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.
HMRC is taking a unilateral proactive lead in devising measures based on OECD BEPS initiatives that introduce a diverted profits tax, as well as country by country (CbC) reporting for UK headquartered MNE’s. A Tax Journal summary provides a summary of the diverted profits tax, which is linked herein, in addition to the HMRC source articles for application of the diverted profits tax and CbC reporting.
This measure will introduce a new 25% tax (regular tax rate plus a punitive component) on diverted profits. The diverted profits tax will operate through two basic rules. The first rule counteracts arrangements by which foreign companies exploit the permanent establishment rules. The second rule prevents companies from creating tax advantages by using transactions or entities that lack economic substance. The proposal will be effective as of 01 April 2015.
The main objective of the diverted profits tax is to counteract contrived arrangements used by large groups (typically multinational enterprises) that result in the erosion of the UK tax base.
The publication allows regulations to be issued re: CbC reporting for UK-based companies after the OECD publishes guidance on how the reports should be filed and how the information in them may be shared between relevant countries, and after a period of consultation in the UK.
After issuance of the hybrid mismatch rules (post of 7 December 2014) that patiently await the final OECD guidelines for consensus in its guidelines, the diverted profits tax mechanism will be in effect next year prior to final OECD guidelines and subject to other countries following a similar early unilateral lead as incentivized by the BEPS initiatives.
The CbC reporting is addressed at UK-based MNE’s, while presumably non-UK based MNE guidance for such reporting will be also be issued in the near future.
These initiatives may target legal mechanisms that the taxpayer will need to defend aggressively, while advancing preparation for timely compliance for CbC reporting. Additionally, other countries may use this information via automatic exchange of information to assist in transfer pricing risk assessment. The initiatives should be reviewed in detail to better understand the rules, and trends, for these proposals.
As the OECD is developing new guidelines to address transfer pricing (TP) risk, including the Country-by-Country (CbC) template, a lack of emphasis resides in the idea that every tax audit involving cross-border issues should require an opening discussion between the taxpayer and the tax authorities of the business, its relevance in that jurisdiction apart from its global business, the functions, assets and risks for that jurisdiction upon which the arm’s length principle is based, and the rationale for the level of income/loss generated during the audit years.
Transfer pricing documentation reports, including a local country report, may be available for review. However, such reports may not simply convey the business rationale easily to form an accurate understanding prior to embarking upon a leap into technicalities and assumptions to initiate data requests and move forward on assumptions prematurely. For example, a company investing in a less developed country seeking long-term growth based on the domestic opportunity may have start-up losses, although such losses may be significantly offset by potential future income.
The open audit discussion should be developed into a Best Practice Ways of Working framework which is discussed and signed by the taxpayer and tax authorities. This framework should be a simple and practical document addressing open dialogue, preliminary discussion of issues designed to produce the relevant documentation, timelines for requesting and providing information and a continuing dialogue discussing the status of open issues and requests, with a mutual effort to resolve issues efficiently.
To the extent this simple idea could be integrated consistently and uniformly around the world, it is a challenge worth addressing.
The Best Practice Ways of Working Framework could be a very effective and practical tool, supplementing the technical and legal requirements for transfer pricing.
The OECD has published comments in response to its Base Erosion and Profit Shifting (BEPS) Action Plan 11, methodologies for collecting and analyzing BEPS data. A link to the comments is attached for reference:
The comments are valuable in assessing current perceptions and trends by interested parties, none of which are multinationals. It is interesting to read comments re: public disclosure of country by country reporting information, etc. and the transparency which today’s environment is demanding. The rapid change and volatility of international tax rules, especially transfer pricing, are leading to a tsunami effect, with the roar of its crashing waves extending far out into the foreseeable future.
The Inland Revenue Authority of Singapore (IRAS) has issued a consultation paper requesting comments on a revision to their transfer pricing (TP) guidelines. The particular questions for which comments are requested, no later than 24 September, consist of the following:
Challenges in preparing TP documentation contemporaneously
Difficulties in obtaining group and entity information in Annex A of the paper
Examples of low-risk documentation areas
Frequency of documentation updates
A link is provided for reference to the consultation paper:
TP documentation to be organized in alignment with the OECD master file and local entity reporting methodology.
TP documentation not applicable for routine services with a 5% safe harbour mark-up
Inadequate TP documentation will lose the support of IRAS in MAP discussions to resolve double taxation.
Annex A provides additional requests for group information that may be the source of requested comments, including:
Worldwide organization chart
Group’s business models and strategies
Profit drivers, including a list of legal ownership for intangibles
Supply chain activities and functions
Business relationships among all related parties
Group’s transfer pricing policies for all types of transactions between related parties
Consolidated group financial statements
Singapore is a jurisdiction (and there may be many more) that is reviewing the OECD’s Action Plan country-by-country reporting template and forthcoming comments as a base upon which to expand TP reporting.
Multinationals will need to capture every country’s additional legislative requirements arising from the OECD’s Action Plan. The additional complexity, cost and time will place a further constraint upon the ability to provide information perceived to be directly relevant for every jurisdiction around the world. Additionally, the threat of lack of support for the MAP process via a determination of inadequate TP documentation (if legislated into law) will increase the risk of double taxation and TP appeals worldwide.
All interested parties should take time to submit comments prior to the 24 September deadline.
The OECD has provided further observations on its country-by-country information template, based on the premise such information is a useful guide in the risk assessment of transfer pricing for relevant jurisdictions. KPMG has provided a summary of the latest notes by OECD on this topic:
As this important initiative develops into final form, additional questions that may be asked include:
Will this information only be provided to tax authorities both currently and in the future, versus subject to public disclosure? Will the OECD and/or separate countries’ provide for such legal assurance?
Should tax authorities be requested to share results of a risk assessment, based on this data, with the taxpayer prior to any assessments to ensure facts are aligned to promote efficiencies upon assessment, and potentially in domestic or treaty based appeals? A possible Best Practice for adoption?
How will relevance of the global information impact discussions and determinations in the relevant jurisdiction upon audit?
Is a post-adoption survey planned to compare expectations with actual results, providing flexibility for ongoing changes as a risk assessment tool?
To the extent that a country has adopted, or will adopt, different rules for global reporting, will the rules prescribed by OECD override, or supplement, domestic law? What (legal) mechanisms will be put in place to align expectations for domestic and international rules?
What alignment is planned for countries utilizing the UN Model Convention?
Will this tool be used differently for co-operative compliance engagements and/or joint audits?
Many other questions should be carefully considered, looking at both immediate issues for implementation and long-term effects for taxpayers and tax administrations.
From a OECD perspective, Would penalties be applicable when a Country-by-Country (CbC) template is not completed, if such information is part of the Transfer Pricing Master File?
The Australian Tax Office (ATO) has already started its process to collect similar information as the CbC template, with 125 review notification letters to be sent to taxpayers, requesting detailed international data and a presentation to the ATO.
The ATO review would include details of global corporate value chains, including sales, profits, and taxes paid in every jurisdiction, payments to / from low tax jurisdictions, e-commerce and tax risk governance. The ATO should ensure that confidential information is only shared with other tax authorities in alignment with confidentiality protocols judicially established in each respective jurisdiction. Additionally, it will be interesting to note how such information is defined, or not defined, by the ATO to ensure information that is collected from taxpayers will be consistent for analyses.
These actions bring forth additional questions re: the OECD proposals, the ATO’s response and advance warnings to taxpayers of how such information will be collected and provided in advance of the OECD’s timelines. To the extent procedures are enacted by taxpayers to collect such data, while the OECD and other tax authorities provide different rules, definitions and timelines, it will substantially increase time and cost by multinationals to respond to multiple initiatives.
Another point of consideration is the symmetry of ATO’s CbC request with that of the OECD: Will the ATO change their rules to coincide with that of the OECD when such rules are issued, and will the separate country’s legislation trump / override the OECD’s final recommendations?
The Tax Executives Institute (TEI) has commented on the OECD Transfer Pricing Documentation and Country by Country Reporting (CbC) discussion draft.
TEI has provided strategic and logical arguments in response to requested comments by the OECD for transfer pricing documentation and CbC reporting. One of the exemplary comments put forth is that the CbC reporting template should be the last item for completion, based upon actions of the other items, to achieve maximum efficiency, relevance and avoidance of duplication in work efforts.
The TEI comments should be read by all multinationals and interested parties to further understand the business rationale and inherent complexity of the OECD proposal that may lead tax authorities to deviate from the arm’s length principle based solely on the CbC information provided.