Strategizing International Tax Best Practices – by Keith Brockman

Archive for May, 2015

European Commission: New Action Plan

The European Commission, in its meeting on 27 May 2015, determined that a new Action Plan is needed to address tax abuse and ensure sustainable fisc growth by the Member States.  This follows its proposals on the Tax Transparency Package, including automatic exchange of tax rulings, possible public tax disclosure, and a review of the Code of Conduct.

The new Action Plan will look at integrating BEPS actions within the EU, review the digitalized economy, relaunching the Common Consolidated Corporate Tax Base (CCCTB) initiative and further rules for increased transparency.

The KPMG Euro Tax Flash provides a summary of the new proposals.

Click to access etf-249.pdf

It is noteworthy that the EU is proceeding on designed actions in anticipation of, and subsequent to, BEPS actions for the EU Member States.  These actions may form a new set of rules similar to, as well as disparate from, the new OECD Guidelines and the rest of the world.  Other countries will be following these initiatives for similar adoption at a unilateral level, thereby providing a complex multi-layering of anti-abuse rules, transparency initiatives, and tax bases.

The answers to the struggle for fostering a better business environment in the EU market may be much different from an EU and rest of world perspective.

Poland’s new TP legislation, with CbC reporting

The referenced KPMG transfer pricing (TP) Alert provides details into the forthcoming sweep of new legislation expected to effective for 2016.  This is a major reform of its domestic legislation which is inclusive of BEPS TP discussion draft intentions, including submission of a country-by-country report (CbC), due one year after a company’s year-end, for for taxpayers with consolidated revenue exceeding EUR 750M.

Click to access poland-may27-2015.pdf

Key observations:

  • The CbC report appears to be applicable for companies exceeding the EUR 750M threshold, regardless of the parent’s place of incorporation.  Thus, this legislation does not rely on the exchange of information to receive this data.
  • Entities with revenues or expenses between EUR 2-10M will be required to produced only a local file, although such file is inclusive of the new BEPS items including organizational structure and restructurings.
  • Medium taxpayers (revenues or expenses exceeding EUR 10M) are required to submit local based comparable analysis.
  • Large taxpayers also have a CbC reporting requirement.  
  • TP documentation is a “contemporaneous” requirement by the due date of the tax return.
  • A Board member will be required to sign a statement confirming preparation of the “contemporaneous” documentation by the deadline.  This applies to all small, medium and large taxpayers.
  •  The 50% tax rate (i.e. penalty provision) to adjusted income is unchanged.

Although expected to become effective commencing in 2016, it is critical to monitor this date to the extent it would be earlier, as it would form a new deadline date for CbC reporting apart from the OECD draft guidelines.  Additionally, the local comparable requirement (similar to Russia) imposes additional cost and complexity for Poland’s new era of TP legislation.

EU ownership registers: 2 year timeline

The European Parliament approved the maintenance of public registers listing ultimate ownership of EU companies, as part of the 4th Anti-Money Laundering Directive.  The new rules must be introduced in all EU Member States within the next 2 years.

A KPMG Euro Tax Flash outlines details of this proposal:

Click to access etf-248.pdf

Key points:

  • Beneficial ownership is broadly defined, covering individuals who ultimately (directly or indirectly) control the entity.  The control threshold is premised on a 25% ownership criterion although Member States may adopt lower percentages.
  • Information accessible by: competent authorities, financial intelligence units, “obliged entities” and persons/organisations that can demonstrate a “legitimate interest” (not a defined term).
  • Member States have 2 years from adoption to implement its provisions into their domestic legislation.

In an ever-increasing quest for transparency, this Directive will fulfill EU’s obligation to meet that objective.

G20 Int’l Tax Symposium: BEPS topics

The G20 recently held a symposium including 300 participants from 60 countries.  The G20 tax agenda focused on the current status of BEPS in developed, and developing, countries.  The PwC summary outlines the current state of agreement, and disagreement, with the proposed BEPS Guidelines.

Click to access pwc-g20-international-tax-symposium.pdf

Key observations:

  • Hybrid mismatches will include treaty changes and domestic law recommendations
  • The interest limitation solution is not yet adequate
  • A clear analytical framework should be used to determine application of non-recognition transactions
  • The Amadeus database, macro-data and tax return data was used to measure the spill-over effect of BEPs
  • Not all measures to tackle BEPS will be supported by guidance, although guidance will continue in following years
  • Coordination and consistency of application is vital, although it is challenged by unilateral actions of residence countries
  • Implementation is key, although a single approach no longer works

The observations cited in the PwC summary are insightful, while providing further certainty that BEPS implementation will be diverse with different timelines, while guidance continues in post-2015.

BEPS Action 6 (Treaty Abuse), as revised

OECD’s latest draft on Action 6 of the BEPS Action Plan (Prevent Treaty Abuse) addresses previous questions raised and comments received, in addition to some new proposals.  Part I of the draft presents the alternative “Simplified” Limitation on Benefits (LOB) Rule, while Part II outlines the previous 20 questions for follow-up work, including changes to domestic law made after the conclusion of a treaty.

Succinct comments are to be submitted by 17 June 2015.  A link to the draft is provided:

Click to access revised-discussion-draft-beps-action-6-prevent-treaty-abuse.pdf

The discussion draft is very comprehensive and principle based, including additional examples from its previous draft.

However, it is worth noting that the OECD would not require an approval process for application of the subjective principal purposes test (PPT) (i.e. the state may “wish” to apply such process) and that the PPT would be included in the arbitration mechanism of paragraph 5 of Article 25, although this issue should also be discussed as part of the work on Action 14 (Make dispute resolution mechanisms more effective).  This latter point would seem to be area for additional confirmation in providing comments to avoid double taxation on issues that are inherently subjective.

The draft will provide important precedent in obtaining treaty relief in a post-BEPS era, thus the proposals should be reviewed in detail, with consideration to provide succinct comments.



US Model Income Tax Convention: A new world

The US Dept. of Treasury has released drafts of its proposed revisions to the US model income tax convention, for which it has requested comments.  The new Model treaty will serve as a template for future US treaties and protocols. A PwC summary and US Treasury press release, which further reference the proposed changes, are included for reference: Key observations:

  • Exempt permanent establishment (PE) rule that will also apply to US branches
  • Denial of treaty benefits re: articles 11 (Interest), 12 (Royalties), and 21 (Other income) for recipients in a “special tax regime.”  There are several exceptions applicable to the general rule.
  • Disallowance of treaty benefits for payments of dividends, interest, royalties and other income for 10 years after a company expatriates.
  • Changes to Limitation on Benefits (LOB) article: (i) New derivative benefits test which is inclusive of a base erosion test, (ii) a base erosion test to the subsidiary of a public company requirement, (iii) changes to base erosion requirements in the public company test, ownership base erosion test and derivative benefits test, and (iv) a change to the discretionary grant of relief clause inclusive of a principal purpose test.
  •  Partial termination provisions for subsequent law changes exempting, or reducing the tax rate to less than 15% for dividends, interest, royalties and other income.

These significant changes represent acknowledgment of the OECD BEPS impact and its impact on the world’s tax treaties that will directly impact the taxation of a multinational company’s global structure.  Accordingly, these changes are required reading for international tax practitioners, as the rest of the world will be following along in measuring its respective treaties and new protocols. BEPS Action 6, Preventing treaty abuse, recognized the US Model Treaty’s LOB article, with an additional inclusion for a derivative benefits test.  The US proposal has now addressed that intent.

Reputation Risk: Insights

A recent Accounting Today article cites the uneasiness of corporate tax leaders re: reputation risk.

Excerpts from the article:

  • The company’s tax policy and principles are being enhanced with greater detail for clarity and transparency
  • Communication of tax strategies to the Board is becoming a primary focus
  • Tax controversy alignment with the Board is being communicated more frequently
  • Increased objective to develop more co-operative working relationships with tax authorities
  • Tax risk is an integral part of decision-making

A link to the article is attached for reference:

As BEPS Actions are currently being transformed into final Guidelines, the subject of reputation risk would be a worthy topic of focus in the interim to be prepared for an uncertain, complex and disparate trend in the world of international tax.

BEPS is ideology, not law: India’s Delhi Tribunal affirms

As the OECD BEPS Actions are a subject of discussion by tax administrations, the Indian Delhi Tribunal confirmed that such ideologies cannot be used as legislative doctrines for legal enforcement.

A non-legislative BEPS approach may become more common in the months/years prior to a country enacting such legislation into its regulatory framework.  However, the BEPS concepts should not be used as a basis for assessment or litigation.  Thus, there will be a short/long lead time, different in almost every country, as to when some, if any, of the BEPS Actions are enacted. This disparity should be recognized prior to raising BEPS concepts as an instrument of legal enforcement.

An EY Global Tax Alert provides additional information about the case.

Click to access 2015G_CM5447_Indias%20Delhi%20Tribunal%20rules%20BEPS%20is%20a%20tax%20policy%20consideration%20and%20not%20relevant%20for%20judicial%20determinations.pdf

Tax Transparency: Pension/Institutional focus

The referenced article provides additional evidence that tax transparency is growing more universal and attracting the interest of many interested parties.  A quote from the first portion of the article addresses interest in a taxpayer’s tax risk framework and governance procedures.

“In an exclusive interview with FTFM Local Authority Pension Fund Forum Chair Kieran Quinn has confirmed that the Forum has launched the Corporate Tax Transparency Initiative (CTTI), writing to every FTSE 100 company in late March seeking technical information via ten detailed taxation questions around tax related governance and accounting practices, taxation risk.”

management and minimisation strategies.

This article raises the question of what public tax posture, if any, companies want to exhibit to address tax authorities, individuals/companies having access to company data, individual / institutional investors, pension funds, etc.  This topic relates directly to reputational risk, and should be aligned with the Board and senior management.

BEPS Action 7: PE, Round 2

The OECD has released its second draft, following its initial draft on 31 October 2014, on BEPS Action 7: Preventing the Artificial Avoidance of PE Status.  Comments, which should be kept as short as possible, on this latest draft should be sent by 12 June 2015.  The discussion draft, and related comments, will be discussed at the Working Party 1 meeting of 22-26 June 2015.

A link to the latest discussion draft is provided for reference:

Click to access revised-discussion-draft-beps-action-7-pe-status.pdf

Key observations:

  • Objective is to address commissionnaire arrangements and fragmentation of operations to meet the “preparatory and auxiliary” exception.
  • Alternative PE options from the first draft have been reduced to 1 proposal re: each PE avoidance strategy, concluding that Option B re: commissionnaire arrangements, Option E re: specific activity exemptions and Option J re: fragmentation are the best models.
  • Follow-up work on attribution of profits issues re: Action 7 would result in additional guidance by the end of 2016, the deadline for negotiation of the multilateral instrument.
  • Low-risk distributor arrangements are to be addressed in Action 9, Risks and Capital.
  • Par. 5 alternative test: Independent agent exception is disregarded if it meets a control (50 % or more interest) test.  Persons (acting on behalf of an enterprise) habitually concluding contracts or habitually negotiating the material elements of contracts can lead to a PE, disregarding the act of formal conclusion/approval/review in another jurisdiction.  “Contracts” refers to the business proper of the enterprise.
  •   Each specific activity exemption would be restricted to activities that are otherwise of a “preparatory or auxiliary” character.  Additional Commentary guidance and examples are provided re: the phrase “preparatory or auxiliary.”
  • Re: splitting up of contracts for the 12-month threshold, the concept of “connected enterprises” replaces “associated enterprises” along with anti-abuse rules for determination.

The above captions provide only a snapshot of the detailed proposals and changes included in this latest draft; accordingly all interested parties should review this draft carefully and consider providing succinct comments for consideration in the final guidelines.

As PE is a strong pillar in the foundation of transfer pricing, this draft will chart the course for future PE determinations that may impact current organization structures and where profits from certain activities are taxed.

Australia’s Budget: BEPS acceleration

Australia’s Budget reveals its intent on becoming a leader in tax transparency and implementation of tools to address anti-avoidance initiatives.  The provisions cite OECD BEPS initiatives, while deciding to act unilaterally on draft guidelines and introducing new transparency standards within its various proposals.

This Budget may set the stage for others to follow similar trends and timelines; accordingly such actions should be monitored in Australia as well as the rest of the world.  The Public Tax Transparency Code is another signal that reporting of economic and tax activity will be used as a public measure to assess reasonableness for determining payment of a “fair share of tax.”

MNE’s have now fully realized the impending complexity, documentation demands and transparency standards that it will be judged by.  Internal education, communication and alignment are now vital in establishing a MNE’s global tax risk framework.  

A link to the Budget actions is provided for reference:

Key Corporate Tax provisions:

  • Multinational Anti-Avoidance Law
    • Economic Australian activities = Australian taxation income
    • Penalties up to 100%, plus interest
  • Country-by-Country (CbC) reporting effective as of 1/1/2016, consistent with OECD Guidelines
  • OECD recommendations re: treaty abuse / non-taxation to be incorporated into tax treaties
  • Draft OECD anti-hybrid rules to be implemented
  • Public Tax Transparency Code to supplement CbC reporting
  • Serious Financial Crime Taskforce to target serious financial crimes and tax evasion
  • Common Reporting Standard to be adopted from 1/1/2017
  • GST Compliance programme extended 3 years

Indonesia APA: Methodical approach

The Indonesian Minister of Finance has released recent Regulations addressing the methodical approach for which taxpayers and the tax administration are to be aligned in seeking an APA.  Most importantly, the approach outlines the advance timing and necessary information by which tax authorities will utilize in considering APA requests.

A link to KPMG’s Tax News Flash is provided for reference:

Click to access TNF%20APA.pdf

As countries continue to enact unilateral legislation, with or without BEPS Actions, it may be prudent to consider a proactive transfer pricing approach to enter into APA’s for significant intercompany transactions.  As the Mutual Agreement Procedure (MAP) procedures are still being refreshed, the transition period would be an excellent time to prepare for additional certainty via APA’s.  The Indonesian approach provides an excellent example to better appreciate the timing, information and exchanges that will become part of this process.

Armed with the foresight that such APA’s may be included in transfer pricing documentation and exchanged between tax authorities around the world, it may be a worthwhile roadmap demonstrating consistency for significant transactions.

Australia, UK DPT: Advancing beyond BEPS

The recent Guardian article highlights the danger that the UK Diverted Profits Tax (DPT) has incited.  Countries are acting unilaterally and/or in working groups (including the EU) to accomplish their fiscal objectives behind a thin veil of BEPS intentions.  Most importantly, such actions may never be unraveled after the final OECD BEPS Guidelines are published.

Accordingly, we will have overlapping  domestic and treaty provisions (including the arguable non-treaty DPT) for anti-avoidance rules, CFC rules, capturing low-taxed income from other jurisdictions in novel ways, non arms-length approaches, formulary calculations of the “right tax” and significant complexity for all.  To the extent public disclosure of tax related data becomes a reality by the OECD or EU, many questions will arise on a very complex topic for which most people will not comprehend.

It is hopeful that countries put a full stop on BEPS activities until the Guidelines are finalized, after which such Guidelines can be adopted in their final form for overall consistency.  Statements similar to the herein should be tempered by patience and a goal for global consistency.  Thus, working group meetings that are scheduled prior to that time will only exacerbate the tsunami of international tax guidance and documentation that will take place.

A link to the article is attached for reference:

Joe Hockey, treasurer, provided the following statement:

Hockey said that the joint working group would enable Australia to go “further and faster” than the framework for change offered through multilateral groups like the OECD and G20.

BEPS Action 3-CFC Rules: TEI comments

TEI has provided recent comments addressing OECD’s Discussion Draft for BEPS Action 3: CFC rules.  A link to their comments are provided for reference:

Click to access TEI%20Comments%20BEPS%20Action%203%20-%20CFC%20Rules%20FINAL%20to%20OECD%2030%20April%202015.pdf

Key comments:

  • Lack of definitive guidance will introduce additional complexity, double taxation and inconsistency of treaty applications.
  • Overlap with other BEPS Actions and the role of CFC rules questions new complex rules at this time.
  • Confusion re: transfer pricing rules and excess profits approach with arm’s length principle.

The well drafted comments provide clarity surrounding the complexity and uncertainty for new rules addressing BEPS concerns by interested parties.  The first question therefore should always be: Do we need these rules at this time?

Notwithstanding the Discussion Draft’s proposals and comments by TEI, among others, MNE’s should plan for increased efficiencies to coordinate and report information, while ensuring global consistency for application of transfer pricing methodologies.

European Commission: Transparency blueprint

Commissioner Moscovici’s recent speech addressing the future of tax policy aims at developing an ambitious blueprint for taxation in Europe.  A link to his speech is provided for reference:

Key comments:

  • Enhanced EU transparency in tax matters
  • Coordination of Member States tax systems
  • Cooperation between Member States, exemplified by EU Tax Transparency Package initiative (refer to 22 March 2015 post)
  • Full transparency cost/benefit assessment re: Country-by-Country reporting for public disclosure
  • New Action plan before summer (an issue that is fundamental to the EU) building on global developments
  • Assess relaunch of Common Consolidated Corporate tax base (CCCTB)

The European Commission is accelerating its efforts, resulting in a potentially different documentation framework than the OECD Guidelines may suggest and/or a basis that the rest of world will follow.  The Commission has the necessary momentum and political cohesiveness to achieve its efforts for the EU, although with a possible demarcation with the rest of the world.

CbC reporting by MNE’s continues its actions on center stage as MNE’s should plan for (if they have not already) public disclosure of such reporting.  Thereby, the topics of supplemental reporting (i.e. indirect tax contributions, etc.) become more important for senior leaders to consider.  Finally, such disclosure warrants a seamless governance process and alignment for addressing future questions by interested parties.

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