17 June 2015 Marlies de Ruiter Head Tax Treaties, Transfer Pricing and Financial Transactions Division Centre for Tax Policy and Administration Organisation for Economic Cooperation and Development 2, rue Andre Pascal 75775 Paris Cedex 16 France By email: taxtreaties@oecd.org Comments on Revised Discussion Draft on BEPS Action 6: Prevent Treaty Abuse Dear Ms. De Ruiter: EY appreciates the opportunity to submit these comments to the OECD on the revised discussion draft on BEPS Action 6: Prevent Treaty Abuse released on 22 May 2015 (Revised Discussion Draft). These comments build on our 9 January 2015 comment submission on the earlier Action 6 discussion draft released on 21 November 2014. Our focus with these comments is on the need to ensure that efforts to protect against the grant of tax treaty benefits in inappropriate circumstances do not interfere with the grant of such benefits in appropriate circumstances. As the OECD requested, this submission is relatively brief, and it focuses in particular on new proposals included in the Revised Discussion Draft. Alternative Simplified Limitation on Benefits Provision The Revised Discussion Draft includes an alternative limitation on benefits (LOB) provision that is a simplified version of the LOB provision included in the September 2014 Report on Action 6. This simplified LOB provision is described as being intended for use in combination with a principal purpose test (PPT) provision. The concept of a simplified LOB provision is a welcome one. However, the statement that such a provision is intended to be used in combination with a PPT provision seems overly prescriptive. Page 1 of 5
This provision would be a new tool for countries to use in addressing the potential for treaty shopping. Its application would be relatively straightforward, which is an important consideration, particularly for countries where such provisions have not been used before. We believe that countries should be free to choose to use the LOB provision that is most appropriate to their own circumstances, whether in combination with a PPT provision or in combination with an anti-conduit mechanism. Similarly, countries should be free to use some elements from the simplified LOB provision and some from the full LOB provision if they consider such a combination to best suit their needs. The Revised Discussion Draft further states that the non-application of the simplified LOB in a given case should not be interpreted in any way as suggesting that the PPT would not be applicable in that case. This statement reflects the OECD s view that satisfaction of the objective tests of the LOB provision should not be determinative of qualification under the more subjective approach of the PPT provision. Nevertheless, we believe that the presence of facts that result in satisfaction of such objective tests could properly be considered to be a relevant and positive factor in the PPT analysis. We urge the OECD to include in the final report on Action 6 an affirmative statement regarding this connection between the LOB provision (both the simplified LOB and the full LOB) and the PPT provision when such provisions are used in combination. Treaty Entitlement of Collective Investment Vehicles (CIVs) The Revised Discussion Draft reflects support for the conclusions of the OECD s 2010 Report on treaty benefits with respect to CIVs, including the need for flexibility in approaches in light of the variations in structures, investor bases and investment policies found across the range of CIVs. We welcome this decision not to specify a single approach to the treaty entitlement of CIVs. The Revised Discussion Draft also notes that proper implementation of the TRACE project s recommendations with respect to compliance approaches is essential to make any approach to treaty entitlement of CIVs operational. In this regard, we urge the OECD to make clear in the final report on Action 6 that adoption of the TRACE recommendations is an integral element of any provision with respect to the treaty entitlement of CIVs. Treaty Entitlement of Non-CIVs The Revised Discussion Draft includes a proposal for explicit confirmation of the conclusions with respect to the treaty entitlement and resident status of real estate investment trusts (REITs) Page 2 of 5
that are reflected in the OECD s 2008 Report on REITs. It also includes a proposal that the resident status of pension funds should not be affected by the partial or full tax exemption of such funds. Both of these proposals are to be further considered by the Working Party at its meeting later this month. We welcome these proposals and urge that they be incorporated in the final report on Action 6. In addition, the Revised Discussion Draft indicates agreement in the Working Party to continue to explore approaches for treaty entitlement of non-civ funds, noting that the work in this area might continue after the September 2015 adoption of the final report on Action 6. We appreciate the OECD s commitment to working on these important issues and to devoting the time necessary to develop solutions. We encourage the OECD to bring to this work a consultative approach and to seek input from the industry, including all the various industry sectors, in order to ensure that operational issues are fully considered and that the solutions developed are practical and workable. Until this work is completed, we urge that the OECD make clear that any new provisions restricting treaty access should not adversely affect non-civs. Derivative Benefits Provision and Relaxation of Restrictions on Intermediate Entities The Revised Discussion Draft reflects the Working Party s continuing consideration of the addition of a derivative benefits test to the LOB provision. Also reflected is the continued consideration of whether the restrictions on intermediate entities for purposes of ownership based tests in the LOB provision could be relaxed. Both of these issues are critically important in the context of modern global businesses that conduct activity involving multiple entities and multiple countries. The inclusion of a derivative benefits test that allows consideration of comparable benefits is essential to the functioning of an LOB provision. Such a rule would reflect the commercial realities and global nature of business today. In addition, the relaxation of proposed restrictions on intermediate owners under a derivative benefits test and other ownership based tests also is essential and would similarly reflect modern business structures. Active Trade or Business The Revised Discussion Draft includes a proposed modifications to the active trade or business test in the LOB provision that are to be considered further at the Working Party s meeting later this month. One proposed modification would limit the ability to take into account activities conducted by connected persons to situations where such persons are engaged in the same or a similar line of business as the resident to which the LOB provision is being applied. Global businesses often have activities divided among multiple entities for regulatory, management or Page 3 of 5
commercial reasons. It is appropriate that the activities of one group entity be attributed to an affiliated group entity for purposes of determining whether there is sufficient business connection to a country to dispel any concern about treaty shopping. We are concerned that introduction of a same or similar line of business requirement with respect to this aggregation rule would create significant uncertainty for businesses. We urge the OECD not to include such a requirement in the final report on Action 6. Moreover, if such a requirement were to be added to the active trade or business test, we urge the OECD to include detailed commentary explaining and illustrating when lines of business would be considered to be the same or similar. More generally with respect to the active trade or business test, we urge the OECD to add an illustrative example making clear that in analyzing whether a holding company would be considered to satisfy the active trade or business test, the aggregation rule would apply to allow the activities of a connected management company to be taken into account. We also request the OECD to clarify that the exclusion of the business of making or managing investments from the active trade or business test under the LOB provision would be limited to passive investment businesses and would not apply where the investor takes an active role in the business of the investee. Further, we ask the OECD to incorporate guidance that recognizes the circumstances of smaller countries and focuses on the characteristics of the business functions conducted rather than merely the quantity of such functions. PPT Provision We continue to be concerned that the proposed PPT provision is overly vague and would add excessive uncertainty with respect to access to treaty benefits by introducing a subjective standard that would be difficult to evaluate and administer in practice because it is dependent on the intent of the taxpayer. Such uncertainty would interfere with the proper functioning of tax treaties and with appropriate access to the intended benefits of tax treaties. We urge the OECD to incorporate into any PPT provision a more objective approach for taxpayers to demonstrate that they satisfy the provision. As discussed in our January submission, such an approach could include, for example, a derivative benefits type test and an active business type test. Where these tests are satisfied, the PPT should not be considered to apply to deny treaty benefits. Special Tax Regimes The Revised Discussion Draft includes a proposal for a new treaty provision that would deny certain treaty benefits in the case of income that is subject to a special tax regime. This proposal Page 4 of 5
is discussed in the context of the potential for inclusion of a derivative benefits rule in the proposed LOB and is described as addressing some of the concerns about such inclusion. We appreciate the OECD s continued work on developing approaches that would facilitate the addition of a derivative benefits rule. However, we believe that development of recommendations regarding the substance and reach of any special tax regime provision properly should be done in connection with the OECD s work on BEPS Action 5 on harmful tax practices. Addressing such matters with respect to the special tax regime concept under Action 5 would ensure greater consistency with the approach to the consideration of other favorable tax regimes being addressed in the work under Action 5. ***** If you have questions or would like further information on any of the points discussed above, please contact Barbara Angus (barbara.angus@ey.com), Arlene Fitzpatrick (arlene.fitzpatrick@ey.com), Jim Tobin (james.tobin@ey.com) or me (alex.postma@eyg.ey.com). Yours sincerely On behalf of EY Alex Postma Page 5 of 5