Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘OECD’

UN: Manual for Treaty Negotiations

As tax treaties become more important in the international tax landscape, for both developed and developing countries, it is important to review practical guidance provided to tax administrations to enforce such treaties.  This is a valuable primer for those involved in tax treaty interpretation and negotiation.  The recently released Manual is provided as a reference link.

The present publication, entitled United Nations Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries (the Manual), aims at strengthening the technical expertise of developing countries’ tax officials as regards the negotiation of tax treaties.

It provides practical guidance to treaty negotiators in developing countries, in particular those who use the United Nations Model Double Taxation Convention between Developed and Developing Countries (the UN Model).

This Manual constitutes an introductory guide to tax treaty negotiations and, as such, provides general explanations on the way treaty negotiations are conducted and on the issues that are typically addressed during these negotiations. While it seeks to identify important issues that treaty negotiators should be aware of, it does not attempt to provide an exhaustive analysis of these issues. When preparing for treaty negotiations, the user of this Manual will therefore often need to go beyond the explanations provided in these pages and to further research the issues that are identified therein. keeping in mind that the detailed Commentaries on the provisions of the United Nations Model Double Taxation Convention between Developed and Developing Countries and of the OECD Model Tax Convention on Income and on Capital constitute the most authoritative source of information on the interpretation of these provisions.

https://www.un.org/esa/ffd/wp-content/uploads/2019/06/manual-bilateral-tax-treaties-update-2019.pdf

OECD update: Digital tax, nexus…

The recently concluded G20 Leaders’ Summit continues to endorse the OECD’s digital project, which includes future debates on nexus allocations, profit allocations and minimum tax.

EY’s Global Tax Alert highlights these developments, as well as remind international tax colleagues to continually monitor these important developments.

https://www.ey.com/Publication/vwLUAssets/G20_Leaders_Summit_Declaration_reiterates_endorsement_of_OECD_workplan_for_development_of_new_international_tax_rules/$FILE/2019G_003186-19Gbl_G20%20Leaders%20endorse%20OECD%20plan%20re%20new%20intl%20tax%20rules.pdf

UAE: Economic substance

The United Arab Emirates (UAE) have enacted new economic substance requirements that entered into force at the end of April 2019.

In response to EU Code of Conduct Group (COCG) initiatives, the governments of Bahamas, Bermuda, British Virgin Islands (BVI), Cayman Islands, Guernsey, Isle of Man, Jersey, Mauritius and Seychelles introduced economic substance rules with effect from 1 January 2019. The rules are based on the guidance and requirements issued by the EU and the OECD, and are designed to ensure that companies operating in a low or no corporate tax jurisdiction have a substantial purpose other than tax reduction and an economic outcome that is aligned with value creation.  To align with the international standards, the UAE has now enacted substance rules.

To meet the economic substance requirement, companies will generally need to satisfy the following three tests:

  1. The company should be directed and managed in the UAE for the specific activity.
  2. The company’s CIGA should be performed in the UAE.
  3. The company should have an adequate level of qualified employees, premises and annual operating expenditures.

Companies with UAE operations, especially without adequate substance, should review the new rules or administrative penalties or reregistration.

EY’s Global Tax Alert provides additional details for reference.

https://www.ey.com/Publication/vwLUAssets/UAE_enacts_economic_substance_rules/$FILE/2019G_003050-19Gbl_UAE%20enacts%20economic%20substance%20rules.pdf

New Zealand DST: In play

Not awaiting the OECD’s proposals for which a Workplace will be delivered in 2020, implementation following that several years later, New Zealand seeks to propose a 2-3% Digital Services Tax (DST) in the interim.  Public comments will be accepted by July 18th. The Government discussion document and EY’s Global Tax Alert provide details, as referenced herein.

Discussion document highlights:

The Government is committed to ensuring everyone pays their fair share of tax, including digital multinationals. Achieving this will require changes to the current tax rules. There are two options for this:

  • The first option is to apply a separate digital services tax (DST) to certain digital transactions. A DST taxes at a low rate (for example, 2% to 3%) the gross turnover of certain highly digitalised businesses that are attributable to the country.
  • The other option is to change the current international income tax rules, which have been agreed to by countries (usually referred to as “the international tax framework”).

In summary, New Zealand is not patient to wait for OECD rules, wishes to implement a transition tax in the interim and plans to repeal this tax with the OECD solution when it becomes effective.

https://www.ey.com/Publication/vwLUAssets/New_Zealand_Government_to_seriously_consider_a_Digital_Services_Tax/$FILE/2019G_002780-19Gbl_Indirect_New%20Zealand%20considers%20Digital%20Services%20Tax.pdf

http://taxpolicy.ird.govt.nz/sites/default/files/2019-dd-digital-economy.pdf

OECD Digital Tax: Consensus Solution?

On 31 May 2019, the Organisation for Economic Co-operation and Development (OECD) released its document Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy (the Workplan).

The Workplan describes the planned approach for addressing the tax challenges of the digitalization of the economy that has been agreed upon by the 129 jurisdictions participating in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The Workplan was approved at the 28-29 May plenary meeting of the BEPS Inclusive Framework, which brought together 289 delegates from 99 member countries and jurisdictions and 10 observer organizations.

A final report is envisioned for 2020, including:

Pillar One focuses on the allocation of taxing rights, and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules;

Pillar Two focuses on the remaining BEPS issues and seeks to develop rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.

Under Pillar One, the first option (i) Modified Residual Profit-Split method would allocate to market jurisdictions a portion of an MNE group’s non-routine profit that reflects the value created in markets that is not recognised under the existing profit allocation rules, or (ii) the fractional apportionment method involves the determination of the amount of profits subject to the new taxing rights without making any distinction between routine and non-routine profit, or (iii) distribution-based approached that would provide a baseline profit attributable to marketing, distribution, and user-related activities.  The concept of losses is also to be recognized in the relevant model.

 

As stated in the workplace, the real risk is that “A further issue is the recognition that if the Inclusive Framework does not deliver a comprehensive consensus-based solution within the agreed G20 time frame, there is a risk that more jurisdictions will adopt uncoordinated unilateral tax measures.”

Additionally, the current workplace is focused on digital tax, although some concepts may creep into discussions of income tax.

A reference to the Workplan is provided for reference.

 

https://www.oecd.org/tax/beps/programme-of-work-to-develop-a-consensus-solution-to-the-tax-challenges-arising-from-the-digitalisation-of-the-economy.pdf

India PE: Profit proposal

India’s Central Board of Direct Taxes has published a report for comments, due by May 18th.

The Committee has recommended a mixed or balanced approach (“fractional apportionment”) that allocates profits between the jurisdiction where sales take place and the jurisdiction where supply is undertaken.  India’s position is that such approach is acceptable in other tax treaties.  However, the risk of double taxation is present if this approach is not adopted by other countries.  Additionally, the approach differs from the OECD approach, which then introduces more complexity for all multinationals with Indian operations.  

India is known for its long appeals, and different approaches to its fisc.  Accordingly this report should be reviewed, with a possibility to comment, prior to further actions.  This report, and methodologies, will also be closely followed by other countries in this complex and subjective area of PE profit allocations.

EY’s Global Tax Alert provides additional details, for reference.

https://www.ey.com/Publication/vwLUAssets/Indian_Tax_Administration_invites_public_comments_on_proposal_to_amend_rules_on_profit_attribution_to_permanent_establishment/$FILE/2019G_001978-19Gbl_TP_India%20-%20Proposal%20to%20amend%20PE%20profit%20attrib%20rules.pdf

OECD TP Guidelines

This 2017 edition of the OECD Transfer Pricing Guidelines incorporates the substantial revisions made in 2016 to reflect the clarifications and revisions agreed in the 2015 BEPS Reports on Actions 8-10 Aligning Transfer pricing Outcomes with Value Creation and on Action 13 Transfer Pricing Documentation and Country-by-Country Reporting. It also includes the revised guidance on safe harbours approved in 2013 which recognises that properly designed safe harbours can help to relieve some compliance burdens and provide taxpayers with greater certainty.

A link to the Guidelines is attached for reference.

http://www.oecd.org/tax/transfer-pricing/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-20769717.htm

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