Strategizing International Tax Best Practices – by Keith Brockman

Archive for October, 2015

Dutch viewpoint: Retain advantages post-BEPS

The Dutch government has provided comments to the BEPS Guidelines, as they have generally been patient re: unilateral legislation that would represent non-conformity with the recently announced actions.  However, they would be ready to adopt tax incentives for Dutch taxpayers if there are unintended BEPS consequences that would weaken its attractive tax environment.  

PwC’ Tax Insights article provides details for this update:

Click to access pwc-dutch-government-responds-to-final-beps-reports.pdf

The article is refreshing re: BEPS conformity, including transparency, by the Dutch government.  The adoption of its innovation box regime as of 1/1/2017 will reflect the modified nexus approach of the BEPS Actions.

However, it is also interesting to note the measures it may take to retain its attractiveness for multinationals if there are adverse BEPS consequences.  This viewpoint is significant to watch, as other countries may adopt similar measures that will represent additional complexity and nonconformity around the world.  Additionally, each country will have its own view, in addition to unique incentives to protect its local tax base.

BEPS related developments

EY’s Global Alert highlights several OECD / unilateral actions resulting from the BEPS Action Items announced earlier this month.

Click to access 2015G_CM5827_The%20Latest%20on%20BEPS%20-%2026%20October%202015.pdf

Highlights:

  • Czech Republic’s 2016’s income tax proposal, including the EU Parent-Subsidiary Directive change limiting exemption of tax deductible distributions, although retaining its own general anti-abuse rule (vs. that in the Directive).
  • EU’s State Aid decisions re: Luxembourg and Netherlands, for which legal appeals are expected.
  • Honduras transfer pricing information return requirement.
  • Indonesian thin capitalization limit of 4:1, remainder of interest non-deductible (thereby incurring one-sided taxation re: interest income of recipient).
  • Ireland’s Knowledge Development Box, following the OECD’s recommendations, and country-by-country (CbC) reporting by Irish headquartered groups with a secondary filing mechanism.
  • Norway’s 2016 budget proposal, with an interest limitation of 25% of taxable EBITDA.
  • Slovakia’s 2016 income tax changes, including implementation of the EU Parent-Subsidiary Directive.

This new post-BEPS period is starting off with a multitude of activities by countries and the EU that is not expected to slow down in the near future.  These developments will shape the transfer pricing regime, and resulting complexity and disparity, around the world.  Accordingly, these trends should be monitored and addressed in a corporation’s tax risk framework accordingly.

Hungary’s tax risk system

The Hungarian government has submitted draft proposals for the 2016 budget.

Two important provisions are provided for review and advance planning:

  • Tax risk rating system of “risky” or “reliable” with corollary changes to tax authority deadlines and penalties.
  • Changes to IFRS, from Hungarian GAAP, for 2016.

EY’s Global Tax Alert provides additional details of these proposals:

Click to access 2015G_CM5889_Hungary%20submits%20new%20proposal%20for%202016%20tax%20law%20changes%20and%20publishes%20IFRS%20transition%20timeline.pdf

The risk rating system is becoming more of a norm, versus an exception, in various jurisdictions.  Accordingly, MNE’s should review its tax risk policies/framework to ensure a favorable “reliable” rating is achieved.

European Parliament’s tax policy paper

The European Parliament’s Policy Dept. A has provided a tax policy paper upon the request of the TAXE Special Committee of European Parliament.  An EY summary, and detailed report, are provided for reference:

Click to access 2015G_CM5880_European%20Parliament%20publishes%20paper%20on%20the%20EU%20Third-Country%20Tax-Governance%20Issues.pdf

Click to access IPOL_IDA(2015)563449_EN.pdf

Key topics:

  • Developing country tax governance issues
  • Tax system trends and challenges
  • Impact of tax havens on EU countries
  • Challenges faced by tax policy makers
  • Exchange of information
  • Tax transparency
  • Illicit activities
  • Harmful tax competition

As the EU has stepped in to take the lead on various post-BEPS initiatives, this policy paper is recommended reading to gauge the trend in these topics that will also take place worldwide.

UK’s Large Business Compliance Consultation: TEI’s comments

Tax Executives Institute (TEI) has provided practical and insightful comments in response to UK’s Large Business Compliance Consultation by HMRC, which is far-reaching.  A link to TEI’s comments is provided for reference:

Click to access TEI-Comments-UK-Public-Consultation-Improving-Large%20Business-Tax-Compliance-FINAL-to-HMRC-14-October-2015.pdf

Key points:

  • The Consultation is focused on UK HQ companies, although the proposals also apply to non-UK based multinationals (MNE’s).
  • The underlying principle is unclear, especially for non-UK based MNE’s, and should be amended accordingly.
  • A separate UK tax strategy is an unrealistic expectation for most MNE’s, and will provide little relevance if enacted.
  • A UK Code of Practice is also unrealistic for MNE’s.
  • UK taxes, paid or accrued, generally bears little relevance to the global effective tax rate and is not relevant.
  • UK’s current tools of general anti-avoidance rules (GAAR), Senior Accounting Officer (SAO) tax framework, newly enacted Diverted Profits Tax, a Customer Relationship Manager (CRM) and other anti-abuse rules are already in place and would seem to remedy HMRC’s concerns.
  • Special measures are subjective and not subject to a formal independent panel for review prior to execution.
  • Board-level accountability may not be practical, while the SAO framework may accommodate this proposal.
  • Signing, or not signing, the Code of Practice should not be a trigger for public disclosure or risk assessment.
  • The Code of Practice includes determinations that transactions meet the intent of Parliament, an inherently subjective test that may be applied at will regardless of the law.

The tax transparency see-saw has now tilted to a dangerous level, in that transparency objectives no longer seem to meet the needs of tax authorities.

Information is being requested to satisfy presumed needs of the public and tax administrations, although similar efforts are not being made to have discussions with taxpayers to better understand tax risk and the relevant functions, assets and risks for which transfer pricing should be based in the relevant jurisdiction.

The UK proposal, and similar initiatives, may indeed erode the trust for which the tax authorities are seeking.  It would be a novel concept to include the business community in discussions around these proposals prior to drafting, a welcome initiative that would better represent a win-win opportunity.  Additionally, all audits should begin with a formal understanding of the transfer pricing practices of the MNE in that jurisdiction to focus tax queries accordingly and efficiently.      

As the UK Diverted Profits Tax model has strayed from the OECD’s intent re: the BEPS Action Items, it has nonetheless been followed by other countries.  This proposal may have a similar result, magnifying the concern of MNE’s and merits a detailed review by all MNE’s irrespective of UK business presence.

CTO Best Practices

KPMG’s Chief Tax Officer (CTO) Insights provides Best Practices for improving relations with key stakeholders, including sample metrics that are a valuable working tool.

Click to access CTO_%20Insights_Issue%20Spotlight_Oct15.pdf

Key points:

  • Regularly scheduled meetings should be scheduled.
  • Individualized dashboards should be presented for different stakeholders.
  • A Tax Value Report should be presented once or twice a year, including important metrics as cash tax savings, cash flow processes and people initiatives.
  • An on-boarding program for new stakeholders should be developed.
  • Sample metrics may include
    • Number of audits
    • Tax rates/effective tax rates/cash tax rates– Benchmarks relative to peers

      – Country-specific for global operations

    • Various internal measures regarding risk management
    • Provision-to-return changes
    • Tax exposures and tax opportunities
    • Partnering with the business

    Similar to a tax risk framework that is shared with the larger business and finance leaders, a CTO’s Best Practice tools provide win-win opportunities to interact with key stakeholders and provide assurance for the importance, and recognition, of the tax function in a multinational organizaiton.

BEPS: Indirect tax impact

EY’s Global Tax Alert highlights the indirect tax consequences resulting from final guidance of the BEPS Action Items:

Click to access 2015G_CM5836_Indirect_OECDs%20recommendations%20on%20BEPS%20project%20has%20wider%20indirect%20tax%20implications.pdf

Key observations:

  • Interaction of Article 1 (Digital Economy) and Article 7 (PE) may create a wider gap for findings of a indirect tax “fixed establishment” and a direct tax “permanent establishment” (PE), although some countries do not respect such distinction.  Thus , business models merit a review for such changes.
  • Article 8 (Intangibles) set forth changes in allocation and valuation that may affect customs valuations.
  • Actons 8-10 (transfer pricing) may invite additional focus by tax authorities on VAT/GST and customs.
  •  Action 13 (country-by-country reporting) may invite scrutiny of indirect taxes.

The focus of BEPS has been on direct taxes, while its impact will now be measured for purposes of indirect taxes.  Thus, a BEPS review should encompass direct and indirect tax effects, including VAT/GST and customs.  

OECD BEPS Action Items

Attached is the link to access the OECD webcast and all of the BEPS Action Items released on 5 Oct. 2015.

http://www.oecd.org/ctp/beps-2015-final-reports.htm

Needless to say, the process of reading, and reviewing, the Action Items has commenced by many.

Importantly, multinationals now have the final rules by which the impact on their organization can be assessed, and action plans developed accordingly.  However, there will be timing differences as to when such guidance is implemented into law by countries, as well as “soft law” conformity.

EU transparency: New Ruling Directive re: tax ruling exchange moves forward

The new EU Directive for the automatic exchange of tax rulings now moves forward for approval, with an effective date of 1/1/2017.  A copy of the press release is provided:

Click to access 40802203260_en_635797403400000000.pdf

Key observations:

  • Cross-border tax rulings and advance pricing agreements (APAs) will be automatically exchanged between EU Member States.
  • The rulings will be stored in a EU central repository, with access available to the Member States.
  • Rulings issued from 2012 will generally be included in the exchange of information, subject to de minimis thresholds.

This development is now moving forward with a transparency focus, although what information will practically be exchanged may be different dependent on the respective Member State.

Multinationals should review prior rulings subject to this exchange to avoid potential surprises.

UK’s CbC Draft Regulations: accuracy check by HMRC

HMRC has provided a technical consultation and explanatory memorandum for new regulations of UK’s country-by-country (CbC) reporting.  Comments are due by 16 Nov. 2015.  A link is provided for reference:

https://www.gov.uk/government/publications/technical-consultation-country-by-country-reporting

An interesting, and debatable, provision is Section 9 of the technical consultation, Provision for information, which is copied herein.  To the extent that a company is considered a “reporting entity,” the provision provides for a request of information, that may reasonably be required, (within 14 days in a form specified by HMRC) to substantiate the accuracy of the CbC report.  

On the heels of the OECD release of the Action Items, including Action 13 CbC reporting, HMRC has released this documentation for consultation.  However, Section 9 may be far-reaching in that there is no transparency into the intent of HMRC or purpose of such potential request.

For example, does this exercise include the accuracy of all entities included in the CbC report?  What type of documentation would be requested, and in what form?  Should the request be limited to UK entities only?  If there are potential inaccuracies in countries other than the UK, what happens then?  What transparency is provided for this process?  Will this request be reviewed prior to informing the taxpayer?  Will such review be shared with other countries?

This provision seems to be far-reaching, and could be followed by other countries.  Therefore, it is paramount that all multinationals monitor such developments, as this will significantly increase complexity.

Provision of information

9.—(1) An officer of Revenue and Customs may, by notice in writing, require a reporting entity to provide the officer with such information (including copies of any relevant books, documents or other records) as the officer may reasonably require for the purposes of determining whether information contained in a country-by-country report filed by that entity is accurate.

(2) A notice under paragraph (1) may specify or describe the information to be provided.

(3) Where a person is required to provide information under paragraph (1), the person must do so—

  1. (a)  within such period, being no less than 14 days; and
  2. (b)  at such time, by such means and in such form (if any),

as is reasonably specified or described by Revenue and Customs.

EU Customs Code changes: time to act

EY’s Global Tax Alert highlights important changes to be introduced by the EU Customs Code.

Click to access 2015G_CM5815_Indirect_Implementation%20of%20EU%20Customs%20Code%20to%20bring%20substantial%20changes%20to%20customs%20valuation.pdf

Key points:

  • First Sale for Export rule abolished, although some planning opportunities exist in the short-term.
  • Bonded warehouse transactions are somewhat unclear.
  • Royalties, license fees and trademark intangible transactions are undergoing major changes.

As the OECD is preparing to issue final Guidelines for the BEPS Actions tomorrow, it is a critical time to ensure that tax and customs practices for multinationals are integrated in their operations while sharing Best Practices and learning how the international tax world is being transformed.  

The EU Customs Code changes merit immediate review for planning opportunities, as well as time to change systems accordingly for the new rules.

Spain’s tax law changes

Spain’s tax law changes have been published, effective as of October 2015.

Click to access 2015G_CM5807_Spain%20amends%20its%20General%20Tax%20Law.pdf

Key observations:

  • The Law introduces a new penalty for a specific anti-abuse provision in cases for application of GAAR.
  • The statute of limitations period of CIT years in which an entity has generated losses and tax credits has been extended from 4 years to 10 years. The Law now extends this provision to all other taxes.
  • Duration of an audit has been extended from 12 to 18, or 27, months.
  • A Statute of Limitations period of 10 years has been established for EU State Aid cases.

As new penalties are being legislated, in Spain and elsewhere, for subjective provisions in the tax law it is becoming mandatory to assess such provisions in the tax planning stages for significant transactions.  This is especially true when the subjective interpretations of GAAR, and the tax authorities, are inherently uncertain and potentially leading to double taxation.

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