Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘OECD BEPS’

BEPS Country Scorecards

Attached is a valuable reference by Deloitte for BEPS initiatives on a jurisdictional basis for the Americas, Europe, APAC and S. Africa.

http://www2.deloitte.com/global/en/pages/tax/articles/beps-country-scorecards.html

The following information is provided for each included jurisdiction:

  • Current Legislative position
  • Perspective of government
  • Current Tax Authority Assessing Practices
  • Perspective of the Public
  • Unilateral BEPS Actions

As BEPS consultation papers and guidelines are being finalized into final guidance this year, this type of reference is valuable for a comprehensive oversight and awareness.

Canada’s TP memorandum: Unilateral rules preceding OECD’s guidelines

The Canada Revenue Agency (CRA) published Transfer Pricing Memorandum (TPM)-15 for intra-group services.  TPM-15 is meant to “clarify” CRA’s audit policy of intra-group services.  Although the guidance references OECD’s 2010 Transfer Pricing Guidelines, it is issued in advance of new OECD guidelines, thereby leading to further global inconsistency and instances of double taxation.  Links to a PwC summary and TPM-15 are included for reference:

Click to access pwc-canada-intra-group-services-guidance.pdf

http://www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/trns/tpm15-eng.html

CRA’s four-pronged approach to allocating costs is:

  1. Shareholder costs (no allocation)
  2. Specific non-Canadian entity costs (no allocation to Canadian entities)
  3. Specific Canadian entity costs (no allocation to non-Canadian entities)
  4. Corporate group costs, allocated via an arm’s length charge

Other highlights:

  • “Auditors should refrain from accepting the proportion of sales revenues as a single allocation basis for management fees.”
  • Specific provisions in the Income Tax Act on non-deductibility of certain costs trumps treaty arguments, leading to double taxation.
  • Indirect tax considerations are also addressed in the memorandum.

CRA’s aggressive approach, coupled with its timing, will result in additional complexity cloaked outside of the double treaty mechanisms for which the goal of avoiding double taxation may be ameliorated via appeal mechanisms.

All organisations with operations in Canada for which costs are allocated should review this memorandum to better understand CRA’s audit intent and processes.

Accordingly, documentation of the benefit provided locally, lack of duplication and transparency of the allocation method is vital in proving the tax benefit for intra-group services.

 

 

BEPS: Asset manager focus

EY’s Global Tax Alert focuses on BEPS considerations for asset managers,  This is a very timely and informative aspect of BEPS, as it will certainly have an impact on asset managers worldwide.  Early review and consideration of three significant proposals is recommended to ensure timely planning and relevant documentation.  The proposals include county-by-country reporting (Action 13), treaty abuse (Action 6), and hybrid mismatch arrangements (Action 2).

Click to access 2015G_CM5228_BEPS%20considerations%20for%20asset%20managers.pdf

The Alert is informative for all MNE’s and fund managers, ensuring the BEPS review umbrella appropriately encompasses direct and indirect aspects of operations, including the investment fund industry.

TEI’s comments: BEPS Actions

TEI has provided comments in response to several OECD BEPS Actions, linked herein for reference.

Action 10:Profit Splits-Key comments:

  • Profit split methodologies should be limited to scenarios where there is not reliable arm’s length pricing.
  • Simple examples provided do not provide a comprehensive basis for detailed replies and consideration.
  • A profit split approach may be subject to abuse by tax authorities.
  • Hindsight application of transfer pricing methodologies should only be used in exceptional circumstances.

Click to access TEI%20Comments%20BEPS%20Action%2010%20-%20Profit%20Splits%20-%20FINAL%20to%20OECD%206%20February%202015.pdf

Actions 8-10: TP Guidelines

  • Transfer pricing analyses discussed in the proposal would require significant resources for MNE’s and tax authorities.
  • The possible merging of the approaches of attributing profits for Article 7 (PE) and Article 9 (Associated Enterprises) should be clarified.
  • The imposition of “insufficient transfer pricing documentation” penalties should be abandoned/relaxed by tax authorities for a reasonable period of time after implementation of the new guidelines.
  • Additional compliance burdens elicit increased complexity and confusion.

Click to access TEI%20Comments%20BEPS%20Actions%208-10%20-%20Risk%20and%20Recharacterisation%20FINAL%20to%20OECD%206%20February%202015.pdf

Action 4: Interest

  • The proposal represents a shift away from the arm’s length principle, introducing difficult and impractical problems to resolve.
  • Capitalisation factors include many considerations other than tax.
  • Double tax consequences are more likely, as MNE’s will not be able to easily rearrange financing structures worldwide.
  • The withholding tax impacts should be clarified for foreign tax credit and related calculations.
  • MNE’s with a higher effective tax rate, and thus less prone to base erosion or profit shifting arrangements, should be excluded.
  • The concept of global limitation calculations, and interest sharing, needs to be further discussed to determine efficient audit guidance.

Click to access TEI%20Comments%20BEPS%20Action%204%20-%20Interest%20Deductions%20-%20FINAL%20to%20OECD%203%20February%202015.pdf

Action 10: Commodities

  • Right to use publicly available quoted exchange prices as a comparable is a welcome proposal.
  • Discussion of other issues, including pricing, pricing date, and documentation should be further considered and clarified.

Click to access TEI%20Comments%20BEPS%20Action%2010%20-%20Commodity%20Transactions%20-%20FINAL%20to%20OECD%203%20February%202015.pdf

 

TEI’s comments are always informative, practical and highlight issues that are both useful as well as problematic.  Therefore, these comments provide an excellent forum, along with comments from other interested parties, for further consideration prior to drafting final guidance.

Indonesia: New MAP guidelines

The Indonesian Ministry of Finance has issued updated MAP guidelines, evidencing focus by the Indonesian Tax Office (ITO) on multilateral dispute resolution.  This regulation is the third MAP related guidance, with the inclusion of additional restrictions.  A link to KPMG’s Tax News Flash is provided for reference:

Click to access Tax-News-Flash-January-2015.pdf

Key summary:

  • The MAP process will be terminated when the Indonesian tax court “deems” that it has conducted sufficient hearings.
  • A tax audit for the MAP years may be conducted, without clarity if such audit is restricted to the MAP issues.
  • A concurrent Indonesian MAP request is required for a MAP request by another country’s tax authority.
  • MAP does not postpone the obligation to pay the tax, unlike domestic legislation.

Indonesia is uniquely interpreting the tax treaty to limit the opportunity for MAP appeals, while introducing additional subjectivity in the rules via vagaries of  the Indonesian tax court’s hearing process.  Most importantly, it will be important to consider the MAP process upon the commencement of an Indonesian audit due to ongoing uncertainties.  

Notably, this guidance is being issued prior to the finalization of the OECD dispute resolution guidelines that will most likely result in inconsistent guidelines for MAP.   

TEI’s comments: OECD BEPS Actions 10 and 14

Tax Executives Institute, Inc. (TEI) recently published comments re: OECD BEPS Action 10, addressing Low Value-Adding Intra-Group Services, and Action 14 re: Dispute Resolution Mechanisms.  The comments elicit practical considerations, including worldwide consistency, in their well written and reasoned responses.  Although many individuals/organizations have provided comments, TEI’s submissions merit required reading and thoughtful consideration. Links to TEI’s comments are included for reference:

Click to access TEI%20Comments%20BEPS%20Action%2010%20-%20Low%20Value%20Added%20Services%20-%20FINAL%20to%20OECD%2013%20January%202015.pdf

Click to access TEI%20Comments%20BEPS%20Action%2014%20-%20Dispute%20Resolution%20-%20FINAL%20to%20OECD%2015%20January%202015.pdf

Key comments re: Action 10, Low Value-Adding Services

  • Non-global implementation will diminish the intended value of this initiative.
  • A “rebuttable presumption” should replace the “benefits test” for low value -added services.
  • Exclusion of corporate senior management’s services is complex; it may be easier to include such services.
  • A mark-up % of 0-5% should replace 2-5% for flexibility and reflecting cost contribution arrangements.
  • Any percentage within the safe harbour range should be allowable.
  • Guidance should be issued re: coordination of Action 10 and Action 13 re: transfer pricing documentation.
  • Reference to the OECD’s previous work on safe harbours has been omitted, for no stated reason.
  • The safe harbour should be available if the taxpayer’s method is different in another jurisdiction (i.e. APA’s, non-OECD alignment).

Key comments re: Action 14, Dispute Resolution Mechanisms

  • Published MAP guidelines and procedures are welcome, although redacted settlements would also reveal legal basis for outcomes,  and may be used as precedent for taxpayers.
  • KPI’s should be established.
  • Monitoring the MAP process is an excellent proposal suggested in the report.
  • A global dispute resolution mechanism and mandatory binding arbitration should be developed, with arbitration available as a pre-MAP appeal avenue.
  • Deadlines for Competent Authority (CA) requests should be in place, along with penalties for CA if they do not respond timely.
  • Maintaining confidentiality is critical and should be a primary focus, especially for countries initially adopting this process.
  • Transparency of independency for Competent Authorities would improve confidence in the process.
  • Taxpayers should participate in face-to-face meetings to facilitate the process, and a simplified process should initiate MAP assistance.
  • Precluding taxpayers from using MAP, directly or indirectly giving up their rights, is not acceptable.
  • Binding arbitration provisions and/or use of a domestic or treaty-based anti-abuse rule should not preclude MAP.
  • Tax, interest and penalties should be suspended during the MAP process.

The comments on Action 14 are especially critical, as dispute resolution will be a critical factor in ensuring that the BEPS guidelines legislated into law will have consistent, fair and transparent processes to resolve disputes timely and effectively.

S. Africa’s BEPS incentivized interest rules

S, Africa’s new interest limitation on related party debt, approximating 40% of EBITDA, is effective as of 1/1/2015.  The new rules are prescribed prior to the OECD BEPS Action 4 Guidelines re: interest limitations.  Disallowed interest is carried over indefinitely, subject to the subsequent year’s limitation.

PwC’s guidance is provided for reference:

Click to access pwc-south-africa-introduces-interest-deduction-limits-debts-owed.pdf

As countries aggressively enact BEPS incentives with unilateral legislation, the premise of worldwide consistency for new OECD guidelines diminishes virtually daily.  New legislation also reduces the country’s further incentive to change such legislation to align with final OECD guidelines.

As S. Africa’s new rules demonstrate, there should be a BEPS champion/team in place at MNE’s to capture such changes worldwide and measure such impacts upon the global organization.  Additionally, future strategic planning should consider current BEPS initiatives, and unilateral legislation that has been passed, to measure tax efficiencies of current and future debt structures.

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.

Japan’s tax reform proposals, including BEPS initiatives

EY has provided a concise summary of Japan’s tax reform proposals, including the limitation for a participation exemption of dividends that are deductible by the payor in alignment with OECD BEPS initiatives and matching the recent change in the EU Parent-Subsidiary Directive.  As Japan, and other countries, enact tax reforms that include OECD BEPS initiatives, it is imperative to review legal structures and potential impacts of such changes, including BEPS reforms.

Trends are also developing as countries follow similar changes of other countries, eager to adopt a “Follow the Leader” approach if it may attract additional tax revenues and economic growth.

EY’s Alert is included herein for reference:

On 30 December 2014, Japan’s coalition leading parties released the 2015 Tax Reform Outline (Outline). The Outline includes both favorable proposals, such as a corporate tax rate reduction and unfavorable proposals, such as lowering an annual net operating loss (NOL) deduction limitation. A tax reform bill will be prepared based on this Outline. The bill will be submitted to the Diet and enacted by the end of March 2015. This Alert summarizes key provisions relevant to multinational corporate taxpayers.

Corporate tax rate reductions
The national corporate tax rate will be reduced to 23.9% from 25.5% for taxable years beginning on or after 1 April 2015.
The local enterprise tax rate applicable to income base will be reduced to 6% from 7.2% for taxable years beginning on or after 1 April 2015.
The combined national and local effective corporate tax rate will be reduced to 32.11% from the current 34.62%.1
A further rate cut is planned in a 2016 tax reform, which would make the combined effective tax rate 31.33%.
The Government is planning to lower the combined effective tax rate to below 30% over several years.
Amendment to NOL deduction and carryover period
A 65% limitation for an annual NOL deduction (compared to the current 80%) is proposed for taxable years between years beginning on or after 1 April 2015 and years beginning on or before 31 March 2017. A further reduction to 50% will apply to taxable years beginning on or after 1 April 2017.
The current 9-year carryover period is extended to 10 years for NOLs incurring for taxable years beginning on or after 1 April 2017.
Small and medium enterprises (SMEs)2 are eligible for a 100% NOL deduction and a 9-year/10-year NOL carryover period.
A special rule will apply to a newly established corporation and a corporation emerging from bankruptcy, which allows a 100% NOL deduction for a seven-year period.
Amendment to domestic dividend received deduction (DRD) rule
The proposed new DRD rates apply to domestic shareholders holding 33.33% or less interest in a Japanese distributing company as follows:3
Ownership percentage
Current
Amendment
At least 25% and 33.33% or less
100%*
50%
More than 5% and less than 25%
50%*
5% or less
20%
* The amount of interest expense allocable to the acquisition cost of stocks will be reduced from the amount of DRD.

For insurance companies, the applicable DRD rate for stocks owned 5% or less will be 40%.
Reduction in income tax base (local enterprise tax)
Local enterprise tax consists of three elements – capital, value added and income. While the total combined tax revenues are intended to remain unchanged, income base percentages over a total enterprise tax are expected to be reduced from the current 75% to 62.5% and 50% for 2015 and 2016, respectively.
Amendment to research and development (R&D) tax credit
The R&D tax credit limitation4 will be reduced from the current 30% to 25% of national corporate tax liability of a taxable year.
A new R&D tax credit limitation of up to 5% of national corporate tax liability will be introduced for special experiment and research expenses.
The carryover of unused creditable amount will be repealed.
International taxation
The proposal will change the effective tax rate from the 20% or less to less than 20% when determining a foreign tax haven subsidiary status.
A 95% participation exemption for dividends paid by a foreign subsidiary will no longer be available for dividends that are deductible in the country where the foreign subsidiary is located.
Consumption tax
The second phase of the consumption tax rate increase (from 8% to 10%) will be postponed for 18 months to 1 April 2017.
Provision of digital services (e.g., e-books, internet-delivery of music, advertisement, etc.) provided by a foreign person to Japanese customers will be subject to consumption tax from 1 October 2015. For business to consumer transactions, the foreign service provider will be required to register as a taxable entity and file consumption tax returns. For business to business transactions, a reverse-charge mechanism will be introduced, which requires a Japanese service recipient to declare taxable sales and related tax due on its consumption tax return.
Endnotes
1. Some local jurisdictions impose higher local inhabitant and enterprise tax rates than the standard rate. The current combined national and local effective tax rate applicable to a corporation located in Tokyo area with capital of more than JPY100 million is 35.64%, and this will be reduced to 33.1% based on the Outline.

2. An SME is generally defined as an entity with capital of JPY100 million or less. An entity that is wholly owned by a shareholder whose capital amount is JPY500 million or more is excluded from the SME regime.

3. Shareholders who hold more than 33.33% interest are eligible for a 100% DRD.

4. The change is only for the base credit portion. For additional information, see EY Tax Alerts, Japan releases 2012 tax reform outline, dated 15 December 2011 and Japan’s tax reform outline announced, dated 4 October 2013.

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.

Spain: New laws, including BEPS alignment

Spain has introduced new tax reforms that will be effective 1/1/2015.  A Deloitte International Tax Alert provides details of the new rules, with a link provided for reference:

Click to access dttl-tax-alert-spain-021214.pdf

Key Observations:

  • OECD BEPS incentivized anti-hybrid rule; Disallowed deductions where no income is generated (Deduction/No-Inclusion), income will not be subject to tax, or income will be subject to a nominal tax rate of less than 10%.
  • Impairment losses will be limited.
  • The 30% corporate income tax rate will be reduced to 28% for 2015, and 25% in subsequent years.
  • NOL’s will be available for indefinite carryover, although subject to taxable income limitations.
  • The Statute of Limitations to review NOL’s is extended from 4 to 10 years.
  • Participation exemption rules are revised, including a anti-hybrid measure to prevent a benefit where a dividend represents a deductible expense for the payer (in alignment with the EU Parent-Subsidiary Directive).
  • New consolidated tax regimes are included, including horizontal tax consolidation.
  • Goodwill and asset step-ups of a merger after 2014 will not be recognized for tax purposes.
  • CFC rules are modified.  Spanish taxable income will include a CFC’s income from a transfer of assets or rights, or service income of the CFC where there are no material and personnel resources at the level of the CFC.  Additionally, certain passive income will be subject to the CFC rules.

The EU Parent-Subsidiary Directive (EU PSD) rules were anticipated to be effective by the end of 2015, whereas the anti-hybrid rules represent a proactive legislative response to the OECD BEPS initiatives for which this rule may not match the final guidelines that the OECD will provide in 2015.

Accordingly, the OECD BEPS Guidelines should be closely followed, knowing that proposed guidelines and actions are being legislatively enacted in various countries that provide a complex puzzle of different actions for identical transactions.

OECD BEPS recent releases

The OECD has, in the past week, published several consultation drafts, with relevant links provided for reference.

The documents include:

Action 8,9,10: Risk, recharacterization

Action 14: Dispute resolution

Action 4: Interest deductions

Action 10: Profit splits

Action 10: Transfer pricing aspects of cross-border commodity transactions

International VAT / GST Guidelines

Click to access discussion-draft-action-10-commodity-transactions.pdf

Click to access discussion-draft-action-10-profit-splits-global-value-chains.pdf

Click to access discussion-draft-action-4-interest-deductions.pdf

Click to access discussion-draft-action-14-make-dispute-resolution-mechanisms-more-effective.pdf

Click to access discussion-draft-actions-8-9-10-chapter-1-TP-Guidelines-risk-recharacterisation-special-measures.pdf

Click to access discussion-draft-oecd-international-vat-gst-guidelines.pdf

The discussion drafts have deadlines for comment in January or February 2015, and all interested parties should review the relevant drafts to submit comments accordingly.  Additionally, the documents should be reviewed by all international tax practitioners to understand the trend of these topics, thereby affecting how all countries may be affected, directly or indirectly, by these actions.

Audit Diary = Tax Risk Best Practice

With the increasing complexity of audits, OECD BEPS incentivized unilateral legislation, General Anti-Avoidance Rules (GAAR), and cases proceeding to arbitration, appeals and Mutual Agreement Procedure (MAP), a comprehensive tax audit diary will prove to be of valuable reference during the audit, from commencement to final determination and thereafter.

Ideally, this diary could be signed/initialed contemporaneously by the company and tax authorities signifying agreement of the summary.

A tax audit diary may include the following components:

  • Summary of discussions at each audit meeting, including attendees, conclusions, future actions and promised timelines.
  • Paper/electronic copies of all written audit inquiries received, including a date stamp upon receipt.
  • Paper/electronic copies of all written audit inquiries provided, including the date provided to tax authorities.
  • Copies of all reports, including transfer pricing studies, provided.
  • Agreement as to what documents are not to be provided, with mutual consent of the company and tax authorities.
  • Documentation of BEPS related discussions / assessments not yet legislated into domestic law.
  • Summary of discussions re: jeopardy assessments / threats of additional assessments re: Competent Authority filings.
  • References to adequate / inadequate transfer pricing documentation, as a finding of “inadequate documentation” may provide a basis for additional interest, penalties and possible disallowance of treaty benefits, such as MAP.

The diary should be included in corporate governance documentation that will provide consistency upon changes in personnel during the course of an audit, including relevant appeals.

Additionally, this diary will be instrumental in providing information to Competent Authority personnel and advisors for clarity of the audit negotiations and discussions, as well as serving as one source of valuable reference for the audit, including similar audits of other legal entities in that jurisdiction, joint audits, etc.

A discussion of a joint audit discussion as a component of the Tax Risk Framework is included in an earlier post dated 25 October 2014 for related reference.

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.

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