Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘HMRC’

UK Spring Statement: Pay your fair share

The UK Chancellor’s Spring Statement was announced on March 13, 2019 with a focus on the following:

  • Making Tax Digital, a light approach to penalties for companies striving to comply
  • Digital Services Tax; companies should pay their fair share (also a theme when the Diverted Profits Tax was announced)
  • Depreciation allowances
  • A policy paper re: HMRC’s approach to tax avoidance, evasion and other…

Additional consultations will follow, including the Digital Services Tax planned for April, 2020.

As the UK is still negotiating its entrance into, or exit from, Brexit, these developments will be especially important.

EY’s Global Tax Alert provides details for reference:

Click to access 2019G_000796-19Gbl_UK%20Chancellor%20announces%20Spring%20Statement.pdf

UK: MAP guidance

Her Majesty’s Revenue and Customs (HMRC), the UK tax authority, has published revised guidance on the Mutual Agreement Procedure (MAP) in its International Manual (INTM).  DLA Piper’s detailed publication is referenced herein.

The revised guidance, together with the supplementary Statement of Practice, provides detailed information on the following:

  • Eligibility for MAP
  • Access to MAP
  • Submitting a MAP request
  • Time limits
  • Protective MAP requests
  • MAP and domestic relief
  • Mutual agreement
  • Methods of relief and
  • Arbitration

Multinationals ought to consider more proactive use of the improved MAP, taken together with similar developments in other countries around the BEPS minimum standards, as a viable compliance risk management tool. Although double taxation is often a precondition in transfer pricing cases that end up in MAP, it is important to note that all issues concerning taxation not in accordance with tax treaties are eligible for MAP.

https://www.dlapiper.com/en/uk/insights/publications/2018/03/the-uk-releases-new-guidance-on-mutual-agreement-procedures/

 

UK DPT: Round 2 review

HMRC is now reviewing diverted profit tax cases in round 2: citing the following EY’s link referenced herein:

There are already 100+ DPT cases ongoing and hundreds more “Large” and “Mid-Sized” cases will now be reviewed and enquiries launched in the next 12 to 18 months. Market intelligence suggests a particular focus on Mid-Sized cases, and on sectors including life sciences, oil and gas, and mining and metals. HMRC is also investigating a number of captive insurance arrangements within large groups.

As a reminder, DPT is aimed at groups that use what HMRC sees as contrived arrangements to circumvent rules on permanent establishment (PE) and transfer pricing. DPT is intended to address two broad situations:

  • A UK company (or UK PE of a foreign company) uses entities or transactions that lack economic substance to exploit tax mismatches to reduce effective taxation to below 80% of rate otherwise payable in the UK.
  • A person carries on activity in the UK in connection with the supply of goods, services or other property by a foreign company and that activity is designed to ensure that the foreign company does not create a PE in the UK.

 

Note, the UK DPT is not arguable on a tax treaty basis, and it is based on the concept of pay now, to be resolved later.  It was also enacted as a deterrent for taxpayers to start paying regular tax, vs. no tax, as a DPT was seen as an avenue to avoid the additional tax and controversy.  Thus, it is prudent to review any potential instances of DPT.  

Click to access 2018G_00778-181Gbl_UK%20TA%20begins%20second%20round%20of%20enquiries%20on%20Diverted%20Profits%20Tax.pdf

UK interest consultation

The UK government has updated its October 2015 interest expense consultation paper as of 12 May 2016, and is seeking comments by 4 August, 2016.  The paper outlines the intent of OECD’s BEPS interest guidelines and provides questions for further consideration of limitations re: interest expense going forward.

The UK previously legislated hybrid mismatch arrangements that will be effective 1/1/2017, and the new rules are not expected to be effective until April 2017.  In the interim, taxpayers will not have certainty re: current arrangements and new rules going forward.

Although following the footsteps of the OECD, UK is not afraid to take an aggressive stance as evidenced by its Diverted Profits Tax legislation, intention to adopt BEPS Actions 8-10 re: transfer pricing at an early stage and inserting risk rules in its Manual with a UK tax strategy governance.  This paper is intended to be a future roadmap for UK tax, thus it should be read by all interested parties.

A reference to the paper is provided for reference, and a summary of the questions.

https://www.gov.uk/government/consultations/tax-deductibility-of-corporate-interest-expense/tax-deductibility-of-corporate-interest-expense-consultation

  1. What are your views on when a general interest restriction should be introduced in the UK?
  2. Should an interest restriction only apply to multinational groups or should it also be applied to domestic groups and stand-alone companies?
  3. Are there any other amounts which should be included or excluded in the definition of interest?
  4. How could the rules identify the foreign exchange gains and losses to be included?
  5. If the rules operate at the UK sub-group level, how should any restriction be allocated to individual companies?
  6. Are there items which should be excluded from both the definition of interest and from “tax EBITDA”, as referred to in the section on a fixed ratio rule?
  7. What do you consider would be an appropriate percentage for a fixed ratio rule within the proposed corridor of 10% to 30% bearing in mind the recommended linkages to some of the optional rules described below?
  8. What are your views on including in any new rules an option for businesses to use a group ratio rule in addition to a fixed ratio rule?
  9. What form of de minimis threshold would be most effective at minimising the compliance burden without introducing discrimination or undermining the effectiveness of any rules?
  10. What level should the de minimis threshold be set at, balancing fairness, BEPS risks and compliance burdens?
  11. Should SMEs as defined by the EU criteria be exempted from the rules, in addition or as an alternative to a de minimis threshold?
  12. What is the best way of ensuring that the rules remain effective and proportionate even when earnings are volatile?
  13. In what situations would businesses choose to use the PBP exclusion? How would this differ if no group ratio rule was implemented?
  14. Do you have any suggestions regarding the design of a PBP exclusion, taking account of the OECD recommendations?
  15. Do you have any views on the specific risks that might sensibly be dealt with through targeted rules?
  16. Do you have any suggestions as to how to address BEPS issues involving interest raised by the banking and insurance sectors?
  17. What are the types of arrangement for which transitional rules would be particularly necessary to prevent any rules having unfair or unintended consequences, and what scope would these rules need to be effective?
  18. To what extent do you believe that the new general interest restriction rule should replace existing rules?

 

Tax strategies: UK transparency

The public transparency of a company’s tax strategies is nearing reality with the advancement of recent updates to the UK’s Finance Bill.

The UK is continuing its leadership objectives in adopting BEPS initiatives, as shown in this latest initiative.

EY’s Global Tax Alert is provided for reference:

Click to access 2016G_00446-161Gbl_UK%20amends%20mandatory%20requirement%20for%20businesses%20to%20publish%20tax%20strategy.pdf

The legislation stipulates that the published tax strategy must cover in relevant, up-to-date detail regarding the:

• Approach of the UK group to risk management and governance arrangements in relation to UK taxation

•Attitude of the group to tax planning (so far as affecting UK taxation)

•Level of risk in relation to UK taxation that the group is prepared to accept

• Approach toward dealings with HMRC

The process of developing the public UK tax strategy should be aligned with the global policy and tax risk framework, especially as other countries look to follow the UK’s lead.  Transparency is the key driver that continues to drive post-BEPS legislation, with no apparent slowdown envisaged.  

UK’s Large Business Compliance Consultation: TEI’s comments

Tax Executives Institute (TEI) has provided practical and insightful comments in response to UK’s Large Business Compliance Consultation by HMRC, which is far-reaching.  A link to TEI’s comments is provided for reference:

Click to access TEI-Comments-UK-Public-Consultation-Improving-Large%20Business-Tax-Compliance-FINAL-to-HMRC-14-October-2015.pdf

Key points:

  • The Consultation is focused on UK HQ companies, although the proposals also apply to non-UK based multinationals (MNE’s).
  • The underlying principle is unclear, especially for non-UK based MNE’s, and should be amended accordingly.
  • A separate UK tax strategy is an unrealistic expectation for most MNE’s, and will provide little relevance if enacted.
  • A UK Code of Practice is also unrealistic for MNE’s.
  • UK taxes, paid or accrued, generally bears little relevance to the global effective tax rate and is not relevant.
  • UK’s current tools of general anti-avoidance rules (GAAR), Senior Accounting Officer (SAO) tax framework, newly enacted Diverted Profits Tax, a Customer Relationship Manager (CRM) and other anti-abuse rules are already in place and would seem to remedy HMRC’s concerns.
  • Special measures are subjective and not subject to a formal independent panel for review prior to execution.
  • Board-level accountability may not be practical, while the SAO framework may accommodate this proposal.
  • Signing, or not signing, the Code of Practice should not be a trigger for public disclosure or risk assessment.
  • The Code of Practice includes determinations that transactions meet the intent of Parliament, an inherently subjective test that may be applied at will regardless of the law.

The tax transparency see-saw has now tilted to a dangerous level, in that transparency objectives no longer seem to meet the needs of tax authorities.

Information is being requested to satisfy presumed needs of the public and tax administrations, although similar efforts are not being made to have discussions with taxpayers to better understand tax risk and the relevant functions, assets and risks for which transfer pricing should be based in the relevant jurisdiction.

The UK proposal, and similar initiatives, may indeed erode the trust for which the tax authorities are seeking.  It would be a novel concept to include the business community in discussions around these proposals prior to drafting, a welcome initiative that would better represent a win-win opportunity.  Additionally, all audits should begin with a formal understanding of the transfer pricing practices of the MNE in that jurisdiction to focus tax queries accordingly and efficiently.      

As the UK Diverted Profits Tax model has strayed from the OECD’s intent re: the BEPS Action Items, it has nonetheless been followed by other countries.  This proposal may have a similar result, magnifying the concern of MNE’s and merits a detailed review by all MNE’s irrespective of UK business presence.

UK’s CbC Draft Regulations: accuracy check by HMRC

HMRC has provided a technical consultation and explanatory memorandum for new regulations of UK’s country-by-country (CbC) reporting.  Comments are due by 16 Nov. 2015.  A link is provided for reference:

https://www.gov.uk/government/publications/technical-consultation-country-by-country-reporting

An interesting, and debatable, provision is Section 9 of the technical consultation, Provision for information, which is copied herein.  To the extent that a company is considered a “reporting entity,” the provision provides for a request of information, that may reasonably be required, (within 14 days in a form specified by HMRC) to substantiate the accuracy of the CbC report.  

On the heels of the OECD release of the Action Items, including Action 13 CbC reporting, HMRC has released this documentation for consultation.  However, Section 9 may be far-reaching in that there is no transparency into the intent of HMRC or purpose of such potential request.

For example, does this exercise include the accuracy of all entities included in the CbC report?  What type of documentation would be requested, and in what form?  Should the request be limited to UK entities only?  If there are potential inaccuracies in countries other than the UK, what happens then?  What transparency is provided for this process?  Will this request be reviewed prior to informing the taxpayer?  Will such review be shared with other countries?

This provision seems to be far-reaching, and could be followed by other countries.  Therefore, it is paramount that all multinationals monitor such developments, as this will significantly increase complexity.

Provision of information

9.—(1) An officer of Revenue and Customs may, by notice in writing, require a reporting entity to provide the officer with such information (including copies of any relevant books, documents or other records) as the officer may reasonably require for the purposes of determining whether information contained in a country-by-country report filed by that entity is accurate.

(2) A notice under paragraph (1) may specify or describe the information to be provided.

(3) Where a person is required to provide information under paragraph (1), the person must do so—

  1. (a)  within such period, being no less than 14 days; and
  2. (b)  at such time, by such means and in such form (if any),

as is reasonably specified or described by Revenue and Customs.

UK risk proposals: Public tax strategy, Voluntary Code of Practice and Special Measures

HMRC has issued consultation documents proposing requirements to publish a “tax strategy,”, voluntary Code of Practice corporate tax processes and creation of a “special measures” regime.  Comments are due by 14 October 2015 for each Consultation document.

These proposals follow closely upon the heels of the ATO issuance of Best Practice methodologies addressing a taxpayer’s tax risk.

Three documents are provided for reference: (1) A Clifford Chance Briefing note, (ii) HMRC’s Consultation document for Improving Large Business Tax Compliance and (iii) HMRC’s Consultation document on Strengthening Sanctions  for Tax Avoidance.

http://www.cliffordchance.com/briefings/2015/07/mandatory_tax_strategiesacodeofpracticean.html

Click to access Improving_Large_Business_Tax_Compliance.pdf

Click to access Strengthening_Sanctions_for_Tax_Avoidance_-_A_Consultation_on_Detailed_Proposals.pdf

Executive brief:

  • Public availability of a company’s tax strategy (financial penalty for non-disclosure) including:
    • Tax internal governance arrangements
    • Risk management approach
    • Tax planning attitude and tax risk appetite, including affirmation that it aims to satisfy the spirit, as well as the letter of the law
    • Attitude to relationship with HMRC
    • Target UK effective tax rate (if applicable), and what measures are being taken to achieve it
  • Voluntary Code of Practice, including affirmations that:
    • Tax planning is consistent with the economic consequences
    • Transactions provide a tax result that is in accordance with the intentions of Parliament: “HMRC will consider a purposive construction of the legislation, and will also consider whether Parliament can realistically have intended to give the proposed result in circumstances that are very different from those that prevailed at the time”
    • Transparent relationship is maintained with HMRC
    • Tax obligations are met
    • Early dialogues for engagement with HMRC to discuss tax planning, strategy, risk, significant transactions and full disclosure of areas providing significant uncertainty
    • Objective evidence is provided to HMRC that decisions with tax implications have been approved by a senior decision maker
  • Special Measures for companies entering into aggressive tax planning / failing to transparently engage withHMRC, including:
    • Providing all documentation (including third party tax advice) related to tax
    • Refusal to provide non-statutory clearances
    • Public naming
    • Automatic 100% tax penalties

Observations in the Documents:

  • Attitudes to tax avoidance and aggressive tax planning have altered significantly, including political interest
  • Intention is to create Best Practices
  • The Government is awaiting the EU Tax Transparency Package consultation, and will consider its findings carefully
  • Proposal is separate from the current SAO regime, as well as the OECD’s country-by-country reporting guidelines
  • A company could be required to state in their tax strategy whether they are a signatory to the Voluntary Code of Practice
  • Non-publication of a tax strategy will be a consideration of HMRC’s tax risk reviews
  • Evidence of “governance in action” to be provided
  • Voluntary Code of Practice is aimed at tax planning that crosses over into tax avoidance
  • The company should reasonably believe that transactions give a tax result which is not contrary to Parliament’s intentions
  • Special measures will remain for a minimum of 2 years

A higher standard of tax excellence is being demanded by public pressures and tax administrations in the form of an objective tax risk framework overseen at the Board level and subject to internal control testing.  HMRC’s proposals are being followed by other countries worldwide, and similar measures would not be unexpected in other jurisdictions.  Accordingly, all interested parties should review the documents, and provide comments thereto.

 

UK: Name and shame scheme of promoters

HMRC has published new guidance providing for publication of names re: high risk promoters.  To the extent a promoter has not complied with the terms of a Conduct Notice previously communicated to them, the promoter will be publicly named and they will need to inform their clients of this monitoring action.

The first Conduct Notice has already been issued, as part of HMRC’s ambitious intent to address “tax avoidance.”

A link to the news story is provided:

https://www.gov.uk/government/news/high-risk-promoters-of-tax-avoidance-face-government-clampdown

The timing is also noteworthy, as it precedes final drafting of the Diverted Profits Tax proposal which will soon be followed by elections.

Advisors, as well as MNE’s, should monitor this trend of “name and shame,” as it is generally considered too late for damage control after one’s name and reputation are subject to public perception in this new age of addressing “tax avoidance.”

UK: HMRC Penalties Discussion Document

HMRC published a discussion document on 2 February addressing the role and imposition of penalties, with a closing date for comments 11 May 2015.  A link to the document is included:

Click to access 150130_HMRC_Penalties_a_Discussion_Document_FINAL_FOR_PUBLICATION__2_.pdf

Key Points:

  • HMRC’s compliance strategy is based on three principles: Promote good compliance via systems/processes, prevent non-compliance and respond to risks.
  • Questions for comment address concerns about current penalties and suggestions for changing the penalties process.
  • The process and next steps are developed in 5 stages: (1) Setting out objectives, (2) Developing options and a framework for implementation, (3) Drafting legislation, (4) Implementing/monitoring the change, and (5) Reviewing/evaluation the change.
  • Annex A provides an overview of the main penalty regimes, with a matrix of penalty percentages dependent on careless, deliberate, or deliberate and concealed behavior.

The document represents a willingness and “good faith” effort on behalf of HMRC to address the current state and request comments for Best Practice processes.  Interested parties should review the document and provide comments accordingly.

As the Diverted Profits Tax option seems to be moving forward quickly to be potentially effective in April, 2015, relevant processes for imposition of a 5% “tax penalty” and accelerated payments should be weighed against the five principles of HMRC’s penalty process.  The five principles state: The penalty regime should be designed from the customer perspective, they should be proportionate, penalties must be applied fairly ensuring that compliant customers are in a better position, penalties must provide a credible threat and customers should see a consistent and standardized approach.  Does the Diverted Profits tax process and objectives meet the principles expressed in the Discussion Document?

UK Consultation document: Tax Avoidance sanctions

HMRC has released a Consultation document entitled: Strengthening Sanctions for Tax Avoidance.  The document was provided on 30 January 2015, with comments due by 12 March 2015.  The document targets repeat offenders of tax avoidance schemes, and also proposes GAAR penalties and processes.

A link is included for reference:

Click to access Strengthening_sanctions_for_tax_avoidance_-_consultation_document.pdf

Key provisions:

  • It is focused on “tax avoidance” arrangements, specifically targeting “serial avoiders.”
  • A tax surcharge and special measures are suggested for repeated use of tax avoidance schemes.
  • A “name and shame” approach is also suggested, although being wary of reputational damage.
  • GAAR: It is now the right time to reconsider imposition of a GAAR-specific penalty and surcharge.  The document addresses maintenance of the current GAAR Independent Advisory Panel and related guidance, for which a flowchart is provided in Annex B for reference.
  • A series of questions re: Serial Avoiders and GAAR Penalties are provided for comment.

It is interesting to note the surcharge and accelerated payment concepts, also introduced in the controversial Diverted Profits Tax proposal.  Additionally, retaining the GAAR independent panel is a welcome statement that is not proposed for comment.

The inherent subjectivity of “tax avoidance” proposals potentially subject taxpayers and tax administrations to further complexity, additional costs and potential double taxation.  Therefore, all interested individuals and organisations should review this document and prepare comments to address this initiative, as other countries will be following these developments for possible application in their respective jurisdictions.

UK Diverted Profits Tax: Conference notes

The UK Diverted Profits Tax (DPT) Conference on 13 January, sponsored by the Oxford University Centre for Business Taxation, was presented to a packed audience.  Attendees represented news agencies, advisors, tax executives as well as other countries, including Australia.

The speaker panel was inclusive of the following presenters that provided excellent thoughts for discussion:

  • Philip Baker QC, a barrister and QC practising from Field Court Tax Chambers.
  • Michael Devereux, Director of the Oxford University Centre for Business Taxation, Professor of Business Taxation and Professorial Fellow at Oriel College, Oxford.
  • Paul Morton, Head of Group Tax at Reed Elsevier Group plc.
  • Heather Self, Partner at Pinsent Masons.
  • Mike Williams, Director of Business and International Tax at HMRC.

A few statements from the panelists offer some background on this debatable issue:

Philip Baker: The DPT is a Targeted Anti-Avoidance Measure.

Michael Devereux: This may represent an overlay of economic substance over existing international tax rules, and there is a debatable point if the UK treatment should depend on the incidence of income / tax inclusion somewhere else.

Paul Morton: A very real, and complex, set of facts were presented showing that countries’ initiatives may result in a tax burden that exceeds 100% of the income without adequate recourse to avoid double taxation.

Heather Self: Practical aspects, from a MNE perspective, of the proposal were presented, supplemented by comments in her 19 December article of Tax Journal.  One of the conclusions in her article states: “This measure will make BEPS more difficult to achieve, and it risks a whole raft of unilateral measures being introduced by other countries.”

Mike Williams: The DPT proposal has alot of political commitment; it is consistent with EU law and treaty obligations; the UK is trying not to tax beyond its fair share of profits; loan exclusions probably do not go far enough and to combat aggressive tax planning, why wait another year.

Comments also addressed the aggressive effective date of April 2015, noting this timeline is in advance of the final OECD BEPS guidelines and there is very little time for reasoned comments and review between now and April.

This initiative has drawn the attention of many countries, anxious to examine the potential benefits it would add to their economy.  Accordingly, it is imperative to track this proposal, its effective date, implementation and a “Follow the Leader” approach in other jurisdictions.

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.

UK: Diverted Profits Tax & CbC reporting

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.

http://www.taxjournal.com/tj/articles/google-tax-sends-clear-message-multinationals-divert-profits-10122014

Click to access Diverted_Profits_Tax.pdf

Click to access TIIN_2150.pdf

Diverted Profits Tax:

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.

CbC reporting:

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.

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

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