Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘OECD’

OECD’s BEPS progress with developing countries

The OECD has participated in recent regional meetings in Eurasia and Latin America, among others, following through on its plan to assist developing countries with the BEPS initiative.  The OECD publication entitled “The BEPS Project and Developing Countries: From Consultation to Participation” and a summary of the Latin America meeting are provided for reference.

Click to access strategy-deepening-developing-country-engagement.pdf

Click to access beps-regional-network-lac-co-chairs-summary-of-discussions.pdf

Observations:

The summary of the regional meetings highlights important trends, indicating alignment and future deviations from the new OECD guidelines.

The Latin America summary observes the region does not approve of unilateral legislation for the interest initiative, noting individual countries should wait for final guidelines to ensure alignment.

In contrast, the region expressed concerns of their administrative capacity to implement the automatic exchange of information procedures.  However, the countries also expressed a desire to access country-by-country reports, assess whether such information is satisfactory, and evaluate the proposed filing threshold for regional MNE groups.  These statements indicate a potential shift from the new guidelines to possibly implement standards that are region specific, and thereby non-conforming with the BEPS guidelines.  

Accordingly, MNE’s should follow these meetings closely to provide flexibility for future BEPS compliance that will be more complex than it now appears.  

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OECD / UN

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India’s 2015 Budget introduction

The 2015 Indian Budget has been recently presented, with highlights referenced in a link for the PwC Tax Insights article.

Click to access pwc-india-budget-2015-defers-gaar-addresses-offshore-transfers.pdf

Key points:

  • GAAR deferment until 1 April 2017.
  • “Clarification” of rules addressing offshore share transfers, including reporting requirements.
  • 5% reduction in corporate income tax rate (30% to 25%), phased in over 4 years, after current year 2% surcharge increase.  
  • “Place of effective management” concept, accepted by the OECD, is introduced, noting that a foreign company will be resident in India if its place of effective management is in India at any time during the year.  Guiding principles are to be issued.
  • Tax rate for royalty/technical services reduced to 10%.

The GAAR deferment is especially welcome, hopefully adding more certainty and objective determination upon final implementation.  The rate reductions and additional clarification for offshore share transfers also are positive signs for tax reform, although offset by application of a “place of effective management” concept that will hopefully be addressed simply and objectively without enduring years of appeals to obtain a definitive conclusion.

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Transfer Pricing

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TEI comments: BEPS IP & VAT Guidelines

TEI submitted comments on the Modified Nexus Approach for IP (BEPS Action 5) and International VAT/GST Guidelines.  Links to the submissions are provided for reference:

Click to access TEI%20Comments%20-%20BEPS%20Action%205%20Harmful%20Tax%20Practices%20-%20FINAL%20to%20OECD%2019%20February%202015.pdf

Click to access OECD%20VAT%20Guidelines%20-%20B2C%20Practical%20Application%20-%20TEI%20Comments%20-%20FINAL.pdf

Summary: IP, BEPS Action 5:

  • Accelerated  comment process will likely lead to suboptimal results.
  • The singular entity approach to benefit from the IP regime is problematic from a potential restructuring necessity and poses deviations from the arm’s length principle.
  • R&D and patents have been expressly stated as benefitting from the IP regime, whereas other activities are not yet mentioned.
  • Limiting the preferential regime to strictly patents, vs. innovative software, etc., represents a myopic approach.
  • The 2021 expiration date for existing regimes seems too short-sighted for patents that may last 20 years.

Summary: International VAT/GST Guidelines

  • Unilateral implementation of such guidelines erodes the neutrality principle, leading to double taxation or double non-taxation.
  • Recommendations should align with the OECD discussions for a reverse charge mechanism in B2B scenarios.
  • Supplier based documentation requirements should be practical and simple.
  • The statement that a VAT/GST registration does not create PE should be moved from a footnote to the body of the document for clarity.
  • The lack of consistency in application of transfer pricing adjustments for VAT/GST will provide increased risk of double taxation.
  • Final rules that are clear and uniformly interpreted should be implemented via simple, consistent, flexible and proportional guidelines.

TEI’s comments for these two critical topics convey practical and thoughtful considerations for change prior to final implementation.  They should thereby be reviewed to better understand the global context and potential consequences for these actions.

 

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OECD / UN

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BEPS update: Actions 5 & 15

The OECD has updates available with respect to Action 5 (Intangibles), Action 15 (Multilateral instrument) and Action 13 (Country-by-Country reporting – refer to prior post of 6 Feb. 2015).  Links are provided for the OECD’s statement of intent addressing these three actions in particular.

http://www.oecd.org/tax/first-steps-towards-implementation-of-oecd-g20-efforts-against-tax-avoidance-by-multinationals.htm

Click to access beps-action-5-agreement-on-modified-nexus-approach-for-ip-regimes.pdf

Click to access beps-action-15-mandate-for-development-of-multilateral-instrument.pdf

Summary – Action 5 (Intangibles):

  • The Modified Nexus Approach is generally accepted.
  • 30% uplift of qualifying expenses re: outsourcing and acquisition costs in addition to significant R&D activities of taxpayer.
  • Existing regimes will be closed by 30 June 2016 to new entrants; legislation to be effected in 2015.
  • Grandfather rules for existing regimes may extend 5 years (i.e. 30 June 2021).
  • Methodology of tracking / tracing R&D expenditures will be developed.
  • Guidance to be issued re: definitions; patents qualify, whereas trademarks do not qualify.

Summary – Action 15 (Multilateral Instrument):

  • The intent to develop a multilateral instrument to implement specific BEPS Actions is still desirable and feasible.
  • The instrument will be designed to implement treaty-related measures of the BEPS Project.
  • Several BEPS Action items that are known to be inclusive are Action 2 (Hybrid entities), Action 6 (Treaty abuse), Action 7 (PE) and Action 14 (Dispute resolution).  Other Action items may be included after final guidance is developed, including a mechanism to exchange information for country-by-country reporting.
  • Each Action item may be optional, or there may be a minimum number of Actions that a country will have to execute.
  • The instrument is not compulsory and is open to all jurisdictions.
  • Development of the instrument will be accomplished by an ad-hoc group that is under the aegis of the OECD and G20.
  • Outputs are expected Sept. 2015, with final development of the instrument concluded by 31 Dec. 2016.

The timing of 31 Dec. 2016 will be critical to monitor, as many countries may decide to develop unilateral legislation prior to this date.  It is hopeful that tax administrations will not try to (informally) implement BEPS guidelines prior to the time that effective legislation is executed.

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OECD / UN

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BEPS Action 13: CbC reporting guidance

The OECD has provided additional information re: the timeline and mechanism for providing the Country-by-Country (CbC) template.  A link to the document is included herein:

Click to access beps-action-13-guidance-implementation-tp-documentation-cbc-reporting.pdf

Summary of key points:

  • Master file and local file should be implemented by, and filed directly with, the relevant jurisdiction
  • Information to be provided for fiscal years beginning on or after 1/1/2016
  • Information to be filed by ultimate parent by 31 Dec. 2017 in their jurisdiction of residence
  • Exemption for MNE groups with annual consolidated revenues less than EUR 750M in immediately preceding year
  • The countries participating in the OECD / G20 BEPS Project agree that they will not require filing of a CbC report based on the new template for fiscal years beginning prior to 1/1/2016
  • Secondary reporting mechanism re: sharing of information between jurisdictions
  • Monitoring mechanism coupled with a 2020 review
  • The participating countries agree to:
    • Confidentiality provisions
    • Consistency (i.e. no additions or changes to template requirements)
    • Appropriate Use: No income allocation formula adjustments; CbC report adjustments are to be conceded by their Competent Authority

The guidelines are fairly short and concise, and it will be important to monitor laws in the parent jurisdiction for details of the respective filing process.  Additionally, it is even more important to watch countries that are NOT participating in the BEPS Project for different timelines, information and processes to be followed for customized CbC templates that would create additional complexity and global inconsistency.

Category:

OECD / UN, Transfer Pricing

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OECD Tax Inspectors Without Borders (TIWB): Update

The OECD’s TIWB program’s trial phase ended in December, 2014, with a launch scheduled in 2015, subsequent to a review process.  (Refer to the 9 June, 2013 post).

The TIWB’s objective is to enable sharing of tax audit knowledge and skills with tax administrators in developing countries through a targeted, real-time “learning by doing” approach.  The program encompasses transfer pricing, thin capitalization, APA’s, anti-avoidance rules, pre-audit risk / case selection, and VAT, although customs is excluded. Links to the program summary and the Toolkit (published in Nov. 2014) are included for reference:

http://www.oecd.org/tax/taxinspectors.htm

Click to access tax-inspectors-without-borders-toolkit.pdf

The Toolkit details the role of a TIWB Secretariat as a Facilitator, and roles and responsibilities of the parties to this shared arrangement.  Eligible individuals must meet a 5-year minimum audit experience requirement, and they can be currently working or recently retired.  Most importantly, the Toolkit addresses legal liability considerations and confidentiality restrictions during, and after, their assistance. T

his initiative should be monitored closely, as there do not seem to be prescribed transparency rules for the company under audit.  Therefore, a question for the opening audit could be an inquiry as to the tax administration’s expectations for outside expert assistance from TIWB.  Additionally, an expert with limited experience, coupled with the lack of familiarity with subjective jurisdictional rules for GAAR assessments, for example, may place additional burdens on an expert and the host country in assessing inherently complex rules.

This initiative has a strong likelihood for implementation that further reinforces the OECD’s intent to provide additional guidance for developing countries as complex BEPS Actions are implemented on a domestic level.  Accordingly, it is imperative to review the Toolkit for current familiarity with this program and follow its developments in the near future.

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OECD / UN

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EU TP Forum: Ready, set, go

The European Commission has formally established the EU Joint Transfer Pricing Forum expert group, based on the press release of 26/01/2015.  The Forum will be composed of transfer pricing experts that will discuss TP problems, advise the Commission on TP issues and assist the Commission in finding practical solutions.

Members will consist of Member States’ tax administrations and 18 organisations, for which guidelines for application are also attached for reference.  The names of the organizations will be published.  Rules for observer status are also set forth.  The Commission will publish all relevant documents such as agendas, minutes and participants’ submissions.  The Decision is applicable until 31 March 2019.

The definition of organisations is stated as: “Companies, associations, NGO’s, trade unions, universities, research institutes, Union agencies, Union bodies and international organisations.”  Application are to be submitted by 25 February 2015.

Click to access decision_c(2015)247_en.pdf

Click to access call_applications_2015_en.pdf

Further work on the work of the Forum may be accessed at:

http://ec.europa.eu/taxation_customs/taxation/company_tax/transfer_pricing/forum/index_en.htm

This development should be closely followed, notably in the member selection, recommendations provided, and TP solutions proposed.

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OECD / UN, Transfer Pricing

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Slovakia joins interest limitation parade

Slovakia joins the march of others, including Germany and S. Africa, that have adopted EBITDA limitations for interest deductions.  Slovakia limits interest to 25% of EBITDA, with no carryovers allowable.  The 2015 tax amendments also extend transfer pricing rules to domestic related party transactions, as well as potential loss of future benefits for net operating loss carryovers.

EY’s Global Tax Alert summarizing these changes is included for reference:

Click to access 2014g-cm4890-slovak-parliament-approves-2015-tax-amendments.pdf

BEPS continues to focus on interest deductions and limiting or allocating such deductions based on the premise that they are a base eroding mechanism that should not be fully deductible.  However, such limitation introduces a mismatch of the related party’s interest income that is not similarly limited, thereby increasing the incidence of unfair taxation.  This argument is contrary to the hybrid entity mismatch rules whereby a deduction is not allowable for income that is not includible, or limited in the case of a double deduction situation.  Accordingly, BEPS seeks not only to create a neutral result for a deduction and the related income, but BEPS disallows the tax benefits of common intercompany financing arrangements while (unfairly) retaining domestic benefits for full taxation of related party interest income to increase the country’s domestic fisc.  

Countries that have adopted EBITDA limitations will not be incentivized to change such legislation for the final OECD BEPS guidelines re: interest, thereby causing further complexity, a potential lack of global consistency and avenues of deviation for BEPS implementation.

MNE’s operating in such countries should review the financial and tax impact of the new rules, noting this will be a significant trend in the future that changes the manner in which debt financing is structured in the worldwide organization.

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Transfer Pricing

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S. Africa’s BEPS incentivized interest rules

S, Africa’s new interest limitation on related party debt, approximating 40% of EBITDA, is effective as of 1/1/2015.  The new rules are prescribed prior to the OECD BEPS Action 4 Guidelines re: interest limitations.  Disallowed interest is carried over indefinitely, subject to the subsequent year’s limitation.

PwC’s guidance is provided for reference:

Click to access pwc-south-africa-introduces-interest-deduction-limits-debts-owed.pdf

As countries aggressively enact BEPS incentives with unilateral legislation, the premise of worldwide consistency for new OECD guidelines diminishes virtually daily.  New legislation also reduces the country’s further incentive to change such legislation to align with final OECD guidelines.

As S. Africa’s new rules demonstrate, there should be a BEPS champion/team in place at MNE’s to capture such changes worldwide and measure such impacts upon the global organization.  Additionally, future strategic planning should consider current BEPS initiatives, and unilateral legislation that has been passed, to measure tax efficiencies of current and future debt structures.

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Transfer Pricing

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Comments re: OECD BEPS 14: Dispute Resolutions

The OECD has released comments received in response to BEPS Action Item 14: Make Dispute Resolutions More Effective. These comments are valuable in understanding these important mechanisms that could minimize potential double taxation and increase certainty in a timely manner, as well as comprehend its significant impact on other current BEPS Guidelines that are being drafted such as Action Item 6: Treaty Abuse re: subjective tests being proposed such as the Principal Purpose Test (PPT).

Unfortunately, mandatory arbitration, as well as consistent consideration and application of the MAP procedure, are ideals that will not be realized, due in part to countries not wanting to give up their control and concept of sovereignty.  As the BEPS guidelines, and unilateral country legislative actions, become more complex and subjective, the dispute resolution process increases its vital importance exponentially.  Therefore, it is in everyone’s interest to make these mechanisms work efficiently and consistently in a transparent environment.

The link to the respective comments are included for reference:

Click to access public-comments-action-14-make-dispute-resolution-mechanisms-more-effective.pdf

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OECD / UN

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UK Diverted Profits Tax: Conference notes

The UK Diverted Profits Tax (DPT) Conference on 13 January, sponsored by the Oxford University Centre for Business Taxation, was presented to a packed audience.  Attendees represented news agencies, advisors, tax executives as well as other countries, including Australia.

The speaker panel was inclusive of the following presenters that provided excellent thoughts for discussion:

  • Philip Baker QC, a barrister and QC practising from Field Court Tax Chambers.
  • Michael Devereux, Director of the Oxford University Centre for Business Taxation, Professor of Business Taxation and Professorial Fellow at Oriel College, Oxford.
  • Paul Morton, Head of Group Tax at Reed Elsevier Group plc.
  • Heather Self, Partner at Pinsent Masons.
  • Mike Williams, Director of Business and International Tax at HMRC.

A few statements from the panelists offer some background on this debatable issue:

Philip Baker: The DPT is a Targeted Anti-Avoidance Measure.

Michael Devereux: This may represent an overlay of economic substance over existing international tax rules, and there is a debatable point if the UK treatment should depend on the incidence of income / tax inclusion somewhere else.

Paul Morton: A very real, and complex, set of facts were presented showing that countries’ initiatives may result in a tax burden that exceeds 100% of the income without adequate recourse to avoid double taxation.

Heather Self: Practical aspects, from a MNE perspective, of the proposal were presented, supplemented by comments in her 19 December article of Tax Journal.  One of the conclusions in her article states: “This measure will make BEPS more difficult to achieve, and it risks a whole raft of unilateral measures being introduced by other countries.”

Mike Williams: The DPT proposal has alot of political commitment; it is consistent with EU law and treaty obligations; the UK is trying not to tax beyond its fair share of profits; loan exclusions probably do not go far enough and to combat aggressive tax planning, why wait another year.

Comments also addressed the aggressive effective date of April 2015, noting this timeline is in advance of the final OECD BEPS guidelines and there is very little time for reasoned comments and review between now and April.

This initiative has drawn the attention of many countries, anxious to examine the potential benefits it would add to their economy.  Accordingly, it is imperative to track this proposal, its effective date, implementation and a “Follow the Leader” approach in other jurisdictions.

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Transfer Pricing

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TEI Comments: BEPS Item 6 – Preventing Treaty Abuse

Tax Executives Institute, Inc. (TEI) has issued follow-up comments in response to the OECD public discussion draft on 21 November 2014, in addition to its prior comments on 8 April 2014 on the first discussion draft.  The latest comments are referenced herein:

Click to access TEI%20Comments%20-%20BEPS%20Action%206%20-%20Follow%20Up%20Work%20on%20Treaty%20Abuse%20-%20FINAL%20to%20OECD%208%20January%202015.pdf

Key observations:

  • The Principal Purpose test remains highly subjective and susceptible to unpredictable interpretations, therefore TEI opposes including this test in the OECD model treaty.
  • Jurisdictions should adopt an administrative appeal process if the Principal Purpose test is asserted.
  • A treaty incorporating a Limitation on Benefits provision (LOB provision) and a Principal Purpose test may deny benefits if the LOB test is satisfied and the benefit is denied under the Principal Purpose test.  The LOB provision should be the primary (objective) tool rather than one part of a two-part treaty abuse test.
  • The Principal Purpose test may result in benefits not recorded on audited financial statements due to its uncertainty.
  • Transition relief and prospective arrangements should be included in the final guidelines.

TEI’s comments should be reviewed to understand the myriad issues proposed to combat treaty abuse.  Additional uncertainty, accompanied by appeals of such assessments, will be the likely result of the proposal as currently drafted.

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OECD / UN

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UK Diverted Profits Tax: Parliamentary debate

The UK Diverted Profits Tax proposal (refer to 12 December 2014 post) will become effective in April, 2015.  The Parliament debate sheds light on the intentions for such tax, as well as the assumptions (true or false) underlying this initiative.

The debate clarifies that such “tax” is not meant to be a tax that meets the definition of a tax for double tax treaty purposes, therefore it is subject to domestic legislation and not overridden by its treaty network.  This rationale therefore leads to the premise that it may not qualify as a tax subject to a US Foreign Tax Credit, resulting in a double “tax” situation regardless of the nomenclature.  Additionally, the Mutual Agreement Procedure (MAP) provided for in a double tax treaty would not be available for recourse.

The tax is aggressive in its timing, ahead of the final OECD proposals and in contrast to other initiatives for which the UK is awaiting final BEPS guidance.  The debate highlights the cynicism about the OECD process, thus providing a rationale for unilateral legislation sooner vs. later.  Additionally, this proposal was discussed as a Targeted Anti-Avoidance Rule (TAAR), which is in addition to the EU and UK General Anti-Avoidance Rules (GAAR).

Most importantly, a diverted profit tax situation involves an initial recharacterization assessment by HMRC, requiring payment by the taxpayer, with appeals to follow later – a “Pay Now, Talk Later” approach.

The clock is ticking and time is winding down with alot of questions remaining unanswered.  The debate is provided for reference:

http://www.publications.parliament.uk/pa/cm201415/cmhansrd/cm150107/halltext/150107h0001.htm

It is very useful to review the Intent of new laws to form a better understanding for the formation of such initiatives, as well as comprehension into the foresight of drafters re: possible appeals by the European Commission and/or European Court of Justice.

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Transfer Pricing

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BEPS Action 7 / PE: TEI’s comments

Tax Executives Institute, Inc. (TEI) has provided comments in response to OECD’s BEPS Action 7: Preventing the Artificial Avoidance of PE Status.

Click to access TEI%20Comments%20-%20OECD%20BEPS%20Action%207%20PE%20-%20FINAL%20to%20OECD%2023%20December%202014.pdf

Key observations:

  • Changes to the definition of a Permanent Establishment (PE) are more welcome in the Model Convention, as recommended, rather than modifying the official commentary.
  • Continued focus on physical presence in the general definition of a PE is commended.
  • “The Discussion Draft generally views commissionaires as structured “primarily” to permit MNEs to erode the tax base of the State of sale.” However, there is no mention of the legitimate arrangements for which they are used.
  • Four amendments are proposed, each of which would likely eliminate the commissionnaire arrangement and increase uncertainty.
  • The new paragraph 6, broadening the definition of an independent agent, is vague and problematic.  This change may result in a subsidiary being a dependent agent of the parent in a limited risk distributor situation, resulting in PE of the parent.
  • The proposed anti-fragmentation rules for a PE exception are subjective and increase uncertainty.
  • The Authorized OECD Approach (AOA) for determining a PE’s profits are complex and uncertain.
  • There are no transition periods or grandfathering provisions for implementation of the new PE definition.

TEI’s commentary is well written and poses practical arguments that should be considered by the OECD.  Accordingly, it is a document that should be required reading for all tax practitioners involved in transfer pricing.  The proposed changes will also affect other aspects of transfer pricing and BEPS Actions that will be finalized this year.

Category:

OECD / UN, PE, Transfer Pricing

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Spain: New laws, including BEPS alignment

Spain has introduced new tax reforms that will be effective 1/1/2015.  A Deloitte International Tax Alert provides details of the new rules, with a link provided for reference:

Click to access dttl-tax-alert-spain-021214.pdf

Key Observations:

  • OECD BEPS incentivized anti-hybrid rule; Disallowed deductions where no income is generated (Deduction/No-Inclusion), income will not be subject to tax, or income will be subject to a nominal tax rate of less than 10%.
  • Impairment losses will be limited.
  • The 30% corporate income tax rate will be reduced to 28% for 2015, and 25% in subsequent years.
  • NOL’s will be available for indefinite carryover, although subject to taxable income limitations.
  • The Statute of Limitations to review NOL’s is extended from 4 to 10 years.
  • Participation exemption rules are revised, including a anti-hybrid measure to prevent a benefit where a dividend represents a deductible expense for the payer (in alignment with the EU Parent-Subsidiary Directive).
  • New consolidated tax regimes are included, including horizontal tax consolidation.
  • Goodwill and asset step-ups of a merger after 2014 will not be recognized for tax purposes.
  • CFC rules are modified.  Spanish taxable income will include a CFC’s income from a transfer of assets or rights, or service income of the CFC where there are no material and personnel resources at the level of the CFC.  Additionally, certain passive income will be subject to the CFC rules.

The EU Parent-Subsidiary Directive (EU PSD) rules were anticipated to be effective by the end of 2015, whereas the anti-hybrid rules represent a proactive legislative response to the OECD BEPS initiatives for which this rule may not match the final guidelines that the OECD will provide in 2015.

Accordingly, the OECD BEPS Guidelines should be closely followed, knowing that proposed guidelines and actions are being legislatively enacted in various countries that provide a complex puzzle of different actions for identical transactions.

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OECD / UN

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