Bracing for BEPS: How the
Evolving Global Tax System
Will Impact Your Company
April 21, 2016
Mary Burke Baker, Government Affairs Advisor, K&L Gates
Betsy-Ann Howe, Partner, K&L Gates
Ignasi Guardans, Partner, K&L Gates
Rainer Schmitt, Partner, K&L Gates
Adam Tejeda, Partner, K&L Gates
© Copyright 2016 by K&L Gates LLP. All rights reserved.
AGENDA
Introduction: What keeps you up at night?
Are you ready for BEPS?
Overview/background of BEPS
Broad application on foreign investment
structures (e.g., funds and multinationals)
 German Overview
 Australian Overview
 Q&A




klgates.com
2
INTRODUCTION: WHAT KEEPS YOU UP AT NIGHT?
Are you ready for BEPS?
WHAT KEEPS YOU UP AT NIGHT?
 Instead of counting sheep, try counting BEPS:
1.
2.
3.
4.
5.
6.
7.
FATCA
Automatic Exchange of Information
G-20/OECD BEPS Project
European Commission Tax Action Plan
European Union Proposed BEPS Directive
European Parliament TAXE Committee, I&II
European Commission State Aid Investigations
klgates.com
4
WHAT KEEPS YOU UP AT NIGHT? (CONT.)
8. Unilateral Actions by UK, Australia, Others
9. US Treasury Anti-inversion Regulations
10. Lux Leaks
11. Panama Papers
12. G-5 Beneficial Ownership Announcement
13. Upcoming US Treasury Regulations on Beneficial
Ownership
14. New Tax Haven Blacklist
15. Collaborative Platform of IMF, World Bank, OECD
and UN
klgates.com
5
WHAT KEEPS YOU UP AT NIGHT? (CONT.)
16. JITSIC
17. Congressional Angst Over Inversions and Earnings
Stripping (Tax Reform)
18. Administration’s Tax Reform Proposals
19. Presidential Candidate Tax Reform Proposals
klgates.com
6
WHY SHOULD I CARE?
WHY IS THIS DIFFERENT?
 It’s not just talk – it’s happening
 The “infrastructure” is in place: FATCA
established relationships and framework for
cooperative/collaborative initiatives
klgates.com
7
ARE YOU READY FOR BEPS?
 Diagnostics: How Will BEPS Affect You?





Taxes?
Organizational structure?
Reputation?
Treasury function?
Other?
klgates.com
8
ARE YOU READY FOR BEPS?




Is the C Suite Informed?
Impact on Efficient Tax Planning?
Treasury Functions?
Compliance Functions?
klgates.com
9
Overview and Background of BEPS
Policy and Political Considerations
Practical Application of BEPS
How OECD BEPS Affects Foreign
Investment Structures
ILLUSTRATION OF BEPS IMPACT ON
SAMPLE PRIVATE EQUITY STRUCTURE
Investors / LPs
Fund Manager
General Partner
Fund
(LP)
Holding Platform
Hybrid/related
party loan
SPV
Third party debt
Target
klgates.com
12
SELECTED OECD BEPS ACTIONS






Action 2: Hybrid Mismatches
Action 3: CFC Rules
Action 4: Interest Deductibility
Action 6: Treaty Abuse
Actions 8 – 10: Transfer Pricing
Action 13: Country by Country Reporting
klgates.com
13
NEXT STEPS
 Internal analysis/structural changes needed?
 Must consider increased focus on substance
and business purpose
 Focus on one holding company jurisdiction to
provide substance, employees, directors, etc.?
 Organize funds in same jurisdiction as
acquisition/holding entities are located to
strengthen business purpose and substance
issues?
klgates.com
14
ACTION 2 – HYBRID MISMATCH
ARRANGEMENTS
klgates.com
15
ACTION 2 – HYBRID MISMATCH
ARRANGEMENTS
Investors / LPs
Fund Manager
BEPS IMPACT
Hybrid/related
party loan
General Partner
Fund
(LP)
Holding Platform
SPV
Third party debt
Target
klgates.com
16
ACTION 3 – CFC RULES
Building blocks for controlled foreign company (“CFC”) rules:
1. Definition of a CFC
2. CFC exemptions and threshold requirements
3. Definition of CFC income
4. Rules for computing of CFC income
5. Rules for attributing CFC income
6. Rules to prevent or eliminate double taxation
 Not minimum standards but rather guidance
 Jurisdictions with CFC regimes may do nothing, but could cause
implementation of OECD CFC recommendations in countries
without CFC regimes
klgates.com
17
ACTION 3 – CFC RULES
Investors / LPs
Fund Manager
General Partner
Fund
(LP)
Holding Platform
Hybrid/related
party loan
BEPS IMPACT
SPV
Third party debt
Target
klgates.com
18
ACTION 4 – INTEREST DEDUCTIBILITY
 Recommendations designed to prevent base erosion through
interest payments.
 Three base erosion scenarios:
 Selectively cherry-picking higher levels of third party debt in high tax
countries
 Related-party interest deductions in excess of third party interest
expense
 Incurring debt (third party or related party) to fund the generation of tax
exempt income
 OECD recommended approach → limiting an entity’s net interest
deduction to a percentage of EBITDA
 US Treasury weighing in with recent Section 385 proposed
regulations
klgates.com
19
ACTION 4 – INTEREST DEDUCTIBILITY
Investors / LPs
Fund Manager
General Partner
Fund
(LP)
Holding Platform
BEPS IMPACT
SPV
Third-party debt
Target
klgates.com
20
ACTION 6 – TREATY ABUSE
Goals:
 Prevent treaty shopping
 Avoid double non-taxation through use of tax-treaties
 Identify policy considerations for treaty negotiations
The OECD proposal – 3 options:
i.
ii.
iii.
simplified limitation-on-benefits test (“LOB”) and principal
purpose test (“PPT”), or
PPT, or
LOB test combined with anti-conduit arrangements rule
klgates.com
21
ACTIONS 8 -10 – TRANSFER PRICING
 Allocate profits associated with intangibles in
accordance with value creation through
functions performed, assets used and rights
assumed in the development, enhancement,
maintenance, protection and exploration of
intangibles
 Provide valuation guidance regarding hard-tovalue intangibles
klgates.com
22
ACTION 13 – CBC REPORTING
 Action 13 contains three-tiered approach to enhance transparency:
1.
2.
3.
Master file containing standardized information (blueprint relevant for
all group members)
Local file containing an overview of all material transactions per group
company
CbC report to contain information regarding the allocation of income,
taxes and business activities per jurisdiction
 Large amount of information to be made available to tax authorities.
Allows CbC comparison by tax authorities to scrutinize low-taxed
profits in group.
 Generally effective 2016; US Treasury final regulations July, 2016.
klgates.com
23
BEPS: German Response
BEPS: Australian Response
THE TAX LANDSCAPE IN AUSTRALIA
 Comprehensive tax system: CFC rules,
thin capitalisation, transfer pricing,
debt/equity rules
 40+ treaties based on the Model OECD
convention
 Why unilateral action on BEPS?
 Corporate tax a substantial portion of total taxes for Australia
relative to most other OECD countries
 Corporate tax enquiry into large multinational corporations in
2015 (Google, Apple, Microsoft and Newscorp)
 Increase in cross-border consumption not caught by GST
(intangibles and low-value goods)
klgates.com
26
Action 1- Tax Challenges of the Digital
Economy
ACTION 1: DIGITAL ECONOMY
 Challenges for the current GST system:
 Rules designed in 2000 focus on Australian-based, rather than
cross-border supplies
 Ongoing surge in digital downloading results in a growing
proportion of consumption not being caught by GST
 High volumes of low-value imports (under $1,000
threshold): 100 million items imported annually (from the
Treasury’s 2013 Report)
klgates.com
28
ACTION 1: DIGITAL ECONOMY
 ‘Netflix tax’
 Rules due to commence from 1 July 2017
 Will impose GST on supplies of anything other than goods or
real property to Australian consumers by non-residents
 Includes supplies of digital products: streaming or downloading
of movies, music, apps, games and e-books
 GST on low-value imports (under $1,000).
klgates.com
29
Action 2 – Anti-Hybrid Rules
ACTION 2: ANTI-HYBRID RULES
 BOT Discussion Paper
(November 2015) – covers a
range of general and specific
queries
 Australia ahead of other OECD
countries (except for the UK –
Finance Bill 2016 introduced on
22 March 2016, new rules to apply
from 1 Jan 2017).
 Commencement date for the
Australian rules still unclear.
klgates.com
31
ACTION 2: ANTI-HYBRID RULES
 Australian approach vs the UK
 UK had a form of anti-hybrid rules since 2005 - “international arbitrage” rules
denying deductions where one of the main purposes is the avoidance of UK tax
 New rules contained in the Finance Bill 2016 replace the arbitrage rules from 1
January 2017
 Proposed definition of a “hybrid entity” in the Bill
 Australia:
 Currently no anti-hybrid legislation.
 Tax Act defines a “foreign hybrid” as a foreign hybrid LP or a foreign hybrid
company.
 Not clear whether a new definition of a “hybrid entity” specifically for the
purposes of the new anti-hybrid legislation will be introduced.
 Australia has complicated rules applying to the taxation of financial arrangements
– current proposal would use the definition of financial arrangement under these
rules and apply them to the anti hybrid rules
 Would result in Australia’s definition being markedly different from that proposed
by OECD and adopted in the UK
klgates.com
32
Action 4 – Limit interest deductions
ACTION 4: LIMITING INTEREST
DEDUCTIONS
 Thin capitalization rules (‘thin cap’)
 Australia has had thin cap rules in place since 2001.
 The rules limit deductions for interest expense and borrowing costs where debtto-equity gearing ratios exceed prescribed debt limits.
 Specific debt limits vary depending on the kind of entity
 The rules were tightened from 1 July 2014.
klgates.com
34
Action 7 – Artificial Avoidance of PE Status
ACTION 7: “GOOGLE TAX”
 Australia followed the UK, which introduced diverted profits tax
(DPT) in March 2015, which:
 targets arrangements similar to that of Google UK
 applies where a non-UK company avoids UK taxable presence
 Australian Multinational Anti-Avoidance Law (MAAL):
 Received Assent in December 2015.
 applies to a “scheme” if certain conditions are satisfied.
 Corporate tax avoidance enquiry into Google, Apple, Microsoft and NewsCorp –
report indicates PE avoidance arrangements may be in place (final report due in
April 2016)
klgates.com
36
Action 13 – Country-by-Country Reporting
Action 13: Reporting
1. Country-by-country reporting
– “significant global entities”
(ie revenue over $1 billion) to
give the ATO a statement
within 12 months after the
end of financial year.
2. ATO now required to publish
information on Australian
public and foreign owned
corporate tax entities with
income of $100 million or
more.
klgates.com
38
Q&A/Discussion