The Australian Tax Office (ATO) has published guidelines addressing general anti-avoidance rules (GAAR) for restructures of hybrid arrangements.
This guidance is a valuable reference for taxpayers not only operating in Australia, although having hybrid arrangements that may need restructuring.
https://www.ato.gov.au/law/view/view.htm?docid=%22COG%2FPCG20187%2FNAT%2FATO%2F00001%22
The EU Anti-Tax Avoidance Package included a Commission recommendation on the implementation of measures against tax treaty abuse. Specifically, this statement was issued to address artificial avoidance of permanent establishment status as stated in BEPS Action 7 Action Plan.
Re: tax treaties of Member States that include a “principal purpose test” (PPT) based general anti-avoidance rule, the following modification is encouraged to be inserted:
“Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capita l if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that it reflects a genuine economic activity or that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.”
This subjective phrase, that applies notwithstanding other provisions of the Convention, has already been used in new treaties and will proliferate as new treaties are drafted by a Member State, not necessarily with another Member State. Thereby, it is important to draft supporting documentation that will provide support for transactions against which it is aimed. This phrase will elicit additional appeals and court cases as to its meaning and / or intent for which non-consistent answers will be provided.
Questions that may be asked re: this statement:
The phrase is purposefully vague, and thereby subject to inconsistent interpretation.
It is hopeful that tax administrations will use this statement wisely to address egregious transactions rather than ordinary business transactions for which the clear intent was not an evasion of tax. This subjectivity will be important to monitor going forward to further understand subjective enforcement interpretations around the world.
The Anti Tax Avoidance Directive includes six anti-abuse measures to address tax avoidance: interest deductibility, exit taxes, a switch-over clause, general anti-abuse rule (GAAR), controlled foreign company (CFC) rules and a hybrid mismatch framework. The Directive prescribes a minimum protection for Member States’ corporate tax systems.
A summary of the anti-abuse measures is provided, based upon the European Commission’s presumption and related summary of actions to address such abuses.
Interest
Presumption: Corporate taxpayers incur interest in high-tax jurisdictions, with income reported in low/nil tax jurisdictions, thereby shifting profits.
Summary: Net (of interest income) interest expense is limited to a 10-30% EBITDA basis.
Exit taxes
Presumption: Tax residence is moved solely to benefit from a low-tax jurisdiction.
Summary: Tax on transferring assets cross-border to capture unrealized profits.
Switch-over clause
Presumption: Low-taxed income is moved within the EU to shift profits.
Summary: Foreign income is subject to a tax, with foreign tax credits, vs. an exemption.
General Anti-Abuse Rule (GAAR)
Presumption: Tax planning schemes are abusive.
Summary: Backstop defense rule for “abusive tax arrangements.”
Controlled foreign company (CFC) rules
Presumption: Income is passive and is shifted to low-tax jurisdictions.
Summary: Reattributes income to a parent company that is taxed at a higher rate.
Hybrid mismatch framework:
Presumption: Double deduction situations due to legal mismatches are being sought.
Summary: Legal characteristics of payment country carries over to recipient country.
The detailed rules, which require a unanimity of approval by the Member States, are complex and far-reaching. The breadth of the rules captures the perceived presumptions stated for each measure, notwithstanding the fact that such measures may also produce economically disadvantageous tax situations (i.e. paying interest from a low-tax to a high-tax jurisdiction), and the possibility of a Member State to legislate rules that move beyond the minimum threshold set forth.
These rules are also being legislated unilaterally outside of the EU Market, such that there may be very broad anti-abuse themes globally with each country having deviations from a general rule that will provide complexity and areas of disagreement for many years.
The comment period, that ends 20 January, will be followed by an introduction of a general anti-avoidance rule (GAAR) that is broad and subjective in nature.
The Proposal defines tax avoidance as an act (or series of acts) applied in order to receive a tax benefit, which in certain circumstances defeats the object and purpose of the tax act, provided the way of conduct in the particular case was artificial. The determination of an artificial arrangement is further elaborated on via examples, including unjustified split of an operation, involvement of intermediary entities without substance, and a measure of economic vs. tax risk, among others.
This measure should be followed closely, as it can be applied very broadly, inconsistently and subject to the tax administration’s view of what is considered “artificial.” It also is focused on the use of holding companies without substance. EY’s Global Tax Alert provides further details on this development.
Jurisdictions are legislating global tax disclosure statements as a separate filing requirement or included with the respective local corporate income tax return. Recent examples seem to highlight this new initiative, including France and Chile. Examples of information requested include entities with legal ownership of IP, entities that have no assets or substance (i.e. holding companies), etc., irrespective of intercompany transactions with the local entity.
These new disclosures have added additional risks for operational compliance, as well as a need to centralize such information. Some multinationals (MNEs) have placed this compliance responsibility with a local / regional team for efficiencies. However, this new reporting trend will require closer coordination of headquarters that has relevant knowledge of the global ownership of IP and legal structures.
Answers to these dislosure questions will pose new audit risks as tax administrations will make further inquiries and/or initiate an audit to assess potentially high risk transactions. This emphasis will include a vigorous challenge to treaty based positions with holding companies, including any general anti-avoidance or anti-abuse rules within the treaty or domestic legislation.
Additionally, audit queries based upon global disclosures will require seamless coordination with headquarters or the individuals possessing this information. Therefore, audit teams and ways of working will need to be strategized for information that is not generally retained by the local business team.
MNEs should monitor new disclosures and ensure there is an efficient governance process to accurately address the BEPS incentivized queries. This may involve a shift in responsibilities within the transfer pricing documentation process.
The post BEPS era signifies a new way of thinking, including the respective documentation responsibilities and structure of an internal transfer pricing team.
UK’s Autumn Statement 2015 has been announced, with several measures aimed at changing corporate tax behavior and promoting transparency with the objective to achieve a modern and fairer tax system. A link to the Statement is provided for reference:
Key points:
A carrot, stick and transparency approach is contained within the Statement, and thus important to follow as other countries will surely review UK’s leading initiatives to gauge impact on their respective economy. The GAAR related penalty, which is inherently subjective, will be dictated in some fashion by HMRC’s aggressiveness to assess GAAR and a willingness to pursue it through the respective appeal avenues or court. The tax strategy initiative will also be interesting to monitor as to its breadth and potential impact upon a company’s risk rating.
Spain’s tax law changes have been published, effective as of October 2015.
Click to access 2015G_CM5807_Spain%20amends%20its%20General%20Tax%20Law.pdf
Key observations:
As new penalties are being legislated, in Spain and elsewhere, for subjective provisions in the tax law it is becoming mandatory to assess such provisions in the tax planning stages for significant transactions. This is especially true when the subjective interpretations of GAAR, and the tax authorities, are inherently uncertain and potentially leading to double taxation.
The Australian Tax Office (ATO) has issued a very interesting Practice Statement Law Administration. It is an informal policy document for which interested parties should submit comments by 25 September. The Statement is a lengthy document, citing case law, that is very worthwhile reading, as Australia continues its proactive efforts driving change in the international tax arena.
Although informal, taxpayers can rely on such guidance for protection from interest and penalties. A copy of the Statement is provided for reference:
http://law.ato.gov.au/atolaw/view.htm?docid=%22DPS%2FPSD200524%2FNAT%2FATO%2F00001%22
Key observations:
The above provisions attempt to conceptualize objective factors for an inherently subjective GAAR determination. As additional GAAR’s are introduced around the world, each applying a different level of subjectivity, the Statement is helpful in understanding the rationale and intent of the ATO.
Tax planning post-BEPS will require additional GAAR documentation for significant transactions, thereby requiring tax to be involved early in the discussions to understand the business intent and alternatives considered.
As tax authorities, most recently Australia and UK, place added focus on a tax risk framework and providing evidence of diligence re: such procedures, it is critical that new financial leaders receive tax risk training upon entering an organization as well as a review on a recurring basis. The training should also be reviewed and updated annually for new developments.
Examples of topics for discussion:
The training generally provides additional awareness, thereby mitigating tax risk exposures and providing a win-win opportunity that cascades across the organization.
Australia continues to lead the way after its completion of cloaking new PE rules within its GAAR legislation, thereby avoiding the protection of the double tax treaty network.
A voluntary tax disclosure code concept is in deliberation by the Australian administration for its 2105-16 Budget. This disclosure would be in addition to other disclosures, such as country-by-country (CbC) reporting.
KPMG’s commentary herein provides a snapshot of this potential new trend that should be monitored by multinationals, as countries around the world are also watching this recent development for perceived benefits.
Corporate tax disclosure code: next big thing in tax transparency?
by Stephen Callahan, Director, and James Gordon, Senior Manager, Corporate Tax
The 2015-16 Budget proposals to introduce a multinational (MNE) anti-avoidance rule and to levy GST on cross-border digital services grabbed the immediate headlines in the large business market.
However, arguably the more far reaching tax integrity proposal is the Board of Taxation review into the development of a voluntary code for greater public disclosure of tax information by large corporates.
There is the obvious, and as yet, unanswered question as to exactly which businesses the proposal is directed towards. Nevertheless, some initial thoughts on possible influences in this review include:
The controversy and confusion surrounding tax performance analytics based on financial statement tax
disclosures.
The tension between community expectations on disclosures covering tax, related party transactions and investment in subsidiaries as against the need for concise reporting for capital market purposes.
Debates surrounding what comprises a business’ tax contribution to a country and the measurement of effective tax rates.
Global developments on alternate models for improved tax transparency.
Tax contribution reporting by an increasing number of multinationals.
The relationship, if any, between a voluntary disclosure code and an involuntary tax transparency publications by the ATO.
We await with interest to see the terms of reference of the Board of Taxation review.
Slovakia has proposed legislation conforming treatment of hybrid loan arrangements and general anti-avoidance rules (GAAR) of the EU Parent-Subsidiary Directive. Note that Slovakia has not suggested expansion of such rules, as Sweden’s recent proposal suggests.
EY’s Global Tax Alert highlights these developments, as well as other changes including penalties and service PE determination.
Click to access 2015G_CM5410_Slovakia%20proposes%20changes%20to%20tax%20legislation.pdf
The new legislation is expected to take effect as of 1/1/2016, thus future planning should document transactions accordingly, especially noting the “main purpose” rule of the GAAR initiative which is inherently subjective.
The 2015 Indian Budget has been recently presented, with highlights referenced in a link for the PwC Tax Insights article.
Click to access pwc-india-budget-2015-defers-gaar-addresses-offshore-transfers.pdf
Key points:
The GAAR deferment is especially welcome, hopefully adding more certainty and objective determination upon final implementation. The rate reductions and additional clarification for offshore share transfers also are positive signs for tax reform, although offset by application of a “place of effective management” concept that will hopefully be addressed simply and objectively without enduring years of appeals to obtain a definitive conclusion.
Following up on its intent to introduce a “Super GAAR” (refer to 03 Jan 2015 post), a draft bill has been issued by the Danish tax authorities to achieve this objective. The new anti abuse provisions would take effect 01 May 2015 with no grandfathering exception.
The draft bill would contain two GAAR provisions:
The provisions would apply to existing and new Danish tax treaties based on the premise that treaty benefits are not available in arrangements that include abuse of treaty provisons.
The inherently subjective nature of the GAAR proposals, including the override of EU Directives, will likely be challenged by taxpayers and possibly the courts. In the interim, Danish transactions should be exercised with an element of care re: the potential application of GAAR that would reverse the tax advantage obtained.
The final OECD BEPS guidelines are yet to be issued, thus inconsistencies may arise between the unilateral legislation speeding into Danish tax law and OECD’s final guidance that aims at worldwide consistency.
The OECD’s TIWB program’s trial phase ended in December, 2014, with a launch scheduled in 2015, subsequent to a review process. (Refer to the 9 June, 2013 post).
The TIWB’s objective is to enable sharing of tax audit knowledge and skills with tax administrators in developing countries through a targeted, real-time “learning by doing” approach. The program encompasses transfer pricing, thin capitalization, APA’s, anti-avoidance rules, pre-audit risk / case selection, and VAT, although customs is excluded. Links to the program summary and the Toolkit (published in Nov. 2014) are included for reference:
http://www.oecd.org/tax/taxinspectors.htm
Click to access tax-inspectors-without-borders-toolkit.pdf
The Toolkit details the role of a TIWB Secretariat as a Facilitator, and roles and responsibilities of the parties to this shared arrangement. Eligible individuals must meet a 5-year minimum audit experience requirement, and they can be currently working or recently retired. Most importantly, the Toolkit addresses legal liability considerations and confidentiality restrictions during, and after, their assistance. T
his initiative should be monitored closely, as there do not seem to be prescribed transparency rules for the company under audit. Therefore, a question for the opening audit could be an inquiry as to the tax administration’s expectations for outside expert assistance from TIWB. Additionally, an expert with limited experience, coupled with the lack of familiarity with subjective jurisdictional rules for GAAR assessments, for example, may place additional burdens on an expert and the host country in assessing inherently complex rules.
This initiative has a strong likelihood for implementation that further reinforces the OECD’s intent to provide additional guidance for developing countries as complex BEPS Actions are implemented on a domestic level. Accordingly, it is imperative to review the Toolkit for current familiarity with this program and follow its developments in the near future.
The inconsistent use of (tax) terminology in drafting / enacting legislation and communicating issues re: perceived tax abuse, developing specific/targeted/general anti-avoidance rules (SAAR, TAAR, GAAR), anti-abuse rules, etc. promotes subjectivity, uncertainty, and misguided perceptions in trying to understand complex legal and technical international tax laws and regulations.
The recently drafted anti-abuse rule in the EU Parent-Subsidiary Directive (attached link for reference) is designed as a minimum standard to be adopted by EU Member States. Article 1, paragraph 4 of the Directive states “This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse.” This language should be compared to other tax legislation that introduce additional subjectivity and confusion with undefined and misunderstood terminology.
http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2016633%202014%20INIT
Subjective terminology that accompanies undefined verbiage as a basis for tax laws and regulations, such as anti-avoidance / abuse rules, further complicates comprehension, application, interpretation, and assessment of complex international tax rules.
The phrases “tax evasion” and “tax fraud” clearly set forth bright legal lines for definition and enforcement, whereas inherently subjective phrases of “tax avoidance,” “aggressive tax planning,” “intent of Parliament”, “tax abuse,” and similar terminology result in additional uncertainty for deciphering the true intent of significant tax legislation.
It would be beneficial to recognize the inherent inconsistencies of terminology applied in tax laws and regulations, and commence inclusion of verbiage and definitions that provide clarity promoting consistent application, implementation and enforcement of international tax guidelines.
Strategizing Multinational Tax Risks 
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