Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘BEPS’

OECD’s new MAP Peer Reviews: will it work?

As the MAP process is acknowledged to be inefficient, ineffective and time-consuming, the OECD will establish a peer review process to monitor performance of countries’ in resolving Mutual Agreement Procedure (MAP) cases.  The reviews should be ready in 2017.

Paascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, has stated: “I don’t know how successful the (BEPS) project will be in the long term, but what is for sure is that we have fed the political beast – the G-20 leaders and finance ministers – and they still have a lot of appetite.  They are asking us for more.  They need some more blood.”

The OECD’s Working Party 1 and the Forum on Tax Administration have started the peer review process under BEPS Action 14.  Reviews will consist of checking number of cases, time needed to resolve, etc.

OECD believes this is a game-changer due to new accountability.  However, without full transparency into what countries are doing, or not doing, how effective will the new peer review process be?  The level of transparency should be commensurate with the transparency demanded from multinationals.  It is hopeful this process will be a revolution for MAP, although many practitioners will be adopting a wait-and-see attitude.  

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OECD

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ECOFIN’s draft directive re: CbC

The EU Economic and Financial Affairs Council (ECOFIN) has drafted a directive, subject to European Parliament’s opinion, for EU consistency of country-by-country (CbC) reporting.

The proposed EU legal instrument provides for:

  • 2016 CbC reporting to the Member State where it is resident
  • Optional provision for non-EU parent companies; 2016 reporting is optional via its EU subsidiaries and such “secondary reporting” will be mandatory for the 2017 tax year.   
  • Automatic exchange of CbC reports between EU Member States

http://www.consilium.europa.eu/en/press/press-releases/2016/03/08-corporate-tax-avoidance/

This surprising draft directive will alleviate some concerns by US headquartered MNE’s (as 2016 CbC reports will probably not be required), although only within the EU.  To the extent non-EU Member States have CbC reporting obligations for the 2016 tax year, a Surrogate Entity or local filing may still be required for US MNE’s.

The EU is still recognized as a leader in pushing forward BEPS Action items, and this directive would provide much-needed consistency among Member States for CbC reporting.  This development is important to monitor going forward, as well as observing other non-EU countries for a follow-the-leader approach.

 

 

 

 

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OECD

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OECD: Inclusive / transparent objectives

The OECD’s Task Force on Tax and Development met in Paris, France, on 1 March 2016, to discuss the new inclusive framework proposed by the OECD for the global implementation of the BEPS project and to support developing countries on their domestic resource mobilisation efforts. Over 180 participants attended.

Co-Chaired by South Africa and the Netherlands, the Task Force is a multi-stakeholder advisory group set up to help to improve the enabling environment for developing countries to collect taxes fairly and effectively.

Recognition and participation in the Tax Inspectors Without Borders partnership was also an agenda item, including present (and future) toolkits for developing countries as a practical resource to implement BEPS Actions.

Participants also highlighted the need for the documentation toolkit to provide clear guidance on how the Country-by-Country Report should be used for risk assessment purposes.

The Task Force will endeavor to take the following steps, commencing with the first meeting in Kyoto Japan, 30 June- 1 July 2016.

  • Support the development of 7 further toolkits to translate the BEPS deliverables into user friendly guidance for developing countries by 2018.
  • Starting now, fully endorse the ATAF/EC/OECD/WBG transfer pricing capacity building support to address the full range of BEPS challenges in developing countries.
  • Support the Tax Inspectors Without Borders programme project to increase the number of TIWB deployment programmes to 20 by the end of 2017 and 30 by the end of 2018.

A copy of the press release is provided for reference:

Click to access co-chairs-statement-task-force-tax-development-march-2016.pdf

Best Practices – To address mutual transparency, OECD and the member countries should be willing to share the contents, and objectives, of the various toolkits under preparation to better understand the risk process and actions by tax administrations around the world. 

 

 

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OECD

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EU & BEPS: Next steps

The EU, now recognized as the accelerator of BEPS for its Member States, have issued a roadmap of priorities and objectives for the near future.  A link to Deloitte’s World Tax Advisor is provided, and the attached article therein.

I have highlighted certain parts of the roadmap worth watching:

  • Country-by-Country reporting (will there be a consistent EU standard?)
  • Hybrid mismatch arrangements
  • Code of Conduct activities, including alignment of transfer pricing outcomes with value creation, an extension of BEPS Actions 8-10.  (Note Sweden and UK are already using such Actions re: clarification of existing transfer pricing policy)
  • Payments from an EU to non-EU country
  • The EU Arbitration Convention is mentioned, although it’s practical effect on mitigating dispute resolution is limited

Click to access dtt-tax-worldtaxadvisor-160226.pdf

European Union:
Dutch presidency issues EU-BEPS roadmap

The Netherlands, which currently holds the presidency of the council of the EU, issued an ambitious EU-BEPS “roadmap” on 19 February 2016 that sets out plans to move forward with previous EU proposals, as well as future efforts on areas relating to the OECD’s base erosion and profit shifting (BEPS) project. The roadmap includes the following:

  • Possibly including a minimum effective taxation clause in the EU interest and royalties directive, and also possibly including or referring to the OECD “modified nexus approach” (however, no mention is made of the previous proposals to reduce the shareholding requirement in the directive from 25% to 10%, add legal entities to the annex or remove the “direct” holding requirement);
  • Reaching consensus on the anti-avoidance directive proposed by the European Commission on 28 January 2016 (for prior coverage, see World Tax Advisor, 12February 2016);URL: http://newsletters.usdbriefs.com/2016/Tax/WTA/160212_1.html
  • Reaching agreement on the European Commission’s proposal to introduce the OECD BEPS minimum standard for country-by-country reporting in the EU;
  • Initiating discussions for reforming the EU Code of Conduct group (specifically, the group’s governance, transparency and working methods), followed by discussions on a revision to the mandate in relation to the concept that profits are subject, as appropriate, to an effective level of tax within the EU;
  • Reaching agreement on guidance and explanatory notes on hybrid permanent establishment mismatches in situations involving third countries;
  • Continuing to monitor the legislative process necessary to revise existing patent box regimes; and
  • Monitoring and exchanging views on the BEPS developments relating to tax treaties concluded by EU member states, the OECD multilateral instrument to modify tax treaties and the European Commission’s recent recommendations on the implementation of measures to combat tax treaty abuse. 

     

     

    The Code of Conduct group will start work on the following:

  • Preparing EU guidance on aligning transfer pricing outcomes with value creation, in accordance with BEPS actions 8-10;
  • Identifying potential issues that arise when payments are made from the EU to a non- EU country;
  • Assessing the opportunity for developing EU guidance for implementing the conclusions on BEPS action 12 (the disclosure of aggressive tax planning), notably, with a view to facilitating the exchange of information between tax authorities; and
  • Developing guidelines on the conditions and rules for the issuance of tax rulings by EU member states.Additionally, the High Level Working Party on Taxation may discuss the current situation regarding the EU arbitration convention that allows the settlement of transfer pricing disputes.

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OECD

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OECD: Welcome to BEPS

The OECD has introduced a new inclusive framework inviting all interested countries to address international tax rules ongoing.  All interested parties will be able to participate as BEPS Associates via the OECD’s Committee on Fiscal Affairs (CFA), thereby have equal participation as the OECD and G20 members including review and monitoring of BEPS implementation.

Indicative of the posture going forward, OECD Secretary-General Angel Gurria stated “It is another strong signal that behaviour which was considered both legal and normal in the past will no longer be accepted.”

This OECD proposal will require endorsement by the G20 at the meeting in Shanghai on 26-27 February, with the first meeting of the inclusive framework members in Kyoto, Japan on 30 June and 1 July 2016.

Links to the OECD press release and summary document are provided for reference.

http://www.oecd.org/tax/all-interested-countries-and-jurisdictions-to-be-invited-to-join-global-efforts-led-by-the-oecd-and-g20-to-close-international-tax-loopholes.htm

Click to access flyer-implementing-the-beps-package-building-an-inclusive-framework.pdf

This new framework would mark another major milestone in the BEPS story; with hopes that global coordination and consistency will be enhanced vs. numerous voices protecting their fiscal growth, thereby adding additional complexity and unilateral actions around the world.

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OECD

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TP BEPS soft law: UK / Sweden

The UK tax authority, HM Revenue & Customs (HMRC), will refer to the OECD base erosion and profit shifting (BEPS) report on BEPS Actions 8-10 in transfer pricing audits.  Maura Parsons, HMRC deputy director and head of transfer pricing, has stated that HMRC will look to the 2015 BEPS reports in addition to the current OECD guidelines (although British law explicitly refers to the 2010 version on the transfer pricing guidelines).

Additionally, Sweden has taken a similar position and adopted the final OECD report in audits.

This line of reasoning is primarily based upon the premise / supposition that the new OECD guidelines are merely a clarification of existing rules, not requiring new legislation.  

In addition to the inherent uncertainty of the new rules, UK, Sweden and other countries that will adopt this position introduce additional challenges into understanding the current law, requirements and grounds upon which appeals / court cases will be based.  This is a new trend that promises to expand quickly into other countries, undermining the intent of transparency and consistency worldwide.  

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OECD

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OECD endorses European Commission’s Anti-Tax Avoidance Package

OECD’s press release highlights their endorsement of the recently announced Anti-Tax Avoidance Package proposal.

“OECD Secretary-General Angel Gurría welcomed the Commission’s proposal, which he said marks an important milestone towards the development of a comprehensive, coherent and co-ordinated approach against corporate tax avoidance in Europe.”

http://www.oecd.org/tax/oecd-secretary-general-angel-gurria-welcomes-european-commission-corporate-tax-avoidance-proposals.htm

This acknowledgment puts additional pressure on the EU Member States for unilateral adoption, as a Member State will not want to be seen as an outlier to transparency and the tax avoidance political landscape.  Thereby, the possibility of unilateral adoption is (highly) likely.  

Placing additional context behind the BEPS statement, the press release provided the following statement: “The OECD conservatively estimates revenue losses from BEPS at USD 100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues.”

 

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OECD

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European Commission: Full speed ahead

The European Commission has clearly announced it’s intent to be the global leader in advancing OECD’s BEPS initiatives, with some proposals exceeding the scope / intent of the OECD.

Copies of the following documents are provided for reference, with subsequent posts addressing highlights of significant initiatives.  It is important to distinguish the documents between Proposals for a Council Directive, Communications, Studies and Recommendations.  

  1. Anti Tax Avoidance Package
  2. Proposal for a Council Directive re: tax avoidance practices
  3. Proposal for a Council Directive re: automatic exchange of information
  4. Annex to automatic exchange of information proposal
  5. Communication on an External Strategy for Effective Taxation
  6. Annexes to the external strategy communication
  7. Communication re: Tax Avoidance Package
  8. Study on Structures of Aggressive Tax Planning & Indicators
  9. Recommendation on implementation of measures against tax treaty abuse

The documents are required reading for all international tax practitioners, as they highlight the complex post-BEPS world and the trend indicators for the near future.  We can assume that some of these developments will proceed for action very quickly, thereby imputing a doctrine that “time is of the essence.”

http://ec.europa.eu/taxation_customs/taxation/company_tax/anti_tax_avoidance/index_en.htm

http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=COM:2016:26:FIN&from=EN

http://eur-lex.europa.eu/resource.html?uri=cellar:89937d6d-c5a8-11e5-a4b5-01aa75ed71a1.0014.03/DOC_1&format=HTML&lang=EN&parentUrn=COM:2016:25:FIN

http://eur-lex.europa.eu/resource.html?uri=cellar:89937d6d-c5a8-11e5-a4b5-01aa75ed71a1.0014.03/DOC_3&format=HTML&lang=EN&parentUrn=COM:2016:25:FIN

http://eur-lex.europa.eu/resource.html?uri=cellar:b5aef3db-c5a7-11e5-a4b5-01aa75ed71a1.0018.03/DOC_1&format=HTML&lang=EN&parentUrn=COM:2016:24:FIN

http://eur-lex.europa.eu/resource.html?uri=cellar:b5aef3db-c5a7-11e5-a4b5-01aa75ed71a1.0018.03/DOC_3&format=HTML&lang=EN&parentUrn=COM:2016:24:FIN

Click to access swd_2016_6_en.pdf

Click to access taxation_paper_61.pdf

Click to access c_2016_271_en.pdf

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OECD / UN

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Finland: CbC Surrogate search

Finland has proposed its new country-by-country (CbC) reporting requirements, having an effective date of 1/1/2017, as further summarized in EY’s Global Tax Alert provided for reference.  Other countries have legislated CbC 2016 effective dates, thus a Finland multinational that does business in other countries requiring a 2016 effective date CbC report will be looking to adopt a surrogate country for its 2016 tax year.

This delay in effective date, while the intention may have been to help Finnish headquartered multinationals, presents significant complexities for their 2016 CbC reporting requirements.  However it does the provide the Finnish / US tax authorities another year to ensure reporting processes are in place to review, and exchange, CbC information.

This legislation mirrors the US proposed regulations (i.e. Final Regulations yet to be issued), which delays the effective date past 2016.

This complexity, although anticipated by the OECD’s BEPS Actions in identifying a surrogate mechanism, understates the practical uncertainties that loom ahead.  For example, some issues are called into question:

  • Will the choice of a surrogate country lock in their CbC requirements, as would be the case if its present headquarter jurisdiction adopted CbC for 2016?  Or could other countries that have add-on CbC requirements, such as Mexico’s intercompany transactional detail, claim/assert that their local requirements could apply in a surrogate situation since the headquarter jurisdiction is not subject to the CbC automatic exchange of information?
  •  The search for a surrogate country will entail the review of treaty exchange mechanisms to reduce additional CbC filings, and complexities, in other countries.
  • The identification of a surrogate will require review of CbC legislation by every country to ensure that a surrogate’s reporting / information exchange satisfies the literal reading of statutory requirements.  This comprehensive review, that may not have been required by a US or Finnish multinational due to extensive exchange of information legislation, will need to be read in the broadest sense to avoid penalties.
  • The identification of a surrogate has not been expressly anticipated by other countries that have proposed CbC legislation, apart from addressing the non-applicability of automatic exchange of information requirements for CbC reporting.

Post BEPS complexity increases with delayed reporting years for CbC reporting.  It may take some time to fully understand all the nuances and complexities of surrogate reporting to ensure potential CbC disclosures are timely met and penalties avoided.

With these complexities becoming reality, countries should clarify CbC reporting in their respective jurisdiction by CbC surrogates.  

 

Click to access 2016G_CM6162_TP_Finnish%20Government%20submits%20CbC%20reporting%20proposal.pdf

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OECD

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Global BEPS update

EY’s Global Tax Alert summarizes recent BEPS developments around the world:

Click to access 2016G_CM6166_The%20Latest%20on%20BEPS%20-%2018%20January%202016.pdf

Highlights:

  • Australia’s client experience roadmap re: its multinational anti-avoidance law (MAAL)
  • Belgium’s adverse State Aid ruling by the European Commission re: its excess profit tax rulings, which is expected to be appealed
  • Chile’s new sworn statement / tax disclosures (highlighted in a recent post)
  • Finland’s draft proposal for country-by-country (CbC) reporting and transfer pricing documentation in a Master / Local file context
  • Greece’s circular identifying preferential tax regimes
  • Korea’s draft decree for transfer pricing documentation
  • Luxembourg’s IP amendments and adoption of the EU Parent-Subsidiary Directive’s proposals
  • Netherland’s CbC and transfer pricing documentation requirements
  • Norway’s new rules for interest limitations, participation exemption regime inapplicable for hybrid instruments, and CbC reporting requirements
  • Panama to announce its decision, in March, for adoption of the OECD BEPS recommendations

The trend for recent BEPS updates reflects an expansion of definitive actions into unilateral measures, decisions whether / when to adopt OECD’s BEPS recommendations, new disclosures, subjective anti-avoidance rules with inherent complexity, and each country’s expression of intent re: BEPS Actions coupled with local add-on documentation requirements.

Monitoring of the global developments in the post-BEPS era has introduced new challenges, requiring additional resources and thought processes for documenting transfer pricing methodologies and the business aspect of significant transactions.

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OECD / UN

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Tax disclosures: Global / BEPS incentivized

Jurisdictions are legislating global tax disclosure statements as a separate filing requirement or included with the respective local corporate income tax return.  Recent examples seem to highlight this new initiative, including France and Chile.  Examples of information requested include entities with legal ownership of IP, entities that have no assets or substance (i.e. holding companies), etc., irrespective of intercompany transactions with the local entity.

These new disclosures have added additional risks for operational compliance, as well as a need to centralize such information.  Some multinationals (MNEs) have placed this compliance responsibility with a local / regional team for efficiencies.  However, this new reporting trend will require closer coordination of headquarters that has relevant knowledge of the global ownership of IP and legal structures.

Answers to these dislosure questions will pose new audit risks as tax administrations will make further inquiries and/or initiate an audit to assess potentially high risk transactions. This emphasis will include a vigorous challenge to treaty based positions with holding companies, including any general anti-avoidance or anti-abuse rules within the treaty or domestic legislation.

Additionally, audit queries based upon global disclosures will require seamless coordination with headquarters or the individuals possessing this information.  Therefore, audit teams and ways of working will need to be strategized for information that is not generally retained by the local business team.

MNEs should monitor new disclosures and ensure there is an efficient governance process to accurately address the BEPS incentivized queries.  This may involve a shift in responsibilities within the transfer pricing documentation process.

The post BEPS era signifies a new way of thinking, including the respective documentation responsibilities and structure of an internal transfer pricing team.

 

 

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Tax Risk Management

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CbC: US timing issues

The timing for implementation of country-by-country (CbC) reporting for non-US jurisdictions is of significant importance to US multinationals, due to the wording of the Proposed Regulations (23 Dec 2015 post).

The Proposed Regulations would require CbC reporting by US MNE’s starting in 2017, thereby not having such requirement in 2016.  If there are no changes in the Final Regulations, US MNE’s will be required to submit CBC reports in many jurisdictions around the world.  Some countries, such as Mexico, that aim to provide additional reporting items beyond the OECD model would present additional complications for a US MNE.  Contemporaneous deadlines will also have to be met, that are prior to the US deadline.

Additionally, if an election provision is adopted in the Final Regulations, this may not solve the dilemma, as many countries are drafting legislation providing that if the parent jurisdiction does not require CbC reporting, then a separate CbC report has to be filed in their local jurisdiction.  A literal reading of such language would result in a required domestic filing, as an election is not a “per se” requirement.

Similar complications will arise in countries that do not adopt CbC reporting for the tax year 2016.

Monitoring of the timing implications for CbC reporting should be a high priority to be addressed currently, with timelines established for the preparation of back-up reporting plans around the world.

 

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OECD

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France: CbC public reporting receives a last-minute “no” vote

Following up the post of 8 December, France’s National Assembly provided a last-minute “no” vote with respect to providing country-by-country (CbC) reports for the public domain.

This has incited an outcry by the enthusiasts behind the transparency measure for additional insight into a multinational’s global tax posture.

Notwithstanding the “no” vote in France, this scenario is expected to emerge in other countries as the OECD BEPS implementation of CbC reporting is established in the local legislative frameworks.

In summary, the premise of multinational organizations for public CbC reports should still be the framework behind the date gathering process that is commencing.

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OECD

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EU Council: New Directive

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:

Click to access 2015G_CM6047_EU%20Council%20adopts%20directive%20on%20exchange%20of%20info%20on%20tax%20rulings,%20agrees%20on%20other%20corporate%20tax%20issues.pdf

Key points:

  • 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.

 

 

 

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OECD

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Public CbC reporting: France moves forward

France’s lower house of Parliament has approved an amendment that would require public reporting of country-by-country (CbC) information.  The amendment will need approval by the Senate, with final confirmation by the French National Assembly before being enacted.

This step represents another move forward, along with the EU proposals, to provide CbC information to the public domain.

Multinational companies should prepare today for public CbC reporting in the near future, as the cannon shots have been fired and they will soon land, resulting in a multitude of inquiries and perceptive conclusions.  Additionally, organisations should have a seamless process to receive, review and decide on communicative courses of action in response.

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OECD, Tax Risk Management

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