OECD’s press release highlights their endorsement of the recently announced Anti-Tax Avoidance Package proposal.
“OECD Secretary-General Angel Gurría welcomed the Commission’s proposal, which he said marks an important milestone towards the development of a comprehensive, coherent and co-ordinated approach against corporate tax avoidance in Europe.”
This acknowledgment puts additional pressure on the EU Member States for unilateral adoption, as a Member State will not want to be seen as an outlier to transparency and the tax avoidance political landscape. Thereby, the possibility of unilateral adoption is (highly) likely.
Placing additional context behind the BEPS statement, the press release provided the following statement: “The OECD conservatively estimates revenue losses from BEPS at USD 100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues.”
The European Commission has clearly announced it’s intent to be the global leader in advancing OECD’s BEPS initiatives, with some proposals exceeding the scope / intent of the OECD.
Copies of the following documents are provided for reference, with subsequent posts addressing highlights of significant initiatives. It is important to distinguish the documents between Proposals for a Council Directive, Communications, Studies and Recommendations.
- Anti Tax Avoidance Package
- Proposal for a Council Directive re: tax avoidance practices
- Proposal for a Council Directive re: automatic exchange of information
- Annex to automatic exchange of information proposal
- Communication on an External Strategy for Effective Taxation
- Annexes to the external strategy communication
- Communication re: Tax Avoidance Package
- Study on Structures of Aggressive Tax Planning & Indicators
- Recommendation on implementation of measures against tax treaty abuse
The documents are required reading for all international tax practitioners, as they highlight the complex post-BEPS world and the trend indicators for the near future. We can assume that some of these developments will proceed for action very quickly, thereby imputing a doctrine that “time is of the essence.”
Thirty-one countries have signed the OECD’s multilateral competent authority agreement (MCAA) for the automatic exchange of country-by-country (CbC) reports, excluding the U.S.
The signatory countries are:
- Costa Rica
- Czech Republic
- Slovak Republic
- South Africa
The position of the US, noticeably absent from the list, is to enter into bilateral agreements with appropriate countries that have safeguards and governance in place, as well as countries that have an income tax treaty or tax information exchange agreement in effect.
OECD BEPS Action 13 provided models for the recommended CbC reporting options; a multilateral agreement, a double tax convention model and a model based on a tax information exchange agreement.
It will be critical to monitor the development of the CbC exchange process, in addition to timing mismatches and the necessity to identify a surrogate country, with additional complexities to consider.
Finland has proposed its new country-by-country (CbC) reporting requirements, having an effective date of 1/1/2017, as further summarized in EY’s Global Tax Alert provided for reference. Other countries have legislated CbC 2016 effective dates, thus a Finland multinational that does business in other countries requiring a 2016 effective date CbC report will be looking to adopt a surrogate country for its 2016 tax year.
This delay in effective date, while the intention may have been to help Finnish headquartered multinationals, presents significant complexities for their 2016 CbC reporting requirements. However it does the provide the Finnish / US tax authorities another year to ensure reporting processes are in place to review, and exchange, CbC information.
This legislation mirrors the US proposed regulations (i.e. Final Regulations yet to be issued), which delays the effective date past 2016.
This complexity, although anticipated by the OECD’s BEPS Actions in identifying a surrogate mechanism, understates the practical uncertainties that loom ahead. For example, some issues are called into question:
- Will the choice of a surrogate country lock in their CbC requirements, as would be the case if its present headquarter jurisdiction adopted CbC for 2016? Or could other countries that have add-on CbC requirements, such as Mexico’s intercompany transactional detail, claim/assert that their local requirements could apply in a surrogate situation since the headquarter jurisdiction is not subject to the CbC automatic exchange of information?
- The search for a surrogate country will entail the review of treaty exchange mechanisms to reduce additional CbC filings, and complexities, in other countries.
- The identification of a surrogate will require review of CbC legislation by every country to ensure that a surrogate’s reporting / information exchange satisfies the literal reading of statutory requirements. This comprehensive review, that may not have been required by a US or Finnish multinational due to extensive exchange of information legislation, will need to be read in the broadest sense to avoid penalties.
- The identification of a surrogate has not been expressly anticipated by other countries that have proposed CbC legislation, apart from addressing the non-applicability of automatic exchange of information requirements for CbC reporting.
Post BEPS complexity increases with delayed reporting years for CbC reporting. It may take some time to fully understand all the nuances and complexities of surrogate reporting to ensure potential CbC disclosures are timely met and penalties avoided.
With these complexities becoming reality, countries should clarify CbC reporting in their respective jurisdiction by CbC surrogates.
EY’s Global Tax Alert summarizes recent BEPS developments around the world:
- Australia’s client experience roadmap re: its multinational anti-avoidance law (MAAL)
- Belgium’s adverse State Aid ruling by the European Commission re: its excess profit tax rulings, which is expected to be appealed
- Chile’s new sworn statement / tax disclosures (highlighted in a recent post)
- Finland’s draft proposal for country-by-country (CbC) reporting and transfer pricing documentation in a Master / Local file context
- Greece’s circular identifying preferential tax regimes
- Korea’s draft decree for transfer pricing documentation
- Luxembourg’s IP amendments and adoption of the EU Parent-Subsidiary Directive’s proposals
- Netherland’s CbC and transfer pricing documentation requirements
- Norway’s new rules for interest limitations, participation exemption regime inapplicable for hybrid instruments, and CbC reporting requirements
- Panama to announce its decision, in March, for adoption of the OECD BEPS recommendations
The trend for recent BEPS updates reflects an expansion of definitive actions into unilateral measures, decisions whether / when to adopt OECD’s BEPS recommendations, new disclosures, subjective anti-avoidance rules with inherent complexity, and each country’s expression of intent re: BEPS Actions coupled with local add-on documentation requirements.
Monitoring of the global developments in the post-BEPS era has introduced new challenges, requiring additional resources and thought processes for documenting transfer pricing methodologies and the business aspect of significant transactions.
The comment period, that ends 20 January, will be followed by an introduction of a general anti-avoidance rule (GAAR) that is broad and subjective in nature.
The Proposal defines tax avoidance as an act (or series of acts) applied in order to receive a tax benefit, which in certain circumstances defeats the object and purpose of the tax act, provided the way of conduct in the particular case was artificial. The determination of an artificial arrangement is further elaborated on via examples, including unjustified split of an operation, involvement of intermediary entities without substance, and a measure of economic vs. tax risk, among others.
This measure should be followed closely, as it can be applied very broadly, inconsistently and subject to the tax administration’s view of what is considered “artificial.” It also is focused on the use of holding companies without substance. EY’s Global Tax Alert provides further details on this development.