Will the EU and the OECD
Decide U.S. Tax Reform?
© Copyright 2014 by K&L Gates LLP. All rights reserved.
Sean P. Donovan-Smith
Bertrand Dussert
Ignasi Guardans
Partner
London
Partner
Paris
Partner
Brussels
Rainer Schmitt
Philip Torbøl
Mary Burke Baker
Partner
Frankfurt
Partner
Brussels
Government Affairs Advisor
Washington, DC
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Overview of the U.S. Tax Policy
Climate
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Context of EU and International Tax
Reform
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The OECD BEPS Project
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Background on OECD BEPS
 OECD developed the “Base Erosion and Profit
Shifting” plan to fight legal but “aggressive” tax
planning by MNEs
 Single set of international tax rules
 End erosion of tax bases
 Prohibit artificial shifting of profits to jurisdictions to
avoid paying tax
 But what is fair? And how can it be
implemented?
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BEPS - DEVELOPMENT

Mid 2012

6 Dec 2012

Feb 2013

Sept 2013


16 Sept 2014
20/21 Sept 2014
15/16 Nov 2014
2015
2017 / 2018
Multinational enterprises (MNEs) questioned in British
Parliament
EU publishes action plan against tax avoidance and
evasion with 34 specific recommendations
OECD presents Action Plan on Base Erosion and Profit
Shifting identifying 15 major issues
G20 St. Petersburg Summit welcomes BEPS plan and
resolves 18-24 months schedule for its implementation
OECD releases BEPS recommendations on 7 Actions
G20 Finance Ministers support BEPS and exchange of
information via Common Reporting Standard (CRS)
G20 Summit in Brisbane to take next steps
Implementation of final BEPS Action Plan to begin
CRS - Automatic Exchange of Information to commence
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BEPS September Recommendations
Action 1 Address Tax Challenges of the Digital Economy (final)
Action 2 Neutralize hybrid mismatches and arbitrage (interim)
Action 5 Counter Harmful tax practices
Action 6
Prevent treaty shopping / treaty abuse (interim report)
Actions 8 Intangibles
Action 13 Develop common transfer pricing template to report worldwide allocation of
profits
Action 15 Multilateral Instrument to counter BEPS developments in international tax
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Transfer Pricing of IP Rights
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SELECTION OF IP BOX
REGIMES IN EUROPE
Belgium
United Kingdom
• R&D tax relief
• R&D tax relief
• IP Box
• IP Box
The Netherlands
Luxembourg
• R&D tax incentives
• No R&D tax relief
• IP Box
• IP Box
France
• R&D tax credit
• IP Box
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IP BOX REGIMES
UNDER SCRUTINY
Existing OECD transfer pricing valuation methods
 CUP
 Resale less
 Cost plus
 Transactional net margin
 Transactional profit split
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IP BOX REGIMES
UNDER SCRUTINY
Impact of BEPS Guidelines on transfer pricing of IP
 Combination of old and new valuation methods
 Increased use of profit split methods
 Newly approved Discounted Cash Flows methods
 Goodwill is treated as an intangible for TP purposes
 Until BEPS guidelines, did not need to be

systematically taken into account for pricing
transactions
Goodwill could therefore be taken into account for the
valuation of IP rights
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IP BOX REGIMES
UNDER SCRUTINY
IP Box regimes: harmful tax practices ?
• Narrowed scope: patents only
• Substantial activity test: the nexus approach
• IP Box eligibility recommended formula:
• Outsourcing costs: for unrelated parties only
• Exclusion of acquired IP, except when it has been enhanced through
R&D
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CONCLUSION
• Gradual deviation from the arm’s length principle over
time is likely
• Non-EU countries are considering IP Box regimes,
subject to BEPS global guidelines
US, Canada, Switzerland (Federal-level)
• EU-level implementation
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EU State Aid Investigations
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EU STATE AID GENERAL PROHIBITION
 State Aid is prohibited under the EU Treaties
(Articles 107 and 108 TFEU), subject to certain
exceptions (which mean that State Aid is
deemed ‘compatible’ with the internal market).
 The Commission is in charge of ensuring that
Member States comply with EU rules on State
Aid.
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EU STATE AID PROCEDURE
Notification /
Complaint
Preliminary
Examination
Formal
Investigation
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Final
Decision
(Judicial
Review)
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Financial Transaction Tax
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EU Financial Transaction Tax
 Initial proposal September 2011 for entire EU by 2014
 Financial transactions between financial institutions in
scope
 0.1% against the exchange of shares and bonds and
0.01% across derivative contracts
 UK and Sweden objections led to enhanced co-operation
approach (with 11 member states)
 Approved in the European Parliament in December 2012
and by the Council of the European Union in January
2013
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French Financial Transaction Tax
 Introduced on March 14, 2012
 Tax on acquisitions of certain French equity securities
and similar instruments
 Tax on High Frequency Trading
 Tax on sovereign Credit Default Swaps: does not apply
in practice as naked CDS have been banned by EU
regulation 236/2012
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Other Key Tax Initiatives
 A global FATCA
 Common reporting standards
 IFRS convergence
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In an increasingly challenging tax
environment, what can be done to
help U.S. companies?
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