Under the mandate of the Report on Actions 8-10 of the BEPS Action Plan (“Aligning Transfer Pricing Outcomes with Value Creation”), Working Party No. 6 (“WP6”) has produced a non-consensus discussion draft on financial transactions.
Comments are due by September 7, 2018. The treasury function, guarantees, intra-group loans, cash pooling transactions and captive insurance are the broad agendas discussed.
The guidance is not intended to prevent countries from implementing approaches to address capital structure and interest deductibility under domestic legislation, nor does it seek to mandate accurate delineation under Chapter I as the only approach for determining whether purported debt should be respected as debt.
As this guidance is critical for establishing if an instrument is true debt, as well as transfer pricing implications for financial relationships, this discussion draft is critical to review and provide relevant comments.
The OECD’s discussion draft is referenced herein for review.
On 22 June 2017, the “Platform for Collaboration on Tax” (the Platform) – a joint effort of the Organisation for Economic Co-operation and Development (OECD), United Nations (UN), International Monetary Fund (IMF) and World Bank Group (WBG) – released a toolkit (the Toolkit) designed to help developing countries address the lack of “comparables” for transfer pricing analyses and better understand mineral product pricing practices.
This Toolkit should also be reviewed by multinationals (MNEs) in developing countries to address the potential lack of comparables to better understand how the tax authorities will approach a transfer pricing audit. The mining supplement is required reading for those working in that industry.
Additional toolkits will be forthcoming:
- TP documentation
- Indirect transfer of assets
- Base eroding payments
- Tax treaty negotiation capacity
- Supply chain management
- BEPS risk assessment
As the first edition of the Toolkit has now been published, it will be interesting to watch developing countries apply the tools prescribed, providing a baseline going forward. All international tax practitioners should be familiar with this latest joint endeavor, as it is an indication of the shared resource approach that is now our future.
EY’s Global Tax Alert provides additional details, and the OECD Toolkit are referenced for review.
The latest BEPS updates are detailed in EY’s Global Tax Report, with the underlying premise of transparency.
OECD: On 5 December 2016, the OECD released an updated version of the Guidance on the Implementation of Country-by-Country Reporting, providing flexibility for notification filing dates for countries not requiring a country-by-country (CbC) report for 2016.
Belgium: New innovation deduction covering patent and other IP rights.
EU: Proposal for hybrid mismatch rules with non-EU countries
Norway: Adoption and regulations for CbC reporting
UK: Interest limitation rules, among other provisions
US: CbC Form 8975 released
From a MNE perspective, it is increasingly apparent that deductions to, and benefits from, tax haven countries are under attack and substance is the key to business and tax decisions.
The draft country-by-country (CbC) law has been forwarded to Parliament, in alignment with the EU Directive for 2016 tax year reporting.
A surrogate parent entity should file a CbC report with the Luxembourg tax authorities in one of the following cases:
- The ultimate parent entity (UPE) is not obliged to file a CbC report in its country of residence,
- The UPE is obliged to submit a CbC report, but there is no automatic exchange of CbC reports between Luxembourg and the country of residence of the UPE or
- The UPE is obliged to submit a CbC report,and there is automatic exchange of CbC reports, but due to systematic failure, no effective exchange of information takes place.
As the terminology includes “obliged” vs. voluntary filings in some countries, the filing entity and disclosure rules should be reviewed. Additionally, there are significant penalties for late/non-filing.
The EY Global Tax Alert, linked for reference, provides additional details.
Tax Executives Institute, Inc. (TEI) has recently submitted comments in response to OECD’s public discussion draft on Action 15 re: technical issues for the upcoming Multilateral Instrument.
A link to TEI’s excellent comments are provided for reference:
- Mandatory binding arbitration was not included, thus the increase in MAP cases seem inevitable.
- A “baseball” type of arbitration is recommended.
- All MAP cases should be eligible for arbitration.
- All signatories should adopt the Action 14 minimum standard.
- Countries should have the ability to choose what treaty-related BEPS measures it will adopt.
- Countries should have the ability to choose what treaty partners and relevant tax treaties would apply for various BEPS provisions.
- The modified provisions are only effective upon official ratification.
- A new peer process should be adopted for treaty interpretation.
The multilateral instrument is key to the consistent application of BEPS Actions, and the well-written TEI comments are highly recommended for all interested parties.