Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘TEI’

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.

Category:

OECD / UN

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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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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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TEI comments: BEPS Action Plan 11

Tax Executives Institute, Inc. (TEI) has provided comments to OECD BEPS Action Plan 11, data collection and BEPS actions.

The comments highlight the wariness of measuring BEPS actions and reacting thereto.  TEI discusses three key deficiencies of trying to measure such data and assess its effectiveness; (1) a lack of understanding  of the current state of affairs, lack of a defined goal to the OECD’s BEPS project, and lack of definition of BEPS behaviors.  The comments are referenced at:

Click to access TEI%20Comments%20-%20Action%2011%20Data%20Collection%20-%20FINAL%20to%20OECD%2017%20September%202014.pdf

Some key TEI comments:

  • Taxing authorities may use a subjective “we know it when we see it” approach rather than objective, evidenced-based measures.
  • The focus on a disconnect of taxable income from activity and value creation also raises concerns that tax authorities may use the measures developed by BEPS Action 11 to advance formulary apportionment approaches to transfer pricing.
  • TEI urges the adoption of a clear definition of BEPS and BEPS behaviors before attempting to develop mechanisms to differentiate inappropriate (if legal) tax results from “regular” corporate tax planning that may take advantage of government enacted tax incentives.
  • A central tracking mechanism for assessing an increase in mutual agreement procedure cases and tax controversy and litigation raising double taxation concerns should be developed.

As the BEPS Action Plans are reviewed and implemented by countries worldwide, it is helpful to review TEI’s comments to ensure there is a comprehensive understanding of the perceived abuses and risks that BEPS Action Plans have addressed.

Category:

Tax Risk Management

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TEI comments – OECD BEPS Action 2: Hybrid Mismatch Arrangements

Tax Executives Institute, Inc. (TEI) has provided comments on the OECD BEPS Action 2 proposal addressing hybrid mismatch arrangements.  The submission is referenced at the following link:

Click to access TEI%20Comments%20-%20OECD%20BEPS%20Action%202%20Hybrids%20-%20FINAL%20to%20OECD%201%20May%202014.pdf

Some key highlights of Submission:

  • Some suggested solutions are overly broad and administratively unworkable.
  • The comments are not limited to hybrid arrangements that are inappropriate or abusive.
  • Simultaneous adoption by countries is encouraged, versus a question of adoption and / or timing of adoption by countries.
  • Double taxation issues, with Competent Authority requests, may increase.
  • A “bottoms-up” approach, applying only to instruments held between related parties, is recommended, using a 50% or greater rule for related parties.
  • For deductible payments not included in “ordinary income” of the holder’s jurisdiction, the term “ordinary income” should be expanded.
  • Further clarification could be provided by delineating how two countries that simultaneously apply their domestic anti-hybrid instruments can coordinate their application.
  • The impact on financial accounting in application of the hybrid rules should be considered.
  • Recommended rules for hybrids will not always produce uniformity due to differing tax systems (i.e., worldwide or territorial).
  • An anti-abuse rule adopted by the OECD should only apply in narrowly targeted axes of abuse, with strict bright line tests.
  • Bilateral tax treaties are not a tool to address legal tax planning adopted by various countries.

TEI’s excellent comments provide further insight into this significant, and broad, proposal.  Accordingly, they should be reviewed to understand complexities of adopting a complex rule without increasing risks of double taxation, with increased pressures on the Competent Authority process.

Category:

Transfer Pricing

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OECD BEPS Action Plan 1: Digital Economy – TEI’s comments

Tax Executives Institute, Inc. (TEI) has submitted comments in response to OECD’s discussion draft on BEPS Action 1: Address the Tax Challenges of the Digital Economy.  The link for the submission is provided for reference:

Click to access TEI%20Comments%20-%20OECD%20Action%20Item%201%20-%20Digital%20Economy%20-%20FINAL%20to%20OECD%2013%20April%202014.pdf

Some of the key comments include:

  • TEI agrees that ring-fencing the digital economy as a separate sector with unique tax rules would be neither appropriate nor feasible.
  • Technology companies face similar challenges as other businesses in moving assets and people, a view not assumed in the Discussion Draft.
  • TEI opposes options set forth in Section VII, including modifications to the PE exemptions, a new nexus standard based on significant digital presence, a virtual PE, and creation of a withholding tax regime on digital transactions.  These options are all generally unworkable.
  • The options set forth above are not aligned with G20’s statement that profits should be taxed where they are located.
  • Other measures noted in the Discussion Draft would aim to restore taxation in both the market country and the country of the ultimate multinational parent.  TEI notes that many of the issues that  these measures are designed to address are the result of deliberate tax policy of the OECD’s Member States.  It is these policies that create the low effective tax rates.

The comments provide thoughtful and practical business considerations that should be considered when formulating principles for international tax policy.  The digital economy issue is very complex, challenging and should be monitored to address proposals by the OECD, Member States and other countries for transformation.

 

 

Category:

OECD / UN

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TEI’s comments: UN TP Manual, Competent Authority & APA’s

TEI has published comments addressing the UN Practical Manual on Transfer Pricing for Developing Countries, in addition to US IRS Notices for revisions to Revenue Procedures setting forth new policies to implement the Competent Authority (CA) and Advance Pricing Agreement (APA) procedures.  References to TEI’s submissions are included for reference:

UN TP Manual key comments:

Click to access TEI%20Comments%20on%20UN%20Transfer%20Pricing%20Manual%20March%202014.pdf

  • Harmonize UN and OECD Transfer Pricing (TP) guidelines to reduce cross-border disputes
  • Risk assessment should be the primary focus, with most multinationals (MNE’s) “low-risk” status due to global and consistent TP policies and documentation
  • First step of tax authorities should be to address overall business, group TP policy and risk control framework
  • Domestic legislation defeats the purpose of a standard international TP guideline
  • Recharacterization by tax authorities should only be permitted in clear cases of abuse
  • TP documentation flexibility must be preserved
  • Burden of proof should reside with tax authorities, with penalty protection granted to taxpayer upon providing sufficient TP documentation
  • Intangible discussion precedes work of the OECD on revision of its Chapter VI Guidelines, reducing likelihood of harmonization
  • Intra-group services and management fees: Consistency of UN and OECD approaches for clarity, in addition to uniform safe harbors
  • TP documentation: “Less is more” approach to assess risk, materiality consideration on a group and country level, global and regional comparables, English language
  • Chapter 10 policy objectives are not aligned with the UN TP Manual and the arm’s-length principle

US Competent Authority key comments to Notice 2013-78 re: revisions to Revenue Procedure:

Click to access TEI%20Comments%20on%20Notice%202013-78%20Revised%20CA%20Revenue%20Procedure%20-%20FINAL%20to%20IRS%20Mar%2010%202014.pdf

  • Opening the CA process to taxpayer initiated adjustments is welcome
  • A new procedure whereby an informal consultation is arranged with taxpayers to discuss its exhaustion of remedies to reduce its foreign tax before claiming a US Foreign Tax Credit (FTC) should not be compulsory.  The timeliness of such advice is also of concern.
  • CA initiated MAP cases and required inclusion of MAP issues that are not a part of the taxpayer’s request for assistance raises many questions.
  • Provision of all information to both CA’s is over broad and may not be mutually relevant.
  • US CA assistance may be denied if a foreign initiated adjustment is agreed to without consulting the US CA: this raises resource and timeliness issues and should also have no impact upon  the merits for claiming a US FTC.

US APA key comments to Notice 2013-79 re: revisions to Revenue Procedure

Click to access TEI%20Comments%20on%20Notice%202013-79%20Revised%20APA%20Revenue%20Procedure%20-%20FINAL%20to%20IRS%20Mar%2010%202014.pdf

  • The Notice reflects prior creation of the Advance Pricing and Mutual Agreement (APMA) program
  • Details are set forth regarding the “pre-filing” process
  • Appendix is included stating the required materials to be submitted for inclusion
  • Rules are provided for when the IRS may cancel or revoke a completed APA
  • Inapplicable information should not be submitted, but a “suitable explanation” why the information is not relevant must be provided
  • The suggested changes will increase information required for application, and time required for APA completion, thereby reducing the likelihood that taxpayers will proceed with an APA request

 

In alignment with the OECD’s BEPS proposals, unilateral country legislation including General Anti-Avoidance Rules (GAAR), and the UN TP Manual principles for developing countries, tax controversies are expected to increase significantly.  Tremendous pressure will be placed on CA assistance around the world, and possibilities for new APA ‘s will be reviewed to reduce inherent uncertainty.

Accordingly, all multinationals and interested parties should read TEI’s excellent comments to better understand the issues to be confronted, with suggestions for thoughtful and practical ideas to achieve mutual objectives for taxpayers and tax authorities around the world.

Category:

Transfer Pricing

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TEI’s response to OECD’s Discussion Draft on TP Documentation & Country by Country reporting

The Tax Executives Institute (TEI) has commented on the OECD Transfer Pricing Documentation and Country by Country Reporting (CbC) discussion draft.

Click to access OECD%20Transfer%20Pricing%20Documentation%20and%20CbC%20Reporting.pdf

TEI has provided strategic and logical arguments in response to requested comments by the OECD for transfer pricing documentation and CbC reporting.  One of the exemplary comments put forth is that the CbC reporting template should be the last item for completion, based upon actions of the other items, to achieve maximum efficiency, relevance and avoidance of duplication in work efforts.

The TEI comments should be read by all multinationals and interested parties to further understand the business rationale and inherent complexity of the OECD proposal that may lead tax authorities to deviate from the arm’s length principle based solely on the CbC information provided.

 

 

 

 

Category:

OECD / UN, Transfer Pricing

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Canada’s BEPS initiative, with Treaty Shopping: 2014 Federal Budget

Details of Canada’s initiative to develop its own Base Erosion and Profit Shifting (BEPS) action plan are outlined in its 2014 Federal Budget, with a link to KPMG’s comments on the Budget referenced herein.

Click to access tnfc1408.pdf

Highlights of the tax initiatives include proposals to expand existing anti-avoidance rules for thin capitalization, and a back-to-back loan provision.  Additionally, the Budget has requested comments, by June 2014, to the following questions for a framework to develop its own BEPS Action Plan:

  • What are the impacts of international tax planning by multinationals on other participants in the Canadian economy?
  • Which of the international corporate income and sales tax issues identified in the OECD BEPS Action Plan should be considered the highest priorities for examination and potential action by the government?
  • Are there other corporate income tax or sales tax issues related to improving international tax integrity that should be of concern to the government?
  • What considerations should guide the government in determining the appropriate approach to take in responding to the issues identified?
  • Would concerns about maintaining Canada’s competitive tax system are alleviated by coordinated multilateral implementation of base protection measures?
  • What actions should  the government take to ensure the effective collection of sales tax on e-commerce sales to Canadian residents by foreign vendors?

The Budget also addressed the treaty shopping consultation paper released in August 2013, which TEI provided comments thereto (refer to 14 January 2014 post).  The government’s position is that  a domestic law re: treaty shopping is preferable to a treaty-based approach.  This proposed rule would be included in Canada’s Income Tax Convention Interpretation Act, thus applicable to all of Canada’s treaties.  Comments on this position are to be submitted within 60 days.  General provisions of this rule are summarized for reference, with a separate link provided for KPMG’s Submission on Canada’s Consultation on Treaty Shopping in December 2013 :

Click to access kpmg-submission-to-treaty-shopping-consultation.pdf

  • The domestic treaty-shopping rule is a “general purpose” provision, versus a “limitation on benefits” approach.
  • A tax treaty benefit is denied for relevant treaty income if it is reasonable to conclude that one of the main purposes for undertaking a transaction, or a transaction that is part of a series of transactions or events, that results in the benefit was for the person to obtain such benefit.
  • It relies on the conduit presumption for tax treaty benefits, absent proof to the contrary.  Safe harbour presumptions are provided for this test.

With the OECD working aggressively to finish the BEPS Action Plan items timely, including the recent draft of a Country-by-Country Reporting template for comment, it is hoped that new international principles and documentation standards being developed are not adopted earlier, and unilaterally, by countries each changing such rules based on its sole interpretation and discretion, which later are effected into local legislation.

Most importantly, multinationals and other interested parties should monitor BEPS related provisions in countries proposing separate legislation, in addition to that proposed by the OECD.  To the extent the OECD’s principles differ from separate country legislation, international tax challenges will significantly increase, with additional likelihood of double taxation.

Category:

Transfer Pricing

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Canadian Treaty Shopping: TEI comments

The Tax Executives Institute (TEI) has submitted comments in response to Canada’s treaty shopping proposals.  TEI’s comments are referenced herein:

Click to access Treaty_Shopping_in_Canada_TEI_submission.pdf

Canada proposes that if all of the following circumstances exist, it would be justified in denying treaty benefits due to the lack of economic substance, and a bona fide purpose, and the ultimate beneficiaries are third-country residents not entitled to direct benefits from the treaty.  Such circumstances include all of the following:

  • A tax treaty resident uses the tax treaty to obtain a reduction of Canadian tax otherwise payable on Canadian source income,
  • The intermediary entity is owned or controlled mainly by residents of another country which are not entitled to at least the same treaty benefits,
  • The intermediary entity pays no or low taxes in its country on the item of income earned in Canada, and
  • The intermediary entity does not carry on real and substantial business activities, other than managing investment income) in its country.

TEI also provides general comments stating the following concepts:

  • Treaty Limitation on Benefit (LOB) Provisions should be the favored approach rather than domestic legislation
  • Unilateral Approach should be eschewed in favor of a multilateral approach
  • Evidence of the scope and degree of treaty abuse in Canada is inconclusive

TEI’s comments also addressed the specific questions raised in the consultation paper of 14 August, 2013:

  1. Advantages and disadvantages of a domestic law approach, a treaty based approach, or a combination of both
  2. Merits of OECD approaches to treaty shopping, and other possible approaches re: treaty shopping
  3. Preference for a general, versus a specific and objective approach; achieving balance between effectiveness, certainty, simplicity, and administration
  4. Views on a domestic law general purpose test and its effectiveness in preventing treaty shopping and achieving taxpayer certainty
  5. Details for preference of a specific approach
  6. Comments addressing applicability of a domestic anti-treaty shopping rule in addition to a comprehensive anti-treaty shopping rule

TEI’s comments are well written, posing arguments for all multinationals to consider for Canada, and in the broader context of domestic general anti-avoidance rules (GAAR), vs. treaty based benefits, and the impetus behind countries to adopt unilateral domestic rules prior to dates in the OECD BEPS Action Plan for issues that should be internationally consistent.  For reference, prior posts have addressed GAAR provisions advocated by several countries that can be accessed for future insight.

Category:

Transfer Pricing

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TEI’s comments: OECD Draft Handbook on Transfer Pricing Risk Assessment

Tax Executives Institute (TEI) has provided comments to the OECD Draft Handbook on Transfer Pricing Risk Assessment, for which the relevant links are provided for reference.  A link to TEI is also included in the Recommended Links page of this blog.

http://www.oecd.org/ctp/transfer-pricing/Draft-Handbook-TP-Risk-Assessment-ENG.pdf

Click to access TEI%20Comments%20-%20OECD%20Draft%20Handbook%20on%20Transfer%20Pricing%20Risk%20Assessment%20-%20FINAL%20to%20OECD%2011%20September%202013.pdf

These comments are useful in comprehending the complexity of transfer pricing risks and documentation concerns, especially against the backdrop of OECD’s recent White Paper on Transfer Pricing Documentation (31 July post) and its Revised Draft for the Transfer Pricing of Intangibles (3 August post).  International tax executives should review OECD’s proposals and public comments from TEI and other organizations to develop a risk framework for new transfer pricing challenges and country-specific initiatives.

Category:

OECD / UN, Transfer Pricing

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