Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘BEPS Action 13’

Dutch draft TP & CbC law

The Dutch State Secretary of Finance has released a draft law that correlates to BEPS Action 13 for transfer pricing documentation and country-by-country (CbC) report.

The CbC report will not be required to be filed in the Netherlands if such report is filed with a jurisdiction that has an information exchange agreement with the Netherlands on such reports.

Click to access 2015G_CM5764_TP_NL%20releases%20draft%20law%20implementing%20new%20TP%20doc%20requirements%20in%20line%20with%20BEPS%20Action%2013.pdf

  • The draft law states that a transfer pricing adjustment may not be based on the CbC report.
  • The CbC report aligns with the BEPS Action 13 requirements.
  • The Master and Local file re: transfer pricing documentation will be required contemporaneously with the filing of the tax return, with such information to be provided upon request.
  • A criminal offense will take place, for the most serious cases, if the CbC reporting requirements are not satisfied.

The draft law should be reviewed by organisations with operations in the Netherlands, noting it follows the BEPS Action 13 proposal.

The contemporaneous requirement for the Master file and Local file should be met to avoid potential fines/penalties.

BEPS TP & CbC reporting: EY Survey

EY’s survey of nearly 100 jurisdictions provides timely insight into unilateral activities and required legislative efforts to implement OECD BEPS Actions 8-10, transfer pricing guidelines, and Action13, transfer pricing documentation / country-by-country (CbC) reporting.

A link to the survey is provided for reference:

Click to access EY-country-implementation-of-beps-actions-8-10-and-13.pdf

Key observations:

  • OECD TP Guidelines:
    • 7 countries (including the UK) to adopt the changes without need for legislative/administrative action
    • 54 countries refer to OECD TP Guidelines by tax authorities/courts for interpretation, but are not binding
    • 21 countries refer to OECD TP Guidelines in domestic legislation
  • TP Guidelines are meant to be an extension of the Commentary to the arm’s length principle in Article 9; if the revised Guidelines go beyond such rules a change in existing treaties will be required for implementation, although the multilateral instrument in development under Action 15 may remedy this
  • Tax authorities have used BEPS initiatives for leverage in Australia, Spain, Hungary, New Zealand, Finland, Indonesia, France and India
  • TP and CbC documentation may be provided as an exchange of information if they are “foreseeably relevant”
  • Legislative action will be required in most countries with current TP legislation to implement Master / Local File requirements
  • Most countries will require a change in law for CbC reporting; 38 countries are/will have such implementation legislation, 49 countries are not yet known, while only 11 countries are not expected to implement in the short/medium term
  • CbC information will be widely exchanged via exchange of information articles in double-tax treaties, tax information exchange agreements or Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (and the corresponding Multilateral Competent Authority Agreement)

The survey is a “must read” for interested parties that will be affected by OECD Actions 8-10 and 13; it magnifies the imperative of collecting such information timely and is not dependent on which countries adopt certain provisions the first year (as information will be exchanged quickly around the world regardless of which jurisdiction the parent entity resides in).

BEPS Action 13 CbC reports: To whom, by whom, for whom

The OECD has released its final guidance on BEPS Action 13, Country-by-Country (CbC) Reporting Implementation Package.  The CbC reporting complements the previous drafts for transfer pricing documentation in the form of a master file and local country file.  The three pillars of reporting for this Action have been acknowledged by OECD as representing its definitive approach, with the dissemination of the Action 13 document to be issued later this year with the other Action items.

Click to access beps-action-13-country-by-country-reporting-implementation-package.pdf

Key points:

  • Three model Competent Authority Agreements based on the Multilateral Convention on Administrative Assistance in Tax Matters, bilateral tax conventions, and Tax Information Exchange Agreements (TIEAs).
  • In accordance with the recent OECD webcast, countries will have 6 months for the initial year to exchange such information (i.e. June 30, 2018 calendar year basis for the 2016 tax information submitted by Dec. 31, 2017, and 3 months for the following reporting year).
  •   Introduces the term “Surrogate Parent Entity” for substitute reporting.
  • Provides conditions for application of the Surrogate Parent Entity approach.
  • The CbC report shall be filed in a form identical to the OECD template.
  • Confidentiality provisions are discussed.
  • Penalties: “It is assumed that jurisdictions would wish to extend their existing transfer pricing documentation penalty regime to the requirements to file the CbC report.”

The manner in which countries implement this initiative should be closely monitored, as there will be differences to the general approach.  For example, Poland recently introduced this proposal into its domestic legislation, whereas other countries have relied on the ultimate parent entity concept for collecting such information.  Additionally, Spain also requires amounts to be reported in local currencies, a process that will not be uniform globally.

MNE’s should be cognizant of the flexibility required for this new transfer pricing risk initiative, while also foreseeing the recent public disclosure proposals by the European Parliament, European Commission and other interested parties.

Spain’s legislation progresses re: CbC reporting & TP documentation

EY’s Global Alert highlights the draft Spanish regulations that would introduce Country-by-Country (CbC) reporting, effective 1/1/2016.

  • Best Practice Observations: The text in bold represents verbiage that should be closely followed, as it may have global implications for flexibility required in CbC reports filed for different jurisdictions.  It is hopeful that the final regulations will entertain additional simplicity and global consistency.  
    • Initially, the test for reporting groups is literally subjective as to “similar terms” of CbC reporting for other jurisdictions.  For example, is reporting in one currency (i.e. US GAAP) equivalent to meeting this test?  What differences, if any, will be acceptable for this determination?  
    • Additionally, the requirement for reporting information in the currency of each jurisdiction implies that a different, or supplementary, approach may be needed for CbC reporting.  To the extent that the OECD final Guidelines are not deemed to be acceptable for Spanish tax authorities, this unilateral “bottoms up” approach will be problematic, complex and costly for everyone.    

Executive summary
On 18 March 2015, the Spanish Government released the draft bill of the new Spanish Corporate Income Tax (CIT) Regulations which complement the provisions included in the new Spanish CIT Law1 that entered into force on 1 January 2015. The CIT Regulations are expected to be adopted in the first half of 2015 and enter into force on 1 January 2016.

This Alert summarizes the new country-by-country (CbC) reporting obligations and the amendments to the transfer pricing rules.

Detailed discussion
On 1 January 2015, a new Spanish Corporate Income Tax Law entered into force (special attention must be drawn to transitory regimes) introducing amendments that are in line with the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project.

In line with these amendments, changes to the CbC reporting obligations and current transfer pricing documentation requirements have been included in the first draft of the Spanish CIT Regulations. These rules, as currently drafted, are aligned with Action 13 of the OECD’s BEPS Project which aims to develop rules regarding transfer pricing documentation to enhance transparency for tax authorities. In particular, the proposed rules generally follow the approach included in the document issued on 6 February 2015 by the OECD named Action 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting (the Guidance).2

Among other changes, the Draft Regulations also address the possibility of using measures of central tendency to determine the point in the range that satisfies the arm’s length principle to minimize the risk of errors derived from comparability defects, as envisaged by OECD Transfer Pricing Guidelines (paragraphs 3.57 and 3.62).

CbC reporting obligations
The proposed CbC reporting obligations would generally apply to Spanish tax resident entities which are “head” of a group (as defined under the Spanish transfer pricing rules), and are not at the same time dependent of any other entity, to the extent the consolidated group’s revenue in the immediately preceding fiscal year exceeds €750 million.

The rules would also apply to Spanish entities and permanent establishments which are, directly or indirectly, held by a non-Spanish resident head entity which is tax resident in a country which (i) has not established CbC reporting obligations in similar terms to Spain; or (ii) has not signed an automatic exchange of information agreement with Spain in relation to these obligations. The wording of the regulations is not clear on how this new rule would apply in practice.

The draft rules establish that the CbC report will have to include the following information per country on an aggregate basis:

a) Group’s revenue, distinguishing between that derived from related and unrelated parties

b) Accounting result before CIT or a tax of similar or analogous nature

c) CIT (or tax of similar or analogous nature) effectively paid, including withholding taxes

d) CIT (or tax of similar or analogous nature) accrued, including withholding taxes

e) Share capital and equity at the end of the fiscal year

f) Average number of employees

g) Tangible assets and real-estate investments, different to treasury and receivables

h) List of resident entities, including permanent establishments, and the main activities these are engaged in

i) Other information that is considered relevant and, if applicable, an explanation on the data included in such information

The information to be provided in the CbC report should be denominated in the local currency of each jurisdiction.

According to the draft of the CIT Regulations, CbC reporting obligations will need to be complied with for fiscal years beginning on or after 1 January 2016; reporting must be completed within a 12 month period from the close of the fiscal year to which the CbC report relates (i.e., companies with a fiscal year ending on 31 December 2016, would be required to file the CbC report by 31 December 2017). A specific tax form will be published by the tax authorities for these purposes.

Transfer pricing documentation requirements
The transfer pricing documentation requirements are modified in very similar terms to the revised standards included in the report on Action 13 released by the OECD on 16 September 2014,3 as follows:

Master file: The data to be included in the Master file is significantly increased to include detailed information on the organizational structure of the group, its business activities, intangibles, Intercompany financial activities, as well as the financial and tax situation of the group (including information on any Advance Pricing Agreement and other tax rulings the group may have obtained.
Entities belonging to groups with an aggregate net turnover lower than €45 million in the preceding year would be exempt from the preparation of the master file.

Local file: Similarly, the information to be included in the Local file is also increased requesting detailed information relating to specific material intercompany transactions.
A simplified local file is foreseen for entities belonging to groups with an aggregate net turnover lower than €45 million in the preceding year. Moreover, small and medium size entities (net turnover lower than €10 million) would be deemed to comply with the local file requirement by filling out a specific form that will be issued by the tax authorities. Information on certain specific transactions will not be excluded (certain business activities carried out by individuals, transfers of businesses and participation in entities, as well as transactions related to real estate property or intangibles).

Impact
The legislative evolution of this proposed measure will be closely monitored and covered in future Tax Alerts but multinational groups with a presence in Spain should focus on the actions that may be necessary to ensure their ability to produce the required information, including preparing protocols for gathering the information and developing internal processes and responsibilities with regard to the new reporting obligations.

Endnotes
1. Law 27/2014 on Corporate Income Tax published in the Spanish Official Gazette on 28 November 2014.

2. See EY Global Tax Alert, OECD issues implementation guidelines for country-by-country reporting under BEPS Action 13, dated 9 February 2015.

3. See EY Global Tax Alert, OECD releases report under BEPS Action 13 on Transfer Pricing Documentation and Country-by-Country Reporting, dated 23 September 2015.

BEPS: Asset manager focus

EY’s Global Tax Alert focuses on BEPS considerations for asset managers,  This is a very timely and informative aspect of BEPS, as it will certainly have an impact on asset managers worldwide.  Early review and consideration of three significant proposals is recommended to ensure timely planning and relevant documentation.  The proposals include county-by-country reporting (Action 13), treaty abuse (Action 6), and hybrid mismatch arrangements (Action 2).

Click to access 2015G_CM5228_BEPS%20considerations%20for%20asset%20managers.pdf

The Alert is informative for all MNE’s and fund managers, ensuring the BEPS review umbrella appropriately encompasses direct and indirect aspects of operations, including the investment fund industry.

BEPS update: Actions 5 & 15

The OECD has updates available with respect to Action 5 (Intangibles), Action 15 (Multilateral instrument) and Action 13 (Country-by-Country reporting – refer to prior post of 6 Feb. 2015).  Links are provided for the OECD’s statement of intent addressing these three actions in particular.

http://www.oecd.org/tax/first-steps-towards-implementation-of-oecd-g20-efforts-against-tax-avoidance-by-multinationals.htm

Click to access beps-action-5-agreement-on-modified-nexus-approach-for-ip-regimes.pdf

Click to access beps-action-15-mandate-for-development-of-multilateral-instrument.pdf

Summary – Action 5 (Intangibles):

  • The Modified Nexus Approach is generally accepted.
  • 30% uplift of qualifying expenses re: outsourcing and acquisition costs in addition to significant R&D activities of taxpayer.
  • Existing regimes will be closed by 30 June 2016 to new entrants; legislation to be effected in 2015.
  • Grandfather rules for existing regimes may extend 5 years (i.e. 30 June 2021).
  • Methodology of tracking / tracing R&D expenditures will be developed.
  • Guidance to be issued re: definitions; patents qualify, whereas trademarks do not qualify.

Summary – Action 15 (Multilateral Instrument):

  • The intent to develop a multilateral instrument to implement specific BEPS Actions is still desirable and feasible.
  • The instrument will be designed to implement treaty-related measures of the BEPS Project.
  • Several BEPS Action items that are known to be inclusive are Action 2 (Hybrid entities), Action 6 (Treaty abuse), Action 7 (PE) and Action 14 (Dispute resolution).  Other Action items may be included after final guidance is developed, including a mechanism to exchange information for country-by-country reporting.
  • Each Action item may be optional, or there may be a minimum number of Actions that a country will have to execute.
  • The instrument is not compulsory and is open to all jurisdictions.
  • Development of the instrument will be accomplished by an ad-hoc group that is under the aegis of the OECD and G20.
  • Outputs are expected Sept. 2015, with final development of the instrument concluded by 31 Dec. 2016.

The timing of 31 Dec. 2016 will be critical to monitor, as many countries may decide to develop unilateral legislation prior to this date.  It is hopeful that tax administrations will not try to (informally) implement BEPS guidelines prior to the time that effective legislation is executed.

BEPS Action 13: CbC reporting guidance

The OECD has provided additional information re: the timeline and mechanism for providing the Country-by-Country (CbC) template.  A link to the document is included herein:

Click to access beps-action-13-guidance-implementation-tp-documentation-cbc-reporting.pdf

Summary of key points:

  • Master file and local file should be implemented by, and filed directly with, the relevant jurisdiction
  • Information to be provided for fiscal years beginning on or after 1/1/2016
  • Information to be filed by ultimate parent by 31 Dec. 2017 in their jurisdiction of residence
  • Exemption for MNE groups with annual consolidated revenues less than EUR 750M in immediately preceding year
  • The countries participating in the OECD / G20 BEPS Project agree that they will not require filing of a CbC report based on the new template for fiscal years beginning prior to 1/1/2016
  • Secondary reporting mechanism re: sharing of information between jurisdictions
  • Monitoring mechanism coupled with a 2020 review
  • The participating countries agree to:
    • Confidentiality provisions
    • Consistency (i.e. no additions or changes to template requirements)
    • Appropriate Use: No income allocation formula adjustments; CbC report adjustments are to be conceded by their Competent Authority

The guidelines are fairly short and concise, and it will be important to monitor laws in the parent jurisdiction for details of the respective filing process.  Additionally, it is even more important to watch countries that are NOT participating in the BEPS Project for different timelines, information and processes to be followed for customized CbC templates that would create additional complexity and global inconsistency.

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