Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘OECD BEPS Action Plan’

UN Tax Workshop, including BEPS Subcommittee

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:

http://www.un.org/esa/ffd/tax/2014TBP2

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.

Poland taxes: CFC’s, Thin capitalization, participation exemption

The Polish President signed a tax bill, effective 1/1/2015 with some major tax reforms.

The changes include:

  • New Controlled Foreign Corp. (CFC) tax regime
  • Change in debt-to-equity ratio from 3:1 to 1:1, some planning opportunities available before year-end
  • Participation regime not applicable  for dividends that provided a deduction for the payor

EY’s Global Tax Alert provides a summary of the upcoming changes attached for reference:

Executive summary
On 16 September 2014, the Polish President signed a tax bill, approved by the Parliament on 29 August 2014, with several changes to the corporate tax rules. The new measures include the introduction of CFC (controlled foreign corporation) rules and much broader thin capitalization restrictions. Also, under the new measures, the participation exemption regime will not be applicable to taxpayers receiving dividends that gave rise to a deduction from the income (or other decrease in the taxable base or tax) of the distributing company. Furthermore, the new measures make the transfer pricing documentation requirements applicable to joint ventures and partnerships.

International groups may be affected by these changes to the Polish tax system that enter into force on 1 January 2015. Certain steps undertaken early enough may mitigate the impact of the changes.

Detailed discussion
Thin capitalization
New restrictions will limit the deductibility of interest on a much broader range of loans (generally on all intra-group financing). Currently only loans from a direct shareholder and/or direct sister company are subject to thin capitalization restrictions. However, loans granted by the end of 2014 may, under certain conditions, remain subject to the current liberal regulations.

The amended provisions introduce a 1:1 debt-to-equity ratio (currently 3:1) and a new definition of “equity.” In addition, taxpayers will have the option to use a new alternative thin cap calculation method based on a reference rate of the National Bank of Poland and the value of assets capped at a percentage of EBIT.

Taxpayers considering new debt placements may want to finalize plans by the end of 2014 to fall under the current rules. Taxpayers should make projections in order to be ready to choose the optimal calculation method (based on debt-to-equity ratio or the new one based on assets) before statutory deadlines.

CFC rules
2015 will witness an unprecedented change to the Polish tax system with the introduction of the CFC regime. The CFC regime will result in taxation of foreign companies’ income at the level of their direct or indirect Polish shareholders.

Depending on the date when the new law is published and on the tax year of the CFC, income of the CFC may be taxed shortly after the provisions enter into force.

Multinational groups should assess the impact of the CFC regime on their Polish companies with foreign subsidiaries and, if required, decide on steps to be taken to e.g., qualify for exemptions.

Other changes
In relation to the current legislation, it should be noted that General Anti Avoidance Regulations are planned to be introduced in Poland as of 1 January 2016.

Best Practice observation: How do these rules, as well as those from all other countries, get filtered and communicated timely to allow for planning in the current multinational tax structure.  As countries start to embark upon initiatives to change their domestic legislation, coupled with OECD BEPS Action Plan initiatives, there should be a proactive structure in place to review planning strategies and identify new risks in the global structure.

OECD BEPS 2014 Deliverables

The OECD has published its 2014 deliverables, referenced at the following link:

http://www.oecd.org/ctp/beps-2014-deliverables.htm

I would encourage all interested parties to thoroughly review the provisions, as well as listen to others as they comment on these significant proposals.

Note that the proposals are not yet enacted into law, which is a focus of the action to provide a multilateral instrument to help facilitate that objective.

Best Practice TP article: TP documentation: time for a strategy refresh

I have attached for reference my first published article, addressing transfer pricing documentation: time for a strategy refresh.

The article was published by Accountancy Magazine.  A reference to the article is included for reference:

https://www.accountancylive.com/transfer-pricing-documentation-time-strategy-refresh

The article addresses the OECD BEPS proposals, including country-by-country reporting, with Best Practice ideas included for Action Plan items.

Additionally, insights into processes for developing a comprehensive plan for revised TP documentation are discussed.

Finally, the hot topics of General Anti-Avoidance Rules (GAAR), local tax disclosures and tax policy statements are addressed for further insight.

 

 

 

 

 

 

 

 

 

Global tax policy in 2014: EY publication

Ernst & Young (EY) has published a very informative study, based on a survey of 830 executives in 25 markets.  The second section of the publication includes analyses of tax outlooks for 38 countries, including BEPS actions.  The 38 countries highlighted in the publication include:

Australia / Austria / Belgium / Canada / Chile / China / Czech Republic / Denmark / Finland / France / Germany / Greece / Hong Kong / Hungary / India / Ireland / Italy / Jordan / Korea / Lithuania / Luxembourg / Malaysia / Mexico / Netherlands / New Zealand / Norway / Panama / Poland / Russia / Singapore / Slovakia / South Africa / Spain / Sweden / Switzerland / United Kingdom / United States / Venezuela

A link to the publication is included for reference:

http://www.ey.com/Publication/vwLUAssets/EY-the-outlook-for-global-tax-policy-in-2014/$File/EY-the-outlook-for-global-tax-policy-in-2014.pdf

The publication includes an introductory section highlighting tax rates and a 2014 tax policy outlook.  The outlook includes the following sections:

  • How countries are adjusting their corporate tax base in 2014
  • Incentives
  • Withholding taxes
  • Transfer pricing changes
  • Interest / Business expense deductibility
  • Changes to tax treatment of losses
  • Changes to CFC rules / thin capitalization

The second section analyzes 38 separate countries, addressing the following topics:

  • Tax rates
  • 2014 tax policy outlook:
    • Key drivers of tax policy changes
    • Fiscal consolidation / stimulus
    • Tax policy outlook for 2014, including political landscape, current tax policy and administrative leaders, key tax policy changes in 2013, country position on OECD BEPS Action Plan, pending tax proposals and consultations opened / closed.

This publication is especially valuable in country outlooks, including the OECD BEPS Action Plan proposals, and should be consulted to develop continued awareness of current and future trends in international taxation.

 

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:

http://www.pwc.in/assets/pdfs/news-alert-tax/2014/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: Cbc reporting update

The OECD has provided further observations on its country-by-country information template, based on the premise such information is a useful guide in the risk assessment of transfer pricing for relevant jurisdictions.  KPMG has provided a summary of the latest notes by OECD on this topic:

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Pages/2014-1/oecd-update-on-transfer-pricing-documentation-country-by-country-reporting.aspx

As this important initiative develops into final form, additional questions that may be asked include:

  • Will this information only be provided to tax authorities both currently and in the future, versus subject to public disclosure?  Will the OECD and/or separate countries’ provide for such legal assurance?
  • Should tax authorities be requested to share results of a risk assessment, based on this data, with the taxpayer prior to any assessments to ensure facts are aligned  to promote efficiencies upon assessment, and potentially in domestic or treaty based appeals?  A possible Best Practice for adoption?
  • How will relevance of the global information impact discussions and determinations in the relevant jurisdiction upon audit?
  • Is a post-adoption survey planned to compare expectations with actual results, providing flexibility for ongoing changes as a risk assessment tool?
  • To the extent that a country has adopted, or will adopt, different rules for global reporting, will the rules prescribed by OECD override, or supplement, domestic law?  What (legal) mechanisms will be put in place to align expectations for domestic and international rules?
  • What alignment is planned for countries utilizing the UN Model Convention?
  • Will this tool be used differently for co-operative compliance engagements and/or joint audits?

Many other questions should be carefully considered, looking at both immediate issues for implementation and long-term effects for taxpayers and tax administrations.

 

 

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