Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘BEPS’

Comments re: OECD BEPS 14: Dispute Resolutions

The OECD has released comments received in response to BEPS Action Item 14: Make Dispute Resolutions More Effective. These comments are valuable in understanding these important mechanisms that could minimize potential double taxation and increase certainty in a timely manner, as well as comprehend its significant impact on other current BEPS Guidelines that are being drafted such as Action Item 6: Treaty Abuse re: subjective tests being proposed such as the Principal Purpose Test (PPT).

Unfortunately, mandatory arbitration, as well as consistent consideration and application of the MAP procedure, are ideals that will not be realized, due in part to countries not wanting to give up their control and concept of sovereignty.  As the BEPS guidelines, and unilateral country legislative actions, become more complex and subjective, the dispute resolution process increases its vital importance exponentially.  Therefore, it is in everyone’s interest to make these mechanisms work efficiently and consistently in a transparent environment.

The link to the respective comments are included for reference:

Click to access public-comments-action-14-make-dispute-resolution-mechanisms-more-effective.pdf

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OECD / UN

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Japan’s tax reform proposals, including BEPS initiatives

EY has provided a concise summary of Japan’s tax reform proposals, including the limitation for a participation exemption of dividends that are deductible by the payor in alignment with OECD BEPS initiatives and matching the recent change in the EU Parent-Subsidiary Directive.  As Japan, and other countries, enact tax reforms that include OECD BEPS initiatives, it is imperative to review legal structures and potential impacts of such changes, including BEPS reforms.

Trends are also developing as countries follow similar changes of other countries, eager to adopt a “Follow the Leader” approach if it may attract additional tax revenues and economic growth.

EY’s Alert is included herein for reference:

On 30 December 2014, Japan’s coalition leading parties released the 2015 Tax Reform Outline (Outline). The Outline includes both favorable proposals, such as a corporate tax rate reduction and unfavorable proposals, such as lowering an annual net operating loss (NOL) deduction limitation. A tax reform bill will be prepared based on this Outline. The bill will be submitted to the Diet and enacted by the end of March 2015. This Alert summarizes key provisions relevant to multinational corporate taxpayers.

Corporate tax rate reductions
The national corporate tax rate will be reduced to 23.9% from 25.5% for taxable years beginning on or after 1 April 2015.
The local enterprise tax rate applicable to income base will be reduced to 6% from 7.2% for taxable years beginning on or after 1 April 2015.
The combined national and local effective corporate tax rate will be reduced to 32.11% from the current 34.62%.1
A further rate cut is planned in a 2016 tax reform, which would make the combined effective tax rate 31.33%.
The Government is planning to lower the combined effective tax rate to below 30% over several years.
Amendment to NOL deduction and carryover period
A 65% limitation for an annual NOL deduction (compared to the current 80%) is proposed for taxable years between years beginning on or after 1 April 2015 and years beginning on or before 31 March 2017. A further reduction to 50% will apply to taxable years beginning on or after 1 April 2017.
The current 9-year carryover period is extended to 10 years for NOLs incurring for taxable years beginning on or after 1 April 2017.
Small and medium enterprises (SMEs)2 are eligible for a 100% NOL deduction and a 9-year/10-year NOL carryover period.
A special rule will apply to a newly established corporation and a corporation emerging from bankruptcy, which allows a 100% NOL deduction for a seven-year period.
Amendment to domestic dividend received deduction (DRD) rule
The proposed new DRD rates apply to domestic shareholders holding 33.33% or less interest in a Japanese distributing company as follows:3
Ownership percentage
Current
Amendment
At least 25% and 33.33% or less
100%*
50%
More than 5% and less than 25%
50%*
5% or less
20%
* The amount of interest expense allocable to the acquisition cost of stocks will be reduced from the amount of DRD.

For insurance companies, the applicable DRD rate for stocks owned 5% or less will be 40%.
Reduction in income tax base (local enterprise tax)
Local enterprise tax consists of three elements – capital, value added and income. While the total combined tax revenues are intended to remain unchanged, income base percentages over a total enterprise tax are expected to be reduced from the current 75% to 62.5% and 50% for 2015 and 2016, respectively.
Amendment to research and development (R&D) tax credit
The R&D tax credit limitation4 will be reduced from the current 30% to 25% of national corporate tax liability of a taxable year.
A new R&D tax credit limitation of up to 5% of national corporate tax liability will be introduced for special experiment and research expenses.
The carryover of unused creditable amount will be repealed.
International taxation
The proposal will change the effective tax rate from the 20% or less to less than 20% when determining a foreign tax haven subsidiary status.
A 95% participation exemption for dividends paid by a foreign subsidiary will no longer be available for dividends that are deductible in the country where the foreign subsidiary is located.
Consumption tax
The second phase of the consumption tax rate increase (from 8% to 10%) will be postponed for 18 months to 1 April 2017.
Provision of digital services (e.g., e-books, internet-delivery of music, advertisement, etc.) provided by a foreign person to Japanese customers will be subject to consumption tax from 1 October 2015. For business to consumer transactions, the foreign service provider will be required to register as a taxable entity and file consumption tax returns. For business to business transactions, a reverse-charge mechanism will be introduced, which requires a Japanese service recipient to declare taxable sales and related tax due on its consumption tax return.
Endnotes
1. Some local jurisdictions impose higher local inhabitant and enterprise tax rates than the standard rate. The current combined national and local effective tax rate applicable to a corporation located in Tokyo area with capital of more than JPY100 million is 35.64%, and this will be reduced to 33.1% based on the Outline.

2. An SME is generally defined as an entity with capital of JPY100 million or less. An entity that is wholly owned by a shareholder whose capital amount is JPY500 million or more is excluded from the SME regime.

3. Shareholders who hold more than 33.33% interest are eligible for a 100% DRD.

4. The change is only for the base credit portion. For additional information, see EY Tax Alerts, Japan releases 2012 tax reform outline, dated 15 December 2011 and Japan’s tax reform outline announced, dated 4 October 2013.

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Tax Risk Management

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Asia: BEPS Review

Loyens & Loeff have published a clear and concise summary of several OECD BEPS deliverables, as well as summarizing the potential impacts of BEPS for each of the following countries:

  • China (PRC)
  • Hong Kong
  • India
  • Indonesia
  • Japan
  • Korea
  • Malaysia
  • Philippines
  • Singapore
  • Taiwan
  • Thailand
  • Vietnam

A link to the publication is provided for reference:

Click to access AsiaNewsletter-BEPS.pdf

This publication provides a concise summary addressing the topics of Characterization and position re: BEPS, BEPS related measures and an Outlook summary for each country.  The recent December 2014 BEPS drafts are not covered in this publication.

Best Practice observations:

MNE’s should be gathering a master file of the BEPS Action Items and status of each Item for each country in which it operates, as the timing of legislation will be different, including countries that have already enacted several Action Items.  Based upon this schedule, a strategic review of items affecting the Company can be developed, reviewed and implemented efficiently.  This schedule will also be a valuable dynamic tool for presentation to internal stakeholders that addresses the impact of BEPS.

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OECD / UN

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The Davis Tax Committee: BEPS Report

The Davis Tax Committee has released its First Interim Report on Base Erosion & Profit Shifting (BEPS), including an introductory document and comprehensive analyses of the following BEPS Action Items:

  • 1, Digital Economy
  • 2, Hybrid Mismatches
  • 5, Harmful Tax Practices
  • 6, Treaty Abuse
  • 8, Transfer pricing re: intangibles
  • 13, Transfer pricing documentation
  • 15, Multilateral instrument
  • Summary of recommendations

The Committee’s objective is to assess South Africa’s tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability.  Links to the Media Statement, Davis Tax Committee’s website and Report are provided for reference:

Click to access 20141223%20Davis%20Tax%20Committee%20Media%20Statement%20-%20Release%20of%20BEPS%20Report%20for%20Public%20Comment.pdf

Comments by all interested parties should be submitted by 31 March 2015.

The documents are a valuable reference in comprehending each of the OECD BEPS Action Items of the Report, not only the viewpoint of S. Africa.  Most importantly, it outlines the tax policies for continued foreign direct investment balanced against BEPS and General Anti-Avoidance Rule (GAAR) initiatives, while providing tax transparency and certainty with a balanced, sustainable tax policy going forward.

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Tax Risk Management

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UK: “Aggressive tax planning” consultation paper

HMRC has published draft rules, entitled “Tackling aggressive tax planning,” to give effect to OECD’s BEPS Action 2 item, Neutralising the Effect of Hybrid Mismatch Arrangements.

The legislation will be effective as of 1/1/2017, preceded by this consultation paper, a summary of responses in summer 2015 and a second consultation on proposed draft legislation prior to its introduction in a future finance bill.  Interested parties have until 11 February 2015 to provide comments for this consultation.

The draft legislation is envisioned to follow the OECD guidelines, and commentary, that are due to be completed by September 2015.  A copy of the consultation paper is provided for reference:

Click to access tackling_aggressive_tax_planning_hybrids_mismatch_arrangements_consultation_final.pdf

Key observations:

  • The primary and defensive rules, as provided by the OECD BEPS Guidelines will be followed.  The primary rule will be used to deny the payer’s deduction for a deduction/no income inclusion arrangement of a hybrid financial instrument or disregarded payment made by a hybrid entity, while the defensive rule would include taxing the income by the payee.  For a double deduction arrangement of a deductible payment made to a hybrid entity, the deduction by the investor’s parent jurisdiction is denied using the primary rule, while the defensive rule would deny the payer deduction.
  • Rules will be considered to restrict the tax transparency of reverse hybrids.
  • The UK anti-arbitrage rules will not likely be retained.
  • The definition of an “arrangement” will not be the OECD version, as the existing UK definition would be used to achieve the same result.
  • Timing differences are not included, unless it appears that they will not unwind within a reasonable (5 years) time period.
  • The mismatch rules will apply for intra-UK and cross border situations.
  • For mismatches as a result of both a hybrid financial instrument and a hybrid entity, the hybrid financial instrument rule applies first.
  • Amended corporation tax returns and/or MAP procedures are permissible if the original mismatch no longer exists.
  • Tax treaties will not prevent the application of the recommended domestic laws to neutralise the effect of hybrid mismatch arrangements, thus no treaty amendments are necessary to apply the mismatch rules.
  • No grandfathering rules are envisioned, as the advance announcement of the UK rules will provide a transitional period to unwind structures.
  • The hybrid mismatch rules will operate within the UK’s self-assessment regime.

As stated in the Foreword of the consultation document, the UK’s strategy is to create the most competitive tax environment in the G20 and has led the way, driving the international tax, transparency and trade agenda forward.

The consultation paper is comprehensive, with numerous examples provided to illustrate, and visualize, the impact of the proposed rules.  This proactive measure should be monitored to see how other countries follow the UK’s lead for taxing mismatch arrangements, including the timing and incorporation of the final guidelines by the OECD in 2015.

 

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Transfer Pricing

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APAC: BEPS Best Practices by tax administrations

The Study Group on Asian Tax Administration and Research (SGATAR) met recently in Sydney, resulting in the creation of a new task force for the Asia-Pacific region to collaborate on OECD BEPS initiatives while enabling cooperation to develop cohesive tax systems in each jurisdiction.  A link to the Communique is attached for reference:

https://www.sgatar2014.org/media/communique

SGATAR 2014 brought together almost 200 delegates, including representatives from the Asian Development Bank (ADB), Inter-Amercian Center of Tax Administrations (CIAT), Asia-Oceania Tax Consultants’ Association (AOTCA), International Bureau of Fiscal Documentation (IBFD), OECD and the World Bank Group (WBG).

SGATAR members include the following jurisdictions: Australia, Cambodia, People’s Republic of China, Hong Kong SAR, Indonesia, Japan, Republic of Korea, Macao SAR, Malaysia, Mongolia, New Zealand, Papua New Guinea, The Philippines, Singapore, Chinese Taipei, Thailand and Vietnam.

Best Practice observations:

As each of these countries propose unilateral legislation, it should be closely monitored as it may well form a foundation of Best Practices  and SGATAR collaboration for the Asia-Pacific region.  A recent example of potential early guidance is Singapore’s transfer pricing documentation paper by the Inland Revenue Authority of Singapore; (refer to my earlier post of 31 October 2014).

The Asia-Pacific regional approach is worth watching to discern trends that may vary from the OECD BEPS Guidelines, forming additional complexities and different interpretations for international tax norms.

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OECD / UN

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Russia: New CFC & Beneficial Ownership rules

Russia has introduced legislation defining a “beneficial owner” and the introduction of CFC rules, expected to be effective 1/1/2015.  PwC has provided a summary of the changes, referenced herein.

Click to access pwc-russian-anti-offshore-law-changes-russian-treaties.pdf

Key observations:

  • Treaty benefits will not apply if the foreign person has limited powers to dispose of the income or fulfill intermediary functions and do not perform any other duties or undertake any risks, or the income is subsequently transferred to another person who would not be entitled to treaty benefits if they had directly received the income.
  • Foreign corporations, trusts, partnerships and funds which hold property subject to Russian property tax are required to notify the Russian tax authorities of their shareholders and founders, beneficiaries and managers.  A 100% penalty tax may apply for noncompliance.
  • A legal entity may now be a Russian tax resident based on its place of management.
  • Russian tax individuals and legal entities must pay Russian tax on a CFC’s retained earnings if the CFC has not paid a dividend, subject to thresholds.  No penalty is applicable for 2015-2107.

Persons with Russian property and legal interests should review this important legislation to understand the new reporting rules and regime for CFC’s and beneficial ownership.  The law follows the intent of the OECD’s BEPS provisions to prevent tax avoidance via tax havens and low-tax jurisdictions.

 

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Transfer Pricing

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OECD BEPS Strategy for Developing Countries

The OECD has released its plans for developing countries to play a greater role in its BEPS initiatives.  A link to the OECD release is attached:

http://www.oecd.org/newsroom/developing-countries-toplay-greater-role-in-oecdg20-efforts-to-curb-corporate-tax-avoidance.htm

Summary:

  • Three-part strategy
    • Attendance at meetings by 10 developing countries, including Albania, Jamaica, Kenya, Peru, Philippines, Senegal and Tunisia.
    • Five regional networks of tax policy and administration officials will be established for coordination and dialogue on BEPS issues.  The regional focus includes developing countries located in Asia, Africa, Central Europe, Middle East, Latin America / Caribbean and Francophone regions.  The regional network will also be a forum for developing countries to discuss negotiation and implementation of the multilateral instrument under Action 15 of the BEPS Project.
    • BEPS toolkits to be developed for practical implementation and capacity building.
  • A two-day workshop is scheduled in December 2014 that will allow developing countries to discuss practical aspects and their priority issues.

Developing countries generally have less resources, experience and training to implement BEPS effectively, therefore this initiative should be monitored to determine ultimate success of the BEPS initiatives around the world.

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OECD / UN

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OECD BEPS 2014 Deliverables

The OECD has published its 2014 deliverables, referenced at the following link:

http://www.oecd.org/ctp/beps-2014-deliverables.htm

I would encourage all interested parties to thoroughly review the provisions, as well as listen to others as they comment on these significant proposals.

Note that the proposals are not yet enacted into law, which is a focus of the action to provide a multilateral instrument to help facilitate that objective.

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OECD / UN

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IMF Policy Paper: Int’l Tax Spillover Effect

The International Monetary Fund (IMF) has published an interesting paper addressing the impacts that current, and proposed, international tax legislation has on others.  Selected key issues include tax treaties, indirect transfers of interests, interest deductibility, arm’s length pricing, formulary apportionment, treaty shopping, and appendices of tables and statistics.  The paper also highlights guiding principles for international tax design, timely concepts as the OECD is preparing to publish responses to several of its BEPS Action Plan items this coming week.

The paper can be referenced at:

Click to access 050914.pdf

The paper is valuable in addressing tax policy topics and issues, thereby setting the stage for future international tax debates.

 

 

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Transfer Pricing

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Best Practice TP article: TP documentation: time for a strategy refresh

I have attached for reference my first published article, addressing transfer pricing documentation: time for a strategy refresh.

The article was published by Accountancy Magazine.  A reference to the article is included for reference:

https://www.accountancylive.com/transfer-pricing-documentation-time-strategy-refresh

The article addresses the OECD BEPS proposals, including country-by-country reporting, with Best Practice ideas included for Action Plan items.

Additionally, insights into processes for developing a comprehensive plan for revised TP documentation are discussed.

Finally, the hot topics of General Anti-Avoidance Rules (GAAR), local tax disclosures and tax policy statements are addressed for further insight.

 

 

 

 

 

 

 

 

 

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Transfer Pricing

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OECD BEPS & EU Case Law: Uncertainty ahead

PwC has published a very informative article addressing the impact of EU case law, exemplified by cases from the Court of Justice of the European Union, on the OECD BEPS international tax proposals.  There may be additional uncertainty by EU Member States after the OECD BEPS measures are announced due to the “fundamental freedoms” in the Treaty on the Functioning of the European Union (CJEU), State Aid principles and the EU direct tax initiatives, including the Parent-Subsidiary Directive.  The link to the article is included for reference:

Click to access pwc-eu-beps-july-2014.pdf

The article provides excellent references to current EU Law concepts, including the basic premise that domestic legislation must be compliant with EU law.  Additionally, the OECD proposals for hybrid mismatch transactions, tax treaty abuse and harmful tax practices are discussed against the backdrop of EU legislation.

The article concludes with the takeaway: “The implementation of OECD BEPS proposals within the EU/EEA Member States will only be possible to the extent that those proposals are also compliant with EU Law.  So far, however, little attention seems to have been paid to potential EU Law issues in the OECD’s draft discussion papers, so that EU/EEA Member States might actually risk breaching EU Law.  As a result, companies doing business in the EU/EEA will be faced with legal uncertainty about the lawfulness of implemented OECD BEPS proposals in domestic law or tax treaties.”

As an additional observation, there is a likelihood that the domestic legislation enacting OECD BEPS proposals will not be consistent for each Member State, thereby the legal uncertainty should be reviewed for each Member State as domestic legislation and OECD proposals are implemented.

 

 

 

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OECD / UN

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Transfer pricing documentation & BEPS: Refresh strategy

As time is of the essence for various OECD BEPS proposals to be made public, the interim time gap may be an excellent time to refresh global transfer pricing documentation strategies.  Several questions that may be addressed in a transparent and critique perspective include the following:

  • Have each of the BEPS proposals been matched to current TP methodology, questioning the future state of global TP documentation?
  • For current cooperative compliance relationships, is a discussion contemplated / scheduled to discuss the potential impacts of BEPS on the ongoing ways of working, including TP documentation?
  • Are future cooperative compliance relationships in focus, aligned with BEPS initiatives, especially among countries seeking unilateral legislative actions re: General Anti-Avoidance Rules (GAAR) implementation, etc.?
  • Are the attributes of a GAAR, including a taxpayer’s responsibility for GAAR compliance, being considered globally and /or in local country files?
  • Should compliance roles and responsibilities of TP compliance change re: internal / external resources due to BEPS with additional complexities envisioned?
  • If a Master File and Local Country file methodology is not currently in place, will there be a global and/or regional shift to such methodology?  What is the proposed timing for change?
  • Are the local tax return disclosures re: TP aligned with that country’s TP documentation?
  • What tax team / TP resources are being aligned to address the BEPS initiatives and proposed documentation?
  • Are tax policy statements of the Tax Risk Framework being reviewed for desired TP transparency?
  • Have there been “idea” meetings to discuss next steps in a creative atmosphere?

A BEPS / TP review will be valuable in aligning future vision, flexibility and transparency in today’s volatile atmosphere of TP assumptions and perceptions.

 

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Transfer Pricing

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Meeting of G5 Ministers: Tools to fight tax fraud & evasion

The Governments of France, Germany, Italy, Spain and the UK (G5) held a meeting on 28 April, 2014 to discuss progress on their mutual objectives to promote tax transparency and cooperation, fight tax fraud and evasion, counter harmful tax practices and respond to aggressive tax planning practices.  The following link provides detailed actions that were discussed:

Click to access Comunicado%20del%20G-5%20sobre%20reunión%20en%20Par%C3%ADs%2028%20abril%202014%20en%20inglés.pdf

Summary of discussions:

  • Agreement to sign the Automatic Exchange of Information (AEOI) agreements in alignment with the new, single, global OECD standard, joining 39 other jurisdictions that will effect exchange of information in 2017 with respect to 2015 data.
  • Reiteration of support to the OECD Base Erosion and Profit Shifting (BEPS) project.
  • Re: taxation of digital economies, the countries where companies conduct economic activities must be able to receive their “fair share” of tax.  To align this initiative, the G5 Ministers agreed on the interest of a flexible interpretation of the territoriality rules, including a Digital Tax Presence concept.
  • Transfer pricing rules must be adapted to ensure that profit and value creation are aligned, citing economic justification.
  • Tax avoidance re: hybrid mismatch arrangements should be addressed.
  • Country-by-Country (CbC) reporting is important, as it should provide all relevant tax administrations with the information necessary to complete a high level risk assessment.
  • OECD BEPS developments must be reflected at the EU level, encouraging review of the EU law and its impact on aggressive tax planning practices.

The conclusions set forth are significant for the following reasons:  Proposal by the G5, EU focused, collaborative discussions and agreement re: “fair share” of tax alignment, economic justification profit / value drivers, and a presumption that CbC reporting will provide information to complete a relevant risk assessment.

These initiatives should be monitored in alignment with the OECD BEPS proposals set forth for 2014 and 2015.

 

 

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OECD / UN

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EU Policy Paper: Beneficial Ownership transparency

The EU Policy Paper, issued by Transparency International, is entitled :”Fighting Money Laundering in the EU: From Secret Ownership to Public Registries.”  The stated objective is to provide company ownership information freely available as a shared objective in the public interest.  The Policy Paper is referenced herein:

Click to access TI-EU-Policy-Paper-Beneficial-Ownership.pdf

The primary objective of this initiative, as stated in the Policy Paper, is: “To keep a level playing field and maximize their benefit, public registries must be made public in all EU Member States as well as internationally.”  The ultimate Beneficial Owner is to provide detailed information.  This recommendation is pursuant to a review of the 3rd EU Anti-Money Laundering Directive, forming a basis for the 4th EU Directive.

As a Best Practice, this initiative should be monitored from a tax policy perspective in alignment with the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan steps, as well as similar trends meant to uncover complex and non-transparent ownership schemes.  It is noted that the EU Policy Paper is meant to extend the transparency reporting internationally, not only for EU Member States.

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Tax Risk Management

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