Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘BEPS’

TAXE: Final report for Parliamentary actions

The EU Parliament’s resolutions were passed by a vote of 508 to 108, with 85 abstentions.  The proposals call for mandatory country-by-country (CbC) reporting, a common consolidated corporate tax base (CCCTB), defined tax terms and transparency / exchange of tax rulings.  A summary press release and the full report are provided for reference:

http://www.europarl.europa.eu/news/en/news-room/content/20151120IPR03607/html/Parliament-calls-for-corporate-tax-makeover

http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P8-TA-2015-0408+0+DOC+XML+V0//EN&language=EN

Key points:

  • Welcomes the EU Parent-Subsidiary Directive amendments, effective at year-end 2015, for a general anti-abuse rule and hybrid mismatches.
  • EU Commission has breached its obligations under Article 108 of the Lisbon Treaty by not launching state aid investigations previously.
  • EU Member States should respect the principle of profits taxation where they are generated.
  • Promote good practices on transfer pricing and the pricing of loans and finance fees in intra-group transactions.
  • Commission to further investigate restrictions of deductions for intercompany royalty payments (i.e. counter profit shifting).
  • All rulings that have an impact on other Member States to be presented in the CbC report, and shared with the Commission and tax administrations.  Rulings to be publicly disclosed in accordance with confidentiality requirements.
  • Mandatory CCCTB, with a deadline for the consolidation element and without any further impact assessments.
  • Develop measures to tackle cross-border VAT fraud.
  • Reform of the Code of Conduct on business taxation.
  • New State Aid guidelines by mid-2017.
  • EU to be a global leader in tax transparency.
  • More extensive CbC report, with intra-group transactions.
  • Accelerate European Tax Identification Number project.
  • Aggressive tax planning is incompatible with Corporate Social Responsibility (CSR).
  • Outgoing financial flows from EU are taxed at least once (i.e. withholding tax).
  • Transition period for developing countries to align with Global Standard on Automatic Information Exchange.

This report is compelling, far-reaching and a resource that will be used worldwide, as most non-EU countries will attempt to follow the ever-increasing EU intensity and propensity for changes in the international tax arena.  Thereby, it is a must read and a learning tool for non-tax executives in multinational organisations, as well as tax advisors, tax administrations and other interested parties.

Category:

OECD / UN

Tagged with:

UK Autumn Statement: 2015

UK’s Autumn Statement 2015 has been announced, with several measures aimed at changing corporate tax behavior and promoting transparency with the objective to achieve a modern and fairer tax system.  A link to the Statement is provided for reference:

https://www.gov.uk/government/publications/spending-review-and-autumn-statement-2015-documents/spending-review-and-autumn-statement-2015

Key points:

  • A 60% penalty of tax due for successful general anti-abuse rule (GAAR) cases, to be implemented in 2016.  The revenue impact of this measure is highly uncertain, as it is also meant to be an incentive to change corporate tax behavior.
  • A desire to be to the most digitally advanced tax administration in the world.
  • New criminal offense for corporates failing to prevent tax evasion; failure to prevent their agents from criminally facilitating tax evasion by an individual or entity.
  • Hybrid mismatch rules to be effective 1/1/2017, following the OECD’s BEPS Guidelines.
  • Corporates to publish tax strategies as they relate to, or affect, UK taxation.
  • Cooperative compliance framework.
  • “Special measures” regime to tackle businesses that persistently engage in aggressive tax planning.

A carrot, stick and transparency approach is contained within the Statement, and thus important to follow as other countries will surely review UK’s leading initiatives to gauge impact on their respective economy.  The GAAR related penalty, which is inherently subjective, will be dictated in some fashion by HMRC’s aggressiveness to assess GAAR and a willingness to pursue it through the respective appeal avenues or court.  The tax strategy initiative will also be interesting to monitor as to its breadth and potential impact upon a company’s risk rating.

Category:

Tax Risk Management

Tagged with:

Transparency & Disclosure: zooming in

EY’s recent publication takes a close-up view of transparency and disclosure trends, including a detailed analysis of several countries’ latest trends.  A link to the report is provided for reference:

Click to access EY-are-you-ready-for-your-close-up.pdf

Key Points:

  • Transparency issues of the future:
    • Country-by-Country (CbC) implementation and inconsistency of approaches
    • New transfer pricing documentation requirements
    • Public access for CbC reports and tax rulings
    • Growing trend to disclose a company’s planning, strategy, risk appetites and effective tax rates
    • Tax codes of conduct, formal and informal
    • Increased disclosure of aggressive tax positions
    • Electronic data gathering
    • Use of third-party data
    • Direct ERP access
    • Matching of data and watching for transactional trends
  • EU transparency update, including proposed Directives
  • Country transparency updates: Argentina, Australia, Brazil, China, Denmark, Ecuador, France, Germany, Greece, Mexico, Netherlands, Poland, Singapore, South Africa, South Korea, Spain, UK, US

The level of future transparency will continue to increase, with new and dissimilar demands by countries around the world.  This report unveils the global trends and issues, with comprehensive analyses of various transparency trends of major countries.  Accordingly, it is a publication that should be reviewed to better understand where the current trends are requiring future demands for transparency in a new world of international taxation.

Category:

Tax Risk Management

Tagged with:

UN: Corp. tax responsibility

Principles for Responsible Investment (PRI), a UN sponsored initiative, published a report entitled “Engagement Guidance on Corporate Tax Responsibility.”  The guidance is investor oriented addressing the conduct of corporate tax responsibility, disclosure, transparency and good tax risk governance.  Therefore, this report is a valuable reference to understand today’s trend of tax disclosure and transparency from an investor’s perspective, and how multinationals may be queried in the new world of international tax transparency.

A link is attached for reference:

Click to access PRI_Tax-Guidance-2015.pdf

Key points:

  • Earnings that rely on tax planning vs. economic activity are vulnerable to tax regulatory changes, earnings risk via strategies are increasing, and some Boards may be unaware of the effect that incentives have on tax planning.
  • Corporate sustainability officers should understand tax decisions and their impact on financial results and stakeholders, with alignment between tax strategies and sustainability commitments.
  • ” Companies should be able to defend how they allocate profit to each country both to tax authorities and the general public to avoid reputational risk and investor backlash.”
  • Before engaging with companies on tax practices, investors should understand various strategies, including IP transfers, financing, marketing service arrangements, principal structures, tax havens, shell companies and tax incentives, that are summarily explained. 
  • A step plan to engage companies:
    • Identify red flags, including a formula to measure tax gap
    • Questions for Senior Management/Board re: tax policy, tax governance, managing tax-related risk, effective tax rate, tax planning strategies including structure and IP rights, and country-by-country (CbC) reporting.  

Appendices are provided for additional reference of the OECD BEPS project, examples of good tax practices re: disclosures, summary of findings from discussions with Heads of Tax in eight multinational organisations, and a Glossary / Resources.

The report, in providing formulas and explanations, includes educational material for the investor community re: tax strategies and governance, while also providing examples of tax queries and good tax governance by many multinationals.

Best Practices:

The report should be used as a metric to assess readiness and alignment for these important topics that may be raised by stakeholders, both internal and external.  To the extent such questions have not been a primary focus, this report is an impetus to raise the priority threshold in addressing tax policies, strategies and governance in a very transparent world.  Additionally, it is also worthy to review the names of multinationals cited in the report for awareness and recognition.

 

Category:

OECD / UN

Tagged with:

Global mobility & BEPS risks

Global mobility will face, directly and indirectly, various challenges resulting from OECD’s BEPS proposals.  PwC’s Insights provide a concise summary of these proposals, included for reference:

Click to access pwc-oecd-final-beps-package-what-does-it-mean-for-global-mobility.pdf

Key points:

  • Treaty changes, either bilaterally or via the Multilateral Instrument, will affect key issues and risks, including permanent establishment (PE).
  • Unilateral changes, several of which have been enacted, should be reviewed with a focus on global mobility functions.
  • The transparency initiative will encourage tax authorities to aggressively pursue PE and treaty based rules.
  • What is the impact of the change for PE dependent/independent test.
  • Responsibilities of senior executives, sales representatives and regionally based employees will need to be reviewed for the new rules.
  • People functions re: controlling risk should receive separate review.
  • Intercompany agreements (i.e. legal form) should be compared to practical substance responsibilities to evidence conformity, as analyses will use legal agreements as only a first step to understand the transactions and potential consequences.

Post BEPS, it is imperative that global mobility’s function and responsibilities should be reviewed, from a tax risk awareness perspective as well as internal governance controls.  To the extent that global mobility is not closely collaborated with the tax function, the ways of working and reporting should be reviewed to address this new world of international tax transparency and the emphasis on multinationals paying their fair share of tax, however construed.

 

 

Category:

OECD

Tagged with:

UN Tax developments

The UN Committee of Experts on International Cooperation in Tax Matters concluded their October meeting with several important milestones discussed.  A summary of the meeting is provided, and a reference to the Handbook on Selected Issues in Protecting the Tax Base of Developing Countries are provided for reference:

http://www.un.org/esa/ffd/special/11ictm-key-outcomes.html

Click to access handbook-tb.pdf

Key points:

  • A new Article was adopted re: fees for technical services that will become a part of the new UN Model Double Tax Convention (DTC).
  • A new practical Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries was adopted.
  • Subcommittee on Exchange of Information presented a draft “Code of Conduct” that will be updated in the October 2016 session.
  • The Committee also welcomed the work of UN DESA’s Financing for Development Office in the area of capacity-building, including the production of a “Handbook on Selected Issues in Protecting the Tax Base of Developing Countries.”
  • Two new subcommittees were formed:
    • Royalties re: updated Article 12 UN Model and commentary
    • Mutual Agreement Procedure (MAP) to review and propose updates to UN Model

On the heels of the OECD BEPS Guidelines, the UN developments will pave the way for many developing countries that lack the time and/or resources for implementation.  Accordingly, additional withholding taxes for services and withholding sources will be revealed to extract monies at source.  As a result, the UN initiatives are paramount to monitor and review accordingly.

These initiatives will also provide greater capacity for global disparity, with the BEPS Guidelines and UN changes in periods of transition re: domestic legislative actions around the world.

Category:

OECD / UN

Tagged with:

Dutch viewpoint: Retain advantages post-BEPS

The Dutch government has provided comments to the BEPS Guidelines, as they have generally been patient re: unilateral legislation that would represent non-conformity with the recently announced actions.  However, they would be ready to adopt tax incentives for Dutch taxpayers if there are unintended BEPS consequences that would weaken its attractive tax environment.  

PwC’ Tax Insights article provides details for this update:

Click to access pwc-dutch-government-responds-to-final-beps-reports.pdf

The article is refreshing re: BEPS conformity, including transparency, by the Dutch government.  The adoption of its innovation box regime as of 1/1/2017 will reflect the modified nexus approach of the BEPS Actions.

However, it is also interesting to note the measures it may take to retain its attractiveness for multinationals if there are adverse BEPS consequences.  This viewpoint is significant to watch, as other countries may adopt similar measures that will represent additional complexity and nonconformity around the world.  Additionally, each country will have its own view, in addition to unique incentives to protect its local tax base.

Category:

OECD

Tagged with:

BEPS related developments

EY’s Global Alert highlights several OECD / unilateral actions resulting from the BEPS Action Items announced earlier this month.

Click to access 2015G_CM5827_The%20Latest%20on%20BEPS%20-%2026%20October%202015.pdf

Highlights:

  • Czech Republic’s 2016’s income tax proposal, including the EU Parent-Subsidiary Directive change limiting exemption of tax deductible distributions, although retaining its own general anti-abuse rule (vs. that in the Directive).
  • EU’s State Aid decisions re: Luxembourg and Netherlands, for which legal appeals are expected.
  • Honduras transfer pricing information return requirement.
  • Indonesian thin capitalization limit of 4:1, remainder of interest non-deductible (thereby incurring one-sided taxation re: interest income of recipient).
  • Ireland’s Knowledge Development Box, following the OECD’s recommendations, and country-by-country (CbC) reporting by Irish headquartered groups with a secondary filing mechanism.
  • Norway’s 2016 budget proposal, with an interest limitation of 25% of taxable EBITDA.
  • Slovakia’s 2016 income tax changes, including implementation of the EU Parent-Subsidiary Directive.

This new post-BEPS period is starting off with a multitude of activities by countries and the EU that is not expected to slow down in the near future.  These developments will shape the transfer pricing regime, and resulting complexity and disparity, around the world.  Accordingly, these trends should be monitored and addressed in a corporation’s tax risk framework accordingly.

Category:

OECD

Tagged with:

BEPS: Indirect tax impact

EY’s Global Tax Alert highlights the indirect tax consequences resulting from final guidance of the BEPS Action Items:

Click to access 2015G_CM5836_Indirect_OECDs%20recommendations%20on%20BEPS%20project%20has%20wider%20indirect%20tax%20implications.pdf

Key observations:

  • Interaction of Article 1 (Digital Economy) and Article 7 (PE) may create a wider gap for findings of a indirect tax “fixed establishment” and a direct tax “permanent establishment” (PE), although some countries do not respect such distinction.  Thus , business models merit a review for such changes.
  • Article 8 (Intangibles) set forth changes in allocation and valuation that may affect customs valuations.
  • Actons 8-10 (transfer pricing) may invite additional focus by tax authorities on VAT/GST and customs.
  •  Action 13 (country-by-country reporting) may invite scrutiny of indirect taxes.

The focus of BEPS has been on direct taxes, while its impact will now be measured for purposes of indirect taxes.  Thus, a BEPS review should encompass direct and indirect tax effects, including VAT/GST and customs.  

Category:

OECD, Tax Risk Management

Tagged with:

OECD BEPS Action Items

Attached is the link to access the OECD webcast and all of the BEPS Action Items released on 5 Oct. 2015.

http://www.oecd.org/ctp/beps-2015-final-reports.htm

Needless to say, the process of reading, and reviewing, the Action Items has commenced by many.

Importantly, multinationals now have the final rules by which the impact on their organization can be assessed, and action plans developed accordingly.  However, there will be timing differences as to when such guidance is implemented into law by countries, as well as “soft law” conformity.

Category:

OECD

Tagged with:

BEPS update

Apart from the expectations surrounding the 5th October release of the OECD BEPS Action Items, the referenced EY Global Tax Alert provides relevant details for the following BEPS related activities:

  • Australia: Multinational anti avoidance law (MAAL), transfer pricing documentation
  • Belgium: Payments to “tax haven” jurisdictions
  • Bulgaria: Consultation draft re: the EU Parent Subsidiary Directive; although the broader local GAAR would be retained
  • China’s recent developments (refer to my 26 Sept. post)
  • Denmark: Transfer pricing documentation
  • Japan: Court case re: PE and “preparatory or auxiliary” exception
  • Kuwait: Virtual Service PE interpretation (refer to my 23 Sept. post)
  • NL: Transfer pricing doucmentation

Click to access 2015G_CM5800_The%20Latest%20on%20BEPS%20-%2028%20September%202015.pdf

The latest developments, along with future unilateral actions that follow the intent of the new OECD Action Items, should be monitored closely.  Additionally, such concepts should be reviewed for domestic legislative compliance, vs. intent.

Category:

OECD

Tagged with:

China’s proposed TP documentation; Non-transparent

China’s State Administration of Taxation (SAT) has issued a consultation draft encompassing transfer pricing documentation; comments are due by 16 October 2015.  The draft includes OECD BEPS Action concepts, such as the form of transfer pricing documentation, although retaining arguable local concepts and introducing intangible definitions prior to the final OECD Guidelines.

Click to access 2015G_CM5783_TP_Chinas%20TAs%20issue%20groundbreaking%20consultation%20draft%20to%20update%20TP%20rules%20in%20a%20Post-BEPS%20environment.pdf

Key observations:

  • The three tier TP documentation concept of Master File, Local File and Country-by-Country report (for Chinese based multinationals) is introduced.
  • A “Special File” is also required for intercompany services, providing copies of agreements, allocation keys and evidence supporting the “benefit test.”
  • “Intangibles” is broader than the OECD proposals, including marketing channels and customer lists.
  • Advance Pricing Agreement (APA) procedures are clarified.
  • The use of transfer pricing comparables is broad and runs counter to the transparency or consistency test.  The use of secret comparables, one comparable, one or multiple year results are allowed.
  • Anti-shifting provisions are to be used for transactions with entities of little substance, thereby increasing Chinese profits.
  • Profitability monitoring will be used to establish a tax risk hierarchy system.

Although the Consultation report includes consistent BEPS measures, there are also concepts included that do not provide consistency with other countries, increasing the risks of double taxation.  Thereby, China is inwardly focusing on its fisc while representing a “rogue” player on the OECD playing field.

All multinationals with operations in China should determine their course of action for these proposals, including a review of holding companies for intercompany transactions with Chinese entities.  

Category:

Transfer Pricing

Tagged with:

Tax risks: Audit committee perspective

Deloitte’s Audit Committee Brief includes a summary and questions outlining Risk oversight and Tax considerations for audit committees.  A link to the publication is provided for reference:

Click to access ACBrief_NovemberDecember2014.pdf

Key observations:

  • Audit committees may have a risk committee (Will this be a continuing trend?)
  • Tone at the top is imperative for effective risk oversight
  • Insightful questions for consideration:
    • What internal controls are in place to address significant tax risks?
    • Is there a clear approach and justification for where risk issues are placed?
    • Is there a widely communicated process to quickly bring risk-related issues to the Board?
    • What issues should the audit (risk) committee be aware of when evaluating potential risks?

Risk governance is rapidly becoming the new norm, both by tax administrations to understand and rate risks of a taxpayer as well as an effective tax risk policy and framework for a multinational to identify and mitigate risks.  This trend will require additional resources to fulfill such commitments, immediately and ongoing.  

Category:

Tax Risk Management

Tagged with:

ATO interim report: Corporate tax avoidance

The Senate Economics References Committee has published its interim report entitled “Corporate tax avoidance.”  Part I, “You cannot tax what you cannot see” provides an excellent frame of reference for the discussions therein.

It is worthwhile noting that there is a section “Government Senators’ Dissenting Report” expressing concerns about some recommendations therein; this should be a additional warning sign of the recommendations put forth.  Conversely, there are “Additional Comments from the Australian Greens” fully supporting the report in its entirety.

The final report is due in November 2015, although this interim release provides an indication of the thought trends currently in process by the Australian Tax Office (AT0).  A link to the report is provided for reference:

http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance/Report_part_1

Key observations:

  • 17 recommendations provided addressing (1) evidence of, and multilateral efforts to combat, tax avoidance and aggressive minimization, (2) multilateral actions to protect Australia’s revenue base, and (3) capacity of Australian government agencies to collect corporate taxes.
  • Australian government to work with other countries having significant marketing hubs to improve the transparency of information
  • Australian government continues to take the load re: OECD BEPS initiatives; international collaboration should not prevent the Australian Government from taking unilateral action
  • Mandatory tax reporting (transparency) code
  • Existing transparency laws to be identical for private and public companies
  • Public register of tax avoidance settlements reached with the ATO
  • Public excerpts from the Country-by-Country OECD reports, based on the EU’s standards
  • Annual public report on aggressive tax minimization and avoidance activities
  • Section 3.95 discusses a novel concept: “Effective tax borne” effective tax rate formula, a metric that seeks to reflect all of the channel profit derived from business activities involving Australia and the Australian and global tax paid on that channel profit.  Appendix 3 provides additional rules for application of this formula, noting that there has not yet been a consultation with taxpayers or other stakeholders.  The metric envisions that the entire supply chain profit is a profit of the economic group arising from Australian business activities (i.e. intercompany purchases of goods and services from offshore related parties).  Numerator is either the Australian tax paid on business activities by the economic group, or the global tax paid by such group.  Denominator is the total economic profit from business activities which are linked to Australia.  Withholding taxes of economic group profit are includable, whereas royalties and excises are not.  Numerous rules apply for intercompany adjustments.

Australia is still recognized as a leader in the pursuit of the BEPS objectives, using transparency as a weapon to fight ensuing battles.

This report not only extends the strong cry for public disclosure of tax information, it suggests a new concept to examine the effective tax rate of jurisdictions having activities with an Australian related party.  However, it is hopeful the envisaged complexity, cost/benefit and technical nuances of the “effective tax borne” concept are presented to stakeholders with enough time to review, plan and adjust/eliminate the final recommendation accordingly.

As Australia leads, many others follow.  This report is required reading for all interested parties, as the ideas presented have a high probability of appearing in other jurisdictions in a similar form and formulating the same intent for transparency.

Category:

Tax Risk Management, Transfer Pricing

Tagged with:

BEPS global update

EY’s Global Tax Alert provides a succinct summary of the latest BEPS (incentivized) developments around the world.  A link to the Alert is provided for reference:

Click to access 2015G_CM5699_The%20Latest%20on%20BEPS%20-%2017%20August%202015.pdf

Overview of the Alert:

  • OECD: Documents re: initiative for automatic exchange of financial account information
  • Africa: Best Practice regional meeting to develop measures for countering BEPS
  • Australia: Exposure draft law re: transfer pricing documentation to be effective 1/1/2016
  • Brazil: Report to eliminate interest on net equity (INE) regime
  • Chile: Foreign residents are to provide a sworn statement to receive treaty benefits
  • Europe: TAXE Committee’s interim report re: tax rulings and BEPS related topics
  • Ireland: Knowledge development box
  • Italy: Patent box regime
  • Japan: Interest limitations
  • Korea: VAT re: electronic services
  • Luxembourg: EU Parent-Subsidiary Directive inclusions (anti-hybrid and anti-abuse clauses)
  • Saudi Arabia: Virtual Service PE
  • Spain: Patent box regime

The Alert highlights the continuous and frenzied pace of the BEPS measures, as well as the unilateral efforts that are mirroring the intent of BEPS, although not necessarily in a consistent and cohesive framework.

 

Category:

OECD

Tagged with: