Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘BEPS’

BEPS Action 8: Intangibles Draft

The OECD released the latest Discussion Draft on Action 8: Hard-to-value Intangibles.

Interested parties are asked to provide comments by 18 June, 2015.  A brief window period to comment should address concerns in the Draft as well as the questions posed at the end of the document.  A link to the Draft is provided for reference:

Click to access discussion-draft-beps-action-8-hard-to-value-intangibles.pdf

“The discussion draft includes an approach based on the determination of the arm’s length pricing arrangements, including any contingent pricing arrangements, that would have been made between independent enterprises at the time of the transaction. The approach protects tax administrations against the negative effects of information asymmetry when specific conditions are met. These conditions ensure that price adjustments will only apply where the difference between expected and actual outcomes cannot be explained by considerations other than inappropriate pricing.”

The valuation of intangibles has been a very complex topic for the OECD and interested parties to address to gain a mutual perspective and balanced approach.  Accordingly, this Draft and related comments will provide a new direction going forward for those countries embracing the final OECD guidelines.

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OECD

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Tax reputation / transparency survey: 2014-15

EY’s publication discussing tax reputation readiness and transparency provides suggestions for increasing readiness with good processes, robust documentation/audit trail and class-leading data management.  The publication is very timely, noting the recent European Parliament’s unanimous vote for public reporting of country-by-country (CbC) and beneficial ownership information.

Click to access ey-managing-tax-transparency-and-reputation-risk.pdf

Key points:

  • More than 60% of companies believe that engaging with the media is a “no-win” situation.
  • Excellent timeline/events of transparency initiatives commencing from 2003 until present, and future, state.
  • 65% of respondents have developed a more structured approach to managing their public tax profile in the previous 2 years.
  • 94% of respondents expect increased growth in global disclosure and transparency initiatives.
  • “Business can do more and be more proactive to prepare for new reporting obligations and, as one proposed step, either proactively or defensively,  Whatever choices a business makes, developing and sustaining the ability to source accurate data, in the right format and in a timely manner will be a critical factor for all large businesses in the years ahead.”
  • Multiple transparency initiatives are succinctly depicted in a table on page 9.
  • Transparency will be the new normal.
  • Quality information requires quality data.
  • Transparency readiness is a significant and underestimated need of companies.
  • Transparency readiness assessment questions are posed for consideration.
  • Detecting risk anomalies in the data is an important consideration; thoughtful questions are posed for review.
  • Companies that can quickly and clearly explain their tax transactions and strategies are best positioned to manage reputation risks.
  • Six proactive actions to consider:
    • Actively monitor the changing landscape
    • Assess readiness, and desire, to respond
    • Enhance communication with internal and external stakeholders
    • Develop steps to prepare the total tax picture
    • Decide with whom the company wishes to communicate
    • Embed reputation risk thinking into core business strategy

This survey provides an excellent approach and proactive roadmap in addressing the challenges, readiness and complex actions required to develop transparency readiness and engage reputation risk proactively.  Accordingly, this should be required reading for all MNE’s as a primer and self test mechanism to address the new era of international tax transparency and potential angles of attack for reputation risk.

Category:

Tax Risk Management

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European Commission: New Action Plan

The European Commission, in its meeting on 27 May 2015, determined that a new Action Plan is needed to address tax abuse and ensure sustainable fisc growth by the Member States.  This follows its proposals on the Tax Transparency Package, including automatic exchange of tax rulings, possible public tax disclosure, and a review of the Code of Conduct.

The new Action Plan will look at integrating BEPS actions within the EU, review the digitalized economy, relaunching the Common Consolidated Corporate Tax Base (CCCTB) initiative and further rules for increased transparency.

The KPMG Euro Tax Flash provides a summary of the new proposals.

Click to access etf-249.pdf

It is noteworthy that the EU is proceeding on designed actions in anticipation of, and subsequent to, BEPS actions for the EU Member States.  These actions may form a new set of rules similar to, as well as disparate from, the new OECD Guidelines and the rest of the world.  Other countries will be following these initiatives for similar adoption at a unilateral level, thereby providing a complex multi-layering of anti-abuse rules, transparency initiatives, and tax bases.

The answers to the struggle for fostering a better business environment in the EU market may be much different from an EU and rest of world perspective.

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OECD / UN

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G20 Int’l Tax Symposium: BEPS topics

The G20 recently held a symposium including 300 participants from 60 countries.  The G20 tax agenda focused on the current status of BEPS in developed, and developing, countries.  The PwC summary outlines the current state of agreement, and disagreement, with the proposed BEPS Guidelines.

Click to access pwc-g20-international-tax-symposium.pdf

Key observations:

  • Hybrid mismatches will include treaty changes and domestic law recommendations
  • The interest limitation solution is not yet adequate
  • A clear analytical framework should be used to determine application of non-recognition transactions
  • The Amadeus database, macro-data and tax return data was used to measure the spill-over effect of BEPs
  • Not all measures to tackle BEPS will be supported by guidance, although guidance will continue in following years
  • Coordination and consistency of application is vital, although it is challenged by unilateral actions of residence countries
  • Implementation is key, although a single approach no longer works

The observations cited in the PwC summary are insightful, while providing further certainty that BEPS implementation will be diverse with different timelines, while guidance continues in post-2015.

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OECD

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US Model Income Tax Convention: A new world

The US Dept. of Treasury has released drafts of its proposed revisions to the US model income tax convention, for which it has requested comments.  The new Model treaty will serve as a template for future US treaties and protocols. A PwC summary and US Treasury press release, which further reference the proposed changes, are included for reference: http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-us-treasury-proposes-changes-us-model-income-tax-convention.pdf http://www.treasury.gov/press-center/press-releases/Pages/jl10057.aspx Key observations:

  • Exempt permanent establishment (PE) rule that will also apply to US branches
  • Denial of treaty benefits re: articles 11 (Interest), 12 (Royalties), and 21 (Other income) for recipients in a “special tax regime.”  There are several exceptions applicable to the general rule.
  • Disallowance of treaty benefits for payments of dividends, interest, royalties and other income for 10 years after a company expatriates.
  • Changes to Limitation on Benefits (LOB) article: (i) New derivative benefits test which is inclusive of a base erosion test, (ii) a base erosion test to the subsidiary of a public company requirement, (iii) changes to base erosion requirements in the public company test, ownership base erosion test and derivative benefits test, and (iv) a change to the discretionary grant of relief clause inclusive of a principal purpose test.
  •  Partial termination provisions for subsequent law changes exempting, or reducing the tax rate to less than 15% for dividends, interest, royalties and other income.

These significant changes represent acknowledgment of the OECD BEPS impact and its impact on the world’s tax treaties that will directly impact the taxation of a multinational company’s global structure.  Accordingly, these changes are required reading for international tax practitioners, as the rest of the world will be following along in measuring its respective treaties and new protocols. BEPS Action 6, Preventing treaty abuse, recognized the US Model Treaty’s LOB article, with an additional inclusion for a derivative benefits test.  The US proposal has now addressed that intent.

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OECD

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BEPS is ideology, not law: India’s Delhi Tribunal affirms

As the OECD BEPS Actions are a subject of discussion by tax administrations, the Indian Delhi Tribunal confirmed that such ideologies cannot be used as legislative doctrines for legal enforcement.

A non-legislative BEPS approach may become more common in the months/years prior to a country enacting such legislation into its regulatory framework.  However, the BEPS concepts should not be used as a basis for assessment or litigation.  Thus, there will be a short/long lead time, different in almost every country, as to when some, if any, of the BEPS Actions are enacted. This disparity should be recognized prior to raising BEPS concepts as an instrument of legal enforcement.

An EY Global Tax Alert provides additional information about the case.

Click to access 2015G_CM5447_Indias%20Delhi%20Tribunal%20rules%20BEPS%20is%20a%20tax%20policy%20consideration%20and%20not%20relevant%20for%20judicial%20determinations.pdf

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OECD

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Australia’s Budget: BEPS acceleration

Australia’s Budget reveals its intent on becoming a leader in tax transparency and implementation of tools to address anti-avoidance initiatives.  The provisions cite OECD BEPS initiatives, while deciding to act unilaterally on draft guidelines and introducing new transparency standards within its various proposals.

This Budget may set the stage for others to follow similar trends and timelines; accordingly such actions should be monitored in Australia as well as the rest of the world.  The Public Tax Transparency Code is another signal that reporting of economic and tax activity will be used as a public measure to assess reasonableness for determining payment of a “fair share of tax.”

MNE’s have now fully realized the impending complexity, documentation demands and transparency standards that it will be judged by.  Internal education, communication and alignment are now vital in establishing a MNE’s global tax risk framework.  

A link to the Budget actions is provided for reference:

http://www.budget.gov.au/2015-16/content/glossy/tax/html/tax-05.htm

Key Corporate Tax provisions:

  • Multinational Anti-Avoidance Law
    • Economic Australian activities = Australian taxation income
    • Penalties up to 100%, plus interest
  • Country-by-Country (CbC) reporting effective as of 1/1/2016, consistent with OECD Guidelines
  • OECD recommendations re: treaty abuse / non-taxation to be incorporated into tax treaties
  • Draft OECD anti-hybrid rules to be implemented
  • Public Tax Transparency Code to supplement CbC reporting
  • Serious Financial Crime Taskforce to target serious financial crimes and tax evasion
  • Common Reporting Standard to be adopted from 1/1/2017
  • GST Compliance programme extended 3 years

Category:

OECD / UN, Transfer Pricing

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Indonesia APA: Methodical approach

The Indonesian Minister of Finance has released recent Regulations addressing the methodical approach for which taxpayers and the tax administration are to be aligned in seeking an APA.  Most importantly, the approach outlines the advance timing and necessary information by which tax authorities will utilize in considering APA requests.

A link to KPMG’s Tax News Flash is provided for reference:

Click to access TNF%20APA.pdf

As countries continue to enact unilateral legislation, with or without BEPS Actions, it may be prudent to consider a proactive transfer pricing approach to enter into APA’s for significant intercompany transactions.  As the Mutual Agreement Procedure (MAP) procedures are still being refreshed, the transition period would be an excellent time to prepare for additional certainty via APA’s.  The Indonesian approach provides an excellent example to better appreciate the timing, information and exchanges that will become part of this process.

Armed with the foresight that such APA’s may be included in transfer pricing documentation and exchanged between tax authorities around the world, it may be a worthwhile roadmap demonstrating consistency for significant transactions.

Category:

Transfer Pricing

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Australia, UK DPT: Advancing beyond BEPS

The recent Guardian article highlights the danger that the UK Diverted Profits Tax (DPT) has incited.  Countries are acting unilaterally and/or in working groups (including the EU) to accomplish their fiscal objectives behind a thin veil of BEPS intentions.  Most importantly, such actions may never be unraveled after the final OECD BEPS Guidelines are published.

Accordingly, we will have overlapping  domestic and treaty provisions (including the arguable non-treaty DPT) for anti-avoidance rules, CFC rules, capturing low-taxed income from other jurisdictions in novel ways, non arms-length approaches, formulary calculations of the “right tax” and significant complexity for all.  To the extent public disclosure of tax related data becomes a reality by the OECD or EU, many questions will arise on a very complex topic for which most people will not comprehend.

It is hopeful that countries put a full stop on BEPS activities until the Guidelines are finalized, after which such Guidelines can be adopted in their final form for overall consistency.  Statements similar to the herein should be tempered by patience and a goal for global consistency.  Thus, working group meetings that are scheduled prior to that time will only exacerbate the tsunami of international tax guidance and documentation that will take place.

A link to the article is attached for reference:

http://www.theguardian.com/australia-news/2015/apr/19/australia-working-with-uk-on-tackling-corporate-tax-says-joe-hockey

Joe Hockey, treasurer, provided the following statement:

Hockey said that the joint working group would enable Australia to go “further and faster” than the framework for change offered through multilateral groups like the OECD and G20.

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OECD / UN

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BEPS Action 3-CFC Rules: TEI comments

TEI has provided recent comments addressing OECD’s Discussion Draft for BEPS Action 3: CFC rules.  A link to their comments are provided for reference:

Click to access TEI%20Comments%20BEPS%20Action%203%20-%20CFC%20Rules%20FINAL%20to%20OECD%2030%20April%202015.pdf

Key comments:

  • Lack of definitive guidance will introduce additional complexity, double taxation and inconsistency of treaty applications.
  • Overlap with other BEPS Actions and the role of CFC rules questions new complex rules at this time.
  • Confusion re: transfer pricing rules and excess profits approach with arm’s length principle.

The well drafted comments provide clarity surrounding the complexity and uncertainty for new rules addressing BEPS concerns by interested parties.  The first question therefore should always be: Do we need these rules at this time?

Notwithstanding the Discussion Draft’s proposals and comments by TEI, among others, MNE’s should plan for increased efficiencies to coordinate and report information, while ensuring global consistency for application of transfer pricing methodologies.

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OECD / UN

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BEPS Action 12-Mandatory Disclosure: TEI comments

Tax Executives Institute (TEI) has provided comments to the issuance of BEPS Action 12 Discussion Draft.

A link to TEI’s comments is provided for reference:

Click to access TEI%20Comments%20BEPS%20Action%2012%20-%20Mandatory%20Disclosure%20-%20FINAL%20to%20OECD%2029%20April%202015.pdf

Key comments:

  • Multiple levels of disclosure options are provided, leading to inconsistency and complexity
  • Information provided is yet another compliance burden for MNE’s, with little cost/benefit to tax authorities
  • Concern about release of information to the public, especially prior to the time that full appeals are exhausted
  • Tax disclosure should only be required upon filing a tax return with a tax benefit from a reportable transaction
  • Limited rules re: who should report
  • Primary purpose or de minims filter process is not recommended
  • Reporting should be limited to new or innovative aggressive tax planning structures
  • Countries with criminal liability provisions should exclude reported transactions with self-incrimination protection
  • Penalty protection for reported transactions

TEI’s comments are well written, concise, practical and relevant.  Their comments should be carefully reviewed prior to implementation of additional disclosures re: BEPS Action 12 that may prove to have little benefit and significant complexity.

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OECD / UN

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BEPS Action 8: Cost Contribution Arrangements

The OECD has released its Discussion Draft addressing BEPS Action 8: TP Guideline revisions on Cost Contribution Arrangements (CCAs).  Comments should be submitted by 29 May 2015.

A link to the Discussion Draft is provided for reference:

Click to access discussion-draft-beps-action-8-cost-contribution-arrangements.pdf

Observations;

  • Updated TP Guidelines text for Chapter VIII
  • Draft guidance on Chapter I of the TP Guidelines released for public comments on 19 Dec. 2014 is taken into account
  • There is always an expected benefit that each participant seeks from its contribution
  • CCAs are to operate in accordance with the arm’s length principle
  • Two types of CCAs: Development (i.e. ongoing future benefits) and Services (i.e current benefits)
  • CCAs differ from intercompany transfer of property/services due to the expected mutual and proportionate benefit from pooling of resources and skills
  • Illustrative examples are provided at the end of the Discussion Draft for further reference
  • Application of arm’s length principle to CCAs:
    • All parties have a reasonable expectation of benefit
    • Calculate value of each participant’s relative contribution to the joint activity
    • Determine whether allocation of CCA contributions accords with their respective share of expected benefits

As CCAs are becoming more common by MNEs, with additional complexity in valuation and comprehension by tax administrations, this Discussion Draft will form long-term guidance for the new TP Guidelines.  Accordingly, it should be reviewed, with comments provided accordingly, by all interested parties.

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OECD / UN

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Sweden adopts new EU PSD with expansion

The Swedish tax authorities have adopted the anti-hybrid legislation of the EU Parent Subsidiary Directive (PSD), and have chosen to expand the participation exemption limitation to non-EU countries.

A link to EY’s Tax Alert discusses the details of this recent development.

Click to access 2015G_CM5392_Swedish%20Gov%20proposes%20limitation%20to%20participation%20exemption%20rules%20and%20amendments%20to%20Swedish%20Tax%20Avoidance%20Act.pdf

The opportunity to reach beyond the EU PSD, incentivized by OECD BEPS draft actions, may become more a norm than the exception, and is a trend worth watching.

Category:

OECD / UN, Transfer Pricing

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BEPS Action 3: Strengthening CFC rules

The OECD has provided its latest consultation inviting comments re: CFC rules, using 7 building blocks for discussion.

  • Definition of a CFC
  • Threshold requirements
  • Definition of control
  • Definition of CFC income
  • Rules for computing income
  • Rules for attributing income
  • Rules to prevent or eliminate double taxation

A link to the consultation is provided for reference:

Click to access discussion-draft-beps-action-3-strengthening-CFC-rules.pdf

As CFC rules are the foundation underlying a country’s right of taxation, while fiscal pressures are forcing administrations to increase their fisc creatively and aggressively, this consultation indicates the long-term strategies for CFC taxation.  Accordingly, MNE’s and other interested parties should review and provide comments accordingly.

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OECD / UN

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BEPS Action 12: Disclosure of tax planning arrangements

The referenced PwC summary highlights the latest OECD proposal re: disclosures of tax planning arrangements.  The Action is generally based on efforts to curb aggressive tax planning transactions for which there are not consistent standards for reporting/sharing details for such transactions.

Click to access pwc-proposals-wider-reporting-international-tax-arrangements.pdf

MNE’s and other interested parties should review this proposal to better understand transparency trends and initiatives, as well as implement relevant planning processes and governance.

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OECD / UN

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