Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘OECD’

OECD BEPS recent releases

The OECD has, in the past week, published several consultation drafts, with relevant links provided for reference.

The documents include:

Action 8,9,10: Risk, recharacterization

Action 14: Dispute resolution

Action 4: Interest deductions

Action 10: Profit splits

Action 10: Transfer pricing aspects of cross-border commodity transactions

International VAT / GST Guidelines

Click to access discussion-draft-action-10-commodity-transactions.pdf

Click to access discussion-draft-action-10-profit-splits-global-value-chains.pdf

Click to access discussion-draft-action-4-interest-deductions.pdf

Click to access discussion-draft-action-14-make-dispute-resolution-mechanisms-more-effective.pdf

Click to access discussion-draft-actions-8-9-10-chapter-1-TP-Guidelines-risk-recharacterisation-special-measures.pdf

Click to access discussion-draft-oecd-international-vat-gst-guidelines.pdf

The discussion drafts have deadlines for comment in January or February 2015, and all interested parties should review the relevant drafts to submit comments accordingly.  Additionally, the documents should be reviewed by all international tax practitioners to understand the trend of these topics, thereby affecting how all countries may be affected, directly or indirectly, by these actions.

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OECD / UN

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Audit Diary = Tax Risk Best Practice

With the increasing complexity of audits, OECD BEPS incentivized unilateral legislation, General Anti-Avoidance Rules (GAAR), and cases proceeding to arbitration, appeals and Mutual Agreement Procedure (MAP), a comprehensive tax audit diary will prove to be of valuable reference during the audit, from commencement to final determination and thereafter.

Ideally, this diary could be signed/initialed contemporaneously by the company and tax authorities signifying agreement of the summary.

A tax audit diary may include the following components:

  • Summary of discussions at each audit meeting, including attendees, conclusions, future actions and promised timelines.
  • Paper/electronic copies of all written audit inquiries received, including a date stamp upon receipt.
  • Paper/electronic copies of all written audit inquiries provided, including the date provided to tax authorities.
  • Copies of all reports, including transfer pricing studies, provided.
  • Agreement as to what documents are not to be provided, with mutual consent of the company and tax authorities.
  • Documentation of BEPS related discussions / assessments not yet legislated into domestic law.
  • Summary of discussions re: jeopardy assessments / threats of additional assessments re: Competent Authority filings.
  • References to adequate / inadequate transfer pricing documentation, as a finding of “inadequate documentation” may provide a basis for additional interest, penalties and possible disallowance of treaty benefits, such as MAP.

The diary should be included in corporate governance documentation that will provide consistency upon changes in personnel during the course of an audit, including relevant appeals.

Additionally, this diary will be instrumental in providing information to Competent Authority personnel and advisors for clarity of the audit negotiations and discussions, as well as serving as one source of valuable reference for the audit, including similar audits of other legal entities in that jurisdiction, joint audits, etc.

A discussion of a joint audit discussion as a component of the Tax Risk Framework is included in an earlier post dated 25 October 2014 for related reference.

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Tax Risk Management

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UK: Diverted Profits Tax & CbC reporting

HMRC is taking a unilateral proactive lead in devising measures based on OECD BEPS initiatives that introduce a diverted profits tax, as well as country by country (CbC) reporting for UK headquartered MNE’s.  A Tax Journal summary provides a summary of the diverted profits tax, which is linked herein, in addition to the HMRC source articles for application of the diverted profits tax and CbC reporting.

http://www.taxjournal.com/tj/articles/google-tax-sends-clear-message-multinationals-divert-profits-10122014

Click to access Diverted_Profits_Tax.pdf

Click to access TIIN_2150.pdf

Diverted Profits Tax:

This measure will introduce a new 25% tax (regular tax rate plus a punitive component) on diverted profits. The diverted profits tax will operate through two basic rules. The first rule counteracts arrangements by which foreign companies exploit the permanent establishment rules. The second rule prevents companies from creating tax advantages by using transactions or entities that lack economic substance.  The proposal will be effective as of 01 April 2015.

The main objective of the diverted profits tax is to counteract contrived arrangements used by large groups (typically multinational enterprises) that result in the erosion of the UK tax base.

CbC reporting:

The publication allows regulations to be issued re: CbC reporting for UK-based companies after the OECD publishes guidance on how the reports should be filed and how the information in them may be shared between relevant countries, and after a period of consultation in the UK.

After issuance of the hybrid mismatch rules (post of 7 December 2014) that patiently await the final OECD guidelines for consensus in its guidelines, the diverted profits tax mechanism will be in effect next year prior to final OECD guidelines and subject to other countries following a similar early unilateral lead as incentivized by the BEPS initiatives.

The CbC reporting is addressed at UK-based MNE’s, while presumably non-UK based MNE guidance for such reporting will be also be issued in the near future.

These initiatives may target legal mechanisms that the taxpayer will need to defend aggressively, while advancing preparation for timely compliance for CbC reporting.  Additionally, other countries may use this information via automatic exchange of information to assist in transfer pricing risk assessment.  The initiatives should be reviewed in detail to better understand the rules, and trends, for these proposals.

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Transfer Pricing

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EU Parent-Sub Directive: Anti-abuse proposal

A anti-abuse rule has been proposed by the EU Economic and Financial Affairs Council for inclusion in the EU Parent-Subsidiary Directive (PSD), following implementation of hybrid mismatch rules as summarized in my post of 24 June 2014.  The proposal would be required to legislated into law by 31 December 2015, in addition to the earlier hybrid loan rules.

A copy of the communique is attached for reference:

http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2016435%202014%20INIT

Key observations:
Annex I contains the following language (highlights added for emphasis) for the proposed anti-abuse rule:

Member States shall not grant the benefits of this Directive to an arrangement or a series of arrangements that, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage which defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. 3. For the purposes of paragraph 2, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. 4. This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse.”

Annex II provides further reference stating that EU Member States  will endeavor to inform each other, and additionally that an anti-abuse provision will be considered in future work addressing the EU Interest and Royalties Directive 2003/49/EC.

This proposal should be closely followed, as it will directly affect transactions between EU Member States.  Additionally, this initiative will be followed by other countries in drafting domestic and/or treaty anti-abuse/anti-avoidance rules, possibly resulting in a multi-pronged approach of anti-avoidance / anti-abuse rules in Directives, treaties and domestic legislation.

The subjectivity of this rule will increase complexity, reduce clarity and certainty while being subject to further appeals contesting implementation and/or interpretation of the guidelines, including the “main purpose” test.

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OECD / UN

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UK: “Aggressive tax planning” consultation paper

HMRC has published draft rules, entitled “Tackling aggressive tax planning,” to give effect to OECD’s BEPS Action 2 item, Neutralising the Effect of Hybrid Mismatch Arrangements.

The legislation will be effective as of 1/1/2017, preceded by this consultation paper, a summary of responses in summer 2015 and a second consultation on proposed draft legislation prior to its introduction in a future finance bill.  Interested parties have until 11 February 2015 to provide comments for this consultation.

The draft legislation is envisioned to follow the OECD guidelines, and commentary, that are due to be completed by September 2015.  A copy of the consultation paper is provided for reference:

Click to access tackling_aggressive_tax_planning_hybrids_mismatch_arrangements_consultation_final.pdf

Key observations:

  • The primary and defensive rules, as provided by the OECD BEPS Guidelines will be followed.  The primary rule will be used to deny the payer’s deduction for a deduction/no income inclusion arrangement of a hybrid financial instrument or disregarded payment made by a hybrid entity, while the defensive rule would include taxing the income by the payee.  For a double deduction arrangement of a deductible payment made to a hybrid entity, the deduction by the investor’s parent jurisdiction is denied using the primary rule, while the defensive rule would deny the payer deduction.
  • Rules will be considered to restrict the tax transparency of reverse hybrids.
  • The UK anti-arbitrage rules will not likely be retained.
  • The definition of an “arrangement” will not be the OECD version, as the existing UK definition would be used to achieve the same result.
  • Timing differences are not included, unless it appears that they will not unwind within a reasonable (5 years) time period.
  • The mismatch rules will apply for intra-UK and cross border situations.
  • For mismatches as a result of both a hybrid financial instrument and a hybrid entity, the hybrid financial instrument rule applies first.
  • Amended corporation tax returns and/or MAP procedures are permissible if the original mismatch no longer exists.
  • Tax treaties will not prevent the application of the recommended domestic laws to neutralise the effect of hybrid mismatch arrangements, thus no treaty amendments are necessary to apply the mismatch rules.
  • No grandfathering rules are envisioned, as the advance announcement of the UK rules will provide a transitional period to unwind structures.
  • The hybrid mismatch rules will operate within the UK’s self-assessment regime.

As stated in the Foreword of the consultation document, the UK’s strategy is to create the most competitive tax environment in the G20 and has led the way, driving the international tax, transparency and trade agenda forward.

The consultation paper is comprehensive, with numerous examples provided to illustrate, and visualize, the impact of the proposed rules.  This proactive measure should be monitored to see how other countries follow the UK’s lead for taxing mismatch arrangements, including the timing and incorporation of the final guidelines by the OECD in 2015.

 

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Transfer Pricing

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OECD: MAP update

The OECD has released new statistics for the Mutual Agreement Procedure (MAP) cases for 2013, including new cases and the inventory of cases by OECD countries and Partner Economies (Argentina, China, Latvia and South Africa).  A link to the MAP summary is included for reference:

http://www.oecd.org/ctp/dispute/map-statistics-2013.htm

The summary is a valuable reference tool, although the MAP procedure has been acknowledged by many as an inefficient, costly and timely process.  Accordingly, it will be interesting to watch the OECD BEPS Action items progress in this area to minimize double taxation in an efficient and timely process.

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OECD / UN

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APAC: BEPS Best Practices by tax administrations

The Study Group on Asian Tax Administration and Research (SGATAR) met recently in Sydney, resulting in the creation of a new task force for the Asia-Pacific region to collaborate on OECD BEPS initiatives while enabling cooperation to develop cohesive tax systems in each jurisdiction.  A link to the Communique is attached for reference:

https://www.sgatar2014.org/media/communique

SGATAR 2014 brought together almost 200 delegates, including representatives from the Asian Development Bank (ADB), Inter-Amercian Center of Tax Administrations (CIAT), Asia-Oceania Tax Consultants’ Association (AOTCA), International Bureau of Fiscal Documentation (IBFD), OECD and the World Bank Group (WBG).

SGATAR members include the following jurisdictions: Australia, Cambodia, People’s Republic of China, Hong Kong SAR, Indonesia, Japan, Republic of Korea, Macao SAR, Malaysia, Mongolia, New Zealand, Papua New Guinea, The Philippines, Singapore, Chinese Taipei, Thailand and Vietnam.

Best Practice observations:

As each of these countries propose unilateral legislation, it should be closely monitored as it may well form a foundation of Best Practices  and SGATAR collaboration for the Asia-Pacific region.  A recent example of potential early guidance is Singapore’s transfer pricing documentation paper by the Inland Revenue Authority of Singapore; (refer to my earlier post of 31 October 2014).

The Asia-Pacific regional approach is worth watching to discern trends that may vary from the OECD BEPS Guidelines, forming additional complexities and different interpretations for international tax norms.

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OECD / UN

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Russia: New CFC & Beneficial Ownership rules

Russia has introduced legislation defining a “beneficial owner” and the introduction of CFC rules, expected to be effective 1/1/2015.  PwC has provided a summary of the changes, referenced herein.

Click to access pwc-russian-anti-offshore-law-changes-russian-treaties.pdf

Key observations:

  • Treaty benefits will not apply if the foreign person has limited powers to dispose of the income or fulfill intermediary functions and do not perform any other duties or undertake any risks, or the income is subsequently transferred to another person who would not be entitled to treaty benefits if they had directly received the income.
  • Foreign corporations, trusts, partnerships and funds which hold property subject to Russian property tax are required to notify the Russian tax authorities of their shareholders and founders, beneficiaries and managers.  A 100% penalty tax may apply for noncompliance.
  • A legal entity may now be a Russian tax resident based on its place of management.
  • Russian tax individuals and legal entities must pay Russian tax on a CFC’s retained earnings if the CFC has not paid a dividend, subject to thresholds.  No penalty is applicable for 2015-2107.

Persons with Russian property and legal interests should review this important legislation to understand the new reporting rules and regime for CFC’s and beneficial ownership.  The law follows the intent of the OECD’s BEPS provisions to prevent tax avoidance via tax havens and low-tax jurisdictions.

 

Category:

Transfer Pricing

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Beneficial Ownership: Guiding Principles

The G20 has provided a set of guiding principles re: definition of “beneficial owner” in its efforts to improve transparency and address abuse.  A link to the principles is provided:

Click to access g20_high-level_principles_beneficial_ownership_transparency.pdf

The principles are a proactive effort by the G20 to identify the ultimate ownership / control of legal entities, provide such information in a mechanism that allows sharing by tax authorities and competent authorities, as well as  assessing risk of legal structures and designing actions to fight abuse.

The principles should be compared to the new definition and guidance re: “beneficial owner” provided for the update to the 2014 OECD Model Convention (refer to 22 July 2014 post), which conveyed that the term should be understood in its context and in light of the object and purposes of the Convention including avoiding double taxation and  prevention of fiscal evasion and avoidance.

The focus on “Beneficial Ownership” is increasing, thereby increased diligence re: documentation to address transparency and benefits of current legal structures should be a top priority for MNE’s.

 

 

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Transfer Pricing

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OECD: Best Practices for Tax administrations

OECD – Tax Administration 2013
This is a unique reference source of high level comparative information on aspects of tax administration system design and practice covering the world’s major revenue bodies. This edition updates performance-related and descriptive material contained in prior editions with new data and supplements this with new features including coverage of 3 additional countries (i.e. Brazil, Columbia, and Hong Kong (China). For the first time, this edition of the series includes comparative information on all 34 member countries of the OECD, the EU and, the G20, as well as certain other countries (e.g. Singapore and South Africa). New subject covered in this series include: 1) a description of how revenue bodies engage and support tax intermediaries. In addition, the series includes extensive description of organizational reforms underway in many countries to improve efficiency and effectiveness, for many in an environment where public sector funding is being significantly reduced.

http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/tax-administration-2013_9789264200814-en#page1

Summary of Topics:

  • Institutional arrangements for tax administrations
  • Organisation of revenue bodies
  • Strategic management
  • Human resource management and tax administration
  • Resources
  • Operational performance
  • Electronic services
  • Tax administration and tax intermediaries
  • Administrative frameworks
  • Various appendices

As the concept of co-operative compliance becomes more commonly practiced, this reference is a valuable contribution to form Best Practices for tax administrations.

Additionally, it is useful for MNE’s to review and gain a better understanding of the issues faced by tax administrations, with a proactive effort needed to form a win-win opportunity to achieve a fair and consistent international tax framework.

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OECD / UN

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OECD BEPS Strategy for Developing Countries

The OECD has released its plans for developing countries to play a greater role in its BEPS initiatives.  A link to the OECD release is attached:

http://www.oecd.org/newsroom/developing-countries-toplay-greater-role-in-oecdg20-efforts-to-curb-corporate-tax-avoidance.htm

Summary:

  • Three-part strategy
    • Attendance at meetings by 10 developing countries, including Albania, Jamaica, Kenya, Peru, Philippines, Senegal and Tunisia.
    • Five regional networks of tax policy and administration officials will be established for coordination and dialogue on BEPS issues.  The regional focus includes developing countries located in Asia, Africa, Central Europe, Middle East, Latin America / Caribbean and Francophone regions.  The regional network will also be a forum for developing countries to discuss negotiation and implementation of the multilateral instrument under Action 15 of the BEPS Project.
    • BEPS toolkits to be developed for practical implementation and capacity building.
  • A two-day workshop is scheduled in December 2014 that will allow developing countries to discuss practical aspects and their priority issues.

Developing countries generally have less resources, experience and training to implement BEPS effectively, therefore this initiative should be monitored to determine ultimate success of the BEPS initiatives around the world.

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OECD / UN

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OECD BEPS Action 10: TP Low Value Add Services

The OECD has released guidance on its BEPS Action Plan item 10: Transfer Pricing Guidelines re: Low Value-Adding Intra-Group Services.  Comments should be submitted by 14 January 2015.  A copy of the guidance is attached for reference:

Click to access discussion-draft-action-10-low-value-adding-intra-group-services.pdf

The Guidance, in summary:

  • Defines low value-adding intra-group services
  • Clarifies the meaning of duplicative activities and shareholder costs
  • Provides a 2-5% range for mark-up
  • Addresses cost allocation methodologies
  • Discusses a simplified benefit test
  • Discusses documentation to support the simplified approach

This guidance is required reading for all interested parties working with transfer pricing methodologies addressing intra-group services, noting the fact that simplification in one area of such services may introduce further complexities and ambiguities.

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OECD / UN

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OECD BEPS Action 7 Guidance: PE Avoidance

OECD has released guidance on the BEPS Action Plan item 7: Preventing the Artificial Avoidance of PE Status.  Comments should be sent by 9 January 2015.  A link to the OECD guidance is attached for reference:

Click to access action-7-pe-status-public-discussion-draft.pdf

Key observations:

  • Commissionaire arrangements: 4 alternatives are provided re: PE avoidance
  • “Independent agent” activities: the independent agent must not act exclusively for one enterprise
  • Options to counter specific activity exemptions are introduced to counter artificial avoidance of PE
  • Two options are provided re: splitting up of construction contracts to avoid the 12 month rule, one of which is the Principal Purpose test general anti-abuse rule
  • Insurance agent PE proposals are introduced
  • Profit attribution concepts to PE are discussed

In summary, additional subjectivity rules are introduced while the current exemption definitions are narrowed.  These actions will tend to significantly increase tax appeals and the risk of double taxation.

All MNE’s should review the guidance to understand the trend for future PE guidance, while also identifying current structures that may be affected by the new rules.  Notably, countries may unilaterally develop legislation based upon this guidance without waiting for final guidelines to be issued, thereby introducing greater complexity and challenges in the determination of PE.

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OECD / UN

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TEI’s comments: Singapore’s TP documentation – Marching to a different drummer

Tax Executives Institute, Inc. (TEI) has provided excellent comments to the transfer pricing documentation paper by the Inland Revenue Authority of Singapore (IRAS).  TEI responds to five questions of the Consultation Paper.  A link to their comments, and the Singapore Consultation Paper,  are included for reference:

Click to access TEI%20submission%20re%20IRAS%20TP%20Documentation.pdf

Click to access pconsult_IT_Transfer%20Pricing%20Documentation_2014-09-01.pdf

Key observations:

  • The proposed rules for documentation by December elevate Singapore’s transfer pricing documentation requirements to a higher level than the current OECD guidelines, prior to its final recommendations, including how the Master File should be filed and transition thereto.
  • The Consultation sets forth guidelines for non-related Singapore entities including the provision of a functional analysis for contributions to value creation by each related group member, consolidated financial statements of the group, and transfer pricing policies re: all types of transactions between group members.  
  • Confidentiality concerns arise with respect to the proposed rules, accordingly appeals for exemption should be appropriately provided.
  • Adverse consequences for not providing “adequate documentation” (term not defined), including withdrawal of MAP support set forth in the relevant treaty.
  • TEI has proposed de minims thresholds to exclude immaterial transactions and excluding documentation for intra-country transactions.
  • TEI has suggested an approach to implementing new documentation guidance tracking OECD BEPS developments, with lead time to adjust processes accordingly.

TEI has provided a valuable contribution in their well-written and thoughtful comments to significant issues posed by countries unilaterally adopting new transfer pricing documentation rules prior to finalization of the OECD BEPS initiatives.

Most importantly, Singapore has suggested using domestic legislation to override the MAP process in treaties as well as introducing overly comprehensive documentation that has no relevance to the domestic entity and its intercompany transactions or transfer pricing methodologies.

This initiative by IRAS is indicative of a parade with an OECD banner, although each member has  a different drummer and leader with distinct initiatives and its concept for application of the “arm’s-length principle” to determine its fiscal fair share of tax to be collected from multinationals that will be determined prior to official OECD guidelines.  It is imperative that all interested parties follow this initiative by Singapore, in addition to correlative initiatives by other countries.

 

Category:

OECD / UN, Transfer Pricing

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TP Risk: Audit discussion = Framework for Ways of Working

As the OECD is developing new guidelines to address transfer pricing (TP) risk, including the Country-by-Country (CbC) template, a lack of emphasis resides in the idea that every tax audit involving cross-border issues should require an opening discussion between the taxpayer and the tax authorities of the business, its relevance in that jurisdiction apart from its global business, the functions, assets and risks for that jurisdiction upon which the arm’s length principle is based, and the rationale for the level of income/loss generated during the audit years.

Transfer pricing documentation reports, including a local country report, may be available for review.  However, such reports may not simply convey the business rationale easily to form an accurate understanding prior to embarking upon a leap into technicalities and assumptions to initiate data requests and move forward on assumptions prematurely.  For example, a company investing in a less developed country seeking long-term growth based on the domestic opportunity may have start-up losses, although such losses may be significantly offset by potential future income.

The open audit discussion should be developed into a Best Practice Ways of Working framework which is discussed and signed by the taxpayer and tax authorities.  This framework should be a simple and practical document addressing open dialogue, preliminary discussion of issues designed to produce the relevant documentation, timelines for requesting and providing information and a continuing dialogue discussing the status of open issues and requests, with a mutual effort to resolve issues efficiently.

To the extent this simple idea could be integrated consistently and uniformly around the world, it is a challenge worth addressing.

The Best Practice Ways of Working Framework could be a very effective and practical tool, supplementing the technical and legal requirements for transfer pricing.

Category:

Transfer Pricing

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