Strategizing International Tax Best Practices – by Keith Brockman

Archive for September, 2015

BEPS update

Apart from the expectations surrounding the 5th October release of the OECD BEPS Action Items, the referenced EY Global Tax Alert provides relevant details for the following BEPS related activities:

  • Australia: Multinational anti avoidance law (MAAL), transfer pricing documentation
  • Belgium: Payments to “tax haven” jurisdictions
  • Bulgaria: Consultation draft re: the EU Parent Subsidiary Directive; although the broader local GAAR would be retained
  • China’s recent developments (refer to my 26 Sept. post)
  • Denmark: Transfer pricing documentation
  • Japan: Court case re: PE and “preparatory or auxiliary” exception
  • Kuwait: Virtual Service PE interpretation (refer to my 23 Sept. post)
  • NL: Transfer pricing doucmentation

Click to access 2015G_CM5800_The%20Latest%20on%20BEPS%20-%2028%20September%202015.pdf

The latest developments, along with future unilateral actions that follow the intent of the new OECD Action Items, should be monitored closely.  Additionally, such concepts should be reviewed for domestic legislative compliance, vs. intent.

China’s proposed TP documentation; Non-transparent

China’s State Administration of Taxation (SAT) has issued a consultation draft encompassing transfer pricing documentation; comments are due by 16 October 2015.  The draft includes OECD BEPS Action concepts, such as the form of transfer pricing documentation, although retaining arguable local concepts and introducing intangible definitions prior to the final OECD Guidelines.

Click to access 2015G_CM5783_TP_Chinas%20TAs%20issue%20groundbreaking%20consultation%20draft%20to%20update%20TP%20rules%20in%20a%20Post-BEPS%20environment.pdf

Key observations:

  • The three tier TP documentation concept of Master File, Local File and Country-by-Country report (for Chinese based multinationals) is introduced.
  • A “Special File” is also required for intercompany services, providing copies of agreements, allocation keys and evidence supporting the “benefit test.”
  • “Intangibles” is broader than the OECD proposals, including marketing channels and customer lists.
  • Advance Pricing Agreement (APA) procedures are clarified.
  • The use of transfer pricing comparables is broad and runs counter to the transparency or consistency test.  The use of secret comparables, one comparable, one or multiple year results are allowed.
  • Anti-shifting provisions are to be used for transactions with entities of little substance, thereby increasing Chinese profits.
  • Profitability monitoring will be used to establish a tax risk hierarchy system.

Although the Consultation report includes consistent BEPS measures, there are also concepts included that do not provide consistency with other countries, increasing the risks of double taxation.  Thereby, China is inwardly focusing on its fisc while representing a “rogue” player on the OECD playing field.

All multinationals with operations in China should determine their course of action for these proposals, including a review of holding companies for intercompany transactions with Chinese entities.  

Denmark’s CbC proposals

Denmark has published its requirements for country-by-country reporting (CbCR), effective for the 2016 tax year by ultimate Danish parent companies.  The content of the report aligns with OECD BEPS Action 13, including the reporting date by the end of 2017.

There are notification requirements re: a “surrogate parent entity” for which the parent jurisdiction will be entering into exchange information agreements for CbCR.

Details are provided in EY’s Global Tax Alert:

Click to access 2015G_CM5788_Denmark%20publishes%20proposal%20to%20introduce%20Country%20by%20Country%20Reporting.pdf

Kuwait: Virtual Service PE

Kuwait’s Department of Inspections and Tax Claims (DIT) has introduced its interpretation of a Virtual Service PE, notwithstanding its nonconformity with the physical presence standard and its double tax treaties in accordance with OECD’s Model Convention.

Unfortunately, this concept is not new in the Middle East and it is hoped that other countries will not follow this breakaway interpretation.

EY’s Global Tax Alert provides additional details into this development:

Click to access 2015G_CM5779_Kuwait%20Tax%20Authorities%20adopt%20Virtual%20Service%20PE%20concept.pdf

Key observations:

  • The Virtual Service PE concept takes into account only the duration of the contract itself.
  • Work extending beyond the tax treaty threshold of 183 days will be presumed to have created a Service PE.
  • The DIT takes the position that a nonresident is deemed to have a PE in Kuwait, particularly, if the following conditions are met:
    • A nonresident furnishes services to an entity in connection with the latter’s activity in Kuwait.
    •  The period during which such services are rendered according to the contract, exceeds the threshold period under the applicable tax treaty.

The immediate implication of the DIT’s current approach to a “Virtual Service PE” is that the applicability of tax treaty-based income tax exemptions with respect to cross-border services has become highly uncertain.

Accordingly, all legal agreements and provision for services to Kuwait (disregarding the physical standard) should be reviewed for potential disputes based on a Virtual Services PE argument.  Practically, it may also be difficult to obtain tax treaty relief from double taxation.

 

TFEU: Tool for EU Directives

The European Commission (EC) and European Parliament (EP), including the TAXE Committee on Rulings established by the EP, have recently endorsed many provisions that would normally require the unanimity of approval by the Member States.  Knowing this has not resulted in success with prior initiatives, a renewed focus may be taking place re: Article 116 of the Treaty on the Functioning of the European Union (TFEU) which empowers the EC/EP to issue a Directive accordingly.

Article 116 TFEU:

Where the Commission finds that a difference between the provisions laid down by law, regulation or administrative action in Member Sates  is distorting the conditions of competition in the internal market and that the resultant distortion needs to be eliminated, it shall consult the Member States concerned.

If such consultation does not result in an agreement eliminating the distortion in question, the EP and the EC, acting in accordance with the ordinary legislative procedure, shall issue the necessary directives.  Any other appropriate measures provided for in the Treaties may be adopted.

 

The TFEU is the same legal mechanism used to address State Aid, and may also be the choice of implementation to establish Directives for one or more of the following initiatives:

  • EU Common Corporate Tax Base (CCTB)
  • Country-by-Country (CbC) reporting, public disclosure
  • Tax rulings, (redacted) public disclosure
  • Permanent Establishment (PE) definition
  • Anti-BEPS Directive, transforming OECD “soft law” into an EU legislative framework
  • Interest & Royalty Directive requiring confirmation of EU tax being paid elsewhere
  • EU Dispute Resolution approach

Everyone should monitor the EC, EP and TAXE for continuing developments, as they may form the basis for new global standards to enact the intent of BEPS initiatives.

Dutch draft TP & CbC law

The Dutch State Secretary of Finance has released a draft law that correlates to BEPS Action 13 for transfer pricing documentation and country-by-country (CbC) report.

The CbC report will not be required to be filed in the Netherlands if such report is filed with a jurisdiction that has an information exchange agreement with the Netherlands on such reports.

Click to access 2015G_CM5764_TP_NL%20releases%20draft%20law%20implementing%20new%20TP%20doc%20requirements%20in%20line%20with%20BEPS%20Action%2013.pdf

  • The draft law states that a transfer pricing adjustment may not be based on the CbC report.
  • The CbC report aligns with the BEPS Action 13 requirements.
  • The Master and Local file re: transfer pricing documentation will be required contemporaneously with the filing of the tax return, with such information to be provided upon request.
  • A criminal offense will take place, for the most serious cases, if the CbC reporting requirements are not satisfied.

The draft law should be reviewed by organisations with operations in the Netherlands, noting it follows the BEPS Action 13 proposal.

The contemporaneous requirement for the Master file and Local file should be met to avoid potential fines/penalties.

New age of transparency / reputational risks

The latest EY tax risk and controversy survey series, entitled A new mountain to climb, provides some insights re: preparing for and proactively management tax / reputational risks.  A link to the report is provided for reference:

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

Key observations:

  • Media coverage of how much companies pay in tax / low effective tax rates is extensive, although engaging with the media is seen by many companies as a “no-win” situation.
  • Leading companies have transformed  the process of communication for tax risks and controversy to internal and external stakeholders.
  • Transparency is providing information to tax authorities re: how much tax is being paid in other jurisdictions as a tool to decide if the company is paying enough tax in their jurisdiction.
  • Global disclosure and transparency requirements will continue to grow in the next two years.
  • Transparency readiness of companies is a significant and underestimated need.
  • Direct ERP access by tax authorities represents a next phase of risk assessment.
  • Transparency readiness can help mitigate reputation risk.
  • Reputation risk strategy elements:
    • Actively monitor the changing landscape.
    • Assess readiness/desire to respond.
    • Enhance communication with internal and external stakeholders.
    • Gain insight into the total tax picture through the lens of public perception.
    • Decide with whom the company wishes to communicate.
    • Embed reputation risk thinking into core business strategy.
  • Transparency is the new norm, and (media) reputation risk may be a permanent risk.

Transparency demands have created a new toolbox required by all multinational organisations.

A tax policy and reputation risk strategy should be essential tools in a comprehensive tax risk framework.  The EY report is required reading for all parties interested in learning more about tax risk trends and Best Practice ideas to proactively address the new world of transparency.

US CA relief: LOB / BEPS focus

The IRS issued Rev. Proc. 2015-40 recently, and this EY summary provides details re: the Limitation on Benefits (LOB) provisions for granting competent authority assistance.

The new rules highlight rules focusing on recent proposals for the US Model Tax Convention as well as the intent of BEPS re: “special regimes.”

Click to access 2015US_CM5749_US%20IRS%20releases%20revised%20procs%20for%20obtaining%20assistance%20from%20US%20CA.pdf

These changes are critical to resolving issues, and the impact of double taxation, accompanying an increasing trend in foreign tax adjustments.  This new procedure will become more visible as more countries implement BEPS guidelines via unilateral legislation and adoption of the OECD multilateral instrument.

French EU dividend tax: refund opportunity

EY’s notice provides details re: an opportunity to receive a refund of the 5% French tax for dividends received from EU subsidiaries.  The French rule was not consistent with the freedom of establishment principle of EU law.

A refund of such French taxes can be filed for taxes paid within the last two years. 

The 3% dividend tax for dividend distributions by a French parent to a non-EU subsidiary, versus intra-group French dividends, may encounter discrimination challenges due to its dissimilar application.

Accordingly, protective refunds should also be considered re: the French 3% dividend tax and similar EU  unilateral legislative provisions to ensure potential opportunities are not lost due to timing as to when the taxes were paid.  

Click to access 2015G_CM5739_CJEU%20holds%20French%20taxation%20of%20EU-source%20dividend%20incompatible%20with%20EU.pdf

“On 2 September 2015, the Court of Justice of the European Union (CJEU) rendered its decision on the Steria case, relating to the French taxation of dividends from European Union (EU) subsidiaries. The CJEU ruled that fully exempting dividends received from French, tax consolidated subsidiaries, but including a 5% fraction of dividends received from EU subsidiaries in the French taxable income, amounted to a discrimination infringing the freedom of establishment.”

BEPS TP & CbC reporting: EY Survey

EY’s survey of nearly 100 jurisdictions provides timely insight into unilateral activities and required legislative efforts to implement OECD BEPS Actions 8-10, transfer pricing guidelines, and Action13, transfer pricing documentation / country-by-country (CbC) reporting.

A link to the survey is provided for reference:

Click to access EY-country-implementation-of-beps-actions-8-10-and-13.pdf

Key observations:

  • OECD TP Guidelines:
    • 7 countries (including the UK) to adopt the changes without need for legislative/administrative action
    • 54 countries refer to OECD TP Guidelines by tax authorities/courts for interpretation, but are not binding
    • 21 countries refer to OECD TP Guidelines in domestic legislation
  • TP Guidelines are meant to be an extension of the Commentary to the arm’s length principle in Article 9; if the revised Guidelines go beyond such rules a change in existing treaties will be required for implementation, although the multilateral instrument in development under Action 15 may remedy this
  • Tax authorities have used BEPS initiatives for leverage in Australia, Spain, Hungary, New Zealand, Finland, Indonesia, France and India
  • TP and CbC documentation may be provided as an exchange of information if they are “foreseeably relevant”
  • Legislative action will be required in most countries with current TP legislation to implement Master / Local File requirements
  • Most countries will require a change in law for CbC reporting; 38 countries are/will have such implementation legislation, 49 countries are not yet known, while only 11 countries are not expected to implement in the short/medium term
  • CbC information will be widely exchanged via exchange of information articles in double-tax treaties, tax information exchange agreements or Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (and the corresponding Multilateral Competent Authority Agreement)

The survey is a “must read” for interested parties that will be affected by OECD Actions 8-10 and 13; it magnifies the imperative of collecting such information timely and is not dependent on which countries adopt certain provisions the first year (as information will be exchanged quickly around the world regardless of which jurisdiction the parent entity resides in).

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