Strategizing International Tax Best Practices – by Keith Brockman

Archive for February, 2016

EU & BEPS: Next steps

The EU, now recognized as the accelerator of BEPS for its Member States, have issued a roadmap of priorities and objectives for the near future.  A link to Deloitte’s World Tax Advisor is provided, and the attached article therein.

I have highlighted certain parts of the roadmap worth watching:

  • Country-by-Country reporting (will there be a consistent EU standard?)
  • Hybrid mismatch arrangements
  • Code of Conduct activities, including alignment of transfer pricing outcomes with value creation, an extension of BEPS Actions 8-10.  (Note Sweden and UK are already using such Actions re: clarification of existing transfer pricing policy)
  • Payments from an EU to non-EU country
  • The EU Arbitration Convention is mentioned, although it’s practical effect on mitigating dispute resolution is limited

http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dtt-tax-worldtaxadvisor-160226.pdf

European Union:
Dutch presidency issues EU-BEPS roadmap

The Netherlands, which currently holds the presidency of the council of the EU, issued an ambitious EU-BEPS “roadmap” on 19 February 2016 that sets out plans to move forward with previous EU proposals, as well as future efforts on areas relating to the OECD’s base erosion and profit shifting (BEPS) project. The roadmap includes the following:

  • Possibly including a minimum effective taxation clause in the EU interest and royalties directive, and also possibly including or referring to the OECD “modified nexus approach” (however, no mention is made of the previous proposals to reduce the shareholding requirement in the directive from 25% to 10%, add legal entities to the annex or remove the “direct” holding requirement);
  • Reaching consensus on the anti-avoidance directive proposed by the European Commission on 28 January 2016 (for prior coverage, see World Tax Advisor, 12February 2016);URL: http://newsletters.usdbriefs.com/2016/Tax/WTA/160212_1.html
  • Reaching agreement on the European Commission’s proposal to introduce the OECD BEPS minimum standard for country-by-country reporting in the EU;
  • Initiating discussions for reforming the EU Code of Conduct group (specifically, the group’s governance, transparency and working methods), followed by discussions on a revision to the mandate in relation to the concept that profits are subject, as appropriate, to an effective level of tax within the EU;
  • Reaching agreement on guidance and explanatory notes on hybrid permanent establishment mismatches in situations involving third countries;
  • Continuing to monitor the legislative process necessary to revise existing patent box regimes; and
  • Monitoring and exchanging views on the BEPS developments relating to tax treaties concluded by EU member states, the OECD multilateral instrument to modify tax treaties and the European Commission’s recent recommendations on the implementation of measures to combat tax treaty abuse. 

     

     

    The Code of Conduct group will start work on the following:

  • Preparing EU guidance on aligning transfer pricing outcomes with value creation, in accordance with BEPS actions 8-10;
  • Identifying potential issues that arise when payments are made from the EU to a non- EU country;
  • Assessing the opportunity for developing EU guidance for implementing the conclusions on BEPS action 12 (the disclosure of aggressive tax planning), notably, with a view to facilitating the exchange of information between tax authorities; and
  • Developing guidelines on the conditions and rules for the issuance of tax rulings by EU member states.Additionally, the High Level Working Party on Taxation may discuss the current situation regarding the EU arbitration convention that allows the settlement of transfer pricing disputes.

OECD: Welcome to BEPS

The OECD has introduced a new inclusive framework inviting all interested countries to address international tax rules ongoing.  All interested parties will be able to participate as BEPS Associates via the OECD’s Committee on Fiscal Affairs (CFA), thereby have equal participation as the OECD and G20 members including review and monitoring of BEPS implementation.

Indicative of the posture going forward, OECD Secretary-General Angel Gurria stated “It is another strong signal that behaviour which was considered both legal and normal in the past will no longer be accepted.”

This OECD proposal will require endorsement by the G20 at the meeting in Shanghai on 26-27 February, with the first meeting of the inclusive framework members in Kyoto, Japan on 30 June and 1 July 2016.

Links to the OECD press release and summary document are provided for reference.

http://www.oecd.org/tax/all-interested-countries-and-jurisdictions-to-be-invited-to-join-global-efforts-led-by-the-oecd-and-g20-to-close-international-tax-loopholes.htm

http://www.oecd.org/tax/flyer-implementing-the-beps-package-building-an-inclusive-framework.pdf

This new framework would mark another major milestone in the BEPS story; with hopes that global coordination and consistency will be enhanced vs. numerous voices protecting their fiscal growth, thereby adding additional complexity and unilateral actions around the world.

EU dispute resolution: time for your voice to be heard

The European Commission has recently released a public consultation on improving double taxation dispute resolution mechanisms, with comments accepted through 10 May 2016.  It is a process / Best Practices approach to enact future efficiencies.  A summary story and consultation links are provided for reference:

http://ec.europa.eu/taxation_customs/common/consultations/tax/double_tax_dispute_en.htm

http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/survey_consult_doc_double_tax_en.pdf

Highlights:

  • Double or multiple taxation by EU Member States is recognized as a barrier to operate freely across borders.
  • A legislative proposal is expected by the end of 2016, following the comment period.
  • The Mutual Agreement Process (MAP) currently is not bound to reach a solution.
  • The EU Arbitration Convention (re: transfer pricing cases and permanent establishment profit attribution) is acknowledged as a current process, but limited in scope.
  • The last such public consultation (2010) resulted in an arbitration provision, although it has not been mandated in double tax conventions.
  • Stakeholders’ views are requested on the relevance of removing double taxation, EU objectives and proposed solutions.

This document is pivotal in establishing practical and efficient EU dispute resolution mechanisms ongoing, and all interested parties should submit thoughtful input.

The proposal, as noted, would only be effective between EU Member States, not between one Member State and another non-EU jurisdiction or between non-EU jurisdictions.  The EU has been a strong proponent in leading global best practices in the post-BEPS environment.  Therefore, global consistency of the EU approach is also encouraged, especially by countries having no such dispute mechanism.  

Additionally, other  countries’ need to rethink sovereignty arguments in trying to evade / negate the effect that such transparent measures would have on their ability to address local tax practices.  

 

 

 

 

 

 

EU Anti-Tax Avoidance Package: PPT

The EU Anti-Tax Avoidance Package included a Commission recommendation on the implementation of measures against tax treaty abuse.  Specifically, this statement was issued to address artificial avoidance of permanent establishment status as stated in BEPS Action 7 Action Plan.

Re: tax treaties of Member States that include a “principal purpose test” (PPT) based general anti-avoidance rule, the following modification is encouraged to be inserted:

“Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capita l if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that it reflects a genuine economic activity or that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.”

This subjective phrase, that applies notwithstanding other provisions of the Convention, has already been used in new treaties and will proliferate as new treaties are drafted by a Member State, not necessarily with another Member State.  Thereby, it is important to draft supporting documentation that will provide support for transactions against which it is aimed.  This phrase will elicit additional appeals and court cases as to its meaning and / or intent for which non-consistent answers will be provided.

Questions that may be asked re: this statement:

  • Who is concluding on the reasonableness?  What facts are used for such determination?
  • Which facts and circumstances are relevant?
  • What are all of the principal purposes of the arrangement or transaction?
  • How is a benefit measured, directly or indirectly?
  • What is a genuine, vs. non-genuine, economic activity?
  • How do you determine if such arrangement is in accordance with the object and purpose of the “relevant provisions” of the Convention?

The phrase is purposefully vague, and thereby subject to inconsistent interpretation.

It is hopeful that tax administrations will use this statement wisely to address egregious transactions rather than ordinary business transactions for which the clear intent was not an evasion of tax.  This subjectivity will be important to monitor going forward to further understand subjective enforcement interpretations around the world.  

 

 

TP BEPS soft law: UK / Sweden

The UK tax authority, HM Revenue & Customs (HMRC), will refer to the OECD base erosion and profit shifting (BEPS) report on BEPS Actions 8-10 in transfer pricing audits.  Maura Parsons, HMRC deputy director and head of transfer pricing, has stated that HMRC will look to the 2015 BEPS reports in addition to the current OECD guidelines (although British law explicitly refers to the 2010 version on the transfer pricing guidelines).

Additionally, Sweden has taken a similar position and adopted the final OECD report in audits.

This line of reasoning is primarily based upon the premise / supposition that the new OECD guidelines are merely a clarification of existing rules, not requiring new legislation.  

In addition to the inherent uncertainty of the new rules, UK, Sweden and other countries that will adopt this position introduce additional challenges into understanding the current law, requirements and grounds upon which appeals / court cases will be based.  This is a new trend that promises to expand quickly into other countries, undermining the intent of transparency and consistency worldwide.  

Tax Strategies: The new norm

As a Tax Policy is recognized as a basic tool for the foundations of a Tax Risk Framework, documented tax strategies are becoming the new norm.

The UK had previously published requests for comments re: publishing a UK tax strategy by UK and non-UK multinationals (MNEs), followed by the EU Anti Tax Avoidance Package with a communique on the subject.

Highlights of EU Communication to the European Parliament:

  • A coordinated EU external strategy on tax good governance is essential for Member States’ to tackle tax avoidance, ensure effective taxation and create a stable business environment.
  • In 2012, the Commission issued a Recommendation encouraging Member States to use transparency, information exchange and fair tax competition to assess third countries’ tax regimes and to possibly apply common counter-measures.  However, this attempt is now recognized as a failed measure.
  • Annex 1 of the Communication sets forth new good governance criteria, which it invites the Council to endorse, as well as provide a basis for all EU external policies on tax matters and promotion of good governance.
  • Annex 2 provide elements forming the basis for negotiating future tax good governance clauses that are recommended for endorsement.
  • A tax good governance standard responds to the EU’s future development commitments and prevents international tax weaknesses that create opportunities for base erosion and profit shifting.
  • The EU seeks to lead by example re: tax good governance.
  • A pan-EU list to identify outliers of tax transparency and tax good governance will be an interim solution until a common EU system is developed. “Once a jurisdiction has been added to the EU list, all Member States should apply common counter-measures against it.”  The defensive measures should be a top-up to other EU Directives, including withholding taxes and non-deductibility of costs for company transactions.

The Communication and Annexes are required reading, as it sets the tone for ensuing battles between the EU Member States’ and other jurisdictions.  Unilateral actions by other countries will probably closely follow, as each country seeks to assert their rights while avoiding the possibility to lose a piece of the tax pie for which everyone is seeking.

It is becoming very clear that MNEs will face a documentation and tax risk framework action to document country/regional/global strategies that will form an element of the post-BEPS transparency world that many are seeking.  

EU Tax Avoidance Package: Automatic exchange of CbC reports

The EU Tax Avoidance Package contains a proposed amended EU Directive that would include CbC reporting as an automatic element of exchange of information between Member States.

Highlights:

  • The proposal expands the current Automatic Exchange of Information (AEOI) requirements in the EU.
  • The country-by-country (CbC) reporting would be encased in a legal instrument that would ensure certainty for companies within the EU.
  • “There is an urgent current demand for coordinated action in the EU on this matter of international political priority.”
  • On the basis of information in the CbC report, the mandatory CbC exchange would be accessible to those Member States in which “one or more entities of the MNE Group are either resident for tax purposes, or are subject to tax with respect to the business carried out through a permanent establishment of an MNE Group.”
  • Member States shall prescribe penalties in line with this proposal.
  • Member States shall adopt and publish, by 31 Dec. 2016, legislative provisions to comply with this Directive , and shall apply those provisions from 1/1/2017.

The proposal also addresses reporting by Surrogate Entities, although restricted to EU Member States.

This proposal pushes the EU initiative of being the global leader in post-BEPS implementation and providing direction for the rest of the world.  Accordingly, the proposal may be precedent setting for other jurisdictions and mandatory reading to understand CbC expectations and perceptions.

 

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