Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘OECD’ Category

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

Click to access 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.

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OECD

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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

Click to access 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.

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OECD

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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

Click to access 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.  

 

 

 

 

 

 

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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.  

 

 

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OECD

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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.  

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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.  

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EU Anti-Tax Avoidance Directive: Primer

The Anti Tax Avoidance Directive includes six anti-abuse measures to address tax avoidance: interest deductibility, exit taxes, a switch-over clause, general anti-abuse rule (GAAR), controlled foreign company (CFC) rules and a hybrid mismatch framework.  The Directive prescribes a minimum protection for Member States’ corporate tax systems.

A summary of the anti-abuse measures is provided, based upon the European Commission’s presumption and related summary of actions to address such abuses.

Interest

Presumption: Corporate taxpayers incur interest in high-tax jurisdictions, with income reported in low/nil tax jurisdictions, thereby shifting profits.

Summary: Net (of interest income) interest expense is limited to a 10-30% EBITDA basis.

Exit taxes

Presumption: Tax residence is moved solely to benefit from a low-tax jurisdiction.

Summary: Tax on transferring assets cross-border to capture unrealized profits.

Switch-over clause

Presumption: Low-taxed income is moved within the EU to shift profits.

Summary: Foreign income is subject to a tax, with foreign tax credits, vs. an exemption.

General Anti-Abuse Rule (GAAR)

Presumption: Tax planning schemes are abusive.

Summary: Backstop defense rule for “abusive tax arrangements.”

Controlled foreign company (CFC) rules

Presumption: Income is passive and is shifted to low-tax jurisdictions.

Summary: Reattributes income to a parent company that is taxed at a higher rate.

Hybrid mismatch framework:

Presumption: Double deduction situations due to legal mismatches are being sought.

Summary: Legal characteristics of payment country carries over to recipient country.

 

The detailed rules, which require a unanimity of approval by the Member States, are complex and far-reaching.  The breadth of the rules captures the perceived presumptions stated for each measure, notwithstanding the fact that such measures may also produce economically disadvantageous tax situations (i.e. paying interest from a low-tax to a high-tax jurisdiction), and the possibility of a Member State to legislate rules that move beyond the minimum threshold set forth.

These rules are also being legislated unilaterally outside of the EU Market, such that there may be very broad anti-abuse themes globally with each country having deviations from a general rule that will provide complexity and areas of disagreement for many years.

 

 

 

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OECD endorses European Commission’s Anti-Tax Avoidance Package

OECD’s press release highlights their endorsement of the recently announced Anti-Tax Avoidance Package proposal.

“OECD Secretary-General Angel Gurría welcomed the Commission’s proposal, which he said marks an important milestone towards the development of a comprehensive, coherent and co-ordinated approach against corporate tax avoidance in Europe.”

http://www.oecd.org/tax/oecd-secretary-general-angel-gurria-welcomes-european-commission-corporate-tax-avoidance-proposals.htm

This acknowledgment puts additional pressure on the EU Member States for unilateral adoption, as a Member State will not want to be seen as an outlier to transparency and the tax avoidance political landscape.  Thereby, the possibility of unilateral adoption is (highly) likely.  

Placing additional context behind the BEPS statement, the press release provided the following statement: “The OECD conservatively estimates revenue losses from BEPS at USD 100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues.”

 

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Finland: CbC Surrogate search

Finland has proposed its new country-by-country (CbC) reporting requirements, having an effective date of 1/1/2017, as further summarized in EY’s Global Tax Alert provided for reference.  Other countries have legislated CbC 2016 effective dates, thus a Finland multinational that does business in other countries requiring a 2016 effective date CbC report will be looking to adopt a surrogate country for its 2016 tax year.

This delay in effective date, while the intention may have been to help Finnish headquartered multinationals, presents significant complexities for their 2016 CbC reporting requirements.  However it does the provide the Finnish / US tax authorities another year to ensure reporting processes are in place to review, and exchange, CbC information.

This legislation mirrors the US proposed regulations (i.e. Final Regulations yet to be issued), which delays the effective date past 2016.

This complexity, although anticipated by the OECD’s BEPS Actions in identifying a surrogate mechanism, understates the practical uncertainties that loom ahead.  For example, some issues are called into question:

  • Will the choice of a surrogate country lock in their CbC requirements, as would be the case if its present headquarter jurisdiction adopted CbC for 2016?  Or could other countries that have add-on CbC requirements, such as Mexico’s intercompany transactional detail, claim/assert that their local requirements could apply in a surrogate situation since the headquarter jurisdiction is not subject to the CbC automatic exchange of information?
  •  The search for a surrogate country will entail the review of treaty exchange mechanisms to reduce additional CbC filings, and complexities, in other countries.
  • The identification of a surrogate will require review of CbC legislation by every country to ensure that a surrogate’s reporting / information exchange satisfies the literal reading of statutory requirements.  This comprehensive review, that may not have been required by a US or Finnish multinational due to extensive exchange of information legislation, will need to be read in the broadest sense to avoid penalties.
  • The identification of a surrogate has not been expressly anticipated by other countries that have proposed CbC legislation, apart from addressing the non-applicability of automatic exchange of information requirements for CbC reporting.

Post BEPS complexity increases with delayed reporting years for CbC reporting.  It may take some time to fully understand all the nuances and complexities of surrogate reporting to ensure potential CbC disclosures are timely met and penalties avoided.

With these complexities becoming reality, countries should clarify CbC reporting in their respective jurisdiction by CbC surrogates.  

 

Click to access 2016G_CM6162_TP_Finnish%20Government%20submits%20CbC%20reporting%20proposal.pdf

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CbC: US timing issues

The timing for implementation of country-by-country (CbC) reporting for non-US jurisdictions is of significant importance to US multinationals, due to the wording of the Proposed Regulations (23 Dec 2015 post).

The Proposed Regulations would require CbC reporting by US MNE’s starting in 2017, thereby not having such requirement in 2016.  If there are no changes in the Final Regulations, US MNE’s will be required to submit CBC reports in many jurisdictions around the world.  Some countries, such as Mexico, that aim to provide additional reporting items beyond the OECD model would present additional complications for a US MNE.  Contemporaneous deadlines will also have to be met, that are prior to the US deadline.

Additionally, if an election provision is adopted in the Final Regulations, this may not solve the dilemma, as many countries are drafting legislation providing that if the parent jurisdiction does not require CbC reporting, then a separate CbC report has to be filed in their local jurisdiction.  A literal reading of such language would result in a required domestic filing, as an election is not a “per se” requirement.

Similar complications will arise in countries that do not adopt CbC reporting for the tax year 2016.

Monitoring of the timing implications for CbC reporting should be a high priority to be addressed currently, with timelines established for the preparation of back-up reporting plans around the world.

 

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CbC: US proposed Reg’s – a question of timing

The US Treasury has released proposed Regulations setting forth details for country-by-country (CbC) reporting by US-based multinationals.  A link to the proposed Reg’s is provided:

Click to access 2015-32145.pdf

The proposed Reg’s have been issued for comment, and two significant timing issues arise in the current version:

  1. Final Regulations would not take effect until tax years beginning after publication in the Federal Register, which would be 2017 for calendar-year taxpayers.
  2. The CbC report would be submitted to IRS with the US corporate income tax return, due Sept. 15.

Although the proposed Reg’s are conformed to the OECD model and have been purposeful in its comments on confidentiality and the exchange of information provisions for CbC reporting, the timing mismatch for the 2016 tax year presents a complexity that hopefully will be overcome in the Final Regulations.  If no changes are made to the effective date, the 2016 tax year would be a dysfunctional method of reporting around the world, based on whom are considered surrogate entities or determining which countries have rules that provide for direct submission to their tax authorities absent a US requirement.  

Additionally, the submission of the CbC report by Sept. 15 accelerates the year-end timing envisioned by the OECD.  This acceleration should be expected by multinationals, thereby leaving less time to coordinate and review the information via developing an efficient and sustainable CbC reporting process.

 

 

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OECD, Transfer Pricing

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France: CbC public reporting receives a last-minute “no” vote

Following up the post of 8 December, France’s National Assembly provided a last-minute “no” vote with respect to providing country-by-country (CbC) reports for the public domain.

This has incited an outcry by the enthusiasts behind the transparency measure for additional insight into a multinational’s global tax posture.

Notwithstanding the “no” vote in France, this scenario is expected to emerge in other countries as the OECD BEPS implementation of CbC reporting is established in the local legislative frameworks.

In summary, the premise of multinational organizations for public CbC reports should still be the framework behind the date gathering process that is commencing.

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EU Council: New Directive

The EU Council has provided a Directive that would introduce legislation ensuring the EU maintains its leadership role in anti-BEPS recommendations, as well as providing good tax governance for the rest of the world.  EY’s summary of the Directive is provided for reference:

Click to access 2015G_CM6047_EU%20Council%20adopts%20directive%20on%20exchange%20of%20info%20on%20tax%20rulings,%20agrees%20on%20other%20corporate%20tax%20issues.pdf

Key points:

  • Automatic exchange of tax rulings would be effective 1/1/2017.
  • Changes would be introduced for the EU Code of Conduct.
  • EU anti-BEPS proposal to include the following BEPS Actions:
    • 2: Hybrid mismatches
    • 3: CFC rules
    • 4: Interest limitations
    • 6: General anti-abuse rule (noting its inclusion for the Royalty & Interest Directive, similar to the Parent-Subsidiary Directive)
    • 7: PE status
    • 13: Country-by-Country (CbC) reporting
  • Common Corp. Tax Base (absent later consolidation phase) proposal to be introduced in 2016

The EU continues its pace to maintain its global lead in addressing anti-BEPS concerns, which will impact non-EU countries around the world.  Thereby, it provides another set of rules that would be mandated to achieve EU conformity.

 

 

 

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Public CbC reporting: France moves forward

France’s lower house of Parliament has approved an amendment that would require public reporting of country-by-country (CbC) information.  The amendment will need approval by the Senate, with final confirmation by the French National Assembly before being enacted.

This step represents another move forward, along with the EU proposals, to provide CbC information to the public domain.

Multinational companies should prepare today for public CbC reporting in the near future, as the cannon shots have been fired and they will soon land, resulting in a multitude of inquiries and perceptive conclusions.  Additionally, organisations should have a seamless process to receive, review and decide on communicative courses of action in response.

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OECD, Tax Risk Management

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Global mobility & BEPS risks

Global mobility will face, directly and indirectly, various challenges resulting from OECD’s BEPS proposals.  PwC’s Insights provide a concise summary of these proposals, included for reference:

Click to access pwc-oecd-final-beps-package-what-does-it-mean-for-global-mobility.pdf

Key points:

  • Treaty changes, either bilaterally or via the Multilateral Instrument, will affect key issues and risks, including permanent establishment (PE).
  • Unilateral changes, several of which have been enacted, should be reviewed with a focus on global mobility functions.
  • The transparency initiative will encourage tax authorities to aggressively pursue PE and treaty based rules.
  • What is the impact of the change for PE dependent/independent test.
  • Responsibilities of senior executives, sales representatives and regionally based employees will need to be reviewed for the new rules.
  • People functions re: controlling risk should receive separate review.
  • Intercompany agreements (i.e. legal form) should be compared to practical substance responsibilities to evidence conformity, as analyses will use legal agreements as only a first step to understand the transactions and potential consequences.

Post BEPS, it is imperative that global mobility’s function and responsibilities should be reviewed, from a tax risk awareness perspective as well as internal governance controls.  To the extent that global mobility is not closely collaborated with the tax function, the ways of working and reporting should be reviewed to address this new world of international tax transparency and the emphasis on multinationals paying their fair share of tax, however construed.

 

 

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