I want to wish all my readers / followers a happy, healthy and exciting New Year, as it will certainly be a challenging one in many ways!
Personally, I have moved from the UK to the US this year and find it interesting to compare and contrast the international tax views and press coverage in different jurisdictions.
Thank you for your comments and insights, enjoy the New Year!
With kind regards,
Keith
The attached link provides access to an invaluable transfer pricing (TP) handbook which is an excellent resource for all international tax practitioners/advisors.
With the advent of the BEPS era and new/novel approaches to arms’s-length pricing are voiced, this resource is a great desktop reference with experience gained by the authors in both applying TP principles as well as teaching those principles to tax administrations in developing economies.
Examples and “boxes” of summary content are provided in the handbook, in addition to a discussion on TP disputes that is inevitable with BEPS Actions and unilateral actions (both legislative and “soft law”) being applied across the world.
A summary of the chapter titles provides a summary of the details therein:
https://openknowledge.worldbank.org/handle/10986/25095
As 2016 draws to a close, and 2016 country-by-reporting (CbC) obligations become effective for the 2016 tax year, Dec. 31, 2016 is an important filing deadline to file CbC “notifications” in many countries advising tax administrations which entity/ “surrogate entity” will be filing such report when it is due.
This deadline is significant for MNE’s with HQ’s in countries that do not require CbC reporting in 2016 (US, Switzerland, and others), with legislatively imposed fines/penalties for non-compliance.
Apart from various forms of guidance, there is not one place to gather such dynamic information. Thus, every MNE should prepare a matrix of countries in which they conduct business operations (including dormant entities, etc.) with corresponding legislation from every country to ensure such deadlines are timely met. Some countries prescribe forms for the notification, although these forms may not be currently printed or available. Therefore, it is recommended to provide some written notification that should ensure no penalties are ultimately applicable.
EY’s Global Tax Alert provides information for Singapore’s recently announced 2016 CbC voluntary filing rules.
This topic will be dynamic, changing almost daily during the next week. Therefore, prudent monitoring of new developments is suggested for this new reporting tool.
The latest BEPS updates are detailed in EY’s Global Tax Report, with the underlying premise of transparency.
Summary:
OECD: On 5 December 2016, the OECD released an updated version of the Guidance on the Implementation of Country-by-Country Reporting, providing flexibility for notification filing dates for countries not requiring a country-by-country (CbC) report for 2016.
Belgium: New innovation deduction covering patent and other IP rights.
EU: Proposal for hybrid mismatch rules with non-EU countries
Norway: Adoption and regulations for CbC reporting
UK: Interest limitation rules, among other provisions
US: CbC Form 8975 released
From a MNE perspective, it is increasingly apparent that deductions to, and benefits from, tax haven countries are under attack and substance is the key to business and tax decisions.
EY’s Global Tax Alert provides the latest developments into the EU’s hybrid arrangements with non-EU Member States to achieve consistency in application of the hybrid mismatch rules. This development is not unanticipated, although will take some time to be fully developed and legislated into action. In the interim, advance planning should take place, recognizing the fact that the current arrangements will not likely be allowed to exist much longer.
After a long waiting period, with many discussions as to its predicted content, the OECD’s Multilateral Convention pursuant to BEPS Action 15 is ready for prime time. Links to EY’s Global Tax Alert, and OECD’s Explanatory Statement and Multilateral Convention are provided for reference.
The Multilateral Convention is very flexible as to what a country wants, or does not want, within its treaty related provisions to signify its alliance with BEPS Actions.
EY’s Global Tax Alert states: “The tax treaty related BEPS measures covered by the multilateral instrument include (elements of): (i) Action 2 on hybrid mismatch arrangements, (ii) Action 6 on treaty abuse, (iii) Action 7 on the artificial avoidance of the PE status; and (iv) Action 14 on dispute resolution. The substance of the tax treaty provisions relating to these actions was agreed under the final BEPS package released in October 2015. The multilateral instrument does not modify or add to the substance of these provisions. The instrument is solely focused on how to modify the provisions in bilateral or regional tax treaties in order to align these treaties with the BEPS measures.”
Due to the flexibility of the new Convention, this unilateral based process poses many questions as to the consistency of intent for the related BEPS Actions around the world. It is certain that, in the short term, there will be considerable complexity and varying interpretations of what the Convention means. Accordingly, the Explanatory Statement and Multilateral Convention are to be reviewed carefully to understand short and long-term trends in this new era of international tax.
The Dutch Secretary of Finance has thoughtfully issued a Decree, whereby the notification period for informing the tax administration of the Country-by-Country (CbC) report for tax year 2016 is delayed until Sept. 1, 2017.
it is intended to officially confirm that the Dutch tax authorities will accept CbC reports that have been filed in other jurisdictions on a voluntary basis (parent surrogate filing) in line with guidance issued by the Organisation for Economic Co-operation and Development (OECD)
The Dutch State Secretary of Finance expects that it may take until August 2017 to have clarity on the automatic exchange of information matching process for reporting fiscal years starting on or after 1 January 2016.
Hopefully, other countries will follow this practical approach, as it represents a win-win for taxpayers and the tax administration. However, other countries still need to be reviewed, especially for US multinationals, to verify additional notifications required by Dec. 31, 2016.
The 2016 draft of the UN TP Manual includes India’s latest expression of alignment, as well as differing views from the OECD BEPS Actions 8-10 and 13.
Accordingly, the Indian tax administration is of the view that the guidance flowing from the final report of the BEPS project on Actions 8-10 should be utilized by both the transfer pricing officers (TPOs) and taxpayers in situations of ambiguity in interpretation of the law. However, India has not endorsed the guidance in the BEPS report pertaining to low value adding intra group services under Action 10 and has not opted for the simplified approach. Further, India has endorsed the recommendations contained in the BEPS final report on Action 13, which supported the three-tiered documentation regime comprising a Local File, a Master File and a Country-by-Country Report and has already carried out legislative changes in its domestic law.
India is known for its creativity, non-technical aggressive positions, and the number of years required to appeal initial assessments. Some of these positions, currently in litigation and dispute, have been reiterated as a further stance in their hard line position on transfer pricing to enhance its economic fisc. Accordingly, interested international tax practitioners should be cognizant of these positions, as other countries will surely “look and see” if such positions could also benefit their economic fisc similarly.
EY’s Global Tax Alert is provided for reference.
With the (unexpected) victory for President-elect Trump, coupled with a majority in both the House and Senate, it is highly likely US tax reform is near. There is a close correlation with Trump’s Plan and the Republican’s Blueprint tax reform initiative, although transitional details (Foreign Tax Credits, Earnings & Profits, etc.) still need to be completed. The US tax rate may no longer be one of the highest in the world, and the tax economics of moving business initiatives, and repatriating cash, to the US are welcome thoughts for US based multinationals. However, attention needs to be focused on the details, including Q4 2016 actions that may provide more efficiencies for the expected 2017 US tax reform.
EY’s Global Tax Alert, and the Blueprint are included for reference.
http://www.ey.com/gl/en/services/tax/international-tax/alert–us-election-2016-and-the-tax-landscape
Click to access ABetterWay-Tax-PolicyPaper.pdf
The IRS has indicated its willingness to share unilateral Advance Pricing Agreement (APA) information to align with BEPS Action 5 re: transparency and substance.
As other jurisdictions have provided taxpayers to submit summary information that will be shared in such exchange, the IRS has not yet indicated such procedures. Thus, it is advised that any multinational with such rulings attempt to obtain a copy of the information to be shared, prior to the automatic sharing process, to ensure its accuracy.
The EY Global Alert provides additional details of this new development.
Most importantly, any taxpayer with tax rulings should already be looking at the information that could be shared to address potential questions/issues by other tax authorities, especially if there are different transfer pricing arrangements in place.
The European Commission issued a significantly important proposal for a Double Taxation Dispute Resolution; it hopes to remain a leader in this ever-changing international tax arena with a mandate for binding arbitration, as applicable, as one of the leading initiatives. This proposal would require a unanimous adoption by all EU Member States (although UK’s vote may be considered to be of less significance as time moves on, it still counts).
Other proposals of the three-prong package include a renewed focus on the Common Consolidated Corporate Tax Base (CCCTB) and hybrid mismatches with third countries. The last initiative is interesting, as the EU now seeks to expand its reach with those countries outside the EU.
Although each proposal is significant as a stand-alone initiative, the Dispute Resolution would provide the most benefit at a critical time for a win-win relationship going forward.
EY’s Global Tax Alert provides further details on this initiative for reference.
The US Treasury and IRS issued the long-awaited Sec. 385 rules re: debt characterization, documentation and potential impact on a company’s international treasury system and related borrowings/distributions.
There are some exemptions everyone was wanting: foreign-to-foreign transactions, cash pooling (notwithstanding related documentation), in addition to relaxed timing for documentation matched to the timing for filing the US federal income tax return and a transition rule pre-2018. However, there are strict documentation rules re: cash pools, including a trigger for substantially modifying terms of the agreement and other significant changes.
Note, the new rules are in addition to the subjective rules on debt characterization in IRC Sec. 385, further complicating characterization of debt instruments.
EY’s Global Tax Alert provides a comprehensive summary of this latest development, which all multinationals are studying to determine what impact it has for 2016, and future operations.
As treasury operations and tax strategies/planning are ineffective operating in silo fashion, it is also a good time to assess the organizational structure for tax and treasury operations to ensure they are operating as one strategic unit.
As MNE’s (anxiously) await the final Treas. Reg. Section 385 final regulations (for which the House and Senate seem unable to slow down Treasury’s intent) and its potential impact on cash pools and foreign-to-foreign transactions, Canada has proposed rules providing for deemed dividend and withholding tax treatment for certain cash pool arrangements, notwithstanding notional pool arrangements.
The perceived abuse of cash pools, albeit physical or notional, has trumped the basic business tenets and rationale of international business. As a result, significant complications have resulted in additional costs, compliance and regulatory oversight that stifles basic business transactions.
MNE’s with physical cash pools may have, or will need to, consider notional vs. cash pools as countries look at such opportunities with its sovereign right for revenues and source taxation. Notional cash pools are no longer safe, as a result.
These non-intuitive rules should introduce discussions between tax administrations and MNE’s located in their jurisdiction to truly understand business dynamics prior to enacting draft/final rules affecting such instruments. Until that time, MNE’s will have to consider restructuring that further begets questions of complexity and planning arrangements.
Details of Canada’s proposal are provided in EY’s Global Tax Alert provided as reference.
As a long-standing advocate of Tax Executive Institute’s (TEI’s) expertise and peer networking for all executive tax members of multinationals, their reappointment as a member of the VAT Expert Group is a sound testament to their advice for the international tax community.
Additionally, TEI’s training programs, and opportunities to be a guest speaker, should be taken advantage of if one has the opportunity.
TEI Appointed as Member to the European Commission’s VAT Expert Group
TEI Staff
On September 30, 2016, the European Commission reappointed TEI as a member of the VAT Expert Group for a three-year term. The VAT Expert Group was established in 2012 for the purpose of “advis[ing] the Commission on the preparation of legislative acts and other policy initiatives in the field of VAT” and “provid[ing] insight concerning the practical implementation of legislative acts and other EU policy initiatives in the field of VAT.” The VAT Expert Group’s next meeting will take place on October 17, 2016 in Brussels.
TEI has participated as a member of the VAT Expert Group since its inception. Allard van Nes will continue to continue to serve as TEI’s primary representative and Lorry G. Limbourg will serve as Mr. van Nes’ alternate. TEI wishes to thank Lynne Clare for her work as the alternate representative during TEI’s prior terms.
As MNE’s are preparing for the country-by-country (CbC) reporting in 2017 for the 2016 tax year, it is readily apparent that the OECD’s intent of Dec. 31, 2017 is readily being eroded by several countries.
For example, US has proposed reporting (obligatory for the 2017 tax year) as of Sept. 15 of the following year, aligned with timing for filing of the federal income tax return.
China has imposed a May 31 date, if a Cbc report is required, aligned with its tax return due date.
Other countries are choosing different dates for CbC reporting, as well as Master File and Local File reporting, that impose additional compliance and timing demands on all MNE’s, based on the earliest date chosen by a country in which it operates.
What does this mean? Earlier preparation, compressed timelines, mismatching of Master File, Local File and CbC reports, notwithstanding its intended comprehensive alignment.
Additionally, all US MNE’s must now review rules to determine if a surrogate filing entity is required for the 2016 CbC report as the US report is not obligatory. The stated filing entity must be communicated by this year-end, 2016, with varying penalty amounts applicable for non-reporting.
As a simple idea is turning into a tsunami of complexity, tax administrations will have to understand how such information is beneficial for transfer pricing risk analysis, as most people will concede that a CbC report has no direct relationship to transfer pricing.
Strategizing Multinational Tax Risks 
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