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:
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.
The OECD has published a report (Part 1) addressing base erosion and profit shifting (BEPS) in developing countries and how these relate to the OECD/G20 BEPS Action Plan. A ranking of low, medium or high is assigned to each of the 15 Actions in Annex A re: the impact on developing countries. Section 5 of the report highlights the primary issues to be addressed, including base-eroding payments, treaty issues, new business models and transfer pricing documentation.
Part 2 of the report, to be presented in September 2014, will (1) confirm which of the Actions are of most relevance to developing countries, (2) discuss other BEPS-related issues not in the Action Plan, and (3) address actions needed to ensure that developing countries can fully benefit from the Action Plan items and how specific BEPS actions may need to be adapted/simplified or supplemented to ensure they are effective for developing countries.
An interesting comment in the Executive Summary states: “The international nature of tax planning means that unilateral and uncoordinated actions by countries will not suffice and may actually make things worse.” Note that recent unilateral actions by developed countries to advance BEPS initiatives would further corroborate this statement.
Additionally, it is stated that approx. 3,000 bilateral tax treaties operate worldwide, with about 1,000 of these involving developing countries. This is a significant fact, as the OECD seeks to ultimately develop tools for countries to enact such legislation, notwithstanding the fact that it may take years to achieve global implementation.
The OECD has recently published a revised timeline for its Base Erosion and Profit Shifting (BEPS) Action Plan that can be accessed via the attached link:
With a short timeframe for comment to multiple initiatives, it is imperative to review this timeline change, especially if comments are to be prepared. This revision in timing also provides transparency for the OECD’s aggressive objectives to assess the milestones accordingly.
The OECD timeline also highlights the expedited actions of individual EU Member States, and other countries, to implement independent BEPS initiatives that may, or may not, be in alignment with the OECD’s final proposals. To the extent such objectives are significantly different in principle and approach, it has not yet been envisaged if, and how, such disparities will be resolved by taxpayers and tax authorities.
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.)
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.
The EU Joint Transfer Pricing Forum (JTPF) report on secondary adjustments was agreed in October 2012. With the OECD Base Erosion and Profit Shifting (BEPS) Action Plan currently under discussion, it is worthy to review the process of secondary adjustments and their various implications and complexities. The report discusses the adjustments under the EU Parent Subsidiary Directive, EU Arbitration Convention, and Mutual Agreement Procedure (MAP). For non-EU countries, it is imperative to review consequences of a secondary adjustment due to additional costs, complication and double taxation risks.
It is possible that a transfer pricing adjustment is accompanied by a so-called “secondary adjustment”.
Transfer pricing legislation in some States allows or requires “secondary transactions” in order to make the actual allocation of profits consistent with the primary adjustment. Double taxation may arise due to the fact that the secondary transaction itself may have tax consequences and results in an adjustment.
The OECD MTC does not prevent secondary adjustments from being made where they are permitted under domestic law.
Secondary adjustments may in some Member States be subject to specific penalties or result in penalties under the general penalty regime.
Procedure for removing double taxation: In their responses to the questionnaire on secondary adjustments most Member States which apply secondary adjustments stated that they do not consider double taxation issues resulting from secondary adjustments as being covered by the Arbitration Convention (AC), only a few consider them covered by the AC Convention, and some other MS indicated that the applicability of the AC to secondary adjustments remains an open question for them. However, most Member States applying secondary adjustments would be willing to address them in the course of a MAP. Therefore, in cases where it is not possible to avoid double taxation at the outset, e.g. by way of applying the Parent Subsidiary Directive (PSD), a taxpayer would – in a case of (potential) double taxation resulting from a secondary adjustment – have to file two requests, i.e. a request under the Arbitration Convention and a request for a MAP. The latter would require in each case a treaty being concluded between Member States that includes a MAP provision comparable to Article 25 of the OECD MTC (preferably including an arbitration clause as per Article 25 (5) OECD MTC).
A review of secondary adjustments, and their application for transfer pricing adjustments, should be reviewed in advance of final audit settlements to ensure additional complexities do not arise.
The U.N. Committee of Experts on International Cooperation in Tax Matters (U.N. Committee ) is responsible for drafting the U.N. model tax treaty and the Practical Manual on Transfer Pricing for Developing Countries. The U.N. Committee’s work on international tax and transfer pricing developments should be watched closely by the international tax community. Additionally, developments on important topics should be compared with that of the OECD, including its Revised Draft on Transfer Pricing Aspects of Intangibles (03 August post), White Paper on Transfer Pricing Documentation (31 July post) and the Base Erosion and Profit Shifting Action Plan (19 July post).
The attached link provides reference to its provisional agenda for the 21-25 October 2013 session, the appointment of 25 members to the U.N. Committee for a 4-year term expiring on 30 June 3017 and the U.N. Model Double Taxation Convention.
The 9th session of the U.N. Committee will address U.N. Model Tax Convention issues, including the following:
Article 4 (Resident): Application of treaty rules to hybrid entities
Article 5 (PE), including international VAT cases
Article 7 (Business Profits): Force of attraction principles
Other topics, including provision on taxation of fees for technical services, issues for the next update of The Practical Transfer Pricing Manual for Developing Countries, and The Manual for Negotiation of Bilateral Tax Treaties between Developed and Developing Countries.
The 25 members were appointed by U.N. Secretary-General Ban Ki-moon and will act in their personal capacity. A detailed biography of each member is included in the press release; a listing of their name and current position is provided herein for quick reference.
Mr. Khalid Abdulrahman Almuftah, Deputy Director, Revenues and Tax Dept., Ministry of Economy and Finance, Qatar
Mr. Mohammed Amine Baina, Chief, Division for International Cooperation, Dept. of Taxation, Ministry of Economy and Finance, Morocco
Ms. Bernadette May Evelyn Butler, Legal Adviser, Ministry of Finance, Bahamas
Mr. Andrew Dawson, Head, Tax Treaty Team, HMRC, UK
Mr. El Hadj Ibrahima Diop, Director of Legislation and Litigation Studies, Ministry of Economy and Finance, Senegal
Mr. Johan Cornelius de la Rey, Legal Officer, Legal and Policy Division, South African Revenue Service (SARS)
Ms. Noor Azian Abdul Hamid, Director, Multinational Tax Dept., Inland Revenue Board (IRBM), Malaysia
Ms. Liselott Kana, Head, Dept. of International Taxation, Internal Revenue Service, Chile
Mr. Toshiyuki Kemmochi, Director, Mutual Agreement Procedures, National Tax Agency, Japan
Mr. Cezary Krysiak, Director, Tax Policy Dept., Ministry of Finance, Poland
Mr. Armando Lara Yaffar, Director General, Int’l Affairs, Dept. of Revenue, Ministry of Finance and Public Credit, Mexico
Mr. Wolfgang Karl Albert Lasars, Director, International Tax Section, Federal Ministry of Finance, Germany
Mr. Tizhong Liao, Deputy Director General of Tax Treaty, Dept. of International Taxation, State Administration of Taxation, China
Mr. Henry John Louie, Deputy to the Int’l Tax Counsel (Treaty Affairs), U.S. Dept. of the Treasury
Mr. Enrico Martino, Head, International Relations, Dept. of Finance, Ministry of the Economy and Finance, Italy
Mr. Eric Nii Yarboi Mensah, Chief Tax Treaty Negotiator, Ghana Double Tax Treaty Convention Team
Mr. Ignatius Kawaza Mvula, Assistant Director, Zambia Revenue Authority
Ms. Carmel Peters, Policy Manager, Inland Revenue, New Zealand
Mr. Jorge Antonio Deher Rachid, Tax and Customs, Embassy of Brazil, Washington, D.C.
Mr. Satit Rungkasiri, Director General, Revenue Dept., Ministry of Finance, Thailand
Ms. Pragya S. Saksena, Joint Secretary, Tax Policy and Legislation, Central Board of Direct Taxes (CBDT), Dept. of Revenue, Ministry of Finance, India
Mr. Christoph Schelling, Head, Division for International Tax Affairs, State Secretariat for Int’l Financial Matters, Swiss Federal Dept. of Finance
Mr. Stig B. Sollund, Director General and Head of Tax Law Dept., Ministry of Finance, Norway
Ms. Ingela Willfors, Director, Int’l Tax Dept., Ministry of Finance, Sweden
Mr. Ulvi Yusifov, Head, Int’l Treaties Division, Int’l Relations Dept., Ministry of Taxes, Azerbaijan
It will be interesting to observe the interaction of new U.N. Committee members, and most importantly the initiatives addressed against the backdrop of the OECD’s recent developments.