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.
OECD’s latest draft on Action 6 of the BEPS Action Plan (Prevent Treaty Abuse) addresses previous questions raised and comments received, in addition to some new proposals. Part I of the draft presents the alternative “Simplified” Limitation on Benefits (LOB) Rule, while Part II outlines the previous 20 questions for follow-up work, including changes to domestic law made after the conclusion of a treaty.
Succinct comments are to be submitted by 17 June 2015. A link to the draft is provided:
The discussion draft is very comprehensive and principle based, including additional examples from its previous draft.
However, it is worth noting that the OECD would not require an approval process for application of the subjective principal purposes test (PPT) (i.e. the state may “wish” to apply such process) and that the PPT would be included in the arbitration mechanism of paragraph 5 of Article 25, although this issue should also be discussed as part of the work on Action 14 (Make dispute resolution mechanisms more effective). This latter point would seem to be area for additional confirmation in providing comments to avoid double taxation on issues that are inherently subjective.
The draft will provide important precedent in obtaining treaty relief in a post-BEPS era, thus the proposals should be reviewed in detail, with consideration to provide succinct comments.
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.
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.
Following up on its intent to introduce a “Super GAAR” (refer to 03 Jan 2015 post), a draft bill has been issued by the Danish tax authorities to achieve this objective. The new anti abuse provisions would take effect 01 May 2015 with no grandfathering exception.
The draft bill would contain two GAAR provisions:
- EU tax directive following the EU Parent-Subsidiary Directive (PSD) adopted by the European Council on 27 January.
- Domestic provision, mirroring language in the PSD, that would apply to all EU Directives, including the Interest and Royalty Directive.
The provisions would apply to existing and new Danish tax treaties based on the premise that treaty benefits are not available in arrangements that include abuse of treaty provisons.
The inherently subjective nature of the GAAR proposals, including the override of EU Directives, will likely be challenged by taxpayers and possibly the courts. In the interim, Danish transactions should be exercised with an element of care re: the potential application of GAAR that would reverse the tax advantage obtained.
The final OECD BEPS guidelines are yet to be issued, thus inconsistencies may arise between the unilateral legislation speeding into Danish tax law and OECD’s final guidance that aims at worldwide consistency.