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.”
OECD’s BEPS Action 13 provides for a Surrogate Entity substitution concept if the headquarter jurisdiction of a multinational does not provide for country-by-country (CbC) reporting for the 2016 tax year. The concept is ideal, if a CbC reporting country considers this Surrogate Entity concept in its legislation.
A review of CbC legislative actions by different countries reveals that such legislation will be inconsistent and will require the multinational to file separate CbC reports in various countries, irrespective of its choice of appointing a surrogate country that has an extensive tax treaty network with exchange of information provisions.
For example, the legislative language of Spain does not provide for the Surrogate Entity concept, thereby requiring a Finnish (and possibly U.S., dependent on Final Regulations) based multinational to file the 2016 Spanish CbC report in Euros. One of the Spanish tax authority representatives recently expressed an opinion that no advance rulings/arrangements will be acceptable for CbC Surrogate Entity filing: The law is the law.
Several issues for consideration by a multinational thinking of a Surrogate include:
Every country’s CbC adopted legislation will require review to determine if a Surrogate filing is acceptable.
For countries that will require a local filing, adoption of such country’s CbC rules will be required re: content, timing, reporting currency, etc.
Upon conclusion of the dynamic review, the CbC template may require adaptation for local filings of countries that have OECD + CbC legislation, adding details beyond those prescribed in BEPS Action 13.
Most countries have penalties (fines/civil/criminal) applicable for failure to file a CbC report.
The definition of a Surrogate Entity, in addition to BEPS Action 13, are included for reference.
The term “Surrogate Parent Entity” means one Constituent Entity of the MNE Group that has been appointed by such MNE Group, as a sole substitute for the Ultimate Parent Entity, to file the country-by-country report in that Constituent Entity’s jurisdiction of tax residence, on behalf of such MNE Group, when one or more of the conditions set out in subsection (ii) of paragraph 2 of Article 2 applies.
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:
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.
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.
Jurisdictions are legislating global tax disclosure statements as a separate filing requirement or included with the respective local corporate income tax return. Recent examples seem to highlight this new initiative, including France and Chile. Examples of information requested include entities with legal ownership of IP, entities that have no assets or substance (i.e. holding companies), etc., irrespective of intercompany transactions with the local entity.
These new disclosures have added additional risks for operational compliance, as well as a need to centralize such information. Some multinationals (MNEs) have placed this compliance responsibility with a local / regional team for efficiencies. However, this new reporting trend will require closer coordination of headquarters that has relevant knowledge of the global ownership of IP and legal structures.
Answers to these dislosure questions will pose new audit risks as tax administrations will make further inquiries and/or initiate an audit to assess potentially high risk transactions. This emphasis will include a vigorous challenge to treaty based positions with holding companies, including any general anti-avoidance or anti-abuse rules within the treaty or domestic legislation.
Additionally, audit queries based upon global disclosures will require seamless coordination with headquarters or the individuals possessing this information. Therefore, audit teams and ways of working will need to be strategized for information that is not generally retained by the local business team.
MNEs should monitor new disclosures and ensure there is an efficient governance process to accurately address the BEPS incentivized queries. This may involve a shift in responsibilities within the transfer pricing documentation process.
The post BEPS era signifies a new way of thinking, including the respective documentation responsibilities and structure of an internal transfer pricing team.
The Chilean Internal Revenue Service has implemented a 24 question disclosure based on BEPS, although going farther than the OECD’s Actions. EY’s Global Tax Alert is provided for reference:
Percentage of related party revenues
EBITDA percentage of related party expenses
Foreign related parties with no staff or relevant assets, and identify those which participated in intercompany transactions
Corporate reorganizations, transfer of functions involving foreign companies.
Taxpayers listed in the Large Business Division (Grande Contribuyente) must file SS No. 1913, as well as those considered large companies by the Chilean IRS. SS No. 1913 must be filed annually from 2016 onwards before filing the corporate return (Form 22), which is due in April.
A careful reading of the new disclosures should be undertaken by those having Chilean operations; this is also a trend that will probably develop in other countries.
Country-by-country (CbC) reporting, effective for the 2016 tax year, for French based MNE’s and other companies not subject to a CbC requirement. (Note for US MNE’s: under the proposed Regulations, this would require CbC reporting in France, and other countries, for 2016 whereas the 2017 tax year would be reported to the IRS in the US)
Penalty up to EUR 100k if a CbC report is not filed.
In addition to current French regulations for transfer pricing information, a new requirement has been added: Identification of jurisdictions where intra-group transactions are conducted or where group members own intangible assets.
The 10.7% exceptional contribution on corporate income tax has not been extended, thereby lowering the total effective tax rate. Calendar year taxpayers will not be subject to this charge for 2016.
Dividend distributions commencing in 2016 within a French fiscal group, or from an EU member, is subject to a 1% (vs. 5%) income inclusion, to bring its legislation into compliance with European law.
The EU Parent-Subsidiary Directive’s provisions are adopted: Anti-abuse de minimis clause including a “main purpose” or “one of the main purposes” test. Additionally, “an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.”
An advisory committee for the research tax cried and innovation tax credit has been created.
The new legislation highlights new trends that may be followed by other countries:
Significant penalties for non-filing of required CbC reports.
Additional subjectivity for anti-abuse provisions.
Legislation that has been adopted to conform with the European Court of Justice determinations.
Additional information reporting, including a focus on IP ownership.
All MNE’s should review these new provisions with a global perspective, not only with respect to companies operating in France.
The timing for implementation of country-by-country (CbC) reporting for non-US jurisdictions is of significant importance to US multinationals, due to the wording of the Proposed Regulations (23 Dec 2015 post).
The Proposed Regulations would require CbC reporting by US MNE’s starting in 2017, thereby not having such requirement in 2016. If there are no changes in the Final Regulations, US MNE’s will be required to submit CBC reports in many jurisdictions around the world. Some countries, such as Mexico, that aim to provide additional reporting items beyond the OECD model would present additional complications for a US MNE. Contemporaneous deadlines will also have to be met, that are prior to the US deadline.
Additionally, if an election provision is adopted in the Final Regulations, this may not solve the dilemma, as many countries are drafting legislation providing that if the parent jurisdiction does not require CbC reporting, then a separate CbC report has to be filed in their local jurisdiction. A literal reading of such language would result in a required domestic filing, as an election is not a “per se” requirement.
Similar complications will arise in countries that do not adopt CbC reporting for the tax year 2016.
Monitoring of the timing implications for CbC reporting should be a high priority to be addressed currently, with timelines established for the preparation of back-up reporting plans around the world.