Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘OECD’ Category

OECD: CbCR update

OECD has published the December 20109 update for implementation of country-by-country reporting (CbCR).

The table of contents conveniently provides the date for the updating of the relevant sections.  The local filing section indicates a December 2019 update.

The guidance link is referenced for review.

http://www.oecd.org/ctp/guidance-on-the-implementation-of-country-by-country-reporting-beps-action-13.pdf

OECD: Tax ruling exchange

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.

 

https://www.oecd-ilibrary.org/docserver/7cc5b1a2-en.pdf?expires=1577490104&id=id&accname=guest&checksum=E74BCF40FC3C25437B469E07971C928B

OECD: Pillar One & Two

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.

 

https://www.oecd.org/tax/beps/public-consultation-document-secretariat-proposal-unified-approach-pillar-one.pdf

https://www.oecd.org/tax/beps/programme-of-work-to-develop-a-consensus-solution-to-the-tax-challenges-arising-from-the-digitalisation-of-the-economy.pdf

US int’l developments

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.

https://www.ey.com/Publication/vwLUAssets/Report_on_recent_US_international_tax_developments_-_16_August_2019/$FILE/2019G_003793-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2016%20Aug%202019.pdf

OECD update: Digital tax, nexus…

The recently concluded G20 Leaders’ Summit continues to endorse the OECD’s digital project, which includes future debates on nexus allocations, profit allocations and minimum tax.

EY’s Global Tax Alert highlights these developments, as well as remind international tax colleagues to continually monitor these important developments.

https://www.ey.com/Publication/vwLUAssets/G20_Leaders_Summit_Declaration_reiterates_endorsement_of_OECD_workplan_for_development_of_new_international_tax_rules/$FILE/2019G_003186-19Gbl_G20%20Leaders%20endorse%20OECD%20plan%20re%20new%20intl%20tax%20rules.pdf

BEPS update-MLI’s, UN, ATAF…

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.

https://www.ey.com/Publication/vwLUAssets/The_Latest_on_BEPS_-_28_June_2019/$FILE/2019G_003051-19Gbl_The%20Latest%20on%20BEPS%20-%2028%20June%202019.pdf

UAE: Economic substance

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:

  1. The company should be directed and managed in the UAE for the specific activity.
  2. The company’s CIGA should be performed in the UAE.
  3. 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.

https://www.ey.com/Publication/vwLUAssets/UAE_enacts_economic_substance_rules/$FILE/2019G_003050-19Gbl_UAE%20enacts%20economic%20substance%20rules.pdf

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