Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘OECD’ Category

OECD Digital Tax: Consensus Solution?

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.

 

Click to access programme-of-work-to-develop-a-consensus-solution-to-the-tax-challenges-arising-from-the-digitalisation-of-the-economy.pdf

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OECD: Treaty abuse peer review report

The OECD recently published its peer review report on treaty shopping re: prevention of treaty abuse under the inclusive framework on BEPS Action 6.  A link to the document is included for reference.

Article 6 targeted treaty abuse; Action 15 introduced the multilateral instrument (MLI) to implement BEPS actions.  The MLI is the mechanism whereby countries are implementing the treaty-shopping minimum standard.

The first Peer Review shows the effectiveness of implementing the minimum standard for treaty abuse.  The intent of Action 6 is to stop treaty shopping in its entirety.

The treaty shopping minimum standard requires countries to include two components in their tax agreements; an express statement on non-taxation and one of three ways to address treaty-shopping.  The provisions require bilateral agreement.  The 2017 OECD Model Tax Convention includes the following express statement: “Intending to conclude a Convention for the elimination of double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance…”

The three methods of addressing treaty shopping include;

  1. Principal Purpose Test (PPT) alone, or
  2. PPT with a simplified or detailed version of the Limitation on Benefits (LOB) rule, or
  3. Detailed LOB rule with a mechanism to deal with conduit arrangements.

As the MLI’s are agreed, it is important to understand the three methods above, and the express statement which includes reference to the elimination of double taxation, a concept which is sometimes ignored in the pursuit of perceived treaty / tax abuse.

 

https://read.oecd-ilibrary.org/taxation/prevention-of-treaty-abuse-peer-review-report-on-treaty-shopping_9789264312388-en#page1

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OECD: New guidance on profit-split and hard-to-value intangibles

The OECD published the final report on revised guidance to apply the transactional profit split method, as part of BEPS Action 10.  This guidance provides the final text, based on comments received.

Additionally, OECD published final guidance for tax administrations for determining the proper approach to apply for hard-to-value intangibles.  This text is included as an annex to Chapter VI of the Transfer Pricing Guidelines.  This approach should promote consistency and, hopefully, minimize double taxation.

The text of these reports are provided for reference, as they are a must read for transfer pricing professionals.

Click to access revised-guidance-on-the-application-of-the-transactional-profit-split-method-beps-action-10.pdf

Click to access guidance-for-tax-administrations-on-the-application-of-the-approach-to-hard-to-value-intangibles-BEPS-action-8.pdf

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US/EU/OECD tax developments

EY’s Global Tax Alert details several important global developments worth watching:

  • Phase 2 US tax reform – individual taxes, what else?
  • OECD’s first peer review reporting on BEPS Action 13: TP Documentation and County-by-Country (CbC) reporting (attached herein for reference)
  • EU Directive on cross-border reportable arrangements, reporting to commence in 2020 although effective date will be June/July 2018.  

The reportable arrangements are a must read for international tax colleagues to understand the impact of arrangements planned for currently that may become a transparent arrangement to be reported in the EU.

The OECD CbC report is also helpful to understand the trend that CbC reports will generate ongoing, and the viewpoint of the countries that administer this process.

The OECD BEPS Actions, including CbC reporting, significantly impact international tax compliance burdens and challenges going forward.  Additionally, US tax reform still has experts deliberating their practical application, notwithstanding future legislation.

Click to access 2018G_03277-181Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%201%20June%202018.pdf

https://read.oecd-ilibrary.org/taxation/country-by-country-reporting-compilation-of-peer-review-reports-phase-1_9789264300057-en#page1

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OECD: TP disputes, intra-group services

The OECD is considering starting two new projects to revise the guidance in Chapter IV (administrative approaches) and Chapter VII (intra-group services) of the Transfer Pricing Guidelines.

OECD has issued scoping papers for public comments addressing transfer pricing disputes and intra-group services, provided for reference herein in addition to Deloitte’s Global TP Alert with insightful comments.

Comments on both subjects are due by June 20, 2018.  Both topics are significant, thus a review of the scoping paper focus is recommended, with an opportunity to provide comments.

Click to access dttl-tax-global-transfer-pricing-alert-18-013-11-may-2018.pdf

Click to access scoping-of-future-revision-of-chapterIV-of-the-transfer-pricing-guidelines.pdf

http://www.oecd.org/tax/transfer-pricing/scoping-of-future-revision-of-chapterVII-of-the-transfer-pricing-guidelines.pdf OEC

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OECD: PE guidance

The OECD has published additional guidance on attributing profits to a Permanent Establishment (PE).

The main takeaway from the guidance is the excerpts as follows: The proposed analysis of the examples included in the Report is governed by the authorized OECD approach (AOA) contained in the 2010 version of Article 7. However, the Report is not intended to extend the application of the AOA to countries that have not adopted that approach in their treaties or domestic legislation. 

Approx. 13 treaties have this provision, although countries may try to adopt such guidance notwithstanding their legal incapacity to enforce such mechanism.

EY’s Global Tax Alert highlights this significant development, as PE will almost certainly lead to double taxation assuming that Competent Authority will not be filed for or given.

Click to access 2018G_01843-181Gbl_OECD%20guidance%20on%20attribution%20of%20profits%20to%20PE%20under%20BEPS%20Action%207.pdf

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US news: Phase 2 tax bill?

The latest US / OECD developments are detailed in the referenced EY Global Tax Alert, highlighting  a potential second tax bill (apart from technical corrections), status on the “Blue Book: by the Congressional Joint Committee on Taxation, Q&A IRS release re: Section 965 including how to pay the first estimate and report on the US federal income tax return, anti-corporate inversion regulations, and OECD’s Interim Report of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), titled “Tax Challenges Arising from Digitalisation.”  Additionally, OECD released the third batch of peer reports – Certainly an exciting and challenging time!

There are still many areas of debate and room for reasonable interpretation on major aspects of the US Tax Act, especially as the 2018 provisions of BEAT, FDII and GILTI are not encased within the one-year measurement period of SAB 118.  For companies subject to Q1 reporting, these uncertainties should be aligned with the auditor to avoid last-minute debates for material items.   

Click to access 2018G_01558-181Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2016%20March%202018.pdf

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UK: MAP guidance

Her Majesty’s Revenue and Customs (HMRC), the UK tax authority, has published revised guidance on the Mutual Agreement Procedure (MAP) in its International Manual (INTM).  DLA Piper’s detailed publication is referenced herein.

The revised guidance, together with the supplementary Statement of Practice, provides detailed information on the following:

  • Eligibility for MAP
  • Access to MAP
  • Submitting a MAP request
  • Time limits
  • Protective MAP requests
  • MAP and domestic relief
  • Mutual agreement
  • Methods of relief and
  • Arbitration

Multinationals ought to consider more proactive use of the improved MAP, taken together with similar developments in other countries around the BEPS minimum standards, as a viable compliance risk management tool. Although double taxation is often a precondition in transfer pricing cases that end up in MAP, it is important to note that all issues concerning taxation not in accordance with tax treaties are eligible for MAP.

https://www.dlapiper.com/en/uk/insights/publications/2018/03/the-uk-releases-new-guidance-on-mutual-agreement-procedures/

 

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OECD: Model CRS disclosures

The Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures contained in the referenced report were approved by the Committee of Fiscal Affairs (CFA) on 8 March 2018.  These represent Best Practices.

15 July 2014 the OECD published the Standard for Automatic Exchange of Financial Account Information in Tax Matters, also known as the Common Reporting Standard or CRS. Since then 102 jurisdictions have committed to its implementation in time to commence exchanges in 2017 or 2018.

The report includes CRS disclosure rules and related penalty requirements.

One of the most discussed aspects of the new report is the following:

  • Rule 2.7: Disclosure of Arrangements entered into after 29 October 2014 and

    before the effective date of these rules

    1. (a)  A Promoter shall disclose a CRS Avoidance Arrangement within 180 days of the effective date of these rules where:
      1. (i)  that Arrangement was implemented on or after 29 October 2014 but before the effective date of these rules; and
      2. (ii)  that person was a Promoter in respect of that Arrangement;

      irrespective of whether that person provides Relevant Services in respect of that Arrangement after the effective date.

Most importantly, “jurisdictions implementing these model rules would need to take into account domestic specificities in their own CRS Legislation and the interaction of these model rules with existing anti-avoidance rules.”

The hallmark for a CRS Avoidance Arrangement captures any Arrangement where it is reasonable to conclude that it has been designed to circumvent, or has been marketed as or has the effect of circumventing CRS Legislation.

To the extent such rules may be applicable, this new report should be reviewed in its entirety to understand potential disclosure requirements in a timely manner.

 

Click to access model-mandatory-disclosure-rules-for-crs-avoidance-arrangements-and-opaque-offshore-structures.pdf

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US developments: Will FDII survive?

EY’s Global Tax Alert summarizes recent US developments, including (expected) pushback by the EU from the Tax Act’s FDII legislation.  The pushback is based upon WTO rules and OECD’s Article 24 on non-discrimination.

One elemental argument against the Foreign Derived Intangible Income (FDII) legislation is that it violates the World Trade Organization (WTO) rules.

“The tax press is reporting that the EU has requested that the Organisation for Economic Co-operation and Development (OECD) Forum on Harmful Tax Practices conduct a “fast track” review of certain of the TCJA’s provisions. The request reportedly came after a meeting of EU Finance Ministers in which the Ministers discussed how to react to the tax reform law and whether to take action in the WTO.  According to the report, a recent EU document states that the new base erosion and anti-abuse tax may contravene the OECD Model Tax Convention’s Article 24 on non-discrimination.”

To the extent that the FDII is found to violate the WTO rules, the timing for this benefit is a short-term (i.e. 3-5 years) period.  Accordingly, relevant restructuring may avail this benefit in the next few years with a long-term strategy based on its revocation.  

Click to access 2018G_01364-181Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%209%20March%202018.pdf

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Debt/cap review: Finland/US/…

Finland is expanding its rules on interest deductibility, including additional breadth over the OECD/BEPS Actions.  Finland is following many other countries, in disallowing such deductions while not providing a deferral/exemption of interest income in the related jurisdiction for interest income.

Additionally, US tax reform has also introduced new interest limitation rules, based upon a 30% tax adjusted EBITDA concept.

This is the ideal time to review one’s capital structure worldwide; is it achieving the economic interests that were in place?  Most MNE’s will be affected in one or more countries from the BEPS, and expanded BEPS, actions by many countries.  The expanded legislative framework dictates a new review of global capital structures.

https://home.kpmg.com/xx/en/home/insights/2018/01/tnf-finland-proposed-changes-to-interest-deduction-limitation-rules.html

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BEPS update: ICAP

Attached are the latest BEPS developments; of particular importance is the International ComplianceAssurance Programme (ICAP).  This program is a voluntary program that focuses on the Country-by-Country (CbC) reports to openly discuss tax risks.

This is a welcome collaborative effort between the tax administrations and MNEs, vs. using the CbC reports to draw unfounded assumptions.

Tax audits should also use this approach at the beginning of an audit to foster understanding and risks.

Click to access 2018G_00553-181Gbl_The%20Latest%20on%20BEPS%20-%2029%20January%202018.pdf

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French CbC: US certainty?

The French Parliament has announced rules for the transmission of the French Country-by-Country (CbC) reports by US MNE’s, although it is yet not 100% certain whether such rules are penalty proof or 100% certain.

As the US has not formally named France as a partner exchanging such information, these dialogues apparently continue.  Thus, all taxpayers should be monitoring this important area through year-end for future developments and additional certainty.

EY’s Global Tax Alert summarily describes the applicable procedures.

Click to access 2017G_07009-171Gbl_TP_FR%20CbCR%20requirements%20may%20impact%20US%20MNE%20groups.pdf

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EU’s List is published: Uncooperative Jurisdictions

The Council of the European Union (ECOFIN) has published its list of uncooperative tax jurisdictions, numbering 17:

American Samoa, Bahrain, Barbados, Grenada, Guam, Korea (Republic of), Macao SAR, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates

The listing criteria are focused on three main categories: tax transparency, fair taxation and implementation of anti-BEPS measures.

 

There are potential counter-measures that could be employed by other jurisdictions, and there is the possibility of other countries aligning such countries on a comparable list.  This list will be reviewed annually, thereby expanding or diminishing accordingly.

EY’s Global Tax Alert provides historical context for development of this list.

Click to access 2017G_06895-171Gbl_Council%20of%20the%20EU%20publishes%20list%20of%20uncooperative%20jurisdictions%20for%20tax%20purposes.pdf

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S. Africa CbC / TP requirements

The South African Revenue Service (SARS) released its final notice re: requirements for filing the Country-by-Country (CbC) report, Master File and Local File, in alignment with OECD BEPS Action Item 13.

It is interesting that, pursuant to minimum thresholds, both a Master File and Local File are required to be filed, rather than only the Local File.  This may become more of a norm, versus an exception, as the global transfer pricing and risk environment will need to be reviewed in alignment with local business operations.  Hopefully, the review will encompass confidential limitations on the information received and will only encompass transfer pricing practices of the local operations rather than extend CbC presumptions or Master File analogies against the local data.

EY’s Global Tax Alert provides the relevant details of the SARS requirement.

Click to access 2017G_05868-171Gbl_TP_South%20African%20RS%20releases%20Public%20Notice%20concerning%20CbCR%20master%20and%20local%20file.pdf

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