Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘GAAR’

Ireland GAAR: New rules

Ireland’s new Finance Bill has introduced a new General Anti-Avoidance Rule (GAAR), effective as of 23 October 2014.

The GAAR rule provides that where a taxpayer enters into a transaction, the tax authority may invoke the GAAR rule if it would be reasonable to consider that it is a “tax avoidance” transaction resulting in a tax advantage.  Accordingly, any reduction in tax payable is disallowed, in addition to a 30% surcharge.

PwC’s recent summary of Ireland’s tax developments is included for reference, including the GAAR rule on page 20:

Click to access 2014-pwc-ireland-budget-finance-bill.pdf

Key observations:

  • No time limit for raising a GAAR assessment.
  • A “protective notification” procedure is provided, protecting the taxpayer from the surcharge.
  • The taxpayer is obliged to furnish all documentation pertaining to the transaction along with an opinion as to why they believe the transaction does not fall within the GAAR provisions.

The GAAR rules are imposing additional arenas of uncertainty, dependent on the subjective interpretations and conclusions of the tax administration.  For Ireland, there is no time limitation and significant penalties are imposed for such assessments.

Due diligence procedures should be provided as an internal governance process to identify and review GAAR rules, domestic and/or treaty application, and possible avenues of appeal for transactions that may be affected.  (Note, details of the EU Parent-Subsidiary Directive GAAR provisions are provided in the 11 December, 2014 post)

UK Diverted Profits Tax: Parliamentary debate

The UK Diverted Profits Tax proposal (refer to 12 December 2014 post) will become effective in April, 2015.  The Parliament debate sheds light on the intentions for such tax, as well as the assumptions (true or false) underlying this initiative.

The debate clarifies that such “tax” is not meant to be a tax that meets the definition of a tax for double tax treaty purposes, therefore it is subject to domestic legislation and not overridden by its treaty network.  This rationale therefore leads to the premise that it may not qualify as a tax subject to a US Foreign Tax Credit, resulting in a double “tax” situation regardless of the nomenclature.  Additionally, the Mutual Agreement Procedure (MAP) provided for in a double tax treaty would not be available for recourse.

The tax is aggressive in its timing, ahead of the final OECD proposals and in contrast to other initiatives for which the UK is awaiting final BEPS guidance.  The debate highlights the cynicism about the OECD process, thus providing a rationale for unilateral legislation sooner vs. later.  Additionally, this proposal was discussed as a Targeted Anti-Avoidance Rule (TAAR), which is in addition to the EU and UK General Anti-Avoidance Rules (GAAR).

Most importantly, a diverted profit tax situation involves an initial recharacterization assessment by HMRC, requiring payment by the taxpayer, with appeals to follow later – a “Pay Now, Talk Later” approach.

The clock is ticking and time is winding down with alot of questions remaining unanswered.  The debate is provided for reference:

http://www.publications.parliament.uk/pa/cm201415/cmhansrd/cm150107/halltext/150107h0001.htm

It is very useful to review the Intent of new laws to form a better understanding for the formation of such initiatives, as well as comprehension into the foresight of drafters re: possible appeals by the European Commission and/or European Court of Justice.

Denmark: (Super) GAAR?

The General Anti-Avoidance Rule (GAAR) has received a status of prominence during 2014, and continues its subjective and complex override provisions in domestic law that are interwoven with treaty provisions.

Denmark has proposed a (Super) GAAR, trumping the EU Parent-Subsidiary Directive, EU Interest-Royalty Directive, EU Merger Directive and Danish double tax treaties.  Notwithstanding its current status as a “proposal,” Denmark’s intent is clearly shown to provide an umbrella rule, evidently overriding the respective treaties, providing that a “main purpose” rule which achieves tax advantages would be used to disallow respective tax benefits of the transaction(s).  The proposed rule would be effective by 01 May, 2015.

PwC’s Insight has provided a brief summary of the proposal:

Click to access pwc-denmark-introduce-gaar-double-tax-treaties-directives.pdf

GAAR continues to be “the elephant in the room,” highly visible although the rules and appeal avenues are distinct and arbitrary for every country.  Some countries have GAAR rules, along with specific / targeted anti-avoidance rules (SAAR / TAAR).  Thereby, tax uncertainty and the risk of double taxation increases, dispute resolution (if available) avenues are further stressed, and arbitration measures may not be available.

With respect to arbitration, it should be adopted by every country to achieve mutuality with taxpayers, however some countries have expressly stated that they do not want to give up their control / sovereignty.  Unfortunately, OECD has not aggressively pursued this remedy for multilateral agreement.

The Davis Tax Committee: BEPS Report

The Davis Tax Committee has released its First Interim Report on Base Erosion & Profit Shifting (BEPS), including an introductory document and comprehensive analyses of the following BEPS Action Items:

  • 1, Digital Economy
  • 2, Hybrid Mismatches
  • 5, Harmful Tax Practices
  • 6, Treaty Abuse
  • 8, Transfer pricing re: intangibles
  • 13, Transfer pricing documentation
  • 15, Multilateral instrument
  • Summary of recommendations

The Committee’s objective is to assess South Africa’s tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability.  Links to the Media Statement, Davis Tax Committee’s website and Report are provided for reference:

Click to access 20141223%20Davis%20Tax%20Committee%20Media%20Statement%20-%20Release%20of%20BEPS%20Report%20for%20Public%20Comment.pdf

Comments by all interested parties should be submitted by 31 March 2015.

The documents are a valuable reference in comprehending each of the OECD BEPS Action Items of the Report, not only the viewpoint of S. Africa.  Most importantly, it outlines the tax policies for continued foreign direct investment balanced against BEPS and General Anti-Avoidance Rule (GAAR) initiatives, while providing tax transparency and certainty with a balanced, sustainable tax policy going forward.

China GAAR: New rules

China’s State Administration of Taxation (SAT) has established rules for implementing its General Anti-Avoidance Rule (GAAR), effective 1 February 2015.  A PwC summary and details of the rule, as translated into English, are attached for reference:

Click to access 635539923624544645_chinatax_news_dec2014_33.pdf

Click to access 635540044774352869_chinatax_news_dec2014_33_article.pdf

Note, as in most GAAR provisions, the definition is subjective in nature.  Additionally, these rules would be applied after the Specific Anti-Avoidance Rules (SAAR) are applied, resulting in a tiering of potential disallowance avenues.  However, the MAP rules could be employed to minimize double taxation consequences.

As the GAAR provisions are being enacted into domestic law, as well as treaties, in addition to existing rules for SAAR, these rules are critical for new arrangements / transactions, as well as preparing relevant documentation for future reference and defense.

 

 

EU Parent-Sub Directive: Anti-abuse proposal

A anti-abuse rule has been proposed by the EU Economic and Financial Affairs Council for inclusion in the EU Parent-Subsidiary Directive (PSD), following implementation of hybrid mismatch rules as summarized in my post of 24 June 2014.  The proposal would be required to legislated into law by 31 December 2015, in addition to the earlier hybrid loan rules.

A copy of the communique is attached for reference:

http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2016435%202014%20INIT

Key observations:
Annex I contains the following language (highlights added for emphasis) for the proposed anti-abuse rule:

Member States shall not grant the benefits of this Directive to an arrangement or a series of arrangements that, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage which defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. 3. For the purposes of paragraph 2, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. 4. This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse.”

Annex II provides further reference stating that EU Member States  will endeavor to inform each other, and additionally that an anti-abuse provision will be considered in future work addressing the EU Interest and Royalties Directive 2003/49/EC.

This proposal should be closely followed, as it will directly affect transactions between EU Member States.  Additionally, this initiative will be followed by other countries in drafting domestic and/or treaty anti-abuse/anti-avoidance rules, possibly resulting in a multi-pronged approach of anti-avoidance / anti-abuse rules in Directives, treaties and domestic legislation.

The subjectivity of this rule will increase complexity, reduce clarity and certainty while being subject to further appeals contesting implementation and/or interpretation of the guidelines, including the “main purpose” test.

The Latest on BEPS: Australia, Canada, Chile, NL, Switzerland and UK

EY’s Global Tax Alert of 29 Sept. 2014 outlines the latest developments of the OECD BEPS initiatives, including BEPS summaries for Australia, Canada, Chile, Netherlands, Switzerland and the UK.  A copy of the Alert is provided herein for reference.

Key developments:

  • Chile has introduced general anti-avoidance rules (GAAR) and CFC legislation, new audit powers and transfer pricing amendments re: business restructurings and thin capitalization.
  • Canada released for consultation several legislative proposals, including thin capitalization and interest withholding tax rules for certain back-to-back lending arrangements.
  • Netherlands will await further BEPS developments prior to taking any unilateral actions.
  • Switzerland has adopted a more restrictive approach when reviewing international structures from a treaty shopping perspective.
  • The UK HMRC formally committed to implementing the country-by-country template, although the timing has not been decided.

As the OECD BEPS developments continue in 2015, it is especially important to view the actions by countries re: unilateral actions prior to final OECD guidance.  Additionally, country guidance may be more restrictive than the OECD recommendations, as well as deciding to impose additional disclosure requirements in their legislation.  The effective dates of such OECD guidance will also not be uniform, via execution of a multilateral instrument and/or domestic legislation.

 

On 16 September 2014, the OECD issued reports and recommendations with respect to the following focus areas set forth in the July 2013 BEPS Action Plan:

Action 1 – Tax challenges of the digital economy (see EY Global Tax Alert on Action 1)
Action 2 – Hybrid mismatch arrangements (see EY Global Tax Alert on Action 2)
Action 5 – Harmful tax practices of countries (see EY Global Tax Alert on Action 5)
Action 6 – Addressing treaty abuse (see EY Global Tax Alert on Action 6)
Action 8 – Transfer pricing for intangibles (see EY Global Tax Alert on Action 8)
Action 13 – Transfer pricing documentation and country-by-country reporting (see EY Global Tax Alert on Action 13)
Action 15 – Multilateral instrument (see EY Global Tax Alert on Action 15)
The OECD also issued an Explanatory Statement providing an overview of developments in the BEPS project.

See EY Global Tax Alert, OECD releases highly anticipated 2014 output of BEPS Action Plan, dated 18 September 2014, for an overview of the overall package of September 2014 OECD BEPS releases.

On 20-21 September 2014, the G20 commitment to the OECD BEPS project was reiterated at the G20 Finance Ministers’ meeting in Cairns, Australia. The meeting communique focused on the documents released by the OECD in the lead up to the meeting, stating “[t]oday, we welcome the significant progress achieved towards the completion of our two-year G20/OECD Base Erosion and Profit Shifting (BEPS) Action Plan and commit to finalizing all action items in 2015.” The communique also addressed with approval the continuing developments with respect to the new standard for automatic exchange of information on financial accounts and noted the increasing engagement with developing countries on BEPS matters.

On 22 September 2014, following the G20 Finance Ministers’ meeting, the OECD provided an update regarding its ongoing work on the particular BEPS considerations for developing countries and on the participation of developing countries in the new standard for automatic exchange of information. The OECD released two reports on these topics: “A Report to G20 Development Working Group on the Impact of BEPS in Low Income Countries (Part 2)” and “Automatic Exchange of Information: A Roadmap for Developing Country Participation.”

On 25-26 September 2014, representatives of more than 100 countries met at the OECD for the 19th Annual Global Forum on Tax Treaties. BEPS developments in general, and the tax treaty related issues with respect to BEPS in particular, were a focus of the meeting discussions.

Australia
On 25 September 2014, the Australian Parliament passed previously announced legislation which includes changes to the thin capitalization rules, a rewrite of the exemption for foreign non-portfolio dividends received by Australian companies, and amendment of the foreign resident capital gains tax concession rules. The thin capitalization changes are effective for years starting on or after 1 July 2014. The existing exemption for Australian companies receiving non-portfolio dividends from foreign companies will no longer apply for distributions made after the date of Royal Assent of the Act, and the replacement by the new rules will commence for distributions made after the date of Royal Assent of the Act. The Royal Assent may occur as soon as within days to a week.

See EY Global Tax Alert, Australian Bills affecting financing and structuring become law, dated 25 September 2014 and EY Global Tax Alert, Australian Tax Bills affect international financing and structuring, dated 18 July 2014, which summarized the proposals in the Bill.

Canada
On 29 August 2014, Canada’s Department of Finance released for consultation revised legislative proposals to implement measures announced in Economic Action Plan 2014, including revisions to previously released legislation under which: (i) Canadian financial institutions would be subject to tax in respect of certain offshore derivative “insurance swaps,” (ii) the regulated foreign financial institution exception to the foreign accrual property income rules would no longer apply to non-financial institutions, and (iii) certain back-to-back lending arrangements would be subject to thin capitalization and interest withholding tax rules.

However, although Economic Action Plan 2014 contained a high-level description of measures under consideration to counteract treaty shopping, none of these were included in the revised legislative proposals. The implementation of these measures is being deferred at this time, as the Government will instead await further work by the OECD in relation to the BEPS project.

See EY Global Tax Alert, Canada’s Department of Finance releases draft international tax measures, dated 3 September 2014.

Chile
On 10 September 2014, the Chilean Chamber of Representatives approved the Bill of Law amending tax regulations, based on the latest draft proposed by the Chilean Ministry of Finance on 9 August 2014. The Bill now must be published by the Chilean Government. The provisions of the Bill include, among other significant changes, the introduction of general anti avoidance rules and CFC legislation, new audit powers for the Chilean Internal Revenue Service, and amendments to the transfer pricing rules related to business restructurings and to the thin capitalization rules. Each provision has a specified entry into force date, which varies from 2014 to 2017.

See EY Global Tax Alert, Chilean Congress approves tax reform, dated 15 September 2014.

Netherlands
On 16 September 2014, in a letter to the Dutch Parliament, the Dutch State Secretary of Finance provided the Dutch Government’s response to the reports in the OECD BEPS project that had been published earlier that day. In line with earlier official statements, the State Secretary indicated that the Dutch Government has actively participated in the BEPS project and will continue to do so as part of a broader effort to develop a durable solution that does not harm the Dutch fiscal investment climate. These efforts have, for instance, led to the extension of the application of the safe harbor rules on substance to group financing/licensing companies that do not request an Advance Pricing Agreement and to holding companies that wish to conclude an Advance Tax Ruling. Importantly, and also in line with earlier official statements, the State Secretary reiterated that at this stage it would be premature to take any unilateral actions based on the 2014 BEPS recommendations and that the Dutch Government will await further developments, as the BEPS project is an holistic one and the OECD is expected to provide further recommendations next year.

Switzerland
On 22 September 2014, the Swiss Federal Council presented the draft legislation for the third Swiss Corporate Tax Reform and initiated the consultation phase. The proposed tax reform aims to strengthen the attractiveness of Switzerland as a business location and is Switzerland’s response to the international tax policy developments and the review of preferential tax practices by the OECD in the BEPS project and by the EU. The Swiss Federal Council proposes to replace the tax regimes that have come under increased international pressure by new measures that are fully in line with international standards, such as a Swiss patent box and notional interest deduction on equity. Other key elements of the reform are cantonal tax rate reductions, a step-up upon migration and change of tax status, abolition of the one-time capital duty, unrestricted use of tax losses, and change to a direct participation exemption. During the next four months, political parties, cantons, and interested associations are invited to share their views on the proposed tax reform. Given the magnitude of the reforms under consideration and the legislative procedure in Switzerland, it is expected that the new law would not enter into force until 2018-2020.

See EY Global Tax Alert, Swiss Federal Council initiates the consultation phase for Corporate Tax Reform III, dated 23 September 2014.

On a separate note, as a result of the international developments with respect to the BEPS project, the Swiss Federal Tax Administration has adopted a more restrictive approach when reviewing international structures from a treaty shopping perspective. In particular, the substance (physical and functional) at the level of the foreign parent company of a Swiss subsidiary is now under increased scrutiny through application of the beneficial ownership concept when treaty relief is applied for in Switzerland with respect to outbound dividends paid by the Swiss subsidiary.

United Kingdom
On 20 September 2014, HM Treasury issued a press release “formally committing” to implement the country-by-country reporting template as released by the OECD on 16 September 2014. The United Kingdom thus is the first of the OECD and G20 countries involved in the BEPS project formally to commit to the template, although the announcement did not include any comment in relation to the proposed timing for implementation.

EYG no. CM4759

Chinese GAAR: Review of a draft “Administrative measure”

The Chinese State Administration of Taxation (SAT) has released draft General Anti-Avoidance Rules (GAAR) to supplement its current GAAR legislation and Circular 2.  The draft rules, when final, will be effective for all arrangements executed after 1/1/2008, the effective date of the Corporate Income Tax Law and the Detailed Implementation Rules.  The KPMG tax alert provides relevant information for this draft guidance, which can be referenced at the following link:

http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Newsletters/ChinaAlerts/Documents/China-tax-alert-1407-19-Guidance-on-Chinese-General-Anti-Avoidance-Rule.pdf

Observations of “clarifications” to the law:

  • Shift from a “primary purpose” test to include “one of its main purposes” to obtain tax benefits.
  • Ordering rules are set forth: Domestic SAARs, Treaty SAARs, and domestic GAAR.
  • It is noted that in most recent Chinese tax treaties, there is a “Miscellaneous Rule” article reserving the right to use GAAR irrespective of treaty commitments.
  • There is not a GAAR review committee.
  • Documentation to be provided by taxpayers includes communications between the taxpayer and its tax advisors, and other parties to the transaction.
  • Documentation may also be requested directly from the tax advisors to the taxpayer.
  • GAAR adjustments include re-characterization of the arrangements, or income, deductions, tax incentives and related foreign tax credits, denial of the existence of a party to the transaction, and any other reasonable method.

This draft emphasizes the use of GAAR by tax authorities to counter perceived tax abuse and treaty shopping techniques.  There is a complex interplay between the treaty provisions, by which treaty relief may be sought, and domestic legislation whereby there is a higher possibility of double taxation.  Prior posts re: GAAR may also be searched in this blog, detailing a non-uniform burden of proof standard, high subjectively threshold and the continuing development of this anti-abuse provision by tax authorities around the world.

It is noted that the draft rules also extend documentation requests directly to tax advisors, including communications to or from the taxpayer.  This explicit provision emphasizes the importance of coordinating relevant communications between the taxpayer and all outside parties to ensure that form and substance requirements are aligned.

GAAR documentation should be considered for all transactional planning, including prior transactions for which current developments are evolving.

 

2014 Update to the OECD Model Tax Convention

The 2014 Update, as adopted by the OECD Council on 15 July 2014, includes changes that were previously released for comments, including the meaning of “beneficial owner.”  Numerous additions and deletions to Commentaries on various Articles, including positions of non-member countries, are also included.  A link to the Update is provided for reference:

http://www.oecd.org/tax/treaties/2014-update-model-tax-concention.pdf

Interesting changes:

  • Article 5 Commentary: new views by Germany, Estonia, and Israel.
  • Article 9 Commentary: Hungary (newly added) and Slovenia reserve the right to specify that a correlative (i.e., offsetting) adjustment will be made only if they consider that the primary adjustment is satisfied.
  • The term “beneficial owner” does not have reference to any technical meaning under domestic law, thus it should not be used in a narrow technical sense, rather, it should be understood in its context and in light of the object and purposes of the Convention including avoiding double taxation and the prevention of fiscal evasion and avoidance.
  • The term “beneficial owner” does not deal with other cases of treaty shopping, which can be addressed in specific anti-abuse treaty provisions, general anti-abuse rules (GAAR), substance-over-form or economic substance approaches.
  • Article 13 Commentary: With respect to paragraph 3.1, Austria and Germany hold the view that when a new tax treaty enters into force, these countries cannot be deprived of the right to tax the capital appreciation which was generated in these countries before the date when the new treaty became applicable.
  • Article 26 Commentary: The Commentary was expanded to develop the interpretation of the standard of “foreseeable relevance” and the term “fishing expeditions,” i.e. speculative requests that have no apparent nexus to an open inquiry or investigation.  The Commentary further provides for an optional default standard of time limits within which the information is required to be provided unless a different agreement has been made by the competent authorities.  The examples provided are to demonstrate the overarching purpose of Article 26 not to restrict the scope of exchange of information but to allow information exchange “to the widest possible extent.”

The Update requires a comprehensive review to determine potential implications, including beneficial ownership restrictions and ways of working by competent authorities.  Such review should distinguish changes to the Articles versus additions or deletions to the Commentary interpreting such Articles.  Note that the OECD BEPS changes will be an addition to this Update.

EU Parent-Subsidiary Directive: One step forward

On 20 June 2014, the EU Economic and Financial Affairs Council reached agreement on modifying the EU Parent-Subsidiary Directive.  The agreement proceeds with the prevention of double non-taxation via the use of hybrid financing arrangements, while agreeing to work separately on an amended General Anti-Avoidance Rule (GAAR).  Links to the current EU Parent Subsidiary Directive (2011/96/EU), a PwC Tax Alert summarizing the proposal and the EU proposals are included for reference:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:345:0008:0016:EN:PDF

Click to access pwc-newsalert-20-june-2014-amendment-parent-subsidiary-directive.pdf

http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2010419%202014%20INIT

The amendment is limited to the 28 Member States of the EU, with a similar proposal envisioned in the OECD BEPS initiative.  It is interesting to note the OECD BEPS provisions are being focused within the EU Community, in addition to the international OECD Guidelines.  Timing for this EU proposal is for domestic legislative action by December 2015.

Re: Best Practices, it is prudent to review the EU legal structure for such hybrid arrangements to quantify the effect of this proposal, possibly requiring modification of hybrid debt and/or legal entities.  Additionally, such hybrid instruments in non-EU countries should be noted for the forthcoming OECD BEPS corollary provision.

Transfer pricing documentation & BEPS: Refresh strategy

As time is of the essence for various OECD BEPS proposals to be made public, the interim time gap may be an excellent time to refresh global transfer pricing documentation strategies.  Several questions that may be addressed in a transparent and critique perspective include the following:

  • Have each of the BEPS proposals been matched to current TP methodology, questioning the future state of global TP documentation?
  • For current cooperative compliance relationships, is a discussion contemplated / scheduled to discuss the potential impacts of BEPS on the ongoing ways of working, including TP documentation?
  • Are future cooperative compliance relationships in focus, aligned with BEPS initiatives, especially among countries seeking unilateral legislative actions re: General Anti-Avoidance Rules (GAAR) implementation, etc.?
  • Are the attributes of a GAAR, including a taxpayer’s responsibility for GAAR compliance, being considered globally and /or in local country files?
  • Should compliance roles and responsibilities of TP compliance change re: internal / external resources due to BEPS with additional complexities envisioned?
  • If a Master File and Local Country file methodology is not currently in place, will there be a global and/or regional shift to such methodology?  What is the proposed timing for change?
  • Are the local tax return disclosures re: TP aligned with that country’s TP documentation?
  • What tax team / TP resources are being aligned to address the BEPS initiatives and proposed documentation?
  • Are tax policy statements of the Tax Risk Framework being reviewed for desired TP transparency?
  • Have there been “idea” meetings to discuss next steps in a creative atmosphere?

A BEPS / TP review will be valuable in aligning future vision, flexibility and transparency in today’s volatile atmosphere of TP assumptions and perceptions.

 

Tax risk & controversy: EY highlights

Ernst & Young (EY) have published their 10th issue of T Magazine, highlighting the topics of tax risk and controversy.  The link is attached for reference:

Click to access tmagazine10-2012-low.pdf

Key Highlights:

  • GAAR, Burden of proof: Taxpayer, Tax authority or Shared; summary of 24 countries.
  • Sustained government pressure on tax compliance means tax risk is now an issue for corporate boards, not just tax directors.
  • Clarity is now the key attribute in any message about tax that companies convey to the outside world.
  • As emerging markets become more confident and sophisticated, they are challenging commonly applied international tax standards.
  • The OECD’s “Tax Inspectors Without Borders” program (details in a prior post of 9 June 2013) seeks to match demand from countries wanting assistance with complex international tax audits with the supply of international tax experts.
  • Companies need to improve local knowledge of risk rating processes in each Asian country, including key focus areas and potential audit triggers.
  • Organizations need to show a willingness to engage with policymakers and administrators to improve policy proactively.
  • Tax authorities are increasingly adopting the OECD’s concept of the  “economic employer” to determine tax liabilities, rather than a treaty residence rule.
  • Creating a PE is the biggest tax risk companies face from sending employees on business or assignments overseas.
  • An increasing number of companies have appointed a head of tax controversy to manage tax risk and its implications.
  • Companies must be prepared to become more transparent.

Tax risk and transparency are the new challenges to be met by multinationals.  The T Magazine is a valuable resource in understanding today’s risks, and the manner in which these issues will transform current standards into leading Best Practices, tax risk policies and processes.

 

Treaty overrides: India’s High Court comments

The PwC News Alert, issued today, highlights statements of India’s High Court re: treaty override situations in a recent decision of Vodafone South Ltd.  These statements are significant in determining whether retrospective amendments can override treaty benefits.  The link to the Alert is attached for reference:

Click to access pwc_news_alert_14_april_2014__vodafone_south_ltd.pdf

Important observations noted in the Alert:

  • Sovereign power extends to “breaking” a tax treaty.
  • Unilateral cancellation of a tax treaty through an amendment to domestic law, subsequent to conclusion of a tax treaty, is a recognized sovereign power.
  • If , after the tax treaty came into force, an Act of Parliament was passed which contained a provision contrary to the tax treaty, the scope and effect of the legislation could not be curtailed by the tax treaty.
  • India is not a signatory to the Vienna Convention on the Law of Treaties (Vienna Convention), although such principles have previously been relied on by several Indian courts as such concepts have been accepted as a source of international law.

The concept of treaty override is becoming a very significant issue, evidenced by various GAAR provisions that have been enacted in domestic law that override general tax treaty provisions.  Additionally, recently released OECD draft on BEPS Action Plan 2 (22 March 2014 post) highlights the complex interplay of GAAR provisions with primary and linking mechanism proposals set forth to ensure consistency and uniformity.

In summary, the concepts of the Vienna Convention, combined with current events and complexities re: tax treaty override, merit special attention as tax audits become more complex leading to costly and lengthy appeals, while legislated issues become more subjective all leading to additional cases of double taxation and controversies based on uncertainties of international tax law.

 

OECD: BEPS Treaty Abuse proposal released for comment

The OECD invites public comments with respect to Action 6 (Prevent Treaty Abuse) of the BEPS Action Plan.

A summary of the OECD press release, the OECD proposal and Best Practice comments are included herein for reference:

Click to access treaty-abuse-discussion-draft-march-2014.pdf

The Action Plan identifies treaty abuse, and in particular treaty shopping, as one of the most important sources of BEPS concerns. Action 6 (Prevent Treaty Abuse) reads as follows:

Action 6 

Prevent treaty abuse

Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be co-ordinated with the work on hybrids.

The Action Plan also provided that “[t]he OECD’s work on the different items of the Action Plan will continue to include a transparent and inclusive consultation process” and that all stakeholders such as business (in particular BIAC), non-governmental organisations, think tanks, and academia would be consulted.

As part of that consultation process, interested parties are invited to send comments on this discussion draft, which includes the preliminary results of the work carried out in the three different areas identified in Action 6:

A. Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances.

B. Clarify that tax treaties are not intended to be used to generate double non-taxation.

C. Identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country.

These comments should be sent on 9 April 2014 at the latest (no extension will be granted). The comments received by that date will be examined by the Focus Group at a meeting that will be held on the following week.

Public Consultation:

Persons and organisations who intend to send comments on this discussion draft are invited to indicate as soon as possible, and  by 3 April at the latest, whether they wish to speak in support of their comments at a public consultation meeting on Action 6 (Prevent Treaty Abuse), which is scheduled to be held in Paris at the OECD Conference Centre on 14-15 April 2014. Persons selected as speakers will be informed by email by 4 April at the latest.

This meeting will also be broadcast live on the internet and can be accessed on line. No advance registration is required for this internet access.

General observations of proposal:

The OECD proposal provides a three-pronged approach:

  • Treaty statement re: anti-avoidance rule and treaty shopping opportunities
  • Specific anti-abuse rule based on Limitation of Benefit (LOB) provisions
  • General anti-abuse rule

Other OECD recommendations include comments re: Permanent Establishment (PE), tax policy, and broad General Anti-Avoidance Rule (GAAR) interpretation (including allowance of domestic GAAR provisions notwithstanding the relevant double tax treaty).  The GAAR proposal provides that obtaining a treaty benefit was one of the main purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.  Note this GAAR proposal supplements the LOB provisions.

Proposals are also introduced to address tax avoidance risks via changes to domestic laws.  Such risks include thin capitalization, dual residence, arbitrage transactions (including timing differences), and transfer mispricing.  Intentions of the UN Model Convention are also introduced for analogous interpretation.  

The proposal notes that treaties should not prevent application of domestic law provisions that would prevent transactions re: CFC rules and thin capitalization.

Finally, the OECD proposal indicates that the treaty should clearly state that prevention of tax evasion and tax avoidance is a purpose of the tax treaties.

The proposal, in alignment with the overall OECD BEPS proposals, is targeted at avoidance of double non-taxation, without a balanced commentary and measures addressing the risk of double taxation.  Additionally, the terms “tax evasion” and “tax avoidance” are used in tandem within the proposal, although such terms are literally construed as having significantly two separate meanings and relative intent.  Finally, the allowance of domestic GAAR provisions in addition to, or in lieu of, treaty provisions and EU Parent-Subsidiary guidelines will promote additional uncertainty re: subjective interpretations of broad proposals that will ultimately lead to increased tax disputes, double taxation and the loss of multilateral symmetry.

This proposal has tremendous significance in the transfer pricing arena that must be seriously considered and reviewed in its entirety, including the possibility for early comment to ensure OECD consideration.

Tax Dispute Resolutions: Best Practices / Update

KPMG provides a timely and relevant update of tax dispute resolution issues, coupled with Best Practice ideas.  The publication can be accessed from this link:

Click to access tdr-quarterly-magazine-winter-2013.pdf

A summary is provided for quick reference:

  • US: New IDR process: Required (new) IDR process for all large-case exams: IDR Collaboration (carrot) & delinquency notice/summons procedures (stick)
  • Risk from whistleblowers: Current climate and Best Practices, including avoidance of retaliation, ethics hotline, procedural awareness, tax dept. procedures, and what to do if you suspect whistle blowing
  • IRS practices, various items of interest
  • Global tax disputes, including a focus on UK GAAR (also refer to a prior blog post)

This publication provides insight into today’s tax challenges and risks, to be mitigated by Best Practice ideas that should be an integral part of all multinationals tax framework.

It will be interesting to note developments into the new procedure by IRS as demonstrated by the agents performing the exam, as the summons procedure process is mandatory and has no exceptions.  Additional time should be spent understanding the issue raised by IRS, as well as collaborating on the draft inquiry, to benefit from undue data collection and audit inefficiencies.

Additionally, the whistleblower comments should be used to test, modifying as necessary, current internal governance procedures.  Such procedures should be reviewed, tested, and modified on an annual / recurring basis.

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