EY’s Global Tax Alert details several important global developments worth watching:
Phase 2 US tax reform – individual taxes, what else?
OECD’s first peer review reporting on BEPS Action 13: TP Documentation and County-by-Country (CbC) reporting (attached herein for reference)
EU Directive on cross-border reportable arrangements, reporting to commence in 2020 although effective date will be June/July 2018.
The reportable arrangements are a must read for international tax colleagues to understand the impact of arrangements planned for currently that may become a transparent arrangement to be reported in the EU.
The OECD CbC report is also helpful to understand the trend that CbC reports will generate ongoing, and the viewpoint of the countries that administer this process.
The OECD BEPS Actions, including CbC reporting, significantly impact international tax compliance burdens and challenges going forward. Additionally, US tax reform still has experts deliberating their practical application, notwithstanding future legislation.
The OECD, in its June release of country-by-country (CbC) guidance, sets forth guidance of BEPS Action 13 re: parent-surrogate reporting that includes the US, Japan and tentatively Switzerland, for which there are no obligatory filing requirements for the calendar tax year 2016.
However, several countries have previously enacted legislation that may not literally accommodate such rules (i.e. voluntary filing to a parent surrogate). To the extent there is this possibility, will the parent surrogate country indemnify such taxpayers for non-filing penalties, etc. imposed by another country for failing to file according to its specific legislation? Alternatively, a detailed review of the specific legislation of all countries adopting CbC is in order. Simplification of CbC filing is the intent of the OECD Guidelines, however additional assurance would be welcome by the parent surrogate countries to support this presumption.
EY’s Global Tax Alert provides the latest BEPS developments for the OECD, EU, Israel, Netherlands, Portugal, South Africa, Sweden, Switzerland, Uruguay and Chile. Brief extracts are provided, with Best Practice comments, with the Tax Alert provided for reference:
Bermuda signed the Multilateral Competent Authority Agreement for the automatic exchange of Country-by-Country reports (CbC MCAA), becoming the 33rd signatory of this instrument.
On 19 April 2016, the OECD released a communiqué announcing that together with the International Monetary Fund (IMF), the United Nations and the World Bank (collectively referred to as the “International Organizations”) have joined efforts to boost global cooperation in tax matters. The joint initiative, named “Platform for Collaboration on Tax” or simply “the Platform,” aims to produce concrete joint outputs and deliverables under an agreed work plan, strengthen dynamic interactions between standard setting, capacity building and technical assistance, and share information on activities more systematically.
The Platform will work on:
Developing appropriate tools for developing countries
Supporting developing countries to participate in the implementation of BEPS
Building effective tax systems and building awareness
Providing a venue for information sharing
The first of the toolkits addresses tax incentives and was issued in November 2015. The remaining seven toolkits will address the indirect transfer of assets (September 2016), transfer pricing comparability (October 2016), transfer pricing documentation (October 2016), tax treaty negotiation capacity (December 2016), base eroding payments (June 2017), supply chain management (March 2018), and BEPS risk assessment (March 2018).
The proposed amendments to the Accounting Directive would require large multinational companies operating in the European Union to draw up and publically disclose reports on income tax information, including a breakdown of profits, revenues, taxes and employees. Note, this is an Accounting Directive that provides another legislative approach to implement transparency measures in addition to proposed EU Directives and/or separate country guidelines. This is also another layer of complexity in reporting by multinational organizations, for which other countries may also adopt as part of statutory reporting that is public information. This report will also dictate a Q&A proactive approach by organisations to address perceived gaps and comments by the public. Such reporting, when finalized, should also be summarized to the Board of Directors as an alignment of their responsibilities.
The concept of “significant digital presence” has been communicated in a circular to broaden the tax net for internet activities applicable for corporate income tax and VAT purposes. Other countries have been, and will continue, embracing this subjective area of tax for additional revenue, albeit with subjectivity and avenues for additional disputes.
Portugal & South Africa:
Draft legislation adopting country-by-country (CbC) reporting has been published. To the extent any US-based multinational thinks additional time is provided due to the potential 1-year lag for US CbC reporting, such legislation demanding obligatory reporting in the parent jurisdiction should reassess future internal reporting timelines and processes.
A consultation process and draft legislation of CbC reporting for the 2018 tax year has commenced, with voluntary reporting for the 2016 and 2017 tax years.
Chile and Uruguay signed a Double Tax Treaty that embodies several BEPS concepts, such as permanent establishment (PE) and hybrid mismatch arrangements. Note, the new BEPS incentivized treaties are currently legislated in several countries, although the related BEPS guidelines may still not be finalized. Accordingly, it is relevant to cross-check countries with significant transactions with the signature of new treaties.
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.
The Australian Treasury announced its draft law encompassing country-by-country reporting (CBCR) and transfer pricing documentation.
EY’s tax publication provides relevant details in the referenced Global Tax Alert:
Conforms to OECD’s recommended 3-tier transfer pricing approach, CBCR, master file and local file. The master file and local file will need to provided, whereas the CBCR may not be necessary if the group’s parent entity jurisdiction has an information sharing agreement.
It is expected the Australian Taxation Office (ATO) will release additional guidance for the CBCR, hopefully by year-end 2015.
Increases penalties for tax avoidance and transfer pricing where there is not a reasonably arguable position by the taxpayer.
Australia has been a leader in following the BEPS Actions and putting such intent into their domestic legislation. As Australia continues to take this lead position, it is expected many other countries will follow similarly. All multinationals should continue to monitor these developments, while accelerating planning and execution for the new CBCR and transfer pricing documentation regime.
This is a valuable insight into the use of country-by-country reporting, based on a report of 26 EU-based banks. Although the reporting criteria is based on the Capital Requirements Directive IV (CRD IV), the interpolations and extrapolations indicate the trend by which such reports could be used, especially when viewed in isolation by recipients in the public domain.
A link to the report is provided for reference:
The reporting was used to test the hypothesis that profits were overstated in low tax/offshore jurisdictions, with understatement of profits in base country or major operating locations.
Unitary tax reporting/allocation was used to determine the likelihood that there was base erosion and profit shifting.
Four methods of assessing profit shifting were used to provide an overall ranking.
If existing Directive is used, it should be used consistently across all EU jurisdictions.
Turnover should include intra-group sales with reconciliation to reported group turnover.
The OECD’s template should be considered as an alternative reporting tool.
Formulary comparisons are measured and used to reapportion the profits.
This report is indicative of conclusions that may be drawn, although data is incomplete and inconclusive, from a table of reported amounts in various jurisdictions.
Most importantly, the group utilized formulary apportionment to derive an expectation of profit levels among various jurisdictions.
Accordingly, all interested parties should review this report as the OECD is nearing completion of the BEPS Action Plans and CbC reporting.
The OECD has provided additional information re: the timeline and mechanism for providing the Country-by-Country (CbC) template. A link to the document is included herein:
Summary of key points:
Master file and local file should be implemented by, and filed directly with, the relevant jurisdiction
Information to be provided for fiscal years beginning on or after 1/1/2016
Information to be filed by ultimate parent by 31 Dec. 2017 in their jurisdiction of residence
Exemption for MNE groups with annual consolidated revenues less than EUR 750M in immediately preceding year
The countries participating in the OECD / G20 BEPS Project agree that they will not require filing of a CbC report based on the new template for fiscal years beginning prior to 1/1/2016
Secondary reporting mechanism re: sharing of information between jurisdictions
Monitoring mechanism coupled with a 2020 review
The participating countries agree to:
Consistency (i.e. no additions or changes to template requirements)
Appropriate Use: No income allocation formula adjustments; CbC report adjustments are to be conceded by their Competent Authority
The guidelines are fairly short and concise, and it will be important to monitor laws in the parent jurisdiction for details of the respective filing process. Additionally, it is even more important to watch countries that are NOT participating in the BEPS Project for different timelines, information and processes to be followed for customized CbC templates that would create additional complexity and global inconsistency.