www.pwc.com VAT The submerged part of the BEPS Thursday, Geneva
Agenda Background Potential VAT impact of BEPS Permanent establishment (PE) issues and threats to commissionaire structures How non-european countries are responding to BEPS Slide 2
Background Slide 3
What is BEPS? OECD action plan launched in July 2013 backed by G20 to address Base Erosion and Profit Shifting (BEPS) Areas of focus: - Countering base erosion and arbitrage between territories - Tax jurisdiction, with a particular focus on the digital economy - Transfer pricing, analysing issues related to the arm s length principle Public concern about whether particular companies and groups are paying their fair share of tax BEPS project launched in July 2013 with ambitious timeline for completing reports on all 15 Actions by December 2015 Slide 4
What is BEPS? (cont d) There are 15 actions with 3 key themes: - Coherence improving interaction of corporate tax in different territories - Substance realignment of taxation and substance - Transparency Governments have moved early due to public and economic pressure Communiqué of G20 Finance Ministers and Central Bank Governors (Istanbul, 9-10 February 2015) and EU press release (Brussels, 18 February 2015) - Full support of BEPS project reiterated and deliverables to be finalised by end of the year Slide 5
What is driving the change? Change in trading environment and increased Stakeholders: transparency: Supranational organisations EU, OECD, UN, G20 Globalisation pressures for MNCs Media and reputation Need for integrated vs. country-standalone NGOs business models National governments and tax authorities Digital environment and emergence of profitable Increased collaboration between tax authorities MNCs partly due to unrewarded externalities within the same country as well as cross-border Shift of economic power from developed to developing countries (BRICS) Technology allows systematic approach of reviews, consistency checks and comparisons by tax authorities Drivers Public perception and political pressure: Austerity programmes have magnified low taxes paid by MNCs Increased use of tax havens and low ETR discretionary tax rulings deemed unfair on domestic businesses Impact in the context of social welfare of developing countries of BEPS Previous initiatives: OECD reports and discussion drafts - Harmful Tax Regimes (1998) - Intangibles Discussion Draft (2013) - Interpretation and Application of Article 5 on PE (2012) UN transfer pricing manual EU, e.g. Commission Double Taxation Convention US tax reform Swiss tax reform Slide 6
Behind BEPS actions many potential indirect tax impacts Action 1: Address the challenges of the digital economy Published March 2014 Action 2: Neutralise the effect of hybrid mismatch arrangements Published March 2014 Action 3: Strengthen CFC rules Action 4: Limit base erosion via interest deductions and other financial payments Published Dec. 2014 Action 5: Counter harmful tax practices, taking into account transparency and substance Published Sept. 2014 Action 6: Prevent treaty abuse Published March 2014 Action 7: Prevent the artificial avoidance of PE status Published Oct. 2014 Action 8: TP outcomes to be in line with value creation-intangibles Published Dec. 2014 Action 9: TP outcomes to be in line with value creation - Risks Published Dec. 2014 Action 10: Assuring that TP outcomes are in line with value creation (high risks) Published Dec. 2014 Action 11: Establish methodologies to collect and analyse data on BEPS Published Aug. 2014 Action 12: Require taxpayers to disclose their aggressive tax planning arrangements Action 13: Re-examine transfer pricing documentation Published Jan. 2014 Action 14: Make dispute resolution mechanisms more effective Published Dec. 2014 Action 15: Develop a multilateral instrument Interim Paper Published Sept. 2014 Slide 7
Potential VAT impact of BEPS Slide 8
Responding to BEPS Hidden indirect tax impacts Background - New approaches to restructuring and acquisition transactions focussing on operational models/business efficiencies Indirect tax impact - Factor indirect taxes in the assessment of a transaction, restructuring or acquisition transaction - Put more effort into analysis and implementation of transaction flows, focusing on other than income tax positions (indirect tax, environmental tax, operational costs, etc.) - Review of local ITX liabilities: Reporting compliance requirements Cash impact/right of recovery IT update Slide 9
Base Erosion and Profit Shifting (BEPS) Companies will focus on 6 key business areas: Holding and repatriation Financing Intellectual property Operating model Governance & Compliance Transparency and disclosure Slide 10
Financing/Holding and Repatriation Related Actions 3 4 5 6 Taking into account BEPS Actions 3, 4, 5 and 6, businesses will likely: Review impact of BEPS on current financing arrangements Consider integrated financing arrangements, such as the set-up of a fully fledged in-house bank in an appropriate jurisdiction, the concentration of financing functions in an appropriate operating entity, etc. What are the indirect tax impacts? Financial services are mainly VAT-exempt without any right of recovery Increase of expenses by about 20% of VAT impact on margin Pure holdings are considered as non-taxable persons with no right of recovery except in Switzerland Actions to consider to mitigate probable VAT leakage Review of the cost allocation and recovery methods Set up of a cost-sharing centre Set up of a VAT group Slide 11
Intellectual property Related Actions 5 8 9 10 Taking into account BEPS Actions 5, 8, 9 and 10, current IP models will likely be regarded as unsustainable under BEPS because lack of substance will be easily identifiable thanks to increased transparency. Businesses will likely consider alternative IP models aligned to operations and use of IP box regime. What are the indirect tax impacts? Qualification of the IP-related fees for ITX purposes? Licence fees? Scope of VAT? Customs impact: value of IP rights may increase the customs value of related imported goods Remember: EU Customs Code effective as of 1May 2016 and the current draft has a new wording regarding royalties and licence fees, resulting (in most cases) in their probable inclusion in the customs value Actions to consider Parallel review of the IP and operating models Adjust IP-related transactions Slide 12
Governance & Compliance All actions Taking into account all BEPS Actions, governments are increasing investments in technology in order to support data collection and analytics. What are the indirect tax impacts? Systematic validation of VAT numbers Need to demonstrate that you are in control of your indirect tax processes (SAO review in the UK) Audit trail requirement for invoicing purposes (i.e. France) Actions to consider Review of internal controls/processes for ITX purposes, organisation and controls (i.e. data quality in and out as well as processes) and latest developments in terms of compliance obligations in countries where a company has a business presence Review of the ERP/IT system ability to comply with the above requirements Consider the creation of a central compliance function Consider automation or use of specific technology to support your Compliance team Examples: German Gelangensbestätigung, Brazilian Public System of Digital Bookkeeping (SPED) Slide 13
Transparency and disclosure Related Actions 5 8 9 10 Taking into account BEPS Actions 5, 8, 9 and 10, tax authorities will be provided with more information and enabled to focus on critical areas. Country-by-country reporting will result in increased transparency with big data management. What are the indirect tax impacts? More interactions between national VAT and customs authorities, with higher risk of discrepancies between TP documentation and VAT returns Increased speed of investigations and systematic approach substituting sample approach Shift of burden of proof to businesses instead of authorities and changes in discussion dynamics with authorities given the data available to them, including computer-based data analytics 80/20 approach will no longer be acceptable in relation to compliance Actions to consider Assess ability to gather the required data, its consistency and consider interaction of BEPS proposals with other information-sharing mechanisms (e.g. pan-eu VAT returns data sharing) Abandon silo approaches and adopt a holistic view Consider reputation risk and review data quality in the ERP/IP systems and HR policy Slide 14
Permanent establishment (PE) Related Action 7 Taking into account BEPS Action 7, a new definition of PE will be accepted by tax authorities, with drastic restrictions of various PE exemptions such as the preparatory or auxiliary fixed place of business. What are the indirect tax impacts? Current independence of CIT and VAT definitions of PE a PE from a CIT perspective does not necessarily create a PE for VAT purposes VAT definition of PE: fixed place of business of a certain minimum size and where both the human and technical resources necessary for the provision of the services are permanently present Under BEPS rules, an existing PE for CIT purposes may be recognised as a VAT PE due to the addition of substance (human and material means) Actions to consider Carry out PE risk review Review the territoriality rules and VAT liabilities Consider whether procedures, processes and controls require revision Consider strengthening substance in one location to mitigate PE qualification in other territories Slide 15
Permanent establishment (PE) issues and threats to commissionaire structures Slide 16
Commissionaire structures Classical principal/commissionaire arrangements Principal Transfer of ownership Deemed inv. 1 Commissionaire Customer Inv. 2 Physical flow of goods Supply of goods from VAT perspective A commissionaire is a person selling products in a given state in its own name but on behalf of a foreign enterprise that is the owner of these products. It usually qualifies as an undisclosed agent or intermediary from a legal point of view (differs from a LRD) Slide 17
Commissionaire structures BEPS challenges Action 7, preventing the artificial avoidance of PE status, is very controversial, very difficult but there is agreement that commissionaire arrangements are coming to an end according to Pascal Saint-Amans, Main Supervisor of BEPS project within the OECD Commissionaire structures threatened by BEPS Already seeing greater scrutiny from tax authorities in various countries, such as Spain Crucial to prove the independence of the commissionaire regarding its decision-making power, its actual profitability, its substance Challenging commissionaire structures from a CIT perspective might impact VAT liabilities (effective recipient of the goods/services or not?) Slide 18
How non-european countries are responding to BEPS Slide 19
Actions taken/proposed/discussed by country Country ACTION 1: Address the challenges of the digital economy ACTION 2: Neutralise the effect of hybrid mismatch arrangements ACTION 3: Strengthen CFC rules ACTION 4: Limit base erosion via interest deductions and other financial payments ACTION 5: Counter harmful tax practices more effectively, taking into account transparency and substance ACTION 6: Prevent treaty abuse ACTION 7: Prevent the artificial avoidance of PE status ACTION 8: Assuring that TP outcomes are in line with value creation Intangibles North America Canada Under discussion postponed Mexico United States expected expected South America Argentina Brazil Chile Slide 20
Actions taken/proposed/discussed by country Country ACTION 9: ACTION 10: ACTION 11: ACTION 12: ACTION 13: ACTION 14: ACTION 15: Assuring that TP outcomes are in line with value creation Risks & capital Assuring that TP outcomes are in line with value creation Other highrisk transactions Establish methodologies to collect and analyse data on BEPS and the actions to address it Require taxpayers to disclose their aggressive tax planning arrangements Re-examine transfer pricing documentation Make dispute resolution mechanisms more effective Develop a multilateral instrument North America Canada Mexico United States Argentina Latin America expected Brazil Chile Slide 21
North America General recognition of the BEPS initiatives but no specific action plans. Canada: As announced in Economic Action Plan 2013, the government is inviting comments with respect to possible measures to prevent a type of abuse of Canada s income tax treaties commonly referred to as treaty shopping. ACTION A6 4 Mexico: 2014 tax reform Payments of interest, royalties and technical assistance fees to related parties in Mexico and abroad not deductible when: - the recipient is a transparent entity whose owner or owners are not subject to tax in its jurisdiction, - the recipient country of tax residence considers the payment to be disregarded, or - the recipient does not include the payment as part of its taxable income under its jurisdiction s rules. ACTION ACTION ACTION A4 4 A6 4 A7 4 United States: Not yet any BEPS-type legislation. However, there have been legislative proposals in recent years that encompass BEPS principles. However, it is generally not anticipated that any of the legislative provisions would be outside the context of major US tax reform. 2015 and 2016 presidential budgets included proposals to: (i) restrict the use of hybrid arrangements that create stateless income, (ii) restrict excessive interest deductions for members of financial reporting groups; Various legislative proposals have been introduced to expand the US CFC rules to additional types of income, particularly related to intangibles; In November 2013, the IRS issued a proposed update and revision of the revenue procedure governing requesting Competent Authority assistance under US tax treaties, principally the Mutual Agreement Procedure (MAP) article. ACTION A2 4 ACTION ACTION ACTION A3 4 A4 4 A14 4 Slide 22
South America Some countries have begun to address BEPS indirectly but no specific unilateral responses. Argentina: New related-party database New white list of cooperative jurisdictions Heavy focus on triangulation transactions ACTION ACTION ACTION A5 4 A11 4 A13 4 Brazil: Although not an OECD member, Brazil was invited as a member of the G20 to participate in the BEPS discussions as an associate member Brazil has not taken any specific legislative actions Tax authorities have begun to focus on the substance of restructuring transactions Internal leveraging transactions Transactions with tax havens ( black list and grey list concepts) ACTION ACTION ACTION ACTION A3 4 A8 4 A9 4 A10 4 Chile: Deductions of payments to related parties now on a cash basis New GAAR rules ACTION A3 4 ACTION ACTION ACTION ACTION A4 4 A5 4 A6 4 A7 4 Slide 23
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Questions? Slide 25
Today s presenters Patricia More Partner, Geneva Phone: +41 58 792 9507 patricia.more@ch.pwc.com Diogo De Lima Santos Manager, Geneva Phone: +41 58 792 9189 diogo.de.lima.santos@ch.pwc.com Slide 26