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.
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.
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.
- 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.
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:
- 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.
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.
- 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.
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:
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.
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: http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-us-treasury-proposes-changes-us-model-income-tax-convention.pdf http://www.treasury.gov/press-center/press-releases/Pages/jl10057.aspx 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.
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.