Strategizing International Tax Best Practices – by Keith Brockman

MAP Vision: Forum on Tax Administration

October 24, 2014

The Forum on Tax Administration (FTA), representing heads of tax administrations from 38 countries, concluded their 9th meeting on 24 October, 2014.  The meeting represented attendance by over 130 delegations, including representatives from the African Tax Administration Forum (ATAF), Inter-American Center of Tax Administrations (CIAR), Centre de Rencontre des Administrations Fiscales (CREDAF), International Monetary Fund (IMF) and the Intra-European Organisation of Tax Administrations (IOTA).  The meeting included strategic visions for the Mutual Agreement Procedure (MAP) and Co-operative Compliance programs.

Links to the meeting summary and MAP vision are included for reference:

Click to access fta-2014-communique.pdf

Click to access map-strategic-plan.pdf

The following actions were agreed:

  • Enhanced cooperation strategy, based on existing legal instruments.
  • Created a new international tax platform, Joint International Tax Shelter Information and Collaboration (JITSIC Network) to focus on tax avoidance.
  • Implement the new standard on automatic exchange of information while protecting taxpayer confidentiality.
  • Improve practical operation of Mutual Agreement Procedure (MAP) to address double tax issues more quickly and efficiently, integrated with the OECD BEPS action item.  Competent authorities of all member countries are “encouraged” to actively participate in this initiative.
  • Promote a voluntary compliance structure.
  • Develop principles on Co-operative Compliance arrangements that form an integral part of effective tax control frameworks.

MAP Strategic Plan summary – “Statement of Vision and Commitment”

  1. Collaboration of the FTA MAP Forum with other multilateral bodies, including OECD’s Working Party 1’s Focus Group, to further its goals.
  2. Participating Competent Authorities (CAs) commit to the stated goals and be accountable thereto.
  3. Allocation of adequate staffing levels and resources to meet CAs working demands.
  4. Adequate training programs and personnel practices.
  5. FTA MAP Forum’s engagement to address resource challenges.
  6. Empowerment of CAs to effect agreements in accordance with principles in the respective tax conventions.
  7. Absence of undue influence by administrative policies, practices or goals.
  8. Support resolution of MAP cases in accordance with multilateral principles, avoiding efforts such as maximizing revenue collection.
  9. Adoption of principle based and mutual trust principles.
  10. Adopt Best Practices in the pursuit of new initiatives to streamline and enhance processes to expedite MAP resolution.
  11. Sharing MAP Best Practices among FTA MAP participants.
  12. New MAP processes to elevate difficult cases.
  13. Enhance taxpayer’s involvement in case resolution, including bilateral/multilateral meetings and sharing case developments.
  14. Seek ways to avoid MAP cases, including APAs, joint audits, “roll-forward” adjustments and other techniques.
  15. Use multilateral MAP procedures.
  16. Adopt agreements for issue consistency.
  17. Avoidance of MAP manipulation by auditors.
  18. Deliver training on double taxation and CA processes via a “Global Awareness Training Module.”

The above meeting commitments and objectives are welcome as tax controversies increase and MAP procedures have seeming lost the elements of  timeliness, cost-effective resolution, avoidance of double taxation, transparency and efficiency.

It is hopeful that most tax administrations endorse, and commit to, the above MAP framework in an effort to achieve Best Practices for a win–win opportunity.

Category:

OECD / UN

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Substance vs. Form: “Directive Shopping”

October 23, 2014

Today’s tax climate, OECD Base Erosion & Profit Shifting (BEPS) Action Plans, 2014 changes to the OECD Model Tax Convention re: “Beneficial Ownership” (refer to 22 July 2014 post), and General Anti-Abuse Rules (GAAR) all focus on increased substance of activities in an entity, versus pure legal form, to derive relevant treaty benefits.

A recent Austrian Administrative High Court decision (VwGH 26/6/2014, 2011/15/0080-13) focused on the EU Parent-Subsidiary Directive (PSD) re: “directive shopping.”  There were dividend distributions from an Austrian company to a pure holding company in Cyprus with no people or physical assets. Withholding tax was paid by the Austrian company, with a refund claimed by the Cypriot company in accordance with the EU PSD.  (Note the Cypriot company had a Russian shareholder, for which direct distributions from Austria to Russia would not have the benefit of the EU PSD.)

The High Court, confirming the tax authority’s view, stated the Cypriot company structure was abusive.  Accordingly, the withholding tax refund application of the Cypriot company was denied.

The substance vs. form application of the case highlights the potential withholding tax issues for a pure holding company located in a tax favorable jurisdiction.  Thus, all holding company structures should be reviewed under current law, and most importantly with respect to future international tax changes focusing on the proper substance to receive treaty benefits.

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Tax Risk Management, Transfer Pricing

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EU State Aid: A primer

October 17, 2014

PwC has provided an outline of EU State Aid requirements.  This comprehensive and succinct summary provides context for the  OECD BEPS provisions, tax arrangements that are considered illegal State Aid, and a valuable reference for potential EU State Aid cases in the foreseeable future.  A link to the outline is provided for reference:

Click to access pwc-eu-fiscal-state-aid.pdf

This information provides a valuable context against which the recent inquiries have been focused, as well as potential areas (including OECD BEPS Actions) that may constitute illegal State Aid in the future.  All MNE’s with European operations should be familiar with these legal provisions and the continuing importance that they have in today’s rapidly changing international tax environment.

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Transfer Pricing

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Internal (tax) audit: Risk governance tool

October 13, 2014

Most MNE’s have an internal audit department, although the extent to which this audit team minimizes tax risks and enhances tax governance is generally not identified.

New out of the box ideas may be necessary for the internal audit function to address the evolution of transfer pricing and new challenges that will surely bring additional appeals and risks of double taxation.  

With the advent of the OECD’s BEPS Action Plans, parallel UN actions, increased tax audits and tax risks re: transfer pricing documentation, there has not been a significant increase in the role of internal audit teams to monitor and minimize potential tax risks, including double taxation. There is also a resource limitation on tax professionals, thus internal audit may provide a win-win opportunity.  The near future may include the addition of an internal tax audit team and/or adding tax professionals to the team.

Best Practice ideas for internal audit collaboration:

  • Tax topic training, including OECD’s BEPS actions
  • Tax risk awareness training, including Permanent Establishment (PE) and transfer pricing methodologies
  • Rotation of tax professionals in the internal audit team
  • Knowledge of tax policies, including intercompany service agreements and internal governance
  • Issues / trends in tax audits and hot topics
  • Treasury / financing issues subject to internal governance

The ideas are meant to promote thought and consideration for Best Practices.

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Tax Risk Management

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BEPS Action Plan 5: Harmful tax practices & transparency focus

October 8, 2014

Loyens & Loeff provides a comprehensive and concise summary of the focus for the OECD BEPS Action 5, Countering Harmful Tax Practices.  One of the priorities for this action is to improve transparency, with the EU Directive on Cooperation as a possible tool to carry out this objective.  The Council Directive on administrative cooperation is highlighted to draw attention to its possible role in the OECD BEPS drama.  An excerpt from their summary, and a link to their article, are provided for reference:

“Another priority under Action 5 is to improve transparency, including compulsory spontaneous exchange on rulings related to preferential regimes. To that extent the FHTP has put together a framework that describes in which situations, which information on which rulings should be exchanged between which countries. The Report mentions that the information exchange may take place on the basis of existing legal instruments, such as bilateral information exchange instruments, the Convention on Mutual Administrative Assistance in Tax Matters and the EU Directive on cooperation in the field of taxation. However, it remains unclear on what legal basis countries would have the obligation to exchange this specific information and how confidentiality can be guaranteed. Furthermore, it can be expected that such obligation may conflict with domestic legal requirements. The Report is also silent on how this should be handled.”

http://www.loyensloeff.com/nl-NL/Documents/Action%205%20–%20Countering%20Harmful%20Tax%20Practices%20More%20Effectively.pdf?_cldee=ZXZlbnRzQGxveWVuc2xvZWZmLmNvbQ%3D%3D&urlid=5

Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation, is applicable as of 1 January 2013 and is repealing the Directive 77/799/EES and lays down clearer and more precise rules governing administrative cooperation, in order to establish a wider scope of administrative cooperation between Member States.

The opportunity for OECD to successfully carry out is Action Plans relies on a legal instrument that provides automatic and timely implementation by the relevant countries.  A forthcoming multilateral instrument may also be a possible tool to accomplish its objective.  It is critical to monitor the implementation of this objective, as countries may comply completely, partially or not at all.  Therein lies the complexity.

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OECD / UN

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OECD BEPS Action Plan 11: Comments re: BEPS data

October 7, 2014

The OECD has published comments in response to its Base Erosion and Profit Shifting (BEPS) Action Plan 11, methodologies for collecting and analyzing BEPS data. A link to the comments is attached for reference:

Click to access comments-action-11-establishing-methodologies.pdf

The comments are valuable in assessing current perceptions and trends by interested parties, none of which are multinationals. It is interesting to read comments re: public disclosure of country by country reporting information, etc. and the transparency which today’s environment is demanding. The rapid change and volatility of international tax rules, especially transfer pricing, are leading to a tsunami effect, with the roar of its crashing waves extending far out into the foreseeable future.

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OECD / UN

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EU Commission: State aid investigations

October 6, 2014

KPMG’s Euro Tax Flash provides a summary of the European Commission’s formal state aid investigations into tax rulings granted by Ireland (Apple) and Luxembourg (Fiat).  This round of investigations follows three investigations, announced 11 June 2014, into alleged state aid granted by Ireland (Apple), Luxembourg (Fiat) and the Netherlands (Starbucks) via transfer pricing rulings.

The procedure is now open for interested parties, including Member States to provide comments to the Commission.

The KPMG Euro Tax Flash and preliminary decisions (English version for Ireland, French version for Luxembourg) are attached for reference:

Click to access tp-eu-sept30-2014.pdf

Click to access 253200_1582634_87_2.pdf

Click to access 253203_1582635_49_2.pdf

Key observations:

  • State Aid – Apple; Section 3.1, par. 46: Any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the provision of certain goods shall be incompatible with the common market, insofar as it affects trade between Member States.
  • Qualification as state aid – Apple; Section 3.1, par. 47:  The following cumulative conditions must be met: (i) the measure must be imputable to the State and financed through State resources; (ii) it must confer an advantage on its recipient; (iii) that advantage must be selective; and (iv) the measure must distort or threaten to distort competition and have the potential to affect trade between Member States.
  • Arm’s length pricing – Apple; Section 3.1, par. 55: The Court of Justice has confirmed that if the method of taxation for intra-group transfers does not comply with the arm’s length principle, and leads to a taxable base inferior to the one which would result from a correct implementation of that principle, it provides a selective advantage to the company concerned.
  • OECD Guidelines – Apple; Section 3.1, par. 56: The OECD Guidelines are a reference document recommending methods for approximating an arm’s length pricing outcome and have been retained as appropriate guidance for this purpose in previous Commission decisions.

These formal rulings and comments by interested parties should be followed closely, especially in today’s challenging international tax environment.

EU case law and European Commission reviews have a significant impact upon the new international tax principles being established by the OECD and EU.  For example, the general anti-abuse rule (GAAR) provision in the Proposal for the 2014 EU Parent-Subsidiary was ultimately not included in the final version of the 2014 Directive, one reason being that the requirements exceeded the precedents of EU case law and would not be ultimately sustained.

To the extent that new OECD guidelines provide an alternative, or exceptions, to the arm’s length principle, it should have a direct impact upon the precedence for reliance by the European Commission re: transfer pricing issues.

 

 

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Transfer Pricing

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The Latest on BEPS: Australia, Canada, Chile, NL, Switzerland and UK

October 3, 2014

EY’s Global Tax Alert of 29 Sept. 2014 outlines the latest developments of the OECD BEPS initiatives, including BEPS summaries for Australia, Canada, Chile, Netherlands, Switzerland and the UK.  A copy of the Alert is provided herein for reference.

Key developments:

  • Chile has introduced general anti-avoidance rules (GAAR) and CFC legislation, new audit powers and transfer pricing amendments re: business restructurings and thin capitalization.
  • Canada released for consultation several legislative proposals, including thin capitalization and interest withholding tax rules for certain back-to-back lending arrangements.
  • Netherlands will await further BEPS developments prior to taking any unilateral actions.
  • Switzerland has adopted a more restrictive approach when reviewing international structures from a treaty shopping perspective.
  • The UK HMRC formally committed to implementing the country-by-country template, although the timing has not been decided.

As the OECD BEPS developments continue in 2015, it is especially important to view the actions by countries re: unilateral actions prior to final OECD guidance.  Additionally, country guidance may be more restrictive than the OECD recommendations, as well as deciding to impose additional disclosure requirements in their legislation.  The effective dates of such OECD guidance will also not be uniform, via execution of a multilateral instrument and/or domestic legislation.

 

On 16 September 2014, the OECD issued reports and recommendations with respect to the following focus areas set forth in the July 2013 BEPS Action Plan:

Action 1 – Tax challenges of the digital economy (see EY Global Tax Alert on Action 1)
Action 2 – Hybrid mismatch arrangements (see EY Global Tax Alert on Action 2)
Action 5 – Harmful tax practices of countries (see EY Global Tax Alert on Action 5)
Action 6 – Addressing treaty abuse (see EY Global Tax Alert on Action 6)
Action 8 – Transfer pricing for intangibles (see EY Global Tax Alert on Action 8)
Action 13 – Transfer pricing documentation and country-by-country reporting (see EY Global Tax Alert on Action 13)
Action 15 – Multilateral instrument (see EY Global Tax Alert on Action 15)
The OECD also issued an Explanatory Statement providing an overview of developments in the BEPS project.

See EY Global Tax Alert, OECD releases highly anticipated 2014 output of BEPS Action Plan, dated 18 September 2014, for an overview of the overall package of September 2014 OECD BEPS releases.

On 20-21 September 2014, the G20 commitment to the OECD BEPS project was reiterated at the G20 Finance Ministers’ meeting in Cairns, Australia. The meeting communique focused on the documents released by the OECD in the lead up to the meeting, stating “[t]oday, we welcome the significant progress achieved towards the completion of our two-year G20/OECD Base Erosion and Profit Shifting (BEPS) Action Plan and commit to finalizing all action items in 2015.” The communique also addressed with approval the continuing developments with respect to the new standard for automatic exchange of information on financial accounts and noted the increasing engagement with developing countries on BEPS matters.

On 22 September 2014, following the G20 Finance Ministers’ meeting, the OECD provided an update regarding its ongoing work on the particular BEPS considerations for developing countries and on the participation of developing countries in the new standard for automatic exchange of information. The OECD released two reports on these topics: “A Report to G20 Development Working Group on the Impact of BEPS in Low Income Countries (Part 2)” and “Automatic Exchange of Information: A Roadmap for Developing Country Participation.”

On 25-26 September 2014, representatives of more than 100 countries met at the OECD for the 19th Annual Global Forum on Tax Treaties. BEPS developments in general, and the tax treaty related issues with respect to BEPS in particular, were a focus of the meeting discussions.

Australia
On 25 September 2014, the Australian Parliament passed previously announced legislation which includes changes to the thin capitalization rules, a rewrite of the exemption for foreign non-portfolio dividends received by Australian companies, and amendment of the foreign resident capital gains tax concession rules. The thin capitalization changes are effective for years starting on or after 1 July 2014. The existing exemption for Australian companies receiving non-portfolio dividends from foreign companies will no longer apply for distributions made after the date of Royal Assent of the Act, and the replacement by the new rules will commence for distributions made after the date of Royal Assent of the Act. The Royal Assent may occur as soon as within days to a week.

See EY Global Tax Alert, Australian Bills affecting financing and structuring become law, dated 25 September 2014 and EY Global Tax Alert, Australian Tax Bills affect international financing and structuring, dated 18 July 2014, which summarized the proposals in the Bill.

Canada
On 29 August 2014, Canada’s Department of Finance released for consultation revised legislative proposals to implement measures announced in Economic Action Plan 2014, including revisions to previously released legislation under which: (i) Canadian financial institutions would be subject to tax in respect of certain offshore derivative “insurance swaps,” (ii) the regulated foreign financial institution exception to the foreign accrual property income rules would no longer apply to non-financial institutions, and (iii) certain back-to-back lending arrangements would be subject to thin capitalization and interest withholding tax rules.

However, although Economic Action Plan 2014 contained a high-level description of measures under consideration to counteract treaty shopping, none of these were included in the revised legislative proposals. The implementation of these measures is being deferred at this time, as the Government will instead await further work by the OECD in relation to the BEPS project.

See EY Global Tax Alert, Canada’s Department of Finance releases draft international tax measures, dated 3 September 2014.

Chile
On 10 September 2014, the Chilean Chamber of Representatives approved the Bill of Law amending tax regulations, based on the latest draft proposed by the Chilean Ministry of Finance on 9 August 2014. The Bill now must be published by the Chilean Government. The provisions of the Bill include, among other significant changes, the introduction of general anti avoidance rules and CFC legislation, new audit powers for the Chilean Internal Revenue Service, and amendments to the transfer pricing rules related to business restructurings and to the thin capitalization rules. Each provision has a specified entry into force date, which varies from 2014 to 2017.

See EY Global Tax Alert, Chilean Congress approves tax reform, dated 15 September 2014.

Netherlands
On 16 September 2014, in a letter to the Dutch Parliament, the Dutch State Secretary of Finance provided the Dutch Government’s response to the reports in the OECD BEPS project that had been published earlier that day. In line with earlier official statements, the State Secretary indicated that the Dutch Government has actively participated in the BEPS project and will continue to do so as part of a broader effort to develop a durable solution that does not harm the Dutch fiscal investment climate. These efforts have, for instance, led to the extension of the application of the safe harbor rules on substance to group financing/licensing companies that do not request an Advance Pricing Agreement and to holding companies that wish to conclude an Advance Tax Ruling. Importantly, and also in line with earlier official statements, the State Secretary reiterated that at this stage it would be premature to take any unilateral actions based on the 2014 BEPS recommendations and that the Dutch Government will await further developments, as the BEPS project is an holistic one and the OECD is expected to provide further recommendations next year.

Switzerland
On 22 September 2014, the Swiss Federal Council presented the draft legislation for the third Swiss Corporate Tax Reform and initiated the consultation phase. The proposed tax reform aims to strengthen the attractiveness of Switzerland as a business location and is Switzerland’s response to the international tax policy developments and the review of preferential tax practices by the OECD in the BEPS project and by the EU. The Swiss Federal Council proposes to replace the tax regimes that have come under increased international pressure by new measures that are fully in line with international standards, such as a Swiss patent box and notional interest deduction on equity. Other key elements of the reform are cantonal tax rate reductions, a step-up upon migration and change of tax status, abolition of the one-time capital duty, unrestricted use of tax losses, and change to a direct participation exemption. During the next four months, political parties, cantons, and interested associations are invited to share their views on the proposed tax reform. Given the magnitude of the reforms under consideration and the legislative procedure in Switzerland, it is expected that the new law would not enter into force until 2018-2020.

See EY Global Tax Alert, Swiss Federal Council initiates the consultation phase for Corporate Tax Reform III, dated 23 September 2014.

On a separate note, as a result of the international developments with respect to the BEPS project, the Swiss Federal Tax Administration has adopted a more restrictive approach when reviewing international structures from a treaty shopping perspective. In particular, the substance (physical and functional) at the level of the foreign parent company of a Swiss subsidiary is now under increased scrutiny through application of the beneficial ownership concept when treaty relief is applied for in Switzerland with respect to outbound dividends paid by the Swiss subsidiary.

United Kingdom
On 20 September 2014, HM Treasury issued a press release “formally committing” to implement the country-by-country reporting template as released by the OECD on 16 September 2014. The United Kingdom thus is the first of the OECD and G20 countries involved in the BEPS project formally to commit to the template, although the announcement did not include any comment in relation to the proposed timing for implementation.

EYG no. CM4759

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OECD / UN

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UN Tax Workshop, including BEPS Subcommittee

September 24, 2014

The UN organized its second workshop on “Tax Base Protection for Developing Countries” on 23 Sept. 2014.  The background materials for the workshop provide valuable insights into the roles that developing countries will continue to play, directly or indirectly, as a part of the OECD BEPS Action Plan.  The final outcome of the project will be a UN handbook.  The topics for the workshop were in parallel with the background materials, focusing on the following topics: (1) Preventing the artificial avoidance of PE status; (2) Neutralizing effects of hybrid mismatch arrangements; (3) Limiting interest deductions; (4) Taxation of capital gains; (5) Preventing tax treaty abuse; and (6) Transparency and disclosure.  Additional information, including the background materials, are referenced at the following link:

http://www.un.org/esa/ffd/tax/2014TBP2

This workshop, and its continuing developments, are significant in assessing whether the OECD Actions will be followed by developing and non-OECD countries in their recommended form and/or if a simpler, more direct application of international tax rules will be pursued.  All interested parties should be aware of these materials and the forthcoming UN handbook.

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OECD / UN

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El Salvador: Tax amnesty

September 22, 2014

The Salvadoran Congress has recently approved a three-month tax amnesty, ending on 9 December 2014.  The amnesty program applies to taxes and customs duties due prior to 9 September 2014 with a waiver on interest, charges and fines.  To the extent there are outstanding issues in El Salvador, this is an excellent time to review this initiative by the tax authorities to facilitate voluntary compliance.

Details of the program are outlined in the EY Global Tax Alert attached herein:

On 5 September 2014, the Salvadoran Congress approved a three-month tax amnesty program.1 The amnesty period began on 9 September and ends on 9 December 2014.

This amnesty program applies to all taxpayers subject to the taxes administered by the Tax2 and Customs Authorities.3 It applies to taxes and customs duties that had to be reported or that were due and payable prior to the entry into force of the program.

Taxpayers that pay initial or additional taxes due are granted a waiver on late payment interest, charges and fines. Amounts previously reported in tax returns can be modified without triggering a penalty.

The amnesty program is not available to taxpayers who are currently undergoing a criminal proceeding for tax crimes or customs violations.

Taxpayers may request from the Treasury Authority a grace period for the discharge of their payment obligations. An extension of up to six months may be granted depending on the amount of the liability.

Endnotes
1. Through Legislative Decree No. 793 approving the Temporary Law to facilitate voluntary compliance with tax and customs duties (in Spanish: Ley Transitoria para facilitar el cumplimiento voluntario de obligaciones tributarias y aduaneras).

2. In Spanish: Dirección General de Impuestos Internos.

3. In Spanish: Dirección General de Aduanas.

EYG no. CM4738

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Tax Risk Management

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TEI comments: BEPS Action Plan 11

September 20, 2014

Tax Executives Institute, Inc. (TEI) has provided comments to OECD BEPS Action Plan 11, data collection and BEPS actions.

The comments highlight the wariness of measuring BEPS actions and reacting thereto.  TEI discusses three key deficiencies of trying to measure such data and assess its effectiveness; (1) a lack of understanding  of the current state of affairs, lack of a defined goal to the OECD’s BEPS project, and lack of definition of BEPS behaviors.  The comments are referenced at:

Click to access TEI%20Comments%20-%20Action%2011%20Data%20Collection%20-%20FINAL%20to%20OECD%2017%20September%202014.pdf

Some key TEI comments:

  • Taxing authorities may use a subjective “we know it when we see it” approach rather than objective, evidenced-based measures.
  • The focus on a disconnect of taxable income from activity and value creation also raises concerns that tax authorities may use the measures developed by BEPS Action 11 to advance formulary apportionment approaches to transfer pricing.
  • TEI urges the adoption of a clear definition of BEPS and BEPS behaviors before attempting to develop mechanisms to differentiate inappropriate (if legal) tax results from “regular” corporate tax planning that may take advantage of government enacted tax incentives.
  • A central tracking mechanism for assessing an increase in mutual agreement procedure cases and tax controversy and litigation raising double taxation concerns should be developed.

As the BEPS Action Plans are reviewed and implemented by countries worldwide, it is helpful to review TEI’s comments to ensure there is a comprehensive understanding of the perceived abuses and risks that BEPS Action Plans have addressed.

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Tax Risk Management

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Poland taxes: CFC’s, Thin capitalization, participation exemption

September 18, 2014

The Polish President signed a tax bill, effective 1/1/2015 with some major tax reforms.

The changes include:

  • New Controlled Foreign Corp. (CFC) tax regime
  • Change in debt-to-equity ratio from 3:1 to 1:1, some planning opportunities available before year-end
  • Participation regime not applicable  for dividends that provided a deduction for the payor

EY’s Global Tax Alert provides a summary of the upcoming changes attached for reference:

Executive summary
On 16 September 2014, the Polish President signed a tax bill, approved by the Parliament on 29 August 2014, with several changes to the corporate tax rules. The new measures include the introduction of CFC (controlled foreign corporation) rules and much broader thin capitalization restrictions. Also, under the new measures, the participation exemption regime will not be applicable to taxpayers receiving dividends that gave rise to a deduction from the income (or other decrease in the taxable base or tax) of the distributing company. Furthermore, the new measures make the transfer pricing documentation requirements applicable to joint ventures and partnerships.

International groups may be affected by these changes to the Polish tax system that enter into force on 1 January 2015. Certain steps undertaken early enough may mitigate the impact of the changes.

Detailed discussion
Thin capitalization
New restrictions will limit the deductibility of interest on a much broader range of loans (generally on all intra-group financing). Currently only loans from a direct shareholder and/or direct sister company are subject to thin capitalization restrictions. However, loans granted by the end of 2014 may, under certain conditions, remain subject to the current liberal regulations.

The amended provisions introduce a 1:1 debt-to-equity ratio (currently 3:1) and a new definition of “equity.” In addition, taxpayers will have the option to use a new alternative thin cap calculation method based on a reference rate of the National Bank of Poland and the value of assets capped at a percentage of EBIT.

Taxpayers considering new debt placements may want to finalize plans by the end of 2014 to fall under the current rules. Taxpayers should make projections in order to be ready to choose the optimal calculation method (based on debt-to-equity ratio or the new one based on assets) before statutory deadlines.

CFC rules
2015 will witness an unprecedented change to the Polish tax system with the introduction of the CFC regime. The CFC regime will result in taxation of foreign companies’ income at the level of their direct or indirect Polish shareholders.

Depending on the date when the new law is published and on the tax year of the CFC, income of the CFC may be taxed shortly after the provisions enter into force.

Multinational groups should assess the impact of the CFC regime on their Polish companies with foreign subsidiaries and, if required, decide on steps to be taken to e.g., qualify for exemptions.

Other changes
In relation to the current legislation, it should be noted that General Anti Avoidance Regulations are planned to be introduced in Poland as of 1 January 2016.

Best Practice observation: How do these rules, as well as those from all other countries, get filtered and communicated timely to allow for planning in the current multinational tax structure.  As countries start to embark upon initiatives to change their domestic legislation, coupled with OECD BEPS Action Plan initiatives, there should be a proactive structure in place to review planning strategies and identify new risks in the global structure.

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Tax Risk Management

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France TP Disclosure form

The transfer pricing information return tax form has been released to provide 2013 information.  The form is to be completed in French with a due date of 20 November 2014.  A reference to the form is attached:

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Pages/2014-1/france-final-version-information-return-transfer-pricing.aspx

Best Practice observation: As more countries initiate transfer pricing disclosure forms, including the types of transfer pricing methodologies being used, it is imperative to align these disclosures with the annual transfer pricing documentation.  Accordingly, there should be clear communication with the Business re: advice to properly file such disclosures.

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Tax Risk Management

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OECD BEPS 2014 Deliverables

September 17, 2014

The OECD has published its 2014 deliverables, referenced at the following link:

http://www.oecd.org/ctp/beps-2014-deliverables.htm

I would encourage all interested parties to thoroughly review the provisions, as well as listen to others as they comment on these significant proposals.

Note that the proposals are not yet enacted into law, which is a focus of the action to provide a multilateral instrument to help facilitate that objective.

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OECD / UN

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Singapore: TP comments

September 14, 2014

The Inland Revenue Authority of Singapore (IRAS) has issued a consultation paper requesting comments on a revision to their transfer pricing (TP) guidelines.  The particular questions for which comments are requested, no later than 24 September, consist of the following:

  • Challenges in preparing TP documentation contemporaneously
  • Difficulties in obtaining group and entity information in Annex A of the paper
  • Examples of low-risk documentation areas
  • Frequency of documentation updates

A link is provided for reference to the consultation paper:

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

Key observations:

  • TP documentation to be organized in alignment with the OECD master file and local entity reporting methodology.
  • TP documentation not applicable for routine services with a 5% safe harbour mark-up
  • Inadequate TP documentation will lose the support of IRAS in MAP discussions to resolve double taxation.
  • Annex A provides additional requests for group information that may be the source of requested comments, including:
    • Worldwide organization chart
    • Group’s business models and strategies
    • Profit drivers, including a list of legal ownership for intangibles
    • Supply chain activities and functions
    • Business relationships among all related parties
    • Group’s transfer pricing policies for all types of transactions between related parties
    • Consolidated group financial statements

Singapore is a jurisdiction (and there may be many more) that is reviewing the OECD’s Action Plan country-by-country reporting template and forthcoming comments as a base upon which to expand TP reporting.

Multinationals will need to capture every country’s additional legislative requirements arising from the OECD’s Action Plan.  The additional complexity, cost and time will place a further constraint upon the ability to provide information perceived to be directly relevant for every jurisdiction around the world.  Additionally, the threat of lack of support for the MAP process via a determination of inadequate TP documentation (if legislated into law) will increase the risk of double taxation and TP appeals worldwide.

All interested parties should take time to submit comments prior to the 24 September deadline.

 

 

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Tax Risk Management

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