Global Tax Policy and Controversy - Ernst & Young...final bend? 78 Digging into the data: the global tax policy outlook for 2015 84 Indirect tax developments in 2015 and beyond: Four

Global Tax Policy and Controversy BriefingIssue 16 | June 2015

Contributing EditorRob ThomasT: + 1 202 327 6053 E: ro b .t h o m as @ ey .c o m

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BEPS-related developments 12“ Th ere’ s a s t ro ng c o m m it m ent t o p u t t ing m o re energy b eh ind t h e MAP f o ru m . It ’ s a c h al l enge, t h at ’ s f o r s u re, b u t t h ere w as a s t ro ng u nders t anding at t h e p l enary t h at w e h ave t o get b eh ind t h is .”

— Interview with Josephine Feehily, outgoing chairman

of the Forum on Tax Administration

6i n terv i ew

inside issue 1614 A new mountain to climb: Tax reputation risk, growing transparency demands and the importance of data readiness

17 Staying up to date with Base Erosion and Profit Shifting developments

28 OECD releases discussion draft on CFC rules under BEPS Action 3

34 OECD’s public consultation on BEPS Action 4 on interest deductions and other financial payments

40 OECD explains agreed approach on intangible property regimes under BEPS Action 5

42 OECD releases revised discussion draft on follow up work on treaty abuse under BEPS Action 6

43 OECD releases revised discussion draft on preventing artificial avoidance of PE status under BEPS Action 7

44 OECD issues discussion draft on mandatory disclosure rules under BEPS Action 12

48 OECD issues implementation guidelines for country-by-country reporting under BEPS Action 13: Companies now have all information needed to achieve “transparency readiness”

54 OECD holds public consultation on BEPS Action 14 on improving dispute resolution

59 OECD holds public consultation on BEPS Actions 8-10 on transfer pricing

66 OECD releases 2013 Mutual Agreement Procedure statistics

70 European Union update: A dark horse on the final bend?

78 Digging into the data: the global tax policy outlook for 2015

84 Indirect tax developments in 2015 and beyond: Four trends that shape the global indirect tax landscape

90 Country updates

91 Australia New Australian anti-avoidance measures for multinationals

92 Australia Dealing with a BEPS-based tax review

96 China State Administration of Taxation looks to provide clarity on China’s General Anti-Avoidance Rule

102 India 2015 budget delivers key developments for inbound investors

106 South Africa South Africa’s BEPS position: Recent developments provide insight and direction

113 The UK’s Diverted Profits Tax: A Roundtable Discussion

121 US US Treasury Department proposes revisions to US model tax treaty to address US tax base erosion

122 US and India Tax authorities agree on a framework for resolving certain double tax cases

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Wit h t h e s p eed, vo l u m e and c o m p l ex it y o f t ax p o l ic y and l egis l at ive and regu l at o ry c h ange c o nt inu ing t o ac c el erat e, ac c es s ing t h e l eading gl o b al ins igh t s h as never b een m o re im p o rt ant .

EY is p l eas ed t o m ak e avail ab l e a Tax Po l ic y and Controversy Briefing portal, p ro viding earl ier ac c es s t o al l art ic l es in t h is p u b l ic at io n and m o re, inc l u ding int erview s w it h m inu t e- b y -m inu t e t w eet s o f k ey new s , dail y t ax al ert s and m o re int erview s w it h t h e l eading s t ak eh o l ders in t h e w o rl d o f t ax .

Ac c es s t h e new p o rt al at :ey.com/tpcbriefing

We c an al l b e f o rgiven f o r t h ink ing at t h e t im e t h at t h e Sep t em b er 2014 BEPS rec o m m endat io ns m igh t h ave rep res ent ed a h igh w at er m ark in rel at io n t o o u t p u t f ro m t h e OECD’ s BEPS p ro j ec t . In f ac t (and ac c ep t ing t h at Sep t em b er saw both discussion drafts and final recommendations — t h o u gh c ert ainl y no t as m any as t h e OECD h ad h o p ed f o r), t h e Sep t em b er o u t p u t w as s u rp as s ed b y b o t h t h e OECD’ s pre-Christmas output and, more recently, a veritable flurry o f new and revis ed dis c u s s io n draf t s , p u b l ic c o m m ent s , and c o ns u l t at io n s es s io ns o n virt u al l y every as p ec t o f t h e BEPS Ac t io n Pl an. Ou r BEPS t im el ine o n p age 16 s u m m ariz es t h e devel o p m ent s o f t h e l as t f ew m o nt h s , w h il e al l Ac t io ns are c o vered in individu al art ic l es .

Racing to the finish line: new drafts, revised drafts, public consultationsMany o f p re- Ch ris t m as draf t s w ere t h e c at al y s t f o r a s eries o f Janu ary and Feb ru ary 2015 p u b l ic c o ns u l t at io ns . Cert ain h igh l igh t s (o r p erh ap s , m o re ac c u rat el y , l o w l igh t s ) do s t and o u t . In p art ic u l ar, Ac t io n 14 o n dis p u t e res o l u t io n, t h e o nl y real “ p res s u re val ve” f o r t h e BEPS p ro j ec t , w as a dis ap p o int m ent t o t h e b u s ines s c o m m u nit y w h o h o p ed t h at t h e earl ier dis c u s s io n draf t m igh t h ave inc l u ded agreem ent o n m andat o ry , b inding arb it rat io n, w h ic h is view ed b y m any as a m ec h anis m f o r res o l ving dis p u t es . Th is is p art ic u l arl y c o nc erning in l igh t o f t h e ex p ec t at io n t h at rec o m m endat io ns u nder o t h er BEPS Ac t io ns w il l inc reas e dis p u t es and t h e as s o c iat ed ris k o f do u b l e t ax at io n. Bu s ines s w il l c ert ainl y b e h o p ing f o r m o re f ro m a revis ed Ac t io n 14 dis c u s s io n draf t in t h e c o m ing m o nt h s .

Wh il e Ac t io n 4 (dedu c t ib il it y o f int eres t and o t h er financial payments) may not have drawn such widespread disappointment, it did draw significant concern from business, w it h t h e OECD’ s Bu s ines s and Indu s t ry Advis o ry Co m m it t ee (BIAC) rep res ent at ive no t ing c o nc erns ab o u t t h e gro u p - w ide ap p ro ac h c o nt ained in t h e dis c u s s io n draf t , inc l u ding p rac t ic al c h al l enges and t h e p o t ent ial c reat io n o f p ervers e inc ent ives t o inc reas e t h ird- p art y l everage.

Th e rep res ent at ive, Wil l Mo rris , ex p res s ed t h e p ref erenc e o f BIAC for a fixed ratio approach, noting that such an approach is rel at ivel y s im p l e and s t ab l e, b u t f u rt h er no t ing c o nc ern ab o u t t h e dis c u s s io n draf t ’ s s u gges t io n t h at t h e b enc h m ark rat io s h o u l d b e l o w er t h an t h e rat io s c u rrent l y u s ed in s o m e c o u nt ries . Again, a revis ed dis c u s s io n draf t is ex p ec t ed in c o m ing m o nt h s , f u rt h er il l u s t rat ing t h e very real is s u es t h e OECD is f ac ing in t ry ing t o devel o p c o ns ens u s aro u nd h igh l y c o m p l ex and s ens it ive is s u es in a very l im it ed Sim il arl y , business has raised significant concerns on other discussion draf t s , inc l u ding o n Ac t io n 3 (Co nt ro l l ed Fo reign Co m p anies , ) w h ere BIAC al s o ex p res s ed c o nc ern t h at t h e l ac k o f c o ns ens u s reflected in the discussion draft represents a missed o p p o rt u nit y ; h ere, it w as no t ed t h at w h il e t h e o b j ec t ive o f CFC ru l es is t o c o m p l em ent t rans f er p ric ing ru l es t o dis c o u rage BEPS and t o redu c e h arm f u l t ax c o m p et it io n, t h e dis c u s s io n draf t f ail ed t o c l earl y art ic u l at e s u c h go al s .

Welc

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Global Tax Policy and Controversy Briefing4

Ac t io n 12 m eanw h il e (o n m andat o ry dis c l o s u re regim es ) m ay no t h ave y et at t rac t ed m u c h at t ent io n b u t h as t h e p o t ent ial t o int erac t w it h m any OECD and no n- OECD devel o p m ent s o f t h e f ew m o nt h s , no t l eas t t h e Eu ro p ean Co m m is s io n’ s 27 Janu ary ado p t io n o f a b inding general ant i- ab u s e ru l e (GAAR) in t h e Parent - Su b s idiary Direc t ive (PSD).

In s l igh t l y m o re p o s it ive new s , t h e OECD in earl y Feb ru ary rel eas ed t h ree addit io nal p ap ers : An agreed ap p ro ac h o n int angib l e p ro p ert y regim es u nder BEPS Ac t io n 5 (i.e., t h e UK/ Germ any p ro p o s al o n p at ent b o x es ), im p l em ent at io n gu idel ines f o r c o u nt ry - b y - c o u nt ry rep o rt ing u nder BEPS Ac t io n 13 (Art ic l e inc l u ded) and t h e m andat e f o r nego t iat io n o f m u l t il at eral ins t ru m ent s u nder BEPS Ac t io n 15. Ac t io n 5 and 13 devel o p m ent s are c o vered o n p ages 28 and 30, res p ec t ivel y .

European Commission developmentsTh e ado p t io n o f t h e PSD GAAR is b u t o ne new Th e ado p t io n o f t h e PSD GAAR is b u t o ne new devel o p m ent f ro m t h e Eu ro p ean Co m m is s io n in t h e area o f t ax evas io n and avo idanc e. 17 Dec em b er 2014 s aw t h e Co m m is s io n ex t end it s t ax ru l ings p rac t ic e inq u iry t o al l Mem b er St at es as w el l as anno u nc ing t h e int ent io n f o r a new Ac t io n Pl an t o c o m b at t ax f rau d and evas io n, w h il e 3 Feb ru ary 2015 s aw t h e o p ening o f y et ano t h er s t at e aid inves t igat io n, this time into Belgium’s “excess profit ru l ing” s y s t em . Th e Co m m is s io n’ s s t at ed int ent io n w as t o int ro du c e a new ac t io n p l an t h at f o c u s es o n a “ f airer and m o re t rans p arent t ax at io n ap p ro ac h w it h in t h e European Union.” The first part of this ac t io n p l an w as del ivered o n 18 Marc h 2015, w h en t h e Co m m is s io n p res ent ed a p ac k age o f t ax t rans p arenc y m eas u res . A k ey el em ent o f t h e t rans p arenc y Pac k age is a p ro p o s al t o int ro du c e q u art erl y , au t o m at ic ex c h ange o f inf o rm at io n b et w een Mem b er St at es regarding t h eir c ro s s - b o rder t ax ru l ings , inc l u ding Advanc e Pric ing Arrangem ent s (APAs ), w h il e a s ec o nd el em ent al s o c al l s f o r a o ne- o f f ex c h ange o f t ax ru l ings m ade

w it h in t h e l as t 10 y ears , w h ere s u c h ru l ings rem ain ac t ive at t h e p o int t h e revis ed Direc t ive is ado p t ed. As no t ed b y t h e Co m m is s io n it s el f :

“Member State Y would find out about the artificially high prices that the s u b s idiary is c h arging t o t h e p arent company, in order to shift profits to Mem b er St at e X. As a res u l t , it m ay b e ab l e t o ap p l y t h e ant i- ab u s e el em ent o f t h e Parent - Su b s idiary Direc t ive, and deny t h e c o m p any t h e u s u al t ax ex em p t io n f o r dividends .”

Th e s ec o nd p ac k age f ro m t h e Co m m is s io n (w h o s e Ju ne 17 l au nc h dat e c o m es af t er t h e l au nc h dat e o f t h is p u b l ic at io n) w il l f o c u s o n a new ac t io n p l an o n t ax avo idanc e and w il l h ave a p ro p o s al f o r a Co m m o n Co ns o l idat ed Co rp o rat e Tax Bas e - w it h t h e c o ns o l idat io n el em ent p o s t p o ned – at it s h eart , as w el l as c o nt aining a nu m b er o f s h o rt t erm m eas u res w h ic h are des igned t o int egrat e t h e res u l t s o f t h e BEPS p ro j ec t at EU Mem b er St at e l evel .

So , al l t h ings c o ns idered, t h e anno u nc em ent o f a Tax Trans p arenc y Pac k age, t h e p u b l ic at io n o f a s ec o nd p ac k age o f m eas u res f o c u s ing o n t h e CCCTB and t h e m any o ngo ing St at e Aid inves t igat io ns al l il l u s t rat e a rap id ex p ans io n o f t h e ex is t ing t ax w o rk o f t h e Co m m is s io n in t h e ant i- avo idanc e area.

Forum on Tax AdministrationOu r f eat u re int erview in t h is edit io n is w it h Jo s ep h ine Feeh il y , o u t go ing Ch air o f t h e OECD’ s Fo ru m o n Tax Adm inis t rat io n (FTA). We int erview ed Ms . Feeh il y s h o rt l y af t er t h e im p o rt ant Du b l in FTA m eet ing, w h ic h inc l u ded inf o rm at io n o n t h e s t rengt h ening o f t h e JITSIC net w o rk , b u t al s o o n t h e w o rk t h at t ax adm inis t rat o rs f eel is nec es s ary t o im p ro ve dis p u t e res o l u t io n. Of c o u rs e, as p irat io ns f o r im p ro vem ent are no t al w ay s c o ns is t ent w it h p o l it ic al o b j ec t ives , and w h et h er m andat o ry , b inding arb it rat io n c an ever b ec o m e a w el l - s u p p o rt ed, gl o b al real it y rem ains t o b e s een.

Mu l t il at eral devel o p m ent s , w h il e c rit ic al t o t h e f u t u re o f t h e c ro s s - b o rder t ax arc h it ec t u re, are o f c o u rs e no t t h e o nl y gam e in t o w n. In t h is edit io n w e p ro vide c o verage o f o u r 2015 Tax p o l ic y o u t l o o k , w h ic h il l u s t rat es t h at t h e b ro ad- b as ed, l o w t ax rat e t rend c o nt inu es t o p l ay o u t gl o b al l y . Th e gro w t h o f t h e t ax at io n o f c o ns u m p t io n h as b een ano t h er t ax “ m egat rend” o f rec ent y ears , w it h c o m p anies b eing t h e u np aid t ax c o l l ec t o rs o f go vernm ent . In t h at regard, w e h o p e t h at t h e ex ec u t ive s u m m ary o f EY ’ s “ Indirec t t ax in 2015” p u b l ic at io n w il l b e an int eres t ing read f o r al l . At t h e c o u nt ry l evel , devel o p m ent s c o nt inu e t o p l ay o u t at a h igh p ac e; h igh l igh t s inc l u de t h e p as s ing int o l aw o f t h e UK’ s Diverted Profits Tax, a similarly-focused m u l t inat io nal c o m p anies ’ ant i- avo idanc e m eas u re f ro m Au s t ral ia and a new Mo del Tax Treat y f ro m t h e US.

Wh il e it w il l nat u ral l y b e dec l ared a s u c c es s at No vem b er’ s G- 20 m eet ing in Tu rk ey , a c o m m o n ref rain t o day is t h at t h e BEPS p ro j ec t w il l b y no m eans b e over at that point. As a final thought, t h is is b o t h t h e m o s t c h al l enging and p erh ap s ex c it ing t im e t o b e invo l ved in Tax . By w o rk ing t o get h er w e c an ac h ieve s u c c es s f u l o u t c o m es t h at w il l w o rk b o t h f o r b u s ines s and regu l at o rs and del iver t h e c ert aint y and as s u ranc e t h at w e all seek. We hope you find this bumper edit io n o f o u r p u b l ic at io n a u s ef u l t o o l and p l eas e, do l et eit h er o f u s k no w if t h ere are specific issues we should cover in the c o m ing m o nt h s .

Global Tax Policy and Controversy Briefing 5

Rob HansonGl o b al Direc t o r, Tax Co nt ro vers y Servic es T: + 1 202 327 6053 E: ro b .h ans o n@ ey .c o m

Chris SangerGl o b al Direc t o r, Tax Po l ic y Servic es T: + 44 20 7 9 51 0150 E: c s anger@ u k .ey .c o m

Jo s ep h ine Feeh il y w as t h e c h airm an o f t h e Iris h Revenu e Co m m is s io ners u nt il t h e end o f Janu ary 2015 and w as t h e c h airm an o f t h e OECD’ s Fo ru m o n Tax Adm inis t rat io n (FTA), h o s t ing t h e Nint h Meet ing o f t h is f o ru m in Du b l in in Oc t o b er 2014. Sh e h as b een s u c c eeded in h er FTA ro l e b y Edw ard Tro u p , Tax As s u ranc e Co m m is s io ner and s ec o nd Perm anent Sec ret ary at t h e UK’ s t ax adm inis t rat io n, Her Maj es t y ’ s Revenu e and Cu s t o m s .

Ms . Feeh il y al s o rec ent l y c o m p l et ed h er t h ird t erm as c h airp ers o n o f t h e Co u nc il o f t h e Wo rl d Cu s t o m s Organiz at io n (WCO). Sh e t o o k u p t h e p o s it io n as c h airp ers o n f o r Irel and’ s new Po l ic ing Au t h o rit y in Feb ru ary 2015.

An interview with J osep hi n e F eehi l y , outgoing chairman of the OECD’s

Forum on Tax Administration In

terv

iew


Rob Thomas: Co u l d y o u s t art b y t el l ing u s ab o u t t h e Fo ru m o n Tax Adm inis t rat io n and its work? We’re all very focused on BEPS and t h e OECD at t h e m o m ent , b u t o u r readers m ay no t k no w m u c h ab o u t t h e FTA, it s vis io n, m is s io n and c o m p o s it io n.

Josephine Feehily: Th e o rigins o f t h e FTA c o m e f ro m a des ire b y Co m m is s io ners t o get t o get h er, s h are b es t p rac t ic es and c o l l ab o rat e ac ro s s b o rders . It w as s et u p ab o u t t en y ears ago b y a nu m b er o f c o m m is s io ners and Jef f rey Ow ens (t h e f o rm er h ead o f OECD’ s Cent re f o r Tax Po l ic y and Adm inis t rat io n). Th ere w as a c o nc ern in t h e int ernat io nal t ax area t h at o nl y t h e p o l ic y m ak ers w ere get t ing t o get h er and I rem em b er t al k ing w it h m y p redec es s o r, Frank Dal y , ab o u t w h ere t o go t o devel o p b es t p rac t ic es aro u nd t ax adm inis t rat io n.

It s eem ed t h at every b o dy w as m ak ing t h eir o w n b il at eral c o nt ac t s and b u il ding u p l o o s e net w o rk s t o dis c u s s b et t er w ay s o f do ing t h ings . Ou t o f t h at , t h e FTA grew t o enab l e c o m m is s io ners t o c o m e t o get h er p erio dic al l y t o t al k ab o u t t w o t h ings . Firs t , t o s h are b es t p rac t ic es and l earn f ro m eac h o t h er, rais ing t h e b ar o f t h e t ax adm inis t rat io ns ’ p erf o rm anc e general l y . Sec o nd, t o deep en c o l l ab o rat io n and c o o p erat io n ac ro s s t ax adm inis t rat io ns and t o m ak e s u re t h at adm inis t rat io ns w ere p art o f t h e w ider p o l ic y dis c u s s io n. Po l ic y m ak ers are go o d at m ak ing p o l ic y , b u t w e (t ax adm inis t rat o rs ) h ave t o ac t u al l y del iver t h e m o ney and t h e p o l ic y im p l em ent at io n at t h e end o f t h e day . Po l ic y m ak ing is no t an end in it s el f .

Over t h e y ears , t h e FTA h as gro w n and no w t h ere are 46 m em b er c o u nt ries . It ’ s m ade u p o f t h e OECD m em b ers p l u s a nu m b er o f o t h ers . We h ave rec ent l y devel o p ed a new c rit erio n f o r m em b ers h ip f o r c o u nt ries w h o w ant t o b ec o m e m em b ers : t h ey no w h ave t o s ign u p f o r au t o m at ic ex c h ange o f inf o rm at io n u nder t h e vario u s s t andards .

Rob Thomas: Th e FTA’ s c u rrent w o rk p ro gram t h at w as m andat ed at t h e 2013 FTA m eet ing in Mo s c o w c o vers w o rk ing s m art er, t ax deb t m anagem ent and m eas u res o f t ax c o m p l ianc e o u t c o m es . Are t h o s e s t il l o ngo ing o r h ave t h ey b een somewhat overtaken by recent events? What are the key focus areas right now?

Josephine Feehily: Th e w o rk o n eac h o f t h o s e is s u es l ed t o rep o rt s w h ic h w e endo rs ed in Du b l in.1 Th e m eas u res o f t ax c o m p l ianc e and t h e p rac t ic al gu ide t h at came out of that is a really difficult piece o f w o rk , w h ic h c ert ainl y is b y no m eans c o m p l et e. Bu t a do c u m ent w as p ro du c ed t o h el p c o u nt ries u nders t and h o w t o f o c u s o n o u t c o m es , no t j u s t o u t p u t s . We p ro du c ed a rep o rt o n deb t m anagem ent o n s m al l and m ediu m - s iz ed ent erp ris e (SME) c o m p l ianc e b y ado p t ing a s y s t em s ap p ro ac h . And w e h ad a f o u rt h rep o rt o n inc reas ing s el f - s ervic e c h annel s and el ec t ro nic s ervic es .

We didn’ t p ro du c e a new w o rk p l an f o r 2014- 15 in Du b l in. Th e FTA h as a new c h air, at l eas t o ne new vic e- c h air and new m em b ers . So w h at w e t o o k aw ay is a l is t o f t h ings t h at w e w il l t al k ab o u t f u rt h er b ef o re nail ing do w n a w o rk p l an f o r t h e y ear ah ead. Am o ng t h e t o p ic s , o ne t h at is o n t h e w o rk p ro gram , and w il l c ert ainl y m o ve ah ead, is t h e es t ab l is h m ent and b u il d- o u t o f t h e new Jo int Int ernat io nal Tax Sh el t er Inf o rm at io n Cent re (JITSIC) Net w o rk . Th ere’ s al s o f u rt h er w o rk t o b e do ne o n t h e Mu t u al Agreem ent Pro c edu re (MAP). And s o m e o f t h e m em b ers w o u l d l ik e t o s ee m o re w o rk do ne o n deb t m anagem ent , el ec t ro nic s ervic es and el ec t ro nic dat a c ap t u re t o deep en every b o dy ’ s u nders t anding o f t h e val u e c o m ing f ro m c ap t u ring t h ird-p art y inf o rm at io n in real t im e, rat h er t h an h aving t ax p ay ers s end a ret u rn a y ear and a h al f l at er. E- c o m m erc e ris k s are al s o o n t h e l is t . Overarc h ing al l o f t h is , t h ere w il l b e a revis it ing o f t h e arc h it ec t u re o f t h e FTA: w e h ave w o rk ing gro u p s , net w o rk s and p rio rit y p ro j ec t s , and it ’ s al l get t ing a b it c ro w ded. So w e gat h ered u p ideas and

1 Fo ru m o n Tax Adm inis t rat io n m eet ing in Du b l in,

24 Oc t o b er 2014.

7Global Tax Policy and Controversy Briefing

Rob ThomasDirector — Tax Policy & Controversy

Ernst & Young LLP T: + 1 202 327 6053

E: ro b .t h o m as @ ey .c o m

Chris SangerGl o b al Direc t o r, Tax Po l ic y Servic es

T: + 44 20 7 9 51 0150E: c s anger@ u k .ey .c o m

left them with the new bureau to work out the priorities that they would adopt in the coming year.

One thing that is a bit different in the last couple of the years is the balance between domestic best practice and international tax cooperation. I think it has shifted lately. It’s not absolutely dominated by base erosion and profit shifting (BEPS), but the implementation of the pieces of BEPS as they come along will assume a bigger prominence in the agenda going forward.

For example, the practical implementation of the automatic exchange of information will be a very significant piece of the FTA’s work because we don’t want 45 countries trying to devise their own solution. There was a very definite view in Dublin that we should try and work out how to do that together. Some countries are well advanced on it, but some are only just starting to think about it.

Rob Thomas: Is there a sponsor of that particular initiative to move it forward?

Josephine Feehily: Not until the bureau sits down and allocates jobs.

Chris Sanger: When might that be?

Josephine Feehily: I’d be surprised if they don’t do it informally, if not formally, in January because we’ve tended to have a bureau meeting every January. The FTA has committed to meeting about every year and a half, and the next one will be in China. So there is a deadline that will drive when the work has to be started and whether it’s going to be delivered for the next forum plenary in Beijing in the first half of 2016.

Enhanced cooperation between tax administrationsRob Thomas: Coming back to the FTA communiqué, there was language on agreement of a strategy for systematic and enhanced cooperation between tax administrations. Can you tell us what that means in practical terms?

Josephine Feehily: This particular piece of work is being sculpted by Australia. One of the immediate priorities which will be led by (ATO) Commissioner Jordan is to put flesh on that strategy. This means taking the existing physical JITSIC structure with physical offices and morphing it into a virtual network instead. Previously, JITSIC had a small number of members. This new network will be open to everybody. In the context of the network, members will be asked to appoint a single contact person, who will be kind of a competent authority and liaison officer all blended in one. Periodically, the members will form themselves into groups to carry out compliance activities, interventions, audits, risk assessments and simultaneous examinations, under a framework that the strategy will specify in considerably more detail now that Chris (Jordan) has received the plenary’s endorsement to draw it up.

Chris Sanger: How are you making sure those different groups are consistent? Is that effectively the role of the framework?

Josephine Feehily: I think the groups may not necessarily be consistent because they might decide to do different interventions. One thing for certain, of course, is that nobody in the group can do anything that there isn’t a legal basis for. It all has to operate within existing legal frameworks, existing treaties and competent authority models until there’s a new model. It’s about providing structure and guidance when the groups come together so that they will know how to navigate that whole competent authority space safely and proactively.

Chris Sanger: When do you expect to see that come to fruition?

Josephine Feehily: Drafts will be developed in the course of the next year. In the meantime, there may be live pilots as well. The smaller JITSIC structure is already there, and I think you’ll find that other countries will join them in doing pilots.

Mutual agreement procedureChris Sanger: One of the other things that the communiqué noted was the practical operation of the mutual agreement procedure. Can you tell us how that fits with the strategic plan or whether this is being led by one of the other countries?

Josephine Feehily: That’s being led by the United States. We were conscious that the MAP process had fallen behind a little bit and did not have the same energy around it. But it has to work and there has to be a way of concluding transfer pricing issues. The strategic document (on MAP) was presented for endorsement. The members have committed to working together actively to promote MAP, to ensure that the principle as embedded in the network of tax treaties and conventions is properly applied and to put resources into the process to make sure that everything moves along quickly. It’s a vision for all MAP forum participants to ensure that the effectiveness of the procedures is collectively improved to meet the needs of both government and taxpayers.

The forum members were invited to sign up, collaborate and work more actively, closely and quickly to resolve cases. That forum will continue to be led by the US. It’s a very important piece of the jigsaw because, whether it’s in BEPS-land or in tax administration, we’re talking about double taxation and double non-taxation, so there must be mechanisms that work in order to enable those things to be addressed at the level of individual cases. There’s a strong commitment to putting more energy behind the MAP forum. It’s a challenge, that’s for sure, but there was a strong understanding at the plenary that we have to get behind this.

“ Previously, JITSIC had a small number of members. This new network will be open to everybody.”


Chris Sanger: How does that fit with mandatory arbitration and India saying that they would not support mandatory and binding arbitration?

Josephine Feehily: This is just a personal view — but if MAP works, it can avoid the mandatory arbitration question. There would have been a sense when MAP was first established that it is much better to have a mutual agreement process that everybody participates in rather than going down the mandatory (arbitration) route alone because there are complicated global issues around the mandatory option.

Putting on my previous WCO hat, mandatory arbitration doesn’t always work very fast for either the government or for business. So if we can make MAP work, I think it should avoid mandatory arbitration becoming necessary in the vast majority of cases.

Tax control frameworksRob Thomas: Staying with the (FTA) communiqué, there was a reference to cooperative compliance, specifically tax control frameworks (TCFs). Can you talk a little bit about how TCFs fit into cooperative compliance, and the methodology behind them?

Josephine Feehily: I see this very much as an evolution, and in some cases it might be old wine in new bottles. It’s a tool that will enable cooperative compliance concepts to be more widely available at the SME level in particular. At the end of the day, as tax administrators we all have more taxpayers than we can police, so having control frameworks and models in place that leverage the business’ own controls seems to be sensible. So at one level, it’s an evolution of the language, both broader and also “downwards” to the SME sector. Some countries, such as the Netherlands, are far advanced on this, while other countries, including Ireland,

are still revisiting and refreshing their cooperative compliance framework. So they haven’t yet begun to move it into an SME space. I imagine a lot of countries that are not as active in this space as the Netherlands are very keen to learn from this work to see how they can leverage business’ own controls in particular.

When your clients are asking about (tax control) frameworks, if they have a framework that does a tax risk assessment for them that can be shared with the administration, I see it as a win-win for everybody. We don’t have enough resources to do everything we need, and neither do any of the other tax administrations. Part of it is about managing resources, while the other part is about leaving compliant businesses alone, freeing us up to focus on the risky ones.

Rob Thomas: Can you foresee the FTA or the OECD generally putting some tighter definitions around what they would expect to see in a TCF, or is it really up to the company to decide?

Josephine Feehily: As this work goes forward, best practice guides will likely emerge. There are similar road maps for tax administration, but clearly these guides will need to be available publicly. So I’d be surprised if the FTA didn’t produce best practice guidance on what a TCF might look like and what it might contain. However, the level of granularity will depend on how interested members are in continuing to take the work on cooperative compliance forward. But certainly in the short term, I could see the various networks producing public documents that would define what a control framework might contain in an ideal situation.

Rob Thomas: Moving on to enforcement issues. We ran a survey a few months ago with about 900 clients, of whom 74% said they felt that some, but certainly not all,

tax administrators have started BEPS-based reviews or BEPS-based audits, even before the September recommendations had been made or the discussion drafts were released. Is there any danger of the BEPS brand being misused?

Josephine Feehily: Administrations can’t begin to apply provisions that aren’t in their law. So I imagine what’s happening is that the global discussion about base erosion, effective corporate tax rates and tax avoidance is probably causing administrations to put multinational corporation (MNC) tax compliance a bit higher up on their risk radar. Maybe what they’re seeing is more activity, but that’s just because consciousness is rising, driven by the global discussion about the taxation of multinationals rather than being exclusively BEPS-driven. When corporate taxation is moving from the business pages to the front pages, it becomes common currency. So it’s simply that administrations are saying maybe they should be looking a bit more closely at some of the practices of some MNCs. I expect that people are actually using the word BEPS as shorthand for the focus on multinational compliance.

Rob Thomas: I know it’s not scheduled to be reviewed until 2020, but do you foresee countries pushing for more information, either broader or deeper information at the entity level, to be reported to them under country-by-county (CbC) reporting?

Josephine Feehily: I imagine that some countries might. From an administration point of view, we need to manage the information that we get. For my own administration, for example, getting from where we are to CbC reporting will be a significant first step. Whether what is currently envisaged under CbC will whet administrations’ appetite for more information will depend on what transpires from the analysis of the data

“The better we become at gathering, grinding and analyzing the information, and the

more effective we are at managing data and mitigating risks using data, there is a possibility

that people will ask for more in the future.”


that is received in the first offering and their ability to leverage the data. But I think you are right to ask the question, and I think that question will be asked when the time for review comes around.

In some ways, the better we become at gathering, grinding and analyzing the information, and the more effective we are at managing data and mitigating risks using data, there is a greater possibility that people will ask for more in the future.

Tax in the boardroomChris Sanger: We’ve seen many tax administrators wanting to put tax into the boardroom as much as they can and we’ve seen that actually be embedded into law in Spain. Where do you see this trend going? Is this something you’re discussing at the FTA as a best practice?

Josephine Feehily: I think it was more active when the United Kingdom and South Africa produced their codes in relation to the taxation of banking. Right now, it’s a topic that people talk about rather than being actively part of a work program. We would have found the idea of directors’ compliance statement very useful to us (in Ireland), but it was dropped from company law some time ago. I certainly talk about the whole concept at various boardroom events in Ireland, but I think the extent to which administrations will take it forward in a legal context will vary.

We do have a mechanism (in Ireland) to influence state bodies, and we use that to embed tax in the code of practice for governance of state bodies. I think in many countries, reasonably similarly to what we’re doing, getting tax into the boardroom is about engaging with the various representative bodies and using persuasion, then getting access to boardrooms and to CEOs and CFOs under the banner of cooperative compliance rather than putting it in law.

There wasn’t any active discussion in Dublin about putting tax in the boardroom onto a legal footing. If it is being discussed in the FTA architecture, it would

be in the large businesses network, but it hasn’t reached my desk.

Let me go back for a second to the CbC reporting, to color in something that’s been playing around in my head for a while. Consumer activism may be a bigger driver for granularity than necessarily everything that’s happening in the BEPS field. We’ve seen consumer activism and the impact it has in relation to the Public Accounts Committee in the UK, for example. Certainly with High Street brands and retailers, I’m hearing consumer demand for information on how much of their profits is earned in any country. Customers are looking across the world without leaving their computer or table, transparently seeing what prices are being charged, and they’re wondering whether they’re being ripped off in the tax area.

Chris Sanger: We’ve seen the development of this in the UK with the “Fair Tax Mark,” which originally focused on those companies that have a large consumer base. It’s more of a transparency mark than it is “fair tax” mark.

Josephine Feehily: If anyone can define “fair” in a tax context, I’ll buy them a drink! I have a background in industrial relations and we had a concept of “felt fairness.” It probably applies more in tax than any technical definition of fairness. If it doesn’t feel fair, it doesn’t matter how legally sound it is. Finding that point in both tax policy and tax administration where citizens feel that something is fair is a big challenge.

Confidence in the tax systemChris Sanger: One of the challenges I think we have in some places is that all the focus on corporate tax has led to an unfair loss of confidence in tax administrations actually doing their job. That can become a loss of confidence in the tax system generally. Is there something that the FTA can and should be doing in that space to try and bolster things on a wider basis?

Josephine Feehily: First of all, having the forum and the mechanisms to share our experience is very helpful for individual commissioners. In terms of the public perception that tax systems are not being administered fairly, I’m not sure that there’s much the FTA can do about that. It probably has to be tackled at the national level in order to have kind of an authentic local feel to it. In Ireland, for example, in the last few years, Pascal (Saint-Amans) has appeared a number of times in the local (Irish) media, and that’s been helpful, but only for the group that actually engages with what’s going on. Those are the people who know there is a difference between the global tax rules and the interplay of those rules. I think the people who would be interested in an FTA- or OECD-led discussion already understand the differences and the challenges. So I think we have to handle the public confidence piece largely on a case-by-case basis, nationally, depending on our cultures.

Rob Thomas: Aside from how you managed to find the time for the FTA role and the World Customs Organization, what kind of intersection was there between the tax and the WCO role? What benefits did you gain from having exposure to both?

Josephine Feehily: Well to be honest, I wouldn’t have chosen to have both at the same time if it hadn’t happened the way it happened, with Doug Shulman stepping down (from the FTA). I couldn’t have done it without a lot of support from my own organization. But we (in Ireland) are an integrated organization, and increasingly you’re seeing that revenue agency model in developing countries and also in some European countries where mergers (of tax and customs agencies) are actively happening. So from either the customs experience or the tax experience, I didn’t find that difficult. Stepping from one to the other wasn’t particularly difficult because we do it at home every day. I actually find it strange that some tax administrators aren’t learning more from their customs peers.

“ Consumer activism may be a bigger driver for granularity than necessarily everything that’s happening in the BEPS field.”


But I was surprised at the institutional level that there was very limited engagement and there were a couple of things that I think are likely to deepen in the coming years. First of all, inevitably, the organizations will end up discussing transfer pricing and customs valuation. No matter how many times people say it’s different and it has a different purpose, information is being shared globally and mismatches will become evident. So I can see a need for the two organizations to develop frameworks and structures to align those two pieces, to align valuation for transfer pricing purposes and for customs purposes, to avoid misunderstanding and to enable administrations and business and practitioners to know how things will be interpreted in the two different fora.

The other piece that struck me very much at the WCO in 2014 was an active discussion led by Brazil and some of the other BRICS about exchange of information. Customs is nowhere near as advanced as the OECD (tax administrations) on this. There is a WCO convention called the Johannesburg Convention, which was about exchange of information, which was put on the books of the WCO about 10 years ago and had very few signatories. So we had a very active discussion at the latest WCO meeting about the fact that the tax world was overtaking the customs world at an increasing pace in terms of exchange of information.

When I went to Berlin recently (for the meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes), I met a WCO official who had been sent to sit in at the global forum to learn about the exchange of information. So I think that’s an area of common interest as well. Finally, the WCO has the Harmonized System, has been a standards-setting organization for years and has been defining data elements for just as long. It has put in place very good structures for defining data elements and for standards settings in 179 countries. That’s going to be increasingly important for tax.

Obviously we have defined the data elements for the exchange of information, but if we move into other data elements, learning how 179 countries cope with it, I think, is something that the OECD could learn from the WCO.

There’s also enormous scope for learning from how global customs and global trade works in terms of data exchange and how customs can learn from the tax world how to build a trust environment for exchanging information, because low trust has damned customs from deepening the exchange of information.

Chris Sanger: So a piece of advice for your new chair of the FTA, for Edward Troup, would be to keep close to the WCO?

Josephine Feehily: At least to be aware that it’s there and to be aware that that relationship should deepen, even if only driven by transfer pricing valuation questions.

Chris Sanger: What other advice would you give to Edward as the new chair of the FTA?

Josephine Feehily: One piece of advice I already gave to Edward is that it’s time to revisit the architecture (of the FTA) and make sure that groups don’t keep doing things for the sake of doing things when those things are not necessarily focused on the priorities. He had already come to that view himself, by the way.

A second piece was that it wouldn’t be wise to rush to settle priorities. Rather, gather up the ideas and then reflect with the vice chairs before settling on priorities. I personally found the vice chairs very helpful. Also, getting to know the secretariat at a deep level is very important.

Chris Sanger: Where next for you personally?

Josephine Feehily: I have a new job!

Chris Sanger: So we heard! Rather than policing taxpayers, you’re going to be policing for real!

Josephine Feehily: In the last week, I’ve been nominated by the government to be the first chair of a new independent policing authority, a body which Ireland currently doesn’t have. We have a single national police force that reports to a minister. So a political decision was made a number of months ago to put in place a policing authority between the police commissioner and the political system.

It’s a feature of the police service, for example in Northern Ireland, in other parts of the UK and in some other countries. The legislation hasn’t passed yet, but my immediate plans are to take a little bit of time out, and then to chair the authority, which will be the oversight body for our national police force.

Chris Sanger: It sounds like you’ve got a full set of new challenges.

Josephine Feehily: When I thought about it, some of the concepts were not dissimilar, and that’s what attracted me to it. The police service here has suffered a bit of public confidence bashing, which is something we worry about all the time in tax. In a self-assessment environment, we use language like “taxing by consent.” Policing by consent is one of the key policing principles. That balance between service and enforcement, between being responsive to the needs of the community and at the same time upholding the law.

At some level, the concepts are not alien. Its things like how to have the kind of structure where you have visibility across the economy, which we do in tax, in policing across society. And at the same time, focusing your resources on the most risky cases, just like we do in tax. So the authority is very much around oversight of the commissioner’s strategic plan, governance, ethics, integrity and public accountability. So at one level, I’m not saying that the elements won’t be different—of course they’ll be vastly different—but the concepts are not entirely alien. So that’ll keep me off the streets for a while!

“There’s also enormous scope for learning from how global customs and global trade works in terms of data exchange and how customs can

learn from the tax world how to build a trust environment for exchanging information.”


BEPS-related developments

Ireland

UK

Spain

Iceland

Irish Department of Finance launches Knowledge Development Box consultation.

UK’s Diverted Profits Tax passed into law.

Spain announces new country-by-country reporting obligations.

Iceland issues final regulation on transfer pricing documentation.

Ghana

Ghana commences transfer pricing audits — Ghana Revenue Authority reveals that over 250 transfer pricing audits have been initiated.

Nigeria

Nigeria begins first audit cycle under new transfer pricing regulations.

Honduras

Honduran Tax Authorities create an International Taxation and Transfer Pricing Department.

United States

United States releases Model Tax Treaty including new clauses designed to counter US tax base erosion.


Australia

Australia’s Federal Budget includes a new Multinational Companies Anti-Avoidance Rule and GST on inbound digital services.

France

A think tank affiliated with the French Government issues a report entitled “Taxation and the digital economy: A survey of theoretical models.”.

Finland

Finland proposes changes to transfer pricing legislation.

Denmark

Denmark introduces international GAAR.

Czech Republic

Czech Republic announces closer scrutiny of transfer pricing.

Luxembourg

Luxembourg introduces legal framework for tax rulings and updates transfer pricing rules.

Belgium

European Commission opens state aid investigation into the Belgian excess profit ruling system.

Japan

China

Singapore

Japan’s coalition leading parties release an outline of the 2015 Tax Reform, including a proposal for an anti-hybrid measure.

China issues administrative guidance on general anti-avoidance rules, issues new Notice 7 on indirect transfers of assets.

Singapore Tax Authority releases updated transfer pricing guidelines.

New Zealand

New Zealand’s Minister of Revenue releases two official reports regarding BEPS.New Zealand government releases 2015–16 Tax policy work program, including major focus on BEPS.

India

India announces a two-year delay to GAAR implementation.

South Africa

South Africa’s Davis Tax Review Committee issues report on BEPS.South Africa’s tax administration increase scrutiny of retroactive transfer pricing adjustments.

Greece

New Bill of the Greek Government includes stricter substance requirements on cross-border and related party transactions


A new mountain to climbTax reputation risk, growing transparency demands and the importance of data readiness

Co m p anies f ac e m o re rep u t at io n- rel at ed t ax ris k s t h an ever, ac c o rding t o o u r rep o rt , A new m o u nt ain t o c l im b . Pu b l ic o p inio n is driving

p o l it ic al ac t io n and req u iring a h igh er t h res h o l d t h an c o m p l y ing w it h t h e l et t er o f t h e l aw .

Co ns t ant s c ru t iny f ro m s t ak eh o l ders , es p ec ial l y new s and s o c ial m edia, h as b u s ines s es c o nc erned ab o u t p ro t ec t ing t h eir b rand. If a c o m p any do es n’ t p ro ac t ivel y m anage t h e inc reas ed rep u t at io nal ris k p o s ed b y t h e o ngo ing ” f air s h are o f t ax ” deb at e, it s im age c an b e q u ic k l y t arnis h ed.

In our survey of 962 tax and finance executives in 27 countries, we found:

8 9 % o f t h o s e w h o w o rk ed f o r t h e l arges t gl o b al c o m p anies s aid they were somewhat or significantly concerned about news m edia c o verage, h o w m u c h c o m p anies p ay in t ax o r t h eir

s eem ingl y l o w ef f ec t ive t ax rat es . In 2011, f ew er t h an h al f o f c o m p anies s aid t h ey w ere s im il arl y c o nc erned.

9 4% o f t h e l arges t c o m p anies h aving an o p inio n o n t h e m at t er t h ink t h at gl o b al dis c l o s u re and t rans p arenc y req u irem ent s w il l c o nt inu e t o gro w in t h e nex t t w o y ears .

8 3% s aid t h ey regu l arl y b rief t h e CEO o r CFO o n t ax ris k s o r t ax c o nt ro vers y .

43% s aid t h ey regu l arl y b rief t h e au dit c o m m it t ee.

65% o f t h o s e w h o w o rk ed f o r t h e l arges t gl o b al c o m p anies s aid they were somewhat or significantly concerned about news m edia c o verage, h o w m u c h c o m p anies p ay in t ax o r t h eir

s eem ingl y l o w ef f ec t ive t ax rat es . In 2011, f ew er t h an h al f o f c o m p anies s aid t h ey w ere s im il arl y c o nc erned.


Greater transparency on the horizon As s t ak eh o l ders b ec o m e m o re c o nc erned ab o u t w h ere t ax revenu e is c o m ing f ro m , m o re t ax t rans p arenc y o b l igat io ns are b eing p u t in p l ac e. At t h e s am e t im e, go vernm ent s h ave o p ened t h eir l ines o f c o m m u nic at io n and are no w ex c h anging m o re inf o rm at io n rel at ed t o individu al and c o rp o rat e t ax at io n.

Fro m f o rt h c o m ing c o u nt ry - b y - c o u nt ry rep o rt ing ru l es p ro p o s ed b y t h e OECD u nder Ac t io n 13 o f its Base Erosion and Profit Shifting project to a new p ac k age o f t ax t rans p arenc y p ro p o s al s f ro m t h e Eu ro p ean Co m m is s io n, w h at a b u s ines s t el l s o ne go vernm ent ab o u t it s t ax es , it w il l s o o n b e t el l ing al l .

Preparation, communication and flexibility are ins t ru m ent al f o r b u s ines s es f ac ing t h is new t rans p arenc y enviro nm ent .

Co m p anies need:

• Ro b u s t p ro c es s es and o vers igh t• Wat ert igh t do c u m ent at io n and au dit t rail s• Leading operational systems• Wo rl d- c l as s dat a m anagem ent s y s t em s

Wit h t h es e el em ent s in p l ac e, new rep o rt ing o b l igat io ns c an b e m et w it h l es s dis ru p t io n t o b u s ines s ac t ivit ies . Fu rt h erm o re, t h e ap p ro p riat e c o m m u nic at io n t o o l s c an b e devel o p ed t o h el p m it igat e f u t u re rep u t at io nal ris k s . Su c h readines s w il l al s o h el p c o m p anies t o c o m m u nic at e m o re ef f ec t ivel y int ernal l y as w el l as ex t ernal l y .

S i x tacti cs to hel p y ou p rep are

1 Actively monitor the changing landscape. Trac k m edia c o verage and s o c ial m edia c h annel s . Th is m ay

req u ire c l o s er c o l l ab o rat io n w it h c o m m u nic at io ns and PR f u nc t io ns w it h in t h e ent erp ris e.

2 Assess your readiness to respond to reputational risk threats. Unders t and w h et h er y o u h ave

c o m p l et e vis ib il it y o f t ax s t ru c t u res and t ax es p aid w h erever y o u o p erat e. Kno w w h et h er t ax es p aid are in l ine w it h y o u r b u s ines s res u l t s . And k no w w h et h er t h e b o ard h as an agreed- u p o n s t rat egy and p l an o f ac t io n f o r res p o nding t o a negat ive s t o ry .

3 Enhance communication with internal and external stakeholders. Co m m u nic at ing ef f ec t ivel y ab o u t y o u r

c o m p any ’ s t o t al t ax p ic t u re, t ax p o l ic ies and o veral l t ax profile is critical to successfully managing tax reputation ris k s . Be s u re y o u r c o m p any is p rep ared if a c ris is w ere t o c o m e ab o u t .

4 If appropriate, prepare a total tax picture. Th e devel o p m ent and s u s t enanc e o f an ac c u rat e t o t al

t ax p ic t u re o f t en s it s at t h e h eart o f a t ax rep u t at io n ris k s t rat egy . It inc o rp o rat es m u c h m o re t h an l is t ing o f t ax es p aid aro u nd t h e w o rl d, ins t ead p res ent ing deep er ins igh t s o n w h y a c o m p any o p erat es w h ere it do es , w h y it is s t ru c t u red in t h e w ay it is and h o w it m anages it s t ax dep art m ent .

5 Decide with whom your company wishes to communicate about tax. Bey o nd go vernm ent s ,

inves t o rs m ay w ant t o k no w h o w t h e OECD and o t h er ref o rm s w il l af f ec t y o u r c o m p any . Y o u m ay w is h t o as s u re em p l o y ees y o u r t ax p o l ic ies are s o u nd. Y o u m ay al s o dec ide t o ado p t a m edia s t rat egy .

6 Embed reputation risk thinking into your business and decision-making processes. In

t h e c u rrent enviro nm ent , t ax is s u es c an em erge f ro m al m o s t any w h ere. Be s u re t o f ac t o r rep u t at io n ris k int o y o u r b u s ines s o p erat io ns and f o c u s o n c as e- s c enario s t rat egies .

Do n’ t l eave y o u r c o m p any ’ s rep u t at io n t o c h anc e. To t h rive in t h e c u rrent rep u t at io n ris k enviro nm ent , it c an be useful to define yourself before others define you.

A ccess the ful l rep ort at www. ey . com/ tax ri sk seri es



Wh il e o ne m ay h ave ex p ec t ed t h e OECD’ s Sep t em b er 2014 rec o m m endat io ns t o rep res ent a

p eak o f ac t ivit y w it h in t h e am b it io u s BEPS p ro j ec t , rec ent m o nt h s h ave s een a s t eady flow of new developments, from both the OECD and t h e Eu ro p ean Co m m is s io n. Wit h s o m e day s and w eek s s eeing a real s p ik e o f new ac t ivit y , t h is t im el ine p ro vides s u m m aries o f t h e k ey devel o p m ent s f ro m b o t h t h e OECD and Eu ro p ean Co m m is s io n s inc e o u r l as t edit io n.

Staying up to date with Base Erosion and Profit Shifting developments

To read f u l l EY anal y s is and c o m m ent ary o n eac h devel o p m ent b el o w , p l eas e vis it

www. ey . com/tax al erts


1 Address the Tax Challenges of the Digital Economy

2 Neutralize the Effects of Hybrid Mismatch Arrangements

3 Strengthen Controlled Foreign Companies Rules

4 Limit Base Erosion via Interest Deductions and Other Financial Payments

5 Counter Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance

6 Prevent Treaty Abuse

7 Prevent the Artificial Avoidance of PE Status

8 Assure that Transfer Pricing Outcomes are in Line With Value Creation/Intangibles

9 Assure that Transfer Pricing Outcomes are in Line With Value Creation/Risks and Capital

10 Assure that Transfer Pricing Outcomes are in Line With Value Creation/Other High-Risk Transactions

11 Establish Methodologies to Collect and Analyze Data on BEPS and the Actions to Address It

12 Require Taxpayers to Disclose Their Aggressive Tax Planning Arrangements

13 Re-examine Transfer Pricing Documentation

14 Make Dispute Resolution Mechanisms More Effective

15 Develop a Multilateral Instrument

6 OECD releases public discussion draft on follow-up work on treaty abuse under BEPS Action 6

On 2 1 Nov ember 2 0 1 4 , t h e OECD rel eas ed a dis c u s s io n draf t in c o nnec t io n w it h f o l l o w u p w o rk o n Ac t io n 6 o n p revent ing t reat y ab u s e. Th e dis c u s s io n draft identifies particular areas with respect to t h e rec o m m endat io ns rel eas ed in Sep t em b er 2014 w h ere t h e OECD int ends t o do addit io nal work. It also includes specific questions on which c o m m ent s o r s u gges t io ns are invit ed. Mu c h o f t h e p l anned w o rk rel at es t o t h e o p erat io n o f t h e proposed limitation on benefits provision, but the proposed principal purpose test for treaty benefits w il l al s o b e t h e s u b j ec t o f s o m e addit io nal w o rk . As indic at ed in t h e Sep t em b er 2014 del iverab l e, t h e OECD is p art ic u l arl y f o c u s ed o n addres s ing treaty qualification issues that arise with respect to c o l l ec t ive inves t m ent veh ic l es and o t h er t y p es o f inves t m ent f u nds inc l u ding p ens io n f u nds , p rivat e eq u it y f u nds , and s o vereign w eal t h f u nds .

OECD holds a BEPS workshop with several developing countries

On 1 0 - 1 1 D ecember 2 0 1 4 , t h e OECD held a workshop with officials from several devel o p ing c o u nt ries t o dis c u s s t h eir inc reas ed invo l vem ent in t h e BEPS p ro j ec t . Th e p art ic ip at ing c o u nt ries w ere Al b ania, Az erb aij an, Bangl ades h , Cro at ia, Geo rgia, Jam aic a, Keny a, Mo ro c c o , Nigeria, Peru , Ph il ip p ines , Senegal , So u t h Af ric a, Tu nis ia, and Viet nam . Rep res ent at ives o f t h e Af ric an Tax Adm inis t rat io n Fo ru m al s o p art ic ip at ed. Mat t ers dis c u s s ed inc l u ded t h e need f o r s u p p o rt in im p l em ent ing BEPS m eas u res and t h e need f o r b al anc e b et w een at t rac t ing f o reign direc t inves t m ent and c o l l ec t ing c o rp o rat e inc o m e t ax .

The 15 BEPS Actions

November December

10-11

21


OECD hosts webcast update on the BEPS project

On 1 5 D ecember 2 0 1 4 , t h e OECD h o s t ed a w eb c as t o n t h e BEPS p ro j ec t . Pas c al Saint - Am ans and o t h er s enio r m em b ers o f t h e OECD Sec ret ariat p ro vided an u p dat e o n rec ent ac t ivit y , f o c u s ing o n t h e f o l l o w - u p w o rk o n t h e BEPS Ac t io ns f o r w h ic h o u t p u t w as del ivered o n 16 Sep t em b er 2014; t h e rec ent l y rel eas ed dis c u s s io n draf t s o n Ac t io n 6 (f o l l o w u p w o rk o n addres s ing t reat y ab u s e), Ac t io n 7 (p erm anent es t ab l is h m ent ), and Ac t io n 10 (t rans f er p ric ing f o r l o w val u e- adding int ragro u p s ervic es ); and t h e u p c o m ing dis c u s s io n draf t s o n o t h er BEPS Ac t io ns .

10 OECD releases discussion draft on cross-border commodity transactions

under BEPS Action 10

On 1 6 D ecember 2 0 1 4 , t h e OECD rel eas ed a dis c u s s io n draf t u nder Ac t io n 10 o n t rans f er p ric ing f o r c o m m o dit y t rans ac t io ns . Th e draf t p ro p o s es addit io ns t o t h e OECD Trans f er Pric ing Gu idel ines t h at addres s u s e o f t h e c o m p arab l e u nc o nt ro l l ed p ric e m et h o d and u s e o f p u b l ic l y avail ab l e c o m m o dit y p ric es in t rans f er p ric ing f o r c o m m o dit y t rans ac t io ns b et w een as s o c iat ed ent erp ris es . Co m m ent s are req u es t ed b y 6 Feb ru ary 2015 and t h e OECD h el d a p u b l ic c o ns u l t at io n o n t h e t rans f er p ric ing rel at ed Ac t io ns o n 19 - 20 Marc h 2015.

4 OECD releases discussion draft on interest deductions under BEPS Action 4

On 1 8 D ecember 2 0 1 4 , t h e OECD rel eas ed a dis c u s s io n draf t o n l im it at io ns o n int eres t dedu c t io ns u nder Ac t io n 4. Th e draf t review s ex is t ing ap p ro ac h es t o addres s BEPS c o nc erns t h ro u gh l im it at io ns o n t h e deductibility of interest and other financial p ay m ent s . Th e draf t t h en s et s f o rt h o p t io ns f o r ap p ro ac h es t h at m ay b e inc l u ded in a b es t p rac t ic e rec o m m endat io n, inc l u ding group-wide tests, fixed-ratio tests, and ap p ro ac h es t h at c o m b ine b o t h t y p es o f t es t s . It al s o addres s es a range o f t ec h nic al , p o l ic y and indu s t ry s ec t o r is s u es . Co m m ent s w ere req u es t ed b y 6 Feb ru ary 2015 and t h e OECD h el d a p u b l ic c o ns u l t at io n o n 17 Feb ru ary 2015.

10 OECD releases discussion draft on use of profit split method in global value chains under BEPS

Action 10

On 1 6 D ecember 2 0 1 4 , t h e OECD rel eas ed a discussion draft under Action 10 on use of the profit s p l it m et h o d f o r t rans f er p ric ing in t h e c o nt ex t o f gl o b al val u e c h ains . Th e draf t addres s es a s eries o f s c enario s w h ere in t h e OECD’ s view it m ay b e more difficult to apply one-sided transfer pricing m et h o ds t o det erm ine t rans f er p ric ing o u t c o m es t h at are ap p ro p riat el y al igned w it h val u e c reat io n and it m ay b e ap p ro p riat e t o ap p l y a t rans ac t io nal profit split method. The draft requests responses to specific questions regarding these scenarios, which w il l b e t ak en int o ac c o u nt in devel o p ing revis io ns t o t h e OECD Trans f er Pric ing Gu idel ines p ro vis io ns o n the profit split method. Comments were requested b y 6 Feb ru ary 2015 and t h e OECD h el d a p u b l ic c o ns u l t at io n o n t h e t rans f er p ric ing rel at ed Ac t io ns o n 19 - 20 Marc h 2015.

European Commission extends tax rulings practice inquiry to all Member States and announces intention for new Action Plan to combat tax fraud and evasion

On 1 7 D ecember 2 0 1 4 , t h e Eu ro p ean Co m m is s io n (EC) anno u nc ed t h at it h as ex p anded it s inq u iries int o t h e t ax ru l ing p rac t ic es u nder EU s t at e aid ru l es , as k ing al l EU Mem b er St at es t o p ro vide f u l l inf o rm at io n o n ru l ings m ade t o al l c o m p anies du ring t h e p erio d 2010 t o 2013. Under t h e ex p anded inq u iry , t h e EC as k s al l EU Mem b er St at es t o p ro vide inf o rm at io n regarding their tax ruling practices, in particular to confirm w h et h er t h ey p ro vide t ax ru l ings , and, if t h ey do , t o s u b m it a l is t o f al l c o m p anies t h at h ave rec eived a t ax ru l ing du ring t h e p erio d 2010 t o 2013. Th e p res s rel eas e anno u nc ing t h es e developments, however, does not note whether the specific t ec h nic al det ail o f eac h individu al ru l ing m u s t b e s u p p l ied b y t h e c o u nt ry c o nc erned as w el l as t h e nam e o f t h e c o m p any rec eiving s u c h ru l ing. As no t ed in t h e EC p res s rel eas e anno u nc ing t h e ex p ans io n, t h e new req u es t s are fully in line with the recent calls for more transparency of tax rulings, in particular the initiative announced by President Juncker on the upcoming legal proposal regarding the automatic exchange of information on tax rulings, on which work is being led by Commissioner Moscovici.

1716

15 18

















OECD releases public discussion draft on international VAT-GST guidelines

On 1 8 D ecember 2 0 1 4 , t h e OECD rel eas ed a dis c u s s io n draf t o n val u e- added t ax (VAT) gu idel ines o n s ervic es and int angib l es , w h ic h is int egral l y rel at ed t o t h e w o rk o n Ac t io n 1 (digit al ec o no m y ). Th e draf t s et s f o rt h a s eries o f p rinc ip l es f o r det erm ining t h e p l ac e o f t ax at io n f o r b u s ines s - t o - c o ns u m er s u p p l ies o f s ervic es and int angib l es . It al s o inc l u des a rec o m m ended ap p ro ac h f o r c o l l ec t io n o f VAT o n s u c h s u p p l ies . Co m m ent s are req u es t ed b y 20 Feb ru ary 2015 and t h e OECD h el d a p u b l ic c o ns u l t at io n o n 25 Feb ru ary 2015.

14 OECD releases discussion draft on more effective dispute resolution mechanisms under BEPS Action 14

On 1 8 D ecember 2 0 1 4 , t h e OECD rel eas ed a dis c u s s io n draf t o n im p ro ving dis p u t e res o l u t io n m ec h anis m s u nder Ac t io n 14. Th e draf t ant ic ip at es t h at t reat y - b as ed dis p u t es w il l inc reas e as a res u l t o f t h e BEPS w o rk and f o c u s es o n w ay s t o im p ro ve t h e ef f ec t ivenes s o f t h e Mu t u al Agreem ent Pro c edu re (MAP) under treaties. The Draft identifies obstacles that are preventing c o u nt ries f ro m res o l ving t reat y - rel at ed dis p u t es t h ro u gh t h e MAP and p ro p o s es o p t io ns f o r addres s ing t h o s e o b s t ac l es . Th e Draf t dis c u s s es m andat o ry b inding arb it rat io n as a t o o l f o r inc reas ing t h e ef f ec t ivenes s o f t h e MAP, b u t m ak es c l ear t h at t h ere is no c o ns ens u s o n t h e ap p ro p riat enes s o f s u c h arb it rat io n m ec h anis m s . Co m m ent s w ere req u es t ed b y 16 Janu ary 2015 and t h e OECD h el d a p u b l ic c o ns u l t at io n o n 23 Janu ary 2015.

The 15 BEPS Actions

December 18


8-10 OECD releases discussion draft under BEPS Actions 8-10 on

risk, recharacterization and special measures

On 1 9 D ecember 2 0 1 4 , t h e OECD rel eas ed a dis c u s s io n draf t u nder Ac t io ns 8 - 10 o n t rans f er p ric ing f o r ris k , rec h arac t eriz at io n and s p ec ial m eas u res . Th e draf t inc l u des p ro p o s ed revis io ns t o t h e OECD Trans f er Pric ing Gu idel ines t h at f o c u s o n del ineat io n o f t rans ac t io ns , rel evanc e and al l o c at io n o f ris k , det erm inat io n o f t h e ec o no m ic al l y rel evant c h arac t eris t ic s o f t rans ac t io ns , and rec h arac t eriz at io n o r no n- rec o gnit io n o f t rans ac t io ns . Th e draf t al s o inc l u des o p t io ns f o r s o m e “ s p ec ial m eas u res ” rel at ing t o t h e t rans f er p ric ing f o r int angib l e as s et s , ris k , and o ver- c ap it al iz at io n. Co m m ent s w ere req u es t ed b y 6 Feb ru ary 2015 and t h e OECD h el d a p u b l ic c o ns u l t at io n o n t h e t rans f er p ric ing rel at ed Ac t io ns o n 19 - 20 Marc h 2015.

14 OECD publishes public comments on discussion draft for BEPS Action 14 —

Make dispute resolution more effective

On 1 9 J an uary 2 0 1 5 , t h e OECD p o s t ed o n it s w eb s it e m o re t h an 400 p ages o f c o m m ent s rec eived f ro m s t ak eh o l ders o n the discussion draft on BEPS Action 14 — Mak e dis p u t e res o l u t io n m o re ef f ec t ive, inc l u ding t h e gl o b al c o m m ent l et t er s u b m it t ed b y EY .

7 OECD publishes public comments on discussion draft for BEPS Action 7 on Preventing the

artificial avoidance of PE status

On 1 1 J an uary 2 0 1 5 , t h e OECD p o s t ed o n it s w eb s it e m o re t h an 7 50 p ages o f c o m m ent s rec eived f ro m s t ak eh o l ders o n t h e dis c u s s io n draf t o n BEPS Ac t io n 7 o n Prevent ing t h e artificial avoidance of PE status including the gl o b al c o m m ent l et t er s u b m it t ed b y EY .

7 OECD holds public consultation on BEPS Action 7 on permanent establishment

On 2 1 J an uary 2 0 1 5 , t h e OECD h el d a p u b l ic c o ns u l t at io n o n t h e dis c u s s io n draf t o n p erm anent es t ab l is h m ent (Ac t io n 7 ). Part ic ip at ing in t h e c o ns u l t at io n w ere rep res ent at ives o f t h e b u s ines s c o m m u nit y (inc l u ding EY rep res ent at ives ) and NGOs , c o u nt ry rep res ent at ives , and t h e OECD Sec ret ariat . Bu s ines s c o m m ent at o rs ex p res s ed c o nc ern t h at t h e o p t io ns in t h e dis c u s s io n draf t f o r l o w ering t h e p erm anent es t ab l is h m ent s t andard w o u l d c reat e u nc ert aint y , inc reas e c o m p l ianc e and adm inis t rat ive b u rdens , ex ac erb at e dis p u t es and c o nt ro vers y , and res u l t in inc reas ed ris k o f do u b l e t ax at io n. Th e OECD int ends t o is s u e a revis ed dis c u s s io n draf t o n Ac t io n 7 in Sp ring 2015, w h ic h w il l p ro vide an o p p o rt u nit y f o r addit io nal c o m m ent s .

January

2111

19 19

















6 OECD holds public consultation on follow-up work on BEPS Action 6 on preventing treaty abuse

On 2 2 J an uary 2 0 1 5 , t h e OECD h el d a p u b l ic c o ns u l t at io n o n t h e f o l l o w u p w o rk o n t reat y ab u s e (Ac t io n 6). Part ic ip at ing in t h e c o ns u l t at io n w ere rep res ent at ives o f t h e b u s ines s c o m m u nit y (inc l u ding EY rep res ent at ives ) and NGOs , c o u nt ry rep res ent at ives , and t h e OECD s ec ret ariat . Th e dis c u s s io n f o c u s ed l argel y o n is s u es rel at ed to treaty qualification of collective investment veh ic l es and o t h er inves t m ent f u nds and o n t h e t ec h nic al det ail s o f t h e p ro p o s ed l im it at io n on benefits provision. Business commentators s t res s ed t h e need t o ens u re t h at t h e p ro p o s ed ant i- ab u s e ru l es do no t p l ac e u ndu e b u rden o n b u s ines s es s eek ing t o ac c es s t reat y benefits. The OECD intends to issue a revised dis c u s s io n draf t o n Ac t io n 6 in t h e s p ring, w h ic h w il l p ro vide an o p p o rt u nit y f o r addit io nal c o m m ent s .

14 OECD holds public consultation on BEPS Action 14 on improving dispute

resolution

On 2 3 J an uary 2 0 1 5 , t h e OECD h el d a p u b l ic c o ns u l t at io n o n t h e dis c u s s io n draf t o n dis p u t e res o l u t io n (Ac t io n 14). Part ic ip at ing in t h e c o ns u l t at io n w ere rep res ent at ives o f t h e b u s ines s c o m m u nit y (inc l u ding EY rep res ent at ives ) and NGOs , c o u nt ry rep res ent at ives , and t h e OECD Sec ret ariat . Th e b u l k o f t h e c o m m ent s f o c u s ed o n t h e u rgent need f o r agreem ent o n m andat o ry b inding arb it rat io n as p art o f t h e m u t u al agreem ent p ro c edu re u nder t reat ies . Bu s ines s c o m m ent at o rs des c rib ed real p ro gres s o n im p ro vem ent s in dis p u t e res o l u t io n as an es s ent ial p art o f t h e BEPS p ro j ec t . Th e OECD int ends t o is s u e a revis ed dis c u s s io n draf t o n Ac t io n 14 in t h e s p ring, w h ic h w il l p ro vide an o p p o rt u nit y f o r addit io nal c o m m ent s .

The 15 BEPS Actions

January

23

22


European Council formally adopts binding general anti-abuse rule in Parent-Subsidiary Directive

On 2 7 J an uary 2 0 1 5 , t h e Eu ro p ean Co u nc il f o rm al l y ado p t ed a b inding general ant i- ab u s e ru l e t o b e inc l u ded in t h e Parent - Su b s idiary Direc t ive (PSD). Th is new ru l e aim s at p revent ing Mem b er States from granting the benefits of the PSD to arrangem ent s t h at are no t “ genu ine, ” i.e., t h at h ave b een p u t int o p l ac e t o o b t ain a t ax advant age without reflecting economic reality. The clause is f o rm u l at ed as a “ de m inim is ” ru l e, m eaning t h at Mem b er St at es c an ap p l y s t ric t er nat io nal ru l es , s o l o ng as t h ey m eet t h e m inim u m EU req u irem ent s . Mem b er s t at es w il l h ave u nt il 31 Dec em b er 2015 t o im p l em ent t h e general ant i- avo idanc e ru l e int o nat io nal l aw .

5 OECD explains agreed approach on intangible property regimes under BEPS Action 5

On 6 F ebruary 2 0 1 5 , t h e OECD rel eas ed Action 5: Agreement on Modified Nexus Ap p ro ac h f o r IP Regim es , w h ic h des c rib es t h e c o ns ens u s o n t h e ap p ro ac h f o r a s u b s t ant ial ac t ivit y req u irem ent f o r int angib l e p ro p ert y regim es s u c h as p at ent b o x es in c o nnec t io n w it h BEPS Ac t io n 5 (h arm f u l t ax p rac t ic es ). The agreed approach builds on the “modified nex u s ap p ro ac h ” t h at w as devel o p ed j o int l y b y t h e Germ an and UK go vernm ent s . Th e Ac t io n 5 do c u m ent des c rib es c o nc ep t u al is s u es w it h respect to the modified nexus approach and addit io nal w o rk t h at w il l b e do ne in o rder t o al l o w agreem ent o n t h e det ail ed ru l es t o b e reac h ed in 2015.

European Commission opens state aid investigation into the Belgian excess profit ruling system

On 3 F ebruary 2 0 1 5 , t h e EU Co m m is s io n anno u nc ed t h at it h as o p ened an indep t h s t at e aid inves t igat io n int o Bel giu m ’ s s o - c al l ed “excess profit” ruling system. According to t h e EU Co m m is s io n, t h e s y s t em al l o w s gro u p c o m p anies t o s u b s t ant ial l y redu c e t h eir c o rp o rat io n t ax l iab il it y in Bel giu m o n t h e b as is of so-called “excess profit” tax rulings. Under t h is s y s t em , m u l t inat io nal ent it ies in Bel giu m m ay redu c e t h eir c o rp o rat e t ax l iab il it y b y t h o s e “excess profits” that the Belgian Government b el ieves res u l t f ro m t h e advant ages o f b eing p art o f a m u l t inat io nal gro u p . At t h is s t age, t h e EU Co m m is s io n h as do u b t s as t o w h et h er t h e t ax p ro vis io n c o m p l ies w it h EU s t at e aid ru l es .

13 OECD issues implementation guidelines for country-by-country reporting under BEPS Action 13

On 6 F ebruary 2 0 1 5 , t h e OECD rel eas ed Ac t io n 13: Gu idanc e o n t h e Im p l em ent at io n o f Trans f er Pric ing Do c u m ent at io n and Co u nt ry - b y - Co u nt ry Rep o rt ing, w h ic h p ro vides m u c h - ant ic ip at ed gu idanc e o n im p l em ent at io n o f t h e c o u nt ry - b y - c o u nt ry (Cb C) rep o rt t h at is p art o f t h e t h ree- t ier t rans f er p ric ing do c u m ent at io n ap p ro ac h devel o p ed u nder BEPS Action 13. The guidance provides for the first CbC reports to be filed covering 2016 fiscal years. The gu idanc e f u rt h er p ro vides f o r Cb C rep o rt s general l y to be filed in the home country of a multinational c o rp o rat io n (MNC) gro u p ’ s p arent c o m p any and s h ared w it h o t h er rel evant c o u nt ries u nder go vernm ent inf o rm at io n ex c h ange m ec h anis m s . Th e gu idanc e al s o addres s es o t h er im p l em ent at io n m at t ers rel at ed t o t h e Cb C rep o rt .

February

03

27 06

















15 OECD issues mandate for negotiation of multilateral instrument under BEPS

Action 15

On 6 F ebruary 2 0 1 5 , t h e OECD rel eas ed Ac t io n 15: A Mandat e f o r t h e Devel o p m ent o f a Mu l t il at eral Ins t ru m ent o n Tax Treat y Meas u res t o Tac k l e BEPS, w h ic h s et s f o rt h t h e m andat e, agreed b y t h e OECD and G20 c o u nt ries , w it h res p ec t t o t h e p ro c es s f o r devel o p ing t h e m u l t il at eral ins t ru m ent c o nt em p l at ed u nder Ac t io n 15. Th e m andat e au t h o riz es t h e es t ab l is h m ent o f an ad h o c gro u p t o c o ndu c t w o rk o n a m u l t il at eral ins t ru m ent t h at w o u l d im p l em ent s o l el y t h e BEPS m eas u res t h at t ak e t h e f o rm o f rec o m m ended t ax t reat y provisions. The group is to have its first meeting no l at er t h an Ju l y 2015 and is t o aim t o h ave t h e m u l t il at eral ins t ru m ent ready t o o p en f o r s ignat u re b y y ear- end 2016.

8-9 OECD publishes public comments on discussion draft for BEPS Action 8-9

on transfer pricing and risk

On 1 0 F ebruary 2 0 1 5 , t h e OECD p o s t ed o n it s w eb s it e m o re t h an 8 00 p ages o f c o m m ent s rec eived f ro m s t ak eh o l ders o n t h e dis c u s s io n draf t o n BEPS Ac t io n 8 - 9 o n t rans f er p ric ing and ris k , rec h arac t eriz at io n, and s p ec ial m eas u res , inc l u ding t h e gl o b al c o m m ent l et t er s u b m it t ed b y EY . On t h e s am e day , t h e OECD al s o p o s t ed 500 p ages o f c o m m ent s o n t h e dis c u s s io n draf t o n BEPS Ac t io n 10 o n t h e u s e of profit splits in the context of global value c h ains and m o re t h an 200 p ages o f c o m m ent s o n t h e dis c u s s io n draf t o n BEPS Ac t io n 10 o n t rans f er p ric ing as p ec t s o f c ro s s - b o rder c o m m o dit y t rans ac t io ns , inc l u ding t h e gl o b al c o m m ent l et t ers s u b m it t ed b y EY o n t h o s e t w o do c u m ent s .

The 15 BEPS Actions

February

10

06


4 OECD publishes public comments on discussion draft for BEPS Action 4

on interest deductions and other financial payments

On 1 1 F ebruary 2 0 1 5 , t h e OECD p o s t ed o n it s w eb s it e m o re t h an 1, 000 p ages o f c o m m ent s rec eived f ro m s t ak eh o l ders o n t h e dis c u s s io n draf t o n BEPS Ac t io n 4 o n int eres t deductions and other financial p ay m ent s , inc l u ding t h e gl o b al c o m m ent l et t er s u b m it t ed b y EY .

On 1 7 M arch 2 0 1 5 , t h e Eu ro p ean Co m m is s io n’ s ex p ert gro u p o n au t o m at ic information exchange published its first rep o rt . Th e rep o rt s et s o u t a nu m b er o f k ey rec o m m endat io ns des igned t o ens u re t h at EU l egis l at io n o n t h e au t o m at ic ex c h ange o f inf o rm at io n in direc t t ax at io n is ef f ec t ivel y al igned and f u l l y c o m p at ib l e w it h t h e OECD Gl o b al St andard o n au t o m at ic ex c h ange o f financial account information (also known as t h e Co m m o n Rep o rt ing St andard o r CRS).

4 OECD holds public consultation on BEPS Action 4 on interest and other financial payments

On 1 7 F ebruary 2 0 1 5 , t h e Organis at io n f o r Ec o no m ic Co - o p erat io n and Devel o p m ent (OECD) h el d a p u b l ic c o ns u l t at io n in c o nnec t io n with the Base Erosion and Profit Shifting (BEPS) p ro j ec t t h at w as f o c u s ed o n Ac t io n 4 o n t h e dedu c t ib il it y o f int eres t dedu c t io ns and o t h er financial payments. During the consultation, b u s ines s p art ic ip ant s ex p res s ed a variet y o f c o nc erns ab o u t t h e p ro p o s ed gro u p - w ide ap p ro ac h es . It w as no t ed t h at b o rro w ing needs dif f er ac ro s s ent it ies w it h in a gro u p . The difficulties in using consolidated financial s t at em ent dat a t o det erm ine al l o c at io ns t o gro u p m em b ers w ere dis c u s s ed, inc l u ding t h e f ac t t h at gro u p - l evel adj u s t m ent s w o u l d m ean t h at t h e s u m o f t h e m em b er nu m b ers t y p ic al l y w o u l d no t eq u al t h e gro u p nu m b ers s u c h t h at t h e res u l t ing al l o c at io n w o u l d no t b e b as ed o n 100% o f t h e gro u p ’ s ex t ernal int eres t ex p ens e.

OECD hosts sixth webcast update on BEPS project

On 1 2 F ebruary 2 0 1 5 , t h e OECD h o s t ed a w eb c as t t o p ro vide an u p dat e o n t h e BEPS p ro j ec t . Th e w eb c as t inc l u ded an o verview o f t h e OECD’ s rec ent ac t ivit ies w it h res p ec t t o t h e BEPS Ac t io n Pl an and a b rief rep o rt o n BEPS rel at ed m at t ers addres s ed du ring t h e G20 Financ e Minis t ers and Cent ral Bank Go verno rs m eet ing o n 9 - 10 Feb ru ary 2015. Th e w eb c as t f o c u s ed in p art ic u l ar o n t h e w o rk o n t rans f er p ric ing is s u es rel at ed t o ris k , rec h arac t eriz at io n and s p ec ial m eas u res (Ac t io ns 8 - 10), gu idel ines o n VAT w it h res p ec t t o b u s ines s t o c u s t o m er (B2C) t rans ac t io ns invo l ving s ervic es and int angib l es , and im p ro ving t h e ef f ec t ivenes s o f t reat y dis p u t e res o l u t io n m ec h anis m s .

European Commission initiates work to create a “fairer and more transparent taxation approach within the European Union”

In Dec em b er 2014, t h e Eu ro p ean Co m m is s io n (t h e Co m m is s io n) in it s 2015 Wo rk Pro gram m e1 s t at ed t h at it w il l c l am p do w n o n t ax evas io n and t ax avo idanc e and ens u re t h at t ax es are paid in the country where the profits are generat ed. On 1 8 F ebruary 2 0 1 5 , t h e Co l l ege o f Co m m is s io ners (t h e gro u p ing o f 28 Co m m is s io ners ) c o m m enc ed t h is work with a first orientation debate, where p o s s ib l e ac t io n p o int s w ere dis c u s s ed. Th e Co m m is s io ners agreed t h at t h e m ain f o c u s s h o u l d b e t o ens u re t h at c o m p anies p ay t h eir f air s h are o f t ax es in t h e c o u nt ry w h ere t h e ec o no m ic ac t ivit y generat ing t h e profit is based, by encouraging greater tax t rans p arenc y .

8-10 OECD held a public consultation

event on transfer pricing matters

On 1 9 – 2 0 M arch 2 0 1 5 t h e OECD h el d a p u b l ic c o ns u l t at io n event o n t rans f er p ric ing m at t ers at t h e OECD Co nf erenc e Cent re in Paris , Franc e. Th e event c o nc ent rat ed o n m at t ers c o vered b y f o u r rec ent l y p u b l is h ed dis c u s s io n draf t s o n w h ic h w rit t en c o m m ent s h ad b een invit ed and w h ic h deal w it h w o rk in rel at io n t o Ac t io ns 8 , 9 and 10 o f t h e Ac t io n Pl an o n Bas e Ero s io n and Profit Shifting (BEPS).

March

12 18 19–20

1711 17

















12 OECD issues discussion draft on mandatory disclosure rules under BEPS Action 12

On 3 M arch 2 0 1 5 , t h e OECD is s u ed a dis c u s s io n draf t o n m andat o ry dis c l o s u re ru l es u nder Ac t io n 12 (Dis c l o s u re o f aggres s ive t ax p l anning arrangements) of the base erosion and profit s h if t ing (BEPS) p ro j ec t . Th e dis c u s s io n draf t m ak es a s eries o f rec o m m endat io ns ab o u t t h e des ign o f m andat o ry dis c l o s u re regim es int ended t o al l o w m ax im u m c o ns is t enc y b et w een c o u nt ries w h il e al s o b eing s ens it ive t o l o c al needs and t o c o m p l ianc e c o s t s . Th e dis c u s s io n draf t f o c u s es in p art ic u l ar o n int ernat io nal t ax s c h em es , w h ic h are view ed as an area o f s p ec ial c o nc ern and t h e p rim ary f o c u s o f t h e BEPS p ro j ec t . It no t es t h at dis c l o s u re s c h em es t h at are int ended t o addres s domestic avoidance might not be sufficient to c ap t u re c ro s s - b o rder arrangem ent s and p ro vides rec o m m endat io ns f o r an al t ernat ive ap p ro ac h .

3 OECD releases discussion draft on mandatory disclosure rules under BEPS Action 12

On 3 A p ri l 2 0 1 5 , t h e OECD rel eas ed a dis c u s s io n draf t in c o nnec t io n w it h Ac t io n 3 o n s t rengt h ening c o nt ro l l ed f o reign c o m p any (CFC) ru l es u nder it s Ac t io n Pl an o n Bas e Ero s io n and Profit Shifting (BEPS). The document titled, BEPS Ac t io n 3: St rengt h ening CFC Ru l es (t h e Dis c u s s io n Draf t o r t h e Draf t ) addres s es h o w t o use CFC rules to address base erosion and profit s h if t ing. Th e Draf t dis c u s s es in det ail eac h o f t h e f o l l o w ing c o re el em ent s o r “ b u il ding b l o c k s ” o f CFC rules including definition of a CFC; threshold requirements; definition of control; definition of CFC inc o m e; ru l es f o r c o m p u t ing inc o m e; ru l es f o r at t rib u t ing inc o m e and ru l es t o p revent o r el im inat e do u b l e t ax at io n. Th e Draf t inc l u des rec o m m ended ap p ro ac h es f o r eac h o f t h es e c o re elements, except the definition of CFC income, f o r w h ic h s everal o p t io ns are inc l u ded.

The 15 BEPS Actions

March April

3

31


11 OECD issues discussion draft on

economic analysis of base erosion and profit shifting under BEPS Action 11

1 6 A p ri l 2 0 1 5

7 OECD releases revised discussion draft on preventing

artificial avoidance of PE status under BEPS Action 7

1 5 M ay 2 0 1 5

12 OECD holds public consultation

on BEPS Action 12 on mandatory disclosure rules

1 1 M ay 2 0 1 5

8 OECD releases discussion draft on cost contribution

arrangements under BEPS Action 8

2 9 A p ri l 2 0 1 5

3 OECD holds public consultation on BEPS Action 3 on

CFC rules

1 2 M ay 2 0 1 5

6 OECD releases revised discussion draft on follow up work on treaty abuse under BEPS Action 6

On 2 2 M ay 2 0 1 5 , t h e OECD rel eas ed a revis ed dis c u s s io n draf t in c o nnec t io n w it h t h e f o l l o w u p w o rk o n Ac t io n 6 o n t h e p revent io n o f t reat y ab u s e under the Base Erosion and Profit Shifting (BEPS) Ac t io n Pl an. Th e do c u m ent t it l ed, BEPS Ac t io n 6: Prevent ing Treat y Ab u s e (t h e Revis ed Dis c u s s io n Draf t o r t h e Revis ed Draf t ) des c rib es p ro p o s al s devel o p ed b y t h e OECD af t er t h e is s u anc e o f a dis c u s s io n draf t o n 21 No vem b er 2014. Th e Revis ed Dis c u s s io n Draf t des c rib es t h e c u rrent s t at u s o f t h e dis c u s s io ns o f OECD Wo rk ing Part y 1, t h e w o rk ing gro u p res p o ns ib l e f o r t reat y m at t ers (t h e Wo rk ing Part y ), o n eac h o f t h e 20 is s u es . In s o m e ins t anc es , new p ro p o s al s t h at h ave b een agreed b y t h e Wo rk ing Part y are p res ent ed in t h e Revis ed Draf t . In o t h er ins t anc es , t h e Revis ed Draf t inc l u des p ro p o s ed ap p ro ac h es t h at are t o b e f u rt h er c o ns idered at t h e Wo rk ing Part y m eet ing s c h edu l ed f o r 22- 26 Ju ne 2015.

May

29 12 22

1516 11


On 3 Ap ril 2015, t h e Organis at io n f o r Ec o no m ic Co - o p erat io n and Devel o p m ent (OECD) rel eas ed a dis c u s s io n draf t

in c o nnec t io n w it h Ac t io n 3 o n s t rengt h ening c o nt ro l l ed f o reign c o m p any (CFC) ru l es u nder it s Action Plan on Base Erosion and Profit Shifting (BEPS). Th e do c u m ent t it l ed BEPS Ac t io n 3: St rengt h ening CFC Ru l es addres s es h o w t o u s e CFC rules to address base erosion and profit shifting.

Th e draf t dis c u s s es in det ail eac h o f t h e f o l l o w ing c o re el em ent s o r “ b u il ding b l o c k s ” o f CFC ru l es :

• Definition of a CFC• Th res h o l d req u irem ent s• Definition of control• Definition of CFC income• Ru l es f o r c o m p u t ing inc o m e• Ru l es f o r at t rib u t ing inc o m e• Ru l es t o p revent o r el im inat e do u b l e t ax at io nTh e draf t inc l u des rec o m m ended ap p ro ac h es f o r eac h o f t h es e c o re el em ent s , except the definition of CFC income, for which several options are included.

OECD releases discussion draft on CFC rules under BEPS Action 3

Gerrit GroenInt ernat io nal Tax Servic es

T: + 1 212 7 7 3 8 627 E: gerrit .gro en@ ey .c o m


Detailed discussionTh e 3 Ap ril 2015 dis c u s s io n draf t u nder Action 3 identifies seven core elements o r b u il ding b l o c k s o f CFC ru l es and p ro vides rec o m m endat io ns o r o p t io ns f o r t h e des ign o f s u c h el em ent s . Th e draf t inc l u des a s t at em ent t h at it do es no t rep res ent t h e c o ns ens u s view s o f t h e OECD’ s Co m m it t ee o n Fis c al Af f airs o r it s w o rk ing gro u p s . Rat h er, t h e draf t is int ended t o give s t ak eh o l ders an o p p o rt u nit y t o p ro vide inp u t b ef o re t h e OECD issues its final recommendations u nder Ac t io n 3 b y Sep t em b er 2015. Co m m ent s are t o b e s u b m it t ed b y 1 May 2015. A p u b l ic c o ns u l t at io n is s c h edu l ed f o r 12 May 2015.

Th e dis c u s s io n draf t no t es t h at , in addit io n t o CFC ru l es , s o m e c o u nt ries h ave p ro p o s ed t h at f u rt h er ru l es c o u l d b e ap p l ied t o inc o m e earned b y CFCs t h at does not give rise to sufficient taxation in t h e p arent j u ris dic t io n t h ro u gh t h e ru l es . Th es e s ec o ndary ru l es w o u l d int ro du c e a t ax in ano t h er j u ris dic t io n (f o r ex am p l e, in t h e s o u rc e c o u nt ry o f t h e inc o m e earned b y t h e CFC). Th e draf t al s o no t es t h at t h e OECD is c o ns idering o p t io ns f o r s p ec ial m eas u res w it h res p ec t t o t rans f er

p ric ing u nder Ac t io ns 8 - 10, 1 w h ic h c o u l d b e im p l em ent ed as s ec o ndary ru l es . Sim il arl y , p o s s ib l e f u t u re w o rk o n o p t io ns t o addres s t h e t ax c h al l enges o f t h e digit al ec o no m y c o u l d b e adap t ed t o ap p l y as s ec o ndary ru l es . Th e draf t indic at es t h at no dec is io n h as b een m ade y et regarding t h is h igh l evel p ro p o s al .

Th e dis c u s s io n draf t is divided int o t h e eigh t c h ap t ers , w h ic h are s u m m ariz ed b el o w .

Policy considerationsThe discussion draft identifies a series of p o l ic y c o ns iderat io ns in c o nnec t io n w it h t h e des ign o f CFC ru l es : (i) w h at is t h e p u rp o s e o f CFC ru l es ; (ii) h o w t o s t rik e a b al anc e b et w een t ax ing f o reign inc o m e and m aint aining c o m p et it ivenes s ; (iii) h o w t o l im it adm inis t rat ive and c o m p l ianc e b u rdens w h il e no t c reat ing o p p o rt u nit ies f o r avo idanc e; (iv) w h at is t h e ro l e o f CFC ru l es as p revent at ive m eas u res ; (v) w h at is t h e s c o p e o f b as e s t rip p ing p revent ed b y CFC ru l es ; (vi) h o w t o ens u re t h at CFC ru l es do no t l ead t o do u b l e t ax at io n; and

1 See EY Gl o b al Tax Al ert , OECD holds public

consultation on BEPS Actions 8-10 on transfer pricing, dat ed 27 Marc h 2015.

(vii) t h e int erac t io n b et w een CFC ru l es and t rans f er p ric ing ru l es .

Definition of a CFCCh ap t er 2 o f t h e dis c u s s io n draf t s et s out two recommendations for defining a CFC: (i) adopt a broad definition so that CFC ru l es w o u l d ap p l y t o b o t h c o rp o rat e and no n- c o rp o rat e ent it ies (s u c h as p art ners h ip s , t ru s t s , and p erm anent es t ab l is h m ent s [ PEs ] ) w h en t h o s e ent it ies are eit h er o w ned b y CFCs o r t reat ed in t h e p arent j u ris dic t io n as t ax ab l e ent it ies s ep arat e f ro m t h eir o w ners ; and (ii) include a modified hybrid mismatch ru l e t h at w o u l d p revent ent it ies f ro m c irc u m vent ing CFC ru l es t h ro u gh dif f erent t reat m ent in dif f erent j u ris dic t io ns .

Th e dis c u s s io n draf t rec o m m ends t h at CFC ru l es ap p l y t o t rans p arent ent it ies in t w o c as es : (i) ent it ies t h at are no t t ax ab l e in o ne j u ris dic t io n b u t are s u b j ec t t o t ax at io n in t h e p arent j u ris dic t io n; and (ii) ent it ies t h at w o u l d no t o t h erw is e b e t ax ab l e and t h at are o w ned b y ano t h er CFC. Th e draf t al s o rec o m m ends t h at PEs b e t reat ed as CFCs w h ere t h e c o m p any o f w h ic h t h e PE is a p art is res ident in a j u ris dic t io n w it h a t errit o rial o r ex em p t io n s y s t em t h at ap p l ies t o PE inc o m e.


http://www.ey.com/GL/en/Services/Tax/International-Tax/Alert--OECD-holds-public-consultation-on-BEPS-Actions-8-10-on-transfer-pricing



Th e dis c u s s io n draf t s et s f o rt h t w o al t ernat ive ap p ro ac h es f o r addres s ing t h e ap p l ic at io n o f CFC ru l es in t h e c as e o f h y b rid ins t ru m ent s o r ent it ies . Under t h e narro w o p t io n, an int ragro u p p ay m ent w o u l d b e t ak en int o ac c o u nt in c al c u l at ing t h e p arent c o m p any ’ s CFC inc o m e if (i) t h e p ay m ent is b as e ero ding (e.g., dedu c t ib l e in o ne j u ris dic t io n and s u b j ec t t o a z ero o r l o w rat e o f t ax at io n in t h e j u ris dic t io n o f rec eip t ); (ii) t h e p ay m ent is no t inc l u ded in CFC inc o m e; and (iii) t h e p ay m ent w o u l d h ave b een inc l u ded in CFC inc o m e if the parent jurisdiction had classified the ent it ies and arrangem ent s in t h e s am e w ay as t h e p ay er o r p ay ee j u ris dic t io n. Under t h e b ro ad o p t io n, in c o nt ras t , an int ragro u p p ay m ent w o u l d b e t ak en int o ac c o u nt if (i) t h e p ay m ent is no t inc l u ded in CFC inc o m e; and (ii) t h e p ay m ent w o u l d h ave b een inc l u ded in CFC inc o m e if t h e parent jurisdiction had classified the ent it ies and arrangem ent s in t h e s am e w ay as t h e p ay er o r p ay ee j u ris dic t io n.

Threshold requirementsCh ap t er 3 o f t h e dis c u s s io n draf t addres s es t h res h o l d req u irem ent s w it h res p ec t t o t h e s c o p e o f CFC ru l es . Th e draf t rec o m m ends inc l u s io n o f a l o w - t ax t h res h o l d t h at is b as ed o n t h e ef f ec t ive t ax rat e (ETR) and t h at u s es a t ax rat e t h at is m eaningf u l l y l o w er t h an t h e t ax rat e in t h e c o u nt ry ap p l y ing t h e CFC ru l es .

Wit h res p ec t t o t h e ap p l ic at io n o f a l o w - t ax t h res h o l d, a b enc h m ark w o u l d c o m p are t h e t ax rat e in t h e CFC jurisdiction either to a particular fixed rat e o r t o a p erc ent age o f t h e p arent j u ris dic t io n’ s rat e. Th e draf t rec o m m ends t h at t h e b enc h m ark b e s et at 7 5% o f t h e p arent j u ris dic t io n’ s s t at u t o ry c o rp o rat e t ax rat e o r l o w er, w h ic h t h e draf t indic at es is t h e l evel u s ed b y m o s t ex is t ing CFC ru l es .

Th e dis c u s s io n draf t al s o rec o m m ends t h e u s e o f t h e CFC’ s ETR in ap p l y ing t h e b enc h m ark . It s t at es t h at u s ing t h e ETR w o u l d b e a m o re ac c u rat e c o m p aris o n t h an u s ing t h e s t at u t o ry t ax rat e. Fo r c al c u l at ing t h e ETR, t h e draf t rec o m m ends t h at t h e inc o m e m eas u re s h o u l d b e eit h er t h e t ax b as e in t h e p arent j u ris dic t io n h ad t h e CFC inc o m e b een

earned t h ere o r t h e t ax b as e c o m p u t ed ac c o rding t o an int ernat io nal ac c o u nt ing s t andard s u c h as IFRS w it h adj u s t m ent s made to reflect the tax base reductions t h at res u l t in l o w t ax at io n o f t h e CFC inc o m e. Th e draf t al s o no t es t h at t h e ETR c o u l d b e c o m p u t ed b ro adl y o r narro w l y . A b ro ad ap p ro ac h w o u l d c al c u l at e t h e ETR o n an ent it y - b y - ent it y b as is o r o n a c o u nt ry - b y - c o u nt ry b as is b y aggregat ing inc o m e w it h in a c o u nt ry . A narro w ap p ro ac h w o u l d c al c u l at e t h e ETR o n an it em o f inc o m e b as is .

Definition of controlCh ap t er 4 o f t h e dis c u s s io n draf t addresses the definition of control, w h ic h inc l u des t w o el em ent s : (i) t h e t y p e o f c o nt ro l t h at is req u ired; and (ii) t h e l evel o f t h at c o nt ro l . Th e draf t ’ s rec o m m endat io n f o r c o nt ro l is t h at CFC ru l es s h o u l d at l eas t ap p l y b o t h a l egal c o nt ro l t es t and an ec o no m ic c o nt ro l t es t s o t h at s at is f ac t io n o f eit h er t es t res u l t s in c o nt ro l f o r p u rp o s es o f t h e ru l es . Co u nt ries m ay al s o inc l u de a de f ac t o c o nt ro l t es t . Th e draf t ’ s rec o m m endat io n f o r t h e l evel o f c o nt ro l is t h at a CFC s h o u l d b e t reat ed as c o nt ro l l ed w h ere res ident s h o l d, at a m inim u m , m o re t h an 50% c o nt ro l . Ho w ever, t h e draf t no t es t h at c o u nt ries m ay s et t h eir c o nt ro l t h res h o l d at a lower level. The specified level of c o nt ro l c o u l d b e es t ab l is h ed t h ro u gh t h e aggregat ed int eres t o f rel at ed p art ies o r u nrel at ed res ident p art ies o r f ro m aggregat ing t h e int eres t s o f any t ax p ay ers t h at are f o u nd t o b e ac t ing in c o nc ert . Addit io nal l y , t h e draf t s t at es t h at CFC ru l es s h o u l d ap p l y w h ere t h ere is eit h er direc t o r indirec t c o nt ro l .

Th e dis c u s s io n draf t s t at es t h at af t er det erm ining w h at c o ns t it u t es c o nt ro l , t h e nex t s t ep is t o det erm ine h o w m u c h c o nt ro l m u s t b e p res ent in o rder f o r CFC ru l es t o ap p l y . Th e draf t o b s erves t h at m o s t ex is t ing CFC ru l es req u ire a “ m o re t h an 50%” l evel o f c o nt ro l . It s t at es t h at t h is t es t is s t raigh t f o rw ard and eas y t o ap p l y w h en c o nt ro l is h el d b y a s ingl e p ers o n. Ho w ever, in t h e event t h at m ino rit y s h areh o l ders are ac t ing t o get h er to exert influence, their interests should b e aggregat ed t o det erm ine c o nt ro l .

Th e draf t rec o m m ends u s e o f o ne o f t h ree ap p ro ac h es t o det erm ine if m ino rit y s h areh o l ders are ac t ing t o get h er: an “ ac t ing- in- c o nc ert ” t es t , an ex am inat io n o f t h e rel at io ns h ip o f t h e p art ies , o r a c o nc ent rat ed o w ners h ip t es t . Th e dis c u s s io n draf t s t at es t h at inc l u ding t h e int eres t s o f no nres ident t ax p ay ers u nder any o f t h es e ap p ro ac h es c o u l d add t o t h e c o m p l ex it y o f t h e c o nt ro l p ro vis io ns . As s u c h , t h e rec o m m endat io n, as a m inim u m t h res h o l d, do es no t t ak e int o ac c o u nt no nres ident s f o r p u rp o s es o f det erm ining c o nt ro l .

Definition of CFC incomeCh ap t er 5 o f t h e dis c u s s io n draf t o u t l ines several approaches to defining income but do es no t y et inc l u de rec o m m endat io ns . Th e draf t indic at es t h at t h e ap p ro ac h es to defining CFC income do not reflect c o ns ens u s as c o u nt ries h ave dif f erent view s o n t h is is s u e.

The discussion draft first states that ex is t ing CFC ru l es ap p l y eit h er a f u l l o r partial system of inclusion in defining CFC inc o m e. Th e draf t no t es t h at b ec au s e t h e f u l l inc l u s io n s y s t em inc l u des al l CFC inc o m e, t h ere is no need t o s ep arat el y define the income subject to CFC rules. Henc e, t h e dis c u s s io n in t h e draf t f o c u s es on the definition of income issues under p art ial inc l u s io n s y s t em s .

Th e dis c u s s io n draf t s t at es t h at CFC rules should be able to accurately define inc o m e in t h e c o nt ex t o f CFCs t h at are holding companies, that provide financial and b ank ing s ervic es o r t h at engage in s al es invo ic ing, as w el l as inc o m e f ro m IP as s et s , digit al go o ds and s ervic es o r c ap t ive ins u ranc e and reins u ranc e. Th e draf t s t at es t h at CFC ru l es m u s t b e c ap ab l e o f deal ing w it h at l eas t t h e f o l l o w ing t y p es o f inc o m e: (i) dividends ; (ii) interest and other financing income; (iii) ins u ranc e inc o m e; (iv) s al es and s ervic es inc o m e; and (v) ro y al t ies and o t h er IP inc o m e. At a m inim u m , CFC ru l es s h o u l d c ap t u re inc o m e t h at rais es BEPS is s u es w it h in eac h c at ego ry and s h o u l d no t c ap t u re inc o m e t h at aris es f ro m val u e- c reat ing ac t ivit y in t h e CFC j u ris dic t io n.


Th e dis c u s s io n draf t s t at es t h at t h e general p rinc ip l e is t h at h igh l y m o b il e and/ o r p as s ive inc o m e s h o u l d b e c o vered b y CFC ru l es b ec au s e it l ik el y h as b een divert ed aw ay f ro m t h e p arent o r a t h ird j u ris dic t io n t o t h e CFC j u ris dic t io n. Th is t y p e o f inc o m e t y p ic al l y inc l u des , at t h e m inim u m , int eres t , ro y al t ies , dividends , and inc o m e earned o t h er t h an in t h e c o u rs e o f an ac t ive t rade o r b u s ines s . One ap p ro ac h , ac c o rding t o t h e draf t , is a f o rm - b as ed anal y s is t h at c at ego riz es an it em o f inc o m e b as ed o n a f o rm al classification. Under this method, sales, s ervic es , and o t h er inc o m e t h at is b y it s nat u re m o re as s o c iat ed w it h t h e c arry ing o n o f a t rade o r b u s ines s w o u l d b e ex c l u ded f ro m CFC inc o m e. Th e draf t s t at es t h at a p u re f o rm - b as ed ap p ro ac h is adm inis t rat ivel y c o nvenient b u t it is al s o eas il y m anip u l at ed and do es no t addres s al l inc o m e t h at c o u l d aris e f ro m b as e erosion and profit shifting.

Bec au s e o f t h e draw b ac k s o f a p u re f o rm - b as ed ap p ro ac h , t h e dis c u s s io n draf t o b s erves t h at CFC ru l es t y p ic al l y ap p l y s o m e degree o f s u b s t anc e anal y s is . Th e draf t o u t l ines t h ree t y p es o f s u b s t anc e anal y s is : (i) s u b s t ant ial c o nt rib u t io n anal y s is ; (ii) viab l e indep endent ent it y anal y s is ; and (iii) em p l o y ees and es t ab l is h m ent anal y s is .

Th e s u b s t ant ial c o nt rib u t io n anal y s is w o u l d f o c u s o n t h e rel evant f ac t s and c irc u m s t anc es t o det erm ine w h et h er t h e em p l o y ees o f t h e CFC h ave m ade a s u b s t ant ial c o nt rib u t io n t o t h e inc o m e earned b y t h e CFC. Onc e t h e CFC h as s h o w n a given l evel o f ac t ivit ies , al l inc o m e earned b y t h at CFC w o u l d t h en be excluded from the definition. The draft c o m m ent s t h at t h is anal y s is m igh t b e ap p ro p riat e f o r s everal t y p es o f inc o m e b u t p ro b ab l y no t f o r IP inc o m e. Al s o it s t at es t h at it w o u l d b e p o s s ib l e f o r c o m p anies t o aim f o r t h e m inim al l evel o f c o nt rib u t io n, k no w ing t h at t h ey c o u l d t h en s h iel d a res idu al am o u nt o f inc o m e.

Th e viab l e indep endent ent it y anal y s is would aim to assess all of the significant f u nc t io ns p erf o rm ed b y ent it ies w it h in t h e gro u p t o det erm ine if t h e CFC c o u l d b e a viab l e indep endent ent it y . To t h e ex t ent

t h at t h e CFC do es no t o w n t h e as s et s o r u ndert ak e t h e ris k s , t h e as s o c iat ed inc o m e w o u l d b e s u b j ec t t o t h e CFC ru l es .

Th e em p l o y ees and es t ab l is h m ent anal y s is w o u l d u s e a m eas u rem ent o f em p l o y ees and b u s ines s p rem is es as a m o re m ec h anic al w ay o f det erm ining w h et h er t h e ac t ivit ies req u ired t o earn t h e inc o m e are l o c at ed in t h e CFC j u ris dic t io n. Th e m ain dif f erenc es b et w een t h e em p l o y ees and es t ab l is h m ent anal y s is and t h e viab l e indep endent ent it y anal y s is are t h at (i) t h e CFC it s el f m u s t h ave t h e em p l o y ees and es t ab l is h m ent nec es s ary f o r earning t h e ac t u al inc o m e, rat h er t h an j u s t t h e em p l o y ees and es t ab l is h m ent nec es s ary f o r m anaging o r o vers eeing t h e val u e- c reat ing ac t ivit ies ; and (ii) t h e em p l o y ees and es t ab l is h m ent anal y s is do es no t req u ire an anal y s is o f ris k s o r as s et o w ners h ip .

Th e dis c u s s io n draf t f u rt h er no t es t h at ex is t ing CFC ru l es al s o ex am ine w h et h er inc o m e is h igh l y m o b il e b y l o o k ing at f ro m w h o m it w as earned (i.e., f ro m rel at ed p art ies o r f ro m o t h ers ) and w h ere it w as earned. Inc o m e earned f ro m a rel at ed p art y is general l y t reat ed as CFC inc o m e b ec au s e s u c h inc o m e is p res u m ed t o h ave b een s h if t ed. Inc o m e earned o u t s ide o f t h e CFC j u ris dic t io n al s o is c o ns idered t o raise profit shifting concerns.

Th e dis c u s s io n draf t o b s erves t h at ex is t ing CFC ru l es general l y u s e a c o m b inat io n o f t h es e ap p ro ac h es . Nevert h el es s , t h e draf t s t at es t h at t h es e ru l es s t ru ggl e t o ac c u rat el y det erm ine t h e inc o m e t h at s h o u l d b e s u b j ec t t o t h e CFC ru l es . Th e draf t t h eref o re c o ns iders t h e need t o devel o p ru l es t o addres s vario u s t y p es o f inc o m e t h at give ris e t o p art ic u l ar difficulties for existing CFC rules.

Th e draf t s u gges t s t h at dividend inc o m e c o u l d b e t reat ed as p as s ive inc o m e, b u t ex c l u ded f ro m CFC inc o m e if it is p aid o u t o f ac t ive inc o m e (o r b y rel at ed p art ies o u t o f ac t ive inc o m e) o r if t h e CFC is in t h e ac t ive t rade o r b u s ines s o f deal ing in s ec u rit ies .

Th e draf t s im il arl y s u gges t s t h at int eres t and other financing income could be t reat ed as p as s ive, b u t ex c l u ded f ro m

CFC inc o m e if t h e CFC is in t h e ac t ive trade or business of financing and is no t o verc ap it al iz ed.

Th e draf t s u gges t s t h at CFC ru l es c o u l d addres s ins u ranc e inc o m e b y f o c u s ing o n o ne o r m o re o f t h e f o l l o w ing f ac t o rs : (i) w h et h er t h e inc o m e is derived (direc t l y o r indirec t l y ) f ro m a rel at ed p art y (and, f o r a narro w er ru l e, w h et h er t h e rel at ed p art y is ab l e t o dedu c t ins u ranc e p rem iu m s p aid t o t h e CFC); (ii) w h et h er t h e p art ies t o t h e ins u ranc e c o nt rac t o r t h e ris k s ins u red are l o c at ed o u t s ide t h e CFC j u ris dic t io n; (iii) whether the CFC has sufficient substance t o as s u m e and m anage t h e ris k s o n it s o w n ac c o rd; and (iv) w h et h er t h e CFC is o verc ap it al iz ed.

Th e draf t s u gges t s t h at CFC ru l es c o u l d t reat s al es and s ervic es inc o m e as ac t ive inc o m e u nl es s it is earned f ro m a rel at ed p art y o r t h e CFC l ac k s t h e s u b s t anc e t o earn t h e inc o m e it s el f .

Th e draf t s t at es t h at inc o m e f ro m ro y al t ies and IP h as b ec o m e t h e m o s t c h al l enging t y p e o f inc o m e t o c at ego riz e in t h e digit al ec o no m y . Th e draf t s u gges t s t h at t o ef f ec t ivel y addres s IP inc o m e, CFC ru l es c o u l d c o ns ider b o t h w h et h er t h e inc o m e is earned f ro m a rel at ed p art y (inc l u ding w h et h er it w as earned f o r IP devel o p ed w it h a rel at ed p art y ) and w h et h er t h e CFC c arried o u t t h e req u ired ac t ivit ies t o devel o p t h e IP u nderl y ing t h e as s et . Th is , h o w ever, w o u l d req u ire dis t ingu is h ing b et w een IP inc o m e and o t h er inc o m e, and t h e draf t s u gges t s t h at CFC ru l es m ay t h eref o re b e m o re ef f ec t ive if t h ey ap p l y j u s t o ne ru l e t o s al es and s ervic es inc o m e and IP inc o m e t h at w o u l d t reat al l s al es , s ervic es , ro y al t y , and o t h er IP inc o m e as p as s ive u nl es s t h e CFC h as engaged in t h e s u b s t ant ial ac t ivit ies req u ired t o earn t h e inc o m e.

Th e dis c u s s io n draf t o u t l ines t w o m ain approaches to defining what constitutes inc o m e s u b j ec t t o CFC ru l es : t h e c at ego ric al ap p ro ac h and t h e ex c es s profits approach.

Th e c at ego ric al ap p ro ac h invo l ves s ep arat e ru l es f o r dif f erent t y p es o f inc o m e. Th is al l o w s j u ris dic t io ns t o t ail o r t h eir ru l es regarding t reat m ent o f eac h


t y p e o f inc o m e. Ho w ever, t h e draf t no t es t h at al l t y p es o f inc o m e w o u l d h ave t o b e c at ego riz ed and a s u b s t anc e anal y s is m igh t h ave t o b e ap p l ied. Th e draf t no t es t h at t h is c at ego ric al ap p ro ac h is no t dis s im il ar t o a t radit io nal CFC ru l e t h at c o m b ines a f o rm - b as ed anal y s is w it h a s u b s t anc e anal y s is , and s t at es t h at j u ris dic t io ns c o u l d ac h ieve s im il ar o u t c o m es t o t h e c at ego ric al ap p ro ac h b y ap p l y ing it as a t w o - s t ep ap p ro ac h . Th e first step would require jurisdictions to divide inc o m e int o f o rm al c at ego ries and t h e s ec o nd s t ep w o u l d b e a s u b s t anc e anal y s is . Th e draf t s u m m ariz es t h e res u l t o f t h e t w o - s t ep p ro c es s as :

• Pas s ive inc o m e w o u l d b e inc l u ded in CFC inc o m e u nl es s t h e CFC c an m eet t h e req u irem ent s o f a s u b s t anc e anal y s is .

• Ac t ive inc o m e w o u l d b e ex c l u ded f ro m CFC inc o m e u nl es s t h e CFC c anno t m eet t h e req u irem ent s o f a s u b s t anc e anal y s is .

Th e o t h er ap p ro ac h des c rib ed b y t h e dis c u s s io n draf t is a f o rm u l ary ex c es s profits approach. Under this approach, a “ no rm al ret u rn” w o u l d b e c al c u l at ed f o r eq u it y inves t m ent in t h e CFC. Any profit in excess of normal return would be t reat ed as CFC inc o m e. Th e draf t no t es t h at s o m e c o u nt ries ap p l y a s u b s t anc e based exclusion as a final step in such an ap p ro ac h .

The draft defines the “normal return” as t h e “ rat e o f ret u rn” m u l t ip l ied b y t h e “ el igib l e eq u it y .” Th e rat e o f ret u rn is an ec o no m ic c o nc ep t t h at b egins b y es t im at ing t h e ris k f ree rat e o f ret u rn and t h en inc reas es it b y a ris k p rem iu m . Th e draf t no t es t h at ec o no m ic s t u dies o f t en es t im at e t h e ris k - inc l u s ive rat e as b eing ap p ro x im at el y 8 % t o 10%, al t h o u gh t h is varies b y indu s t ry , l everage, and j u ris dic t io n. Th e draf t s u gges t s f o u r o p t io ns f o r det erm ining ris k - inc l u s ive rat e o f ret u rn: (i) a s et p erc ent age s u c h as 10%; (ii) a 10- y ear go vernm ent b o nd y iel d increased by a fixed equity premium; (iii) t h e c o rp o rat e gro u p ’ s c o s t o f c ap it al ; o r (iv) a c o m b ined ap p ro ac h t h at u s es t h e first or second option but allows groups to o p t ins t ead t o u s e t h eir c o s t o f c ap it al .

The draft defines “eligible equity” as eq u it y as s o c iat ed w it h t h e as s et s u s ed in t h e ac t ive c o ndu c t o f t h e t rade o r b u s ines s in t h e l o w - t ax j u ris dic t io n. Th e draf t s u gges t s u s ing eit h er b o o k val u e o r t ax val u e f ro m t h e p ers p ec t ive o f t h e p arent j u ris dic t io n t o c al c u l at e eq u it y , redu c ed b y ap p o rt io ned l iab il it ies .

Final l y , t h e draf t dis c u s s es w h et h er t h e definition of what constitutes income s u b j ec t t o CFC ru l es s h o u l d b e ap p l ied o n an ent it y o r t rans ac t io nal b as is . Th e ent it y ap p ro ac h is an al l o r no t h ing ap p ro ac h , depending on whether at least a specified p erc ent age o f t h e inc o m e f al l s w it h in the definition of CFC income. Under the t rans ac t io nal ap p ro ac h , in c o nt ras t , t h e c h arac t er o f eac h s t ream o f inc o m e is as s es s ed t o det erm ine w h et h er t h at stream of income is within the definition o f CFC inc o m e. Th e dis c u s s io n draf t c o ns iders it t o b e b es t p rac t ic e general l y t o u s e t h e t rans ac t io nal ap p ro ac h rat h er t h an t h e ent it y ap p ro ac h .

Rules for computing incomeCh ap t er 6 o f t h e dis c u s s io n draf t addres s es t h e c o m p u t at io n o f inc o m e o f t h e CFC, p ro viding rec o m m endat io ns o n (i) w h ic h j u ris dic t io n’ s ru l es s h o u l d ap p l y ; and (ii) whether any specific rules for c o m p u t ing CFC inc o m e are nec es s ary . Th e draf t rec o m m ends t h at t h e ru l es o f t h e p arent j u ris dic t io n b e u s ed t o c o m p u t e a CFC’ s inc o m e. Th e draf t des c rib es t h is ap p ro ac h as c o ns is t ent w it h t h e go al s o f t h e BEPS Ac t io n Pl an and as redu c ing adm inis t rat ive c o s t s .

Th e dis c u s s io n draf t al s o rec o m m ends that jurisdictions should have a specific ru l e l im it ing t h e o f f s et o f CFC l o s s es s o that they can be used only against profits o f t h e s am e CFC o r o t h er CFCs in t h e s am e j u ris dic t io n. Su c h a ru l e c o u l d b e ap p l ied t o get h er w it h a ru l e t h at l im it s offset of losses to similar types of profits.

Rules for attributing incomeCh ap t er 7 o f t h e dis c u s s io n draf t addres s es h o w t o at t rib u t e inc o m e t o s h areh o l ders . Th e draf t b reak s t h is do w n into a five-step process: (i) determining w h ic h t ax p ay ers s h o u l d h ave inc o m e at t rib u t ed t o t h em ; (ii) det erm ining h o w

m u c h inc o m e s h o u l d b e at t rib u t ed; (iii) det erm ining w h en t h e inc o m e s h o u l d b e inc l u ded in t h e ret u rns o f t h e t ax p ay ers ; (iv) det erm ining h o w t h e inc o m e s h o u l d b e t reat ed; and (v) det erm ining w h at t ax rat e s h o u l d ap p l y t o t h e inc o m e.

Th e dis c u s s io n draf t rec o m m ends t h at t h e t h res h o l d f o r at t rib u t io n b e t ied t o t h e m inim u m c o nt ro l t h res h o l d. Ho w ever, t h e draf t no t es t h at c o u nt ries c an c h o o s e dif f erent at t rib u t io n and c o nt ro l t h res h o l ds dep ending o n t h e p o l ic y c o ns iderat io ns u nderl y ing t h eir CFC ru l es .

Th e dis c u s s io n draf t rec o m m ends t h at t h e am o u nt o f inc o m e t o b e at t rib u t ed t o eac h s h areh o l der b e c al c u l at ed b y ref erenc e t o t h e s h areh o l der’ s p ro p o rt io n o f o w ners h ip in t h e CFC and t h e p erio d o f s u c h o w ners h ip .

Th e dis c u s s io n draf t rec o m m ends t h at j u ris dic t io ns c an det erm ine w h en inc o m e s h o u l d b e inc l u ded and h o w it s h o u l d b e t reat ed s o t h at t h eir CFC ru l es o p erat e in a m anner t h at is c o h erent w it h t h eir do m es t ic l aw .

Th e dis c u s s io n draf t rec o m m ends t h at t h e t ax rat e o f t h e p arent j u ris dic t io n b e ap p l ied. Th e draf t al s o no t es t h at c o u nt ries c o u l d c o ns ider a “ t o p - u p t ax ” ins t ead o f t ax at t h e f u l l rat e.

Rules to prevent or eliminate double taxationCh ap t er 8 o f t h e draf t s et s o u t rec o m m endat io ns f o r p revent ing o r el im inat ing do u b l e t ax at io n.

Th e draf t f o c u s es o n t h ree s it u at io ns w h ere do u b l e t ax at io n m ay aris e: (i) s it u at io ns w h ere t h e at t rib u t ed CFC inc o m e is al s o s u b j ec t t o f o reign c o rp o rat e t ax es ; (ii) s it u at io ns w h ere CFC ru l es in m o re t h an o ne j u ris dic t io n ap p l y t o t h e s am e CFC inc o m e; and (iii) s it u at io ns w h ere a CFC ac t u al l y dis t rib u t es dividends o u t o f inc o m e t h at h as al ready b een at t rib u t ed t o it s res ident s h areh o l ders u nder t h e CFC ru l es o r a res ident s h areh o l der dis p o s es o f t h e s h ares in t h e CFC.

With respect to the first two situations, t h e dis c u s s io n draf t rec o m m ends t h at c o u nt ries al l o w a c redit f o r f o reign


t ax es ac t u al l y p aid, inc l u ding CFC t ax o n int erm ediat e c o m p anies . Wit h res p ec t t o t h e t h ird s it u at io n, t h e draf t rec o m m ends ex em p t ing dividends and gains o n dis p o s it io n o f CFC s h ares if t h e inc o m e o f t h e CFC h as p revio u s l y b een s u b j ec t t o CFC t ax at io n. Ho w ever, t h e p rec is e t reat m ent o f dividends and gains c an b e l ef t t o j u ris dic t io ns t o det erm ine s o t h at s u c h t reat m ent is c o h erent w it h t h eir do m es t ic l aw .

OECD holds public consultation on BEPS Action 3 on CFC rulesOn 12 May 2015, t h e OECD h el d a p u b l ic c o ns u l t at io n in c o nnec t io n w it h t h e BEPS p ro j ec t t h at w as f o c u s ed o n Ac t io n 3 o n c o nt ro l l ed f o reign c o m p any (CFC) ru l es . Th e m eet ing w as an o p p o rt u nit y f o r s t ak eh o l ders t o engage direc t l y w it h t h e OECD Sec ret ariat and t h e c o u nt ry del egat es w h o are res p o ns ib l e f o r t h e w o rk o n t h is Ac t io n.

On 3 Ap ril 2015, t h e OECD is s u ed a dis c u s s io n draf t o n Ac t io n 3 o n s t rengt h ening CFC ru l es (t h e Dis c u s s io n Draf t o r Draf t ).1 Th e Dis c u s s io n Draf t f o c u s es o n h o w t o u s e CFC ru l es t o res p o nd t o BEPS and addres s es w h at it des c rib es as t h e c o re el em ent s o r “ b u il ding b l o c k s ” o f CFC ru l es . Th e Draf t inc l u des rec o m m ended ap p ro ac h es o r o p t io ns f o r eac h o f t h e c o re el em ent s . Th e OECD rec eived o ver 57 0 p ages o f c o m m ent s o n t h e Dis c u s s io n Draf t , w h ic h are p o s t ed o n it s w eb s it e.

Th e p u b l ic c o ns u l t at io n o n 12 May 2015 w as a dial o gu e am o ng stakeholders, country tax officials, and the OECD Secretariat on key is s u es and c o nc erns rais ed in t h e c o m m ent s . Th e c o ns u l t at io n w as h o s t ed b y OECD Wo rk ing Part y 11, w h ic h h as res p o ns ib il it y f o r t h e OECD’ s w o rk o n Ac t io n 3. Th is w o rk ing gro u p al s o h as res p o ns ib il it y f o r o t h er BEPS Ac t io ns , inc l u ding t h e w o rk o n Ac t io n 2 (h y b rid m is m at c h arrangements), Action 4 (interest deductions and other financial p ay m ent s ) and Ac t io n 12 (m andat o ry dis c l o s u re).

Tax officials from 26 countries participated in the consultation. Also p art ic ip at ing w ere rep res ent at ives o f m u l t inat io nal b u s ines s es and indu s t ry b o dies ; t ax advis o rs , inc l u ding EY rep res ent at ives ; and rep res ent at ives o f no n- go vernm ent al o rganiz at io ns (NGOs ). Th e c o ns u l t at io n w as l ive- s t ream ed b y t h e OECD and a rec o rding is avail ab l e o n t h e OECD w eb s it e.

In o p ening c o m m ent s , a rep res ent at ive o f t h e Bu s ines s and Indu s t ry Advis o ry Co m m it t ee (BIAC) t o t h e OECD ex p res s ed c o nc ern t h at the lack of consensus reflected in the Discussion Draft represents a m is s ed o p p o rt u nit y . It w as no t ed t h at t h e o b j ec t ive o f CFC ru l es is t o c o m p l em ent t rans f er p ric ing ru l es t o dis c o u rage BEPS and t o redu c e h arm f u l t ax c o m p et it io n b u t t h at t h e Draf t f ail s t o c l earl y art ic u l at e s u c h go al s . Fu rt h er c o nc ern w as ex p res s ed t h at t h e Draf t dep art s f ro m t h e c o m m o n ac t ive/ p as s ive inc o m e s t ru c t u re f o r CFC ru l es b y inc l u ding new ideas s u c h as t h e ex c es s ret u rn ap p ro ac h . Mo reo ver, s o m e rec o m m endat io ns in t h e Draf t c o u l d inap p ro p riat el y s h if t t ax ing righ t s t o res idenc e j u ris dic t io ns f ro m s o u rc e j u ris dic t io ns , w h ic h c o u l d h arm c ro s s - b o rder inves t m ent .

R ead more of E Y’ s an al y si s at bi t. l y / 1 c2 fe1 a

I mp l i cati on sThe discussion draft is the first draf t o f t h e o u t p u t t o b e p ro du c ed u nder Ac t io n 3 o f t h e OECD BEPS Pro j ec t . Wh il e t h e draf t m ak es rec o m m endat io ns w it h res p ec t t o s everal as p ec t s o f CFC ru l es , it do es no t m ak e rec o m m endat io ns o n t h e definition of CFC income; in that area, t h e draf t inc l u des o p t io ns as t h ere is no t y et c o ns ens u s am o ng c o u nt ries o n a rec o m m ended ap p ro ac h . Th e rec o m m endat io ns and o p t io ns in t h e dis c u s s io n draf t , if ado p t ed b y c o u nt ries , c o u l d have significant implications for t h e t ax at io n o f gl o b al b u s ines s es . Co m p anies s h o u l d eval u at e h o w t h e rec o m m endat io ns and o p t io ns m ay af f ec t t h em , s t ay inf o rm ed ab o u t devel o p m ent s in t h e OECD and in t h e c o u nt ries w h ere t h ey o p erat e o r inves t , and c o ns ider p art ic ip at ing in t h e dial o gu e regarding t h e BEPS p ro j ec t and t h e u nderl y ing int ernat io nal t ax p o l ic y is s u es .


On 17 Feb ru ary 2015, t h e Organis at io n f o r Ec o no m ic Co - o p erat io n and Devel o p m ent (OECD) h el d a p u b l ic c o ns u l t at io n in c o nnec t io n

with the Base Erosion and Profit Shifting (BEPS) Ac t io n 4 t h at is f o c u s ed o n t h e dedu c t ib il it y o f int eres t deductions and other financial payments, where t h e OECD is p ro p o s ing b ro ad l im it at io ns o n int eres t dedu c t ib il it y . Th e c o ns u l t at io n w as an o p p o rt u nit y f o r s t ak eh o l ders t o engage direc t l y w it h t h e OECD Sec ret ariat and t h e c o u nt ry del egat es w h o are res p o ns ib l e f o r t h e w o rk o n t h is Ac t io n.

OECD’s public consultation on BEPS Action 4 on interest deductions and other financial payments

Barbara AngusInt ernat io nal Tax Servic es

T: + 1 202 327 58 24 E: b arb ara.angu s @ ey .c o m


As b ac k gro u nd, t h e OECD is s u ed a dis c u s s io n draf t o n Ac t io n 4 o n int eres t deductions and other financial payments on 18 December 2014. You can find full c o verage o f t h e dis c u s s io n draf t c o nt ent s in EY Gl o b al t ax al ert 2014- 2329 at www. ey . com/ tax al erts. In addit io n, y o u c an read EY ’ s c o m m ent l et t er in res p o ns e t o t h e OECD at www. ey . com/ B E P S . In o u r c o m m ent l et t er, w e s et f o rt h a number of significant concerns in relation t o t h e dis c u s s io n draf t .

Alternative approaches to limiting deductions for interest expenseTh e dis c u s s io n draf t s et f o rt h al t ernat ive ap p ro ac h es t o l im it ing dedu c t io ns f o r int eres t ex p ens e, inc l u ding:

(1) Gro u p - w ide ru l es , w h ic h w o u l d l im it t h e net int eres t dedu c t io ns o f a m em b er o f a m u l t inat io nal c o rp o rat io n (MNC) gro u p t o a p ro p o rt io n o f t h e gro u p ’ s ac t u al net t h ird- p art y int eres t ex p ens e

(2) Fix ed rat io ru l es , w h ic h w o u l d l im it a c o m p any ’ s int eres t dedu c t io ns t o an am o u nt det erm ined b y ap p l y ing a b enc h m ark rat io t o an ent it y ’ s earnings , as s et s o r eq u it y

(3) Co m b inat io ns o f t h es e t w o ap p ro ac h es

Th e dis c u s s io n draf t al s o des c rib es a range o f t ec h nic al , p o l ic y and indu s t ry s ec t o r is s u es rel evant t o t h e c o ns iderat io n o f t h es e ap p ro ac h es . Th e OECD rec eived o ver 1, 000 p ages o f c o m m ent s o n t h e dis c u s s io n draf t , w h ic h are p o s t ed o n it s w eb s it e.

Th e 17 Feb ru ary 2015 c o ns u l t at io n w as a dial o gu e am o ng s t ak eh o l ders , c o u nt ry tax officials and the OECD Secretariat o n k ey is s u es and c o nc erns rais ed in t h e c o m m ent s . Th e c o ns u l t at io n w as h o s t ed b y OECD Wo rk ing Part y 11, w h ic h h as res p o ns ib il it y f o r t h e OECD’ s w o rk o n Ac t io n 4. Th is w o rk ing gro u p al s o h as res p o ns ib il it y f o r o t h er BEPS Ac t io ns , inc l u ding t h e w o rk o n Ac t io n 2 (h y b rid m is m at c h arrangem ent s ), Ac t io n 3 (CFC ru l es ) and Ac t io n 12 (dis c l o s u re o f aggres s ive t ax p l anning arrangem ent s ).

Delegates from 30 countries participated in the consultation. Also participating were business representatives from around the world, including EY representatives and representatives of non-governmental organizations (NGOs). The session was live-streamed by the OECD and recordings of the morning and afternoon sessions are available on the OECD website:

1 0 : 0 0 – 1 3 : 0 0 : http : / / v i d eo. oecd .org/?action=video&id=1482

1 4 : 3 0 – 1 8 : 0 0 : http : / / v i d eo. oecd .org/?action=video&id=1483


Opening remarks Th e c o ns u l t at io n b egan w it h o p ening rem ark s f ro m t h e UK del egat e w h o is a c o - c h air o f t h e f o c u s gro u p o n Ac t io n 4. He indic at ed t h at int eres t dedu c t ib il it y is a m aj o r c o nc ern f o r t h e c o u nt ries invo l ved in t h e BEPS p ro j ec t . Th o s e c o nc erns f o c u s o n w h en t h e t o t al int eres t ex p ens e o f gro u p m em b ers ex c eeds t h e gro u p ’ s t h ird- p art y int eres t ex p ens e and al s o w h en int eres t ex p ens e o f a gro u p do es no t al ign w it h t h e ec o no m ic ac t ivit y in t h e gro u p . Fo r t h is reas o n, t h e f o c u s gro u p is l o o k ing at o p t io ns t h at w o u l d m o ve t h e “ gearing” o f ent it ies in t h e gro u p c l o s er t o t h e “ gearing” o f t h e o veral l gro u p .

Th e c o - c h air al s o :

(1) No t ed t h e s u gges t io n t h at b es t p rac t ic e in t h is area s h o u l d b e b as ed o n t h e arm ’ s - l engt h p rinc ip l e

(2) Ex p res s ed t h e view t h at f ew c o u nt ries ap p l y arm ’ s - l engt h ru l es t o int eres t and t h o s e t h at do u s e t h o s e ru l es do no t u s e t h em t o addres s BEPS ac t ivit y

(3) St at ed t h at t h e f o c u s gro u p dec ided no t t o u s e t h e arm ’ s - l engt h p rinc ip l e in t h e p ro p o s ed m eas u res u nder Ac t io n 4

Final l y , t h e c o - c h air c o m m ent ed t h at t h e s o l u t io n f o r int eres t dedu c t io ns and o t h er financial payments will require interaction ac ro s s c o u nt ries .

Th e rep res ent at ive o f t h e Bu s ines s Indu s t ry and Advis o ry Co m m it t ee (BIAC) o f t h e OECD o p ened b y c o m m ent ing o n t h e im p o rt anc e o f deb t f u nding t o m any b u s ines s es and ex p res s ing t h e view t h at ru l es l im it ing dedu c t ib il it y s h o u l d b e narro w l y c raf t ed. He indic at ed t h at t h e arm ’ s - l engt h p rinc ip l e s h o u l d h ave a ro l e t o p l ay b ec au s e it p ro vides inf o rm at io n ab o u t w h at t h ird p art ies w o u l d do . Th e BIAC rep res ent at ive f u rt h er no t ed c o nc erns ab o u t t h e gro u p - w ide ap p ro ac h c o nt ained in t h e dis c u s s io n draf t , inc l u ding p rac t ic al c h al l enges and t h e p o t ent ial c reat io n o f p ervers e inc ent ives t o inc reas e t h ird- p art y

l everage. He ex p res s ed t h e p ref erenc e o f BIAC for the fixed ratio approach, noting t h at s u c h an ap p ro ac h is rel at ivel y s im p l e and s t ab l e, b u t f u rt h er no t ing c o nc ern ab o u t t h e dis c u s s io n draf t ’ s s u gges t io n t h at t h e b enc h m ark rat io s h o u l d b e l o w er t h an t h e rat io s c u rrent l y u s ed in c o u nt ries . He c o nc l u ded w it h BIAC’ s view t h at a c o m b ined ap p ro ac h w o u l d b e t h e m o s t ap p ro p riat e o f t h e o p t io ns c o nt ained in t h e dis c u s s io n draf t , s u b j ec t t o c o nc ern ab o u t t h e rat io b eing m ade ex c es s ivel y l o w .

Data regarding debt levels in MNC groups Th e dis c u s s io n draf t inc l u des dat a o n t h e gl o b al t o p 100 c o m p anies b y m ark et c ap it al iz at io n f o r 2009 and 2013, w h ic h p u rp o rt s t o s h o w t h at ab o u t h al f o f t h o s e c o m p anies h ad net int eres t ex p ens e t o EBITDA rat io s o f l es s t h an 5%. Th e dis c u s s io n draf t c o nc l u des f ro m t h is dat a that the benchmark ratio for a fixed-ratio approach should be significantly l o w er t h an t h e 30% l evel s u s ed in s everal c o u nt ries . Th is anal y s is w as ro u ndl y c rit ic iz ed in t h e c o m m ent s s u b m it t ed, o n gro u nds t h at t h es e c o m p anies are no t rep res ent at ive o f t y p ic al c o m p any leverage profiles, the use of data from consolidated financial statements was not ap p ro p riat e and t h e c u rrent int eres t rat e environment reflects all-time lows.

Du ring t h e c o ns u l t at io n, a m em b er o f t h e OECD Sec ret ariat p res ent ed addit io nal dat a b as ed o n 250 c o m p anies s h o w ing s im il ar res u l t s . He al s o p res ent ed dat a t h at s h o w ed h igh er int eres t am o u nt s in h igh er t ax rat e c o u nt ries .

BIAC m ade an ex t ens ive p res ent at io n o f dat a invo l ving 20, 000 c o m p anies f o r t h e five years from 2009 to 2013. Based on t h is dat a, 42- 47 % o f t h e c o m p anies h ad net int eres t ex p ens e t o EBIDTA rat io s o f greater than 10%. Looking at companies defined as small cap by Standard & Poor’s Gl o b al Vant age Dat ab as e, 52- 62% h ad net int eres t ex p ens e t o EBIDTA rat io s o f great er t h an 10%.

In res p o ns e t o t h e BIAC p res ent at io n, t h e m em b er o f t h e OECD Sec ret ariat no t ed that it would be useful to look at affiliate dat a as w el l as gro u p dat a. A US del egat e noted that perhaps a fixed-ratio approach t h at dif f erent iat es b et w een s m al l c ap and l arge c ap c o m p anies w o u l d m ak e s ens e and al s o s u gges t ed t h at it w o u l d u s ef u l t o s ee dat a f o r a dif f erent p erio d.

Group-wide approaches Bu s ines s p art ic ip ant s ex p res s ed a variet y o f c o nc erns ab o u t t h e p ro p o s ed gro u p -w ide ap p ro ac h es . It w as no t ed t h at b o rro w ing needs dif f er ac ro s s ent it ies within a group. The difficulties in using consolidated financial statement data to det erm ine al l o c at io ns t o gro u p m em b ers w ere dis c u s s ed, inc l u ding t h e f ac t t h at gro u p - l evel adj u s t m ent s w o u l d m ean t h at t h e s u m o f t h e m em b er nu m b ers t y p ic al l y w o u l d no t eq u al t h e gro u p nu m b ers , s u c h t h at t h e res u l t ing al l o c at io n w o u l d no t b e b as ed o n 100% o f t h e gro u p ’ s ex t ernal int eres t ex p ens e. Co m m ent s w ere m ade ab o u t t h e draw b ac k s o f b o t h earnings and as s et s m eas u res as t h e al l o c at io n k ey , and s o m e p art ic ip ant s s u gges t ed t h at flexibility regarding the choice of measure w o u l d b e needed b ec au s e o f indu s t ry dif f erenc es .

Many p art ic ip ant s s t res s ed t h e inab il it y t o engage in s el f - h el p u nder a gro u p ap p ro ac h b ec au s e o f t h e res t ric t io ns o n p u s h ing deb t do w n t o gro u p m em b ers t h at ex is t in m any c o u nt ries , no t ing t h at t h e res u l t t h eref o re w o u l d b e ex t ernal int eres t ex p ens e t h at is dedu c t ib l e no w h ere in t h e w o rl d. In res p o ns e t o an OECD q u es t io n ab o u t w h et h er t h es e p ro b l em s c o u l d b e addres s ed b y ap p l y ing a gro u p - w ide ap p ro ac h t o a nu m b er t h at ex c eeds 100% o f a gro u p ’ s net ex t ernal int eres t ex p ens e (s ay 105- 110%), b u s ines s p art ic ip ant s indic at ed t h at s u c h an adj u s t m ent w o u l d b e arb it rary and t h at t h e res u l t s s t il l w o u l d no t b e f air in p art ic u l ar c as es b ec au s e t h e s t ru c t u ral p ro b l em s w it h t h e gro u p - w ide ap p ro ac h w o u l d rem ain.


Fixed-ratio approaches So m e b u s ines s p art ic ip ant s f avo red a fixed-ratio approach as involving less complexity and providing flexibility for eac h c o u nt ry t o s et it s o w n b enc h m ark l evel . It w as s t res s ed, h o w ever, t h at t h e b enc h m ark rat io w o u l d h ave t o b e h igh eno u gh t o al l o w ap p ro p riat e am o u nt s o f int eres t ex p ens e; in t h is regard, it w as no t ed t h at dif f erent indu s t ries h ave very dif f erent am o u nt s o f l everage. It al s o w as no t ed t h at int eres t ab o ve t h e amount allowed under a fixed-ratio ap p ro ac h w o u l d b e no n- dedu c t ib l e, w h il e t h e int eres t inc o m e w o u l d b e t ax ab l e, u nl es s t h e OECD devel o p s a l ink ing ru l e t h at addres s es t h e inc o m e inc l u s io n.

In res p o ns e t o a q u es t io n f ro m t h e New Zeal and del egat e ab o u t w h et h er t h ere s h o u l d b e c o nc ern t h at b u s ines s es w o u l d l ever u p t o t h e b enc h m ark rat io , b u s ines s p art ic ip ant s no t ed t h at c o m m erc ial reas o ns are needed f o r b o rro w ing. In regard t o t h e l evel o f t h e fixed ratio, a US delegate commented t h at int erc o m p any deb t is t ax - driven. An NGO rep res ent at ive ex p res s ed t h e view that fixed caps do not work to address BEPS.

Combined approaches Many b u s ines s p art ic ip ant s f avo red a combined approach that used a fixed-rat io t es t as t h e m ain ru l e, w it h a gro u p al l o c at io n ru l e as a f al l b ac k . It w as no t ed t h at s u c h an ap p ro ac h w o u l d p ro vide needed flexibility. In response to a q u es t io n f ro m a UK del egat e ab o u t h o w a c o m b ined ap p ro ac h w o u l d w o rk given t h e c o m p u t at io nal is s u es o f a gro u p al l o c at io n ru l e, a b u s ines s p art ic ip ant no t ed t h at it w o u l d b e im p o rt ant t o h ave the fixed ratio high enough to limit when t h e gro u p ru l e w o u l d h ave t o b e ap p l ied. Ano t h er US del egat e indic at ed t h at t h e fixed ratio should be set at a level that w o u l d enc o u rage c o m p anies t o l everage in l ine w it h t h eir gro u p rat io . An NGO rep res ent at ive ex p res s ed t h e view t h at a c o m b ined ap p ro ac h w o u l d no t w o rk b ec au s e it w o u l d al l o w b u s ines s es t o c h o o s e t h e s t ru c t u re t h ey w ant .

It w as no t ed t h at t arget ed ru l es addres s ing p art ic u l ar BEPS c o nc erns s h o u l d p l ay an im p o rt ant ru l e. Fo r c arry o vers , it w as ac k no w l edged t h at t h is w o u l d m it igat e s o m e o f t h e is s u es w it h a gro u p al l o c at io n ru l e if t h e c arry o ver p erio d is l o ng eno u gh , b u t it al s o w as no t ed t h at a gro u p ap p ro ac h w o u l d l ead t o a p erm anent s t ru c t u ral dis al l o w anc e. It al s o w as no t ed t h at t rans it io n ru l es w o u l d b e needed, given the long-term nature of financing arrangem ent s .

Special industry issues Regarding the financial services indu s t ry , b u s ines s p art ic ip ant s ex p res s ed ap p rec iat io n t h at t h e dis c u s s io n draf t ac k no w l edged t h e s p ec ial c irc u m s t anc es f o r t h is indu s t ry , b u t al s o ex p res s ed c o nc ern ab o u t t h e p o s s ib il it y o f an ap p ro ac h t h at f o c u s es o n regu l at o ry c ap it al , as no t ed in t h e Draf t . In t h is regard, it w as no t ed t h at s t ringent res t ric t io ns are im p o s ed o n regu l at o ry c ap it al in t h e f o rm o f deb t , t h at regu l at io n in t h is regard c o nt inu es t o evo l ve, and t h at t ax ru l es t h at do no t al ign w it h regu l at o ry ru l es w o u l d c reat e s erio u s p ro b l em s f o r t h e indu s t ry . It w as s u gges t ed t h at t h e OECD s h o u l d w o rk w it h t h e indu s t ry and it s regu l at o rs in devel o p ing an ap p ro p riat e ap p ro ac h t o addres s any BEPS c o nc erns .

Bu s ines s p art ic ip ant s al s o rais ed s p ec ial considerations about the oil & gas indu s t ry , t h e s ec u rit iz at io n s ec t o r and t h e airc raf t - l eas ing s ec t o r. In addit io n, b u s ines s p art ic ip ant s c o m m ent ed o n t h e s p ec ial c irc u m s t anc es f o r inf ras t ru c t u re inves t m ent .

Concluding comments In c l o s ing, a m em b er o f t h e OECD Sec ret ariat ex p res s ed ap p rec iat io n f o r t h e p art ic ip at io n in c o ns u l t at io n and f o r al l t h e w rit t en c o m m ent s s u b m it t ed. Sh e indic at ed t h at t h ey are s t il l w o rk ing t h ro u gh al l o f t h e c o m m ent s and m ay req u es t addit io nal inp u t as t h e p ro c es s m o ves f o rw ard.

I mp l i cati on sTh e dis c u s s io n at t h e c o ns u l t at io n underscored the significant effect t h at t h e l im it at io ns o n int eres t dedu c t ib il it y c o nt em p l at ed in t h e dis c u s s io n draf t w o u l d h ave o n financing activities and capital s t ru c t u res o f MNCs . Mo reo ver, s u c h c h anges are b eing p ro p o s ed agains t t h e b ac k dro p o f c o u nt ry ac t ivit y in rec ent y ears t h at h as invo l ved enac t m ent o f a variet y o f new res t ric t io ns o n int eres t dedu c t io ns . Th u s , it is im p o rt ant f o r c o m p anies t o k eep inf o rm ed o f devel o p m ent s in t h is area in t h e OECD and in t h e c o u nt ries in w h ic h t h ey o p erat e, t o as s es s t h e im p l ic at io ns o f t h es e devel o p m ent s f o r t h eir b u s ines s models and financing structures, and t o c o ns ider ac t ivel y engaging w it h p o l ic y m ak ers in t h is int ernat io nal t ax deb at e.


in the spotlight

Tax Council Policy Institute (TCPI) honors EY Global Chairman and CEO Mark Weinberger at annual symposium

Th u rs day 12 Feb ru ary s aw t h e Tax Co u nc il Po l ic y Ins t it u t e (TCPI) rec o gniz e Mark Weinb erger, EY Gl o b al Ch airm an and CEO, and f o rm er U.S. Treas u ry As s is t ant Sec ret ary f o r Tax Po l ic y , w it h it s Pil l ar o f Ex c el l enc e Aw ard f o r h is ex t rao rdinary ac c o m p l is h m ent s in t h e field of business and tax policy. The award w il l b e p res ent ed at TCPI’ s 16t h Annu al Tax Policy & Practice Symposium in Was h ingt o n, D.C.

“ With an eminent career and track record of leadership in global tax policy on all platforms both inside EY and out, Mark is the perfect business leader for this year’s Pillar Award,” said Doug Bates, Chair of TCPI’s Board of Directors and Vice President of Federal Relations at Northwestern Mutual. “His forward-thinking approach will continue to create positive change in the business and tax community.”

Mark is o nl y t h e s ix t h rec ip ient o f t h is aw ard, w h ic h h o no rs individu al s in t h e t ax c o m m u nit y w h o c o ns is t ent l y go ab o ve and beyond what is required to fulfill their p ro f es s io nal o b l igat io ns , p ro ving t o b e true leaders in their field. TCPI searches f o r an o u t s t anding t ax p ro f es s io nal w h o s e p erf o rm anc e and ac t ivit ies h el p f u rt h er t h e k no w l edge and u nders t anding o f t h e t ax c o m m u nit y at l arge. Crit eria f o r t h e Pil l ar o f Ex c el l enc e Aw ard inc l u de: p l ay ing a k ey ro l e in devel o p ing t ax p o l ic y , rec o gniz ing it s im p ac t o n b u s ines s and t h e ec o no m y ; and, im p ro ving t h e o veral l u nders t anding o f f o reign and do m es t ic t ax p o l ic ies am o ng t ax p ro f es s io nal s , ex ec u t ives and p o l ic y m ak ers .

Ac c ep t ing t h e aw ard, Mark s aid:

“ I’ve been involved with TCPI for years, because it always offers a terrific conference and a great debate about the important issues that affect us all. It’s exactly the kind of dialogue we need today. What an honor it is to be up here today. And more importantly, I want to say how honored I am to have had the opportunity to work side by side with so many people in this room.”

Mark as s u m ed h is c u rrent ro l e in Ju l y 2013. In addit io n t o h is ro l e at Treas u ry , h e h as al s o h ad an ex t ens ive c areer in p u b l ic s ervic e and as an ent rep reneu r. He w as ap p o int ed b y Pres ident Cl int o n t o s erve o n t h e U.S. So c ial Sec u rit y Adm inis t rat io n Advis o ry Bo ard, and h el d o t h er US go vernm ent p o s it io ns inc l u ding Ch ief o f St af f o f Pres ident Cl int o n’ s 19 9 4 Bip art is an Co m m is s io n o n Ent it l em ent and Tax Ref o rm ; Ch ief Tax and Bu dget Co u ns el t o US Senat o r Jo h n Danf o rt h (R- Mis s o u ri); advis o r t o t h e Nat io nal Co m m is s io n o n Ec o no m ic Gro w t h and Tax Ref o rm ; and Co m m is s io ner o n t h e Nat io nal Co m m is s io n o n Ret irem ent Po l ic y . Mark al s o c o - f o u nded Was h ingt o n Co u ns el , P.C., a Was h ingt o n DC- b as ed l aw and legislative advisory firm that merged into Ernst & Young LLP and now operates as Was h ingt o n Co u nc il EY .

TCPI’s 16th Annual Tax Policy & Practice Sy m p o s iu m , “ Ho w Tax es Mat t er: Th e Gl o b al iz at io n o f Tax Po l ic y and Im p l ic at io ns f o r US Ec o no m ic Gro w t h and Inves t m ent , ” ex p l o red t h e gl o b al iz at io n o f t ax p o l ic y and it s im p l ic at io ns o n t h e ec o no m ic gro w t h o f t h e Unit ed St at es and c o m p anies ’ inves t m ent dec is io ns .


in the spotlight

EY report: Wealth under the spotlight 2015

Agains t a b ac k dro p o f gro w ing p u b l ic , m edia and ac t ivis t int o l eranc e o f p erc eived ab u s e o f t h e t ax s y s t em , w e c o nt inu e t o s ee u np rec edent ed l evel s and s p eed o f c h ange in t ax p o l ic y and t ax adm inis t rat io n ap p ro ac h es al l aro u nd t h e w o rl d.

Wealth under the spotlight 2015 — following on from our 2010 Wealth under the spotlight publication — highlights some of these global changes and the subsequent impact being felt by High Net Worth Individuals. We explore current tax policy direction and the spectacular rise in collaboration and taxpayer information sharing among tax administrations.

As a res u l t o f t h es e s h if t s , m any High Net Wo rt h Individu al s are no w s t art ing t o real iz e t h at t h eir rel at io ns h ip w it h k ey t ax ing adm inis t rat io ns needs t o evo l ve and c h ange, and in m any c as es , t ax

adm inis t rat io ns t h em s el ves are s h o w ing a des ire t o devel o p c l o s er, m o re t rans p arent rel at io ns h ip s w it h t h eir c u s t o m ers w h ic h c an res u l t in b et t er u s e o f t im e, res o u rc es and t h e gaining o f h igh er l evel s o f c ert aint y s o o ner in t h e gam e. Wit h m any t ax is s u es ex p erienc ed b y High Net Wo rt h Individu al s h aving a m u l t i- y ear

and in s o m e c as es , m u l t il at eral im p ac t , m anaging p ers o nal t ax c o m p l ianc e o b l igat io ns h as never b een s o im p o rt ant .

In our report, we provide coverage of many of the areas that governments and tax administrators are focusing on, as well as setting out a framework of recommendations which you may wish to consider when assessing your current global tax position. In preparing this framework, we drew upon EY’s extensive global network of personal tax, tax policy and tax controversy professionals as well as exclusive interviews with leaders in many tax administrations around the world.

Access the report at www. ey . com/

wealthunderthespotlight


On 6 February 2015, the Organisation for Economic Co-operation and Development

(OECD) released a trio of papers that address three of the focus areas in its Action Plan on Base Erosion and Profit Shifting (BEPS). The OECD presented these developments during the G20 Finance Ministers’ meeting on 9-10 February 2015. One of the documents, titled Action 5: Agreement on Modified Nexus Approach for IP Regimes, describes the consensus on the approach for a substantial activity requirement for intangible property (IP) regimes such as patent boxes in connection with BEPS Action 5 (harmful tax practices).

OECD explains agreed approach on intangible property regimes under BEPS Action 5

Chris SangerGlobal and UK Tax Policy Leader

T: +44 207 951 0150 E: [email protected]

Ute WittTax Policy Leader — Germany



Th e agreed ap p ro ac h b u il ds o n t h e “modified nexus approach” developed j o int l y b y t h e Germ an and UK go vernm ent s 1 w h ic h w as m ade p u b l ic o n 11 No vem b er 2014. Th e Ac t io n 5 Pap er des c rib es c o nc ep t u al is s u es with respect to the modified nexus ap p ro ac h and addit io nal w o rk t h at w il l b e c arried o u t in o rder t o al l o w agreem ent o n t h e det ail ed ru l es t o b e reac h ed in 2015.

BackgroundTh e int erim rep o rt o n Ac t io n 5 o f t h e BEPS Pro j ec t , “ Co u nt ering Harm f u l Tax Prac t ic es Mo re Ef f ec t ivel y , Tak ing int o Ac c o u nt Trans p arenc y and Su b s t anc e, ” rel eas ed o n 16 Sep t em b er 2014, 2 reflected consensus on the importance o f h aving ap p ro p riat e s u b s t ant ial ac t ivit y req u irem ent s w it h res p ec t t o p ref erent ial t ax regim es in c o nnec t io n w it h t h e det erm inat io n w h et h er s u c h regim es are t o b e c o ns idered h arm f u l t ax p rac t ic es . Ho w ever, f u l l c o ns ens u s had not been reached yet on defining s u b s t ant ial ac t ivit y . Fo r IP regim es , o ne o f t h e p ro p o s ed ap p ro ac h es w as t h e “ nex u s ap p ro ac h , ” w h ic h w o u l d allow benefits granted with respect to IP inc o m e in l ine w it h t h e ex p endit u res l ink ed t o generat ing s u c h inc o m e. Th e Germ an and UK Go vernm ent s j o int l y proposed a modified nexus approach in No vem b er 2014, w h ic h h as no w b een endo rs ed b y al l OECD and G20 c o u nt ries .

Conceptual issuesTh e Ac t io n 5 Pap er no t es t h e general ac c ep t anc e o f t h e nex u s ap p ro ac h , subject to modifications relating to t h e l evel o f q u al if y ing ex p endit u re, grandf at h ering p ro vis io ns , and t h e t rac k ing and t rac ing o f ex p endit u re.

Ac c o rding t o t h e p ap er, t h e agreem ent al l o w s c o u nt ries t o p ro vide f o r an “ u p - l if t ” o f q u al if y ing ex p endit u re b y t h e am o u nt o f ac t u al ex p endit u res o n o u t s o u rc ing and ac q u is it io n c o s t s b u t no t t o ex c eed 30% o f t h e am o u nt o f

1 See EY Gl o b al Tax Al ert , UK and Germany

agree to joint proposal on preferential intellectual property regimes, 13 No vem b er 2014.2 See EY Gl o b al Tax Al ert , OECD releases

interim report under BEPS Action 5 on countering harmful tax practices, 21 Sep t em b er 2014.

q u al if y ing ex p endit u re o f t h e c o m p any , in o rder c o m p ens at e f o r t h e f ac t t h at rel at ed- p art y o u t s o u rc ing and ac q u is it io n c o s t s w il l no t c o ns t it u t e q u al if y ing ex p endit u re. An ex am p l e o f h o w t h e u p - l if t w o u l d b e c o m p u t ed is al s o inc l u ded.

Timing, grandfathering and reporting issuesTh e Ac t io n 5 Pap er s t at es t h at u nder t h e agreem ent t h ere c an b e no new ent rant s t o any ex is t ing regim e af t er t h e dat e t h at a new regim e c o ns is t ent with the modified nexus approach t ak es ef f ec t and, in any event , no l at er t h an 30 Ju ne 2016. Fu rt h er, any l egis l at ive p ro c es s nec es s ary t o m ak e t h is c h ange m u s t c o m m enc e in 2015. Fo r t h is p u rp o s e, “ new ent rant s ” inc l u de b o t h t ax p ay ers no t p revio u s l y benefiting from the regime and new IP as s et s o w ned b y t ax p ay ers al ready benefiting from the regime.

Th e p ap er al s o indic at es t h at c o u nt ries are al l o w ed t o int ro du c e grandfathering rules, with final ab o l it io n req u ired t o b e no m o re t h an five years after the date the regime is c l o s ed t o new ent rant s , w h ic h w o u l d b e no l at er t h an 30 Ju ne 2021.

Further work to be doneTh e p ap er no t es t h at an ap p ro ac h t o t h e t rac k ing and t rac ing o f res earc h and devel o p m ent ex p endit u re t h at is p rac t ic al f o r t ax au t h o rit ies and c o m p anies t o im p l em ent needs t o b e devel o p ed in o rder t o im p l em ent t h e modified nexus approach. Agreement w il l al s o b e needed o n t rans it io nal p ro vis io ns t o enab l e c o m p anies t o t rans f er IP f ro m ex is t ing regim es int o new regim es . Th e OECD w il l w o rk t o agree o n p rac t ic al m et h o ds t h at s h o u l d b e u s ed f o r ident if y ing q u al if y ing ex p endit u re, t ak ing int o ac c o u nt t h e p art ic u l ar is s u es as s o c iat ed w it h ex p ens es inc u rred p rio r t o int ro du c t io n of the modified nexus approach.

I mp l i cati on sCompanies that are benefiting f ro m IP regim es s h o u l d c o nt inu e t o m o nit o r OECD devel o p m ent s w it h res p ec t t o Ac t io n 5 and, more specifically, the discussion s u rro u nding a s u b s t ant ial ac t ivit y req u irem ent and t h e agreed ap p ro ac h w it h res p ec t t o IP regim es . Th ey al s o s h o u l d m o nit o r rel at ed devel o p m ent s in t h e c o u nt ries w h ere t h ey o p erat e o r inves t , as w el l as t h e Eu ro p ean Co m m is s io n’ s o ngo ing s c ru t iny o f p at ent b o x regim es .


On 22 May 2015, t h e OECD rel eas ed a revis ed dis c u s s io n draf t in c o nnec t io n w it h t h e f o l l o w u p w o rk o n Ac t io n 6 o n t h e p revent io n o f t reat y ab u s e u nder t h e Bas e Erosion and Profit Shifting (BEPS) Action Pl an. Th e do c u m ent t it l ed, BEPS Ac t io n 6: Prevent ing Treat y Ab u s e des c rib es p ro p o s al s devel o p ed b y t h e OECD af t er t h e is s u anc e o f a dis c u s s io n draf t o n 21 No vem b er 2014 t it l ed, Fo l l o w Up Wo rk o n BEPS Ac t io n 6: Prevent ing Treat y Ab u s e (t h e Dis c u s s io n Draf t ). Th e Dis c u s s io n Draft identified 20 different issues to be addres s ed as p art o f t h e OECD’ s f o l l o w -u p w o rk o n it s 16 Sep t em b er 2014 rep o rt , Prevent ing t h e Grant ing o f Treat y Benefits in Inappropriate Circumstances. Specifically, the Discussion Draft h igh l igh t ed is s u es w it h res p ec t t o t h e proposed limitation on benefits (LOB) p ro vis io n, in p art ic u l ar regarding t h e t reat y ent it l em ent o f c o l l ec t ive inves t m ent veh ic l es (CIVs ) and No n- CIV f u nds ; t h e

p ro p o s ed general ant i- ab u s e ru l e b as ed o n a p rinc ip al p u rp o s e t es t (PPT); and o t h er is s u es invo l ving t h e p ro p o s ed new t reat y t ie- b reak er ru l e, t h e t reat m ent o f p erm anent es t ab l is h m ent s in t h ird c o u nt ries , and t h e int erac t io n b et w een t ax t reat ies and do m es t ic ant i- ab u s e ru l es .

Th e Revis ed Dis c u s s io n Draf t des c rib es t h e c u rrent s t at u s o f t h e dis c u s s io ns o f OECD Wo rk ing Part y 1, t h e w o rk ing gro u p res p o ns ib l e f o r t reat y m at t ers (t h e Wo rk ing Part y ), o n eac h o f t h e 20 is s u es . In s o m e ins t anc es , new p ro p o s al s t h at h ave b een agreed b y t h e Wo rk ing Part y are p res ent ed in t h e Revis ed Draf t . In o t h er ins t anc es , t h e Revis ed Draf t inc l u des p ro p o s ed ap p ro ac h es t h at are t o b e f u rt h er c o ns idered at t h e Wo rk ing Part y m eet ing s c h edu l ed f o r 22- 26 Ju ne 2015. Last, the Revised Draft describes s o m e is s u es t h at are t o b e dis c u s s ed at t h e Ju ne m eet ing f o r w h ic h t h ere is no specific proposal at this time. As with

o t h er BEPS dis c u s s io n draf t s , t h e Revis ed Draf t inc l u des t h e c aveat t h at t h e view s and p ro p o s al s do no t rep res ent c o ns ens u s view s o f t h e OECD’ s Co m m it t ee o n Fis c al Af f airs o r it s s u b s idiary b o dies .

Co m m ent s o n t h e p ro p o s al s in t h e Revis ed Draf t s h o u l d b e s u b m it t ed t o t h e OECD b y 17 Ju ne 2015. No p u b l ic c o ns u l t at io n m eet ing w il l b e h el d o n t h e p ro p o s al s inc l u ded in t h e Revis ed Draf t , b u t is s u es rais ed in c o m m ent s w il l b e dis c u s s ed at t h e Ju ne m eet ing. Th e OECD h as indic at ed it s int ent io n t o p ro du c e a final report on the recommendations u nder Ac t io n 6 b y Sep t em b er 2015.

OECD releases revised discussion draft on follow up work on treaty abuse under BEPS Action 6

A ccess E Y’ s ful l an al y si s at

bi t. l y / 1 H A hz J G


On 15 May 2015, t h e OECD rel eas ed a revis ed dis c u s s io n draf t in c o nnec t io n with Action 7 on the artificial avoidance o f p erm anent es t ab l is h m ent (PE) s t at u s u nder it s Ac t io n Pl an o n Bas e Ero s io n and Profit Shifting (BEPS). The document ent it l ed BEPS Ac t io n 7 : Prevent ing Artificial Avoidance of PE Status (the Revis ed Dis c u s s io n Draf t o r Revis ed Draf t ) substantially refines the initial discussion draf t o n Ac t io n 7 , w h ic h w as rel eas ed b y t h e OECD o n 31 Oc t o b er 2014. Th e Init ial Dis c u s s io n Draf t s o u gh t c o m m ent s o n 14 p ro p o s ed o p t io ns f o r m o dif y ing the definition of PE under Article 5 of the OECD Mo del Tax Co nvent io n o n Inc o m e and o n Cap it al (t h e Mo del Co nvent io n), w h ic h general l y w o u l d l o w er t h e PE t h res h o l d and t igh t en t h e ex c ep t io ns t o PE s t at u s .

Th e OECD rec eived ex t ens ive c o m m ent s o n t h e Init ial Dis c u s s io n Draf t and h el d a p u b l ic c o ns u l t at io n. Wit h t h is inp u t and f o l l o w ing f u rt h er dis c u s s io n w it h in t h e OECD gro u p res p o ns ib l e f o r t h e w o rk o n Ac t io n 7 , t h e OECD p rep ared t h e Revis ed Dis c u s s io n Draf t . Unl ik e t h e Init ial Draf t , w h ic h c o nt ained s everal al t ernat ive p ro p o s al s f o r m o dif y ing Art ic l e 5 t o addres s p art ic u l ar f o c u s areas , t h e Revised Draft contains a specific proposal t o m o dif y Paragrap h s (4), (5) and (6) o f Art ic l e 5 t o addres s eac h f o c u s area. In addit io n, t h e Revis ed Draf t c o nt ains p ro p o s ed am endm ent s t o t h e ex is t ing c o m m ent ary ac c o m p any ing t h e Mo del Co nvent io n (t h e ex is t ing c o m m ent ary , t h e Mo del Co m m ent ary and am endm ent s , t h e Pro p o s ed Co m m ent ary ).

As in t h e Init ial Draf t , t h e Revis ed Dis c u s s io n Draf t s t at es t h at it do es no t rep res ent t h e c o ns ens u s view o f t h e OECD’ s Co m m it t ee o n Fis c al Af f airs o r it s s u b s idiary b o dies and s eek s c o m m ent s o n it s p ro p o s al s . Co m m ent s o n t h e Revis ed Draf t are t o b e s u b m it t ed b y 12 Ju ne 2015. Th e OECD h as indic at ed t h at it do es no t int end t o h o l d a p u b l ic c o ns u l t at io n o n t h e Revis ed Draf t .

OECD releases revised discussion draft on preventing artificial avoidance of PE status under BEPS Action 7

R ead E Y’ s ful l an al y si s at

bit.ly/1GgBxyh


On 31 Marc h 2015, t h e Organis at io n f o r Ec o no m ic Co - o p erat io n and Devel o p m ent

(OECD) is s u ed a dis c u s s io n draf t o n m andat o ry dis c l o s u re ru l es u nder Ac t io n 12 (Disclosure of aggressive tax planning arrangements) o f t h e b as e erosion and profit shifting (BEPS) project. Th e dis c u s s io n draf t m ak es a s eries o f rec o m m endat io ns ab o u t t h e des ign o f m andat o ry dis c l o s u re regim es int ended t o al l o w m ax im u m c o ns is t enc y b et w een c o u nt ries w h il e al s o b eing s ens it ive t o l o c al needs and t o c o m p l ianc e c o s t s .

OECD issues discussion draft on mandatory disclosure rules under BEPS Action 12

Rob HansonGlobal Tax Controversy Leader — EY

T: + 1 202 327 569 6 E: ro b .h ans o n@ ey .c o m


Th e dis c u s s io n draf t f o c u s es in p art ic u l ar o n int ernat io nal t ax s c h em es , w h ic h are view ed as an area o f s p ec ial c o nc ern and t h e p rim ary f o c u s o f t h e BEPS p ro j ec t . It no t es t h at dis c l o s u re s c h em es t h at are int ended t o addres s do m es t ic avoidance might not be sufficient to c ap t u re c ro s s - b o rder arrangem ent s and p ro vides rec o m m endat io ns f o r an al t ernat ive ap p ro ac h .

Th e dis c u s s io n draf t inc l u des a s t at em ent t h at it do es no t nec es s aril y reflect consensus views of the OECD Co m m it t ee o n Fis c al Af f airs o r t h e w o rk ing gro u p res p o ns ib l e for Action 12. It reflects preliminary c o ns iderat io n o f t h e is s u es and identifies issues for public comment.

Th e dis c u s s io n draf t req u es t s t h at c o m m ent s b e s u b m it t ed b y 30 Ap ril 2015. A p u b l ic c o ns u l t at io n m eet ing o n Ac t io n 12 is s c h edu l ed f o r 11 May 2015. Th e BEPS Ac t io n Pl an c al l s f o r final recommendations on the design o f m andat o ry dis c l o s u re regim es t o b e m ade b y Sep t em b er 2015.

Detailed discussionTh e Ac t io n 12 dis c u s s io n draf t b egins w it h an o verview o f k ey f eat u res o f a m andat o ry dis c l o s u re regim e and it s int erac t io n w it h o t h er dis c l o s u re ru l es and c o m p l ianc e t o o l s . It s et s o u t o p t io ns f o r t h e m o du l ar des ign o f a m andat o ry dis c l o s u re regim e. Final l y , it inc l u des a dis c u s s io n o f int ernat io nal t ax s c h em es in p art ic u l ar and h o w t h es e c o u l d b e c o vered b y a m andat o ry dis c l o s u re regim e. Wit h res p ec t t o t h e el em ent o f Ac t io n 12 t h at is t o f o c u s o n des ign and im p l em ent at io n o f enh anc ed inf o rm at io n s h aring f o r int ernat io nal t ax s c h em es , t h e do c u m ent indic at es t h at t h is w o rk w il l b e c o o rdinat ed w it h t h e o t h er p art s o f t h e BEPS Ac t io n Pl an t h at invo l ve inf o rm at io n ex c h ange, inc l u ding Ac t io n 5 o n h arm f u l t ax p rac t ic es and Ac t io n 13 o n t rans f er p ric ing do c u m ent at io n and c o u nt ry - b y - c o u nt ry rep o rt ing.

Th e dis c u s s io n draf t c o ns iders t h e m andat o ry dis c l o s u re regim es t h at h ave b een im p l em ent ed in vario u s c o u nt ries t o ident if y and eval u at e des ign f eat u res t h at are c o m m o nl y u s ed. Th e Unit ed Kingdo m ’ s Dis c l o s u re o f Tax Avo idanc e Sc h em es ru l es are a p art ic u l ar f o c u s o f at t ent io n b ec au s e t h ey h ave b een in p l ac e s inc e 2004 and are p erc eived t o h ave h ad c o ns iderab l e s u c c es s in redu c ing aggres s ive t ax avo idanc e. Ot h er f o rm s o f dis c l o s u re, s u c h as t ax ru l ings , rep o rt ing o b l igat io ns in t ax ret u rns , and vo l u nt ary dis c l o s u re ru l es are al s o c o ns idered. Th e dis c u s s io n draf t indic at es t h at m andat o ry dis c l o s u re is f o u nd t o b e m o s t ef f ec t ive f o r ac c o m p l is h ing t h e o b j ec t ives o f o b t aining inf o rm at io n earl y ; al l o w ing t h e p ro m o t ers and u s ers o f aggres s ive t ax arrangem ent s to be identified; and deterring the use o f s u c h arrangem ent s .


Summary of design recommendations for mandatory disclosure regimesTh e ex is t ing m andat o ry dis c l o s u re regim es c o ns idered in t h e dis c u s s io n draf t are eit h er ” t rans ac t io n- b as ed” o r ” p ro m o t er- b as ed.” Th e f o rm er dep ends o n t h e t ax au t h o rit ies ident if y ing t rans ac t io ns t h at t ax p ay ers m u s t rep o rt w h en t h ey ent er int o t h em . ” Pro m o t er-b as ed” regim es p l ac e t h e o nu s o n p ro m o t ers t o dis c l o s e arrangem ent s t h at dis p l ay p res c rib ed h al l m ark s . Th e des ign rec o m m endat io ns s et f o rt h in t h e dis c u s s io n draf t draw o n el em ent s f ro m b o t h k inds o f regim es .

Ac c o rding t o t h e dis c u s s io n draf t , al l m andat o ry dis c l o s u re regim es s h o u l d b e enforced through financial penalties for no n- c o m p l ianc e. Dis c l o s u re s h o u l d inc l u de f u l l det ail s o f h o w t h e arrangem ent w o rk , w h y it is s u b j ec t t o dis c l o s u re, and w h o is u s ing it .

Who has to disclose: Th e draf t rec o m m ends t h at p ro m o t ers s h o u l d al w ay s b e s u b j ec t t o dis c l o s u re o b l igat io ns , al t h o u gh t h ere c o u l d b e a du al o b l igat io n o n t ax p ay ers as w el l . Wh ere p ro m o t ers h ave t h e p rim ary dis c l o s u re o b l igat io n, t h e o b l igat io n s h o u l d revert t o t h e t ax p ay er w h en t h e p ro m o t er is o u t s ide t h e j u ris dic t io n o r as s ert s l egal p rivil ege o r w h ere t h e arrangem ent is devel o p ed b y t h e t ax p ay er al o ne.

Wh ere an arrangem ent is dis c l o s ed b y a p ro m o t er o nl y , t h e p ro m o t er s h o u l d b e req u ired t o draw u p c l ient l is t s and t h ere s h o u l d b e a s c h em e ref erenc e nu m b er s y s t em . Th es e c l ient l is t s and ref erenc e nu m b ers al s o are view ed as u s ef u l t o o l s even w h en t ax p ay ers are s u b j ec t t o t h eir o w n dis c l o s u re req u irem ent .

Threshold conditions: Mandat o ry dis c l o s u re regim es o f t en h ave a t h res h o l d c o ndit io n. Fo r ex am p l e, t h is m igh t b e a t es t o f w h et h er o b t aining a t ax advant age is a main benefit of the arrangement.

Alternatively, a de minimis filter can be u s ed. Th e dis c u s s io n draf t ac k no w l edges t h at t h res h o l d c o ndit io ns c an b e ap p ro p riat e b ec au s e t h ey h el p k eep t h e nu m b er o f dis c l o s u res t o a m anageab l e l evel . Ho w ever, t h e dis c u s s io n draf t indicates that a main benefit test should not be combined with a de minimis filter.

Hallmarks: In ex is t ing dis c l o s u re regim es , dis c l o s u re is t riggered b y an arrangem ent t h at inc l u des c ert ain h al l m ark c h arac t eris t ic s . Th e dis c u s s io n draf t rec o m m ends t h at t h e ex is t enc e o f a s ingl e h al l m ark in res p ec t o f a s c h em e should be sufficient to give rise to a dis c l o s u re o b l igat io n.

Hal l m ark s c an eit h er b e general o r specific. General hallmarks include a p ro m o t er’ s des ire t o k eep t h e arrangement confidential or requirement o f a c o nt ingent o r p rem iu m f ee. Th e dis c u s s io n draf t rec o m m ends t h at regim es ado p t b o t h t h es e h al l m ark s and indic at es t h at a regim e al s o m ay ado p t a h al l m ark t h at ap p l ies t o s t andardiz ed t ax p ro du c t s as w el l .

Th e dis c u s s io n draf t al s o rec o m m ends that countries use specific hallmarks des igned f o r t h eir l o c al c irc u m s t anc es . Examples of specific hallmarks include l eas ing t rans ac t io ns , t rans ac t io ns s im il ar t o t h o s e inc l u ded o n a b l ac k l is t , o r t rans ac t io ns w it h c o u nt erp art ies in l o w t ax j u ris dic t io ns . Individu al c o u nt ries are left to design the specific hallmarks most ap p ro p riat e t o t h eir l o c al c irc u m s t anc es and may attach a de minimis filter to individual specific hallmarks.

Timeframe for disclosure: Th e dis c u s s io n draf t rec o m m ends t h at a p ro m o t er m u s t dis c l o s e an arrangem ent w h en it is avail ab l e f o r u s e. Wh ere t h ere is a dis c l o s u re o b l igat io n o n t ax p ay ers , t h e t im ing o f dis c l o s u re s h o u l d b e l ink ed t o im p l em ent at io n o f t h e arrangem ent .

International tax schemesTh e dis c u s s io n draf t indic at es t h at c ro s s -b o rder t rans ac t io ns rais e p art ic u l ar is s u es f o r dis c l o s u re regim es b ec au s e it m ay no t al w ay s b e c l ear in o ne j u ris dic t io n w h et h er a t ax advant age h as b een o b t ained in ano t h er j u ris dic t io n. To addres s t h is , t h e dis c u s s io n draf t rec o m m ends t h at s p ec ial h al l m ark s b e devel o p ed f o r “ c ro s s - b o rder o u t c o m es .” Th es e o u t c o m es are b ro adl y defined to include situations where t ax p ay ers c an o b t ain dedu c t io ns f o r t h e s am e ex p endit u re in t w o j u ris dic t io ns (s u c h as w h ere a s al e and l eas eb ac k al l o w s am o rt iz at io n o f t h e s am e as s et in t w o j u ris dic t io ns ) o r a t ax dedu c t io n in o ne j u ris dic t io n w it h no t ax at io n o n t h e c o rres p o nding inc o m e. Many s u c h arrangem ent s w o u l d b e c au gh t b y t h e ant i- h y b rid ru l es p ro p o s ed u nder BEPS Ac t io n 2 and c o u l d al s o b e w it h in t h e reac h o f o t h er BEPS Ac t io ns s u c h as Ac t io n 6 o n t reat y ab u s e o r Ac t io n 7 o n p erm anent es t ab l is h m ent . Th e m andat o ry dis c l o s u re rec o m m endat io ns u nder Ac t io n 12 are int ended t o h el p t ax au t h o rit ies addres s aggres s ive t ax avo idanc e t h at m ay no t b e addres s ed b y t h e c u rrent BEPS p ro j ec t .

Th e dis c u s s io n draf t rec o m m ends t h at t h res h o l d c o ndit io ns , s u c h as t h e main benefit test, should not apply t o arrangem ent s w it h c ro s s - b o rder o u t c o m es . Th is is b ec au s e it is no t al w ay s clear where a tax benefit arises in the c as e o f a c ro s s - b o rder o u t c o m e. Th e dis c u s s io n draf t al s o rec o m m ends t h at t ax p ay ers s h o u l d o nl y b e req u ired t o dis c l o s e an arrangem ent t o w h ic h t h ey are a p art y o r w h ere t h e c ro s s - b o rder o u t c o m e aris es in t h eir gro u p .


I mp l i cati on sThe discussion draft is the first draf t o f t h e o u t p u t t o b e p ro du c ed u nder BEPS Ac t io n 12. If t h e OECD’s final recommendations u nder Ac t io n 12 are f o l l o w ed, m o re j u ris dic t io ns c an b e ex p ec t ed t o es t ab l is h m andat o ry dis c l o s u re regim es . Ju ris dic t io ns w it h ex is t ing m andat o ry dis c l o s u re regim es al s o c an b e ex p ec t ed t o m ak e c h anges t o t h eir ru l es as a res u l t o f t h e rec o m m endat io ns u nder Ac t io n 12.

Co m p anies s h o u l d eval u at e h o w t h e p ro p o s ed rec o m m endat io ns in t h e dis c u s s io n draf t m ay im p ac t t h em , s t ay inf o rm ed ab o u t devel o p m ent s in t h e OECD and in t h e c o u nt ries w h ere t h ey o p erat e o r inves t , and c o ns ider p art ic ip at ing in t h e dial o gu e regarding t h e BEPS p ro j ec t and t h e u nderl y ing int ernat io nal t ax p o l ic y is s u es .

OECD holds public consultation on BEPS Action 12 on mandatory disclosure rulesOn 11 May 2015, t h e OECD h el d a p u b l ic c o ns u l t at io n in c o nnec t io n w it h t h e BEPS p ro j ec t t h at w as f o c u s ed o n Ac t io n 12 o n m andat o ry dis c l o s u re ru l es . Th e c o ns u l t at io n w as an o p p o rt u nit y f o r s t ak eh o l ders t o engage direc t l y w it h t h e OECD Sec ret ariat and t h e c o u nt ry del egat es w h o are res p o ns ib l e f o r t h e w o rk o n t h is Ac t io n.

On 31 Marc h 2015, t h e OECD is s u ed a dis c u s s io n draf t o n Ac t io n 12 o n m andat o ry dis c l o s u re ru l es . Th e Dis c u s s io n Draf t m ak es a s eries o f rec o m m endat io ns ab o u t t h e des ign o f m andat o ry dis c l o s u re regim es , w h ic h are des c rib ed as int ended t o al l o w m ax im u m c o ns is t enc y b et w een c o u nt ries w h il e al s o b eing s ens it ive t o l o c al needs and t o c o m p l ianc e c o s t s . Th e OECD rec eived nearl y 300 p ages o f c o m m ent s o n t h e Dis c u s s io n Draf t , w h ic h are p o s t ed o n it s w eb s it e.

Th e p u b l ic c o ns u l t at io n o n 11 May 2015 w as a dial o gu e am o ng stakeholders, country tax officials, and the OECD Secretariat on key is s u es and c o nc erns rais ed in t h e c o m m ent s . Th e c o ns u l t at io n w as h o s t ed b y OECD Wo rk ing Part y 11, w h ic h h as res p o ns ib il it y f o r t h e OECD’ s w o rk o n Ac t io n 12. Th is w o rk ing gro u p al s o h as res p o ns ib il it y f o r o t h er BEPS Ac t io ns , inc l u ding t h e w o rk o n Ac t io n 2 (h y b rid m is m at c h arrangem ent s ), Ac t io n 3 (CFC ru l es ) and Ac t io n 4 (int eres t dedu c t io ns and other financial payments). The consultation was live-streamed by t h e OECD and a rec o rding is avail ab l e o n t h e OECD w eb s it e.

Bu s ines s p art ic ip ant s f ro m vario u s b u s ines s es ex p res s ed s everal c o m m o n c o nc erns . Firs t , t h ey s t at ed t h at t h e p ro p o s ed ru l es l ac k c l arit y . Su b j ec t ive ru l es w o u l d c reat e u nc ert aint ies and, w it h s u b s t ant ial p enal t ies p ro p o s ed, any f ail u re w it h res p ec t t o c o m p l ianc e w it h s u c h u nc ert ain ru l es w o u l d b e very c o s t l y . So m e b u s ines s p art ic ip ant s s t res s ed t h at t rans ac t io ns s u b j ec t t o t h e dis c l o s u re ru l e m u s t no t b e as s u m ed t o b e p er s e ab u s ive.

In addit io n, b u s ines s p art ic ip ant s p o int ed o u t t h at t h e c o nc ep t o f “ c ro s s -border outcomes” should be narrowly defined to cover only transactions w it h m at erial t ax c o ns eq u enc es . Th ey no t ed t h at o verl y b ro ad dis c l o s u re would make risk identification more difficult, especially for developing countries. Thresholds or filters should be used to better exclude from t h e m andat o ry dis c l o s u re ru l es l o w - ris k t rans ac t io ns and t rans ac t io ns with clearly delineated non-BEPS tax benefits.

R ead E Y’ s ful l an al y si s at bi t. l y / 1 J m5 D 4 4


One o f t h e do c u m ent s , t it l ed Action 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-

Country Reporting, p ro vides m u c h - ant ic ip at ed gu idanc e o n a range o f im p l em ent at io n m eas u res rel at ed t o t h e c o u nt ry - b y - c o u nt ry rep o rt (Cb C Rep o rt ) t h at is p art o f t h e t h ree- t ier t rans f er p ric ing do c u m ent at io n ap p ro ac h devel o p ed u nder BEPS Ac t io n 13. Wit h t h is new gu idanc e in p l ac e, and t h e s c o p e, t im ing and m et h o d o f s u b m is s io n no w k no w n, c o m p anies s h o u l d do every t h ing p o s s ib l e t o ens u re t h eir p eo p l e, p ro c es s es and t ec h no l o gy are “ t rans p arenc y ready .”

OECD issues implementation guidelines for country-by-country reporting under BEPS Action 13: Companies now have all information needed to achieve “transparency readiness”

Jean-Pierre LiebEu ro p e, Middl e Eas t , India and Af ric a

Tax Controversy Leader — EY T: + 33 1 55 61 16 10

E: j ean.p ierre.l ieb @ ey - avo c at s .c o m


Th e new 10- p age gu idanc e do c u m ent s t w o very k ey p o int s (am o ng o t h ers ):

• Firs t l y t h at , w h il e c o u nt ries w il l es s ent ial l y p ic k t h eir o w n im p l em ent at io n t im el ine, OECD dis c u s s io ns h ave f o c u s ed o n req u iring the first CbC Reports to be filed covering 2016 fiscal years

and

• Sec o ndl y , t h at Cb C Rep o rt s , general l y , will need to be filed in the home c o u nt ry o f a m u l t inat io nal c o rp o rat io n (MNC) gro u p ’ s p arent c o m p any and s h ared w it h o t h er rel evant c o u nt ries u nder go vernm ent inf o rm at io n ex c h ange m ec h anis m s . Al o ngs ide t h es e k ey m es s ages , it al s o addres s es o t h er im p l em ent at io n m at t ers rel at ed t o t h e Cb C Rep o rt and inc l u des s o m e h igh - l evel inf o rm at io n regarding implementation of the master file and local file elements of the transfer p ric ing do c u m ent at io n.

BackgroundTh e OECD rep o rt o n Ac t io n 13, dat ed 16 Sep t em b er 2014, is in t h e f o rm o f a revis ed c h ap t er o f t h e OECD Trans f er Pric ing Gu idel ines , w h ic h s et s f o rt h a t h ree- t ier ap p ro ac h f o r t rans f er p ric ing do c u m ent at io n t h at inc l u des a framework for the master file and local file and a template for CbC Report.1 Th e Ac t io n 13 Rep o rt al s o indic at ed t h at t h e OECD w o u l d u ndert ak e addit io nal w o rk o n im p l em ent at io n and t h e ap p ro ac h for filing of the CbC Report and the master file.

Th e new OECD gu idanc e f o c u s es p rim aril y o n im p l em ent at io n is s u es rel at ed t o t h e Cb C Rep o rt . It addres s es t h e f o l l o w ing m at t ers :

• The timing of preparation and filing of Cb C Rep o rt s

• Those MNC groups required to file CbC Rep o rt s

• Th e c o ndit io ns f o r o b t aining and u s e o f t h e Cb C Rep o rt s b y j u ris dic t io ns , and

1 See EY Gl o b al Tax Al ert , OECD releases report

under BEPS Action 13 on Transfer Pricing Documentation and Country-by-Country Reporting, 23 Sep t em b er 2014.

• Th e f ram ew o rk f o r go vernm ent - t o -go vernm ent m ec h anis m t o ex c h ange t h e Cb C Rep o rt s .

Wh il e t h e gu idanc e rel at es p rim aril y t o t h e Cb C Rep o rt , it do es inc l u de t h e recommendation that the master file and local file requirements be implemented t h ro u gh l o c al c o u nt ry l egis l at io n o r adm inis t rat ive p ro c edu res and t h at MNC groups file the master file and local file direc t l y w it h t h e t ax adm inis t rat io n in eac h rel evant j u ris dic t io n u nder t h e req u irem ent s o f s u c h adm inis t rat io ns .

Th e gu idanc e f u rt h er s t at es t h at c o u nt ries p art ic ip at ing in t h e BEPS project agree that both confidentiality and c o ns is t ent u s e o f t h e f ram ew o rk (f o r t h e content to be included in the master file and local file), as specified in the Action 13 Rep o rt , s h o u l d b e t ak en int o ac c o u nt w h en inc o rp o rat ing t h es e req u irem ent s int o l o c al l aw and p ro c edu res . Th e OECD also specifically acknowledged that the need f o r m o re ef f ec t ive dis p u t e res o l u t io n m ay inc reas e f o l l o w ing ado p t io n and im p l em ent at io n o f t h e Cb C rep o rt ing req u irem ent and s t at es t h at t h e w o rk u nder Ac t io n 14 o n im p ro ving dis p u t e res o l u t io n s h o u l d t ak e t h at int o ac c o u nt . Indeed, t h is w as il l u s t rat ed du ring a rec ent EY w eb c as t , w h ere 52% o f res p o ndent s t o a w eb c as t p o l l ex p ec t an inc reas e in c o nt ro vers y in Wes t ern Eu ro p e b ec au s e o f devel o p m ent s rel at ed t o BEPS Ac t io ns 8 (Trans f er p ric ing f o r int angib l es ) and 13.

Timing of preparation and filing of the CbC ReportThe guidance recommends that the first CbC Report be required to be filed for, and c o nt ain inf o rm at io n w it h res p ec t t o , an MNC group’s first fiscal year beginning o n o r af t er 1 Janu ary 2016. Th e Cb C Report would need to be filed within 12 months of the close of the fiscal year. For MNC groups with fiscal years ending on 31 December, the first CbC Report would therefore be required to be filed by

31 Dec em b er 2017 . Th e gu idanc e provides that the term “fiscal year” refers t o t h e c o ns o l idat ed rep o rt ing p erio d f o r financial statement purposes (and not to taxable years or to the financial reporting p erio ds o f s u b s idiaries ).

Th e Gu idanc e indic at es t h at c o u nt ries p art ic ip at ing in t h e OECD BEPS p ro j ec t agree that they will not require filing of Cb C Rep o rt s b as ed o n t h e new t em p l at e for fiscal years beginning prior to 1 Janu ary 2016. Of c o u rs e, do m es t ic l egis l at ive c h anges w il l al s o b e nec es s ary if c o u nt ries are t o ado p t t h es e new rep o rt ing o b l igat io ns and t h e OECD al s o indic at es t h at , t o as s is t in t h e l egis l at ive p ro c es s , it w il l devel o p l angu age f o r k ey el em ent s o f s t at u t o ry p ro vis io ns t h at req u ire u l t im at e p arent s o f MNC gro u p s to file the CbC Report in their jurisdiction o f res idenc e.

MNC groups required to file the CbC ReportTh e Gu idanc e rec o m m ends t h at al l MNC groups be required to file the CbC Report eac h y ear, s u b j ec t t o o ne ex em p t io n w h ic h w o u l d ap p l y t o MNC gro u p s w it h annu al c o ns o l idat ed gro u p revenu e in t h e immediately preceding fiscal year of less t h an € 7 50 m il l io n (o r a near eq u ival ent am o u nt in do m es t ic c u rrenc y ). Th e gu idanc e s t at es t h at t h e OECD b el ieves t h is ex em p t io n w il l ex c l u de ap p ro x im at el y 8 5- 9 0% o f MNC gro u p s f ro m t h e Cb C rep o rt ing req u irem ent , b u t w il l req u ire Cb C Rep o rt s f ro m MNC gro u p s c o nt ro l l ing ap p ro x im at el y 9 0% o f c o rp o rat e revenu es .

Th e res u l t s o f Ac t io n 13 are s c h edu l ed f o r f u l l review in 2020 and t h e OECD s et o u t in t h e gu idanc e t h at it is t h e int ent io n o f t h e c o u nt ries p art ic ip at ing in t h e BEPS p ro j ec t t o rec o ns ider t h e ap p ro p riat enes s o f t h is revenu e t h res h o l d at t h at p o int . Th at review al s o w il l inc l u de w h et h er addit io nal o r dif f erent dat a s h o u l d b e req u ired t o b e rep o rt ed. Th e gu idanc e al s o indic at es t h at it is c o ns idered t h at no other exemption from filing the CbC


Rep o rt s h o u l d b e ado p t ed. It s t at es t h at , in p art ic u l ar, t h ere s h o u l d b e no s p ec ial indu s t ry ex em p t io ns , no general ex em p t io n f o r inves t m ent f u nds , and no ex em p t io n f o r no n- c o rp o rat e ent it ies o r no n- p u b l ic c o rp o rat e ent it ies .

It is no t ed, h o w ever, t h at t h e c o u nt ries p art ic ip at ing in t h e BEPS p ro j ec t agree t h at MNC gro u p s w it h inc o m e derived f ro m int ernat io nal t rans p o rt at io n o r t rans p o rt at io n in inl and w at erw ay s t h at is c o vered b y t reat y p ro vis io ns w h ic h are specific to such income and under which t ax ing righ t s o n s u c h inc o m e are al l o c at ed ex c l u s ivel y t o o ne j u ris dic t io n s h o u l d inc l u de t h e inf o rm at io n req u ired b y t h e Cb C t em p l at e w it h res p ec t t o s u c h inc o m e o nl y w it h res p ec t t o t h e j u ris dic t io n t o w h ic h s u c h t ax ing righ t s are al l o c at ed.

Necessary conditions for obtaining and use of the CbC ReportWith respect to confidentiality, the OECD no t es t h at j u ris dic t io ns s h o u l d p ro vide and enf o rc e l egal p ro t ec t io ns of the confidentiality of the reported inf o rm at io n. Su c h p ro t ec t io n w o u l d preserve confidentiality to an extent at l eas t eq u ival ent t o t h e p ro t ec t io ns t h at w o u l d ap p l y if s u c h inf o rm at io n w ere del ivered t o t h e j u ris dic t io n u nder t h e p ro vis io ns o f t h e OECD Mu l t il at eral Co nvent io n o n Mu t u al Adm inis t rat ive As s is t anc e in Tax Mat t ers , a t ax inf o rm at io n ex c h ange agreem ent , o r a t ax t reat y t h at m eet s t h e int ernat io nal l y agreed s t andard o f inf o rm at io n u p o n req u es t . Th es e p ro t ec t io ns inc l u de l im it at io n o n t h e u s e o f inf o rm at io n and ru l es o n p ers o ns t o w h o m t h e inf o rm at io n m ay b e dis c l o s ed.

Wit h res p ec t t o c o ns is t enc y , j u ris dic t io ns s h o u l d u s e t h eir “ b es t ef f o rt s ” t o ado p t a l egal req u irem ent t h at t h e u l t im at e p arent ent it ies o f MNC gro u p s t h at are resident there prepare and file the Cb C Rep o rt (u nl es s ex em p t ed u nder t h e revenu e t h res h o l d). In addit io n, j u ris dic t io ns s h o u l d u s e t h e s t andard t em p l at e as s et f o rt h in t h e OECD Trans f er Pric ing Gu idel ines (and inc l u ded in t h e Ac t io n 13 Rep o rt ).

Wit h res p ec t t o ap p ro p riat e u s e, j u ris dic t io ns s h o u l d u s e t h e inf o rm at io n in the CbC Report only as specified in t h e Ac t io n 13 Rep o rt . In p art ic u l ar, j u ris dic t io ns w il l c o m m it t o u s e t h e Cb C Rep o rt f o r as s es s ing h igh - l evel t rans f er p ric ing ris k and m ay al s o u s e it f o r as s es s ing o t h er BEPS rel at ed ris k s . Ju ris dic t io ns s h o u l d no t p ro p o s e adj u s t m ent s o n t h e b as is o f an inc o m e al l o c at io n f o rm u l a u s ing dat a in t h e Cb C Rep o rt . Ju ris dic t io ns f u rt h er c o m m it t h at , if s u c h adj u s t m ent s are m ade b y t h e l o c al t ax adm inis t rat io n, t h e j u ris dic t io n’ s c o m p et ent au t h o rit y w il l b e req u ired t o p ro m p t l y c o nc ede t h e adj u s t m ent in any rel evant c o m p et ent au t h o rit y p ro c eeding. Ho w ever, j u ris dic t io ns w o u l d no t b e p revent ed f ro m u s ing t h e Cb C Rep o rt dat a as a b as is f o r m ak ing f u rt h er inq u iries int o t h e MNC’ s t rans f er p ric ing arrangem ent s and o t h er t ax m at t ers du ring a t ax au dit .

In t h is regard, t h e gu idanc e no t es t h at t h e m u t u al agreem ent p ro c edu re (MAP) w il l b e avail ab l e w h en go vernm ent ex c h ange o f t h e Cb C Rep o rt s is b as ed o n t ax t reat ies . Wh ere t h e go vernm ent ex c h ange is u nder an agreem ent t h at do es no t c o nt ain MAP p ro vis io ns , c o u nt ries c o m m it t o devel o p ing a m ec h anis m f o r c o m p et ent au t h o rit y p ro c edu res f o r dis c u s s io ns aim ed at res o l ving c as es o f “ u ndes irab l e ec o no m ic o u t c o m es .”

Framework for government-to-government mechanisms to exchange CbC ReportsIn it s l at t er s t ages , t h e do c u m ent des c rib es a f ram ew o rk u nder w h ic h j u ris dic t io ns s h o u l d req u ire, in a t im el y manner, the filing of CbC Reports by t h e u l t im at e p arent ent it ies o f MNC gro u p s res ident t h ere and ex c h ange t h is inf o rm at io n o n an au t o m at ic b as is w it h t h e j u ris dic t io ns in w h ic h t h e MNC groups operate and which fulfill the c o ndit io ns dis c u s s ed ab o ve. It indic at es t h at , if a j u ris dic t io n f ail s t o p ro vide inf o rm at io n t o ano t h er j u ris dic t io n, a s ec o ndary m ec h anis m w o u l d b e ac c ep t ed as appropriate, through local filing or by m o ving t h e o b l igat io n f o r req u iring t h e filing of CbC Reports and automatically

ex c h anging s u c h inf o rm at io n t o t h e nex t t ier p arent c o u nt ry .

Th e gu idanc e f u rt h er indic at es t h at c o u nt ries p art ic ip at ing in t h e BEPS p ro j ec t h ave agreed t o devel o p an im p l em ent at io n p ac k age f o r t h e go vernm ent - t o - go vernm ent ex c h ange o f Cb C Rep o rt s . Th is w il l invo l ve t h e devel o p m ent o f t h e k ey el em ent s o f do m es t ic l egis l at io n req u iring t h e u l t im at e p arent ent it y o f an MNC gro u p to file the CbC Report in its jurisdiction of res idenc e. Key el em ent s o f t h e s ec o ndary m ec h anis m s no t ed ab o ve al s o w il l b e devel o p ed. Ju ris dic t io ns t h en w il l adap t t h is l angu age t o t h eir o w n l egal s y s t em s w h ere nec es s ary .

In addit io n, im p l em ent ing arrangem ent s f o r au t o m at ic ex c h ange o f Cb C Rep o rt s u nder int ernat io nal agreem ent s w il l b e devel o p ed. Th is w il l inc l u de devel o p ing c o m p et ent au t h o rit y agreem ent s b as ed o n ex is t ing int ernat io nal agreem ent s , w it h b o t h b il at eral and m u l t il at eral ap p ro ac h es ex p l o red and u s ing t h e m o del o f t h e OECD s t andard f o r au t o m at ic ex c h ange of financial account information. The Gu idanc e s t at es t h at t h is im p l em ent at io n p ac k age w il l b e avail ab l e b y Ap ril 2015.

Final l y , t h e gu idanc e indic at es t h at p art ic ip at ing c o u nt ries w il l endeavo r t o int ro du c e any nec es s ary l egis l at io n in a t im el y m anner and are enc o u raged t o ex p and t h e c o verage o f t h eir inf o rm at io n ex c h ange agreem ent s . Th e im p l em ent at io n o f t h e p ac k age w il l b e m o nit o red and t ak en int o c o ns iderat io n in t h e 2020 review .

Implications for the tax functionTh e agreem ent o n t h es e im p l em ent at io n m at t ers w it h res p ec t t o t h e Cb C Rep o rt is an im p o rt ant devel o p m ent . It reaffirms the expectation that many c o u nt ries w il l m o ve f o rw ard w it h s u c h req u irem ent s , c o ns is t ent w it h t h e OECD rec o m m endat io ns . MNC gro u p s s h o u l d t h eref o re c l o s el y m o nit o r devel o p m ent s w it h res p ec t t o t h e Cb C Rep o rt , and t rans f er p ric ing do c u m ent at io n req u irem ent s m o re general l y , in t h eir p arent c o m p any ’ s h o m e j u ris dic t io n and


al s o in t h e h o m e j u ris dic t io ns o f o t h er gro u p m em b ers .

In addit io n, c o m p anies s h o u l d f o c u s o n t h e nec es s ary s t ep s t o ens u re t h eir ab il it y t o p ro du c e t h e req u ired inf o rm at io n, inc l u ding p rep aring p ro t o c o l s f o r gat h ering t h e inf o rm at io n and devel o p ing int ernal p ro c es s es and res p o ns ib il it ies w it h regard t o t h e new rep o rt ing. Wit h t h is new gu idanc e indic at ing t h at t h e first required CbC Report is to cover the 2016 fiscal year, it is important that c o m p anies b egin t h eir p rep arat io ns s o o ner rat h er t h an l at er. Co m p anies w il l need t o as s es s w h et h er t h eir t ax f u nc t io n is “ t rans p arenc y ready “ in terms of meeting the rapid flow of new reporting and disclosure requirements — w h et h er at OECD, Eu ro p ean Co m m is s io n, s ec t o r o r nat io nal l evel (s u c h as Mex ic o ’ s new requirement to report significant t rans ac t io ns ).

Indeed, int erim s o l u t io ns m ay need t o b e im p l em ent ed in advanc e o f m o re c o m p l ex , t ail o red ERP l ink ing and dat a w areh o u s ing solutions that are specifically designed f o r t h e t as k at h and. Cu rrent ex p erienc e s h o w s t h at even s o m e o f t h e m o s t w el l -k no w n gl o b al c o m p anies are reac t ing t o t h e c h anging l ands c ap e w it h m anu al p ro c es s es b as ed u p o n em ail , s p reads h eet -b as ed dat a c ap t u re and s t o rage o f a s nap s h o t o f dat a o u t s ide t radit io nal ERP s y s t em s o r dat a w areh o u s es .

This is a natural first step in advance o f t h e f o rm al s o f t w are m ark et c at c h ing u p . Th is m ark et is no w reac t ing and s o l u t io ns w il l b e avail ab l e. Bu t s o l o ng as go o d go vernanc e and ro b u s t p ro c es s es (inc l u ding rem ediat io n, w h ere ap p ro p riat e) u nderp in dat a c o l l ec t io n and anal y s is , t h is is an ap p o s it e init ial solution, even if not the most efficient.

Fo r m any c o m p anies , t h e req u ired s k il l w il l b e in m arry ing u p a y ear o ne s o l u t io n at t h e s am e t im e as devel o p ing m o re s u s t ainab l e ap p ro ac h es f o r f u t u re y ears t h at are gro u nded in au t o m at ed data collection, fit for purpose data w areh o u s ing and s o p h is t ic at ed dat a anal y t ic s c ap ab il it ies .

How to assess the dataWhile the risk assessment of financial and t ax dat a varies dep ending o n a nu m b er o f dif f erent f ac t o rs and no t w o s it u at io ns are t h e s am e, s o m e general c o nc l u s io ns c an b e draw n. Th e rep o rt ing o b l igat io ns u nder t h e BEPS Ac t io n 13 (t h o u gh no t t h e o nl y new rep o rt ing o b l igat io ns f o r t ax p ay ers ) p ro vide a ro b u s t il l u s t rat io n o f s o m e o f t h e t y p es o f q u es t io ns t h at b u s ines s l eaders s h o u l d as k t h em s el ves w h en ris k as s es s ing t h e inf o rm at io n t h ey m ay s u b m it . Th es e inc l u de, b u t are c ert ainl y in no w ay l im it ed t o :

• Ho w m u c h inf o rm at io n s h o u l d t h e company submit? What is the balance providing sufficient information for t ax au t h o rit ies t o m ak e an inf o rm ed dec is io n ab o u t t rans f er p ric ing ris k agains t t h e t im e and c o s t invo l ved in producing the reports?

• Sh o u l d p arent c o m p any o r l o c al c o m p any GAAP b e u s ed as a b as is f o r reporting?

• Can t h e s u p p l y c h ain b e diagram m ed and c an t h e c o m p any p ro vide a f u nc t io nal anal y s is o f eac h o f t h e no des of the supply chain for the top five p ro du c t s and/ o r al l p ro du c t s w it h m o re than 5% of sales?

• Is t h e c o m p any p rep ared t o inc l u de ro y al t y inc o m e, int eres t inc o m e and services income in revenue disclosures?

• Can t h e c o m p any m anage t h e p o s s ib il it y t h at w e m ay h ave dif f erent ac c o u nt ing p erio ds f o r dif f erent ent it ies in different countries?

• Ho w c an t h e c o m p any m anage t h e possibility that financial data may be stored in different currencies?

• Can t h e c o m p any ex p l ain it s t rans f er p ric ing c o m p l ianc e s u c c inc t l y and consistently? Do you have a written t rans f er p ric ing p o l ic y w it h res p ec t to intangibles and R&D? Do you need t o c h ange y o u r advanc e p ric ing agreement (APA) strategy?

• Can the company disclose financial inf o rm at io n and al l o c at io n s c h edu l es o n a p er- c o u nt ry b as is s h o w ing h o w the financial data used in applying the t rans f er p ric ing m et h o d m ay b e t ied t o the annual financial statements?

Concluding thoughtsBey o nd t h e im p l ic at io ns f o r individu al b u s ines s es , it ’ s c l ear t h at c u rrent devel o p m ent s aro u nd t h e w o rl d are rap idl y m ak ing t ax t rans p arenc y a real it y . Bu t as revo l u t io nary as t h e t rans p arenc y j o u rney h as b een, it al s o dem o ns t rat es t h at m any b u s ines s es m u s t no w deal w it h a c o m p l et el y dis p arat e s et o f inf o rm at io n rep o rt ing req u irem ent s . In t h at vein, w h il e Ac t io n 13 is c l earl y f ro nt and c ent er f o r al l c o m p anies o f a c ert ain s iz e, it is no t t h e o nl y new o b l igat io n t h at c o m p anies w il l b e req u ired t o m eet . Indeed, ac c o rding t o res p o ndent s t o EY ’ s 2014 Tax risk and controversy survey, 9 4% o f t h e l arges t c o m p anies h aving an o p inio n o n t h e m at t er t h ink t h at gl o b al dis c l o s u re and t rans p arenc y req u irem ent s w il l c o nt inu e t o gro w in t h e nex t t w o y ears . Th at m eans t h at t rans p arenc y readines s h as never b een m o re im p o rt ant ! Co nvers at io ns w it h company management, finance and IT l eaders s h o u l d b egin im m ediat el y , if no t al ready u nderw ay .

• Ho w c an t h e c o m p any avo id m is int erp ret at io n o f dat a, s u c h as reporting ordinary profits in addition to profits after extraordinary items?

• Do es t h e c o m p any h ave ac c u rat e information on global operations — inc l u ding h eadc o u nt , revenu es and profits by country?

• Has the company identified features l is t ed as p o t ent ial l y indic at ive o f transfer pricing risk?

• Does the company have significant transactions with a low tax jurisdiction?

• Do es t h e c o m p any h ave t rans f ers o f IP to related parties?


in the spotlight

EY report:2014 Global transfer pricing tax authority survey

Ou r l at es t Global transfer pricing tax authority survey review s t rans f er p ric ing (TP) p rac t ic es and at t it u des o f t ax au t h o rit ies in 50 j u ris dic t io ns ac ro s s the Americas, Asia-Pacific and Europe. To p ic s h igh l igh t ed inc l u de t rans ac t io ns and indu s t ries o f f o c u s , p enal t ies , dispute resolution options, influences on l o c al devel o p m ent s and ap p ro ac h es t o c o m p arab l es b enc h m ark ing.

Our survey highlights the fact that TP will continue to be “front of mind” for both tax authorities and multinationals. Tracking trends, obtaining timely information on the TP environment and being ready to respond to an inquiry will be critical to effective risk management.

Key s u rvey t rends inc l u de:

• Th ere h as b een a c l ear s p ik e in TP res o u rc es in t ax adm inis t rat io ns , l eading t o a general inc reas e in t h e nu m b er o f t ax inq u iries and au dit s .

• Bu s ines s res t ru c t u rings are no w inc reas ingl y a driver o f t ax au t h o rit y s c ru t iny .

• Th e OECD’ s BEPS agenda is a k ey underlying influence on the methods b eing ado p t ed b y t ax au t h o rit ies w h en p erf o rm ing inq u iries and au dit s . Th is inc l u des t h e nat u re o f inf o rm at io n being requested, the use of profit and ris k - b as ed as s es s m ent s w h en s el ec t ing c as es and f o c u s ing o n t h e ret u rns derived f ro m int angib l es .

• On a gl o b al s c al e, indu s t ries t h at h ave at t rac t ed p art ic u l ar at t ent io n f ro m t ax au t h o rit ies inc l u de p h arm ac eu t ic al s , automotive, financial services in Europe and nat u ral res o u rc es in t errit o ries t h at ex t rac t o r t rade t h es e.

• Tax au t h o rit ies c o nt inu e t o c al l f o r t h e u s e o f l o c al c o u nt ry c o m p arab l es w it h res p ec t t o b enc h m ark ing, al t h o u gh w ider regio nal anal y s es are t y p ic al l y accepted if sufficient local comparables cannot be identified.


in the spotlight

• Trans f er p ric ing p enal t ies are b ec o m ing m o re c o m m o np l ac e, b u t t h ey c an b e redu c ed w h en t ax p ay ers m aint ain l o c al t rans f er p ric ing do c u m ent at io n.

• Fo rm al Advanc e Pric ing Arrangem ent p ro gram s are avail ab l e in a w ider nu m b er o f t errit o ries , al t h o u gh t h e t ak e u p in new m ark et s h as t y p ic al l y b een l o w t o dat e.

• Wh il e t h e Mu t u al Agreem ent Pro c edu re p ro gram is u s ed w idel y in m o s t m at u re TP j u ris dic t io ns , it s u s e and ef f ec t ivenes s is l im it ed in m any em erging t errit o ries .

• Th e det erm inat io n o f im p o rt at io n p ric es s ep arat el y b y t rans f er p ric ing and c u s t o m s val u at io ns t eam s w it h in Go vernm ent al b o dies is s t il l t h e no rm . Wh il e t h ere is s o m e inf o rm al s h aring and int egrat ed au dit s , t h is is no t c o m m o np l ac e.

Actions recommended for businessCo rp o rat e t ax p ay ers f ac e m o re t rans f er p ric ing c h al l enges f ro m em p o w ered au t h o rit ies , no t o nl y b ec au s e o f inc reas ed res o u rc ing, b u t al s o f ro m a w ider range o f t o o l s o u t l ined w it h in t h e BEPS Ac t io n Pl ans . In o rder t o m eet t h e inc reas ed l evel o f ac t ivit y f ro m t ax au t h o rit ies , w e rec o m m end t h at c o m p anies m o re ef f ec t ivel y m anage their transfer pricing risk profile in the f o l l o w ing w ay s :

Get read y . Be p ro ac t ive in ident if y ing areas o f ris k b y ac t ivel y as s es s ing if y o u r t rans ac t io ns m ay at t rac t s p ec ial at t ent io n f ro m au t h o rit ies .

E x ami n e y our busi n ess. Unders t and b u s ines s c h anges , w h at t h e TP im p ac t s c o u l d b e, and m o nit o r if ex is t ing TP m o del s c an c o nt inu e t o b e ap p l ied o r if t h ey need t o b e adap t ed.

R esp on d . As t rans p arenc y dem ands w il l inc reas e, p u t in p l ac e s t rat egies and do c u m ent at io n p l at f o rm s t o b e ab l e t o res p o nd t o enq u iries as t h ey aris e.

F ocus. Th e p erf o rm anc e o f m u l t i-s ided anal y s es , inc l u ding a f o c u s o n t h e ret u rns o n int angib l es , is b ec o m ing a c l ear req u irem ent t o b e ado p t ed.

Engage. Y o u c an enh anc e y o u r p re- em p t ive def ens e s t rat egies in k ey m ark et s b y engaging w it h l o c al t ax au t h o rit ies w h ere avail ab l e, s u c h as t h ro u gh APAs o r o t h er ru l ings .

Access the survey at www. ey . com/ T P surv ey


On 23 January 2015, the Organisation for Economic Co-operation and Development (OECD) held a public consultation in connection

with the Base Erosion and Profit Shifting (BEPS) project that was focused on Action 14 on improving the effectiveness of dispute resolution mechanisms. The consultation was an opportunity for stakeholders to engage directly with the OECD Secretariat and the country delegates who are responsible for the work on this Action and to share their views on the 18 December 2014 discussion draft on the same action which was met with significant disappointment from business.

OECD holds public consultation on BEPS Action 14 on improving dispute resolution

Rob HansonGlobal Director — Tax Controversy



That discussion draft identifies obstacles t h at are p revent ing c o u nt ries f ro m res o l ving t reat y - rel at ed dis p u t es t h ro u gh t h e Mu t u al Agreem ent Pro c edu re (MAP) and p ro p o s ed a s eries o f o p t io ns f o r addres s ing t h o s e o b s t ac l es . Th e dis c u s s io n draf t s t at ed t h at “ t h ere is no c o ns ens u s o n m o ving t o w ards u nivers al m andat o ry b inding MAP arb it rat io n.” Th e OECD rec eived o ver 400 p ages o f c o m m ent s o n t h e dis c u s s io n draf t , w h ic h are p o s t ed o n it s w eb s it e.1 On- dem and video o f t h e p u b l ic c o ns u l t at io n is al s o avail ab l e o n t h e OECD’ s w eb s it e.2

The public consultationTh e 23 Janu ary 2015 c o ns u l t at io n w as a dial o gu e am o ng s t ak eh o l ders , c o u nt ry tax officials, and the OECD Secretariat o n k ey is s u es and c o nc erns rais ed in t h e c o m m ent s . Th e c o ns u l t at io n w as h o s t ed b y OECD Wo rk ing Part y 1, w h ic h h as res p o ns ib il it y f o r t h e OECD’ s w o rk o n t ax t reat y m at t ers . Th is w o rk ing gro u p al s o h as res p o ns ib il it y f o r o t h er

1 h t t p : / / w w w .o ec d.o rg/ t ax / dis p u t e/ p u b l ic -

c o m m ent s - ac t io n- 14- m ak e- dis p u t e- res o l u t io n-m ec h anis m s - m o re- ef f ec t ive.p df2 http://video.oecd.org/?action=video&id=1461

BEPS Ac t io ns , inc l u ding t h e w o rk o n p revent ing t reat y ab u s e (Ac t io n 6) and on preventing the artificial avoidance o f PE s t at u s (Ac t io n 7 ), w h ic h w ere t h e s u b j ec t o f p u b l ic c o ns u l t at io ns du ring t h e s am e w eek .

Del egat es f ro m 13 c o u nt ries p art ic ip at ed in t h e c o ns u l t at io n. Al s o p art ic ip at ing w ere b u s ines s rep res ent at ives f ro m aro u nd t h e w o rl d, inc l u ding EY rep res ent at ives , and rep res ent at ives o f no n- go vernm ent al o rganiz at io ns (NGOs ).

Opening remarksTh e c o ns u l t at io n b egan w it h o p ening rem ark s f ro m t h e Bel gian del egat e w h o c h airs t h e s u b gro u p o n Ac t io n 14. Sh e s t at ed t h at t h e rec o m m endat io ns f ro m t h e BEPS p ro j ec t m ay res u l t in inc reas ed u nc ert aint y . Sh e o b s erved t h at dis p u t e res o l u t io n m ec h anis m s are no t al w ay s f u nc t io ning as ef f ec t ivel y as t h ey s h o u l d, as evidenc ed b y t h e inc reas e in p ending MAP c as es and MAP c as es t h at are no t ef f ec t ivel y res o l ved o r are w it h draw n. Sh e al s o des c rib ed t h e t h ree el em ent s o f t h e m andat e t h e s u b gro u p ex p ec t s t o del iver:

(1) Po l it ic al c o m m it m ent t o ef f ec t ivel y el im inat e do u b l e t ax at io n

(2) New m eas u res t o im p ro ve ac c es s t o t h e MAP and im p ro ved MAP p ro c es s es

(3) A m ec h anis m t o m o nit o r t h e p ro p er im p l em ent at io n o f t h e p o l it ic al c o m m it m ent . Sh e no t ed t h at t h e dis c u s s io n draf t f o c u s es m ainl y o n el em ent (ii). Wit h res p ec t t o arb it rat io n, s h e s t at ed t h at m andat o ry arb it rat io n is c o ns idered t o b e an efficient tool, but has not been advanc ed f u rt h er b y t h e s u b gro u p in t h e dis c u s s io n draf t b ec au s e s o m e c o u nt ries are o p p o s ed t o it .

Th e rep res ent at ive o f t h e OECD’ s Bu s ines s and Indu s t ry Advis o ry Co m m it t ee s t res s ed t h at a “ p o l it ic al commitment” alone is not sufficient. He f u rt h er ex p res s ed t h e view t h at t h e Fo ru m o n Tax Adm inis t rat io n’ s (FTA) MAP Fo ru m s h o u l d b e invo l ved in t h e w o rk o n Ac t io n 14. He s t at ed t h at b inding arb it rat io n m u s t b e inc l u ded in t h e general s t andard f o r c o u nt ries t h at are f u l l y c o m m it t ed t o avo iding do u b l e t ax at io n, des p it e c o nc erns ab o u t arb it rat io n ex p res s ed b y s o m e c o u nt ries . He f u rt h er no t ed t h at sufficient resources and proper authority m u s t b e p ro vided s o t h at t h e MAP c an be used to effectively and efficiently res o l ve c as es .


General discussionCo m m ent at o rs des c rib ed p ro gres s o n Ac t io n 14 as c ru c ial f o r t h e s u c c es s o f t h e BEPS p ro j ec t . Th ey f u rt h er s t at ed t h at t h e s u c c es s o f t h e BEPS p ro j ec t w il l req u ire t h at c o u nt ries are w il l ing t o f u l l y s u p p o rt t h e BEPS p ro j ec t and t h at b u s ines s es are w il l ing t o f u l l y ac c ep t it s o u t c o m es . Co m m ent at o rs s u gges t ed t h at a c o u nt ry m ay no t b e w il l ing t o ado p t c ert ain BEPS rec o m m endat io ns if t h ey are view ed as giving a s t rat egic advant age t o ano t h er c o u nt ry , eit h er in t erm s o f enh anc ed revenue viewed as taken from the first c o u nt ry o r in t erm s o f f avo ring l o c al t ax p ay ers . Th eref o re, c o m m ent at o rs reas o ned t h at a ro b u s t and w idel y s u p p o rt ed dis p u t e res o l u t io n m ec h anis m aim ed at ens u ring a f air and p redic t ab l e ap p l ic at io n o f t h e new l y agreed s t andards could give countries confidence that t h eir t ax b as e c an b e p ro t ec t ed f ro m t h e u nil at eral ac t io ns o f o t h er c o u nt ries , and, in turn, the confidence to adopt rec o m m endat io ns p ro du c ed b y t h e BEPS p ro j ec t . Co m m ent at o rs f u rt h er s u gges t ed t h at t h e BEPS rec o m m endat io ns w il l l ik el y rais e t ax es o n m any b u s ines s es and impose significant new reporting and c o m p l ianc e b u rdens . If t h e recommendations also significantly inc reas e c as es o f do u b l e t ax at io n t h at c anno t b e ef f ec t ivel y res o l ved, b u s ines s es m ay no t f eel t h ey are b eing t reat ed f airl y in t h e BEPS p ro j ec t and “ c o o p erat ive c o m p l ianc e” m ay b reak do w n du e t o l o s s o f t ru s t b et w een b u s ines s es and go vernm ent s . Th eref o re, an im p ro ved dis p u t e res o l u t io n m ec h anis m is es s ent ial f ro m t h e p ers p ec t ive o f b u s ines s .

Mandatory binding arbitrationTh e b u l k o f t h e c o m m ent s f o c u s ed o n t h e u rgent need f o r agreem ent o n m andat o ry b inding arb it rat io n. Co m m ent at o rs no t ed t h at BEPS- driven dis p u t es are h ap p ening al ready . Th ey view ed t h e dis c u s s io n draf t as no t go ing f ar eno u gh , no t ing t h at m ino r c h anges w il l no t m ak e t h e dif f erenc e needed and enc o u raging t h e w o rk ing gro u p t o b e m o re am b it io u s . Several c o m m ent at o rs no t ed h o w s u c c es s f u l t h e arb it rat io n p ro vis io n in t h e t reat y b et w een Canada and t h e Unit ed St at es h as b een in im p ro ving t h e res o l u t io n o f MAP c as es .

So m e c o m m ent at o rs ex p res s ed t h e view t h at t h ere is no p ro ven al t ernat ive t o arb it rat io n in im p ro ving dis p u t e res o l u t io n. So m e indic at ed t h at m ediat io n c o u l d b e a s ec o nd b es t o p t io n f o r c o u nt ries t h at h ave s o vereignt y c o nc erns ab o u t arb it rat io n; o t h ers view ed m ediat io n as no t l ik el y t o c o nt rib u t e m u c h t o dis p u t e res o l u t io n. A m em b er o f t h e OECD Sec ret ariat agreed t h at m ediat io n m ay no t b e a p ro du c t ive s t ep .

So m e s t at em ent s w ere m ade regarding t h e l ac k o f a c o m m o n u nders t anding ab o u t w h at t y p e o f arb it rat io n w o u l d b e ap p ro p riat e. So m e c o m m ent at o rs no t ed t h at t h e des ign o f t h e arb it rat io n ap p ro ac h is k ey . Su p p o rt w as ex p res s ed f o r u s e o f t h e “ l as t b es t o f f er” ap p ro ac h . Th ere w as s o m e dis c u s s io n ab o u t c o m m erc ial arb it rat io n ap p ro ac h es , b u t c o m m ent at o rs no t ed t h at s u c h ap p ro ac h es rais e c o nc erns am o ng go vernm ent s . Th e OECD Sec ret ariat m em b er ex p res s ed t h e view t h at t h e “ l as t b es t o f f er” ap p ro ac h is f avo red as it is f as t er and l es s ex p ens ive.

Publication of MAP resultsAn NGO rep res ent at ive s t at ed t h at dis p u t e res o l u t io n c an o nl y addres s a s m al l p erc ent age o f m at t ers and t h at t h eref o re t h ere is a need f o r ru l es t h at are c l earer and eas y t o adm inis t er. In t h is regard, h e des c rib ed t h e t rans f er p ric ing ru l es as p art o f t h e p ro b l em . Th e NGO rep res ent at ive ex p res s ed t h e view t h at p u b l ic at io n o f MAP res u l t s is c ent ral t o f airnes s and a p rinc ip l ed t ax s y s t em , o b j ec t ing t o w h at h e des c rib ed as a c l o s ed c o m m u nit y dec iding t h ings b eh ind c l o s ed do o rs . He c au t io ned t h at t h e dis c u s s io n s h o u l d no t j u m p s t raigh t t o arbitration with no basis for confidence in t h e o u t c o m e.

Improving MAPIn addit io n t o t h e s u b s t ant ial f o c u s o n t h e need f o r arb it rat io n as a dis p u t e res o l u t io n m ec h anis m , t h ere al s o w as s o m e dis c u s s io n o f o t h er w ay s t o im p ro ve t h e o p erat io n o f t h e MAP. Co m m ent at o rs c al l ed f o r t h e c o m p et ent au t h o rit y f u nc t io n t o b e indep endent and t o b e adeq u at el y f u nded. Th e s u gges t io n w as m ade t h at t h e rec o m m endat io ns

reflected in the OECD Manual on Effective Mu t u al Agreem ent Pro c edu res (MEMAP), w h ic h are view ed as val u ab l e, s h o u l d b e m ade p art o f t h e c o m m ent ary t o t h e OECD Mo del Tax Co nvent io n. Several c o m m ent at o rs al s o no t ed t h at t h e t o ne o f t h e dis c u s s io n draf t s h o u l d b e el evat ed b y rep l ac ing l angu age s t at ing t h at “ c o u nt ries c o u l d c o ns ider” t h e vario u s MAP im p ro vem ent o p t io ns w it h l angu age t h at s t at es t h at c o u nt ries “ s h o u l d” o r “ m u s t ” ado p t t h e o p t io ns . So m e c o m m ent at o rs s t at ed t h at al l c o u nt ries s h o u l d p u b l is h MAP s t at is t ic s in o rder t o b et t er inf o rm t h eir t reat y p art ners and b u s ines s es .

In addit io n, c o m m ent at o rs s t res s ed t h e im p o rt anc e o f t ax p ay er invo l vem ent in res o l ving MAP c as es , es p ec ial l y in MAP c as es deal ing w it h t rans f er p ric ing. It w as ex p l ained t h at t h is is b ec au s e t h e m o s t t im e c o ns u m ing as p ec t o f a MAP c as e is get t ing a f u l l u nders t anding o f t h e f ac t s . As t h e t ax p ay er is t h e p art y t h at h as t h e b es t k no w l edge, t h e invo l vem ent o f t h e t ax p ay er in, f o r ex am p l e, f ac e- t o -f ac e m eet ings t o ans w er q u es t io ns o n facts would be beneficial. Furthermore, c o m m ent at o rs no t ed t h at t h e o p t io n o f m u l t il at eral MAP c as es w as c o ns idered a u s ef u l t o o l f o r gl o b al o p erat ing c o m p anies t h at ado p t gl o b al al l o c at io n m o del s (e.g., for head office expenses).

Th e OECD Sec ret ariat m em b er no t ed t h at m any o f t h e is s u es rais ed in t h e c o ns u l t at io n w ere p revio u s l y c o ns idered b y t h e OECD and t h at t h e gu idanc e reflected in the MEMAP is relevant. Ho w ever, t h e ac t u al im p l em ent at io n o f t h is gu idanc e c o u l d b e im p ro ved. Th e aim o f t h e dis c u s s io n draf t w as t o ident if y areas in w h ic h t h es e im p ro vem ent s c o u l d b e m ade.

So m e c o u nt ry del egat es s t at ed t h at c u rrent dis p u t e res o l u t io n m ec h anis m s are no t as ef f ec t ive as t h ey s h o u l d b e and rec o gniz ed t h at t h e BEPS p ro j ec t w il l p u t m o re p res s u re o n t h o s e m ec h anis m s . In t h is regard, h o w ever, it w as s u gges t ed b y s o m e t h at t h e res o u rc es needed t o m ak e im p ro vem ent s t o t h e MAP m ay no t b e avail ab l e as t h e o t h er rec o m m endat io ns f ro m t h e BEPS p ro j ec t are b eing im p l em ent ed.


Closing remarks Ano t h er m em b er o f t h e OECD Sec ret ariat c o nc l u ded t h e c o ns u l t at io n w it h s o m e h igh - l evel p o int s . Sh e no t ed t h at it b ec am e c l ear in t h e c o ns u l t at io n t h at t h e b u s ines s c o m m u nit y b el ieves t h e BEPS p ro j ec t w il l l ead t o a t s u nam i o f new MAP c as es and s h e s t at ed t h at t h e OECD m u s t addres s t h is p erc ep t io n. Sh e al s o no t ed t h at real p o l it ic al c o m m it m ent s are req u ired t o im p ro ve t h e MAP. In t h is regard, m andat o ry b inding arb it rat io n is view ed b y t h e b u s ines s c o m m u nit y no t as a “ s il ver b u l l et ” b u t t h e “ go l d s t andard, ” as it w il l no t s o l ve al l t h e is s u es b u t w il l h ave a p o s it ive ef f ec t . Sh e ref erenc ed t h e dis c u s s io n ab o u t t y p es o f arb it rat io n ap p ro ac h es and al s o t h e q u es t io n o f w h et h er arb it rat io n dec is io ns s h o u l d b e p u b l is h ed in s o m e f o rm .

Th e OECD Sec ret ariat m em b er indic at ed t h at it is c l ear t h at t h e b u s ines s c o m m u nit y view s Ac t io n 14 as c rit ic al t o t h e s u c c es s o f t h e BEPS p ro j ec t and s t res s ed t h at t h e OECD w il l t reat it as s u c h . In addit io n, s h e s t at ed t h at t h e OECD s h o u l d no t l o o k at dis p u t e res o l u t io n in is o l at io n. Th e OECD s h o u l d f o c u s o n b o t h t h e t ec h nic al as p ec t s o f BEPS and t h e c l arit y and adm inis t rab il it y o f it s rec o m m endat io ns . Final l y , s h e no t ed t h at MAP s t at is t ic s are u s ef u l b u t c au t io ned t h at no t al l c o u nt ries p ro vide s t at is t ic s and t h at t h e inf o rm at io n t h at is provided can be difficult to understand.

In t erm s o f nex t s t ep s , t h e w o rk ing gro u p w as s c h edu l ed t o m eet in Marc h t o discuss modifications to be made to the dis c u s s io n draf t .

I mp l i cati on sTh e dis c u s s io n at t h e c o ns u l t at io n u nders c o red t h e b u s ines s c o m m u nit y ’ s deep dis ap p o int m ent t h at t h e dis c u s s io n draf t o n Ac t io n 14 did no t inc l u de agreem ent o n arb it rat io n, w h ic h is view ed as a nec es s ary m ec h anis m f o r res o l ving dis p u t es . Th is is p art ic u l arl y c o nc erning in l igh t o f t h e ex p ec t at io n t h at rec o m m endat io ns u nder o t h er BEPS Ac t io ns w il l inc reas e dis p u t es and t h e as s o c iat ed ris k o f do u b l e t ax at io n.

Pas c al Saint - Am ans , Direc t o r o f t h e OECD’ s Cent re f o r Tax Po l ic y and Adm inis t rat io n no t ed o n a 12 Feb ru ary 2015 OECD w eb c as t 3 t h at , af t er rec eiving w rit t en c o m m ent s and f eedb ac k f ro m t h e p u b l ic c o ns u l t at io n, it is c l ear t h at t h e c u rrent dis c u s s io n draf t is inadeq u at e. He indic at ed t h at c h anges w il l b e m ade t o ex p and t h e s c o p e and m o dif y t h e c o ndit io ns rel at ed t o dis p u t e res o l u t io n t o p revent do u b l e t ax at io n. He reit erat ed t h at t h ere is no c o ns ens u s w it h res p ec t t o arb it rat io n, b u t s aid t h at t h e w o rk ing gro u p is c u rrent l y l o o k ing at o p t io ns , inc l u ding a s t ringent p eer review p ro p o s al t h at h as t h e endo rs em ent o f t h e G20. In t h is res p ec t , Saint -Am ans h igh l igh t ed t h e agreem ent ado p t ed in t h e l as t Co m m it t ee o f Fis c al Af f airs m eet ing w h ere al l c o u nt ries dec ided t o m ak e p ro gres s towards achieving an effective and efficient dispute resolution p ro c edu re in t h e c o nt ex t o f t ax t reat ies .

3 http://www.ey.com/GL/en/Services/Tax/International-Tax/Alert--OECD-hosts-sixth-webcast-

u p dat e- o n- BEPS- p ro j ec t


in the spotlight

EY report: Managing operational tax risk

Our first 2014 Tax risk and controversy survey identified four heightened sources of risk — reputation, legislative, enforcement and operational — based on results from 962 tax and finance executives in 27 countries, including more than 130 chief financial officers.Managing o p erat io nal t ax ris k is o u r s ec o nd rep o rt in t h is s eries . Us ing t h e s u rvey res u l t s , inp u t s f ro m t ax f u nc t io n l eaders and EY p ro f es s io nal s , it p ro vides a deep er ex p l o rat io n o f t h e m any s o u rc es of “operational” tax risk. We define o p erat io nal t ax ris k as t h o s e aris ing ins ide t h e o rganiz at io n f ro m t h e p eo p l e, p o l ic ies and p ro c es s es and t ec h no l o gy .

In t h is rep o rt , w e ex am ine w h at c o m p anies are do ing w it h t h e res o u rc es t h ey h ave no w , as w el l as h o w t h ey build flexibility and resilience. We al s o inves t igat e t h e divide t h at s o m e c o m p anies m ay h ave t o c ro s s as t h ey m o ve f ro m c u rrent t o f u t u re t ax ris k m anagem ent m o del s .

Final l y , w e ident if y eigh t k ey c o m p o nent s o f an o p t im al t ax f ram ew o rk t h at c an b e ado p t ed t o m it igat e o p erat io nal t ax ris k s and ac h ieve c o nt ro l , val u e and efficiency across the entire record-to-rep o rt p ro c es s .

The fact is, now is the time for businesses to make sure their tax functions have the right people, processes and technology in place. Getting things right the first time can pay dividends — from higher levels of control, greater efficiency and value in the tax function to reducing the incidence of risk.

Download the report at www. ey . com/ tax ri sk seri es


OECD holds public consultation on BEPS Actions 8-10 on transfer pricing

Ronald van den BrekelInternational Tax Services


On March 19 and 20, 2015, the Organisation for Economic Co-operation and Development (OECD) held a public consultation in

connection with the Base Erosion and Profit Shifting (BEPS) project that was focused on Actions 8 through 10 on transfer pricing, specifically risk and recharacterization, profit splits, commodities, and low value-adding services. The consultation was an opportunity for stakeholders to engage directly with the OECD Secretariat and the country delegates who are responsible for the OECD’s transfer pricing work.


Th e OECD is s u ed s everal dis c u s s io n draf t s in l at e 2014 o n t rans f er p ric ing as p ec t s o f t h e BEPS p ro j ec t . On Dec em b er 19 , 2014, t h e OECD is s u ed a dis c u s s io n draf t , BEPS Actions 8, 9 and 10: Discussion draft on revisions to Chapter I of the Transfer Pricing Guidelines (including risk, recharacterisation and special measures).1 Th e do c u m ent c o ns is t s o f t w o p art s . Part I is a p ro p o s ed revis io n t o Sec t io n D o f Ch ap t er I o f t h e OECD Trans f er Pric ing Gu idel ines , w h ic h em p h as iz es t h e im p o rt anc e o f ac c u rat el y del ineat ing t h e ac t u al t rans ac t io ns and c o nt ains gu idanc e b o t h o n t h e rel evanc e and al l o c at io n o f ris k and o n rec h arac t eriz at io n (o r no n- rec o gnit io n), inc l u ding c rit eria f o r det erm ining w h en it w o u l d b e ap p ro p riat e f o r t h e ac t u al t rans ac t io n no t t o b e recognized. Part II sets out five options f o r p o t ent ial “ s p ec ial m eas u res ” in c o nnec t io n w it h int angib l e as s et s , ris k , and o ver- c ap it al iz at io n.

1 See Tax Al ert 2014- 2330.

On Dec em b er 16, 2014, t h e OECD is s u ed a dis c u s s io n draf t , BEPS Action 10: Discussion draft on the use of profit splits in the context of global value chains.2 Th e do c u m ent addres s es nine s c enario s in w h ic h , in t h e OECD’ s view , it m ay b e more difficult to apply one-sided transfer-p ric ing m et h o ds t o det erm ine t rans f er-p ric ing o u t c o m es t h at are in l ine w it h val u e c reat io n s u c h t h at ap p l ic at io n o f a transactional profit split method may be ap p ro p riat e.

Al s o o n Dec em b er 16, 2014, t h e OECD is s u ed a dis c u s s io n draf t , BEPS Action 10: Discussion draft on the transfer pricing aspects of cross-border commodity transactions.3 Th e do c u m ent p ro p o s es addit io nal gu idanc e in Ch ap t er II o f t h e OECD Trans f er Pric ing Gu idel ines t h at addres s c ro s s - b o rder c o m m o dit y t rans ac t io ns .

On 3 No vem b er 2014, t h e OECD is s u ed a dis c u s s io n draf t , BEPS Action 10: Proposed modifications to Chapter VII of the Transfer Pricing Guidelines relating to low value-adding intra-group services.4

2 See Tax Al ert 2014- 227 9 .

3 See Tax Al ert 2014- 229 3.

4 See Tax Al ert 2014- 19 66.

Th e do c u m ent c o nt ains p ro p o s ed modifications to the OECD Transfer Pric ing Gu idel ines rel at ing t o s u c h s ervic es .

Th e OECD rec eived o ver 2, 000 p ages o f c o m m ent s o n t h es e dis c u s s io n draf t s , w h ic h are p o s t ed o n it s w eb s it e.

Th e p u b l ic c o ns u l t at io n o n Marc h 19 - , 2015 w as a dial o gu e am o ng s t ak eh o l ders , country tax officials, and the OECD Sec ret ariat o n k ey is s u es and c o nc erns rais ed in t h e c o m m ent s t o t h es e t rans f er p ric ing dis c u s s io n draf t s . Th e c o ns u l t at io n w as h o s t ed b y OECD Wo rk ing Part y 6, w h ic h h as res p o ns ib il it y f o r t h e OECD’ s w o rk o n t rans f er p ric ing m at t ers .

Ap p ro x im at el y 27 0 p art ic ip ant s rep res ent ing o ver 43 go vernm ent s ; m u l t inat io nal b u s ines s es , indu s t ry b o dies and advis o rs , inc l u ding EY rep res ent at ives ; and no n- go vernm ent al o rganiz at io ns (NGOs ) p art ic ip at ed in t h e t w o - day c o ns u l t at io n. Th e c o ns u l t at io n w as l ive- s t ream ed b y t h e OECD and a rec o rding is avail ab l e o n t h e OECD w eb s it e.


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The consultation: Opening remarks and general commentsTh e c o ns u l t at io n b egan w it h o p ening rem ark s f ro m t h e Canadian del egat e w h o c h airs Wo rk ing Part y 6. Sh e s t at ed t h at t h e aim o f t h e w o rk ing p art y is t o arrive at c o ns is t ent , b al anc ed gu idanc e.

A rep res ent at ive o f t h e Bu s ines s and Indu s t ry Advis o ry Co m m it t ee (BIAC) ex p res s ed t h e view t h at t h e arm ’ s - l engt h s t andard, w h en p ro p erl y ap p l ied b y b o t h t ax p ay ers and go vernm ent s , o f f ers t h e b es t p ro s p ec t o f c l as s if y ing t rans ac t io ns ac c o rding t o “ real - w o rl d” ec o no m ic s and eq u it ab l y and c o ns ens u al l y dividing inc o m e b et w een c o u nt ries b as ed o n ec o no m ic ac t ivit y .

Co nc erns w ere ex p res s ed t h at a b ro ad int erp ret at io n o f “ BEPS p rinc ip l es ” c o u l d b e u s ed t o j u s t if y new u nil at eral t h eo ries and t h e au t o m at ic ap p l ic at io n o f no n- arm ’ s - l engt h ap p ro ac h es in ro u t ine s it u at io ns . Th eref o re, el em ent s o f t h e p ro p o s ed gu idanc e c o vering areas t h at are am b igu o u s w ere w el c o m ed. Su c h gu idanc e, h o w ever, s h o u l d b u il d o n es t ab l is h ed c o nc ep t s rat h er t h an new c o nc ep t s s u c h as “ m o ral h az ard.”

Rec h arac t eriz at io n, o r “ s p ec ial m eas u res , ” w h ic h rec as t s a c o nt rac t o r o t h er l egal arrangem ent s f ro m t h e f o rm agreed b y t h e p art ies int o a new and different form, may be justified in extreme c as es , b u t o nl y w h en o t h er al t ernat ives , p art ic u l arl y t h e p ro p er ap p l ic at io n o f t rans f er p ric ing p rinc ip l es , h ave b een t ried and f ail ed. Co nc ern w as ex p res s ed t h at t h ere is a ris k t h at a b ro ad p o p u l at io n o f c o m p anies c o u l d b e req u ired t o ap p l y ru l es t h at are t arget ed at a very s m al l nu m b er o f c as es invo l ving BEPS.

It w as s t res s ed t h at it is o f t h e u t m o s t im p o rt anc e t h at t h e OECD des ign ef f ec t ive m ec h anis m s t o res o l ve do u b l e t ax at io n.

Risk and recharacterizationTh e US del egat e, w h o c o - c h airs t h e w o rk o n ris k and rec h arac t eriz at io n, o p ened t h e dis c u s s io n b y indic at ing t h at t h e p ro p o s ed rew rit e o f Ch ap t er I o f t h e OECD gu idel ines p l ac es em p h as is o n ac c u rat el y del ineat ing t rans ac t io ns b y f u nc t io nal anal y s is o f c o ndu c t and no t nec es s aril y res p ec t ing c o nt rac t u al arrangem ent s . Wh il e t h ere s eem ed t o b e c o ns ens u s t h at t h ere is a need t o rec o gniz e t h e

“ real deal ” o f p art ies ’ arrangem ent s , m any c o m m ent at o rs req u es t ed great er c l arit y o n t h e t y p es o f s it u at io ns w h en c o nt rac t u al t erm s w o u l d no t b e res p ec t ed. Co nc erns w ere rais ed t h at t h e c u rrent draf t p ro p o s al s c o u l d res u l t in t ax au t h o rit ies ’ h aving t o o m u c h dis c ret io n as t o res p ec t ing c o nt rac t s , w h ic h c o u l d l ead t o do u b l e t ax at io n.

Th e del egat e f ro m It al y as k ed b u s ines s p art ic ip ant s w h et h er t h ey b el ieve t h ere s h o u l d b e a h ierarc h y in c o m p arab il it y f ac t o rs , p u t t ing m o re w eigh t o n c o nt rac t s t h an o n o t h er f ac t o rs . He al s o q u es t io ned w h et h er c o nt rac t s are h el p f u l in anal y z ing t h e val u e c h ain w h en f u nc t io ns are p erf o rm ed at vario u s p l ac es .

Th e OECD Sec ret ariat p u t f o rw ard s im il ar q u es t io ns . In t h e OECD’ s view , t h e c o nt rac t is t h e c o nt ex t f o r int erp ret ing t h e f u nc t io ns p erf o rm ed. Fro m t h at perspective, does the order matter? When int erp ret ing f ac t s , s h o u l d a dif f erent w eigh t b e p u t o n c o nt rac t s as a f ac t t h an on functions performed? For the OECD, t h is is a very im p o rt ant is s u e, as t h e s ec ret ariat b el ieves t h at t h ere s h o u l d b e s o m e w ay f o r t ax au t h o rit ies t o verif y t h e c o nt rac t u al al l o c at io n o f ris k .


Th e del egat e f ro m Franc e ex p res s ed t h e view t h at c o nt rac t s h ave t o b e res p ec t ed, except in specific circumstances. He al s o indic at ed t h at t h e w o rk ing p art y is aw are t h at l o o k ing f o r t h e “ real deal ” m ay inc reas e t h e ins t anc es o f do u b l e t ax at io n. He s t res s ed t h at t h e w o rk ing p art y s h o u l d c aref u l l y draf t t h e gu idanc e t o avo id do u b l e t ax at io n.

Bu s ines s c o m m ent at o rs req u es t ed re- w o rding o f t h e s o m ew h at negat ive c o nno t at io ns in t h e re- draf t o f Ch ap t er I, w h ic h c o u l d im p l y t h at int ragro u p t rans ac t io ns , o r t rans ac t io ns w it h l o w er-t ax j u ris dic t io ns , s h o u l d au t o m at ic al l y b e t reat ed w it h m o re rigo ro u s s c ru t iny t h an ex t ernal t rans ac t io ns o r t rans ac t io ns w it h h igh er- t ax j u ris dic t io ns . Bu s ines s es ex p res s ed t h e view t h at t h is s h o u l d no t b e t h e c as e w h en c o ndu c t al igns w it h c o nt rac t u al t erm s .

Th e OECD’ s revis ed Ch ap t er I al s o inc l u des m o re c o m p reh ens ive gu idanc e on defining risk and the allocation of risk b et w een gro u p c o m p anies , eit h er u nder c o nt rac t u al arrangem ent s o r as a res u l t o f c o ndu c t . Th e draf t gu idanc e is f o c u s ed o n al igning ris k s w it h f u nc t io ns in o rder t o p revent BEPS, s u c h t h at ris k s , and t h e rew ard t o c ap it al s u p p o rt ing ris k s , are al l o c at ed t o f u nc t io ns t h at are c ap ab l e o f c o nt ro l l ing, m anaging, and m o nit o ring such risks. Specific input was requested b y t h e c o u nt ry del egat es o n t h e no t io ns o f c o nt ro l and m anagem ent o f ris k , in p art ic u l ar a c o m p aris o n w it h s im il ar no t io ns in t h e ex is t ing Ch ap t er IX o f t h e OECD Trans f er Pric ing Gu idel ines .

Th ere w as m u c h dis c u s s io n o f t h e OECD’ s p ro p o s al s regarding no n- rec o gnit io n o f t rans ac t io ns . Bu s ines s c o m m ent at o rs ex p res s ed c o nc ern t h at t h e gu idanc e is no t ex p l ic it eno u gh in det erm ining u nder w h at c irc u m s t anc es no n- rec o gnit io n w o u l d b e p erm it t ed. In p art ic u l ar, c l earer, l es s nu anc ed ex am p l es w ere req u es t ed t o il l u s t rat e t h e b o u ndary o f t h e p ro p o s ed ru l es . Many c o m m ent at o rs f el t t h at w it h o u t b et t er ex am p l es , t h e t h res h o l d f o r rec h arac t eriz at io n c o u l d b e t o o l o w .

Bu s ines s es s t at ed t h at t h e c u rrent proposals would place a significant addit io nal c o m p l ianc e b u rden o n t ax p ay ers in del ineat ing m any m o re, o r even al l , t rans ac t io ns and t h at ins t ead t h e b u rden o f p ro o f t h at a c o nt rac t is no t ac c u rat el y del ineat ed o r s h o u l d no t b e res p ec t ed s h o u l d b e o n t h e t ax au t h o rit ies .

Special measuresIn addit io n t o revis ing Ch ap t er I o f t h e OECD Trans f er Pric ing Gu idel ines , t h e OECD h as p ro p o s ed o p t io ns f o r t h e int ro du c t io n o f “ s p ec ial m eas u res ” t o f u rt h er addres s BEPS c o nc erns . Many b u s ines s c o m m ent at o rs ex p res s ed t h e view t h at , w it h t h e ex c ep t io n o f “ Op t io n 1: Hard- t o - val u e int angib l es , ” t h e o t h er f o u r o p t io ns ex t end b ey o nd t h e arm ’ s -l engt h p rinc ip l e and c o u l d no t t h eref o re b e im p l em ent ed t h ro u gh t h e t rans f er-p ric ing gu idel ines . Th es e o p t io ns inc l u de addres s ing “ inap p ro p riat e” ret u rns f o r p ro viding c ap it al , “ t h ic k ” c ap it al iz at io n, m inim al l y f u nc t io nal ent it ies , and ens u ring t ax at io n o f ex c es s ret u rns . Su c h p ro p o s al s rep res ent f u ndam ent al c h anges t o t h e ex is t ing t ax at io n p rinc ip l es and w o u l d l ik el y res u l t in do u b l e t ax at io n. Several c o m m ent at o rs ex p res s ed c o nc ern t h at t h e c u rrent o p t io ns f o r s p ec ial m eas u res o u t l ined b y t h e OECD are no t det ail ed eno u gh at t h is s t age and t h at it is premature to discuss them without first c o ns idering t h e c o nc l u s io ns o f t h e w o rk c u rrent l y u nderw ay o n t rans f er p ric ing and o t h er BEPS ac t io ns , inc l u ding t h e w o rk o n c o nt ro l l ed f o reign c o m p anies .

Overal l t h e OECD s eem ed t o rec o gniz e t h at c ap it al and ris k are t h e “ s t o c k in trade” for financial services businesses and t h at it m ay b e nec es s ary t o c o ns ider t h es e b u s ines s es dif f erent l y in t h e c o nt ex t o f ris k , rec h arac t eriz at io n and s p ec ial m eas u res .

Profit splitsIn the discussion draft on profit-split methods, the OECD invited clarification on t h e u s e o f t h o s e m et h o ds in t h e c o nt ex t o f gl o b al val u e c h ains . Bu il ding o n t h e revis ed Ch ap t er I draf t , and l o o k ing at t h e ac c u rat e del ineat io n o f t rans ac t io ns t h ro u gh al igning f u nc t io ns , as s et s and risk, the OECD recognizes the difficulty in es t ab l is h ing c o m p arab l es f o r c ert ain t rans ac t io ns . As s u c h , t h e OECD b el ieves a profit-split method may be the most ap p ro p riat e t rans f er- p ric ing m et h o d. Th e dis c u s s io n draf t rec o gniz es t h at profit splits typically are applied in global trading and other integrated financial s ervic es b u s ines s es .

Th e OECD s t res s ed t h at it is no t m ak ing any s u gges t io ns o r rec o m m endat io ns at this stage as to the use of profit splits but is ins t ead l o o k ing t o b et t er u nders t and ex p erienc es and view s . In p art ic u l ar, t h e OECD w ant s t o u nders t and t h e rel evanc e and c o nt ex t o f t h ird- p art y arrangem ent s close to profit-split methods, especially in t h e c o nt ex t o f u nders t anding t h e ro l e o f c ap it al . Th e c o u nt ry del egat es ex p res s ed s o m e diverging view s . Th e US del egat e s t at ed t h at it is very im p o rt ant t o p erf o rm an anal y s is b as ed o n Ch ap t ers I and III o f t h e OECD Trans f er Pric ing Gu idel ines and t h at t h e m o s t ap p ro p riat e m et h o d s h o u l d s t il l ap p l y . One s h o u l d no t s im p l y c o nc l u de t h at t h e ex is t enc e o f a gl o b al val u e c h ain implies that the profit-split method s h o u l d ap p l y .

Bu s ines s c o m m ent at o rs ex p res s ed a s im il ar view . Th ey al s o s t at ed t h at b o t h losses and profits should be referenced in t h e gu idanc e as al l o c ab l e u nder any profit-split method because the upsides and do w ns ides o f o p erat ing as a gl o b al gro u p need t o b e al l o c at ed.

Ot h er c o u nt ry del egat es s eem ed t o w el c o m e f u rt h er gu idanc e o n ap p l y ing profit-split methods, noting that reliable comparables can be difficult to find.


So m e b u s ines s c o m m ent at o rs f el t that transactional profit-split methods are c o m p l ex t o ap p l y and m aint ain in p rac t ic e, as s u c h m et h o ds o f t en w o u l d be outside the group’s finance system. In s o m e c irc u m s t anc es , f o r ex am p l e, in t h e c o nt ex t o f ac q u is it io ns o r gro u p s w it h divisional-based data, it can be difficult t o ac c es s dat a. Th is l ik el y w o u l d l ead t o inc reas ed dis p u t es b et w een t ax p ay ers and t ax au t h o rit ies . Many del egat es ex p res s ed c o nc erns t h at gl o b al f o rm u l ary ap p o rt io nm ent c o u l d res u l t .

Intragroup servicesTh e s es s io n o n int ragro u p s ervic es addres s ed t h e p ro p o s ed revis io ns t o Ch ap t er VII o f OECD Trans f er Pric ing Gu idel ines o n t h o s e s ervic es , p art ic u l arl y the proposal to define a certain class of “ l o w val u e- adding” s ervic es as el igib l e f o r simplified treatment in cost allocation and rec h arging m o del s .

Th e c o m m ent s f o c u s ed o n t h e need f o r t h e gu idanc e t o s u p p o rt b u s ines s es in ac h ieving dedu c t io ns f o r al l c o s t s , no t ing t h at s ervic e- p ro vider j u ris dic t io ns c u rrent l y t end t o argu e f o r a w ide definition of services and service-recipient j u ris dic t io ns argu e f o r a m u c h narro w er o ne, o f t en s u gges t ing t h at int ragro u p services do not provide benefit locally.

So m e c o m m ent at o rs req u es t ed t h at t h e OECD provide greater flexibility in the guidance on the definition of services t h at m ay q u al if y f o r t h e s p ec ial “ l o w val u e- adding” t reat m ent , no t ing t h at s o m e ac t ivit ies t h at t h e dis c u s s io n draf t excludes from such definition could in f ac t b e ro u t ine and add l it t l e val u e. Specific examples given included activities o f s enio r m anagem ent and c o nt rac t R&D services. Other commentators s u gges t ed t h at t h e OECD s h o u l d p ro vide a c o m p reh ens ive l is t o f s ervic es t h at w o u l d b e t reat ed as “ s h areh o l der” s ervic es deemed to be performed for the benefit o f t h e u l t im at e p arent in it s c ap ac it y as a s h areh o l der o f t h e gro u p . Th e c o s t s o f s u c h s ervic es w o u l d no t t o b e c h arged t o gro u p m em b ers .

Co m m ent at o rs al s o no t ed t h at t h e s u gges t io n t h at al l l o w - val u e adding s ervic es s h o u l d b e ac c u m u l at ed in o ne c o s t p o o l and s u b j ec t t o a s ingl e m ark - u p might be difficult to apply in practice. So m e s u gges t ed t h at a divis io nal ap p ro ac h w it h divis io nal c o s t p o o l s m igh t b e m o re ap p ro p riat e and p rac t ic al t o ap p l y .

Th e dis c u s s io n t h at f o l l o w ed f o c u s ed o n s everal p o int s t h at c u rrent l y c au s e difficulties for multinational groups. Bu s ines s c o m m ent at o rs argu ed t h at t h e l angu age at p aragrap h 7 .35 o f t h e dis c u s s io n draf t , w h ic h s u gges t s t h at it m ay b e ap p ro p riat e t o c o m p are t h e c o s t s o f s ervic es b eing c h arged w it h t h e h y p o t h et ic al c o s t s o f o b t aining s im il ar s ervic es in t h e l o c al m ark et , s h o u l d b e am ended, as it is a h igh l y s u b j ec t ive t es t and w o u l d l ik el y l ead t o dis p u t es in p rac t ic e.

Th ere w as a dis c u s s io n ab o u t t h e ap p ro p riat e l evel o f m ark - u p . Bu s ines s c o m m ent at o rs w ere c o nc erned t h at t h e int erac t io n and inc o ns is t enc y w it h other guidance might lead to difficulty in p rac t ic e in ap p l y ing t h e OECD’ s gu idanc e o n m ark - u p s f o r l o w val u e-adding s ervic es . Fo r ins t anc e, u nder t h e US s ervic es c o s t m et h o d, s o m e s ervic es m ay b e rec h arged at c o s t , w h ereas s o m e t errit o ries eit h er h ave s t at u t o ry m ark - u p s o r in p rac t ic e ap p l y m inim u m m ark - u p s .

Th e US del egat e res p o nded t o s o m e o f t h es e p o int s . On t h e q u es t io n o f m ark - u p , t h e del egat e no t ed t h at t h e real is s u e is in w h ic h c o u nt ry t h e b as e c o s t s are dedu c t ed. Fo r l o w val u e- adding s ervic es , t h e US view w as t h at t h e l evel o f m ark - u p is t o o im m at erial t o deb at e. Th e del egat e al s o no t ed t h at , al t h o u gh b u s ines s es would find it helpful to have a list of low value-adding services identified, it is not p rac t ic al f o r t h e OECD t o do s o b ec au s e t h e c o nt ex t and c irc u m s t anc es in every c as e w o u l d det erm ine w h et h er a s ervic e is a l o w val u e- adding s ervic e.

Transfer pricing of commodity transactionsIn t h e dis c u s s io n draf t o n t h e t rans f er-p ric ing as p ec t s o f c ro s s - b o rder c o m m o dit y t rans ac t io ns , t h e OECD advo c at es t h e u s e o f t h e CUP m et h o d f o r p ric ing c ro s s - b o rder c o m m o dit y t rans ac t io ns and s u gges t s t h at q u o t ed p ric es c an f o rm a s u it ab l e CUP in m any c irc u m s t anc es . Wh en a t ax p ay er h as b as ed t h e p ric e f o r a t rans ac t io n o n t h e quoted price on a specified date, but t h e t ax au t h o rit ies c anno t det erm ine t h at t h e t rans ac t io n ac t u al l y t o o k p l ac e o n t h at dat e, t h e OECD s u gges t s t h at t ax au t h o rit ies s h o u l d b e p erm it t ed t o s u b s t it u t e a “ deem ed- p ric ing dat e” , s u c h as t h e b il l o f l ading dat e f o r a c argo s h ip m ent , s im il ar t o t h e s o - c al l ed “ s ix t h m et h o d” t h at t ax au t h o rit ies in s o m e em erging c o u nt ries are no w u s ing.

Co m m ent at o rs rep res ent ing t h e o il and gas indu s t ry no t ed t h at t h e u s e o f t h e CUP m et h o d, w h il e ap p ro p riat e in s o m e ins t anc es , w o u l d no t b e s u it ab l e in every c as e. Fo r o il and gas , it w as no t ed t h at t h ere are o f t en m u l t ip l e dif f erent q u o t ed p ric es f o r t h e s am e c o m m o dit y and j u dgm ent is needed in det erm ining w h ic h o ne s h o u l d b e u s ed. It w as al s o no t ed t h at q u o t ed p ric es f o r p h y s ic al del ivery o f c o m m o dit ies rarel y rep res ent t h e ac t u al p ric e p aid, b ec au s e t h ere are al m o s t al w ay s q u al it y and del ivery p rem iu m s o r dis c o u nt s . Final l y , t h e u s e o f a CUP o r q u o t ed p ric e in m any c irc u m s t anc es w o u l d no t b e ap p ro p riat e b ec au s e it igno res t h e val u e c reat ed b y t h e ac t ivit y o f t raders w h o h edge c o m m o dit y p ric e ris k . In s o m e c as es , a “ net b ac k ” p ric e is view ed as m o re ap p ro p riat e.


Fo r agric u l t u ral c o m m o dit ies , t w o commentators representing Latin American grain p ro du c ing b u s ines s es s t ro ngl y c rit ic iz ed t h e s ix t h m et h o d u s ed in s o m e c o u nt ries . Th ey no t ed t h at a grain s h ip m ent m igh t b e s o l d u p t o a y ear in advanc e and that the floating market price could move s u b s t ant ial l y f ro m o ne h arves t t o t h e nex t . Th e p ro b l em t h ey h igh l igh t ed w it h t h e s ix t h m et h o d is t h at , in p rac t ic e, it s eem s t o al l o w t ax au t h o rit ies t o c h o o s e t h e m o s t advant ageo u s o p t io n, eit h er ac c ep t ing t h e p ric e u s ed o r s u b s t it u t ing t h e index p ric e o n t h e deem ed p ric ing dat e if h igh er. Th ey s u gges t ed t h at , rat h er t h an a deem ed p ric ing dat e, c o u nt ries s h o u l d es t ab l is h a c o nt rac t regis t ry and m ak e it a l egal req u irem ent f o r c o m m o dit y p ro du c ers t o regis t er t h e c o nt rac t s w it h t h e regis t ry o n t h e dat e t h ey are ent ered, t h ereb y el im inat ing dis p u t es o ver t h e dat e o n w h ic h t h e p ric e f o r a rel at ed- p art y t rans ac t io n w as agreed.

Ano t h er c o m m ent at o r, f o c u s ing o n t h e int eres t s o f devel o p ing c o u nt ries , s p o k e in f avo r o f t h e s ix t h m et h o d as a m o re p rac t ic al al t ernat ive t o t h e CUP. Sh e argu ed t h at t h e advant ages o f t h e s ix t h m et h o d are t h at it is s im p l e t o ap p l y in p rac t ic e and it l eaves very l it t l e ro o m f o r deb at e o ver p ric es . Th eref o re, it is view ed b y s o m e as a p rac t ic al t o o l f o r t ax au t h o rit ies in devel o p ing c o u nt ries t o u s e t o ens u re t h at t h ey rec eive s o m e t ax revenu e f ro m t h e p ro du c t io n ac t ivit y in t h eir c o u nt ries .

Concluding commentsTh e c h air o f t h e w o rk ing p art y c o nc l u ded t h at t h e m eet ing p ro vided u s ef u l inp u t and t h ank ed t h e p art ic ip ant s f o r t h eir inp u t . Th e w o rk ing p art y w il l dis c u s s t h e c o m m ent s at it s nex t m eet ing. A c o m m o n t h em e o b s erved w as t h at m o re c l arit y is needed. Th e OECD ex p ec t s t o is s u e revis ed dis c u s s io n draf t s o n t h es e t rans f er p ric ing t o p ic s in Ap ril .

I mp l i cati on sTh e dis c u s s io n at t h e c o ns u l t at io n u nders c o red t h e b ro ad s c o p e o f t h e t rans f er- p ric ing c h anges t h e OECD is c o ns idering. Th e changes could significant affect global businesses. Moreover, c o u nt ries al ready are ap p l y ing s o m e o f t h e c o nc ep t s in p rac t ic e, even in advanc e o f any c h anges in int ernat io nal t rans f er- p ric ing ru l es . Th u s , it is im p o rt ant f o r c o m p anies t o k eep inf o rm ed o f devel o p m ent s in t h is area in t h e OECD and in t h e rel evant c o u nt ries in w h ic h t h ey o p erat e, t o as s es s t h e im p l ic at io ns o f t h es e devel o p m ent s f o r t h eir b u s ines s m o del s , and t o c o ns ider ac t ivel y engaging w it h p o l ic y m ak ers in t h is int ernat io nal tax☺ debate.


in the spotlight

Taking on taxes: The board’s role in tax oversight

Access Board Matters Quarterly at www. ey . com/ bmq tax

Tax h as m o ved nearer t h e t o p o f b o t h t h e b o ardro o m and new s ro o m agendas in t h e l as t f ew y ears . Th e m edia h as b een b u z z ing ab o u t t h e t ax es c o m p anies p ay , and al l indic at io ns are t h at c o rp o rat e t ax es w il l rem ain a k ey is s u e in t h e c o m ing y ears .

EY ’ s 2014 Tax risk and controversy survey o f l arge m u l t inat io nal c o m p anies s h o w s t h at 8 9 % are “ s o m ew h at ” o r “significantly” concerned about the media c o verage o f t h e t ax es c o m p anies p ay . Bo ard m em b ers and C- s u it e ex ec u t ives told Lloyd’s of London in a similar survey t h at u nc ert aint y ab o u t c u rrent and f u t u re t ax c o m m it m ent s is t h e b igges t ris k t h ey f ac e, ac c o rding t o t h e c o m p any ’ s Risk Index 2013. Meanw h il e, m o re c o u nt ries are ado p t ing l egis l at io n o r m o dif y ing t h eir l aw s t o p u s h t ax is s u es int o t h e b o ardro o m , inc l u ding l aw s t h at ex t end the responsibility for tax-significant t rans ac t io ns t o b o ards o f direc t o rs .

Th is is s u e o f Board Matters Quarterly f o c u s es o n s o m e o f t h e k ey t ax ris k s b u s ines s es f ac e t o day . It o u t l ines s t rat egies , p o l ic ies , c h ec k s and b al anc es and t ec h no l o gies t h at c an b e p u t in p l ac e t o m anage t h e ris k s m o re ef f ec t ivel y .

In t h is is s u e o f EY ’ s Board Matters Quarterly p u b l ic at io n, w e c o ver t h e f o l l o w ing k ey t o p ic s :

• A wave of tax risks: developing the right tax strategy to meet rising challenges

• Global focus on tax base erosion and profit shifting: what boards should know about the OECD initiative

• Income tax accounting challenges can lead to errors: how the board and audit committee can help

• Managing tax controversy: identifying disputes early can reduce risk


On 25 No vem b er 2014, t h e Organis at io n f o r Ec o no m ic Co - o p erat io n and Devel o p m ent (OECD) rel eas ed it s annu al s t at is t ic al

p u b l ic at io n o n t h e Mu t u al Agreem ent Pro c edu re (MAP) c as el o ads o f al l OECD m em b er c o u nt ries and p art ner ec o no m ies f o r t h e 2013 rep o rt ing p erio d.1 Th e rep o rt c o vers o p ening and ending invent o ry o f MAP c as es f o r 2013, t h e nu m b er o f new MAP c as es init iat ed, nu m b er o f MAP c as es c o m p l et ed, c as es c l o s ed o r w it h draw n w it h do u b l e t ax at io n, and average c y c l e t im e f o r c as es c o m p l et ed, c l o s ed o r w it h draw n.

1 h t t p : / / w w w .o ec d.o rg/ c t p / dis p u t e/ m ap - s t at is t ic s - 2013.h t m .

OECD releases 2013 Mutual Agreement Procedure statistics

Frank NgExecutive Director — Tax Co nt ro vers y and

Ris k Managem ent Servic es T: + 1 202 327 7 8 8 7 E: f rank .ng@ ey .c o m

66 Global Tax Policy and Controversy Briefing

Overall 2013 inventory Th e ending invent o ry o f MAP c as es h as s t eadil y ris en in t h e l as t f ew y ears as a res u l t o f t h e rel at ivel y l arge nu m b er o f new l y init iat ed c as es , c o u p l ed w it h redu c ed c l o s u re rat es . At t h e end o f 2013, t h ere w ere 4, 566 c as es in ending invent o ry , a 12% inc reas e o ver 2012 and a 9 4.1% inc reas e c o m p ared t o t h e 2006 rep o rt ing p erio d. Germ any (8 58 ), Unit ed St at es (7 32) and Franc e (618 ) h ad t h e l arges t ending invent o ry o f MAP c as es in 2013.

Th e s ep arat io n o f rep o rt ed MAP c as es int o c as es b et w een OECD m em b er c o u nt ries and c as es b et w een OECD and p art ner ec o no m ies c o nt inu es t o s h o w t h at m o re t h an 9 0% o f OECD m em b er c o u nt ries ’ MAP invent o ries are c as es w it h o t h er OECD m em b er c o u nt ries .

MAP cases initiated during 2013Ac c o rding t o t h e OECD dat a, m em b er c o u nt ries w it nes s ed a 14% inc reas e in new MAP c as es init iat ed in 2013, ris ing t o 19 10 c as es f ro m 167 8 in 2012. Th e Unit ed St at es ex p erienc ed t h e l arges t o veral l nu m b er o f new MAP c as es o f al l OECD m em b er c o u nt ries (f ro m 236 in 2012 t o 403 in 2013) w h il e New Zeal and ex p erienc ed t h e l arges t p erc ent age gro w t h o f new c as es , at 367 % (an inc reas e f ro m 3 c as es in 2012 t o 14 c as es in 2013). Tab l e 1 b el o w p res ent s t h e 10 OECD m em b er c o u nt ries w it h t h e l arges t nu m b er o f MAP c as es init iat ed in 2013.

Table 1Countries with the highest number of new MAP cases in 2013

So u rc e: OECD

US Germ any Franc e Sw it z erl and Canada Bel giu m UK Net h erl ands Sw eden Finl and

403

267

216

131 127 124

7 9 7 5 65 56


Th e t o t al nu m b er o f MAP c as es h as inc reas ed s t eadil y s inc e 2008 , o t h er t h an dec l ining s l igh t l y o nl y in 2010. Figu re 1 b el o w p res ent s t h e nu m b er o f new c as es init iat ed f ro m 2006 t o 2013, al o ng w it h y ear- o n- y ear gro w t h rat es .

Figure 1:New MAP cases, 2006-2013

So u rc e: OECD

MAP cases completed in 2013Wh il e 1, 9 10 new MAP c as es w ere init iat ed in 2013, o nl y 19 7 c as es (inc l u ding t h o s e w it h p art ner c o u nt ries ) w ere rep o rt ed t o h ave b een c o m p l et ed in 2013. Th is is a redu c t io n o f ap p ro x im at el y 30% f ro m t h e 27 9 c as es rep o rt ed c o m p l et ed in 2012. Wh il e m any o f t h e 19 7 c l o s ed c as es w il l h ave b een init iat ed b ef o re 2013, t h e c l o s u re rat e rep res ent s j u s t 10.3% o f t h e 2013 c as e init iat io n rat e and o nl y 4.3% o f t h e t o t al s t o c k o f o p en MAP c as es .

The five countries completing the most MAP cases in 2013 were Luxembourg (27), Belgium (25), Netherlands (23), Sweden (23), and Sw it z erl and (23). Th e Unit ed St at es did no t rep o rt h o w m any c as es w ere c l o s ed in 2013.

- 20%

- 15%

- 10%

- 5%

0%

5%

10%

15%

20%

25%

0

500

1, 000

1, 500

2, 000

2, 500

2006 2007 2008 2009 2010 2011 2012 2013

% G

row

th

Num

ber

of c

ases

Year

So m e MAP c as es w ere rep o rt ed t o b e c l o s ed o r w it h draw n w it h double taxation during 2013. The five countries with the highest rat io s o f c as es c l o s ed o r w it h draw n w it h do u b l e t ax at io n t o c as es c l o s ed are il l u s t rat ed in Tab l e 2 b el o w .

Table 2:Highest ratios of cases closed to cases closed or withdrawn with double taxation

C oun tryNumber of

cases cl osed

Number of cases cl osed or wi thd rawn wi th d oubl e tax ati on 2

Percentage rate

Sp ain 1 3 300%

Germ any 4 4 100%

Canada 9 3 33%

Net h erl ands 23 6 26%

Denm ark 4 1 25%

So u rc e: OECD

Average cycle time for cases completed, closed or withdrawn3 Th e average t im e f o r t h e c o m p l et io n o f MAP c as es w it h o t h er OECD m em b er c o u nt ries in 2013 w as 23.57 m o nt h s , a redu c t io n o f t h e 2012 c y c l e t im e o f 25.46 m o nt h s .4 Very f ew c o u nt ries rep o rt ed average c y c l e t im e in 2013, b u t int eres t ingl y , New Zealand, Portugal, Luxembourg and Netherlands all reported average c y c l e t im es average c y c l e t im e f o r c o m p l et ed, c l o s ed and w it h draw n c as es o f l es s t h an t h ree m o nt h s .

2 Th e Unit ed St at es did no t p ro vide t h is dat a.

3 Ib id.

4 No t al l c o u nt ries rep o rt ed average c y c l e t im e.

5 h t t p : / / w w w .o ec d.o rg/ s it e/ c t p f t a/ m ap - s t rat egic - p l an.p df .

C on cl usi onTh e rel eas e o f t h is dat a b y t h e OECD is p art o f it s ef f o rt t o im p ro ve dis p u t e res o l u t io n p ro c es s es , in l ine w it h t h e Mu l t il at eral St rat egic Pl an o n Mu t u al Agreem ent Pro c edu res 5 l au nc h ed b y t h e Fo ru m o n Tax Adm inis t rat io n, as well as Action 14 of the G201 OECD’s BEPS (Base Erosion and Profit Shifting) Action Plan. Both initiatives set out t o ac h ieve m o re ef f ec t ive dis p u t e res o l u t io n res u l t s and t h e avail ab il it y o f t h is dat a enab l es int eres t ed gro u p s t o ac c es s t h e ef f ec t ivenes s o f t h e MAP p ro c es s es in t h e OECD m em b er c o u nt ries and p art ner ec o no m ies .


webcast

Webcast replay: Addressing China’s wave of new anti-avoidance measures

Replay the webcast at www. ey . com/

Noti ce7 webcast

Rec ent w eek s and m o nt h s h ave s een a b ro ad range o f k ey new ant i- avo idanc e regu l at io ns and c irc u l ars f ro m Ch ina’ s St at e Adm inis t rat io n o f Tax at io n. Wit h revis ed general ant i- avo idanc e ru l e (GAAR) gu idanc e p rec eding t h e anno u nc em ent o f l o ng- aw ait ed No t ic e 7 o n t h e indirec t t rans f er o f as s et s (rep l ac ing Circ u l ar 69 8 ), Friday , 27 Feb ru ary 2015 s aw a gro u p o f EY t ax p ro f es s io nal s review t h e k ey devel o p m ent s and s u gges t ac t io ns f o r c o m p anies t o c o ns ider.

Topics discussed included:

• China’s Base Erosion and Profit Shifting (BEPS) position

• Administrative guidance on China’s GAAR

• Release of the long-awaited Notice 7 on Indirect Transfer Regulations which replaces Circular 698

• A discussion draft on revised Tax Collection and Administration Law, which may pave the way for an advance ruling system

• Tax controversy trends in China — including new anti-avoidance investigations on service fee and royalty payments, and an internal notification on the examination of dividends paid to nonresidents


A common sporting adage holds that it can be beneficial to not lead from the very start. Instead, a dark horse, on an outside lane and

out of view for much of the course, can sometimes steam through at the last minute, upsetting the whole field. While many spectators have been fixated on the rapid succession of BEPS discussion drafts, public comments and consultations, 2015 sees the European Commission, under the leadership of a new President, Jean-Claude Juncker, and a new Commissioner for Taxation and Economic Affairs, Pierre Moscovici, launching measure after measure designed to tackle what they perceive as tax avoidance, unfair tax competition and base erosion. Is this the real thing, or is it fantasy?1

1 With apologies to the rock band, Queen.

European Union update: A dark horse on the final bend?


Ernst & Young LLP T: +1 202 327 6053

E: [email protected]


Some commentators have questioned whether, with all the BEPS work at the OECD, and the recent history of launching ambitious tax initiatives only to see them wither on the vine, the Commission has become largely irrelevant in this space. But in fact, the opposite may well be becoming true — the EU has become the motor for much of the work that is being done in the BEPS space. The Commission, in many ways, is picking up the baton on behalf of EU Member States and using its own momentum to forge many decisions on which the OECD has struggled to find consensus among its members.

So how best to structure and explain recent events, of which there have been bombardments? Alphabetically? Split them between transparency, anti-avoidance and harmonization initiatives? Between developments that are legislative in nature versus those that are non-legislative? None of these models are particularly attractive. The tried and tested chronological timeline may be a more fitting approach, although with developments typically spanning many months, we may need to jump around a bit.

December 2014: seeds of the next phase of action are sown1 December 2014 saw the Finance Ministers of Germany, France and Italy send a joint letter to Pierre Moscovici. According to media reports, the letter called upon the Commission to rapidly develop a new EU Directive on anti-base erosion and profit-shifting issues, which they suggested should be presented for consideration before the end of 2014 (a virtually impossible task), with a view to EU Member States adopting the measures therein by the end of 2015. The ministers noted that the G20 and the Organisation for Economic Co-operation and Development (OECD) are already one year through a two-year-long comprehensive Base Erosion and Profit Shifting (BEPS) initiative, but also said that it is important that the EU should also adopt a common set of binding rules that go beyond greater transparency and company registries, to a “general principle of effective taxation” to stem the EU’s lack of “tax harmonization.”

According to the letter, these rules should include mandatory and automatic exchange of information

on cross-border tax rulings (including Advance Pricing Agreements in the field of transfer pricing), a register identifying beneficiaries of trusts, shell companies and other non-transparent entities, and measures against tax havens.

Given that the EU is itself one of the 20 members of the G20, this issue was already on the Commission’s agenda and these requests in fact provided a suitable prompt for the Commission to publish its own development plans. These plans were delivered on 16 December, embedded in the Commission’s 2015 Work Programme.

Tax never used to figure that highly in the Work Programme and it’s interesting that two out of the 23 key initiatives for the Commission in 2015 are tax issues. The first is the promised proposal for the disclosure of tax rulings between tax administrations, proposals for which were issued on 18 March 2015 (see below), while the second is the action plan on efforts to combat tax evasion and tax fraud. Reading the fine print, it’s about building up a system that taxes profits in the country where they are generated. This will bring the discussion to the core of the BEPS Project.


Th e Co m m is s io n h as b een q u it e ex p l ic it in s ay ing t h at it aim s t o s t ab il iz e c o rp o rat e t ax b as es in t h e EU, inc l u ding rel au nc h ing w o rk t o es t ab l is h a Co m m o n Co ns o l idat ed Co rp o rat e Tax Bas e (CCCTB). Th is p o int s t o a p u s h f o r t h e int ro du c t io n o f t h e Co m m o n Co ns o l idat ed Co rp o rat e Tax Bas e (CCCTB), o r at l eas t a CCTB (i.e., w it h o u t t h e c o ns o l idat io n). It ’ s s u p p o s ed t o b e a no n- l egis l at ive init iat ive, s o w e m igh t ex p ec t a c o m m u nic at io n t h at w il l s et o u t ideas , w it h an argu m ent t h at s o m e k ind o f l egis l at ive u nderp inning in t h e f o rm o f a CCTB is es s ent ial .

Fast-forward to February 2015Fas t - f o rw ard b y t en w eek s and t h e Co l l ege o f Co m m is s io ners (t h e gro u p ing o f 28 Co m m is s io ners ) c o m m enc ed ac t ivit y o n w h at t h e Co m m is s io n is des c rib ing as w o rk f o r a “ f airer and m o re t rans p arent t ax at io n ap p ro ac h w it h in t h e Eu ro p ean Union” with a first orientation debate w h ere p o s s ib l e ac t io n p o int s w ere dis c u s s ed. Ac c o rding t o a p o s t - m eet ing p res s rel eas e, t h e Co m m is s io ners agreed t h at t h e m ain f o c u s s h o u l d b e t o ens u re t h at c o m p anies p ay t h eir f air s h are o f t ax es in t h e c o u nt ry w h ere ec o no m ic activity generating the profit is based, by enc o u raging great er t ax t rans p arenc y .

In t h is res p ec t , t h e Co m m is s io n c o m m it t ed t o p res ent a Tax Trans p arenc y Pac k age in Marc h 2015, w h ic h w o u l d inc l u de a l egis l at ive p ro p o s al f o r t h e au t o m at ic ex c h ange o f inf o rm at io n o n t ax ru l ings , w h ic h t h e Co m m is s io n f eel s s h o u l d enab l e Mem b er St at es t o s h are inf o rm at io n ab o u t ru l ings w it h res p ec t t o t h eir c o rp o rat e t ax regim es , ens u ring t h at Mem b er St at es s h o u l d b e ab l e t o det erm ine w h ere t h e real ec o no m ic ac t ivit y o f a m u l t inat io nal is t ak ing p l ac e and t o ap p l y t ax ru l es f airl y o n t h at b as is .

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, illustrated just how serious the Commission is on opening up transparency in this area, saying that “abusive tax practices and harmful tax regimes breed in the shadows; transparency and co-operation are their natural foes. It is time for a new era of openness between tax administrations, a new age of solidarity between governments to ensure fair taxation for all. The Commission is fully committed to securing the highest level of tax transparency in Europe.”

Several l egis l at ive and no n- l egis l at ive m eas u res t o inc reas e t ax t rans p arenc y w ere dis c u s s ed at t h e m eet ing and w il l b e inc l u ded in t h e p ro p o s al t o b e p res ent ed in Marc h . Ac c o rding t o s o u rc es near t o t h e Co m m is s io ners , s erio u s c o ns iderat io n is b eing given t o m ak ing t h e ru l ings inf o p u b l ic (as o p p o s ed t o b et w een t ax adm inis t rat io ns ) and al s o t o p ro viding b e s o m e degree o f ret ro ac t ivit y .

Commission extends information enquiry on tax rulings practice to all Member StatesCl o s el y l ink ed t o t h e t rans p arenc y p ac k age are t h e m y riad s t at e aid inves t igat io ns c u rrent l y u nderw ay w it h in t h e Co m m is s io n. On 17 Dec em b er 2014, t h e Eu ro p ean Co m m is s io n (EC) anno u nc ed t h at it h as ex p anded it s inq u iries int o t h e t ax ru l ing p rac t ic es u nder EU s t at e aid ru l es , as k ing al l EU Mem b er St at es t o p ro vide f u l l inf o rm at io n o n ru l ings m ade t o al l c o m p anies du ring t h e p erio d 2010 t o 2013. As b ac k gro u nd c o nt ex t t o t h is devel o p m ent , s inc e Ju ne 2013 t h e Co m m is s io n h as

b een inves t igat ing, u nder s t at e aid ru l es , t h e t ax ru l ing p rac t ic es o f s everal Mem b er St at es . Of c o u rs e, m any c o u nt ries p ro vide ru l ings t o t ax p ay ers , inc l u ding t o t ax p ay ers int ending t o m ak e significant investments in a country, in o rder t o p ro vide c ert aint y in advanc e o n h o w t rans ac t io ns w il l b e t ax ed. Th e q u es t io n t h e Co m m is s io n p o s ed in earl ier req u es t s (t h e inves t igat io ns o f w h ic h rem ain o ngo ing) is w h et h er specific rulings provided by the countries c o nc erned are p ref erent ial ru l ings , giving dis c ret io nary inc ent ives , o r w h et h er t h ey s im p l y s et o u t f o r t h e t ax p ay er h o w t h e general l y ap p l ic ab l e l aw ap p l ies in t h eir c irc u m s t anc es .

Th e inf o rm at io n req u es t s m ade b y t h e Co m m is s io n o f s everal Mem b er St at es in t h e l as t 18 m o nt h s o r s o are driven b y q u es t io ns aro u nd w h et h er a Mem b er St at e’ s t ax - redu c ing m eas u res c o ns t it u t e s t at e aid. Th e c u rrent EU s t at e aid l egal f ram ew o rk al l o w s f o r t h e Co m m is s io n t o dem and f ro m t h e Mem b er St at e a rep ay m ent o f an il l egit im at el y grant ed t ax benefit respectively from the recipient of t h e il l egit im at el y grant ed t ax advant age, i.e., t h e ru l ing. Su c h a rep ay m ent c o u l d p o t ent ial l y b e dem anded w it h ret ro ac t ive effect from when the benefit was first grant ed. Addit io nal l y , c o nt ingent o n t h e individu al c as e, t h e EU St at e Aid l egal f ram ew o rk al l o w s f o r t h e Co m m is s io n t o impose fines and penalties on the Member St at e. As p art o f t h is p rio r s c ru t iny , t h e Co m m is s io n req u es t ed an o verview o f t ax ru l ings p ro vided b y s ix Mem b er States (Cyprus, Ireland, Luxembourg (t w o req u es t s ), Mal t a, t h e Net h erl ands and t h e UK). Th e Co m m is s io n h as al s o req u es t ed inf o rm at io n f ro m Bel giu m o n certain specific tax rulings. Furthermore, t h e Co m m is s io n h as al s o req u es t ed inf o rm at io n regarding int el l ec t u al p ro p ert y t ax at io n regim es , s o - c al l ed p at ent b o x es , f ro m t h e 10 Mem b er St at es w it h s u c h a regim e (Bel giu m , Cy p ru s , France, Hungary, Luxembourg, Malta, the Net h erl ands , Po rt u gal , Sp ain, and Unit ed Kingdo m ). In s everal c as es , t h is s c ru t iny l ed t o f o rm al inves t igat io ns .


The expanded inquiryUnder t h e ex p anded inq u iry , t h e Co m m is s io n h as as k ed al l EU Mem b er St at es t o p ro vide inf o rm at io n regarding t h eir t ax ru l ing p rac t ic es , in p art ic u l ar to confirm whether they provide tax ru l ings , and, if t h ey do , t o s u b m it a l is t o f al l c o m p anies t h at h ave rec eived a t ax ru l ing du ring t h e p erio d 2010 t o 2013. Th e p res s rel eas e anno u nc ing t h es e devel o p m ent s , h o w ever, do es no t no t e whether the specific technical detail of eac h individu al ru l ing m u s t b e s u p p l ied b y t h e c o u nt ry c o nc erned as w el l as t h e nam e o f t h e c o m p any rec eiving s u c h ru l ing.

A further development — scrutinizing LuxembourgFas t - f o rw ard (again! ) t o Feb ru ary 2015, w h ere, o n t h e t h ird o f t h at m o nt h t h e Co m m is s io n anno u nc ed t h at it h ad o p ened an indep t h s t at e aid inves t igat io n into Belgium’s so-called excess profit ru l ing s y s t em . Ac c o rding t o t h e Co m m is s io n, t h e s y s t em al l o w s gro u p c o m p anies t o s u b s t ant ial l y redu c e t h eir c o rp o rat io n t ax l iab il it y in Bel giu m o n the basis of “excess profit” tax rulings. Under t h is s y s t em , m u l t inat io nal ent it ies in Bel giu m m ay redu c e t h eir c o rp o rat e tax liability by those “excess profits” that t h e Bel gian go vernm ent b el ieves res u l t f ro m t h e advant ages o f b eing p art o f a m u l t inat io nal gro u p .

Ac c o rding t o t h e Bel gian t ax p ro vis io n u nder inves t igat io n (Art ic l e 18 5§ 2, b ) Code des Impôts sur les Revenus/ Wetboek Inkomstenbelastingen), a c o m p any ’ s t ax m ay b e redu c ed b y “ ex c es s profits,” which are profits registered in t h e ac c o u nt s o f t h e Bel gian ent it y t h at al l egedl y res u l t f ro m t h e advant age o f b eing p art o f a m u l t inat io nal gro u p . Th es e p erc eived advant ages inc l u de int ragro u p s y nergies and ec o no m ies o f s c al e. In o rder f o r t h e dedu c t io ns t o ap p l y , a c o m p any m u s t s ec u re a t ax ru l ing f ro m t h e Bel gian t ax adm inis t rat io n.

European Commission concernsIn anno u nc ing t h eir inves t igat io n, t h e Co m m is s io n no t ed t h at t h ey b el ieve the scheme appears to only benefit m u l t inat io nal gro u p s , w h il e Bel gian c o m p anies ac t ive o nl y in Bel giu m may not claim similar benefits. In that regard, t h e Co m m is s io n h as do u b t s as t o w h et h er t h e t ax p ro vis io n c o m p l ies w it h EU s t at e aid ru l es , w h ic h p ro h ib it t h e grant ing t o c ert ain c o m p anies o f s el ec t ive advant ages t h at dis t o rt c o m p et it io n in t h e Singl e Mark et .

Sp eak ing o n t h is is s u e, Co m p et it io n Co m m is s io ner Margret h e Ves t ager said: “The Belgian ‘excess profit’ tax s y s t em ap p ears t o grant s u b s t ant ial t ax redu c t io ns o nl y t o c ert ain m u l t inat io nal c o m p anies t h at w o u l d no t b e avail ab l e t o s t and- al o ne c o m p anies . If o u r concerns are confirmed, this generalized s c h em e w o u l d b e a s erio u s dis t o rt io n o f competition unduly benefiting a selected nu m b er o f m u l t inat io nal s . As p art o f o u r ef f o rt s t o ens u re t h at al l c o m p anies p ay t h eir f air s h are o f t ax , w e h ave t o inves t igat e t h is f u rt h er.”

Th e Co m m is s io n no t es it s c o nc ern t h at the “excess profit” alleged under the t ax ru l ings , (i.e., t h e dedu c t io ns t h at a company may claim for), may significantly overestimate the actual benefits of being in a m u l t inat io nal gro u p . Ac c o rding t o t h e Co m m is s io n’ s p res s rel eas e anno u nc ing t h e inves t igat io n, “ dedu c t io ns grant ed through the excess profit ruling system u s u al l y am o u nt t o m o re t h an 50% o f t h e profits covered by the tax ruling and can s o m et im es reac h 9 0%.” 2

Mo reo ver, t h e Co m m is s io n no t es t h at their assessment of the excess profits regim e t h u s f ar c o nc l u des t h at s u c h a system cannot be justified by the objective o f p revent ing do u b l e t ax at io n as t h e dedu c t io ns in Bel giu m do no t c o rres p o nd t o a c l aim f ro m ano t h er c o u nt ry t o t ax t h e same profits.

2 h t t p : / / eu ro p a.eu / rap id/ p res s - rel eas e_I P- 15-

408 0_e n.h t m

Having ex am ined p as t adm inis t rat ive p rac t ic e, t h e Co m m is s io n no t es t h at t h es e t ax ru l ings are “ o f t en grant ed t o c o m p anies t h at h ave rel o c at ed a s u b s t ant ial p art o f t h eir ac t ivit ies t o Belgium or that have made significant inves t m ent s in Bel giu m .”

Ac c o rding t o t h e Bel gian au t h o rit ies , t h is t ax p ro vis io n o nl y im p l em ent s t h e general OECD “ arm ’ s l engt h ” p rinc ip l e. Ho w ever, at t h is s t age t h e Co m m is s io n h as do u b t s t h at t h is int erp ret at io n o f t h e OECD p rinc ip l e is val id.

So u rc es ins ide t h e Co m m is s io n indic at e that the scrutiny of Luxembourg will draw c o nc l u s io ns in a rap id m anner. Th is is a go o d t h ing, as s u c c es s ive inves t igat io ns o f t h is t y p e are rap idl y rais ing u nc ert aint y l evel s f o r b u s ines s .

What can be said of all this?Let’s start with something less controversial: It is both fiscally and c o m m erc ial l y p ru dent f o r b u s ines s es and t ax au t h o rit ies t o agree ab o u t t ax p o s it io ns in advanc e rat h er t h an h aggl e o ver t h em m any y ears l at er o n au dit o r in t h e c o u rt s . Th es e “ c o o p erat ive c o m p l ianc e” agreem ent s are endo rs ed and enc o u raged b y t h e G20 and t h e OECD b ec au s e t h ey p ro vide c ert aint y to taxpayers and significantly reduce t ax au t h o rit ies ’ w o rk l o ad. And w h ere c ert aint y ex is t s , inves t m ent f o l l o w s .

So t h e EU Co m m is s io n c o nt ends t h at s o m e o f t h e agreem ent s b et w een t ax au t h o rit ies and b u s ines s es are in b reac h o f t h es e St at e Aid ru l es . Y et , in t h e s am e c as es w h ere it h as al l eged s el ec t ive f avo rit is m , t h e Co m m is s io n h as no t y et dem o ns t rat ed t h ere h as b een a dep art u re f ro m t h e “ no rm al ” t ax ru l es f o r t h at j u ris dic t io n o r indeed t h at o t h er b u s ines s es in t h e j u ris dic t io n in q u es t io n would not have been able to benefit from a s im il ar agreem ent .


Th is t h ru s t s t h e f u ndam ent al t ens io n o f t h e EU Co m m is s io n’ s inq u iry int o t h e l im el igh t : t ax c o m p et it io n rem ains a s o vereign righ t o f EU m em b er s t at es , p ro vided t h eir p o l ic ies do n’ t h arm o t h ers in t h e u nio n. Bu t t h e l ac k o f a b righ t light defining what constitutes harm w h il e s im u l t aneo u s l y c as t ing as p ers io n o n agreem ent s o nl y int ro du c es t ax u nc ert aint y int o t h e regio n’ s ec o no m y . As India’ s ex p erienc e w it h dec l ining FDI s inc e 2009 p ro ves , t ax u nc ert aint y is o ne o f t h e m o s t s ens it ive variab l es gu iding inves t m ent dec is io ns .

Th e Co m m is s io n m ay al s o b e o vers t ep p ing. Th e OECD h as is s u ed guidelines — not mandatory rules — al l o w ing f o r c o u nt ries t o int erp ret t h em w it h in t h eir o w n p rac t ic es . Ho w ever, t h e Co m m is s io n is o verl o o k ing c o u nt ries ’ o b l igat io ns b y f ail ing t o int erp ret t h e gu idel ines o n int erc o m p any p ric ing w it h in t h e c o nt ex t o f t h e rel evant j u ris dic t io n; t h e Co m m is s io n is , rat h er, s u gges t ing t h at l o c al c o u nt ry ru l es b e rep l ac ed w it h new l y c o ns t ru c t ed t erm ino l o gy and m et h o do l o gy as a b as is f o r it s inves t igat io ns .

Wh et h er t ax c o m p et it io n in t h e c as es t arget ed b y t h e Co m m is s io n h as o vers t ep p ed int o t h e area o f h arm f u l p rac t ic es is o ne t h ing. Bu t p rac t ic al it y and s ens ib il it y m u s t al s o b e c o ns idered w it h in t h e c o nt ex t o f w h at is o c c u rring. As no t ed, t h e St at e Aid ru l es al l o w f o r t h e Co m m is s io n t o dem and f ro m t h e Mem b er St at e a rep ay m ent f ro m t h e rec ip ient (i.e., t h e t ax p ay er) o f an il l egit im at el y granted tax benefit respectively from the addres s ee o f t h e il l egit im at el y grant ed t ax advant age. Th e ru l es f u rt h er al l o w f o r p enal t ies o n Mem b er St at es w h o h ave deem ed t o h ave t rans gres s ed. At a t im e w h en Eu ro p e’ s rec o very is in j eo p ardy and t h e Eu ro p ean Cent ral Bank is ac t ivel y b u y ing b o nds t o t h e t u ne o f € 60b eu ro s a m o nt h , t ak ing m o ney o u t o f t h e s y s t em is u ndes irab l e, no t l eas t f ro m t h e p u re m o net ary ef f ec t b u t al s o f ro m t h e s erio u s knock it will have to business confidence. It w il l ef f ec t ivel y b e view ed as b u s ines s being fined for something that countries t o l d t h em w as p erf ec t l y f air and l egal in the first place.

Th at is a very dangero u s p rec edent t o s et and, al l t h ings c o ns idered, I h o p e t h e Co m m is s io n w il l c o ns ider t h e f u l l and real im p ac t o f p u rs u ing t h is l ine t o o f ar, and c o ns ider al t ernat ives .

January 2015: A new GAAR for EU Member StatesOn 27 Janu ary 2015, t h e Eu ro p ean Co u nc il 3 f o rm al l y ado p t ed a b inding general ant i- ab u s e ru l e t o b e inc l u ded in t h e Parent - Su b s idiary Direc t ive (PSD). Th is new ru l e aim s at p revent ing Mem b er States from granting the benefits of t h e PSD t o arrangem ent s t h at are no t “ genu ine, ” i.e., t h at h ave b een p u t int o p l ac e t o o b t ain a t ax advant age w it h o u t reflecting economic reality. The clause is f o rm u l at ed as a “ de m inim is ” ru l e, m eaning t h at Mem b er St at es c an ap p l y s t ric t er nat io nal ru l es , s o l o ng as t h ey m eet t h e m inim u m EU req u irem ent s .

Th e PSD aim s t o rem o ve do u b l e t ax at io n in the case of profit distributions made b y a s u b s idiary l o c at ed in o ne Mem b er St at e and rec eived b y it s p arent l o c at ed in ano t h er Mem b er St at e.

In No vem b er 2013, t h e Co m m is s io n p ro p o s ed am ending t h e Direc t ive t o s t o p t h e it f ro m b eing m is u s ed f o r t h e p u rp o s es o f t ax avo idanc e.

Tw o am endm ent s w ere p ro p o s ed:

i. Pro vis io ns des igned t o p revent c o rp o rat e gro u p s f ro m u s ing h y b rid loan arrangements to benefit from do u b l e no n- t ax at io n u nder t h e PSD

ii. Int ro du c t io n o f a general ant i- ab u s e ru l e

In Ju l y 2014, t h e Co u nc il ado p t ed a specific linking rule that seeks to prevent c o rp o rat e gro u p s f ro m u s ing h y b rid l o an arrangements to benefit from double no n- t ax at io n u nder t h e PSD. Th e deadl ine f o r t rans p o s it io n o f t h e l ink ing ru l e is 31 Dec em b er 2015.

3 Th e Eu ro p ean Co u nc il is t h e EU ins t it u t io n t h at

defines the general political direction and priorities o f t h e Eu ro p ean Unio n. It c o ns is t s o f t h e h eads o f s t at e o r go vernm ent o f t h e m em b er s t at es , t o get h er w it h it s Pres ident and t h e Pres ident o f t h e Co m m is s io n.

Sinc e t h en, w o rk h as c o nt inu ed o n t h e general ant i- ab u s e c l au s e, t h e aim o f w h ic h is t o s t o p t h e PSD f ro m b eing m is u s ed f o r t h e p u rp o s es o f t ax avo idanc e, and t o ac h ieve great er c o ns is t enc y in it s ap p l ic at io n in dif f erent Mem b er St at es . In Dec em b er 2014, p o l it ic al agreem ent w as reac h ed o n t h e w o rding o f t h e general ant i- ab u s e ru l e, w h ereb y in Direc t ive 2011/ 9 6/EU, Art ic l e 1(2) is rep l ac ed b y t h e f o l l o w ing p aragrap h s :

“2. Member States shall not grant the benefits of this Directive to an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances.

An arrangement may comprise more than one step or part.

3. For the purposes of paragraph 2, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.

4. This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse.”

Mem b er s t at es w il l no w h ave u nt il 31 Dec em b er 2015 t o im p l em ent t h e general ant i- avo idanc e ru l e int o nat io nal l aw . In ap p l y ing t h e general ant i- ab u s e c l au s e, t h e Co u nc il ant ic ip at es t h at Mem b er St at es w il l endeavo r t o inf o rm eac h o t h er w h en inf o rm at io n m ay b e u s ef u l t o t h e o t h er Mem b er St at e. Mem b er St at es are req u ired t o ap p l y t h e general ant i- avo idanc e ru l e o nl y t o s it u at io ns t h at f al l u nder t h e s c o p e o f t h e PSD. Mem b er St at es m ay ap p l y s t ric t er nat io nal ru l es , h o w ever, as l o ng as t h ey m eet o r s u rp as s t h e m inim u m EU req u irem ent s . Final l y , t h e Co u nc il w il l t ak e int o c o ns iderat io n t h e b inding ant i- ab u s e p ro vis io n in it s f u t u re w o rk o n a p o s s ib l e ant i- ab u s e p ro vis io n t o b e inc l u ded in t h e Interest & Royalty Directive.


January 2015: Efforts to revive the Financial Transaction TaxWit h s o m u c h f o c u s o n t rans p arenc y and ant i- avo idanc e, it m igh t b e t em p t ing t o t h ink t h at ef f o rt s at t ax h arm o niz at io n h ave f al l en b y t h e w ay s ide. Th is is f ar f ro m t h e t ru t h . As ide f ro m ef f o rt s t o revive CCCTB dis c u s s io ns , w h ic h w il l f al l u nder t h e Su m m er 2015 ac t io n p l an o n ef f o rt s t o c o m b at t ax evas io n and t ax f rau d, Eu ro p e’ s Financ ial Trans ac t io n Tax h as al s o s een a reinvigo rat io n o f ef f o rt s in earl y 2015. In l at e Janu ary , t h e Financ e Minis t ers o f Franc e and Au s t ria (Mic h ael Sap in and Hans Jö rg Sc h el l ing, res p ec t ivel y ) s o u gh t t o b reak deadl o c k ed t al k s o n a Eu ro p ean Financ ial Trans ac t io ns Tax (FTT) b y w rit ing t o t h e o t h er nine c o u nt ries 4 p u rs u ing t h e Eu ro p ean Unio n’ s (EU) ” enh anc ed c o o p erat io n” p ro c edu re t o int ro du c e s u c h a t ax . Th e j o int l et t er, dat ed 21 Janu ary 2015, w as s ent aro u nd a w eek in advanc e o f t h e nex t m eet ing o f t h e ECOFIN5 c o u nc il , s c h edu l ed f o r 27 Janu ary 2015. In t h e l et t er, t h e Minis t ers s eek t o “ b reat h e new l if e int o t al k s o n t h e FTT” and s et o u t t h eir “ des ire t o s ee t h e t ax int ro du c ed in 2016.” Th e l et t er s t at es t h at f res h t al k s are needed b o t h in t erm s o f t h e c o nc ep t s u nderp inning t h e FTT and t h e p ro c edu res nec es s ary f o r it t o b e ado p t ed. Th e Minis t ers f u rt h er p ro p o s e t h at al l 11 c o u nt ries s h o u l d agree t h at an FTT s h o u l d b e ap p l ied t o “ t h e w ides t p o s s ib l e t ax b as e, w it h l o w rat es , ” f ro m 2016 o nw ards .

4 Bel giu m , Es t o nia, Germ any , Greec e, It al y ,

Po rt u gal , Sl o vak ia, Sl o venia and Sp ain.5 ECOFIN is a configuration of the Council of the

Eu ro p ean Unio n, and is c o m p o s ed o f t h e ec o no m ic s and finance ministers of the 28 European Union Mem b er St at es , inc l u ding Bu dget Minis t ers , w h en b u dget ary is s u es are dis c u s s ed.

Substance of the FTTTh e l et t er no t es t h at dis c u s s io ns t o dat e h ave f o c u s ed o n w h ic h p ro du c t s s h o u l d b e t ax ed, w it h eac h p art ic ip at ing Mem b er St at es ex p res s ing a des ire t o ex em p t c ert ain as s et s . Ac c o rding t o t h e l et t er, t h is ap p ro ac h h as w at ered do w n t h e t ax b as e o f t h e FTT: “ Each participating Member State has consequently expressed a desire to exempt certain sensitive assets. As a result, the very tax base has been stripped of meaning, particularly in the case of derivatives.”

Ins t ead, t h e l et t er p ro p o s es a f res h direc t io n, b as ed o n t h e as s u m p t io n t h at t h e FTT s h o u l d h ave t h e “ w ides t p o s s ib l e b as e and l o w rat es .” It do es no t , h o w ever, make any specific recommendations o n h o w an agreem ent t o t ak e t h e FTT f o rw ard m ay dif f er f ro m t h e 2013 p ro p o s al s in t erm s o f t ax b as e o r rat es . Th e l et t er do es , h o w ever, no t e t h e need t o m it igat e t h e ris k o f rel o c at io n o f t h e financial sector so as to avoid financial t rans ac t io ns s im p l y b y m o ving aw ay f ro m t h e c o u nt ies t h at h ad im p l em ent ed t h e FTT.

Procedural suggestionsTh e l et t er s u gges t s ap p o int ing o ne o f t h e 11 Financ e Minis t ers t o s t eer f o rw ard t h e p ro p o s al s w it h o ne o f t h e m em b ers o f t h e gro u p o f nat io nal t ec h nic al ex p ert s t o rep o rt o n t h e p ro gres s o f t h e t ec h nic al w o rk . An ap p ro ac h w o u l d al s o b e m ade t o t h e Eu ro p ean Co m m is s io n t o s ee h o w it c o u l d p ro vide addit io nal t ec h nic al s u p p o rt .

Ten countries reiterate their commitment to an FTTAs no t ed, t h e l et t er f ro m t h e Financ e Minis t ers o f Au s t ria and Germ any w as s ent a f ew day s in advanc e o f t h e ECOFIN s es s io n. Al t h o u gh no t f o rm al l y o n t h e agenda at ECOFIN, o n 28 Janu ary 2015 (t h e day af t er t h e ECOFIN s es s io n) t h e Financ e Minis t ers o f Au s t ria, Bel giu m , Es t o nia, Franc e, Germ any , It al y , Po rt u gal , Sl o vak ia, Sl o venia and Sp ain (t h e “ p art ic ip at ing Mem b er St at es ” o r PMS) is s u ed a j o int s t at em ent s et t ing o u t t h eir renew ed c o m m it m ent t o t h e FTT. Ec h o ing t h e earl ier l et t er, t h e new s t at em ent as s ert s t h at t h e FTT s h o u l d b e t ax ed o n t h e w ides t p o s s ib l e b as e and at l o w rat es . Wh il e t h e s t at em ent it s el f is s il ent o n the definition of “widest possible base” and “ l o w rat es , ” an art ic l e p o s t ed o n t h e official website of the Austrian Federal Minis t ry o f Financ e indic at es t h at “ a l o w er rat e o f t ax t h an o riginal l y p l anned is al s o c o nc eivab l e.” In t h is c o nt ex t , it s h o u l d b e no t ed t h at t h e draf t EU FTT direc t ive p u b l is h ed b y t h e Eu ro p ean Co m m is s io n o n 14 Feb ru ary 2013 p ro p o s ed m inim u m t ax rat es o f 0.1% f o r eq u it ies and b o nds , and 0.01% f o r derivat ives .


Th ere are a nu m b er o f o b s ervat io ns t o m ak e regarding t h e FTT s t at em ent ’ s c o nt ent , as w el l as o n t h o s e is s u es it do es no t addres s .

1 B asi s of tax : Th e s t at em ent do es no t c l arif y t h e b as is o n w h ic h t h e t ax w il l ap p l y ; i.e., w h et h er t h e t ax w il l b e b as ed o n al l o r s o m e o f t h e is s u anc e, res idenc e o r

c o u nt erp art y p rinc ip l es . Ho w ever, t h e ref erenc e t o t h e ris k o f relocation of the financial sector may reflect concerns that have b een ex p res s ed, in p art ic u l ar, in rel at io n t o an FTT b as ed o n t h e counterparty principle. This remains to be clarified.

2 H av e the P M S n ow been red uced to 1 0 M ember States? Th e s t at em ent w as s igned b y o nl y 10 c o u nt ries . Greec e (p revio u s l y inc l u ded as a PMS)

did no t s ign t h e s t at em ent . Wh il e t h e new s h as rep o rt ed t h at Greec e did no t s ign t h e s t at em ent b ec au s e o f t h e rec ent l y - h el d el ec t io ns and t h eref o re t h ere w as no rep res ent at ive t o agree t o the statement, it is yet to be confirmed whether the new Greek Go vernm ent w il l ret ain t h e p o s it io n ado p t ed b y t h e o u t go ing Greek Go vernm ent . It is al s o no t ab l e t h at Sl o venia, w h ic h did no t s ign t h e May 2014 Jo int St at em ent (l eading t o s p ec u l at io n t h at it h ad dro p p ed o u t o f t h e enh anc ed c o o p erat io n p ro c es s ), h as s igned t h e s t at em ent indic at ing t h at it rem ains in t h e p ro c es s . A m inim u m o f nine Mem b er St at es are req u ired f o r a l egal l y val id enh anc ed c o o p erat io n p ro c edu re.

3 S cop e: As no t ed, t h e s t at em ent do es no t el ab o rat e o n the definition of “widest possible base.” In particular, it is u nc l ear w h et h er t h is is s im p l y a p o l it ic al s t at em ent

o f int ent o r a c l ear dec is io n t o m o ve b ac k t o w ard t h e Eu ro p ean Co m m is s io n’ s p ro p o s al o f 14 Feb ru ary 2013 w h ic h s o u gh t t o ap p l y EU FTT t o “ al l ins t ru m ent s ” (i.e., eq u it ies , b o nds and derivatives). The article posted on the official website of the Au s t rian Federal Minis t ry o f Financ e ex c l u des go vernm ent bonds from the scope of taxation. This is arguably a significant dep art u re f ro m t h e 2014 dis c u s s io ns w h ere o nl y eq u it ies and “ s o m e derivat ives ” w ere b eing c o ns idered as init ial f o c u s areas . No t ab l y , t h is b ro ad- b as ed ap p ro ac h w as o p p o s ed b y Franc e, w h ic h ap p ears t o h ave rec ent l y s h if t ed it s p o s it io n. This development may itself have contributed significantly to

t h e new im p et u s f o r advanc ing EU FTT dis c u s s io ns . Ho w ever, given t h at t h e PMS are c o ns c io u s ab o u t t h e ris k o f rel o c at io n in the financial sector and have agreed to give full consideration to t h e im p ac t s o n t h e real ec o no m y , t h is l eaves o p en a very w ide range o f o p t io ns in t h e s c o p e and des ign o f t h e t ax .

4 T i metabl e: Th e s t art dat e o f 1 Janu ary 2016 as s t at ed in t h e s t at em ent is ex t rem el y am b it io u s , given (a) t h at t h e s t at em ent is es s ent ial l y a p o l it ic al s t at em ent , and

there is a need to reach agreement among the PMS and flesh out both high-level and detailed technical rules and finalize the form of a Directive; (b) the need for sufficient time to complete t h e EU l egis l at ive p ro c es s , al l o w ing t h e PMS t im e t o t rans p o s e t h e Direc t ive int o nat io nal l aw s (w h ic h w o u l d t y p ic al l y b e at l eas t s ix m o nt h s f ro m t h e dat e t h e Direc t ive is p as s ed int o EU l aw ); and (c) the need to give sufficient lead time to financial market p art ic ip ant s t o b u il d t h e req u is it e s y s t em s t o ens u re c o l l ec t io n and p ay m ent o f EU FTT.

5 E x emp ti on s: Th e s t at em ent do es no t s et o u t t h e p o s it io n o f t h e PMS o n ex em p t io ns f ro m EU FTT, w h ic h has been a key concern for the financial markets. This

c o nc ern w as reit erat ed in t h e j o int l et t er w rit t en b y t h e Eu ro p ean b ank ing s ec t o r (Eu ro p ean As s o c iat io n o f Co o p erat ive Bank s (EACB), t h e Eu ro p ean As s o c iat io n o f Pu b l ic Bank s (EAPB), t h e Eu ro p ean Bank ing Federat io n (EBF) and t h e Eu ro p ean Savings and Ret ail Bank ing Gro u p (ESBG)) t o EU Financ e Minis t ers . Th e article posted on the official website of the Austrian Federal Minis t ry o f Financ e o nl y ref erenc es go vernm ent b o nds as ex c l u ded f ro m t h e s c o p e o f t ax at io n.

6 Sharing of EU FTT revenues amongst the PMS: One o f t h e m o s t im p o rt ant reas o ns f o r b reak do w n in t h e EU FTT t al k s l as t y ear w as w h et h er t h e t ax

collected in smaller countries would be sufficient enough to c o m p ens at e f o r t h e c o s t o f c o l l ec t ing. Th e s t at em ent do es no t m ak e any ref erenc e t o t h is .

Where next for the FTT?As w it h any New Y ear’ s res o l u t io n t h at c o u l d eit h er enc o u rage c h ange in t h e y ear t o c o m e o r c o m p l et el y f al l ap art , at this stage, it is difficult to form a clear view on whether this political New Year’s resolution in the form of the statement w il l m eet it s go al in reac h ing agreem ent u p o n and im p l em ent ing an EU FTT o r p ro ve t h e t h eo ry t h at t h e m aj o rit y o f New Y ear’ s res o l u t io ns f ail . No net h el es s , t h e renew ed s t at em ent indic at es a ref res h ed des ire t o p ro c eed, and t h eref o re financial institutions and others affected should continue to watch developments closely. The PMS have not yet outlined p u b l ic l y any t im et ab l e f o r p ro gres s ing t h eir dis c u s s io ns . It s h o u l d b e f u l l y ex p ec t ed, h o w ever, t h at t h ere w il l b e int ens ive dis c u s s io ns , at b o t h t h e p o l it ic al and t ec h nic al l evel s .


Key messagesIt h as b een a b u s y q u art er f o r t h e Co m m is s io n, and t h e rem ainder o f 2015 l o o k s t o b e a m ak e o r b reak p erio d f o r it s t ax w o rk . A k ey m es s age f o r b u s ines s is t h at t h e Co m m is s io n is inc reas ingl y c h anging direc t io n and w o rk ing o n w h at s eem s t o b e w ant ed b y t h e Member States — namely more measures to combat tax avo idanc e and evas io n, w it h l es s f o c u s (at l eas t f ro m t h e Commission itself) — on tax harmonization to improve the functioning of the internal market. Looking back to 2014, w e al ready s aw ac t io n o n h y b rid m is m at c h es and ex c h ange o f inf o rm at io n, ec h o ing OECD w o rk .

New init iat ives inc l u ding t h e ex c h ange o f ru l ings and a new ac t io n p l an o n ef f o rt s t o c o m b at t ax evas io n and t ax f rau d s im il arl y ec h o w o rk at t h e OECD. Are t h ey al igned and united with OECD efforts? Perhaps. Are these efforts rep res ent at ive o f a new t rend f o r t h e Co m m is s io n t o t ak e u p t h e m ant l e o n b eh al f o f EU Mem b er St at es w h o f eel t h at t h eir t ax b as es are b eing ero ded no t o nl y b y c o m p anies f ro m w it h in t h e Unio n b u t al s o b y no n- EU companies? Probably. Will these efforts create more work and uncertainty for business? Yes, definitely.

This dark horse needs watching, closely.

Eu ro p ean Co m m is s io n p res ent s a p ac k age o f t ax t rans p arenc y m eas u res

18 Marc h 2015 s aw t h e Eu ro p ean Co m m is s io n p res ent a new Tax Trans p arenc y Pac k age.6 A k ey el em ent o f t h e t rans p arenc y Pac k age is a p ro p o s al t o int ro du c e q u art erl y , au t o m at ic ex c h ange o f inf o rm at io n b et w een Mem b er St at es regarding t h eir c ro s s -b o rder t ax ru l ings , inc l u ding Advanc e Pric ing Arrangem ent s (APAs ), w h il e a s ec o nd el em ent al s o c al l s f o r a o ne- o f f ex c h ange o f t ax ru l ings m ade w it h in t h e l as t 10 y ears , w h ere s u c h ru l ings rem ain ac t ive at t h e p o int t h e revis ed Direc t ive is ado p t ed.

Th e p ro p o s al t ak es t h e f o rm o f new req u irem ent s t o b e inc l u ded in t h e ex is t ing l egis l at ive f ram ew o rk f o r inf o rm at io n ex c h ange, via am endm ent s t o t h e Direc t ive o n Adm inis t rat ive Co o p erat io n (t h e Direc t ive). Th e Co m m is s io n no t es t h at t h is w il l enab l e au t o m at ic inf o rm at io n ex c h ange o n t ax ru l ings t o b e rap idl y im p l em ent ed, as t h e p ro c edu res , p ro c es s es and f ram ew o rk t o do s o are al ready in p l ac e.

Al o ngs ide t h e p ro p o s al t o au t o m at ic al l y ex c h ange inf o rm at io n regarding ru l ings , t h e Trans p arenc y Pac k age al s o c o nt ains a c o m m u nic at io n o u t l ining a nu m b er o f o t h er init iat ives des igned t o advanc e t h e t ax t rans p arenc y agenda in t h e EU,

6 See EY Global tax alert for full details: http://www.ey.com/GL/en/Services/

Tax / Int ernat io nal - Tax / Al ert - - Eu ro p ean- Co m m is s io n- p res ent s - a- p ac k age- o f - t ax -t rans p arenc y - m eas u res .

inc l u ding as s es s ing p o s s ib l e new t rans p arenc y req u irem ent s f o r m u l t inat io nal c o m p anies , review ing t h e Co de o f Co ndu c t o n Bu s ines s Tax at io n, q u ant if y ing t h e s c al e o f t ax evas io n and avo idanc e and rep eal ing t h e Savings Tax Direc t ive.

As no t ed b y t h e Co m m is s io n it s el f , t h ere are s t ro ng l ink s h ere t o t h e earl ier new s o f a new GAAR w it h in t h e PSD: “ Mem b er State Y would find out about the artificially high prices that the s u b s idiary is c h arging t o t h e p arent c o m p any , in o rder t o s h if t profits to Member State X. As a result, it may be able to apply the ant i- ab u s e el em ent o f t h e Parent - Su b s idiary Direc t ive, and deny t h e c o m p any t h e u s u al t ax ex em p t io n f o r dividends ” .

Th e t w o l egis l at ive p ro p o s al s o f t h e Trans p arenc y Pac k age (t h e au t o m at ic ex c h ange o f inf o rm at io n regarding ru l ings and t h e rep eal o f t h e Savings Tax Direc t ive) w il l b e s u b m it t ed t o t h e Eu ro p ean Parl iam ent f o r c o ns u l t at io n and t o t h e Co u nc il f o r ado p t io n. Th e Co m m is s io n in it s p res s rel eas e c al l s u p o n Mem b er St at es t o agree o n t h e ru l ings p ro p o s al b y t h e end o f 2015, al l o w ing it t o ent er int o f o rc e o n 1 Janu ary 2016. On t h e b as is t h at t h e Eu ro p ean Co u nc il in Dec em b er 2014 c al l ed f o r t h e p ro p o s al , t h e Co m m is s io n ex p ec t s f u l l p o l it ic al c o m m it m ent o n reac h ing a t im el y agreem ent .

European Commission foreshadows proposal for a Common Consolidated Corporate Tax Base — with consolidation element postponed

On 27 May 2015, Th e Eu ro p ean Co m m is s io n’ s Co l l ege o f Co m m is s io ners h el d an o rient at io n deb at e o n m eas u res des igned t o m ak e Eu ro p ean c o rp o rat e t ax at io n f airer, m o re gro w t h - f riendl y and t rans p arent .

At t h e m eet ing, it w as agreed t h at a “ new EU ap p ro ac h t o c o rp o rat e t ax at io n is needed t o s u c c es s f u l l y addres s t ax ab u s e, ens u re s u s t ainab l e revenu es and f o s t er a b et t er b u s ines s enviro nm ent in t h e int ernal m ark et .”

Focusing on four specific objectives and five key actions, t h e new ap p ro ac h w il l b e del ivered in t h e f o rm o f an ac t io n p l an b y t h e Eu ro p ean Co m m is s io n (t h e Co m m is s io n) o n 17 Ju ne 2015, and s u c h m eas u res w il l c ent er u p o n t h e re- l au nc h o f t h e Co m m o n Co ns o l idat ed Co rp o rat e Tax Bas e (CCCTB) – b u t w it h t h e c o ns o l idat io n el em ent “ p o s t p o ned” – al o ngs ide a nu m b er o f s h o rt - t erm m eas u res des igned t o int egrat e t h e res u l t s o f t h e OECD’ s BEPS p ro j ec t at EU Mem b er St at e l evel .

Th e deb at e o rient at io n p ap er (t h e Pap er) no t es t h at s u c h m eas u res w il l al s o inc l u de a p u b l ic c o ns u l t at io n in rel at io n t o o p t io ns f o r p u b l ic dis c l o s u re o f t ax inf o rm at io n. Th at c o ns u l t at io n w il l c o m m enc e o n 17 Ju ne 2015.

R ead E Y’ s ful l an al y si s at bi t. l y / 1 co3 A x N


T h is p as t y ear, gl o b al l y , w e h ave ex p erienc ed t ax c h anges t h at h ave b ec o m e m o re rap id, c o m p l ex and vo l u m ino u s t h an w e h ave s een

in rec ent m em o ry . To h el p c l ient s and p ro f es s io nal s u nders t and and p u t int o c o nt ex t al l t h e c h anges and w h at t o ex p ec t go ing f o rw ard, p o l ic y l eaders f ro m 32 c o u nt ries h ave c o nt rib u t ed t h eir k no w l edge and ins igh t s t o c reat e EY ’ s 2015 Gl o b al Tax Po l ic y Ou t l o o k . In it , w e h el p t o ex p l ain al l t h e drivers o f policy, the financial situation that may dictate which l evers o f p o l ic y are u s ed, and w h ic h el em ent s o f t h eir t ax regim e c o u nt ries h ave anno u nc ed w il l c h ange o r w e f eel t h ey are l ik el y t o c h ange in 2015. Th is is b ef o re get t ing int o t h e im p ac t o f o il p ric es , c u rrenc y fluctuations and national elections.

Digging into the data: the global tax policy outlook for 2015


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E: ro b .t h o m as @ ey .c o m


Eac h o f t h e s ix annu al rep o rt s w e h ave res earc h ed and p ro du c ed h as b een ey e- o p ening. Seeing t h e s t im u l u s t rends p l ay o u t in 2009 w as f as c inat ing. Seeing VAT rat es f al l , and t h en ris e, in u nis o n ac ro s s t h e Eu ro p ean Unio n and el s ew h ere b et w een 2009 and 2011 dem o ns t rat ed j u s t h o w im p o rt ant t h is t ax t y p e h as and w il l b ec o m e. And, m o s t rec ent l y , s eeing t h e ris e o f t ax c o o rdinat io n t h at f o u nd it s genesis in the global financial crisis bloom f u l l y in 2013 h as b een il l u m inat ing.

Th is y ear h as del ivered o nc e again, b u t h as req u ired m o re dis c rim inat io n. In t h e l at es t ro u nd o f anal y s is it h as b ec o m e h arder t o ident if y t rends du e t o t h e ex is t enc e o f t h e OECD’ s BEPS p ro j ec t . Many c o u nt ries al ready h ave p res s ed f o rw ard and p u t in p l ac e c h anges in anticipation of the BEPS project’s final rec o m m endat io ns . Th e m o s t p reval ent t ec h nic al c h ange f o r t h e y ear ah ead is t h e t ac k l ing o f h y b rid m is m at c h es , w h ere 11 o f t h e 32 rep o rt t h eir go vernm ent s h ave eit h er enac t ed new l egis l at io n o r w il l l ik el y do s o . Th at w o u l d indic at e 2015 w il l s ee addit io nal vo l u m es o f BEPS- rel at ed c h ange. Ex p ec t t o s ee nat io nal ac t ivit y in t h e areas o f CFCs , t rans f er p ric ing and h y b rid ins t ru m ent s , as t h e y ear p l ay s o u t .

So what do we see in the data for 2015?

The year aheadTh e direc t io n o f h eadl ine c o rp o rat e inc o m e t ax (CIT) rat es and t h e o veral l CIT burden comprised the first two data p o int s . Ac ro s s t h es e m et ric s , s even o f 32 c o u nt ries (22 p erc ent ) s u rvey ed al ready h ave anno u nc ed h eadl ine CIT rat e dec reas es f o r 2015. Ch il e is t h e o nl y c o u nt ry o f t h e 32 rep o rt ing a k no w n CIT rat e inc reas e in 2015, w h il e 24 c o u nt ries are f o rec as t ing s t eady h eadl ine CIT rat es . So f ro m t h at dat a s et , o ne m igh t as s u m e t h at t h e c o rp o rat e t ax b u rden is go ing t o be steady, if not falling, in 2015? Not so. Ten o f t h e 32 (31 p erc ent ) al s o rep o rt an inc reas e in t h e o veral l CIT b u rden f o r 2015. So l as t y ear’ s t rend o f f al l ing rat es and b ro adening t ax b as e c o nt inu es t o ac c el erat e. (Th e rat io w as 26 p erc ent o f countries in 2014). Just five of the 32 — Denm ark , Greec e, Jap an, Po rt u gal and UK, al l o f w h ic h h ave k no w n o r ex p ec t ed CIT rate reductions in 2015 — forecast a dec reas ed CIT b u rden f o r 2015. Th e rem aining 17 c o u nt ries f o rec as t t h e s am e o veral l CIT b u rden in 2015.

OutliersTh ere are a c o u p l e o f p rim e ex am p l es . Firs t is Ch il e: in Sep t em b er 2014, a m aj o r t ax o verh au l c am e int o ef f ec t . Th e key driver for this reform was to finance the significant educational reform that is b eing dis c u s s ed b y Ch il e’ s Co ngres s and w h ic h it s el f h as b een t h e s o u rc e o f m u c h c ivil u nres t in t h e l as t f ew y ears . As a res u l t o f t h is ref o rm , EY ’ s t ax p o l ic y l eader f o r Ch il e, Pab l o Greib er, rep o rt s t h at Ch il e w il l s ee a s t aggering inc reas e o f 12 o f t h e 18 dat a p o int s w e are t rac k ing f o r 2015. Th es e b u rden inc reas es w il l c o m e f ro m an inc reas ed h eadl ine CIT rat e and w idened b as e; w idened b as es f o r b o t h Pers o nal Inc o m e Tax (PIT) and Val u e Added Tax (VAT); c h anges t o int eres t dedu c t ib il it y ; h y b rid m is m at c h es ; t ax t reat m ent o f l o s s es ; c ap it al gains t ax es ; c o nt ro l l ed f o reign c o m p anies ; and t h in c ap it al iz at io n. At t h e o t h er end o f t h e s p ec t ru m , s it s Mex ic o , w h ere EY t ax policy leader Jorge Libreros reports that Pres ident Enriq u e Peñ a Niet o ’ s s ignat u re o n Feb ru ary 2014’ s “ Cert aint y Tax Agreem ent ” rep res ent s h is c o m m it m ent t o m ak e no c h anges t o t h e c u rrent t ax s t ru c t u re f ro m 2014 t o 2018 .


Impact of BEPS on national policy formationLooking into the detail, it is easy to see t h at t h e 2014 BEPS ac t io ns h ave h ad a significant impact on national policy decisions, oftentimes ahead of their final f o rm b eing p u b l is h ed. In t h at vein, it is p ro b ab l y s af e t o s ay t h at t h e 2015 BEPS ac t io ns al s o w il l h ave a s im il ar im p ac t .

Thin capitalizationTh in c ap it al iz at io n c h anges is t h e s ec o nd m o s t p o p u l ar area o f BEPS- rel at ed c h ange af t er ac t io ns t o t ac k l e h y b rid m is m at c h es . Of t h e 28 c o u nt ries w it h a t h in c ap regim e, eigh t (29 p erc ent ) f o rec as t a k no w n o r ex p ec t ed inc reas e in t ax b u rden. Th e rem aining 20 c o u nt ries f o rec as t s t ab l e t ax b u rden. No c o u nt ry f o rec as t a redu c ed t ax b u rden in rel at io n t o t h in c ap .

CFCsPo l ic y ac t ivit y in t h e areas o f Co nt ro l l ed Fo reign Co m p anies is ex p anding c o m p ared t o p rio r y ears . Of t h e 29 c o u nt ries s u rvey ed w h ic h h ave a CFC regim e, s ix (21 p erc ent ) rep o rt a ris e in t ax b u rden f o r 2015. Onl y Jap an and It al y rep o rt t h at a redu c ed t ax b u rden m ay o c c u r, w h il e t h e rem aining 21 c o u nt ries rep o rt t h e s am e b u rden f o r 2015. Th e OECD’ s rec o m m endat io ns ab o u t CFC c h anges l at er in 2015 m ay h ave a significant impact on EY’s 2016 outlook, t h o u gh it rem ains t o b e s een h o w w idel y -draw n t h e p ro p o s al s m ay b e.

Interest deductibilityTh e s am e o u t c o m e is q u it e p o s s ib l e f o r c h anges t o t h e dedu c t ib il it y o f int eres t ex p ens es . In t h is y ear’ s o u t l o o k , s even o f t h e 32 c o u nt ries (22 p erc ent ) rep o rt t h at t h e c o rp o rat e t ax b u rden w il l ris e in t h eir c o u nt ry in 2015 as a res u l t o f c h anges t o int eres t dedu c t ib il it y . Th e rem aining 25 rep o rt no k no w n c h anges t o int eres t dedu c t ib il it y . Th at p erc ent age c o u l d b e f ar h igh er in 2016.

Transfer pricingTrans f er p ric ing h as b een a s o u rc e o f c o ns t ant c h ange in eac h and every o u t l o o k w e h ave p ro du c ed. Bu s ines s and go vernm ent al ik e t el l u s annu al l y t h at it s u s t ains it s p l ac e a p rim e f o c u s area. Th is is reflected by the core place transfer p ric ing t ak es in t h e BEPS ac t io n p l an, and no do u b t w e w il l s ee s u b s t ant ial c h anges ah ead at t h e nat io nal l evel . As it is , nine o f t h e 32 c o u nt ries (28 p erc ent ) f o rec as t a ris ing t ax b u rden in 2015 in rel at io n t o k no w n o r p o t ent ial c h anges t o t rans f er

p ric ing. Tw ent y - t w o c o u nt ries f o rec as t t h e s am e t ax b u rden in t h is area, w h il e o nl y Sp ain rep o rt s a k no w n c h ange t h at w il l res u l t in a f al l ing b u rden. Th e c h anges c o u nt ries are ado p t ing range f ar and w ide: in Ch ina, nat io nw ide inves t igat io ns ab o u t s u b s t ant ial o u t b o u nd p ay m ent s o f s ervic e f ees (w h ic h inc l u de m anagem ent f ees ) and ro y al t y p ay m ent s t o o vers eas rel at ed p art ies h ave b een l au nc h ed b y t h e SAT. In t h e Sl o vak Rep u b l ic , t h e t ax b as e is b eing b ro adened b y m ak ing t rans f er p ric ing ru l es al s o ap p l y t o t rans ac t io ns b et w een do m es t ic rel at ed p art ies . In So u t h Af ric a, t rans f er p ric ing s ec o ndary adj u s t m ent s are t o b e t reat ed as deem ed dividends .

LossesTh e t ax t reat m ent o f l o s s es w as ano t h er o f t h e m o s t ac t ive areas o f p o l ic y c h ange as the financial crisis played out. At first, c o u nt ries t ried t o s t im u l at e b u s ines s b y p ro viding m o re genero u s t ax t reat m ent o f l o s s es . Bu t as t h e c o s t o f s ervic ing t h is p o l ic y ro s e, m o re c o u nt ries h ave b een m ak ing t h eir l o s s ru l es l es s genero u s s inc e 2012. In 2015, a f u l l s ix y ears af t er t h e h eigh t o f t h e c ris is , t h e redu c ed inc idenc e o f c h anges in t ax l egis l at io n in rel at io n t o t h e t reat m ent o f l o s s es c o nt inu es t o dis s ip at e, general l y s p eak ing. Ju s t f o u r o f t h e 32 c o u nt ries (Ch il e, Hu ngary , Jap an and t h e UK) rep o rt t h at t h e t ax b u rden w il l ris e in t h eir c o u nt ry in 2015 as a res u l t o f c h anges t o t h e t ax t reat m ent o f l o s s es . Jap an’ s l es s genero u s t reat m ent o f l o s s es is o ne o f t h e p o l ic y m eas u res t h at p art ial l y w il l p ay f o r 2015’ s CIT rat e redu c t io n f ro m 35.64 p erc ent t o 33.10 p erc ent (To k y o b as e). Th ere, t h e c u rrent 8 0 p erc ent u t il iz at io n limitation of an annual NOL deduction w il l b e l o w ered t o 65 p erc ent f o r t ax ab l e y ears b eginning o n o r af t er 1 Ap ril 2015 and o n o r b ef o re 31 Marc h 2017 , and f u rt h er l o w ered t o 50 p erc ent f o r t ax ab l e y ears b eginning o n o r af t er Ap ril 2017 .) Jap an’ s aim is t o f u rt h er l o w er t h e rat e in t h e 2016 ref o rm s , t arget ing a rat e o f l es s t h an 30 p erc ent w it h in a f ew y ears .

Incentivizing research and development (R&D)Rap id advanc em ent s in t ec h no l o gy , t el ec o m m u nic at io ns and s c ienc e h ave b o u gh t t ax and o t h er inc ent ives f o r res earc h and devel o p m ent t o t h e f o ref ro nt in t h e l as t dec ade. Th ey w ere o ne o f t h e k ey w ay s in w h ic h go vernm ent s c h o s e t o t ry and s t im u l at e b u s ines s spending during the global financial crisis. Lately, though, many countries have m ade m o ves t o res t ric t t h e avail ab il it y of broad-based R&D incentives to the

l arges t c o m p anies , ins t ead f o c u s ing t h eir funds on specific sectors, geographies o r b u s ines s s egm ent s s u c h as s m al l - and m ediu m - s iz ed ent erp ris es . Eigh t o f t h e 32 c o u nt ries (25 p erc ent ) s u rvey ed rep o rt that their R&D incentives are either k no w n o r ex p ec t ed t o b ec o m e m o re genero u s o veral l in 2015, h o l ding p ac e w it h dat a rep o rt ed in o u r 2013 and 2014 o u t l o o k s . So m e c o u nt ries are m ak ing their R&D incentives less generous, with Finl and and Po l and b o t h rep o rt ing m o ves in t h is direc t io n. Finl and is ab o l is h ing it s inc ent ive al t o get h er. Au s t ral ia’ s p o t ent ial l y redu c ed inc ent ive, al ready redu c ed in 2014, is t h e res u l t o f a new measure to deny R&D tax incentives for l arge c o m p anies w it h inc o m es o f A$ 20 b il l io n o r m o re.

Value-Added TaxesVal u e- Added Tax (VAT) is s o m et im es t h o u gh t o f as a t ax t h at is o nl y o f int eres t t o c o ns u m ers . Ho w ever, t ax direc t o rs w o rl dw ide k no w t h ey p l ay t h e ro l e o f u np aid t ax c o l l ec t o r f o r t h e go vernm ent , and VAT c an b e des c rib ed as a c o l o r- b l ind t ax , in t h at y o u h ave t o p ay it w h et h er y o u r b o t t o m l ine is b l ac k o r red. Fo l l o w ing t h e h igh p ac e o f c h ange in 2009 - 11, t h e p ac e o f c h ange t o day c o nt inu es t o s l o w . Five o f t h e 32 c o u nt ries s u rvey ed f o rec as t t h eir o veral l VAT b u rden w il l inc reas e in 2015, w h il e t h ree f o rec as t t h at it w il l dec reas e. Tw o c o u nt ries , Germ any and India, f o rec as t a m ix ed p ic t u re, w h il e t h e rem aining 25 f o rec as t t h e s am e o veral l VAT b u rden in 2015. Rat e c h anges , as m ent io ned, are redu c ing in inc idenc e. Th ree o f t h e 32 c o u nt ries (Luxembourg, Malaysia and South Africa) rep o rt a k no w n o r p o t ent ial inc reas e in t h e h eadl ine VAT rat e, w h il e 29 f o rec as t a s t ab l e rat e. No c o u nt ry w it h in t h e 32 s am p l ed f o rec as t a VAT rat e redu c t io n.

Tax enforcementGo vernm ent s h ave t w o l evers t o p u l l w h en taxing their citizens. The first is tax policy: w h at is t ax ed; t o w h at ex t ent ; at w h at t im e; and u nder w h at c irc u m s t anc es . Th e s ec o nd is t ax enf o rc em ent : h o w t h o s e laws are administered? Here, 10 of the 32 c o u nt ries (31 p erc ent ) s u rvey ed rep o rt k no w n o r f o rec as t ed inc reas es in t ax enf o rc em ent in 2015. Th is h as s l o w ed a l it t l e f ro m o u r 2014 Ou t l o o k p u b l ic at io n, w h ere t h e p erc ent age w as 39 p erc ent . It do es s t il l rep res ent an u p w ard t raj ec t o ry . It al s o ec h o es t h e s ent im ent s p u t f o rw ard b y b u s ines s in EY ’ s 2014 Tax Risk and Controversy Survey w h ere 68 p erc ent o f res p o ndent s f el t t h at t ax au dit s h ad b ec o m e m o re f req u ent and aggres s ive in t h e l as t t h ree y ears .


Reviewing the key messages• Th e b ro ad- b as e, l o w - rat e b u s ines s t ax t rend

c o nt inu es t o p l ay o u t , and b u s ines s c an l earn m u c h b y u nders t anding w h ere eac h c o u nt ry s t ands in t erm s o f it s o w n p o l ic y m ix .

• Th e im p ac t o f BEPS o n nat io nal l egis l at io n is o nl y go ing t o gro w , l ik el y t o reac h a c res c endo in 2016. However, countries may not wait for final rec o m m endat io ns t o b e u nveil ed t o m ak e nat io nal c h anges . Many w o u l d rat h er enac t l egis l at io n no w , and t h en adap t it l at er, if needed, t o al ign t o gl o b al l y agreed s t andards .

• Wh il e no t a direc t o u t p u t o f o u r o u t l o o k dat a, c o ns ens u s in t erm s o f BEPS c an b e h ard t o reac h , p art ic u l arl y o n m o re c o m p l ex is s u es s u c h as p erm anent es t ab l is h m ent . Th e p o s s ib il it y o f p o l ic y rep l ic at io n in m o re no vel areas , s u c h as t h e UK’ s new Diverted Profits tax, will be carefully monitored by b u s ines s , go vernm ent and m u l t il at eral b o dies al ik e.

• Oil prices and currency fluctuations have the p o t ent ial t o drive p o l ic y c h ange in 2015, p art ic u l arl y if l o w o il p ric es are eit h er s u s t ained o r f al l f u rt h er. Currency fluctuations may drive the possibility of c u rrenc y c o nt ro l s o r deval u at io ns at t h e nat io nal l evel .

• El ec t io ns in a nu m b er o f j u ris dic t io ns h ave t h e p o t ent ial t o t u rn t ax p o l ic ies o n t h eir h ead. Ex am p l es inc l u de Canada, Denm ark , Finl and, Greec e, Po l and, Sp ain, Sw it z erl and and t h e Unit ed Kingdo m . Inc reas ingl y , and as s h o w n b y Jap an’ s s nap el ec t io n in Dec em b er 2014, t ax at io n f o rm s a c ent ral f o c al p o int o f any el ec t io n c am p aign. Mu c h t h e s am e is true of Greece’s recent election where finances, if no t t ax , w ere t h e c ent ral deb at e.

• High l evel s o f t ax enf o rc em ent are s et t o b e s u s t ained, if no t inc reas ed, given t h e ever- inc reas ing vo l u m e o f inf o rm at io n avail ab l e; t h e inc idenc e o f new t rans p arenc y req u irem ent s inc l u ding c o u nt ry b y c o u nt ry rep o rt ing; t rans f er p ric ing m as t er and local files; not to mention whatever BEPS action 12 b rings . Al l t h is m eans t h at b u s ines s is real l y go ing t o h ave t o b e al ert if t h ey w ant t o m anage t h e req u irem ent s ef f ec t ivel y .

A cti on s comp an i es shoul d con si d er1 It is m o re im p o rt ant t h an ever t o h ave c l ear,

w el l - res o u rc ed p ro c es s es t o m o nit o r and as s es s p o s s ib l e f u t u re t ax p o l ic y s h if t s . Having t h is inf o rm at io n is o ne t h ing. Ac t ing o n it is ano t h er.

2 Be an ac t ive p art ic ip ant in t ax p o l ic y devel o p m ent . In s u c h a rap idl y s h if t ing

ec o no m ic , l egis l at ive and regu l at o ry enviro nm ent , new t ax l aw s m ay s o m et im es im p ede c o m m erc ial dec is io ns in w ay s t h at w ere u nint ended b y p o l ic y m ak ers . Co m p anies f ac ed w it h t h is is s u e c an eit h er adap t t h eir b u s ines s p l ans ac c o rdingl y o r w o rk c o l l ab o rat ivel y w it h t h e go vernm ent t o ex p l ain t h e im p edim ent , m o del t h e p o t ent ial o u t c o m es and devel o p al t ernat ive p o l ic y c h o ic es .

3 Co ns ider t h e p o s s ib il it y o f j o ining f o rc es . Wil l f o rm ing a new indu s t ry o r t rade gro u p b e

an appropriate way to develop a collective voice? Al t ernat ivel y , are t h ere o p p o rt u nit ies t o add y o u r voice to an existing group?

4 Regu l arl y as s es s t h e im p ac t o f c h ange. If c h ange is c l ear and do c u m ent ed, c reat e

an im p ac t as s es s m ent t h at c o nt ains ec o no m ic m o del ing. Po l ic y m ak ers need inf o rm at io n t o devel o p go o d t ax and ec o no m ic p o l ic y , and c o m p arat ive t ax s t u dies and ins igh t f u l anal y s is o f t ax p o l ic y p ro p o s al s ’ ef f ec t s o n c o m p et it ivenes s c an h el p in t h is ef f o rt . Us e t h is inf o rm at io n t o inf o rm t h e deb at e. We’ re al l in t h is t o get h er, and t o get h er w e c an h el p b u il d a b et t er w o rk ing w o rl d.

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T h e indirec t t ax w o rl d is in c o ns t ant m o t io n. Wh at w as t ru e y es t erday o r even t o day m ay p ro ve t o b e w ro ng t o m o rro w . Igno ring rec ent

devel o p m ent s in indirec t t ax es o r no t b eing c o m p l iant with indirect tax obligations has definitely become an ex p ens ive o vers igh t f o r c o m p anies o f al l s iz es , w h et h er t h ey are ac t ive in t h e l o c al m ark et o r o n a gl o b al l evel . Th is art ic l e dis c u s s es t h e l at es t t rends and devel o p m ent s in indirec t t ax aro u nd t h e w o rl d and w h at b u s ines s l eaders s h o u l d w at c h o u t f o r in 2015 and b ey o nd. Th e art ic l e h as b een ex c erp t ed f ro m EY ’ s “Indirect taxes in 2015 — A review of global indirect tax devel o p m ent s and is s u es .” Th is c an b e do w nl o aded at w w w .ey .c o m / indirec t t ax 2015.

Indirect tax developments in 2015 and beyond: Four trends that shape the global indirect tax landscape

Gijsbert BulkGl o b al Direc t o r o f Indirec t Tax

Ernst & Young LLP T: + 31 8 8 40 7 117 5

E: gij s b ert .b u l k @ nl .ey .c o m


Four trends that shape the global indirect tax landscape

1. Indirect taxes continue to grow while direct taxes

stagnate

In the aftermath of the financial crisis, go vernm ent s in m any c o u nt ries s t il l h ave a s t ro ng need f o r c as h . Wh et h er t h e need is to finance targeted stimulation p ro gram s f o r t h e ec o no m y , o r t o general l y m ak e u p f o r t h e gap s l ef t b eh ind b y a s h rink ing ec o no m y , indirec t t ax es have proven to be the first choice for generat ing revenu e f o r a nu m b er o f y ears . And t h ey c o nt inu e t o b e as s een b y t h e l arge nu m b er o f p ro m inent advo c at es w h o al l p ro m o t e t h e s h if t f ro m direc t t o indirec t t ax es , s u c h as t h e Int ernat io nal Mo net ary Fu nd (IMF), t h e Organis at io n f o r Ec o no m ic Co - o p erat io n and Devel o p m ent (OECD) and t h e Eu ro p ean Co m m is s io n. A nu m b er o f int ernat io nal s t u dies h ave indic at ed t h at val u e- added t ax es (VAT) h ave t h e l eas t im p ac t o n gro w t h , w h il e c o rp o rat e inc o m e t ax es h ave a negat ive im p ac t o n gro w t h .1

1 “ Tak ing s t o c k o f ref o rm ac t io n and ident if y ing

p rio rit ies in 2013” c h ap t er as p art o f Economic Policy Reforms 2013: Going for Growth (OECD Pu b l is h ing, 2013).

In p rac t ic e w e s ee t h ree m ain w ay s t h at indirec t t ax es are u s ed t o generat e m o re revenu e:

• VAT/ GST s y s t em s are s p reading. Ac c o rding t o t h e OECD’ s “ Co ns u m p t io n Tax Trends 2014, ” 164 c o u nt ries in t h e w o rl d l evied a VAT as o f 1 Janu ary 2014: 46 in Af ric a, 1 in No rt h Am eric a, 18 in Cent ral Am eric a and t h e Carib b ean, 12 in So u t h Am eric a, 28 in As ia, 51 in Eu ro p e, and 8 in Oc eania. As a res u l t , o nl y a m ino rit y o f c o u nt ries no w ap p l y ret ail s al es t ax es , i.e., s ingl e-s t age t ax es o n go o ds and s ervic es supplied by final consumers.

Fu rt h erm o re, t h e nu m b er o f “ VAT c o u nt ries ” c o nt inu es t o gro w , es p ec ial l y in em erging ec o no m ies , s u c h as Bah am as , Egy p t , India, Mal ay s ia, Pu ert o Ric o and Su rinam e.

• VAT/ GST rat es are ris ing. In c o u nt ries w h ere a VAT/ GST al ready ex is t s , average VAT/ GST rat es h ave inc reas ed in rec ent y ears , and t h o s e inc reas es s eem s et t o c o nt inu e. Th is u p w ard rat e t rend is p art ic u l arl y t ru e f o r Eu ro p e and t h e OECD c o u nt ries , w h ere t h e average s t andard VAT rat e h as no w reac h ed 21.6% (EU Mem b er St at es ) and 19 .2% (OECD Mem b er Co u nt ries ) c o m p ared w it h 19 .5% and 17 .5% average rat es , res p ec t ivel y , b ef o re t h e c ris is in 2008 .


Fo r t h e OECD c o u nt ries , t h e m ain reas o n f o r t h e inc reas ed average is b ec au s e o f t h e c o ns u m p t io n t ax rat e inc reas e in Jap an f ro m 5% t o 8 % in Ap ril 2014. Again, t h is t rend is l ik el y t o c o nt inu e, w it h t h e al ready s c h edu l ed nex t inc reas e in Jap an du e in 2017 . Ot h er t h an Eu ro p e and t h e OECD c o u nt ries , t h e VAT rat e devel o p m ent is m o re s t ab l e. In c o nt ras t t o Eu ro p e, Angola, Peru and Sri Lanka all lowered t h eir s t andard rat es .

• Ex c is e t ax es are inc reas ing. A t ru l y gl o b al t rend t h at l eads t o h igh er indirec t t ax revenu e is t h e inc reas e o f ex c is e t ax es . Ex c is e t ax es o n t o b ac c o h ave inc reas ed o r w il l s o o n inc reas e in m any c o u nt ries . No t o nl y are t h e rat es inc reas ing, b u t go vernm ent s are b eing c reat ive in invent ing new t ax es . Fo r ex am p l e, a rel at ivel y new t rend is t h e int ro du c t io n o f ex c is e t ax es o n h eal t h -rel at ed p ro du c t s .

In addit io n, t h ere are s t il l at t em p t s t o increase the tax burden on financial t rans ac t io ns , al t h o u gh t h ere is no c o m m o n gl o b al ap p ro ac h t o ac h ieving t h is . So m e c o u nt ries h ave inc reas ed t h e s u p ervis io n o f t h e b ank ing indu s t ry and t igh t ened regu l at io ns .

2. Indirect taxes are adapting to new economic realities

One o f t h e p ec u l iarit ies o f indirec t t ax es is t h at t h ey are very s t ro ngl y int ert w ined w it h t h e ec o no m y . Th eir t ax o b j ec t u s u al l y is an ec o no m ic t rans ac t io n, s u c h as t h e s al e o f a go o d o r t h e p ro vis io n o f a s ervic e. If t h e nat u re o f t h es e t rans ac t io ns o r t h e w ay t h at s u c h t rans ac t io ns are h andl ed c h ange, t h is im m ediat el y h as a s t ro ng im p ac t o n indirec t t ax at io n.

• Th e c h al l enge o f e- c o m m erc e. A s t rik ing ex am p l e o f s u c h a c h ange t h at h as dis ru p t ed indirec t t ax es is t h e b o o m o f e- c o m m erc e. E- c o m m erc e m ay be defined as trading in products or s ervic es u s ing c o m p u t er net w o rk s , s u c h as t h e int ernet . Th e w o rl d s t art ed t o b e o nl y “ o ne c l ic k ” aw ay .

Over t h e l as t f ew y ears , e- c o m m erc e h as b een t h e f as t es t - gro w ing s ec t o r in m any c o u nt ries . It is ex p ec t ed t h at t h e int ernet ec o no m y w il l ac c o u nt f o r 5.3% o f GDP in t h e G- 205 c o u nt ries in 2016.

Th e int ernat io nal c o m m u nit y reac t ed q u ic k l y t o t h is new real it y , and al ready in 19 9 8 , t h e OECD Mem b er St at es agreed o n t h e Ot t aw a p rinc ip l es o n t h e t ax at io n o f e- c o m m erc e:• Ru l es f o r t h e c o ns u m p t io n t ax at io n

o f c ro s s - b o rder t rade s h o u l d res u l t in t ax at io n in t h e j u ris dic t io n w h ere c o ns u m p t io n t ak es p l ac e.

• An int ernat io nal c o ns ens u s s h o u l d b e f o u nd o n w h ic h s u p p l ies are h el d t o b e c o ns u m ed in a j u ris dic t io n.

• Fo r t h e p u rp o s e o f c o ns u m p t io n t ax es , t h e s u p p l y o f digit iz ed p ro du c t s s h o u l d no t b e t reat ed as a s u p p l y o f go o ds .

• Wh ere a b u s ines s ac q u ires s ervic es and int angib l e p ro p ert y f ro m s u p p l iers o u t s ide t h e c o u nt ry , c o u nt ries s h o u l d ex am ine t h e u s e o f revers e c h arge, s el f - as s es s m ent o r o t h er eq u ival ent m ec h anis m s .

• Co u nt ries s h o u l d devel o p ap p ro p riat e s y s t em s t o c o l l ec t t ax o n t h e im p o rt at io n o f p h y s ic al go o ds , and s u c h s y s t em s s h o u l d no t im p ede revenue collection and the efficient del ivery o f p ro du c t s t o c o ns u m ers .

• Virt u al c u rrenc y . Ano t h er int eres t ing devel o p m ent in t h e digit al age is t h e u s e o f virt u al c u rrenc ies s u c h as b it c o in. Al t h o u gh it is c l ear t h at t h e u s e o f t h es e c u rrenc ies t o c o nc l u de t rans ac t io ns t riggers m any VAT/ GST q u es t io ns . Fro m a GST p ers p ec t ive, b u s ines s es need t o c h arge GST w h en t h ey s u p p l y b it c o ins , and t h ey m ay b e s u b j ec t t o GST w h en rec eiving b it c o ins in ret u rn f o r go o ds and s ervic es .

It ap p ears t h at t h e p o s it io ns b eing ado p t ed b y t h es e dif f erent c o u nt ries are no t c o ns is t ent , and t h at p at t ern m ay b e ex p ec t ed t o c o nt inu e. So m e c o u nt ries h ave b anned b it c o ins o u t righ t , w h ereas o t h ers are c u rrent l y as s es s ing t h e t ax t reat m ent .

Additional country-specific guidance is ex p ec t ed go ing f o rw ard (f ro m b o t h an indirec t and direc t t ax p ers p ec t ive). Th is l ac k o f gl o b al c o ns is t enc y m ay l ead t o a nu m b er o f c h al l enges f o r b u s ines s es o p erat ing in t h is m ark et .

3. The global trade landscape is changing fast

Wh il e every o ne agrees o n t h e im p o rt anc e o f f ree t rade t o b o o s t t h e gl o b al ec o no m y , t h e real it y s h o w s a dif f erent p ic t u re. On t h e p o s it ive s ide, c o u nt ries are nego t iat ing m eas u res t o f ac il it at e t rade. G- 20 ec o no m ies ap p l ied 7 9 t rade-l ib eral iz ing m eas u res b et w een May and Oc t o b er 2014. Th is am o u nt s t o c l o s e t o US$370 billion — almost three times the t rade val u e o f t h e new t rade- res t ric t ive m eas u res . In addit io n, t h e nu m b er o f f ree t rade agreem ent s (FTAs ) t h at are nego t iat ed and s igned s t eadil y inc reas es . Th e WTO c u rrent l y rep o rt s 604 ac t ive and p ending rec ip ro c al regio nal t rade agreem ent s am o ng it s m em b ers .

Des p it e t h e gro w ing nu m b er o f FTAs , in m any c as es , b u s ines s es are no t ac t u al l y obtaining the potential benefits offered b y FTAs b ec au s e t h ey c anno t , o r do no t , m eet t h e q u al if y ing c o ndit io ns . Wh ere c o u nt ries are no t b o u nd b y FTAs , im p o rt du t ies are s t il l a c o m m o n and o f t en- u s ed m eans t o s t eer t rade and p ro du c t io n devel o p m ent .

Al t h o u gh c u s t o m s du t y rat es are general l y redu c ing, t h es e t ax es s t il l p l ay a very significant role in meeting countries’ b u dget ary needs . In m any c as es , du t y rat es are h igh and du t ies f o rm p art o f t h e c o s t b as e o f af f ec t ed go o ds , b ec au s e du t ies c h arged at o ne s t age in t h e s u p p l y c h ain are no t o f f s et agains t t ax es du e at l at er s t ages (u nl ik e VAT/ GST). On t h e m o re p rac t ic al s ide, m any c o u nt ries are m ak ing c h anges t o t h eir c u s t o m s legislation that reflect a number of t h es e t rends . In t h e EU, f o r ex am p l e, t h e l egis l at io n t h at go verns c u s t o m s ac t ivit ies is c u rrent l y b eing rew rit t en as t h e Unio n Cu s t o m s Co de (UCC). It w il l ent ail p ro f o u nd c h anges t o s o m e c u s t o m s


regim es and c o nt ro l s t h at s h o u l d f ac il it at e t rade, s u c h as :

• Th e int ro du c t io n o f Sel f - As s es s m ent and Cent ral is ed Cl earanc e

• Mandat o ry gu arant ees f o r s p ec ial p ro c edu res and t em p o rary s t o rage

• Th e ab il it y t o m o ve go o ds u nder t em p o rary s t o rage rat h er t h an nat io nal t rans it o r New Co m p u t eris ed Trans it Sy s t em (NCTS)

• Al l c o m m u nic at io ns b et w een c u s t o m s au t h o rit ies and ec o no m ic o p erat o rs m u s t b e el ec t ro nic

4. Tax authorities are focusing on enforcement of indirect taxes

Tax au dit s are c h anging. Tax and c u s t o m s ins p ec t o rs are inc reas ingl y u s ing m o dern t ec h no l o gy t o o l s t o ac c es s real - t im e comparative figures and data when au dit ing b u s ines s es . Th ey are s h aring m o re inf o rm at io n, and m o re t ax adm inis t rat io ns aro u nd t h e w o rl d are im p l em ent ing el ec t ro nic auditing of businesses’ financial records and s y s t em s . In m any c as es , t ax p ay ers ’ inf o rm at io n is u nder s c ru t iny even w it h o u t an o ns it e au dit t ak ing p l ac e.

A rec ent s u rvey c arried o u t am o ng EY Indirec t Tax p ro f es s io nal s b as ed in 8 2 c o u nt ries reveal ed t h at t h e t ax au t h o rit ies in 59 o f t h o s e c o u nt ries u s e el ec t ro nic dat a ex t rac t io n to perform tax audits. The benefits for tax administrations are clear: the more efficient u s e o f t ec h no l o gy l o w ers c o s t s o f c o l l ec t io n and c o m p l ianc e and inc reas es t h e am o u nt o f erro rs det ec t ed. In addit io n, t ax and p o s t -im p o rt at io n au dit s are b ec o m ing m u c h h arder t o deal w it h f o r t h o s e c o m p anies t h at are no t well prepared. On the flipside, knowledgeable and prepared taxpayers may also find it easier t o deal w it h m o re p ro f es s io nal t ax and c u s t o m s adm inis t rat io ns .

Th es e devel o p m ent s in t ec h no l o gy and e- au dit ing are al s o p aving t h e w ay f o r m andat o ry el ec t ro nic invo ic ing and el ec t ro nic filing of tax returns, which are fast becoming t h e gl o b al no rm .

W hat d o these tren d s mean for business?All of the developments trends identified in the report have a direc t im p ac t o n b u s ines s ac t ivit ies ; h o w ever, no t al l o f t h em may have a direct impact on your organization. Confirming t h at t h e l at es t c h anges and devel o p m ent s in a c o u nt ry ’ s l egis l at io n h ave b een c o rrec t l y im p l em ent ed int o y o u r ERP s y s t em is es s ent ial t o ens u ring ac c u rat e l o c al c o m p l ianc e. Th e im p o rt anc e o f ac c u rac y inc reas es as indirec t t ax rat es inc reas e, b ec au s e t h e c o ns eq u enc es o f ap p l y ing t h e w ro ng rat e b ec o m e m o re s evere. Th e im p ac t o f ris ing VAT/ GST rat es is particularly significant for businesses that do not recover VAT/ GST in f u l l (e.g., b ec au s e o f VAT ex em p t ac t ivit y ), s u c h as b ank s and ins u ranc e c o m p anies .

Ou r ex p erienc e s h o w s t h at m any c o m p anies s t il l p ay t o o m u c h indirec t t ax es , o f t en b ec au s e t h ey do no t ident if y and m anage t h es e du t ies and t h eir as s o c iat ed c o s t s ef f ec t ivel y . Co m p anies t h at o p erat e in t h e digit al ec o no m y are direc t l y af f ec t ed b y t h e inc reas ing t rend t o t ax t h es e ac t ivit ies .

Mo re t h an ever, it p ay s o u t t o p ro ac t ivel y m anage indirec t t ax es . Es t ab l is h ing a c l ear indirec t t ax s t rat egy w il l h el p y o u k eep y o u r b u s ines s u p t o dat e w it h t h e rap idl y c h anging t ax enviro nm ent .

Th is art ic l e h as b een ex c erp t ed f ro m EY ’ s “ Indirec t t ax es in 2015 — A review of global indirect tax developments and is s u es .”

Th is c an b e do w nl o aded at www. ey . com/ i n d i recttax 2 0 1 5 .


in the spotlight

Indirect Tax Briefing: planning for the future

In this edition, we examine a variety of developments in the taxation of cross-border trade, which continue to be influenced by globalization and advances in technology.

In a series of articles on Africa, we focus on the East African Community and some of the benefits available for companies that are looking to trade and invest in the area. Taxes continue to evolve to keep pace with the ever-changing world that we live and work in. We reexamine several aspects of how businesses are dealing with the indirect tax challenges of the digital age.

Preparing for an e-auditWe c o ns ider t h e el ec t ro nic - au dit c ap ab il it ies b eing devel o p ed b y t ax adm inis t rat io ns and h o w b u s ines s es c an p rep are f o r an e- au dit , f o c u s ing o n t h e ru l es t h at ap p l y t o f o reign c o m p anies regis t ered f o r VAT in Franc e.

We al s o l o o k at t h e new e- invo ic ing ru l es t h at w il l ap p l y in It al y f o r s u p p l ies t o p u b l ic b o dies and t h e int ro du c t io n o f new invo ic ing ru l es and e- invo ic es in Hu ngary .

Th e rec ent rep o rt is s u ed b y t h e Organis at io n f o r Ec o no m ic Co - o p erat io n and Devel o p m ent (OECD) u nder it s Action Plan on Base Erosion and Profit Sh if t ing (BEPS) o n t h e t ax c h al l enges o f the digital economy identifies the need t o al s o addres s indirec t t ax at io n and t h e ef f ec t ive c o l l ec t io n o f c o ns u m p t io n t ax es w it h res p ec t t o t h e c ro s s - b o rder s u p p l y o f digit al go o ds and s ervic es .


in the spotlight

The impact of EU VAT changes and digital servicesTh is need is b eing addres s ed in t h e EU w it h c h anges in t h e ap p l ic at io n o f VAT t o t el ec o m m u nic at io ns , b ro adc as t ing and e- s ervic es s u p p l ied t o p rivat e c o ns u m ers f ro m 1 Janu ary 2015.

In addit io n, w e l o o k at t h e im p ac t o f t h es e EU VAT changes on financial services p ro viders and l o o k at t h e p rac t ic al im p l ic at io ns in a nu m b er o f k ey areas .

We rep o rt o n s im il ar c h anges f o r s u p p l ies o f digit al s ervic es m ade t o no n- t ax ab l e p ers o ns c o m ing int o f o rc e in Al b ania, as w el l as h o w Al b ania is b ring it s VAT s y s t em c l o s er t o t h e EU m o del .

Ou r c o u nt ry s ec t io n art ic l es inc l u de devel o p m ent s t h at il l u s t rat e t h e c o nt inu ing im p o rt anc e o f indirec t t ax es , p art ic u l arl y VAT, as a s o u rc e o f go vernm ent revenu es . Il l u s t rat io ns o f t h is

trend include Luxembourg, for example, which has recently confirmed the VAT rat e inc reas es t h at w il l c o m e int o ef f ec t o n 1 Janu ary 2015, and Sl o vak ia, w h ic h has confirmed that the planned reversal o f it s inc reas e in t h e s t andard rat e h as b een c anc el ed.

At t h e s am e t im e, new VAT and GST s y s t em s c o nt inu e t o b e int ro du c ed, f o r ex am p l e in t h e Bah am as o n 1 Janu ary and in Mal ay s ia o n 1 Ap ril 2015, w h il e rec ent new s rep o rt s al s o p redic t t h at t h e l o ng aw ait ed GST in India w il l l ik el y ro l l o u t in Ap ril 2016.

New indirect taxes being introducedNew indirec t t ax es are al s o b eing int ro du c ed, s u c h as t h e advert is ing t ax in Hu ngary , and t h e p l as t ic b ag l evy al ready int ro du c ed in Sc o t l and t h at is b eing int ro du c ed in Engl and in 2015.

In 2014 w e h ave s een c o u nt ries m o ving b ac k and f o rt h f ro m s t im u l u s t o au s t erit y and a c o nt inu ed rel ianc e o n indirec t t ax as a s o u rc e o f revenu e. Mo re c o u nt ries c o nt inu e t o add indirec t t ax es t o t h eir t ax t o o l s o veral l and devel o p m ent s in t ec h no l o gy im p ac t o n t h o s e w o rk ing in indirec t t ax .

St ay ing o n t o p o f indirec t t ax c h anges and devel o p m ent s rem ains a c h al l enge f o r al l who work in this field.

Download the Indirect Tax Briefing at www.ey.com/indirecttaxbriefing


Country updates


Australia New Australian anti-avoidance measures for multinationals

Th e Au s t ral ian Go vernm ent h as anno u nc ed a c h ange t o it s General Ant i- avo idanc e Ru l e (Part IVA) t o t ac k l e p erc eived t ax avo idanc e b y MNEs . Th e draf t l aw it h as rel eas ed h as m eas u res c l earl y direc t ed at US t ec h no l o gy c o m p anies b u t w il l req u ire c o ns iderat io n b y m any o t h er f o reign ent erp ris es o p erat ing in t h e Au s t ral ian m ark et . Th e new ru l es w il l af f ec t gl o b al gro u p s w it h annu al revenu e ex c eeding A$ 1b b as ed o n ac c o u nt ing p rinc ip l es .

Th is c h ange c o m es ah ead o f t h e c o nc l u s io n o f t h e OECD b as e erosion profit shifting (BEPS) projects and any recommendations f o r a gl o b al l y c o o rdinat ed res p o ns e t o t h e is s u e. It al s o p rec edes the conclusion of any of the high profile tax audits that the ATO h as p u b l ic iz ed in t h e t ec h no l o gy s ec t o r. Sinc e it h as y et t o b e es t ab l is h ed w h et h er f o reign MNEs o p erat ing in Au s t ral ia are, o r are no t , p ay ing t h e righ t am o u nt o f t ax , t h ere are no revenu e es t im at es o f c o l l ec t io ns f ro m t h is m eas u re.

Im p o rt ant l y , t h e c h ange do es no t c reat e a new t ax s im il ar to the UK style Diverted Profits Tax. Although Part IVA can o verride Au s t ral ia’ s vario u s do u b l e t ax t reat y o b l igat io ns , it ap p ears t h at t h es e new ru l es w il l o p erat e w it h in t h e ex is t ing f ram ew o rk o f Au s t ral ian t ax l aw . Wh et h er t reat y p ro t ec t io n w il l b e avail ab l e t o p ro t ec t agains t an as s es s m ent o f t ax w il l need f u rt h er c o ns iderat io n.

The change raises many questions that hopefully will be clarified in t h e c o ns u l t at io n p erio d (s u b m is s io ns o n t h e draf t l aw w ere du e 9 Ju ne 2015) and b y ATO p u b l is h ed gu idanc e.


Australia Dealing with a BEPS-based tax review

Fiona MooreTax Policy & Controversy T: + 61 2 9 248 59 31 E: [email protected]

Ermelinda KovacsTax Policy & Controversy T: + 61 2 9 248 557 3 E: erm el inda.k o vac s @ au .ey .c o m

As the OECD’s work on base erosion and profit shifting (BEPS) continues, many national tax administrations are also undertaking heightened scrutiny of multinational companies in order to secure their revenue base. The Australian Taxation Office (ATO) is once again at the forefront of activity and lessons learned from the ATO’s compliance focus and approach shine a light on processes and procedures other administrations may adopt as the BEPS project continues to play out. This article is an excerpt of a more detailed analysis of ATO activity in this area, which can be accessed at ey . com/ bep srev i ew.

Many res p o ndent s t o EY ’ s 2014 Tax ris k and c o nt ro vers y s u rvey rep o rt ed t h at t h e OECD’ s BEPS p ro j ec t is h aving a gal vaniz ing ef f ec t o n t ax enf o rc em ent in s o m e c o u nt ries , and c o m p anies rep o rt ed t h at t ax adm inis t rat io n ap p ro ac h es s eem t o b e c h anging ah ead o f any l aw c h anges t h at m ay b e m ade as a res u l t o f BEPS rec o m m endat io ns . Wh il e s o m e c h anges (s u c h as new o r s t rengt h ened general ant i- avo idanc e ru l es (GAAR)) are w rit t en direc t l y int o l aw , o t h ers are f ar more subjective and difficult to identify, l et al o ne m anage;

7 4% o f res p o ndent s , f o r ex am p l e, rep o rt t h at t ax ing

au t h o rit ies are no w c h al l enging ex is t ing s t ru c t u res du e t o c h anges in t h e l aw o r in t h eir enf o rc em ent ap p ro ac h .

Current Australian experiencesMany t ec h no l o gy c o m p anies w it h a p res enc e in Au s t ral ia w il l al ready b e u nder s o m e f o rm o f s c ru t iny b y t h e ATO, p art ic u l arl y t h o s e w h o rep o rt o ngo ing t ax l o s s es in Au s t ral ia. Mo re rec ent l y , h o w ever, t h e Co m m is s io ner’ s BEPS ac t ivit ies h ave ex t ended b ey o nd t ax p ay ers in t h e t ec h no l o gy indu s t ry t o t ax p ay ers in indu s t ries s u c h as t rans p o rt at io n, m edia and ent ert ainm ent , and c o ns u m er p ro du c t s , and t h e ATO h as c o nvened a s p ec ial is t t eam t o s c ru t iniz e BEPS- rel at ed s t ru c t u res and t rans ac t io ns . Bro adl y , the areas of concern identified in these review s inc l u de b u s ines s res t ru c t u res , u s e o f h y b rid ent it ies and ins t ru m ent s f o r t ax arb it rage, p erc eived t reat y ab u s e, p ric ing m is m at c h es , deb t du m p ing int o Au s t ral ia, and c o m p l ianc e w it h t h in c ap it al iz at io n s af e h arb o rs .


In addit io n t o t h is s c ru t iny , t h e ATO’ s p erc eived t ax t reat m ent o f t h e s al es and m ark et ing s u p p o rt b u s ines s m o del em p l o y ed b y f o reign inb o u nd c o m p anies is t w o f o l d, f o c u s ing o n w h et h er:

• Th e f o reign c o m p any h as a p erm anent es t ab l is h m ent (PE) in Au s t ral ia, and that profits should be correctly at t rib u t ed t o t h is Au s t ral ian PE.

• Th e t rans f er p ric ing m et h o do l o gy em p l o y ed b y t h e t ax p ay er is at arm ’ s l engt h . A rec ent l y em erging el em ent o f t h is anal y s is is t h e s o - c al l ed “ Au s t ral ia t ax , ” ref erring t o t h e p rem iu m t h at Au s t ral ian end u s ers p ay o n go o ds and s ervic es , and t h e im p ac t t h at t h is h as o n t h e al l o c at io n o f f u nc t io ns and ris k t o ac t ivit ies p erf o rm ed in Au s t ral ia.

What is different in a BEPS-based review or audit?“ Companies are putting these structures in place and asserting they have tax compliance. That might be their assertion, but we are going to test every single aspect of those structures. W e wi l l wan t to k n ow whether what p urp orts to hap p en , actual l y hap p en s on the ground. … It is one thing to put in place a fancy structure, but it is another to have it tested five years later, because by their nature these schemes are quite, sort of, artificial.”

— Chris JordanCo m m is s io ner o f Tax at io n,

Au s t ral ian Parl iam ent ’ s Pu b l ic Ac c o u nt Meet ing dat ed 26 Ju ne 2013

Th e ab o ve q u o t e f ro m Co m m is s io ner o f Tax at io n Ch ris Jo rdan h igh l igh t s t h e dif f erenc e in em p h as is w h en a t y p ic al ATO c o m p l ianc e ac t ivit y is c o m p ared w it h a BEPS- b as ed review o r au dit . Ty p ic al k ey f eat u res o f a BEPS- b as ed review o r au dit c an b e c h arac t eriz ed as f o l l o w s :

• Inf o rm at io n gat h ering: t h e l evel o f m inu t iae inves t igat ed b y t h e ATO is highly granular, designed to confirm t h at t h e b u s ines s m o del ado p t ed h as b een c arried o u t . Th is inc l u des s c ru t iniz ing det ail s s u c h as :

• Em p l o y m ent arrangem ent s , inc l u ding j o b des c rip t io ns , rem u nerat io n and k ey p erf o rm anc e indic at o rs


• Evidenc e f ro m t h ird p art ies t o s u p p o rt t h e t ax p ay er’ s s t at em ent s regarding t h eir b u s ines s deal ings w it h c u s t o m ers

• ☺Functional interviews: early in the inf o rm at io n- gat h ering p ro c es s , t h e ATO c o ndu c t s f u nc t io nal int erview s w it h k ey s t af f t o c h ec k t h at ac t ivit y as s ert io ns m ade t o t h e ATO in s u p p o rt o f t h e t ax t ec h nic al p o s it io n ac t u al l y o c c u r.

• ☺Coercive powers: the ATO is inc reas ingl y w il l ing t o u s e it s “ c o erc ive p o w ers ” t o req u es t inf o rm at io n o r s eek an int erview w it h p ers o nnel . Th es e p o w ers are ak in t o a s u b p o ena t h at req u ires a t ax p ay er t o p ro du c e c ert ain inf o rm at io n o r b e int erview ed under penalty of prosecution or fine.

• ☺Information sharing between revenue au t h o rit ies : t ax adm inis t rat o rs are t es t ing t h e s t at em ent s m ade b y t ax p ay ers t o dif f erent au t h o rit ies . We u nders t and t h at t h ere are s ix c o u nt ries s h aring inf o rm at io n w it h res p ec t t o BEPS- rel at ed is s u es .

Surviving information fatigueA BEPS review o r au dit c an o f t en b e a l o ng, draw n- o u t and s u s t ained p ro c es s . An o verl o ad o f inf o rm at io n and c o m m u nic at io n c an o f t en f at igu e t h e p art ies invo l ved, w it h inf o rm at io n o f t en m is int erp ret ed o r no t p ro p erl y m aint ained, c au s ing f u rt h er u nnec es s ary del ay s in t h e review o r au dit p ro c es s .

To avoid this, we have identified a nu m b er o f s t rat egies t ax p ay ers em p l o y t o s u rvive inf o rm at io n f at igu e:

• Selecting one specific point of contact t o m anage al l c o m m u nic at io n w it h t h e ATO

• Managing information — when notified t h at t h e t ax p ay er m ay b e s u b j ec t ed t o a BEPS review o r au dit , t h e l eading c o m p anies are t ak ing t h e t im e t o o rganiz e any int ernal o r ex t ernal do c u m ent s t h at t h e ATO m ay req u es t

• Tak ing t h e t im e t o c l earl y u nders t and t h e drivers o f Aggres s ive Tax Pl anning (ATP) b eh avio r

• Tak ing t h e t im e t o f u l l y u nders t and t h e ATO’ s c o m p l ianc e p ro c es s es and, if u nc l ear, t ak ing t h e t im e f o r ex t ernal as s is t anc e, if req u ired

• Being p rep ared t o b e o p en and t rans p arent and ens u ring t h at al l k ey s t ak eh o l ders invo l ved o r w h o m ay b ec o m e invo l ved in t h e BEPS review o r au dit are al s o aw are o f t h e im p o rt anc e o f t rans p arenc y w it h t h e ATO

• Devel o p ing m et h o ds t o p ro ac t ivel y ex p l ain l ive t rans ac t io ns t o t h e ATO t h at af f ec t t h e t ax p ay er’ s c o m p any , b u s ines s and it s deal ings , in o rder t o avo id c o nf u s io n o r m is int erp ret at io n

• Prep aring and ant ic ip at ing t h e need f o r adeq u at e res o u rc es t o b e invo l ved as req u ired in a BEPS review o r au dit

• Tak ing t h e t im e t o c o ns ider and ident if y any is s u es o r areas t h e t ax p ay er m ay w is h t o rais e in advanc e and/ o r vo l u nt aril y dis c l o s e t o t h e ATO

• Agreeing t o a c l ear m anagem ent p l an w it h t h e ATO and c o m m u nic at ing t h is p l an t o any o t h er int ernal o r ex t ernal s t ak eh o l ders w h o m ay b e invo l ved o r m ay b e as k ed t o b e invo l ved in t h e BEPS- b as ed review o r au dit

W hat are the ex p ected outcomes?Wh il e t ax p ay ers u nder BEPS- b as ed review o r au dit s m ay b e endu ring inf o rm at io n f at igu e, it is c ru c ial t h at t h ey ap p ro p riat el y m anage t h e inf o rm at io n gat h ering b y t ax adm inis t rat io ns ac ro s s j u ris dic t io ns . Tax p ay ers m ay h ave a s ens e o f inevit ab il it y as t o w h ere t h es e review s w il l l ead, b u t o u r ex p erienc e indic at es t h at m anaging t h es e review s and any progression to audit can significantly s t ream l ine t h e t ax p ay er’ s w o rk and al s o res u l t in m o re des irab l e o u t c o m es , inc l u ding:

• Few er f u nc t io nal int erview s /w o rk s h o p s b eing c o ndu c t ed, m inim iz ing dis ru p t io n t o t h e t ax p ay er’ s b u s ines s

• Mo re ef f ec t ive m anagem ent o f ATO rel at io ns h ip , al l o w ing t h e t ax p ay er o p p o rt u nit y t o nego t iat e t im e f ram es , ac c es s t o inf o rm at io n and s c ru t iny o f t h ird- p art y c u s t o m ers

• Cl o s u re o f t h e review b ef o re it p ro gres s es t o au dit o r l it igat io n, b y s et t l em ent , m ediat io n, and/ o r go - f o rw ard c o m p l ianc e (s u c h as an advanc e p ric ing agreem ent )

F or further i n formati on , p l ease see EY’s published paper “Dealing with a B E P S - based tax rev i ew” at ey . com/bep srev i ew.


UpdateOn 13 March 2015, the Australian Tax Office (ATO) rel eas ed a c o ns u l t at io n p ap er o n h o w it int ends t o c o m p l y w it h it s req u irem ent t o p u b l ic l y rep o rt c ert ain t ax dat a f o r l arge c o m p anies and c o rp o rat e t ax ent it ies . Th is m eas u re w as enac t ed in 2013 and req u ires t h e ATO t o p u b l ic l y rep o rt c ert ain inc o m e t ax dat a in rel at io n t o c o rp o rat e t ax ent it ies h aving inc o m es o ver AUD$ 100 m il l io n p er annu m , p l u s det ail s o f ent it ies p ay ing m ineral s res o u rc e rent t ax (MRRT) and p et ro l eu m res o u rc e rent t ax (PRRT). Beginning w it h t h e 2013- 14 inc o m e y ear, t h e ATO w il l p u b l is h :

• Inc o m e t ax inf o rm at io n o f c o m p anies and c o rp o rat e t ax ent it ies (inc l u ding s o m e t ru s t s and p art ners h ip s ) w it h t o t al inc o m es o f AUD$ 100 m il l io n o r m o re annu al l y , dis c l o s ing t ax p ay ers ’ ABN (Au s t ral ian Bu s ines s Nu m b er), t o t al inc o m e, t ax ab l e inc o m e and t ax p ay ab l e.

• Pay m ent s o f MRRT/ PRRT, regardl es s o f t h e ent it y ’ s t o t al inc o m e am o u nt .

Th e ATO p ro p o s es t h at o ne s ingl e rep o rt w il l b e rel eas ed in l at e 2015, c o vering ap p ro x im at el y 2, 300 ent it ies .


In China, alongside the introduction of the New Corporate Income Tax (CIT) Law and its Detailed Implementation Rules (effective from 1 January 2008), China’s General Anti-Avoidance Rule (GAAR) has emerged as one of the most widely discussed and contentious elements of the prevailing CIT regime. On 2 December 2014, China’s State Administration of Taxation (SAT) published the Administrative Measures of GAAR (referred to as SAT Order No. 32 hereafter) which aims to provide greater clarity and transparency on the fundamental principles, procedural guidelines and relevant documentation requirements in relation to the application of GAAR.

Background and contextIn reaction to increasing deficits and det erio rat ing t ax revenu es stemming from the global financial c ris is , c o u nt ries aro u nd t h e w o rl d h ave b een as s ert ing great er ef f o rt s t o c u rb w h at t h ey s ee as ab u s ive t ax ac t s t h ro u gh im p l em ent at io n o f General Ant i- Avo idanc e Ru l es (GAAR).

In a nu t s h el l , GAAR is a s et o f b ro ad, p rinc ip l es - b as ed ru l es em b edded in a j u ris dic t io n’ s t ax l aw s o r revenu e c o de t h at is des igned t o c o u nt erac t t ax avo idanc e ac t s , and ac c o rdingl y it p ro vides t ax au t h o rit ies w it h t h e nec es s ary l egal b as is and m ec h anis m to claw back or deny tax benefits on t rans ac t io ns o r arrangem ent s t h at t h ey j u dge t o b e l ac k ing c o m m erc ial s u b s t anc e o r p u rp o s e.

Wh il e Ch ina h as al ready c o m m enc ed im p l em ent at io n o f GAAR m eas u res b as ed o n rel evant p rinc ip l es and provisions cited under the CIT Law and it s Det ail ed Im p l em ent at io n Ru l es p rio r t o t h e is s u anc e o f SAT Order No . 32 (inc l u ding nec es s ary ac t io ns t ak en w it h res p ec t t o o f f s h o re indirec t t rans f er o f Ch ines e c o m p any s h ares via t h e rep o rt ing m ec h anis m s s t ip u l at ed u nder Gu o s h u ih an [ 2009 ] No .69 8 (“ Cir69 8 ” )), Ch ina’ s GAAR h as b een c rit ic iz ed f o r h aving insufficiently clear principles, p ro c edu ral gu idel ines and rel evant adm inis t rat ive req u irem ent s o r m eas u res w h en deal ing w it h s u c h c as es .

China State Administration of Taxation looks to provide clarity on China’s General Anti-Avoidance Rule

Henry ChanLeader, Tax Controversy (Great er Ch ina) T: + 8 6 10 58 15 339 7E: h enry .c h an@ c n.ey .c o m

Andrew ChoyLeader, International Tax Servic es (Great er Ch ina) T: + 8 6 10 58 15 3230E: andrew .c h o y @ c n.ey .c o m


With a view to providing greater transparency and certainty, China’s SAT issued SAT Order No. 32 on 2 December 2014.

International contextIn brief, GAAR is viewed by many countries as a tool that can be employed (or at least available, as a visible deterrent) by a jurisdiction to defend its tax revenue (or taxing rights). The GAAR will be calibrated based on taxpayers’ attitudes in relation to avoidance, and designed and administered accordingly.

Although a GAAR may be the most visible of anti-avoidance measures available, many jurisdictions take extra steps to prescribe more specific anti-avoidance rules (SAAR) under their domestic tax regime. No matter whether GAAR or SAAR is adopted, the fundamental intention and spirit behind the anti-avoidance measures adopted by relevant jurisdictions are inherently consistent, notwithstanding the varied legal basis that applies.

Well-accepted GAARs (containing effective and fair approaches) should share common characteristics as discussed below.

Characteristics of well-accepted GAARWhile GAAR should be designed with a core objective of tackling tax avoidance, its application of which should ideally be “balanced,” i.e., GAAR should be enacted within parameters that aim to stop tax avoidance behavior but should not inhibit or interfere with taxpayers’ ability to organize their affairs in an ordinary manner. In broad terms, authorities should realize the potential adverse impacts on the local economy’s development, as well as the discouraging message that may be conveyed through overuse (or aggressive use) of GAAR.

In order to achieve the desired balance — effectively tackling unwanted behaviors that primarily or solely aim to reduce tax liabilities through holding structures or arrangements without bona fide

commercial purpose, while minimizing any jeopardizing effect to the jurisdiction’s economic development agendas (or sending discouraging messages to foreign investors) — a well-accepted GAAR system should ideally possess the following features that are generally seen as the fundamental “foundations” of GAAR.

• GAARs should be built upon clear and concise policies, principles and laws that reflect the Government’s objectives and parameters in tackling tax avoidance behaviors.

• Taxpayers should have reasonable access to detailed and comprehensive guidance on how GAAR should operate, and what would be referred to as the so-called “unwanted” behaviors not welcomed by the relevant tax authorities.

• Opportunities for taxpayers to obtain advance rulings from the tax authorities to ascertain whether a specific case and relevant fact patterns should or should not trigger GAAR.


• Fine- t u ning o f GAAR s h o u l d b e b as ed u p o n c o ns u l t at io ns b et w een t ax au t h o rit ies and rep res ent at ives from specific industry groups and/or p ro f es s io nal advis o rs .

• Cas es s u b j ec t t o an au t h o rit y ’ s s c ru t iny should be undertaken with sufficient t rans p arenc y t h ro u gh anal y s is and review on specific fact patterns.

• A c o ns u l t at ive p anel s h o u l d b e em p l o y ed t o c o ndu c t review s o n t h e ap p l ic at io n o f GAAR in o rder t o enh anc e c o ns is t enc ies o n int erp ret at io ns and im p l em ent at io n o f rel evant p ro vis io ns .

• Pro vis io ns s h o u l d b e l aid do w n t o provide specific guidance on, and ex am p l es o f , c irc u m s t anc es o r c as es w h ere GAAR s h o u l d no t b e invo k ed.

• Cl arit y is p ro vided o n w h et h er GAAR ap p l ic at io ns w o u l d o verride t reat y p ro vis io ns (f o r ins t anc e, t reat y p ro vis io ns c an b e o verridden b y t h e Au s t ral ian o r Jap anes e GAAR, b u t t h is is no t t h e c as e f o r So u t h Af ric a).

What constitutes an avoidance behavior, and what triggers the application of GAAR?This is a difficult question that academics, t ax au t h o rit ies and t ax p ay ers h ave b een t ry ing t o addres s and deb at e s inc e t h e int ro du c t io n o f GAAR b ec au s e eac h jurisdiction has its own sets of definitions and int erp ret at io n o f “ ab u s ive” o r “ avo idanc e” ac t s via s t at u t e, regu l at io ns and p u b l is h ed gu idanc e o r c as e l aw .1

China’s GAAR and relevant guidanceTh e p revail ing do m es t ic GAAR in Ch ina p redo m inant l y em p l o y s a p u rp o s e t es t t o ident if y im p erm is s ib l e arrangem ent s o r t rans ac t io ns and, in rel at io n t o w h ic h , Ch ines e t ax au t h o rit ies are em p o w ered

1 Ch ina f o l l o w s a c ivil l aw rat h er t h an c as e l aw

s y s t em , and it is s t il l no t c o m m o n f o r t ax p ay ers t o b ring t ax c as es / dis p u t es t o c o u rt in Ch ina.

t o adj u s t o r rec h arac t eriz e t h e rel evant t rans ac t io n(s ) p u rs u ant t o Art ic l e 47 of the CIT Law. At a high level, GAAR is t arget ed at arrangem ent s o r t rans ac t io ns t h at l ead t o a redu c t io n o f t ax ab l e inc o m e and that lack reasonable or bona fide c o m m erc ial p u rp o s es . On t h is f ro nt , arrangem ent s t h at “ l ac k reas o nab l e c o m m erc ial p u rp o s e” are (general l y and broadly) defined as those with a “primary o b j ec t ive” t o “ avo id, def er o r redu c e Ch ina t ax l iab il it ies ” (Art ic l e 120 o f Det ail ed Im p l em ent at io n Ru l es ).

Sim il ar t o o t h er j u ris dic t io ns , l is t ening t o t ax p ay ers ’ c o m m ent s and f eedb ac k h as been an essential component of refining Ch ina’ s GAAR im p l em ent at io n. Th is is evidenc ed b y vario u s s u p p l em ent ary c irc u l ars is s u ed b y t h e Ch ines e t ax au t h o rit ies t h at p ro vide f u rt h er gu idanc e o n h o w l o c al t ax au t h o rit ies s h o u l d eval u at e t ax avo idanc e arrangem ent s b as ed o n t h e “ s u b s t anc e o ver f o rm ” do c t rine and t h at t ak e o n b o ard t h e specific and enumerated fact patterns, as w el l as t h e t im ing, m anner and s t ep s needed t o p u t t h e t rans ac t io ns o r arrangem ent s in p l ac e. It is al s o w o rt h no t ing t h at , p rio r t o , and in p rep arat io n f o r t h e f o rm al is s u anc e o f SAT Order No . 32, a dis c u s s io n draf t o n Adm inis t rat ive Meas u res o f GAAR2 w as is s u ed b y t h e SAT o n 3 Ju l y 2014 w it h t h e int ent io n t o s o l ic it c o m m ent s and o p inio ns f ro m t h e general p u b l ic .

Wit h a view t o t ac k l ing ab u s ive o r m is u s e o f p ref erent ial t ax t reat m ent s and/ o r c o rp o rat e o rganiz at io nal s t ru c t u res , “ ec o no m ic s u b s t anc e” h as al s o em erged as o ne o f k ey areas o f f o c u s o f GAAR inves t igat io ns . In p art ic u l ar, Gu o s h u if a [ 2009 ] No . 2 s t ip u l at es t h at , w h ere an

2 Th e int ent io n o f is s u ing t h e dis c u s s io n draf t w as

t o s o l ic it c o m m ent s and o p inio ns f ro m t h e general p u b l ic , w h ic h indic at es Ch ines e t ax au t h o rit ies ’ inc reas ing w il l ingnes s t o p ro vide o p p o rt u nit ies t o t ax p ay ers and o t h er s t ak eh o l ders t o vo ic e o u t t h eir o p inio ns and c o nc erns o n im p o rt ant regu l at io ns .

ent erp ris e l ac k s ec o no m ic s u b s t anc e (es p ec ial l y t h o s e es t ab l is h ed in a s o - c al l ed “ t ax h aven” j u ris dic t io ns ) and w h ere t h at ent erp ris e’ s Ch ines e t ax l iab il it ies are b eing avo ided, def erred o r redu c ed, Ch ines e t ax au t h o rit ies c o u l d l au nc h GAAR inves t igat io ns o n s u c h c as es p u rs u ant t o Art ic l e 47 o f the CIT Law and Article 120 of the Det ail ed Im p l em ent at io n Ru l es . Th es e m ay u l t im at el y res u l t in negat ing o r dis regarding t h e ex is t enc e o f t h e ent erp ris e f o r Ch ines e t ax p u rp o s es .

How is “economic substance” defined?In China, tax officials tend to focus o n a f o reign ent it y ’ s o p erat io nal s u b s t anc e, nam el y b u s ines s ac t ivit ies and o p erat io ns , nu m b er o f em p l o y ees , office space, and assets (among other f ac t o rs ) in det erm ining w h et h er GAAR s h o u l d p o t ent ial l y b e invo k ed. Wh il e s u c h as s es s m ent p aram et ers s eem eas ier t o q u ant if y , general o b s ervat io ns f ro m t h e l im it ed GAAR c as es rep o rt ed s inc e it s int ro du c t io n indic at e t h at l o c al Ch ines e t ax au t h o rit ies s o m et im es h ave a t endenc y t o p ay m o re at t ent io n t o t h e o p erat io nal s u b s t anc e and m ay no t h ave given du e c o ns iderat io n t o t h e u nderl y ing c o m m erc ial p u rp o s es o r no n- t ax o b j ec t ives o f an arrangem ent .


Positive steps taken by Chinese tax authoritiesNo t w it h s t anding t h e ab o ve, t h e is s u anc es o f SAT Anno u nc em ent [ 2012] No .30 (“ Anno u nc em ent 30” ) and Sh u iz o ngh an [ 2013] No .165 (“ Circ u l ar 165” ) dem o ns t rat e SAT’ s gro w ing degree o f u nders t anding o f t ax p ay ers ’ b u s ines s m o del s and h o l ding s t ru c t u res and it s inc reas ed w il l ingnes s t o c o ns ider t h e genu ine c o m m erc ial at t rib u t es and no n- t ax o b j ec t ives . In t h is regard, s o m e o f t h e k ey m es s ages and f eat u res o f Anno u nc em ent 30 and Circ u l ar 165 are im p o rt ant :

• ☺For the same-country exception for listed companies, if a treaty benefit ap p l ic ant is a l is t ed c o m p any , o r is 100% o w ned (direc t l y o r indirec t l y ) b y a l is t ed c o m p any l o c at ed in t h e s am e c o u nt ry , Ch ines e t ax au t h o rit ies c o u l d ac c ep t t h e applicant as the Beneficial Owner (BO) of the income for treaty benefit c l aim p u rp o s e.

• BO s t at u s s h o u l d no t b e denied m erel y b ec au s e an inves t m ent c o m p any is es t ab l is h ed f o r a s ingl e p ro j ec t .

• Inves t m ent ac t ivit ies c arried o u t c o u l d b e regarded as b u s ines s o p erat io ns f o r BO as s es s m ent p u rp o s es .

Wit h a view t o al igning it s GAAR im p l em ent at io n and rel evant int erp ret at io ns w it h int ernat io nal p rac t ic es , and t ak ing int o ac c o u nt t h e int ro du c t io n o f OECD/ G20 Bas e Ero s io n and Profit Shifting (BEPS) project, in w h ic h t h e Ch ines e au t h o rit ies h ave ac t ivel y p art ic ip at ed and m ade val u ab l e c o nt rib u t io ns t o rel evant dis c u s s io ns , w e ex p ec t t h at t h e SAT w o u l d c o ns ider and u t il iz e t h e ap p l ic ab l e c o m m ent aries and

rec o m m endat io ns o f t h e BEPS p ro j ec t t o further fine-tune its GAAR application. Th is c o u l d p ro vide great er degrees o f t rans p arenc y and p rac t ic al it y , al l o f w h ic h should benefit both the tax authorities and t ax p ay ers .

Latest developments in China’s GAARAs t h e ab o ve dis c u s s io ns indic at e, t h ere rem ain c o ns iderab l e u nc ert aint ies aro u nd Ch ina’ s GAAR, p art ic u l arl y as t o w h en and h o w GAAR m ay b e invo k ed. In o rder t o redu c e s u c h u nc ert aint ies and ac h ieve t h e “ b al anc e” as em p h as iz ed earl ier, SAT rel eas ed SAT Order No . 32 o n 2 Dec em b er 2014 t o p ro vide great er c l arit y and t rans p arenc y o n t h e f u ndam ent al p rinc ip l es , p ro c edu ral gu idel ines and rel evant do c u m ent at io n req u irem ent s in rel at io n t o t h e ap p l ic at io n o f GAAR.

Th e k ey c o nt ent s o f SAT Order No . 32 is s u m m ariz ed as f o l l o w s :

• A t ax avo idanc e s c h em e int ended t o obtain a tax benefit without reasonable c o m m erc ial p u rp o s e3 s h al l b e s u b j ec t t o GAAR inves t igat io ns and adj u s t m ent s

• Key f eat u res o f a t ax avo idanc e s c h em e are:• Th e s o l e o r m ain p u rp o s e4 is t o

obtain a tax benefit (i.e., a reduction, ex em p t io n o r def erral o f CIT p ay ab l e)

3 It is w o rt h no t ing t h at t h e o nu s o f p ro o f res t s

w it h t h e t ax p ay er(s ) u nder s c ru t iny . Ot h er rel evant p art ies , s u c h as t h e rel at ed p art ies and/ o r o t h er p art ies invo l ved in t h e s u b j ec t t rans ac t io n m ay al s o b e req u es t ed b y t h e in- c h arge PRC t ax au t h o rit y (s ) t o p ro vide rel evant inf o rm at io n and/ o r as s is t in t h e inves t igat io n.4 No t e t h at u nder t h e dis c u s s io n draf t is s u ed in

Ju l y 2014, t h e t erm “ o ne o f t h e p rim ary p u rp o s es ” w as al s o u s ed. It is go o d t o s ee t h at t h e SAT h as dec ided t o s t ic k w it h “ s o l e o r m ain p u rp o s e” o n t h is front. Such wording change significantly reduces t h e ap p l ic ab l e s c o p e o f t h e GAAR m eas u res and p ro vides m o re c ert aint ies t o t ax p ay ers .

• Th e l egal f o rm o f t h e s c h em e is in c o m p l ianc e w it h t h e t ax res u l t s , b u t no t in c o nf o rm it y w it h o r c o m m ens u rat e w it h it s c o m m erc ial o r ec o no m ic s u b s t anc e (t h is is c o ns is t ent w it h t h e “ p u rp o s e” f o c u s o f p revail ing GAAR and rel evant s u b s t anc e o ver f o rm ap p ro ac h ).

• Tax au t h o rit ies s h o u l d eval u at e GAAR c as es via t es t s f ro m b o t h t h e “ p u rp o s e” and “ s u b s t anc e” p ers p ec t ives .

• St ip u l at io n o f a c o m p reh ens ive s et o f p ro c edu res w it h res p ec t t o GAAR im p l em ent at io n t h at ent ail s

• Cas e s el ec t io n

• Cas e inves t igat io n

• Cas e c o nc l u s io n

• Dis p u t e res o l u t io n

It s h o u l d b e no t ed t h at SAT Order No . 32 is s il ent o n h o w t o as s es s “ reas o nab l e c o m m erc ial p u rp o s e” and “ ec o no m ic s u b s t anc e” . Th e SAT nevert h el es s s t at ed t h at t h e t ax au t h o rit ies s h o u l d c o ns ider t h e f ac t s and c irc u m s t anc es o f eac h individu al c as e in it s t o t al it y w h en p erf o rm ing t h e c o rres p o nding as s es s m ent , w h il s t reit erat ing t h at :

• Lack of “economic substance” remains as o ne o f t h e k ey indic at o rs o f t ax avo idanc e arrangem ent s .

• “ Su b s t anc e o ver f o rm ” do c t rine/ t es t s h o u l d b e f o l l o w ed o r u ndert ak en w h en as s es s ing a t rans ac t io n t h at is s u s p ic io u s f o r t ax avo idanc e in nat u re.


O ther recen t tax en forcemen t d ev el op men ts i n C hi n a

Al o ngs ide t h e Adm inis t rat ive Meas u res o f GAAR dis c u s s ed in t h is art ic l e, rec ent months have seen a steady flow of o t h er enf o rc em ent new s .

On 29 July 2014, the General Office of SAT issued an internal notification, Sh u iz o ngb anf a [ 2014] No .146 (Notification) which requires local t ax b u reau s in Ch ina t o inves t igat e significant amounts of service fees and ro y al t y p ay m ent s rem it t ed t o o vers eas rel at ed p art ies f ro m 2004 t o 2013, in p art ic u l ar, t h o s e in l o w t ax j u ris dic t io ns . Th e SAT req u ires l o c al t ax b u reau s t o as s es s t h e reas o nab l enes s o f s u c h p ay m ent s o n b o t h a b u s ines s p u rp o s e and c o m m erc ial s u b s t anc e b as is . Fo r m o re inf o rm at io n, p l eas e s ee http : / / ow. l y / D 9 S K f. Mo re rec ent l y , SAT anno u nc ed a p l an t o inves t igat e

dividend dis t rib u t io ns m ade t o no nres ident s in c al endar y ears 2012 and 2013. The first phase of the plan is t o f o c u s o n t h e f o l l o w ing as p art o f t h e dat a c o l l ec t io n p ro c es s :

• Dec l ared dividends no t y et dis t rib u t ed, o r dividends p aid t o a rel at ed p art y o r a c o nt ro l l ed p art y in Ch ina des ignat ed b y t h e f o reign s h areh o l der w it h o u t w it h h o l ding t ax

• Po t ent ial dis gu is ed dividends• Co nvers io n o f dividends t o c ap it al

o r u s ed f o r reinves t m ent w it h o u t w it h h o l ding t ax

• Treaty benefits obtained by using an agent o r a c o ndu it c o m p any in a j u ris dic t io n w it h a f avo rab l e w it h h o l ding t ax rat e o n dividends u nder a t reat y

• Ot h er t ax avo idanc e ris k s as s o c iat ed w it h dividends and eq u it y inves t m ent

Af t er c o m p l et io n o f t h e dat a c o l l ec t io n, t h e SAT m ay u ndert ak e ris k anal y s is , risk verifications and assessment of ap p ro p riat e p enal t ies f o r t ax vio l at io ns .

Th e init iat ive is in c o nj u nc t io n w it h ant i- t reat y s h o p p ing ru l e u nder Circ u l ar Gu o s h u ih an [ 2009 ] No .601 (Circ u l ar 601) is s u ed in 2009 . Circ u l ar 601 focuses on true beneficial owners of treaty benefits and therefore the notification may measure how effective Circ u l ar 601 h as b een. In l igh t o f rec ent BEPS devel o p m ent s , f u rt h er ant i- t reat y s h o p p ing p ro vis io ns m ay b e ex p ec t ed. Fo r m o re inf o rm at io n, p l eas e s ee http : / / ow. l y / D 9 S W 5 .

Impact of SAT Order No. 32Th e rel eas e o f SAT Order No . 32 undoubtedly reflects the Chinese au t h o rit ies ’ w il l ingnes s t o enh anc e t h e t rans p arenc y and s t andardiz at io n o f GAAR im p l em ent at io n, w h ereb y o ne o f t h e k ey int ent io ns is t o p ro vide t ax p ay ers w it h great er c ert aint y and a b et t er “ f eel ” o n h o w and w h en Ch ines e t ax au t h o rit ies w o u l d invo k e GAAR.

While further clarifications on the f u ndam ent al GAAR p rinc ip l es are s et f o rt h u nder SAT Order No . 32, t h ere rem ains a nu m b er o f k ey u nc ert aint ies , inc l u ding:

• Wh il e l o c al PRC t ax au t h o rit ies are no w enc o u raged t o ado p t t h e “ p u rp o s e” t es t and “ s u b s t anc e” t es t , as c it ed u nder SAT Order No . 32 f o r t h e p u rp o s e o f ident if y ing t ax avo idanc e arrangem ent s , “ p u rp o s e” is no t something that can be easily quantified and t h u s w h et h er a p u rp o s e is t h e “ m ain” p u rp o s e o f a t rans ac t io n is s u b j ec t t o u nc ert aint y

• Th e “ ec o no m ic s u b s t anc e” t es t m ay go b ey o nd t h e t radit io nal p aradigm s u rro u nding t h e u nderl y ing f ac t s , and m ay t h eref o re req u ire m o re indep t h anal y s is f ro m vario u s p ers p ec t ives (e.g., geo grap h ies , rel at ed indu s t ry , ris k s and benefits and so forth), and may imply t h at t h e ent ire b u s ines s s t ru c t u re c o u l d b e s u b j ec t t o review and eval u at io n, t h u s p o t ent ial l y l ead t o dif f erent int erp ret at io ns and p erc ep t io ns o f dif f erent p art ies

Set t ing as ide t h e u nc ert aint ies aro u nd SAT Order No . 32, as w el l as t h e p o t ent ial to further fine-tune China’s GAAR Meas u res , SAT Order No . 32 u ndo u b t edl y reflects Chinese tax authorities’ effort to t ac k l e t ax avo idanc e arrangem ent s and p ro t ec t it s t ax ing righ t s .

Future direction for China’s GAAR?In l igh t o f t h e is s u anc e o f SAT Order No . 32 and t h e inc reas ing at t ent io n b eing given t o t h e BEPS p ro j ec t , it is o b vio u s t h at t h e SAT is ever m o re ready t o

c o m b at t ax avo idanc e and p ro vide great er p ro t ec t io n t o it s t ax ing righ t s .

Having s aid t h at , w e are s eeing earl y s igns o f SAT’ s w il l ingnes s t o c o ns ider b u s ines s and no n- t ax o b j ec t ives (in addit io n t o t h e c u rrent p rac t ic e o f rel y ing h eavil y o n o p erat io nal s u b s t anc e) w h en as s es s ing w h et h er GAAR s h o u l d b e invo k ed. In addit io n, w it h c o u nt ries m o re al igned o n c ert ain int ernat io nal t ax p rinc ip l es as a res u l t o f t h e BEPS init iat ives , w e h o p e t h at GAAR w o u l d b e invo k ed o nl y as a l as t res o rt t o c o u nt er t ax avo idanc e rat h er t h an f o r t h e p u rp o s e o f c o u nt ering l egit im at e and c o m m erc ial l y driven t ax p l anning.

Final l y , in o rder t o p ro vide great er t rans p arenc y and c ert aint ies o n t h e ap p l ic at io n o f GAAR, w e h o p e t h at t h e SAT w o u l d c o ns ider t h e int ro du c t io n o f an advanc ed ru l ing s y s t em , as w el l as a GAAR p anel , at an ap p ro p riat e t im e.


O ther recen t tax d ev el op men tsChina issues circular to encourage corporate restructuring

In Marc h 2014, t h e St at e c o u nc il is s u ed Gu o f a [ 2014] No . 14 (Circ u l ar 14), u rging vario u s go vernm ent b o dies t o im p ro ve t h eir p o l ic ies s o as t o enc o u rage m ergers and ac q u is it io ns ac t ivit ies in Ch ina. In res p o ns e t o Circ u l ar 14, t h e SAT rec ent l y rel eas ed Cais h u i [ 2014] No . 109 (Circ u l ar 109 ) t o im p ro ve t h e c o rp o rat e inc o m e t ax res t ru c t u ring ru l es b y rel ax ing t h e s p ec ial res t ru c t u ring t reat m ent c rit eria u nder Cais h u i [ 2009 ] No . 59 (Circ u l ar 59 ).

Th e f avo rab l e c h anges w it h in Circ u l ar 109 inc l u de a redu c t io n o f ac q u ired eq u it y o r as s et s t h res h o l d f o r t ax def erral t reat m ent . Fo r eq u it y ac q u is it io n, t h e m inim u m eq u it y int eres t ac q u ired is redu c ed t o 50% o f t h e t arget ’ s eq u it y int eres t f ro m t h e p revio u s t h res h o l d o f 7 5% f o r ac q u is it io n o f eq u it y int eres t . Fo r as s et ac q u is it io n, t h e m inim u m as s et s ac q u ired is c h anged t o 50% o f t h e t arget ’ s t o t al as s et s f ro m t h e p revio u s t h res h o l d o f 7 5% f o r ac q u is it io n o f as s et s . Th e p ro vis io n is ap p l ic ab l e t o b o t h do m es t ic and c ro s s -b o rder t rans ac t io ns .

Circular 10 also offers new benefits f o r t ax def erral o n b u s ines s res t ru c t u ring o f Ch ines e t ax res ident c o m p anies , A do m es t ic t rans f ero r is el igib l e f o r t ax def erral t reat m ent if al l o f t h e f o l l o w ing c o ndit io ns are satisfied:

• Trans f ero r and t rans f eree are:• Parent and 100% o w ned

s u b s idiary , o r• Bro t h er- s is t er c o m p anies t h at

are 100% o w ned b y t h e c o m m o n Ch ines e t ax res ident p arent c o m p any o r t h e gro u p o f Ch ines e t ax res ident c o m p anies . Th e c o m m o n Ch ines e t ax res ident p arent c o m p any o r t h e gro u p o f Ch ines e t ax res ident c o m p anies m ay b e h el d b y a f o reign c o m m o n p arent .

• Th e t rans ac t io n is ef f ec t ed at net b o o k val u e.

• Neit h er t h e t rans f ero r no r t h e t rans f eree rec o gniz es gain o r l o s s o n t h e t rans f erred as s et o r eq u it y u nder Ch ina GAAP.

• Th e t rans ac t io n is b as ed o n val id b u s ines s p u rp o s es and it s p rim ary o b j ec t ive is no t t ax avo idanc e, redu c t io n o r def erral .

• Th e nat u re o f t h e b u s ines s ac t ivit ies as s o c iat ed w it h t h e t rans f erred eq u it ies o r as s et s m u s t rem ain u nc h anged f o r 12 m o nt h s f o l l o w ing t h e t rans f er.

• Circ u l ar 109 is ef f ec t ive ret ro ac t ivel y as o f 1 Janu ary 2014 and ap p l ies t o t rans f ers t h at are s t il l p ending.

China releases discussion draft on revised Tax Collection and Administration Law for public commentsOn 5 Janu ary 2015, Ch ina’ s Legislative Affairs Office of the St at e Co u nc il rel eas ed a dis c u s s io n draf t o n revis ed Tax Co l l ec t io n and Administration Law (Draft Law) for p u b l ic c o m m ent s b y 3 Feb ru ary 2015.

The Draft Law proposes various changes to the existing Law but t h e f o l l o w ing t w o addit io ns are p art ic u l arl y no t ew o rt h y :

• Int ro du c t io n o f an advanc e t ax ru l ing p ro c edu re: A t ax p ay er m ay ap p l y f o r an advanc e ru l ing w it h p ro vinc ial and h igh er t ax au t h o rit ies f o r c o m p l ic at ed f u t u re transactions. The final ruling will b e is s u ed in w rit ing and b e b inding t o t h e req u es t ing t ax p ay er u nl es s f ac t s c h ange.

• Tax dis p u t e adm inis t rat io n p ro c es s : Unl ik e t h e c u rrent l aw , a t ax p ay er w il l b e al l o w ed t o def er a t ax p ay m ent u nt il t h e ap p eal p ro c es s is c o m p l et ed.

As noted, the Draft Law contains o t h er c h anges b u t w h et h er t h ey w il l s u rvive f u rt h er review s is y et t o b e s een. Th ere are s o m e u nc ert ain is s u es s u c h as w h et h er t h e advanc e ru l ing p ro c edu re w o u l d ap p l y t o c ro s s - b o rder t ax dis p u t es . Su c h is s u es may be addressed in the final law and im p l em ent at io n ru l es .


India 2015 budget delivers key developments for inbound investors

India’s Union Budget for 2015-16 was presented by the Finance Minister on 28 February 2015. The Finance Bill, 2015 (FB 2015), that was introduced in Parliament as part of budget contains a number of international tax proposals, potentially amending the Indian Tax Laws (ITL) to provide clarity on taxation of the indirect transfers of Indian assets and also deferring implementation of General Anti Avoidance Rules (GAAR) by two years. Other significant proposals include introduction of Place of Effective Management (POEM) as a test for determining corporate residency, taxation of interest paid by a branch of a foreign bank in India to its head office, enabling provisions to frame foreign tax credit rules, taxation of offshore funds which have fund managers based in India and reporting requirements for foreign payments. The Finance Minister also announced a phased reduction in the corporate tax rate from the current 30% to 25% over the next four years.

Ganesh RajTax Policy Leader — IndiaT: + 9 1 12 067 1 7 110E: ganes h .raj @ in.ey .c o m

Rajan VoraTax Co nt ro vers y Leader – IndiaT: + 9 1 22 619 2 0440E: raj an.vo ra@ in.ey .c o m


International tax proposals of Finance Bill 2015Taxation of indirect transfersThe ITL was amended by the Finance Act, 2012 t o t ax gains aris ing f ro m t rans f er o f a f o reign ent it y w h o s e val u e is derived direc t l y o r indirec t l y s u b s t ant ial l y f ro m as s et s l o c at ed in India. Co nc erns w ere rais ed b y vario u s s t ak eh o l ders o n t h e s c o p e and im p ac t o f t h e indirec t t rans f er p ro vis io ns . Th is res u l t ed in f o rm at io n o f an Ex p ert Co m m it t ee t o ex am ine t h e ru l es and vario u s rec o m m endat io ns w ere given b y t h e Co m m it t ee p u rs u ant t o a p u b l ic c o ns u l t at io n p ro c es s . Th e Indian t ax adm inis t rat io n h as al s o s et u p a Co m m it t ee t o dec ide o n t h e o ngo ing c as es rel at ing t o t h e indirec t t rans f er p ro vis io ns .

Wit h t h e o b j ec t ive o f p ro viding c l arit y o n t ax at io n o f indirec t t rans f ers t h e FB 2015 p ro p o s es t h e f o l l o w ing am endm ent s ef f ec t ive f ro m t ax y ear 2015- 16:

• Th e s h are o r int eres t in a f o reign ent it y s h al l b e deem ed t o derive it s val u e s u b s t ant ial l y f ro m as s et s l o c at ed in India if , t h e val u e o f Indian as s et s :• Ex c eeds INR100 m il l io n; and • Rep res ent s at l eas t 50% o f val u e o f al l

as s et s o w ned b y t h e f o reign ent it y• ☺“Value of an asset” refers to the

f air m ark et val u e (w it h o u t redu c ing t h e l iab il it ies ) as o n t h e l as t day o f t h e ac c o u nt ing p erio d o f t h e ent it y p rec eding t h e t rans f er. Ho w ever, if t h e b o o k val u e o f as s et s h as inc reas ed b y 15% o r m o re f ro m s u c h dat e t il l t h e dat e o f t rans f er, t h e dat e o f t rans f er w o u l d b e t h e val u at io n dat e.

• Th e c ap it al gains o n indirec t t rans f er w il l b e t ax ed o n a p ro p o rt io nat e b as is in India. Th e m et h o d o f det erm ining t h e p ro p o rt io nal it y as w el l as t h e m anner o f det erm inat io n o f f air m ark et val u e (FMV) o f t h e Indian as s et s vis - à - vis gl o b al as s et s w il l b e p res c rib ed t h ro u gh specific rules.

• ☺The Indian entity (in which assets are h el d b y t h e f o reign ent it y ) is o b l iged t o f u rnis h inf o rm at io n o n t h e o f f s h o re t rans f er w h ic h h as t h e ef f ec t o f direc t l y o r indirec t l y m o dif y ing t h e o w ners h ip s t ru c t u re o r c o nt ro l o f t h e Indian ent it y . Fail u re o n t h e ab o ve w o u l d res u l t in an o nero u s p enal t y o f 2% o f t h e val u e o f o vers eas t rans f er o r INR0.5 m il l io n.


Exemptions from indirect transfer provisionsTh e f o l l o w ing t rans f ers are ex em p t :

• ☺If the transferor of share or interest in f o reign ent it y , al o ng w it h as s o c iat ed ent erp ris es (AEs ), do es no t h o l d • ☺Right of control or management and • ☺Voting power/share capital/interest

ex c eeding 5% in t h e f o reign ent it y • ☺In case the shares or interest in the

f o reign c o m p any o r ent it y w h ic h is t rans f erred h o l ds Indian as s et s indirec t l y and t rans f ero r, al o ng w it h AEs do es no t h o l d• ☺Right of management or control

in rel at io n t o s u c h c o m p any o r t h e ent it y ; and

• ☺Any rights in such company by w h ic h it c an ex erc is e c o nt ro l o r m anagem ent o r vo t ing righ t s ex c eeding 5% in t h e direc t h o l ding c o m p any o r ent it y h o l ding Indian as s et

• ☺Transfer of shares of foreign company o r ent it y w h ic h derives it s val u e s u b s t ant ial l y f ro m as s et s s it u at ed in India w h ic h are t rans f erred in a s c h em e o f am al gam at io n o r dem erger, s u b j ec t t o c o ndit io ns

Deferral of GAARThe ITL contain General Anti-Avoidance Ru l es (GAAR), b ro ad b as ed ant i- avo idanc e p ro vis io ns w h ic h h ave t h e ef f ec t o f inval idat ing an im p erm is s ib l e avo idanc e arrangem ent w h ic h h as b een ent ered int o b y a t ax p ay er w it h t h e m ain p u rp o s e o f obtaining a tax benefit. GAAR are aimed t o addres s aggres s ive t ax p l anning and c o dif y t h e do c t rine o f “ s u b s t anc e o ver f o rm .” GAAR p ro vis io ns w ere int ro du c ed in 2012 and t h eir ap p l ic ab il it y h as b een def erred s inc e t h en t o c o m e t o ef f ec t f ro m t ax y ear 2015- 16.

Cert ain c o nt ent io u s is s u es rel at ing t o GAAR need t o b e res o l ved. Fu rt h er, t h e t ax avo idanc e as p ec t s are a p art o f OECD’s Base Erosion and Profit Shifting (BEPS) p ro j ec t t o w h ic h India is an ac t ive p art ic ip ant . In view o f t h e ab o ve, t h e FB

2015 p ro p o s es t o def er GAAR b y t w o more years — i.e., to come in effect from t ax y ear 2017 - 18 , t o b e im p l em ent ed as p art o f a c o m p reh ens ive regim e t o deal w it h BEPS and aggres s ive t ax avo idanc e.

Fu rt h er, it is anno u nc ed t h at GAAR s h o u l d b e ap p l ic ab l e p ro s p ec t ivel y and inves t m ent s m ade u p t o 31 Marc h 2017 w il l b e grandf at h ered. A s t at u t o ry am endm ent t o give ef f ec t t o t h e ab o ve is aw ait ed.

Residential status of foreign companiesUnder the ITL, foreign companies b ec o m e res ident o f India if , du ring t h e y ear, c o nt ro l and m anagem ent o f s u c h c o m p any is s it u at ed w h o l l y in India.

Th e FB 2015 p ro p o s es t h at a f o reign c o m p any w il l b e t reat ed as a res ident o f India if it s POEM is in India at any p o int du ring t h e y ear f ro m t ax y ear 2015- 16 onwards. Further, POEM is defined to m ean a p l ac e w h ere k ey m anagem ent and c o m m erc ial dec is io ns t h at are nec es s ary f o r t h e c o ndu c t o f t h e b u s ines s o f an ent it y as a w h o l e are, in s u b s t anc e, m ade. Th e ab o ve am endm ent is p ro p o s ed t o align the provisions of the ITL with the tax t reat ies .

Source rule in respect of interest paid by branch of foreign bank to head officeUnder the ITL, interest paid to a non-res ident (NR) is t ax ab l e in India if it is deb t inc u rred o r m o ney s b o rro w ed and u s ed f o r t h e p u rp o s es o f a b u s ines s o r p ro f es s io n c arried o n in India.

Indian t ax adm inis t rat io n h ad is s u ed a c irc u l ar1 direc t ing t h at int eres t p aid b y an Indian branch to its head office is t ax ab l e in India and s h o u l d b e s u b j ec t t o w it h h o l ding t ax . Ho w ever, s u b s eq u ent j u dic ial p rec edent s 2 h ad h el d t h at s u c h p ay m ent is dedu c t ib l e w h il e c o m p u t ing t ax ab l e inc o m e o f t h e Indian b ranc h as p er t h e t ax t reat y b u t is no t t ax ab l e in t h e

1 Circ u l ar No . 7 40 dat ed 17 Ap ril 19 9 6.

2 Inc l u ding t h e ITAT Sp ec ial b enc h in t h e c as e o f

Su m it o m o Mit s u i Bank ing Co rp o rat io n [ 136 ITD- 66 TBOM] .

hands of the head office being payment to self. Such legal fiction created under the t reat y is no t ed t o res u l t in b as e ero s io n.

To c l arif y t h e is s u e and p revent f u t u re dis p u t es , t h e FB 2015 p ro p o s es t h at :

• Th e p erm anent es t ab l is h m ent (PE) (b ranc h ) in India w il l b e deem ed t o b e a s ep arat e and indep endent p ers o n f ro m the NR (head office)

• Interest paid by the PE to its head office o r any o t h er PE o f t h e NR is an int eres t inc o m e s o u rc ed in India. Su c h int eres t w o u l d b e t ax ab l e in India s u b j ec t t o w it h h o l ding t ax .

• Th is w o u l d b e in addit io n t o any inc o m e at t rib u t ab l e t o t h e PE in India u nder t h e t ax t reat y .

Th is p ro p o s al w o u l d b e ef f ec t ive f ro m t ax y ear 2015- 16.

Furnishing information on payments to NRPresently, under the ITL, any person m ak ing a t ax ab l e p ay m ent t o a NR is l iab l e t o w it h h o l d t ax at t h e ap p ro p riat e rat es . In addit io n, t h e p ay er is al s o o b l iged t o f u rnis h c ert ain inf o rm at io n t o t h e Tax Au t h o rit y o n s u c h p ay m ent s . Th is req u irem ent w as u nders t o o d t o ap p l y o nl y t o p ay m ent o f am o u nt s t ax ab l e in India.

In o rder t o ident if y p ay m ent s o n w h ic h t h ere is a f ail u re t o w it h h o l d t ax es and t o ens u re w it h h o l ding t ax at ap p ro p riat e rat es , t h e FB 2015 p ro p o s es t h at t h e p ay er is req u ired t o f u rnis h p res c rib ed inf o rm at io n o n al l p ay m ent s t o NR irres p ec t ive o f w h et h er s u c h p ay m ent s are t ax ab l e in India. Fail u re in c o m p l y ing w it h t h e ab o ve p ro vis io n w il l res u l t in a p enal t y o f INR 0.1 m il l io n. Th es e p ro vis io ns are p ro p o s ed t o c o m e in ef f ec t f ro m 1 Ju ne 2015.

Tax treatment of REIT and InviTThe ITL had a special tax regime in res p ec t o f a Real Es t at e Inves t m ent Tru s t (ReIT) and an Inf ras t ru c t u re Inves t m ent t ru s t (InviT) [ c o l l ec t ivel y , ref erred t o as Bu s ines s Tru s t ] . Ho w ever, t h ere w as dis p arit y o n c ap it al gains t ax at io n f o r Sp o ns o r (o ne w h o ex c h anges s h ares o f s p ec ial p u rp o s e veh ic l e w it h u nit s ), and t h e no rm al u nit h o l ders (w h o p ic k u p u nit s


af t er t h e Bu s ines s Tru s t is l is t ed). In o rder t o p ro vide p arit y , FB 2015 p ro p o s es t o t ax s al e o f l is t ed u nit s (s u b j ec t ed t o s ec u rit ies t rans ac t io n t ax ) as f o l l o w s : (i) l o ng t erm c ap it al gain is ex em p t , and (ii) s h o rt t erm c ap it al gain is t ax ab l e at 15%.

Rent al inc o m e earned b y ReIT is p ro p o s ed a “ p as s t h ro u gh ” s t at u s and, ac c o rdingl y , s u c h inc o m e is no t t ax ab l e in t h e h ands o f ReIT b u t t ax ab l e in t h e h ands o f t h e Sp o ns o r/ u nit h o l ders . ReIT is , h o w ever, req u ired t o w it h h o l d ap p ro p riat e t ax es . Th e “ p as s t h ro u gh ” s t at u s o n rent al inc o m e is no t ap p l ic ab l e f o r InvIT.

Th e ab o ve p ro p o s al s w o u l d b e ef f ec t ive f ro m t ax y ear 2015- 16.

Reduction of tax rates on income from Royalty/FTS for NRUnder the ITL, NRs’ income from royalty/Fees f o r Tec h nic al Servic es (FTS) w h ic h is no t ef f ec t ivel y c o nnec t ed w it h a PE in India is t ax ed at t h e rat e o f 25%.

In o rder t o redu c e t h e h ards h ip f ac ed b y s m al l ent it ies du e t o t h e h igh rat e o f t ax and to facilitate technology inflow to small b u s ines s es at l o w c o s t s , t h e FB 2015 p ro p o s es t o redu c e t h e rat e o f t ax rat e o n ro y al t y and FTS p ay m ent s m ade t o NRs t o 10% f ro m t ax y ear 2015- 16 o nw ards .

Rules for Foreign Tax Credit (FTC)The ITL provides a relief in respect of inc o m e w h ic h is do u b l y t ax ed in India as w el l as in ano t h er j u ris dic t io n b y w ay o f a c redit in res p ec t o f f o reign t ax es p aid o n inc o m e w h ic h is t ax ed in India. Th e FB 2015 proposes to amend the ITL to em p o w er t h e Indian t ax adm inis t rat io n t o p res c rib e ru l es regarding t h e p ro c edu re for granting FTC under the ITL.

Minimum Alternate Tax on Foreign Institutional InvestorsTh e FB 2015 p ro p o s es t h at inc o m e o f f o reign ins t it u t io nal inves t o rs (FII) f ro m t rans ac t io ns in s ec u rit ies (ap art f ro m s h o rt t erm c ap it al gains o n w h ic h Sec u rit ies Trans ac t io n Tax is no t ap p l ic ab l e) w o u l d b e ex c l u ded w h il e computing book profits for computation o f Minim u m Al t ernat e t ax (MAT).Th e c o rres p o nding ex p endit u re in rel at io n t o earning s u c h inc o m e w o u l d b e added b ac k .

Taxation of offshore funds Under the ITL, income of an NR is taxable in India if it aris es , int er al ia, t h ro u gh a b u s ines s c o nnec t io n in India.

Pres enc e o f a f u nd m anager in India m ay c reat e a b u s ines s c o nnec t io n/ t ax ab l e p res enc e in India f o r t h e o vers eas f u nd and l ead t o inc o m e o f t h e f u nd b eing t ax ab l e in India. Su c h p res enc e m ay al s o t rigger ex p o s u re o f c reat ing res idenc y o f t h e f u nd in India o n t h e b as is o f it s c o nt ro l and m anagem ent in India.

In o rder t o f ac il it at e l o c at io n o f o f f s h o re fund managers in India, a specific regime in l ine w it h int ernat io nal b es t p rac t ic es is p ro p o s ed s o t h at t ax l iab il it y o f t h e f u nd f ro m inves t m ent in India w o u l d no t b e im p ac t ed b y t h e engagem ent o f a f u nd m anager in India and inc o m e o f t h e f u nds f ro m inves t m ent s m ade o u t s ide India w o u l d no t b e t ax ab l e in India m erel y b ec au s e f u nd m anager is l o c at ed in India. Th e p ro p o s ed regim e p ro vides t h at :

• ☺In the case of an “eligible investment f u nd” , t h e f u nd m anagem ent ac t ivit y c arried o u t t h ro u gh an “ el igib l e f u nd m anager” ac t ing o n b eh al f o f s u c h f u nd w il l no t c o ns t it u t e b u s ines s c o nnec t io n in India.

• ☺An eligible investment fund will not be a res ident in India m erel y b ec au s e t h e el igib l e f u nd m anager u ndert ak es f u nd m anagem ent ac t ivit ies in India.

• ☺Offshore fund and the fund manager m u s t s at is f y c ert ain c o ndit io ns t o b e el igib l e f o r t h e p ro p o s ed regim e, il l u s t rat ivel y :• ☺The fund is a tax resident of a country

w it h w h ic h India h as a t ax t reat y• ☺Certain capital and investment related

limits are satisfied• ☺Fund manager is not an employee of

t h e f u nd o r a c o nnec t ed p ers o n o f t h e f u nd and is ap p ro p riat el y regu l at ed by SEBI and fulfils the prescribed c o ndit io ns

• ☺The fund is required to furnish a s t at em ent in t h e p res c rib ed f o rm w it h in 9 0 day s f ro m t h e end o f t h e y ear. Th es e p ro p o s al s are ef f ec t ive f ro m t ax y ear 2015- 16.

K ey tak eaway sTh e int ernat io nal t ax p ro p o s al s anno u nc ed b y t h e Financ e Minis t er are f ar reac h ing. Tax es are a c ru c ial c o m p o nent o f a c o u nt ry ’ s int ernat io nal c o m p et it ivenes s . In t o day ’ s gl o b al iz ed ec o no m y , t h e s t ru c t u re o f a c o u nt ry ’ s t ax c o de is an im p o rt ant f ac t o r f o r b u s ines s es w h en t h ey dec ide w h ere t o inves t . In rec ent y ears , m any c o u nt ries h ave rec o gniz ed t h is f ac t and h ave m o ved t o ref o rm t h eir t ax c o des t o b e m o re c o m p et it ive. Th e Financ e Minis t er’ s anno u nc em ent o f a p h as ed redu c t io n in Indian’ s c o rp o rat e t ax rat e f ro m 30% t o 25% w o u l d b e a c at al y s t in im p ro ving t h e c o m p et it ivenes s o f t h e Indian ec o no m y . Th e p ro p o s al t o def er GAAR b y t w o y ears and t h e p ro p o s al t o p ro vide c l arit y o n c irc u m s t anc es w h en indirec t t rans f er o f Indian as s et s w o u l d b e t ax ab l e w o u l d im p ro ve t h e eas e o f do ing b u s ines s in India. Th e redu c t io n in t ax rat e o n im p o rt o f t ec h no l o gy w o u l d al s o b e w el c o m e. Inves t o rs w il l need t o review t h e im p ac t o f t h es e p ro p o s al s o n t h eir o p erat io ns in India.

Extension of concessional tax rate on interest on borrowings by FIIs/QFIs Under the existing provisions of the ITL, interest income earned by FII/ Qualified Financ ial Ins t it u t io n (Q FI) in res p ec t o f ru p ee deno m inat ed c o rp o rat e b o nds o r a go vernm ent s ec u rit y is el igib l e f o r l o w er w it h h o l ding t ax rat e o f 5%. Th e c o nc es s io nal rat e w as val id u p t o 30 Ju ne 2015. Th e FB 2015 p ro p o s es t o ex t end t h is c o nc es s io nal rat e o f 5% o n inc o m e earned b y FII/ Q FI t il l 30 Ju ne 2017 . Th is is t o b ring t h e ab o ve c o nc es s io n in l ine w it h t h e l o w er rat e o f w it h h o l ding t ax o n Ex t ernal Co m m erc ial Bo rro w ings (ECBs ) under the ITL.


Both transfer pricing and the concept of the G201 Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan have been receiving attention in the South African media and Parliament for quite some time. Two recent developments indicate the importance of the BEPS project to South Africa and provide insight into potential considerations for national implementation as we move through into the second half of the highly ambitious BEPS project.

BEPS and transfer pricing: session in ParliamentOn 19 No vem b er 2014, a s es s io n o n t rans f er p ric ing w as h el d du ring a m eet ing o f Parl iam ent ’ s m ineral resources and finance committees. Pres ent at io ns b y t h e Nat io nal Treas u ry and t h e So u t h Af ric an Revenu e Servic e (SARS) du ring t h is s es s io n p ro vide ins igh t int o p o s s ib l e f u t u re t rans f er p ric ing l egis l at io n in So u t h Af ric a. Mo s t no t ab l y :

• Over t h e l as t t h ree y ears , t h e SARS Trans f er Pric ing u nit h as au dit ed m o re t h an 30 c as es and m ade t rans f er p ric ing adj u s t m ent s o f o ver R 20 b il l io n (ab o u t US$ 1.7 b il l io n) w it h an inc o m e t ax im p ac t o f R5 b il l io n.

• A s im il ar nu m b er o f c as es are c u rrent l y in p ro gres s and o t h ers are in t h e p ro c es s o f b eing ris k as s es s ed.

• Legislative requirements for m u l t inat io nal ent erp ris es (MNEs ) t o maintain specific transfer pricing do c u m ent at io n is t o b e c o ns idered.

• Legislative measures to address o u t c o m es o f t h e BEPS Ac t io n Pl an (e.g. c o u nt ry - b y - c o u nt ry rep o rt ing) are t o b e c o ns idered.

• Legislative framework for Advance Pric ing Agreem ent s (APAs ) is t o b e c o ns idered, as s u c h advanc e agreem ent s o n t rans f er p ric ing b et w een t ax p ay ers and SARS c o u l d al l eviat e t h e enf o rc em ent b u rden and enc o u rage c o m p l ianc e.

• Wh il e t igh t er l egis l at io n m ay b e needed, SARS rec o gniz es t h e vit al im p o rt anc e o f a b al anc ed res p o ns e within the confines of domestic and int ernat io nal l aw , w h il e no t p o s ing a det errent t o f o reign direc t inves t m ent .

South Africa South Africa’s BEPS position: Recent developments provide insight and direction

Justin LiebenbergTax Po l ic y and Int ernat io nal Tax Services Leader — EY So u t h Af ric aT: + 27 11 7 7 2 39 07E: j u s t in.l ieb enb erg@ z a.ey .c o m


Over the past few months, transfer pricing and BEPS have been the subject of discussions by Members of Parliament on various occasions. In September, one Member of Parliament called for a “comprehensive and clearly articulated law which forbids transfer pricing” during a beneficiation colloquium of Parliament’s portfolio committee on trade and industry.1 Earlier this year, transfer pricing and the possible instances of BEPS in the mining sector were a topic of discussion during a meeting of the Portfolio Committee on Mineral Resources.2 Against this background, the National Treasury and a research executive of SARS presented on

1 Linda Ensor, “Clamour to end transfer pricing

abuse,” 4 September 2014. See http://www.bdlive.co.za/business/2014/09/04/clamour-to-end-transfer-pricing-abuse2 Portfolio Committee on Mineral Resources,

National Assembly, Wednesday, 2 July 2014.

South Africa’s Tax Policy Structure and Transfer Pricing and BEPS respectively during the meeting of Parliament’s mineral resources and finance committees on 19 November 2014.

Corporate income tax, BEPS and transfer pricingThe presentation by National Treasury on South Africa’s tax policy structure (with a focus on corporate income tax) and the presentation by the SARS research executive provided a brief overview of the current corporate income tax act and an explanation of what transfer pricing entails. While the presentations were part of the meeting of the mineral resources and finance committees, it was noted that the extractive industry from a transfer pricing and BEPS perspective is essentially no different than any other sector and is therefore not the sole cause of concern.

Measures against BEPSThe issues of transfer pricing and BEPS were touched upon in the context of South Africa’s need for foreign investment in light of the twin budget and current account deficits. Most significant foreign investment comes from MNEs, which are inherently engaged in cross-border transactions with related parties, e.g., through the sale of goods, intangibles transactions, the provision of services and the provision of funding. While such cross-border transactions are in principle beneficial, they can be used to shift profits in order to exploit differences in tax rates between the countries involved. In other words, transfer pricing itself is an essential feature of cross-border activities of MNEs and only “transfer mispricing” is unacceptable.


Th e t h reat o f BEPS f o r t h e c o rp o rat e inc o m e t ax b as e and t h e t ax im p l ic at io ns o f c ro s s - b o rder t rans ac t io ns and int ernat io nal t ax at io n w ere addres s ed. It w as no t ed t h at So u t h Af ric a p l ay s a k ey ro l e as a m em b er o f t h e BEPS Bu reau Pl u s and t h at a nu m b er o f m eas u res h ave al ready b een im p l em ent ed t o addres s BEPS, s o m e even b ef o re t h e BEPS Ac t io n Pl an w as rel eas ed b y t h e OECD in Ju l y 2013.3 Su c h m eas u res inc l u de ru l es and regu l at io ns regarding t rans f er p ric ing, c o nt ro l l ed f o reign c o m p anies , int eres t dedu c t io n l im it at io ns , h y b rid ins t ru m ent s and ent it ies , t h e digit al ec o no m y and ex c h ange o f t ax inf o rm at io n.

In addit io n, t h e Trans f er Pric ing u nit established at the Large Business Centre o f SARS w as m ent io ned as o ne o f t h e res p o ns es t o t h e t h reat o f BEPS. In t h is regard, it w as no t ed t h at :

• Au dit s req u ire s c arc e s k il l s , are res o u rc e int ens ive, req u iring u nders t anding o f c o m p any , indu s t ry , gl o b al val u e c h ain, s t rat egic dec is io n m ak ing, b u s ines s m o del s , et c ., and t ak e at l eas t 18 m o nt h s .

• As a res u l t o f l im it ed res o u rc es t h ere is a f o c u s o n s t rat egic au dit ing – h igh ris k , h igh - val u e t rans ac t io ns .

• Over t h e l as t t h ree y ears t h e Trans f er Pric ing u nit h as au dit ed m o re t h an 30 c as es and m ade t rans f er p ric ing adj u s t m ent s o f j u s t o ver R20 b il l io n (at a c o ns ervat ive m eas u re) w it h an inc o m e t ax im p ac t o f R5 b il l io n.

• A s im il ar nu m b er o f c as es are c u rrent l y in p ro gres s and o t h ers are in t h e p ro c es s o f b eing ris k as s es s ed.

• Due to the size and significance of the ex t rac t ive indu s t ry in So u t h Af ric a, it rem ains a k ey area o f f o c u s f o r SARS.

3 See h t t p : / / w w w .o ec d.o rg/ c t p / BEPSAc t io nPl an.p df

f o r m o re inf o rm at io n.

Insights and implicationsSARS indic at ed t h ere w il l b e an o ngo ing f o c u s o n s t rengt h ening SARS c ap ac it y and c ap ab il it y . At t h e s am e t im e, t h ere w il l b e a c o nt inu al review o f au dit and ris k as s es s m ent p ro c es s es and an o ngo ing dial o gu e w it h MNEs o n l evel s o f t ax c o m p l ianc e. On an int ernat io nal l evel , SARS w il l c o nt inu e it s p art ic ip at io n in and c o o p erat io n w it h , int er al ia, t h e OECD, t h e Unit ed Nat io ns , t h e Af ric an Tax Adm inis t rat io n Fo ru m (ATAF) and t h e Wo rl d Bank . It w il l al s o c o nt inu e it s c o o p erat io n w it h o t h er t ax adm inis t rat io ns and review int ernat io nal ap p ro ac h es t o t h e ex t rac t ive indu s t ry .

Wit h res p ec t t o t h e f u t u re o f t rans f er p ric ing and p o s s ib l e m eas u res agains t BEPS, it was specifically mentioned that:

• Legislative requirements for MNEs to maintain specific transfer pricing do c u m ent at io n is t o b e c o ns idered.

• Legislative measures to address o u t c o m es o f t h e BEPS Ac t io n Pl an (e.g., c o u nt ry - b y - c o u nt ry rep o rt ing) are t o b e c o ns idered.

• Legislative framework for Advance Pric ing Agreem ent s (APAs ) is t o b e c o ns idered, as s u c h advanc e agreem ent s o n t rans f er p ric ing b et w een t ax p ay ers and SARS c o u l d al l eviat e t h e enf o rc em ent b u rden and enc o u rage c o m p l ianc e.

SARS no t ed t h ere is no eas y s o l u t io n and it has to work within the confines o f b o t h do m es t ic and int ernat io nal l aw . Wh il e t igh t er l egis l at io n m ay b e needed, SARS rec o gniz ed it is vit al l y im p o rt ant t o res p o nd in a m anner t h at is b al anc ed and do es no t p o s e a det errent t o f o reign direc t inves t m ent . In t h is regard, it is w o rt h no t ing t h at addit io nal m eas u res m ay c o m e f ro m t h e Davis Tax Co m m it t ee f o l l o w ing it s review o f t h e c o rp o rat e t ax s y s t em w it h s p ec ial ref erenc e t o t ax avo idanc e (e.g., b as e ero s io n, inc o m e splitting and profit shifting).4

4 On 17 Ju l y 2013, t h e So u t h Af ric an Minis t er o f

Financ e anno u nc ed t h e m em b ers o f a t ax review c o m m it t ee (t h e Davis Tax Co m m it t ee) t o inq u ire int o t h e ro l e o f t h e t ax s y s t em in t h e p ro m o t io n o f inc l u s ive ec o no m ic gro w t h , em p l o y m ent c reat io n,

Davis Tax Review Committee issues a draft interim report on BEPSNo vem b er’ s Parl iam ent ary s es s io n w as f o l l o w ed s h o rt l y af t erw ards b y t h e publication of the first interim draft rep o rt o f So u t h Af ric a’ s Davis Tax Review Co m m it t ee o n 23 Dec em b er 2014. As b ac k gro u nd, t h e Go vernm ent es t ab l is h ed t h is c o m m it t ee in 2013 t o inves t igat e t h e vario u s as p ec t s o f t h e So u t h Af ric an t ax p o l ic y f ram ew o rk . Th e rep o rt as k s f o r int eres t ed p art ies t o p ro vide c o m m ent s b y 31 Marc h 2015.

Once the report is finalized, its rec o m m endat io ns w il l inf o rm f u t u re t ax p o l ic y devel o p m ent in So u t h Af ric a and m ay t rans l at e int o do m es t ic t ax l egis l at ive am endm ent s if ac c ep t ed b y t h e Minis t er o f Financ e. No t al l o f t h e OECD’ s BEPS Ac t io n it em s are c o vered in t h e rep o rt , w h ic h f o c u s o n Ac t io n 1 (Digit al ec o no m y ), Ac t io n 2 (Hy b rid m is m at c h es ), Ac t io n 5 (Harm f u l t ax p rac t ic es ), Ac t io n 6 (Treat y ab u s e), Ac t io n 8 (Trans f er p ric ing w it h regard t o int angib l es ), Ac t io n 13 (Trans f er p ric ing do c u m ent at io n) and Ac t io n 15 (Devel o p a m u l t il at eral ins t ru m ent ).

development and fiscal sustainability. See http://w w w .t ax c o m .o rg.z a/ f o r m o re inf o rm at io n.


Digital economyTh e rep o rt no t es t h at t h ere is no u rgent need f o r t h e am endm ent o f t h e ru l es t o addres s vario u s as p ec t s rel at ing t o o u t b o u nd e- c o m m erc e b u s ines s es . Th e m ain rec o m m ended adj u s t m ent s rel at ed t o e- c o m m erc e inc l u de:

• Adj u s t m ent o f t h e f o reign t ax c redit p ro vis io ns

• Adj u s t m ent o f t h e s o u rc e ru l es f o r t h e digit al ec o no m y and s u p p l y o f digit al go o ds and s ervic es

• Ru l es o n t h e c h arac t eriz at io n o f t y p ic al e- c o m m erc e p ay m ent s

• Ru l es t o req u ire no nres ident s t h at derive SA s o u rc ed inc o m e (o t h er than passive income) to file income t ax ret u rns even if t h ey do no t h ave a p erm anent es t ab l is h m ent in SA

SA w il l c o nt inu e t o m o nit o r t h e OECD w o rk o n t h e p erm anent es t ab l is h m ent t h res h o l d f o r t h e digit al ec o no m y .

Hybrid mismatchesTh e rep o rt no t es indu s t ry s ent im ent t h at SA is ah ead o f t h e c u rve in t erm s o f l egis l at ing ant i- avo idanc e m eas u res t o c u rb t h e u s e o f h y b rid ins t ru m ent s and ent it ies . In t h e m ain, t h e k ey do m es t ic p ro vis io ns are: c o o rdinat io n ru l es prescribed in the definition of “foreign p art ners h ip ” and dividend, int eres t dedu c t io n l im it at io n ru l es , and h y b rid deb t and h y b rid eq u it y ru l es .

Key rec o m m endat io ns o f t h e rep o rt inc l u de:

• Legislative simplification and refocusing t h e vario u s ru l es o n l egal p rinc ip l es underlying hybrids rather than specific t rans ac t io ns

• Bal anc ing t h e need f o r int eres t dedu c t io n l im it at io n ru l es t o c u rb BEPS agains t SA ec o no m ic im p erat ives o f at t rac t ing f o reign direc t inves t m ent and enc o u raging int ernat io nal t rade

• Co ns idering t h e u s e o f t h e UK ap p ro ac h t o m at c h ing ” m anu f ac t u red p ay m ent s ” ins t ead o f ant i- avo idanc e l egis l at io n

• Th e u s e o f t h e general ant i- avo idanc e ru l es and c o m m o n l aw s u b s t anc e vers u s f o rm ru l es t o c o m b at BEPS, as a l as t res o rt

Th e rep o rt al s o c al l s f o r t h e f o c u s t o b e h o ned o n m is m at c h es t h at ero de t h e SA t ax b as e in t h e c o nt ex t o f Do u b l e Tax at io n Agreem ent (t reat y )

Harmful tax practicesTh e rep o rt h igh l igh t s t h e im p o rt anc e o f So u t h Af ric a’ s as p irat io n t o rem ain an inves t m ent gat ew ay t o Af ric a as no t ed, in am o ng o t h ers , t h e Nat io nal Devel o p m ent Pl an (t h e Go vernm ent ’ s ec o no m ic t rans f o rm at io n b l u e- p rint ). Th is as p irat io n is as s es s ed agains t SA’ s int ernat io nal o b l igat io n no t t o engage in h arm f u l t ax p rac t ic es . To t h is end, t h e rep o rt rec o m m ends t h at t h e c u rrent h eadq u art er c o m p any regim e (w h ic h p ro vides f o r inves t m ent gat ew ay int o Af ric a) s h o u l d p res c rib e t h e m inim u m s u b s t anc e req u irem ent as p er t h e OECD rec o m m endat io ns . Cu rrent l y , t h ere is no m inim u m req u irem ent f o r s et t ing u p a HQ c o m p any in So u t h Af ric a. Ho w ever, s u b s t anc e is im p l iedl y req u ired f o r a HQ company to qualify for treaty benefits.

Th e rep o rt al s o no t es t h at SARS s h o u l d no t s anc t io n advanc e t ax ru l ings “ t h at f o s t er h arm f u l t ax p rac t ic es and h am p er t rans p arenc y .” Fu rt h erm o re, it is rec o m m ended t h at , in l ine w it h OECD rec o m m endat io ns , SARS s h o u l d ex c h ange ru l ings w it h f o reign t ax au t h o rit ies o n a s p o nt aneo u s b as is , w h ere SARS is aw are t h at t h e ru l ing af f ec t s res ident s o f t h at c o u nt ry .

Preventing treaty abuseSeveral rec o m m endat io ns are m ade o n t h e im p ro vem ent o f SA t reat y net w o rk w it h a l angu age t h at w o u l d c o u nt er t reat y ab u s e, in l ine w it h OECD rec o m m endat io ns . Th e rec o m m endat io ns inc l u de:

• Adj u s t t h e p ream b l e t o t reat ies t o ex p res s a c l ear s t at em ent t h at t reat ies are no t int ended t o avo id o r c reat e o p p o rt u nit ies f o r do u b l e no n- t ax at io n o r redu c ed t ax at io n

• Introduce a limitation on benefits clause (al o ng t h e l ines o f t h e US t reat ies )

• Us e o f t h e “ p rinc ip al p u rp o s e t es t ” in t reat ies t o c o u nt er t h e u s e o f aggressive financing structures. The p rinc ip al p u rp o s e t es t is in l ine w it h t h e ex is t ing do m es t ic general ant i-avo idanc e p ro vis io ns and w o u l d f o l l o w the example of Article 11(9) of the SA — Braz il t reat y . Th e t es t w il l t arget t h e as s ignm ent and c es s io n o f u nderl y ing financial instruments with the main o r o ne o f t h e m ain p u rp o s es o f t ak ing advant age o f t reat y p ro vis io ns .

Th e rep o rt al s o c al l s f o r t h e renego t iat io n o f t reat ies w it h z ero w it h h o l ding t ax rat es and t h at do no t al l o c at e s o u rc e t ax ing righ t s f o r l and ric h s h ares and no t es t h e stalling of the finalization of the SA-Mau rit iu s revis ed t reat y . Th e p o l ic y o f renego t iat ing f avo rab l e t reat ies w it h l o w t ax j u ris dic t io ns h as b een a k ey f o c u s f o r a while and the report adds significant im p et u s t o t h at init iat ive.

Final l y , it is p ro p o s ed t h at t h e p o l ic y o f granting foreign tax credits (cash flow rel ief p ending engagem ent b y c o m p et ent au t h o rit ies ) f o r So u t h Af ric an s o u rc ed inc o m e s h o u l d b e rec o ns idered. Th e p o l ic y ap p arent l y enc o u rages t reat y p art ners t o im p o s e inc o m e t ax o n SA s o u rc ed inc o m e in t o t al dis regard o f t h e t reat ies .


General transfer pricing considerationsThe report recommends the official ado p t io n o f OECD s t andards t h ro u gh ex p res s l egis l at ive p ro vis io n o r general b inding ru l ing. Cu rrent l y , t h e OECD TP Gu idel ines are ap p l ied as a m at t er o f p rac t ic e. Th e ado p t io n o f t h e OECD s t andards w o u l d b e adj u s t ed w it h o u t deviating from the core, in order to reflect t h e SA real it y . No addit io nal inf o rm at io n is p ro vided o n t h e nat u re and ex t ent o f t h e adj u s t m ent s t o b e c o ns idered. In addit io n, t h e rep o rt no t es t h at t h e SARS c ap ac it y o n t rans f er p ric ing s h o u l d b e b o l s t ered.

Transfer pricing of intangiblesMeas u res t o c u rb t h e ex p o rt o f int el l ec t u al p ro p ert y (IP), c ap p ing ro y al t y rat es and p revent ing t h e ero s io n o f SA t ax b as e t h ro u gh dedu c t io n o f ro y al t ies rel at ed t o p revio u s l y SA o w ned IP c u rrent l y ex is t w it h in t h e ex c h ange c o nt ro l and t ax f ram ew o rk . Th e k ey t ax ru l es are t rans f er p ric ing ru l es , p ro h ib it io n o f c l aim ing dedu c t io ns in rel at io n t o p revio u s l y SA o w ned IP, l im it ed o r no c o nt ro l l ed f o reign c o rp o rat io n (CFC) ex em p t io ns for IP and the beneficial ownership req u irem ent s in t h e t reat ies . Given t h e ex t ent o f t h es e m eas u res , no general ac t io n is rec o m m ended in rel at io n t o t h e im p l em ent at io n o f t h e OECD BEPS Ac t io n 8 . Ho w ever, c o nc erns w ere no t ed in rel at io n t o t h e val u at io n o f IP and l im it ed rem u nerat io n o f SA c o u nt erp art ies in t h e c o nt ex t o f a c o nt rac t res earc h and development (R&D) arrangement.

Transfer pricing documentationTh e c u rrent t rans f er p ric ing ru l es do no t ex p res s l y req u ire t rans f er p ric ing do c u m ent at io n, al t h o u gh s u c h do c u m ent at io n is rec o m m ended f ro m a ris k m it igat io n p ers p ec t ive. Th e rep o rt rec o m m ends t h e ado p t io n o f t h e OECD t h ree- t iered s t ru c t u re in rel at io n t o t rans f er p ric ing do c u m ent at io n, i.e., master file, local file and country by c o u nt ry rep o rt ing. Th e t h res h o l d f o r c o m p u l s o ry do c u m ent at io n w il l rel at e t o l arge m u l t inat io nal s w it h o ver a R1 b il l io n gro u p t u rno ver.

Development of a multinational instrument Th e rep o rt s u p p o rt s t h e OECD ap p ro ac h t o ado p t io n o f a m u l t inat io nal ins t ru m ent t o ef f ec t am endm ent s in nu m ero u s t reat ies . SA is c u rrent l y p art y t o s everal m u l t il at eral ins t ru m ent s o n m u t u al as s is t anc e in t ax m at t ers .

Given t h at t h e DTC rep o rt is s t il l in draf t f o rm at and Treas u ry h as no t y et c o ns idered indu s t ry view s o n t h e rec o m m endat io ns , it is u nl ik el y t h at t h e m o re o nero u s rec o m m endat io ns w il l t rans l at e int o im m ediat e l egis l at ive amendments in the current fiscal year.


ConclusionsWhile both the Parliamentary session and the interim draft report of the Davis Tax Review Committee have both occurred well in advance of the final BEPS recommendations, together they indicate the broad range of implementation measures each country will be considering. In respect to South Africa specifically, the news that Legislative requirements for multinational enterprises (MNEs) to maintain specific transfer pricing documentation is to be considered is not surprising at all, given the groundswell of countries who have already moved in that direction in recent years. Perhaps more welcome is the news that a legislative framework for Advance Pricing Agreements (APAs) is to be considered. The lack of an APA has long been a bone of contention for business and it is hoped that, in the context of the potential for a rising number of transfer pricing disputes, all efforts will be made to put this in place sooner rather than later.

More broadly, the Davis Committee report provides an early, highly interesting insight into just how many areas of legislation the BEPS project will potentially impact in each country. While not every country may give such clear opportunities for business to engage in the process, it is clear that where that opportunity is granted, business should take every chance to provide input. This really is the period when changes are going to occur and any feelings of “BEPS fatigue” need to be shaken off.



In this roundtable discussion, the group discusses the objectives, workings, and application of the UK’s proposed diverted profits tax, which were passed and became effective on 1 April 2015.

R ob T homas: Mat , b ef o re w e get int o t h e m ec h anic s o f t h e diverted profits tax (DPT), can you tell us a little bit of the b ac k gro u nd ab o u t h o w it c am e ab o u t and w h at w as driving t h e UK government to introduce it?

M at M eal ey : Th ere are t h ree k ey drivers . Firs t , it is p o l it ic al . Th e UK go vernm ent b el ieves t h at t h e UK el ec t o rat e is h o s t il e t o int ernat io nal t ax avo idanc e, w h ic h t h ey u nders t and t o b e t h e t y p e o f arrangem ent s t h at t h ey ’ ve read ab o u t in new s p ap ers and t h at h ave b een b ef o re t h e UK Parl iam ent ’ s Pu b l ic Ac c o u nt s Committee. This is where there are profits in low-substance, low-t ax ent it ies and w h ere t h e s o u rc e o f t h e revenu e t h at generat es the profits is in the UK. Secondly, it’s revenue raising — this new tax is predicted to raise about a billion pounds over a five-year p erio d. Th e DPT h as c ro s s - p art y p o l it ic al s u p p o rt in t h e UK and b ec au s e o f t h is it s eem s u nl ik el y t h at t h ere w il l b e any s c o p e f o r del ay o r f u ndam ent al p o l ic y c h ange.

Th irdl y , it is ab o u t driving b eh avio ral c h ange. In t h is regard, I h ave a f eel ing t h at HM Revenu e and Cu s t o m s , t h e UK’ s t ax adm inis t rat io n, is s o m et im es f ru s t rat ed t h at in t h e c as e o f c ert ain t rans ac t io ns t h at t h ey b el ieve m igh t ero de t h e UK’ s tax base it’s very difficult to get full information about the transactional flow. They feel they are being held at a distance, b eing t o l d t h at t h e c o u nt erp art y w it h t h e direc t t rans ac t io n w it h t h e UK do es n’ t h ave ac c es s t o t h e inf o rm at io n h igh er u p t h e c h ain. No w w it h DPT, t h ey c an s t im u l at e a c h ange o f b eh avio r, b ec au s e, in s im p l e t erm s , if t h e t ax p ay er do es n’ t p ro vide t h e inf o rm at io n, t h en t h ere w il l b e a p enal c h arge and t h ey w o n’ t get m o ney b ac k u nt il t h e inf o rm at io n is p ro vided

T homas: I k no w w e’ ve h ad a c o ns u l t at io n p ro c es s in earl y 2015 — what was the outcome from that?

M eal ey : Uns u rp ris ingl y , w h il e t h e c o ns u l t at io n p ro c es s w as very real , w e didn’ t s ee t h e w it h draw al o r f u ndam ent al am endm ent t h e ru l es . Ho w ever, it is c l ear t h at t h e ru l es are int ended t o b e c l o s el y t arget ed o n w h at t h e UK p erc eives t o b e ab u s ive arrangem ent s . Th e c o ns u l t at io n s h o w ed t h at t h e l it eral des ign o f t h e ru l e didn’ t ac h ieve t h at o b j ec t ive, and w e s aw t h e p ro vis io ns narro w ed do w n. As an ex am p l e, HMRC rec o gniz e t h e ‘‘notification requirements’’ may need to be narrowed.

Th e UK s ay s it s p o l ic y is t o b e ‘ ‘ o p en f o r b u s ines s ’ ’ b u t t o u gh o n avo idanc e, h aving a c o m p et it ive t ax s y s t em and l o w rat e o f tax — but they expect you to pay the low rate of tax on the net profits you generate here. So the UK government would say that the rule forces alignment of profits with substance and is aligned both with that policy and the base erosion and profit-shifting init iat ive.

F eatured P ersp ecti v e

The UK’s Diverted Profits Tax: A Roundtable Discussionby Mat Mealey, Simon Atherton, Chris Sanger, Jenny Coletta and Rob Thomas

Mat Meal ey is Int ernat io nal Tax Servic es Nat io nal Office Leader and Simon Atherton is Transfer Pricing and Operating Model Effectiveness Leader for EY in t h e Unit ed Kingdo m . Ch ris Sanger is Gl o b al Tax Policy Leader for EY and Jenny Coletta is EY’s EMEIA Insurance Transfer Pricing Leader; both are also based in London. Rob Thomas is a director in EY’s Tax Policy and Co nt ro vers y gl o b al net w o rk and is b as ed in Was h ingt o n.

A version of this article first appeared in Volume 77, Nu m b er 6 o f Tax Notes International, Tax Analysts.


Chris Sanger: What about legality? Wo n’ t t h ere b e q u es t io ns ab o u t w h et h er t h e ru l es are l egal and enf o rc eab l e, b o t h u nder t reat y p ro vis io ns and EU provisions?

M eal ey : Wh at w e c an s ay at t h is s t age is t h at t h ey ’ ve b een des igned t o b e l egal and enf o rc eab l e, w it h f u l l rec o gnit io n t h at t h ey are int ended t o c o nt radic t t reat ies and t h ey are int ended no t t o b e s u s c ep t ib l e t o EU l aw o verride. In m y view , t h e UK h as general l y j u dged t h is w el l in t h e p as t . Th ere w il l inevit ab l y b e s o m e q u es t io ns aro u nd l egal it y o f t h e t ax b u t it w il l b e ris k y and ex p ens ive t o c h al l enge. In t h e vas t m aj o rit y o f c as es , t h e DPT c an b e s w it c h ed o f f w it h arm ’ s - l engt h t rans f er p ric ing w h ere al l rel evant arrangem ent s h ave b een m ade t rans p arent t o and agreed w it h HMRC. We c an ex p ec t t h at is l ik el y t o b e t h e p ref erred w ay f o rw ard in m o s t c as es . Th e DPT ap p l ies f ro m 1 Ap ril 2015, and t h ere are t w o c h arging p ro vis io ns . Firs t , t h ere w il l b e a c h arge if t h ere is avo idanc e o f a p erm anent es t ab l is h m ent , and s ec o nd, if t h ere are t rans ac t io ns invo l ving ent it ies o r t rans ac t io ns w it h o u t ec o no m ic s u b s t anc e. It ’ s a p enal c h arge w it h a p enal rat e and a p enal t ax b as e, c ert ainl y du ring t h e as s es s m ent p erio d and s o m et im es af t erw ards if t h ere is rec h arac t eriz at io n. Th is inc ent iviz es res t ru c t u ring o u t o f DPT as w el l as inc reas ed val u e c h ain t rans p arenc y as y o u need t o p ro ve t h e ro b u s t nes s o f y o u r t rans f er p ric ing, t h ro u gh m u l t ip l e t iers o f t rans ac t io ns if t h ey af f ec t t h e UK. Co nt ro vers ial l y , t h e m ec h anic s o f t h e as s es s m ent ru l es s h if t t h e b al anc e o f p o w er in nego t iat io ns o ver t rans f er p ric ing in h igh - ris k c as es t o w ard HMRC.

Triggering the DPTT homas: Jenny , w h y do n’ t y o u t ak e u s t h ro u gh t h e t h ree c irc u m s t anc es w h ere we think the DPT might be triggered?

J en n y C ol etta: Th ere are t h ree h igh -ris k c irc u m s t anc es . Firs t is PE avo idanc e t rans ac t io ns , w h ere y o u w o u l d h ave a t rans ac t io n w it h UK c u s t o m ers and t h e t rans ac t io n is des igned t o avo id a PE. In t h o s e c irc u m s t anc es , w h en t h e o t h er t h res h o l d c o ndit io ns are m et , w e h ave a deem ed PE o f a no nres ident c reat ed in the UK. Profits would be attributed to the deem ed PE o n an arm ’ s - l engt h b as is and w o u l d b e t ax ab l e at 25%, b eing a p enal t ax t h at is 5 p erc ent age p o int s h igh er t h an t h e 20% rat e du e t o ap p l y w h en t h e DPT c o m es int o f o rc e o n Ap ril 1, 2015.

Sec o nd, w e h ave no n- arm ’ s - l engt h t rans f er p ric ing. If t h ere is a t rans ac t io n t h at invo l ves arrangem ent s t h at redu c e t h e UK t ax b as e and invo l ve no n- arm ’ s -l engt h t rans f er p ric ing, t h en t h ere w o u l d b e a 25% p enal DPT adj u s t m ent o n t h e no n- arm ’ s - l engt h p o rt io n o f t h e t rans f er p ric e.

It ’ s no t o b vio u s h o w y o u w o u l d h ave a no n- arm ’ s l engt h t rans f er p ric ing t rans ac t io n int o t h e UK b ec au s e t h e UK h as arm ’ s - l engt h t rans f er p ric ing ru l es , b u t t h e DPT im p ac t c o u l d b e p o s s ib l e in t w o c irc u m s t anc es . Firs t l y , s inc e t h e DPT ru l es c an b e im p o s ed t h ro u gh HMRC is s u ing a c h arging no t ic e, t h is m ay b e as a res u l t o f HMRC deem ing t h e t rans ac t io n t o b e no n- arm ’ s - l engt h b as ed o n t h eir int erp ret at io n o f t h e t rans f er pricing rules — which may differ from the t ax p ay er’ s o w n s el f - as s es s m ent . Sec o ndl y , on indirect transactions — transactions t h at do n’ t direc t l y t o u c h t h e UK.

Then finally, there is recharacterization o f t rans ac t io ns , w h ere y o u h ave UK nex u s w it h o f f s h o re as s et s o r ris k s . If t h e righ t c o ndit io ns are m et , t h en t h e l egis l at io n c an ap p l y t o rec h arac t eriz e t h e t rans ac t io n, s o t h e as s et o r ris k is as s u m ed t o b e h el d o ns h o re, and t h eref o re again, y o u w o u l d h ave t h e diverted profits tax of 25% in the UK.

S i mon A therton : Th e gat ew ay s int o t h e ru l es are dif f erent , dep ending o n w h ic h p art o f t h e ru l es y o u are in. Firs t l y , m any t ax p ay ers w il l b e o b l iged t o give notification that they are potentially liable t o DPT; it ’ s a b ro ad t es t f o r ent ry int o t h e regim e. Ho w ever, m any o f t h o s e t ax p ay ers w il l p ro b ab l y get a nil as s es s m ent .

Th en t h ere is a s ec o nd c at ego ry o f t ax p ay ers f o r w h o m HMRC is u ns u re o f t h e t rans f er p ric ing arrangem ent s , and hence notifies the company that the DPT ap p l ies t o t h eir s it u at io n. Th es e c o m p anies w il l get an as s es s m ent , t h ey w il l h ave t o p ay q u it e a p enal am o u nt o f t ax , b u t t h en w il l h ave t h at t ax ref u nded w h en t h ey p ro vide t h e t rans p arenc y o ver t h eir arrangem ent s and p ro ve t h eir t rans f er p ric ing.

Th irdl y , t h ere are t ax p ay ers f o r w h o m t h e arrangem ent s are c u rrent l y avo iding t ax , du e t o PE avo idanc e. Fo r t h o s e t ax p ay ers , t h ey w il l b e ab l e t o avo id t h e DPT c h arge at 25% b y res t ru c t u ring t h eir arrangem ent s t o c o m e w it h in t h e c o rp o rat e inc o m e t ax c h arge (b y t h en at 20%). Then there’s a final class of t ax p ay ers w h o f al l w it h in t h e DPT c h arge and do n’ t res t ru c t u re t h eir arrangem ent and ac t u al l y p ay t h e p enal t y rat e o f t ax .

T homas: Let’s go back to the PE avo idanc e c as e. Can y o u give u s an o verview o f t h e p o t ent ial m ec h anic s o f the rules?

A therton : Bas ic al l y , t h is f o c u s es o n a no n- UK c o m p any p ro viding go o ds o r s ervic es t o c u s t o m ers in t h e UK, w h ere s o m eb o dy is c arry ing o n an ac t ivit y in t h e UK in c o nnec t io n w it h t h o s e s u p p l ies . Y o u t h en h ave t o l o o k at w h et h er it ’ s reas o nab l e t o as s u m e t h at t h e ac t ivit y h as b een des igned t o ens u re t h at t h ere is n’ t a PE in t h e UK. Im p o rt ant l y , y o u h ave t o m ak e t h at as s u m p t io n igno ring any c o m m erc ial o b j ec t ives t h at m ay h ave driven h o w ac t ivit ies m ay h ave b een des igned. Th at is q u it e a w ide ent ry int o t h e c h arge. We t h en h ave t w o t es t s t h at h ave t o b e m et , al t h o u gh b o t h c an b e m et at t h e s am e t im e. Firs t , y o u h ave t h e m is m at c h c o ndit io n, o r y o u h ave t h e t ax avo idanc e c o ndit io n. Th e m is m at c h

“ Th ere is a s ec o nd c at ego ry o f t ax p ay ers f o r w h o m HMRC is u ns u re o f t h e t rans f er pricing arrangements, and hence notifies the company that the DPT applies to their s it u at io n. Th es e c o m p anies w il l get an as s es s m ent , t h ey w il l h ave t o p ay q u it e a p enal am o u nt o f t ax , b u t t h en w il l h ave t h at t ax ref u nded w h en t h ey p ro vide t h e t rans p arenc y o ver t h eir arrangem ent s and p ro ve t h eir t rans f er p ric ing.”


c o ndit io n is b as ic al l y t h at in b et w een t h e f o reign c o m p any , t h ere is a t ax - ef f ec t ive arb it rage (8 0%) via a t rans ac t io n o r a s eries o f t rans ac t io ns . In addit io n, t h e m is m at c h c o ndit io n req u ires t h at t h ere is insufficient economic substance, which I’ll c o m e t o s h o rt l y .

Tax avoidance conditionTh e t ax avo idanc e c o ndit io n is very s im p l e. It b as ic al l y s ay s ‘ ‘ in c o nnec t io n w it h t h e s u p p l y ing o f go o ds and s ervic es , is it p o s s ib l e t h at o ne o f t h e m ain p u rp o s es , o r t h e m ain p u rp o s e it s el f , w as t o avo id t h e c h arge o f c o rp o rat io n t ax in the UK?’’ The only guidance is that this definition of tax avoidance is to be as per c o m m o n l angu age in UK t ax l aw , s o again t h at is p o t ent ial l y q u it e b ro ad.

This is satisfied if there is an insufficient financial benefit referable to the t rans ac t io n (t h at is , in c o m p aris o n t o t h e t ax arb it rage), o r w h ere in a s eries o f t rans ac t io ns a p ers o n o r an ent it y t h at is p art o f t h o s e t rans ac t io ns and h as ec o no m ic val u e l es s t h an t h e val u e o f t h e arb it rage.

Int eres t ingl y , t h e UK h as s o f ar s aid t h at t h e ec o no m ic val u e is t o b e m eas u red s o l el y b y t h e f u nc t io n p erf o rm ed b y t h e s t af f o f t h at ent it y . Th at c an inc l u de direc t o rs and ex t ernal s t af f w h ere ac t ivit ies are o u t s o u rc ed, p ro vided t h ey are u nder t h e c o m p any ’ s direc t io n. In eac h c as e, dep ending o n w h ic h p art o f t h e insufficient economic substance condition is m et , y o u h ave t o as k if it is reas o nab l e t o as s u m e t h at t rans ac t io n is des igned t o s ec u re t h e t ax dedu c t io n. Bas ic al l y , if y o u h ave m o re t h an 8 0% t ax - ef f ec t ive arbitrage and you have insufficient ec o no m ic s u b s t anc e s o m ew h ere al o ng t h e l ine, t h en y o u m eet t h e m is m at c h c o ndit io n in t o t al , and o nc e again t h e DPT w il l ap p l y .

Under t h e t ax avo idanc e ro u t e, t h e DPT basically seeks to tax the profits of the avo ided PE o n an o ngo ing b as is , s o y o u w o u l d l ik el y h ave s o m e k ind o f dis t rib u t io n ret u rn al l o c at ed t o t h e PE in t h e UK. Th is is al s o l ik el y u nder t h e m is m at c h ro u t e, b u t im p o rt ant l y , t h e m is m at c h c o ndit io n

al s o al l o w s f o r t h e rec h arac t eriz at io n, s o w h ere t h ere is a p ro vis io n s o m ew h ere al o ng t h e ro u t e t h at w o u l dn’ t h ave b een m ade o r im p o s ed w it h o u t t h e t ax advant age, HMRC c an p ro p o s e a rep l ac em ent t h at is o n a j u s t and reas o nab l e b as is . Th at is very b ro ad and is the first time that we’ve seen something as b ro ad, and w e are u nc l ear at t h e m o m ent ex ac t l y h o w t h at is go ing t o b e ap p l ied. Cl earl y t h at h as b een p u t in p l ac e b ec au s e t h ere is a f eel ing t h at t h e ex is t ing rec h arac t eriz at io n o f b u s ines s in t h e OECD gu idel ines h as no t b een p ro viding HMRC w it h t h e ab il it y t o at t ac k s o m e o f t h e t rans ac t io ns t h ey dis l ik e. Ho w ever, t h e rec ent OECD BEPS dis c u s s io n draf t o n ac t io ns 8 - 10 (ris k and rec h arac t eriz at io n) s eem s t o int ro du c e m o re s t ringent rec h arac t eriz at io n p ro vis io ns t h an is c u rrent l y t h e c as e in t h e OECD gu idel ines , and t h ere are s im il arit ies w it h t h e DPT p ro p o s al s in t h is regard.

T homas: So s ec t io n 2 is ac t u al l y p ro b ab l y t h e m o re b as ic o f t h e p ro vis io ns des p it e w h at t h at m igh t s o u nd l ik e, h aving ru n t h ro u gh it . Wh y do n’ t y o u t ak e u s t h ro u gh section 3, Jenny?

C ol etta: Sec t io n 3 is a s ep arat e c h arging p ro vis io n t h at is c o m p l et el y s ep arat e f ro m s ec t io n 2 and ap p l ies w h en y o u ’ ve go t a PE o r a s u b s idiary in t h e UK. Es s ent ial l y , s ec t io n 3 l o o k s t o ap p l y a DPT c h arge w h ere t h ere are t rans ac t io ns b et w een c o nnec t ed p art ies b y m eans o f a s eries o f t rans ac t io ns o r a s ingl e t rans ac t io n w h ere o ne o f t h e p art ies is res ident in t h e UK. So t h is c o u l d b e any t y p e o f t rans ac t io n, o t h er t h an l o an rel at io ns h ip s . Th e p ro vis io n ap p l ies in s im il ar c irc u m s t anc es t o s ec t io n 2, b u t t h e p rec is e c rit eria are s l igh t l y dif f erent . Th ere is s t il l an ef f ec t ive t ax m is m at c h c o ndit io n, b u t it is a dif f erent t es t . Again t h ere is an insufficient economic substance c o ndit io n, and t h is is es s ent ial l y t h e s am e t es t as s ec t io n 2.

Th e m is m at c h p ro vis io n is rel at ed t o a t ax p aid t es t . Th e t es t l o o k s at t h e ex t ent t o w h ic h t h e o vers eas c o m p any is p ay ing t ax o n t h e t rans ac t io n u p o n w h ic h t h e UK ent it y h as es s ent ial l y no t p aid t ax . Th e

t es t h ere real l y rel at es t o a p erc ent age o f t h e UK rat e, and t h e s af e h arb o r is s et at 8 0%, s o w h ere y o u ’ ve go t o vers eas c o m p anies t h at h ave an ef f ec t ive t ax rat e o f l es s t h an 16%, t h en y o u are p o t ent ial l y in t h es e ru l es . Wh il s t t h e ru l es rel at e t o t h e t ax p aid, it do es al l o w t h e u s e o f losses — there are references to allowing o f f s et o f l o s s es in t h e o vers eas c o m p anies b u t t h e ref u nd o f t ax (b y m eans o f a t ax c redit ) c an p o t ent ial l y add t o t h e t ax p aid m is m at c h .

Th is t es t is int eres t ing and u nu s u al c o m p ared t o w h at w e are u s ed t o s eeing in o t h er p art s o f UK l egis l at io n.

Onc e y o u ’ ve go ne t h ro u gh t h at anal y s is , you then need to look at the insufficient economic substance test. The first pillar is: ‘‘Do you have a financial benefit that is in line with the tax benefit?’’ So, for example, if your tax benefit is greater than any other type of financial benefit, t h en y o u are p o t ent ial l y int o t h is t es t . If y o u m eet t h at t es t , t h en y o u h ave effectively breached the insufficient ec o no m ic s u b s t anc e c o ndit io n, even if y o u then have sufficient economic substance.

If y o u are int o t h e c h arging p ro vis io n, t h e ru l es c an adj u s t t h e t rans ac t io n t o an arm ’ s - l engt h t rans f er p ric ing am o u nt . If y o u r t rans f er p ric ing is al l in l ine, t h en y o u h ave t o go t h ro u gh t h e rec h arac t eriz at io n t es t and l o o k at t h e ex t ent t o w h ic h it is reas o nab l e t o as s u m e t h at t h e t rans ac t io n w o u l d h ave t ak en p l ac e w ere it no t f o r t h e tax benefit and as compared to alternative arrangem ent s . Th e k ey w o rding h ere is ‘ ‘ reas o nab l e t o as s u m e.’ ’ It is c u rrent l y u nc l ear w h at is reas o nab l e t o as s u m e and in w h at s c enario y o u m ay o r m ay no t h ave b een ab l e t o o r dec ided no t t o p ay t h e UK t ax . Again t h ere are s o m e s im il arit ies w it h t h e p ro p o s ed c h anges t o t h e OECD gu idel ines o u t l ined in t h e BEPS ris k and rec h arac t eriz at io n dis c u s s io n draf t , w h ic h t al k s ab o u t ‘ ‘ reas o nab l e ex p ec t at io n.’ ’

T homas: So l et ’ s j u s t p au s e f o r a m o m ent . Wh at do y o u s ee as t h e h igh - l evel messages so far?

“ Th e k ey w o rding h ere is ‘ ‘ reas o nab l e t o as s u m e.’ ’ It is c u rrent l y u nc l ear w h at is

reas o nab l e t o as s u m e and in w h at s c enario y o u m ay o r m ay no t h ave b een ab l e t o o r

dec ided no t t o p ay t h e UK t ax .”


M eal ey : I t h ink t h at t ax p ay ers w it h a DPT ex p o s u re w il l m o s t l ik el y res p o nd b y al t ering t h eir c o rp o rat e s t ru c t u re, b ec au s e t h e DPT is at a h igh er rat e t h an t h e UK m ain CIT rat e and it ’ s a b ro ader b as e t h an t h e UK b as e. I c o u l d vis u al iz e t h at a very s m al l nu m b er o f t ax p ay ers m igh t no t w ant t o do t h at b ec au s e in s o res t ru c t u ring, y o u m igh t h ave t o rec al ib rat e y o u r t rans f er p ric ing int o t h e UK. And if y o u are u s ing t h e s am e m et h o do l o gy in 60 c o u nt ries , y o u m igh t no t w ant t o adj u s t y o u r t rans f er p ric ing in t h e UK b ec au s e o f t h e l ac k o f c o ns is t enc y w it h o t h er c o u nt ries .

A s ec o nd p o int is t h at , in t h e vas t m aj o rit y o f c as es , t rans p arent t rans f er p ric ing ap p ro ved b y HMRC is l ik el y t o s w it c h o f f t h e DPT and avo id t h e ris k o f p u nit ive o r u p f ro nt as s es s m ent . St ru c t u res at risk of a DPT charge are not going to be that difficult to identify — there will be UK-source profits, UK—source customers, and lots of profits arising in an entity with low substance and low t ax .

A t h ird and very c o nt ro vers ial p o int : Fo reign- t o - f o reign t rans f er p ric ing w it h l o w - s u b s t anc e ent it ies is go ing t o h ave t o b e at arm ’ s l engt h w h ere it l eads , in HMRC’ s view , t o UK t ax b as e ero s io n. Co m p anies w il l need t o h ave regard t o HMRC’ s int erp ret at io n o f t h e f o reign t rans ac t io ns .

Thomas: Simon, could you bring this alive with an example?

Figure 1. PE avoidance cases: direct example

Services (likely

cost-plus transfer pricing)

Low-tax jurisdiction

(asset owner)

UK Co (sales support

services)

Sales of goods or services

UK customers

A therton : Co ns ider a f o reign c o m p any in a p l ac e t h at is view ed as a l o w - t ax j u ris dic t io n, w h ic h is p ro viding go o ds o r s ervic es t o UK c u s t o m ers . It h as s o m eo ne in t h e UK u ndert ak ing ac t ivit y in as s o c iat io n w it h t h e p ro vis io n o f t h o s e go o ds o r s ervic es , s u c h as a UK c o m p any o p erat ing as a s al es s u p p o rt veh ic l e, o n c o s t -p l u s ret u rn.

So first HMRC will ask whether, ignoring commercial imperatives, it is reas o nab l e t o as s u m e t h at ac t ivit y h as b een des igned t o avo id a PE. In t h is c as e, w e are no t l o o k ing at t h e m is m at c h p ro vis io ns , s inc e it req u ires ano t h er ent it y , o r s eries o f ent it ies , o n t o p o f t h is t rans ac t io n. Th eref o re, w e l o o k at t h e t ax avo idanc e c o ndit io n, w h ic h is t h e o t h er ro u t e int o s ec t io n 2, as k ing w h en t ax avo idanc e is t h e m ain p u rp o s e o r o ne o f t h e m ain p u rp o s es in es t ab l is h ing t h e ac t ivit ies .

So how would such an assessment apply in practice? In this case, t h e o f f s h o re ent it y w o u l d h ave t o no t if y t h at it is p o t ent ial l y l iab l e t o t h e c h arge. Th e as s es s m ent w o u l d b e w h at HMRC b el ieves is the best estimate of the profit that would be in the PE, which m o s t l ik el y w o u l d b e s o m e f o rm o f dis t rib u t io n ret u rn. As t h ere is no m is m at c h , y o u do n’ t rec al c u l at e t h e t ax b as e u p o n w h ic h t h e profit is charged, and also the recharacterization provision does no t ap p l y .

Al t h o u gh t h e c h arge is o n t h e deem ed PE in t h e l o w - t ax j u ris dic t io n, and t h eref o re t h e l o w - t ax j u ris dic t io n is al w ay s init ial l y as s es s ed, t h e t ax c an b e c o l l ec t ed f ro m t h e UK c o m p any in def au l t , and t h at ’ s c o m m o n t h ro u gh o u t al l o f t h e DPT ru l es .

Figure 2. PE avoidance cases: i n d i rect ex amp l e wi th mi smatch

Low-tax jurisdiction (asset owner)

Intermediary (distributor)

Sales of goods or services

License to use asset (likely

rent/royalty payable by

intermediary)

Services (likely cost-plus transfer pricing) UK Co

(sales support services)

UK customer

“ Al t h o u gh t h e c h arge is o n t h e deem ed PE in t h e l o w - t ax j u ris dic t io n, and t h eref o re t h e l o w - t ax j u ris dic t io n is al w ay s init ial l y as s es s ed, t h e t ax c an b e c o l l ec t ed f ro m t h e UK c o m p any in def au l t , and t h at ’ s c o m m o n t h ro u gh o u t al l o f t h e DPT ru l es .”


M eal ey : Th is nex t ex am p l e il l u s t rat es an indirec t s t ru c t u re, w h ere t h e t errit o ry t h at is avo iding t h e UK PE is it s el f b as e ero ded t o s o m ew h ere el s e. Co ns ider a l o w - t ax as s et o w ner w h o l ic ens es t h e righ t t o u s e t h e as s et t o an int erm ediary distributor, based in a treaty-qualified territory with a 10% ef f ec t ive t ax rat e. Th e int erm ediary dis t rib u t o r h as a UK s al es s u p p o rt f u nc t io n t h at p ro vides s ervic es t o t h e dis t rib u t o r b u t do es n’ t c o nc l u de c o nt rac t s , and h enc e t h ere is no PE. Th e int erm ediary s el l s t h e go o ds o r s ervic es t o t h e UK c u s t o m ers . Under t h e ru l es , is it reas o nab l e t o as s u m e t h at t h e ac t ivit y o f t h e int erm ediary dis t rib u t o rs (t h at is , t h e 10% t ax rat e c o u nt ry ) is designed to avoid a UK PE? Yes, it is — in this case, we don’t t es t t h e t ax - avo idanc e m o t ive, b ec au s e w e al ready h ave a t ax m is m at c h and a m at erial p ro vis io n (b eing t h e l ic ens e f ro m t h e l o w - t ax j u ris dic t io n t o t h e int erm ediary ) t h at is b as e ero ding t h e int erm ediary f ro m 10% do w n t o a rat e o f l es s t h an 8 0% o f 10%.

If the mismatch condition is triggered, the insufficient substance c o ndit io n m u s t al s o b e t es t ed. Th e t rans ac t io n t h at gives ris e t o t h e m is m at c h is t h at ro y al t y o r l ic ens e f ro m t h e l o w - t ax j u ris dic t io n t o t h e int erm ediary , s o it ’ s a s ingl e t rans ac t io n. We have to test whether the financial benefit of the tax reduction is less than the financial benefit of the transaction. If this threshold is m et , t h ere is ano t h er t es t : Was t h e c o nt rib u t io n o f t h e l o w -t ax j u ris dic t io n s t af f o r t h e int erm ediary s t af f l es s t h an t h e t ax benefit of the transaction? That will have to be evaluated on a c as e- b y - c as e b as is .

The mechanics here are interesting because in the first case, w h ere t h ere w as direc t avo idanc e o f t h e PE, w e j u s t h ad a deem ed PE, b u t h ere w e h ave a deem ed PE o f t h e int erm ediary in t h e UK and w e h ave t o l o o k at t h e b as e ero ding p ay m ent to the low-tax jurisdiction. If HMRC is not satisfied that that p ay m ent is at arm ’ s l engt h , t h en t h e as s es s m ent m ec h anic s dis al l o w 30% o f t h e ro y al t y . Y o u t h en h ave t o p ay t h at t ax , b u t if y o u p ro ve t h at t h e t rans f er p ric ing w as righ t , t h e t ax w il l b e p aid b ac k t o y o u , w it h int eres t . So b y int erp o s ing t h e int erm ediary , y o u get a w o rs e o u t c o m e: a w o rs e as s es s m ent p ro t o c o l and t h e ris k o f rec h arac t eriz at io n.

T homas: Ho p ef u l l y , t h at h as il l u s t rat ed s o m e o f t h e m ec h anic s and t h e c o ns eq u enc es o f t h e s ec t io n 2 PE avo idanc e c as es . Jenny , w h y do n’ t y o u w al k u s t h ro u gh a s ec t io n 3 c as e invo l ving a low-substance transaction or a low-substance entity?

Figure 3. Section 3 Case involving a l ow- substan ce tran sacti on or

l ow- substan ce en ti ty

Subs Global (Inc. UK)Commission?

T hi rd - p arty i n surer ( wi th l ocal l i cen ses)

Return to capital

Parent Co

Group captive re/insurer (Bermuda)

Reinsurance premium/

claims net of

commission

Insurance premium/

claims

C ol etta: Let’s consider captive insurance, by which I mean an ins u ranc e t rans ac t io n w it h in a gro u p t h at is no t an ins u ranc e gro u p . Th is diagram rep res ent s c ap t ive ins u ranc e w it h a t h ird-p art y ins u rer, w h ic h m any no n- ins u ranc e c o m p anies m igh t h ave w it h in t h eir gro u p . Th e c ap t ive w il l b e l ic ens ed and regu l at ed in t h e t errit o ry in w h ic h it is l o c at ed, b u t it w il l es s ent ial l y t rans ac t b u s ines s w it h t h e res t o f t h e gro u p , o f t en t h ro u gh a t h ird- p art y ins u rer t h at es s ent ial l y p ro vides t h e l ic ens es in al l t h e l o c at io ns in w h ic h t h e gro u p c arries o u t b u s ines s . So t h e s u b s idiaries o f t h e gro u p w il l ent er int o ins u ranc e arrangem ent s w it h t h e t h ird- p art y ins u rer, b u t t h e t h ird- p art y ins u rer is m erel y p ro viding a l ic ens e and a b al anc e s h eet , and t h en t h at ris k is es s ent ial l y reins u red b ac k int o t h e c ap t ive.


Th is enab l es t h e gro u p t o ret ain t h e ris k w it h in it s o w n c o rp o rat e s t ru c t u re, and t o es s ent ial l y aggregat e t h e ris k , w h ic h f ro m an ins u ranc e c ap it al p ers p ec t ive gives you diversification and aggregation benefits. This DPT provision could p o t ent ial l y ap p l y h ere du e t o t h e need t o as s es s w h et h er t h ere is a t ax m is m at c h as a res u l t o f t h e arrangem ent and, in t h is c as e, t h e UK s u b s idiary w o u l d b e c l aim ing a t ax dedu c t io n f o r t h e p ay m ent o f t h e ins u ranc e p rem iu m . In m any c as es , t h e p rem iu m m ay u l t im at el y end u p in a l o w - t ax j u ris dic t io n, and t h eref o re t h e 8 0% t es t m igh t b e m et . Given t h is , w e need t o l o o k at w h et h er t h ere is insufficient substance.

In t h ink ing ab o u t t h e t w o as p ec t s o f t h e insufficient substance test, we need to consider whether the financial benefit of t h e arrangem ent ef f ec t ivel y o u t w eigh s its tax benefit. That, in the context of insurance, is a difficult test. Often, the aim o f a c ap t ive ins u rer w il l b e t o aggregat e ris k f o r t h e b u s ines s as a w h o l e t o ac h ieve b et t er ret u rn o n c ap it al and t o divers if y t h at c ap it al . Th at is n’ t s o m et h ing w e c an m eas u re t h ro u gh GAAP ac c o u nt s o r financial reporting; it’s something that w e t y p ic al l y m eas u re t h ro u gh ec o no m ic c ap it al m o del ing, invo l ving ac t u arial as s es s m ent o f t h e ris k . Fu rt h erm o re, given ins u ranc e c o nt rac t s m ay o f t en b e m u l t iy ear, t h is t ends t o b e m eas u red at t h e o u t s et o f t h e c o nt rac t (w it h o u t t h e benefit of knowing the outcome of the ins u red event ) and c o ns idered o ver t h e l if e o f t h e c o nt rac t . Wh ereas t h e DPT ru l es s eem t o s u gges t a t es t b as ed o n t h e o u t c o m e f o r a p art ic u l ar y ear in is o l at io n. Th is t es t c o u l d t h eref o re b e o nero u s f o r t ax p ay ers .

Th en, y o u h ave t o l o o k at t h e m o re traditional substance test — are there eno u gh s t af f in t h e c ap t ive t o ef f ec t ivel y generat e t h is l evel o f ret u rn in it , f o r ex am p l e. Cap t ive s t ru c t u res c an o f t en b e ru n in c o nj u nc t io n w it h c ap t ive m anagers o n an o u t s o u rc ed m o del , w it h rel at ivel y l o w c o s t b as e, h el p ing t o o p t im iz e t h e c ap it al b as e. Ho w ever, w e c an ex p ec t t h at t h is w il l c o m e u nder great er s c ru t iny o f t h e res u l t o f t h e DPT (and al s o t h e OECD BEPS ac t io ns 8 - 10

p ro p o s al s ). Th e as s es s m ent m ec h anic s are t h e s am e as t h o s e o u t l ined in t h e p revio u s ex am p l e, s o t h ere is a need t o no t if y HMRC if y o u t h ink t h at y o u are in t h es e ru l es , and y o u m ay h ave t o m ak e a p ay m ent p ending t h e as s es s m ent . Th is ex am p l e w il l b e o f int eres t t o b o t h gro u p s w it h a c ap t ive, and al s o t o ins u ranc e gro u p s w h o m ay reins u re ris k int ragro u p in order to optimize capital efficiency. Al s o f o r ins u rers w h o s e c u s t o m ers are t h e c ap t ives , b ec au s e t h ey m ay get q u es t io ns f ro m t h e c ap t ive as k ing t h em t o p ro ve t h at t h e t rans ac t io n and t h e p rem iu m s are at arm ’ s l engt h . Cl earl y t h at is no t the responsibility of the insurer — it’s the responsibility of the captive — but it m ay need s u p p o rt in c o m ing t o t h at c o nc l u s io n.

Pre-filing agreementsT homas: So given al l t h at w e h ave covered so far, what about prefiling agreements? Should companies do some kind of protective filing?

M eal ey : Th e s af es t s it u at io n t o b e in is if y o u r arrangem ent s are f u l l y t rans p arent t o HMRC, s o t h ey u nders t and al l o f t h e flows and they’ve given an advance p ric ing agreem ent . At a w o rk s h o p o n January 8, HMRC confirmed that there w il l b e no c l earanc e p ro c edu re f o r DPT as t h e ru l es are f ac t dep endent . Th e s af es t ap p ro ac h f o r t ax p ay ers t o t ak e is t o p ro vide HMRC w it h f u l l val u e c h ain t rans p arenc y and agree t o an APA f o r h igh - ris k c as es . An ex is t ing APA s w it c h es o f f t h e 30% dis al l o w anc e (as t h e t rans f er p ric ing w il l b e as s u m ed t o b e righ t ) b u t no t nec es s aril y rec h arac t eriz at io n o f t h e ac t u al p ro vis io n o r PE avo idanc e. An APA s t ru c k af t er Ap ril 1, 2015, w il l s w it c h o f f t h e DPT.

T homas: We k eep o n t al k ing ab o u t 8 0% o f t h e h eadl ine c o rp o rat e t ax rat e (w h ic h w il l b e 20% b y Ap ril 1, 2015), b u t t h e UK it s el f h as a m u c h l o w er rat e du e t o it s patent box. How does that affect this?

M eal ey : Wh at y o u h ave t o do is ident if y t h e m at erial p ro vis io n t h at gives ris e t o t h e t ax m is m at c h . So c o ns ider a ro y al t y p ay m ent : Y o u h ave t o l o o k at t h e c as h t ax rat e o f t h e ro y al t y dedu c t io n. If y o u are get t ing 10% in t h e UK, b ec au s e y o u are

in t h e p at ent b o x , t h en it ’ s 10%. Th en y o u h ave t o l o o k at t h e o t h er s ide o f it and say, ‘‘Is it 80% or more of that?’’ Indeed, t h e o t h er s ide o f it c an b e in t h e UK, s o if y o u h ad an arrangem ent w h ere a 20% UK c o m p any w as t u rned int o a 10% UK c o m p any w it h o u t s u b s t anc e, y o u w o u l d b e w it h in t h e DPT b ec au s e y o u w o u l d f ail t h e t ax rat e m is m at c h .

Sanger: Wil l c o m p anies c o nvert t h e UK s al es s u p p o rt s ervic es t o dis t rib u t io n c o m p anies , s o t h at t h e int erm ediary dis t rib u t o r s im p l y s el l s go o ds direc t l y t o t h e UK dis t rib u t io n c o m p any , and t h e UK dis t rib u t io n c o m p any b u y s t h e go o ds from the intermediary, generating profit in t h e UK t h at is c o ns is t ent w it h arm ’ s -l engt h t rans f er p ric ing, p res u m ab l y b as ed on some percentage of revenue? Will t h at addres s t h e PE avo idanc e is s u e in this case?

M eal ey : It w o u l d s w it c h o f f t h e PE avo idanc e c as e c o m p l et el y , b u t it w o u l d al s o p u t y o u int o t h e l o w - s u b s t anc e m is m at c h c as e. If t h e int erm ediary dis t rib u t o r is in a l o c at io n w it h a t ax rat e o f , s ay , 15%, t h en t h e p ay m ent w o u l d b e f ro m 20% t o 15%, b eing b el o w t h e 8 0% t h res h o l d. Th eref o re, y o u w o u l d h ave a t ax m is m at c h , and w o u l d h ave t o as k t h e q u es t io n o f w h et h er t h ere is sufficient substance in the intermediary dis t rib u t o r t o def end t h e p ay m ent . If t h ere w as , y o u w o u l dn’ t b e in t h e DPT. Bu t if t h e int erm ediary dis t rib u t o r it s el f p aid a ro y al t y t o a l o w - t ax j u ris dic t io n, t h en y o u w o u l d h ave t o t es t t h e s u b s t anc e b y ref erenc e t o t h at l o w - t ax j u ris dic t io n, no t b y ref erenc e t o t h e int erm ediary dis t rib u t o r.

IP ownershipCo nt ro l o ver t h e IP o w ners h ip f u nc t io ns in t h e l o w - t ax j u ris dic t io n w o u l d s w it c h o f f t h e m is m at c h , b ec au s e y o u w o u l d h ave sufficient substance. In the alternative, if y o u m o ved t h e IP t o t h e int erm ediary dis t rib u t o r, b u t y o u didn’ t h ave c o nt ro l o ver t h e IP o w ners h ip f u nc t io ns and y o u j u s t h ad dis t rib u t io n f u nc t io ns in t h e int erm ediary dis t rib u t o r, I do n’ t t h ink it w o u l d s w it c h o f f t h e m is m at c h . So I do n’ t t h ink t h ere is a generic s o l u t io n; o ns h o ring t o t h e int erm ediary dis t rib u t o r

“ Th e UK general l y do es no t b el ieve y o u need l arge nu m b ers o f p eo p l e t o c reat e val u e, b u t y o u do need t h e p eo p l e w h o c o nt ro l t h e devel o p m ent , enh anc em ent , m aint enanc e, and/ o r p ro t ec t io n f u nc t io ns .”


and p ay ing t ax o f 15 p erc ent is s t il l a m is m at c h . To p ro t ec t y o u rs el f f ro m t h e ru l es , y o u w o u l d need t o al s o m o ve t h e IP o w ners h ip f u nc t io n int o t h e int erm ediary dis t rib u t o r; if y o u c o u l dn’ t do t h at , t h en y o u w o u l d s t il l h ave a ris k o f t h e DPT ap p l y ing.

T homas: Wh at s u b s t anc e do y o u need f o r the IP ownership?

M eal ey : Th ere are a f ew p o int s w e c an s ay ab o u t t h at . One is t h at t h e UK general l y do es no t b el ieve y o u need l arge nu m b ers o f p eo p l e t o c reat e val u e, b u t y o u do need t h e p eo p l e w h o c o nt ro l t h e devel o p m ent , enh anc em ent , m aint enanc e, and/ o r p ro t ec t io n f u nc t io ns . Y o u do n’ t nec es s aril y need t h em t o b e t h ere p erm anent l y ; y o u j u s t need t h em t o b e em p l o y ed, and y o u need t o ex erc is e t h e f u nc t io n in t h e ent it y . Ou t s o u rc ing and s p ec ial iz at io n o f f u nc t io n and c o nt ro l o f specialized functions by head office is a no rm al p art o f w h at HMRC ex p ec t s t o s ee in m u l t inat io nal gro u p s .

Wh at p rec is el y is needed dep ends o n t h e f ac t s and c irc u m s t anc es , and y o u c an s ec u re APAs w it h HMRC. Ho w ever, t h es e are APAs that are generally quite difficult t o o b t ain, and y o u real l y h ave t o des c rib e t h e f u nc t io ns in t h e l o w - s u b s t anc e IP o w ner and dig int o w h o do es w h at . Al s o , this is so subjective and fluid that it can be difficult to conclude without making s u re HMRC agrees . If y o u are a l o w -s u b s t anc e ent it y , y o u m ay w ant t o m ak e s u re t h at HMRC u nders t ands t h e l evel o f substance and confirms its agreement. Th is is t h e real gam e c h anger f ro m t h e DPT: HMRC’ s agreem ent o n t h e t rans f er p ric ing b ec o m es even m o re im p o rt ant t o o b t ain.

My c u rrent ex p ec t at io n is t h at w it h o u t an APA t h ere is a ris k t h at y o u w il l s u f f er a 30% dis al l o w anc e o n t h e ro y al t y o r s ervic e f ee o r p ro du c t p ric e p aid t o t h e int erm ediary dis t rib u t o r and m ay h ave t o p ay DPT o n t h at at 25%, w it h t h e p o s s ib il it y o f get t ing t h at b ac k , w it h int eres t , if and w h en y o u p ro ve t h e t rans f er p ric ing. I t h ink t h at is ex ac t l y what HMRC wants to achieve — to drive and f o rc e t rans p arenc y . It w ant s t o m ak e

s u re t h at t rans ac t io ns are at arm ’ s l engt h and t o t es t t h at b y ref erenc e t o it s o w n int erp ret at io n o f OECD s t andards .

T homas: Do es HMRC h ave eno u gh p eo p l e t o ac t u al l y reac t t o w h at l o o k s l ik e w h at will be a real uptick in APA applications?

M eal ey : Ex t ra res o u rc e w as m ade avail ab l e t o b u il d HMRC’ s t rans f er p ric ing t eam in l as t y ear’ s UK b u dget , b u t it ’ s no t c l ear t h at t h ey h ave eno u gh res o u rc e t o deal w it h t h e DPT. It dep ends m o s t l y o n h o w m any gro u p s are go ing t o b e in t h e regim e. Th ere are l o t s o f t rans ac t io ns t h at are in t h e b o u ndaries as c u rrent l y drafted, but if the provisions are refined and u l t im at el y l o t s o f c o m p anies f al l o u t s ide o f it s o t h at it ’ s j u s t a narro w c l as s o f c o m p any , t h en m ay b e t h e res o u rc e is t h ere. If it ends u p b eing very w ide ranging, t h en t h ere is a real danger. In t h at c as e, t h ere w il l b e l o t s o f c o m p anies , I t h ink , w h o w il l b e at ris k o f an u p f ro nt c h arge (w h ic h in s o m e c as es m ay b e very substantial) and will have to fight to get t h e m o ney b ac k .

Pers o nal l y , I w o u l d b e very s u rp ris ed if t h at is t h e o u t c o m e, as HMRC t ends t o draw t h e b o u ndaries q u it e narro w l y , b u t it is a real ris k , and w e s h o u l dn’ t as s u m e that it isn’t a risk until we definitively know t h at it ’ s no t .

T homas: If t h e DPT is no t ac t u al l y a c o rp o rat io n t ax , do es t h is m ean t h at o t h er j u ris dic t io ns w il l no t ac c ep t it as such? What I’m thinking here is mutual agreement procedures — are companies going to be able to get relief?

A therton : It ’ s del ib erat el y a p enal t y t ax in o rder f o r it no t t o b e c o rp o rat io n t ax and t h eref o re no t s u b j ec t t o t reat y o verrides , s o t h e UK c an c o l l ec t it . It do es n’ t l o o k c redit ab l e in s o m e c as es , b u t o b vio u s l y t h at w il l b e a q u es t io n f o r t h e o vers eas t errit o ry .

C ol etta: Th ere is al s o an ac c o u nt ing q u es t io n as w el l , w h ic h gro u p s w il l need t o dis c u s s w it h t h eir au dit o rs . If the DPT is not tax on the profits of the c o m p any , is t h ere a p o t ent ial ris k t h at it is an above-the-line tax for financial reporting purposes?

T homas: Ho w m igh t o t h er c o u nt ries respond? Do you expect anyone else to adopt a DPT? And what about the interaction with BEPS action 7 on PE?

Sanger: I do n’ t t h ink w e k no w y et . Th e is s u es t h at t h is t ax is t ac k l ing are very high-profile issues for several countries, inc l u ding Au s t ral ia, Franc e, It al y , Sp ain, and m ay b e t o a l es s er ex t ent , Germ any . It s eem s t o m e t h at t h e DPT is al s o h igh l y rel evant f o r US c o rp o rat io ns , b ec au s e it s eem s t o b e h igh l y l ik el y t h at it w il l im p o s e a greater tax burden on the foreign profits o f s o m e US c o rp o rat io ns , s o a rat h er m o re negat ive o u t l o o k f ro m t h e US m igh t b e ex p ec t ed.

On t h e p o int y o u m ak e ab o u t ac t io n 7 o n PE, I t h ink y o u w o u l dn’ t need t h is t ax if y o u rew rit e t h e PE art ic l e. I t h ink t h e UK m u s t p erc eive t h ere t o b e a ris k t h at c o ns ens u s aro u nd PE and t rans f er p ric ing c h anges m igh t t ak e q u it e s o m e t im e t o w in.

In t erm s o f t h e w ider BEPS init iat ive, Pas c al Saint - Am ans [ direc t o r o f t h e Cent re f o r Tax Po l ic y and Adm inis t rat io n at t h e OECD] h as al ready c o m m ent ed t h at ‘ ‘ it ’ s a b it b iz arre t h at in t h e m iddl e o f t h e p ro j ec t , y o u h ave a c o u nt ry ac t ing u nil at eral l y b ec au s e t h at ’ s w h at w e’ re t ry ing t o avo id. Bu t o n t h e o t h er h and, it s h o w s t h at t h ere is a real b ig p o l it ic al is s u e, w h ic h is no t ab o u t p o l it ic ians s p eak ing b u t p o l it ic ians t ak ing ac t io n.’ ’ 1

It ’ s c l ear t h at t h e devel o p m ent o f t h e DPT is s o m et h ing f o r al l int ernat io nal t ax p rac t it io ners t o k eep a very c l o s e ey e o n, w h et h er o r no t y o u h ave an int eres t in t h e UK.

1 Tax Po l ic y Fire Side Ch at at Vienna Univers it y o f

Ec o no m ic s and Bu s ines s , Dec . 16, 2014, avail ab l e at h t t p : / / w w w .w u .ac .at / w u t v/ c l ip s / 20141216-firesidechat. An abbreviated transcript of this int erview is f o rt h c o m ing in TNI.

“ Y o u w o u l dn’ t need t h is t ax if y o u rew rit e t h e PE art ic l e. I t h ink t h e UK m u s t p erc eive t h ere t o b e a

ris k t h at c o ns ens u s aro u nd PE and t rans f er p ric ing c h anges m igh t t ak e q u it e s o m e t im e t o w in.”


Legislative update: Financ e Bil l 2015 del ivers DPT l egis l at ive l angu age

Th e DPT l egis l at io n inc l u ded in t h e UK’ s 2015 Financ e Bil l c l earl y s h o w s t h at HMRC h ave res p o nded t o t h e rep res ent at io ns rec eived o n t h e draf t c l au s es rel eas ed o n 10 Dec em b er 2014. A k ey c o nc ern expressed was the breadth of the notification requirements.

Th es e h ave b een narro w ed f ro m t h e o riginal draf t , f o c u s ing o n s it u at io ns w h ere t h e financial benefit of the tax reduction is significant relative to the non-tax benefits of the material provision. Fu rt h erm o re, t h ere is an o p p o rt u nit y f o r gro u p s t o p ro ac t ivel y discharge their DPT notification obligations by providing HMRC with, and ensuring HMRC has examined, sufficient information to able it to det erm ine w h et h er a DPT as s es s m ent no t ic e s h o u l d b e is s u ed. Th is w il l b e w el c o m ed b y m any t ax p ay ers .

Despite the narrowing of the notification provisions, it is clear that HMRC c o nt inu es t o int end DPT t o h ave a very w ide s c o p e. In f ac t , t h e s c o p e o f t h e avo ided p erm anent es t ab l is h m ent s ru l e h as b een ex p anded t o inc l u de s al es t o no n- UK c u s t o m ers t h at rel at e t o UK b u s ines s ac t ivit y and t o s al es o f l and and p ro p ert y . It h as al s o b een p u t b ey o nd do u b t t h at UK h eaded- gro u p s t h at h ave s u f f ered a UK c o nt ro l l ed f o reign c o rp o rat io n (CFC) c h arge, c o u l d s t il l b e s u b j ec t t o a DPT c h arge. Credit w il l , h o w ever, b e avail ab l e w h ere a c o m p any h as p aid a CFC c h arge.

As expected, it has been confirmed that DPT will not apply where t h ere h as b een a w h o l es al e t rans f er t o a l o w er t ax j u ris dic t io n o f t h e ec o no m ic ac t ivit y needed t o generat e t h e as s o c iat ed inc o m e. Specific details of how this will be applied are yet to be received but the briefing note published on 20 March suggests that merely the h o l ding, m aint enanc e o r l egal p ro t ec t io n o f int el l ec t u al p ro p ert y w il l not be considered sufficient to avoid a DPT charge.

Mo re inf o rm at io n is avail ab l e at www. ey . com/ tax al erts.


On 20 May 2015, t h e US Treas u ry Dep art m ent rel eas ed p ro p o s ed revis io ns t o t h e US Mo del Inc o m e Tax Co nvent io n (t h e US Mo del ), w h ic h w as l as t u p dat ed in 2006, t o addres s c ert ain c o nc erns w it h t h e ero s io n o f t h e US t ax b as e in l igh t o f c h anges in t h e int ernat io nal t ax enviro nm ent . Th e revis io ns inc l u de p ro vis io ns t h at w o u l d:

• Deny treaty benefits for dividends and c ert ain dedu c t ib l e p ay m ent s m ade b y a do m es t ic c o rp o rat io n, t reat ed as an ex p at riat ed ent it y u nder Sec t io n 7 8 7 4, du ring t h e 10 y ears f o l l o w ing t h e c o m p l et io n o f t h e invers io n t rans ac t io n

• Deny treaty benefits to certain income items benefiting from a “special tax regime” in the beneficial owner’s c o u nt ry o f res idenc e

• Tigh t en t h e “ t riangu l ar p ro vis io n” t h at would deny treaty benefits when certain inc o m e is at t rib u t ab l e t o a p erm anent establishment outside the beneficial o w ner’ s c o u nt ry o f res idenc e (e.g., deny treaty benefits for income attributable t o a US b ranc h t h at do es no t give ris e t o a p erm anent es t ab l is h m ent u nder t h e rel evant t ax t reat y )

• Make certain modifications to the limitation-on-benefits article, including adding a “derivative benefits test” and a b as e ero s io n p ro ng t o t h e “ s u b s idiary o f a p u b l ic l y t raded c o m p any ” t es t

Addit io nal l y , gu idanc e f ro m Treas u ry indic at ed t h at w h il e no t am o ng t h e draf t t reat y p ro vis io ns t h at are w ere rel eas ed, it is int ended t o inc l u de in t h e nex t U.S. Mo del a new Art ic l e t o res o l ve dis p u t es b et w een t ax au t h o rit ies t h ro u gh m andat o ry b inding arb it rat io n.

Th e Treas u ry Dep art m ent is s u ed t ec h nic al ex p l anat io ns f o r t h e p ro p o s ed revis io ns , ex c ep t f o r t h o s e t o t h e l im it at io n- o n-benefits article, and has requested c o m m ent s o n t h e p ro p o s ed revis io ns .

US US Treasury Department proposes revisions to US model tax treaty to address US tax base erosion

R ead E Y’ s ful l an al y si s at

bit.ly/1GgBxyh


US and India Tax authorities agree on a framework for resolving certain double tax cases

David CanaleAm eric as Trans f er Pric ing Co nt ro vers y Servic es Leader — EYT: + 1 202 327 7 653E: david.c anal e@ ey .c o m

E. Miller Williams, Jr.Part ner/ Princ ip al Trans f er Pric ing Co nt ro vers y Servic esWashington, DC — Nat io nal TaxT: + 1 202 49 5 9 8 09E: m il l er.w il l iam s @ ey .c o m

US and India tax officials met on 15-16 January 2015 in Delhi and have agreed on a framework for the resolution of pending double tax cases involving information technology enabled services (ITeS) and software development, according to news reports. This is the third formal meeting of the two governments in the past 16 months; however, there have also been on-going discussions and exchanges of information and analysis during that time.

Do u gl as O’ Do nnel l , US c o m p et ent au t h o rit y and Dep u t y Co m m is s io ner (Int ernat io nal ) in t h e Int ernal Revenu e Service (IRS) Large Business & International (LB&I) Division, said he met w it h Indian c o m p et ent au t h o rit y and Bil at eral Advanc e Pric ing Agreem ent (APA) Co m m is s io ner, Ak h il es h Ranj an.

In t h at m eet ing, t h ey agreed o n a b ro ad f ram ew o rk f o r res o l ving t h e b ac k l o g o f p ending US- India do u b l e t ax c as es . Specifically, the agreed-upon framework is aim ed at res o l ving t h o s e c as es invo l ving ITeS and s o f t w are devel o p m ent s ervic es . O’ Do nnel l no t ed t h ere are m o re t h an 250 p ending Mu t u al Agreem ent Pro c edu re (MAP) c as es b et w een t h e t w o c o u nt ries , and nex t s t ep s invo l ve review ing t h at invent o ry t o ident if y t h o s e c as es t h at c an b e res o l ved u nder t h e f ram ew o rk .

Sep arat el y , in t h e Indian p res s , Mr. Ranj an s t at ed “ Af t er t w o day s o f f ru it f u l and int ens e dis c u s s io ns (o n 15- 16 Janu ary ), b o t h s ides h ave arrived at a b ro ad agreem ent o n a f ram ew o rk t o b e ap p l ied f o r res o l ving dis p u t es in c as es o f IT Software Services & ITeS. The details o f eac h c as e are no w b eing w o rk ed o u t . Th e US h as al s o agreed t o ac c ep t Bil at eral APAs w it h India. Th is w il l m ark a b reak t h ro u gh in a l o ng p ending m at t er. Dis p u t es as o l d as AY 2006 w il l no w b e resolved within this financial year.” (i.e., b y 31 Marc h 2015).

Bilateral APAsTh e m eet ing ac h ieved a res o l u t io n t h at p ro vides a f ram ew o rk t h at w il l b e u s ed t o s et t l e as m any as 100 c o m p et ent au t h o rit y c as es and t h at t h e IRS w il l allow for the filing of bilateral APAs with India and US t ax au t h o rit ies . Th is is c o ns is t ent w it h t h e IRS’ p as t c o m m ent s t h at u nt il t h ere w as a f ram ew o rk t o s et t l e a significant amount of the outstanding c o m p et ent au t h o rit y c as es , t h e IRS w o u l d no t al l o w f o r b il at eral APA c as es w it h India.

EY is al ready s t art ing t o s ee t h e IRS reac h o u t t o US t ax p ay ers f o r inf o rm at io n. Th e t y p ic al req u es t is as k ing f o r t h e applicable India affiliate’s audited financial statements for assessment y ears (p rep ared in ac c o rdanc e w it h Indian GAAP) and (a) t h e t o t al s ervic es c o s t (o r eq u ival ent , w h ic h m ay b e des ignat ed “ o p erat ing c o s t ” o r s o m e o t h er variat io n) f o r t h e s ervic es t h at w ere t h e s u b j ec t o f t h e adj u s t m ent s ; and (b ) t h e am o u nt s o f any adj u s t m ent s t o t h e t o t al s ervic es c o s t as rep o rt ed b y t h e t ax p ay er o n it s t ax ret u rn f o r s u c h as s es s m ent y ears .


Accordingly, US taxpayers with filed c o m p et ent au t h o rit y c as es s h o u l d b egin t o as s em b l e t h is inf o rm at io n in ant ic ip at io n o f t h e IRS c o nt ac t ing t h em .

Transfer pricing adjustments on the riseThis resolution is significant since Indian t rans f er p ric ing adj u s t m ent s are o n t h e ris e. In t h e m o s t rec ent au dit c y c l e, t rans f er p ric ing adj u s t m ent s w ere m ade in o ver h al f o f t h e au dit s res u l t ing in ap p ro x im at el y US$ 12.5 b il l io n o f t ax as s es s m ent s (vs . US$ 7 .4 b il l io n in t h e p revio u s c y c l e). Th e Indian Tax au t h o rit y c o nt inu es t o au dit m o s t f o reign- o w ned c o m p anies in India o n an annu al b as is and s t at is t ic s s h o w t h at o ver h al f o f al l India t rans f er p ric ing au dit s res u l t in adj u s t m ent s . US and Eu ro p ean-b as ed t ax p ay ers o p erat ing in India are at t h e rec eiving end o f m any o f t h es e adj u s t m ent s .

Th e agreem ent t o al l o w f o r b il at eral APAs w il l re- o p en an o p t io n f o r US- o w ned c o m p anies t o m anage t h eir t rans f er p ric ing ris k in India. It is des igned t o avo id t h e c o nf ro nt at io n inh erent in an ex am inat io n and f o s t er m o re ef f ec t ive c o m m u nic at io n b et w een t ax p ay ers and t h e Indian t ax au t h o rit ies and IRS. Onc e s igned, a b il at eral APA w il l p ro vide t ax p ay ers c ert aint y o n t h e APA c o vered transactions for five consecutive years al o ng w it h u p t o f o u r y ears o f ro l l b ac k . Th e ro l l b ac k p ro vis io n c o m b ined w it h a b il at eral APA and Co m p et ent Au t h o rit y filings should allow for as many as 14 y ears o f t rans f er p ric ing is s u es t o b e res o l ved.

The filing date in India to cover the tax y ear s t art ing 1 Ap ril 2015 is 31 Marc h 2015. The APA request must be filed prior to the start of the financial year in India. Th is s h o rt deadl ine m ay m ean t h at companies will need to file for a unilateral APA in India and l at er c o nvert it t o a b il at eral APA t o give t h em m o re t im e t o o b t ain req u is it e inf o rm at io n.

India’s APA programAf t er t h e India APA p ro gram s t art ed, close to 150 APA applications were filed in the first year and an additional 232 APA applications were filed by 31 March 2014. Bas ed o n EY India’ s es t im at es , ap p ro x im at el y 8 0% o f t h e ap p l ic at io ns are f o r u nil at eral APAs and t h e b al anc e is f o r b il at eral APAs . Th e Go vernm ent is p l eas ed w it h t ax p ay ers ’ int eres t and h as p ro m is ed t o p ro c es s t h es e ap p l ic at io ns as rap idl y as p o s s ib l e. Th e Indian APA Pro gram agreed to and signed five unilateral APAs in Marc h 2014 and h as m any o t h ers in advanc ed s t ages o f t h e p ro c es s . Al s o , t h e Jap anes e Tax Au t h o rit y and t h e Indian Tax Au t h o rit y h ave c o nc l u ded o ne b il at eral APA and are dis c u s s ing s everal o t h ers . In a c o u p l e o f c as es , t h e res u l t s t h ro u gh t h e APA p ro c es s h ave b een m o re f avo rab l e t o t ax p ay ers t h an t y p ic al res u l t s s een in t ax au dit s o r in t h e Saf e Harb o r p ro vis io ns (t h e t y p ic al m ark - u p u nder t h e s af e h arb o r o f 22% t o 28 %).


Table 1. Global CIT rates — largest 50 “economies” or “jurisdictions” by GDP, sorted by tax rateNote: Where applicable, rates include an average subnational (state/provincial) tax rate in addition to the national/federal rate.

Corporate income tax (CIT) rates

1. IMF World Economic Outlook Database — September 2012.

Ju ris dic t io n

GDP 2015 (US$ b il l io ns )1

2015 CIT rat e (nat io nal s t at u t o ry rat e o nl y )

2015 CIT rat e (nat io nal and s u b nat io nal , average)

Wo rl dw ide vs . t errit o rial t ax at io n

Notes

Unit ed St at es 15, 653 35.00% 39 .00% Wo rl dw ide

Franc e 2, 58 0 38 .00% Territ o rial Th e init ial l y p ro p o s ed 1% t ax o n EBITDA (earnings b ef o re int eres t , t ax es , dep rec iat io n and am o rt iz at io n) is rep l ac ed b y an inc reas e o f t h e t em p o rary addit io nal c o nt rib u t io n t o CIT f ro m 5% t o 10.7 %, t h at ap p l ies t o c o m p anies (o r t ax c o ns o l idat ed gro u p s ) w it h an annu al t u rno ver ex c eeding € 250 m il l io n. Th e inc reas e w o u l d apply to fiscal years (FYs) ending between 31 December 2013 and 30 Dec em b er 2015. Th e m ax im u m CIT rat e w o u l d t h u s am o u nt t o c irc a 38 % ins t ead o f t h e c u rrent 36.1%.

Argent ina 47 5 35.00% Wo rl dw ide

Pak is t an 231 35.00% Wo rl dw ide

Braz il 2, 425 34.00% Wo rl dw ide

Venez u el a 338 34.00% Wo rl dw ide

India 1, 9 47 33.9 9 % Wo rl dw ide Rat e il l u s t rat ed is ap p l ied t o do m es t ic c o m p anies , inc l u ding s u rc h arge and edu c at io n CESS. Fo reign c o m p anies p ay t ax o f 43.26% inc l u ding s u rc h arge and edu c at io n CESS.

Bel giu m 47 7 33.9 9 % Territ o rial

Jap an 5, 9 8 4 33.10% Territ o rial Th e Go vernm ent h as a p o l ic y t o c u t t h e ef f ec t ive c o rp o rat e t ax rat e f ro m t h e c u rrent 35% t o b el o w 30% o ver s everal y ears s t art ing in the fiscal year starting on or after 1 April 2015. Under the 2015 t ax ref o rm p l an anno u nc ed o n 30 Dec em b er 2014, t h e ef f ec t ive c o rp o rat e t ax rat e (To k y o area) w il l b e redu c ed b y 2.54 p erc ent point in the fiscal year starting on or after 1 April 2015.

Germ any 3, 367 To p f ederal (nat io nal ) c o rp o rat e t ax rat e: 15% (p l u s s o l idarit y s u rc h arge o f 5.5%)

33.00% Territ o rial To p f ederal (nat io nal ) c o rp o rat e t ax rat e: 15% (p l u s s o l idarit y surcharge of 5.5%). Local trade taxes range between 7% and 17.5%

It al y 1, 9 8 0 31.40% Territ o rial

Au s t ral ia 1, 542 30.00% Territ o rial Th e CIT rat e is t o b e c u t b y 1.5 p erc ent age p o int s t o 28 .5% f ro m 1 Ju l y 2015.

Mex ic o 1, 163 30.00% Wo rl dw ide An additional 10% CIT will be imposed on certain profits and dividends f ro m 2014 o nw ards . Bec au s e t h e t ax o n dividends w o u l d b e o n t h e dis t rib u t ing c o m p any , t h ere w o u l d b e no t ax t reat y p ro t ec t io n.

Nigeria 27 3 30.00% Wo rl dw ide

Ph il ip p ines 241 30.00% Wo rl dw ide

Sp ain 1, 340 28 .00% Territ o rial

So u t h Af ric a 39 1 28 .00% Territ o rial

Do m inic an Rep u b l ic

Dat a no t avail ab l e 28 .00%

Global Tax Policy and Controversy Briefing124 Global Tax Policy and Controversy Briefing124

Ju ris dic t io n

GDP 2015 (US$ b il l io ns )1

2015 CIT rat e (nat io nal s t at u t o ry rat e o nl y )

2015 CIT rat e (nat io nal and s u b nat io nal , average)

Wo rl dw ide vs . t errit o rial t ax at io n

Notes

Gu at em al a Dat a no t avail ab l e 28 .00%

No rw ay 500 27 .00% Territ o rial

Egy p t 255 26.50% Wo rl dw ide

Is rael 247 26.50% Territ o rial

Canada 1, 7 7 0 15.00% 26.23% Territ o rial

Greec e 255 26.00% Territ o rial

Ch ina 8 , 250 25.00% Wo rl dw ide

Indo nes ia 8 9 5 25.00% Wo rl dw ide

Net h erl ands 7 7 0 25.00% Territ o rial Rate for the first €200,000 taxable basis is 20%.

Is l am ic Rep u b l ic o f Iran

48 4 25.00% Wo rl dw ide

Au s t ria 39 1 25.00% Territ o rial

Co l o m b ia 365 25.00% Wo rl dw ide

Mal ay s ia 307 25.00% Territ o rial

Al geria 207 25.00% Wo rl dw ide

Denm ark 309 24.50% Territ o rial

Ko rea 1, 151 24.20% Wo rl dw ide 24.2% t o p t ax rat e inc l u des a 10% s u rc h arge ap p l ic ab l e t o t ax ab l e inc o m e in ex c es s o f KRW20 b il l io n (US$ 18 m il l io n).

Po rt u gal 211 23.00% Territ o rial

Ch il e 268 22.50% Wo rl dw ide

Sw it z erl and 623 7 .8 0% 22.00% Territ o rial Mu nic ip al rat es vary w idel y .

Sw eden 520 22.00% Territ o rial

Viet nam Dat a no t avail ab l e 22.00%

Sl o vak Rep u b l ic Dat a no t avail ab l e 22.00%

Unit ed Kingdo m 2, 434 20.00% Territ o rial Mains t ream rat e o f c o rp o rat io n t ax w il l b e 20% f ro m Ap ril 2015.

Ru s s ia 1, 9 54 20.00% Territ o rial

Tu rk ey 7 8 3 20.00% Territ o rial

Sau di Arab ia 657 20.00% Wo rl dw ide

Th ail and 37 7 20.00% Territ o rial

Finl and 247 20.00% Territ o rial Finl and c u t t h e rat e b y 4.5 p erc ent age p o int s as o f 2014

Po l and 47 0 19 .00% Wo rl dw ide

Cz ec h Rep u b l ic 19 4 19 .00% Territ o rial

Taiw an 466 17 .00% Wo rl dw ide

Singap o re 268 17 .00% Territ o rial

Ho ng Ko ng SAR 258 16.50% Territ o rial

Ro m ania 17 1 16.00% Wo rl dw ide

Irel and 205 12.50% Wo rl dw ide

Unit ed Arab Em irat es

362 0.00% N/ A

Global Tax Policy and Controversy Briefing 125Global Tax Policy and Controversy Briefing 125

2015 CIT rateNote: Where applicable, rates include an average subnational (state/provincial) tax rate in addition to the national/federal rate.

Figure 1. 2012 Headline CIT rates — largest 50 “economies” or “jurisdictions” by 2011 GDP

Figure 2. “Economies” or “jurisdictions” taxing worldwide income

Figure 3. “Economies” or “jurisdictions” taxing territorially

40%

35%

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20%

15%

10%

5%

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Uni

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Stat

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Arg

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Paki

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Braz

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Mex

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Phili

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Taiw

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Irela

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Japa

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40%

35%

30%

25%

20%

15%

10%

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0%

Fran

ce

Belg

ium

Germ

any

Italy

Spai

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Nor

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Sout

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Swed

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Cana

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Mal

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Port

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Finl

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Fran

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40%

35%

30%

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Global Tax Policy and Controversy Briefing126 Global Tax Policy and Controversy Briefing126

Th e t rend t o w ard a redu c t io n o f s t at u t o ry CIT rat es s t art ed w it h t h e t ax ref o rm s in t h e Unit ed Kingdo m and t h e Unit ed St at es in t h e m id- 19 8 0s , w h ic h b ro adened t h e t ax b as e (f o r ex am p l e, b y m ak ing dep rec iat io n al l o w anc es f o r t ax p u rp o s es l es s genero u s ) and c u t s t at u t o ry rat es . CIT rat es h ave c o nt inu ed t o b e c u t in rec ent y ears , ac c o m p anied b y vario u s b as e b ro adening m eas u res , inc l u ding l im it at io ns in int eres t (and o t h er b u s ines s ex p ens es ) dedu c t ib il it y , m o re l im it ed u t il iz at io n o f l o s s es and c o nt inu ing t o res t ric t dep rec iat io n al l o w anc es .

Th e t ab l e b el o w s h o w s t h at s t at u t o ry CIT rat es in OECD m em b er c o u nt ries dro p p ed o n average b y m o re t h an 7 p erc ent age p o int s b et w een 2000 and 2014, f ro m 32.6% t o 25.2% (a f u rt h er 0.3% dec reas e f ro m 2012). Th is t rend s eem s t o b e w ides p read, as rat es h ave b een redu c ed in m o re t h an 9 0 c o u nt ries gl o b al l y . Wit h in t h e OECD area, t h e rat e h as s t ay ed c o ns t ant in t h e Unit ed St at es , as w el l as in no n- OECD c o u nt ries s u c h as Braz il . Al m o s t 9 5% o f OECD c o u nt ries h ave redu c ed t h eir CIT rat es s inc e 2000; o nl y Ch il e and Hu ngary h ave 2014 rat es t h at are h igh er t h an t h eir 2000 rat e.

A nu m b er o f c o u nt ries aro u nd t h e w o rl d (Denm ark , Do m inic an Rep u b l ic , Jap an, Finl and, Po rt u gal , Sl o vak Rep u b l ic , Unit ed Kingdo m and Viet nam f o r ex am p l e) c o nt inu e t o redu c e rat es in 2014, w h il e o t h er c o u nt ries (Au s t ral ia, Th e Net h erl ands , am o ng o t h ers ) s eem t o h ave no w s t ret c h ed t h eir t ax b as es as f ar as t h ey b el ieve t o b e c o m p et it ivel y and/ o r p o l it ic al l y p ru dent . In a rec ent EY s t u dy o f 61 c o u nt ries , t h e nu m b er o f c o u nt ries redu c ing t h eir s t at u t o ry CIT rat es o u t p ac ed t h o s e inc reas ing it b y a f ac t o r o f m o re t h an 3 t o 1.

Figure 1. Statutory corporate income tax rates, 2000 and 2014

2014 2000

0

10

20

30

40

50

60

USA JP

NFR

ABE

LPR

TDE

UA

US

MEX ES

PLU

XN

ZL

NO

RIT

A

SWE

CAN

AU

TDN

KIS

RN

LD FIN

KOR

GBR

CHE

EST

CHL

GRC

ISL

SVN

TUR

CZE

HU

NPO

L

SVK

IRE

OECD average in 2000 (32.6%) and 2014 (25.2%)

InsightsStatutory corporate income tax rates, 2000-2014


EY contacts

Chris Sanger Rob Hanson

Global Tax Policy Leader Global Tax Controversy Leader [email protected] [email protected] +44 20 7951 0150 +1 202 327 5696

Global Leaders

AmericasJurisdiction Tax policy Tax controversy

Tax policy and controversy leaders

C athy K ochcathy . k och@ ey . com+ 1 2 0 2 3 2 7 7 4 8 3

R ob H an sonrob. han son @ ey . com + 1 2 0 2 3 2 7 5 6 9 6

Argentina Ariel Bec h erariel .b ec h er@ ar.ey .c o m+ 54 11 4318 168 6

Ariel Bec h erariel .b ec h er@ ar.ey .c o m+ 54 11 4318 168 6

Brazil Gil Mendesgil .f .m endes @ b r.ey .c o m + 55 11 257 3 3466

Ju l io As s isj u l io .as s is @ b r.ey .c o m + 55 11 257 3 3309

Canada Greg Bo eh m ergreg.c .b o eh m er@ c a.ey .c o m+ 1 416 9 43 3463

Gary Zedgary .z ed@ c a.ey .c o m + 1 403 206 5052

Chile Carl o s Mart inezc arl o s .m art inez @ c l .ey .c o m+ 56 2 267 61261

Carl o s Mart inezc arl o s .m art inez @ c l .ey .c o m+ 56 2 267 61261

Colombia Margarit a Sal asm argarit a.s al as @ c o .ey .c o m + 57 1 48 4 7 110

Margarit a Sal asm argarit a.s al as @ c o .ey .c o m + 57 1 48 4 7 110

Costa Rica Raf ael Say agu é sraf ael .s ay agu é s @ c r.ey .c o m+ 506 2208 9 8 8 0

Raf ael Say agu é sraf ael .s ay agu é s @ c r.ey .c o m+ 506 2208 9 8 8 0

Dominican Republic Raf ael Say agu é sraf ael .s ay agu é s @ c r.ey .c o m+ 506 2208 9 8 8 0


Ecuador Fernanda Ch ec af ernanda.c h ec a@ ec .ey .c o m+ 59 3 2 255 3109

Fernanda Ch ec af ernanda.c h ec a@ ec .ey .c o m+ 59 3 2 255 3109

El Salvador Raf ael Say agu é sraf ael .s ay agu é s @ c r.ey .c o m+ 506 2208 9 8 8 0



AmericasJurisdiction Tax policy Tax controversy

Guatemala Raf ael Say agu é sraf ael .s ay agu é s @ c r.ey .c o m+ 506 2208 9 8 8 0


Honduras Raf ael Say agu é sraf ael .s ay agu é s @ c r.ey .c o m+ 506 2208 9 8 8 0


Israel Arie Pu ndakarie.p u ndak @ il .ey .c o m+ 9 7 2 3 568 7 115

Gil ad Sh o valgil ad.s h o val @ il .ey .c o m+ 9 7 2 3 623 27 9 6

Mexico Jorge Librerosj o rge.l ib rero s @ m x .ey .c o m+ 52 55 528 3 1439

Enriq u e Ram irezenriq u e.ram irez @ m x .ey .c o m+ 52 55 528 3 1367

Nicaragua Raf ael Say agu é sraf ael .s ay agu é s @ c r.ey .c o m+ 506 2208 9 8 8 0


Panama Luis Ocandol u is .o c ando @ p a.ey .c o m+ 507 208 0144

Luis Ocandol u is .o c ando @ p a.ey .c o m+ 507 208 0144

Peru David de l a To rredavid.de.l a.t o rre@ p e.ey .c o m+ 51 1 411 447 1

David de l a To rredavid.de.l a.t o rre@ p e.ey .c o m+ 51 1 411 447 1

Puerto Rico Teres it a Fu ent est eres it a.f u ent es @ ey .c o m+ 1 7 8 7 7 7 2 7 066

Teres it a Fu ent est eres it a.f u ent es @ ey .c o m+ 1 7 8 7 7 7 2 7 066

United States Nic k Gio rdanonic k .gio rdano @ w c .ey .c o m+ 1 202 467 4316

Ro b Hans o nro b .h ans o n@ ey .c o m + 1 202 327 569 6

Venezuela Al as k a Mo s c at oal as k a.m o s c at o @ ve.ey .c o m+ 58 212 9 05 667 2

Al as k a Mo s c at oal as k a.m o s c at o @ ve.ey .c o m+ 58 212 9 05 667 2


Asia-PacificJurisdiction Tax policy Tax controversy


A l f C ap i toal f. cap i to@ au. ey . com+ 6 1 2 8 2 9 5 6 4 7 3

H oward A d amshoward . ad ams@ au. ey . com+ 6 1 2 9 2 4 8 5 6 0 1

Australia Al f Cap it oal f .c ap it o @ au .ey .c o m+ 61 2 8 29 5 647 3

Ho w ard Adam sh o w ard.adam s @ au .ey .c o m+ 61 2 9 248 5601

China Becky Laib ec k y .l ai@ h k .ey .c o m+ 8 52 2629 318 8

Henry Ch anh enry .c h an@ c n.ey .c o m+ 8 6 10 58 15 339 7

Hong Kong SAR Becky Laib ec k y .l ai@ h k .ey .c o m+ 8 52 2629 318 8

Jo e Ch anj o e- c h .c h an@ c n.ey .c o m+ 8 52 2629 309 2

Indonesia Rac h m ant o Su rah m atrac h m ant o .s u rah m at @ id.ey .c o m+ 62 21 528 9 558 7

Rac h m ant o Su rah m atrac h m ant o .s u rah m at @ id.ey .c o m+ 62 21 528 9 558 7

Malaysia Kah Fan Limk ah - f an.l im @ m y .ey .c o m+ 60 3 7 49 5 8 218

Kah Fan Limk ah - f an.l im @ m y .ey .c o m+ 60 3 7 49 5 8 218

New Zealand Aaro n Q u int alaaro n.q u int al @ nz .ey .c o m+ 64 9 300 7 059

Kirs t y Keat ingk irs t y .k eat ing@ nz .ey .c o m+ 64 9 300 7 07 3

Philippines Em m anu el Cas t il l o Al c ant araem m anu el .c .al c ant ara@ p h .ey .c o m+ 63 2 8 9 4 8 143

Wil f redo U. Vil l anu evaw il f redo .u .vil l anu eva@ p h .ey .c o m+ 63 2 8 9 4 8 18 0

Singapore Ru s s el l Au b reyru s s el l .au b rey @ s g.ey .c o m+ 65 6309 8 69 0

Lee Khoon Tanl ee- k h o o n.t an@ s g.ey .c o m+ 65 6309 8 67 9

South Korea Min Y o ng Kw o nm in- y o ng.k w o n@ k r.ey .c o m+ 8 2 2 37 7 0 09 34

Min Y o ng Kw o nm in- y o ng.k w o n@ k r.ey .c o m+ 8 2 2 37 7 0 09 34

Taiwan So p h ie Ch o us o p h ie.c h o u @ t w .ey .c o m+ 8 8 6 2 27 57 8 8 8 8

So p h ie Ch o us o p h ie.c h o u @ t w .ey .c o m+ 8 8 6 2 27 57 8 8 8 8

Thailand Y u p a Wic h it k rais o rny u p a.w ic h it k rais o rn@ t h .ey .c o m+ 66 2 264 07 7 7

Y u p a Wic h it k rais o rny u p a.w ic h it k rais o rn@ t h .ey .c o m+ 66 2 264 07 7 7

Vietnam Hu o ng Vuh u o ng.vu @ vn.ey .c o m+ 8 4 9 034327 9 1

Hu o ng Vuh u o ng.vu @ vn.ey .c o m+ 8 4 9 034327 9 1


EMEIAJurisdiction Tax policy Tax controversy


J ean - P i erre L i ebj ean . p i erre. l i eb@ ey - av ocats. com+ 3 3 1 5 5 6 1 1 6 1 0

J ean - P i erre L i ebj ean . p i erre. l i eb@ ey - av ocats. com+ 3 3 1 5 5 6 1 1 6 1 0

Austria Andreas St ef anerandreas .s t ef aner@ at .ey .c o m+ 43 1 2117 0 1040

Andreas St ef anerandreas .s t ef aner@ at .ey .c o m+ 43 1 2117 0 1040

Belgium Herw ig Jo o s t enh erw ig.j o o s t en@ b e.ey .c o m+ 32 2 7 7 4 9 349

Ph il ip p e Renierp h il ip p e.renier@ b e.ey .c o m+ 32 2 7 7 4 9 3 8 5

Bulgaria Mil en Raik o vm il en.raik o v@ b g.ey .c o m+ 359 2 8 17 7 100

Mil en Raik o vm il en.raik o v@ b g.ey .c o m+ 359 2 8 17 7 100

Croatia Denes Sz ab odenes .s z ab o @ h r.ey .c o m+ 38 5 248 0 540

Denes Sz ab odenes .s z ab o @ h r.ey .c o m+ 38 5 248 0 540

Cyprus Ph il ip p o s Rap t o p o u l o sp h il ip p o s .rap t o p o u l o s @ c y .ey .c o m + 357 25 209 9 9 9

Ph il ip p o s Rap t o p o u l o sp h il ip p o s .rap t o p o u l o s @ c y .ey .c o m + 357 25 209 9 9 9

Czech Republic Lucie Rihoval u c ie.rih o va@ c z .ey .c o m+ 420 225 335 504

Lucie Rihoval u c ie.rih o va@ c z .ey .c o m+ 420 225 335 504

Denmark Jens Wit t endo rfj ens .w it t endo rf f @ dk .ey .c o m+ 45 51 58 28 20

Bj arne Gim s ingb j arne.gim s ing@ dk .ey .c o m+ 45 25 29 369 9

Johannes Larsenj o h annes .r.l ars en@ dk .ey .c o m+ 45 7 3 23 3414

Estonia Ranno Tingasranno .t ingas @ ee.ey .c o m+ 37 2 611 457 8

Ranno Tingasranno .t ingas @ ee.ey .c o m+ 37 2 611 457 8

European Union Marnix Van Rijm arnix .van.rij @ nl .ey .c o m+ 31 7 0 328 67 42

Kl au s Vo n Bro c k ek l au s .vo n.b ro c k e@ de.ey .c o m+ 49 8 9 14331 1228 7

Finland To m i Jo h annes Viit al [email protected]+ 358 207 28 0 19 0

Jukka [email protected]+ 358 207 28 0 19 0

France Ch arl es Menardc h arl es .m enard@ ey - avo c at s .c o m+ 33 1 55 61 15 57

Ch arl es Menardc h arl es .m enard@ ey - avo c at s .c o m+ 33 1 55 61 15 57

Germany Ut e Wit tu t e.w it t @ de.ey .c o m+ 49 30 2547 1 21660

Jü rgen Sc h im m el ej u ergen.s c h im m el e@ de.ey .c o m+ 49 211 9 352 219 37



Greece St ef ano s Mit s io ss t ef ano s .m it s io s @ gr.ey .c o m+ 302 102 8 8 6 365

Tas s o s Anas t as s iadist as s o s .anas t as s iadis @ gr.ey .c o m+ 302 102 8 8 6 59 2

Hungary Bo t o nd Renc zb o t o nd.renc z @ h u .ey .c o m+ 36 145 18 602

Bo t o nd Renc zb o t o nd.renc z @ h u .ey .c o m+ 36 145 18 602

India Ganes h Rajganes h .raj @ in.ey .c o m+ 9 1 120 67 17 110

Raj an Vo raraj an.vo ra@ in.ey .c o m+ 9 1 22 619 20440

Ireland Kevin McLoughlink evin.m c l o u gh l in@ ie.ey .c o m+ 353 1221 247 8

David Sm y t hdavid.s m y t h @ ie.ey .c o m+ 353 1 2212 439

Italy Giac o m o Al b anogl ac o m o .al b ano @ it .ey .c o m+ 39 068 5567 338

Maria Ant o niet t a Bis c o z z im aria- ant o niet t a.b is c o z z i@ it .ey .c o m+ 39 02 8 514312

Kazakhstan Ko ns t ant in Y u rc h enk o k o ns t ant in.y u rc h enk o @ k z .ey .c o m+ 7 49 5 641 29 58

Ko ns t ant in Y u rc h enk o k o ns t ant in.y u rc h enk o @ k z .ey .c o m+ 7 49 5 641 29 58

Latvia Il o na Bu t aneil o na.b u t ane@ l v.ey .c o m+ 37 1 67 04 38 36

Il o na Bu t aneil o na.b u t ane@ l v.ey .c o m+ 37 1 67 04 38 36

Lithuania Kestutis Lisauskask es t u t is .l is au s k as @ l t .ey .c o m+ 37 0 5 27 4 2252

Kestutis Lisauskask es t u t is .l is au s k as @ l t .ey .c o m+ 37 0 5 27 4 2252

Luxembourg Marc Sc h m it zm arc .s c h m it z @ l u .ey .c o m+ 352 42 124 7 352

Jo h n Ham esj o h n.h am es @ l u .ey .c o m+ 352 42 124 7 256

Malta Ro b ert At t ardro b ert .at t ard@ m t .ey .c o m+ 356 2134 2134

Ro b ert At t ardro b ert .at t ard@ m t .ey .c o m+ 356 2134 2134

Middle East Bal aj i Ganes h b al aj i.ganes h @ k w .ey .c o m+ 202 27 260260

Bal aj i Ganes h b al aj i.ganes h @ k w .ey .c o m+ 202 27 260260

The Netherlands Arj o van Eij s denarj o .van.eij s den@ nl .ey .c o m+ 31 10 406 8 506

Arj o van Eij s denarj o .van.eij s den@ nl .ey .c o m+ 31 10 406 8 506

Norway Aril d Ves t engenaril d.ves t engen@ n0.ey .c o m+ 47 24 002 59 2

Aril d Ves t engenaril d.ves t engen@ n0.ey .c o m+ 47 24 002 59 2

Poland Zbigniew Liptakz b igniew .l ip t ak @ p l .ey .c o m+ 48 22 557 7 025

Agnies z k a Tal as iew ic zagnies z k a.t al as iew ic z @ p l .ey .c o m+ 48 22 557 7 2 8 0

Portugal Carlos Manuel Baptista Loboc arl o s .l o b o @ p t .ey .c o m+ 351 217 9 12 000

Pau l o Mendo nc ap au l o .m endo nc a@ p t .ey .c o m+ 351 21 7 9 1 2045



Romania Al ex ander Mil c eval ex ander.m il c ev@ ro .ey .c o m+ 40 21 402 4000

Jean- Marc Cam b ienm arc .c am b ien@ ro .ey .c o m+ 40 21 402 419 1

Russia Alexandra Lobovaal ex andra.l o b o va@ ru .ey .c o m+ 7 49 5 7 05 9 7 30

Alexandra Lobovaal ex andra.l o b o va@ ru .ey .c o m+ 7 49 5 7 05 9 7 30

Slovak Republic Ric h ard Panekric h ard.p anek @ s k .ey .c o m+ 421 2 333 39 109

Pet er Feil erp et er.f eil er@ s k .ey .c o m+ 421 2 333 39 15

Slovenia Lucijan Klemencicl u c ij an.k l em enc ic @ s i.ey .c o m+ 38 6 1 58 317 21

Lucijan Klemencicl u c ij an.k l em enc ic @ s i.ey .c o m+ 38 6 1 58 317 21

South Africa Jam es Deio t t ej am es .deio t t e@ z a.ey .c o m+ 27 11 7 7 2 3307

Ch ris t el Brit sc h ris t el .b rit s @ z a.ey .c o m+ 27 11 502 0100

Spain Edu ardo Verdu n Frail eedu ardo .verdu nf rail e@ es .ey .c o m+ 34 9 15 7 27 419

Maximino Linaresm ax im ino .l inares gil @ es .ey .c o m+ 34 9 1 57 2 7 1 23

Sweden Erik Hu l t m anerik .h u l t m an@ s e.ey .c o m+ 46 8 520 59 4 68

Erik Hu l t m anerik .h u l t m an@ s e.ey .c o m+ 46 8 520 59 4 68

Switzerland Cl au dio Fis c h [email protected]+ 41 58 28 6 3433

Wal o St aeh l inw al o .s t aeh l in@ c h .ey .c o m+ 41 58 28 6 649 1

Turkey Yusuf Gokhan Penezoğluy u s u f .p enez o gl u @ t r.ey .c o m+ 9 0 212 368 55 47

Yusuf Gokhan Penezoğluy u s u f .p enez o gl u @ t r.ey .c o m+ 9 0 212 368 55 47

Ukraine Jo rge Int riagoj o rge.int riago @ u a.ey .c o m+ 38 0 44 49 0 3003

Vl adim ir Ko t enk ovl adim ir.k o t em k o @ u a.ey .c o m+ 38 0 44 49 0 3006

United Kingdom Ch ris Sangerc s anger@ u k .ey .c o m+ 44 20 7 9 51 0150

Jam es Wil s o nj w il s o n8 @ u k .ey .c o m+ 44 20 7 9 51 59 12

JapanJurisdiction Tax policy Tax controversy


Alf [email protected]+61 2 8295 6473

Howard [email protected]+61 2 9248 5601

Japan Ko ic h i Sek iy a k o ic h i.s ek iy a@ j p .ey .c o m+ 8 1 3 3506 2447

Ko ic h i Sek iy a k o ic h i.s ek iy a@ j p .ey .c o m+ 8 1 3 3506 2447


EY | As s u ranc e | Tax | Trans ac t io ns | Advis o ry

About EYEY is a gl o b al l eader in as s u ranc e, t ax , t rans ac t io n and advis o rys ervic es . Th e ins igh t s and q u al it y s ervic es w e del iver h el p b u il d t ru s t and c o nf idenc e in t h e c ap it al m ark et s and in ec o no m ies t h e w o rl d o ver. We devel o p o u t s t anding l eaders w h o t eam t o del iver o n o u r p ro m is es t o al l o f o u r s t ak eh o l ders . In s o do ing, w e p l ay a c rit ic al ro l e in b u il ding a b et t er w o rk ing w o rl d f o r o u r p eo p l e, f o r o u r c l ient s and f o r o u r c o m m u nit ies .

EY ref ers t o t h e gl o b al o rganiz at io n, and m ay ref er t o o ne o r m o re, o f the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company l im it ed b y gu arant ee, do es no t p ro vide s ervic es t o c l ient s . Fo r m o re inf o rm at io n ab o u t o u r o rganiz at io n, p l eas e vis it ey .c o m .

EY’s Tax Policy and Controversy servicesOu r b u s ines s t ax s ervic es are des igned t o h el p y o u m eet y o u r b u s ines s t ax c o m p l ianc e and advis o ry needs . Ou r [ nu m b er] t ax p ro f es s io nal s draw o n t h eir divers e p ers p ec t ives and s k il l s t o give y o u s eam l es s gl o b al s ervic e in p l anning, f inanc ial ac c o u nt ing, t ax c o m p l ianc e and ac c o u nt ing, and m aint aining ef f ec t ive rel at io ns h ip s w it h t h e t ax au t h o rit ies . Ou r t al ent ed p eo p l e, c o ns is t ent gl o b al m et h o do l o gies and u nw avering c o m m it m ent t o q u al it y s ervic e give y o u al l y o u need t o b u il d t h e s t ro ng c o m p l ianc e and rep o rt ing f o u ndat io ns and s u s t ainab l e t ax s t rat egies t h at h el p y o u r b u s ines s s u c c eed.

© 2015 EYGM Limited. Al l Righ t s Res erved.

EYG no. DL1309

ED 1122

Th is m at erial h as b een p rep ared f o r general inf o rm at io nal p u rp o s es o nl y and is no t int ended t o b e rel ied u p o n as ac c o u nt ing, t ax , o r o t h er p ro f es s io nal advic e. Pl eas e ref er t o y o u r advis o rs f o r s p ec if ic advic e.

ey.com

Th e o p inio ns o f t h ird p art ies s et o u t in t h is p u b l ic at io n are no t nec es s aril y t h e o p inio ns o f t h e gl o b al EY o rganiz at io n o r it s m em b er f irm s . Mo reo ver, t h ey s h o u l d b e view ed in t h e c o nt ex t o f t h e t im e t h ey w ere ex p res s ed.

Circular 230 Statement: Any US t ax advic e c o nt ained h erein is no t int ended o r w rit t en t o b e u s ed, and c anno t b e u s ed, f o r t h e p u rp o s e o f avo iding p enal t ies t h at m ay b e im p o s ed u nder t h e Int ernal Revenu e Co de o r ap p l ic ab l e s t at e o r l o c al t ax l aw p ro vis io ns .

Global Tax Policy and Controversy - Ernst & Young...final bend? 78 Digging into the data: the global tax policy outlook for 2015 84 Indirect tax developments in 2015 and beyond: Four

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