Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘OECD’ Category

BEPS Action 8: Intangibles Draft

The OECD released the latest Discussion Draft on Action 8: Hard-to-value Intangibles.

Interested parties are asked to provide comments by 18 June, 2015.  A brief window period to comment should address concerns in the Draft as well as the questions posed at the end of the document.  A link to the Draft is provided for reference:

Click to access discussion-draft-beps-action-8-hard-to-value-intangibles.pdf

“The discussion draft includes an approach based on the determination of the arm’s length pricing arrangements, including any contingent pricing arrangements, that would have been made between independent enterprises at the time of the transaction. The approach protects tax administrations against the negative effects of information asymmetry when specific conditions are met. These conditions ensure that price adjustments will only apply where the difference between expected and actual outcomes cannot be explained by considerations other than inappropriate pricing.”

The valuation of intangibles has been a very complex topic for the OECD and interested parties to address to gain a mutual perspective and balanced approach.  Accordingly, this Draft and related comments will provide a new direction going forward for those countries embracing the final OECD guidelines.

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BEPS Action 13 CbC reports: To whom, by whom, for whom

The OECD has released its final guidance on BEPS Action 13, Country-by-Country (CbC) Reporting Implementation Package.  The CbC reporting complements the previous drafts for transfer pricing documentation in the form of a master file and local country file.  The three pillars of reporting for this Action have been acknowledged by OECD as representing its definitive approach, with the dissemination of the Action 13 document to be issued later this year with the other Action items.

Click to access beps-action-13-country-by-country-reporting-implementation-package.pdf

Key points:

  • Three model Competent Authority Agreements based on the Multilateral Convention on Administrative Assistance in Tax Matters, bilateral tax conventions, and Tax Information Exchange Agreements (TIEAs).
  • In accordance with the recent OECD webcast, countries will have 6 months for the initial year to exchange such information (i.e. June 30, 2018 calendar year basis for the 2016 tax information submitted by Dec. 31, 2017, and 3 months for the following reporting year).
  •   Introduces the term “Surrogate Parent Entity” for substitute reporting.
  • Provides conditions for application of the Surrogate Parent Entity approach.
  • The CbC report shall be filed in a form identical to the OECD template.
  • Confidentiality provisions are discussed.
  • Penalties: “It is assumed that jurisdictions would wish to extend their existing transfer pricing documentation penalty regime to the requirements to file the CbC report.”

The manner in which countries implement this initiative should be closely monitored, as there will be differences to the general approach.  For example, Poland recently introduced this proposal into its domestic legislation, whereas other countries have relied on the ultimate parent entity concept for collecting such information.  Additionally, Spain also requires amounts to be reported in local currencies, a process that will not be uniform globally.

MNE’s should be cognizant of the flexibility required for this new transfer pricing risk initiative, while also foreseeing the recent public disclosure proposals by the European Parliament, European Commission and other interested parties.

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G20 Int’l Tax Symposium: BEPS topics

The G20 recently held a symposium including 300 participants from 60 countries.  The G20 tax agenda focused on the current status of BEPS in developed, and developing, countries.  The PwC summary outlines the current state of agreement, and disagreement, with the proposed BEPS Guidelines.

Click to access pwc-g20-international-tax-symposium.pdf

Key observations:

  • Hybrid mismatches will include treaty changes and domestic law recommendations
  • The interest limitation solution is not yet adequate
  • A clear analytical framework should be used to determine application of non-recognition transactions
  • The Amadeus database, macro-data and tax return data was used to measure the spill-over effect of BEPs
  • Not all measures to tackle BEPS will be supported by guidance, although guidance will continue in following years
  • Coordination and consistency of application is vital, although it is challenged by unilateral actions of residence countries
  • Implementation is key, although a single approach no longer works

The observations cited in the PwC summary are insightful, while providing further certainty that BEPS implementation will be diverse with different timelines, while guidance continues in post-2015.

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US Model Income Tax Convention: A new world

The US Dept. of Treasury has released drafts of its proposed revisions to the US model income tax convention, for which it has requested comments.  The new Model treaty will serve as a template for future US treaties and protocols. A PwC summary and US Treasury press release, which further reference the proposed changes, are included for reference: http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-us-treasury-proposes-changes-us-model-income-tax-convention.pdf http://www.treasury.gov/press-center/press-releases/Pages/jl10057.aspx Key observations:

  • Exempt permanent establishment (PE) rule that will also apply to US branches
  • Denial of treaty benefits re: articles 11 (Interest), 12 (Royalties), and 21 (Other income) for recipients in a “special tax regime.”  There are several exceptions applicable to the general rule.
  • Disallowance of treaty benefits for payments of dividends, interest, royalties and other income for 10 years after a company expatriates.
  • Changes to Limitation on Benefits (LOB) article: (i) New derivative benefits test which is inclusive of a base erosion test, (ii) a base erosion test to the subsidiary of a public company requirement, (iii) changes to base erosion requirements in the public company test, ownership base erosion test and derivative benefits test, and (iv) a change to the discretionary grant of relief clause inclusive of a principal purpose test.
  •  Partial termination provisions for subsequent law changes exempting, or reducing the tax rate to less than 15% for dividends, interest, royalties and other income.

These significant changes represent acknowledgment of the OECD BEPS impact and its impact on the world’s tax treaties that will directly impact the taxation of a multinational company’s global structure.  Accordingly, these changes are required reading for international tax practitioners, as the rest of the world will be following along in measuring its respective treaties and new protocols. BEPS Action 6, Preventing treaty abuse, recognized the US Model Treaty’s LOB article, with an additional inclusion for a derivative benefits test.  The US proposal has now addressed that intent.

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BEPS is ideology, not law: India’s Delhi Tribunal affirms

As the OECD BEPS Actions are a subject of discussion by tax administrations, the Indian Delhi Tribunal confirmed that such ideologies cannot be used as legislative doctrines for legal enforcement.

A non-legislative BEPS approach may become more common in the months/years prior to a country enacting such legislation into its regulatory framework.  However, the BEPS concepts should not be used as a basis for assessment or litigation.  Thus, there will be a short/long lead time, different in almost every country, as to when some, if any, of the BEPS Actions are enacted. This disparity should be recognized prior to raising BEPS concepts as an instrument of legal enforcement.

An EY Global Tax Alert provides additional information about the case.

Click to access 2015G_CM5447_Indias%20Delhi%20Tribunal%20rules%20BEPS%20is%20a%20tax%20policy%20consideration%20and%20not%20relevant%20for%20judicial%20determinations.pdf

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BEPS Action 7: PE, Round 2

The OECD has released its second draft, following its initial draft on 31 October 2014, on BEPS Action 7: Preventing the Artificial Avoidance of PE Status.  Comments, which should be kept as short as possible, on this latest draft should be sent by 12 June 2015.  The discussion draft, and related comments, will be discussed at the Working Party 1 meeting of 22-26 June 2015.

A link to the latest discussion draft is provided for reference:

Click to access revised-discussion-draft-beps-action-7-pe-status.pdf

Key observations:

  • Objective is to address commissionnaire arrangements and fragmentation of operations to meet the “preparatory and auxiliary” exception.
  • Alternative PE options from the first draft have been reduced to 1 proposal re: each PE avoidance strategy, concluding that Option B re: commissionnaire arrangements, Option E re: specific activity exemptions and Option J re: fragmentation are the best models.
  • Follow-up work on attribution of profits issues re: Action 7 would result in additional guidance by the end of 2016, the deadline for negotiation of the multilateral instrument.
  • Low-risk distributor arrangements are to be addressed in Action 9, Risks and Capital.
  • Par. 5 alternative test: Independent agent exception is disregarded if it meets a control (50 % or more interest) test.  Persons (acting on behalf of an enterprise) habitually concluding contracts or habitually negotiating the material elements of contracts can lead to a PE, disregarding the act of formal conclusion/approval/review in another jurisdiction.  “Contracts” refers to the business proper of the enterprise.
  •   Each specific activity exemption would be restricted to activities that are otherwise of a “preparatory or auxiliary” character.  Additional Commentary guidance and examples are provided re: the phrase “preparatory or auxiliary.”
  • Re: splitting up of contracts for the 12-month threshold, the concept of “connected enterprises” replaces “associated enterprises” along with anti-abuse rules for determination.

The above captions provide only a snapshot of the detailed proposals and changes included in this latest draft; accordingly all interested parties should review this draft carefully and consider providing succinct comments for consideration in the final guidelines.

As PE is a strong pillar in the foundation of transfer pricing, this draft will chart the course for future PE determinations that may impact current organization structures and where profits from certain activities are taxed.

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