Panellists. Rodney Lawrence Principal, Global Head of International Tax. Chris Xing Partner. Stephen Carpenter. Girish Vanvari. Kozu Takayuki.

Transcription

1 Rodney Lawrence Principal, Global Head of International Tax Panellists - KPMG in the US Chris Xing Partner KPMG in China Stephen Carpenter Partner KPMG in Australia Girish Vanvari Partner KPMG in India Kozu Takayuki Partner KPMG in Japan

2 KPMG International Tax website International Tax

3 OECD BEPS Action Plan Action Deadline Action Deadline 1 2 Addressing the tax challenges of the digital economy Neutralise the effects of hybrid mismatch arrangements Sept 14 Sept 14 3 Strengthen CFC rules Sept Limit base erosion via interest deductions/other financial payments Counter harmful tax practices more effectively taking into account transparency and substance Sept/Dec 15 Sept 14 & Sept/Dec Assure that TP outcomes are in line with value creation: risks/capital Assure that TP outcomes are in line with value creation: other high-risk transactions Establish methodologies to collect and analyse data on BEPS/actions to address it Require taxpayers to disclose their aggressive tax planning arrangements Sept 15 Sept 15 Sept 15 Sept Re-examine TP documentation Sept 14 6 Prevent treaty abuse Sept 14 7 Prevent the artificial avoidance of PE status Sept Make dispute resolution mechanisms more effective Sept 15 8 Assure that TP outcomes are in line with value creation: intangibles Sept 14 & Sept Develop a multilateral instrument Sept 14 & Dec 15 Sept 2014 deliverables OECD released Discussion Drafts Oct/Nov/Dec 2014

4 Panel Questions

5 Panel Question Enhanced tax enforcement concurrent with BEPS initiative. The most significant new tax law/enforcement initiatives, allied to BEPS, launched in their jurisdictions since the commencement of the BEPS Action Plan? To what extent are initiatives launched actually divergent from the BEPS initiative?

6 Panel Question Tax Treaties. It may be said that some ASPAC jurisdictions, such as China, were ahead of the game in toughening up the granting of treaty benefits prior to the launch of the OECD/G20 BEPS initiative. The OECD has put forward an LOB/Principal Purpose Test treaty-based anti-abuse approach to tackling treaty shopping. Do the panelists consider that their countries will instead continue to adhere to anti-treaty shopping approaches developed pre-beps?

7 Panel Question Transfer Pricing (TP). MNEs have faced increasing TP challenges in recent years, and risk of double taxation, as a result of divergence from the traditional TP approach in the TP approaches taken e.g. India, with their greater focus on functions, assets, and market characteristics (e.g. LSAs), and downplaying of legal ownership and financing of IP, and contractual allocation of risks, in allocating profits. Does the panel consider that these TP proposals will contribute towards maintaining an agreed common global approach to TP? Would this agreed common approach, coupled with the proposals (in the December 2014 draft) for improving dispute resolution mechanisms, be sufficient to limit TP controversies and double taxation outcomes?

8 Panel Question Interest deductions. Many ASPAC jurisdictions still have capital controls in place limiting the use of cross-border financing tax planning. Would the BEPS proposals for the capping of interest deductions on the basis of worldwide MNE group gearing likely to impact on MNE operations in your jurisdiction?

9 Panel Question Information exchange initiatives. A substantial expansion of information collection and exchange between tax authorities is foreseen both by the BEPS Action points (e.g., CbC reporting, spontaneous compulsory exchange of tax rulings, mandatory reporting of aggressive tax planning, and through FATCA platform). Given the high technical/administrative demands this would place on tax authorities, what do the panel think would be a realistic timeframe for the rollout of these initiatives in ASPAC jurisdictions and would the tax authorities, in reality, be in a position to actually use such information? Which of the information collection/exchange initiatives do the panel consider give rise to the greatest concerns for taxpayers?

10 Panel Question Novel initiatives. Can the panel point to other novel international tax law/enforcement initiatives being pursued in ASPAC which may be difficult to reconcile with other countries tax systems, even with the greater degree of international harmonization/co-ordination provided for through the BEPS changes?

11 Panel Question Japan. It has been commented that Japanese MNES, since the launch of the BEPS initiative, have shown even greater interest in implementing international tax planning arrangements, given the awareness created of the potential advantages. Have you noted a keener interest in implementing tax efficient planning, to the extent possible within the emergent new global framework.

12 BEPS and Tax structuring evaluation in ASPAC - Case study

13 Contract manufacturer / IP holding structure Technology and marketing intangibles transferred to Singapore Co and ongoing payments for update by Japan Parent Co Sales income arises in HK may avail of offshore income exemption Local manufacturing in China, India, with local sales and brand royalty payments to Singapore Co R&D performed in Australia Parent Co (Japan) Cost sharing payments Parent country Hold Co/IP Co (Singapore) Brand royalty Sales Co (Hong Kong) Royalties on IP license Sales income Customers (Overseas) Trading /IP Cos Manufacturing /R&D R&D Co (Australia) Contract R&D fee Support fee Sales Support / Manufacturing Co (India) Sales Support / Manufacturing Co (PRC) Contract processing arrangement for fee and sales via HK Direct sales income Customers (PRC / India)

14 Areas subject to scrutiny if BEPS proposals implemented China PE risks, Greater TP allocations, denial of deduction for royalty payments Japan CFC rules HK sustainability of offshore profits claim India / Australia areas of potential challenges? Parent Co (Japan) Cost sharing payments Parent country Hold Co/IP Co (Singapore) Brand royalty Sales Co (Hong Kong) Royalties on IP license Sales income Customers (Overseas) Trading /IP Cos R&D Co (Australia) Contract R&D fee Support fee Sales Support / Manufacturing Co (India) Sales Support / Manufacturing Co (PRC) Contract processing arrangement for fee and sales via HK Direct sales income Customers (PRC / India) Manufacturing /R&D

15 Audience Polling Questions

16 Audience Polling Question 1. Which BEPS Actions are likely to have the most impact on you? a) A combination of Permanent Establishment (Action 7) and TP (Actions 8, 9, 10, 13, 14) or b) Mandatory reporting and examination arising from a review of the reporting (Action 12)

17 Audience Polling Question 2. Do you consider that firms in your industry have been experiencing greater scrutiny/more detailed audit and assessment in your jurisdictions of operation since the commencement of the BEPS initiative in 2013? (Y/N)

18 Audience Polling Question 3. Going forward, will you spend more time seeking rulings and APAs? (Y/N)

19 Audience Polling Question 4. Has the conversation on BEPs changed your approach to tax planning and if so in which of the following areas? a)ip holding structures b)financing arrangements c) Investment holding structure d)supply chain / trading models

20 Audience Polling Question 5. Are you considering replacement strategies for any structures you have put in place that are now potentially open to question? (Y/N)

21 Audience Polling Question 6. Given the extent to which many of the new BEPSproposed measures turn on considering the economic substance at the level of group entities (TP, Treaty Shopping, CFC rules), has your firm been devoting resources to improving the documentation of substance in your various group entities? (Y/N)

22 Audience Polling Question 7. Is your firm concerned about the administrative burden/potential for greater tax impositions as a result of the roll out of CbC reporting? (Y/N)

23 Audience Polling Question 8. Is your firm already actively planning revisions to operating manuals/procedures to deal with the potential expansion of PE rules? (Y/N)

24 Key Takeaways Today

25 Your Panel Today Rodney Lawrence KPMG's Global Head of International Tax T Chris Xing Asia Pacific Regional Leader for International Tax T E. Stephen Carpenter Head of International Tax, KPMG in Australia T E. scarpenter@kpmg.com.au Girish Vanvari Co-Head of Tax, KPMG in India T E.gvanvari@kpmg.com Kozu Takayuki Head of International Tax, KPMG in Japan T E. Takayuki.Kozu@jp.kpmg.com

26 Australia and BEPS Stephen Carpenter

27 Agenda - Australia Recent legislative change in BEPS environment Tax administration focus in BEPS environment Changes in approach to international tax planning Community, public opinion and broader BEPS environment

28 Legislative changes in BEPS environment Exempt dividend rules From 17 October 2014, the non-portfolio foreign dividend participation exemption has been amended to ensure that it is only available for returns on instruments that are treated as equity for Australian tax purposes Thin capitalisation safe harbour From 1 July 2014, debt: assets safe harbour of 3:2 Reduced from 20:1 to 15:1 for non-bank financial entities De minims increased from $250k to $2 million Review of arms length debt rule New transfer pricing rules From 1 July 2013, new TP rules provide increased power to ATO to reconstruct cross border transactions to reflect arms length Ability to reconstruct the transaction itself and then impose arms length pricing Response to Sept OECD papers No specific legislative response to recent OECD discussion papers White Paper on tax reform expected end 2015 Unfavourable parliamentary environment for legislative change

29 Tax administration in BEPS environment ISAPS More focus on inbound investment and tax structuring Information sharing from Foreign Investment Review Board Transfer pricing focus ATO focus on all cross-border dealings Step change in documentation requirements Significant Tax Rulings in November 2014 Publication of tax information From 1 July 2015, large groups will have published their accounting profit, taxable income and tax payable Need to consider potential for public response Consider publishing parallel information to explain figures, with assurance from audit firm

30 Changes in approach to international tax planning Outward bound investment by Australian corporates Continued use and evaluation of hybrid instruments/entities, especially inbound US Location of global finance structure: moves away from Germany to the UK Management of Permanent Establishment risks (BEPS Action Item 7) Outward bound investment by Australian SWF s, superannuation funds Holding company jurisdiction? Future of Luxembourg, Ireland? Submissions on OECD Treaty Abuse paper (BEPS Action Item 6): Unlisted v listed CIV s Substance: wholly owned vehicles v outsourced managers Inbound Australian investment Proactive engagement by Australian taxation Office seeking details of offshore investment structures Exit strategy consultation with the Australian Taxation Office?

31 Civil response to BEPS environment Community opinion Increased community opinion and response Significant misinformation Significant press coverage often poorly researched and incorrect Senate inquiry Senate inquiry announced by Minority parties into Australian base erosion 40 corporate groups will be invited to present on their Effective Tax Rates and approach to cross border tax planning

32 India and BEPS Girish Vanvari

33 Action 1 : Digital Economy Impact of BEPS recommendations in India Having regard to the BEPS recommendations, E-commerce business models likely to be subjected to increased scrutiny in India. Specifically: PE assertions PE assertions by the Tax office based on accessibility of websites from India, presence of equipment, agents in India, are likely to increase. Also potential tax exposure in India on account of significant digital presence in India Profit attribution Value creation through use of customer data generated from India increased possibility of attribution of profits to India Withholding tax Increased focus on withholding tax implications on e-commerce payments to non-residents Litigation Possibility of litigation over characterization of payments relating to new digital products and services (e.g. Cloud computing) as royalties / FTS Urgent need to evaluate business models and digital presence to assess risks and identify remedial measures

34 Action 2 : Hybrid Mismatch Impact of BEPS recommendations in India BEPS recommendations (once implemented) are likely to impact cross-border arrangements / instruments where tax characterizations vary in both countries In an Indian context, such risks may typically revolve around situations where : Debt Instruments issued by Indian Cos (e.g. CCDs) may be considered as equity in the debenture holder s jurisdiction Indian partnerships / LLPs are considered pass-through in overseas jurisdictions Dual-resident companies There is a need to identify arrangements which could be hit under BEPS and to take remedial measures.

35 Action 6 : Treaty Abuse An Indian perspective Indian tax office could use BEPS recommendations to deny treaty benefits for inbound investments in India through mere holding / shell companies. LOB - a key component of India s recent tax treaty negotiations/ re-negotiations (such as treaties signed by India with UK, Spain and Poland) GAAR provisions introduced in Indian Income-tax Act (proposed to be effective from FY ) Urgent need to evaluate investment holding structures and build appropriate commercial rationale for the same. Public comments sought on certain aspects of BEPS Action 6

36 Action 7 : Preventing artificial avoidance of Permanent Establishment status Objectives Changes to the definition of PE to prevent artificial avoidance of PE status through the use of Commissionaire Arrangements and Specific Activity Exemptions Proposed Approach Commissionaire arrangements Artificial avoidance of PE status through commissionaire arrangements and similar strategies India does not recognize Commissionaire arrangements and hence, this may not be relevant Specific activity exemption Artificial avoidance of PE through the specific activity exemption - Make all the activities listed in Article 5 (4) subject to the conditions of being preparatory or auxiliary. Other alternatives - Deletion of word delivery, exceptions applicable to purchasing offices to be deleted, delete the entire subparagraph d Splitting-up of contracts Concerns related to splitting-up of contracts to abuse exception in Article 5 (3) could be addressed either: By an automatic rule taking account of any activities performed by associated enterprises; or By addition of a new example on the general anti-abuse rule (i.e. the Principal Purposes Test rule) proposed by Action 6

37 Transfer Pricing Action points : India perspective (1/2) Intangibles have been the focus of TP disputes and highly litigated Circular 6 of 2013 also points to the Significant Peoples function (SPF) test as recommended by OECD Possibility of in-depth scrutiny by the Indian Revenue authorities on transactions involving intangibles (location savings, assembled workforce, group synergies etc) based on OECD guidelines Companies operating in India need to analyze : Legal ownership and contractual arrangements vis-à-vis intangibles Thorough analysis of Functions, Assets and Risks (FAR) Various issuesincluded in the Guidance are contemporary, highly debated, and frequently litigated transfer pricing issues in India

38 Transfer Pricing Action points : India perspective (2/2) Action 10 : Low value-adding intra-group services For Captive Shared Service center, points such as nature of services outlined as low value-adding, manner of classifying core and non-core business activities, and proposed mark-up in the range of 2 per cent to 5 per cent etc may be challenged by tax authorities; A non-core activity for a MNC could be a core activity from a shared services / back-office perspective and hence appropriate margins would need to determined from a transfer pricing perspective; MNCs need to take cognizance while planning the cross charge for services which might be high value / low value. Action 13 : Transfer Pricing Documentation and Country-by-Country (CbC) reporting Increased compliance cost and burden on taxpayers

39 Japan and BEPS Takayuki Kozu

40 Agenda - Japan Current focus areas Recent legislative changes in BEPS environment Investment statistics Direct inbound and outbound investment Reaction from businesses Japan and foreign

41 Current focus areas Action 2 - Neutralize the effects of hybrid mismatch arrangements of the digital economy Action 3 - Strengthen CFC rules Action 6 - Prevent treaty abuse Action 8 - Assure that transfer pricing outcomes are in line with value creation Intangibles Action 13 - Re-examine transfer pricing documentation

42 Recent legislative changes relating to BEPS discussions Foreign dividend exclusion (FDE) rules Action 2 Where the dividend received is deductible in the country where the head office of the paying foreign subsidiary is located, the exemption will not be applied to the extent of the deduced amount. Consumption tax on digital services Action 2 Digital services provided from foreign suppliers to domestic business customers and domestic consumers will be categorized as domestic transactions subject to consumption tax. This is the same tax treatment as in EU countries. Exit tax for individuals Action 6 In order to prevent wealthy individuals from avoiding tax on capital gains in Japan by moving out of Japan with appreciated financial assets and subsequently selling those assets, the exit tax to impose income tax on unrealized capital gains on financial assets at the time of departure will be introduced.

43 Investment statistics direct investment (INTO Japan) Unit: JPY 100 million Source: Japan Ministry of Finance Total Equity other than reinvestment of earnings Reinvestment of earnings Debt instruments (NOTE for 2014 C.Y.) Number does not include the December result October and November results are preliminary figures

44 Investment statistics direct investment (FROM Japan) Unit: JPY 100 million Source: Japan Ministry of Finance Total Equity other than reinvestment of earnings Reinvestment of earnings Debt instruments (NOTE for 2014 C.Y.) Number does not include the December result October and November results are preliminary figures

45 Reaction from businesses relating to Japan BEPS development Japan MNEs (outbound) No much changes expected to their existing business structure and the global tax planning strategies Increasing administrative burden concerned Foreign MNEs (inbound) No much changes expected to their existing business structure and the Japan tax planning strategies Increasing administrative burden concerned Increasing unrelieved double-taxation cases concerned with emerging countries

46 China and BEPS Chris Xing

47 2014 Deliverables support ongoing tax enforcement actions State Administration of Taxation (SAT) had significant input into BEPS work on Intangibles and CbC reporting President Xi s statement in support of BEPS measures (G20 meeting) has spurred on international tax activity at SAT level New OECD TP guidance in line with SAT thinking Location specific advantages (LSAs) Downplaying legal ownership, funding of intangibles, and contractual risk, in allocating profits Greater use of profit split methods BEPS principles inform enforcement actions Additional scrutiny of cross border dividends, interest, royalties and service fee payments Tighter reins on tax treaty claims Tax on offshore share disposals CFC rule application Key areas of challenge for MNEs from the trend in PRC tax policy, supported by the 2014 BEPS Deliverables and by draft 2015 Deliverables

48 Greater MNE global profit allocations to China Location Savings Cost efficiencies from low labor costs, and the concentrations of supplier networks etc. in China Arguably reflected in higher TP profit allocation to China Market Premium Burgeoning China market allows higher than normal profits in China (e.g., luxury products) China contribution to the intangibles (marketing) Value Chain Analysis Manufacturing enterprises classified as: - full-fledged manufacturer (high profit) - single-function manufacturer (higher profit); or - toll manufacturer (routine profit) different transfer pricing methods for different function and risk profiles of manufacturer Tax authorities prefer taxpayer self adjustments MNEs may seek to forestall TP controversy by altering TP approach and contractual arrangements in China

49 Cross border intra-group payments scrutinised Authorities targeting deductions for outbound services/royalties SAT Directive 146 (July 2014) requires scrutiny of service fees/royalty payments prior to extensive audits Questioning of value add supported by November BEPS report on Low Value Adding Intra-Group Services SAT plans to issue hybrid mismatch rules in summer 2015 Beefed up information disclosure requirements With China s recent adherence to Multilateral Convention, China participation in automatic information exchange platform anticipated from 2018 China agreement with G20 (15 November 2014) to monitor beneficial ownership CBC reporting to be made keen use of with new Circular 2 (due 2015) FATCA collaboration, revitalized JITSIC, closer co-op of Chinese agencies Sustainability of recharge, IP holding and shared service arrangements MNE internal review needed, particularly for foreign IP holding companies in low tax jurisdictions, with transferred patents and brand rights

50 Other implications of 2014 Deliverables More rigorous tax enforcement for outbound investment in future BEPS work intersects with increased Chinese focus on outbound investment SAT Announcement 38 (July 2014) beefs up reporting on Chinese MNEs overseas CFCs Indications that enforcement of CFC rules has commenced in Shandong Prevention of Double non-taxation of offshore share transfers Circular 698 (and replacement rules set to be released) supported by BEPS concepts for indirect share transfers New GAAR guidance (December 2015) provides more comprehensive basis for anti-avoidance efforts China tax authorities draw BEPS support for treaty abuse approach BEPS Action plan can be read in support of Chinese rules (e.g. Circular 601 on beneficial ownership) Large scale examination of dividend DTA WHT relief claims launched with Shui Zong Han [2014] No. 317 (August 2014)

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