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
- Digital taxation
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.
UK and Australia have formed a joint working group to develop initiatives re: “diverted profits” by MNE’s.
A copy of the press release is attached for reference:
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.
Summary – Action 5 (Intangibles):
- 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.