On October 19, 2017, Tax Executives Institute (TEI) filed a letter with the Platform for Collaboration on Tax, a joint initiative of the World Bank, OECD, International Monetary Fund, and United Nations, regarding the Platform’s draft toolkit on the taxation of offshore indirect transfers. TEI’s comments focused on the need for the Platform’s toolkit to educate and provide options to nations considering taxing offshore indirect transfers, rather than prescribing a preferred approach, among other things.
The Platform for Collaboration on Tax (the Platform), a joint initiative of the Organisation for Economic Co-Operation and Development, International Monetary Fund, United Nations, and World Bank, released a document entitled The Taxation of Offshore Indirect Transfers – A Toolkit (the Draft Toolkit or Toolkit) on 1 August 2017. The Draft Toolkit was designed to help developing countries address the complexities of taxing offshore indirect transfers of assets, which the Platform states is a practice by which some multinational corporations try to minimize their tax liability.
The toolkit and TEI’s submission paper are referenced herein for review
Highlights of TEI’s comments include the following points:
- There should be symmetry and neutrality as compared to direct asset transfers
- Status of toolkit is unclear, and is not a source of authoritative guidance
- The goal of the draft toolkit is unclear
- A capital gains tax can distort economic transactions
- Gains and losses should be the subject of the toolkit
- Most indirect transfers are made for economic, not tax, reasons
- The general treaty definition of immovable property seems to have been abandoned with no reason
The toolkit can be applauded for launching a multi-organizational approach with some good ideas, although such ideas should be further challenged and developed prior to an overall vision and detailed rules promulgated
The South African Revenue Service (SARS) released its final notice re: requirements for filing the Country-by-Country (CbC) report, Master File and Local File, in alignment with OECD BEPS Action Item 13.
It is interesting that, pursuant to minimum thresholds, both a Master File and Local File are required to be filed, rather than only the Local File. This may become more of a norm, versus an exception, as the global transfer pricing and risk environment will need to be reviewed in alignment with local business operations. Hopefully, the review will encompass confidential limitations on the information received and will only encompass transfer pricing practices of the local operations rather than extend CbC presumptions or Master File analogies against the local data.
EY’s Global Tax Alert provides the relevant details of the SARS requirement.
OECD has published new handbooks, one of which relates to country-by-country (CbC) reports and how tax administrations can incorporate this information into their tax risk processes, inclusive of risk tools and governance processes.
Other reports/handbooks have also been issued that will be a valuable reference:
- Tax Administration 2017
- The Changing Tax Compliance Environment and the role of audit
- Shining Light on the Shadow Economy
- CbC: Handbook on effective implementation
EY’s Global Tax Alert highlights several postulates for potential US tax reform, in which both the House and Senate are busily writing new language this month to push this reform effort by President Trump.
The OECD’s additional guidance on Country-by-Country reporting is also reiterated, and the short-term extension for the US debt limit is provided to further the tax reform process.
New Zealand’s government has announced the introduction of new BEPS compliant rules that will be effective mid-2018. Additionally, the government has taken this opportunity to expand upon the OECD’s rules, in an attempt to ensure that a “fair share of tax” is paid by multinationals doing business in the country.
Acknowledging the OECD’s intent to provide flexibility with its BEPS Actions and subjective language therein, New Zealand is looking for this legislation to impose rules above and beyond the BEPS Actions. For example, anti-PE rules will be introduced that look to Australia’s provisions, which were initially introduced by the UK as diverted profit tax schemes to collect additional tax.
International tax practitioners should review these provisions and plan their tax strategies accordingly, knowing that New Zealand will introduce double taxation sooner vs. later in the global concept.
EY’s Global Tax Alert provides relevant details of New Zealand’s proposals.
OECD has published, pursuant to OECD BEPS Action 2, its framework entitled “Neutralising the Effects of Branch Mismatch Arrangements.” A link to the report is provided for reference.
The report includes five types of branch mismatch arrangements:
- Disregarded branch structures where the branch is not a Permanent Establishment (PE)
- Diverted branch payments
- Deemed branch/notional payments
- Branch payments leading to a double deduction (DD)
- Imported branch mismatches
Recommendations to domestic law are included to prevent perceived abuses for the five types of mismatch arrangements. Numerous examples are also provided in the document to illustrate the branch arrangements and recommendations thereto.
This document is required reading for all international tax practitioners, as tax administrations will be seriously considering the recommendations and may decide to try to enforce such rules prior to official legislative actions.
With the introduction of BEPS Action Items, recently followed by the subjective assent procedures of the Multilateral Instrument, it seems that the aggressiveness of tax administrations to apply current tax laws, and BEPS Actions yet to be enacted, is on the increase. One result of such actions is the continuation, in certain jurisdictions, of tax raids which are unannounced, intense and producing immediate distrust between the parties.
For tax administrations, the question is “Does the necessity of such raids still exist?” and if so, they should be delegated to those that are egregious and potentially criminal in nature after the refusal of the taxpayer to legally comply with prior requests and inquiries.
For MNE’s, a tax raid causes immediate panic at the Business Unit, thus at least one legal or tax contact regionally and globally should be available at any time to address a phone call on necessary action steps that day and going forward. This communication protocol should be common knowledge throughout the global organization to ensure alignment and appropriate steps are immediately taken if a tax raid were to occur.
It is hopeful these circumstances will become less frequent around the world, although learnings can be taken from past experiences to form Best Practices for the future.