OECD has published, pursuant to OECD BEPS Action 2, its framework entitled “Neutralising the Effects of Branch Mismatch Arrangements.” A link to the report is provided for reference.
The report includes five types of branch mismatch arrangements:
Disregarded branch structures where the branch is not a Permanent Establishment (PE)
Diverted branch payments
Deemed branch/notional payments
Branch payments leading to a double deduction (DD)
Imported branch mismatches
Recommendations to domestic law are included to prevent perceived abuses for the five types of mismatch arrangements. Numerous examples are also provided in the document to illustrate the branch arrangements and recommendations thereto.
This document is required reading for all international tax practitioners, as tax administrations will be seriously considering the recommendations and may decide to try to enforce such rules prior to official legislative actions.
The EU Council has provided a Directive that would introduce legislation ensuring the EU maintains its leadership role in anti-BEPS recommendations, as well as providing good tax governance for the rest of the world. EY’s summary of the Directive is provided for reference:
Automatic exchange of tax rulings would be effective 1/1/2017.
Changes would be introduced for the EU Code of Conduct.
EU anti-BEPS proposal to include the following BEPS Actions:
2: Hybrid mismatches
3: CFC rules
4: Interest limitations
6: General anti-abuse rule (noting its inclusion for the Royalty & Interest Directive, similar to the Parent-Subsidiary Directive)
7: PE status
13: Country-by-Country (CbC) reporting
Common Corp. Tax Base (absent later consolidation phase) proposal to be introduced in 2016
The EU continues its pace to maintain its global lead in addressing anti-BEPS concerns, which will impact non-EU countries around the world. Thereby, it provides another set of rules that would be mandated to achieve EU conformity.
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).
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.
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.
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.
HMRC has published draft rules, entitled “Tackling aggressive tax planning,” to give effect to OECD’s BEPS Action 2 item, Neutralising the Effect of Hybrid Mismatch Arrangements.
The legislation will be effective as of 1/1/2017, preceded by this consultation paper, a summary of responses in summer 2015 and a second consultation on proposed draft legislation prior to its introduction in a future finance bill. Interested parties have until 11 February 2015 to provide comments for this consultation.
The draft legislation is envisioned to follow the OECD guidelines, and commentary, that are due to be completed by September 2015. A copy of the consultation paper is provided for reference:
The primary and defensive rules, as provided by the OECD BEPS Guidelines will be followed. The primary rule will be used to deny the payer’s deduction for a deduction/no income inclusion arrangement of a hybrid financial instrument or disregarded payment made by a hybrid entity, while the defensive rule would include taxing the income by the payee. For a double deduction arrangement of a deductible payment made to a hybrid entity, the deduction by the investor’s parent jurisdiction is denied using the primary rule, while the defensive rule would deny the payer deduction.
Rules will be considered to restrict the tax transparency of reverse hybrids.
The UK anti-arbitrage rules will not likely be retained.
The definition of an “arrangement” will not be the OECD version, as the existing UK definition would be used to achieve the same result.
Timing differences are not included, unless it appears that they will not unwind within a reasonable (5 years) time period.
The mismatch rules will apply for intra-UK and cross border situations.
For mismatches as a result of both a hybrid financial instrument and a hybrid entity, the hybrid financial instrument rule applies first.
Amended corporation tax returns and/or MAP procedures are permissible if the original mismatch no longer exists.
Tax treaties will not prevent the application of the recommended domestic laws to neutralise the effect of hybrid mismatch arrangements, thus no treaty amendments are necessary to apply the mismatch rules.
No grandfathering rules are envisioned, as the advance announcement of the UK rules will provide a transitional period to unwind structures.
The hybrid mismatch rules will operate within the UK’s self-assessment regime.
As stated in the Foreword of the consultation document, the UK’s strategy is to create the most competitive tax environment in the G20 and has led the way, driving the international tax, transparency and trade agenda forward.
The consultation paper is comprehensive, with numerous examples provided to illustrate, and visualize, the impact of the proposed rules. This proactive measure should be monitored to see how other countries follow the UK’s lead for taxing mismatch arrangements, including the timing and incorporation of the final guidelines by the OECD in 2015.