IFA Colombia V CONGRESO COLOMBIANO DE TRIBUTACIÓN INTERNACIONAL November 2016

Transcription

1 IFA Colombia V CONGRESO COLOMBIANO DE TRIBUTACIÓN INTERNACIONAL November 2016 Kees van Raad Professor of Law, University of Leiden Chairman International Tax Center Leiden Of counsel, Loyens & Loeff

2 Overview of issues discussed Tax treaties (60 mins): o Anti-hybrids TT rule (BEPS Action 2) o LOB / PPT (BEPS Action 6) o Artificial avoidance of the PE status (BEPS Action 7) o New MAP and arbitration rules (BEPS Action 14) o Multilateral Instrument (MLI BEPS Action 15) Transfer pricing (20 mins): o Overview of outcomes of BEPS Actions 8 to 10. o Effect of those outcomes on the attribution of profits to PEs. o CbCR (BEPS Action 13) o Overlap of BEPS Action 4 and Art 9 of the OECD MC.

3 Overview of issues discussed

4 BEPS Action 2 hybrid entities Proposed rule (new 2d para. of Art. 1): 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 law 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 purposes of taxation by that State, as the income of a resident of that State > cf. OECD 1999 Partnership Rep. & Art. 1.6 US 2016 Model > applies also to other hybrid entities than partnerships > more detailed Commentary

5 BEPS Action 2 hybrid entities 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 law 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 purposes of taxation by that State, as the income of a resident of that State

6 BEPS Action 2 hybrid entities Trilateral -- Case (a) [OECD Comm Art. 1, 6.5] If State E treats its partnership as nontransparent (and taxes the income to the partnership) and State P treats the partnership as transparent and taxes the income to the partners, then State S is restricted by both the S-E treaty and the S-P treaty [irrespective how State S itself views the partnership]. However, in E-P treaty States E and P may agree that treaty benefits may be claimed only by the partnership (E) and not by the partners (P)

7 BEPS Action 2 hybrid entities

8 BEPS Action 6 int l tax avoidance O BEPS Action 6 minimum standard: implement LOB and/or PPT + changes to treaty title and preamble O Two options of LOB clauses: simplified or full version. O One option of PPT clause. O To be implemented through the MLI. O Key issues: Interaction of these clauses with domestic anti-abuse provisions. Interaction of these clauses among themselves. Application of the LOB clause to holding and financing companies. Differing choices made by two Contracting Parties in the context of the MLI.

9 BEPS Action 6 int l tax avoidance As a general rule, there is no conflict between domestic anti-abuse rules and tax treaties O This was conclusion in OECD Comm. 1, Sec O Confirmed by Final Report on BEPS Action 6 and by proposed changes to the OECD Comm. But two specific situations: In some cases, treaties may expressly allow the application of domestic anti-abuse rules. In other cases, treaty application depends on application of domestic law (>> thus: if application domestic law is controlled by the domestic anti-abuse rules, application of treaty is also affected). O In line with OECD and BEPS recommendations, some treaties recently concluded by Colombia already include clauses that expressly allow the application of domestic anti-abuse provisions (see treaties with India, Portugal and Czech Republic). O What about those that do not include any anti-abuse provision?

10 BEPS Action 6 int l tax avoidance LOB clauses can have a very restrictive effect in the case of structures using holding companies when the shareholders of the holding company are located in third countries. The usual structure of LOB clauses, including the one proposed by the OECD, comprise 5 tests (`safe havens ) : Qualified persons test (individuals, governments and state-owned entities, pension funds, etc.) Publicly traded test Ownership and base erosion test Active business test Derivative benefits test Most of these tests cannot be passed by a pure holding entity whose shareholders are more than 50% residents of another jurisdiction.

11 BEPS Action 6 int l tax avoidance Application of the LOB test to a holding structure: Qualified persons test Publicly traded test Ownership & base erosion test Active business test Derivative benefits test

12 BEPS Action 6 int l tax avoidance Application of the PPT test to a holding structure: PPT test : not mechanical but requires judgement no express exclusion for the activity of making and managing investments examples (F, G and H) are provided in draft Commentary of cases where use of HC is legitimate but HC must have higher degree of substance

13 BEPS Action 6 int l tax avoidance Most of the treaties concluded by Colombia an anti-abuse provision include O With the exception of the treaties with Spain and Switzerland, all Colombian treaties include a specific anti-abuse provision. O The most common provisions are of two kinds: One is denominated Limitation on Benefits but is similar, in substance, to a PPT rule. The other type contains specific wording establishing an ownership test, paired with a derivative benefits clause that is not similar to the OECD LOB or PPT and intends to prevent granting benefits to entities that are perceived as conduits (including holding companies). O Which kind of anti-abuse provision will adopt Colombia in the MLI? O Will the currently existing provisions be replaced by those in the MLI or supplemented by them?

14 BEPS Action 6 int l tax avoidance Choice of anti-abuse rule in Multilateral Instrument (`MLI ) O Cafeteria approach of the MLI: allows two treaty partners to select two different kinds of anti-abuse rule to comply with the minimum standard. Example: State X selects a PPT clause while State Y selects the simplified LOB plus the application of domestic anti-abuse provisions. O How to deal with this? Allow different choices by the two parties to the relevant treaty (similar to what happens in the context of Art. 23, where each Contracting State may have different mechanisms to eliminate double taxation). Engage in bilateral negotiations to solve differences (thereby frustrating the objective of the MLI). Other options? OECD to publish final version of the MLI at the end of November 2016.

15 BEPS Action 7 `abuse of PE definition Exceptions of para. 4 of Art.5 (PE definition) O Does the E-tailer earn profits taxable in States R, B and C? O If yes, how to determine the amount of these profits?

16 BEPS Action 7 `abuse of PE definition Example 1 of structures affected by new PE definition

17 BEPS Action 7 `abuse of PE definition Example 2 of structures affected by new PE definition

18 BEPS Action 14 dispute resolution O the purpose of BEPS Action 14 measures is `to ensure certainty and predictability for business. O minimum standard (= must be implemented by all BEPS states): peer monitoring to ensure implementation of the minimum standard promotion of implementation of best practices. some States (not all) will in addition implement mandatory binding arbitration. all to be implemented through the MLI.

19 BEPS Action 14 dispute resolution By adopting the minimum standard, all countries taking part of the BEPS Project have committed to: Include para.s 1 to 3 of Art 25 (MAP) OECD Model in their tax treaties Provide access to MAP in transfer pricing cases. Timely solve MAP cases (average timeframe of 24 months). Implement the result of MAP cases. Enhance existing relationships between Competent Authorities so as to increase the effectiveness of MAP and ensure that the officials in charge of solving MAP cases actually have the authority to make decisions and commit the State without requiring the authorization of other officials. Prepare rules, guidelines & procedures to access and use MAP. Set up the FTA MAP Forum and be subject to peer review in the context of the Forum..

20 BEPS Action 14 dispute resolution Some considerations on mandatory binding arbitration Countries committing to it amount to 90% of all MAP cases. Final wording of the treaty provision to be published as part of the work on the MLI. Effective resolution of MAP cases. Harmonization of interpretation and application of tax treaty rules Concerns about sovereignty and about the independence of arbitrators. Parallel work outside the OECD: the TRIBUTE initiative.

21 BEPS Action 15 MLI Challenges of the MLI: Achieve adequate level of standardization while allowing flexibility for a wider spectrum of countries to take part. Use of compatibility clauses or application of the lex posteriori rule of Art 30.2 of VCLT. Identification of treaty provisions to be replaced or supplemented (differences in location, numbering, language, etc). Modification of treaties in languages other than English or French.. Differences in treaty policies towards different treaty partners (treatyby-treaty reservations?) Coherence in the application of the treaty rules (legal status of final reports, new commentary and other relevant materials).

22 BEPS Action 15 MLI Other issues: application of the new rules in time When will the new tax treaties rules become effective? Will the new rules affect existing structures or only structures implemented in the future? In particular: Will the new rules on treaty abuse turn into abusive arrangements certain structures that were not sanctioned as abusive before BEPS? Will taxpayers have newly created PEs as a consequence of the new rules, even though the structures and relevant circumstances will remain the same? Can it be argued that applying the new rules to existing structures is retroactive?

23 BEPS Action 15 MLI Opportunities opened by the MLI: New way to update tax treaties? Potential implementation of future changes to the OECD/UN MC. Homogenization of tax treaty rules (beyond the use of a common, non-binding model). Other issues: Potential use of treaty provisions incorporating existing Commentary as authorized interpretation by the competent authorities of the Contracting States.

24 BEPS Action 8-10 Aligning Transfer Pricing Outcomes with Value Creation O revamps the guidance on the interpretation of the arm s length that enterprises carrying on the value-generating economic activities O guidance on the arm s length principle shifts from a more legal analysis based on contractual arrangements and legal ownership towards a more substance approach, focusing on the value generated by the activities performed by the associated enterprises O on 23 May 2016, the OECD Council approved the inclusion of the new guidance on the Transfer Pricing Guidelines In addition to the Final Report, the OECD has also released on the 4 July 2016 a Public Discussion Draft on Revised guidance on profit splits, and the Document for Public Review on Conforming amendments to Chapter IX of the Transfer Pricing Guidelines.

25 BEPS Actions 8-10 The impact on profit attribution to PEs Under Art. 7.2 OECD MC, profits should be attributed to PEs as if they were a separate and independent >> as a result of deeming the PE as a separate enterprise, the Transfer Pricing Guidelines are applicable by analogy >> Changes introduced by BEPS Actions 8-10 will therefore impact on) the attribution of profits to PEs, despite no changes introduced to the AOA. The new guidance on comparability analysis for purposes of Art. 9 OECD MC therefore to be taken into consideration when determining the arm s length price of any internal dealing entered into by the PE >> synergies (incidental positive/negative effects arising from the integration in a multinational group) may now require adjustments to the extent that they constitute clearly identifiable structural advantage or disadvantage >> locational advantages derived from the functions performed by the PE that are not passed on to third party customers (and therefore lead to increased profits) should now be shared between PE (as if it were a separate enterprise) and other group members in accordance with local comparables

26 BEPS Actions 13 country-by-country R The purpose of BEPS Action 13 is to ensure that all countries where multinational groups operate have access to information on the global allocation of profits, level of physical and human presence (e.g.: number of employees) and the amount of tax paid in each country. For these purposes, MNEs will be required to submit: a local file in the jurisdiction in which they operate, providing details regarding the controlled transactions entered into a master file with information on the worldwide operations and transfer pricing policies, which should be submitted to all the tax authorities of the countries where the group operates a country-by-country report : a separate form (with template similar in all jurisdictions) providing overview of group s activities, including operations, revenue, taxes paid, total number of employees and assets owned worldwide Implementation of these reporting obligations should be effective for fiscal years beginning on/after 1 January MNEs with an annual consolidated turnover below 750 million: exempt from filing the country-by-country R

27 BEPS Actions 13 country-by-country R The country-by-country report must be submitted only in the country of the parent company of the group (State P). The tax authorities of State P will subsequently exchange information automatically with all the other countries Should State P fail to exchange information with other countries, another member of the group (e.g. Sub Co. 1 or Sub Co. 2) should file the documents on behalf of the parent company. In case State P does not have country-by-country report rules, reporting obligations must be complied within the jurisdiction where the most significant activities take place (e.g. State S-1 or S-2). P Parent Co. S-1 Sub Co. 1 Sub Co. 2 S-2 PE PE S-3 Sub Co. 3

28 BEPS Action 4 overlap with Art. 9 OECD BEPS also recommends a set of changes to domestic laws which, in some circumstances, may overlap with treaty provisions. In a financing transaction, there may be a clear overlap between BEPS Action 4 and Art. 9 OECD MC concerning the tax treatment of the financial expense at level of the payor: >> BEPS Action 4 recommends that the deductibility of net financial expenses should be limited to the higher of the following: (i) a de minimis monetary threshold or (ii) an amount equivalent to 10% to 30% of the EBITDA. >> Art. 9.1 OECD MC provides that countries may adjust the profits of an enterprise if they are not arm s length (primary adjustment). Art. 9.2 OECD MC then requires a corresponding adjustment in the other treaty state at the level of the other associated enterprise to avoid economic double taxation. >> If upon a corresponding adjustment under Art. 9 OECD MC, an interest expense is not deductible, there will be economic double taxation of the same item of income. No OECD guidance how to deal with this issue.

29 BEPS Action 4 overlap with Art. 9 OECD Case study L Co. enters into a financing agreement with an associated enterprise, B Co. B Co. (the borrower) pays interest of 100 to L Co. (the lender). As the higher threshold under the laws of State B is 100 (de minimis threshold), all interest expenses would be deductible by B Co. If State L adjusts the profits of L Co. under Art. 9.1 OECD by deeming that the arm s length interest would be 120, then State B would be required to make a corresponding adjustment under Art. 9.2 OECD, i.e. to allow the deduction of 120. However, since 120 exceeds both thresholds for deduction of net financial expenses, the increased interest expense (20) would not be deductible, thus leading to economic double taxation. Is there a way to avoid this outcome?.

30 ITC Leiden In 1998, the International Tax Center Leiden was set up to accommodate the rapidly increasing interest in studying and researching international tax law. 30

31 Leiden University Adv LLM Program in International Tax Law Fall term (Sep Dec) : Fundamentals of International Tax Law 4 weeks Tax Treaties 11 week Individual wealth (estate & trust) tax planning 2 weeks Spring term (Jan Jun) : Transfer pricing 4 weeks EU tax law (basic) 3 weeks US dom. tax law or Advanced EU tax law 3 weeks Customs duties and excise taxes 1 week VAT or Advanced transfer pricing 4 weeks US international tax law 3 weeks Corporate international tax planning 2 weeks Paper [30-50 pages] 7 weeks >> see further at 231

32 If you want to learn more about international tax law, you should consider enrolling in the Leiden Adv LLM Program in International Tax Law. If you cannot go for a full year, you should think about taking only 1 or 2 of the Program s courses. If you do not have the time for 1 or 2 courses, you may want to treat yourself (or your top associates) to 1, 2 or 3 weeks of Summer Course in Leiden each year in July >> Always feel free to contact me at: mail@vanraad.eu 32

33 33

34 34

35

36

37