Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘thin capitalization’

Poland taxes: CFC’s, Thin capitalization, participation exemption

The Polish President signed a tax bill, effective 1/1/2015 with some major tax reforms.

The changes include:

  • New Controlled Foreign Corp. (CFC) tax regime
  • Change in debt-to-equity ratio from 3:1 to 1:1, some planning opportunities available before year-end
  • Participation regime not applicable  for dividends that provided a deduction for the payor

EY’s Global Tax Alert provides a summary of the upcoming changes attached for reference:

Executive summary
On 16 September 2014, the Polish President signed a tax bill, approved by the Parliament on 29 August 2014, with several changes to the corporate tax rules. The new measures include the introduction of CFC (controlled foreign corporation) rules and much broader thin capitalization restrictions. Also, under the new measures, the participation exemption regime will not be applicable to taxpayers receiving dividends that gave rise to a deduction from the income (or other decrease in the taxable base or tax) of the distributing company. Furthermore, the new measures make the transfer pricing documentation requirements applicable to joint ventures and partnerships.

International groups may be affected by these changes to the Polish tax system that enter into force on 1 January 2015. Certain steps undertaken early enough may mitigate the impact of the changes.

Detailed discussion
Thin capitalization
New restrictions will limit the deductibility of interest on a much broader range of loans (generally on all intra-group financing). Currently only loans from a direct shareholder and/or direct sister company are subject to thin capitalization restrictions. However, loans granted by the end of 2014 may, under certain conditions, remain subject to the current liberal regulations.

The amended provisions introduce a 1:1 debt-to-equity ratio (currently 3:1) and a new definition of “equity.” In addition, taxpayers will have the option to use a new alternative thin cap calculation method based on a reference rate of the National Bank of Poland and the value of assets capped at a percentage of EBIT.

Taxpayers considering new debt placements may want to finalize plans by the end of 2014 to fall under the current rules. Taxpayers should make projections in order to be ready to choose the optimal calculation method (based on debt-to-equity ratio or the new one based on assets) before statutory deadlines.

CFC rules
2015 will witness an unprecedented change to the Polish tax system with the introduction of the CFC regime. The CFC regime will result in taxation of foreign companies’ income at the level of their direct or indirect Polish shareholders.

Depending on the date when the new law is published and on the tax year of the CFC, income of the CFC may be taxed shortly after the provisions enter into force.

Multinational groups should assess the impact of the CFC regime on their Polish companies with foreign subsidiaries and, if required, decide on steps to be taken to e.g., qualify for exemptions.

Other changes
In relation to the current legislation, it should be noted that General Anti Avoidance Regulations are planned to be introduced in Poland as of 1 January 2016.

Best Practice observation: How do these rules, as well as those from all other countries, get filtered and communicated timely to allow for planning in the current multinational tax structure.  As countries start to embark upon initiatives to change their domestic legislation, coupled with OECD BEPS Action Plan initiatives, there should be a proactive structure in place to review planning strategies and identify new risks in the global structure.

Global tax policy in 2014: EY publication

Ernst & Young (EY) has published a very informative study, based on a survey of 830 executives in 25 markets.  The second section of the publication includes analyses of tax outlooks for 38 countries, including BEPS actions.  The 38 countries highlighted in the publication include:

Australia / Austria / Belgium / Canada / Chile / China / Czech Republic / Denmark / Finland / France / Germany / Greece / Hong Kong / Hungary / India / Ireland / Italy / Jordan / Korea / Lithuania / Luxembourg / Malaysia / Mexico / Netherlands / New Zealand / Norway / Panama / Poland / Russia / Singapore / Slovakia / South Africa / Spain / Sweden / Switzerland / United Kingdom / United States / Venezuela

A link to the publication is included for reference:

http://www.ey.com/Publication/vwLUAssets/EY-the-outlook-for-global-tax-policy-in-2014/$File/EY-the-outlook-for-global-tax-policy-in-2014.pdf

The publication includes an introductory section highlighting tax rates and a 2014 tax policy outlook.  The outlook includes the following sections:

  • How countries are adjusting their corporate tax base in 2014
  • Incentives
  • Withholding taxes
  • Transfer pricing changes
  • Interest / Business expense deductibility
  • Changes to tax treatment of losses
  • Changes to CFC rules / thin capitalization

The second section analyzes 38 separate countries, addressing the following topics:

  • Tax rates
  • 2014 tax policy outlook:
    • Key drivers of tax policy changes
    • Fiscal consolidation / stimulus
    • Tax policy outlook for 2014, including political landscape, current tax policy and administrative leaders, key tax policy changes in 2013, country position on OECD BEPS Action Plan, pending tax proposals and consultations opened / closed.

This publication is especially valuable in country outlooks, including the OECD BEPS Action Plan proposals, and should be consulted to develop continued awareness of current and future trends in international taxation.

 

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.

http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/TNF/Pages/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 :

http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/Documents/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.

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