Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘transfer pricing’

OECD update

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.

Click to access 2016G_02042-161Gbl_OECD%20releases%20drafts%20on%20profit%20splits,%20attribution%20of%20profits%20to%20PEs%20and%20TPG%20business%20restructuring.pdf

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OECD

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US: Country-by-country (CbC) reporting

The US administration has released final regulations on its CbC reporting requirements.  This guidance provides voluntary filing for a 2016 calendar year US MNE, whereas 2017 is the required reporting year, due in 2018.  The OECD has also issued guidance to provide impetus for countries to accept voluntary filings by US MNE’s with IRS, rather than rely solely on its legislation for 2016.  However, this premise should be carefully reviewed, as countries have already enacted legislation and may not wish to change it.

Additionally, the filing period for a US MNE is Sept. 15th for a calendar year taxpayer, accelerating the Dec. 31st date proposed by the OECD.

This guidance will have widespread impact and contains many clarifications that should be  understood prior to collecting data.

Click to access 2016US_01933-161US_Final%20US%20CbC%20reporting%20regulations%20analyzed%20in%20depth.pdf

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OECD, Tax Risk Management

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EU: CbC marches on

EY’s Global Tax Alert, attached for reference, provides details on the continuing momentum of the country-by-country (CbC) reporting rules in the EU. These rules will certainly be applied by some EU countries in 2016, thus US and other non-EU based multinationals should start to seriously consider options for separate and/or surrogate entity filings in EU and other jurisdictions for the 2016 tax year.

Note, it is likely the continuing transparency momentum will continue and likely to obligate multinationals to more disclosures going forward. Thus, it is imperative the key stakeholders are aligned currently and ongoing.

Global Tax Alert | 25 May 2016
ECOFIN formally adopts directive on country-by-country reporting in the EU
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On 25 May 2016, the Economic and Financial Affairs Council of the European Union (ECOFIN) which is made up of the Finance Ministers of all European Union (EU) Member States unanimously voted in favor of the amendments to the EU directive on exchange of information (the Directive). The revision, that will implement the recommendations of Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 13 on country-by-country reporting, is one of the elements of the European Commission’s Anti-Tax Avoidance package from January 2016.2 According to the ECOFIN, “the principal aim of the directive is to prevent multinationals from exploiting the technicalities of the tax system, or mismatches between different tax systems, in order to reduce of avoid their tax liabilities.”

The Directive requires multinationals to report information on revenues, profits, taxes paid, capital, earnings, tangible assets and the number of employees on a country-by-country basis. This information must be reported for fiscal years starting on or after 1 January 2016, to the tax authorities of the Member State where the group’s ultimate parent entity (UPE) is tax resident. If the UPE is not resident in the EU, the report would have to be filed through a surrogate parent (EU or non-EU based) or the EU based subsidiaries. The Directive would give Member States the option to either require secondary filing for fiscal years starting on or after 1 January 2016 or to defer that obligation to financial years starting on or after 1 January 2017.

The Member States adopted the amendments without discussion, following the agreement reached at the previous ECOFIN meeting held on 8 March 2016. Thus, the details of the Directive remained virtually unchanged to what had previously been reported.3

Next steps
The Directive will require EU Member States to implement a country-by-country reporting obligation in their national legislation in line with the requirements of the Directive within 12 months from the date of its entry into force.

The first reports will have to be filed within 12 months from the end of the fiscal year to which they relate. Member States will have to exchange them within 3 months thereafter, except for the reports relating to fiscal years starting on or after 1 January 2016 where the term would be 18 months after the end of the fiscal year. The European Commission will adopt the necessary practical arrangements for upgrading the existing common platform for automatic exchange in the EU to fit the needs of the new requirements.

Endnotes

1. Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation.

2. See EY Global Tax Alert, European Commission releases anti-tax avoidance package designed to provide uniform implementation of BEPS measures and minimum standards across Member States, dated 28 January 2016.

3. See EY Global Tax Alert, EU Council publishes updated Draft Directive on implementation of country-by-country reporting, dated 23 March 2016.

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OECD

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OECD: Inclusive / transparent objectives

The OECD’s Task Force on Tax and Development met in Paris, France, on 1 March 2016, to discuss the new inclusive framework proposed by the OECD for the global implementation of the BEPS project and to support developing countries on their domestic resource mobilisation efforts. Over 180 participants attended.

Co-Chaired by South Africa and the Netherlands, the Task Force is a multi-stakeholder advisory group set up to help to improve the enabling environment for developing countries to collect taxes fairly and effectively.

Recognition and participation in the Tax Inspectors Without Borders partnership was also an agenda item, including present (and future) toolkits for developing countries as a practical resource to implement BEPS Actions.

Participants also highlighted the need for the documentation toolkit to provide clear guidance on how the Country-by-Country Report should be used for risk assessment purposes.

The Task Force will endeavor to take the following steps, commencing with the first meeting in Kyoto Japan, 30 June- 1 July 2016.

  • Support the development of 7 further toolkits to translate the BEPS deliverables into user friendly guidance for developing countries by 2018.
  • Starting now, fully endorse the ATAF/EC/OECD/WBG transfer pricing capacity building support to address the full range of BEPS challenges in developing countries.
  • Support the Tax Inspectors Without Borders programme project to increase the number of TIWB deployment programmes to 20 by the end of 2017 and 30 by the end of 2018.

A copy of the press release is provided for reference:

Click to access co-chairs-statement-task-force-tax-development-march-2016.pdf

Best Practices – To address mutual transparency, OECD and the member countries should be willing to share the contents, and objectives, of the various toolkits under preparation to better understand the risk process and actions by tax administrations around the world. 

 

 

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OECD

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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

Click to access 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.

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OECD

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OECD: Welcome to BEPS

The OECD has introduced a new inclusive framework inviting all interested countries to address international tax rules ongoing.  All interested parties will be able to participate as BEPS Associates via the OECD’s Committee on Fiscal Affairs (CFA), thereby have equal participation as the OECD and G20 members including review and monitoring of BEPS implementation.

Indicative of the posture going forward, OECD Secretary-General Angel Gurria stated “It is another strong signal that behaviour which was considered both legal and normal in the past will no longer be accepted.”

This OECD proposal will require endorsement by the G20 at the meeting in Shanghai on 26-27 February, with the first meeting of the inclusive framework members in Kyoto, Japan on 30 June and 1 July 2016.

Links to the OECD press release and summary document are provided for reference.

http://www.oecd.org/tax/all-interested-countries-and-jurisdictions-to-be-invited-to-join-global-efforts-led-by-the-oecd-and-g20-to-close-international-tax-loopholes.htm

Click to access flyer-implementing-the-beps-package-building-an-inclusive-framework.pdf

This new framework would mark another major milestone in the BEPS story; with hopes that global coordination and consistency will be enhanced vs. numerous voices protecting their fiscal growth, thereby adding additional complexity and unilateral actions around the world.

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OECD

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TP BEPS soft law: UK / Sweden

The UK tax authority, HM Revenue & Customs (HMRC), will refer to the OECD base erosion and profit shifting (BEPS) report on BEPS Actions 8-10 in transfer pricing audits.  Maura Parsons, HMRC deputy director and head of transfer pricing, has stated that HMRC will look to the 2015 BEPS reports in addition to the current OECD guidelines (although British law explicitly refers to the 2010 version on the transfer pricing guidelines).

Additionally, Sweden has taken a similar position and adopted the final OECD report in audits.

This line of reasoning is primarily based upon the premise / supposition that the new OECD guidelines are merely a clarification of existing rules, not requiring new legislation.  

In addition to the inherent uncertainty of the new rules, UK, Sweden and other countries that will adopt this position introduce additional challenges into understanding the current law, requirements and grounds upon which appeals / court cases will be based.  This is a new trend that promises to expand quickly into other countries, undermining the intent of transparency and consistency worldwide.  

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OECD

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OECD Multilateral pact is signed

Thirty-one countries have signed the OECD’s multilateral competent authority agreement (MCAA) for the automatic exchange of country-by-country (CbC) reports, excluding the U.S.

The signatory countries are:

  1. Australia
  2. Austria
  3. Belgium
  4. Chile
  5. Costa Rica
  6. Czech Republic
  7. Denmark
  8. Estonia
  9. Finland
  10. France
  11. Germany
  12. Greece
  13. Ireland
  14. Italy
  15. Japan
  16. Liechtenstein
  17. Luxembourg
  18. Malaysia
  19. Mexico
  20. Netherlands
  21. Nigeria
  22. Norway
  23. Poland
  24. Portugal
  25. Slovak Republic
  26. Slovenia
  27. South Africa
  28. Spain
  29. Sweden
  30. Switzerland
  31. UK

The position of the US, noticeably absent from the list,  is to enter into bilateral agreements with appropriate countries that have safeguards and governance in place, as well as countries that have an income tax treaty or tax information exchange agreement in effect.

OECD BEPS Action 13 provided models for the recommended CbC reporting options; a multilateral agreement, a double tax convention model and a model based on a tax information exchange agreement.

It will be critical to monitor the development of the CbC exchange process, in addition to timing mismatches and the necessity to identify a surrogate country, with additional complexities to consider.

 

 

 

 

 

 

 

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OECD / UN

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CbC: US timing issues

The timing for implementation of country-by-country (CbC) reporting for non-US jurisdictions is of significant importance to US multinationals, due to the wording of the Proposed Regulations (23 Dec 2015 post).

The Proposed Regulations would require CbC reporting by US MNE’s starting in 2017, thereby not having such requirement in 2016.  If there are no changes in the Final Regulations, US MNE’s will be required to submit CBC reports in many jurisdictions around the world.  Some countries, such as Mexico, that aim to provide additional reporting items beyond the OECD model would present additional complications for a US MNE.  Contemporaneous deadlines will also have to be met, that are prior to the US deadline.

Additionally, if an election provision is adopted in the Final Regulations, this may not solve the dilemma, as many countries are drafting legislation providing that if the parent jurisdiction does not require CbC reporting, then a separate CbC report has to be filed in their local jurisdiction.  A literal reading of such language would result in a required domestic filing, as an election is not a “per se” requirement.

Similar complications will arise in countries that do not adopt CbC reporting for the tax year 2016.

Monitoring of the timing implications for CbC reporting should be a high priority to be addressed currently, with timelines established for the preparation of back-up reporting plans around the world.

 

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OECD

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CbC: US proposed Reg’s – a question of timing

The US Treasury has released proposed Regulations setting forth details for country-by-country (CbC) reporting by US-based multinationals.  A link to the proposed Reg’s is provided:

Click to access 2015-32145.pdf

The proposed Reg’s have been issued for comment, and two significant timing issues arise in the current version:

  1. Final Regulations would not take effect until tax years beginning after publication in the Federal Register, which would be 2017 for calendar-year taxpayers.
  2. The CbC report would be submitted to IRS with the US corporate income tax return, due Sept. 15.

Although the proposed Reg’s are conformed to the OECD model and have been purposeful in its comments on confidentiality and the exchange of information provisions for CbC reporting, the timing mismatch for the 2016 tax year presents a complexity that hopefully will be overcome in the Final Regulations.  If no changes are made to the effective date, the 2016 tax year would be a dysfunctional method of reporting around the world, based on whom are considered surrogate entities or determining which countries have rules that provide for direct submission to their tax authorities absent a US requirement.  

Additionally, the submission of the CbC report by Sept. 15 accelerates the year-end timing envisioned by the OECD.  This acceleration should be expected by multinationals, thereby leaving less time to coordinate and review the information via developing an efficient and sustainable CbC reporting process.

 

 

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OECD, Transfer Pricing

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Public CbC reporting: France moves forward

France’s lower house of Parliament has approved an amendment that would require public reporting of country-by-country (CbC) information.  The amendment will need approval by the Senate, with final confirmation by the French National Assembly before being enacted.

This step represents another move forward, along with the EU proposals, to provide CbC information to the public domain.

Multinational companies should prepare today for public CbC reporting in the near future, as the cannon shots have been fired and they will soon land, resulting in a multitude of inquiries and perceptive conclusions.  Additionally, organisations should have a seamless process to receive, review and decide on communicative courses of action in response.

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OECD, Tax Risk Management

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LOB: European Commission takes aim

The European Commission has aimed its sights upon the Limitation on Benefits (LOB) provision between Netherlands and Japan.  Netherlands has been asked to change this treaty provision on the grounds that it is incompatible with EU law.

As the LOB provision is widely used in the US treaty network, as well as many other countries, the impact of this recent development may expand exponentially with global ramifications.  Accordingly, this pursuit should be closely followed.

Deloitte’s summary is provided for reference:

http://www2.deloitte.com/nl/nl/pages/tax/articles/european-commission-challenges-lob-in-treaty-with-japan.html

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OECD / UN, Transfer Pricing

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TAXE: Final report for Parliamentary actions

The EU Parliament’s resolutions were passed by a vote of 508 to 108, with 85 abstentions.  The proposals call for mandatory country-by-country (CbC) reporting, a common consolidated corporate tax base (CCCTB), defined tax terms and transparency / exchange of tax rulings.  A summary press release and the full report are provided for reference:

http://www.europarl.europa.eu/news/en/news-room/content/20151120IPR03607/html/Parliament-calls-for-corporate-tax-makeover

http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P8-TA-2015-0408+0+DOC+XML+V0//EN&language=EN

Key points:

  • Welcomes the EU Parent-Subsidiary Directive amendments, effective at year-end 2015, for a general anti-abuse rule and hybrid mismatches.
  • EU Commission has breached its obligations under Article 108 of the Lisbon Treaty by not launching state aid investigations previously.
  • EU Member States should respect the principle of profits taxation where they are generated.
  • Promote good practices on transfer pricing and the pricing of loans and finance fees in intra-group transactions.
  • Commission to further investigate restrictions of deductions for intercompany royalty payments (i.e. counter profit shifting).
  • All rulings that have an impact on other Member States to be presented in the CbC report, and shared with the Commission and tax administrations.  Rulings to be publicly disclosed in accordance with confidentiality requirements.
  • Mandatory CCCTB, with a deadline for the consolidation element and without any further impact assessments.
  • Develop measures to tackle cross-border VAT fraud.
  • Reform of the Code of Conduct on business taxation.
  • New State Aid guidelines by mid-2017.
  • EU to be a global leader in tax transparency.
  • More extensive CbC report, with intra-group transactions.
  • Accelerate European Tax Identification Number project.
  • Aggressive tax planning is incompatible with Corporate Social Responsibility (CSR).
  • Outgoing financial flows from EU are taxed at least once (i.e. withholding tax).
  • Transition period for developing countries to align with Global Standard on Automatic Information Exchange.

This report is compelling, far-reaching and a resource that will be used worldwide, as most non-EU countries will attempt to follow the ever-increasing EU intensity and propensity for changes in the international tax arena.  Thereby, it is a must read and a learning tool for non-tax executives in multinational organisations, as well as tax advisors, tax administrations and other interested parties.

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OECD / UN

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Transparency & Disclosure: zooming in

EY’s recent publication takes a close-up view of transparency and disclosure trends, including a detailed analysis of several countries’ latest trends.  A link to the report is provided for reference:

Click to access EY-are-you-ready-for-your-close-up.pdf

Key Points:

  • Transparency issues of the future:
    • Country-by-Country (CbC) implementation and inconsistency of approaches
    • New transfer pricing documentation requirements
    • Public access for CbC reports and tax rulings
    • Growing trend to disclose a company’s planning, strategy, risk appetites and effective tax rates
    • Tax codes of conduct, formal and informal
    • Increased disclosure of aggressive tax positions
    • Electronic data gathering
    • Use of third-party data
    • Direct ERP access
    • Matching of data and watching for transactional trends
  • EU transparency update, including proposed Directives
  • Country transparency updates: Argentina, Australia, Brazil, China, Denmark, Ecuador, France, Germany, Greece, Mexico, Netherlands, Poland, Singapore, South Africa, South Korea, Spain, UK, US

The level of future transparency will continue to increase, with new and dissimilar demands by countries around the world.  This report unveils the global trends and issues, with comprehensive analyses of various transparency trends of major countries.  Accordingly, it is a publication that should be reviewed to better understand where the current trends are requiring future demands for transparency in a new world of international taxation.

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Tax Risk Management

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BEPS: Indirect tax impact

EY’s Global Tax Alert highlights the indirect tax consequences resulting from final guidance of the BEPS Action Items:

Click to access 2015G_CM5836_Indirect_OECDs%20recommendations%20on%20BEPS%20project%20has%20wider%20indirect%20tax%20implications.pdf

Key observations:

  • Interaction of Article 1 (Digital Economy) and Article 7 (PE) may create a wider gap for findings of a indirect tax “fixed establishment” and a direct tax “permanent establishment” (PE), although some countries do not respect such distinction.  Thus , business models merit a review for such changes.
  • Article 8 (Intangibles) set forth changes in allocation and valuation that may affect customs valuations.
  • Actons 8-10 (transfer pricing) may invite additional focus by tax authorities on VAT/GST and customs.
  •  Action 13 (country-by-country reporting) may invite scrutiny of indirect taxes.

The focus of BEPS has been on direct taxes, while its impact will now be measured for purposes of indirect taxes.  Thus, a BEPS review should encompass direct and indirect tax effects, including VAT/GST and customs.  

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OECD, Tax Risk Management

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