As countries become creative re: permanent establishment (PE) taxation, this scenario presented by the EY Global Tax Alert reminds all tax practitioners to be cognizant of what intercompany provisions are provided.
The Danish Tax Board referred to the contract between the Austrian company and the Danish company, according to which the Danish company would make offices and storage facilities available to the Austrian company. The Danish Tax Board was informed that the premises would be used by the subcontractor only. The Danish Tax Board ruled that according to the wording of the contract between the Austrian company and the Danish company, the Austrian company would have a place of business in Denmark at its disposal regardless of the fact that the services would be outsourced to a subcontractor.
Thus, providing for a storage closet (in literal terms) may impose PE liability, with the ensuing compliance and fees a significant factor for what was probably an inadvertent error by the drafters of the intercompany agreement.
The treaty had the same PE provisions as OECD’s Article 5 language, although noting that the OECD’s recommendations were looked to by the tax administration.
As a Best Practice, all intercompany agreements (anywhere in the world) need to be reviewed by an international tax practitioner prior to execution, whether in-house personnel or outside advisors.
EY’s Alert provides additional details that should be reviewed to indicate the pervasiveness of the new PE rules, and the aggressiveness of tax administrations to literally interpret intercompany agreements.
New Zealand’s government has announced the introduction of new BEPS compliant rules that will be effective mid-2018. Additionally, the government has taken this opportunity to expand upon the OECD’s rules, in an attempt to ensure that a “fair share of tax” is paid by multinationals doing business in the country.
Acknowledging the OECD’s intent to provide flexibility with its BEPS Actions and subjective language therein, New Zealand is looking for this legislation to impose rules above and beyond the BEPS Actions. For example, anti-PE rules will be introduced that look to Australia’s provisions, which were initially introduced by the UK as diverted profit tax schemes to collect additional tax.
International tax practitioners should review these provisions and plan their tax strategies accordingly, knowing that New Zealand will introduce double taxation sooner vs. later in the global concept.
EY’s Global Tax Alert provides relevant details of New Zealand’s proposals.
EY’s Global Tax Alert provides a succinct summary of the latest OECD and BEPS developments, including:
- G20 and exchange of information upon request standard
- Multilateral instrument, 68 countries moving forward
- Peer reviews on BEPS 4 minimum standards:
- Action 5, harmful tax practices
- Action 6, treaty abuse
- Action 13, country-by-country reporting (CbCR)
- Action 14, dispute resolution
- Action 5 peer reviews of preferential tax regimes
- Action 13, CbCR exchange relationships; important for US MNE’s and similar jurisdictions without obligatory 2016 reporting
- MAP peer reviews
- Discussion drafts on profit splits and attribution of profits re: PE’s; comment period to Sept. 15, 2017
- Branch mismatch forthcoming revisions
- Common reporting standard
- Digital taxation
OECD is still very busy, with a plethora of BEPS follow-up and other activities, although there seems to be continuing flexibility to gain collaboration that will also lead to added complexity and disputes.
As the subject of permanent establishment (PE) becomes more controversial amid the ever-changing rules, multinationals (MNEs) should have a proactive partnership relationship with their global mobility service provider, whether in-sourced or outsourced.
Global mobility generally reports through the HR function, thus a silo approach may result without the proactive ability of the tax function to create a cohesive team. The concepts of legal employer, economic employer, intercompany allocations, foreign reporting relationships, contractual arrangements, intercompany agreements, etc. all need to be vetted and challenged for every assignment that may have adverse consequences for the employee and/or the company.
Countries are taking a more aggressive PE approach, thus a standard assignment template and / or agreement may not work in today’s post-BEPS world. India, for example, has very specific rules that dictate a PE without special attention to the control and payment arrangements of the assignment. Assessments may take years to resolve requiring additional cost and time, including the necessity of external advisors.
The organizational structure of significant functions that may cause consequences for a MNE’s tax organization should be reviewed, possibly adding dotted line relationships for global mobility, customs, external communications, etc. At the very least, these related functions should be discussing these potential issues on a regular basis, while forming a mini-university for learning.
As the subject suggests, the organizational structure and reporting relationships should not follow the same-as-last-year approach due to the BEPS evolution around the world.
After a long waiting period, with many discussions as to its predicted content, the OECD’s Multilateral Convention pursuant to BEPS Action 15 is ready for prime time. Links to EY’s Global Tax Alert, and OECD’s Explanatory Statement and Multilateral Convention are provided for reference.
The Multilateral Convention is very flexible as to what a country wants, or does not want, within its treaty related provisions to signify its alliance with BEPS Actions.
EY’s Global Tax Alert states: “The tax treaty related BEPS measures covered by the multilateral instrument include (elements of): (i) Action 2 on hybrid mismatch arrangements, (ii) Action 6 on treaty abuse, (iii) Action 7 on the artificial avoidance of the PE status; and (iv) Action 14 on dispute resolution. The substance of the tax treaty provisions relating to these actions was agreed under the final BEPS package released in October 2015. The multilateral instrument does not modify or add to the substance of these provisions. The instrument is solely focused on how to modify the provisions in bilateral or regional tax treaties in order to align these treaties with the BEPS measures.”
Due to the flexibility of the new Convention, this unilateral based process poses many questions as to the consistency of intent for the related BEPS Actions around the world. It is certain that, in the short term, there will be considerable complexity and varying interpretations of what the Convention means. Accordingly, the Explanatory Statement and Multilateral Convention are to be reviewed carefully to understand short and long-term trends in this new era of international tax.
OECD has released discussion drafts on Action 7, attribution of profit to permanent establishments (PEs) and Actions 8-10 (profit splits).
It also requested public review of the document containing conforming changes to Chapter IX (business restructurings) of the OECD Transfer Pricing Guidelines (TPG).
The PE Discussion Draft is not restricted to issues related to PEs that will result from the changes made by the Action 7 Final Report, but also takes into account the results of the work on other parts of the BEPS Action Plan dealing with transfer pricing, in particular the work related to intangibles, risk and capital. This factor is especially important if countries do not adopt the new Action 5 PE Guidelines in a bilateral tax treaty or via the pending multilateral instrument. Thus, this section will be all-encompassing and important to understand the drivers, such as key people functions, behind this issue.
The profit split guidance is indicia of a trend for some governments to apply this standard, albeit not from a pure economic/technical perspective. Therefore, this complex guidance will enhance knowledge of those being asked the question from tax authorities, as well as in developing transfer pricing guidance.
EY’s Global Tax Alert describes these developments in greater detail.