Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘hybrid mismatch’

Hybrid mismatches: EU / Rest of World

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.

http://www.ey.com/Publication/vwLUAssets/EU_Council_adopts_Directive_ATAD_2_to_address_hybrid_mismatches_with_third_countries/$FILE/2017G_03493-171Gbl_EU%20Council%20adopts%20Directive%20to%20address%20hybrid%20mismatches%20with%20third%20countries.pdf

BEPS update: transparency

The latest BEPS updates are detailed in EY’s Global Tax Report, with the underlying premise of transparency.

Summary:

OECD: On 5 December 2016, the OECD released an updated version of the Guidance on the Implementation of Country-by-Country Reporting, providing flexibility for notification filing dates for countries not requiring a country-by-country (CbC) report for 2016.

Belgium: New innovation deduction covering patent and other IP rights.

EU: Proposal for hybrid mismatch rules with non-EU countries

Norway: Adoption and regulations for CbC reporting

UK: Interest limitation rules, among other provisions

US: CbC Form 8975 released

From a MNE perspective, it is increasingly apparent that deductions to, and benefits from, tax haven countries are under attack and substance is the key to business and tax decisions.  

(CbCR).http://www.ey.com/Publication/vwLUAssets/The_Latest_on_BEPS_-_19_December_2016/$FILE/2016G_04446-161Gbl_The%20Latest%20on%20BEPS%20-%2019%20December%202016.pdf

EU to Non-EU Hybrid rules

EY’s Global Tax Alert provides the latest developments into the EU’s hybrid arrangements with non-EU Member States to achieve consistency in application of the hybrid mismatch rules.  This development is not unanticipated, although will take some time to be fully developed and legislated into action.  In the interim, advance planning should take place, recognizing the fact that the current arrangements will not likely be allowed to exist much longer.

http://www.ey.com/Publication/vwLUAssets/European_Council_achieves_broad_consensus_on_draft_directive_aimed_at_closing_down_hybrid_mismatches_with_third_country_tax_systems/$FILE/2016G_04247-161Gbl_EC%20draft%20directive%20aimed%20at%20closing%20down%20hybrid%20mismatches%20with%20third%20country%20tax%20systems.pdf

EU’s Dispute Resolution: Follow the leader

The European Commission issued a significantly important proposal for a Double Taxation Dispute Resolution; it hopes to remain a leader in this ever-changing international tax arena with a mandate for binding arbitration, as applicable, as one of the leading initiatives.  This proposal would require a unanimous adoption by all EU Member States (although UK’s vote may be considered to be of less significance as time moves on, it still counts).

Other proposals of the three-prong package include a renewed focus on the Common Consolidated Corporate Tax Base (CCCTB) and hybrid mismatches with third countries.  The last initiative is interesting, as the EU now seeks to expand its reach with those countries outside the EU.

Although each proposal is significant as a stand-alone initiative, the Dispute Resolution would provide the most benefit at a critical time for a win-win relationship going forward.

EY’s Global Tax Alert provides further details on this initiative for reference.

http://www.ey.com/Publication/vwLUAssets/European_Commission_announces_proposal_on_double_taxation_dispute_resolution_mechanisms_in_the_European_Union/$FILE/2016G_03538-161Gbl_EC%20announces%20proposal%20on%20double%20taxation%20dispute%20resolution%20mechanisms%20in%20the%20EU.pdf

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:

http://www.taxcom.org.za/docs/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.

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

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/385741/Diverted_Profits_Tax.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/385161/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.

OECD BEPS & EU Case Law: Uncertainty ahead

PwC has published a very informative article addressing the impact of EU case law, exemplified by cases from the Court of Justice of the European Union, on the OECD BEPS international tax proposals.  There may be additional uncertainty by EU Member States after the OECD BEPS measures are announced due to the “fundamental freedoms” in the Treaty on the Functioning of the European Union (CJEU), State Aid principles and the EU direct tax initiatives, including the Parent-Subsidiary Directive.  The link to the article is included for reference:

http://www.pwc.com/en_GX/gx/tax/newsletters/tax-policy-bulletin/assets/pwc-eu-beps-july-2014.pdf

The article provides excellent references to current EU Law concepts, including the basic premise that domestic legislation must be compliant with EU law.  Additionally, the OECD proposals for hybrid mismatch transactions, tax treaty abuse and harmful tax practices are discussed against the backdrop of EU legislation.

The article concludes with the takeaway: “The implementation of OECD BEPS proposals within the EU/EEA Member States will only be possible to the extent that those proposals are also compliant with EU Law.  So far, however, little attention seems to have been paid to potential EU Law issues in the OECD’s draft discussion papers, so that EU/EEA Member States might actually risk breaching EU Law.  As a result, companies doing business in the EU/EEA will be faced with legal uncertainty about the lawfulness of implemented OECD BEPS proposals in domestic law or tax treaties.”

As an additional observation, there is a likelihood that the domestic legislation enacting OECD BEPS proposals will not be consistent for each Member State, thereby the legal uncertainty should be reviewed for each Member State as domestic legislation and OECD proposals are implemented.

 

 

 

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