Welcome to the EFS-seminar BEPS and transfer pricing, but what about VAT and Customs? Conference Chairman: René van der Paardt Rotterdam February 3, 2016
Agenda Seminar An update on the transfer pricing related elements of the OECD BEPS project Ronald van den Brekel BEPS and VAT Herman van Kesteren BEPS and Customs Walter de Wit
An update on the transfer pricing related elements of the OECD BEPS project February 3, 2016 Ronald van den Brekel
Agenda Introduction to BEPS The BEPS deliverables Overview transfer pricing related points EU and BEPS
The OECD BEPS Project Reasons for BEPS Aggressive Tax Planning / Harmful Tax Practices Domestic Tax Systems not co-ordinated across borders International tax standards not keeping pace with changing global environment Estimated Global CIT revenue losses: 4%-10% of Global CIT USD 100-240 billion Lack of transparency and coordination between tax administrations Limited country enforcement resources Lack of relevant information at level of tax administrations
The OECD BEPS Project What is BEPS (Base Erosion and Profit Shifting)? Fundamental changes are needed to effectively prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it. The measures we are presenting today represent the most fundamental changes to international tax rules in almost a century: they will put an end to double nontaxation, facilitate a better alignment of taxation with economic activity and value creation, and when fully implemented, these measures will render BEPS-inspired tax planning structures ineffective. OECD Secretary-General Angel Gurría The G20 finance ministers called on the OECD to develop an action plan to address BEPS issues in a coordinated and comprehensive manner. OECD Action Plan on Base Erosion and Profit Shifting, 2013
Final BEPS reports Minimum standards Reinforced standards Common approaches and best practices Action 5 Harmful tax practices OECD Transfer Pricing Guidelines Actions 8-10 (transfer pricing) Action 2 Hybrid mismatch arrangements Action 6 Treaty abuse Action 13 Country-bycountry reporting Action 14 Dispute resolution Action 13 (transfer pricing documentation) OECD Model Tax Convention Action 2 (hybrid mismatch arrangements) Action 6 (treaty abuse) Action 3 Controlled foreign company (CFC) rules Action 4 Interest deductions and other financial payments Action 12 Mandatory disclosure rules Action 7 (permanent establishment status) Action 14 (dispute resolution) The output also includes analytical reports on Action 1 (digital economy, Action 11 (economic analysis) and Action 15 (multilateral instrument)
Impact of BEPS final reports Immediate impact Treaty-based action Legislative action Action 8 Transfer pricing for intangibles Action 2 Hybrid mismatch arrangements Action 2 Hybrid mismatch arrangements Action 9 Transfer pricing for risks and capital Action 10 Transfer pricing for other high-risk transactions Action 13 Transfer pricing documentation and countryby- country reporting Action 6 Treaty abuse Action 7 Permanent establishment status Action 14 Dispute resolution Action 15 - Multilateral instrument Further development Action 3 CFC rules Action 4 Interest deductions and other financial payments Action 5 Harmful tax practices Follow on work on several Actions Framework for monitoring country implementation and involvement of additional countries
Interrelationship between BEPS Action Plan, VAT and Customs 1 Addressing the tax challenges of the digital economy 2 Neutralizing the effects of hybrid mismatch arrangements 3 Strengthening CFC rules 4 Limiting base erosion via interest deductions and other financial payments 5 Countering harmful tax practices 6 Preventing the granting of treaty benefits in inappropriate circumstances 7 Prevent the artificial avoidance of PE status 8 Considering transfer pricing for intangibles 9 Considering transfer pricing for risks and capital 10 Considering transfer pricing for other high-risk transactions 11 Collecting and Analyzing data on BEPS 12 Disclosing aggressive tax planning arrangements 13 Guidance on transfer pricing documentation and country-by-country reporting 14 Making dispute resolution mechanisms more effective 15 Developing a multilateral instrument to modify bilateral tax treaties
Action 1: Tax Challenges of the digital economy Only action point that officially includes VAT. The Final Report recommends: Modifying the list of PE exceptions regarding preparatory and auxiliary activities related to the digital economy Introduction of an anti-fragmentation rule Modifying the definition of a PE to address artificial arrangements through the conclusion of certain contract arrangements A correlative update to the TP Guidelines - To prevent the transfer of intangibles or right to intangibles to tax-advantaged jurisdictions Changes to the CFC rules The fundamental conclusion is that the digital economy cannot be ring-fenced as it is increasingly the economy itself.
Action 7: Areas of focus Areas of focus Significant changes Commissionaire arrangements and similar strategies Art. 5(5) and Art. 5(6) are amended to lower the PE threshold. Specific activity exemptions Application of the specific activity exemptions from PE status in Art. 5(4) is limited to activities of a preparatory or auxiliary character. Alternatively, states may opt to retain the existing version of Art. 5(4) if they adopt a new anti-fragmentation rule. Fragmentation of activities Splitting-up of contracts (projects where activities are carried out by several closely related entities) New anti-fragmentation rule whereby the specific activity exemptions in Art. 5(4) would not apply to a place of business maintained by the enterprise or a closely related enterprise in specific circumstances. Application of a principal purposes test rule or, alternatively, aggregation of time spent on connected activities (to be included in the Commentary)
Actions 8-10: Overview of the final report BEPS Actions 8, 9 and 10 aims to assure that transfer pricing outcomes are in line with value creation Action 8: Intangibles Action 8 provides a broader and more specific definition of intangibles. Introduction of a six step framework to analyse intangibles Focus on DEMPE functions: Development, Enhancement, Maintenance, Protection and Exploitation Hard-to-Value Intangibles (HTVIs) Cost-Contribution Arrangements (CCAs) Action 9: Risk and Capital Focus on conduct of parties and their financial capacity to assume and functionality to manage risks. Separate consideration regarding an appropriate return to any cash investment Introduction of a six step framework to analyse risks Action 10: Other high-risk transactions Intra-group services / low valueadd services Profit Splits (work to be continued in 2016) Recognition of transactions Commodity transactions
Actions 8-10: Allocation of Risk (1) Revised Section D of Chapter I of the OECD Guidelines: Accurately delineate the actual transactions Detailed guidance on analyzing risks as integral part of a functional analysis Introduction of the six-step framework The party assuming a risk should control the risk and have the financial capacity to assume the risk Cash boxes will attain no more than a risk-free return Shift from the contractual reality to the economic reality with respect to risk allocation between related parties
Actions 8-10: Allocation of Risk (2) New Six-step Framework for Analysis of Risks 1 2 3 4 5 6 Identification of economically significant risks with specificity Determination of contractual assumption of the specific risk Functional analysis in relation to risk Interpreting steps 1-3 Allocation of risk Pricing the transactions taking into account the allocation of risks If the associated enterprise (contractually) assuming the risk does not exercise control over the risk or does not have the financial capacity to assume the risk, then the risk should be allocated to the enterprise exercising control and having the financial capacity to assume the risk
Actions 8-10: New six-step analytical framework for intangibles 1 Identify the intangibles and economically significant risks associated with the DEMPE of the intangibles 2 Identify the full contractual arrangements and determine legal ownership 3 Detailed functional analysis to identify the parties performing functions, using assets, and managing risks related to DEMPE 4 Confirm the consistency between the terms of the relevant contractual arrangements and the conduct of the parties 5 Delineate the actual controlled transactions related to the DEMPE of intangibles 6 Where possible, determine arm s length prices for these transactions consistent with each party s contributions
Actions 8-10: DEMPE functions are key Development of intangible asset Enhancing value of intangible asset Maintenance of intangible asset (e.g. quality control) Protection of intangible asset against infringement Exploitation
Action 13: Re-examining Transfer Pricing Documentation Master File High level information about group s business, TP policies and agreements with tax authorities in a single document available to all tax authorities where the MNE has operations Local File Detailed information about the local business, including related party payments and receipts for products, services, royalties, interest, etc. Country-by-Country Report High level information about the jurisdictional allocation of profits, revenues, employees and assets Implementation Master / Local File: to be maintained/delivered directly by the parent company in all countries where it does business Filing: generally ultimate parent to file CbC report in jurisdiction of residence (but: EUR 750 million consolidated revenue threshold) Timing: First set of CbC reports to be filed by 31 December 2017 for fiscal years beginning on 1 January 2016 (in other cases, the term for filing will be one year from the close of the fiscal year) Implementation package Released on June 8th 2015 containing model legislation Dutch legislation entered into force on 1 January 2016.
Country-by-country reporting, table 1
Implementation status US will require CbC for calendar year 2017. Non compliance is a criminal offense in the Netherlands Mandatory for large UK parented groups only United States of America Norway Mexico United Kingdom Ireland Belgium France Switzerland Luxembourg Spain Denmark Netherlands Poland Czech Republic Austria Italy China Brazil China: Filing due with tax return on 31 May No surrogate parent provision local filing required Australia Already implemented Implementation in progress Spain: Group definition based on control Equity rather than stated capital and accumulated earnings No surrogate parent provision local filing required
Country-by-Country Reporting (2/2) CBCR Implementation specifics OECD United Kingdom Spain Poland Netherlands Status Implementation packages released in February and June 2015 with model legislation and model competent authority agreements Draft statutory instrument implementing rules issued on 5 October 2015 Legislation in force Legislation in force Legislation in force Who Ultimate Parents of group with revenue of EUR 750 million or greater Threshold of 586 million (approximately EUR 790 million) When For fiscal years starting in 2016, with filing within 12 months from fiscal year end Secondary filing rule 1. Local filing, or 2. Filing by named Surrogate Parent entity Voluntary local filing Local filing Not required Penalties Left to countries Specific penalty for non compliance General penalty for non compliance Transfer pricing documentation penalties Criminal penalty for non compliance Consistent with OECD recommendations
Action 15: Developing a Multilateral Instrument to modify bilateral tax treaties The Final Report on Action 15 provides an overview of the current status The aim is to consistently implement the tax treaty-based measures developed during the BEPS project Ad hoc group of countries have begun negotiations in May 2015. Goal is to have multilateral instruments open for signing by December 31, 2016. The instrument will focus on tax treaties provisions with respect to: Hybrid mismatch arrangements (Action 2) Treaty abuse (Action 6) PE Status (Action 7) Dispute resolution (Action 14) This instrument could result in some key BEPS recommendations taking effect as early as of 2017 through significant changes to bilateral treaties
EU and BEPS (1) The EU has embraced the OECD/G20 base erosion and profit shifting (BEPS) project and is working to integrate the results of the project at the EU level where appropriate. The EU aims to coordinate on a common EU approach to avoid risk of fragmentation in the internal market. The EU has already introduced legislation to implement BEPS recommendations: Exchange of information on rulings between EU Member States. Introduction of hybrid mismatch rule and general anti-avoidance rule (GAAR) in the Parent-/Subsidiary (P/S) Directive. The European Commission has launched State aid investigations into ruling practices of Member States.
EU and BEPS (2) The EC Commission s has published its EU Anti-Tax Avoidance Package on January 28, 2016. The constituent parts are: The EU Anti-Tax Avoidance Directive ( ATA Directive ); The Revised Administrative Cooperation Directive; The Communication on External Strategy; and The Recommendation on Tax Treaties.
Draft EU Anti-Tax Avoidance Directive Background The draft EU Anti-Tax Avoidance Directive ( ATA Directive ) was released January 28, 2016. An earlier draft (from the Council) was made public on December 11, 2015. The ATA Directive lays down rules against tax avoidance practices that directly affect the functioning of the internal market. This ATA Directive is a first step to introduce of a European Common Consolidated Tax Base, as its initial anti-avoidance provisions are converted into this separate Directive. Next Steps The ATA Directive is currently subject to review by the EU Council and unanimous consent in the EU Council is required for the ATA Directive to be adopted. Cannot be ruled out that final ATA Directive may differ significantly from current draft and that the timetable set for agreement by July 2016 / implementation by 2017 may not be met.
Draft EU Anti-Tax Avoidance Directive Framework The scope of the ATA Directive includes all taxpayers that are subject to corporate tax in one of more Member States, including permanent establishments (in one or more Member States) of entities that are resident in third countries (art. 1). The proposed ATA Directive sets out certain minimum standards EU Member States need to adhere to, and does not preclude the application of domestic or agreement-based provisions aimed at safeguarding a higher level of protection for domestic corporate tax bases (art. 3). Measures / Scope Having the aim of combating tax avoidance practices which directly affect the functioning of the internal market, the ATA Directive lays down anti-tax avoidance rules in 6 specific fields: Uniform interest deduction denial rule in the form of an EBITDA-limit (interest limitation rule, art. 4); Uniform exit taxation (art. 5); General Anti-Abuse Rule ( GAAR ) (art. 7); Switch Over Clause, (art. 6) Controlled Foreign Company Rules (art. 8 and 9); and Rules for the avoidance of mismatches due to hybrid entities and hybrid instruments between EU Member States (art. 10).
The BEPS project is not over, it has just started! Also for VAT and Customs
BEPS and VAT February 3, 2016 Prof. Herman van Kesteren (Tilburg University/ PwC)
Agenda Direct and indirect taxes Impact of BEPS Actions on Indirect Taxes BEPS Action 1 Digital economy BEPS Action 7 (PE issues) BEPS Action 8 and 13 (Intangibles, Country-by-Country reporting) 28
Direct and indirect taxes: a comparison Direct Income Taxable person High revenues Consumption Indirect Person bearing the tax burden Higher revenues 29
The estimated impact of BEPS on the total tax revenue mix Corporate income tax has currently a 8% share in total tax revenue 8% 2% Increase of tax revenue if BEPS actions are successful VAT vs CIT 30
Direct and indirect taxes: a comparison Direct Income Taxable person High revenues Visible Slow Profit shifting Consumption Person bearing the tax burden Invisible Indirect Higher revenues Fast Consumption shifting 31
Direct and indirect taxes: a comparison Consumption shifting? Ticket Right Flight Shifting the recipient Shifting the chargeable event 32
Direct and indirect taxes: a comparison Direct Income Taxable person High revenues Visible Slow Profit shifting Profit erosion Consumption Person bearing the tax burden Invisible Indirect Higher revenues Fast Consumption shifting Consumption erosion/vat Gap 33
Profit erosion vs VAT/GST erosion (VAT Gap) 2012-2013 figures for EU-28 34
Direct and indirect taxes: a comparison Direct Income Taxable person High revenues Visible Slow Profit shifting Profit erosion Volatile Consumption Person bearing the tax burden Invisible Indirect Higher revenues Fast Consumption shifting VAT Gap (erosion) Robust/solid 35
Direct and indirect taxes: a comparison Percentage of GDP EU-28 36
Direct and indirect taxes: a comparison Direct Income Taxable person High revenues Visible Slow Profit shifting Profit erosion Volatile International Consumption Person bearing the tax burden Invisible Indirect Higher revenues Fast Consumption shifting VAT Gap (erosion) European 37
Direct and indirect taxes: a comparison OECD VAT CIT EU Treaty EU Treaty VAT Directive National VAT Act National CIT Act 38
Direct and indirect taxes: a comparison Direct Income/profit Taxable person High revenues Visible Slow Profit shifting Volatile International Also interesting! Consumption/expenditures Person bearing the tax burden Higher revenues Invisible Fast Consumption shifting Solid/robust European Interesting Indirect 39
Impact of BEPS actions on Indirect taxes Action 1 Digital economy OECD Guideline 1: taxing services in jurisdiction of consumption OECD Guideline 2: taxing services in jurisdiction of the customer Nexus and data challenges Simplified registration and compliance, but separate VAT refund claims 40
Impact of BEPS actions on Indirect taxes Action 7 Permanent establishment CIT VAT/GST NL Comm. 41
Purchase fixed establishment Welmory C-605/12 Welmory ltd Cyprus Welmory Ltd Cyprus Cyprus Welmory ltd Poland Welmory Poland Polen Without fixed establishment With fixed establishment 42
Purchase fixed establishment Welmory C-605/12 Welmory ltd Cyprus Welmory Ltd Cyprus Cyprus Welmory ltd Poland Welmory Poland Polen Without fixed establishment With fixed establishment 43
Impact of BEPS actions on Indirect taxes Action 7 Permanent establishment CIT VAT/GST Principal Principal NL Comm. Comm. Comm. 44
Impact of BEPS actions on Indirect taxes Action 8 and 13 Intangibles, Country-by-country reporting Connection transfer pricing and VAT impact of country-by-country reporting What if the final price of the goods is higher/lower after all? Corrective documentation and lump-sum credit notes (no period-specific line item details are available) 45
Transfer pricing (related parties) Issue 1 Final price is higher; adjustment at moment 1? 1 2
Transfer pricing (related parties) Issue 1 or adjustment at moment 2? 1 2 47
Transfer pricing (related parties) Issue 2 Included in taxable amount? Taxable amount? 48
Transfer pricing (related parties) Issue 2 Or separate supply? Separate supply? Transfer Pricing and VAT October 2015 49
Transfer pricing and supply of goods Principal 50
Transfer pricing / VAT and goods Issue 1, tax authorities with different views Principal 1 2 TP adjustment MS 1 correction at moment 1 MS 2 correction at moment 2 51
Transfer pricing / VAT and goods Issue 2 Additional payments Principal Customs authorities claim late payment fines for VAT and customs duties In some cases also excise duty issues. 52
Transfer pricing / VAT and goods Issue 3 - Discounts Principal = additional marketing service in some non-eu countries (Turkey), place of supply in non-eu country (effective use) = no refund for principal = fines and interests imposed on LRD for late payment 53
Conclusions BEPS impact on VAT BEPS action 1: Digital economy BEPS Action 7: PE issues BEPS Action 8 and 13: Intangibles, Country by Country reporting 54
BEPS and Customs February 3, 2016 Prof. Walter de Wit (Erasmus University Rotterdam/EY)
Customs & Transfer Pricing Customs value based on transaction value method is preferred method; When transaction takes place between two related parties, relationship may not influence the transaction value (transaction value must be at arms length); If not, alternative valuation method;
Customs & Transfer Pricing (II) Royalties and license fees related to the goods imported into the EU to be added to the customs value if paid as a condition of sale of the goods.
WCO Guide on transfer pricing and customs Pragmatic approach to utilizing transfer pricing documentation to support customs value A list of good practices for customs administrations, including the encouragement to customs administrations to consider information derived from transfer pricing studies when examining related party transactions
WCO Guide on transfer pricing and customs A list of good practices for international business, including: Coordination among tax and customs departments and advisors on transfer prices Consider the needs of customs authorities when preparing transfer pricing documentation or developing Advance Pricing Agreements With appropriate consideration of local requirements, provide customs administrations with advance notification that post importation adjustments may occur Work with customs authorities to provide interpretation into a customs framework of transfer pricing analyses and data
BEPS and customs: overview Direct consequences for customs resulting from BEPS Actions (which regard transfer pricing) EU customs measures in the same vein as BEPS: changes to customs valuation
Aligning Transfer Pricing Outcomes with Value Creation & customs (I) Relevant BEPS Actions for customs: Actions 8 to 10: Aligning Transfer Pricing Outcomes with Value Creation: ( ) the Report determines that risks contractually assumed by a party that cannot in fact exercise meaningful and specifically defined control over the risks, or does not have the financial capacity to assume the risks, will be allocated to the party that does exercise such control and does have the financial capacity to assume the risks.
Aligning Transfer Pricing Outcomes with Value Creation & customs (II) Actions 8 to 10: Aligning Transfer Pricing Outcomes with Value Creation: For intangibles, the guidance clarifies that legal ownership alone does not necessarily generate a right to all (or indeed any) of the return that is generated by the exploitation of the intangible. In other words: economic reality over legal reality?
Value of goods for customs purposes Customs value is generally based on the transaction value of goods The price actually paid or payable for the goods when sold for export to the customs territory of the Union, adjusted, where necessary UCC Implementing Act: The transaction value of the goods sold for export to the customs territory of the Union shall be determined at the time of acceptance of the customs declaration on the basis of the sale occurring immediately before the goods were brought into that customs territory.
Value of goods for customs purposes The CCC allows the use of the First Sale for Export In case of chain transactions, all of which result in an export to the EU, the first sale can be used to determine the transaction value, if it can be demonstrated that at the time of that sale the goods are destined for export to the EU Example Manufacturer US 80 100 US Co US EU Related Distribution Co EU Goods are shipped directly to EU CCC (current legislation): Customs duty calculated on 80 rather than 100 (subject to certain conditions being met).
Value of goods for customs purposes Changes under UCC (Union Customs Code) The UCC changes this rule to refer to the Last Sale for Export Transaction value must be determined based on the sale occurring immediately before the goods were brought into the customs territory of the EU Example Manufacturer US 80 100 US Co US Goods are shipped directly to EU EU Related Distribution Co EU UCC: Customs duty calculated on 100 rather than 80 Legal flow Physical flow
Value of goods for customs purposes Changes under UCC (Union Customs Code) The UCC changes this rule to refer to the Last Sale for Export Example Transaction value must be determined based on the sale occurring immediately before the goods were brought into the customs territory of the EU Manufacturer US 80 100 US Co US Goods are shipped directly to EU Related Distribution Co EU UCC: Customs duty calculated on 80, but what if goods were already sold to Distribution co before the goods were brought into the customs territory of the EU? Legal flow Physical flow
The sale occurring immediately before the goods were brought into the customs territory? (I) What is a last sale? What is a sale? Sale vs supply of goods (VAT definition) See also Notice on Bona Fide Sales from US customs
The sale occurring immediately before the goods were brought into the customs territory? (II) Broad definition of sale (case Christodoulou, C-116/12) : 44. Since, for the purposes of the customs valuation, priority is to be given to the transaction value in accordance with Article 29 of the Customs Code, that method of determining the customs value is assumed to be the most appropriate and the most frequently used. 45 In order to maintain that priority, it is necessary to interpret the term sale in Article 29(1) broadly.
Royalties & License Fees Payments in respect of patents, designs, trademarks, copyrights etc. are added to the price paid or payable if: related to the goods being valued (imported) The buyer must pay these elements, either directly or indirectly, as a condition of sale If royalties or license fees are paid to a third party, these payments are currently only considered a condition of sale if the seller or a person related to the seller requires that payment to be made
Royalties & License Fees Under the UCC, the condition of sale requirement is deemed to be met if: The seller or a person related to the seller requires the buyer to make this payment; or The payment by the buyer is made to satisfy an obligation of the seller, in accordance with contractual obligations; or The goods cannot be sold to, or purchased by the buyer without payment of the royalties or license fees to a licensor.
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