On May 29. 2017 the EU Council adopted the Anti-Tax Avoidance Directive (ATAD), to be effective by 1/1/2020 between EU and the rest of world for hybrid mismatch arrangements. This Directive is known as ATAD-2 and follows the intent of BEPS Action 2, hybrid mismatch arrangements.
ATAD 2 expands the scope to address hybrid permanent establishment (PE) mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches.
EY’s Global Tax Alert provides additional details; all hybrid mismatch arrangements will be of limited use going forward to the extent they are included in these new rules.
EY’s Global Tax Alert provides the latest BEPS developments for the OECD, EU, Israel, Netherlands, Portugal, South Africa, Sweden, Switzerland, Uruguay and Chile. Brief extracts are provided, with Best Practice comments, with the Tax Alert provided for reference:
Bermuda signed the Multilateral Competent Authority Agreement for the automatic exchange of Country-by-Country reports (CbC MCAA), becoming the 33rd signatory of this instrument.
On 19 April 2016, the OECD released a communiqué announcing that together with the International Monetary Fund (IMF), the United Nations and the World Bank (collectively referred to as the “International Organizations”) have joined efforts to boost global cooperation in tax matters. The joint initiative, named “Platform for Collaboration on Tax” or simply “the Platform,” aims to produce concrete joint outputs and deliverables under an agreed work plan, strengthen dynamic interactions between standard setting, capacity building and technical assistance, and share information on activities more systematically.
The Platform will work on:
Developing appropriate tools for developing countries
Supporting developing countries to participate in the implementation of BEPS
Building effective tax systems and building awareness
Providing a venue for information sharing
The first of the toolkits addresses tax incentives and was issued in November 2015. The remaining seven toolkits will address the indirect transfer of assets (September 2016), transfer pricing comparability (October 2016), transfer pricing documentation (October 2016), tax treaty negotiation capacity (December 2016), base eroding payments (June 2017), supply chain management (March 2018), and BEPS risk assessment (March 2018).
The proposed amendments to the Accounting Directive would require large multinational companies operating in the European Union to draw up and publically disclose reports on income tax information, including a breakdown of profits, revenues, taxes and employees. Note, this is an Accounting Directive that provides another legislative approach to implement transparency measures in addition to proposed EU Directives and/or separate country guidelines. This is also another layer of complexity in reporting by multinational organizations, for which other countries may also adopt as part of statutory reporting that is public information. This report will also dictate a Q&A proactive approach by organisations to address perceived gaps and comments by the public. Such reporting, when finalized, should also be summarized to the Board of Directors as an alignment of their responsibilities.
The concept of “significant digital presence” has been communicated in a circular to broaden the tax net for internet activities applicable for corporate income tax and VAT purposes. Other countries have been, and will continue, embracing this subjective area of tax for additional revenue, albeit with subjectivity and avenues for additional disputes.
Portugal & South Africa:
Draft legislation adopting country-by-country (CbC) reporting has been published. To the extent any US-based multinational thinks additional time is provided due to the potential 1-year lag for US CbC reporting, such legislation demanding obligatory reporting in the parent jurisdiction should reassess future internal reporting timelines and processes.
A consultation process and draft legislation of CbC reporting for the 2018 tax year has commenced, with voluntary reporting for the 2016 and 2017 tax years.
Chile and Uruguay signed a Double Tax Treaty that embodies several BEPS concepts, such as permanent establishment (PE) and hybrid mismatch arrangements. Note, the new BEPS incentivized treaties are currently legislated in several countries, although the related BEPS guidelines may still not be finalized. Accordingly, it is relevant to cross-check countries with significant transactions with the signature of new treaties.
The EU, now recognized as the accelerator of BEPS for its Member States, have issued a roadmap of priorities and objectives for the near future. A link to Deloitte’s World Tax Advisor is provided, and the attached article therein.
I have highlighted certain parts of the roadmap worth watching:
Country-by-Country reporting (will there be a consistent EU standard?)
Hybrid mismatch arrangements
Code of Conduct activities, including alignment of transfer pricing outcomes with value creation, an extension of BEPS Actions 8-10. (Note Sweden and UK are already using such Actions re: clarification of existing transfer pricing policy)
Payments from an EU to non-EU country
The EU Arbitration Convention is mentioned, although it’s practical effect on mitigating dispute resolution is limited
European Union: Dutch presidency issues EU-BEPS roadmap
The Netherlands, which currently holds the presidency of the council of the EU, issued an ambitious EU-BEPS “roadmap” on 19 February 2016 that sets out plans to move forward with previous EU proposals, as well as future efforts on areas relating to the OECD’s base erosion and profit shifting (BEPS) project. The roadmap includes the following:
Possibly including a minimum effective taxation clause in the EU interest and royalties directive, and also possibly including or referring to the OECD “modified nexus approach” (however, no mention is made of the previous proposals to reduce the shareholding requirement in the directive from 25% to 10%, add legal entities to the annex or remove the “direct” holding requirement);
Reaching agreement on the European Commission’s proposal to introduce the OECD BEPS minimum standard for country-by-country reporting in the EU;
Initiating discussions for reforming the EU Code of Conduct group (specifically, the group’s governance, transparency and working methods), followed by discussions on a revision to the mandate in relation to the concept that profits are subject, as appropriate, to an effective level of tax within the EU;
Reaching agreement on guidance and explanatory notes on hybrid permanent establishment mismatches in situations involving third countries;
Continuing to monitor the legislative process necessary to revise existing patent box regimes; and
Monitoring and exchanging views on the BEPS developments relating to tax treaties concluded by EU member states, the OECD multilateral instrument to modify tax treaties and the European Commission’s recent recommendations on the implementation of measures to combat tax treaty abuse.
The Code of Conduct group will start work on the following:
Preparing EU guidance on aligning transfer pricing outcomes with value creation, in accordance with BEPS actions 8-10;
Identifying potential issues that arise when payments are made from the EU to a non- EU country;
Assessing the opportunity for developing EU guidance for implementing the conclusions on BEPS action 12 (the disclosure of aggressive tax planning), notably, with a view to facilitating the exchange of information between tax authorities; and
Developing guidelines on the conditions and rules for the issuance of tax rulings by EU member states.Additionally, the High Level Working Party on Taxation may discuss the current situation regarding the EU arbitration convention that allows the settlement of transfer pricing disputes.
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.
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.
Presumption: Tax residence is moved solely to benefit from a low-tax jurisdiction.
Summary: Tax on transferring assets cross-border to capture unrealized profits.
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.
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:
A 60% penalty of tax due for successful general anti-abuse rule (GAAR) cases, to be implemented in 2016. The revenue impact of this measure is highly uncertain, as it is also meant to be an incentive to change corporate tax behavior.
A desire to be to the most digitally advanced tax administration in the world.
New criminal offense for corporates failing to prevent tax evasion; failure to prevent their agents from criminally facilitating tax evasion by an individual or entity.
Hybrid mismatch rules to be effective 1/1/2017, following the OECD’s BEPS Guidelines.
Corporates to publish tax strategies as they relate to, or affect, UK taxation.
Cooperative compliance framework.
“Special measures” regime to tackle businesses that persistently engage in aggressive tax planning.
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.
The Australian government has released Terms of Reference in preparation for anti-hybrid legislation, expected to be announced 12 May, 2016 in the federal budget. Effective dates may be set as of 1 July, 2016 or 1 January, 2017 for calendar year taxpayers.
Specific rules are under consideration, including:
Objectives for eliminating double non-taxation
Economic costs for Australia
Taxpayer compliance costs
Interactions of domestic legislation, tax treaties and new anti-hybrid rules, expected to be announced by the OECD in October 2015.
A PwC Tax Insight summary is included for reference:
Australia, recently following the lead of the UK for diverted profits tax initiatives, has shown its proactive stance for adoption of the new OECD guidelines.
It is important to note that Australia will wait for the final OECD guidelines to pass matching legislation. This legislative trend, and steps to initiate BEPS proposals quickly, will be a trend to watch for the rest of world countries.
HMRC has published draft rules, entitled “Tackling aggressive tax planning,” to give effect to OECD’s BEPS Action 2 item, Neutralising the Effect of Hybrid Mismatch Arrangements.
The legislation will be effective as of 1/1/2017, preceded by this consultation paper, a summary of responses in summer 2015 and a second consultation on proposed draft legislation prior to its introduction in a future finance bill. Interested parties have until 11 February 2015 to provide comments for this consultation.
The draft legislation is envisioned to follow the OECD guidelines, and commentary, that are due to be completed by September 2015. A copy of the consultation paper is provided for reference:
The primary and defensive rules, as provided by the OECD BEPS Guidelines will be followed. The primary rule will be used to deny the payer’s deduction for a deduction/no income inclusion arrangement of a hybrid financial instrument or disregarded payment made by a hybrid entity, while the defensive rule would include taxing the income by the payee. For a double deduction arrangement of a deductible payment made to a hybrid entity, the deduction by the investor’s parent jurisdiction is denied using the primary rule, while the defensive rule would deny the payer deduction.
Rules will be considered to restrict the tax transparency of reverse hybrids.
The UK anti-arbitrage rules will not likely be retained.
The definition of an “arrangement” will not be the OECD version, as the existing UK definition would be used to achieve the same result.
Timing differences are not included, unless it appears that they will not unwind within a reasonable (5 years) time period.
The mismatch rules will apply for intra-UK and cross border situations.
For mismatches as a result of both a hybrid financial instrument and a hybrid entity, the hybrid financial instrument rule applies first.
Amended corporation tax returns and/or MAP procedures are permissible if the original mismatch no longer exists.
Tax treaties will not prevent the application of the recommended domestic laws to neutralise the effect of hybrid mismatch arrangements, thus no treaty amendments are necessary to apply the mismatch rules.
No grandfathering rules are envisioned, as the advance announcement of the UK rules will provide a transitional period to unwind structures.
The hybrid mismatch rules will operate within the UK’s self-assessment regime.
As stated in the Foreword of the consultation document, the UK’s strategy is to create the most competitive tax environment in the G20 and has led the way, driving the international tax, transparency and trade agenda forward.
The consultation paper is comprehensive, with numerous examples provided to illustrate, and visualize, the impact of the proposed rules. This proactive measure should be monitored to see how other countries follow the UK’s lead for taxing mismatch arrangements, including the timing and incorporation of the final guidelines by the OECD in 2015.
The UN organized its second workshop on “Tax Base Protection for Developing Countries” on 23 Sept. 2014. The background materials for the workshop provide valuable insights into the roles that developing countries will continue to play, directly or indirectly, as a part of the OECD BEPS Action Plan. The final outcome of the project will be a UN handbook. The topics for the workshop were in parallel with the background materials, focusing on the following topics: (1) Preventing the artificial avoidance of PE status; (2) Neutralizing effects of hybrid mismatch arrangements; (3) Limiting interest deductions; (4) Taxation of capital gains; (5) Preventing tax treaty abuse; and (6) Transparency and disclosure. Additional information, including the background materials, are referenced at the following link:
This workshop, and its continuing developments, are significant in assessing whether the OECD Actions will be followed by developing and non-OECD countries in their recommended form and/or if a simpler, more direct application of international tax rules will be pursued. All interested parties should be aware of these materials and the forthcoming UN handbook.