Strategizing Multinational Tax Risks

Click to access pwc-global-r-and-d-incentives-brochure-may-2013.pdf

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R&D/Patent, Innovation Box global summary

December 15, 2013

PwC Global R&D Incentives Group has published a valuable global summary of R&D incentives, including the Innovation and Patent Box.

The summary provides the status of the R&D Credit, R&D Super Deduction, Patent and Innovation box for the following countries:

Australia
Austria
Belgium
Brazil
Canada
China
Czech Republic
Denmark
France
Hungary
India
Ireland
Italy
Japan
Korea
Liechtenstein
Lithuania
Luxembourg
Netherlands
Poland
Portugal
Romania
Russia
Singapore
Slovak Republic
South Africa
Spain
Switzerland
Turkey
United Kingdom
United States

This valuable summary provides an up-to-date status of the R&D, Patent/Innovation Box to develop Best Practices in pursuing these valuable opportunities.

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Click to access n-13-78.pdf

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BEPS Action item 14: OECD Dispute Resolution Focus Group

December 13, 2013

OECD Working Party 1 has formed a Dispute Resolution Focus Group to address BEPS Action Plan item 14, copied herein for reference.

Focus areas of WP 1:

Access to Mutual Agreement Procedure (MAP)
Arbitration
Multilateral MAPs & APAs
Adjustment issues, including timing for corresponding adjustments, self-initiated adjustments, and secondary adjustments
Interest & Penalties
Hybrid Entities
Legal status of a mutual agreement

In the US, IRS has also issued Notice 2013-78 detailing a proposed Rev. Procedure on US Competent Authority procedures, including an emphasis on informal consultation for US Foreign Tax Credit determinations.

OECD BEPS ACTION 14

Make dispute resolution mechanisms more effective

Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under MAP, including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases.

(iv) From agreed policies to tax rules: the need for a swift implementation of the measures

There is a need to consider innovative ways to implement the measures resulting from the work on the BEPS Action Plan. The delivery of the actions included in the Action Plan on BEPS will result in a number of outputs.

Some actions will likely result in recommendations regarding domestic law provisions, as well as in changes to the Commentary to the OECD Model Tax Convention and the Transfer Pricing Guidelines. Other actions will likely result in changes to the OECD Model Tax Convention. This is for example the case for the introduction of an anti-treaty abuse provision, changes to the definition of permanent establishment, changes to transfer pricing provisions and the introduction of treaty provisions in relation to hybrid mismatch arrangements.

Changes to the OECD Model Tax Convention are not directly effective without amendments to bilateral tax treaties. If undertaken on a purely treaty-by-treaty basis, the sheer number of treaties in effect may make such a process very lengthy, the more so where countries embark on comprehensive renegotiations of their bilateral tax treaties. A multilateral instrument to amend bilateral treaties is a promising way forward in this respect.

This new initiative highlights innovative and forward thinking by the OECD.

Best Practice thoughts include:

Using MAP as a roll-forward mechanism to an APA to cover additional years beyond the MAP request
Using simultaneous appeals and Competent Authority relief provisions

These developments merit additional attention to self-initiated adjustments, Best Practices to address secondary / corresponding adjustments and creative thinking to resolve bilateral / multilateral disputes.

BEPS Effort Seen Likely to Increase Double Tax Disputes – Bloomberg BNA (bna.com)

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OECD / UN

Click to access tax-and-legal-alert_4-2013_en.pdf

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Slovakia’s amendments: TP, licenses, anti-abuse

December 12, 2013

Some interesting proposals to Slovakia’s tax code are highlighted for review, as detailed in the PwC summary in the attached link:

Interesting provisions include:

Transactions will not be recognized if they have no business substance and their purpose is to avoid tax or attain a tax advantage that would not be otherwise attributable to the taxpayer
Binding rulings will be available at the end of 2014
The corporate income tax rate will decrease by 1% to 22% in 2014
Net loss carryover period is shortened from seven to four years
A tax license, from EUR 480 to EUR 2,880 will be introduced
A service permanent establishment (PE) concept is created, provided it is recognized in the double tax treaty
A new 35% withholding tax rate is introduced for payments to taxpayers from non-contracting states
Transfer pricing documentation is to be provided within 15 days upon request

Slovakia’s proposals are further evidence of increased general anti-avoidance rules (GAAR) and emphasis on transfer pricing.

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http://www.publications.pwc.com/DisplayFile.aspx?Attachmentid=7092&Mailinstanceid=28847

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Belgium renews transfer pricing emphasis

December 6, 2013

The Belgian tax authorities (BTA) are accelerating their focus on transfer pricing ahead of the OECD’s recommendations from its Base Erosion and Profit Shifting (“BEPS”) Action Plan. The transfer pricing initiatives are highlighted herein for reference and are discussed in the attached link from PwC.

Summary of initiatives:

Additional transfer pricing resources, with 30 individuals assigned to transfer pricing by year-end 2013.
A targeted action plan was started in January 2013, selecting 230 companies for a transfer pricing audit.
Determine taxpayer selection via risk assessment by the transfer pricing audit team, leveraging on information exchange with foreign tax authorities. Companies with significant loss carry-overs and/or volatile profit margins will reflect a high risk rating.
The Belgian Tax Authority’s Special Investigation Tax team, re: fiscal fraud, and its transfer pricing audit team will form a collaborative centre of excellence to collect and share transfer pricing knowledge, including sharing respective databases.
An extension of the 3 year statute of limitations is envisaged.

As evidenced by the Belgian initiatives, the focus on transfer pricing will intensify as information initiatives are being developed within a jurisdiction in addition to exchange of tax information with other tax administrations. These initiatives dictate increased emphasis on transfer pricing documentation for risk assessment and issue consistency in response to audits as tax information is shared.

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Click to access PwC%20Vietnam%20Newsbrief%20-%20Draft%20Circular%20on%20treaty%20shopping%20provisions_EN.pdf

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Vietnam introduces anti-treaty shopping rules

December 2, 2013

A draft circular, released by the Ministry of Finance, introduces rules that would enable Vietnamese tax authorities to deny tax treaty benefits. A substance-over-form principle would be used for those transactions concluded solely to achieve a tax benefit (i.e. the main purpose of an agreement is to obtain treaty benefits) and for which the benefit is not received by the beneficial owner.

Beneficial ownership benefits may be challenged if the applicant:

Has the obligation to distribute more than 50% of the income to another entity,
Only has business activities consisting of asset ownership or the right to generate income,
Has an amount of assets, business scale or employees not commensurate with the income received,
Does not have control or power over the assets of has low risks for such assets or income,
Has a back-to-back arrangement for lending, royalties or technical services with a third party,
Is resident of a country which has no, or a low, income tax, or
Is an intermediary solely for the purpose of accessing treaty benefits.

The Circular is presently in draft form, although the concept of “Beneficial Ownership” should be reviewed in every legal structure to determine potential risks and consequences. This action in Vietnam is also mirrored by efforts of the OECD and other countries to restrict treaty benefits for certain activities. For example, the UK has recently released rules enabling public disclosure of beneficial owners having ultimate ownership of the respective entity (refer to 1 Nov. post).

Note that the proposed tests for beneficial ownership are primarily objective, thus holding company structures, and their respective Articles of Association, should be reviewed in preparation for revised rules of “Beneficial Ownership.”

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Legal Entity governance: Best Practice ideas

December 1, 2013

Maintaining an up-to-date legal entity organization process / document is an important requirement for accurate and timely tax compliance and planning. Best Practice ideas for consideration include the following:

Governance sign-off process for all changes of a legal entity, including:

Stated capital
Share premium (Additional paid-in capital)
Authorized capital
Officers / Directors
Tax elections re: tax characterization
Change in name or form of entity
Trade names / DBA
Restructurings / Mergers / Liquidations
Articles of Incorporation or Association

Documentation backup supporting all changes during the life of a legal entity, including formation and dissolution

Assigned Legal Entity champion in the organization

Governance process re: authorized users (view/print/edit)

List of authorized users

Guidelines re: providing legal entity data to third parties, including audit requests

Providing updates with distribution on a real-time (electronic) basis

Master Legal Entity Chart, archiving prior versions as permanent files

Permanent file retention of relevant supporting documentation

Listing of nominee shareholders

Legal and tax characterization, if different

Developing legal entity approval and sign-off in a business recommendation, rather than a separate subsequent process

Most organizations have a process to govern legal entity changes and provide contemporaneous information, although all processes merit a creative review to gain additional efficiencies and Best Practices.

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Click to access eu-nov25-2013.pdf

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EU Parent-Sub Directive: GAAR/Mismatch proposals

November 27, 2013

The proposals for the EU Parent-Subsidiary Directive have been published, with a summary and KPMG review in this post.

Proposed amendments on 25 Nov., 2013

• Domestic law implementation

• Financial mismatches (PPL, hybrids, etc.)

• GAAR:

Artificial arrangements: to gain improper tax advantages, and defeats object, spirit & purpose of tax provisions

• Compliance with Directive by 31 Dec. 2014

Determination of artificiality (one or more):

• Legal characterization, vs. legal substance, of individual steps

• Does not reflect economic reality

• Arrangement is not ordinarily used in reasonable business conduct

• Arrangement has offsetting or cancelling elements

• Transactions are circular in nature

• Arrangement results in a significant tax benefit which is not reflected in the business risks undertaken by the taxpayer

This proposal follows GAAR implementations by several countries in advance of the OECD BEPS Action Plan. This subjective anti-avoidance action should be followed, as other countries will also be examining the relevant wording and guidance therein.

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Click to access pwc_tax_transparency_and-country_by_country_reporting.pdf

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Tax transparency & Country reporting: PwC briefing

November 21, 2013

The timely and comprehensive PwC update is insightful into the various aspects of the transparency and country-by-country reporting initiatives. Selected topics include:

Extractive Industries Transparency Initiative (EITI)
Dodd-Frank Wall Street Reform and Consumer Protection Act
EU Directives on Accounting and Transparency
EU Capital Requirements Directive (CRD IV)
Appendices re: country-by-country reporting information requirements, EITI reporting framework, EU Accounting and Transparency Directive requirements, and EU Capital Requirements Directive IV.

This guide is a valuable overview of the multiple initiatives re: transparency and country-by-country reporting. Tax executives should use this guide in developing a conceptual tax framework for providing summary/detailed data, developing a relevant methodology for capturing such information and providing supplemental information that may be beneficial.

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http://europa.eu/rapid/press-release_AGENDA-13-40_en.htm

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Parent Sub Directive: EU Anti abuse proposals

November 18, 2013

European Commission tackles tax avoidance: tightening key EU corporate tax legislation

On 25 November, the European Commission will adopt a proposal to amend the Parent Subsidiary Directive (2011/96/EU) in order to close off opportunities for corporate tax avoidance. The Parent Subsidiary Directive was originally conceived to prevent the double taxation of same-group companies based in different Member States. However, loopholes in the Directive have been exploited by some companies to avoid paying any taxes at all. The proposal aims to close these loopholes. First, it will introduce a common anti-abuse rule into the Directive. This will allow Member States to ignore artificial arrangements used for tax avoidance purposes and to tax on the basis of real economic substance. Second, it will ensure that the Directive is tightened up so that specific tax planning arrangements are no longer eligible for the tax exemptions provided under the Directive.

The background:

The issue of corporate tax avoidance is very high in the political agenda of many EU and non-EU countries, and the need for action to combat it has been highlighted at recent G20 and G8 meetings.

One of the key problems to be addressed is that of double non-taxation i.e. where loopholes in national tax systems are exploited by companies to pay no tax at all. Double non-taxation deprives Member States of significant revenues and creates unfair competition between businesses in the Single Market. Tackling this problem requires urgent and coordinated action at EU level.

On 6 December 2012 the Commission presented an Action Plan for a more effective EU response to tax evasion and avoidance. This action set out a comprehensive set of measures, to help Member States protect their tax bases and recapture billions of euros legitimately due (IP/12/1325). The revision of the Parent Subsidiary Directive is one of the measures announced in the action plan.

The event:

Algirdas Šemeta, the European Commissioner for Taxation, Customs, Anti-Fraud, Statistics and Audit will present the proposal at the midday briefing in the Commission’s press room. Press materials will be available on the day.

Available on EbS

The sources:

Information on fight against tax fraud and evasion:

http://ec.europa.eu/taxation_customs/taxation/tax_fraud_evasion/index_en.htm

Information on Commissioner Šemeta:

http://ec.europa.eu/commission_2010-2014/semeta/index_en.htm

This important proposal should be monitored by all multinationals re: potential impacts upon current or future planning and relevant documentation.

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OECD / UN

http://www.taxcom.org.za/aboutus.html

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South Africa’s Davis Tax Committee: Update / BEPS alignment & input

Following his 2013 Budget announcement, the Minister of Finance publicised the members of a tax review committee on 17 July 2013. The committee, now known as the Davis Tax Committee (DTC), will examine the role of South Africa’s tax system to promote growth, job creation, sustainable development and fiscal self-reliance. It will take the long term objectives of the National Development Plan into account in its work. The following links provide reference to the DTC homepage and biographies of its members.

Click to access Tax%20Review%20Committee%20-%20Brief%20Biographies.pdf

Using its Terms of Reference as the point of departure, the DTC has adopted a work programme that has prioritised the establishment of specialist sub-committees on small businesses, the appropriateness of the tax base and tax mix in South Africa, and base erosion and profit shifting (BEPS).

The DTC has also adopted an approach that is participatory and consultative. This will provide for wide engagement with all stakeholders. Special dialogue sessions are arranged on an ongoing basis to take into account a diversity of interests and opinions. The DTC accordingly calls upon all interested parties to make use of the opportunity to contribute to the mentioned priorities for now.

Top priority of the DTC at the moment is to address ways in which the tax system can be improved to facilitate entrepreneurship and the growth of small businesses. Various tax packages already exist to encourage small businesses. The DTC needs to review these packages to find an optimal tax package that assists small businesses in contributing towards economic growth and reducing the high unemployment rate. Urgent contributions in this regard will be most welcome by 20 November 2013.

Contributions with regard to the tax burden and tax mix are invited by 30 November 2013. The BEPS Sub-Committee is working on a longer timeframe that is aligned with the OECD BEPS Action Plan. Contributions with regard to BEPS are welcome by 31 January 2014.

All contributions can be made via e-mail to taxcom@sars.gov.za . More details on the work of the DTC and its Terms of Reference can be found on its website, http://www.taxcom.org.za .

For multinationals with operations in S. Africa, it is beneficial to maintain reference to the operations of the DTC, their alignment with the OECD BEPS Action Plan and provide input, as applicable.

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http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Pages/nigeria-new-transfer-pricing-forms-dedicated-tax-office.aspx

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Nigeria: New TP Division & Disclosure forms

November 14, 2013

In concert with the global emphasis on transfer pricing, Nigeria’s Federal Inland Revenue Service (FIRS) has issued new transfer pricing (TP) forms to be filed with the annual corporate income tax returns for 2013. Additionally, a new Transfer Pricing Division has been implemented following Best Practices by other tax administrations.

A Transfer Pricing Declaration form and Transfer Pricing Disclosure form are released to implement the TP regulations issued in 2012. The Transfer Pricing Declaration form includes information on the company’s directors and parent company, whereas the Transfer Pricing Disclosure form requests information about the company’s performance in relation to the group, in addition to disclosure of zero consideration goods, services, or intercompany loans.

The new disclosures highlight the trend for increased disclosures, for which there should be Best Practices implemented to ensure timely compliance and global consistency of tax reporting positions.

A KPMG summary is included as an insightful reference.

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http://www.oecd.org/tax/tax-global/taxanddevelopment.htm

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OECD Task Force on Tax & Development: Meeting update

November 9, 2013

The OECD Task Force’s role is to advise the OECD Committees in delivering a Tax and Development Programme focused on developing countries. Co-chaired by South Africa and the Netherlands, its members include OECD and developing countries, business, and regional/international organisations.

Click to access taskforce-tax-development-korea-outcome-statement.pdf

The annual meeting was held 30-31 October in Seoul, Korea, with the following points of emphasis.

State building, accountability and effective capacity development, including governance of tax incentives and a feasibility study on Tax Inspectors Without Borders initiative (9 June post)
More effective transfer pricing regimes in developing countries, with country initiatives in Columbia, Ghana, Honduras, Kenya, Rwanda, Tanzania and Vietnam developed in partnership with the EU and World Bank.
Increased transparency in the reporting of financial data by MNEs, identifying Best Practices while monitoring developments of the Dodd-Frank Act and proposals for revising the EU Transparency Directive.
Countering international tax evasion/avoidance and improving transparency and exchange of information, preparing countries for peer reviews by the Global Forum on Transparency and Exchange of Information and developing exchange of information projects in Kenya and Ghana.

The report provides added value with numerous links to referenced initiatives (i.e., Tax Inspectors Without Borders, EU Transparency Directive) for a comprehensive understanding of the multiple initiatives being developed.

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OECD / UN

https://www.gov.uk/government/news/public-register-to-boost-company-transparency

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UK transparency initiatives announced

November 1, 2013

The Prime Minister announced that ownership details of UK companies will be made publicly accessible.

This announcement was preceded by a Discussion Paper in July 2013 outlining various proposals of the initiative, including the statement in paragraph 11: “The names of legal owners appear on an individual company’s share register, which is publicly available. But if we want to know who really owns and controls a company, we must identify its beneficial owners too. The beneficial owners are the individuals that ultimately own or control the company – either because they hold an interest in more than 25% of the company’s shares or voting rights; or because they control the management of the company in some other way.”

Links to the announcement, Discussion Paper, and executive summary of the Discussion Paper are attached for reference.

Click to access bis-13-959es-transparency-and-trust-enhancing-the-transparency-of-uk-company-ownership-and-increaing-trust-in-uk-business-executive-summary.pdf

Click to access bis-13-959-transparency-and-trust-enhancing-the-transparency-of-uk-company-ownership-and-increaing-trust-in-uk-business.pdf

This initiative is likely to be followed closely by other countries, and details requiring UK disclosure should be reviewed early to adopt Best Practices and address questions arising in the UK and around the world from this public disclosure announcement.

Transparency International welcomes UK implementation of public register of beneficial owners (amynos.wordpress.com)
The Africa Progress Panel Welcomes UK Announcement On Beneficial Ownership (modernghana.com)
Cameron announces the UK will have a public registry of the beneficial ownership of companies (taxresearch.org.uk)

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Withholding taxes: Cash efficiencies

October 27, 2013

Withholding tax rates are increasing in many developing countries, creating additional timing and/or permanent cash inefficiencies. To the extent withholding tax payments, receipts and documentation are viewed from a Best Practice process perspective, immediate cash savings may be realized. The following points may be considered in this process:

How are payments attracting withholding taxes identified?
Identify internal/external responsibility for tracking changes in withholding tax rates and communication to the business payor.
Are higher payments being made due to contemporaneous documentation (i.e., certificates of residence) not received timely?
What integration is in place for Tax and/or Treasury to manage the withholding tax process?
For shared service centers, how are changes in withholding rates communicated for timely implementation?
Has an internal and/or external review of withholding taxes been performed in the last year?
How are withholding taxes considered for new intercompany loans?
Who reviews withholding tax considerations for legal entities in new jurisdictions?
For taxes that are not ultimately creditable, is there a process to identify and quantify such payments?
Is there a review process for proper characterization of “withholding” taxes that may or may not be creditable?
Is there specific responsibility within the business to ensure withholding taxes are properly characterized and paid timely?
Should a withholding tax flow chart be used for internal governance and global consistency in methodology?
Is there a governance process for collection of receipts when withholding taxes are paid?
Identify a process for physical/electronic receipt retention to ensure timely and accurate documentation is maintained for audits.
Are different payment flows in place for similar services where withholding taxes apply?
Is there a variance analysis performed on a recurring basis to identify significant changes?
Are internal governance principles established for withholding taxes?
Is the business aware of the importance for efficient mechanisms re: withholding taxes?

Withholding, and similar, taxes are being legislated by many countries, especially in developing markets. Accordingly, Best Practice processes should be in place to maximize cash efficiencies.

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