BEPS & transfer pricing May 2015 Suchint Majmudar, Taxand India Amit Rana, GE Polly Mak, Michelin Tim Wach, Taxand Global
Contents 1. Introduction: background to BEPS 2. What is BEPS? 3. Key BEPS concerns 4. BEPS Action 8 Intangibles 5. BEPS Action 9 risk and capital 6. BEPS Action 10 low value adding intra-group services 7. BEPS Action 13 country-by-country reporting 8. Taxand s Take 1
Introduction: Background to BEPS Quality tax advice, globally
Introduction: the background to BEPS Evolution of BEPS Globalisation and technological advances, increased pace of integration of national economies and evolution of new business models Shift from country specific business models to global models 3
Introduction: the background to BEPS Evolution of BEPS Domestic laws of countries do not consider tax systems of other countries - gaps remain in international standards (say in bilateral agreements) Exploitation of the legal arbitrage opportunities and boundaries of acceptable tax planning to minimise tax burden (say Double Irish Dutch Sandwich) 4
What is BEPS? Quality tax advice, globally
What is BEPS? Shifting of profits / income to low-tax jurisdictions or other locations enabling a more favorable tax treatment Arrangements involving double non-taxation or less than single taxation Transfer of intangibles to favorable tax jurisdictions Stripping legal entities of business functions, assets and risks 6
What is BEPS? Use of tax attributes such as tax credits, loss-carry forwards, etc Use of intermediary companies / jurisdictions in investment and financing structures Use of hybrid arrangements to exploit mismatches in tax treatment 7
Key BEPS concerns Quality tax advice, globally
Key BEPS concerns Harm to governments Loss of substantial corporate tax revenues High cost of tax administration Undermines integrity of tax system Tax fairness issue Critical under-funding of public investment 9
Key BEPS concerns Harm to individual tax payers To bear a greater share of tax burden Harm to businesses Significant reputational risk for MNEs whose effective tax rate is low Competitive disadvantage for domestic businesses Risk of unilateral actions by certain tax jurisdictions 10
BEPS Action 8 - Intangibles Quality tax advice, globally
BEPS Action 8 Intangibles Assure that TP outcomes are in line with value creation - intangible Develop rules to prevent BEPS by moving intangibles among group members, including: Broad and clearly delineated definition of intangibles Ensure that profits associated with the transfer and use of intangibles are appropriately allocated in accordance with (rather than divorced from) value creation Develop TP rules or special measures for transfers of hard-to-value intangibles and Update the guidance on Cost Compensation Agreements (CCAs) 12
BEPS Action 8 Intangibles (scope / coverage) Locations savings savings attributable to working in a particular market Whether locational savings exist? Amount of location savings Extent to which savings are retained or passed on to customer Where savings are not passed on - allocation of net retained locational savings 13
BEPS Action 8 - Intangibles (scope / coverage) Assembled workforce Existence of uniquely qualified or experienced employees Such workforce impact arm s length price on account of efficiency with which services are provided or goods produced Transfer of such employees may necessitate comparability adjustment in the form of time and expense savings 14
BEPS Action 8 Intangibles (scope / coverage) MNE group synergies Distinction between incidental benefits and benefits arising on account of deliberate group actions Incidental benefits require no compensation (eg non explicit guarantee on loan) Deliberate group action related synergies to be shared in proportion of contribution to its creation (eg group wide centralised purchasing) 15
BEPS Action 8 Intangibles (scope / coverage) Identification of intangibles broad definitions Ownership of intangibles legal versus contributions Marketing intangibles and R&D risk assumed by each party towards creation of intangibles Determination of arm s length conditions consider realistically available options 16
BEPS Action 9 - Risk and capital Quality tax advice, globally
BEPS Action 9 Risk and capital Assure that transfer pricing outcomes are in line with value creation Action 9 Risks and capital Shareholders activities Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value creation. This work will be coordinated with the work on interest expense deductions and other financial 18 payments
Discussion draft of revised section D, chapter 1 Part 1 Updated guidance on the identification of the commercial or financial relations New guidance on identifying risks in commercial or financial relations New guidance on non-recognition of a transaction Part II Potential special measures to reduce possibilities for BEPS 19
Identification of commercial or financial relations Agreement terms ambiguous transaction deduced from the conduct Functional analysis to focus on parties actions / capabilities Characteristics of property / services (unchanged) Economic circumstances of the parties / market (unchanged) Business strategies (unchanged) 20
Identifying and allocating risks Nature of risk Allocation of risk How risks are assumed Risk management Actual conduct vs arrangements Impact of moral hazard and risk-return trade-off 21
Non recognition / re-characterisation Transactions lacking economic attributes Do not enhance commercial / economic position Not conducted between 3rd parties (not an essential condition) Illustration S1 (high-taxed) transfer TM to S2 (low taxed) to manage risk and enhance value by marketing, exploitation of TM by S1 22
Potential special measures Hard to value intangibles Independent investor Thick capitalisation Minimal functional entities Taxation of excess (low-taxed) returns 23
BEPS Action 10 low value adding intra-group services Quality tax advice, globally
BEPS Action 10: Low valueadding intra-group services Draft aims to tackle excessive management fees and head office expenses Defines low value-adding intra-group services which warrants limited mark-up on cost Application of a consistent allocation key for all service recipients Specific reporting requirements in determining specific cost pool 25
BEPS Action 10: Low valueadding intra-group services Low value-adding intra-group services Supportive in nature Not a part of the core group business Do not require or lead to creation of intangibles Do not assume or create significant risk 26
BEPS Action 10: Low valueadding intra-group services Specifically excluded Services constituting core business Research and development Manufacturing and production Sales, marketing and distribution Financial transactions Extraction, exploration, or processing or natural resources Insurance and reinsurance Services of corporate senior management 27
BEPS Action 10: Low valueadding intra-group services Benefit testing Asia tax environment continues to change rapidly Specifically excluded: Independent enterprise in comparable circumstances would have been willing to pay or perform for itself Shareholders activities Performs solely because of it s ownership interest in one or more other group members v stewardship activity Duplication activities that duplicate what another group member is performing itself or is being by a third party 28
BEPS action 10: Low valueadding intra-group services Mark up Cost plus or CUP is acceptable Cost Direct and indirect (subject to allocation using methods chosen consistent with would be acceptable in 3 rd party situation) Simplified benefits test Prove benefits by categories of services as opposed to a specific charge Documentation 29
Action 10 other high risk transactions Paper discusses various aspects of risks but does not define high risk transactions Should high risk transactions be defined, paper also does not specify any particular treatment What does that mean to taxpayer? Continue what is normally expected to support arm s length principle such as proper transfer pricing documentation until further clarification is available. 30
BEPS action 13 country by country reporting Quality tax advice, globally
Action 13: Country by country reporting 6 February 2015, OECD releases Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting Follows CbC report issued on 16 September 2014 32
Action 13: Country by country reporting One of the BEPS objectives is transparency / greater information for tax administrators CbC fits this objective The others are: Action 5: Counter harmful tax practices more effectively, taking into account transparency and substance Action 11: Establish methodologies to collect and analyse data on BEPS and the actions to address it Action 12: Require taxpayers to disclose their aggressive tax planning arrangements 33
Action 13: Country by country reporting The purpose of CbC reporting is risk assessment Intent is to give tax authorities an overview of where the profits, sales, employees, and assets are located where taxes are paid Intended to serve as an initial high-level risk assessment to make a decision about where the tax authority should allocate its limited resources what should be reviewed further, where to focus 34
Action 13: Country by country reporting The 6 February 2015 Guidance Still some practical implementation issues to be determined Guidance provides answers to: which companies are subject to reporting requirements timing of preparation and filing of the CbC report use of the CbC report 35
Action 13: Country by country reporting The 6 February 2015 Guidance indicates that: CbC reporting will be required only of MNEs with annual consolidated group revenues that exceed 750 million OECD has indicated that this will exclude about 85-90% of all MNE groups, but it covers MNE groups that control about 90 % of all corporate revenue 36
Action 13: Country by country reporting The 6 February 2015 Guidance indicates that: first CbC reports must be filed for MNE fiscal years beginning on or after January 1, 2016. Given the recommendation in the September 2014 report that MNEs be allowed one year from the close of the fiscal year to which the CbC report relates to prepare and file the CbC report, the first reports are due December 31, 2017 37
Action 13: Country by country reporting Concerns? OECD has stated that CbC should not be used for a formulary apportionment approach Reports will be a mix of tax information and financial information so could be misleading Some public interest groups have been pushing for public disclosure of CbC-type information With greater dissemination of confidential information, there is inherently greater risk 38
Action 13: Country by country reporting Comments CbC should not be a mindless exercise Just as with any documentation, you need to think about how your information might be misread or misconstrued In particular, think strategically about what you say under: Additional information: Please include any further brief information or explanation you consider necessary or that would facilitate the understanding of the compulsory information provided in the country by country template. 39
Action 13: Country by country reporting Status: German: Federal Ministry of Finance recently introduced plans for the implementation of CbC reporting India: Country-by-country reporting has been proposed, and will likely coincide with the implementation of other BEPS actions in 2017 40
Action 13: Country by country reporting Status: Spain: The Minister for Finance announced that countryby-country reporting obligations will be introduced in the legislature soon UK: Will adopt the OECD s CbC reporting template effective from 1 January 2016 41
Action 13: Country by country reporting Status: US: Has made an informal commitment to introducing country by country reporting in the near future, although a formal discussion of timetables and structure is yet to occur 42
Taxand s Take Quality tax advice, globally
Taxand s Take OECD s work on intangibles is commendable and sheds to light some of the thorny issues of transfer pricing Practical illustrations have been provided at several instances which take root from matters litigated in India and elsewhere It is expected that OECD shall deal with pending issues including re-characterisation and guidance on hard to value intangibles by September 2015 44
Taxand s Take (cont) Much deliberations amongst stakeholders (consultants, industry, government) shall continue before finalisation CbC is coming - so start preparing Consider what your group will look like under CbC prepare a pro forma now Start thinking about what additional information you will provide 45
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