Permanent Establishment issues post BEPS · Permanent Establishment issues post BEPS. EMA Tax Summit — London, September 2016

Permanent Establishment issues post BEPSEMA Tax Summit—London, September 2016

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Jaap BellingwoutTax PartnerKPMG Meijburg & Co, in the Netherlands

Oliver HeinsenPartner, International Tax KPMG in Germany


Agenda— Introduction: PE post BEPS

- OECD and EU

— What’s new? Sept 2016:- BEPS 2: PE & hybrid mismatches- BEPS 7: Attribution of profits to Pes

— The real issue: from PE to TP?

— Case Studies- BEPS 7: impact / exposures

— Takeaway: location & people functions Mars | Source: NASA


Introduction— BEPS

- curing the symptom, not the disease

— PE topic: in the heart of BEPS - source country tax base- stateless income foreign MNEs

— PE-related action items OECD & EU

— Unilateral measures - diverted profits tax- aggressive audits (tax raids…)- …creating double taxation?

— DPT: superior to PE?

— No harmonization but fragmentation?

Pascal Saint Amans, OECD | Source: Irish Times

What’s new in 2016


BEPS & PE - 2016 updateBEPS 15 (MLI) & BEPS 7:— opt in/out per element— opt in/out per country— no link with dispute resolution

BEPS 2016 discussion drafts:— branch mismatch structures (#2)— attribution of profits to PEs (#7)— revised guidance on profit splits (#8-10)

EU— ATAD: no PE definition included— CCTB: no drafts published yet— Code of Conduct: soft law on hybrid Pes— Pressure on 3rd countries

Source: OECD


BEPS & PE - 2016 update— OECD / BEPS 2

- 2016 discussion draft

— EU Code of Conduct ‘guidance notes’:- intra-EU: 11 June 2015 / 9620-15- extra-EU: 13 June 2016 / 9912-16

Source: OECD

Head OfficeExemption of branch profits

No inclusion of interest income

Financing Branch

Deemed interest expense

IC-receivables group financing


BEPS 7 (2016): attribution of profits— OECD/BEPS 7:

2016 discussion draft

— …where PE meets TP

— Focus on ‘economic ownership’- AOA functional analysis- ignoring contractual arrangements

— Dependent Agent PE (DAPE):- may even arise if no profits attributable- nevertheless: filing requirements?

— How much profit can be attributed to a DAPE?

— Administrative burden or real tax exposure?

Source: OECD


BEPS 7 (2016): profit attribution to PEsExample (Report, par. 40-55)— PrimaCo (country A) manufactures consumer products in country A

— SellCo (country B) is engaged by PrimaCo as a sales agent, selling PrimaCo‘s products to customers on behalf of PrimaCo

— As such, SellCo earns its own income (sales commission)

— OECD discussion draft September 2016: AOA analysis of SellCo functions -> Dependent Agent PE for Prima Co in country B

Contractual arrangements between SellCo and PrimaCo:— SellCo is responsible for identifying customers, soliciting, placing and

processing customer orders with PrimaCo

— SellCo provides local marketing and advertising services based on PrimaCo strategy – PrimaCo owns marketing intangibles

— PrimaCo owns the products/inventory until delivered to customer

— PrimaCo sets the pricing & sales strategy

— PrimaCo invoices customers and bears credit risk for customer rec.

— PrimaCo remunerates SellCo with a commission on sales

— SellCo is responsible for warehousing of inventory and maintaining appropriate inventory levels

— SellCo sets parameters to extend credit to customers and approves sales in view of customer‘s creditworthiness

— SellCo handles collection of customer receivables

PrimaCo

SellCo

Country A

Country B

Contractually:Sales Agent

OECD Discussion Draft September 2016:In addition to its own profits as agent, SellCo‘s activities alsoconstitute a PE of PrimaCo, based on attribution of:— Inventory risk and economic ownership— Credit risk and economic ownership of customer rec.— Capital, to fund these risks and (economic) assets

OECD 2016:Dependent Agent PE of PrimaCo

Customer


From PE to Transfer Pricing

Mfg Co (Toll Manufacturer)

25%

75%

R&D Co(Contract R&D)

SalesCo(Limited Risk Distributor)

Customer

US Parent (US IP Owner)

Cayman Principal (Non-US IP

Owner)

Reporting lines

Reporting linesCSA

BEPS 7: Case Studies


Permanent Establishment Taxation

GmbH CustomerKey Account Manager

PE according to Art. 5(5) OECD Model Convention ?- Detailed negotiation of

contracts- Negotiation of single

contract elements- Presentation of Samples- Serves as local point of

contact


Permanent Establishment TaxationThe German based procurement department of German Parent negotiates global purchase contract with a (German or non-German) Supplier. Negotiation and Signing of global purchase contract takes place in Germany− Global purchase contract is basis for each of

German Parent‘s group member‘s orders – group members can make orders with the Supplier on the basis of the global purchase contract

− Can German Parent be a dependent agent of NL Sub in the sense of Art. 5(5) OECD Model Convention?

German Parent (Purchaser)

(German or non-German)

Supplier

Foreign Sub NL Sub

German PE of NL Sub

Invoice Delivery


Conclusions— Use of PE hybrid mismatches: increasingly under pressure

— PE as an increased admin exposure -TP as the real tax exposure?

— Increased double taxation due to BEPS 7 & 15 & unilateral measures

— Contractual allocation of risks and functions: increasingly under pressure

— IP/Principal structures: can only survive in jurisdictions where there is sufficient R&D population

— Onshoring of IP to reduce PE/TP exposures

Thank you


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Fragmentation and controversyTax in a post-BEPS world



© 2016 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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Permanent Establishment issues post BEPS · Permanent Establishment issues post BEPS. EMA Tax Summit — London, September 2016

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