Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘OECD BEPS’

OECD BEPS & EU Case Law: Uncertainty ahead

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

Click to access pwc-eu-beps-july-2014.pdf

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

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

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

 

 

 

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OECD / UN

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APAs, MAP, Self-Assessment: Vietnam update & Best Practice ideas

Vietnam has recently adopted regulations on Mutual Agreement Procedures (MAP) and Advance Pricing Agreements (APAs), with additional transfer pricing measures.    A link to the informative summary prepared by KPMG is provided as reference:

http://www.internationaltaxreview.com/Article/3319685/Vietnam-Getting-up-to-speed-in-Vietnam.html

Key Highlights:

  • The APA negotiation and conclusion procedures, consisting of five steps, is expected to take nine months from submission to a concluded APA.
  • Formal guidance has been issued for MAP implementation.
  • Related party transaction disclosure is to be submitted with 2014 tax returns, based on a self-assessment process with contemporaneous documentation to effectively shift the burden of proof to the tax authorities.

Re: Best Practices, transfer pricing opportunities and documentation requirements, by Vietnam as well as all other countries, should be mapped to formulate new audit defense strategies, cooperative compliance ideas and transfer pricing governance guidelines.

In today’s volitive transfer pricing environment, a member of every multinational company’s global tax department should have responsibility for a real-time assessment of all new developments, thereby providing a significant value-add for legal structuring, debt financing, transfer pricing documentation, and audit defense strategies to avoid double taxation.  To the extent such resources are not being focused, a cost/benefit analysis of missed opportunities may be helpful to achieve additional Best Practice methodologies.

 

 

Category:

Transfer Pricing

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EU Parent-Subsidiary Directive: One step forward

On 20 June 2014, the EU Economic and Financial Affairs Council reached agreement on modifying the EU Parent-Subsidiary Directive.  The agreement proceeds with the prevention of double non-taxation via the use of hybrid financing arrangements, while agreeing to work separately on an amended General Anti-Avoidance Rule (GAAR).  Links to the current EU Parent Subsidiary Directive (2011/96/EU), a PwC Tax Alert summarizing the proposal and the EU proposals are included for reference:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:345:0008:0016:EN:PDF

Click to access pwc-newsalert-20-june-2014-amendment-parent-subsidiary-directive.pdf

http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2010419%202014%20INIT

The amendment is limited to the 28 Member States of the EU, with a similar proposal envisioned in the OECD BEPS initiative.  It is interesting to note the OECD BEPS provisions are being focused within the EU Community, in addition to the international OECD Guidelines.  Timing for this EU proposal is for domestic legislative action by December 2015.

Re: Best Practices, it is prudent to review the EU legal structure for such hybrid arrangements to quantify the effect of this proposal, possibly requiring modification of hybrid debt and/or legal entities.  Additionally, such hybrid instruments in non-EU countries should be noted for the forthcoming OECD BEPS corollary provision.

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OECD / UN

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Transfer pricing documentation & BEPS: Refresh strategy

As time is of the essence for various OECD BEPS proposals to be made public, the interim time gap may be an excellent time to refresh global transfer pricing documentation strategies.  Several questions that may be addressed in a transparent and critique perspective include the following:

  • Have each of the BEPS proposals been matched to current TP methodology, questioning the future state of global TP documentation?
  • For current cooperative compliance relationships, is a discussion contemplated / scheduled to discuss the potential impacts of BEPS on the ongoing ways of working, including TP documentation?
  • Are future cooperative compliance relationships in focus, aligned with BEPS initiatives, especially among countries seeking unilateral legislative actions re: General Anti-Avoidance Rules (GAAR) implementation, etc.?
  • Are the attributes of a GAAR, including a taxpayer’s responsibility for GAAR compliance, being considered globally and /or in local country files?
  • Should compliance roles and responsibilities of TP compliance change re: internal / external resources due to BEPS with additional complexities envisioned?
  • If a Master File and Local Country file methodology is not currently in place, will there be a global and/or regional shift to such methodology?  What is the proposed timing for change?
  • Are the local tax return disclosures re: TP aligned with that country’s TP documentation?
  • What tax team / TP resources are being aligned to address the BEPS initiatives and proposed documentation?
  • Are tax policy statements of the Tax Risk Framework being reviewed for desired TP transparency?
  • Have there been “idea” meetings to discuss next steps in a creative atmosphere?

A BEPS / TP review will be valuable in aligning future vision, flexibility and transparency in today’s volatile atmosphere of TP assumptions and perceptions.

 

Category:

Transfer Pricing

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Meeting of G5 Ministers: Tools to fight tax fraud & evasion

The Governments of France, Germany, Italy, Spain and the UK (G5) held a meeting on 28 April, 2014 to discuss progress on their mutual objectives to promote tax transparency and cooperation, fight tax fraud and evasion, counter harmful tax practices and respond to aggressive tax planning practices.  The following link provides detailed actions that were discussed:

Click to access Comunicado%20del%20G-5%20sobre%20reunión%20en%20Par%C3%ADs%2028%20abril%202014%20en%20inglés.pdf

Summary of discussions:

  • Agreement to sign the Automatic Exchange of Information (AEOI) agreements in alignment with the new, single, global OECD standard, joining 39 other jurisdictions that will effect exchange of information in 2017 with respect to 2015 data.
  • Reiteration of support to the OECD Base Erosion and Profit Shifting (BEPS) project.
  • Re: taxation of digital economies, the countries where companies conduct economic activities must be able to receive their “fair share” of tax.  To align this initiative, the G5 Ministers agreed on the interest of a flexible interpretation of the territoriality rules, including a Digital Tax Presence concept.
  • Transfer pricing rules must be adapted to ensure that profit and value creation are aligned, citing economic justification.
  • Tax avoidance re: hybrid mismatch arrangements should be addressed.
  • Country-by-Country (CbC) reporting is important, as it should provide all relevant tax administrations with the information necessary to complete a high level risk assessment.
  • OECD BEPS developments must be reflected at the EU level, encouraging review of the EU law and its impact on aggressive tax planning practices.

The conclusions set forth are significant for the following reasons:  Proposal by the G5, EU focused, collaborative discussions and agreement re: “fair share” of tax alignment, economic justification profit / value drivers, and a presumption that CbC reporting will provide information to complete a relevant risk assessment.

These initiatives should be monitored in alignment with the OECD BEPS proposals set forth for 2014 and 2015.

 

 

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OECD / UN

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EY 2013 Global Transfer Pricing survey: A sea of change

Click to access EY-2013-GTP-Survey.pdf

This very insightful, and timely, survey of senior tax professionals in 26 countries clearly portrays a significant increase in transfer pricing controversies and resulting double taxation.  The survey indicates that 66% of the respondents identified “risk management” as the highest transfer pricing priority.

Some challenges cited in the report include:

  • Governmental authorities expanding definitions of “aggressive tax planning”
  • Permanent Establishment (PE) assertions, including reliance on proposed changes to the commentary to Article 5 of the OECD Model Treaty
  • Reputational risks
  • Public perception
  • Increased transfer pricing complexity

Other findings include:

  1. 55% increase in Competent Authority cases from 2010
  2. 28% of the companies utilized Mutual Agreement Procedure (MAP)
  3. 26% of the companies entered into Advance Pricing Agreements (APAs)
  4. Master file documentation methodology may not be compliant in Africa, Asia and Latin America
  5. 41% expect intangibles to be the most important area in the next 2 years
  6. Intangible issues included assertion of uncompensated marketing intangibles and dispute over legal vs. beneficial ownership
  7. Over 75% of PE issues arose from frequent business travelers, seconded employees and providing services through employees or other personnel abroad (PE statistics on page 23)
  8. BRICs and Africa are #1 or #2 ranking in transfer pricing priority for 30% of such companies, although 75% of those companies have no full-time transfer pricing personnel located in those jurisdictions

The report concludes with detailed survey responses for each of the 26 countries, addressing the following topics:

  1. Importance of transfer pricing
  2. Audit and controversy experience
  3. Trends in transfer pricing approaches, topics and enforcement
  4. Operationalizing transfer pricing

Best Practice considerations presented for insight include:

  • Indirect taxes, including customs and VAT, should be an integral part of the transfer pricing process, notwithstanding different functional reporting
  • Attention to detail, via frequent reviews, for intercompany transactions should be  a recurring process to ensure substance matches the form cited in transfer pricing documentation
  • Review of current transfer pricing methodologies
  • Renewed focus on controversy and dispute resolution techniques, including MAP, APAs and arbitration
  • Reputational risk consideration

The survey provides a thoughtful perspective in addition to recently issued consultation documents by the OECD re: transfer pricing documentation and intangibles, as well as recent general anti-abuse rules (GAAR) drafted and/or legislated into law.

This survey is especially insightful when compared to prior posts re: OECD Revised Draft on Transfer Pricing Aspects of Intangibles (3 August), OECD White Paper on Transfer Pricing Documentation suggesting a Masterfile and Local file approach (31 July), UK Finance Act 2013: GAAR has arrived (21 July), OECD BEPS report and Action Plan (19 July), PwC PE survey: Trends & Challenges (14 July), OECD: A Framework for Co-operative Compliance (13 June), UN: Practical Manual on Transfer Pricing & Tax Training Initiatives (2 June), A new role: Head of tax controversy (3 May), Global Mobility & International Tax: Alignment for Best Practices (24 April), and  PE Risks & Best Practices for Awareness & Planning (14 April).

Category:

Tax Risk Management, Transfer Pricing

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OECD: White Paper on Transfer Pricing Documentation

http://www.oecd.org/tax/transfer-pricing-documentation.htm

The Organization for Economic Cooperation and Development (“OECD”) is quickly following up Step 13 in its Action Plan on Base Erosion and Profit Shifting (“BEPS Action Plan”) for enhanced transparency, information on global income allocation, economic activity and taxes paid among countries, according to a common template.  Refer to my 19 July 2013 post for information on the OECD BEPS and Action Plan.

The White Paper takes a “big picture” approach, with interested parties invited to comment by 01 October 2013.  An insightful summary outlines significant differences in transfer pricing documentation requirements from country to country, concluding with a recommended two-tiered approach (“Coordinated Documentation Approach”) consisting of a Masterfile and a Local file.

The recommended Masterfile is broad in scope, requesting global legal ownership/structure, geographical location of principal operating entities, in addition to management structure and geographical location of key management personnel.  Major business lines would be described in extensive detail, as well as intangible strategies, intercompany financing activities, listing of APAs, MAP procedures and the consolidating income statement.

The Local File describes local management structure and geographical location of senior executives, recent business restructurings including transfers of intangibles, controlled transactions and financial information.

Annex 1 and 2 provide multi-country surveys on transfer pricing documentation and tax return disclosure requirements, with related sources of information for reference.

The OECD believes the Coordinated Documentation Approach offers a balanced trade-off between greater transparency and streamlined transfer pricing documentation requirements.

All international tax executives should follow public comments that are posted by  OECD for this new Coordinated Documentation approach, discuss advantages and disadvantages with their peers, in addition to determining if they will provide comments directly.  The current methodology of preparing transfer pricing documentation reports should be compared to this suggested approach to initiate insightful planning and efficiencies that will form Best Practices for future years.

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OECD / UN, Tax Risk Management, Transfer Pricing

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