EY’s Global Tax Alert provides a succinct summary of the latest OECD and BEPS developments, including:
G20 and exchange of information upon request standard
Multilateral instrument, 68 countries moving forward
Peer reviews on BEPS 4 minimum standards:
Action 5, harmful tax practices
Action 6, treaty abuse
Action 13, country-by-country reporting (CbCR)
Action 14, dispute resolution
Action 5 peer reviews of preferential tax regimes
Action 13, CbCR exchange relationships; important for US MNE’s and similar jurisdictions without obligatory 2016 reporting
MAP peer reviews
Discussion drafts on profit splits and attribution of profits re: PE’s; comment period to Sept. 15, 2017
Branch mismatch forthcoming revisions
Common reporting standard
OECD is still very busy, with a plethora of BEPS follow-up and other activities, although there seems to be continuing flexibility to gain collaboration that will also lead to added complexity and disputes.
The OECD has introduced a new inclusive framework inviting all interested countries to address international tax rules ongoing. All interested parties will be able to participate as BEPS Associates via the OECD’s Committee on Fiscal Affairs (CFA), thereby have equal participation as the OECD and G20 members including review and monitoring of BEPS implementation.
Indicative of the posture going forward, OECD Secretary-General Angel Gurria stated “It is another strong signal that behaviour which was considered both legal and normal in the past will no longer be accepted.”
This OECD proposal will require endorsement by the G20 at the meeting in Shanghai on 26-27 February, with the first meeting of the inclusive framework members in Kyoto, Japan on 30 June and 1 July 2016.
Links to the OECD press release and summary document are provided for reference.
This new framework would mark another major milestone in the BEPS story; with hopes that global coordination and consistency will be enhanced vs. numerous voices protecting their fiscal growth, thereby adding additional complexity and unilateral actions around the world.
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.
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.
The press release cites the urgency of such legislation, while also stating that such initiatives will be consistent with the OECD BEPS Actions.
The UK’s new tax still has more questions than answers, and it is hopeful that Australia and members of the G20 will await OECD’s final guidance on BEPS initiatives and align any new tax with comprehensive documentation prior to issuance. Additionally, it will be interesting to note the trend away from citation of the well recognized arm’s length principle toward a concept of economic value and significant people functions.
The OECD has updates available with respect to Action 5 (Intangibles), Action 15 (Multilateral instrument) and Action 13 (Country-by-Country reporting – refer to prior post of 6 Feb. 2015). Links are provided for the OECD’s statement of intent addressing these three actions in particular.
The Modified Nexus Approach is generally accepted.
30% uplift of qualifying expenses re: outsourcing and acquisition costs in addition to significant R&D activities of taxpayer.
Existing regimes will be closed by 30 June 2016 to new entrants; legislation to be effected in 2015.
Grandfather rules for existing regimes may extend 5 years (i.e. 30 June 2021).
Methodology of tracking / tracing R&D expenditures will be developed.
Guidance to be issued re: definitions; patents qualify, whereas trademarks do not qualify.
Summary – Action 15 (Multilateral Instrument):
The intent to develop a multilateral instrument to implement specific BEPS Actions is still desirable and feasible.
The instrument will be designed to implement treaty-related measures of the BEPS Project.
Several BEPS Action items that are known to be inclusive are Action 2 (Hybrid entities), Action 6 (Treaty abuse), Action 7 (PE) and Action 14 (Dispute resolution). Other Action items may be included after final guidance is developed, including a mechanism to exchange information for country-by-country reporting.
Each Action item may be optional, or there may be a minimum number of Actions that a country will have to execute.
The instrument is not compulsory and is open to all jurisdictions.
Development of the instrument will be accomplished by an ad-hoc group that is under the aegis of the OECD and G20.
Outputs are expected Sept. 2015, with final development of the instrument concluded by 31 Dec. 2016.
The timing of 31 Dec. 2016 will be critical to monitor, as many countries may decide to develop unilateral legislation prior to this date. It is hopeful that tax administrations will not try to (informally) implement BEPS guidelines prior to the time that effective legislation is executed.
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:
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.
The G20 has provided a set of guiding principles re: definition of “beneficial owner” in its efforts to improve transparency and address abuse. A link to the principles is provided:
The principles are a proactive effort by the G20 to identify the ultimate ownership / control of legal entities, provide such information in a mechanism that allows sharing by tax authorities and competent authorities, as well as assessing risk of legal structures and designing actions to fight abuse.
The principles should be compared to the new definition and guidance re: “beneficial owner” provided for the update to the 2014 OECD Model Convention (refer to 22 July 2014 post), which conveyed that the term should be understood in its context and in light of the object and purposes of the Convention including avoiding double taxation and prevention of fiscal evasion and avoidance.
The focus on “Beneficial Ownership” is increasing, thereby increased diligence re: documentation to address transparency and benefits of current legal structures should be a top priority for MNE’s.
OECD – Tax Administration 2013
This is a unique reference source of high level comparative information on aspects of tax administration system design and practice covering the world’s major revenue bodies. This edition updates performance-related and descriptive material contained in prior editions with new data and supplements this with new features including coverage of 3 additional countries (i.e. Brazil, Columbia, and Hong Kong (China). For the first time, this edition of the series includes comparative information on all 34 member countries of the OECD, the EU and, the G20, as well as certain other countries (e.g. Singapore and South Africa). New subject covered in this series include: 1) a description of how revenue bodies engage and support tax intermediaries. In addition, the series includes extensive description of organizational reforms underway in many countries to improve efficiency and effectiveness, for many in an environment where public sector funding is being significantly reduced.
Institutional arrangements for tax administrations
Organisation of revenue bodies
Human resource management and tax administration
Tax administration and tax intermediaries
As the concept of co-operative compliance becomes more commonly practiced, this reference is a valuable contribution to form Best Practices for tax administrations.
Additionally, it is useful for MNE’s to review and gain a better understanding of the issues faced by tax administrations, with a proactive effort needed to form a win-win opportunity to achieve a fair and consistent international tax framework.
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.
The International Bar Association’s Human Rights Institute (IBAHRI) Task Force on Illicit Financial Flows, Poverty and Human Rights was convened to reflect upon these pressing questions from the perspective of international human rights law and policy. This innovative report:
provides a detailed overview of tax abuses and secrecy jurisdictions
investigates the links between tax abuses, poverty and human rights
draws on case studies from Brazil, Jersey and the SADC region
evaluates responsibilities and remedies to counter tax abuses affecting human rights
delivers unique recommendations for states, business enterprises and the legal profession
For the purposes of this report, tax abuses include the tax practices that are contrary to the letter or spirit of domestic and international tax laws and policies. They include tax evasion, tax fraud and other illegal practices − including the tax losses resulting from other illicit financial flows such as bribery, corruption and money laundering. The term ‘tax abuse’ also includes tax practices that may be legal, strictly speaking, but are currently under scrutiny because they avoid a ‘fair share’ of the tax burden and have negative impacts on the tax revenues and economies of developing countries.
This report covers developments in international tax cooperation on issues such as automatic exchange of information, and base erosion and profit-shifting. It also assesses trends in international development policy which are increasingly focused on strengthening good tax governance in developing countries – thereby reducing dependency on foreign aid and improving development outcomes. It demonstrates the evolution of international human rights law and policy, whilst highlighting tax abuses as a pressing human rights concern.
The Task Force’s goals and objectives are:
1. To publish an innovative report containing findings and a set of recommendations on the interaction between illicit financial flows, poverty and human rights.
2. To widely disseminate the report with the view of pushing the issue of tax evasion and human rights onto global policy agendas, and sustaining discussion thereafter.
3. To incite multi-level policy changes in the area of tax evasion and economic, social and cultural rights adjudication to help end global poverty.
The report cites the following topics for relevance in its comprehensive discussion:
OECD BEPS Action Plan
OECD Anti-Bribery Convention
OECD “Tax Inspectors Without Borders” initiative (refer to 9 June posting)
G8 and G20 countries
US FATCA rules
US Dodd Frank legislation
UK House of Commons
UN Guiding Principles on Business and Human Rights
EU Accounting and Transparency Directives
Extractive Industries Transparency Initiative (EITI) (39 countries have signed up)
This report provides interesting insights into the complex relationship of international taxes and non-tax principles and objectives, for which all international tax executives should be aware. Appendices of the report provide suggested recommendations for States, international business and the legal profession to help combat today’s conflicts.
OECD’s report to the G20 leaders in St. Petersburg, Russia is attached for reference, consisting of a Progress Report to the G20 in Part I, and details of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan and offshore tax evasion efforts in Part II. This posting will capture some highlights from the report, and pose analogies for Best Practices in alignment with the OECD’s initiatives. The report may be accessed at:
The Introduction provides commentary on “legal tax avoidance,” renewed demands for greater transparency, calling for all taxpayers to pay their fair share, and completion of a global model for automatic exchange of information by 2014.
Initiatives of the Global Forum on Transparency and Exchange of Information (the Global Forum) have resulted in 119 jurisdictions committed to standards of transparency and exchange of information. Best Practices includes communicating results of the Global Forum to global and regional tax teams, and business leaders, to ensure that global consistency of information is being provided to tax authorities.
The Global Forum promotes exchange of information via a monitoring and peer review process. The process includes Phase 1 reviews, examining a jurisdiction’s legal framework for exchange of information, and Phase 2 reviews that examine information exchange in practice. How well does the exchange of information process work for Multinational Enterprises (MNEs)? Is this report, with a schedule of subsequent discussions on its impact, automatically sent to all tax team members, or is each individual personally responsible for accessing, reading and comprehending the report, including Phase 1 and Phase 2 reviews?
Peer reviews result in recommendations for improvement, with all jurisdictions required to provide follow-up reports describing actions taken. Re: global audits, are recommendations for improvement provided during, and after, the audit, with action steps documented?
The Global Forum has organized four training seminars in 2012, and five training seminars this year, in addition to implementation toolkits. Appendix 4 of Part 1 provides a listing of members and observers, inherently resulting in potential impacts for these proposals beyond the OECD member countries. How many training forums and business tools have been provided by MNEs in the last two years to review the ongoing trend of global tax proposals?
Part 2 lists the 15 activities of the BEPS Action Plan to be addressed by all relevant stakeholders. For analogy, has the MNE also listed those same activities, addressing potential impacts, risk quantifications and expected actions for each of the proposals, including a relevant timeline and accountability? Are all international tax team members and business leaders aware of the BEPS Action Plan?
Automatic exchange of information is becoming the norm, versus the exception, for tax authorities around the world. How are tax changes, audit queries, changes in tax laws, etc., communicated within the MNE enterprise quickly and efficiently? Is a tax newsletter communicated to the global business, addressing areas of focus and learning?
Annex 2 of the Progress Report outlines a model of multilateral automatic exchange of information designed to implement a step change in transparency. This section is useful in addressing future legislative changes, draft model competent authority agreements, legal / confidentiality concerns, and legal bases for the exchange of information. MNEs should track public comments and future changes of OECD member countries and observers to address these initiatives.
The highlights of the OECD G20 Report, and suggested comments for Best Practices, are meant to promote creative thought and reflection to effectively plan for the rapid evolution of change in the international tax arena.
This link provides access to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters prescribing procedures for the exchange of information between tax authorities, in addition to press releases and related documents.
The Convention, and its provisions, are becoming more important with increased tax transparency and sharing of Best Practices among tax jurisdictions. The Multilateral Convention, as well as factors leading to its current and future importance provide valuable context in understanding the current state of affairs, and intentions to increase the exchange of information worldwide.