IFA/CIOT 18th Cross Atlantic and
European Tax Symposium
BEPS and MNCs
Lydia Challen – Allen & Overy
Keith Brockman – Mars
Anne Starck – HMRC
Peter Adriaansen – Loyens & Loeff
Jean Schaffner – Allen & Overy
The picture is still incomplete…
Residence
Source
P
 CFCs (Action 3)
 TP and intangibles (Action 8)
 TP and risk/capital/other
high risk transactions (Action
9/10)
C





Hybrids (Action 2)
Harmful tax practices (Action 5)
Treaty abuse (Action 6)
TP and intangibles (Action 8)
TP and risk/capital/other high
risk transactions (Action 9/10)
© Allen & Overy 2014
 Dispute resolution
(Action 14);
 Multilateral
instrument (Action 15)
 Disclosure (Action 12)
 TP and
documentation
(Action 13)
S




Hybrids (Action 2)
Interest deductions (Action 4)
Treaty abuse (Action 6)
Permanent establishment (Action
7)
 TP and intangibles (Action 8)
 TP and risk/capital/other high
risk transactions (Action 9/10)
2
Beyond hybrids
– Treaty abuse
– Effect of widespread adoption of LOB provisions
– Removal of tie-breaker provisions
– Need to reorganise group structures?
– More referrals to competent authority?
– Permanent Establishments discussions draft
– Commissionaire structures
– Use of in-country marketing personnel with contracts
concluded abroad
– Maintenance of merchandise for delivery
– Digital economy?
© Allen & Overy 2014
IP regimes
– Transfer pricing approach vs nexus approach
– TP approach: functions, legal ownership, use of assets,
economic risks
– Nexus: links to expenditure incurred in creation of IP. Focus
on incentivising R&D activity. Compatible with EU law?
– EU Commission investigation on IP Boxes announced
March 2014
– Germany/UK joint statement – 11 November 2014
– Confirms Nexus approach
– Can take into account some expenditure by related parties
– Existing regimes to be closed to new entrants in June 2016
– Grandfathering of existing regimes to June 2021
– FHTP to develop methods for tracking expenditure by June
2015; emphasis on practical methodologies
© Allen & Overy 2014
Looking to 2015 – will BEPS be eliminated?
– Respect for tax sovereignty – position of tax havens?
– CFC rules
– TP and risk/capital
– Prospect of US reform?
© Allen & Overy 2014
Implementation
• Treaty abuse
• Withholding taxes on PE in
third countries
• PE definition
• Transfer pricing
• Disclosure
Treaty change
© Allen & Overy 2014
•
•
•
•
Hybrids
CFCs
Harmful tax practices
Interest deductions
Domestic law
Treaty change
– Multilateral instrument
– Living document with ongoing OECD involvement
– Challenges:
– Existing treaty relationships – eg EU, Nordic tax treaty
– Reservations?
– Accommodating alternatives
– When might it come into force?
– Conference 2015
– How many states will have to ratify?
– Incorporation into domestic law
© Allen & Overy 2014
Need for domestic implementation
– Requirement for domestic legislative change
– What about the US?
– Risk of unilateral action?
– Early adopters
– “Corrective” action
© Allen & Overy 2014
OECD Guidance
•
It is essential that the new guidance in
Chapter V of the Guidelines, and
particularly the new country-by-country
(CbC) report, be implemented effectively
and consistently.
•
The international nature of tax planning
means that unilateral and uncoordinated
actions by countries will not suffice and
may actually make things worse
9
Potential for Inconsistency
•
Confidentiality / Public availability
•
Early unilateral legislation & non-conformity
•
TP exceptions to the “arm’s length principle”
•
Exchange of information: Liberal definition /
use
•
LOB derivative benefits provision
•
Subjective General Anti-Avoidance Rules
(GAAR)-“Principal Purpose” vs. LOB &
Domestic vs. Treaty
10
Potential for Inconsistency
•
TP CbC: Formulary apportionment vs:
Functions, assets and risks analysis
•
TP rules as a substitute for CFC rules
•
Global consensus: US Foreign Tax Credit (FTC)
•
Arbitration provisions: Adopt “Best Practices”
at audit level and provide avenues for
resolution (MAP inefficiencies, timeliness)
•
CbC rules: Timing / OECD + domestic
legislation
11
TP Documentation: What
next?
•
Pre-BEPS
•
BEPS incentivized unilateral legislation
•
BEPS Guidelines / Consistent domestic
legislation
•
Post-BEPS + domestic legislation
12
GAAR: What next?
•
Domestic and / or treaty legislation
•
Increased subjectivity & uncertainty
•
Additional documentation: material
transactions
•
Additional likelihood of double taxation
•
Monitoring adherence to GAAR standard
13
CbC Reporting: What next?
•
Preparation of outline per OECD Guidelines
•
Prepare Q & A’s for audit
•
Provide supplementary information
•
Supplement with TP Master File and / or Local
File
14
The BEPS Action Plan
•
The action plan calls for 15 actions organised around the following three main
pillars:
•
The coherence of corporate tax at the international level
•
A re-alignment of tax and substance
•
Transparency, coupled with certainty and predictability.
Actions 11 - 14 Transparency and Certainty
•
Greater transparency for tax administrations and more certainty for business:
•
Establish methodologies to collect and analyse data on BEPS and the actions to
address it (Action11)
•
Require taxpayers to disclose their aggressive tax planning arrangements (Action
12)
•
Re-examine transfer pricing documentation (Action 13)
•
Make dispute resolution mechanisms more effective (Action 14).
Guidance on transfer pricing documentation and
country-by-country reporting (Action 13)
•Revised standards for transfer pricing documentation:
• a master file containing high-level information about global business
operations and transfer pricing policies available to all relevant country tax
administrations
• a local file for each country containing more transactional transfer pricing
documentation, identifying related party transactions, the amounts
involved, and the company’s analysis of their transfer pricing
determinations.
•Template for country-by-country reporting:
• showing income, earnings, taxes paid and certain measures of economic
activity
• identifying each entity within a group doing business in a particular tax
jurisdiction and indicating the business activities engaged in.
G20 Finance Ministers and Central Bank Governors
20-21 September 2014, Cairns, Australia
“We are strongly committed to a global response to cross-border tax avoidance
and evasion so that the tax system supports growth-enhancing fiscal strategies
and economic resilience. Today, we welcome the significant progress achieved
towards the completion of our two-year G20/OECD Base Erosion and Profit
Shifting (BEPS) Action Plan and commit to finalising all action items in 2015. …
We support further co-ordination and collaboration by our tax authorities on their
compliance activities on entities and individuals involved in cross-border tax
arrangements.”
Forum on Tax Administration
24 October 2014, Dublin, Ireland
“We are taking a significant step forward in global tax co-operation. We have
agreed a strategy for systematic and enhanced co-operation between our tax
administrations, based on existing legal instruments, that will allow us to quickly
understand and deal with global tax risks whenever and wherever they arise.
Along with the strategy, we have created a new international platform called the
JITSIC Network to focus specifically on cross border tax avoidance, which is
open to all FTA members on a voluntary basis. This new network integrates the
existing cooperation amongst some of us into the larger FTA framework.”
Dispute resolution
– Big missing piece
– Reported resistance to arbitration
– Most common current causes of disputes
– Existence of PE and attribution profits to PE
– Discrimination
– Arm’s length pricing
– Hybrids – interest or dividends?
– Determining residence
– Likely to increase as a result of BEPS
© Allen & Overy 2014
Mutual agreement procedure vs arbitration
– Mutual agreement procedure
– Not litigation/limited arbitration
– ‘Discussion’ process between competent authorities
– With a view to reaching agreement
– Limited taxpayer participation
– Activating the process
– Mandatory binding arbitration in OECD model since 2008
– Only 17% actual treaties
– Triggering the process
– Resolving the issues not the case
– Supports but does not replace mutual agreement procedure
© Allen & Overy 2014
21
Mutual agreement procedure
– Statistics
– Growing case load
– Increasing duration
– Why do taxpayers fail?
– Agreement reached in 90% of cases – is this success?
– Providing insufficient information
– Domestic law dispute
– Time limits lapse
– Taxpayer guilty of avoidance, evasion, fraud
© Allen & Overy 2014
22
MAP cases – the numbers
© Allen & Overy 2014
23
MAP cases – the numbers by country
OECD Member Countries
© Allen & Overy 2014
2006
2007
2008
2009
2010
2011
2012
Inventory of
cases at end of
reporting period
Inventory of
cases at end of
reporting period
Inventory of
cases at end of
reporting period
Inventory of
cases at end of
reporting period
Inventory of
cases at end of
reporting period
Inventory of
cases at end of
reporting period
Inventory of
cases at end of
reporting period
Australia
16
23
22
23
27
21
21
Canada
134
153
186
206
225
225
222
France
254
233
328
427
490
539
551
Germany
476
527
519
543
484
702
787
Italy
52
63
56
67
80
102
130
Japan
67
85
82
90
75
61
70
Netherlands
120
151
127
118
97
99
140
United Kingdom
84
109
126
120
131
133
143
United States
430
500
578
724
705
686
573
24
Number of months to complete a MAP case?
© Allen & Overy 2014
25
The Netherlands – general view on BEPS
•
BEPS is mostly a source country problem and international cooperation is the only solution
•
An increase of international transparency and exchange of information is essential for this
•
The Netherlands supports the ‘holistic’ approach
•
Nonetheless, The Netherlands has already taken some domestic measures
•
Before taking any further measures, the Netherlands will await the further guidance expected 2015
•
On a separate note: the Netherlands is not an advocate of harmonization of EU corporate tax systems by means of a
common consolidated corporate tax base (CCCTB)
26
Renewed regulations on Dutch minimum substance requirements
•
Decree on Dutch minimum substance requirements for DVL (dienstverleningslichaam) and information provision effective as
per 1 January 2014. By exchanging information, the Netherlands provides the concerning treaty partner state with a fair
possibility to make a well-informed decision whether or not to grant treaty benefits to the DVL
•
Codification of existing minimum substance requirements for stronger enforcement and for exchange of information with
foreign tax authorities
•
Updated regulations on APA’s, ATR’s and relating substance requirements – published on 12 June 2014
•
Exchange of information
•
DVLs that do not meet substance requirements but apply tax treaties and/or EU I&R Directive;
•
APAs for stand alone structures
•
Extension substance rules to holdings - if ATR desired
•
Extension substance rules to other categories (e.g. non-resident taxation)
27
Sanctions non-compliance regulations
•
Non-, inadequate or late provision of information: fine
•
Spontaneous exchange of information to source country in respect of interest, royalty, rent or lease amounts for which
treaty or EU I&R directive protection has or may be claimed
•
Exchange of information on APA’s:
-
Only for stand-alone structures (i.e. in the absence of other activities in the Netherlands)
For new APA’s only
28
The Netherlands – Non-resident taxation – anti abuse provision
ForeignCo I
As from 2012, ForeignCo II is subject to max. 25% Dutch CIT on any benefits derived from its
substantial interest (shortly: a ≥ 5% shareholding) in DutchCo, if:
1. The substantial interest is held with the main purpose (or one of the main purposes) to avoid
dividend withholding tax of (in this case) ForeignCo I
(Main Purpose Test); and
2. The substantial interest is not attributable to a business enterprise carried on by ForeignCo II
(Enterprise Test).
ForeignCo II
•
if ForeignCo II has a so-called ‘real function’ i.e. does not concern a ‘wholly artificial
arrangement’ the Main Purpose Test would not be met (ECJ C-196/04, Cadbury Schweppes).
•
There are several concepts of business enterprise for Dutch CITA purposes. ForeignCo II may
be deemed to carry on an enterprise to which the substantial interest is attributable if
ForeignCo II fulfills an vital/intermediary function (schakelfunctie) in regard to the business
pursued by the group.
•
The Netherlands may (to a certain extent) be precluded from levying the non-resident taxation
based on an applicable tax treaty.
Country X
Netherlands
DutchCo
29
Conclusions
•
Netherlands codified minimum substance requirements as per 1 January 2014
•
Netherlands tries to make system ‘more robust’
•
Netherlands focuses on exchange of information
•
Allow source country to make own analysis
•
Further steps: international cooperation is the only solution
30
State Aid – Starbucks
11 June 2014
EC press release regarding the opening of in-depth state aid investigations regarding
Apple (Ireland), Fiat Finance & Trade (Luxembourg) and Starbucks (the Netherlands).
30 September 2014
EC published its opening decisions regarding Apple and Fiat Finance & Trade
11 November 2014
EC published its opening decision regarding Starbucks
31
State aid
1. Context
–
aid granted via public resources,
–
which distorts competition
–
by favouring certain undertakings or good
© Allen & Overy 2014
32
2. Examples
FFT
 Lack of cooperation of Luxembourg, indirect method of transfer pricing determination
22 anticipated decisions presented, representative of the rulings practice, on an anonymous
basis, but reference to « FFT » (with, in the initial file, a ruling request, TP report and tax
administration reply)
Discussion on the methodology and assets funds exposed to risks, on the comparables and
the return on equity (parallell with Starbucks)
Comparison between the financial sectors and the automotive sector
No precisions regarding the deduction for the counterparts
No precisions regarding the linking with accounts
Link to case law pending against EU Commission (T-258/14): request to provide a complete
list of anticipating decisions made in 2010, 2011 and 2012:




© Allen & Overy 2014
Right of defense
Principle of proportionality
No link to precise facts (no relevance of information sought)
Direct tax is competence of member states
33
3. Examples
Amazon
Luxco paid royalties to SCS (non taxable in Luxembourg in the absence of commercial
activity)
• Excessive reduction of the base, any result that differs from the full market competition price
and lowers the tax base can be considered a State aid
• No TP report provided
• Limitation of the taxable result of Luxco, without consideration of its turnover
• Global context (royalties received by Luxco)
• Taking into account the respective functions of Luxco and of SCS
• Duration of the ruling (in fact)
• More favorable treatment than other tax payers in the same situation
 Code of conduct group has validated on 27 May 2011 the Luxembourg TP Circulars on
intragroup financing
© Allen & Overy 2014
34
4. Market perception
−Rulings are acceptable if they interpret the law
−Regulations on rulings and TP (methodology and documentation)
−No base erosion
© Allen & Overy 2014
Questions?
These are presentation slides only. The information within these slides does not
constitute definitive advice and should not be used as the basis for giving
definitive advice without checking the primary sources.
Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term
partner is used to refer to a member of Allen & Overy LLP or an employee or
consultant with equivalent standing and qualifications or an individual with
equivalent status in one of Allen & Overy LLP’s affiliated undertakings.
© Allen & Overy 2014
36