OECD s Base Erosion and Profit Shifting (BEPS) Action Plan

Transcription

1 OECD s Base Erosion and Profit Shifting (BEPS) Action Plan Joanne Theodorides Senior Manager Tax Advisory Services, PWC joanne.theodorides@cy.pwc.com

2 OECD s BEPS Action Plan The G20 finance minsters called on the OECD to develop an action plan to address BEPS issues in a co-ordinated and comprehensive manner. The draft Action Plan was approved by the OECD CFA on June 26, 2013 and then presented to the G20 Finance Ministers at July 19-20, 2013 meeting. The Action Plan: Identifies actions needed to address BEPS Sets deadlines to implement these actions Identifies the resources needed and the methodology to implement these actions 15 actions with 3 key themes - Coherence Improving interaction of corporate tax in different territories; - Substance Realignment of taxation and substance; - Transparency; 2

3 OECD s BEPS Action Plan Transparency Substance Coherence Improve transparency Address tax planning strategies that shift profits to locations where there is little or no real activity* but the taxes are low, resulting in little or no overall corporate tax being paid *activity increasingly appears to mean significant people functions Address tax planning strategies that exploit gaps and mismatches in tax rules to make profits disappear for tax purposes Outcomes:- Changes to the OECD Model Tax Treaty and Commentaries Recommended changes to domestic laws 3

4 BEPS Action Plan No Action Area of focus OECD Deadline(s) 1 Address the tax challenges of the digital economy Digital economy Delivered - Sept Neutralise the effects of hybrid mismatch arrangements Coherence Delivered - Sept Strengthen CFC rules Coherence September Limit base erosion via interest deductions and other financial payments Coherence September / December Counter harmful tax practices more effectively, taking into account transparency and substance Coherence Delivered - Sept 2014 Further Input - September / December Prevent treaty abuse Substance Delivered- Sept Prevent the artificial avoidance of PE status Substance September Assure that transfer pricing outcomes are in line with value creation: intangibles 9 Assure that transfer pricing outcomes are in line with value creation: risks and capital 10 Assure that transfer pricing outcomes are in line with value creation: other high-risk transactions 11 Establish methodologies to collect and analyse data on BEPS and the actions to address it Substance Delivered - Sept 2014 Further input -September 2015 Substance September 2015 Substance September 2015 Transparency September Require taxpayers to disclose their aggressive tax planning arrangements Transparency September Re-examine transfer pricing documentation Transparency Delivered - Sept Make dispute resolution mechanisms more effective Transparency September Develop a multilateral Instrument Multilateral instrument Delivered - Sept 2014 Further Input - December

5 BEPS Action Plan Transparency No Action Area of focus OECD Deadline(s) 1 Address the tax challenges of the digital economy Digital economy Delivered - Sept Neutralise the effects of hybrid mismatch arrangements Coherence Delivered - Sept Strengthen CFC rules Coherence September Limit base erosion via interest deductions and other financial payments Coherence September / December Counter harmful tax practices more effectively, taking into account transparency and substance Coherence Delivered - Sept 2014 Further Input - September / December Prevent treaty abuse Substance Delivered- Sept Prevent the artificial avoidance of PE status Substance September Assure that transfer pricing outcomes are in line with value creation: intangibles Substance Delivered - Sept 2014 Further input -September Assure that transfer pricing outcomes are in line with value creation: risks and capital Substance September Assure that transfer pricing outcomes are in line with value creation: other high-risk transactions 11 Establish methodologies to collect and analyse data on BEPS and the actions to address it Substance September 2015 Transparency September Require taxpayers to disclose their aggressive tax planning arrangements Transparency September Re-examine transfer pricing documentation Transparency Delivered - Sept Make dispute resolution mechanisms more effective Transparency September Develop a multilateral Instrument Multilateral instrument Delivered - Sept 2014 Further Input - December

6 Action 11 Establish methodologies to collect and analyse data on BEPS and the actions to address it Action Develop recommendations regarding indicators of the scale of BEPS and ensure that tools are available to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS on an ongoing basis. 6

7 Action 12 Disclosure of aggressive tax planning arrangements Action Develop recommendations regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements or structures...drawing on the experience of the increasing number of countries that have such rules. 7

8 Action 13 Transfer pricing documentation Action Re-examine TP documentation requirements and develop new rules (e.g. country-by-country reporting (CBCR), according to a common template) Outcomes to date Report (agreed draft) September 2014 Implementation package 8

9 Action 13 Transfer pricing documentation A threetiered approach Master file CBCR Local file TP documentation 9

10 Action 13 Transfer pricing documentation Master file Org. structure Chart showing legal & ownership structure & geo. location of operating entities Description of MNE s business Important drivers of business profit Description of supply chain for material products & services MNE s intangibles Overall strategy: Development, oversight, & exploitation, including location of R&D facilities & management List of IP and entities that own IP MNE s financial activities Description of how the MNE is financed, including arrangements with third-party lenders Financial transfer pricing policies MNE s financial & tax positions Annual consolidated financial statement for FY List & description of unilateral APAs & other tax rulings relating to allocation of income List & description of service arrangements among MNE members other than R&D, including policies Main geographic markets for products and services Agreements related to IP, including CSAs IP and R&D transfer pricing policies ID central financial function, country of org. & management of entity providing function Functional analysis describing contributions to value creations by individual entity Material transfers of IP among MNE members during FY, including details Business restructurings, acquisitions, divestitures in FY Slide 10

11 Action 13 Transfer pricing documentation Local file Provides more detailed information relating to specific intercompany transactions; assure compliance with the arm s length principle in material transfer pricing positions impacting a specific jurisdiction 1. Detail on local management reporting lines 2. Business restructurings or IP in current or immediately past year 3. Key competitors 4. Amount of payments and receipts for each category of controlled transactions involving the local entity 5. Copies of all material intercompany agreements concluded by local entity 6. Copy of existing unilateral/bilateral/multilateral APAs and other tax rulings to which the local jurisdiction is not a party and which are related to the local file controlled transactions 7. Reconciliation of the financial data used in applying TP policies to the financial statements 11

12 Action 13 Transfer pricing documentation CBCR Revenues Tax jurisdiction Unrelated party Related party Total Profit (loss) before income tax Income tax paid (on cash basis) Income taxes accrued - current year Stated capital Accumulated earnings Number of full time employees Tangible Assets (other than cash and cash equivalents) USA UK Cyprus Footnotes: 1. Revenues: Should exclude payments received from other constituent entities that are treated as dividends in the payor's country. 2. Income tax paid (on cash basis): Should also include withholding taxes paid by other entities (related and unrelated) with respect to payments made to the constituent entity(ies). 3. Income tax accrued - current year: Tax accrual should only reflect operations in the current year and should not include deferred taxes or provisions for UTPs. 4. Full time employees: This is seeking 'full time equivalents' and should include independent contractors. This may be reported on any basis, as long as it is consistent across countries. Slide 12

13 Research and development Holding or managing intellectual property Purchasing or procurement Manufacturing or production Sales, marketing or distribution Administrative management or support services Provision of services to unrelated parties Internal group finance Regulated financial services Insurance Holding shares or other equity instruments Dormant Other Action 13 Transfer pricing documentation CBCR Main business activity(ies) Tax Jurisdiction Constituent entities resident in the Tax Jurisdiction Tax Jurisdiction of organisation or incorporation if different from Tax Jurisdiction of residence Slide 13

14 Action 13 Transfer pricing documentation CBCR Who? What? Multinational enterprises (MNEs) whose group turnover is at least 750m County by country (CbC) report to be submitted annually Where? CbC filed in MNE s ultimate parent jurisdiction, automatically exchanged with other relevant countries (secondary mechanisms where necessary) When? For fiscal years beginning from 1 January 2016, reporting from 2017 Why? To enhance transparency for tax administrations by providing them with adequate information to conduct risk assessments and examinations...and contribute to understanding and tackling base erosion and profit shifting (BEPS) behaviours 14

15 Action 14 Dispute resolution Action Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under mutual agreement procedures (MAP), including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases. Outcomes to date Discussion draft December

16 Action 14 Dispute resolution Mandatory binding arbitration difficult/impossible to currently achieve Discussion draft sets out proposals and options for a minimum standard to ensure that: Treaty obligations related to mutual agreement procedures (MAP) are implemented in good faith Administrative processes promote the prevention and resolution treatyrelated disputes Taxpayers can access MAP when eligible Cases are resolved once they are in MAP Establish a monitoring mechanism for MAP 16

17 BEPS Action Plan Substance No Action Area of focus OECD Deadline(s) 1 Address the tax challenges of the digital economy Digital economy Delivered - Sept Neutralise the effects of hybrid mismatch arrangements Coherence Delivered - Sept Strengthen CFC rules Coherence September Limit base erosion via interest deductions and other financial payments Coherence September / December Counter harmful tax practices more effectively, taking into account transparency and substance Coherence Delivered - Sept 2014 Further Input - September / December Prevent treaty abuse Substance Delivered- Sept Prevent the artificial avoidance of PE status Substance September Assure that transfer pricing outcomes are in line with value creation: intangibles 9 Assure that transfer pricing outcomes are in line with value creation: risks and capital 10 Assure that transfer pricing outcomes are in line with value creation: other high-risk transactions 11 Establish methodologies to collect and analyse data on BEPS and the actions to address it Substance Delivered - Sept 2014 Further input -September 2015 Substance September 2015 Substance September 2015 Transparency September Require taxpayers to disclose their aggressive tax planning arrangements Transparency September Re-examine transfer pricing documentation Transparency Delivered - Sept Make dispute resolution mechanisms more effective Transparency September Develop a multilateral Instrument Multilateral instrument Delivered - Sept 2014 Further Input - December

18 Action 6 Prevent Treaty abuse Action Development model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Clarify that tax treaties are not intended to be used to generate double nontaxation Identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country Outcomes to date Report (agreed draft) September 2014 Discussion draft November

19 Action 6 Prevent Treaty abuse Prevent treaty shopping Minimum level of protection: Treaty preamble express statement that treaty intention is to eliminate double taxation without creating opportunities for non-taxation/reduced taxation through tax evasion/avoidance (including treaty shopping), and either: Limitation on benefits (LOB) and Principal Purpose Test (PPT), or PPT only, or LOB and a restricted PPT applicable to conduit arrangements (or domestic anti abuse rules on conduit arrangements) 19

20 Action 6 Prevent treaty abuse LOB overview yes yes yes Publicly traded test Principal class of shares traded on at least one recognized stock exchange Stock exchange with primary trading or place of management located in Contracting State no Ownership/base erosion test At least 50% of shares (vote and value) owned by persons resident in the Contracting State and eligible for treaty benefits (eligible persons) Less than 50% of the taxpayer s income is paid as deductible payments to persons not qualifying as eligible persons (exclude services/tangibles) [No bad intermediate owners-same state] no Competent authority consultation Application required Case by case decision Excluded if authority determines that principal purpose was achieving of treaty benefits no Subsidiary test At least 50% of shares (vote and value) Owned by 5 or fewer companies qualifying for the stock quotation test [No bad intermediate owners either state] no Active trade or business test (Substantial if connected) active trade or business in Contracting State Does not include own account investment business unless bank etc Income from Source State in connection with trade/business no No treaty benefits yes yes Treaty benefits granted Slide 20

21 Action 6 Prevent Treaty abuse LOB continued Certain not for profit organisations and certain pension funds to qualify Possible inclusion of provisions for Collective Investment Vehicles (CIVs) and non-civs Possible inclusion of derivative benefit provisions 21

22 Action 6 Prevent Treaty abuse PPT Denial of treaty benefit with respect to an item of income/capital if obtaining that benefit was one of the principal purposes of any arrangement/transaction that resulted directly or indirectly in that benefit unless granting the benefit would be in accordance with object and purpose of the relevant treaty provisions. 22

23 Action 6 Prevent Treaty abuse Other provisions Introduction of a 365 day holding period for lower withholding tax rate on dividend payments. For gains relating to property rich companies (Article 13(4)): extension of provisions to partnership interests and trusts inclusion of a preceding 365 day testing period (not just at time of alienation) Replace place of effective management residency tie-breaker with mutual agreement denial of treaty benefits until agreement reached (but POEM to remain an option) Restriction of treaty benefits for permanent establishments in cases of low taxation Clarify that a treaty does not affect the taxation by a State of its own residents (with certain exceptions) Commentary that treaty rules do not prevent domestic anti-abuse rules provided not in conflict with the treaty 23

24 Action 7 Prevent the artificial avoidance of PE status Action Develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific activity exemptions. Work on these will also address related profit attribution issues. Outcomes to date Discussion draft October

25 Action 7 Prevent the artificial avoidance of PE status Dependent Agent and Independent Agent Aimed at commissionaire and similar arrangements but go much further - likely to impact a broad range of taxpayer structure/arrangements Four alternative options for the amending (widening scope) of the dependent agent rule and a proposal to amend (narrow scope) the independent agent rule Dependent agent No requirement for contract/terms to be in the name of No requirement for agent to be restricted to concluding contracts activity leading to contracts sufficient No requirement for contract to be concluded Independent agent Requirement for multiple unrelated consumers of agent s products/services to qualify as independent agent all related party service providers now PEs? Disqualified as independent agent if acting exclusively or almost exclusively for the principal 25

26 Action 7 Prevent the artificial avoidance of PE status Activity based exemptions Preference to subject all specific activity exemptions to an overriding preparatory or auxiliary test Result of work on digital paper preparatory or auxiliary test intended to only exempt activities with low levels of profit to be attributed to them Alternatives if not adopted: changes to specific exemptions Remove exemption for facilities used for delivery (as in UN Model) removes warehouse exemption Remove exemption for purchasing goods or merchandise on basis profit should be attributed to this activity Remove exemption for collecting information 26

27 Action 7 Prevent the artificial avoidance of PE status Fragmentation Tax Authority concern that fragmentation of business across separate but related enterprises avoids PE status A test looking at all activities of associated enterprises where there are complementary functions which are part of a cohesive business operation 27

28 Action 7 Prevent the artificial avoidance of PE status Splitting-up of contracts Artificial division of contracts to avoid passing 12 month PE threshold for constructions sites Building sites/construction projects Services PE also features in the discussion Specific rule to prevent avoidance of passing 12 month threshold by splitting contracts between associated enterprises Alternative approach identified: reliance on Action 6 work (general antiabuse rule) 28

29 Action 7 Prevent the artificial avoidance of PE status Insurance Insurers avoid PE through use of travelling agents not concluding contract terms Significant economic activity not giving rise to taxable profit in state concerned Importing of UN Model approach on insurance PE Requires only collecting of premiums or insuring of risk in the state concerned by a dependent agent Alternative approach identified: rely on changes to dependent agent and independent agent provisions (targeted at commissionaires, etc.) to catch activity Suggested that the same effect might be achieved through these changes 29

30 Action 8,9 and 10 Align transfer pricing outcomes with value creation In many instances transfer pricing (TP) rules work well In other instances, TP rules could be misused to separate profits from corresponding economic activity (into low tax jurisdictions) Action plan for 3 identified areas typically used in this respect (#8) Intangibles: Develop rules to prevent BEPS by transferring intangibles among group members...ensuring that profits... are appropriately allocated in accordance with (rather than divorced from) value creation... (#9) Risks and Capital: Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members...ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital...require alignment of returns with value creation (#10) Other High Risk transactions: Develop rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties...clarify the circumstances when transactions can be recharacterised...profit splits...protection against...management fees and head office expenses 30

31 Action 8,9 and 10 Align transfer pricing outcomes with value creation Outcomes to date Report (agreed draft) September 2014 Intangibles (Action 8) Discussion draft November low value-adding intra-group services (Action 10) Discussion draft December 2014 Risk, characterisation and special measures (Actions 8-10) Discussion draft December 2014 Commodity transactions (Action 10) Discussion draft December 2014 Profit splits (Action 10) 31

32 Action 8,9 and 10 Align transfer pricing outcomes with value creation Bottom line Legal agreements / contracts merely the starting point... Deep-dive into MNE s global business / value - chain Strategic management R&D Supply-chain management Sales & Marketing Support services Examination of functions, assets and risks... Substance of the transaction... Actual conduct... 32

33 BEPS Action Plan Coherence No Action Area of focus OECD Deadline(s) 1 Address the tax challenges of the digital economy Digital economy Delivered - Sept Neutralise the effects of hybrid mismatch arrangements Coherence Delivered - Sept Strengthen CFC rules Coherence September Limit base erosion via interest deductions and other financial payments Coherence September / December Counter harmful tax practices more effectively, taking into account transparency and substance Coherence Delivered - Sept 2014 Further Input - September / December Prevent treaty abuse Substance Delivered- Sept Prevent the artificial avoidance of PE status Substance September Assure that transfer pricing outcomes are in line with value creation: intangibles Substance Delivered - Sept 2014 Further input -September Assure that transfer pricing outcomes are in line with value creation: risks and capital Substance September Assure that transfer pricing outcomes are in line with value creation: other high-risk transactions 11 Establish methodologies to collect and analyse data on BEPS and the actions to address it Substance September 2015 Transparency September Require taxpayers to disclose their aggressive tax planning arrangements Transparency September Re-examine transfer pricing documentation Transparency Delivered - Sept Make dispute resolution mechanisms more effective Transparency September Develop a multilateral Instrument Multilateral instrument Delivered - Sept 2014 Further Input - December

34 Action 2 Neutralise the effects of hybrid mismatches Action Address the gaps created by interactions between domestic tax laws that have led to double non-taxation, double deductions or long-term tax deferral due to hybrid instruments and hybrid entities Development model treaty provisions and recommendations regarding the design of domestic rules to neutralise the hybrid mismatches Outcomes to date Report (agreed draft) September

35 Action 2 Neutralise the effects of hybrid mismatches Types of mismatches tackled are cross-border payments that because of a hybrid element lead to: Deduction / No inclusion as ordinary income ( D/NI ) Double Deductions ( DD ) Indirect deduction/no inclusion as ordinary income ( Indirect D/NI ) Ignore timing differences but not clear how rules would apply where effect is close to permanent Hybrid element may be due to: Hybrid instruments (including transfers) Hybrid entities 35

36 Action 2 Neutralise the effects of hybrid mismatches Hybrid financial instrument example Hybrid Financing Instrument A Co Country A No ordinary income taxation Payment Payments under the hybrid financing instrument are deductible in B Co s jurisdiction and not taxed as ordinary income in A Co s jurisdiction (D/NI). e.g., collateralized loan arrangements, convertible notes B Co Country B Tax Deduction 36

37 Action 2 Neutralise the effects of hybrid mismatches Overview of recommendations Recommendations for deduction/no inclusion (D/NI) Primary Rule: Deny the payer a deduction to the extent payment not taxed as ordinary income in recipient s hands Defensive Rule: Ordinary income recognition for recipient to the extent of payer s deduction Special case rule: Participation exemption for dividends to be denied for deductible payments, and Tax credit for withholding tax limited to proportion of income taxed This is similar to EU amended Parent-Subsidiary Directive 37

38 Action 2 Neutralise the effects of hybrid mismatches Imported mismatch arrangements example Hybrid financing instrument A Co Country A Payment A Co. lends money to B Co using a hybrid financial instrument. The payments will be exempt in A Co s jurisdiction, while being deductible in B Co s jurisdiction. Loan B Co C Co Country B Interest Country C C Co borrows from B Co under a plain vanilla loan. Interest payable is deductible in C Co s jurisdiction and taxable in B Co s jurisdiction (D /NI outcome between A Co and C Co) 38

39 Action 2 Neutralise the effects of hybrid mismatches Overview of recommendations Recommendation for indirect deduction/no inclusion (Indirect D/NI) Deny the payer a deduction 39

40 Action 2 Neutralise the effects of hybrid mismatches Hybrid entity payments example A Co B Co B Sub Country A Interest Bank Loan Country B B Co is treated as transparent under the laws of the investor s jurisdiction (A Co) and non transparent under its own jurisdiction. Interest paid to the bank is set off against the profits of B Sub through group relief and also used against A Co s profits due to transparent nature of B Co (DD). 40

41 Action 2 Neutralise the effects of hybrid mismatches Overview of recommendations Recommendations for double deductions (DD) For hybrid payments Primary rule -parent to deny payment Defensive rule payer to deny payment For dual resident entities Each State of residence denies deduction to the extent it gives rise to a DD outcome 41

42 Action 2 Neutralise the effects of hybrid mismatches Overview of recommendations Recommendations for double tax treaties amendment to OECD Model Article 1 Persons covered 1. This Convention shall apply to persons who are residents of one or both Contracting States. 2. For the purposes of this Convention, income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax laws of either Contracting State shall be considered to be income of a resident of a Contracting State but only to the extent that the income is treated for the purposes taxation by that State, as the income of a resident of that State. [In no case shall the provisions of this paragraph be construed so as to restrict in any way a Contracting State s right to tax the residents of that State.] 42

43 Action 3 Strengthen Controlled Foreign Country ( CFC ) rules Action Development of recommended domestic CFC rules CFC can de-incentivise multinational enterprises to shift profits Development of recommended domestic CFC rules Many countries have already CFC but large differences need for conformity EU countries: Impact of European Court of Justice decisions? 43

44 Action 4 Limit base erosion via interest deductions and other financial payments Action Produce best practice rules to address base erosion and profit shifting through the use of interest expense. Development of transfer pricing guidance for related party financial transactions. Outcomes to date Discussion draft December 2014 on first of the above matters 44

45 Action 4 Limit base erosion via interest deductions and other financial payments Proposed approaches Group-wide interest allocation or ratio test limit net interest expense to a proportion of the group s actual net third party interest or limit interest deductions based on a group-wide ratio test (interest/[earnings, assets or equity]) Fixed ratio test limit net interest expense based on a fixed ratio test Combination of the above two approaches this appears to be OECD s preferred approach, for example, a low fixed ratio as initial test with the possibility to deduct greater amount if this is supported by group specific calculations 45

46 Action 5 Harmful tax regimes Action Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime. It will take a holistic approach to evaluate preferential tax regimes in the BEPS context. Outcome Report (agreed draft) September

47 Action 5 Harmful tax regimes Substantial Activity Intellectual Property regimes the nexus approach Nexus proportion of IP net income benefits, depending on proportion of expenditure that is qualifying - links to front-end IP reliefs like R&D credits must be a direct nexus between the income and the previous expenditure. Purpose - benefits only where the actual R&D activity was undertaken by the taxpayer itself. Acquired IP assets do not qualify. Only patents (and other IP assets that are functionally equivalent to patents) marketingrelated IP assets such as trademarks cannot qualify. What is qualifying expenditure can be decided by each country, but it must only include expenditure necessary for actual R&D activity Nexus approach allows expenditure on unrelated party services to be considered as qualifying but not if the same expenditure is with a related party (even if it was otherwise good ). Qualifying income may include embedded income 30% uplift in qualifying expenditure for related outsourcing and acquisition costs Close existing to new joiners 2016 benefits continue until

48 Action 5 Harmful tax regimes Rulings Agreed draft report also included a framework on compulsory spontaneous exchange of rulings for preferential regimes 48

49 BEPS Action Plan Digital economy / multilateral instrument No Action Area of focus OECD Deadline(s) 1 Address the tax challenges of the digital economy Digital economy Delivered - Sept Neutralise the effects of hybrid mismatch arrangements Coherence Delivered - Sept Strengthen CFC rules Coherence September Limit base erosion via interest deductions and other financial payments Coherence September / December Counter harmful tax practices more effectively, taking into account transparency and substance Coherence Delivered - Sept 2014 Further Input - September / December Prevent treaty abuse Substance Delivered- Sept Prevent the artificial avoidance of PE status Substance September Assure that transfer pricing outcomes are in line with value creation: intangibles Substance Delivered - Sept 2014 Further input -September Assure that transfer pricing outcomes are in line with value creation: risks and capital Substance September Assure that transfer pricing outcomes are in line with value creation: other high-risk transactions 11 Establish methodologies to collect and analyse data on BEPS and the actions to address it Substance September 2015 Transparency September Require taxpayers to disclose their aggressive tax planning arrangements Transparency September Re-examine transfer pricing documentation Transparency Delivered - Sept Make dispute resolution mechanisms more effective Transparency September Develop a multilateral Instrument Multilateral instrument Delivered - Sept 2014 Further Input - December

50 Action 1 Address the tax challenges of the digital economy Action Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation. Issues (non-exhaustive) include: Ability to have a significant digital presence in another country without liability to taxation due to lack of nexus (i.e. permanent establishment issues) Attribution of value created from marketable location-relevant data through the use of digital products an services Characterisation of income Application of rules of VAT/GST on cross border digital good/services Outcomes to date Report (agreed draft) September 2014 Discussion draft on VAT December

51 Action 1 Address the tax challenges of the digital economy The digital economy is multi-present, and should be tackled through other BEPS action items. Specific focus points: Permanent establishment exemption review of what constitutes preparatory/auxiliary activities, for example o local warehouse exemption for an 0nline retailer where proximity to customer/speed of delivery are key business drivers review the conclusion of contracts in one territory to avoid taxation in another, for example o where on-line seller uses the sales force of a local subsidiary to negotiate contracts but legal conclusion of contracts takes place electronically Transfer pricing methodologies need to be reviewed in light of importance of intangibles and data report suggests that relying upon a model which allocates a routine return to a low risk subsidiary and the balance of the return to a low tax entrepreneur company may not be approriate CFC rules may need to target types of income that typically feature in a digital economy business model Focus upon VAT administrative collection procedures 51

52 Action 1 Address the tax challenges of the digital economy The September 2014 report proposes options (no recommendations) to change tax policy due to challenges of the digital economy: Modify exemptions from permanent establishment to eliminate exceptions or make them subject to an auxiliary/preparatory standard. Establish a new nexus standard for digital business upon instance of digital presence (acknowledges new business profit allocation rules needed). Create a new rule for virtual permanent establishments for website through which business is conducted. Create a withholding tax on digital transactions. Introduction of a bandwith tax. Value added tax considerations. Consider the characterization of various payments arising in the new information and technology enabled world (i.e., cloud computing, 3D printing) 52

53 Action 15 Multilateral instrument Action Analyse the tax and public international law issues related to the development of a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral treaties. Outcome Report (agreed draft) September 2014 Desirable Technically feasible 53

54 Base Erosion and Profit Shifting (BEPS) Holding and repatriation Financing Intellectual property BEPS Transparency and disclosure Permanent establishment Operating model 54

55 Financing Hybrid mismatches - arrangements involving hybrid entities or instruments may be affected Treaty access treaty changes may prevent or restrict access to reduced rates of WHT on interest Reliance on preferential regimes likely to be subject to closer scrutiny from tax authorities Transfer pricing increased TP documentation may highlight inappropriate/inconsistent TP policies Tax deductions for interest may be restricted e.g. earning stripping (interest cover) 55

56 Holding and repatriation Treaty abuse paper - Minimum protection (LoB and PPT; PPT; or LoB and anti-conduit financing rules) - Further work (LoB, CIVs and non-civ funds) - Potential issues with LoB (complexity, not publicly owned / traded, intermediate holding companies, no active trade or business, compatibility with EU law) - Potential issues with PPT (subjectivity, uncertainty) - Alignment of holding and substance some companies may only be able to access treaty benefits if they have an active trade or business in the territory in which they are resident - Implications of new residence tiebreaker (effective management v competent authority) - Treaty protection on dividends and non-resident capital gains - Tax authorities refocusing on treaty access, even under existing rules (e.g. beneficial ownership) 56

57 Intellectual property Focus on alignment of profit and functions Loss of rulings/preferential regimes may impact IP model Loss of treaty benefits may make licensing models uneconomic 57

58 Permanent establishment Preparatory and auxiliary exemption may be changed to ensure that core business activities are not exempted The dependent agent PE rule is likely to be amended Commissionaires and certain other business models vulnerable Profit attribution to PEs? Treaty access anti-triangulation rules As well as PE implications, working in a different country may also lead to individual tax burden on the employee and withholding, social security and pension obligations on the employer in the new country 58

59 Operating model The level of substance in any central companies will be a key area of focus going forward Centralised business models with insufficient substance my be subject to transfer pricing adjustments, imputed PEs, recharaterisation of model Business models particularly affected are likely to be procurement models, commissionaires, centre-led models and IP companies Digital paper concludes that any solution is best found through the rest of the BEPS workstreams Indirect taxes are often one of the key areas affected by changes to operating models - Further BEPS work on collection of VAT in B2C transactions 59

60 Transparency & Disclosure TP documentation requirements are increasing Country by country reporting will result in increased transparency across all taxes - Highlight use of preferential regimes, misalignment of profit and substance, and differences in approach between territories Interaction of BEPS proposals with other country by country reporting regimes (e.g. EU Accounting Directive) and information sharing mechanisms (e.g. pan-eu VAT return data sharing) 60

61 Thank you!