Strategizing International Tax Best Practices – by Keith Brockman

Archive for April, 2015

BEPS Action 8: Cost Contribution Arrangements

The OECD has released its Discussion Draft addressing BEPS Action 8: TP Guideline revisions on Cost Contribution Arrangements (CCAs).  Comments should be submitted by 29 May 2015.

A link to the Discussion Draft is provided for reference:

http://www.oecd.org/tax/transfer-pricing/discussion-draft-beps-action-8-cost-contribution-arrangements.pdf

Observations;

  • Updated TP Guidelines text for Chapter VIII
  • Draft guidance on Chapter I of the TP Guidelines released for public comments on 19 Dec. 2014 is taken into account
  • There is always an expected benefit that each participant seeks from its contribution
  • CCAs are to operate in accordance with the arm’s length principle
  • Two types of CCAs: Development (i.e. ongoing future benefits) and Services (i.e current benefits)
  • CCAs differ from intercompany transfer of property/services due to the expected mutual and proportionate benefit from pooling of resources and skills
  • Illustrative examples are provided at the end of the Discussion Draft for further reference
  • Application of arm’s length principle to CCAs:
    • All parties have a reasonable expectation of benefit
    • Calculate value of each participant’s relative contribution to the joint activity
    • Determine whether allocation of CCA contributions accords with their respective share of expected benefits

As CCAs are becoming more common by MNEs, with additional complexity in valuation and comprehension by tax administrations, this Discussion Draft will form long-term guidance for the new TP Guidelines.  Accordingly, it should be reviewed, with comments provided accordingly, by all interested parties.

Slovakia proposes EU PSD conformity

Slovakia has proposed legislation conforming treatment of hybrid loan arrangements and general anti-avoidance rules (GAAR) of the EU Parent-Subsidiary Directive.  Note that Slovakia has not suggested expansion of such rules, as Sweden’s recent proposal suggests.

EY’s Global Tax Alert highlights these developments, as well as other changes including penalties and service PE determination.

http://www.ey.com/Publication/vwLUAssets/Slovakia_proposes_changes_to_tax_legislation/$FILE/2015G_CM5410_Slovakia%20proposes%20changes%20to%20tax%20legislation.pdf

The new legislation is expected to take effect as of 1/1/2016, thus future planning should document transactions accordingly, especially noting the “main purpose” rule of the GAAR initiative which is inherently subjective.

Audit committee agenda: Tax risk in focus

KPMG has provided a valuable reference re: 2015 audit committee topics, providing insight into company risks and the importance of governance.

The following extract, from the report provided as reference, addresses tax risks in the following manner:

Pay particular attention to the global “tax transparency and morality” debate being driven by notions of “fairness”and “morality,” and consider the impact of tax risk on the company’s reputation.Tax is no longer simply an expense to be managed; it now involves fundamental changes in attitudes and approaches to tax globally. Ensure that tax decisions take into account reputational risks and not simply whether the company has technically complied with tax laws. Monitor OECD and governmental efforts globally to address perceived transfer pricing abuses. Help shape the company’s tax risk appetite, and establish a clear communications protocol for the chief tax officer to update the audit committee regularly. Help ensure the adequacy of the company’s tax resources and expertise globally.

https://www.kpmg.com/UK/en/IssuesAndInsights/ArticlesPublications/Documents/PDF/Audit/audit-committee-agenda-2015.pdf

Highlights of future trends:

  • Transparency
  • Reputation risk
  • OECD monitoring
  • Transfer pricing abuse
  • Tax risk appetite

To the extent the Audit Committee has not inquired into BEPS, tax risk frameworks, OECD Actions and transfer pricing governance,  a proactive effort should immediately begin to align the Board with the MNE’s tax risk posture and ongoing governance.  It is imperative a robust tax risk framework is established and communicated effectively.

Sweden adopts new EU PSD with expansion

The Swedish tax authorities have adopted the anti-hybrid legislation of the EU Parent Subsidiary Directive (PSD), and have chosen to expand the participation exemption limitation to non-EU countries.

A link to EY’s Tax Alert discusses the details of this recent development.

http://www.ey.com/Publication/vwLUAssets/Swedish_Government_proposes_limitation_to_participation_exemption_rules_and_amendments_to_the_Swedish_Tax_Avoidance_Act_to_cover_the_Swedish_Coupon_Tax_Act/$FILE/2015G_CM5392_Swedish%20Gov%20proposes%20limitation%20to%20participation%20exemption%20rules%20and%20amendments%20to%20Swedish%20Tax%20Avoidance%20Act.pdf

The opportunity to reach beyond the EU PSD, incentivized by OECD BEPS draft actions, may become more a norm than the exception, and is a trend worth watching.

EU Customs alert: 1st sale rule in danger

As May 2016, the effective date for the EU’s Union Customs Code, approaches several questions remain.  One significant question is whether the  long-recognized “first sale” rule will be transformed into.. the sale occurring immediately before the goods are brought into the customs territory of the Union.

The links to Deloitte and PwC guidance highlight this change, among others, for which all MNE’s and organisations affected by EU customs duties should closely review and assess current operations to quantify impacts of such changes.

http://www2.deloitte.com/content/dam/Deloitte/nl/Documents/tax/deloitte-nl-tax-in-2016-the-european-union-will-have-a-new-customs-code.pdf

http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-new-eu-definition-transaction-value-1st-sale.pdf

Tax/Customs oversight observations for MNE’s:

  • Are these separate functions?
  • Is there in-house customs expertise?
  • Are transfer pricing and customs integrated re: risks, opportunities and planning?
  • What supply chain changes are contemplated, and is customs a major consideration?
  • What reporting lines are in place for each function?
  • Should tax, treasury and customs be integrated functions for risk oversight and review?

As the OECD BEPS Actions approach conclusion the end of this year, it may be timely to review anticipated transfer pricing changes and upcoming customs considerations for effective long-term planning.

UK Diverted Profits Tax: Australia/G20 – Who’s next?

UK and Australia have formed a joint working group to develop initiatives re: “diverted profits” by MNE’s.

A copy of the press release is attached for reference:

http://jbh.ministers.treasury.gov.au/media-release/030-2015/

The press release cites the urgency of such legislation, while also stating that such initiatives will be consistent with the OECD BEPS Actions.

The UK’s new tax still has more questions than answers, and it is hopeful that Australia and members of the G20 will await OECD’s final guidance on BEPS initiatives and align any new tax with comprehensive documentation prior to issuance.  Additionally, it will be interesting to note the trend away from citation of the well recognized arm’s length principle toward a concept of economic value and significant people functions.

Kuwait: 100% FDI regime

The recent issue of PwC International Tax News highlights a recent development for taxpayers operating in Kuwait whereby they can retain 100% ownership rights.  This is a significant development in the Middle Eastern region signaling the foreign direct investment initiatives elicited by the Kuwaiti administration.

http://www.pwc.com/en_GX/gx/tax/newsletters/international-tax-services/assets/pwc-international-tax-news-april-2015.pdf

Additionally, the new regime introduces income / customs tax benefits that can be availed of.

Tax and customs tax incentives are of growing importance around the world.  MNE’s should have a proactive structure in place that focuses attention on these opportunities.  Most importantly, tax and customs should be integrated re: tax disputes and appeals in the future coupled with the initial attraction of tax savings.

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