Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘Patent Box’

EU & BEPS: Next steps

The EU, now recognized as the accelerator of BEPS for its Member States, have issued a roadmap of priorities and objectives for the near future.  A link to Deloitte’s World Tax Advisor is provided, and the attached article therein.

I have highlighted certain parts of the roadmap worth watching:

  • Country-by-Country reporting (will there be a consistent EU standard?)
  • Hybrid mismatch arrangements
  • Code of Conduct activities, including alignment of transfer pricing outcomes with value creation, an extension of BEPS Actions 8-10.  (Note Sweden and UK are already using such Actions re: clarification of existing transfer pricing policy)
  • Payments from an EU to non-EU country
  • The EU Arbitration Convention is mentioned, although it’s practical effect on mitigating dispute resolution is limited

http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dtt-tax-worldtaxadvisor-160226.pdf

European Union:
Dutch presidency issues EU-BEPS roadmap

The Netherlands, which currently holds the presidency of the council of the EU, issued an ambitious EU-BEPS “roadmap” on 19 February 2016 that sets out plans to move forward with previous EU proposals, as well as future efforts on areas relating to the OECD’s base erosion and profit shifting (BEPS) project. The roadmap includes the following:

  • Possibly including a minimum effective taxation clause in the EU interest and royalties directive, and also possibly including or referring to the OECD “modified nexus approach” (however, no mention is made of the previous proposals to reduce the shareholding requirement in the directive from 25% to 10%, add legal entities to the annex or remove the “direct” holding requirement);
  • Reaching consensus on the anti-avoidance directive proposed by the European Commission on 28 January 2016 (for prior coverage, see World Tax Advisor, 12February 2016);URL: http://newsletters.usdbriefs.com/2016/Tax/WTA/160212_1.html
  • Reaching agreement on the European Commission’s proposal to introduce the OECD BEPS minimum standard for country-by-country reporting in the EU;
  • Initiating discussions for reforming the EU Code of Conduct group (specifically, the group’s governance, transparency and working methods), followed by discussions on a revision to the mandate in relation to the concept that profits are subject, as appropriate, to an effective level of tax within the EU;
  • Reaching agreement on guidance and explanatory notes on hybrid permanent establishment mismatches in situations involving third countries;
  • Continuing to monitor the legislative process necessary to revise existing patent box regimes; and
  • Monitoring and exchanging views on the BEPS developments relating to tax treaties concluded by EU member states, the OECD multilateral instrument to modify tax treaties and the European Commission’s recent recommendations on the implementation of measures to combat tax treaty abuse. 

     

     

    The Code of Conduct group will start work on the following:

  • Preparing EU guidance on aligning transfer pricing outcomes with value creation, in accordance with BEPS actions 8-10;
  • Identifying potential issues that arise when payments are made from the EU to a non- EU country;
  • Assessing the opportunity for developing EU guidance for implementing the conclusions on BEPS action 12 (the disclosure of aggressive tax planning), notably, with a view to facilitating the exchange of information between tax authorities; and
  • Developing guidelines on the conditions and rules for the issuance of tax rulings by EU member states.Additionally, the High Level Working Party on Taxation may discuss the current situation regarding the EU arbitration convention that allows the settlement of transfer pricing disputes.

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:

http://www.ey.com/Publication/vwLUAssets/The_Latest_on_BEPS_-_17_August_2015/$FILE/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.

 

OECD BEPS: EY update

EY’s recent tax alert highlights the recent developments and trends of the OECD BEPS initiatives:

OECD
The OECD has announced another in its series of webcasts providing updates on developments with respect to the BEPS project. The webcast is scheduled for 15 December 2014 and will feature senior members of the OECD secretariat.

Asia-Pacific region
On 24-27 November 2014, the creation of a new task force was announced at a meeting of the Study Group on Asian Tax Administration and Research (SGATAR) in Sydney. The task force is to be made up of SGATAR members and be designed to, among other things, enable the Asia-Pacific region to discuss and to keep abreast of international developments and issues including base erosion, profit shifting, and tax transparency. According to the announcement, there is already unprecedented and powerful global collaboration on these issues and the creation of the task force will give all SGATAR members a platform to play a role, including relaying their views to international forums. The task force also is intended to enable cooperation and support for the development of robust, cohesive tax systems in each jurisdiction. According to the announcement, SGATAR members will be able to use the task force to coordinate sharing of best practices and experience and to seek assistance on implementing initiatives such as exchange of information. Current SGATAR members include Australia, 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.

See EY Global Tax Alert, Asia Pacific tax administrations create task force as next step in greater regional cooperation, dated 2 December 2014.

European Union
On 1 December 2014, according to several media outlets, the Finance Ministers of Germany, France and Italy sent a joint letter to Pierre Moscovici, European Union (EU) Commissioner for Economic and Financial Affairs, Taxation and Customs. According to the reports, the letter calls upon the EU to rapidly develop a new EU Directive on anti-base erosion and profit-shifting measures, which should be presented for consideration before the end of 2014, with a view to EU Member States adopting the measures therein by the end of 2015. According to the reports, the ministers noted that the G20 and the OECD are already one year through a two year long comprehensive BEPS initiative, but further noted that it is important that the EU should also adopt a common set of binding rules that go beyond greater transparency and company registries, to a “general principle of effective taxation” to compensate for the EU’s lack of “tax harmonization.” According to the letter, these rules should include mandatory and automatic exchange of information on cross-border tax rulings (including Advance Pricing Agreements in the field of transfer pricing), a register identifying beneficiaries of trusts, shell companies and other non-transparent entities, and measures against tax havens.

See EY Global Tax Alert, Finance Ministers of France, Germany and Italy ask European Commission to rapidly develop a new Directive addressing tax avoidance and tax evasion issues, dated 2 December 2014.

France
On 5 December 2014, during the debates on the Draft Amended Finance Bill for 2014, the French Assemblée Nationale incorporated a provision addressing inbound hybrid payments. The rule would deny the participation exemption on income from shares (i) if the income was tax deductible for the distributing entity (in implementation of the EU Parent-Subsidiary Directive as amended on 8 July 2014) or (ii) if such income was paid out of profits from a non-taxable activity. The rule would apply to fiscal years that begin on or after 1 January 2015. The Bill is still in draft form, and final enactment is expected by the end of December.

See EY Global Tax Alert, French Parliament to implement recent EU rule on hybrid mismatches, dated 8 December 2014.

Netherlands
On 1 December 2014, the Dutch State Secretary of Finance provided input on previously raised parliamentary questions regarding the future of the innovation box regime. Generally, the Dutch State Secretary supports the discussions around substance requirements, but also wants to safeguard the position of innovative small and medium sized entities. The Dutch State Secretary has stated that the Netherlands plans to continue to promote innovation through tax and other incentives and expressed the view that, in light of the strong substance requirements that are in place for the Dutch innovation box, the regime should not be vulnerable for abuse. Based on this, it is not expected that the Dutch government will propose major changes to the Dutch innovation regime at this time.

See EY Global Tax Alert, Dutch State Secretary of Finance provides input on innovation box regime, dated 5 December 2014.

New Zealand
On 27 November 2014, New Zealand’s Minister of Revenue released two officials’ reports regarding BEPS. They outline officials’ current views on the BEPS project and the timetable for action. They show strong support for the OECD’s approach to BEPS and commit to no unilateral measures in advance of final OECD recommendations, which should reduce risks of incoherence and double taxation. They also show that tax authorities are using BEPS concerns to justify certain measures with respect to foreign trusts, non-resident withholding taxes, and tax compliance for large corporations. The reports provide a detailed timetable, which should give business some measure of short-term certainty.

South Africa
On 19 November 2014, National Treasury and the South African Revenue Service (SARS) made presentations on transfer pricing during a meeting of Parliament’s Mineral Resources and Finance Committees. SARS informed the committees that specific legislation is being considered for transfer pricing documentation and for country-by-country reporting and that a legislative framework for Advance Pricing Agreements is also being considered. While tighter legislation may be needed, SARS recognizes the importance of a balanced approach in line with domestic and international law, which does not pose a deterrent to foreign direct investment. The date when such legislation will be drafted (or implemented) is unclear. SARS also informed Parliament of the results of transfer pricing audits performed over the last three years. The SARS Transfer Pricing Unit has audited more than 30 cases and made transfer pricing adjustments of over R 20billion (at a conservative estimate) with an income tax impact of R 5billion. A similar number of cases are currently in progress and other cases are in the process of risk assessment. This underscores the importance for South African taxpayers of making sure that their transfer pricing policies are compliant with the arm’s length principle and South African transfer pricing regulations.

See EY Global Tax Alert, South African authorities address transfer pricing and OECD’s BEPS Action Plan, dated 8 December 2014.

Spain
On 28 November 2014, Laws enacting a Spanish tax reform were published in the Spanish Official Gazette. Most rules will enter into force as of 1 January 2015 (subject to specific transition rules). Among many other measures, the new Laws address matters that are focus areas in the OECD BEPS project. Anti-hybrid arrangement rules are introduced under which: (i) expenses corresponding to related party transactions will no longer be tax deductible if, as a result of a different tax characterization, no income is generated or, if generated, the income is tax exempt or subject to a nominal tax rate lower than 10%; and (ii) the participation exemption will no longer apply to dividend or profits distributions that are derived from a tax deductible expense in the source country. Intra-group profit sharing loans, currently characterized as debt instruments for Spanish tax purposes, are treated as equity instruments. An additional limitation is introduced that caps deductible interest on loans financing the purchase of purchase of shares at 30% of the operating profit of the acquiring entity (including where the acquired and acquiring entities are merged or join the same tax unity), subject to an escape clause. The Spanish controlled foreign company (CFC) rules are strengthened, including additional substance requirements for the CFC in order to avoid imputation of foreign low-taxed income. Anti-abuse rules regarding EU dividend and royalty payments are amended.

See EY Global Tax Alert, Spain enacts tax reform, dated 5 December 2014.

United Kingdom
On 2 December 2014, the UK Government issued an update on likely changes required to the UK patent box following the work being done on preferential, intellectual-property (IP) tax regimes as part of the OECD BEPS project. The UK announcement indicates that the joint UK and German proposal on a new modified nexus approach was welcomed by both the G20 and the OECD Forum on Harmful Tax Practices as well as the EU’s Code of Conduct Group in recent meetings. The proposal will now form the basis of continuing work by the Forum on Harmful Tax Practices to determine how the approach will work in practice. As part of this work, the OECD will carry out an informal consultation with countries and other stakeholders. Under the proposal, countries with existing preferential IP regimes would be required to agree to close these to new IP by 30 June 2016 and to eliminate them by 30 June 2021, after which all countries would be required to operate only regimes that are compliant with the modified nexus approach. The UK has confirmed its commitment to retaining a patent box. It will consult on changes to the existing patent box once the Forum on Harmful Tax Practices has completed work on the detail of the new rules.

See EY Global Tax Alert, Update on UK Patent Box and other preferential IP regimes, dated 3 December 2014.

On 3 December 2014, the UK Chancellor of the Exchequer delivered his Autumn Statement. Key announcements from a BEPS perspective include the introduction of a “diverted profits tax” on profits earned as a result of substantial UK activity (e.g., sales) where those profits are considered to be diverted abroad. The tax charge will be 25% of the diverted profits and will come into effect from 1 April 2015. At present there is no further information on the rules but draft legislation and a technical note are expected to be available on 10 December. Also, a consultation document was released on the implementation of the OECD’s recommendations to prevent hybrid mismatches under BEPS Action 2. The new rules are proposed to apply to payments made after 1 January 2017. The rules proposed in the consultation document are directionally similar to the existing UK anti-arbitrage rules, but the motive test would be removed. This would mean that, from 2017, any structure involving hybrid mismatches would potentially be subject to higher UK taxation, regardless of whether the mismatch was for the purposes of avoiding UK tax. The consultation document largely mirrors the latest Action 2 report issued by the OECD in September.

R&D/Patent, Innovation Box global summary

PwC Global R&D Incentives Group has published a valuable global summary of R&D incentives, including the Innovation and Patent Box.

http://www.pwc.com/en_GX/gx/tax/assets/pwc-global-r-and-d-incentives-brochure-may-2013.pdf

The summary provides the status of the R&D Credit, R&D Super Deduction, Patent and Innovation box for the following countries:

  • Australia
  • Austria
  • Belgium
  • Brazil
  • Canada
  • China
  • Czech Republic
  • Denmark
  • France
  • Hungary
  • India
  • Ireland
  • Italy
  • Japan
  • Korea
  • Liechtenstein
  • Lithuania
  • Luxembourg
  • Netherlands
  • Poland
  • Portugal
  • Romania
  • Russia
  • Singapore
  • Slovak Republic
  • South Africa
  • Spain
  • Switzerland
  • Turkey
  • United Kingdom
  • United States

This valuable summary provides an up-to-date status of the R&D, Patent/Innovation Box to develop Best Practices in pursuing these valuable opportunities.

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