Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘OECD BEPS’

EU Parent-Sub Directive: Anti-abuse proposal

A anti-abuse rule has been proposed by the EU Economic and Financial Affairs Council for inclusion in the EU Parent-Subsidiary Directive (PSD), following implementation of hybrid mismatch rules as summarized in my post of 24 June 2014.  The proposal would be required to legislated into law by 31 December 2015, in addition to the earlier hybrid loan rules.

A copy of the communique is attached for reference:

http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2016435%202014%20INIT

Key observations:
Annex I contains the following language (highlights added for emphasis) for the proposed anti-abuse rule:

Member States shall not grant the benefits of this Directive to an arrangement or a series of arrangements that, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage which defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. 3. For the purposes of paragraph 2, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. 4. This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse.”

Annex II provides further reference stating that EU Member States  will endeavor to inform each other, and additionally that an anti-abuse provision will be considered in future work addressing the EU Interest and Royalties Directive 2003/49/EC.

This proposal should be closely followed, as it will directly affect transactions between EU Member States.  Additionally, this initiative will be followed by other countries in drafting domestic and/or treaty anti-abuse/anti-avoidance rules, possibly resulting in a multi-pronged approach of anti-avoidance / anti-abuse rules in Directives, treaties and domestic legislation.

The subjectivity of this rule will increase complexity, reduce clarity and certainty while being subject to further appeals contesting implementation and/or interpretation of the guidelines, including the “main purpose” test.

OECD BEPS: EY update

EY’s recent tax alert highlights the recent developments and trends of the OECD BEPS initiatives:

OECD
The OECD has announced another in its series of webcasts providing updates on developments with respect to the BEPS project. The webcast is scheduled for 15 December 2014 and will feature senior members of the OECD secretariat.

Asia-Pacific region
On 24-27 November 2014, the creation of a new task force was announced at a meeting of the Study Group on Asian Tax Administration and Research (SGATAR) in Sydney. The task force is to be made up of SGATAR members and be designed to, among other things, enable the Asia-Pacific region to discuss and to keep abreast of international developments and issues including base erosion, profit shifting, and tax transparency. According to the announcement, there is already unprecedented and powerful global collaboration on these issues and the creation of the task force will give all SGATAR members a platform to play a role, including relaying their views to international forums. The task force also is intended to enable cooperation and support for the development of robust, cohesive tax systems in each jurisdiction. According to the announcement, SGATAR members will be able to use the task force to coordinate sharing of best practices and experience and to seek assistance on implementing initiatives such as exchange of information. Current SGATAR members include Australia, People’s Republic of China, Hong Kong SAR, Indonesia, Japan, Republic of Korea, Macao SAR, Malaysia, Mongolia, New Zealand, Papua New Guinea, The Philippines, Singapore, Chinese Taipei, Thailand and Vietnam.

See EY Global Tax Alert, Asia Pacific tax administrations create task force as next step in greater regional cooperation, dated 2 December 2014.

European Union
On 1 December 2014, according to several media outlets, the Finance Ministers of Germany, France and Italy sent a joint letter to Pierre Moscovici, European Union (EU) Commissioner for Economic and Financial Affairs, Taxation and Customs. According to the reports, the letter calls upon the EU to rapidly develop a new EU Directive on anti-base erosion and profit-shifting measures, which should be presented for consideration before the end of 2014, with a view to EU Member States adopting the measures therein by the end of 2015. According to the reports, the ministers noted that the G20 and the OECD are already one year through a two year long comprehensive BEPS initiative, but further noted that it is important that the EU should also adopt a common set of binding rules that go beyond greater transparency and company registries, to a “general principle of effective taxation” to compensate for the EU’s lack of “tax harmonization.” According to the letter, these rules should include mandatory and automatic exchange of information on cross-border tax rulings (including Advance Pricing Agreements in the field of transfer pricing), a register identifying beneficiaries of trusts, shell companies and other non-transparent entities, and measures against tax havens.

See EY Global Tax Alert, Finance Ministers of France, Germany and Italy ask European Commission to rapidly develop a new Directive addressing tax avoidance and tax evasion issues, dated 2 December 2014.

France
On 5 December 2014, during the debates on the Draft Amended Finance Bill for 2014, the French Assemblée Nationale incorporated a provision addressing inbound hybrid payments. The rule would deny the participation exemption on income from shares (i) if the income was tax deductible for the distributing entity (in implementation of the EU Parent-Subsidiary Directive as amended on 8 July 2014) or (ii) if such income was paid out of profits from a non-taxable activity. The rule would apply to fiscal years that begin on or after 1 January 2015. The Bill is still in draft form, and final enactment is expected by the end of December.

See EY Global Tax Alert, French Parliament to implement recent EU rule on hybrid mismatches, dated 8 December 2014.

Netherlands
On 1 December 2014, the Dutch State Secretary of Finance provided input on previously raised parliamentary questions regarding the future of the innovation box regime. Generally, the Dutch State Secretary supports the discussions around substance requirements, but also wants to safeguard the position of innovative small and medium sized entities. The Dutch State Secretary has stated that the Netherlands plans to continue to promote innovation through tax and other incentives and expressed the view that, in light of the strong substance requirements that are in place for the Dutch innovation box, the regime should not be vulnerable for abuse. Based on this, it is not expected that the Dutch government will propose major changes to the Dutch innovation regime at this time.

See EY Global Tax Alert, Dutch State Secretary of Finance provides input on innovation box regime, dated 5 December 2014.

New Zealand
On 27 November 2014, New Zealand’s Minister of Revenue released two officials’ reports regarding BEPS. They outline officials’ current views on the BEPS project and the timetable for action. They show strong support for the OECD’s approach to BEPS and commit to no unilateral measures in advance of final OECD recommendations, which should reduce risks of incoherence and double taxation. They also show that tax authorities are using BEPS concerns to justify certain measures with respect to foreign trusts, non-resident withholding taxes, and tax compliance for large corporations. The reports provide a detailed timetable, which should give business some measure of short-term certainty.

South Africa
On 19 November 2014, National Treasury and the South African Revenue Service (SARS) made presentations on transfer pricing during a meeting of Parliament’s Mineral Resources and Finance Committees. SARS informed the committees that specific legislation is being considered for transfer pricing documentation and for country-by-country reporting and that a legislative framework for Advance Pricing Agreements is also being considered. While tighter legislation may be needed, SARS recognizes the importance of a balanced approach in line with domestic and international law, which does not pose a deterrent to foreign direct investment. The date when such legislation will be drafted (or implemented) is unclear. SARS also informed Parliament of the results of transfer pricing audits performed over the last three years. The SARS Transfer Pricing Unit has audited more than 30 cases and made transfer pricing adjustments of over R 20billion (at a conservative estimate) with an income tax impact of R 5billion. A similar number of cases are currently in progress and other cases are in the process of risk assessment. This underscores the importance for South African taxpayers of making sure that their transfer pricing policies are compliant with the arm’s length principle and South African transfer pricing regulations.

See EY Global Tax Alert, South African authorities address transfer pricing and OECD’s BEPS Action Plan, dated 8 December 2014.

Spain
On 28 November 2014, Laws enacting a Spanish tax reform were published in the Spanish Official Gazette. Most rules will enter into force as of 1 January 2015 (subject to specific transition rules). Among many other measures, the new Laws address matters that are focus areas in the OECD BEPS project. Anti-hybrid arrangement rules are introduced under which: (i) expenses corresponding to related party transactions will no longer be tax deductible if, as a result of a different tax characterization, no income is generated or, if generated, the income is tax exempt or subject to a nominal tax rate lower than 10%; and (ii) the participation exemption will no longer apply to dividend or profits distributions that are derived from a tax deductible expense in the source country. Intra-group profit sharing loans, currently characterized as debt instruments for Spanish tax purposes, are treated as equity instruments. An additional limitation is introduced that caps deductible interest on loans financing the purchase of purchase of shares at 30% of the operating profit of the acquiring entity (including where the acquired and acquiring entities are merged or join the same tax unity), subject to an escape clause. The Spanish controlled foreign company (CFC) rules are strengthened, including additional substance requirements for the CFC in order to avoid imputation of foreign low-taxed income. Anti-abuse rules regarding EU dividend and royalty payments are amended.

See EY Global Tax Alert, Spain enacts tax reform, dated 5 December 2014.

United Kingdom
On 2 December 2014, the UK Government issued an update on likely changes required to the UK patent box following the work being done on preferential, intellectual-property (IP) tax regimes as part of the OECD BEPS project. The UK announcement indicates that the joint UK and German proposal on a new modified nexus approach was welcomed by both the G20 and the OECD Forum on Harmful Tax Practices as well as the EU’s Code of Conduct Group in recent meetings. The proposal will now form the basis of continuing work by the Forum on Harmful Tax Practices to determine how the approach will work in practice. As part of this work, the OECD will carry out an informal consultation with countries and other stakeholders. Under the proposal, countries with existing preferential IP regimes would be required to agree to close these to new IP by 30 June 2016 and to eliminate them by 30 June 2021, after which all countries would be required to operate only regimes that are compliant with the modified nexus approach. The UK has confirmed its commitment to retaining a patent box. It will consult on changes to the existing patent box once the Forum on Harmful Tax Practices has completed work on the detail of the new rules.

See EY Global Tax Alert, Update on UK Patent Box and other preferential IP regimes, dated 3 December 2014.

On 3 December 2014, the UK Chancellor of the Exchequer delivered his Autumn Statement. Key announcements from a BEPS perspective include the introduction of a “diverted profits tax” on profits earned as a result of substantial UK activity (e.g., sales) where those profits are considered to be diverted abroad. The tax charge will be 25% of the diverted profits and will come into effect from 1 April 2015. At present there is no further information on the rules but draft legislation and a technical note are expected to be available on 10 December. Also, a consultation document was released on the implementation of the OECD’s recommendations to prevent hybrid mismatches under BEPS Action 2. The new rules are proposed to apply to payments made after 1 January 2017. The rules proposed in the consultation document are directionally similar to the existing UK anti-arbitrage rules, but the motive test would be removed. This would mean that, from 2017, any structure involving hybrid mismatches would potentially be subject to higher UK taxation, regardless of whether the mismatch was for the purposes of avoiding UK tax. The consultation document largely mirrors the latest Action 2 report issued by the OECD in September.

UK: “Aggressive tax planning” consultation paper

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:

Click to access tackling_aggressive_tax_planning_hybrids_mismatch_arrangements_consultation_final.pdf

Key observations:

  • 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.

 

TP Risk: Audit discussion = Framework for Ways of Working

As the OECD is developing new guidelines to address transfer pricing (TP) risk, including the Country-by-Country (CbC) template, a lack of emphasis resides in the idea that every tax audit involving cross-border issues should require an opening discussion between the taxpayer and the tax authorities of the business, its relevance in that jurisdiction apart from its global business, the functions, assets and risks for that jurisdiction upon which the arm’s length principle is based, and the rationale for the level of income/loss generated during the audit years.

Transfer pricing documentation reports, including a local country report, may be available for review.  However, such reports may not simply convey the business rationale easily to form an accurate understanding prior to embarking upon a leap into technicalities and assumptions to initiate data requests and move forward on assumptions prematurely.  For example, a company investing in a less developed country seeking long-term growth based on the domestic opportunity may have start-up losses, although such losses may be significantly offset by potential future income.

The open audit discussion should be developed into a Best Practice Ways of Working framework which is discussed and signed by the taxpayer and tax authorities.  This framework should be a simple and practical document addressing open dialogue, preliminary discussion of issues designed to produce the relevant documentation, timelines for requesting and providing information and a continuing dialogue discussing the status of open issues and requests, with a mutual effort to resolve issues efficiently.

To the extent this simple idea could be integrated consistently and uniformly around the world, it is a challenge worth addressing.

The Best Practice Ways of Working Framework could be a very effective and practical tool, supplementing the technical and legal requirements for transfer pricing.

MAP Vision: Forum on Tax Administration

The Forum on Tax Administration (FTA), representing heads of tax administrations from 38 countries, concluded their 9th meeting on 24 October, 2014.  The meeting represented attendance by over 130 delegations, including representatives from the African Tax Administration Forum (ATAF), Inter-American Center of Tax Administrations (CIAR), Centre de Rencontre des Administrations Fiscales (CREDAF), International Monetary Fund (IMF) and the Intra-European Organisation of Tax Administrations (IOTA).  The meeting included strategic visions for the Mutual Agreement Procedure (MAP) and Co-operative Compliance programs.

Links to the meeting summary and MAP vision are included for reference:

Click to access fta-2014-communique.pdf

Click to access map-strategic-plan.pdf

The following actions were agreed:

  • Enhanced cooperation strategy, based on existing legal instruments.
  • Created a new international tax platform, Joint International Tax Shelter Information and Collaboration (JITSIC Network) to focus on tax avoidance.
  • Implement the new standard on automatic exchange of information while protecting taxpayer confidentiality.
  • Improve practical operation of Mutual Agreement Procedure (MAP) to address double tax issues more quickly and efficiently, integrated with the OECD BEPS action item.  Competent authorities of all member countries are “encouraged” to actively participate in this initiative.
  • Promote a voluntary compliance structure.
  • Develop principles on Co-operative Compliance arrangements that form an integral part of effective tax control frameworks.

MAP Strategic Plan summary – “Statement of Vision and Commitment”

  1. Collaboration of the FTA MAP Forum with other multilateral bodies, including OECD’s Working Party 1’s Focus Group, to further its goals.
  2. Participating Competent Authorities (CAs) commit to the stated goals and be accountable thereto.
  3. Allocation of adequate staffing levels and resources to meet CAs working demands.
  4. Adequate training programs and personnel practices.
  5. FTA MAP Forum’s engagement to address resource challenges.
  6. Empowerment of CAs to effect agreements in accordance with principles in the respective tax conventions.
  7. Absence of undue influence by administrative policies, practices or goals.
  8. Support resolution of MAP cases in accordance with multilateral principles, avoiding efforts such as maximizing revenue collection.
  9. Adoption of principle based and mutual trust principles.
  10. Adopt Best Practices in the pursuit of new initiatives to streamline and enhance processes to expedite MAP resolution.
  11. Sharing MAP Best Practices among FTA MAP participants.
  12. New MAP processes to elevate difficult cases.
  13. Enhance taxpayer’s involvement in case resolution, including bilateral/multilateral meetings and sharing case developments.
  14. Seek ways to avoid MAP cases, including APAs, joint audits, “roll-forward” adjustments and other techniques.
  15. Use multilateral MAP procedures.
  16. Adopt agreements for issue consistency.
  17. Avoidance of MAP manipulation by auditors.
  18. Deliver training on double taxation and CA processes via a “Global Awareness Training Module.”

The above meeting commitments and objectives are welcome as tax controversies increase and MAP procedures have seeming lost the elements of  timeliness, cost-effective resolution, avoidance of double taxation, transparency and efficiency.

It is hopeful that most tax administrations endorse, and commit to, the above MAP framework in an effort to achieve Best Practices for a win–win opportunity.

EU State Aid: A primer

PwC has provided an outline of EU State Aid requirements.  This comprehensive and succinct summary provides context for the  OECD BEPS provisions, tax arrangements that are considered illegal State Aid, and a valuable reference for potential EU State Aid cases in the foreseeable future.  A link to the outline is provided for reference:

Click to access pwc-eu-fiscal-state-aid.pdf

This information provides a valuable context against which the recent inquiries have been focused, as well as potential areas (including OECD BEPS Actions) that may constitute illegal State Aid in the future.  All MNE’s with European operations should be familiar with these legal provisions and the continuing importance that they have in today’s rapidly changing international tax environment.

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

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.

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.

Australia TP: Self-assessment regime

Australia’s new transfer pricing rules require that officers signing the corporate tax return must sign off for transfer pricing arrangements on a self-assessment basis.  The self-assessment process would affirm that the transfer pricing is pursuant to arm’s length consideration that would be transacted between unrelated parties.  Details of the new self-assessment regime are referenced at the attached link:

http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/tax-insights/Pages/a-new-obligation-for-public-officers-28-august-2014.aspx

Additional review of transfer pricing documentation may be required for self-assessment consideration.  The OECD BEPS proposals may also impact such reporting in the future.

 

OECD report to G20: Issues re: Developing countries

The OECD has published a report (Part 1) addressing base erosion and profit shifting (BEPS) in developing countries and how these relate to the OECD/G20 BEPS Action Plan. A ranking of low, medium or high is assigned to each of the 15 Actions in Annex A re: the impact on developing countries.  Section 5 of the report highlights the primary issues to be addressed, including base-eroding payments, treaty issues, new business models and transfer pricing documentation.

Part 2 of the report, to be presented in September 2014, will (1) confirm which of the Actions are of most relevance to developing countries, (2) discuss other BEPS-related issues not in the Action Plan, and (3) address actions needed to ensure that developing countries can fully benefit from the Action Plan items and how specific BEPS actions may need to be adapted/simplified or supplemented to ensure they are effective for developing countries.

An interesting comment in the Executive Summary states: “The international nature of tax planning means that unilateral and uncoordinated actions by countries will not suffice and may actually make things worse.”  Note that recent unilateral actions by developed countries to advance BEPS initiatives would further corroborate this statement.

Additionally, it is stated that approx. 3,000 bilateral tax treaties operate worldwide, with about 1,000 of these involving developing countries.  This is a significant fact, as the OECD seeks to ultimately develop tools for countries to enact such legislation, notwithstanding the fact that it may take years to achieve global implementation.

A link to the report is provided for reference:

http://www.oecd.org/tax/part-1-of-report-to-g20-dwg-on-the-impact-of-beps-in-low-income-countries.pdf

The report is invaluable as it provides significant trends and challenges faced by developing countries, coupled with potential solutions under consideration to address such challenges.

 

Asia Corporate Treasury risks: Tax & Treasury collaboration

PwC has published the inaugural Asia Corporate Treasury Survey 2014, based on responses from 117 organisations across 7 countries in Asia.  The Report includes risk management approaches, treasury structures and various other treasury topics that revealed significant opportunities for Asian treasury centres to deliver strategic business benefits.  The Report highlights the necessity of tax and treasury collaboration in developing Best Practices due to the mutuality of objectives and complementary issues for which one function should not operate independent from the other.  A link to the Report is included for reference:

http://www.pwc.com/en_GX/gx/audit-services/corporate-treasury-solutions/assets/pwc-building-the-case-for-asia-corporate-treasury-fa.pdf

The Contents include the following topics:

  • Deployment of treasury staff
  • Core treasury activities in Asia
  • Treasury function in Asia
  • Key financial risks
  • Risk approach
  • Hedge accounting
  • Bank relationships
  • Type of debt used
  • Funding management strategies
  • Investment of excess cash
  • Key cash management activities in Asia
  • Cash centralisation
  • Treasury technology
  • Future changes to think about

The Report provides valuable insight into the rapidly growing Asian region and the complexities encountered in addressing Best Practice methodologies,

Every organization should periodically review the structure of tax and treasury due to their interwoven functions, as well as compare the risk drivers for each function.

Relevant Best Practice questions include the following examples:

  • Are the tax risk framework and treasury risk framework integrated processes, or are such frameworks developed independently?
  • Does tax and treasury share updates re: new debt instruments, OECD BEPS action plan, hybrid instruments, triggering foreign exchange risk proactively, etc.?
  • Are training workshops / opportunities provided for the integrated functions, leading to a Best in Class methodology for both treasury and tax processes?
  • What is the future vision for tax and treasury?
  • Is the transfer pricing documentation for loans, pooling structures, etc., consistent with current treasury practices globally?
  • What is the withholding tax certification process from a tax and treasury perspective?

The Report, and Best Practice observations, are valuable topics for internal discussion and benchmarking the combined processes with peer organizations.

 

2014 Update to the OECD Model Tax Convention

The 2014 Update, as adopted by the OECD Council on 15 July 2014, includes changes that were previously released for comments, including the meaning of “beneficial owner.”  Numerous additions and deletions to Commentaries on various Articles, including positions of non-member countries, are also included.  A link to the Update is provided for reference:

http://www.oecd.org/tax/treaties/2014-update-model-tax-concention.pdf

Interesting changes:

  • Article 5 Commentary: new views by Germany, Estonia, and Israel.
  • Article 9 Commentary: Hungary (newly added) and Slovenia reserve the right to specify that a correlative (i.e., offsetting) adjustment will be made only if they consider that the primary adjustment is satisfied.
  • The term “beneficial owner” does not have reference to any technical meaning under domestic law, thus it should not be used in a narrow technical sense, rather, it should be understood in its context and in light of the object and purposes of the Convention including avoiding double taxation and the prevention of fiscal evasion and avoidance.
  • The term “beneficial owner” does not deal with other cases of treaty shopping, which can be addressed in specific anti-abuse treaty provisions, general anti-abuse rules (GAAR), substance-over-form or economic substance approaches.
  • Article 13 Commentary: With respect to paragraph 3.1, Austria and Germany hold the view that when a new tax treaty enters into force, these countries cannot be deprived of the right to tax the capital appreciation which was generated in these countries before the date when the new treaty became applicable.
  • Article 26 Commentary: The Commentary was expanded to develop the interpretation of the standard of “foreseeable relevance” and the term “fishing expeditions,” i.e. speculative requests that have no apparent nexus to an open inquiry or investigation.  The Commentary further provides for an optional default standard of time limits within which the information is required to be provided unless a different agreement has been made by the competent authorities.  The examples provided are to demonstrate the overarching purpose of Article 26 not to restrict the scope of exchange of information but to allow information exchange “to the widest possible extent.”

The Update requires a comprehensive review to determine potential implications, including beneficial ownership restrictions and ways of working by competent authorities.  Such review should distinguish changes to the Articles versus additions or deletions to the Commentary interpreting such Articles.  Note that the OECD BEPS changes will be an addition to this Update.

Treasury related transfer pricing disclosures: Czech Republic

The Czech Republic has published new tax return disclosure requirements for the 2014 year, including 2013 data for selected taxpayers.  A link to the requested information is provided for reference:

Click to access KPMG-Financial-Update-2014-07-Special-Issue.pdf

The Czech Republic disclosures include the amount of short-term and long-term intercompany receivables and payables at the end of the current and prior years for comparison.

Best Practice: Treasury training for BEPS – As more countries implement transfer pricing disclosure legislation, with increased emphasis on intercompany loans and financing transactions, it is imperative that Tax Team members provide BEPS training for international treasury centers.  This training should raise awareness of the OECD BEPS initiatives resulting in increased disclosures and inquiries from Business Units, as well as provide internal transparency and governance for significant treasury transactions.

UN BEPS Questionnaire: Contrasting comments re: Arm’s length principle

The UN Subcommittee on Base Erosion and Profit Shifting (BEPS) Issues for Developing Countries has reiterated its request for comments to its BEPS Questionnaire, copied herein for reference.   Additional time is available for comments submitted by 8 August 2014.

The Subcommittee is mandated to draw upon its own experience and engage with other relevant bodies, particularly the OECD, with a view to monitoring developments on base erosion and profit shifting issues and communicating on such issues with officials in developing countries directly and through regional and inter-regional organizations.

Links to the Questionnaire and responses are provided.  Comments from Brazil, Mexico, Singapore, Christian Aid & Action Aid, and the Economic Justice Network and Oxfam South Africa are posted for review.

http://www.un.org/esa/ffd/tax/Beps/index.htm

Click to access BepsIssues.pdf

The wide divide in the role (and perception) of the arm’s length principle for transfer pricing is very apparent in the responses from Singapore and Christian Aid & Action Aid.

Actions 6 &  7: Singapore’s comments: 
“The continued correct application of the arm’s length principle to allocate profits based on function, assets and risks will help to ensure that profits are allocated based on where value is created.”  

“We would like to highlight that the focus on countering BEPS should be to grow the economic pie for every country, and not let the work be sidetracked by protectionism and development of rules for political expedience.”

Actions 8-10: Christian Aid & Action Aid’s comments:
“Transfer (mis-)pricing is a significant challenge to developing countries, and improvements to current rules need to take place to ensure developing countries can seek appropriate tax contributions from Transnational Corporations (TNCs).  The best solution may be outside of the arm’s length principle however, something that the OECD appears to not want to consider.  We believe that there should be more comprehensive research done into alternatives to the arm’s length principle and how effective they may be for developing countries.”

Questionnaire:

Countries’ experiences regarding base erosion and profit shifting issues.

Developing countries are invited to provide feedback by answering the following questions. Feedback (and any questions about the feedback requested) should be sent to taxffdoffice@un.org. The deadline for responses is 8 August 2014.

1. How does base erosion and profit shifting affect your country?

2. If you are affected by base erosion and profit shifting, what are the most common practices or structures used in your country or region, and the responses to them?

3. When you consider an MNE’s activity in your country, how do you judge whether the MNE has reported an appropriate amount of profit in your jurisdiction?

4. What main obstacles have you encountered in assessing whether the appropriate amount of profit is reported in your jurisdiction and in ensuring that tax is paid on such profit?

The Subcommittee have identified a number of actions in the Action Plan that impact on taxation in the country where the income is earned (the source country), as opposed to taxation in the country in which the MNE is headquartered (the residence country), or seek to improve transparency between MNEs and revenue authorities as being particularly important to many developing countries (while recognising that there will be particular differences between such countries). These are:  Action 4 – Limit base erosion via interest deductions and other financial payments  Action 6 – Prevent Treaty Abuse  Action 8 – Assure that transfer pricing outcomes are in line with value creation: intangibles  Action 9 – Assure that transfer pricing outcomes are in line with value creation: risks and capital  Action 10 – Assure that transfer pricing outcomes are in line with value creation with reference to other high risk transactions (in particular management fees)  Action 11 – Establish methodologies to collect and analyse data on BEPS and the actions to address it  Action 12 – Require taxpayers to disclose their aggressive tax planning arrangements  Action 13 – Re-examine transfer pricing documentation

5. Do you agree that these are particularly important priorities for developing countries?

6. Which of these OECD’s Action Points do you see as being most important for your country, and do you see that priority changing over time?

7. Are there other Action Points currently in the Action Plan but not listed above that you would include as being most important for developing countries?

8. Having considered the issues outlined in the Action Plan and the proposed approaches to addressing them (including domestic legislation, bilateral treaties and a possible multilateral treaty) do you believe there are other approaches to addressing that practices that might be more effective at the policy or practical levels instead of, or alongside such actions, for your country?

9. Having considered the issues outlined in the Action Plan, are there are other base erosion and profit shifting issues in the broad sense that you consider may deserve consideration by international organisations such as the UN and OECD?

10.Do you want to be kept informed by email on the Subcommittee’s work on base erosion and profit shifting issues for developing countries and related work of the UN Committee of Experts on International Cooperation in Tax Matters?

Do you have any other comments you wish to share with the Subcommittee about base erosion and profit shifting, including your experience of obstacles to assessing and then addressing the issues, as well as lessons learned that may be of wider benefit?

 

The insightful Questionnaire, as well as commentaries received, reflect the continuing conflict re: transfer pricing principles to be applied by developed and developing countries.  Additionally, unilateral requests for BEPS comments by countries also reflect the tendency to adopt OECD principles as adapted to local needs.

As a result, transfer pricing documentation will be inherently more complex and non-standardized, while controversies between tax authorities and multinational corporations will multiply significantly in magnitude and scope.

 

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