When The Dust Has Settled (Part 1)

Transcription

1 When The Dust Has Settled (Part 1) Elaine Ng, Tax Partner 15 August 2017

2 Let s shake up the dust ITA NOA GST IRAS DTA SDA EEIA 2

3 Let s shake up the dust CbCR PPT AEOI MAAL BEPS DPT MLI FHTP DEMPE 3

4 Who stirred up the storm? 4

5 A typical MNC structure around 2008 Parent / TopCo Principal HoldCo IP Co Local OpCos Low tax Finco Operating model debt 5

6 A quick recap 6

7 OECD BEPS Project Overview of Action Plan Items and Timeline February 2013 : BEPS Report 19 July 2013 : Action Plan for BEPS Sept & December 2014: BEPS Drafts 5 Oct 2015 : Final reports issued Early 2016: Follow-on work on a number of items ACTION 1: Address the challenges of the digital economy ACTION 2: Neutralise the effect of hybrid mismatch arrangements ACTION 3: Design effective controlled foreign corporation (CFC) rules ACTION 4: Limit base erosion via interest deductions and other financial payments ACTION 5: Counter harmful tax practices more effectively - transparency and substance ACTION 6: Prevent treaty abuse ACTION 7: Prevent the artificial avoidance of permanent establishment (PE) status ACTION 8: Align transfer pricing (TP) outcomes with value creation - intangibles ACTION 9: Align TP outcomes with value creation - risks & capital ACTION 10: Align TP outcomes with value creation - other high-risk transactions ACTION 11: Measure and monitor BEPS ACTION 12: Mandatory disclosure of aggressive tax planning arrangements ACTION 13: TP documentation and country by-country reporting ACTION 14: Make dispute resolution mechanisms more effective ACTION 15: Develop a multilateral instrument to modify bilateral tax treaties Coherence Substance Transparency 7

8 Summary of recent key changes in tax regulations Quick scan of changed in key global economies United States Proposed Section 385 changes Impact on related debt financing FY 2016 Obama Budget proposals incorporating BEPS action points Consultation on/ proposals on codification of Economic Substance United Kingdom Diverted Profits Tax introduced on 1 April 2015 HMRC guidance on corporate tax loss refresh prevention BEPS implementation Hybrid mismatch and Countryby-Country Reporting (CbCR) Netherlands Introduction of TP documentation and CbCR rules Decrees to address the perceived improper use of Dutch tax treaties and tax law by financial services companies Decree to clarify proper implementation of arm s length principle China Focus on transfer pricing - substance, value creation and local intangibles Public Notice 16 on intragroup outbound payments Public Notice 7 on indirect equity transfer Release of administrative measures on GAAR Brazil Issuance of TP guidance on commodities pricing and financing transactions Interest deductibility limitations Issue of guidance on new Brazil CFC rules. Proposed amendments to reintroduce WHT on dividends paid out of profits Indonesia Issue of guidance on APA process Tax audit focus on companies suspected of abusing tax treaties, intercompany transactions with offshore entities and O&G / mining companies India 2016 Union Budget: Introduction of CbCR Core issues disputes around Permanent Establishments (PEs) and TP New APA program Australia Multinational Anti- Avoidance Legislation (MAAL) and CbCR Updated thin capitalisation rules in line with BEPS Keen scrutiny/ focus on tax practices of MNCs

9 Where are we now? 102 Members of the Inclusive Framework on BEPS at 6 July

10 As the dust settles, four minimum standards arise 10

11 Four Minimum Standards under IF Increasing Transparency Enhancing Dispute Resolution BEPS Associate Countering Harmful Tax Practices Preventing Treaty Abuse 11

12 Increasing tax transparency: Impact of CbCR CbCR in a nutshell CbCR is of particular interest to many MNC groups Disclosure of key information on country-by-country basis Financial information (e.g., revenues, profit before tax, income tax paid, capital etc.); against Economic indicators (e.g., business activity, asset base and headcount) CbCR template submitted to and automatically exchanged between tax authorities (AEoI) 1 New global compliance requirement Tax jurisdiction Unrelated party Revenues 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 employees Tangible Assets (other than cash and cash equivalents) 2 Transparency over global profit allocation and value chain 12

13 Hypothetical case study - CbCR Country Activity TP Policy AE Third PBT % of Global Tax Employees Revenues Party Profits Revenues Japan Owner of Residual profits Japan Owner of intangibles Royalty % (Parent) intangibles / losses (Parent) Residual profits 230 Key Facts: China Distributor Distribution + Routine net margin % 9 20 China Contract Contract 1, Japan is the parent entity 120 and owns the 21% IP Manufacturing Cost Plus Manufacturer 2. India performs contract R&D India Contract R&D R&D 375 Cost Plus % 20 China acts as a contract manufacturer and sells to Japan 100 Australia Distributor Gross margin % China and Australia act as a distributor for Japan - 18 Korea Singapore Japan China India Australia Korea Singapore Licensed Manufacturer (entrepreneur) Residual profits Entrepreneur Entrepreneurial profits (Acquired business) 5. Korea is a licensed manufacturer and pays royalty to Japan Total Global Profits % Singapore is an entrepreneurial entity and recently merged in the group % Slide 13

14 Global adoption of CbCR (only key and /or major economies indicated) Implement as from 1 Jan 2016 Implement on or after 1 Jan 2017 Announcement (including signing up to CbCR MCAA - but no details) Americas Canada US (30 June 2016; voluntary filing) Mexico Europe Denmark Finland France Germany Luxembourg Netherlands Norway South Africa Turkey UK Etc. APAC Australia New Zealand China India (1 April 2016) Japan (1 April 2016) Indonesia Korea Americas Uruguay Europe Switzerland (as from 2018; but voluntary filing) Iceland APAC Singapore (voluntary filing for 1 Jan 2016) Malaysia Vietnam Others Americas Argentina Peru Europe A number of African states APAC Hong Kong Taiwan (As at 29 June 2017) Others Guernsey (under consultation) JLL Others Bermuda Jersey (still in consultation) (*A number of territories are still consulting June on their 2016 CbCR implementation. Details (e.g., timing) may change) 14

15 Countering Harmful Tax Practices Compulsory spontaneous exchange of information on certain tax rulings Taxpayer specific rulings related to preferential regimes Cross border unilateral APAs and other unilateral tax rulings on TP PE rulings Related party conduit rulings Any other type that gives rise to BEPS concern 15

16 Countering Harmful Tax Practices Realigning the location of taxation with the location of the underlying economic activity and value creation Peer review of some preferential regimes completed and rest underway some eliminated Cash box goodbye! IP box modified nexus approach 16

17 Countering Harmful Tax Practices Source: Inclusive Framework on BEPS Progress Report Jul 16 to Jun 17 17

18 Countering Harmful Tax Practices Source: Inclusive Framework on BEPS Progress Report Jul 16 to Jun 17 18

19 Preventing Treaty Abuse Anti-abuse provisions and explicit statements will be included in tax treaties Bilateral negotiations Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS aka MLI Sandwiches goodbye? Death of SPVs? 19

20 Enhancing Dispute Resolution Mechanisms MAP procedures will be improved and mandatory binding arbitration being introduced Peer review of MAP process - ongoing More MAP resources and clearer guidance Arbitration final offer (baseball arbitration) 20

21 Introduction to the Multilateral Instrument 70 Members have signed up to MLI at 11 July

22 MLI: Key principles 7 June 2017: Singapore signs the Multilateral Convention To Implement Tax Treaty Related Measures To Prevent Base Erosion And Profit Shifting (BEPS) The MLI provides a convenient mechanism for countries to update their treaties to implement measures to counter BEPS. Singapore has committed to: Prevent treaty abuse (adopting the principal purpose test) Enhance dispute resolution Adopt mandatory binding arbitration (choosing the final offer option) to help facilitate resolution of cross border disputes Singapore has identified 68 double tax agreements to be updated through this instrument. Updates will only take place when both countries agree on changes. 22

23 MLI: Key principles 7 June 2017: Singapore signs the Multilateral Convention To Implement Tax Treaty Related Measures To Prevent Base Erosion And Profit Shifting (BEPS) Implications: How do multinationals respond to the increase in coordination between tax authorities, but not necessarily harmonisation of tax rules? Planning - consider heightened standard for treaty access Review consider legacy arrangements in the light of evolving standards and changes in business model Calibrate dispute prevention and resolution strategy through mutual agreement procedure and advance pricing agreements in an increasing tax transparent environment 23

24 Singapore s BEPS position 24

25 Singapore: BEPS position BEPS aligned actions taken to date 21 June 2017: Singapore signed the Multilateral Competent Authority Agreement on the exchange of CbC Reports ( MCAA CbCR ) 7 June 2017: Singapore signed the Multilateral Convention To Implement Tax Treaty Related Measures To Prevent Base Erosion And Profit Shifting Singapore Budget 2017: Announcements on enhancing Singapore s tax incentive regime 10 October 2016: Singapore releases e-tax guide to provide practical guidance on implementation of Country by Country Reporting in Singapore 16 June 2016: Singapore becomes BEPS Associate Singapore commits to implementing the four minimum standards under the BEPS project: 1. Transfer pricing documentation - Country by Country Reporting ( CbCR ); 2. Enhancing dispute resolution; 3. Countering harmful tax practices; 4. Preventing treaty abuse. 20 January 2016: Singapore deposited its instrument of ratification for the Convention on Mutual Administrative Assistance in Tax Matters (signed 29 May 2013) on 20 January Jan 2015 and 5 Jan 2016: IRAS updated TP Guidelines which includes contemporaneous TP documentation requirements 25

26 The dust is still settling 26

27 What will change? 1 2 OECD recommendations for Changes to domestic legislation Amendments to OECD Model Treaty and Commentary Amendments to OECD Transfer Pricing Guidelines Multilateral Instrument for implementing Tax Treaty Related measures Unilateral action and behavioural changes from tax authorities 3 4 Impact of tax transparency Country-by-Country Reporting and automatic exchange of information Spontaneous exchange of tax rulings Digital Economy 27

28 MLI and beyond Minimum standards Reinforced international standards Common approaches & best practices Analytical reports & measuring BEPS Action 5 MLI Action 7 Action 1 Action 11 Counter harmful tax practices Prevent the artificial avoidance of PE status Digital economy Data analysis MLI Action 6 MLI Action 2 Action 15 Prevent treaty abuse Action 13 Re-examine transfer pricing documentation MLI Action 14 Dispute resolution Actions 8-10 Aligning transfer pricing outcomes with value creation: Intangibles; Risk and capital; and Other high-risk transactions Neutralise the effects of hybrid mismatch arrangements Action 3 Strengthen CFC rules Action 4 Limit interest deductibility Develop a multilateral instrument Action 12 Mandatory disclosure rules 28

29 BEPS impact of typical MNC structure BEPS overlay Impact on BEPS Action Plan Item Parent / TopCo Disclosure and transparency ParentCo. TP / CbCR CFC Harmful Tax Practices Treaty Abuse Principal HoldCo Operating model ParentCo. Principal IP Co. OpCo. TP PE CFC Harmful Tax Practices Treaty Abuse Digital Economy IP Co Operating model Local OpCos debt Low tax Finco Hold Co and Financing HoldCo. Lender Borrower Treasury Harmful Tax Practices Treaty Abuse Hybrid mismatch Interest deductibility limitations TP (e.g., guarantees, interest rates) 29

30 The Future of Taxation TRANSPARENCY SUBSTANCE DISPUTE RESOLUTION 10

31 Thank you The information contained in this presentation is for general guidance on matters of interest only and is not meant to be comprehensive. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PricewaterhouseCoopers Singapore Pte.Ltd. client service team or your other tax advisers. The materials contained in this presentation were assembled in July 2017 and were based on the law enforceable and information available at that time PricewaterhouseCoopers Singapore Pte. Ltd. All rights reserved. In this document, refers to PricewaterhouseCoopers Singapore Pte. Ltd. or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate legal entity. 31