Strategizing International Tax Best Practices – by Keith Brockman

OECD has published, pursuant to OECD BEPS Action 2, its framework entitled “Neutralising the Effects of Branch Mismatch Arrangements.”  A link to the report is provided for reference.

The report includes five types of branch mismatch arrangements:

  • Disregarded branch structures where the branch is not a Permanent Establishment (PE)
  • Diverted branch payments
  • Deemed branch/notional payments
  • Branch payments leading to a double deduction (DD)
  • Imported branch mismatches

Recommendations to domestic law are included to prevent perceived abuses for the five types of mismatch arrangements.  Numerous examples are also provided in the document to illustrate the branch arrangements and recommendations thereto.

This document is required reading for all international tax practitioners, as tax administrations will be seriously considering the recommendations and may decide to try to enforce such rules prior to official legislative actions.

http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/neutralising-the-effects-of-branch-mismatch-arrangements-action-2_9789264278790-en#.WX0tijOZOqA#page1

With the introduction of BEPS Action Items, recently followed by the subjective assent procedures of the Multilateral Instrument, it seems that the aggressiveness of tax administrations to apply current tax laws, and BEPS Actions yet to be enacted, is on the increase.  One result of such actions is the continuation, in certain jurisdictions, of tax raids which are unannounced, intense and producing immediate distrust between the parties.

For tax administrations, the question is “Does the necessity of such raids still exist?” and if so, they should be delegated to those that are egregious and potentially criminal in nature after the refusal of the taxpayer to legally comply with prior requests and inquiries.

For MNE’s, a tax raid causes immediate panic at the Business Unit, thus at least one legal or tax contact regionally and globally should be available at any time to address a phone call on necessary action steps that day and going forward.  This communication protocol should be common knowledge throughout the global organization to ensure alignment and appropriate steps are immediately taken if a tax raid were to occur.

It is hopeful these circumstances will become less frequent around the world, although learnings can be taken from past experiences to form Best Practices for the future.

The UK EU exit bill has been introduced in Parliament, paving the way for suggested interpretations of:

  • Existing EU law
  • Loss of EU Directives
  • New customs regime
  • Transitional EU VAT case law
  • Social security contributions/benefits
  • Corporation tax impact of UK vs. EU law/Directives
  • Employee mobility
  • Employment law

This document portrays a glimpse into the thoughts behind the complex and myriad evolutions that will take place with the Brexit negotiations.  Tax, supply chains, individual changes, VAT, etc. and related unknown implications are still to be discovered; the EY Global Tax Alert provides a primer into the brave new world of a country exiting the EU.  Note, this is also a valuable reference for other countries considering this option.

http://www.ey.com/Publication/vwLUAssets/UK_Government_introduces_European_Union_(Withdrawal)_Bill/$FILE/2017G_04283-171Gbl_UK%20Government%20introduces%20European%20Union%20Withdrawal%20Bill.pdf

On 22 June 2017, the “Platform for Collaboration on Tax” (the Platform) – a joint effort of the Organisation for Economic Co-operation and Development (OECD), United Nations (UN), International Monetary Fund (IMF) and World Bank Group (WBG) – released a toolkit (the Toolkit) designed to help developing countries address the lack of “comparables” for transfer pricing analyses and better understand mineral product pricing practices.

This Toolkit should also be reviewed by multinationals (MNEs) in developing countries to address the potential lack of comparables to better understand how the tax authorities will approach a transfer pricing audit.  The mining supplement is required reading for those working in that industry.

Additional toolkits will be forthcoming:

  • TP documentation
  • Indirect transfer of assets
  • Base eroding payments
  • Tax treaty negotiation capacity
  • Supply chain management
  • BEPS risk assessment

As the first edition of the Toolkit has now been published, it will be interesting to watch developing countries apply the tools prescribed, providing a baseline going forward.  All international tax practitioners should be familiar with this latest joint endeavor, as it is an indication of the shared resource approach that is now our future.

EY’s Global Tax Alert provides additional details, and the OECD Toolkit are referenced for review.

http://www.ey.com/Publication/vwLUAssets/OECD_UN_IMF_and_World_Bank_issue_toolkit_for_addressing_difficulties_in_accessing_comparable_data_for_transfer_pricing_analysis/$FILE/2017G_04037-171Gbl_OECD%20UN%20IMF%20and%20World%20Bank%20issue%20toolkit%20for%20difficulties%20in%20accessing%20comparable%20data%20for%20TP%20analysis.pdf

http://www.oecd.org/tax/toolkit-on-comparability-and-mineral-pricing.pdf

OECD / BEPS update

EY’s Global Tax Alert provides a succinct summary of the latest OECD and BEPS developments, including:

  • G20 and exchange of information upon request standard
  • Multilateral instrument, 68 countries moving forward
  • Peer reviews on BEPS 4 minimum standards:
    • Action 5, harmful tax practices
    • Action 6, treaty abuse
    • Action 13, country-by-country reporting (CbCR)
    • Action 14, dispute resolution
  • Action 5 peer reviews of preferential tax regimes
  • Action 13, CbCR exchange relationships; important for US MNE’s and similar jurisdictions without obligatory 2016 reporting
  • MAP peer reviews
  • Discussion drafts on profit splits and attribution of profits re: PE’s; comment period to Sept. 15, 2017
  • Branch mismatch forthcoming revisions
  • Common reporting standard
  • Digital taxation

OECD is still very busy, with a plethora of BEPS follow-up and other activities, although there seems to be continuing flexibility to gain collaboration that will also lead to added complexity and disputes.

http://www.ey.com/Publication/vwLUAssets/OECD_shares_updates_on_tax_activities_in_26_June_2017_Tax_Talk_webcast/$FILE/2017G_04094-171Gbl_OECD%20provides%20updates%20on%20tax%20activities%20in%20Tax%20Talk%20webcast.pdf

The European Commission has proposed a new Directive calling for additional transparency into cross-border arrangements.  Initially, this proposal has the liability for such reporting borne by the advisor, however it may apparently be also transferred to the taxpayer.  The effective date would be 1//1/2019 with recurring reporting by the EU Member States on a quarterly basis thereafter.

In a common theme when the “transparency’ envelope is opened, the relevant basket of potential transactions is widened from the most aggressive to ordinary tax-planning transactions.  Hopefully, if the Directive is adopted, the Member States will use discretion and ask questions about such transactions prior to drawing intuitive conclusions  and assessing taxpayers before having all facts and transactional history for consideration.

The potential transactions include arrangements:

  • To which a confidentiality clause is attached
  • Where the fee is fixed by reference to the amount of the tax advantage derived or whether a tax advantage is actually derived
  • That involve standardized documentation which does not need to be tailored for implementation
  • Which use losses to reduce tax liability
  • Which convert income into capital or other categories of revenue which are taxed at a lower level
  • Which include circular transactions resulting in the round-tripping of funds
  • Which include deductible cross-border payments which are, for a list of reasons, not fully taxable where received (e.g., recipient is not resident anywhere, zero or low tax rate, full or partial tax exemption, preferential tax regime, hybrid mismatch)
  • Where the same asset is subject to depreciation in more than one jurisdiction
  • Where more than one taxpayer can claim relief from double taxation in respect of the same item of income in different jurisdictions
  • Where there is a transfer of assets with a material difference in the amount treated as payable in consideration for those assets in the jurisdictions involved
  • Which circumvent EU legislation or arrangements on the automatic exchange of information (e.g., by using jurisdictions outside exchange of information arrangements, or types of income or entities not subject to exchange of information)
  • Which do not conform to the “arms’ length principle” or to OECD transfer pricing guidelines
  • Which fall within the scope of the automatic exchange of information on advance cross-border rulings but which are not reported or exchanged

The proposal will be submitted to the European Parliament for consideration; this additional layer of transparent information will also be viewed by other countries as potential tools to uncover similar arrangements.  Several “arrangements” are also highly subjective, leading to additional transfer pricing disputes and increased double taxation.

EY’s Global Tax Alert provides additional details for this important proposal:

http://www.ey.com/gl/en/services/tax/international-tax/alert–european-commission-proposes-new-transparency-rules-for-intermediaries

The recent election, resulting in the Conservative Party losing a majority, introduces additional uncertainty into the Brexit process and also affects the Finance Act.

What will happen to the tabled Finance Act proposals that were deleted by the fast-track changes in the last amendment?  Additionally, what will be the effective dates, if they are formally introduced at a later date, April 2017, upon introduction or possible extending into 2018 or not at all based on the political uncertainty.

The normally routine Finance Act process, with no amendments and straightforward measures that can be planned for upon announcement, is no longer true.  At this moment, the tabled measures should not be considered probable to happen due to the new political nightmare that was self-created although not envisioned.

It is hopeful the UK Parliament will stabilize this process going forward, although in the near future there is no definitive certainty.

EY’s Global Tax Alert provides additional details:

http://www.ey.com/Publication/vwLUAssets/The_UK_election_and_its_implications_for_Finance_Act_measures_and_tax_proposals/$FILE/2017G_03722-171Gbl_UK%20election%20and%20its%20implications%20for%20Finance%20Act%20measures%20and%20tax%20proposals.pdf

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