Strategizing International Tax Best Practices – by Keith Brockman

Archive for March, 2015

UK Diverted Profits Tax (DPT): Start your engines

Clifford Chance has provided an excellent primer discerning the objectives, framework and challenges of the UK DPT that await MNE’s with a commencement date of 1 April, 2015.  The most recent guidelines were set forth in the latest UK Finance Bill, including a narrowing of the notification requirement while expanding the permanent establishment (PE) threshold.  A link to the summary and related PDF detail, as well as recently issued guidance from HMRC, are included for reference:

http://www.cliffordchance.com/briefings/2015/03/the_uk_diverted_profitstaxfinallegislatio.html

https://www.gov.uk/government/publications/diverted-profits-tax-guidance/summary-of-amendments-following-the-technical-consultation

This new “tax” is controversial, although its tentacles have already spread to Australia and other countries for similar consideration and implementation.  Additionally, it is worth noting that the OECD is closely watching these actions, remembering the viral discussions that ensued after UK and Germany jointly endorsed the “substantial nexus” approach for intangibles.

MNE’s will need to understand this new initiative and design a course of action, starting with documentation of its actions directly / indirectly in the UK and deciding if it is beneficial, and how, to discuss such conclusions with HMRC.  Apart from potential double taxation, there are many uncertainties introduced by this legislation.

Only time will tell how aggressively HMRC will pursue this “tax,” especially with its commencement on the heels of an upcoming election for which politics and taxes are always intertwined.

S. Africa’s “reportable arrangements”- BEPS incentivized contemporaneous reporting

KPMG’s summary provides details for contemporaneous reporting (i.e. within 45 business days) of “reportable arrangements” that include acquiring a controlling interest in a company with loss attributes, hybrid debt/equity instruments, contributions to/beneficial interests in foreign trusts, and certain arrangements with foreign insurers.

The hybrid debt/equity arrangements are aimed at tackling BEPS substance vs. form transactions, although this unilateral guidance precedes final OECD guidelines and thereby represents an additional reporting requirement for such instruments, notwithstanding potential taxation of  related dividends or denial of deductions for related interest.

The public notice also provides for “excluded arrangements” where the aggregate tax benefit does not exceed R5M, although the exclusion for transactions where a tax benefit was not the main, or one of the main, purposes of the arrangement appears to have been removed from this new legislation.

http://www.kpmg.com/ZA/en/IssuesAndInsights/ArticlesPublications/Tax-and-Legal-Publications/Pages/Reportable-Arrangements-Amended.aspx

This new “contemporaneous” guidance provides a very small window for reporting “reportable arrangements” to the South African Revenue Service (SARS).  Accordingly, a review of current and prospective arrangements in S. Africa should provide for timely reporting governance guidelines.

ICC Policy Statement TP/Customs (2015)

The International Chamber of Commerce (ICC) has released the 2015 update of its policy statement on “Transfer Pricing and Customs Valuation” first issued in 2012 jointly prepared by the ICC Commission on Taxation and the Commission on Customs and Trade Facilitation. The statement supports companies that face the challenge of determining the appropriate related party valuation of goods in the context of disparity between governments’ customs and fiscal policies.

 
The proposals put forward in the statement are designed to help simplify regulations for companies and administrations and also to clarify rules for both parties so as to reduce the negative financial impact linked to divergent valuation. The compliance costs of companies would be significantly reduced if tax and customs administrations were to accept and implement ICC’s proposals that would contribute to a more coherent approach to cross-border trade. These policies would also minimise the risk of penalties that result from opposing views between customs and tax authorities.

 
In February 2015 the policy statement has been offered to the Organization for Economic Co-operation and Development (OECD). Within the context of the G20 mandated OECD Base Erosion and Profit Shifting (BEPS) taxation project. The OECD is working on a revision of its transfer pricing guidelines and the ICC Statement will be helpful in this regard.
Furthermore, the policy statement will be included by the World Customs Organization (WCO) in the WCO’s Revenue Package, which provides guidance (tools and guidelines) to customs administrations around the world on their revenue collection. The WCO Revenue Package will be released in spring 2015.

http://www.iccwbo.org/Advocacy-Codes-and-Rules/Document-centre/2015/ICC-Policy-Statement-Transfer-Pricing-and-Customs-Valuation-(2015)/

Best Practice observations: Customs is playing a larger role in today’s environment of tax transparency, although there continues to be a disparity between customs adjustments and transfer pricing determination.  It is hopeful this welcome update will introduce simplicity and transparency while avoiding the “one-sided” effect of adjusting customs or transfer pricing going forward.

Additionally, timing is also critical to review the MNE functional oversight of customs and transfer pricing, ensuring they operate seamlessly and in tandem as the international tax arena becomes more complex.

Spain’s legislation progresses re: CbC reporting & TP documentation

EY’s Global Alert highlights the draft Spanish regulations that would introduce Country-by-Country (CbC) reporting, effective 1/1/2016.

  • Best Practice Observations: The text in bold represents verbiage that should be closely followed, as it may have global implications for flexibility required in CbC reports filed for different jurisdictions.  It is hopeful that the final regulations will entertain additional simplicity and global consistency.  
    • Initially, the test for reporting groups is literally subjective as to “similar terms” of CbC reporting for other jurisdictions.  For example, is reporting in one currency (i.e. US GAAP) equivalent to meeting this test?  What differences, if any, will be acceptable for this determination?  
    • Additionally, the requirement for reporting information in the currency of each jurisdiction implies that a different, or supplementary, approach may be needed for CbC reporting.  To the extent that the OECD final Guidelines are not deemed to be acceptable for Spanish tax authorities, this unilateral “bottoms up” approach will be problematic, complex and costly for everyone.    

Executive summary
On 18 March 2015, the Spanish Government released the draft bill of the new Spanish Corporate Income Tax (CIT) Regulations which complement the provisions included in the new Spanish CIT Law1 that entered into force on 1 January 2015. The CIT Regulations are expected to be adopted in the first half of 2015 and enter into force on 1 January 2016.

This Alert summarizes the new country-by-country (CbC) reporting obligations and the amendments to the transfer pricing rules.

Detailed discussion
On 1 January 2015, a new Spanish Corporate Income Tax Law entered into force (special attention must be drawn to transitory regimes) introducing amendments that are in line with the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project.

In line with these amendments, changes to the CbC reporting obligations and current transfer pricing documentation requirements have been included in the first draft of the Spanish CIT Regulations. These rules, as currently drafted, are aligned with Action 13 of the OECD’s BEPS Project which aims to develop rules regarding transfer pricing documentation to enhance transparency for tax authorities. In particular, the proposed rules generally follow the approach included in the document issued on 6 February 2015 by the OECD named Action 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting (the Guidance).2

Among other changes, the Draft Regulations also address the possibility of using measures of central tendency to determine the point in the range that satisfies the arm’s length principle to minimize the risk of errors derived from comparability defects, as envisaged by OECD Transfer Pricing Guidelines (paragraphs 3.57 and 3.62).

CbC reporting obligations
The proposed CbC reporting obligations would generally apply to Spanish tax resident entities which are “head” of a group (as defined under the Spanish transfer pricing rules), and are not at the same time dependent of any other entity, to the extent the consolidated group’s revenue in the immediately preceding fiscal year exceeds €750 million.

The rules would also apply to Spanish entities and permanent establishments which are, directly or indirectly, held by a non-Spanish resident head entity which is tax resident in a country which (i) has not established CbC reporting obligations in similar terms to Spain; or (ii) has not signed an automatic exchange of information agreement with Spain in relation to these obligations. The wording of the regulations is not clear on how this new rule would apply in practice.

The draft rules establish that the CbC report will have to include the following information per country on an aggregate basis:

a) Group’s revenue, distinguishing between that derived from related and unrelated parties

b) Accounting result before CIT or a tax of similar or analogous nature

c) CIT (or tax of similar or analogous nature) effectively paid, including withholding taxes

d) CIT (or tax of similar or analogous nature) accrued, including withholding taxes

e) Share capital and equity at the end of the fiscal year

f) Average number of employees

g) Tangible assets and real-estate investments, different to treasury and receivables

h) List of resident entities, including permanent establishments, and the main activities these are engaged in

i) Other information that is considered relevant and, if applicable, an explanation on the data included in such information

The information to be provided in the CbC report should be denominated in the local currency of each jurisdiction.

According to the draft of the CIT Regulations, CbC reporting obligations will need to be complied with for fiscal years beginning on or after 1 January 2016; reporting must be completed within a 12 month period from the close of the fiscal year to which the CbC report relates (i.e., companies with a fiscal year ending on 31 December 2016, would be required to file the CbC report by 31 December 2017). A specific tax form will be published by the tax authorities for these purposes.

Transfer pricing documentation requirements
The transfer pricing documentation requirements are modified in very similar terms to the revised standards included in the report on Action 13 released by the OECD on 16 September 2014,3 as follows:

Master file: The data to be included in the Master file is significantly increased to include detailed information on the organizational structure of the group, its business activities, intangibles, Intercompany financial activities, as well as the financial and tax situation of the group (including information on any Advance Pricing Agreement and other tax rulings the group may have obtained.
Entities belonging to groups with an aggregate net turnover lower than €45 million in the preceding year would be exempt from the preparation of the master file.

Local file: Similarly, the information to be included in the Local file is also increased requesting detailed information relating to specific material intercompany transactions.
A simplified local file is foreseen for entities belonging to groups with an aggregate net turnover lower than €45 million in the preceding year. Moreover, small and medium size entities (net turnover lower than €10 million) would be deemed to comply with the local file requirement by filling out a specific form that will be issued by the tax authorities. Information on certain specific transactions will not be excluded (certain business activities carried out by individuals, transfers of businesses and participation in entities, as well as transactions related to real estate property or intangibles).

Impact
The legislative evolution of this proposed measure will be closely monitored and covered in future Tax Alerts but multinational groups with a presence in Spain should focus on the actions that may be necessary to ensure their ability to produce the required information, including preparing protocols for gathering the information and developing internal processes and responsibilities with regard to the new reporting obligations.

Endnotes
1. Law 27/2014 on Corporate Income Tax published in the Spanish Official Gazette on 28 November 2014.

2. See EY Global Tax Alert, OECD issues implementation guidelines for country-by-country reporting under BEPS Action 13, dated 9 February 2015.

3. See EY Global Tax Alert, OECD releases report under BEPS Action 13 on Transfer Pricing Documentation and Country-by-Country Reporting, dated 23 September 2015.

Tax strategies: New entry in Dow Jones Sustainability Assessment

The RobecoSAM 2014 Corporate Sustainability Assessment, referenced herein, introduced tax strategy criteria in their scoring to address critiques of MNE’s tax structures, tax reporting transparency and tax risks.

The publication discusses reputational risk in its new survey questions and is very informative re: companies not yet having a tax policy, as well as asking relevant questions addressing the license to operate in a country, relationship risks with host country and economic development risks in regions where the company is operating.

Click to access CSA_2014_Annual_Scoring_Methodology_Review.pdf

Tax strategies, policies and the perception gap are increasing in importance worldwide, with a kindly reminder for the necessity of developing a comprehensive tax framework that is flexible with today’s challenging international tax environment.

The enterprise risk management analyses for a MNE should have an integrated tax risk framework, coupled with functional interface between common risks that are multi-faceted.

European Commission’s Tax Transparency Package: new era

The European Commission published a package of tax transparency measures on 18 March 2015.  The press release and other documents, linked herein for reference, include a tax transparency communication, Council Directive re: automatic exchange of information and Q and A’s of the comprehensive package. Significant initiatives are included in this package addressing corporate tax avoidance and harmful tax competition in the EU, key components of which are highlighted. http://europa.eu/rapid/press-release_IP-15-4610_en.htm http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_136_en.pdf http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_135_en.pdf http://europa.eu/rapid/press-release_MEMO-15-4609_en.htm Press release:

  • The concepts of tax evasion, corporate tax avoidance, “pay their fair share,” aggressive tax planning and abusive tax practices are summarily stated, although corollary concepts for avoidance of double taxation and effective dispute resolution are noticeably absent.
  • Tax rulings will be automatically exchanged every 3 months.
  • Feasibility of public disclosure of certain tax information of MNE’s will be examined.
  • The EU Code of Conduct on Business Taxation will be reviewed to ensure fair and transparent tax competition within the EU.
  • The Savings Tax Directive is proposed to be repealed to provide efficiencies and eliminate redundant legislation in the Administration Cooperation Directive.
  • Next steps: The tax rulings proposal  will be submitted to the European Parliament for consultation and to the Council for adoption, noting that Member States should agree on this proposal by the end of 2015, to enter into force 1/1/2016.
  • Common Consolidated Corporate Tax Base (CCCTB) proposal will be re-launched later this year.

Tax Transparency proposal:

  • Existing legislative framework for information exchange will be used to exchange cross-border tax rulings between EU tax authorities.
  • The Commission will develop a cost/benefit analysis for additional public disclosure of certain tax information.
  • The tax gap quantification will be explored to derive more accuracy.
  • The global automatic exchange of information for tax rulings will be promoted by the EU.

Council Directive (amending Directive 2011/16/EU) re: automatic exchange of information:

  • Mandatory automatic exchange of basic information about advance cross-border rulings and advance pricing agreements (APAs).
  • Article I definition of “advance cross-border ruling:
    • any agreement, communication, or any other instrument or action with similar effects, including one issued in the context of a tax audit, which:
      • is given by, or on behalf of, the government or the tax authority of a Member State, or any territorial or administrative subdivisions thereof, to any person;
      • concerns the interpretation or application of a legal or administrative provision concerning the administration or enforcement of national laws relating to taxes of the Member State, or its territorial or administrative subdivisions;
      • relates to a cross-border transaction or to the question of whether or not activities carried on by a legal person int he other Member Sate create a permanent establishment, and;
      • is made in advance of the transactions or of the activities in the other Member State potentially creating a permanent establishment or of the filing of a tax return covering the period in which the transaction or series of transactions or activities took place.
  • Automatic exchange proposal is extended to valid rulings issued in the 10 years prior to the effective date of the proposed Directive (Article 8a(2)).
  • In addition to basic information exchanged, Article 5 of the Directive should provide relevant authority for the full text of rulings, upon request.
  • EU central repository to be established for submission of information by Member States.
  • Confidentiality provisions should be amended to reflect the exchange of advance cross-border rulings and APAs.

Q and A’s:

  • Corporate tax avoidance, as explained, undermines the principle that taxation should reflect where the economic activity occurs.
  • Standard/template information for the quarterly exchange of information includes:
    • Name of taxpayer and group
    • Issues addressed 
    • Criteria used to determine an APA
    • Identification of Member States most likely to be affected
    • Identification of any other taxpayer likely to be affected
  • Commission could open an infringement procedure for Member States not following the disclosure obligations.
  • Domestic tax rulings are exempt.
  • The EU could be a global standard setter of tax transparency.
  • The EU Code of Conduct criteria are no longer adequate, and it lacks a strong enough mandate to act against harmful tax regimes.

The EU Tax Transparency Package is required reading for all MNE’s and other interested parties, as it is an ambitious effort to provide globally consistent procedures for the exchange of tax rulings/APAs. Additionally, it is interesting to note the EU’s aggressive actions and timing in its efforts to align, as well as expand, the OECD’s efforts to address BEPS Action Items.  These actions are also intended to be a standard for global setting in the new era of international tax transparency.     As a Best Practice, the 10-year look-back provision for rulings implies that MNE’s should have a similar central database for prior, and future, cross-border rulings.  Additionally, this automatic exchange is another element of consideration prior to formally requesting a tax ruling.    

OECD BEPS update

EY’s Global Alert discusses the upcoming public consultations on BEPS Actions 8-10, and includes country related BEPS initiatives for Australia, France, Honduras, India and Taiwan.

Click to access 2015G_CM5299_The%20Latest%20on%20BEPS%20-%2016%20March%202015.pdf

The latest updates highlight the pivotal discussions around complex transfer pricing issues including risk recharacterisation (also referred to as non-recognition).  These discussions and final guidelines will set the stage for upcoming controversies, including efforts to avoid double taxation.

UK: Name and shame scheme of promoters

HMRC has published new guidance providing for publication of names re: high risk promoters.  To the extent a promoter has not complied with the terms of a Conduct Notice previously communicated to them, the promoter will be publicly named and they will need to inform their clients of this monitoring action.

The first Conduct Notice has already been issued, as part of HMRC’s ambitious intent to address “tax avoidance.”

A link to the news story is provided:

https://www.gov.uk/government/news/high-risk-promoters-of-tax-avoidance-face-government-clampdown

The timing is also noteworthy, as it precedes final drafting of the Diverted Profits Tax proposal which will soon be followed by elections.

Advisors, as well as MNE’s, should monitor this trend of “name and shame,” as it is generally considered too late for damage control after one’s name and reputation are subject to public perception in this new age of addressing “tax avoidance.”

BEPS Timing: Mismatch

The Dec. 2016 completion date for BEPS Action 15, Multilateral Instrument (refer to 11 Feb. post) and the completion of the remaining 15 Actions by the end of 2015 is a clear mismatch between issuance of guidelines and an efficient process for implementation.

The multilateral instrument is not projected to be available until the end of 2016, with subsequent enactment by countries in 2017, 2018 or later years.  As a result, countries will need infinite patience to wait for final guidelines, and the corresponding multilateral instrument, without enacting unilateral legislation that may be non-conforming and subject to different interpretations.  Therefore, the result will be increased complexity with more diversity in transfer pricing practices, different interpretations of the arm’s length principle and additional risks of double taxation.

As the pace of BEPS enactment and increased interest by all parties accelerates, it is hopeful that countries will be coordinated in this game of patience to address a new era of transfer pricing interpretation and documentation.  MNE’s should therefore prepare for maximum flexibility to anticipate this divergence.

OECD’s BEPS progress with developing countries

The OECD has participated in recent regional meetings in Eurasia and Latin America, among others, following through on its plan to assist developing countries with the BEPS initiative.  The OECD publication entitled “The BEPS Project and Developing Countries: From Consultation to Participation” and a summary of the Latin America meeting are provided for reference.

Click to access strategy-deepening-developing-country-engagement.pdf

Click to access beps-regional-network-lac-co-chairs-summary-of-discussions.pdf

Observations:

The summary of the regional meetings highlights important trends, indicating alignment and future deviations from the new OECD guidelines.

The Latin America summary observes the region does not approve of unilateral legislation for the interest initiative, noting individual countries should wait for final guidelines to ensure alignment.

In contrast, the region expressed concerns of their administrative capacity to implement the automatic exchange of information procedures.  However, the countries also expressed a desire to access country-by-country reports, assess whether such information is satisfactory, and evaluate the proposed filing threshold for regional MNE groups.  These statements indicate a potential shift from the new guidelines to possibly implement standards that are region specific, and thereby non-conforming with the BEPS guidelines.  

Accordingly, MNE’s should follow these meetings closely to provide flexibility for future BEPS compliance that will be more complex than it now appears.  

TP recharacterisation: Australia’s new process

The KPMG guidance herein provides background for the new transfer pricing recharacterisation/reconstruction provisions that enable the tax administration to conform the transaction in accordance with its substance, versus form.

Global- KPMG- Research

March 2: The Australian Taxation Office (ATO) in late February 2015 issued a practice statement that offers some guidance when an ATO transfer pricing audit team looks to apply reconstruction provisions.

While the ATO audit team may take a position that the reconstruction provisions in Australia’s new transfer pricing rules would apply—because the substance of the commercial or financial relations between the related parties is different to the form of those relations—the practice statement (PS LA 2015/3, issued 26 February 2015) sets out a new internal approval process for application of the reconstruction provisions.

Amongst other things, the practice statement requires ATO personnel to:

Seek approval from an Assistant Commissioner within their business line or from a Senior Tax Counsel in the Tax Counsel Network prior to the ATO’s adoption of any view that one of the reconstruction provisions applies, and provide the Assistant Commissioner with a position paper setting out the views proposed in relation to the application of any of the reconstruction provisions, including a clear explanation of the reasons for the application of the reconstruction provisions.

Although the ATO has new processes in place for this methodology, this practice should be limited to the most egregious transfer pricing transactions.  Accordingly, it should not be interpreted as expanding/circumventing the arm’s length principle.  

Other countries may lack adequate resources and processes enabling the formalities and diligence of the ATO, thus this transfer pricing mechanism should not become the norm for international transfer pricing legislation.  Additionally, equal weight should be conferred upon appeal mechanisms and corresponding adjustments to avoid double taxation.  

 

India’s 2015 Budget introduction

The 2015 Indian Budget has been recently presented, with highlights referenced in a link for the PwC Tax Insights article.

Click to access pwc-india-budget-2015-defers-gaar-addresses-offshore-transfers.pdf

Key points:

  • GAAR deferment until 1 April 2017.
  • Clarification” of rules addressing offshore share transfers, including reporting requirements.
  • 5% reduction in corporate income tax rate (30% to 25%), phased in over 4 years, after current year 2% surcharge increase.  
  • “Place of effective management” concept, accepted by the OECD, is introduced, noting that a foreign company will be resident in India if its place of effective management is in India at any time during the year.  Guiding principles are to be issued.
  • Tax rate for royalty/technical services reduced to 10%.

The GAAR deferment is especially welcome, hopefully adding more certainty and objective determination upon final implementation.  The rate reductions and additional clarification for offshore share transfers also are positive signs for tax reform, although offset by application of a “place of effective management” concept that will hopefully be addressed simply and objectively without enduring years of appeals to obtain a definitive conclusion.

African Tax Research Network 1st Annual Congress, Call for Papers

The African Tax Research Network (ATRN) requests research papers for its 1st Annual Congress entitled Contemporary Tax Challenges for African Countries.  A link to the conference details is provided for reference;

http://www.123contactform.com/form-1143642/AFRICAN-TAX-RESEARCH-NETWORK-ATRN-CALL-FOR-PAPERS

The African Tax Research Network (ATRN) is a newly established platform for African inspired dialogue, research and collaboration mainly among researchers, policy makers and tax administrators. Its establishment results from the need to identify potential synergies and linkages, in areas of research, between academics, policymakers, researchers and tax officials from the African Tax Administration Forum’s (ATAF) member countries. Launched in 2009, the African Tax Administration Forum is a platform to promote efficient, effective and service-oriented tax administrations and currently consists of 38 African member states. The ATRN, which is housed in the ATAF Secretariat in South Africa, is pleased to announce its 1st Annual Congress from 02 – 04 September 2015 in Victoria Falls, Zimbabwe.

This congress presents an opportunity for academics, researchers, tax administrators, students, tax practitioners, consultants and decision-makers on fiscal and tax policy to gather and discuss different aspects relating to national, regional and international tax matters.

The theme of the Annual Congress is “Contemporary Tax Challenges for African Countries”.
Prospective authors, both academics and practitioners, are invited to submit original and innovative papers on any topic related to this broad theme. Suggested topics of interest to be covered under the main theme include:
Natural resources taxation
Local taxation and fiscal decentralisation
International taxation
Customs & domestic taxation
Indirect taxation
Taxation in the digital economy
Tax treaties
Taxation in banking, telecommunication, insurance
Environmental tax
Taxation and regional integration
Tax compliance
Taxation & the distribution of income & wealth
Taxation and Human Rights (including taxation & gender)
Tax incentives

This conference is an excellent opportunity for interested parties to submit their ideas and presentations to form a win-win opportunity for taxpayers and tax administrations.  A collaborative relationship will enhance future efficiencies in this rapidly growing region.

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