The OECD provided this guidance in April, 2020, although the PE issue remains in many countries due to the COVID-19 crisis. The guidance revisits OECD PE guidelines and commentary, and also represents opportunities to revisit potential PE issues for employees working from home as companies adopt regional and global work from home policies.
The document highlights the fact that temporary COVID-19 interruptions should not change a permanent establishment (PE) determination, although tax administrations should publish more guidance on their domestic PE laws and determinations.
Home offices, agency PE and construction site PE situations are addressed. Summaries are also provided for place of effective management (POEM)/dual residence, income tax considerations for cross-border workers, and treaty residence issues.
The guidance is a valuable read, especially as countries are now starting to address these issues with more focus. The diminished fiscal growth may also change the direction of penalty abatement, especially in areas that may subject to interpretation.
Finland has interpreted the “new” guidance for Financial Transactions as merely a clarification of prior law.
This interpretation is not novel, and is a position sometimes taken in an audit, rightly or wrongly, for which taxpayers should be aware.
In tax administration statement No. VH/3605/00.01.00/2020, published July 1, Finland’s tax agency explained the relevance of the newly added chapter 10 of the OECD transfer pricing guidelines on financial transactions. With the sole exception of the new guidance on the relevance of a parent company’s credit rating in determining the credit rating of another group member for purposes of pricing intercompany debt, chapter 10 will be applied both prospectively and retrospectively, according to the statement. This includes the guidance on cash pooling, guarantees, captive insurance, and determination of risk-free and risk-adjusted returns.
“The new chapter 10 of the OECD transfer pricing guidelines on transfer pricing for financial transactions does not, in the opinion of the tax administration, contain fundamental new interpretative guidance, except for [determining] the creditworthiness of a separate company. Therefore, the guidelines can otherwise be used as a source of interpretation for tax years ended before the guidelines were published,” the statement says.
The UK House of Commons Notice of Amendments, as of 29 June 2020, includes an interesting proposed amendment re: Country-by-Country (CbC) reporting. A CbC report would be submitted as part of the UK group’s tax strategy for taxpayers subject to the DST.
The CbC public transparency initiative was included in proposed legislation in other countries, including France and the U.S. These proposals were never finalized, and the UK proposal, for certain groups, may be nearing certainty.
McDermott Will & Emery’s (MWE) informative article presents basic reporting attributes for DAC6 reporting that may be a good reference tool in understanding this reporting quagmire, which seems to get deeper as more countries publish their rules and ordinary transactions are surfaced for inclusion to avoid penalties.
The Swedish Government issued, on 4 February 2020, a final bill to Parliament implementing the European Union (EU) Directive on the mandatory disclosure and exchange of cross-border tax arrangements (referred to as DAC6 or the Directive).
An earlier draft was issued in December 2019, the final legislation is expected to be enacted in March 2020, and penalties apply after it goes into force July 1, 2020.
EU Member States were to adopt and publish national laws required to comply with the Directive by 31 December 2019. Sweden did not meet this deadline. This major miss of the OECD deadlines for a complex, subjective and arguably far-reaching disclosure legislation brings forth the question: Why is there not a similar delay for implementation by taxpayers and reporting parties? Unfortunately, the OECD has not provided any comments on this mismatch of Member State responsibilities and taxpayer obligations.
The scope of the taxes covered under the Swedish new draft legislation is fully aligned with the Directive and applies to all taxes except VAT, customs duties, excise duties and compulsory social security contributions.
In accordance with DAC6, the main benefit test (MBT) will be satisfied if it can be established that the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement, is the obtaining of a tax advantage.
The Government’s explanatory notes indicate that a “tax advantage” includes a tax advantage outside of Sweden (and there is no suggestion that such tax advantage must arise in respect of EU taxes).
The Government further concludes that there is no requirement that the tax advantage occurs during the current fiscal year, it can occur also in the future, for example, in the form of deferred taxation. It states, however, that it must be a tax advantage based on current rules.
DAC6 is complex, subjective and frustrating as each Member State applies their own interpretation of the final rules, as well as reporting formats.
Taxpayers with operations or transactions affecting Sweden, or other Member States, will likely over-report transactions for the initial period, and hope for further clarifications in the near future. However, penalty consequences are so significant with respect to each (subjective) reportable arrangement that some companies may find it difficult to prove the negative – that each arrangement was reported timely.
The OECD report to G20 Finance Ministers and Central Bank Governors, resulting from the recent meeting in Riyadh this month, is attached for reference.
The report highlights that BEPS will continue to be a focus through 2025, indicating the increased transparency and reporting that is envisioned.
The recent issues of Pillar One and Two reflecting digital and global minimum taxation are addressed, based on the perception that these methodologies are a “must have” and not a “nice to have,” in the face of unilateral taxation efforts already underway.
The OECD/G20d BEPS Project has published: Harmful Tax Practices – 2018 Peer Review Reports on the Exchange of Information on Tax Rulings, referenced herein. This is the third annual peer review of the transparency framework. It covers individual reports for 112 jurisdictions, including 20 jurisdictions reviewed for the first time.
The transparency framework requires spontaneous exchange of information on five categories of taxpayer-specific rulings: (i) rulings related to certain preferential regimes, (ii) unilateral advance pricing arrangements (APAs) or other cross-border unilateral rulings in respect of transfer pricing, (iii) rulings providing for a downward adjustment of taxable adjustment of taxable profits (iv) PE rulings and (v) related party conduit rulings.
The requirement to exchange information on the rulings in the above categories includes certain past rulings as well as future rulings, pursuant to pre-defined periods which are outlined in each jurisdiction’s report and that varies according to the time when a certain jurisdiction has joined the Inclusive Framework or has been identified as a Jurisdiction of Relevance. The exchanges occur pursuant to international exchange of information agreements, which provide the legal conditions under which exchanges take place, including the need to ensure taxpayer confidentiality.
The OECD has now two proposals in process: Pillar One addresses the digital economy and Pillar Two sets forth a global minimum tax system; global anti-base erosion (GloBE) proposal. The proposals are linked herein for reference.
Both proposals may have one or more legal entities of a multinational taxed on more than one approach, whether they have a digital business segment, and also dependent on the countries where it is taxed notwithstanding the type of business it operates.
This represents a new era of BEPS, and one that demands attention to as the proposals move forward.
Pillar One summary
Scope. The approach covers highly digital business models but goes wider – broadly focusing on consumer-facing businesses with further work to be carried out on scope and carve-outs. Extractive industries are assumed to be out of the scope.
New Nexus. For businesses within the scope, it creates a new nexus, not dependent on physical presence but largely based on sales. The new nexus could have thresholds including country specific sales thresholds calibrated to ensure that jurisdictions with smaller economies can also benefit. It would be designed as a new self-standing treaty provision.
New Profit Allocation Rule going beyond the Arm’s Length Principle. It creates a new profit allocation rule applicable to taxpayers within the scope, and irrespective of whether they have an in-country marketing or distribution presence (permanent establishment or separate subsidiary) or sell via unrelated distributors. At the same time, the approach largely retains the current transfer pricing rules based on the arm’s length principle but complements them with formula based solutions in areas where tensions in the current system are the highest.
Increased Tax Certainty delivered via a Three Tier Mechanism. The approach increases tax certainty for taxpayers and tax administrations and consists of a three tier profit allocation mechanism, as follows:
‒ Amount A – a share of deemed residual profit6 allocated to market jurisdictions using a formulaic approach, i.e. the new taxing right
‒ Amount B – a fixed remuneration for baseline marketing and distribution functions that take place in the market jurisdiction; and
‒ Amount C – binding and effective dispute prevention and resolution mechanisms relating to all elements of the proposal, including any additional profit where in-country functions exceed the baseline activity compensated under Amount B.
Pillar Two Summary
Under Pillar Two, the Members of the Inclusive Framework have agreed to explore an approach that leaves jurisdictions free to determine their own tax system, including whether they have a corporate income tax and where they set their tax rates, but considers the right of other jurisdictions to apply the rules explored further below where income is taxed at an effective rate below a minimum rate. Within this context, and on a without prejudice basis, the members of the Inclusive Framework have agreed a programme of work that contains exploration of an inclusion rule, a switch over rule, an undertaxed payment rule, and a subject to tax rule. They have further agreed to explore, as part of this programme of work, issues related to rule co-ordination, simplification, thresholds, compatibility with international obligations and any other issues that may emerge in the course of the work.
Members of the Inclusive Framework agree that any rules developed under this Pillar should not result in taxation where there is no economic profit nor should they result in double taxation.
This part sets out the global anti-base erosion (GloBE) proposal which seeks to address remaining BEPS risk of profit shifting to entities subject to no or very low taxation It first provides background including the proposed rationale for the proposal and then summarises the mechanics of the proposed rules together with a summary of the issues that will be explored as part of the programme of work.
While the measures set out in the BEPS package have further aligned taxation with value creation and closed gaps in the international tax architecture that allowed for double non-taxation, certain members of the Inclusive Framework consider that these measures do not yet provide a comprehensive solution to the risk that continues to arise from structures that shift profit to entities subject to no or very low taxation. These members are of the view that profit shifting is particularly acute in connection with profits relating to intangibles, prevalent in the digital economy, but also in a broader context; for instance group entities that are financed with equity capital and generate profits, from intra-group financing or similar activities, that are subject to no or low taxes in the jurisdictions where those entities are established.
Proposed Regulations were issued for cloud computing and digital transactions; this is an especially important area re: sourcing of income, definitions, etc. especially in light of France and others looking to implement a digital services tax.
Publication 5188 was revised re: FATCA data reporting.
OECD released Peer 2 review reports re: re: BEPS Action 14 (dispute resolution). Interestingly, some US treaties include a MAP provision, although not all are consistent with the minimum standard.
EY’s Global Tax Alert highlights the recent BEPS developments, including the country-specific Multilateral Instruments (MLIs) with varying changes to its covered treaties and other treaty provisions.
It is noteworthy, at these MLIs approach legislation targets, that it is no longer intuitive as to how a country’s treaty provisions interact with other treaty partners, apart from general guiding principles that will vary as to the relevant details therein.
UN developments; In June 2019, the Report on the Eighteenth Session of the Committee of Experts on International Cooperation in Tax Matters (Committee), which was held by the United Nations (UN) on 23-26 April 2019 in New York, was released. The report describes a number of substantive issues related to tax cooperation in tax matters that were discussed during the session. Among others, the session addressed: (i) the next update of the UN Model Double Taxation Convention between developed and developing countries; (ii) the update of the UN Transfer Pricing (TP) Manual; (iii) dispute avoidance and resolution; and (iv) tax consequences of the digitalized economy.
African Tax Administration Forum (ATAF): In June 2019, the African Tax Administration Forum (ATAF) issued a paper on “The Place Of Africa In The Shift Towards Global Tax Governance: Can the taxation of the digitalised economy be an opportunity for more inclusiveness?” (the paper). The paper provides an overview of the current international tax governance landscape and inroads towards inclusiveness.
Country updates: Austria, Russia, Bulgaria, Canada, Finland, Guernsey, India, Ireland, Netherlands, Switzerland, Israel, China, Italy, Myanmar, New Zealand, Panama, Slovak Republic, Spain, Sweden, and Zimbabwe.
The United Arab Emirates (UAE) have enacted new economic substance requirements that entered into force at the end of April 2019.
In response to EU Code of Conduct Group (COCG) initiatives, the governments of Bahamas, Bermuda, British Virgin Islands (BVI), Cayman Islands, Guernsey, Isle of Man, Jersey, Mauritius and Seychelles introduced economic substance rules with effect from 1 January 2019. The rules are based on the guidance and requirements issued by the EU and the OECD, and are designed to ensure that companies operating in a low or no corporate tax jurisdiction have a substantial purpose other than tax reduction and an economic outcome that is aligned with value creation. To align with the international standards, the UAE has now enacted substance rules.
To meet the economic substance requirement, companies will generally need to satisfy the following three tests:
The company should be directed and managed in the UAE for the specific activity.
The company’s CIGA should be performed in the UAE.
The company should have an adequate level of qualified employees, premises and annual operating expenditures.
Companies with UAE operations, especially without adequate substance, should review the new rules or administrative penalties or reregistration.
EY’s Global Tax Alert provides additional details for reference.
Not awaiting the OECD’s proposals for which a Workplace will be delivered in 2020, implementation following that several years later, New Zealand seeks to propose a 2-3% Digital Services Tax (DST) in the interim. Public comments will be accepted by July 18th. The Government discussion document and EY’s Global Tax Alert provide details, as referenced herein.
Discussion document highlights:
The Government is committed to ensuring everyone pays their fair share of tax, including digital multinationals. Achieving this will require changes to the current tax rules. There are two options for this:
The first option is to apply a separate digital services tax (DST) to certain digital transactions. A DST taxes at a low rate (for example, 2% to 3%) the gross turnover of certain highly digitalised businesses that are attributable to the country.
The other option is to change the current international income tax rules, which have been agreed to by countries (usually referred to as “the international tax framework”).
In summary, New Zealand is not patient to wait for OECD rules, wishes to implement a transition tax in the interim and plans to repeal this tax with the OECD solution when it becomes effective.
On 31 May 2019, the Organisation for Economic Co-operation and Development (OECD) released its document Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy (the Workplan).
The Workplan describes the planned approach for addressing the tax challenges of the digitalization of the economy that has been agreed upon by the 129 jurisdictions participating in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The Workplan was approved at the 28-29 May plenary meeting of the BEPS Inclusive Framework, which brought together 289 delegates from 99 member countries and jurisdictions and 10 observer organizations.
A final report is envisioned for 2020, including:
Pillar One focuses on the allocation of taxing rights, and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules;
Pillar Two focuses on the remaining BEPS issues and seeks to develop rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.
Under Pillar One, the first option (i) Modified Residual Profit-Split method would allocate to market jurisdictions a portion of an MNE group’s non-routine profit that reflects the value created in markets that is not recognised under the existing profit allocation rules, or (ii) the fractional apportionment method involves the determination of the amount of profits subject to the new taxing rights without making any distinction between routine and non-routine profit, or (iii) distribution-based approached that would provide a baseline profit attributable to marketing, distribution, and user-related activities. The concept of losses is also to be recognized in the relevant model.
As stated in the workplace, the real risk is that “A further issue is the recognition that if the Inclusive Framework does not deliver a comprehensive consensus-based solution within the agreed G20 time frame, there is a risk that more jurisdictions will adopt uncoordinated unilateral tax measures.”
Additionally, the current workplace is focused on digital tax, although some concepts may creep into discussions of income tax.
A reference to the Workplan is provided for reference.