Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘OECD’

UN Tax developments

The UN Committee of Experts on International Cooperation in Tax Matters concluded their October meeting with several important milestones discussed.  A summary of the meeting is provided, and a reference to the Handbook on Selected Issues in Protecting the Tax Base of Developing Countries are provided for reference:

http://www.un.org/esa/ffd/special/11ictm-key-outcomes.html

Click to access handbook-tb.pdf

Key points:

  • A new Article was adopted re: fees for technical services that will become a part of the new UN Model Double Tax Convention (DTC).
  • A new practical Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries was adopted.
  • Subcommittee on Exchange of Information presented a draft “Code of Conduct” that will be updated in the October 2016 session.
  • The Committee also welcomed the work of UN DESA’s Financing for Development Office in the area of capacity-building, including the production of a “Handbook on Selected Issues in Protecting the Tax Base of Developing Countries.”
  • Two new subcommittees were formed:
    • Royalties re: updated Article 12 UN Model and commentary
    • Mutual Agreement Procedure (MAP) to review and propose updates to UN Model

On the heels of the OECD BEPS Guidelines, the UN developments will pave the way for many developing countries that lack the time and/or resources for implementation.  Accordingly, additional withholding taxes for services and withholding sources will be revealed to extract monies at source.  As a result, the UN initiatives are paramount to monitor and review accordingly.

These initiatives will also provide greater capacity for global disparity, with the BEPS Guidelines and UN changes in periods of transition re: domestic legislative actions around the world.

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OECD / UN

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Dutch viewpoint: Retain advantages post-BEPS

The Dutch government has provided comments to the BEPS Guidelines, as they have generally been patient re: unilateral legislation that would represent non-conformity with the recently announced actions.  However, they would be ready to adopt tax incentives for Dutch taxpayers if there are unintended BEPS consequences that would weaken its attractive tax environment.  

PwC’ Tax Insights article provides details for this update:

Click to access pwc-dutch-government-responds-to-final-beps-reports.pdf

The article is refreshing re: BEPS conformity, including transparency, by the Dutch government.  The adoption of its innovation box regime as of 1/1/2017 will reflect the modified nexus approach of the BEPS Actions.

However, it is also interesting to note the measures it may take to retain its attractiveness for multinationals if there are adverse BEPS consequences.  This viewpoint is significant to watch, as other countries may adopt similar measures that will represent additional complexity and nonconformity around the world.  Additionally, each country will have its own view, in addition to unique incentives to protect its local tax base.

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OECD

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OECD BEPS Action Items

Attached is the link to access the OECD webcast and all of the BEPS Action Items released on 5 Oct. 2015.

http://www.oecd.org/ctp/beps-2015-final-reports.htm

Needless to say, the process of reading, and reviewing, the Action Items has commenced by many.

Importantly, multinationals now have the final rules by which the impact on their organization can be assessed, and action plans developed accordingly.  However, there will be timing differences as to when such guidance is implemented into law by countries, as well as “soft law” conformity.

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OECD

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BEPS update

Apart from the expectations surrounding the 5th October release of the OECD BEPS Action Items, the referenced EY Global Tax Alert provides relevant details for the following BEPS related activities:

  • Australia: Multinational anti avoidance law (MAAL), transfer pricing documentation
  • Belgium: Payments to “tax haven” jurisdictions
  • Bulgaria: Consultation draft re: the EU Parent Subsidiary Directive; although the broader local GAAR would be retained
  • China’s recent developments (refer to my 26 Sept. post)
  • Denmark: Transfer pricing documentation
  • Japan: Court case re: PE and “preparatory or auxiliary” exception
  • Kuwait: Virtual Service PE interpretation (refer to my 23 Sept. post)
  • NL: Transfer pricing doucmentation

Click to access 2015G_CM5800_The%20Latest%20on%20BEPS%20-%2028%20September%202015.pdf

The latest developments, along with future unilateral actions that follow the intent of the new OECD Action Items, should be monitored closely.  Additionally, such concepts should be reviewed for domestic legislative compliance, vs. intent.

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OECD

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China’s proposed TP documentation; Non-transparent

China’s State Administration of Taxation (SAT) has issued a consultation draft encompassing transfer pricing documentation; comments are due by 16 October 2015.  The draft includes OECD BEPS Action concepts, such as the form of transfer pricing documentation, although retaining arguable local concepts and introducing intangible definitions prior to the final OECD Guidelines.

Click to access 2015G_CM5783_TP_Chinas%20TAs%20issue%20groundbreaking%20consultation%20draft%20to%20update%20TP%20rules%20in%20a%20Post-BEPS%20environment.pdf

Key observations:

  • The three tier TP documentation concept of Master File, Local File and Country-by-Country report (for Chinese based multinationals) is introduced.
  • A “Special File” is also required for intercompany services, providing copies of agreements, allocation keys and evidence supporting the “benefit test.”
  • “Intangibles” is broader than the OECD proposals, including marketing channels and customer lists.
  • Advance Pricing Agreement (APA) procedures are clarified.
  • The use of transfer pricing comparables is broad and runs counter to the transparency or consistency test.  The use of secret comparables, one comparable, one or multiple year results are allowed.
  • Anti-shifting provisions are to be used for transactions with entities of little substance, thereby increasing Chinese profits.
  • Profitability monitoring will be used to establish a tax risk hierarchy system.

Although the Consultation report includes consistent BEPS measures, there are also concepts included that do not provide consistency with other countries, increasing the risks of double taxation.  Thereby, China is inwardly focusing on its fisc while representing a “rogue” player on the OECD playing field.

All multinationals with operations in China should determine their course of action for these proposals, including a review of holding companies for intercompany transactions with Chinese entities.  

Category:

Transfer Pricing

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Kuwait: Virtual Service PE

Kuwait’s Department of Inspections and Tax Claims (DIT) has introduced its interpretation of a Virtual Service PE, notwithstanding its nonconformity with the physical presence standard and its double tax treaties in accordance with OECD’s Model Convention.

Unfortunately, this concept is not new in the Middle East and it is hoped that other countries will not follow this breakaway interpretation.

EY’s Global Tax Alert provides additional details into this development:

Click to access 2015G_CM5779_Kuwait%20Tax%20Authorities%20adopt%20Virtual%20Service%20PE%20concept.pdf

Key observations:

  • The Virtual Service PE concept takes into account only the duration of the contract itself.
  • Work extending beyond the tax treaty threshold of 183 days will be presumed to have created a Service PE.
  • The DIT takes the position that a nonresident is deemed to have a PE in Kuwait, particularly, if the following conditions are met:
    • A nonresident furnishes services to an entity in connection with the latter’s activity in Kuwait.
    •  The period during which such services are rendered according to the contract, exceeds the threshold period under the applicable tax treaty.

The immediate implication of the DIT’s current approach to a “Virtual Service PE” is that the applicability of tax treaty-based income tax exemptions with respect to cross-border services has become highly uncertain.

Accordingly, all legal agreements and provision for services to Kuwait (disregarding the physical standard) should be reviewed for potential disputes based on a Virtual Services PE argument.  Practically, it may also be difficult to obtain tax treaty relief from double taxation.

 

Category:

PE

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TFEU: Tool for EU Directives

The European Commission (EC) and European Parliament (EP), including the TAXE Committee on Rulings established by the EP, have recently endorsed many provisions that would normally require the unanimity of approval by the Member States.  Knowing this has not resulted in success with prior initiatives, a renewed focus may be taking place re: Article 116 of the Treaty on the Functioning of the European Union (TFEU) which empowers the EC/EP to issue a Directive accordingly.

Article 116 TFEU:

Where the Commission finds that a difference between the provisions laid down by law, regulation or administrative action in Member Sates  is distorting the conditions of competition in the internal market and that the resultant distortion needs to be eliminated, it shall consult the Member States concerned.

If such consultation does not result in an agreement eliminating the distortion in question, the EP and the EC, acting in accordance with the ordinary legislative procedure, shall issue the necessary directives.  Any other appropriate measures provided for in the Treaties may be adopted.

 

The TFEU is the same legal mechanism used to address State Aid, and may also be the choice of implementation to establish Directives for one or more of the following initiatives:

  • EU Common Corporate Tax Base (CCTB)
  • Country-by-Country (CbC) reporting, public disclosure
  • Tax rulings, (redacted) public disclosure
  • Permanent Establishment (PE) definition
  • Anti-BEPS Directive, transforming OECD “soft law” into an EU legislative framework
  • Interest & Royalty Directive requiring confirmation of EU tax being paid elsewhere
  • EU Dispute Resolution approach

Everyone should monitor the EC, EP and TAXE for continuing developments, as they may form the basis for new global standards to enact the intent of BEPS initiatives.

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OECD

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BEPS global update

EY’s Global Tax Alert provides a succinct summary of the latest BEPS (incentivized) developments around the world.  A link to the Alert is provided for reference:

Click to access 2015G_CM5699_The%20Latest%20on%20BEPS%20-%2017%20August%202015.pdf

Overview of the Alert:

  • OECD: Documents re: initiative for automatic exchange of financial account information
  • Africa: Best Practice regional meeting to develop measures for countering BEPS
  • Australia: Exposure draft law re: transfer pricing documentation to be effective 1/1/2016
  • Brazil: Report to eliminate interest on net equity (INE) regime
  • Chile: Foreign residents are to provide a sworn statement to receive treaty benefits
  • Europe: TAXE Committee’s interim report re: tax rulings and BEPS related topics
  • Ireland: Knowledge development box
  • Italy: Patent box regime
  • Japan: Interest limitations
  • Korea: VAT re: electronic services
  • Luxembourg: EU Parent-Subsidiary Directive inclusions (anti-hybrid and anti-abuse clauses)
  • Saudi Arabia: Virtual Service PE
  • Spain: Patent box regime

The Alert highlights the continuous and frenzied pace of the BEPS measures, as well as the unilateral efforts that are mirroring the intent of BEPS, although not necessarily in a consistent and cohesive framework.

 

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OECD

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Australia’s draft law: CbCR, TP documentation

The Australian Treasury announced its draft law encompassing country-by-country reporting (CBCR) and transfer pricing documentation.

EY’s tax publication provides relevant details in the referenced Global Tax Alert:

Click to access 2015G_CM5672_Australia%20releases%20draft%20law%20implementing%20CbC%20reporting%20and%20increasing%20penalties%20for%20TA%20and%20TP.pdf

Key observations:

  • Conforms to OECD’s recommended 3-tier transfer pricing approach, CBCR, master file and local file.  The master file and local file will need to provided, whereas the CBCR may not be necessary if the group’s parent entity jurisdiction has an information sharing agreement.
  • It is expected the Australian Taxation Office (ATO) will release additional guidance for the CBCR, hopefully by year-end 2015.
  • Increases penalties for tax avoidance and transfer pricing where there is not a reasonably arguable position by the taxpayer.

Australia has been a leader in following the BEPS Actions and putting such intent into their domestic legislation.  As Australia continues to take this lead position, it is expected many other countries will follow similarly.  All multinationals should continue to monitor these developments, while accelerating planning and execution for the new CBCR and transfer pricing documentation regime.

Category:

Transfer Pricing

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CbC Bank Reporting Review: EU Parliament Group

This is a valuable insight into the use of country-by-country reporting, based on a report of 26 EU-based banks.  Although the reporting criteria is based on the Capital Requirements Directive IV (CRD IV), the interpolations and extrapolations indicate the trend by which such reports could be used, especially when viewed in isolation by recipients in the public domain.

A link to the report is provided for reference:

Click to access CRDivCBCR2015.pdf

Key observations:

  • The reporting was used to test the hypothesis that profits were overstated in low tax/offshore jurisdictions, with understatement of profits in base country or major operating locations.
  • Unitary tax reporting/allocation was used to determine the likelihood that there was base erosion and profit shifting.
  • Four methods of assessing profit shifting were used to provide an overall ranking.
  • If existing Directive is used, it should be used consistently across all EU jurisdictions.
  • Turnover should include intra-group sales  with reconciliation to reported group turnover.
  • The OECD’s template should be considered as an alternative reporting tool. 
  • Formulary comparisons are measured and used to reapportion the profits.

This report is indicative of conclusions that may be drawn, although data is incomplete and inconclusive, from a table of reported amounts in various jurisdictions.

Most importantly, the group utilized formulary apportionment to derive an expectation of profit levels among various jurisdictions.

Accordingly, all interested parties should review this report as the OECD is nearing completion of the BEPS Action Plans and CbC reporting.

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Tax Risk Management

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Saudi Arabia: Virtual PE

Saudi Arabia’s Department of Zakat and Income Tax (DZIT) has issued internal guidelines defining a creative concept of Permanent Establishment (PE) that is not aligned with its legislated tax law, double tax treaties, OECD or UN Model Conventions.

This new approach may affect treaty-based withholding tax exemptions, as well as refunds.  Saudi Arabian customers may apply the domestic withholding tax rate as a result, thereby requiring the non-resident to apply for a tax refund.

EY’s Global Tax Alert provides additional details about this latest development:

Click to access 2015G_CM5642_Saudi%20Arabian%20tax%20authorities%20introduce%20Virtual%20Service%20PE%20concept.pdf

The PE definition, and related legislative thresholds, are being aggressively contested by various countries in an effort to capture additional taxes that have been paid in other jurisdictions.  However, such provisions usually have no offsetting adjustment for simultaneous relief from double taxation.  It is expected to see this trend continue, at least partially incentivized by OECD’s BEPS Acton Plans that have yet to be finalized.

The PE pursuits should be closely monitored, with the expectation that assessments will be issued and further appeals will be necessary to fairly address the issue within the intended legal context of that jurisdiction.

Category:

PE

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European Parliament urges CBCR public transparency

The European Parliament adopted a resolution to tackle tax avoidance and tax evasion via transparency measures to ameliorate limited resources of tax administrations.  A summary and full content of the proposal are referenced herein:

http://www.europarl.europa.eu/oeil/popups/summary.do?id=1396472&t=d&l=en

http://www.europarl.europa.eu/sides/getDoc.do?type=TA&language=EN&reference=P8-TA-2015-0265

Key observations:

  • Publish country-by-country reporting (CBCR) template as part of annual reporting; The European Commission is to provide a legislative proposal to amend the Accounting Directive accordingly.
  • Establish a consistent definition of “tax havens” by the end of 2015.
  • Provide a blacklist of countries that do not combat tax evasion or that accept it.
  • New treaties with developing countries should tax profits where value is created.
  • EU Member States should agree on a Common Consolidated Corporate Tax Base (CCCTB).
  • The EU should be taking a leading role to combat tax havens, tax fraud and evasion, leading by example.
  • Beneficial information should be public; the Financial Action Task Force’s (FAFT) anti-money laundering recommendation is a minimum.
  • Public scrutiny of tax governance and the monitoring of tax fraud cases; protect whistleblowers and journalistic sources.
  • Transition period for developing countries to adopt the Automatic Exchange of Information mechanism.

These initiatives are accelerating the focus and intent for public tax disclosures in the very near future.

Most importantly, inclusion of the CBCR template as required documentation of annual reporting will automatically accelerate the due date for completion of such information.  Thus, the year-end 2017 timeline proposed by the OECD will give way to this proposal and similar unilateral actions.

Category:

OECD, Tax Risk Management

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BEPS Early Adopters: Australia-Anti hybrids

The Australian government has released Terms of Reference in preparation for anti-hybrid legislation, expected to be announced 12 May, 2016 in the federal budget.  Effective dates may be set as of 1 July, 2016 or 1 January, 2017 for calendar year taxpayers.

Specific rules are under consideration, including:

  • Objectives for eliminating double non-taxation
  • Economic costs for Australia
  • Taxpayer compliance costs
  • Interactions of domestic legislation, tax treaties and new anti-hybrid rules, expected to be announced by the OECD in October 2015.

A PwC Tax Insight summary is included for reference:

Click to access pwc-australia-announces-plans-beps-anti-hybrid-legislation.pdf

Australia, recently following the lead of the UK for diverted profits tax initiatives, has shown its proactive stance for adoption of the new OECD guidelines.

It is important to note that Australia will wait for the final OECD guidelines to pass matching legislation.  This legislative trend, and steps to initiate BEPS proposals quickly, will be a trend to watch for the rest of world countries.  

Category:

OECD / UN

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OECD Tax Inspectors Without Borders (TIWB): Now a reality

The OECD’s long-awaited Tax Inspectors Without Borders (TIWB) initiative (posts of 9 June 9, 2013 & 30 January, 2015) has now become a reality.  The program is a collaboration of the OECD with the United Nations (UN) Development Programme.

A framework of international tax experts will augment local tax authorities on current audits, providing advice on transfer pricing and cross-border information exchange that will result in significantly increased tax revenue collection by developing countries.

http://www.oecd.org/tax/launch-of-tax-inspectors-without-borders.htm

Ways of Working / Transparency observations:

  • Will the list of countries’ receiving support be transparent?
  • How will issue consistency be assured for similar issues of different taxpayers across that jurisdiction: will the “experts” also be developing this process?
  • Will the “experts” be assisting in addressing/developing audit queries, issue determination, appeals and/or Competent Authority proceedings?
  • Will the “experts” be available to discuss issues directly with the taxpayer, if they have assisted with determination of such potential issue?
  • Is there a common “Memorandum of Understanding” that is shared with the taxpayer upon commencement of an audit, outlining the relevant processes that will be performed in collaboration by the relevant tax authority?

Answers to these questions, among others, will be helpful in providing additional context and understanding between taxpayers and tax authorities for this important initiative.

The metrics for monitoring such progress should include not only the amount of additional revenues assessed/collected, but should be inclusive of Best Practice methodologies and consistent methods of transfer pricing risk determination aligned with established laws in such jurisdiction.  

It is hopeful the UN and OECD will endeavor to provide additional mutuality and transparency for this initiative that will further enhance win-win opportunities.

 

 

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OECD / UN

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IMF, World Bank: Support for developing countries

The World Bank and the IMF have released a new initiative to support tax systems in developing countries; a link to the press release is provided for reference.

http://www.imf.org/external/np/sec/pr/2015/pr15330.htm

Key observations:

  • World Bank Group President Jim Yong Kim’s statement: “If everyone pays their fair share – developing countries can close their financing gaps and promote inclusive growth.”
  • The IMF and World Bank will continue to collaborate with the OECD and other development partners in expanding tax assistance and expertise.
  • Two pillars of development:
    • International tax dialogue to increase their collective voice
    • Developing diagnostic tools to evaluate and strengthen tax policies

These developments will be a key metric to monitor, in view of the increased complexity and documentation demands in a post-BEPS era.

Multinationals may also view these developments as added impetus to be more proactive in engaging with tax authorities in developing countries to better understand their business, as well as provide expertise in the complex transfer pricing arena.

Category:

OECD / UN

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