Strategizing International Tax Best Practices – by Keith Brockman

Archive for June, 2015

Poland’s latest Draft Bill accelerates CbC reporting

Poland’s latest amendments to its Draft Bill incorporates a major change to the date for submission of a country-by-country report (CbCR).

The original draft (refer to 28 May 2015 post) provided a 1/1/2016 effective date, with the CbCR due at the end of 2017 for 2016 data.  However, the latest draft moves the effective date of the Bill to 1/1/2017, however it also states that the CbCR must be attached to the 2016 corporate income tax return, generally due 3 months after the end of the tax year.

The final version of the bill should be monitored closely, as it would accelerate submission of the CbCR to 31 March 2017 for 2016 activity, which is significantly earlier than the 31/12/2017 date (for calendar year taxpayers) envisioned by the OECD’s BEPS Action 13 Discussion Draft.

The latest changes reflect the increasing emphasis on transparency and assessment of transfer pricing risk, a trend that is closely followed by all other countries in assessing their urgent need for transparency.

The EY publication link is attached for additional reference:

Click to access 2015G_CM5559_TP_Poland%20amends%20draft%20bill%20on%20TP%20documentation.pdf

Australia: Voluntary Tax disclosure proposal

Australia continues to lead the way after its completion of cloaking new PE rules within its GAAR legislation, thereby avoiding the protection of the double tax treaty network.

A voluntary tax disclosure code concept is in deliberation by the Australian administration for its 2105-16 Budget.  This disclosure would be in addition to other disclosures, such as country-by-country (CbC) reporting.

KPMG’s commentary herein provides a snapshot of this potential new trend that should be monitored by multinationals, as countries around the world are also watching this recent development for perceived benefits.

Corporate tax disclosure code: next big thing in tax transparency?
by Stephen Callahan, Director, and James Gordon, Senior Manager, Corporate Tax

The 2015-16 Budget proposals to introduce a multinational (MNE) anti-avoidance rule and to levy GST on cross-border digital services grabbed the immediate headlines in the large business market.
However, arguably the more far reaching tax integrity proposal is the Board of Taxation review into the development of a voluntary code for greater public disclosure of tax information by large corporates.

There is the obvious, and as yet, unanswered question as to exactly which businesses the proposal is directed towards. Nevertheless, some initial thoughts on possible influences in this review include:

The controversy and confusion surrounding tax performance analytics based on financial statement tax
disclosures.
The tension between community expectations on disclosures covering tax, related party transactions and investment in subsidiaries as against the need for concise reporting for capital market purposes.
Debates surrounding what comprises a business’ tax contribution to a country and the measurement of effective tax rates.
Global developments on alternate models for improved tax transparency.
Tax contribution reporting by an increasing number of multinationals.
The relationship, if any, between a voluntary disclosure code and an involuntary tax transparency publications by the ATO.

We await with interest to see the terms of reference of the Board of Taxation review.

New Customs and TP Guide by WCO

The World Customs Organization (WCO) has published a new Guide to Customs Valuation and Transfer Pricing.

The Guide will:

  • Provide a policy/audit/control tool for Customs officials
  • Cross reference transfer pricing documentation that may be relevant for customs purposes
  • Address transfer pricing misconceptions
  • Reconfirm “transaction value” as the starting point for customs valuation
  • Encourage consideration of transfer pricing studies
  • Encourage consistency of transfer pricing adjustments
  • Encourage the provision of advance customs valuation rulings
  • Provide Best Practices for business, integrating customs and transfer pricing documentation/discussions

A succinct summary by DLA Piper, and the Guide, are provided for reference:

https://www.dlapiper.com/en/uk/insights/publications/2015/06/wco-publishes-guide-to-customs-valuation/

http://www.wcoomd.org/en/topics/key-issues/revenue-package/~/media/36DE1A4DC54B47109514FFCD0AAE6B0A.ashx

The Guide should also be used as a proactive tool to review reporting structures of transfer pricing and customs employees/advisors, functional integration, etc. to address the new changes in transfer pricing and the possible effect on customs valuations and documentation going forward.

 

S. Africa: Draft notice on “reportable arrangements”

In an ever-increasing tidal wave of transparency proposals, the South African Revenue Service (SARS) issued a draft notice on Reportable Arrangements.

The proposals provides that a Reportable Arrangement must be reported to SARS with 45 business days if:

  • A nonresident renders technical, managerial or consultancy services (non-defined terms) to a resident, and
  • The nonresident, its employees, agents or representatives were or will be physically present in S. Africa in rendering such services, and
  • The expenditure will exceed R10M (approx. $823k) in the aggregate.

Penalties for non-disclosure are applicable, and SARS may use this new mechanism to determine if the non-resident company is registered for income tax or VAT in S. Africa and if there is a permanent establishment (PE) for profit attribution.

Click to access 2015G_CM5521_South%20Africa%20issues%20draft%20notice%20on%20reportable%20arrangements.pdf

This proposal is important to monitor, as it highlights different methodologies for determining what services are being provided by non-resident companies, and if such activities could be designated as a PE with some profits subject to tax.  

The UK’s Diverted Profits Tax, Australia’s follow the leader implementation in its General Anti-Avoidance Rules (GAAR) and this disclosure present different processes that tax administrations are looking to capture additional taxes for fiscal growth, incentived by the OECD BEPS Guidelines and objectives, although such Guidelines are not yet finalized.

EU Tax Transparency Package-update/delay

EY’s Global Tax Alert highlights recent developments re: the previously announced Tax Transparency Package initiatives of the EU.  Key observations, and a copy of the Alert, are provided for reference:

Key Observations:

  • Definition of “tax rulings” is too broad for effective implementation by the Member States
  • The 10-year time period for rulings seems excessive and burdensome
  • 1/1/2016 implementation deadline to be extended to 12 months from entry into force of the amending Directive
  • OECD Action items should be considered for relevant integration / coordination
  • European Commission would also receive a copy of the rulings, with a central directory to be developed

EU Council Presidency issues report detailing open questions on proposal for automatic exchange of advance cross-border tax rulings and Advance Pricing Arrangements
Executive summary
On 8 June 2015, the Presidency of the EU Council (Latvia) sent a report (The Report) to the Permanent Representatives Committee and the European Council. The Report sets out the current state, as well as a number of open issues and questions, in regard to the 18 March 2015 proposal for a Council Directive amending Directive 2011/16/EU regarding the mandatory automatic exchange of tax information.

That proposal, focusing on the exchange of advance cross-border tax rulings (ATRs) and Advance Pricing Arrangements (APAs), constitutes a key element of the Tax Transparency Package1 issued on the same date. The Tax Transparency Package further contained a proposal to repeal the Savings Directive as well as a Commission communication outlining a number of other initiatives to advance tax transparency.

Detailed discussion
Under the Tax Transparency Package proposal, Member States will be required to automatically exchange information on their ATRs and APAs, with the Commission proposing a strict timeline whereby every three months all Member States would be obliged to report to all other Member States and the Commission on the rulings they have issued during that period.

This report, sent via a secure email system, would contain a pre-defined, standard set of information. The recipient Member States would also have the right to request more detailed information on any of the documented rulings, where the information is relevant to the administration of the tax laws of the Member State. Each year, Member States would have to provide statistics to the Commission on the volume of information exchange on tax rulings.

In addition to this quarterly exchange of information, the proposal also refers to a retroactive application of ten years, whereby the above obligation is extended to rulings issued during the ten years prior to the date on which the proposed Directive takes effect, where such rulings are still valid on the date of entry into force of the Directive.

The instrument under which all such exchange would occur is Directive 2011/16/EU on Administrative Cooperation in the Field of Taxation (DAC).

Open questions and issues detailed in the Report
The Report details that four meetings of the Working Party on Tax Questions have taken place (31 March, 30 April, 21 May and 9 June 2015) since the Tax Transparency Package was published, with the proposals being discussed in detail at each meeting. The Report further sets out a number of open issues and questions raised at those meetings. In the Report, the Presidency asks the Council to discuss these questions, in order to move the proposals forward, and to help the incoming Presidency to draft a compromise text for the DAC that could eventually be tabled for the political agreement of the Council in the autumn of 2015.

Scope and timing of exchange of information
In regard to the scope of definitions of ATRs and APAs, the Report noted that the definitions proposed by the Commission are too broad for a number of Member States. While the objective of the Tax Transparency Package is to cover as wide a scope of ATRs and APAs as possible, some Member States raised concerns that too much room for interpretation (by introducing a distinction between binding and non-binding rulings, for example) would create uncertainty. The Presidency therefore deemed it appropriate, to narrow the scope to ATRs and APAs which are issued to specific taxpayers or groups of taxpayers, with the effect of exempting from automatic exchange the commentaries of tax laws of a general nature.

In terms of the proposal to require the exchange of ten years of ATRs and APAs, the report notes that many Member States believe that this requirement goes beyond what is reasonably required for reasonable tax transparency purposes, as well as creating an overly voluminous administrative burden. The report makes no reference to what time period may be more acceptable to those Member States.

On the starting date of the exchange of new rulings, many Member States argue that at least 12 months would be required to transpose any new rules into national legislation. Therefore, the Presidency deemed it appropriate to bind the starting date of mandatory exchange of information (which was originally set to be 1 January 2016) with the transposition deadline, which would be 12 months from entry into force of the new amending Directive.

Taking OECD work into account

The Report states that a number of Member States have expressed that further work on a Presidency compromise should take into account work conducted at the Organisation for Economic Co-operation and Development (OECD) level, specifically within Action 5 of the Base Erosion and Profit Shifting (BEPS) project and at the Forum on Harmful Tax Practices (FHTP). Action 5 of the BEPS Action Plan calls for a framework for compulsory spontaneous information exchange on rulings to member and associate countries’ preferential regimes, with a view to starting to apply the framework following the FHTP’s Autumn 2015 meeting. The Report further notes that the OECD work currently seems to cover a narrower scope of ATRs and APAs than proposed by the Commission’s proposals. This, in turn, leads the Presidency to aim at an agreement within the EU of a higher standard, in order not to undermine the objectives of the Commission proposal. In that regard, the Report notes that the standard form developed by the FHTP for rulings exchanged could also potentially be used for the automatic exchange of information within the EU, as well as providing inspiration around the potential ”retroactivity” date used.

Exemption of bilateral and multilateral APAs with third countries
The Report notes that while all Member States support that APAs should fall under the scope of mandatory automatic exchange of information, a number of delegations believe it is important in certain cases to exclude from the proposed Directive the information exchanged with third countries, where such an APA was agreed to before the entry into force of the revised DAC.

Specifically, the Report notes that:

However, a number of delegations believe it is important, for reasons of legal certainty and under a set of very strict conditions, to exclude from the proposed Directive the information exchanged with third countries when agreeing to bilateral or multilateral APAs with third countries, which have been agreed to before the entry into force of this Directive, under existing international treaties, where those treaties foresee stricter confidentiality standards than would be provided for in Directive 2011/16/EC, once this legislative proposal on automatic exchange of ATRs and APAs has been adopted.

Role of the Commission in the new mechanism
The Report closes with a series of main features with regard to the Commission’s central role in the new rulings exchange mechanism. These include:

The initial information on the ATRs and APAs being communicated not only to other Member States, but also to the Commission
That the Commission would have to develop a central directory, where the information exchanged would be stored and the Commission would have access to all data
That the Commission would, by way of the “comitology”2 procedure, develop a standard form and all other measures and practical arrangements that are required for the first stage of the automatic exchange of information.
Implications
The series of open issues and questions raised at the four successive meetings of the European Commission’s Working Party on Tax Questions reflects the sensitive nature of the issue of tax rulings in Europe. With much debate and discussion due in the coming months in advance of a compromise text for the DAC, the business community should make all efforts to closely monitor developments.

Endnotes
1. See EY Global Tax Alert, European Commission presents a package of tax transparency measures, dated 19 March 2015.

2. Comitology is the process by which EU law is modified or adjusted and takes place within Comitology Committees chaired by the European Commission.

EYG no. CM5538

This is an important development, as the European Commissions’s aggressive timetable and efforts to tackle tax abuse are ameliorated by practical and relevant concerns of practicality and usefulness.  

Monitoring Developments to address tax risk

A Board member may ask: How is the tax dept. monitoring daily developments of the OECD, BEPS Actions, European Commission, European Parliament, unilateral country actions, US Congress/Treasury, etc. to assess tax risk in this new era of transfer pricing interpretation?

For example, one University assigned this daily task to one individual who would report his findings for others to follow up.  However, many times this is not a proactive process, especially as new OECD transfer pricing guidelines, and perceptions of what a fair tax should be, develop for implementation in the foreseeable future.  If a tax department is fragmented for responsibilities of different areas (i.e. indirect tax, customs, direct tax, regional tax, country taxes, etc.) or regions, many people may be performing this function specifically to identify developments related to their narrow function.

Best Practice principles should be applied to allow time for planning, creating/revising new systems, interacting with other key stakeholders, etc.  Different tactics may be employed, although avoiding duplication of efforts and integrated communication should be the focus to identify efficiencies in a tax risk framework.  This need should be addressed in the short term, with long-term sustainability elements for new waves of ongoing actions by many interested parties.

European Commission’s new Action Plan

My prior post of 30 May 2015 revealed that the European Commission would be developing a new Action Plan, the contents of which are hereby revealed.

The objectives of the new Action Plan are:

  1. Re-establish the link between taxation and where economic activity takes place
  2. Ensuring that Member States can correctly value corporate activity in their jurisdiction
  3. Creating a competitive and growth-friendly EU tax environment
  4. Protecting the Single Market and securing a strong EU approach to external corporate tax issues, including BEPS measures, to deal with non-cooperative tax jurisdictions and to increase tax transparency

The new Action Plan is provided for reference:

Click to access com_2015_302_en.pdf

5 Key Action Areas:

  1. Mandatory Common Consolidated Corporate Tax Base (CCCTB), with the consolidation component included as a second step.
  2. Taxation of profits where they are generated (“However, it is clear that the current transfer pricing system no longer works effectively in the modern economy.”)
  3. Enhance the EU’s tax environment via cross-border loss offset and improving double taxation dispute resolution mechanisms.
  4. Increased tax transparency via an EU-wide list of third country non-cooperative tax jurisdictions and assessing whether additional disclosure obligations of certain tax information should be introduced.
  5. Providing EU Coordination Tools to improve Member States’ tax audit coordination and reforming the Code of Conduct for Business Taxation and the Platform on Tax Good Governance.

The European Commission’s Action Plan clearly reveals a large step away from the traditional arm’s-length transfer pricing principle and toward an economic activity based source of taxation.  This clear divergence, with the OECD and established legislation in most countries, sets the stage for a new evolution in transfer pricing and a hybrid of different approaches by various jurisdictions in the next several years.

Accordingly, the Action Plan is required reading to appreciate short and long-term objectives of the European Commission to unify the Member States.

France’s 5% participation exemption disparity may end

The KPMG News Flash reveals: “The AG concluded that the French rules that allow a French parent company a full exemption in respect of dividends received from domestic subsidiaries under a group taxation regime, but effectively tax 5% of dividends received from shareholdings in EU subsidiaries, is in breach of the freedom of establishment. The CJEU now has to decide the case.”

https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/france-jun15-2015.pdf

It is hopeful the CJEU follows this legal conclusion, thereby restoring a consistent participation exemption regime in France for domestic and foreign subsidiaries.  Other Member States will also be following this case to the extent similar arrangements are in place.

NID: Italy’s perspective

Italy’s new guidelines deny benefits of the Notional Interest Deduction (NID) to “tainted contributions” to avoid the granting of dual benefits by respective entities.  There is a tracing mechanism that can be confirmed in a ruling process to rebut the dual benefit presumption.

PwC’s publication provides a succinct summary of this latest development.

Click to access pwc-guidelines-notional-interest-deduction-anti-avoidance-rules.pdf

The NID arrangement may represent an opportunity to achieve a local tax benefit as OECD’s BEPS Action Item and unilateral legislation enacted by various countries restrict interest expense deductions premised on the basis of a base erosion / profit shifting technique, although not suggesting an interest income offset that would ameliorate double taxation for a multinational organization.  

However, the proposed US Model Income Tax Convention (refer to 23 May 2015 post) includes the denial of treaty benefits for Special Tax Regimes, which is inclusive of a NID arrangement.  The arrangement that Italy is providing may not receive treaty benefits with the US if this proposal is included in the final legislation, thereby providing evidence of unilateral actions that produce non-intuitive and disjunctive results.  This lack of coordination will increase with future unilateral actions by countries that mitigate the OECD’s brave intentions to achieve global consistency and uniform guidelines.

US & BEPS conformity: (Un)certainty

The attached letter from the Congressional tax-writing Committees to US Treasury sets the stage for future US BEPS conformity and policy approach.  This letter is especially revealing after the US has declined an invitation to be a member of the ad-hoc group for creating a BEPS Multilateral Instrument, of which over 80 countries have signaled their positive intent.

The letter also questions the positive verbal nods from the US that it has relevant legislative authority to collect the Country-by-Country report, and disseminate it, in accordance with OECD’s intent.

Additionally, the letter confirms that the US strongly adheres to the arm’s length transfer pricing principle, which was in clear evidence during the BEPS proceedings.

Only time will reveal the final answers, however the inward US focus is clearly evident as has been the case for other countries that have already adopted BEPS incentivized legislation that may not conform with OECD’s final guidelines.
The letter is attached for reference, with my highlights for emphasis.

Hatch, Ryan Call on Treasury to Engage Congress on OECD International Tax Project
Lawmakers Push to Ensure Global Tax Law Recommendations Benefit U.S. Interests
June 9, 2015 – PRESS RELEASE
Ryan: BRENDAN BUCK (202) 226-4774
Hatch: JULIA LAWLESS (202) 224-4515

WASHINGTON — In advance of the 2015 Organisation for Economic Cooperation and Development (OECD) conference on Base Erosion and Profit Shifting (BEPS) taking place this week in the nation’s capital, Senate Finance Committee Chairman Orrin Hatch (R-UT) and House Ways & Means Committee Chairman Paul Ryan (R-WI) called on Treasury Secretary Jack Lew to work with Congress to ensure the international tax proposals being considered under the BEPS project are beneficial to American workers and job creators.
“As your BEPS discussions continue and proposals are considered, we strongly encourage you to continue engagement with us and to solicit input from the tax-writing committees,” wrote Hatch and Ryan in a letter today. “We have been monitoring, and continue to monitor, the BEPS project, and we understand the significance it carries in the global community and its potential impact on U.S. workers and their multinational employers. We stand ready to work with you as the BEPS discussions conclude and final reports are issued this year so that we reach good outcomes for the United States and U.S. companies and provide an atmosphere within which we can continue to work towards U.S. tax reform.”

The text of the letter is a below and a signed copy can be found here.

June 9, 2015

The Honorable Jacob Lew

Secretary of the Treasury

U.S. Department of the Treasury

1500 Pennsylvania Avenue, NW

Washington, DC 20220

Dear Secretary Lew:

As the leaders of the Congressional tax-writing committees, we are writing to you about the need for the Treasury Department to remain engaged with Congress as you and your colleagues negotiate and develop proposals with member countries of the Organisation for Economic Co-operation and Development (OECD) and others on fundamental changes in international tax rules under the OECD’s Base Erosion and Profit Shifting (BEPS) project.

Congress is tasked with writing the tax laws of the United States, including those associated with cross-border activities of U.S. companies. Regardless of what the Treasury Department agrees to as part of the BEPS project, Congress will craft the tax rules that it believes work best for U.S. companies and the U.S. economy. Close consultation between Congress and the Treasury Department should inform the BEPS discussions. We expect that as we move forward on U.S. tax reform, U.S. tax policy will not be constrained by any concessions to other nations in the BEPS project to which Congress has not agreed.

As your BEPS discussions continue and proposals are considered, we strongly encourage you to continue engagement with us and to solicit input from the tax-writing committees. We have been monitoring, and continue to monitor, the BEPS project, and we understand the significance it carries in the global community and its potential impact on U.S. workers and their multinational employers. We stand ready to work with you as the BEPS discussions conclude and final reports are issued this year so that we reach good outcomes for the United States and U.S. companies and provide an atmosphere within which we can continue to work towards U.S. tax reform.

We appreciate some of the work that your team has done as part of the OECDs BEPS project, especially efforts to defend and advocate certain long-standing tax principles, such as the arms-length transfer-pricing standard. However, we are troubled by some positions the Treasury Department appears to be agreeing to as part of this project. For example, we are concerned about the country-by-country (CbC) reporting standards that will contain sensitive information related to a U.S. multinational’s group operations. We are also concerned that Treasury has appeared to agree that foreign governments will be able to collect the so-called “master file” information directly from U.S. multinationals without any assurances of confidentiality or that the information collection is needed. The master file contains information well beyond what could be obtained in public filings and that is even more sensitive for privately-held multinational companies. We are also concerned about interest-deductibility limitation proposals on the basis of questionable empirics and metrics.

Some recent press reports have indicated that the Treasury Department believes it currently has the authority under the Internal Revenue Code to require CbC reporting by certain U.S. companies and that Internal Revenue Service (IRS) guidance on this reporting will be released later this year. We believe the authority to request, collect, and share this information with foreign governments is questionable. In addition, the benefits to the U.S. government from agreeing to these new reporting requirements are unclear, particularly since the IRS already has access to much of this information to administer U.S. tax laws. Therefore, we request that, before finalizing any decisions, the Treasury Department and IRS provide the tax-writing committees with a legal memorandum detailing its authority for requesting and collecting this CbC information from certain U.S. multinationals and master file information from U.S. subsidiaries of foreign multinationals. We also request that you provide a document: (i) identifying how the CbC reporting and other transfer pricing documentation obtained by the IRS on foreign multinationals operating in the United States will be utilized, and; (ii) providing the justification for agreeing that sensitive master file information on U.S. multinationals can be collected directly by foreign governments. In the event we do not receive such information, Congress will consider whether to take action to prevent the collection of the CbC and master file information.

We also have significant concerns about many of the provisions included in several other proposals of the BEPS project, including, among others, modifying the permanent establishment (PE) rules, using subjective general anti-abuse rules (GAAR) in tax treaties, and collecting even more sensitive data from U.S. companies to analyze and measure base erosion and profit shifting. These are but a few of the areas where we recommend that we work together to find consensus and identify a path forward for consideration as part of the BEPS negotiations and, if necessary, Congressional actions.

In the coming months, we look forward to working with you with respect to the BEPS project. In the interim, we want to remind the Treasury Department that it has the ability to refrain from signing on to the BEPS final reports, and we expect you to do just that if doing so protects the interests of the United States and of U.S. persons. Many of the OECD’s BEPS project objectives are sound, and international cooperation – as well as competition – in tax policies is desirable. We trust that you agree, however, that precipitous decisions to impose constraints on U.S. tax policy and added burdens on U.S. companies, especially on the basis of weak empirics and metrics, are not desirable.

Thank you for your attention to these important matters.

BEPS Action 8: Intangibles Draft

The OECD released the latest Discussion Draft on Action 8: Hard-to-value Intangibles.

Interested parties are asked to provide comments by 18 June, 2015.  A brief window period to comment should address concerns in the Draft as well as the questions posed at the end of the document.  A link to the Draft is provided for reference:

Click to access discussion-draft-beps-action-8-hard-to-value-intangibles.pdf

“The discussion draft includes an approach based on the determination of the arm’s length pricing arrangements, including any contingent pricing arrangements, that would have been made between independent enterprises at the time of the transaction. The approach protects tax administrations against the negative effects of information asymmetry when specific conditions are met. These conditions ensure that price adjustments will only apply where the difference between expected and actual outcomes cannot be explained by considerations other than inappropriate pricing.”

The valuation of intangibles has been a very complex topic for the OECD and interested parties to address to gain a mutual perspective and balanced approach.  Accordingly, this Draft and related comments will provide a new direction going forward for those countries embracing the final OECD guidelines.

BEPS Action 13 CbC reports: To whom, by whom, for whom

The OECD has released its final guidance on BEPS Action 13, Country-by-Country (CbC) Reporting Implementation Package.  The CbC reporting complements the previous drafts for transfer pricing documentation in the form of a master file and local country file.  The three pillars of reporting for this Action have been acknowledged by OECD as representing its definitive approach, with the dissemination of the Action 13 document to be issued later this year with the other Action items.

Click to access beps-action-13-country-by-country-reporting-implementation-package.pdf

Key points:

  • Three model Competent Authority Agreements based on the Multilateral Convention on Administrative Assistance in Tax Matters, bilateral tax conventions, and Tax Information Exchange Agreements (TIEAs).
  • In accordance with the recent OECD webcast, countries will have 6 months for the initial year to exchange such information (i.e. June 30, 2018 calendar year basis for the 2016 tax information submitted by Dec. 31, 2017, and 3 months for the following reporting year).
  •   Introduces the term “Surrogate Parent Entity” for substitute reporting.
  • Provides conditions for application of the Surrogate Parent Entity approach.
  • The CbC report shall be filed in a form identical to the OECD template.
  • Confidentiality provisions are discussed.
  • Penalties: “It is assumed that jurisdictions would wish to extend their existing transfer pricing documentation penalty regime to the requirements to file the CbC report.”

The manner in which countries implement this initiative should be closely monitored, as there will be differences to the general approach.  For example, Poland recently introduced this proposal into its domestic legislation, whereas other countries have relied on the ultimate parent entity concept for collecting such information.  Additionally, Spain also requires amounts to be reported in local currencies, a process that will not be uniform globally.

MNE’s should be cognizant of the flexibility required for this new transfer pricing risk initiative, while also foreseeing the recent public disclosure proposals by the European Parliament, European Commission and other interested parties.

Tax reputation / transparency survey: 2014-15

EY’s publication discussing tax reputation readiness and transparency provides suggestions for increasing readiness with good processes, robust documentation/audit trail and class-leading data management.  The publication is very timely, noting the recent European Parliament’s unanimous vote for public reporting of country-by-country (CbC) and beneficial ownership information.

Click to access ey-managing-tax-transparency-and-reputation-risk.pdf

Key points:

  • More than 60% of companies believe that engaging with the media is a “no-win” situation.
  • Excellent timeline/events of transparency initiatives commencing from 2003 until present, and future, state.
  • 65% of respondents have developed a more structured approach to managing their public tax profile in the previous 2 years.
  • 94% of respondents expect increased growth in global disclosure and transparency initiatives.
  • “Business can do more and be more proactive to prepare for new reporting obligations and, as one proposed step, either proactively or defensively,  Whatever choices a business makes, developing and sustaining the ability to source accurate data, in the right format and in a timely manner will be a critical factor for all large businesses in the years ahead.”
  • Multiple transparency initiatives are succinctly depicted in a table on page 9.
  • Transparency will be the new normal.
  • Quality information requires quality data.
  • Transparency readiness is a significant and underestimated need of companies.
  • Transparency readiness assessment questions are posed for consideration.
  • Detecting risk anomalies in the data is an important consideration; thoughtful questions are posed for review.
  • Companies that can quickly and clearly explain their tax transactions and strategies are best positioned to manage reputation risks.
  • Six proactive actions to consider:
    • Actively monitor the changing landscape
    • Assess readiness, and desire, to respond
    • Enhance communication with internal and external stakeholders
    • Develop steps to prepare the total tax picture
    • Decide with whom the company wishes to communicate
    • Embed reputation risk thinking into core business strategy

This survey provides an excellent approach and proactive roadmap in addressing the challenges, readiness and complex actions required to develop transparency readiness and engage reputation risk proactively.  Accordingly, this should be required reading for all MNE’s as a primer and self test mechanism to address the new era of international tax transparency and potential angles of attack for reputation risk.

European Parliament 24-0 vote for public disclosure: CbC & Beneficial Ownership

The European Parliament recently voted unanimously for public disclosure rules to fight tax evasion, tax avoidance and establishing fair, well-balanced, efficient and transparent tax systems.  A copy of the press release is provided for reference:

http://www.europarl.europa.eu/news/en/news-room/content/20150601IPR61336/html/Development-MEPs-call-for-action-to-target-tax-evasion-in-developing-countries

Summary:

  • All countries to adopt country-by-country (CbC) reporting, with all information available to the public
  • Beneficial ownership information to be made publicly available
  • Call for coordination to combat tax evasion and avoidance by the European Investment Bank, European Bank for Reconstruction and Development and EU financial institutions.
  • Request to the Commission for an ambitious action plan, without delay

The outcry for public reporting, currently underway by the OECD, European Parliament and European Commission is increasing exponentially within Europe.  Other countries will obviously follow the EU approach, with perceptions of complicated international tax rules increasing disparity between application of the transfer pricing arm’s length principle.

The CbC reporting, and beneficial ownership detail, should be expected to be in the public domain if this trend continues.  Currently, it is a sign of an incoming tsunami that cannot be completely avoided.

 

TEI’s comments: BEPS Action 8, CCA’s

The referenced TEI comments provide an excellent understanding into the challenges and complexity of Cost Contribution Arrangements (CCAs). http://tei.org/Documents/TEI%20Comments%20BEPS%20Action%208%20-%20CCAs%20-%20FINAL%20to%20OECD%2028%20May%202015.pdf\ Key observations:

  • The Discussion Draft comments deviate from the current accepted methodology of sharing costs (apart from contributions of pre-existing intangibles at fair value) into an assessment of value in order to be consistent with the arm’s length principle.
  • A CCAs risk arrangement is much different than other contractual arrangements, for which comparability  is illusory.
  • The Draft provides that low value-added series should be valued at cost for practical reasons, whereas BEPS Action 10 prescribes an election to value such services at a markup of 2-5%.  These approaches should be aligned.
  • If contributions are measured at value vs. cost, clarity of withholding tax application would be welcome.
  • The condition of required balancing payments should be removed as it is not a feature of arm’s-length adjustments.
  • Qualifications for a CSA participant should be clarified, as the Draft precludes a participant unless it has “the capability to make decisions to take on the risk-bearing opportunity, to make decisions on how to respond the the risks, and to assess, monitor, and direct any outsourced measures affecting risk outcomes under the CCA.”
  • Funding the research and development in a CCA should receive increased emphasis.
  • Complex and extreme examples should be accompanied by practical and easy examples to implement CCAs.

TEI’s comments introduce well written rationales for suggested changes to the Draft, resulting in a win-win opportunity for taxpayers and tax authorities. CCAs seem to be difficult to comprehend in various tax jurisdictions, thus the practicality to be introduced would significantly reduce misconceptions / assumptions for the use, and benefits, of a CCA.

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