Strategizing International Tax Best Practices – by Keith Brockman

OECD: MAP update

December 4, 2014

The OECD has released new statistics for the Mutual Agreement Procedure (MAP) cases for 2013, including new cases and the inventory of cases by OECD countries and Partner Economies (Argentina, China, Latvia and South Africa).  A link to the MAP summary is included for reference:

http://www.oecd.org/ctp/dispute/map-statistics-2013.htm

The summary is a valuable reference tool, although the MAP procedure has been acknowledged by many as an inefficient, costly and timely process.  Accordingly, it will be interesting to watch the OECD BEPS Action items progress in this area to minimize double taxation in an efficient and timely process.

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OECD / UN

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APAC: BEPS Best Practices by tax administrations

December 1, 2014

The Study Group on Asian Tax Administration and Research (SGATAR) met recently in Sydney, resulting in the creation of a new task force for the Asia-Pacific region to collaborate on OECD BEPS initiatives while enabling cooperation to develop cohesive tax systems in each jurisdiction.  A link to the Communique is attached for reference:

https://www.sgatar2014.org/media/communique

SGATAR 2014 brought together almost 200 delegates, including representatives from the Asian Development Bank (ADB), Inter-Amercian Center of Tax Administrations (CIAT), Asia-Oceania Tax Consultants’ Association (AOTCA), International Bureau of Fiscal Documentation (IBFD), OECD and the World Bank Group (WBG).

SGATAR members include the following jurisdictions: Australia, Cambodia, People’s Republic of China, Hong Kong SAR, Indonesia, Japan, Republic of Korea, Macao SAR, Malaysia, Mongolia, New Zealand, Papua New Guinea, The Philippines, Singapore, Chinese Taipei, Thailand and Vietnam.

Best Practice observations:

As each of these countries propose unilateral legislation, it should be closely monitored as it may well form a foundation of Best Practices  and SGATAR collaboration for the Asia-Pacific region.  A recent example of potential early guidance is Singapore’s transfer pricing documentation paper by the Inland Revenue Authority of Singapore; (refer to my earlier post of 31 October 2014).

The Asia-Pacific regional approach is worth watching to discern trends that may vary from the OECD BEPS Guidelines, forming additional complexities and different interpretations for international tax norms.

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OECD / UN

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Treaty Abuse: OECD follow-up

November 26, 2014

The OECD has published a public discussion draft on its BEPS Action Item 6: Preventing Treaty Abuse.  Comments by interested parties are due by 9 January 2015.  A link to the draft is attached for reference:

Click to access discussion-draft-action-6-follow-up-prevent-treaty-abuse.pdf

Some key points:

  • Comments are invited on the Limitation of Benefits (LOB) clause re: interaction with Competent Authority (CA) relief
  • Alternative LOB provision for EU countries?
  • “Active business” test of the LOB: clarification/application
  • Process for approval to apply the “Principal Purpose” test for disallowing treaty benefits
  • Interaction of domestic and treaty anti-abuse rules

This Action item is very comprehensive and will also serve as a blueprint for some countries designing unilateral legislation.  Accordingly, the LOB and Principal Purpose tests, among other complex provisions in the draft, should be reviewed to convey its terms succinctly and simply to others not well versed in the technical intricacies to promote further understanding and practical application.

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OECD / UN

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Russia: New CFC & Beneficial Ownership rules

November 22, 2014

Russia has introduced legislation defining a “beneficial owner” and the introduction of CFC rules, expected to be effective 1/1/2015.  PwC has provided a summary of the changes, referenced herein.

Click to access pwc-russian-anti-offshore-law-changes-russian-treaties.pdf

Key observations:

  • Treaty benefits will not apply if the foreign person has limited powers to dispose of the income or fulfill intermediary functions and do not perform any other duties or undertake any risks, or the income is subsequently transferred to another person who would not be entitled to treaty benefits if they had directly received the income.
  • Foreign corporations, trusts, partnerships and funds which hold property subject to Russian property tax are required to notify the Russian tax authorities of their shareholders and founders, beneficiaries and managers.  A 100% penalty tax may apply for noncompliance.
  • A legal entity may now be a Russian tax resident based on its place of management.
  • Russian tax individuals and legal entities must pay Russian tax on a CFC’s retained earnings if the CFC has not paid a dividend, subject to thresholds.  No penalty is applicable for 2015-2107.

Persons with Russian property and legal interests should review this important legislation to understand the new reporting rules and regime for CFC’s and beneficial ownership.  The law follows the intent of the OECD’s BEPS provisions to prevent tax avoidance via tax havens and low-tax jurisdictions.

 

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Transfer Pricing

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Beneficial Ownership: Guiding Principles

November 18, 2014

The G20 has provided a set of guiding principles re: definition of “beneficial owner” in its efforts to improve transparency and address abuse.  A link to the principles is provided:

Click to access g20_high-level_principles_beneficial_ownership_transparency.pdf

The principles are a proactive effort by the G20 to identify the ultimate ownership / control of legal entities, provide such information in a mechanism that allows sharing by tax authorities and competent authorities, as well as  assessing risk of legal structures and designing actions to fight abuse.

The principles should be compared to the new definition and guidance re: “beneficial owner” provided for the update to the 2014 OECD Model Convention (refer to 22 July 2014 post), which conveyed that the term should be understood in its context and in light of the object and purposes of the Convention including avoiding double taxation and  prevention of fiscal evasion and avoidance.

The focus on “Beneficial Ownership” is increasing, thereby increased diligence re: documentation to address transparency and benefits of current legal structures should be a top priority for MNE’s.

 

 

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Transfer Pricing

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OECD: Best Practices for Tax administrations

November 14, 2014

OECD – Tax Administration 2013
This is a unique reference source of high level comparative information on aspects of tax administration system design and practice covering the world’s major revenue bodies. This edition updates performance-related and descriptive material contained in prior editions with new data and supplements this with new features including coverage of 3 additional countries (i.e. Brazil, Columbia, and Hong Kong (China). For the first time, this edition of the series includes comparative information on all 34 member countries of the OECD, the EU and, the G20, as well as certain other countries (e.g. Singapore and South Africa). New subject covered in this series include: 1) a description of how revenue bodies engage and support tax intermediaries. In addition, the series includes extensive description of organizational reforms underway in many countries to improve efficiency and effectiveness, for many in an environment where public sector funding is being significantly reduced.

http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/tax-administration-2013_9789264200814-en#page1

Summary of Topics:

  • Institutional arrangements for tax administrations
  • Organisation of revenue bodies
  • Strategic management
  • Human resource management and tax administration
  • Resources
  • Operational performance
  • Electronic services
  • Tax administration and tax intermediaries
  • Administrative frameworks
  • Various appendices

As the concept of co-operative compliance becomes more commonly practiced, this reference is a valuable contribution to form Best Practices for tax administrations.

Additionally, it is useful for MNE’s to review and gain a better understanding of the issues faced by tax administrations, with a proactive effort needed to form a win-win opportunity to achieve a fair and consistent international tax framework.

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OECD / UN

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OECD BEPS Strategy for Developing Countries

November 13, 2014

The OECD has released its plans for developing countries to play a greater role in its BEPS initiatives.  A link to the OECD release is attached:

http://www.oecd.org/newsroom/developing-countries-toplay-greater-role-in-oecdg20-efforts-to-curb-corporate-tax-avoidance.htm

Summary:

  • Three-part strategy
    • Attendance at meetings by 10 developing countries, including Albania, Jamaica, Kenya, Peru, Philippines, Senegal and Tunisia.
    • Five regional networks of tax policy and administration officials will be established for coordination and dialogue on BEPS issues.  The regional focus includes developing countries located in Asia, Africa, Central Europe, Middle East, Latin America / Caribbean and Francophone regions.  The regional network will also be a forum for developing countries to discuss negotiation and implementation of the multilateral instrument under Action 15 of the BEPS Project.
    • BEPS toolkits to be developed for practical implementation and capacity building.
  • A two-day workshop is scheduled in December 2014 that will allow developing countries to discuss practical aspects and their priority issues.

Developing countries generally have less resources, experience and training to implement BEPS effectively, therefore this initiative should be monitored to determine ultimate success of the BEPS initiatives around the world.

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OECD / UN

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MENA Regional Profile 2014: World Bank Report

November 9, 2014

The World Bank and the International Finance Corporation collaborated in providing a 2014 Doing Business Report for the Middle East and North Africa (MENA) Region.  A link to the report is attached for reference:

Click to access 834130DB140Mid0Box0382128B00PUBLIC0.pdf

Key observations:

  • Ease of Doing Business: UAE and Saudi Arabia were first (23) and second (26), while Libya rated 187th of 189 economies.
  • Total Tax Rate measures corporate income tax, social contributions and labor taxes, property taxes, dividend, capital gains and financial transaction taxes, waste collection, vehicle, road and other taxes.  Qatar, Kuwait, Bahrain, Saudi Arabia, UAE, the West Bank and Gaza all had a total tax rate less than 20%, while Tunisia was 62.4% and Algeria 71.9%.  The MENA Regional Average total tax rate was 32.3%.
  • Egypt made paying taxes more costly by increasing its corporate income tax rate.
  • Recent years have seen a reduction in Yemen’s corporate income tax from 35% to 20%, while UAE and Saudi Arabia have introduced online filing and payment systems for social security contributions.

The MENA Region is a significant area of focus for many MNE’s , with this report showing the tremendous progress and large gaps between countries in this interesting region.

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Tax Risk Management

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World Bank: Doing Business 2015 Report

The World Bank Group Report compares business regulations, including taxation, in 189 Economies.  A link to the report is attached for reference:

Click to access DB15-Full-Report.pdf

The Report provides an Ease of Doing Business Ranking for each economy, in addition to related sections for starting a business, dealing with construction permits, getting electricity, registering property, taxation, trading across borders, and various legal aspects including enforcing contracts and protecting minority investors.

Key summaries re: taxation:

  • Governments generally reduced the rates and broadened the base for corporate income tax while increasing the rates for the consumption or value added tax (VAT)
  • The total tax (profit, labor and other) rate averaged 43.1% of commercial profit in 2012 (Sub-Saharan Africa was 53.4% in 2012 versus over 70% in 2004, while the Middle East and North Africa region was approx. 35% in 2012 versus over 45% in 2004).

The report is useful in comparing trends and business related factors, in addition to taxation, that impact a MNE’s operations around the world.  The measurement of total tax is an interesting concept that many MNE’s are using in Corporate Sustainability Reports to reflect tax contributions around the world.

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Tax Risk Management

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OECD BEPS Action 10: TP Low Value Add Services

November 7, 2014

The OECD has released guidance on its BEPS Action Plan item 10: Transfer Pricing Guidelines re: Low Value-Adding Intra-Group Services.  Comments should be submitted by 14 January 2015.  A copy of the guidance is attached for reference:

Click to access discussion-draft-action-10-low-value-adding-intra-group-services.pdf

The Guidance, in summary:

  • Defines low value-adding intra-group services
  • Clarifies the meaning of duplicative activities and shareholder costs
  • Provides a 2-5% range for mark-up
  • Addresses cost allocation methodologies
  • Discusses a simplified benefit test
  • Discusses documentation to support the simplified approach

This guidance is required reading for all interested parties working with transfer pricing methodologies addressing intra-group services, noting the fact that simplification in one area of such services may introduce further complexities and ambiguities.

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OECD / UN

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OECD BEPS Action 7 Guidance: PE Avoidance

OECD has released guidance on the BEPS Action Plan item 7: Preventing the Artificial Avoidance of PE Status.  Comments should be sent by 9 January 2015.  A link to the OECD guidance is attached for reference:

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

Key observations:

  • Commissionaire arrangements: 4 alternatives are provided re: PE avoidance
  • “Independent agent” activities: the independent agent must not act exclusively for one enterprise
  • Options to counter specific activity exemptions are introduced to counter artificial avoidance of PE
  • Two options are provided re: splitting up of construction contracts to avoid the 12 month rule, one of which is the Principal Purpose test general anti-abuse rule
  • Insurance agent PE proposals are introduced
  • Profit attribution concepts to PE are discussed

In summary, additional subjectivity rules are introduced while the current exemption definitions are narrowed.  These actions will tend to significantly increase tax appeals and the risk of double taxation.

All MNE’s should review the guidance to understand the trend for future PE guidance, while also identifying current structures that may be affected by the new rules.  Notably, countries may unilaterally develop legislation based upon this guidance without waiting for final guidelines to be issued, thereby introducing greater complexity and challenges in the determination of PE.

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OECD / UN

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Tax Risks: strategic personal development objective

November 2, 2014

The subject of international tax risk for multinationals is growing exponentially every day, although there does not seem to be a significant focus on the commitment in personal development plans for the identification, assessment and / or monitoring of such risks.

Tax risk management is an integral part of all tax professionals focus, although this objective may not be identified to measure accurately and consistently.

For example, if the tax professional is communicating in an audit or appeals process, does the individual have the relevant training for interpersonal skills and understanding the negotiation process to develop a win-win opportunity for efficient resolution?

The timing for next year’s development plan has arrived, thus it might be the right time to consider tax risk with a new focus.

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Leadership

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Bangladesh TP Reg’s 2014: Effective July 2014

October 31, 2014

Bangladesh has introduced new transfer pricing (TP) regulations, effective from July 2014.

Key observations:

  • Definition of: associated enterprise, international transaction and arm’s length methodologies
  • No APAs or safer harbor rules
  • Key documentation requirements include:
    • Business relationships between each member of the MNE group
    • Consolidated financial statements of the MNE group
    • Record of any financial estimates
    • De minims requirements for international transactions less than approx. USD 390,000
    • New statement of international transactions required in addition to the income statement
    • Chartered Accountant’s report
    • 1% of value TP penalties

These rules, similar to Singapore’s recent comments for its proposed update for TP legislation, request broad and complex documentation requirements for the MNE group.  Accordingly, all MNE’s need to modify global transfer pricing documentation methodologies in response to unilateral legislation of various countries.

Most importantly, the global TP requirements will require attendees in all future audits to be familiar with these global methodologies and information that the tax authorities will have had the chance to review.  

A Financial Express summary is included for reference:

http://www.thefinancialexpress-bd.com/2014/06/17/39946

Category:

Transfer Pricing

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TEI’s comments: Singapore’s TP documentation – Marching to a different drummer

Tax Executives Institute, Inc. (TEI) has provided excellent comments to the transfer pricing documentation paper by the Inland Revenue Authority of Singapore (IRAS).  TEI responds to five questions of the Consultation Paper.  A link to their comments, and the Singapore Consultation Paper,  are included for reference:

Click to access TEI%20submission%20re%20IRAS%20TP%20Documentation.pdf

Click to access pconsult_IT_Transfer%20Pricing%20Documentation_2014-09-01.pdf

Key observations:

  • The proposed rules for documentation by December elevate Singapore’s transfer pricing documentation requirements to a higher level than the current OECD guidelines, prior to its final recommendations, including how the Master File should be filed and transition thereto.
  • The Consultation sets forth guidelines for non-related Singapore entities including the provision of a functional analysis for contributions to value creation by each related group member, consolidated financial statements of the group, and transfer pricing policies re: all types of transactions between group members.  
  • Confidentiality concerns arise with respect to the proposed rules, accordingly appeals for exemption should be appropriately provided.
  • Adverse consequences for not providing “adequate documentation” (term not defined), including withdrawal of MAP support set forth in the relevant treaty.
  • TEI has proposed de minims thresholds to exclude immaterial transactions and excluding documentation for intra-country transactions.
  • TEI has suggested an approach to implementing new documentation guidance tracking OECD BEPS developments, with lead time to adjust processes accordingly.

TEI has provided a valuable contribution in their well-written and thoughtful comments to significant issues posed by countries unilaterally adopting new transfer pricing documentation rules prior to finalization of the OECD BEPS initiatives.

Most importantly, Singapore has suggested using domestic legislation to override the MAP process in treaties as well as introducing overly comprehensive documentation that has no relevance to the domestic entity and its intercompany transactions or transfer pricing methodologies.

This initiative by IRAS is indicative of a parade with an OECD banner, although each member has  a different drummer and leader with distinct initiatives and its concept for application of the “arm’s-length principle” to determine its fiscal fair share of tax to be collected from multinationals that will be determined prior to official OECD guidelines.  It is imperative that all interested parties follow this initiative by Singapore, in addition to correlative initiatives by other countries.

 

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OECD / UN, Transfer Pricing

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TP Risk: Audit discussion = Framework for Ways of Working

October 25, 2014

As the OECD is developing new guidelines to address transfer pricing (TP) risk, including the Country-by-Country (CbC) template, a lack of emphasis resides in the idea that every tax audit involving cross-border issues should require an opening discussion between the taxpayer and the tax authorities of the business, its relevance in that jurisdiction apart from its global business, the functions, assets and risks for that jurisdiction upon which the arm’s length principle is based, and the rationale for the level of income/loss generated during the audit years.

Transfer pricing documentation reports, including a local country report, may be available for review.  However, such reports may not simply convey the business rationale easily to form an accurate understanding prior to embarking upon a leap into technicalities and assumptions to initiate data requests and move forward on assumptions prematurely.  For example, a company investing in a less developed country seeking long-term growth based on the domestic opportunity may have start-up losses, although such losses may be significantly offset by potential future income.

The open audit discussion should be developed into a Best Practice Ways of Working framework which is discussed and signed by the taxpayer and tax authorities.  This framework should be a simple and practical document addressing open dialogue, preliminary discussion of issues designed to produce the relevant documentation, timelines for requesting and providing information and a continuing dialogue discussing the status of open issues and requests, with a mutual effort to resolve issues efficiently.

To the extent this simple idea could be integrated consistently and uniformly around the world, it is a challenge worth addressing.

The Best Practice Ways of Working Framework could be a very effective and practical tool, supplementing the technical and legal requirements for transfer pricing.

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Transfer Pricing

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