BEPS: What has been, what is to come and its impact on business in Asia

Transcription

1 BEPS: What has been, what is to come and its impact on business in Asia Chris Xing, KPMG China Vinod Kalloe, KPMG Amsterdam Umang Daiya, KPMG Singapore 6 May 2015

2 Agenda Welcome OECD and EU fight against Base Erosion and Profit Shifting BEPS and ASPAC countries in focus: - China - Australia - Japan BEPS and India 2

3 OECD and EU fight against Base Erosion and Profit Shifting an interim state of play Vinod Kalloe, KPMG Amsterdam

4 Most OECD members also EU members OECD EU member G-20 OECD Member G-20 Non-OECD member OECD Members other AT, BE, BG, CZ, DK, EE, FI, FR, DE, EL, HU, IE, IT, LT, LU, NL, PL, PT, SK, SI, ES, SE, UK EU/non-OECD: CY, HR, LV, MT, RO CAN USA MEX TUR AUS S.KOR JAP BRA RUS SAF SAU ARG CHI IND INO SWI CHIL ICE ISR NOR NZ 4

5 OECD/G20 BEPS Action Plan Timeline for the EU? September 2015 September- December 2016 to 2020 Start: 15 actions 7 deliverables published 8 deliverables Implementation? 5

6 OECD/G20 BEPS Action Plan and related EU actions OECD BEPS action points Related EU action points Unilateral examples 1 Digital economy Digital economy expert group FRA, ITA, AUS 2 Hybrid mismatch arrangements PS Directive including hybrid finance NZ, AUS EU Code of Conduct group Hybrid entities DE, UK EU Code of Conduct group Hybrid permanent establishments 3 Strengthen CFC rules EU Code of Conduct: inbound profit transfers UK, KOR, IND, TAIW RUS 4 Limit base erosion via interest deductions/other financial payments AT, BRA, CHI, FRA, MEX, BEL, AUS, JAP, MAL, THA, GER 5.1 Counter harmful tax practices EU State Aid review: Ruling practices BG EP Special committee rulings review EU Code of Conduct: Switzerland regimes EU Code of Conduct: IP regimes SWI UK, LU 6

7 OECD/G20 BEPS Action Plan and related EU actions OECD BEPS action points Related EU action points Unilateral examples 5.2 Exchange of information on preferential regimes EU Directive on Administrative Cooperation (DAC) including rulings and APAs BE EP Special Committee ruling review exchange of information 6 Prevent treaty abuse EU Parent Subsidiary Directive GAAR CHI, DK, NL, INO, JAP, MON, SA, SPA, IND, TAI, EU Interest and Royalty Directive GAAR inclusion 2015 EU: Coordinated blacklisting tax havens 7 Prevent the artificial avoidance of PE status UK DPT, MEX, ITA, CHI 8-10 Transfer Pricing: intangibles / risk/capital / other high risk transactions AUS, CHI, MAL, IND, NZ, ARG, CZ, NIG, PHI, RUS and many more 7

8 OECD/G20 BEPS Action Plan and related EU actions OECD BEPS action points Related EU actions Unilateral examples 11 Collect BEPS data AUS, CAN, CHI, 12 Mandatory disclosure aggressive tax planning UK 13 Re-examine TP documentation including CBCR EU CBCR (public) 1. Extractive Industry 2. Banks 3. Other MNEs? FRA, SPA, IND Public: AUS, DK, NOR 14 Dispute resolution mechanisms EU Joint Transfer Pricing Forum 15 Develop a multilateral instrument EU alignment coordinated implementation ISR 8

9 OECD BEPS Action 2 - Hybrid Mismatch Arrangements EU action in parallel EU amendment to Parent / Subsidiary Directive OLD: Parent NEW: Parent EXEMPTION TAXED Hybrid loan Dividend Hybrid loan Dividend EU member state 1 EU member state 2 DEDUCTION DEDUCTION Subsidiary Subsidiary 9

10 OECD BEPS Action 5 Harmful Tax Practices EU State Aid review Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 TFEU European Commission Procedural rules Focus Courts Article 107 (1) aid granted by a Member State. which distorts or threatens to distort competition by.. favoring certain undertakings.. incompatible with the internal market. Article 108.the Commission keeps constant review of State Aid Council Regulation 659/1999 Preliminary investigation Formal investigation procedure Third party comments (for all interested parties The Final decision Recovery of aid OECD BEPS Action 5 1. Tax rulings 2. Transfer pricing 3. Discretionary powers 4. Attracting foreign direct investment Judicial review For Member State: European Court of Justice For companies with direct and individual concern Court of First Instance Impact on other comparable cases 10

11 OECD BEPS Action 5 Harmful Tax Practices EU State Aid review 1 Group financing interest payments and spread Group licensing royalty payments 2 Sales and profit allocation 3 Production and manufacturing cost-plus 4 Group synergies and economies of scale 11

12 EU State Aid review Ruling Practices Lessons learned so far Indicators Advantage 1. apparent discretionary power (fixing base/rate) 2. reverse engineering (taxable base determines facts) 3. long period / open-ended period without review 1. fixed margins/base without checking / taking into account facts and circumstances, leading to lower level of taxation 2. transfer pricing not in line with the dealing at arm s length principle (prudent behavior of a hypothetical market operator) 4. no underlying transfer pricing documents 5. tax authorities, without any investigation, easily accepts the requested outcome 6. negotiating link between taxable base and certain minimum investment (employees or capital) 12

13 OECD BEPS Action 5 IP regimes EU agreement on modified nexus approach DE/UK Joint statement 11 November 2014 Nexus direct nexus between the income receiving benefits and the expenditures contributing to that income. excluding related party outsourcing and acquired IP Qualifying expenditure incurred to develop IP asset Overall expenditure incurred to develop IP asset X overall Income from IP asset = eligible IP income for the IP box Modified nexus 30% (max.) uplift qualifying expenditure (related party outsourcing and acquisition costs) 13

14 OECD BEPS Action 5.2 Exchange of Rulings EU draft legislation (DAC) 1 Tax rulings and APAs all 28 EU Member States (2005) 2 From quarterly reports 3 To all EU Member States and EU Commission (EU State Aid) 4 Push and pull mechanism 14

15 OECD BEPS Action 6 Preventing Treaty Abuse EU introducing GAAR Country R TopCo Country R TopCo No tax treaty or sub-optimal tax treaty Dividend Interest Royalties WHT (20, 25, 30%) Intermediate Co Dividend WHT (0, 5, 10%) Interest/royalties No WHT Dividend/interest/royalties WHT (0, 5, 10%) Country S OpCo Country S OpCo 15

16 OECD BEPS Action 6 Preventing Treaty Abuse EU introducing GAAR The new EU GAAR consists of two key elements: 1..an arrangement put into place for the main purpose or one of the main purposes of obtaining a tax advantage which defeats the object or purpose of this Directive and are not genuine having regard to all relevant facts and circumstances. 2. an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. 16

17 OECD BEPS Action 15 Multilateral Instrument EU alignment 2015 Purpose: to avoid cumbersome negotiations and ensure alignment (3000+ treaties in place!) Scope: treaty-based BEPS actions Characteristics: Legally binding and governed by international law Coexistence with existing treaty network: modifying existing provisions Flexibility: 'Minimum Standard': core set of provisions and opt-in/opt-out mechanism Commitments can be tailored depending on the partner country Process: Negotiated through International Conference G20/OECD/other interested countries Mandate limited in time (max. 2 yrs) Start:

18 OECD and EU BEPS key messages Consider risk hybrid entities and hybrid financing Consider business substance in structures such as holding, finance and license arrangements including IP location Consider permanent establishment risks Develop/strengthen transfer pricing approach including documentation and country by country report Scan tax rulings and review ruling practices (transparency and State Aid) Prepare strategy for public communication on tax positions 18

19 China, Australia, Japan and BEPS

20 Chinese government policy on BEPS President Xi address to G20 Summit and SAT Measures China s support for enhanced global cooperation to address international tax avoidance Subsequent SAT measures linked to speech New GAAR (Dec 2014), Announcement 16 (Mar 2015) Future measures linked to Xi speech China law integration of BEPS Deliverables, SAT 3 year plan * Source: SAT Announcement

21 China actions on BEPS Transfer Pricing CFC/ Hybrids - Circular 38 outbound reporting - Hybrid rules late 2015* Digital Economy and EoI - Online shopping platforms to report on e- retailers - EoI through Multilateral Convention, China s FATCA, and TIEAs Indirect disposals - Announcement 7 [2015] - More anchored in GAAR analysis - Wider range of transactions caught - Penalties and interest for non compliance - WHT for purchasers a real challenge Treaty shopping - Circular 601 economic substance approach to determine beneficial ownership - Challenges to DTA relief progressively in line with new GAAR Measures (Circular 32) - Examination of dividend DTA WHT relief in Circular 317 (August 2014) - Likely roll out of CbC reporting - Self-adjustments supported by Circular 54 [2014] - LSAs - Examination of cross border royalty and service fee payments (Circular 146 and Circular 16) * Source: SAT Announcement

22 R&D Hold/manage ip Purchasing & Procurement Manufacturing & Production Sales, Marketing & Distribution Administrative, Management & Support Services External Service Business Internal Group Finance Regulated Financial Services Insurance Holding Company Dormant Other CBC Template Model CBC template consists of (1) selected financial data by country and (2) business activities within each country. CbyC Template Page 1 Revenue Country Related Party Unrelate d Party Total Profit (Loss) before Income Tax Income Tax Paid (on a Cash Basis) Income tax Accrued Current Year Stated Capital Accumula ted Earnings Number of Employees Tangible Assets Other than Cash and Cash Equivalents Country A Country B CbyC Template Page 2 (onwards) Activities Country Constituen t Entities Resident in Country Country of Organizatio n or Incorporati on if Different from Country of Residence Country A Entity A Country B Entity B 22

23 Enhanced China TP reporting to impact on China tax enforcement Employees by Location Chinese tax authorities currently collate information on global value chain mainly through TP audits Incorporation of BEPS CbC elements to allow TP risk assessment and audit selection at lower revenue thresholds Operating profit by Location Strong interest shown in group value chain suggests beefed up information gathering Chinese tax authority s TP data analytics capacities to be combined with other data pooling Expected that profit attributions for trading, group financing and IP structures to lead to more PE challenges 23

24 Australia action on BEPS Transfer pricing -ATO enabled to reconstruct cross border transactions (July 2013) - Increased documentation requirements 2014* Proactive government - Joint cooperation with UK gov on MNE avoidance announced 19 April - BEPS package in Budget 12 May - Senate inquiry report on MNE avoidance in June Interest deductions - New thin cap debt to equity safe harbor of 3:2 (reduced from 3:1 from July 2014) - Reduced from 20:1 to 15:1 for non-bank financial entities * Source: ATO Announcement 2014 Transparency and investigation Review program (from late 2013) led to greater information sharing with Foreign Investment Review Board Australia s first automatic exchanges under Common Reporting Standard in 2018 From July 2015, large groups must publish their accounting profit, taxable income and tax payable 24

25 Japan action on BEPS Auto EoI Digital Economy - Digital services from foreign suppliers to Japan B2B and B2C subject to consumption tax from 1 Oct 2015 Hybrids - Foreign dividend exclusion (FDE) - Where div received in Japan is deductible to paying foreign sub then no Japan exemption (Apr 2016) Exit Tax - Prevent wealthy Japanese individuals avoiding tax on capital gains by moving out of Japan with appreciated financial assets presale - Exit tax on unrealized capital gains (July 2015) - Enhanced bank account reporting requirements for Japan account holders to support automatic exchange of information (Jan 2017) 25

26 India and BEPS

27 India s perspective on BEPS BEPS has been a cause of concern for India for a long time Avenues for BEPS Excessive payments in respect of interest, service charges, management / technical fees and royalties Aggressive Transfer Pricing arrangements by MNEs (for eg. supply chain restructuring) No guidance on identification of intangibles and their valuation in Indian Regulations Inability to tax digital enterprises Artificial avoidance of PE status Treaty shopping Indirect transfer of assets located in India 27

28 India s response to BEPS Developing a robust Transfer Pricing (TP) audit system Extensive definition of intangibles inserted in Indian TP regulations Suggestion of applying withholding tax on all payments for digital transactions Indirect transfer provisions introduced to tax transfer of assets located in India Expansion of ambit of royalties subject to tax in India Introduction of General Anti- Avoidance Rules in domestic law (effective 1 April 2017) LOB a key component of India s recent tax treaties India welcomes BEPS initiatives undertaken by the OECD 28

29 Impact of OECD s BEPS recommendations in India E-commerce business models likely to be subjected to increased scrutiny in India vis-à-vis: PE assertions by the Revenue Authorities / tax exposure on account of significant digital presence in India Characterization of payments for new digital products / services (eg. cloud computing) Potential re-characterization of hybrid instruments (eg. CCDs) issued by Indian entities Possible denial of tax treaty benefits to cases involving treaty shopping Need of the hour is to evaluate business models/ investment structures, assess risks and identify remedial measures 29

30 Impact of OECD s BEPS recommendations in India Guidance on TP aspects of intangibles Through a clarification issued in 2013, India has advocated the Significant Peoples functions test for compensation related to intangibles in line with OECD Possibility of in-depth scrutiny by the Indian Revenue authorities on transactions involving intangibles (location savings, assembled workforce, group synergies etc.) Proposed 3 tier documentation structure India is geared to adopt the 3 tier documentation structure as soon as practicable. The TP audit trend in India indicates that there may be a temptation to use the data from the Master File and CbC report for purposes other than just risk assessment. Businesses should look beyond the legal structures and legal contracts and focus on SPF analysis to identify where actual value is created 30

31 KPMG Contacts Chris Xing Asia Pacific Regional Leader for International Tax, KPMG in China T E. Vinod Kalloe Head of International Tax Policy KPMG Meijburg & Co T. +31 (0) E. Umang Daiya Director, India Tax Desk, KPMG Singapore T E. 31

32 kpmg.com/socialmedia 2015 KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.