The Toolkit on Tax Treaty Negotiation (the “Toolkit”), has been prepared in the framework of the Platform for Collaboration on Tax (the “PCT”) by the IMF, the OECD, the UN and the WBG (the “PCT Partners”).
Date and time:
Wednesday, November 4, 2020 9:00 am Eastern Standard Time (New York, GMT-05:00) Change time zone
2 hours 30 minutes
Please join The Platform for Collaboration on Tax (PCT) for the public consultation webinar of its draft Toolkit on Tax Treaty Negotiations. The toolkit authors and expert speakers will discuss how the toolkit can help developing countries, followed by a demo of the interactive, web-based version of the toolkit and a feedback roundtable with experienced negotiators.
PCT’s draft Toolkit on Tax Treaty Negotiations is a joint effort to provide capacity-building support to developing countries on tax treaty negotiations, building on existing guidance, particularly from the UN Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries (the “UN Manual”). The Toolkit provides tax officials with:
***Information on the steps involved in tax treaty negotiations ***Practical tips for treaty negotiators on the conduct of negotiations and negotiation styles ***Easy access to already publicly available resources that treaty negotiators will find useful
The design of the Toolkit also allows regular updates and improvements based on the feedback from users and experienced negotiators.
The PCT released the draft toolkit for public feedback from June 29th to September 24th, 2020 through its website and the KSP-TA hub. In addition to written comments, this virtual workshop aims to gather further feedback from stakeholders, particularly treaty negotiating teams.
The Toolkit represents a joint effort to provide capacity-building support to developing countries on tax treaty negotiation, building on previous contributions and reducing duplication and inconsistencies.
The OECD Corporate Tax Statistics, Second Edition, published this year reveals interesting trends, including the results of the anonymized and aggregated Country-by-Country (CbC) data which includes statistics from 26 countries for the 2016 tax year.
Tax administrations are moving toward more data analysis as an audit tool, and multinationals should be aware of this data which is used as a risk assessment tool, among others.
The OECD International Compliance Assurance Programme (ICAP) is a voluntary programme for a multilateral co-operative risk assessment and assurance process.
ICAP uses Country-by-Country (CbC) data as part of its risk assessment analysis and includes potential benefits for participating taxpayers re: certainty and avoiding double taxation, among other benefits.
ICAP is still fairly new in practice, although the process should be understood as a tool in pro-active compliance.
The UN tax committee members have issued a proposal re: taxation of digital service income. The proposal will be discussed in meetings later this year, making their way to become a part of the UN Model Tax Convention.
This will be an interesting dynamic, as the OECD is working diligently to finish their digital tax project this year. It is hopeful that both proposals will have a similar framework, avoiding a natural clash in methodology prone to dispute.
In summary, the UN and OECD digital tax proposals should be monitored to watch the progress, and changes prior to finalization envisioned by the end of this year.
The OECD provided this guidance in April, 2020, although the PE issue remains in many countries due to the COVID-19 crisis. The guidance revisits OECD PE guidelines and commentary, and also represents opportunities to revisit potential PE issues for employees working from home as companies adopt regional and global work from home policies.
The document highlights the fact that temporary COVID-19 interruptions should not change a permanent establishment (PE) determination, although tax administrations should publish more guidance on their domestic PE laws and determinations.
Home offices, agency PE and construction site PE situations are addressed. Summaries are also provided for place of effective management (POEM)/dual residence, income tax considerations for cross-border workers, and treaty residence issues.
The guidance is a valuable read, especially as countries are now starting to address these issues with more focus. The diminished fiscal growth may also change the direction of penalty abatement, especially in areas that may subject to interpretation.
Finland has interpreted the “new” guidance for Financial Transactions as merely a clarification of prior law.
This interpretation is not novel, and is a position sometimes taken in an audit, rightly or wrongly, for which taxpayers should be aware.
In tax administration statement No. VH/3605/00.01.00/2020, published July 1, Finland’s tax agency explained the relevance of the newly added chapter 10 of the OECD transfer pricing guidelines on financial transactions. With the sole exception of the new guidance on the relevance of a parent company’s credit rating in determining the credit rating of another group member for purposes of pricing intercompany debt, chapter 10 will be applied both prospectively and retrospectively, according to the statement. This includes the guidance on cash pooling, guarantees, captive insurance, and determination of risk-free and risk-adjusted returns.
“The new chapter 10 of the OECD transfer pricing guidelines on transfer pricing for financial transactions does not, in the opinion of the tax administration, contain fundamental new interpretative guidance, except for [determining] the creditworthiness of a separate company. Therefore, the guidelines can otherwise be used as a source of interpretation for tax years ended before the guidelines were published,” the statement says.
The OECD report to G20 Finance Ministers and Central Bank Governors, resulting from the recent meeting in Riyadh this month, is attached for reference.
The report highlights that BEPS will continue to be a focus through 2025, indicating the increased transparency and reporting that is envisioned.
The recent issues of Pillar One and Two reflecting digital and global minimum taxation are addressed, based on the perception that these methodologies are a “must have” and not a “nice to have,” in the face of unilateral taxation efforts already underway.
The OECD recently published Transfer Pricing Guidance on Financial Transactions, an inclusive framework on BEPS Actions 4, 8-10. This guidance takes into consideration comments received in the July 2018 discussion draft on financial transactions.
The guidance represent an update to the OECD Transfer Pricing Guidelines.
This importance guidance presents guidance for:
Determination if the purported loan should be regarded as a loan
Treasury functions, including cash pooling, intracompany loans and hedging
Risk-free and risk-adjusted rates of return
These principles are significant in scope and consequences that also allow countries to implement approaches in their domestic legislation, so there will be areas of dispute as this new guidance is implemented and interpreted.
The OECD has published its consultation document: Review of Country-by-Country Reporting (BEPS Action 13). Comments are requested no later than March 6th.
Chapter 1 contains general topics concerning the implementation and operation of BEPS Action 13, including the MNE group experience of CbC reporting implementation by jurisdictions, the use of CbC reports by tax administrations and other aspects of BEPS Action 13, being the master file and local file.
Chapter 2 contains topics concerning the scope of CbC reporting, including the definition of an MNE group, and the level and operation of consolidated group revenue threshold.
Chapter 3 contains topics concerning the content of a CbC report, including whether aggregate or consolidated information should be provided in Table 1, whether information in Table 1 should be presented by entity rather than by tax jurisdiction, and whether additional or different information is needed.
One key item in the report is in Section 12: Should Table 1 information be presented on an entity or jurisdictional basis? There are arguments pro and con, and this is an important item to monitor.
The OECD/G20d BEPS Project has published: Harmful Tax Practices – 2018 Peer Review Reports on the Exchange of Information on Tax Rulings, referenced herein. This is the third annual peer review of the transparency framework. It covers individual reports for 112 jurisdictions, including 20 jurisdictions reviewed for the first time.
The transparency framework requires spontaneous exchange of information on five categories of taxpayer-specific rulings: (i) rulings related to certain preferential regimes, (ii) unilateral advance pricing arrangements (APAs) or other cross-border unilateral rulings in respect of transfer pricing, (iii) rulings providing for a downward adjustment of taxable adjustment of taxable profits (iv) PE rulings and (v) related party conduit rulings.
The requirement to exchange information on the rulings in the above categories includes certain past rulings as well as future rulings, pursuant to pre-defined periods which are outlined in each jurisdiction’s report and that varies according to the time when a certain jurisdiction has joined the Inclusive Framework or has been identified as a Jurisdiction of Relevance. The exchanges occur pursuant to international exchange of information agreements, which provide the legal conditions under which exchanges take place, including the need to ensure taxpayer confidentiality.
The Organisation for Economic Co-operation and Development (OECD) held a public consultation on the Secretariat Proposal for a “Unified Approach” under Pillar 1 of the BEPS 2.0 project on 21-22 November 2019 in Paris at the OECD Conference Centre.
The OECD Secretariat laid out the timeline for meetings of the Inclusive Framework for the end of January 2020 and in June/July 2020, and suggested that, at a minimum, a high-level political agreement on the Pillar One framework must be achieved by the January meeting.
One commonality voiced at the meeting was that the existing global transfer pricing system, based on the arm’s-length principle, needs to be changed and should at least be augmented by some more formulaic rules.
This common voice is expressed in terms of Pillar One re: digital tax, although this concept has also been trending for international tax in general. It will be interesting to watch this development as the meetings address Pillar Two and a global minimum tax.
Videos of the meeting and other details can be referenced in the EY Global Tax Alert.
The OECD has released a public consultation document on Global Anti-Base Erosion (GloBE), providing novel new rules to address a global minimum tax structure. Comments are due by 02 December 2019, which will assist members of the Inclusive Framework in the development of a solution for its final report to the G20 in 2020.
Comments are requested specifically in three areas: (i) use of financial accounts for tax tax base/timing differences, (ii) combining high-tax and low-tax income, and (iii) carve-out and threshold mechanisms.
The document is well worthy to read, as it shows the new direction (worldwide minimum tax), although the EU and others are yet to be completely convinced.
The OECD has now two proposals in process: Pillar One addresses the digital economy and Pillar Two sets forth a global minimum tax system; global anti-base erosion (GloBE) proposal. The proposals are linked herein for reference.
Both proposals may have one or more legal entities of a multinational taxed on more than one approach, whether they have a digital business segment, and also dependent on the countries where it is taxed notwithstanding the type of business it operates.
This represents a new era of BEPS, and one that demands attention to as the proposals move forward.
Pillar One summary
Scope. The approach covers highly digital business models but goes wider – broadly focusing on consumer-facing businesses with further work to be carried out on scope and carve-outs. Extractive industries are assumed to be out of the scope.
New Nexus. For businesses within the scope, it creates a new nexus, not dependent on physical presence but largely based on sales. The new nexus could have thresholds including country specific sales thresholds calibrated to ensure that jurisdictions with smaller economies can also benefit. It would be designed as a new self-standing treaty provision.
New Profit Allocation Rule going beyond the Arm’s Length Principle. It creates a new profit allocation rule applicable to taxpayers within the scope, and irrespective of whether they have an in-country marketing or distribution presence (permanent establishment or separate subsidiary) or sell via unrelated distributors. At the same time, the approach largely retains the current transfer pricing rules based on the arm’s length principle but complements them with formula based solutions in areas where tensions in the current system are the highest.
Increased Tax Certainty delivered via a Three Tier Mechanism. The approach increases tax certainty for taxpayers and tax administrations and consists of a three tier profit allocation mechanism, as follows:
‒ Amount A – a share of deemed residual profit6 allocated to market jurisdictions using a formulaic approach, i.e. the new taxing right
‒ Amount B – a fixed remuneration for baseline marketing and distribution functions that take place in the market jurisdiction; and
‒ Amount C – binding and effective dispute prevention and resolution mechanisms relating to all elements of the proposal, including any additional profit where in-country functions exceed the baseline activity compensated under Amount B.
Pillar Two Summary
Under Pillar Two, the Members of the Inclusive Framework have agreed to explore an approach that leaves jurisdictions free to determine their own tax system, including whether they have a corporate income tax and where they set their tax rates, but considers the right of other jurisdictions to apply the rules explored further below where income is taxed at an effective rate below a minimum rate. Within this context, and on a without prejudice basis, the members of the Inclusive Framework have agreed a programme of work that contains exploration of an inclusion rule, a switch over rule, an undertaxed payment rule, and a subject to tax rule. They have further agreed to explore, as part of this programme of work, issues related to rule co-ordination, simplification, thresholds, compatibility with international obligations and any other issues that may emerge in the course of the work.
Members of the Inclusive Framework agree that any rules developed under this Pillar should not result in taxation where there is no economic profit nor should they result in double taxation.
This part sets out the global anti-base erosion (GloBE) proposal which seeks to address remaining BEPS risk of profit shifting to entities subject to no or very low taxation It first provides background including the proposed rationale for the proposal and then summarises the mechanics of the proposed rules together with a summary of the issues that will be explored as part of the programme of work.
While the measures set out in the BEPS package have further aligned taxation with value creation and closed gaps in the international tax architecture that allowed for double non-taxation, certain members of the Inclusive Framework consider that these measures do not yet provide a comprehensive solution to the risk that continues to arise from structures that shift profit to entities subject to no or very low taxation. These members are of the view that profit shifting is particularly acute in connection with profits relating to intangibles, prevalent in the digital economy, but also in a broader context; for instance group entities that are financed with equity capital and generate profits, from intra-group financing or similar activities, that are subject to no or low taxes in the jurisdictions where those entities are established.