Global Tax
Policy and
Controversy
Briefing
Special edition:
BEPS final recommendations
Issue 17 | March 2016
B EP S - related developments 2
T his latest issue of our
Global T ax P olicy &
ontro ers riefing
is a special edition,
foc sing on the
recommendations.
F or each of the O EC D’ s
reports, we provide a
factual commentary,
plus a supplementary
point of view analysis
by other EY T ax
leaders.
lo al a
olic and ontro ers
riefing
8
Global Tax Policy and Controversy Briefing
is pub lished each q uarter b y E Y .
To ac c es s p revio u s is s u es and t o l earn m o re
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ontri
ting ditor
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ro b .t h o m as @ ey .c o m
C onnect with EY T ax in the
following wa s
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inside issue 17
1 0
St at em ent o f Barb ara M. Angu s t o t h e
Ho u s e Co m m it t ee o n Way s and Means
Su b c o m m it t ee o n Tax Po l ic y Hearing
on the OECD Base Erosion and Profit
Sh if t ing Pro j ec t
7 6
1 34
OECD releases final report on
c o u nt ering h arm f u l t ax p rac t ic es
u nder Ac t io n 5
OECD rel eas es new gu idanc e o n
t rans f er p ric ing f o r l o w val u e- adding
int ra- gro u p s ervic es u nder BEPS
Ac t io ns 8 - 10
A ction 5
1 8
8 8
32
OECD releases final report under BEPS
Ac t io n 6 o n p revent ing t reat y ab u s e
BEPS — Th e Eu ro p ean dim ens io ns
Dec ip h
Rec o m
c at ego
im p l em
ering t h e BEPS
m endat io ns : Ho w t h e t h ree
ries o f Ac t io n w il l drive
ent at io n
36
A ction 1
OECD issues final report on the tax
c h al l enges o f t h e digit al ec o no m y
u nder Ac t io n 1
4 6
A ction 2
OECD releases final report on Hybrid
Mis m at c h Arrangem ent s u nder
Ac t io n 2
5 8
A ction 3
OECD releases final report on CFC
ru l es u nder BEPS Ac t io n 3
6 8
A ction 4
OECD releases final report on
l im it at io ns o n int eres t dedu c t io ns
u nder Ac t io n 4
A ction 6
1 0 2
A ction 7
OECD releases final report on
preventing the artificial avoidance of
p erm anent es t ab l is h m ent s t at u s u nder
Ac t io n 7
1 1 6
A ction 8
OECD issues final guidance on transfer
p ric ing f o r int angib l es u nder BEPS
Ac t io n 8
1 2 4
A ction 8 - 1 0
OECD rel eas es new gu idanc e o n c ro s s b o rder c o m m o dit y t rans ac t io ns u nder
BEPS Ac t io ns 8 - 10
1 2 8
A ction 8 - 1 0
OECD releases final transfer pricing
gu idanc e o n ris k and rec o gnit io n
u nder BEPS Ac t io ns 8 - 10
A ction 8 - 1 0
1 4 2
A ction 1 1
OECD releases final report on
m eas u ring and m o nit o ring BEPS u nder
Ac t io n 11
1 5 0
A ction 1 2
OECD releases final report on
m andat o ry dis c l o s u re ru l es u nder
Ac t io n 12
1 6 0
A ction 1 3
OECD releases final report on transfer
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 u nder Ac t io n 13
1 6 8
A ction 1 4
OECD releases final report on
im p ro ving t h e ef f ec t ivenes s o f
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
1 7 6
A ction 1 5
OECD releases final report on
devel o p ing a m u l t il at eral ins t ru m ent
t o m o dif y b il at eral t ax t reat ies u nder
BEPS Ac t io n 15
lo al a
olic and ontro ers
riefing
3
“ Does the release
and G20 approval
of the final
deli era les signal
the end of the
eginning or the
eginning of the end
T he answer may
be neither.”
Chris Sanger and
Rob Hanson discuss the
BEPS recommendations
A
f t er t w o y ears , t h o u s ands o f p ages o f dis c u s s io n draf t s , and m any
h o u rs o f m eet ings and p u b l ic c o ns u l t at io ns , t h e OECD o n 5 Oc t o b er
2015 released the final deliverables under its Base Erosion and Profit
Sh if t ing (BEPS) Ac t io n Pl an. Th e in- dep t h nego t iat io ns o f t h e l as t t w o y ears
res u l t ed in t h e is s u anc e o f 13 rep o rt s c o vering 15 Ac t io n it em s (Ac t io ns
1
8 - 10 w ere addres s ed in o ne rep o rt ) t h at c o m p ris ed al m o s t 2, 000 p ages
and a s eries o f rec o m m endat io ns int ended t o im p ro ve t h e f u nc t io ning o f t h e
international tax framework. The package was approved by the G20 finance
m inis t ers at t h eir Oc t o b er m eet ing in Lim a, Peru , and t h en b y t h e G20
l eaders at t h eir No vem b er s u m m it in Ant al y a, Tu rk ey .
Does the release and G20 approval of the final deliverables signal the
end o f t h e b eginning o r t h e b eginning o f t h e end? Th e ans w er is p ro b ab l y
neit h er. Cl earl y p ro gres s w as m ade in s o m e areas , no t ab l y in ac h ieving s o m e
c o m m o nal it y in t h e ap p ro ac h es t o neu t ral iz ing h y b rid m is m at c h es (Ac t io n
2), l im it ing b as e ero s io n via int eres t dedu c t io ns (Ac t io n 4), u p dat ing t h e
OECD Trans f er Pric ing Gu idel ines (Ac t io ns 8 - 10) and s et t ing o u t a f ram ew o rk
f o r c o u nt ry - b y - c o u nt ry rep o rt ing (Ac t io n 13). Ho w ever, in o t h er areas —
p art ic u l arl y in t h e digit al ec o no m y (Ac t io n 1), p erm anent es t ab l is h m ent
(Ac t io n 7 ), dis p u t e res o l u t io n (Ac t io n 14) and m andat o ry dis c l o s u re regim es
(Ac t io n 12) — t h e p ic t u re h as argu ab l y no t go t t en m u c h c l earer, m o s t l y
because the recommendations reflect a varying degree of consensus and
im p o s e dif f erent l evel s o f c o m m it m ent f ro m t h e p art ic ip at ing c o u nt ries .
Th e net ef f ec t w il l b e o f a c o m p l ex im p l em ent at io n p ro c es s , w it h c o u nt ries
c h o o s ing b et w een dif f erent o p t io ns , al t ernat ive ap p ro ac h es and s u b j ec t ive
administration. This may mean that when the dust does finally settle, we see
end res u l t s t h at are s o m e w ay o f f f ro m t h o s e envis aged b y t h e OECD.
It is p o s s ib l e t h at s o m e o f t h e OECD and G20 m em b er c o u nt ries w il l
c o ns ider t h e BEPS Ac t io n Pl an t o h ave b een a s u c c es s in t erm s o f p ro viding
go vernm ent s w it h t h e p o l ic y and l egis l at ive t o o l s t o t ac k l e t h e m aj o r s o u rc es
of base erosion and profit shifting. It is equally conceivable that other
s t ak eh o l ders , p art ic u l arl y t ax ac t ivis t s and no n- go vernm ent al o rganiz at io ns ,
will view the BEPS project as merely the first phase in overhauling the
int ernat io nal t ax f ram ew o rk , and w il l c al l f o r f u rt h er w o rk t o ref o rm t ax ru l es
t h at f avo r t h e w eal t h y and l arge m u l t inat io nal c o m p anies .
Wel c o m e
4
1
lo al a
olic and ontro ers
riefing
1, 9 53 t o b e p rec is e.
Rob H anson
hris anger
Gl o b al Direc t o r,
Tax Co nt ro vers y Servic es
+ 1 202 327 6053
ro b .h ans o n@ ey .c o m
Gl o b al Direc t o r,
Tax Po l ic y Servic es
+ 44 20 7 9 51 0150
c s anger@ u k .ey .c o m
More than j ust the
O EC D countries
We m u s t al s o k eep in m ind t h at t h e BEPS
init iat ive invo l ved no t j u s t t h e devel o p ed
w o rl d b u t t h e em erging m ark et s as w el l .
Th e OECD’ s invit at io n t o devel o p ing
c o u nt ries t o p art ic ip at e in t h e BEPS
p ro j ec t (eit h er t h ro u gh direc t invo l vem ent
in t h e BEPS t ec h nic al gro u p s o r t h ro u gh
regio nal s t ru c t u red dial o gu es ) w as
int ended t o s end a s ignal t h at t h e p ro c es s
w as an inc l u s ive o ne, b u t in m any w ay s
t h eir invo l vem ent (w h ic h , inc ident al l y ,
grant ed t h em no vo t ing righ t s )
u nders c o red t h e f u ndam ent al dif f erenc es
b et w een t h e devel o p ed and devel o p ing
w o rl d o n is s u es s u c h as t h e ro l e o f t ax
t reat ies , t h e al l o c at io n o f t ax ing righ t s ,
and t h e ap p ro p riat e int erp ret at io n o f t h e
arm ’ s l engt h p rinc ip l e.
Several devel o p ing c o u nt ries h ave indeed
s p o k en c rit ic al l y o f t h e w ay t h e BEPS
p ro c es s u nf o l ded, s ay ing t h ey w ere
al l o w ed a s eat at t h e t ab l e b u t h ad no s ay
in vo t ing. It is very l ik el y t h at t h e BEPS
p ro j ec t did no t s at e t h eir ap p et it e f o r
int ernat io nal t ax ref o rm , and t h at t h ey
and o rganiz at io ns s u c h as t h e Unit ed
Nat io ns and t h e Int ernat io nal Mo net ary
Fund will launch tax initiatives to address
t h e needs o f devel o p ing c o u nt ries . Mo ving
f o rw ard, t h e p o l it ic al b al anc ing ac t w il l b e
t o m es h t h es e needs and des ires o f t h es e
m u l t il at eral o rganiz at io ns w it h t h o s e o f
t h e OECD.
We are no do u b t in a p erio d o f
ex t rao rdinary c h ange and u nc ert aint y .
It is t h eref o re c rit ic al t h at b u s ines s
m o nit o rs o ngo ing devel o p m ent s and
understands what the OECD’s final BEPS
rec o m m endat io ns m ean in t erm s o f h o w
t h e ant ic ip at ed c h anges t o c o u nt ries ’ t ax
l aw s , adm inis t rat ive p rac t ic es and t ax
t reat ies w il l af f ec t c o m p l ianc e b u rdens
and require multinationals to make
significant changes to their business
o p erat io ns . To h el p c o m p anies as s es s
w h at t h e BEPS Ac t io n Pl an m eans f o r
t h em , w e h ave p rep ared a c o m p reh ens ive
o verview o f eac h Ac t io n in w h ic h o u r t ax
s p ec ial is t s ex p l ain t h e rec o m m endat io ns ,
o f f er t h eir view s o n w h at w il l h ap p en
nex t , and give ins igh t o n h o w t h e
rec o m m endat io ns w il l im p ac t b u s ines s .
Ou r anal y s is o f t h e 15 Ac t io n it em s
reveal ed t h ree b ro ad t h em es : t h ere w il l
no t b e a u nif o rm s et o f c h anges ado p t ed
b y c o u nt ries aro u nd t h e w o rl d, t h e new
reporting requirements will increase
c o m p l ianc e b u rdens and p o t ent ial l y c reat e
new t ax rep u t at io n ris k s , and t h e BEPS
p ro j ec t w il l h ave an im p ac t no t o nl y o n
m u l t inat io nal s ’ t ax dep art m ent s b u t al s o
o n t h e m anner in w h ic h m any ent erp ris es
c o ndu c t t h eir b u s ines s .
T he European dimension
Wh et h er o r no t t h ey are ac t u al l y b as ed
in t h e Eu ro p ean Unio n o r no t , c o m p anies
h ave t o deal w it h t h e f ac t t h at t h e OECD
is no t t h e o nl y o rganiz at io n addres s ing
BEPS. 2015 s aw vario u s p art s o f t h e
Eu ro p ean m ac h inery j o in t h e Eu ro p ean
Co m m is s io n in deb at ing — and p ro p o s ing
w ide- ranging m eas u res — b u s ines s
t ax at io n. Th e Eu ro p ean Co m m is s io n,
o riginal l y l eading t h e c h arge w it h it s
2
2015 w o rk p l an, w as j o ined as t h e y ear
p ro gres s ed b y t h e f o rm at io n o f t h e TAXE
c o m m it t ee, great er invo l vem ent f ro m t h e
m em b ers o f t h e Eu ro p ean Parl iam ent , a
3
greater focus on tax issues from ECOFIN
and, o f c o u rs e, b y b o t h o ngo ing and new
St at e Aid inves t igat io ns , s o m e o f w h ic h
p u b l is h ed t h eir res u l t s l at e in t h e y ear.
Al l Eu ro p ean b o dies w il l no w h ave an
ex t rem el y b u s y 2016 ah ead o f t h em :
On 28 Janu ary 2016, t h e Eu ro p ean
Co m m is s io n rel eas ed an ant i- t ax
4
avo idanc e p ac k age c o m p ris ing f o u r
s ep arat e do c u m ent s : i) a p ro p o s ed
Eu ro p ean Unio n (EU) Ant i- Tax Avo idanc e
5
Direc t ive (t h e ATA Direc t ive); ii) a
p ro p o s ed Direc t ive im p l em ent ing t h e
au t o m at ic ex c h ange o f c o u nt ry - b y 6
c o u nt ry (Cb C) rep o rt s (Cb CR Direc t ive);
iii) a c o m m u nic at io n p ro p o s ing a
f ram ew o rk f o r a new EU ex t ernal s t rat egy
2
See h t t p : / / w w w .ey .c o m / GL/ en/ Servic es / Tax /
Int ernat io nal - Tax / Al ert - - Eu ro p ean- Co m m is s io nextends-tax-rulings-practice-inquiry-to-all-MemberSt at es - and- anno u nc es - int ent io n- f o r- new - Ac t io nPl an- t o - c o m b at - t ax - f rau d- and- evas io n.
3
A configuration of the Council of Europe which
is made up of the economics and finance ministers
f ro m al l Eu ro p ean Unio n (EU) Mem b er St at es and
rel evant Eu ro p ean Co m m is s io ners .
4
h t t p : / / eu ro p a.eu / rap id/ p res s - rel eas e_I P- 16159 _e n.h t m
5
h t t p : / / ec .eu ro p a.eu / t ax at io n_c u s t o m s / res o u rc es /
do c u m ent s / t ax at io n/ c o m p any _t ax / ant i_t ax _
avo idanc e/ c o m 2
_ 016_2 6_e n.p df
6
h t t p : / / ec .eu ro p a.eu / t ax at io n_c u s t o m s / res o u rc es /
do c u m ent s / t ax at io n/ c o m p any _t ax / ant i_t ax _
avo idanc e/ c o m 2
_ 016_2 5_e n.p df
lo al a
olic and ontro ers
riefing
5
Des p it e b o t h t h e Eu ro p ean
Co m m is s io n and OECD
sharing the goal of finding
c o m m o n ap p ro ac h es t o
res o l ving t h e c h al l enges
and l im it at io ns o f t h e
c u rrent int ernat io nal
t ax enviro nm ent , t h e
o p t io ns and al t ernat ives
reflected in the BEPS
rec o m m endat io ns and t h e
p ro p o s ed ATA direc t ive
mean that significant
dif f erenc es w il l l ik el y aris e
as c o u nt ries c o ns ider t h e
rec o m m endat io ns and
adap t t h em t o t h eir o w n
ex is t ing l aw and p o l ic ies .
f o r ef f ec t ive t ax at io n (t h e ex t ernal
7
s t rat egy c o m m u nic at io n) and iv) a
rec o m m endat io n o n t h e im p l em ent at io n
8
o f m eas u res agains t t ax t reat y ab u s e.
It s h o u l d b e no t ed t h at , at t h is s t age, t h e
p ro p o s ed ATA and Cb CR direc t ives b o t h
rem ain in draf t f o rm , and u nanim o u s
agreem ent o f al l Mem b er St at es w il l b e
required before they can be implemented.
Al t h o u gh t h ere ap p ears t o b e s t ro ng
p o l it ic al s u p p o rt f o r an ATA Direc t ive
am o ng Mem b er St at es , it is p o s s ib l e t h at
the form of the final directive will differ
significantly from the current draft and
t h at t h e t im et ab l e s et f o r agreem ent
b y Ju l y 2016 m ay no t b e m et . Th e ATA
Direc t ive is m u c h m o re c o nt ro vers ial
b ec au s e it inc l u des el em ent s t h at are
argu ab l y w ider t h an ant i- BEPS m eas u res ,
b u t in f ac t rep res ent a c o m p ro m is e
b et w een t h e EU Co m m o n Co ns o l idat ed
Co rp o rat e Tax Bas e p ro p o s al and a
c o m m o n EU res p o ns e t o BEPS. As s u c h it
go es m u c h f u rt h er t h an t h e OECD BEPS
rec o m m endat io ns , inc l u ding m ak ing
rec o m m endat io ns w h ic h are real l y
no t rel at ed t o BEPS, b u t are ins t ead
rel at ed t o t h e des ire f o r inc reas ed EU
h arm o niz at io n — s u c h as t h e s w it c h - o ver
c l au s e, c o ns is t ent GAARs and c o ns is t ent
ex it t ax regim es .
While both directives will require
u nanim o u s s u p p o rt f ro m al l Mem b er
St at es in o rder t o b e s u c c es s f u l , t h e
m aj o rit y o f deb at e and dis c u s s io n w il l
l ik el y f o c u s o n t h e ATA Direc t ive b ec au s e
o f it s s t ric t er ap p l ic at io n o f t h e OECD
BEPS rec o m m endat io ns and it s o vert t ax
h arm o niz at io n agenda.
It is c l ear t h o u gh , t h at t h e f u t u re
im p l em ent at io n o f al l o r p art s o f eit h er
Direc t ive, in eit h er c u rrent f o rm o r
amended, will have a significant impact on
t h e t ax at io n o f m u l t inat io nal c o m p anies
and w il l t rigger an u np rec edent ed c h ange
in Eu ro p ean t ax at io n, as Kl au s vo n Bro c k e
ex p l ains o n p age 18 .
7
h t t p : / / ec .eu ro p a.eu / t ax at io n_c u s t o m s / res o u rc es /
do c u m ent s / t ax at io n/ c o m p any _t ax / ant i_t ax _
avo idanc e/ c o m 2
_ 016_2 4_e n.p df
8
h t t p : / / ec .eu ro p a.eu / t ax at io n_c u s t o m s / res o u rc es /
do c u m ent s / t ax at io n/ c o m p any _t ax / ant i_t ax _
avo idanc e/ c _2 016_2 7 1_e n.p df
6
lo al a
olic and ontro ers
riefing
ac to
e pect
inconsistency ahead
Des p it e b o t h t h e Eu ro p ean Co m m is s io n
and OECD sharing the goal of finding
c o m m o n ap p ro ac h es t o res o l ving t h e
c h al l enges and l im it at io ns o f t h e c u rrent
int ernat io nal t ax enviro nm ent , t h e o p t io ns
and alternatives reflected in the BEPS
rec o m m endat io ns and t h e p ro p o s ed ATA
Directive mean that significant differences
w il l l ik el y aris e as c o u nt ries c o ns ider t h e
rec o m m endat io ns and adap t t h em t o
t h eir o w n ex is t ing l aw and p o l ic ies . Mu c h
o f t h e inc o ns is t enc y w il l s t em f ro m t h e
f ac t t h at t h e rec o m m endat io ns general l y
reflect a move away from relatively clear
ru l es and w el l - u nders t o o d s t andards t o
less-specific rules, more subjective tests
and vagu er c o nc ep t s . In addit io n, t h e
OECD may find that their ongoing peer
review and monitoring process identifies
ex am p l es w h ere c o u nt ries eit h er o m it
specific model legislation (as suggested by
t h e OECD) o r add new c l au s es devel o p ed
l o c al l y . Th es e are t h e inc o ns is t enc ies
t h at , t ak en t o get h er, w il l al s o inc reas e t h e
c o m p l ianc e b u rden o n b u s ines s and f u el
p o t ent ial f u t u re c o nt ro vers y .
Many o f t h e new ru l es w il l b e m o re
difficult both for taxpayers to apply and
f o r t ax au t h o rit ies t o adm inis t er. As a
res u l t , int erp ret at io ns o f t h e new ru l es are
l ik el y t o dif f er — ac ro s s c o u nt ries , b et w een
t ax p ay ers and t ax au t h o rit ies , and even
o ver t im e.
Mo reo ver, t h eir dy nam ic im p l em ent at io n
in t h is m anner m ay al s o c au s e s o m e
l evel o f ret ro ac t ivit y t o o c c u r. Th e
OECD h as al w ay s t ak en t h e “ dy nam ic ”
ap p ro ac h regarding ef f ec t ivenes s , i.e.,
o nc e ap p ro ved, revis ed gu idel ines w ere
ap p l ic ab l e t o al l o p en c as es . So m e
c o u nt ries , (s u c h as Germ any , f o r ex am p l e)
h ave t ak en a “ s t at ic ” ap p ro ac h , w h ereb y
c o m m ent aries and gu idel ines ap p l ic ab l e
Ch ange driven b y t h e BEPS
p ro j ec t w il l al s o im p ac t
t h e m anner in w h ic h
m any ent erp ris es c o ndu c t
t h eir b u s ines s , and t h e
final recommendations
will require companies to
rec o ns ider and p o t ent ial l y
real ign t h eir b u s ines s
m o del s , m o s t p art ic u l arl y
t h eir s u p p l y c h ain
structures, finance and
t reas u ry f u nc t io ns .
at t h e t im e a t reat y w as s igned s h al l
p revail . Again, t h is adds a new l ay er o f
c o m p l ex it y f o r b u s ines s t o b e aw are o f .
Th e t ax l ands c ap e o f t h e f u t u re is al l
b u t gu arant eed t o s ee s t rengt h ening
u nderc u rrent s o f c o m p l ianc e b u rden and
dis p u t e; t h e u s e o f s o m any dif f erent
o p t io ns and s u c h varied int erp ret at io ns
b y nat io nal t ax adm inis t rat io ns u nderp ins
t h is view . Su c c es s f u l im p l em ent at io n at
the country level will require detailed
guidance containing specific, real life
ex am p l es . In m any c as es , t h e t rans it io n
p erio d int o t h e new ru l es w il l b e needed.
And w h at ever c h anges are ex ec u t ed,
t raining o f t ax au t h o rit y s t af f res p o ns ib l e
f o r adm inis t ering t h e new ru l es w il l b e
k ey . Co nt ro vers y w il l aris e w h en t h ere are
gap s in any o f t h es e areas .
B EP S isn’ t j ust a tax issue
As w e m o ve p as t t h e rel eas e o f t h e
final recommendations and into the
im p o rt ant nex t s t ages o f im p l em ent at io n,
monitoring, reflection and potential
refinement (or even wholesale) of the
BEPS Actions, one final thought for
c o m p any t ax l eaders t o c o ns ider is t h e
f ac t t h at t h e BEPS p ro j ec t c reat es a s eries
o f im p ac t s t h at w il l b e f el t o u t s ide t h e
t ax f u nc t io n.
Ch ange driven b y t h e BEPS p ro j ec t w il l
al s o im p ac t t h e m anner in w h ic h m any
ent erp ris es c o ndu c t t h eir b u s ines s , and
the final recommendations will require
c o m p anies t o rec o ns ider and p o t ent ial l y
real ign t h eir b u s ines s m o del s , m o s t
p art ic u l arl y t h eir s u p p l y c h ain s t ru c t u res ,
finance and treasury functions. When
review ing t h eir b u s ines s m o del s and
devel o p ing s t rat egic p l ans f o r any
res t ru c t u ring o r real ignm ent t h at is
needed in t h e c o u nt ries w h ere t h ey
o p erat e, MNCs w il l need t o addres s a
broad range of questions, including:
• Wh at is t h e im p ac t o n o u r ef f ec t ive t ax
rat e and h o w s h o u l d w e m anage and
c o m m u nic at e any c h ange in t h at area?
• Ho w w il l o u r m ark et and c o m p et it ive
dy nam ic s b e im p ac t ed?
• Do es t h e BEPS p ro j ec t drive a
h eigh t ened need t o c o ns ider o u r
c o rp o rat e rep u t at io n?
• Is o u r c u rrent int el l ec t u al p ro p ert y
strategy model fit for purpose?
• Do w e need t o revis e o u r s u p p l y c h ain
s t ru c t u res ?
• Is our financing model sustainable?
• Sh o u l d w e c o ns ider as s es s ing o u r
c u rrent l egal ent it y s t ru c t u re, w it h a
view t o rat io nal iz at io n o r c o ns o l idat io n?
• Do es o u r c u rrent inf o rm at io n
t ec h no l o gy s t rat egy m eet o u r needs —
and do w e h ave t h e righ t t al ent t o get
w h at w e need o u t o f o u r t ec h no l o gy
f ro m a t ax p ers p ec t ive?
• Do w e need t o inves t m o re in
devel o p ing rel at io ns h ip s w it h t h e t ax
p o l ic y m ak ers and adm inis t rat o rs w h ere
w e o p erat e?
• Ho w do t h e BEPS o u t c o m es im p ac t h o w
we plan for acquisitions or dispositions?
Bu s ines s l eaders p ref er no t t o ex p erienc e
negat ive s u rp ris es . Wh il e t h ey rem ain
u nder p res s u re t o s u s t ain ETR, m any
m o re t ax direc t o rs are no w addres s ing
these broader questions with their CEO,
CFO and Board. Some are extending
t h o s e c o nvers at io ns t o o t h er ex t ernal
s t ak eh o l ders . Th es e are s ens ib l e
c h o ic es . Wh il e t h e c o nvers at io ns m ay b e
c h al l enging, t h ey are m o re p al at ab l e t h an
deal ing w it h a p o t ent ial negat ive o u t c o m e
l at er in t im e.
Lif e as a t ax l eader h as never b een s o
c h al l enging — dare w e s ay it , t ax h as even
b ec o m e int eres t ing! As w e m o ve f ro m
rec o m m endat io n t o im p l em ent at io n,
m any w il l ident if y w it h t h e w o rds o f
J.R.R. To l k ien’ s The Fellowship of the Ring:
“ I feel thin, sort of stretched, like butter
scraped over too much bread.”
We w is h y o u al l c o u rage and s u c c es s as
w e ent er t h is new era t o get h er. And, as
al w ay s , if w e c an h el p y o u navigat e t h e
ever- c h anging t ax p o l ic y and c o nt ro vers y
l ands c ap e, p l eas e do l et eit h er o f u s k no w .
hris anger
lo al a
o
olic and ontro ers
anson
riefing
7
MNCs w il l need
t o addres s a
b ro ad range
of questions,
inc l u ding:
Ac c es s l eading
gl o b al ins igh t s
o nl ine
• W hat is the impact on our effective tax
rate and how sho ld we manage and
comm nicate an change in that area
• H ow will our mark et and competitive
d namics e impacted
•
oes the
pro ect dri e a heightened
need to consider our corporate
rep tation
• I s our current intellectual property
strateg model fit for p rpose
• Do we need to revise our supply chain
str ct res
•
s o r financing model s staina le
•
ho ld we consider assessing o r c rrent
legal entit str ct re, with a iew to
rationali ation or consolidation
•
oes o r c rrent information technolog
strateg meet o r needs and do we ha e
the right talent to get what we need o t of
o r technolog from a ta perspecti e
•
o we need to in est more in de eloping
relationships with the tax policymak ers
and administrators where we operate
8
• H ow do the B EP S outcomes impact how
we plan for ac isitions or dispositions
lo al a
olic and ontro ers
riefing
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, providing
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 eb 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 .
A ccess the new portal at
ey.com tpc riefing
Are you ready for your close up?
How a new era of tax transparency
is being woven together
Multinational businesses face a multitude of
different transparency and data disclosure
requirements in the wake of the broad debate
about how the international tax environment
should reflect 21st century ways of global
business. Among other things, they face new
transfer pricing documentation requirements;
demands to publicly account for their tax and
business activities on a country-by-country
basis; and pressure in countries like the UK
to disclose more information about their
overall tax strategy. In this report from EY,
we provide a snapshot of some of these new
demands and offer those with responsibility
for keeping business compliant some
insights on the current and potential future
trajectories of the debate.
Download the report at www.ey.com/tax
Global Tax Policy and Controversy Briefing
9
St at em ent o f
Barb ara M. Angu s t o
t h e Ho u s e Co m m it t ee
o n Way s and Means
Su b c o m m it t ee o n Tax
Po l ic y Hearing o n t h e
OECD Bas e Ero s io n and
Profit Shifting Project
Barb ara M. Angu s
1 Dec em b er 2015
On 20 Janu ary 2016, Ch airm an
Kevin Brady (R- TX) o f t h e US
Way s and Means Co m m it t ee
anno u nc ed t h at Barb ara Angu s
w il l s erve as Ch ief Tax Co u ns el
f o r t h e Co m m it t ee, w h ere s h e w il l
l ead Ch airm an Brady ’ s ef f o rt t o
devel o p and enac t c o m p reh ens ive
t ax ref o rm . Barb ara’ s new ro l e is a
t es t am ent t o h er s t ro ng rep u t at io n
in the international tax policy field
and, m o re b ro adl y , as a l eading
vo ic e f o r t ax ref o rm . Sh e h as
t irel es s l y s erved EY ’ s c l ient s s inc e
j o ining EY in Janu ary 2009 .
We c o u l d no t b e m o re p ro u d
o f Barb ara f o r b eing c h o s en t o
s erve o n t h e US Co ngres s io nal
c o m m it t ee t h at w il l b e at t h e
c ent er o f u np rec edent ed t im e o f
c h ange in t h e t ax enviro nm ent
gl o b al l y and dis c u s s io n o n US
t ax ref o rm .
10
lo al a
olic and ontro ers
riefing
C
h airm an Bo u s t any , Rank ing Mem b er Neal , and dis t ingu is h ed
m em b ers o f t h e Su b c o m m it t ee, it is an h o no r t o ap p ear
b ef o re y o u t o day as t h e Su b c o m m it t ee c o ns iders t h e
implications of the OECD Base Erosion and Profit Shifting (BEPS)
p ro j ec t . I am l eader o f St rat egic Int ernat io nal Tax Po l ic y Servic es
f o r Erns t & Y o u ng LLP. Earl ier in m y c areer, I h ad t h e p rivil ege
o f s erving as Int ernat io nal Tax Co u ns el f o r t h e US Treas u ry
Dep art m ent and as Bu s ines s Tax Co u ns el f o r t h e Jo int Co m m it t ee
o n Tax at io n. In m y ro l e at Treas u ry , I w as t h e l ead US rep res ent at ive
to the OECD Committee on Fiscal Affairs, which is the OECD group
res p o ns ib l e f o r w o rk rel at ed t o t ax at io n. I am ap p earing t o day o n
m y o w n b eh al f and no t o n b eh al f o f EY o r any c l ient . Th e view s
reflected in my testimony are my own.
With the OECD’s recent issuance of final reports in connection
w it h it s BEPS Ac t io n Pl an, t h e BEPS p ro j ec t is ent ering a new
p h as e w h ere t h e f o c al p o int w il l b e im p l em ent at io n o f t h e
recommendations reflected in those reports. At this stage attention
m u s t t u rn t o t h e p rac t ic al im p l ic at io ns f o r gl o b al b u s ines s es o f t h e
c h anges in int ernat io nal t ax l aw s and t reat ies t h at are em b o died
in t h e BEPS rec o m m endat io ns and t h at are b eing c o ns idered
and ado p t ed b y c o u nt ries aro u nd t h e w o rl d. Mo reo ver, as t h e
Way s and Means Co m m it t ee c o nt inu es it s w o rk t o w ard ref o rm ing
t h e US t ax s y s t em , it w il l b e im p o rt ant t o c o ns ider t h e p rinc ip l es
and recommendations reflected in the final BEPS reports, the
ac t io ns t h at o t h er c o u nt ries are t ak ing in res p o ns e t o t h e BEPS
rec o m m endat io ns , and h o w t h o s e ac t io ns w il l af f ec t gl o b al
companies that are headquartered or invested in the United States.
O EC D B EP S P roj ect, F inal
Reports and Next S teps
On October 5th, the OECD issued final
rep o rt s w it h res p ec t t o al l 15 f o c u s areas
in it s BEPS Ac t io n Pl an. Th e rep o rt s w ere
endorsed by the G20 Finance Ministers at
t h eir m eet ing o n Oc t o b er 8 t h and t h e G20
Leaders at t h eir s u m m it o n No vem b er
15t h - 16t h . At t h e c o re o f t h e rep o rt s are
recommendations for significant changes
in c o u nt ries ’ t ax l aw s and t reat y p ro vis io ns
t h at af f ec t f u ndam ent al el em ent s o f t h e
int ernat io nal t ax f ram ew o rk .
Th e OECD’ s f o c u s o n BEPS b egan in
2012, and at t h e direc t io n o f t h e G20
BEPS b ec am e a f o rm al p ro j ec t w it h
t h e is s u anc e o f a p rel im inary rep o rt in
February 2013 and the 15-point BEPS
Ac t io n Pl an in Ju l y 2013. Th is o c c u rred
agains t t h e b ac k dro p o f inc reas ingl y
int ens e c rit ic is m in Eu ro p e and el s ew h ere
o f t h e t ax at io n o f f o reign c o m p anies w it h
inb o u nd inves t m ent , h igh l y - c h arged
rh et o ric ab o u t “ f air s h are” o f t ax es ,
and al l egat io ns o f t ax evas io n f u el ing
h eadl ines in t h e p res s . Th e c reat io n o f an
OECD p ro j ec t w as view ed b y p o l ic y m ak ers
in s o m e G20 c o u nt ries as a c o ns t ru c t ive
w ay t o ap p ro ac h t h e u nderl y ing c o nc erns
ab o u t t h e int ernat io nal t ax s y s t em ,
t h ro u gh t h e OECD’ s h is t o ric ro l e as a
f o ru m t h at b rings c o u nt ries t o get h er t o
c o ns ider t ax m at t ers o f c o m m o n int eres t
f ro m a c o m b inat io n o f t ec h nic al , p o l ic y
and ec o no m ic p ers p ec t ives . Ho w ever, t h e
am b it io u s s c o p e and t im et ab l e es t ab l is h ed
f o r t h e p ro j ec t nec es s aril y c h al l enged t h e
del ib erat ive p ro c es s f o r w h ic h t h e OECD
is k no w n. Rat h er t h an narro w l y t arget ing
the potential for artificial shifting of
inc o m e and o t h er ero s io n o f c o u nt ries ’
t ax b as es , t h e BEPS Ac t io n Pl an invo l ves
virt u al l y every as p ec t o f t h e int ernat io nal
t ax inf ras t ru c t u re. Th e s h o rt deadl ines
inc l u ded in t h e Ac t io n Pl an m eant t h at
t h ere w as l it t l e t im e t o engage f u l l y w it h
s t ak eh o l ders o r t o reac h s o l id agreem ent
am o ng c o u nt ries gro u nded in m u t u al
understanding of the final outcomes.
The OECD’s issuance of final BEPS reports
w as t h e c u l m inat io n o f an ex p edit ed
p ro c es s o f dis c u s s io n draf t s , c o m m ent
p erio ds and c o ns u l t at io n s es s io ns w it h
res p ec t t o eac h o f t h e 15 f o c u s areas .
Th e gl o b al b u s ines s c o m m u nit y , inc l u ding
m any US- b as ed b u s ines s es t h at ac t ivel y
p art ic ip at ed in t h e p ro c es s , s u b m it t ed
t h o u s ands o f p ages o f c o m m ent s o n t h e
vario u s dis c u s s io n draf t s , addres s ing
p o l ic y , ec o no m ic , t ec h nic al and p rac t ic al
as p ec t s o f t h e p ro p o s al s f o r c h ange.
Bu s ines s rep res ent at ives p art ic ip at ed
in c o ns u l t at io ns w it h OECD and G20
member country officials to present their
p ers p ec t ives and c o nc erns and t o res p o nd
to questions and requests for further
inp u t . Ot h er int eres t ed p art ies , inc l u ding
rep res ent at ives o f no n- go vernm ent al
o rganiz at io ns , al s o p ro vided inp u t
du ring t h e c o ns u l t at io n p ro c es s . At t h e
s am e t im e, t h e dial o gu e am o ng c o u nt ry
officials regarding the development of
t h e rec o m m endat io ns c o nt inu ed, as
t h e dis c u s s io n draf t s t h at w ere rel eas ed
general l y w ere p rel im inary in nat u re and
did not yet reflect agreement among the
p art ic ip at ing c o u nt ries .
The final reports that were issued
rep res ent an evo l u t io n, t o a great er o r
l es s er degree, f ro m t h e o riginal draf t s .
Several of the final reports reflect
moderation, in some cases significant,
o f t h e init ial p ro p o s al s f o r c h ange. US
Treas u ry w as an im p o rt ant vo ic e in t h e
discussions that led to these refinements.
Ho w ever, t h e p ro c es s reveal ed h o w m u c h
divergenc e o f view s t h ere is am o ng
c o u nt ries in m any areas . Bec au s e t h e
OECD o p erat es b y c o ns ens u s , u nanim o u s
acceptance was required for the issuance
o f t h e rep o rt s . Given t h e w ide range
of views, reaching agreement required
t h e inc l u s io n o f o p t io ns and al t ernat ive
ap p ro ac h es in s o m e o f t h e rep o rt s . In
o t h er c as es , t h e u s e o f f airl y general
c o nc ep t s and b ro ad l angu age t o l eave
ro o m f o r varied int erp ret at io ns l ik el y
facilitated acceptance of the final reports.
As t h e OECD ac k no w l edges , c o u nt ries
are s o vereign and t h e OECD is no t a
ru l e- m ak ing b o dy . As p art o f t h e BEPS
p ro j ec t , OECD and G20 m em b er c o u nt ries
h ave agreed o n t h e rec o m m endat io ns
reflected in the final reports. However,
given t h e o p t io ns , al t ernat ives and b ro ad
language reflected in the reports and the
c o m p l ex it y inh erent in m es h ing any o f
t h es e c o nc ep t s w it h c o u nt ries ’ ex is t ing
do m es t ic t ax s y s t em s , t h ere m ay b e
significant distance between agreement in
t h e OECD p ro c es s and u l t im at e ado p t io n
o f new do m es t ic t ax ru l es .
Mo reo ver, m o s t o f t h e rec o m m endat io ns
likely would require legislative changes
o r t reat y revis io ns , t h u s nec es s it at ing t h e
legislative or treaty ratification processes
w h ic h in m any c o u nt ries are s ep arat e
f ro m t h e p ro c es s f o r p art ic ip at io n in t h e
OECD. In addit io n, s o m e c o u nt ries m ay
al ready h ave m eas u res in p l ac e t h at t h ey
b el ieve are c o ns is t ent w it h o ne o r m o re
o f t h e BEPS rec o m m endat io ns s u c h t h at
t h ey w o u l d t ak e t h e view t h at no f u rt h er
ac t io n w o u l d b e needed in t h o s e areas .
At the same time it issued the final
rep o rt s , t h e OECD al s o is s u ed an
ex p l anat o ry s t at em ent t h at des c rib es
addit io nal w o rk t o b e do ne in c o nnec t io n
w it h t h e BEPS p ro j ec t . Th ere w il l b e
f o l l o w - o n w o rk in s everal areas , inc l u ding
es s ent ial w o rk t o addres s indu s t ry specific issues that were not resolved in
the final reports and some broader work
rel at ed t o t rans f er p ric ing. Th is w o rk is
ex p ec t ed t o b e c o m p l et ed in 2016 and
2017 . Nego t iat io ns h ave j u s t b egu n o n
t h e s o - c al l ed m u l t il at eral ins t ru m ent
t h at is envis io ned b y t h e OECD as a
m ec h anis m f o r am ending ex is t ing b il at eral
t ax t reat ies t o inc o rp o rat e t h e BEPS
rec o m m endat io ns t h at are t reat y - b as ed
w it h o u t a s ep arat e b il at eral nego t iat io n
f o r eac h s u c h t reat y . Th es e nego t iat io ns
are ex p ec t ed t o b e c o m p l et ed b y t h e end
o f 2016, w it h t h e ins t ru m ent t h en o p en
f o r s ignat u re b y int eres t ed c o u nt ries
s u b j ec t t o eac h c o u nt ry ’ s ap p l ic ab l e
lo al a
olic and ontro ers
riefing
11
Co o rdinat io n and
c o ns is t enc y o f ac t io n are
l ik el y t o b e l im it ed as eac h
c o u nt ry int erp ret s t h e
BEPS rec o m m endat io ns
t h ro u gh it s o w n l ens and in
t h e c o nt ex t o f it s o w n t ax
p o l ic ies and p rac t ic es .
ratification procedure. The OECD plans
t o devel o p a p eer review p ro c es s w it h
res p ec t t o c o u nt ries ’ p rac t ic es in res o l ving
dis p u t es u nder t reat y - b as ed m u t u al
agreem ent p ro c edu res . It is ex p ec t ed t h at
t h is w il l b e b as ed o n a s im il ar p ro c es s
in p l ac e f o r p eer review o f c o u nt ries ’
ex c h ange o f inf o rm at io n p rac t ic es . At
t h e direc t io n o f t h e G20, t h e OECD al s o
int ends t o devel o p a f ram ew o rk f o r
m o nit o ring c o u nt ries ’ im p l em ent at io n
o f t h e BEPS rec o m m endat io ns . Wh il e
t h e f o rm and nat u re o f t h is m o nit o ring
is not yet defined, the G20 intends that
addit io nal c o u nt ries s h o u l d b e invo l ved
in t h is as p ec t o f t h e BEPS w o rk go ing
forward. Finally, the OECD statement
indic at es t h at t h e OECD and G20 w il l
c o nt inu e t o w o rk t o get h er o n BEPS
u nt il 2020.
C ountry activity with
respect to B EP S
Wit h t h e OECD’ s is s u anc e o f t h e
final reports, countries must now
c o ns ider w h et h er, h o w and w h en t o
ac t w it h res p ec t t o t h e vario u s BEPS
rec o m m endat io ns . Co u nt ries w il l ac t
in t h eir o w n int eres t s and ac c o rding t o
t h eir o w n t im et ab l es . Co o rdinat io n and
c o ns is t enc y o f ac t io n are l ik el y t o b e
l im it ed as eac h c o u nt ry int erp ret s t h e
BEPS rec o m m endat io ns t h ro u gh it s o w n
l ens and in t h e c o nt ex t o f it s o w n t ax
p o l ic ies and p rac t ic es .
No t w it h s t anding t h e l ik el y ab s enc e o f a
coordinated approach, significant action
w it h res p ec t t o BEPS nevert h el es s is
ex p ec t ed ac ro s s c o u nt ries aro u nd t h e
w o rl d. Th e OECD p ro j ec t aro s e o u t o f
a gro w ing p o l it ic al and p u b l ic f o c u s in
m any c o u nt ries o n t h e t ax at io n o f f o reign
c o m p anies . Mo re t h an 60 c o u nt ries
ac t ivel y p art ic ip at ed in t h e BEPS p ro j ec t ,
inc l u ding al l m em b ers o f t h e OECD
and G20 and a s u b s t ant ial nu m b er
o f devel o p ing c o u nt ries . Mo re t h an
9 0 c o u nt ries are p art ic ip at ing in t h e
nego t iat io n o f t h e m u l t il at eral ins t ru m ent
12
lo al a
olic and ontro ers
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t o b e u s ed t o am end ex is t ing b il at eral
t reat ies t o inc o rp o rat e t h e t reat y - b as ed
BEPS rec o m m endat io ns . Th u s , t h ere is
s u b s t ant ial int eres t b y c o u nt ries in t h e
BEPS rec o m m endat io ns .
In t h e c as e o f t h e BEPS rec o m m endat io ns
w it h res p ec t t o t rans f er p ric ing, w h ic h
represent some of the most significant
c h anges c o m ing o u t o f t h e BEPS p ro j ec t ,
t h e new ru l es w il l h ave ef f ec t in s o m e
c o u nt ries w it h o u t f u rt h er ac t io n b y
t h e c o u nt ry . Th e rec o m m endat io ns
are reflected in revisions to the OECD
t rans f er p ric ing gu idel ines , w h ic h in
m any c o u nt ries , o t h er t h an t h e Unit ed
St at es , h ave b een m ade a p art o f t h e
c o u nt ries ’ ru l es o n t rans f er p ric ing
t h ro u gh l egis l at io n o r gu idanc e. Th u s ,
in t h es e c o u nt ries , t h e t rans f er p ric ing
c h anges w il l b ec o m e ap p l ic ab l e as s o o n
as the revised guidelines are finalized by
t h e OECD.
Co u nt ries h ad al ready b egu n t ak ing
u nil at eral ac t io n t o addres s BEPS even
w h il e t h e OECD p ro c es s w as c o nt inu ing
and before final recommendations
h ad b een agreed. In s o m e c as es t h e
action taken anticipated the final BEPS
rec o m m endat io n and is general l y
c o ns is t ent w it h it . In o t h er c as es ,
u nil at eral ac t io n t h at is inc o ns is t ent w it h
t h e BEPS rec o m m endat io ns h as b een
t ak en. In addit io n, in m any c o u nt ries ,
t ax au t h o rit ies h ave b een c it ing BEPS
concerns as justification for new
adm inis t rat ive p rac t ic es even w it h o u t any
c h ange in t h e ap p l ic ab l e l aw . In addit io n
t o individu al c o u nt ry ac t io n, t h e Eu ro p ean
Unio n al ready h as agreed o n m eas u res
t o addres s BEPS t h at al l EU m em b er
countries are required to implement and
s everal addit io nal BEPS- rel at ed m eas u res
are u nder o ngo ing dis c u s s io n in t h e
Eu ro p ean Unio n.
EY h as b een t rac k ing BEPS- rel at ed
devel o p m ent s in c o u nt ries ’ t ax l aw
and adm inis t rat ive p rac t ic es s inc e t h e
b eginning o f 2014. In t h e p as t t w o y ears ,
BEPS- rel at ed devel o p m ent s in m o re
In t o day ’ s gl o b al ec o no m
o p erat io ns . Wh il e t h e OECD p ro
t h e rec o m m endat io ns c o u l d h
t h ey t end t o b e t h e b
than 60 countries have been identified.
Il l u s t rat io ns o f t h e k inds o f m eas u res t h at
al ready h ave b een enac t ed, im p l em ent ed
o r p ro p o s ed inc l u de t h e f o l l o w ing:
• Th e Unit ed Kingdo m h as enac t ed t h e
diverted profits tax which would impose
a p enal t y rat e o f t ax in s it u at io ns w h ere
it is c o ns idered t h at a p erm anent
es t ab l is h m ent h as b een avo ided o r
profits otherwise have been artificially
s h if t ed o u t o f t h e Unit ed Kingdo m .
• Mex ic o , Po l and and Sp ain h ave
ado p t ed c o u nt ry - b y - c o u nt ry rep o rt ing
requirements; legislation that includes
c o u nt ry - b y - c o u nt ry rep o rt ing is
advanc ing t h ro u gh t h e p ro c es s in
Australia, China, Denmark, France,
Irel and, t h e Net h erl ands , and t h e
Unit ed Kingdo m .
• Th e Eu ro p ean Unio n h as am ended
a direc t ive t o addres s c ert ain
h y b rid arrangem ent s w h ic h is t o b e
im p l em ent ed b y al l m em b er s t at es
b y t h e 2015. Braz il and No rw ay h ave
proposals to address hybrids. France
and Mex ic o h ave enac t ed ant i- h y b rid
ru l es t h at go b ey o nd t h e BEPS
rec o m m endat io n in t h is area.
• Au s t ral ia, Au s t ria, Braz il , Po l and, t h e
Sl o vak Rep u b l ic , So u t h Af ric a, and
Sp ain h ave m ade c h anges t o ru l es
rel at ed t o t h e dedu c t ib il it y o f int eres t .
Co s t a Ric a, Indo nes ia, Jap an, Ko rea,
Les o t h o , and No rw ay are c o ns idering
c h anges in s u c h ru l es .
• Argent ina, Au s t ral ia, Ch il e, and
Germ any h ave am ended t ax t reat ies t o
restrict access to benefits. Vietnam has
is s u ed adm inis t rat ive gu idanc e l im it ing
treaty benefits.
• Th e Eu ro p ean Parl iam ent is dis c u s s ing
requiring public reporting of
inf o rm at io n s im il ar t o t h e inf o rm at io n
required in the country-by-country
rep o rt .
y , a b u s ines
j ec t did no t
ave a dis p ro
igges t c o m p
s need no t b e l arge t o h ave int ernat io nal
del ib erat el y t arget US- b as ed c o m p anies ,
p o rt io nat e im p ac t o n s u c h b u s ines s es as
anies w it h t h e b ro ades t gl o b al f o o t p rint .
mplications for glo al
businesses
Gl o b al b u s ines s es w il l need t o m o nit o r
devel o p m ent s in al l t h e c o u nt ries w h ere
t h ey o p erat e o r inves t . Even in t h e
ab s enc e o f any im m ediat e US l egis l at ive
action, US-headquartered companies
w il l b e advers el y af f ec t ed b y ac t io ns
t h at are t ak en in t h e f o reign c o u nt ries
t h at are p art o f t h eir gl o b al f o o t p rint .
Th e p o t ent ial ef f ec t s are an im m ediat e
c o nc ern b ec au s e, as no t ed ab o ve, BEPSrel at ed c h ange h as o c c u rred in c o u nt ries
al ready and addit io nal ac t io n is ex p ec t ed
w it h c o u nt ries ’ y ear- end t ax l egis l at io n.
Th e OECD BEPS p ro j ec t and t h e
int ernat io nal t ax c h anges t h at are
em b o died in t h e BEPS rec o m m endat io ns
have significant implications for all global
b u s ines s es . In t o day ’ s gl o b al ec o no m y ,
a b u s ines s need no t b e l arge t o h ave
int ernat io nal o p erat io ns . Wh il e t h e OECD
p ro j ec t did no t del ib erat el y t arget USb as ed c o m p anies , t h e rec o m m endat io ns
c o u l d h ave a dis p ro p o rt io nat e im p ac t
o n s u c h b u s ines s es as t h ey t end t o
b e t h e b igges t c o m p anies w it h t h e
b ro ades t gl o b al f o o t p rint . In addit io n, t h e
im p l ic at io ns o f t h e c u rrent US w o rl dw ide
t ax s y s t em m ay h ave t h e ef f ec t o f
ex ac erb at ing t h e advers e im p ac t o f t h e
BEPS rec o m m endat io ns f o r US- b as ed
c o m p anies . Mo reo ver, s o m e c o u nt ries
c ert ainl y s eem t o h ave s ingl ed o u t
US- b as ed c o m p anies in t h eir c rit ic is m
o f f o reign inves t o rs and t h e BEPS
rec o m m endat io ns c o u l d w el l b e u s ed b y
c o u nt ries in s u c h t arget ing.
Global companies face significant
u nc ert aint y in l igh t o f t h e BEPS
rec o m m endat io ns , u nc ert aint y t h at c an
b e a s u b s t ant ial b arrier t o c ro s s - b o rder
o p erat io n and inves t m ent . Ch ange o f t h e
m agnit u de c o nt em p l at ed in t h e BEPS
rec o m m endat io ns nec es s aril y c reat es
u nc ert aint y .
The options and alternatives reflected in
t h e BEPS rec o m m endat io ns add t o t h e
u nc ert aint y , as do es t h e f ac t t h at eac h
c o u nt ry w il l m ak e it s o w n c h o ic es w it h
res p ec t t o t h e rec o m m endat io ns . Bu t t h e
m o s t f u ndam ent al u nc ert aint y c o m es
f ro m t h e f o rm o f t h e rec o m m endat io ns ,
which generally reflect a move away
f ro m rel at ivel y c l ear ru l es and w el l understood standards to less-specific
ru l es , m o re s u b j ec t ive t es t s and vagu er
c o nc ep t s . Many o f t h e new ru l es w il l b e
more difficult both for taxpayers to apply
and f o r t ax au t h o rit ies t o adm inis t er.
Int erp ret at io ns o f t h e new ru l es are l ik el y
t o dif f er — ac ro s s c o u nt ries , b et w een
t ax p ay ers and t ax au t h o rit ies , and even
o ver t im e.
One il l u s t rat io n o f t h e u nc ert aint y
inh erent in t h e new ru l es is t h e
rec o m m endat io ns w it h res p ec t t o t h e
p erm anent es t ab l is h m ent s t andard, w h ic h
is t h e c o nc ep t u s ed in t ax t reat ies t o
es t ab l is h a t h res h o l d f o r t ax ab l e p res enc e
in a c o u nt ry . Th e BEPS rec o m m endat io n
o n p erm anent es t ab l is h m ent rep l ac es
w h at are rel at ivel y b righ t - l ine s t andards
w it h vagu er and m o re s u b j ec t ive t es t s
t h at c l earl y l o w er t h e t h res h o l d b u t are
m u c h l es s c l ear as t o ex ac t l y w h ere t h e
new t h res h o l d l ies . A gl o b al c o m p any
w o u l d h ave t o o p erat e w it h o u t c l arit y
as t o w h en it s ac t ivit ies in a f o reign
c o u nt ry w o u l d b e c o ns idered t o give
ris e t o a p erm anent es t ab l is h m ent s u c h
t h at it s o p erat io ns in t h e c o u nt ry w o u l d
b e t reat ed l ik e a l o c al t ax ab l e ent it y
s u b j ec t t o al l o f t h e c o u nt ry ’ s do m es t ic
t ax o b l igat io ns . At t h e s am e t im e, t h e
c o m p any ’ s h o m e c o u nt ry m ay s ee t h e
new ru l es dif f erent l y and m ay no t b e
p rep ared t o c ede t ax ing j u ris dic t io n o ver
t h o s e o p erat io ns .
lo al a
olic and ontro ers
riefing
13
Global companies face significant new
c o m p l ianc e b u rdens . Th is inc l u des
m o s t direc t l y t h e t rans p arenc y - f o c u s ed
BEPS rec o m m endat io ns : t h e new
requirement for country-by-country
rep o rt ing, t h e t w o - t ier ap p ro ac h t o
t rans f er p ric ing do c u m ent at io n, and t h e
m andat o ry dis c l o s u re regim e. Ho w ever,
t h e c o m p l ianc e o b l igat io ns do no t end
with the filing requirements but also will
include the follow up that will be required
in m any c o u nt ries t o ex p l ain t h e new
rep o rt ing and t o p u t t h e inf o rm at io n in
p ro p er c o nt ex t .
Gl o b al c o m p anies f ac e
significant risk of misuse of
c o re b u s ines s inf o rm at io n.
Th e new t rans p arenc y
requirements would
p u t inf o rm at io n ab o u t a
c o m p any ’ s ent ire gl o b al
f o o t p rint int o t h e h ands o f
al l t h e c o u nt ries w h ere t h e
c o m p any h as ent it ies o r
C ountry- by- country
b ranc h es .
reporting
As an il l u s t rat io n, t h e new c o u nt ry - b y country report requires global companies
t o p ro vide c o u nt ry - b as ed inf o rm at io n
o n vario u s m eas u res o f inc o m e, t ax es ,
and ec o no m ic ac t ivit y f o r al l c o u nt ries
w h ere t h ey h ave ent it ies o r b ranc h es ;
t h is inf o rm at io n is t o b e del ivered t o t h e
c o m p any ’ s h o m e c o u nt ry t ax au t h o rit y
t o b e s h ared w it h o t h er c o u nt ries u nder
t ax inf o rm at io n ex c h ange rel at io ns h ip s
o r al t ernat ivel y m u s t b e del ivered t o
each country directly. The required
inf o rm at io n t y p ic al l y is no t m aint ained
b y c o m p anies in t h is f o rm f o r any o t h er
p u rp o s e s o c o m p anies w il l need t o
c reat e new s y s t em s and p ro c es s es in
o rder t o c o l l ec t t h e inf o rm at io n. Th e
report requires financial accounting
inf o rm at io n, no t t ax inf o rm at io n, s o it w il l
no t t ie w it h l o c al t ax ret u rns . Th e rep o rt
requires information that is aggregated
b y c o u nt ry , w it h o u t t h e el im inat io n o f
int erc o m p any t rans ac t io ns as is do ne
in a financial consolidation, so it will
not tie to the consolidated financial
s t at em ent s . Gl o b al c o m p anies w il l h ave t o
be prepared to respond to inquiries and
p ro vide addit io nal inf o rm at io n (o r deal
w it h adj u s t m ent s t h at are p ro p o s ed o n
t h e b as is o f t h e rep o rt al o ne) in al l t h e
c o u nt ries t h at rec eive t h e c o u nt ry - b y c o u nt ry rep o rt . In t h e c as e o f US- b as ed
c o m p anies , t h is c o u l d b e as m any as a
h u ndred o r m o re c o u nt ries , inc l u ding
c o u nt ries w h ere t h e c o m p any h as
rel at ivel y l it t l e l o c al p res enc e.
14
lo al a
olic and ontro ers
riefing
New c o m p l ianc e b u rdens al s o are
em b edded in t h e s u b s t ant ive c h anges
reflected in the BEPS recommendations.
As no t ed ab o ve, a gl o b al c o m p any t h at
is c o ns idered t o h ave a p erm anent
es t ab l is h m ent in a c o u nt ry is s u b j ec t t o
t h e c o u nt ry ’ s do m es t ic t ax o b l igat io ns
w it h res p ec t t o it s l o c al o p erat io ns . Wit h
t h e BEPS rec o m m endat io n l o w ering t h e
p erm anent es t ab l is h m ent t h res h o l d,
gl o b al c o m p anies l ik el y w o u l d h ave new
p erm anent es t ab l is h m ent s , p erh ap s in
multiple countries. This would require
t h e es t ab l is h m ent o f new s y s t em s t o
c reat e and m aint ain s ep arat e b o o k s and
rec o rds f o r eac h s et o f ac t ivit ies t h at is
f o u nd t o b e a p erm anent es t ab l is h m ent .
It would require the filing of income tax
ret u rns f o r t h e p erm anent es t ab l is h m ent .
Moreover, in many countries, the finding
o f a p erm anent es t ab l is h m ent h as
consequences beyond income tax. A
p erm anent es t ab l is h m ent o f t en w il l b e
required to register for and collect value
added t ax . Ot h er b u s ines s regis t rat io n
and license requirements also may be
t riggered.
Global companies face significant risk of
m is u s e o f c o re b u s ines s inf o rm at io n. Th e
new transparency requirements would
p u t inf o rm at io n ab o u t a c o m p any ’ s ent ire
gl o b al f o o t p rint int o t h e h ands o f al l t h e
c o u nt ries w h ere t h e c o m p any h as ent it ies
or branches. For US-based companies,
w h ic h t end t o h ave t h e b ro ades t gl o b al
f o o t p rint , t h e ris k is p art ic u l arl y ac u t e.
The information required to be provided
w o u l d inc l u de c o m m erc ial dat a t h at is
competitively sensitive. For example,
t h e c o u nt ry - b y - c o u nt ry rep o rt inc l u des
revenue and profit information from
w h ic h o p erat ing m argins c o u l d b e
es t im at ed. Th e inf o rm at io n al s o c o u l d b e
u s ed t o c au s e rep u t at io nal dam age. Th e
inf o rm at io n in t h e c o u nt ry - b y - c o u nt ry
rep o rt is an annu al s nap s h o t , s o it m igh t
s h o w , f o r ex am p l e, t h at a c o m p any p ay s
l it t l e o r no t ax in a c o u nt ry des p it e h aving
significant income in that country without
s h o w ing t h at t h is res u l t is b ec au s e o f
s u b s t ant ial net o p erat ing l o s s es c arried
o ver f ro m p rio r y ears . A c o m p any w it h
that profile could be falsely branded a
t ax evader b as ed o n inf o rm at io n t h at
is im p ro p erl y rel eas ed t o t h e p u b l ic (in
s u c h a c as e t h e t ax au t h o rit y al s o c o u l d
b e f al s el y c rit ic iz ed as h aving f ail ed
t o enf o rc e a t ax o b l igat io n). Bec au s e
al l c o u nt ries t h at rec eive a c o m p any ’ s
c o u nt ry - b y - c o u nt ry rep o rt w il l h ave
it s gl o b al inf o rm at io n, a b reac h o f
confidentiality in any one country could
h ave gl o b al ef f ec t s .
rowing ris of
controversy
Global companies face significant
ris k o f c o nt ro vers y . Th e f u ndam ent al
c h anges and new ru l es s u b j ec t t o varied
int erp ret at io n t h at c reat e u nc ert aint y f o r
gl o b al c o m p anies al s o c reat e c o nt ro vers y
w it h t ax au t h o rit ies . Th e BEPS
rec o m m endat io ns l argel y are h igh - l evel
p o l ic y s t at em ent s . Pro p er im p l em ent at io n
will require detailed and specific guidance.
In m any c as es , ap p ro p riat e t rans it io n int o
t h e new ru l es w il l b e needed. In al l c as es ,
t raining o f t h e t ax au t h o rit y p ers o nnel
res p o ns ib l e f o r adm inis t ering t h e new
ru l es w il l b e es s ent ial . Co nt ro vers y w il l
aris e w h en t h ere are gap s in any o f
t h es e areas . Wit h c h ange h ap p ening
al l aro u nd t h e w o rl d, gl o b al c o m p anies
l ik el y w il l b e deal ing w it h c o nt ro vers y
in m u l t ip l e f o reign c o u nt ries at t h e
s am e t im e. Wh il e s o m e c o u nt ries h ave
advanc e res o l u t io n m ec h anis m s t h at are
int ended t o h ead o f f c o nt ro vers y , l ik e
t h e c o m p l ianc e as s u ranc e p ro gram o r
CAP in t h e Unit ed St at es , t h e dem and
f o r t h es e m ec h anis m s m ay w el l ex c eed
t h eir c ap ac it y . Many c o u nt ries h ave
no p ro c edu res f o r addres s ing is s u es in
advanc e. Mo reo ver, in s o m e c o u nt ries
t ax p ay ers h ave no real ac c es s t o a j u dic ial
s y s t em t o res o l ve dis p u t es . Co nt ro vers y
im p o s es a s u b s t ant ial res o u rc e b u rden
o n b o t h t ax p ay ers and t ax au t h o rit ies .
For taxpayers, controversy in a foreign
country is more complex and requires
m o re res o u rc es . And c o nt ro vers y t h at
c anno t b e p ro p erl y res o l ved res u l t s in
inap p ro p riat e t ax at io n.
Co ns ider t h e BEPS rec o m m endat io n o n
limiting access to tax treaty benefits,
w h ic h inc l u des a p ro p o s ed ru l e u nder
w h ic h a t ax p ay er w o u l d b e denied t reat y
benefits if one of the principal purposes
o f t h e t rans ac t io n w as t o o b t ain t reat y
benefits, unless the taxpayer can establish
that the granting of such benefits would
b e in ac c o rdanc e w it h t h e o b j ec t and
p u rp o s e o f t h e t reat y . A gl o b al c o m p any
that loans funds to a foreign affiliate
w il l rec eive int eres t p ay m ent s f ro m t h e
affiliate. Countries typically impose a
gro s s - b as is w it h h o l ding t ax o n c ro s s b o rder int eres t p ay m ent s (f o r ex am p l e,
t h e US w it h h o l ding t ax rat e is 30%), b u t
p ro vide an ex em p t io n f ro m s u c h t ax
u nder t h eir t ax t reat ies . If t h e c o m p any
is c h al l enged u nder t h e t es t des c rib ed
ab o ve, it is no t c l ear w h at p ro o f w o u l d
be required by the foreign country to
es t ab l is h t h e c o m p any ’ s ent it l em ent t o
the benefits of the treaty. In the absence
of treaty benefits, the tax imposed on the
gro s s am o u nt o f t h e int eres t p ay m ent
c o u l d ex c eed t h e c o m p any ’ s net inc o m e
f ro m t h e l ending ac t ivit y o nc e it s c o s t o f
f u nds is t ak en int o ac c o u nt .
Double taxation risk
Global companies face significant risk
o f do u b l e t ax at io n. As no t ed ab o ve,
t h e rec o m m ended ru l es are s u b j ec t t o
varied int erp ret at io ns . So m e c o u nt ries
may choose to go beyond the final
rec o m m endat io ns , inc l u ding res u rrec t ing
ap p ro ac h es t h at w ere p ro p o s ed b y t h e
OECD in init ial dis c u s s io n draf t s b u t w ere
rep l ac ed w it h m o re m o derat e ap p ro ac h es
in the final reports. Other countries
m ay ado p t u nil at eral m eas u res . Wh ere
t w o o r m o re c o u nt ries do no t int erp ret
o r ap p l y t h e new t rans f er p ric ing ru l es
in t h e s am e w ay , f o r ex am p l e, t h ey
m ay as s ert t ax ing j u ris dic t io n o ver t h e
s am e do l l ar o f inc o m e. One o f t h e BEPS
f o c u s areas w as t h e dis p u t e res o l u t io n
m ec h anis m s in t ax t reat ies t h at are
int ended t o p revent t h is k ind o f do u b l e
t ax at io n. Ho w ever, w h il e t h e OECD’ s aim
w as t o devel o p ap p ro ac h es f o r im p ro ving
t h e ef f ec t ivenes s o f t h es e dis p u t e
res o l u t io n m ec h anis m s , rel at ivel y l it t l e
w as ac c o m p l is h ed in t h is regard. It is
t h e view o f m any b u s ines s s t ak eh o l ders
and p o l ic y m ak ers in m any c o u nt ries
t h at m andat o ry b inding arb it rat io n is an
es s ent ial m ec h anis m f o r ens u ring t h e
res o l u t io n o f t reat y dis p u t es . Arb it rat io n
p ro vis io ns h ave b een inc l u ded in US
t ax t reat ies and are view ed as h aving
a p o s it ive ef f ec t in t erm s o f p revent ing
dis p u t es . Ho w ever, s o m e c o u nt ries
p art ic ip at ing in t h e BEPS p ro j ec t h ave
rej ec t ed s u c h a m ec h anis m . Wh ere
a t reat y dis p u t e c anno t b e p ro p erl y
res o l ved, t h e res u l t f o r t h e c o m p any is
u nrel ieved do u b l e t ax at io n.
Even though the OECD has issued its final
BEPS rep o rt s , t h e c o nt inu ing w o rk in t h e
OECD o n BEPS p ro vides s o m e o p p o rt u nit y
t o am el io rat e t h es e is s u es . Th e addit io nal
t ec h nic al w o rk t h at is p l anned s h o u l d
p ro vide m u c h needed gu idanc e o n
industry-specific issues and could include
f u rt h er gu idanc e o n t h e int erp ret at io n
and p rac t ic al ap p l ic at io n o f t h e BEPS
rec o m m endat io ns m o re general l y . Th e
p l anned p eer review p ro c es s w it h res p ec t
t o dis p u t e res o l u t io n p rac t ic es w il l al l o w
c o nt inu ed at t ent io n t o b e f o c u s ed o n t h e
need f o r im p ro vem ent s t o al l as p ec t s
o f s u c h p rac t ic es and c o nt inu ed ef f o rt
t o ex p and t h e gro u p o f c o u nt ries t h at
are c o m m it t ed t o m andat o ry b inding
arb it rat io n. Th e f ram ew o rk t o b e
devel o p ed f o r m o nit o ring im p l em ent at io n
o f t h e BEPS rec o m m endat io ns s h o u l d go
b ey o nd m erel y ident if y ing w h ic h c o u nt ries
h ave t ak en w h ic h ac t io ns and s h o u l d
f o c u s o n enc o u raging and f ac il it at ing
b es t p rac t ic es f o r f air, ef f ec t ive, and
t rans p arent t ax adm inis t rat io n. Th e
gl o b al b u s ines s c o m m u nit y s h o u l d b e
given t h e o p p o rt u nit y t o p ro vide inp u t
t o al l o f t h es e w o rk s t ream s and t h e US
b u s ines s c o m m u nit y , w h ic h h as m u c h at
s t ak e, s h o u l d c o nt inu e it s p art ic ip at io n.
In o rder t o ens u re t h at US int eres t s are
p ro t ec t ed, it is es s ent ial t h at Treas u ry ,
in c o ns u l t at io n w it h t h e t ax - w rit ing
c o m m it t ees , c o nt inu e t o p l ay an ac t ive
ro l e in al l as p ec t s o f t h e o ngo ing w o rk .
lo al a
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15
Th e OECD BEPS p ro j ec t
and c o u nt ries ’ ac t io ns
w it h res p ec t t o t h e BEPS
rec o m m endat io ns w il l
dram at ic al l y c h ange t h e
gl o b al t ax l ands c ap e. Th e
as p ec t s o f t h e c u rrent US
t ax s y s t em t h at det rac t
f ro m t h e at t rac t ivenes s
o f t h e Unit ed St at es as a
location to headquarter
and inves t w il l b ec o m e
m o re ac u t e.
While there are significant concerns
ab o u t t h e BEPS rec o m m endat io n o n
c o u nt ry - b y - c o u nt ry rep o rt ing, m any
US- b as ed c o m p anies b el ieve it is in t h eir
int eres t f o r t h e US t o im p l em ent t h is
requirement so that they can provide
t h eir inf o rm at io n t o t h e Int ernal Revenu e
Servic e ins t ead o f h aving t o deal w it h
the local reporting requirements of the
m any f o reign c o u nt ries w h ere t h ey h ave
ent it ies o r b ranc h es . Th e IRS w o u l d s h are
t h e c o u nt ry - b y - c o u nt ry rep o rt s o f US
c o m p anies w it h o t h er t ax au t h o rit ies
u nder t h e f o rm al agreem ent s t h e Unit ed
St at es h as in p l ac e f o r t ax inf o rm at io n
ex c h ange and s u b j ec t t o t h e US ru l es o n
confidentiality of taxpayer information.
If t h ere w ere a p ro b l em w it h m is u s e o f
inf o rm at io n in a p art ic u l ar c o u nt ry , t h e
IRS c o u l d s u s p end inf o rm at io n ex c h ange.
Th is ap p ro ac h w o u l d m ean great er
p ro t ec t io n and l o w er adm inis t rat ive
b u rdens f o r US- b as ed c o m p anies t h an
the alternative of direct filing of countryb y - c o u nt ry rep o rt s in m u l t ip l e f o reign
c o u nt ries .
I mplications for U S tax
reform
Th e Unit ed St at es s h o u l d h ave a t ax
s y s t em t h at m ak es Am eric a an at t rac t ive
place for businesses to headquarter
and inves t . In des igning t h e t ax s y s t em
t h at w il l b es t s u p p o rt gro w t h in US j o b s
and t h e US ec o no m y , it is im p o rt ant
t o c o ns ider t h e t ax p o l ic y c h o ic es t h at
h ave b een m ade b y o t h er c o u nt ries .
Th e c u rrent US c o rp o rat e t ax s y s t em is
an o u t l ier rel at ive t o t h e c o rp o rat e t ax
s y s t em s o f o u r m aj o r t rading p art ners ,
b o t h in t erm s o f t h e c o rp o rat e t ax rat e
and t h e w o rl dw ide ap p ro ac h f o r t ax ing t h e
f o reign inc o m e o f US- b as ed c o m p anies .
Th es e f eat u res advers el y af f ec t t h e
16
lo al a
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c o m p et it ivenes s o f c o m p anies t h at are
headquartered in the United States and
t h e c o m p et it ivenes s o f US inves t m ent
o p p o rt u nit ies f o r f o reign c o m p anies .
Th e OECD BEPS p ro j ec t and c o u nt ries ’
ac t io ns w it h res p ec t t o t h e BEPS
rec o m m endat io ns w il l dram at ic al l y
c h ange t h e gl o b al t ax l ands c ap e. Th e
as p ec t s o f t h e c u rrent US t ax s y s t em
t h at det rac t f ro m t h e at t rac t ivenes s
o f t h e Unit ed St at es as a l o c at io n t o
headquarter and invest will become more
ac u t e. US- b as ed c o m p anies w il l f ac e new
p res s u res in t h e f o reign c o u nt ries w h ere
t h ey o p erat e t h at w il l ex ac erb at e t h e
b u rden o f t h e b arrier t o reinves t m ent in
t h e Unit ed St at es t h at is c reat ed b y t h e
current worldwide tax system. Foreign
c o m p anies al s o w il l f ac e new p res s u res in
f o reign c o u nt ries t h at c o u l d redu c e t h eir
ap p et it e f o r inves t m ent in t h e Unit ed
St at es . Mo reo ver, t h e f o reign t ax c redit
regim e t h at is p art o f t h e c u rrent US
w o rl dw ide t ax s y s t em m eans t h at t h e c o s t
o f inc reas ed f o reign t ax es o n US- b as ed
c o m p anies w il l b e b o rne in p art b y t h e US
fisc through reduced residual US tax when
f o reign earnings are rep at riat ed.
Th is Su b c o m m it t ee and t h e Way s and
Means Co m m it t ee h ave l o ng rec o gniz ed
t h e need f o r int ernat io nal t ax ref o rm in
p art ic u l ar and c o m p reh ens ive t ax ref o rm
m o re general l y . Th e BEPS p ro j ec t and
t h e res p o ns e b y f o reign c o u nt ries s h o u l d
b e view ed as y et ano t h er reas o n w h y t ax
ref o rm m u s t b e an u rgent p rio rit y .
* * * * *
Th ank y o u f o r t h e o p p o rt u nit y t o p res ent
t h es e p ers p ec t ives . I w o u l d b e h ap p y t o
answer any questions the Subcommittee
m ay h ave.
Feeling taxed by going digital?
EY’s global digital tax insights are now available for download at
www.ey.com/digitaltax
Highlights
Learn more about BEPS and national developments impacting
digital activity, 3D printing, the sharing economy and more.
Global digital
tax developments
review
November 2015
Digital Taxation Developments Review —
A new round-up of global developments from EY
The Digital Taxation Developments Review is a new publication from
EY which will periodically provide global updates on the complex and
challenging digital tax changes impacting companies around the world.
In our first edition, you can read an interview with the OECD’s Raffaele
Russo, head of the BEPS project and co-leader of the OECD’s Task Force
on the Digital Economy. In addition, we provide a review of the final
recommendations of BEPS Action 1, reflect on the UK’s Diverted Profits
Tax and cover digital tax developments in countries around the world.
The dawning of digital economy taxation
Top of Mind
Issues facing technology companies
The dawning
of digital economy
taxation
From the outset, technology companies have been in the vanguard
of globalizing new digital business models that may challenge
sovereign borders. As such, they have also found themselves under
the spotlight from policymakers and the media as tax issues have
risen to new prominence.
In our new report, we address the likelihood that multinational
technology companies are going to see significant upward pressure on
their global tax burden in 2016 and beyond, shedding light on the need
to prepare now.
3D printing taxation issues and impacts
What if your business world were turned upside down?
What if tangible goods moved digitally, intangibly across borders? If
globally centralized production migrated to local markets? What if
individual consumers turned into the producers of goods?
Are you ready for 3D printing? In the future, we may no longer ship
cargo containers filled with manufactured products via boats, trains
or planes, but instead digitally transmit production instructions for
3D manufacturers to produce the products.
What changes in tax policy might that scenario drive?
Global Tax Policy and Controversy Briefing
17
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implementation of the
recommendations
the participating
co ntries will li el pro e to e e en more challenging
Th e f o c u s in 2016 w il l l ik el y f al l h eavil y o n t h e Eu ro p ean Unio n, w h ere t h e Mem b er
St at es w il l deb at e an ant i- t ax avo idanc e p ac k age rel eas ed b y t h e Eu ro p ean Co m m is s io n
o n 28 Janu ary 2016. Th e p ac k age inc l u ded t w o p ro p o s ed direc t ives t h at w o u l d
im p l em ent vario u s BEPS rec o m m endat io ns — al o ng w it h o t h er m eas u res t h at are
no t inc l u ded in t h e BEPS Ac t io n Pl an b u t are p art o f t h e w ider EU agenda t o t ac k l e
aggres s ive t ax p l anning — w it h in t h e EU in w h at t h e Co m m is s io n h o p es w il l b e a s w if t ,
c o o rdinat ed and c o ns is t ent m anner.
In t h is art ic l e, Kl au s vo n Bro c k e, EU Tax Servic es Leader f o r EY , p ro vides ins igh t o n
w h at t h e Co m m is s io n — and o t h er s t ak eh o l ders , w h o are b ec o m ing inc reas ingl y ac t ive —
are t ry ing t o ac h ieve, and h o w .
hat is the
tr ing to achie e
Unt il rec ent l y , al m o s t al l EU t ax p ro p o s al s and init iat ives w ere generat ed 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). Ho w ever, as t h e OECD’ s BEPS p ro j ec t gained
m o m ent u m f o l l o w ing t h e Ju l y 2013 rel eas e o f it s 15- p o int Ac t io n Pl an, and as t h e
deb at e h as ent ered t h e p u b l ic do m ain, s everal o t h er EU ins t it u t io ns h ave j o ined t h e
ef f o rt t o t ac k l e p erc eived c o rp o rat e t ax avo idanc e. In addit io n t o t h e Co m m is s io n
and its numerous departments (Directorates-General, or DG) that focus on specific
p o l ic y areas (s u c h as t h e DG f o r Tax at io n and Cu s t o m s Unio n, t h e DG f o r Co m p et it io n,
and t h e DG f o r Int ernal Mark et , Indu s t ry , Ent rep reneu rs h ip and SMEs ), t h e Eu ro p ean
Parliament has played a high-profile role by launching investigations of EU corporate
t ax p o l ic ies via t h e p erm anent Ec o no m ic and Mo net ary Af f airs (ECON) Co m m it t ee and
t h e t em p o rary Sp ec ial Co m m it t ee o n Tax Ru l ings and Ot h er Meas u res Sim il ar in Nat u re
or Effect (TAXE committee). At the same time, the Economic and Financial Affairs
Council of the European Union (ECOFIN) has put BEPS and EU corporate tax policy high
o n it s agenda.
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The Commission must perform the delicate balancing act of finding
w ay s t o im p l em ent t h e BEPS rec o m m endat io ns in w h at t h ey h o p e
w il l b e a s w if t , c o o rdinat ed and c o ns is t ent m anner, w h il e rec o gniz ing
t h at s o m e Mem b er St at es m ay dec ide t o as s ert t h eir s o vereign
righ t s in t ax m at t ers b y ado p t ing o nl y t h o s e m eas u res t h ey b el ieve
are ap p ro p riat e f o r t h eir nat io nal t ax l aw s and p o l ic ies .
These multiple (and sometimes conflicting) EU initiatives have
p u t eno rm o u s p res s u re o n t h e Co m m is s io n t o ac h ieve a very
difficult goal: It must satisfy the demands of the European
Parl iam ent and t ax f airnes s ac t ivis t s t h at m u l t inat io nal s b e
s u b j ec t t o t rans p arenc y and c o m p l ianc e o b l igat io ns t h at , in
s o m e res p ec t s , w o u l d go f u rt h er t h an w h at t h e OECD’ s BEPS
Action Plan requires. At the same time, the Commission
must perform the delicate balancing act of finding ways to
im p l em ent t h e BEPS rec o m m endat io ns ac ro s s t h e EU in a
general l y c o ns is t ent m anner, w h il e rec o gniz ing t h at s o m e
Mem b er St at es m ay dec ide t o as s ert t h eir s o vereign righ t s
in t ax m at t ers b y ado p t ing o nl y t h o s e m eas u res t h ey b el ieve
are ap p ro p riat e f o r t h eir nat io nal t ax l aw s and p o l ic ies . To
ac h ieve u nanim it y and m inim iz e t h e ris k s o f ending u p w it h
a patchwork of EU BEPS rules, the Commission has to find
a m inim u m s t andard f o r t h e vario u s Ac t io n it em s t h at every
Mem b er St at e c an l ive b y .
W hat B EP S - related actions has the
ta en to date
Th e Co m m is s io n’ s 28 Janu ary 2016 rel eas e o f an ant i- t ax
1
avo idanc e p ac k age rep res ent ed t h e c u l m inat io n o f s everal
y ears o f w o rk c arried o u t b y t h e Co m m is s io n and o t h er
EU b o dies t o t ac k l e p erc eived aggres s ive t ax p l anning and
c o rp o rat e t ax avo idanc e. Addres s ing t h is is s u e w as al ready
h igh o n t h e EU’ s agenda b ef o re t h e OECD rel eas ed t h e BEPS
Ac t io n Pl an; t h e genes is f o r m any o f t h e p ro p o s al s c o nt ained
in t h e 28 Janu ary p ac k age argu ab l y go es b ac k t o t h e
Co m m is s io n’ s Dec em b er 2012 Ac t io n Pl an t o s t rengt h en t h e
2
fight against tax fraud and tax evasion.
Th e 28 Janu ary p ac k age c o m p ris ed f o u r s ep arat e do c u m ent s :
(i) a p ro p o s ed EU Ant i- Tax Avo idanc e Direc t ive (t h e ATA
Direc t ive) t h at w o u l d im p l em ent f o u r o f t h e OECD’ s BEPS
Ac t io n it em s as w el l as t w o m eas u res t h at w ere earl ier
c o ns idered as p art o f t h e Co m m is s io n’ s 2011 Co m m o n
Co ns o l idat ed Co rp o rat e Tax Bas e (CCCTB) p ro p o s al ;
1
See EY Gl o b al Tax Al ert , European Commission releases anti-tax avoidance
package designed to provide uniform implementation of BEPS measures and
minimum standards across Member States, dat ed 28 Janu ary 2016.
(ii) a p ro p o s ed Direc t ive t h at w o u l d im p l em ent t h e au t o m at ic
ex c h ange o f c o u nt ry - b y - c o u nt ry (Cb C) rep o rt s (t h e Cb CR
Direc t ive); (iii) a rec o m m endat io n o n t h e im p l em ent at io n o f
m eas u res agains t t ax t reat y ab u s e; and (iv) a c o m m u nic at io n
p ro p o s ing a f ram ew o rk f o r a new EU ex t ernal s t rat egy f o r
ef f ec t ive t ax at io n.
Th e p ro p o s ed ATA Direc t ive go es m u c h f u rt h er t h an t h e OECD’ s
BEPS rec o m m endat io ns and in f ac t rep res ent s a c o m p ro m is e
b et w een t h e EU CCCTB p ro p o s al and a c o m m o n res p o ns e t o t h e
OECD’ s Ac t io n Pl an. Th e Co m m is s io n u nders c o red t h is p o int b y
nam ing t h e p ro p o s al an “ ant i- t ax avo idanc e” direc t ive rat h er
t h an an “ ant i- BEPS” direc t ive, as m any w it h in t h e EU h ad b een
c al l ing it b ef o re t h e p ro p o s al w as rel eas ed. Th e nam ing o f t h e
ATA Direc t ive w as l ik el y m ade t o dif f erent iat e t h e Co m m is s io n’ s
work from the OECD’s project and to reflect the Commission’s
p o s it io n t h at it is t h e EU’ s l egis l at ive b o dy , w h ereas t h e OECD is
a b o dy t h at c an o nl y m ak e no n- b inding rec o m m endat io ns . So m e
c o u l d even argu e t h at t h e p ro p o s ed ATA Direc t ive rep res ent s
an o vert at t em p t b y t h e Co m m is s io n t o f u rt h er h arm o niz e EU
Mem b er St at es ’ c o rp o rat e t ax regim es .
To u nders t and h o w t h e Co m m is s io n devel o p ed t h is p ac k age, a
b rief o verview o f t h e s t ep s t ak en in 2015 b y t h e Co m m is s io n,
the European Parliament and ECOFIN is in order.
T he C ommission in 2015
In Marc h 2015, t h e Co m m is s io n rel eas ed a p ac k age o f t ax
3
t rans p arenc y m eas u res aim ed at t ac k l ing p erc eived c o rp o rat e
t ax avo idanc e and h arm f u l t ax c o m p et it io n in t h e EU. Th e
p ac k age inc l u ded a p ro p o s al t o int ro du c e t h e 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 in regard
t o inf o rm at io n rel at ing t o c ro s s - b o rder t ax ru l ings , and
announced plans to consider new transparency requirements for
m u l t inat io nal s and t o l au nc h a review o f t h e Co de o f Co ndu c t f o r
Bu s ines s Tax at io n.
3
See h t t p : / / w w w .ey .c o m / GL/ en/ Servic es / 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 .
2
See h t t p s : / / w w w .ey c o m .c h / en/ Pu b l ic at io ns / 20121210- Gl o b al - Tax - Al ert - 6Dec em b er- 2012/ do w nl o ad.
lo al a
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19
In Ju ne, t h e Co m m is s io n f o l l o w ed u p w it h t h e rel eas e o f a
c o m p reh ens ive ac t io n p l an t o ref o rm c o rp o rat e t ax at io n in t h e
EU. Th e p l an inc l u ded an init iat ive t o revis it t h e 2011 EU CCCTB
p ro p o s al , b u t w it h s o m e c h anges — t h e Co m m is s io n advo c at ed
m ak ing t h e CCCTB m andat o ry and im p l em ent ing it in p h as es
(i.e., p o s t p o ne t h e w o rk o n c o ns o l idat io n u nt il af t er a c o m m o n
c o rp o rat e t ax b as e is agreed). Th e Co m m is s io n al s o s t at ed t h at
it w o u l d ex p l o re a nu m b er o f m eas u res t o ens u re t h e ef f ec t ive
taxation of profits, improve the EU’s transfer pricing framework,
p ro vide gu idanc e o n h o w t o im p l em ent p at ent b o x regim es
4
in line with the OECD’s “modified nexus approach,” c reat e a
c o o rdinat ed, EU- w ide ap p ro ac h t o res o l ving do u b l e t ax at io n
dis p u t es , ens u re a m o re c o m m o n ap p ro ac h t o t h ird c o u nt ry no nc o o p erat ive t ax j u ris dic t io ns , and ref o rm t h e Co de o f Co ndu c t f o r
Bu s ines s Tax at io n and t h e Pl at f o rm o n Tax Go o d Go vernanc e.
2015 f u rt h er s aw b o t h o ngo ing and new s c ru t iny o f m u l t ip l e
Mem b er St at es ’ t ax regim es u nder t h e b anner o f St at e Aid
inves t igat io ns . In Oc t o b er 2015, t h e Co m m is s io n det erm ined
t h at Lu x em b o u rg and t h e Net h erl ands grant ed il l egal St at e
Aid t o a Lu x em b o u rg- res ident and a Du t c h - res ident c o m p any ,
res p ec t ivel y , w h ic h b o t h f o rm p art o f a m u l t inat io nal c o m p any
(MNC) gro u p . Th e Co m m is s io n f o u nd u nder t h e EU St at e Aid
ru l es t h at Lu x em b o u rg and t h e Net h erl ands grant ed a s el ec t ive
t ax advant age. Th is new s w as f o l l o w ed in earl y Dec em b er 2015
b y t h e Co m m is s io n’ s anno u nc em ent t h at it is inves t igat ing t h e
Lu x em b o u rg ru l ings o f an MNC t h at invo l ves a Lu x em b o u rg
5
c o m p any w it h US and Sw is s b ranc h es . Th e Co m m is s io n h as no t
y et anno u nc ed a dec is io n in t w o o t h er St at e Aid c as es invo l ving
t ax ru l ings grant ed t o MNCs b y Irel and and Lu x em b o u rg (t h e
Iris h c as e w as anno u nc ed in Ju ne 2014, t h e Lu x em b o u rg c as e in
Oc t o b er 2014).
4
See h t t p : / / w w w .ey .c o m / GL/ en/ Servic es / Tax / Int ernat io nal - Tax / Al ert - - OECDex p l ains - 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.
5
It is im p o rt ant t o no t e t h at t h e inves t igat io n is l im it ed t o t h e ru l ings o b t ained
b y t h is MNC and w e are no t aw are o f any m o re general Co m m is s io n f o c u s o n
ex em p t b ranc h s t ru c t u res .
20
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riefing
T he European P arliament
In t h e w ak e o f t h e No vem b er 2014 il l egal l eak ing o f Lu x em b o u rg
t ax ru l ings and p u b l ic int eres t in t h e Co m m is s io n’ s o ngo ing
St at e Aid inves t igat io ns , t h e Eu ro p ean Parl iam ent t o o k s t ep s
t h ro u gh 2015 t o review and p ro p o s e c h anges t o EU c o rp o rat e
t ax p o l ic ies . In Dec em b er 2014, it dec ided t o l au nc h t h e draf t ing
o f a l egis l at ive o w n- init iat ive rep o rt o n inc reas ing t rans p arenc y ,
c o o rdinat io n and c o nvergenc e t o c o rp o rat e t ax p o l ic ies in
t h e EU. Th e draf t ing o f t h e rep o rt w as as s igned t o t h e ECON
Co m m it t ee. Th e Eu ro p ean Parl iam ent m ade ano t h er m o ve in
February 2015 by forming the TAXE committee, with a mandate
t o review Mem b er St at es ’ ru l ing p rac t ic es go ing as f ar b ac k as
Janu ary 19 9 1.
Th e ECON c o m m it t ee in Sep t em b er rel eas ed a draf t vers io n o f it s
rep o rt , “ Bringing t rans p arenc y , c o o rdinat io n and c o nvergenc e t o
Corporate Tax policies in the Union.” The final version, which was
ado p t ed b y t h e c o m m it t ee o n 1 Dec em b er 2015 and p u b l is h ed
o n 2 Dec em b er, rec o m m ended t h at t h e Co m m is s io n, int er al ia,
do t h e f o l l o w ing:
• Table a proposal for CbC reporting on profit, tax and subsidies
b y Ju ne 2016
• Table a proposal for introducing a “Fair Tax Payer” program
• Introduce a Common Tax Base (CCTB) as a first step, and then
int ro du c e c o ns o l idat io n as w el l (CCCTB)
• Table a proposal for a common European Tax Identification
Nu m b er
• Tab l e a p ro p o s al f o r l egal p ro t ec t io n o f w h is t l eb l o w ers
• Im p ro ve c ro s s - b o rder t ax at io n dis p u t e res o l u t io n m ec h anis m s
• Tab l e a p ro p o s al f o r a new m
St at es s h o u l d inf o rm eac h o
new al l o w anc e, rel ief , ex c ep
t h e t ax b as e o f o t h er Mem b
ec h anis m w h ereb y Mem b er
t h er if t h ey int end t o int ro du c e a
t io n, inc ent ive, et c . t h at m ay af f ec t
er St at es
At an 8 December 2015 meeting, ECOFIN formally adopted a legislative proposal
t o am end Direc t ive 2011/ 16/ EU (t h e Direc t ive o n t h e Au t o m at ic Ex c h ange o f
Information) that will require Member States to automatically exchange information
related to cross-border tax rulings and advance pricing arrangements. ECOFIN
al s o ado p t ed c o nc l u s io ns regarding t h e EU im p l em ent at io n o f t h e OECD’ s BEPS
rec o m m endat io ns , s ay ing t h at EU direc t ives s h o u l d b e, w h ere ap p ro p riat e, t h e
p ref erred veh ic l e f o r im p l em ent ing t h e BEPS rec o m m endat io ns in t h e EU.
• Es t im at e t h e c o rp o rat e t ax gap
• St rengt h en t h e m andat e and im p ro ve t rans p arenc y o f t h e
Co de o f Co ndu c t Gro u p
• Pro vide gu idel ines regarding “ p at ent b o x es ” s o as t o ens u re
t h ey are no t h arm f u l
• Develop common definitions for “permanent establishment”
and “economic substance” so as to ensure that profits are
t ax ed w h ere val u e is generat ed
• Develop an EU definition of “tax haven” and counter-measures
f o r t h o s e w h o u s e t h em
• Im p ro ve t h e t rans f er p ric ing f ram ew o rk in t h e EU
On 16 Dec em b er 2015, t h e Eu ro p ean Parl iam ent in a p l enary
s es s io n ado p t ed t h e rep o rt b y an o verw h el m ing m aj o rit y o f 500
t o 122 vo t es , w it h 8 1 ab s t ent io ns . Th e rep o rt is de f ac t o no nbinding from a legislative perspective, but puts forward specific
p o l ic y p ro p o s al rec o m m endat io ns t o w h ic h t h e Co m m is s io n h as
t o res p o nd w it h in t h ree m o nt h s . Af t er m o nt h s o f p u b l ic f ac t finding hearings, the TAXE committee also released a report; an
interim report of its initial findings and recommendations was
issued in July 2015, with the committee issuing a final report in
October. The final report recommended, inter alia,
• Int ro du c ing Cb C rep o rt ing f o r m u l t inat io nal c o m p anies o n
financial data, including profits made, taxes paid and subsidies
rec eived
• Introducing clear definitions of “economic substance” and
o t h er det erm ining f ac t o rs o f c o rp o rat e t ax b il l s
• Devel o p ing c o m m o n EU gu idel ines regarding t ax ru l ings and
advance transfer pricing agreements, specifically for the
ap p l ic at io n o f t h e arm ’ s - l engt h p rinc ip l e
• Int ro du c ing a c o m p u l s o ry EU- w ide CCCTB s o t h at t h ere is a
c o m m o n agreem ent o n w h at is al l o w ed in t erm s o f t ax ru l ings
and advanc e t rans f er p ric ing agreem ent s
• Im p l em ent ing a f ram ew o rk u nder w h ic h Mem b er St at es
s y s t em at ic al l y s h are t h eir nat io nal ru l ings and o t h er t ax
inf o rm at io n w it h eac h o t h er as w el l as w it h t h e Co m m is s io n
• Ap p o int ing a p erm anent , p o l it ic al l y ac c o u nt ab l e c h air o f t h e
Code of Conduct Group and having finance ministers regularly
p art ic ip at e in t h e Gro u p
• Devel o p ing an EU l egis l at ive f ram ew o rk t o b et t er p ro t ec t
w h is t l eb l o w ers w h o s e revel at io ns p ro m o t e t h e p u b l ic int eres t
As w it h t h e ECON rep o rt , t h e Eu ro p ean Parl iam ent ado p t ed
t h e TAXE c o m m it t ee rep o rt in a 25 No vem b er 2015 p l enary
s es s io n b y an o verw h el m ing m aj o rit y (508 vo t es t o 108 , w it h
8 5 ab s t ent io ns ). Th e TAXE c o m m it t ee’ s m andat e ended o n 30
No vem b er. Th e Eu ro p ean Parl iam ent o n 2 Dec em b er ap p ro ved a
m eas u re t o c o nt inu e t h e c o m m it t ee’ s w o rk f o r s ix m o nt h s u nder
a new m andat e.
EC O F I N
At an 8 December 2015 meeting, ECOFIN formally adopted
a l egis l at ive p ro p o s al t o am end Direc t ive 2011/ 16/ EU (t h e
Direc t ive o n t h e Au t o m at ic Ex c h ange o f Inf o rm at io n) t h at w il l
require Member States to automatically exchange information
rel at ed t o c ro s s - b o rder t ax ru l ings and advanc e p ric ing
6
arrangem ent s . ECOFIN had reached political agreement on the
p ro p o s al in Oc t o b er. As p art o f t h e new ex c h ange p ro c edu re, t h e
Co m m is s io n w il l devel o p a s ec u re c ent ral direc t o ry f o r s t o ring
t h e ex c h anged inf o rm at io n. Th e direc t o ry w il l b e ac c es s ib l e
to all Member States and, to the extent that it is required for
m o nit o ring t h e c o rrec t im p l em ent at io n o f t h e Direc t ive, t o t h e
Co m m is s io n. Th e f o rm al ado p t io n o f t h e Direc t ive am endm ent s
fulfilled one of the elements of the Commission’s March 2015
t ax t rans p arenc y p ac k age.
6
See EY Gl o b al Tax Al ert , EU Council adopts directive on exchange of
information on tax rulings, agrees on other corporate tax issues, dat ed
10 Dec em b er 2015.
lo al a
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21
It s h o u l d b e no t ed t h at
b as ed ru l es and l eaves
Mem b er St at es . In t h at
im p l em ent m eas u res t h
t h e Direc t ive; in ef f ec t ,
t h e p ro p o s ed Direc t ive s et s o u t p rinc ip l et h e det ail s o f t h eir im p l em ent at io n t o t h e
regard, Mem b er St at es m ay c h o o s e t o
at go ab o ve and b ey o nd t h o s e s et o u t in
it rep res ent s a s et o f m inim u m s t andards .
ECOFIN also adopted conclusions regarding the EU
im p l em ent at io n o f t h e OECD’ s BEPS rec o m m endat io ns . It s aid
t h at EU direc t ives s h o u l d b e, w h ere ap p ro p riat e, t h e p ref erred
veh ic l e f o r im p l em ent ing t h e BEPS rec o m m endat io ns in t h e EU
in o rder t o ens u re b o t h l egal c ert aint y and p ro p o rt io nal it y in t h e
level of harmonization required by the Single Market. ECOFIN
t as k ed t h e Co m m is s io n w it h devel o p ing a l egis l at ive p ro p o s al
o n im p l em ent ing Ac t io ns 2 (h y b rid m is m at c h es ), 3 (Co nt ro l l ed
Foreign Company (CFC) rules), 4 (interest limitation rules), 6
(t reat y ant i- ab u s e ru l e), 7 (p erm anent es t ab l is h m ent (PE) s t at u s )
and 13 (Cb C rep o rt ing).
ECOFIN concluded that further technical analysis should
b e c arried o u t p rio r t o im p l em ent at io n, and as k ed t h at t h e
Co m m is s io n t ak e int o ac c o u nt t h e c o ns iderat io n al ready given
t o t h o s e Ac t io n it em s w it h in t h e Co m m is s io n’ s o ngo ing w o rk ,
no t ab l y w it h res p ec t t o t h e CCCTB. Regarding Ac t io n 6, t h e
ins ert io n o f a c o m m o n ant i- ab u s e c l au s e is envis aged in t h e
c o nt ex t o f t h e rec as t o f t h e Int eres t and Ro y al t ies Direc t ive.
ECOFIN noted that the implementation of BEPS measures via EU
l egis l at io n s h al l no t p rec l u de t h e ap p l ic at io n o f Mem b er St at es ’
do m es t ic l egis l at io n o r agreem ent - b as ed p ro vis io ns aim ed at
p revent ing BEPS.
an ar anti ta a oidance pac age
he
irecti e
The proposed ATA Directive significantly expands the scope of
what was envisioned in ECOFIN’s 8 December 2015 conclusions,
with provisions addressing the OECD BEPS measures requested
by ECOFIN (interest deductibility, a GAAR, CFC rules and a
f ram ew o rk t o t ac k l e h y b rid m is m at c h es ), as w el l as p ro vis io ns
o n u nif o rm ex it t ax at io n and a s w it c h - o ver c l au s e as regards a
m inim u m ef f ec t ive c o rp o rat e t ax at io n rat e t h at h ave b een s p l it
f ro m t h e CCCTB p ro p o s al .
22
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For a comprehensive overview of how the six provisions
w o u l d o p erat e, p l eas e s ee EY Gl o b al Tax Al ert , European
Commission releases anti-tax avoidance package designed
to provide uniform implementation of BEPS measures
and minimum standards across Member States, dat ed
28 Janu ary 2016 at ey.com/taxalerts.
It s h o u l d b e no t ed t h at
b as ed ru l es and l eaves
Mem b er St at es . In t h at
im p l em ent m eas u res t h
t h e Direc t ive; in ef f ec t ,
t h e p ro p o s ed Direc t ive s et s o u t p rinc ip l et h e det ail s o f t h eir im p l em ent at io n t o t h e
regard, Mem b er St at es m ay c h o o s e t o
at go ab o ve and b ey o nd t h o s e s et o u t in
it rep res ent s a s et o f m inim u m s t andards .
Th e p ro vis io ns t h at w il l l ik el y c au s e t h e b igges t p o int s o f
c o nt ent io n du ring Mem b er St at es ’ deb at e o f t h e p ro p o s ed ATA
Direc t ive are t h e s w it c h - o ver c l au s e and h y b rid m is m at c h ru l es .
The switch-over clause would require Member States to deny an
ex em p t io n f ro m c o rp o rat e t ax w it h res p ec t t o dis t rib u t io ns o f
profits and proceeds from the sale of shares in low-taxed entities
t h at are res ident in, and PEs t h at are l o c at ed in, t h ird c o u nt ries .
An ent it y o r PE w o u l d b e regarded as l o w - t ax ed w h en t h at ent it y
o r PE is s u b j ec t t o a s t at u t o ry c o rp o rat e t ax rat e l o w er t h an 40%
o f t h e s t at u t o ry c o rp o rat e t ax rat e t h at w o u l d h ave b een c h arged
b y t h e Mem b er St at e o f t h e t ax p ay er rec eiving t h e inc o m e. A
c redit w o u l d b e avail ab l e f o r t ax t h at w as p aid b y t h e l o w - t ax ed
s u b s idiary o r PE.
This approach (on hybrid mismatches) differs significantly from the BEPS
Ac t io n 2 rec o m m endat io ns , w h ere t h ere is a p rim ary ru l e t h at t h e dedu c t io n b e
disallowed, with a secondary rule requiring that income be taxed, or a second
dedu c t io n dis al l o w ed, if t h e p rim ary ru l e is no t ado p t ed. Ho w ever, it s eem s
u nl ik el y t h at t h e Co m m is s io n w o u l d go s o f ar t o p ro p o s e s u c h a p ro vis io n if it
were not confident it could get agreement by all Member States.
Th is p ro vis io n is a h igh l y c o nt ro vers ial o ne; t h e UK is b el ieved
t o h ave s t ro ngl y o b j ec t ed t o ins ert ing t h is c l au s e int o t h e
p ro p o s ed ATA Direc t ive, f o r ex am p l e. If t h e Co u nc il is u nab l e
t o o b t ain u nanim o u s s u p p o rt f o r t h is p art ic u l ar p ro vis io n, it is
p o s s ib l e t h at it w il l b e s p l it u p and p o s t p o ned f o r ado p t io n at a
l at er s t age.
Th e h y b rid m is m at c h p ro vis io n is int ended t o addres s s it u at io ns
w h ere t h ere are dif f erenc es in t h e l egal c h arac t eriz at io n o f
p ay m ent s o r ent it ies b et w een t w o Mem b er St at es w h ic h give ris e
t o a do u b l e dedu c t io n o r a dedu c t io n/ no inc l u s io n. Th e p ro p o s ed
Directive would require that the treatment in the Member
State where the first deduction is claimed be followed by the
o t h er Mem b er St at e w h ere t h e inc o m e is rec eived o r a s ec o nd
dedu c t io n is c l aim ed.
This approach differs significantly from the BEPS Action 2
rec o m m endat io ns , w h ere t h ere is a p rim ary ru l e t h at t h e
deduction be disallowed, with a secondary rule requiring that
inc o m e b e t ax ed, o r a s ec o nd dedu c t io n dis al l o w ed, if t h e
p rim ary ru l e is no t ado p t ed. Ho w ever, it s eem s u nl ik el y t h at t h e
Co m m is s io n w o u l d go s o f ar as t o p ro p o s e s u c h a p ro vis io n if it
were not confident it could get agreement by all Member States.
Again, t h is p art ic u l ar p iec e o f t h e p u z z l e is l ik el y t o at t rac t
c o nt ro vers y as t h e nego t iat io ns m o ve f o rw ard.
T he C bC R Directive
Th e Co m m is s io n’ s 28 Janu ary p ac k age al s o inc l u ded a p ro p o s ed
Co u nc il Direc t ive t h at w o u l d am end Direc t ive 2011/ 16/ EU t o
p ro vide f o r t h e m andat o ry au t o m at ic ex c h ange o f Cb C rep o rt s .
Th e p ro p o s ed am endm ent s w o u l d l argel y im p l em ent t h e
OECD’ s Cb C rep o rt ing rec o m m endat io ns w it h in an EU c o nt ex t ,
and would require Member States to implement the exchange
o f Cb C rep o rt s b et w een c o m p et ent au t h o rit ies in rel at io n t o
multinational enterprises for fiscal years beginning on or after
1 Janu ary 2016. Th e p ro p o s al do es no t c o nt ain ru l es o n t h e
Action 13 requirements for a master file and local file, as these
are al ready addres s ed b y t h e EU’ s vo l u nt ary Co de o f Co ndu c t o n
Trans f er Pric ing Do c u m ent at io n f o r As s o c iat ed Ent erp ris es in t h e
European Union. The proposal has been specifically designed to
enab l e t h e au t o m at ic ex c h ange o f Cb C rep o rt s t o b u il d o n t h e
ex is t ing ru l es in Direc t ive 2011/ 16/ EU rel at ing t o t h e p rac t ic al
arrangem ent s f o r ex c h anging inf o rm at io n, inc l u ding t h e u s e o f
s t andard f o rm s .
During an 8 March 2016 meeting, ECOFIN reached political
agreem ent o n m o ving f o rw ard w it h t h e p ro p o s ed Cb CR
Direc t ive, s u b j ec t t o t h e Eu ro p ean Parl iam ent ’ s o p inio n o f
t h e p ro p o s al as w el l as t h e UK’ s p ending Cb CR c o ns u l t at io n
with its Parliament. Following the 28 January release of the
p ro p o s ed Cb CR Direc t ive, t h ere h ad b een s o m e c o nc erns am o ng
t h e Mem b er St at es regarding t h e m andat o ry nat u re o f t h e
“ s ec o ndary rep o rt ing” p ro vis io n f o r EU s u b s idiaries in c as es
where (i) the ultimate parent is not required to file a CbC report
in it s j u ris dic t io n o f t ax res idenc e, (ii) t h e u l t im at e p arent ’ s
j u ris dic t io n do es no t h ave a c o m p et ent au t h o rit y agreem ent
in p l ac e t o ef f ec t Cb C rep o rt ex c h ange w it h a c o ns t it u ent
ent it y ’ s j u ris dic t io n o f t ax res idenc e, o r (iii) t h ere h as b een a
“ s y s t em ic f ail u re” b y t h e u l t im at e p arent ’ s j u ris dic t io n t o c arry
out CbC report exchange. Under the OECD’s final Action 13
rec o m m endat io ns regarding Cb CR, t h e s ec o ndary rep o rt ing
m ec h anis m is o p t io nal .
At the 8 March 2016 ECOFIN meeting, the Member States
agreed t h at s ec o ndary rep o rt ing w il l b e m andat o ry , b u t no t u nt il
the 2017 fiscal year; it will be optional in 2016. The Council will
f o rm al l y ado p t t h e Cb CR Direc t ive af t er t h e Eu ro p ean Parl iam ent
h as given it s o p inio n and nat io nal p arl iam ent ary res ervat io ns
have been lifted, and after the text is finalized in all languages.
At this stage, the proposed CbCR Directive would not require
t h e p u b l ic dis c l o s u re o f Cb C rep o rt s , as t h e Eu ro p ean Parl iam ent
and m any t ax j u s t ic e ac t ivis t s h ave b een dem anding. Ho w ever,
t h e Co m m is s io n no t ed in it s init ial 28 Janu ary 28 draf t t h at
the decision not to require public disclosure does not preclude
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23
Th e Co m m is s io n is c u rrent l y c arry ing o u t an im p ac t
as s es s m ent t o det erm ine w h et h er m u l t inat io nal s
should be required to publicly disclose certain
inf o rm at io n o n a Cb C b as is . Th e Co m m is s io n ex p ec t s
to finalize the impact assessment and announce a
dec is io n o n t h e m at t er in s p ring 2016.
it f ro m dec iding in t h e f u t u re t o p ro p o s e p u b l ic dis c l o s u re
o b l igat io ns o n c o m p anies . Th e Co m m is s io n is c u rrent l y c arry ing
o u t an im p ac t as s es s m ent t o det erm ine w h et h er m u l t inat io nal s
should be required to publicly disclose certain information
on a CbC basis. The Commission expects to finalize the
im p ac t as s es s m ent and anno u nc e a dec is io n o n t h e m at t er in
s p ring 2016.
Recommendation on tax treaty issues
As p art o f t h e 28 Janu ary ant i- t ax avo idanc e p ac k age, t h e
Co m m is s io n is s u ed a rec o m m endat io n regarding t h e EU
im p l em ent at io n o f t h e OECD’ s p ro p o s ed m eas u res addres s ing t ax
t reat y - rel at ed BEPS c o nc erns , i.e. t h e Ac t io n 6 rec o m m endat io n
t h at c o u nt ries inc l u de in t h eir t ax t reat ies a 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 t h e Ac t io n 7
rec o m m endat io n t h at c o u nt ries ado p t t h e new p ro p o s ed
changes to the definition of PE in Article 5 of the OECD Model
Tax Convention to make the definition more resilient against
artificial structures designed to circumvent its application.
Regarding Ac t io n 6, t h e Co m m is s io n rec o m m ended t h at w h en
Member States include a PPT as suggested by the Action 6 Final
Rep o rt in t ax t reat ies w h ic h t h ey c o nc l u de am o ng t h em s el ves o r
w it h t h ird c o u nt ries , t h ey s h o u l d ins ert in t h e PPT t h e f o l l o w ing
modification to ensure compliance with EU law (modification
in b o l d):
“ No t w it h s t anding t h e o t h er p ro vis io ns o f t h is Co nvent io n, a
benefit under this Convention shall not be granted in respect
o f an it em o f inc o m e o r c ap it al if it is reas o nab l e t o c o nc l u de,
h aving regard t o al l rel evant f ac t s and c irc u m s t anc es , t h at
obtaining that benefit was one of the principal purposes of any
arrangem ent o r t rans ac t io n t h at res u l t ed direc t l y o r indirec t l y
in that benefit, unless it is established that it re ects a gen ine
economic activ ity or that granting that benefit in these
c irc u m s t anc es w o u l d b e in ac c o rdanc e w it h t h e o b j ec t and
p u rp o s e o f t h e rel evant p ro vis io ns o f t h is Co nvent io n.”
24
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Regarding t h e im p l em ent at io n o f Ac t io n 7 , t h e Co m m is s io n
as k ed Mem b er St at es t o adh ere t o t h e p ro p o s ed c h anges t o
Art ic l e 5 o f t h e OECD Mo del w h en c o nc l u ding t ax t reat ies am o ng
t h em s el ves o r w it h t h ird c o u nt ries .
Th e Co m m is s io n’ s dec is io n t o addres s Ac t io ns 6 and 7 in a
rec o m m endat io n, rat h er t h an inc l u ding t h em in a b inding
EU Direc t ive, s eem s ap p ro p riat e, given t h at t h e dec is io ns o n
whether to include a PPT and how to define a PE in a bilateral
t ax t reat y w il l b e nego t iat ed b y t h e rel evant t reat y p art ners .
For example, it is possible that when one treaty partner is more
indu s t rial iz ed t h an t h e o t h er p art ner, t h e f o rm er w il l agree
t o give m o re c o nc es s io ns t o t h e l at t er b y deviat ing f ro m t h e
general l y ap p l ic ab l e OECD gu idel ines o n w h at c o ns t it u t es a PE.
Th u s , it m ak es s ens e t o l eave it u p t o t h e Mem b er St at es t o
decide those questions during their treaty negotiations.
ternal strateg for effecti e ta ation
Th e Co m m is s io n’ s 28 Janu ary ex t ernal s t rat egy c o m m u nic at io n
s u m m ariz es a nu m b er o f is s u es aro u nd BEPS, t h e p rinc ip l es
u nderl ining t h e vario u s ant i- BEPS m eas u res and t h e vario u s
m eas u res and init iat ives b eing t ak en w it h in t h e EU. Th e
c o m m u nic at io n s et s o u t t h e Co m m is s io n’ s view t h at a
c o o rdinat ed EU ex t ernal s t rat egy (i.e., c o vering t h ird c o u nt ries
and no t j u s t EU Mem b er St at es ) is es s ent ial t o b o o s t ing Mem b er
St at es ’ c o l l ec t ive s u c c es s in t ac k l ing t ax avo idanc e, ens u ring
ef f ec t ive t ax at io n and c reat ing a c l ear and s t ab l e enviro nm ent
f o r b u s ines s es in t h e Singl e Mark et .
Al o ngs ide m ent io n o f t h e p ro p o s ed ATA and Cb CR Direc t ives ,
t h e c o m m u nic at io n m ak es ref erenc e t o a nu m b er o f
addit io nal m eas u res w h ic h t h e Co m m is s io n b el ieves c o u l d
f u rt h er s t rengt h en t h e p ro m o t io n o f t ax go o d go vernanc e
int ernat io nal l y . At t h e c o re o f t h es e m eas u res l ies t h e
c reat io n and m aint enanc e o f an EU- w ide l is t o f p ro b l em at ic
t ax j u ris dic t io ns . Th e Co m m is s io n ex p l ained t h at t h e c u rrent
m edl ey o f individu al Mem b er St at e l is t ing p ro c es s es s h o u l d
The Netherlands, which holds the EU presidency for the first half of 2016, has
s et an ex t rem el y am b it io u s t im et ab l e f o r im p l em ent ing t h e p ro p o s ed ATA and
Cb CR Direc t ives . It aim s t o get a p o l it ic al agreem ent o n t h e direc t ives b y t h e
end o f it s p res idenc y (i.e., Ju ne 2016) and t o h ave Mem b er St at es im p l em ent
t h e direc t ives int o t h eir nat io nal l aw s b y t h e end o f Dec em b er 2016.
u l t im at el y b e rep l ac ed w it h a c l ear and c o h erent EU ap p ro ac h
t o ident if y ing t h ird c o u nt ries t h at f ail t o c o m p l y w it h go o d
governance standards, along with a unified EU response to these
j u ris dic t io ns . Th e Co m m is s io n s t at ed t h at o nc e t h is c o m m o n EU
l is t is f u l l y es t ab l is h ed, Mem b er St at es in Co u nc il s h o u l d f o rm al l y
agree t o u s e it ins t ead o f nat io nal l is t s t o addres s ex t ernal b as e
ero s io n t h reat s .
While the Commission’s communication may fly under the radar
s inc e it do es no t h ave any b inding l egal ef f ec t , t ax advis ers
and t h eir c l ient s s h o u l d t ak e no t e t h at t h e Co m m is s io n’ s
go al o f devel o p ing a c o m m o n EU l is t o f p ro b l em at ic t ax
jurisdictions could have a significant impact on third countries’
t ax s o vereignt y . As w e s aw w h en t h e Co m m is s io n in Ju ne
2015 published for the first time a consolidated overview of all
t h ird c o u nt ries l is t ed b y Mem b er St at es f o r t ax p u rp o s es , s u c h
c o u nt ries t ak e t h es e “ b l ac k ” and “ gray ” l is t s very s erio u s l y . An
EU- w ide l is t m o nit o red and m aint ained b y t h e Co m m is s io n c o u l d
h ave a great er ef f ec t o n t h e int ernat io nal inves t m ent c l im at e
t h an m any p eo p l e m ay real iz e.
Very often multinationals may decide to invest in a particular
c o u nt ry no t nec es s aril y b ec au s e o f t ax reas o ns b u t b ec au s e
o f o t h er f ac t o rs , s u c h as a f avo rab l e regu l at o ry enviro nm ent ,
m eaning t h o s e c o m p anies h ave genu ine b u s ines s reas o ns f o r
l o c at ing in t h o s e j u ris dic t io ns . Tax advis ers s h o u l d t h eref o re
c l o s el y f o l l o w t h e devel o p m ent o f t h e EU’ s l is t o f p ro b l em at ic
t ax j u ris dic t io ns and t h e c rit eria f o r l is t ing s u c h j u ris dic t io ns ,
p art ic u l arl y as t h e Co m m is s io n w il l b e c o o rdinat ing it s ef f o rt s
with regional bodies like the African Tax Administration Forum
(ATAF), the Centre de Rencontres et d’Etudes des Dirigeants
des Administrations Fiscales (CREDAF) and the Inter-American
Cent er o f Tax Adm inis t rat io ns (CIAT). In s o m e w ay s t h e
Co m m is s io n’ s ef f o rt s c o u l d b e des c rib ed as a b ac k - do o r ro u t e t o
gl o b al l y al igning c o u nt ries ’ c o rp o rat e t ax s y s t em s .
hat s going to happen ne t, and how
niform might
implementation e
in the
The Netherlands, which holds the EU presidency for the first
h al f o f 2016, h as s et an ex t rem el y am b it io u s t im et ab l e f o r
im p l em ent ing t h e p ro p o s ed ATA and Cb CR Direc t ives . It aim s
t o get a p o l it ic al agreem ent o n t h e direc t ives b y t h e end o f
it s p res idenc y (i.e., Ju ne 2016) and t o h ave Mem b er St at es
im p l em ent t h e direc t ives int o t h eir nat io nal l aw s b y t h e end o f
Dec em b er 2016.
Ho w ever, b o t h t h e Co m m is s io n and t h e Du t c h EU Pres idenc y
are p rep ared t o at l eas t reac h s o m e k ind o f agreem ent t h at
do es no t nec es s aril y inc l u de al l s ix p ro vis io ns c o nt ained in t h e
p ro p o s ed ATA Direc t ive. So it is h igh l y l ik el y t h at w e c o u l d s ee
an ATA Direc t ive agreed u p o n b y m id- 2016, b u t no t nec es s aril y
enc o m p as s ing al l p ro vis io ns in t h eir c u rrent f o rm and w it h t h e
t ec h nic al det ail s s et o u t in t h e 28 Janu ary p ro p o s al , and w it h a
requirement that the Member States implement the Directive in
a very s h o rt t im e f ram e (i.e., a m inim u m o f s ix m o nt h s ). MNEs
s h o u l d t h eref o re ex p ec t t o s ee al m o s t al l o f t h e p ro p o s ed ATA
Direc t ive p ro vis io ns , as w el l as t h e p ro p o s ed Cb CR Direc t ive, in
p l ac e b y 2017 , and s h o u l d al ready s t art p l anning t h eir c u rrent
s t ru c t u res aro u nd t h is ex p ec t at io n.
Aside from the big question of whether the Commission can
ac h ieve u nanim o u s s u p p o rt f o r t h e p ro p o s ed ATA Direc t ive,
t h ere is a p o t ent ial l y t ro u b l es o m e is s u e f o r Mem b er St at es
w h o s e nat io nal l aw s do no t c u rrent l y h ave s o m e o f t h e p ro vis io ns
called for under the Directive and would now be required to
implement them. Such a scenario raises a fundamental question
as to whether the Commission has competence to require those
Mem b er St at es t o adh ere t o t h e Direc t ive and f u rt h er h arm o niz e
t h eir c o rp o rat e t ax regim es t o o t h er Mem b er St at es ’ regim es .
lo al a
olic and ontro ers
riefing
25
Given t h e m u l t ip l e BEPS init iat ives b eing l ed b y dif f erent EU b o dies ,
t h ere are l egit im at e c o nc erns t h at al l o f t h is w o rk w il l u l t im at el y
c reat e a very u ns y s t em at ic ap p ro ac h t o t ac k l ing BEPS, w it h
all parties — the Member States, the Commission, ECOFIN, the
Eu ro p ean Parl iam ent and o t h er s t ak eh o l ders s u c h as t ax c am p aign
gro u p s — h aving vary ing int erp ret at io ns o f h o w t h e BEPS Ac t io n
Pl an rec o m m endat io ns s h o u l d b e im p l em ent ed in t h e EU.
Regarding t h e ref o rm o f t h e Co de o f Co ndu c t o n b u s ines s
taxation, ECOFIN on 8 March 2016 adopted conclusions on
enh anc ing t h e go vernanc e, t rans p arenc y and w o rk ing m et h o ds
o f t h e w o rk ing gro u p (t h e Gro u p ) res p o ns ib l e f o r o vers eeing
w h et h er t h e Mem b er St at es are in c o m p l ianc e w it h t h e Co de o f
7
Co ndu c t . In its 8 March conclusions, ECOFIN directed the Group
t o , int er al ia, devel o p gu idanc e o n t h e int erp ret at io n o f t h e
gat ew ay c rit erio n and it s ap p l ic at io n, and t o ac t ivel y u s e ex is t ing
s u b - gro u p s and es t ab l is h new s u b - gro u p s w h ere ap p ro p riat e.
ECOFIN further concluded that efficiency will be improved by
s p eeding u p t h e as s es s m ent o f p o t ent ial l y h arm f u l t ax regim es ,
with an earlier and more frequent involvement of the Council.
As s u m ing t h e Co m m is s io n did it s h o m ew o rk and rec eived a l egal
opinion that it does have such competence, the next question
is w h at h ap p ens if t h e ATA Direc t ive is im p l em ent ed b u t a
p ro vis io n ru ns c o u nt er t o t h e general o b j ec t ive o f a Mem b er
St at e’ s c o rp o rat e t ax s y s t em . Wil l t h at Mem b er St at e h ave t h e
o p t io n t o no t im p l em ent t h at p ro vis io n? If t h e ans w er is no ,
t h en t h e Co m m is s io n — as t h e w at c h do g o f t h e EU t reat ies
and secondary law — would be required to open infringement
p ro c eedings agains t a Mem b er St at e t h at f ail s t o im p l em ent t h e
Direc t ive. If t h e p ro c eedings are b ro u gh t t o t h e CJEU, and t h e
Co u rt u p h o l ds t h e Co m m is s io n’ s p o s it io n b u t t h e Mem b er St at e
s t il l ref u s es t o im p l em ent t h e Direc t ive, t h en t h at Mem b er St at e
c o u l d b e s u b j ec t t o p enal t y p ay m ent f o r eac h day it do es no t
c o m p l y w it h t h e Co u rt ’ s j u dgm ent .
ECOFIN also emphasized the need to increase the transparency
o f t h e Gro u p ’ s w o rk , inc l u ding b y h aving m o re s u b s t ant ial s ix monthly Group reports to ECOFIN and regular oral reports to
ECOFIN from the Group’s chair, and by exploring initiatives to
f u rt h er inf o rm t h e p u b l ic o n t h e res u l t s o f t h e Gro u p ’ s m eet ings .
Th e Du t c h EU Pres idenc y int ends t o h ave a dec is io n m ade b y t h e
end o f Ju ne 2016 o n t h e revis io n o f t h e Gro u p ’ s m andat e.
As f o r t h e nex t s t ep s in o t h er BEPS- rel at ed m eas u res , t h e
amendments to Directive 2011/16/EU to require automatic
ex c h ange o f inf o rm at io n regarding c ro s s - b o rder t ax ru l ings
and advanc e p ric ing arrangem ent s m ay rais e s o m e l o gis t ic al
is s u es t h at h ave t o b e res o l ved as t h e Co m m is s io n devel o p s t h e
s ec u re c ent ral direc t o ry f o r s t o ring t h e inf o rm at io n t h at w il l b e
ex c h anged. It is no t y et c l ear w h o w il l ac t u al l y b e res p o ns ib l e f o r
s et t ing u p t h e t ec h nic al devic es t h at w il l enab l e Mem b er St at es
t o u p l o ad t h e c o nt ent o f t ax ru l ings t o t h e c ent ral dep o s it o ry .
Ac c o rding t o t h e direc t ive, t h e Co m m is s io n w il l b e t as k ed w it h
m o nit o ring Mem b er St at es ’ adh erenc e t o t h e new inf o rm at io n
ex c h ange ru l es , b u t it w il l no t h ave a righ t t o ac c es s t h e c o nt ent
o f t h e ru l ings . Th at m eans t h at if t h e Co m m is s io n is invo l ved in
s et t ing u p t h e direc t o ry , s o m eo ne w il l h ave t o ens u re t h at t h e
Co m m is s io n do es no t h ave f u l l ac c es s t o t h e ent ire c o nt ent o f
t h e ru l ings .
Given t h e m u l t ip l e BEPS init iat ives b eing l ed b y dif f erent EU
b o dies , t h ere are l egit im at e c o nc erns t h at al l o f t h is w o rk w il l
u l t im at el y c reat e a very u ns y s t em at ic ap p ro ac h t o t ac k l ing BEPS,
with all parties — the Member States, the Commission, ECOFIN,
t h e Eu ro p ean Parl iam ent and o t h er s t ak eh o l ders s u c h as t ax
c am p aign gro u p s — h aving vary ing int erp ret at io ns o f h o w t h e
BEPS Ac t io n Pl an rec o m m endat io ns s h o u l d b e im p l em ent ed in
t h e EU. So m e Co m m is s io n m em b ers h ave p rivat el y f ret t ed t h at
w it h al l o f t h e dif f erent , s o m et im es o verl ap p ing init iat ives , t h e
EU is l o s ing s igh t o f t h e go al o f BEPS — t o b et t er h arm o niz e EU
Mem b er St at es ’ c o rp o rat e t ax s y s t em s . By revis ing ex is t ing t ax
Direc t ives and int ro du c ing new o nes , t h e EU ris k s j eo p ardiz ing
t h e h arm o niz at io n t h at h as b een ac h ieved s o f ar. Th at c o u l d
enc o u rage Mem b er St at es t o ado p t u nil at eral m eas u res t h at
are o veral l inc o ns is t ent w it h t h e BEPS rec o m m endat io ns , w h ic h
would make it even more difficult for the Commission to find
unanimous support by ECOFIN.
Regarding s o f t l aw m eas u res , it ap p ears t h at m u c h w o rk w il l
b e c arried o u t b y t h e Co m m is s io n in t erm s o f devel o p ing
rec o m m endat io ns o r gu idel ines o n w h at a ru l ing p ro c edu re
s h o u l d l o o k l ik e and h o w t rans p arenc y aro u nd a ru l ing s y s t em
s h o u l d o p erat e. It is p o s s ib l e t h at w e c o u l d s ee t h e Co m m is s io n
p ro p o s e a s y s t em s im il ar t o Bel giu m ’ s , w h ere ru l ings are
dis c l o s ed o n an ano ny m o u s b as is .
7
See EY Gl o b al Tax Al ert , EU Finance Ministers reach conclusions on new rules
for Code of Conduct, dat ed 14 Marc h 2016.
26
lo al a
olic and ontro ers
riefing
W hat are the potential impacts on
siness
Th e EU is no w in an u np rec edent ed s t at e o f c h ange, and
BEPS developments are moving rapidly. For the next several
y ears , it w il l b e m o re c rit ic al t h an ever t h at b u s ines s c l o s el y
m o nit o rs w h at h as b een dec ided, rec o m m ended, and
im p l em ent ed (and b y w h o m ) in o rder t o m anage w h at w il l
s u rel y b e a h igh l y u nc ert ain and c o m p l ex p erio d.
Given t h e m as s ive vo l u m e o f inf o rm at io n, p ro p o s al s , and
s t ak eh o l der s u b m is s io ns , it m igh t b e eas y f o r c o m p anies t o
lose sight of what is important and what requires immediate
ac t io n. Co m p anies s h o u l d t h eref o re c o ns ider des ignat ing an
individu al o r t eam t o m o nit o r t h e o ngo ing devel o p m ent s in
t h e Co m m is s io n and t h e Eu ro p ean Parl iam ent , as w el l as in
t h e individu al Mem b er St at es w h ere t h ey do b u s ines s .
Th e EU is no w in an u np rec edent ed
s t at e o f c h ange, and BEPS
devel o p m ent s are m o ving rap idl y .
For the next several years, it will
b e m o re c rit ic al t h an ever t h at
b u s ines s c l o s el y m o nit o rs w h at
h as b een dec ided, rec o m m ended
and im p l em ent ed (and b y w h o m )
in o rder t o m anage w h at w il l s u rel y
b e a h igh l y u nc ert ain and c o m p l ex
p erio d.
lo al a
olic and ontro ers
riefing
27
BEPS-related
developments
UK
UK Government publishes draft
legislation on hybrid and other
mismatches, issues new measures
on large business tax compliance
applicable from April or July 2016.
Ireland
Ireland adopts OECD
country-by-country
reporting.
Italy
United States
Italy issues instructions
and important clarifications
on Patent Box regime.
US Treasury and
IRS issue proposed
regulations on countryby-country reporting.
Brazil
Brazil places Dutch
holding companies without
“substantial economic
activity” back on list of
privileged tax regimes,
Congress rejects tax-planning
disclosure requirements.
28
Global Tax Policy and Controversy Briefing
Luxembourg
European Commission announces
new state aid investigation.
Denmark
Danish Parliament passes bill on
country-by-country reporting.
Russia
Russia’s bill on changes to De-offshorization
legislation addresses payment of tax by foreign
company in connection with direct or indirect
sale of immovable property in Russia
Japan
Japan announces CbCR and Master File
requirement will be applied for taxable
years beginning on or after 1 April 2016.
Local File requirement will be applicable
for taxable years beginning on or after
1 April 2017.
Australia
Australian Parliament passes Bill for
MAAL, CbC reporting and increased
penalties with wider ATO public reporting.
Israel
New Israeli legislation requires
disclosure of certain tax advice
and tax positions.
Global Tax Policy and Controversy Briefing
29
30
Global Tax Policy and Controversy Briefing
EY webcasts provide a way to
understand tax, technical and
wider business impacts of BEPS
EY has hosted a series of eight tax webcasts that will provide a comprehensive review of
the final BEPS reports and the outlook for country action. In addition, EY hosted a series
of webcasts in early 2016 that focus on the wider business implications of the BEPS
recommendations and their potential implementation. Set out below are details of the
webcasts to date. You can also use the same URL to register for business-focused webcasts
in 2016:
•
•
•
•
•
•
•
•
OECD BEPS Project Outcomes: Highlights and Next Steps (15 October)
New Reporting under BEPS Action 13 (20 October)
Digital Economy Developments and BEPS Action 1 (27 October)
Permanent Establishment Developments and BEPS Action 7 (5 November)
Transfer Pricing and BEPS Actions 8-10 (12 November)
Anti-abuse Measures under BEPS Actions 3, 5, 6 and 12 (19 November)
Financial Payments and BEPS Actions 2 and 4 (3 December)
Dispute Resolution and BEPS Action 14 (10 December)
“BEPS is broader than tax” series:
•
•
•
•
•
•
•
Mergers and acquisitions (7 January)
Impact on the operating model including intellectual property issues (14 January)
Considerations and challenges for the treasury team
Implications for financial accounting and tax compliance
Key issues for the General Counsel’s office
Changes affecting the human capital function
Overall review of key focus areas and country developments
For more information and to register for EY’s webcast series, visit
www.ey.com/webcasts
webcasts
Global Tax Policy and Controversy Briefing
31
Dec ip h ering t h e BEPS
Rec o m m endat io ns : Ho w t h e
t h ree c at ego ries o f Ac t io n
w il l drive im p l em ent at io n
The recommendations contained in the BEPS Final Reports
reflect varying degrees of consensus among the many countries
t h at c am e t o get h er in 2013, and c an general l y b e gro u p ed int o
t h ree c at ego ries :
• Bes t p rac t ic es
• Minim u m
s t andards
• Reinf o rc ed s t andards
Bu t w h at do t h es e t erm s ac t u al l y m ean, and w h at is t h eir
p o t ent ial im p ac t o n c o u nt ries w h en t h ey c o ns ider h o w and w h en
t o im p l em ent t h e BEPS rec o m m endat io ns ?
In t h e Ex p l anat o
rec o m m endat io
c o m m it m ent s m
t h e dif f erent t y p
ry St at em ent ac c o m p any ing t h e BEPS
1
ns , t h e OECD des c rib ed t h e nat u re o f t h e
ade b y t h e p art ic ip at ing c o u nt ries in devel o p ing
es o f rec o m m endat io ns :
Best practices: In areas w h ere t h e rec o m m endat io ns are in
t h e f o rm o f b es t p rac t ic es (Ac t io ns 2, 3, 4 and 12), c o u nt ries
engaged in t h e BEPS p ro j ec t h ave agreed o n a general t ax p o l ic y
direc t io n, b u t are f ree t o as s es s and p ic k f ro m t h e el em ent s o f
eac h Ac t io n t h at are m o s t s u it ed t o t h eir c u rrent t ax regim e and
t ax c o m p et it ivenes s s t rat egy . Th es e b es t p rac t ic es are ex p ec t ed
t o c o nverge o ver t im e t h ro u gh t h e im p l em ent at io n o f agreed
c o m m o n ap p ro ac h es , t h u s enab l ing f u rt h er c o ns iderat io n o f
a le
ow the
w h et h er s u c h m eas u res s h o u l d b ec o m e m inim u m
t h e f u t u re.
s t andards in
M inimum standards: Al l OECD and G20 c o u nt ries c o m m it t ed
t o a c o ns is t ent im p l em ent at io n o f t h e rec o m m endat io ns t h at
im p o s e m inim u m s t andards (Ac t io ns 5, 6, 13 and 14). Th es e
m inim u m s t andards w ere agreed f o r t h es e Ac t io n it em s b ec au s e
t h ere w ere c o nc erns t h at no ac t io n b y s o m e c o u nt ries w o u l d
h ave c reat ed negat ive s p il l o vers (inc l u ding advers e im p ac t s o f
c o m p et it ivenes s ) o n o t h er c o u nt ries . Th ere w as al s o agreem ent
f o r t arget ed m o nit o ring o f t h e m inim u m s t andards o n t reat y
s h o p p ing and o n dis p u t e res o l u t io n, t h e ap p l ic at io n o f t h e
c rit eria o n h arm f u l t ax p rac t ic es , and t h e im p l em ent at io n o f t h e
country-by-country reporting requirements.
einforced standards: For Actions 7 (Preventing the
Artificial Avoidance of Permanent Establishment Status)
and 8 - 10 (Aligning Transfer Pricing Outcomes with Value
Creation), ex is t ing OECD s t andards (i.e., Art ic l e 5 (Perm anent
2
Es t ab l is h m ent ) o f t h e OECD Mo del Tax Co nvent io n and Art ic l e
9 o f t h e 2010 Trans f er Pric ing Gu idel ines f o r Mu l t inat io nal
3
Ent erp ris es and Tax Adm inis t rat io ns , res p ec t ivel y ) h ave b een
u p dat ed and w il l b e im p l em ent ed, al t h o u gh t h e OECD no t ed
t h at no t al l BEPS p art ic ip ant s h ave endo rs ed t h e u nderl y ing
s t andards o n t ax t reat ies o r t rans f er p ric ing.
recommendations are categori ed
Minimum standards
Reinforced standards
B est practices
A ction 5 — Co u nt er h arm f u l t ax p rac t ic es
m o re ef f ec t ivel y , t ak ing int o ac c o u nt
t rans p arenc y and s u b s t anc e
A ction 7 — Prevent the artificial avoidance
o f p erm anent es t ab l is h m ent s t at u s
A ction 2 — Neu t ral iz e t h e ef f ec t s o f h y b rid
m is m at c h arrangem ent s
A ction 6 — Prevent t reat y ab u s e
A ction 8 — Trans f er p ric ing f o r int angib l es
A ction 3 — Strengthen CFC rules
A ction 1 3 — Trans 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
A ction 9 — Trans f er p ric ing f o r ris k s and
c ap it al
A ction 4 — Lim it b as e ero s io n via int eres t
deductions and other financial payments
A ction 1 4 — Mak 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
A ction 1 0 — Trans f er p ric ing f o r o t h er h igh ris k t rans ac t io ns
A ction 1 2 — Mandat o ry dis c l o s u re ru l es
2
h t t p : / / w w w .o ec d.o rg/ c t p / t reat ies / o ec d- m o del - t ax - c o nvent io n- avail ab l ep ro du c t s .h t m
1
h t t p : / / w w w .o ec d.o rg/ c t p / b ep s - ex p l anat o ry - s t at em ent - 2015.p df
3 2
lo al a
olic and ontro ers
riefing
3
h t t p : / / w w w .o ec d.o rg/ c t p / t rans f er- p ric ing/ t rans f er- p ric ing- gu idel ines .h t m
Wh il e Tab l e 1 m ay l o o k l ik e it p ro vides a
clear cut definition of how each Action is
t reat ed, it c o nc eal s o ne im p o rt ant f ac t o r —
no t every Ac t io n it em f al l s neat l y int o a
s ingl e c at ego ry ; ins t ead, s o m e Ac t io n
it em s are a c o m b inat io n o f reinf o rc ed
s t andards and m inim u m s t andards and
s o m e are a c o m b inat io n o f reinf o rc ed
s t andards and b es t p rac t ic es . So w h il e t h e
t ab l e m ay b e ac c u rat e at a h igh l evel , it
slightly oversimplifies the issue.
O EC D approval of the
reinforced standards
an additional step to
consider
Ano t h er k ey as p ec t f o r b u s ines s t o
c o ns ider is at w h at p o int t h e reinf o rc ed
s t andards ac t u al l y b ec o m e ac t ive in
p rac t ic e. Here, t h ere are t w o dim ens io ns
t o c o ns ider — t h eir ap p ro val b y t h e OECD,
and subsequently, whether they are
ado p t ed int o nat io nal l aw s “ dy nam ic al l y ”
o r “ m anu al l y .”
Formally, only the guidance is part of
t h e int erp ret at io n o f art ic l e 9 (o f t h e
OECD Mo del Tax Co nvent io n) ap p ro val
b y t h e OECD Co u nc il . Ho w ever, as
o f t h at m o m ent , t h e gu idanc e c an
ef f ec t ivel y rel at e t o t rans f er p ric ing
c as es t h at s t art ed b ef o re t h e gu idanc e
w as ap p ro ved. If t h e gu idanc e is an
int erp ret at io n o f t h e ex is t ing arm ’ s l engt h
p rinc ip l e, t h en ef f ec t ivel y t h ere m ay b e
a ret ro ac t ive ef f ec t w it h in a c o u nt ry . If
t h e new gu idanc e c o nt radic t s ex is t ing
gu idanc e, t h en t h e new gu idanc e w il l
o nl y h ave ef f ec t as o f t h e m o m ent
o f ap p ro val — s im il ar t o t h e dy nam ic
int erp ret at io n o f t h e OECD Mo del Tax
Co nvent io n. As a res u l t o f t h is , t h e
new gu idanc e c an al s o b e ap p l ied t o
ex is t ing m u t u al agreem ent p ro c edu res .
Wh et h er t h e c h anges in t h e Trans f er
Pric ing Gu idel ines h ave ef f ec t in
do m es t ic l aw , h o w ever, dep ends o n t h e
do m es t ic l egis l at io n o f a c o u nt ry (as
o u t l ined b el o w ).
Cu rrent l y , t h e OECD’ s int ent io n is t o
h ave t h e f u l l , new Trans f er Pric ing
Gu idel ines p res ent ed t o t h e OECD c o u nc il
very s o o n — h o p ef u l l y as c l o s e t o t h e
b eginning o f 2016 as p o s s ib l e. In t h at
regard, a t ax p ay er c o u l d c o nc eivab l y
argu e t h at s o l o ng as t h e Trans f er Pric ing
Gu idel ines h ave no t b een ap p ro ved b y
t h e Co u nc il , t h at f o rm al l y t h ey do n’ t
h ave ef f ec t in t h e c o u nt ries t h at adh ere
t o t h e Trans f er Pric ing Gu idel ines . At
t h e s am e t im e, if t h at is c o rrec t , t h is
w il l c h ange rap idl y w h en t h e Co u nc il
ap p ro ves t h e c h anges . In p rac t ic e, m any
c o u nt ries c o u l d p o t ent ial l y s ay t h at t h is
is clarification of the existing ALP in
art ic l e 9 and t h eref o re t h e gu idanc e is
b eing ap p l ied al ready .
o ing onto national
implementation
Po t ent ial im p l em ent at io n ap p ro ac h es
in rel at io n t o t h e reinf o rc ed s t andards
are w h ere p o t ent ial ac t io ns b y c o u nt ries
b ec o m e a l it t l e m o re c o m p l ex . Readers
m ay rec al l t h at t h e Ex p l anat o ry St at em ent
s ay s (u nder t h e h eader “ Implementation
starts now” ) t h at t h e revis io ns o f t h e
t rans f er p ric ing gu idanc e m ay h ave
im m ediat e ef f ec t . Bu t t h e p ic t u re m ay no t
b e s o c l ear at c o u nt ry l evel , w it h nat io nal
go vernm ent s t y p ic al l y t ak ing o ne o f
t h ree ro u t es :
1. Ex is t ing l egis l at io n in s o m e c o u nt ries
m ay direc t l y ref erenc e t h e OECD
s t andards , and m ay “ dy nam ic al l y ”
ado p t c h anges t h erein
2. Ex is t ing l egis l at io n in s o m e c o u nt ries
m ay direc t l y ref erenc e t h e OECD
s t andards , b u t t h e s t andards m ay b e
t reat ed as “ s o f t l aw , ” w it h t h e c o u nt ry
needing t o vo t e o n t h e ado p t io n o f t h e
s t andards int o new nat io nal l aw
3. Ex is t ing l egis l at io n in s o m e c o u nt ries
m ay no t ref erenc e t h e OECD s t andards
in any w ay , and t h e res p ec t ive
c o u nt ries w il l need t o draf t and agree
c o m p l et el y new l egis l at io n t h at c o vers
t h e am endm ent s t o t h e gu idel ines .
final iss e to consider
Finally, it is worth noting that some BEPS
rec o m m endat io ns , irres p ec t ive o f w h ic h
o f t h e t h ree ab o ve c at ego ries t h ey f al l
into, will require changes that can be
im p l em ent ed via t ax t reat ies , inc l u ding
t h ro u gh t h e m u l t il at eral ins t ru m ent .
As Jef f rey Ow ens no t es in h is review o f
Ac t io n 15 (t h e Mu l t il at eral Ins t ru m ent ),
“ ex p erienc e s u gges t s t h at t h e t im et ab l e
s et f o r t h e p ro j ec t m ay b e am b it io u s s inc e
o t h er m u l t il at eral agreem ent s in t h e t ax
area h ave t ak en t w o t o t h ree y ears t o
ac h ieve, es p ec ial l y w h ere a l arge nu m b er
o f c o u nt ries are invo l ved w h ic h h ave
dif f erent t ax s y s t em s and t ax p o l ic ies .
Ex p erienc e al s o s h o w s t h at an even
longer period might be required before
t h e m inim u m nu m b er o f c o nt rac t ing
s t at es nec es s ary f o r a m u l t il at eral
ins t ru m ent t o ent er int o f o rc e is at t ained.”
In t h at regard, b
c o ns ider t h at t h
rec o m m endat io
im p o rt ant m il es
in t h e revis io n o
arc h it ec t u re.
lo al a
u s ines s s h o u l d f u l l y
e ex is t enc e o f t h e BEPS
ns , w h il e c ert ainl y an
t o ne, is b u t o ne s t ep
f t h e c ro s s - b o rder t ax
olic and ontro ers
riefing
3 3
Disruptive
business?
Business
disruption?
The rise of the digital economy raises complex global taxation questions
and opportunities. EY tax professionals help leading companies manage their
risk, their reputation and their return on investment on their digital journey.
ey.com/digitaltax #BetterQuestions
Business and Industry Advisory
Committee to the OECD updates
BEPS position paper, issues
series of advocacy summaries
The Business and Industry Advisory Committee to the OECD (BIAC) recently
released an updated version of its BEPS Position Paper. In addition, it also
released its advocacy summaries which compile key concerns submitted by
BIAC to the OECD during the BEPS consultation process; for each concern
there is a short comment on the OECD Response, as reflected in the BEPS
Final Reports.
Currently there are advocacy summaries for Actions 3, 4, 6, 7, 11, 12, 13 and
14. The full series of advocacy summaries provide a wealth of information in
relation to commonly asked questions and concerns, and may be accessed at:
http://biac.org/focus-areas/international-taxation/
Global Tax Policy and Controversy Briefing
35
ction
1
OECD issues final report
o n t h e t ax c h al l enges
o f t h e digit al ec o no m y
u nder Ac t io n 1
Executive summary
On 5 Oc t o b er 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) released its final report on Hybrid Mismatch Arrangements under Action 2 of
its Action Plan on Base Erosion and Profit Shifting (BEPS). This report was released in a
package that included final reports on all 15 BEPS Actions.
Th e do c u m ent , Addressing the Tax Challenges of the Digital Economy (t h e Digit al
Economy Report or Final Report), largely follows the initial Action 1 deliverable on the
1
digit al ec o no m y rel eas ed b y t h e OECD o n 16 Sep t em b er 2014 (t h e 2014 Del iverab l e).
At 290 pages, the Final Report exceeds the 2014 Deliverable by 88 pages.
The Final Report provides the OECD’s conclusions regarding the digital economy and
rec o m m ended nex t s t ep s t o addres s t h e t ax c h al l enges p res ent ed b y it s evo l u t io n.
The Final Report continues to acknowledge that special rules designed exclusively for
t h e digit al ec o no m y w o u l d p ro ve u nw o rk ab l e, b ro adl y s t at ing t h at t h e digit al ec o no m y
c anno t b e ring- f enc ed b ec au s e it “ is inc reas ingl y b ec o m ing t h e ec o no m y it s el f .” Th e
Final Report summarizes key features of evolving digital business models that the OECD
considers relevant for the overall BEPS analysis; in addition, the Final Report considers
t h e b ro ader direc t and indirec t t ax c h al l enges rais ed b y t h e digit al ec o no m y and
eval u at es t h e o p t io ns t o addres s t h o s e c h al l enges .
To addres s t h e direc t t ax c h al l enges , t h e Digit al Ec o no m y Rep o rt do es no t rec o m m end
c reat ing s p ec ial ru l es ; rat h er, it s t at es t h at t h o s e c h al l enges w il l b e ef f ec t ivel y
addres s ed b y t h e w o rk c arried o u t u nder o t h er BEPS Ac t io ns .
In t h at regard, t h e Digit al Ec o no m y Rep o rt rec o m m ends :
(i)
Modifying the list of exceptions to the definition of Permanent Establishment (PE)
regarding p rep arat o ry o r au x il iary ac t ivit ies as t h ey rel at e t o a digit al enviro nm ent
and introducing new anti-fragmentation rules to deny benefits from these
ex c ep t io ns t h ro u gh t h e f ragm ent at io n o f c ert ain b u s ines s ac t ivit ies
(ii) Modifying the definition of a PE to address artificial arrangements through certain
2
“ c o nc l u s io n o f c o nt rac t s ” arrangem ent s
1
See EY Gl o b al Tax Al ert , OECD issues report on the tax challenges of the digital economy under Action 1,
dat ed 21 Sep t em b er 2014.
2
See EY Gl o b al Tax Al ert , OECD releases final report on preventing the artificial avoidance of permanent
establishment status under Action 7, dat ed 19 Oc t o b er 2015.
3 6
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A ction 1
(iii) A c o rrel at ive u p dat e t o t h e Trans f er Pric ing Gu idel ines
3
(iv) Changes to the controlled foreign company (CFC) rules
4
addressing identified challenges of the digital economy
The Final Report also addresses the indirect tax treatment
o f c ert ain digit al t rans ac t io ns , rec o m m ending t h at c o u nt ries
apply the principles of the OECD’s International Value Added
Tax and Goods and Services Tax (VAT/GST) Guidelines as well
as c o ns ider t h e int ro du c t io n o f t h e c o l l ec t io n m ec h anis m s
inc l u ded t h erein. Eac h o f t h e ab o ve rec o m m endat io ns is
dis c u s s ed in m o re det ail in t h is Al ert .
Future work in the area of Action 1 will be conducted in
c o ns u l t at io n w it h a b ro ad range o f s t ak eh o l ders , and o n t h e
b as is o f a det ail ed m andat e t o b e devel o p ed b y t h e OECD
du ring 2016 in t h e c o nt ex t o f des igning a gl o b al l y inc l u s ive
p o s t - BEPS m o nit o ring p ro c es s . A s u p p l em ent ary rep o rt
reflecting the outcome of continued work on the overall
t ax at io n o f t h e digit al ec o no m y s h o u l d b e rel eas ed b y 2020.
Th e OECD int ends t o devel o p im p l em ent at io n p ac k ages t o
enable countries to implement the OECD’s International VAT/
GST Gu idel ines in a c o o rdinat ed m anner.
3
See EY Gl o b al Tax Al ert s , OECD rel eas es new gu idanc e o n c ro s s - b o rder
c o m m o dit y t rans ac t io ns u nder BEPS Ac t io ns 8 – 10, dat ed 13 Oc t o b er 2015,
OECD issues final guidance on transfer pricing for intangibles under BEPS
Action 8, dat ed 13 Oc t o b er 2015, OECD releases final transfer pricing
guidance on risk and recognition under Actions 8–10, dat ed 13 Oc t o b er
2015, and OECD releases new guidance on transfer pricing for low valueadding intra-group services under BEPS Actions 8-10, dat ed 13 Oc t o b er
2015.
Detailed discussion
Similar to the 2014 Deliverable, the Final Report is organized
into a number of different chapters: Fundamental principles
5
o f t ax at io n (Ch ap t er 2); Inf o rm at io n and c o m m u nic at io n
t ec h no l o gy and it s im p ac t o n t h e ec o no m y (Ch ap t er 3); Th e
digit al ec o no m y , new b u s ines s m o del s and k ey f eat u res (Ch ap t er
4); Ident if y ing o p p o rt u nit ies f o r BEPS in t h e digit al ec o no m y
(Ch ap t er 5); Tac k l ing BEPS in t h e digit al ec o no m y (Ch ap t er 6);
Bro ader direc t t ax c h al l enges rais ed b y t h e digit al ec o no m y
and t h e o p t io ns t o addres s t h em (Ch ap t er 7 ); Bro ader indirec t
t ax c h al l enges rais ed b y t h e digit al ec o no m y and t h e o p t io ns
t o addres s t h em (Ch ap t er 8 ); Eval u at io n o f t h e b ro ader direc t
and indirec t t ax c h al l enges rais ed b y t h e digit al ec o no m y and
t h e o p t io ns t o addres s t h em (Ch ap t er 9 ); and Su m m ary o f t h e
c o nc l u s io ns and nex t s t ep s (Ch ap t er 10).
Th e rep o rt al s o inc l u des : Annex A, w h ic h dis c u s s es p rio r w o rk
o n t ax at io n and t h e digit al ec o no m y ; Annex B, w h ic h il l u s t rat es
t y p ic al t ax p l anning s t ru c t u res in int egrat ed b u s ines s m o del s ;
Annex C, w h ic h c o nt ains t h e t ex t o f a rep o rt o n p o s s ib l e
approaches for implementing a more efficient collection of VAT/
GST o n im p o rt s o f l o w - val u e go o ds ; Annex D, w h ic h p res ent s
Chapter 3 of the International VAT/GST Guidelines; and Annex E,
w h ic h p ro vides an o verview o f t h e ex p ec t ed ec o no m ic inc idenc e
o f t h e t h ree p ro p o s ed o p t io ns t o addres s t h e b ro ader t ax
c h al l enges o f t h e digit al ec o no m y . Annex es C, D and E w ere no t
c o nt ained in t h e 2014 Del iverab l e.
5
Ch ap t er 1, Introduction to tax challenges of the digital economy, briefly
dis c u s s es t h e b ac k gro u nd l eading t o t h e ado p t io n o f t h e BEPS Ac t io n Pl an,
inc l u ding t h e w o rk 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 .
4
See EY Gl o b al Tax Al ert , OECD releases final report on CFC rules under
BEPS Action 3, dat ed 11 Oc t o b er 2015.
lo al a
olic and ontro ers
riefing
3 7
A ction 1
Em erging t ec h no l o gies (s u c h as Int ernet o f Th ings ,
virt u al c u rrenc ies , ro b o t ic s , and 3D p rint ing) are al s o
identified and underscore that the landscape is still
m o ving rap idl y , t h eref o re m ak ing it a c h al l enge t o
ant ic ip at e al l p o t ent ial is s u es .
F undamental principles of taxation
The Final Report starts by examining overarching tax policy
c o ns iderat io ns t h at h ave t radit io nal l y gu ided t h e devel o p m ent
of taxation systems. The Final Report makes reference to
the Ottawa Taxation Framework Conditions of Neutrality,
Efficiency, Certainty and Simplicity, Effectiveness and Fairness,
and Flexibility.
Following the discussion of tax policy considerations, the Final
Rep o rt go es o n t o des c rib e t h e t y p ic al f o rm s o f t ax at io n o n
inc o m e and c o ns u m p t io n. Th is inc l u des an o verview o f t h e
p rinc ip l es u nderl y ing c o rp o rat e inc o m e t ax es in t h e c o nt ex t o f
both domestic law and tax treaties, as well as an overview of VAT
systems. The Final Report addresses the taxation of cross-border
income through a discussion of CFC rules, the potential for
do u b l e t ax at io n in t h e al l o c at io n o f c ro s s b o rder inc o m e, and t h e
ru l es rel at ed t o t h e t ax at io n o f PE’ s u nder t ax t reat ies .
I nformation and communication
technolog and the emergence of new
business models
Th e Digit al Ec o no m y Rep o rt inc l u des a dis c u s s io n o f t h e
evo l u t io n and ex p ans io n o f inf o rm at io n and c o m m u nic at io n
t ec h no l o gy (ICT) ac ro s s t h e ec o no m y , t h e k ey f eat u res o f t h e
new b u s ines s m o del s t h at h ave em erged as a res u l t o f t h is
evo l u t io n, and t h eir im p ac t o n t h e ec o no m y . Bu il ding o n t h is
discussion, the Final Report identifies some key trends in the
evo l u t io n o f ICT and new b u s ines s m o del s t h at are view ed as
c o nt rib u t ing t o t h e t ax c h al l enges o f t h e digit al ec o no m y . Th e
f o l l o w ing f eat u res are no t ed as ex am p l es o f new b u s ines s m o del s
res u l t ing f ro m t h e evo l u t io n o f ICT:
• E- c o m m erc e (inc l u ding b u s ines s - t o - b u s ines s , b u s ines s - t o c o ns u m er, and c o ns u m er- t o - c o ns u m er m o del s )
• Ap p s t o res
• Onl ine advert is ing
• Cl o u d c o m p u t ing (inc l u ding inf ras t ru c t u re- as - a- s ervic e,
p l at f o rm - as - a- s ervic e, s o f t w are- as - a- s ervic e, c o nt ent - as - as ervic e, and dat a- as - a- s ervic e)
The Final Report identifies the key features of the digital
ec o no m y and new b u s ines s m o del s t h at are p o t ent ial l y rel evant
f ro m a t ax p ers p ec t ive as :
• Mo b il it y , inc l u ding m o b il it y o f int angib l es o n w h ic h t h e digit al
ec o no m y rel ies , m o b il it y o f u s ers o f t h e digit al ec o no m y , and
m o b il it y o f b u s ines s f u nc t io ns res u l t ing f ro m a dec reas ed need
for local personnel to perform functions as well as flexibility to
c h o o s e t h e l o c at io n o f s ervers o r o t h er res o u rc es
• Rel ianc e o n dat a (c o l l ec t io n, anal y s is and s t o rage)
• Net w o rk ef f ec t s (u nders t o o d w it h ref erenc e t o w h ere u s er
p art ic ip at io n, int egrat io n and s y nergies are im p o rt ant )
• Us e o f m u l t i- s ided b u s ines s m o del s (a b u s ines s m o del in w h ic h
t h e t w o s ides o f t h e m ark et m ay b e in dif f erent j u ris dic t io ns
and int erac t t h ro u gh an int erm ediary o r p l at f o rm inc reas ing
flexibility and reach)
• A t endenc y t o w ard m o no p o l y o r o l igo p o l y in c ert ain b u s ines s
m o del s
• Volatility (resulting from relatively low barriers to entry and
rap idl y evo l ving t ec h no l o gy )
Em erging t ec h no l o gies (s u c h as Int ernet o f Th ings , virt u al
currencies, robotics, and 3D printing) are also identified and
u nders c o re t h at t h e l ands c ap e is s t il l m o ving rap idl y , t h eref o re
m ak ing it a c h al l enge t o ant ic ip at e al l p o t ent ial is s u es .
dentif ing planning opport nities and
tac ling
in the digital econom
The Final Report states that the Task Force on the Digital
6
Ec o no m y (the Task Force) discussed how some of the tax and
l egal s t ru c t u res u s ed t o im p l em ent b u s ines s m o del s in t h e
digit al ec o no m y c an c reat e BEPS p l anning o p p o rt u nit ies . Th e
Final Report notes that while many strategies used by digital
b u s ines s es m ay b e s im il ar t o t h o s e u s ed b y m o re t radit io nal
b u s ines s es , s o m e o f t h e k ey f eat u res o f t h e digit al ec o no m y m ay
ex ac erb at e BEPS ris k s in t h e c o nt ex t o f b o t h direc t and indirec t
taxation. The Final Report illustrates how planning strategies in a
direc t t ax s et t ing t ak e advant age o f t h o s e k ey f eat u res and h o w
the digital economy places pressure on VAT systems.
• Pay m ent s ervic es
• High frequency trading
• Part ic ip at ive net w o rk ed p l at f o rm s
3 8
lo al a
olic and ontro ers
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6
A gro u p w it h in t h e OECD res p o ns ib l e f o r w o rk w it h res p ec t t o Ac t io n 1.
A ction 1
The Final Report states that the work developed under
o t h er BEPS Ac t io ns t o o k int o ac c o u nt t h e digit al
ec o no m y ’ s k ey f eat u res t o ens u re t h at t h e p ro p o s ed
s o l u t io ns ef f ec t ivel y addres s BEPS in t h e digit al s p ac e.
In t h e c o nt ex t o f direc t t ax at io n, t h e Digit al Ec o no m y Rep o rt
p ro vides m o re det ail o n t h e f o u r c o re el em ent s o f p l anning
strategies identified in the OECD’s February 2013 report
Addressing Base Erosion and Profit Shifting:
• Minim iz at io n o f t ax at io n in t h e m ark et (s o u rc e) c o u nt ry
(t h ro u gh t h e m inim iz at io n o f f u nc t io ns , as s et s and ris k s
o r o t h er avo idanc e o f a t ax ab l e p res enc e b y c o nt rac t u al l y
al l o c at ing ris k and l egal o w ners h ip o f int angib l es , o r in t h e
case of a taxable presence, by shifting profits or maximizing
dedu c t io ns )
• Redu c t io n o r el im inat io n o f w it h h o l ding t ax at s o u rc e
• Redu c t io n o r el im inat io n o f t ax at io n at t h e l evel o f t h e
rec ip ient (ac h ieved t h ro u gh l o w - t ax j u ris dic t io ns , p ref erent ial
regim es , o r h y b rid m is m at c h arrangem ent s ) w it h ent it l em ent
to substantial non-routine profits often built-up via intra-group
arrangem ent s
• Elimination of current taxation of low-tax profits at the level of
t h e u l t im at e p arent
The Final Report states that the work developed under other
BEPS Ac t io ns t o o k int o ac c o u nt t h e digit al ec o no m y ’ s k ey
f eat u res t o ens u re t h at t h e p ro p o s ed s o l u t io ns ef f ec t ivel y
addres s BEPS in t h e digit al s p ac e. It no t es t h at w h il e al l o f t h e
BEPS rec o m m endat io ns w il l t ac k l e t h e c h al l enges rais ed b y t h e
digit al ec o no m y b y res t o ring t ax at io n o n “ s t at el es s ” inc o m e, t h e
deliverables regarding CFC rules (Action 3); artificial avoidance
o f PE (Ac t io n 7 ); and t rans f er p ric ing (Ac t io ns 8 t h ro u gh 10) w il l
b e p art ic u l arl y rel evant .
In the context of indirect taxation, the Final Report identifies the
t ax p l anning o p p o rt u nit ies t h at m ay b e c reat ed w h en c o u nt ries
do not fully implement the OECD’s international VAT/GST
Guidelines for the collection of VAT on cross-border business-toc o ns u m er s u p p l ies and s ervic es and int angib l es . BEPS c o nc erns
could therefore arise in two types of VAT transactions:
• Remote supply of digital goods and services to VAT exempt
b u s ines s es
• Rem o t e s u p p l y o f digit al go o ds and s ervic es t o a c ent ral iz ed
l o c at io n f o r res u p p l y w it h in a m u l t inat io nal gro u p no t s u b j ec t
to VAT
The Final Report concludes that implementing Guidelines 2
and 4 of the OECD’s international VAT/GST Guidelines will
m inim iz e t h o s e p l anning o p p o rt u nit ies .
ddressing the roader ta challenges raised
the digital econom and potential options to
address those challenges
The Final Report discusses the broader, more systemic direct tax
and indirec t t ax c h al l enges and eval u at es p o t ent ial o p t io ns t o
addres s t h o s e c h al l enges .
Direct taxation
In the area of direction taxation, the Final Report identifies the
t h ree m ain t ax p o l ic y c o nc erns rais ed b y t h e digit al ec o no m y :
• Nexus — Ability to have significant digital presence without
b eing l iab l e t o t ax
• Dat a — Ho w t o at t rib u t e val u e c reat ed f ro m t h e generat io n o f
dat a t h ro u gh digit al p ro du c t s and s ervic es and det erm ining t h e
share of profit attributable to these value drivers
• Ch arac t eriz at io n — Pro p er c h arac t eriz at io n o f inc o m e in t h e
c o nt ex t o f new b u s ines s m o del s
In rel at io n t o t h e ab o ve c h al l enges , t h e Digit al Ec o no m y Rep o rt
s et s o u t k ey rec o m m endat io ns in a nu m b er o f areas , c ent ering
o n t h e f o l l o w ing:
(1) Perm anent es t ab l is h m ent
Regarding the modification of the PE rules, the Final
Rep o rt s t at es t h at it w as agreed u nder t h e w o rk c arried
o u t in rel at io n t o Ac t io n 7 t o m o dif y t h e l is t o f ex c ep t io ns
to the definition of PE in Article 5(4) of the OECD Model
Tax Co nvent io n (OECD Mo del ) t o ens u re t h at eac h o f t h e
ex c ep t io ns inc l u ded t h erein is res t ric t ed t o ac t ivit ies t h at are
o f a “ p rep arat o ry o r au x il iary ” c h arac t er, and t o int ro du c e a
new ant i- f ragm ent at io n ru l e t o ens u re t h at it is no t p o s s ib l e
to benefit from these exceptions through the fragmentation
o f b u s ines s ac t ivit ies am o ng c l o s el y rel at ed ent erp ris es .
The Final Report provides an example describing how the
m aint enanc e o f a very l arge l o c al w areh o u s e, in w h ic h
a significant number of employees work for purposes of
lo al a
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3 9
A ction 1
The Final Report also noted that improvements
in ICT h ave ac c el erat ed t h e s p read o f gl o b al val u e
c h ains , t h ereb y enab l ing m u l t inat io nal c o m p anies t o
b ec o m e m o re int egrat ed and b et t er ab l e t o m ax im iz e
o p p o rt u nit ies in a gl o b al ec o no m y .
s t o ring and del ivering go o ds s o l d o nl ine t o c u s t o m ers b y
an o nl ine s el l er o f p h y s ic al p ro du c t s (w h o s e b u s ines s m o del
relies on the proximity to customers and the need for quick
del ivery t o c l ient s ), w o u l d c o ns t it u t e a PE f o r t h at s el l er.
So m e c o u nt ries , h o w ever, b el ieve t h ere is no need t o m o dif y
Art ic l e 5(4) and t h at t h e l is t o f ex c ep t io ns in s u b p aragrap h s
a) t o d) o f Art ic l e 5(4) s h o u l d no t b e s u b j ec t t o t h e c o ndit io n
t h at t h e ac t ivit ies ref erred t o in t h o s e s u b p aragrap h s b e o f
a p rep arat o ry o r au x il iary c h arac t er. Th o s e c o u nt ries m ay
ado p t a dif f erent vers io n o f Art ic l e 5(4) as l o ng as t h ey
inc l u de t h e new ant i- f ragm ent at io n ru l e. Th e c h anges t o
the definition of PE in the OECD Model are included in the
document Preventing the Artificial Avoidance of Permanent
Establishment Status, Action 7: 2015 Final Report. The
OECD ex p ec t s t h e new ru l es t o b e im p l em ent ed ac ro s s t h e
existing tax treaty network in a synchronized and efficient
m anner via t h e c o nc l u s io n o f t h e m u l t il at eral ins t ru m ent
7
that modifies bilateral tax treaties under BEPS Action 15.
(3) A c o rrel at ive u p dat e t o t h e OECD’ s Trans f er Pric ing
Gu idel ines
In t h e c o nt ex t o f t h e OECD’ s w o rk o n t rans f er p ric ing in
Ac t io ns 8 - 10, it w as no t ed t h at c o m p anies in t h e digit al
ec o no m y rel y h eavil y o n int angib l es in c reat ing val u e and
p ro du c ing inc o m e and t h at m any BEPS s t ru c t u res ado p t ed
b y p art ic ip ant s in t h e digit al ec o no m y invo l ve t h e t rans f er
o f int angib l es o r righ t s in int angib l es t o t ax - advant aged
l o c at io ns , c o u p l ed w it h t h e p o s it io n t h at t h es e c o nt rac t u al
al l o c at io ns (t o get h er w it h l egal o w ners h ip o f int angib l es )
j u s t if y l arge al l o c at io ns o f inc o m e t o t h e ent it y al l o c at ed t h e
ris k even if it p erf o rm s l it t l e o r no b u s ines s ac t ivit y .
The Final Report also noted that improvements in ICT have
ac c el erat ed t h e s p read o f gl o b al val u e c h ains , t h ereb y
enab l ing m u l t inat io nal c o m p anies t o b ec o m e m o re
int egrat ed and b et t er ab l e t o m ax im iz e o p p o rt u nit ies in
a global economy. The Final Report states that attention
s h o u l d b e devo t ed t o t h e im p l ic at io ns o f t h is inc reas ed
int egrat io n and t h e need f o r great er rel ianc e o n val u e c h ain
analyses and transactional profit split methods.
(2) Modifying the definition of a PE to address artificial
arrangem ent s t h ro u gh c ert ain “ c o nc l u s io n o f
c o nt rac t s ” arrangem ent s
In addit io n t o t h e ab o ve c h anges w it h in Ac t io n 7 , t h e
OECD also agreed to modify the definition of PE in Article
5(5) and 5(6) to address circumstances in which artificial
arrangem ent s rel at ing t o t h e s al es o f go o ds o r s ervic es o f
o ne c o m p any in a m u l t inat io nal gro u p ef f ec t ivel y res u l t in
t h e c o nc l u s io n o f c o nt rac t s , s u c h t h at t h e s al es s h o u l d b e
t reat ed as if t h ey h ad b een m ade b y t h at c o m p any .
It w as c o nc l u ded t h at t h e BEPS w o rk in t h e area o f t rans f er
p ric ing t o o k t h o s e is s u es int o ac c o u nt u nder t h e revis io ns t o
t h e gu idanc e o n int angib l es and t h e agreem ent t o f u rt h er
examine the practical application of transactional profit split
methods. The Final Report notes that the latter work will
t ak e t h e Ac t io n 1 c o nc l u s io ns int o ac c o u nt and w il l addres s
the application of transactional profit split methods to
h igh l y int egrat ed b u s ines s o p erat io ns , as w el l as addres s ing
9
s it u at io ns w h ere t h e avail ab il it y o f c o m p arab l es is l im it ed.
The Final Report sets out a second example to illustrate
t h is c o nc ep t , des c rib ing a s c enario w h ere t h e s al es f o rc e
o f a l o c al s u b s idiary o f an o nl ine s el l er o f t angib l e p ro du c t s
o r an o nl ine p ro vider o f advert is ing s ervic es h ab it u al l y
p l ay s t h e p rinc ip al ro l e in t h e c o nc l u s io n o f c o nt rac t s w it h
p ro s p ec t ive l arge c l ient s f o r t h o s e p ro du c t s o r s ervic es , and
t h o s e c o nt rac t s are ro u t inel y c o nc l u ded w it h o u t m at erial
modification by the parent company. That activity would
8
res u l t in a PE f o r t h e p arent c o m p any .
7
For more information, see EY Global Tax Alert, OECD releases final report on
developing a multilateral instrument to modify bilateral tax treaties under BEPS
Action 15, dat ed 10 Oc t o b er 2015.
8
See EY Gl o b al Tax Al ert , OECD releases final report on preventing the
artificial avoidance of permanent establishment status under Action 7, dat ed
19 Oc t o b er 2015.
4 0
lo al a
olic and ontro ers
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9
See EY Gl o b al Tax Al ert s , OECD releases new guidance on cross-border
commodity transactions under BEPS Actions 8–10, dat ed 13 Oc t o b er 2015,
OECD issues final guidance on transfer pricing for intangibles under BEPS Action
8, dat ed 13 Oc t o b er 2015, OECD releases final transfer pricing guidance on
risk and recognition under Actions 8–10, dat ed 13 Oc t o b er 2015, and OECD
releases new guidance on transfer pricing for low value-adding intra-group
services under BEPS Actions 8-10, dat ed 13 Oc t o b er 2015.
A ction 1
The report states that although CFC rules vary
significantly from jurisdiction to jurisdiction,
inc o m e f ro m digit al go o ds and s ervic es p ro vided
remotely is frequently not subject to current
taxation under CFC rules.
(4) CFC rules
(5) Op t io ns t h at w ere c o ns idered b u t no t rec o m m ended
The Final Report notes that the work on designing effective
CFC rules under BEPS Action 3 may also contribute
t o res t o ring t ax at io n in t h e j u ris dic t io n o f t h e u l t im at e
p arent c o m p any .
The Task Force also considered several options to address
t h e b ro ader t ax c h al l enges rais ed b y t h e digit al ec o no m y .
No ne o f t h e f o l l o w ing addit io nal o p t io ns w ere rec o m m ended
at t h is s t age:
The report states that although CFC rules vary significantly
f ro m j u ris dic t io n t o j u ris dic t io n, inc o m e f ro m digit al go o ds
and services provided remotely is frequently not subject
to current taxation under CFC rules. Such income may be
p art ic u l arl y m o b il e du e t o t h e im p o rt anc e o f int angib l es in
t h e p ro vis io n o f s u c h go o ds and s ervic es and t h e rel at ivel y
few people required to carry out online sales activities.
• A new nexus test in the form of a significant economic
presence requirement
Th e OECD w o rk o n BEPS Ac t io n 3 res u l t ed in
rec o m m endat io ns in t h e f o rm o f s ix b u il ding b l o c k s ,
including a definition of CFC income which sets out a
no n- ex h au s t ive l is t o f ap p ro ac h es o r a c o m b inat io n o f
approaches that CFC rules could use for such a definition.
In t h e c o nt ex t o f Ac t io n 1, t h e Rep o rt s t at es t h at c o u nt ries
may implement those approaches to design CFC rules
t h at w o u l d s u b j ec t inc o m e t h at is t y p ic al l y earned in
t h e digit al ec o no m y t o t ax at io n in t h e j u ris dic t io n o f t h e
ultimate parent company. For instance, countries could use
the categorical analyses to define CFC income to include
t y p es o f revenu e t y p ic al l y generat ed in digit al ec o no m y
t rans ac t io ns , s u c h as l ic ens e f ees and c ert ain t y p es o f
inc o m e f ro m s al es o f digit al go o ds and s ervic es . If c o u nt ries
adopted the excess profits approach, this could characterize
any “excess profits” generated in low-tax jurisdictions,
which may include profits attributable to IP-related assets,
as CFC income. This approach could potentially limit the
u s e o f o f f s h o re def erral s t ru c t u res p o p u l ar w it h digit al
economy multinational companies that indefinitely defer
f o reign inc o m e f ro m t ax at io n in t h e res idenc e j u ris dic t io n.
Bo t h ap p ro ac h es m ay b e c o m b ined w it h a s u b s t anc e
analysis aimed at verifying whether the CFC is engaged in
10
s u b s t ant ial ac t ivit ies .
• A w it h h o l ding t ax o n c ert ain t y p es o f digit al t rans ac t io ns
• An equalization levy
While these options were not recommended, the Final
Rep o rt do es s t at e t h at c o u nt ries c o u l d int ro du c e any o f
t h em in t h eir do m es t ic l aw s as addit io nal s af egu ards agains t
BEPS, p ro vided t h ey res p ec t ex is t ing t reat y o b l igat io ns ,
o r inc l u de t h em in t h eir b il at eral t ax t reat ies . Ado p t io n as
domestic law measures would require further calibration of
t h e o p t io ns in o rder t o p ro vide addit io nal c l arit y ab o u t t h e
det ail s , as w el l as s o m e adap t at io n t o ens u re c o ns is t enc y
w it h ex is t ing int ernat io nal l egal c o m m it m ent s .
A det erm inat io n w il l b e m ade b y t h e OECD as t o w h et h er
f u rt h er w o rk o n t h e ab o ve o p t io ns s h o u l d b e c arried
o u t . Th is det erm inat io n w il l b e b as ed o n a b ro ad l o o k at
t h e ab il it y o f ex is t ing int ernat io nal t ax s t andards t o deal
w it h t h e t ax c h al l enges rais ed b y devel o p m ent s in t h e
digit al ec o no m y .
10
See EY Gl o b al Tax Al ert , OECD releases final report on CFC rules under BEPS
Action 3, dat ed 11 Oc t o b er 2015.
lo al a
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4 1
A ction 1
Th e Digit al Ec o no m y Rep o rt no t es t h at t h e c o nc l u s io ns
m ay evo l ve as t h e digit al ec o no m y c o nt inu es t o devel o p ,
w h ic h m eans it w il l b e im p o rt ant f o r c o u nt ries t o m o nit o r
devel o p m ent s in t h e digit al ec o no m y and t o review and
anal y z e dat a t h at w il l b ec o m e avail ab l e o ver t im e.
I ndirect taxation
Next steps
In the context of indirect taxation, the Final Report identifies
as t h e m ain p o l ic y c o nc erns t h e ab il it y o f p rivat e c o ns u m ers t o
acquire goods, services and intangibles from remote suppliers,
and t h e u s e o f ex em p t io ns f o r im p o rt s o f l o w - val u e go o ds .
Th e Digit al Ec o no m y Rep o rt no t es t h at t h e c o nc l u s io ns
m ay evo l ve as t h e digit al ec o no m y c o nt inu es t o devel o p ,
w h ic h m eans it w il l b e im p o rt ant f o r c o u nt ries t o m o nit o r
devel o p m ent s in t h e digit al ec o no m y and t o review and anal y z e
data that will become available over time. The Final Report
states that continual monitoring will enable the Task Force
t o as s es s t h e ex t ent o f t h e b ro ader direc t t ax c h al l enges and
det erm ine w h et h er f u t u re w o rk o n t h e t h ree addit io nal o p t io ns
s h o u l d b e c arried o u t .
The Final Report recommends that countries apply the
principles of the International VAT/GST Guidelines and consider
int ro du c ing t h e c o l l ec t io n m ec h anis m s inc l u ded in t h o s e
gu idel ines .
The Task Force agreed that follow-up work will be carried out
in c o ns u l t at io n w it h s t ak eh o l ders and o n t h e b as is o f a det ail ed
m andat e t h at w il l b e devel o p ed du ring 2016 in t h e c o nt ex t o f
des igning a gl o b al l y - inc l u s ive p o s t - BEPS m o nit o ring p ro c es s .
The Task Force will produce a report reflecting the outcome of
t h e c o nt inu ed w o rk o n t h e digit al ec o no m y b y 2020.
In addit io n, OECD Wo rk ing Part y 1 w il l c l arif y t h e
c h arac t eriz at io n u nder c u rrent t ax t reat y ru l es o f s o m e
p ay m ent s m ade u nder new b u s ines s m o del s , p art ic u l arl y c l o u d
c o m p u t ing p ay m ent s . Th e OECD w il l devel o p im p l em ent at io n
p ac k ages t o ens u re t h at c o u nt ries c an im p l em ent t h e
International VAT/GST Guidelines in a coordinated manner.
4 2
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A ction 1
I mplications
Wh il e t h ere s t il l rem ain c ert ain areas o f
dis agreem ent am o ng s t ak eh o l ders (e.g., im p o rt
o f dat a in driving val u e f o r t ax p u rp o s es ), t h e
Final Report shows there is consensus that
m o re w o rk s h o u l d b e do ne in a variet y o f areas ,
inc l u ding addres s ing PE is s u es in t h e digit al
ec o no m y and c o ns u m p t io n t ax es o n b u s ines s - t o c o ns u m er t rans ac t io ns .
In l igh t o f t h e int erac t io n am o ng al l t h e f o c u s
areas in t h e BEPS Ac t io n Pl an, t h e OECD’ s w o rk
o n t h e t ax at io n is s u es w it h in t h e digit al ec o no m y
w il l c o nt inu e int o 2015 and b ey o nd. Ho w ever,
c o u nt ries are al ready t ak ing nat io nal ac t io n w it h
res p ec t t o t h e t ax t reat m ent o f ac t ivit y in t h e
digit al ec o no m y . Co m p anies s h o u l d t h eref o re
c o ns ider p u t t ing in p l ac e o r inc reas ing t h eir
ef f o rt s t o m o nit o r c h ange at b o t h m u l t il at eral
and nat io nal l evel s .
Th e im p l ic at io ns o f t h e Digit al Ec o no m y Rep o rt
and t h e o u t l o o k f o r ac t io n f o c u s ed o n t h e digit al
ec o no m y in j u ris dic t io ns aro u nd t h e w o rl d w il l b e
t h e f o c u s o f an u p c o m ing EY gl o b al t ax w eb c as t
(t h e t h ird in a s eries o f w eb c as t s o n BEPS
devel o p m ent s ), w it h f u rt h er inf o rm at io n and
regis t rat io n det ail s o n t h e f o l l o w ing p age.
E Y contacts
For additional information concerning this Alert,
p l eas e c o nt ac t :
• Int ernat io nal Tax Servic es
Gl o b al Tec h no l o gy Sec t o r
San Jo s e, CA
• Channing Flynn
+ 1 408 9 47 5435
channing.flynn@ey.com
• Int ernat io nal Tax Servic es
Gl o b al Tec h no l o gy Sec t o r
San Francisco, CA
• St ep h en Bat es
+ 1 415 8 9 4- 8 19 0
s t ep h en.b at es @ ey .c o m
• Jes s Mart in
+ 1 415 8 9 4- 4450
j es s .m art in@ ey .c o m
• Erns t & Y o u ng LLP
Int ernat io nal Tax Servic es
Was h ingt o n, DC
• Ro b Th o m as
+ 1 202 327 6053
ro b .t h o m as @ ey .c o m
lo al a
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4 3
BEPS Ac t io n 1:
Anal y s is
In Oc t o b er 2015, t h e OECD c o nc l u ded m o re
t h an t w o y ears o f del ib erat io ns w h en t h e
group released their final report under (Action
1) o f t h e BEPS Ac t io n Pl an. Th e do c u m ent ,
Addressing the Tax Challenges of the Digital
Economy (t h e Digit al Ec o no m y Rep o rt o r
Final Report) acknowledges that special rules
des igned ex c l u s ivel y f o r t h e digit al ec o no m y
w o u l d p ro ve u nw o rk ab l e.
hanning lynn
+ 1 212 7 7 3 7 064
c h anning.f l y nn@ ey .c o m
hat is the action tr ing
to achie e
Th e Digit al Ec o no m y Rep o rt is t arget ing al l eged
taxpayer abuses. For example, Annex B of
t h e 29 0 p age do c u m ent il l u s t rat es l egal and
t ax s t ru c t u res t h at p l ac e p res s u re o n t h e
ex is t ing int ernat io nal t ax f ram ew o rk . Wh il e t h e
t radit io nal t ax ing p aradigm c al c u l at es l iab il it y
in p art b y anal y z ing f u nc t io ns , as s et s and ris k s ,
t h is inc o m e t ax f ram ew o rk is c h al l enged b y t h e
f o l l o w ing digit al ec o no m y f eat u res — and m o re:
• E- c o m m erc e (inc l u ding B2B, B2C, and C2C
m o del s )
T odd S cherz er
+ 1 212 7 7 3 7 064
t o dd.s c h erz er@ ey .c o m
• Ap p s t o res
• Onl ine advert is ing
• Cl o u d c o m p u t ing
Es s ent ial l y , t h e BEPS rep o rt s , inc l u ding t h e
Ac t io n 1 rep o rt , are int ended t o res t o re t ax o n
“ s t at el es s ” inc o m e derived b y digit al l y ac t ive
c o m p anies . Th e rep o rt s u gges t s t h e l im it ing o f
offshore deferral or profit shifting via enhanced
CFC rules (Action 3); prevent the artificial
avo idanc e o f PE (Ac t io n 7 ); and inc reas e
s c ru t iny in s it u at io ns w h ere t rans f er p ric ing h as
shifted profits to low-tax jurisdictions (Actions 8
t h ro u gh 10). In t h e c o nt ex t o f indirec t t ax at io n,
the Final Report urges individual countries to
im p l em ent Gu idel ines 2 and 4 o f t h e OECD’ s
international VAT/GST guidelines in order to
m inim iz e t ax p l anning o p p o rt u nit ies .
4 4
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W ere any of the action
recommendations
ne pected
The OECD’s Task Force on the Digital Economy
(or TFDE, the OECD body tasked with
devel o p ing Ac t io n 1) h ad a s u b s t ant ial p ro j ec t
in f ro nt o f t h em b ec au s e evo l u t io nary b u s ines s
m o del s (b ey o nd t h e e- c o m m erc e is s u es o f
t h e 19 9 0’ s ) are b eing dis ru p t ed, w it h new
ex am p l es c ro p p ing u p eac h day . Meanw h il e,
t h e OECD is u nder p res s u re f ro m im p at ient
nat io n- s t at es t ro u b l ed b y a redu c t io n o f inc o m e
t h ey f eel is a res u l t o f BEPS, t h e “ s h aring
ec o no m y , ” “ c l o u d c o m p u t ing, ” and t h e s p read
o f “ digit al c u rrenc ies .”
Although the TFDE considered the adoption
of — (i) a new nexus in the form of significant
ec o no m ic p res enc e; (ii) a w it h h o l ding t ax
o n c ert ain t y p es o f digit al t rans ac t io ns ;
or (iii) an equalization levy, none of these
recommendations were made in the Final
Report. Likewise, the Final Report dismissed
a m u l t i- f ac t o r ap p o rt io nm ent t es t w h ic h c o u l d
h ave ac t ed as a s af e h arb o r.
I s there any interaction
between this action and the
others
The Final Report states that the work developed
u nder o t h er BEPS Ac t io ns t o o k int o ac c o u nt
t h e digit al ec o no m y ’ s k ey f eat u res t o ens u re
t h at t h e p ro p o s ed s o l u t io ns ef f ec t ivel y addres s
BEPS in t h e digit al s p ac e. Ch ap t er s ix no t es
t h at Ac t io n it em s 3, 7 , 8 , 9 , and 10 w il l addres s
is s u es rais ed in t h e digit al ec o no m y .
Ac t io n 1 rec o m
BEPS w it h in t h
(Bes t p rac t ic es
8 - 10 (Reinf o rc
m ends t h at c o u nt ries addres s
e digit al ec o no m y via Ac t io ns 3
), 7 (Reinf o rc ed s t andards ) and
ed s t andards ).
See p age 32 f o r m o re inf o rm at io n.
1
a e an co ntries made specific
comments in relation to this action
Ac t io n it em s 3, 7 , 8 , 9 , 10. Here, t h ere is no t y et a c l ear p ic t u re,
and readers are direc t ed t o review t h e art ic l es and ins igh t s o f m y
c o l l eagu es o n eac h o f t h o s e Ac t io ns .
Wh il e m any j u ris dic t io ns are p u t t ing in p l ac e new l egis l at io n
w h ic h w il l gu arant ee a m inim u m am o u nt o f t ax , o t h er
jurisdictions are taking a longer term approach. For example,
in 2012 France set up a task force on the taxation of the digital
ec o no m y w h ic h c o nc l u ded t h at t h ere is a c l ear l ink b et w een t ax
and dat a- u s e is s u es . Nevert h el es s , t h e m ain m es s age c o nvey ed
by the French report was that in the digital economy, the notion
of a fixed place of business is not relevant for determining the
p l ac e w h ere t h e s u b s t anc e o f a b u s ines s ac t ivit y is c arried o n.
As a result of this report, the French Tax Authority (FTA) has
inc reas ed t h e nu m b er o f t ec h c o m p any au dit s and o f t en p u s h es
these cases into the French court system — by arguing that the
taxpayer has a French PE.
The second dimension addresses VAT measures. Here we saw
m any c o u nt ries al ready m o ve in t h is direc t io n, w el l ah ead o f t h e
Final Report’s recommendations. Many continue to adopt new
VATs and we expect that number to grow in 2016.
Irel and al s o s u p p o rt s t h e BEPS init iat ive, b u t f ro m a dif f erent
angl e. Th e Iris h go vernm ent h as no t h idden t h e f ac t t h at t h ey
are k een t o ex p l o it t h e BEPS rep o rt t o im p ro ve t h eir int ernat io nal
competitiveness. For example, the Irish government is
c o m m it t ed t o t h e 12.5% t ax rat e and rec ent l y int ro du c ed new
depreciation and IP box regimes intended to increase FDI.
His t o ric al l y c ap it al and t ec h no l o gy im p o rt ers , Lat in Am eric an
c o u nt ries (p art ic u l arl y Mex ic o and Braz il ), s t ro ngl y s u p p o rt BEPS
initiative and the recommendation derived therefrom. Faced
w it h t ax p ay ers rel o c at ing t h eir val u ab l e int angib l es du ring t h e
l at e 9 0’ s and t h e earl y 2000’ s m any Lat in Am eric an j u ris dic t io ns
h ave al ready enac t ed and im p l em ent ed s everal s p ec ial regim es
t o p revent b as e ero s io n s c h em es . Th es e inc l u de: t rans f er p ric ing
rules, CFC regimes, thin capitalization standards, and in some
c as es , general ant i- avo idanc e ru l es . In f ac t , du ring t h e p ro c es s
o f enac t ing t ax ref o rm f o r y ear 2014, s everal BEPS ins p ired
s t at u t es w ere dis c u s s ed and p as s ed t h ro u gh t h e Mex ic an
Co ngres s (even agains t t h e OECD rec o m m endat io n w h ic h c l earl y
asked the member countries to wait for the final reports).
Au s t ral ia and t h e Unit ed Kingdo m , m eanw h il e, h ave b o t h p u t in
p l ac e t ax l egis l at io n w h ic h is des igned t o t ac k l e w h at t h e UK h as
described as “Diverted Profits.”
hat s going to happen ne t, and how
niform might implementation e
Po t ent ial im p l em ent at io n o f Ac t io n 1 rec o m m endat io ns f al l s
across two distinct dimensions. The first dimension relates to
t h o s e digit al t ax rec o m m endat io ns em b edded w it h in BEPS
As with all complex concepts, a final point on implementation
addres s es w h at c o u l d b e des c rib ed as “ o u t l iers ” — t h o s e
c o u nt ries ado p t ing addit io nal m eas u res , s u c h as no vel
w it h h o l ding t ax es o r c o nc ep t s o f digit al p erm anent
es t ab l is h m ent .
Co ns ider t h e view o f j u ris dic t io ns l ik e Ho ng Ko ng and Singap o re.
Wit h c o m p arat ivel y l o w t ax rat es , t h e t w o is l and nat io ns are
c o m m o n j u ris dic t io ns f o r e- c o m m enc e p rinc ip al c o m p anies
which tend to capture a relatively bigger share of profits. Under
t h es e c irc u m s t anc es , b o t h Ho ng Ko ng and Singap o re w o u l d s t il l
h ave t o p ay at t ent io n t o t h e rel evant BEPS rec o m m endat io ns b u t
p ro b ab l y f ro m a dif f erent p ers p ec t ive.
W hat are the potential impacts on
siness
Wit h al l t h is u nc ert aint y , o ne t h ing is c l ear: As ent erp ris es m o ve
t o w ard a digit al s u p p l y c h ain, t ax direc t o rs need t o b e c o gniz ant
o f new l egis l at io n t arget ing p erc eived ab u s es o f c o m m o n t ax
o p erat ing m o del s . An advis ed ap p ro ac h f o r t ax direc t o rs t o t ak e
is t o ens u re t h at t h e f u nc t io ns s u p p o rt ing IP (dep ending o n t h e
b u s ines s ) c an b e ac c u rat el y art ic u l at ed, and are s u p p o rt ed b y
t h e p eo p l e f u nc t io ns at t h e IP o w ner.
It is no t u nreas o nab l e t o ex p ec t digit al l y - ac t ive c o m p anies t o
f ac e a gradu al ris e in t h eir ef f ec t ive t ax rat e (ETR) o ver t h e
s h o rt t o m ediu m t erm . Ent it ies s h o u l d review t h eir c u rrent
DEMPE (Des ign, Enh anc e, Mark et , Pro t ec t and Ex p l o it ) f u nc t io n
m o del (s ), c o ns idering w h et h er t h eir ex is t ing IP s t ru c t u res are
s u s t ainab l e. Bu s ines s es s h o u l d as s es s and c aref u l l y m anage t h e
digit al el em ent s o f t h e s u p p l y c h ain, ens u ring it is do c u m ent ed
and as s es s ed f ro m a digit al t ax p ers p ec t ive. Th is w il l p ro b ab l y
require a deeper dive into the digital supply chain than most
tax directors have hitherto undertaken. On a final note, tax
dep art m ent s m u s t c o nt inu e t o im p ro ve t h eir o w n ado p t io n o f
int ernal digit al t ec h no l o gies — as t h e m o re ef f ec t ive c o l l ec t io n
and remittance of GST and VAT is a key part of the Action 1
rec o m m endat io ns , and t h u s , p o t ent ial s o u rc e o f t ax ris k .
lo al a
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4 5
ction
2
OECD releases final report
o n Hy b rid Mis m at c h
Arrangem ent s u nder
Ac t io n 2
Executive summary
On 5 Oc t o b er 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) released its final report on Hybrid Mismatch Arrangements under Action 2 of
its Action Plan on Base Erosion and Profit Shifting (BEPS). This report was released in a
package that included final reports on all 15 BEPS Actions.
The final report on Action 2, Neutralizing the Effect of Hybrid Mismatch Arrangements
1
(the Final Report), supersedes the interim report that was released in September 2014
(the 2014 report). Similar to the 2014 report, the Final Report consists of two parts
with detailed recommendations to address hybrid mismatch arrangements and reflects
t h e c o ns ens u s ac h ieved o n t h es e is s u es . Part I c o nt ains rec o m m endat io ns o n do m es t ic
l aw ru l es t o addres s h y b rid m is m at c h arrangem ent s . Part II c o nt ains rec o m m ended
c h anges t o t h e OECD Mo del Tax Co nvent io n.
The recommendations in Part I include “specific recommendations” and “hybrid
mismatch rules.” The specific recommendations are modifications to provisions of
do m es t ic l aw aim ed at avo iding h y b rid m is m at c h es and ac h ieving al ignm ent b et w een
t h o s e do m es t ic l aw p ro vis io ns and t h eir int ended t ax p o l ic y o u t c o m es (e.g., b y
no t ap p l y ing a dividend ex em p t io n at t h e l evel o f t h e p ay ee f o r p ay m ent s t h at are
dedu c t ib l e at t h e l evel o f t h e p ay er).
Th e h y b rid m is m at c h ru l es are l ink ing ru l es aim ed at neu t ral iz ing o ne o f t h e
f o l l o w ing t h ree m is m at c h es in t ax o u t c o m es aris ing o u t o f c ert ain h y b rid
m is m at c h arrangem ent s :
• Pay m ent s t h at give ris e t o a dedu c t io n w it h no t ax ab l e inc l u s io n aris ing f ro m a h y b rid
financial instrument (including a hybrid transfer), a disregarded payment made by a
h y b rid ent it y o r a p ay m ent m ade t o a revers e h y b rid
• Pay m ent s t h at give ris e t o a do u b l e dedu c t io n aris ing f ro m
m ade b y a h y b rid ent it y o r a du al res ident
a dedu c t ib l e p ay m ent
• Pay m ent s t h at give ris e t o an indirec t dedu c t io n w it h no inc l u s io n aris ing f ro m
im p o rt ed m is m at c h
Th e h y b rid m is m at c h ru l es are divided int o a p rim ary res p
a s ec o ndary o r def ens ive ru l e. Th e def ens ive ru l e o nl y ap p
m is m at c h ru l e in t h e c o u nt erp art y j u ris dic t io n o r w h ere t h
t h e p art ic u l ar ent it y o r arrangem ent . Eac h o f t h e h y b rid m
specified scope of application.
1
an
o ns e and, w h ere ap p l ic ab l e,
l ies w h ere t h ere is no h y b rid
e ru l e is no t ap p l ied t o
is m at c h ru l es h as it s o w n
See EY Gl o b al Tax Al ert , OECD releases report under BEPS Action 2 on hybrid mismatch arrangements,
dat ed 24 Sep t em b er 2014.
4 6
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A ction 2
In a significant expansion from the 2014 report, the
recommendations in Part I of the Final Report have been
s u p p l em ent ed w it h f u rt h er gu idanc e and a w ide array o f
det ail ed ex am p l es t o ex p l ain t h e o p erat io n o f t h e ru l es .
Some outstanding issues that were identified in the 2014
rep o rt are addres s ed, s u c h as t h e t reat m ent o f s t o c k l ending
and s al e and rep u rc h as e t rans ac t io ns , t h e t reat m ent o f
no n- int eres t b earing l o ans and t h e t reat m ent o f b ranc h
s t ru c t u res w it h in t h e h y b rid m is m at c h arrangem ent c at ego ry
for hybrid financial instruments.
In addition, the Final Report includes new and detailed
gu idanc e o n h o w t o t reat a p ay m ent t h at is inc l u ded u nder a
controlled foreign corporation (CFC) regime. Significant new
gu idanc e o n t h e o p erat io n o f t h e im p o rt ed m is m at c h ru l e is
p ro vided as w el l , w h ic h inc l u des t h ree t rac ing and p rio rit y
ru l es t o det erm ine t h e ex t ent t o w h ic h a p ay m ent s h o u l d b e
t reat ed as s et - o f f agains t a dedu c t io n u nder an im p o rt ed
m is m at c h arrangem ent .
Part II of the Final Report focuses on changes to be made
t o t h e OECD Mo del Tax Co nvent io n in addres s ing Ac t io n 2.
It c o m p l em ent s Part I and deal s w it h t h e p art s o f Ac t io n 2
t h at indic at e t h at t h e o u t p u t s o f t h e w o rk o n t h at ac t io n it em
m ay inc l u de c h anges t o t h e OECD Mo del Tax Co nvent io n
t o ens u re t h at h y b rid ins t ru m ent s and ent it ies , as w el l as
dual resident entities, are not used to obtain the benefits of
t reat ies u ndu l y . It no t es t h at s p ec ial at t ent io n s h o u l d b e given
t o t h e int erac t io n b et w een p o s s ib l e c h anges t o do m es t ic
l aw and t h e p ro vis io ns o f t h e OECD Mo del Tax Co nvent io n.
Furthermore, Part II specifically examines treaty issues related
t o du al res ident ent it ies , inc l u des a p ro p o s al f o r a new t reat y
p ro vis io n deal ing w it h t rans p arent ent it ies and addres s es
t h e is s u e o f t h e int erac t io n b et w een t h e rec o m m endat io ns
included in Part I of the Final Report and the provisions of
t ax t reat ies .
The Final Report recommends that every jurisdiction
int ro du c e al l t h e ru l es c o nt ained in t h e rep o rt and t h at
j u ris dic t io ns c o o p erat e o n m eas u res t o ens u re t h es e ru l es are
im p l em ent ed and ap p l ied c o ns is t ent l y and ef f ec t ivel y .
Detailed discussion
art
ecommendations for
domestic law
The recommended hybrid mismatch rules set out in the Final
Rep o rt are des igned t o t arget p art ic u l ar arrangem ent s t h at give
ris e t o t h e f o l l o w ing o u t c o m es :
i.
Pay m ent s t h at give ris e t o a dedu c t io n/ no inc l u s io n o u t c o m e
(D/ NI o u t c o m e) (i.e., p ay m ent s t h at are dedu c t ib l e u nder
t h e ru l es o f t h e p ay er j u ris dic t io n and are no t inc l u ded in t h e
o rdinary inc o m e o f t h e p ay ee) — Rec o m m endat io ns 1- 5 deal
w it h s u c h D/ NI o u t c o m es
ii.
Pay m ent s t h at give ris e t
o u t c o m e) (i.e., p ay m ent s
res p ec t o f t h e s am e p ay m
deal w it h s u c h DD o u t c o m
o a do u b l e dedu c t io n o u t c o m e (DD
t h at give ris e t o t w o dedu c t io ns in
ent ) — Rec o m m endat io ns 6 and 7
es
iii. Pay m ent s t h at give ris e t o an indirec t D/ NI o u t c o m e (i.e.,
p ay m ent s t h at are dedu c t ib l e u nder t h e ru l es o f t h e p ay er
j u ris dic t io n and t h at are s et - o f f b y t h e p ay ee agains t
a dedu c t io n u nder a h y b rid m is m at c h arrangem ent ) —
Rec o m m endat io n 8 deal s w it h s u c h indirec t D/ NI o u t c o m es
ecommendation
instrument rule
rid financial
The hybrid financial instrument rule under Recommendation 1
applies to three particular types of financing arrangements as
f o llo w s :
i.
Arrangements that are treated as debt, equity or derivative
contracts under local law (“financial instruments”)
ii.
Arrangements involving the transfer of financial instruments
w h ere dif f erenc es in t h e t ax t reat m ent o f t h at arrangem ent
result in the same financial instrument being treated as held
b y m o re t h an o ne t ax p ay er (“ h y b rid t rans f ers ” )
iii. Arrangements involving the transfer of financial instruments
where a payment is made in substitution for the financing
or equity return on the transferred asset and differences
b et w een t h e t ax t reat m ent o f t h at p ay m ent and t h e
u nderl y ing ret u rn o n t h e ins t ru m ent h ave t h e net ef f ec t o f
undermining the integrity of the hybrid financial instrument
ru l e (“ s u b s t it u t e p ay m ent s ” )
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4 7
A ction 2
Th e c at ego ry o f h y b rid t rans f ers is a no t ab l e addit io n c o m p ared
to the 2014 report and is defined as being any arrangement
to transfer a financial instrument where, as a consequence of
t h e ec o no m ic s o f t h e t rans ac t io n and t h e w ay it is s t ru c t u red,
t h e l aw s o f t w o j u ris dic t io ns t ak e o p p o s ing view s o n w h o is t h e
o w ner o f t h e u nderl y ing ret u rn o n t h e t rans f erred as s et .
With respect to a payment made under a financial instrument
t h at res u l t s in a h y b rid m is m at c h and a s u b s t it u t e p ay m ent
under an arrangement to transfer a financial instrument, the
hybrid financial instrument rule recommends as a primary
res p o ns e t h at t h e p ay er j u ris dic t io n deny a dedu c t io n f o r s u c h
p ay m ent t o t h e ex t ent it gives ris e t o a D/ NI o u t c o m e. If t h e
p ay er j u ris dic t io n do es no t neu t ral iz e t h e m is m at c h , t h en t h e
payee jurisdiction will require such payment to be included in
o rdinary inc o m e t o t h e ex t ent t h e p ay m ent gives ris e t o a D/ NI
o u t c o m e. Th is is t h e def ens ive ru l e.
Dif f erenc es in t h e t im ing o f t h e rec o gnit io n o f p ay m ent s w il l
no t b e t reat ed as giving ris e t o a D/ NI o u t c o m e f o r a p ay m ent
made under a financial instrument, provided the taxpayer can
es t ab l is h t o t h e s at is f ac t io n o f a t ax au t h o rit y t h at t h e p ay m ent
w il l b e inc l u ded as o rdinary inc o m e w it h in a reas o nab l e p erio d
of time. Furthermore, differences in tax outcomes that are solely
at t rib u t ab l e t o dif f erenc es in t h e val u e as c rib ed t o a p ay m ent
(inc l u ding t h ro u gh t h e ap p l ic at io n o f t rans f er p ric ing) do no t f al l
w it h in t h e s c o p e o f t h e ru l e.
It is stated that the hybrid financial instrument rule only applies
w h ere t h e m is m at c h in t ax t reat m ent is at t rib u t ab l e t o t h e
t erm s o f t h e ins t ru m ent (e.g., ap p l ic at io n o f dif f erent ac c o u nt ing
p o l ic ies t o t h e s am e ins t ru m ent ) rat h er t h an t h e s t at u s o f t h e
taxpayer or the context in which the instrument is held. For
example, the hybrid financial instrument rule should not apply
t o a p ay m ent m ade t o a t ax - ex em p t rec ip ient if t h is t ax - ex em p t
s t at u s is t h e o nl y reas o n f o r t h e D/ NI o u t c o m e.
Furthermore, it is noted that the scope of the rule would
b e l im it ed t o p ay m ent s m ade t o rel at ed p ers o ns and u nder
s t ru c t u red arrangem ent s t o w h ic h t h e t ax p ay er is a p art y .
These operative terms are defined in recommendations 10
and 11 of the Final Report.
In t erm s o f ex c ep t io ns t o t h e ru l e, in c ert ain c irc u m s t anc es t h e
p rim ary ru l e s h o u l d no t ap p l y t o a p ay m ent m ade b y c ert ain
ent it ies w h ere t h e t ax p o l ic y o f t h e dedu c t io n u nder t h e l aw s
o f t h e p ay er j u ris dic t io n is t o p res erve t ax neu t ral it y f o r t h e
p ay er and p ay ee. A nu m b er o f ex am p l es are c it ed, inc l u ding t h e
ex am p l e o f a m u t u al f u nd o r real es t at e inves t m ent t ru s t t h at h as
t h e righ t , u nder do m es t ic l aw , t o dedu c t dividends in o rder t o
p res erve it s t ax neu t ral it y — s u c h dedu c t ib l e dividend p ay m ent s ,
it is no t ed, general l y s h o u l d no t give ris e t o a h y b rid m is m at c h
under the hybrid financial instrument rule. It is noted, however,
t h at t h e def ens ive ru l e w o u l d c o nt inu e t o ap p l y t o any s u c h
p ay m ent o n rec eip t .
4 8
lo al a
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In det erm ining t h e t y p e o f p ay m ent s t arget ed u nder t h e h y b rid
financial instrument rule, it is important to note that the
definition of “payment” for the purposes of the Final Report
specifically excludes payments that are only deemed to be made
f o r t ax p u rp o s es . Th eref o re, t h e ru l e w o u l d no t ap p l y t o an
adjustment resulting from a deemed interest charge on equity.
In addition, the Final Report includes two specific examples
c o nc erning int eres t - f ree l o an arrangem ent s , s h o w ing a
dif f erenc e in t reat m ent f o r s it u at io ns in w h ic h a b o rro w er — f o r
t ax ac c o u nt ing p u rp o s es — ac c ru es a deem ed dis c o u nt o n an
int eres t f ree l o an and s it u at io ns w h ere a b o rro w er c l aim s a
(deem ed) dedu c t io n f o r t ax p u rp o s es as if it h ad p aid int eres t o n
t h e l o an at a m ark et rat e. Th e l at t er arrangem ent do es no t f al l
within the scope of the hybrid financial instrument rule, because
t h ere is no p ay m ent u nder t h e l o an t h at gives ris e t o a dedu c t io n
in t h e b o rro w er’ s t errit o ry . Th e addit io nal det ail ed anal y s is s et
o u t in t h e ex am p l e no t es t h at a dedu c t io n t h at aris es in res p ec t
o f an am o u nt t h at is no t c ap ab l e o f b eing p aid is no t c o ns idered
a “payment” for the purposes of applying the rule. For the
arrangem ent w h ere a b o rro w er s p l it s t h e l o an p ay ab l e int o t w o
s ep arat e c o m p o nent s f o r t ax ac c o u nt ing p u rp o s es (i.e., a l o an
treated as having been issued at a discount and a deemed equity
c o nt rib u t io n) and t h ere is an ac c ru al f o r t h e deem ed dis c o u nt o n
t h e int eres t - f ree l o an, no dedu c t io n s h o u l d b e avail ab l e t o t h e
b o rro w er in rel at io n t o t h e ac c ru al o f t h e deem ed dis c o u nt .
Th e c at ego ry o f h y b rid t rans f ers is a no t ab l e addit io n c o m p ared
to the 2014 report and is defined as being any arrangement
to transfer a financial instrument where, as a consequence of
t h e ec o no m ic s o f t h e t rans ac t io n and t h e w ay it is s t ru c t u red,
t h e l aw s o f t w o j u ris dic t io ns t ak e o p p o s ing view s o n w h o is t h e
o w ner o f t h e u nderl y ing ret u rn o n t h e t rans f erred as s et . Th e
Final Report recommends that jurisdictions treat hybrid transfers
as financial instruments within the scope of the hybrid financial
ins t ru m ent ru l e. Hy b rid t rans f ers inc l u de s al e and re- p u rc h as e
(rep o ) t rans ac t io ns and s ec u rit y l ending t rans ac t io ns w h ere
t h e righ t s and o b l igat io ns o f t h e p art ies are s t ru c t u red in s u c h
a way that the transferor remains exposed to the financing or
equity return on the financial instrument transferred under
t h e arrangem ent . A nu m b er o f det ail ed ex am p l es s et t ing o u t
the application of the hybrid financial instrument rule to such
t rans ac t io n t y p es — p art ic u l arl y w it h res p ec t t o t raders — are
included in the Final Report.
A ction 2
Al s o c o ns idered in s o m e det ail u nder Rec o m m endat io n I o f t h e
Final Report is the application of the hybrid financial instrument
ru l e in a s c enario w h ere c ert ain m ec h anis m s o f t ax rel ief s u c h
as (p art ial ) ex em p t io n, (p art ial ) c redit and rat e redu c t io n are in
p l ay . In t h o s e c as es , t h e am o u nt o f t h e dedu c t io n t h at s h o u l d
b e denied s h o u l d general l y b e no m o re t h an is nec es s ary t o
el im inat e t h e m is m at c h in t ax o u t c o m es and a dedu c t io n s h o u l d
c o nt inu e t o b e al l o w ed t o t h e ex t ent t h e p ay m ent is s u b j ec t
t o t ax in t h e p ay ee j u ris dic t io n at t h e f u l l rat e. A nu m b er o f
ex am p l es il l u s t rat ing p art ial ex em p t io n/ c redit and redu c ed rat e
scenarios are included in the Final Report.
A no t ab l e area o f gu idanc e and c o m m ent ary w it h res p ec t t o
Rec o m m endat io n 1 inc l u des gu idanc e o n t h e t reat m ent o f
payments that are included under a CFC regime. A payment that
h as b een f u l l y at t rib u t ed t o a p arent (o r t h e u l t im at e p arent ) o f
the group under a CFC regime and has been subject to tax at the
f u l l rat e s h o u l d b e t reat ed as h aving b een inc l u ded in o rdinary
inc o m e f o r t h e p u rp o s es o f t h e revers e h y b rid ru l e.
In addit io n t o t h e ex am p l es ref erenc ed ab o ve, a w ide nu m b er o f
other detailed examples are also included in the Final Report.
ecommendation
pecific recommendations
for the ta treatment of financial instr ments
This section sets out specific recommendations for changes to
the tax treatment of cross-border financial instruments in order
t o p revent h y b rid m is m at c h es f ro m aris ing.
First, it is recommended that countries do not grant a dividend
exemption or equivalent tax relief for dividend payments that
are t reat ed as dedu c t ib l e b y t h e p ay er. Th is rec o m m endat io n
only affects payments that would otherwise qualify for dividend
exemption or equivalent tax relief and does not deal with other
t y p es o f no n- inc l u s io n s u c h as a p ay m ent t h at is t reat ed as a
ret u rn o f c ap it al .
Sec o nd, in o rder t o p revent du p l ic at io n o f t ax c redit s u nder a
hybrid transfer, the Final Report recommends limiting the ability
o f a t ax p ay er t o c l aim rel ief f ro m f o reign w it h h o l ding t ax o n
ins t ru m ent s t h at are h el d s u b j ec t t o a h y b rid t rans f er. In ef f ec t ,
under this recommendation, the benefit of any tax credits would
b e res t ric t ed in p ro p o rt io n t o t h e net t ax ab l e inc o m e o f t h e
rec ip ient t ax p ay er u nder t h e arrangem ent .
Su p p l em ent ary gu idanc e and a nu m b er o f det ail ed ex am p l es
w it h res p ec t t o t h e ab o ve rec o m m endat io ns are al s o inc l u ded in
the Final Report. There is no limitation of scope with regard to
t h e ap p l ic at io n o f Rec o m m endat io n 2.
ecommendation
payments rule
isregarded h
rid
Under t h e dis regarded h y b rid p ay m ent s ru l e, a nu m b er o f
rec o m m endat io ns deal w it h t h e s it u at io n w h ere a h y b rid p ay er
m ak es a dedu c t ib l e p ay m ent u nder t h e l aw s o f t h e p ay er
j u ris dic t io n t h at is dis regarded u nder t h e l aw s o f t h e p ay ee
j u ris dic t io n. Su c h a ru l e c o u l d, f o r ex am p l e, ap p l y t o a h o l ding
c o m p any (in Co u nt ry A) t h at l ends t o a direc t s u b s idiary
(in Co u nt ry B), w h ere t h e direc t s u b s idiary is t reat ed as a
dis regarded (t rans p arent ) ent it y f o r t ax p u rp o s es in Co u nt ry A
but is treated as a separate (opaque) entity for tax purposes in
Co u nt ry B.
Th e p rim ary rec o m m endat io n u nder t h e dis regarded h y b rid
p ay m ent s ru l e c al l s f o r deny ing a dedu c t io n f o r s u c h a p ay m ent
t o t h e ex t ent t h at it gives ris e t o a D/ NI o u t c o m e. And u nder
t h e rec o m m ended def ens ive ru l e, t h e p ay ee j u ris dic t io n w o u l d
require such a payment to be included in ordinary income to the
ex t ent t h at t h e p ay m ent gives ris e t o a D/ NI o u t c o m e.
The Final Report goes on to note that no mismatch will arise to
t h e ex t ent t h at t h e dedu c t io n in t h e p ay er j u ris dic t io n is s et o f f
agains t inc o m e inc l u ded in o rdinary inc o m e o f b o t h t h e p ay er’ s
and p ay ee’ s j u ris dic t io ns (i.e., du al inc l u s io n inc o m e) and t h at
any dedu c t io n t h at ex c eeds t h e am o u nt o f du al inc l u s io n inc o m e
m ay b e el igib l e f o r s et o f f agains t du al inc l u s io n inc o m e in
ano t h er p erio d.
Th e dis regarded h y b rid p ay m ent s ru l e w il l o nl y ap p l y w h en
a h y b rid p ay er m ak es a dis regarded p ay m ent , and t h e ru l e
is l im it ed in s c o p e t o p art ies w it h in t h e s am e c o nt ro l gro u p
(as defined in Recommendation 11) or where the payment
is made under a structured arrangement (as defined in
Rec o m m endat io n 10) t o w h ic h t h e t ax p ay er is a p art y .
Su p p l em ent ary gu idanc e and a nu m b er o f det ail ed ex am p l es
in rel at io n t o t h e dis regarded h y b rid p ay m ent s ru l e al s o are
included in the Final Report.
lo al a
olic and ontro ers
riefing
4 9
A ction 2
ecommendation
e erse h
rid r le
Th e revers e h y b rid ru l e s eek s t o addres s D/ NI o u t c o m es aris ing
f ro m p ay m ent s m ade t o a revers e h y b rid. A revers e h y b rid is any
p ers o n t h at is t reat ed as a s ep arat e ent it y b y an inves t o r and as
t rans p arent u nder t h e l aw s o f t h e t errit o ry in w h ic h t h e p ers o n
is es t ab l is h ed.
Wit h res p ec t t o a p ay m ent m ade t o a revers e h y b rid t h at res u l t s
in a h y b rid m is m at c h , t h e revers e h y b rid ru l e rec o m m ends t h at
t h e p ay er j u ris dic t io n deny a dedu c t io n f o r s u c h p ay m ent t o t h e
ex t ent t h at it gives ris e t o a D/ NI o u t c o m e. It is f u rt h er no t ed t h at
a p ay m ent w il l res u l t in a h y b rid m is m at c h if a m is m at c h w o u l d
no t h ave aris en h ad t h e ac c ru ed inc o m e b een p aid direc t l y t o
t h e inves t o r.
In t erm s o f s c o p e, t h e revers e h y b rid ru l e o nl y ap p l ies w h ere t h e
inves t o r, t h e revers e h y b rid and t h e p ay er are m em b ers o f t h e
same control group (as defined in Recommendation 11) or if the
payment is made under a structured arrangement (as defined in
Rec o m m endat io n 10) t o w h ic h t h e p ay er is a p art y .
Su p p l em ent ary gu idanc e and a nu m b er o f det ail ed ex am p l es
in rel at io n t o t h e revers e h y b rid ru l e are al s o inc l u ded in t h e
Final Report.
ecommendation
pecific recommendations
for the tax treatment of reverse hybrids
This section includes three specific recommendations in relation
t o t h e t ax t reat m ent o f revers e h y b rids and rec o m m ended
im p ro vem ent s t h at j u ris dic t io ns c o u l d m ak e t o t h eir do m es t ic
law in order to reduce the frequency of hybrid mismatches.
As noted, the specific recommendations are not hybrid
m is m at c h ru l es .
First, it is recommended that jurisdictions introduce or amend
their offshore investment or CFC regimes in order to prevent D/
NI o u t c o m es f ro m aris ing w it h res p ec t t o p ay m ent s t o a revers e
h y b rid. As p art o f t h is rec o m m endat io n, it is al s o s u gges t ed t h at
j u ris dic t io ns c o ns ider int ro du c ing o r m ak ing c h anges t o s u c h
regim es in rel at io n t o im p o rt ed m is m at c h arrangem ent s .
Second, it is recommended that domestic tax laws be modified to
ens u re t h at a revers e h y b rid is t reat ed as a res ident t ax p ay er o f
t h e j u ris dic t io n o f o rganiz at io n if it s inc o m e is no t t ax ed in t h at
5 0
lo al a
olic and ontro ers
riefing
j u ris dic t io n and t h e ac c ru ed inc o m e o f t h e no nres ident inves t o r
al s o is no t t ax ed u nder t h e l aw s o f t h e inves t o r j u ris dic t io n.
Th is rec o m m endat io n ef f ec t ivel y enc o u rages j u ris dic t io ns t o
“ t u rn o f f ” t h eir t ax t rans p arenc y ru l es w h ere t h o s e ru l es are
p rim aril y u s ed t o ac h ieve h y b rid m is m at c h es .
Th ird, it is rec o m m ended t h at j u ris dic t io ns s h o u l d int ro du c e
improved tax filing and information reporting requirements in
rel at io n t o t ax t rans p arent ent it ies t h at are es t ab l is h ed w it h in
t h at j u ris dic t io n. Su c h a rec o m m endat io n s h o u l d as s is t t ax p ay ers
and t ax adm inis t rat io ns in m ak ing a p ro p er, m o re inf o rm ed,
det erm inat io n o f t h e p ay m ent s t h at h ave b een at t rib u t ed t o t h e
no nres ident inves t o r t h at h o l ds t h e revers e h y b rid.
Su p p l em ent ary gu idanc e and c o m m ent ary in rel at io n t o t h e
above recommendations are also included in the Final Report.
ecommendation
payments rule
ed cti le h
rid
Th e dedu c t ib l e h y b rid p ay m ent s ru l e u nder Rec o m m endat io n 6
ap p l ies t o a h y b rid p ay er t h at m ak es a p ay m ent t h at is dedu c t ib l e
u nder t h e l aw s o f t h e p ay er j u ris dic t io n and t h at al s o t riggers a
du p l ic at e dedu c t io n in t h e p arent j u ris dic t io n.
Th e rec o m m ended ru l es u nder t h e dedu c t ib l e h y b rid p ay m ent s
ru l e are f o r t h e p arent j u ris dic t io n t o deny a du p l ic at e dedu c t io n
f o r s u c h p ay m ent t o t h e ex t ent it gives ris e t o a DD o u t c o m e.
Th is is t h e p rim ary res p o ns e. Th e def ens ive ru l e, if t h e p arent
j u ris dic t io n do es no t neu t ral iz e t h e m is m at c h , is f o r t h e p ay er
j u ris dic t io n t o deny t h e dedu c t io n f o r s u c h p ay m ent t o t h e ex t ent
t h at t h e p ay m ent gives ris e t o a DD o u t c o m e.
No m is m at c h w il l aris e t o t h e ex t ent t h at a dedu c t io n is s et - o f f
agains t inc o m e t h at is inc l u ded in inc o m e u nder t h e l aw o f b o t h
t h e p arent and p ay er j u ris dic t io ns (i.e., du al inc l u s io n inc o m e).
Furthermore, it is noted that any deduction that exceeds the
am o u nt o f t h e du al inc l u s io n inc o m e (i.e., t h e ex c es s dedu c t io n)
m ay b e el igib l e f o r s et - o f f agains t du al inc l u s io n inc o m e in
ano t h er p erio d. In o rder t o p revent s t randed l o s s es , t h e ex c es s
dedu c t io n m ay b e al l o w ed t o t h e ex t ent t h at t h e t ax p ay er c an
es t ab l is h , t o t h e s at is f ac t io n o f t h e t ax adm inis t rat io n, t h at
t h e ex c es s dedu c t io n in t h e o t h er j u ris dic t io ns c anno t b e s et o f f agains t inc o m e o f any p ers o n u nder t h e l aw s o f t h e o t h er
j u ris dic t io n t h at is no t du al inc l u s io n inc o m e.
A ction 2
Th e o verriding o b j ec t ive o f t h e im p o rt ed m is m at c h ru l e
is t o m aint ain t h e int egrit y o f t h e o t h er h y b rid m is m at c h
ru l es b y rem o ving any inc ent ive f o r m u l t inat io nal
gro u p s t o ent er int o h y b rid m is m at c h arrangem ent s .
A p ers o n w il l b e t reat ed as a h y b rid p ay er in res p ec t o f a
p ay m ent t h at is dedu c t ib l e u nder t h e l aw s o f t h e p ay er
j u ris dic t io n w h ere t h e p ay er is no t a res ident o f t h e p ay er
j u ris dic t io n and t h e p ay m ent t riggers a du p l ic at e dedu c t io n f o r
t h at p ay er (o r a rel at ed p ers o n) u nder t h e l aw s o f t h e j u ris dic t io n
w h ere t h e p ay er is res ident (t h e p arent j u ris dic t io n) o r w h ere
t h e p ay er is res ident in t h e p ay er j u ris dic t io n and t h e p ay m ent
t riggers a du p l ic at e dedu c t io n f o r an inves t o r in t h at p ay er (o r
a rel at ed p ers o n) u nder t h e l aw s o f t h e o t h er j u ris dic t io n (t h e
p arent j u ris dic t io n).
The Final Report goes on to state that the deductible hybrid
p ay m ent s ru l e o nl y ap p l ies t o a dedu c t ib l e p ay m ent m ade b y a
h y b rid p ay er and s u c h p ay m ent res u l t s in a h y b rid m is m at c h .
Wh il e t h ere is no l im it at io n o n s c o p e in res p ec t o f t h e
rec o m m ended p rim ary res p o ns e, t h e def ens ive ru l e o nl y ap p l ies
if t h e p art ies t o t h e m is m at c h are in t h e s am e c o nt ro l gro u p o r
w h ere t h e m is m at c h aris es u nder a s t ru c t u red arrangem ent and
t h e t ax p ay er is p art y t o t h at s t ru c t u red arrangem ent .
Su p p l em ent ary gu idanc e and a nu m b er o f det ail ed
ex am p l es in rel at io n t o t h e dedu c t ib l e h y b rid p ay m ent s ru l e
recommendations are also included in the Final Report.
ecommendation
al resident pa er r le
Th e du al - res ident p ay er ru l e u nder Rec o m m endat io n 7 ap p l ies
w h ere t h e p ay er is a du al res ident and m ak es a p ay m ent t h at
is dedu c t ib l e u nder t h e l aw o f b o t h j u ris dic t io ns and t h at DD
o u t c o m e res u l t s in a h y b rid m is m at c h . Th e rec o m m ended
ru l e u nder t h e du al - res ident p ay er ru l e is f o r eac h res ident
j u ris dic t io n t o deny a dedu c t io n f o r s u c h p ay m ent t o t h e ex t ent
it gives ris e t o a DD o u t c o m e. Rec o m m endat io ns w it h res p ec t t o
du al inc l u s io n inc o m e and s t randed l o s s es are s im il ar t o t h o s e
m ade u nder Rec o m m endat io n 6.
Th e ru l e o nl y ap p l ies t o dedu c t ib l e p ay m ent s m ade b y a
du al res ident , and t h at a t ax p ay er w il l b e a du al res ident if
it is res ident f o r t ax p u rp o s es u nder t h e l aw s o f t w o o r m o re
j u ris dic t io ns . Th e du al - res ident p ay er ru l e w il l o nl y ap p l y t o
p ay m ent s t h at res u l t in a h y b rid m is m at c h . A h y b rid m is m at c h
w il l aris e w h ere a dedu c t io n f o r a p ay m ent m ay b e s et - o f f , u nder
t h e l aw s o f t h e o t h er j u ris dic t io n, agains t inc o m e t h at is no t du al
inc l u s io n inc o m e.
Su p p l em ent ary gu idanc e and an ex am p l e in rel at io n t o t h e u s e o f
a c o ns o l idat io n regim e and t h e u s e o f a revers e h y b rid s t ru c t u re
invo l ving a du al res ident ent it y is al s o inc l u ded in t h e Rep o rt .
Th ere is no l im it at io n o f s c o p e w it h regard t o t h e ap p l ic at io n o f
t h e du al - res ident p ay er ru l e.
ecommendation
mported mismatch r le
Th is rec o m m endat io n addres s es t h e s o - c al l ed im p o rt ed
m is m at c h arrangem ent s u nder w h ic h t h e dedu c t io n res u l t ed
f ro m a h y b rid m is m at c h arrangem ent t h at w as p ro du c ed in a
dif f erent j u ris dic t io n, is im p o rt ed t o a t h ird j u ris dic t io n and s et o f f t h e inc o m e in t h at t h ird j u ris dic t io n. Th e im p o rt ed m is m at c h
ru l e dis al l o w s dedu c t io ns f o r a b ro ad range o f p ay m ent s
(inc l u ding int eres t , ro y al t ies , rent s and p ay m ent s f o r s ervic es ) if
t h e inc o m e f ro m s u c h p ay m ent s is s et - o f f , direc t l y o r indirec t l y ,
agains t a dedu c t io n t h at aris es u nder a h y b rid m is m at c h
arrangem ent in an o f f s h o re j u ris dic t io n.
Th e o verriding o b j ec t ive o f t h e im p o rt ed m is m at c h ru l e is t o
m aint ain t h e int egrit y o f t h e o t h er h y b rid m is m at c h ru l es b y
rem o ving any inc ent ive f o r m u l t inat io nal gro u p s t o ent er int o
h y b rid m is m at c h arrangem ent s .
Th e im p o rt ed m is m at c h ru l e ap p l ies t o b o t h s t ru c t u red and int ragro u p im p o rt ed m is m at c h arrangem ent s and c an b e ap p l ied
t o any p ay m ent t h at is direc t l y o r indirec t l y s et - o f f agains t
any type of hybrid deduction. A hybrid deduction is defined
as (i) a payment under a financial instrument that results in a
h y b rid m is m at c h ; (ii) a dis regarded p ay m ent m ade b y a h y b rid
p ay er t h at res u l t s in a h y b rid m is m at c h ; (iii) a p ay m ent m ade
t o a revers e h y b rid t h at res u l t s in a h y b rid m is m at c h ; o r (iv) a
p ay m ent m ade b y a h y b rid p ay er o r du al res ident t h at t riggers
a du p l ic at e dedu c t io n res u l t ing in a h y b rid m is m at c h . A h y b rid
dedu c t io n al s o inc l u des a dedu c t io n res u l t ing f ro m a p ay m ent
m ade t o any o t h er p ers o n t o t h e ex t ent t h at p ers o n t reat s t h e
p ay m ent as s et - o f f agains t ano t h er h y b rid dedu c t io n.
A no t ab l e addit io n c o m p ared t o t h e 2014 rep o rt in t h at t h e
gu idanc e s et s o u t t h ree t rac ing and p rio rit y ru l es (i.e., t h e
“ s t ru c t u red im p o rt ed m is m at c h ru l e, ” t h e “ direc t im p o rt ed
m is m at c h ru l e” and t h e “ indirec t im p o rt ed m is m at c h ru l e” )
t o b e u s ed b y t ax p ay ers and adm inis t rat io ns t o det erm ine t h e
ex t ent t o w h ic h a p ay m ent s h o u l d b e t reat ed as s et - o f f agains t a
dedu c t io n u nder an im p o rt ed m is m at c h arrangem ent .
lo al a
olic and ontro ers
riefing
5 1
A ction 2
A s t ru c t u red arrangem ent is any arrangem ent w h ere
t h e h y b rid m is m at c h is p ric ed int o t h e t erm s o f t h e
arrangem ent o r t h e f ac t s and c irc u m s t anc es (inc l u ding
t h e t erm s ) o f t h e arrangem ent indic at e t h at it h as b een
des igned t o p ro du c e a h y b rid m is m at c h .
Further details and commentary in relation to the three tracing
and p rio rit y ru l es ab o ve, and t h e m ec h anic al s t ep s invo l ved in
their application, are included in the Final Report. Guidance on
the treatment of payments that are included under a CFC regime
is al s o p ro vided.
Rec o m m endat io n 9 .2 s et s o u t f u rt h er ac t io ns t h at c o u nt ries
s h o u l d t ak e t o ens u re t h at ru l es are int erp ret ed and ap p l ied
consistently on a cross-border basis. More specifically it calls for
c o u nt ries t o :
As with most of the other rules in Part I of the Final Report, the
s c o p e o f t h e im p o rt ed m is m at c h ru l e is l im it ed t o t ax p ay ers in
t h e s am e c o nt ro l gro u p as t h e p art ies t o t h e im p o rt ed m is m at c h
arrangem ent , o r t o p ay m ent s t h at are m ade u nder a s t ru c t u red
arrangem ent t o w h ic h t h e t ax p ay er is a p art y .
• Devel o p s t andards t h at w il l al l o w c o - o rdinat io n o f t h e
im p l em ent at io n o f t h e rec o m m endat io ns , inc l u ding o f t im ing
in t h e ap p l ic at io n o f ru l es , m inim iz ing im p ac t aris ing f ro m a
dif f erent im p l em ent at io n t im e
A w ide range o f det ail ed ex am p l es in addit io n t o s u p p l em ent ary
c o m m ent ary and gu idanc e in rel at io n t o t h e im p o rt ed m is m at c h
rule also are included in the Final Report.
ecommendation
esign principles
Th is s ec t io n c al l s o n c o u nt ries t o im p l em ent and ap p l y t h e
ru l es in a c o o rdinat ed m anner t h at p res erves t h e u nderl y ing
policy objectives of the Final Report. This would ensure
p redic t ab il it y o f o u t c o m es f o r t ax p ay ers and avo id t h e ris k o f
do u b l e t ax at io n. Rec o m m endat io n 9 .1 addres s es c ert ain des ign
p rinc ip l es reit erat ing t h at c o u nt ries s h o u l d s eek t o ens u re
t h at t h e do m es t ic ru l es , o nc e im p l em ent ed, w il l ap p l y t o t h e
s am e arrangem ent s and ent it ies , and p ro vide f o r t h e s am e t ax
outcomes, as set out in the Final Report. The design principles
s t at e t h at f o r a ru l e c reat ed t o addres s m is m at c h es aris ing f ro m
t h e u s e o f h y b rid arrangem ent s t o b e ef f ec t ive, it m u s t :
• Operate to eliminate the mismatch without requiring the
j u ris dic t io n ap p l y ing t h e ru l e t o es t ab l is h t h at it h as “ l o s t ” t ax
revenu e u nder t h e arrangem ent
• Be c o m p reh ens ive
• Ap p l y au t o m at ic al l y
• Avo id do u b l e t ax at io n t h ro u gh ru l e c o - o rdinat io n
• Minim iz e t h e dis ru p t io n t o ex is t ing do m es t ic l aw
• Be c l ear and t rans p arent in it s o p erat io n
• Provide the flexibility necessary for the rule to be incorporated
int o t h e l aw s o f eac h j u ris dic t io n
• Be w o rk ab l e f o r t ax p ay ers and k eep c o m p l ianc e c o s t s t o a
m inim u m
• Be eas y f o r t ax au t h o rit ies t o adm inis t er
5 2
lo al a
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• Agree o n gu idanc e o n h o w t h e ru l es o u gh t t o b e ap p l ied
• Ident if y t h e need f o r t rans it io nal ru l es (in t h is regard t h e
rec o m m endat io n s t at es t h at t h e need f o r t rans it io nal
arrangements can be minimized by ensuring a sufficient notice
p erio d f o r t ax p ay ers and t h at t h ere w il l b e no p res u m p t io n as
t o t h e need f o r grandf at h ering ru l es )
• Undert ak e a review o f t h e o p erat io n o f t h e ru l es as nec es s ary
t o det erm ine w h et h er t h ey are o p erat ing as int ended
• Ent er int o ex c h ange o f inf o rm at io n, w it h earl y and
s p o nt aneo u s ex c h ange o f inf o rm at io n rec o gniz ed as k ey t o an
ef f ec t ive im p l em ent at io n o f h y b rid m is m at c h ru l es
• Endeavo u r t o m ak e rel evant inf o rm at io n o n t h e t ax t reat m ent
of entities and financial instruments available to taxpayers
• Co ns iderat io n o f t h e int erac t io n w it h o t h er BEPS Ac t io ns ,
inc l u ding p ro viding t h at ru l es t o addres s h y b rid m is m at c h
arrangements should be applied before application of a ”fixed
rat io ru l e” u nder Ac t io n 4
Rec o m m endat io n 9 inc l u des rec o m m endat io ns f o r do m es t ic
l aw des ign p rinc ip l es , im p l em ent at io n and c o o rdinat io n t h at are
s im il ar t o t h o s e in t h e 2014 rep o rt
ecommendation
arrangement
efinition of str ct red
Recommendation 10 includes a general definition of a
“structured arrangement” as well as a list of specific examples
o f s t ru c t u red arrangem ent s . A s t ru c t u red arrangem ent is any
arrangem ent w h ere t h e h y b rid m is m at c h is p ric ed int o t h e t erm s
o f t h e arrangem ent o r t h e f ac t s and c irc u m s t anc es (inc l u ding t h e
t erm s ) o f t h e arrangem ent indic at e t h at it h as b een des igned t o
p ro du c e a h y b rid m is m at c h .
A ction 2
The definition of structured arrangement in the Final
Report does not significantly deviate from the 2014
report, but the Final Report contains significantly
more explanation regarding the definition.
Th e h y b rid m is m at c h ru l es ap p l y t o any p ers o n w h o is a p art y
t o a s t ru c t u red arrangem ent . Th e p u rp o s e o f t h e s t ru c t u red
arrangement definition is to capture those taxpayers who
ent er int o arrangem ent s t h at h ave b een des igned t o p ro du c e
a m is m at c h in t ax o u t c o m es w h il e ens u ring t ax p ay ers w il l no t
be required to make adjustments in circumstances where the
taxpayer is unaware of the mismatch and derives no benefit from
it . Rec o m m endat io n 10.3 t h eref o re ex c l u des a t ax p ay er f ro m t h e
s t ru c t u red arrangem ent ru l e w h ere t h e t ax p ay er is no t a p art y t o
t h e s t ru c t u red arrangem ent .
The definition of structured arrangement in the Final Report
does not significantly deviate from the 2014 report, but the
Final Report contains significantly more explanation regarding
the definition.
ecommendation
efinitions of related
persons, control gro p and acting together
With respect to hybrid financial instruments and hybrid transfers,
t h e s c o p e o f t h e h y b rid m is m at c h ru l es c o vers s u c h t rans ac t io ns
b et w een rel at ed p art ies . Ot h er h y b rid m is m at c h arrangem ent s
are general l y t reat ed as w it h in s c o p e o f t h e rec o m m endat io ns
w h ere t h e p art ies t o t h e m is m at c h are m em b ers o f t h e s am e
c o nt ro l gro u p .
Tw o p ers o ns w il l b e t reat ed as rel at ed if t h ey f o rm p art o f t h e
s am e c o nt ro l gro u p o r if o ne p ers o n h as a 25% inves t m ent in t h e
o t h er p ers o n o r a t h ird p ers o n h as a 25% inves t m ent in b o t h .
Pers o ns w h o are ac t ing t o get h er in res p ec t o f t h e o w ners h ip o r
control of an investment in certain circumstances are required
t o aggregat e t h eir o w ners h ip int eres t s f o r t h e p u rp o s es o f t h e
rel at ed p art y t es t .
In addit io n, t w o p ers o ns w o u l d b e in t h e s am e “ c o nt ro l gro u p ”
if (i) t h ey are c o ns o l idat ed f o r ac c o u nt ing p u rp o s es ; (ii) t h e
first person has an investment in a second person that grants
t h e f o rm er ef f ec t ive c o nt ro l , o r a t h ird p ers o n h as s u c h an
investment in the first two; (iii) the first person has a 50% or
great er inves t m ent in t h e s ec o nd p ers o n, o r a t h ird p ers o n h as a
50% o r great er inves t m ent in b o t h ; o r (iv) t h e t w o p ers o ns c an b e
regarded as as s o c iat ed ent erp ris es u nder Art ic l e 9 o f t h e OECD
Mo del Tax Co nvent io n.
A p ers o n w il l b e regarded as “ h o l ding an inves t m ent ” if it direc t l y
or indirectly holds a percentage of voting rights or value in equity
o f ano t h er p ers o n.
The definitions in the Final Report do not significantly deviate
from the 2014 report, but the Final Report contains significantly
more explanation regarding the definitions.
ecommendation
ther definitions
The Final Report notes that the language of the
rec o m m endat io ns is no t m eant t o b e t rans l at ed direc t l y int o
do m es t ic l egis l at io n. Co u nt ries are ex p ec t ed t o im p l em ent
t h es e rec o m m endat io ns int o do m es t ic l aw u s ing t h eir o w n
c o nc ep t s and t erm ino l o gy . At t h e s am e t im e, t h e ru l es in
o ne c o u nt ry need t o b e c o o rdinat ed w it h t h e ru l es in o t h er
c o u nt ries . Rec o m m endat io n 12 t h eref o re inc l u des a w ide array
of definitions for purposes of the recommendations included
in the Final Report, with the aim of ensuring consistency in the
ap p l ic at io n o f t h e ru l es .
art
ecommendations on
treaty issues
Part II of the Final Report contains recommendations on changes
t o t h e OECD Mo del Tax Co nvent io n t o b e m ade t o ens u re t h at
h y b rid ins t ru m ent s and ent it ies are no t u s ed t o o b t ain t reat y
benefits inappropriately and to address treaty issues that may
aris e f ro m t h e rec o m m ended do m es t ic l aw c h anges .
hapter
al resident entities
The first recommendation made is with respect to dual-resident
entities. The Final Report makes a reference to new proposed
Art ic l e 4(3) t o t h e OECD Mo del Tax Co nvent io n as p art o f
t h e w o rk o n Ac t io n 6 o n t reat y ab u s e. Th e p ro p o s ed art ic l e
s t at es t h at t h e res idenc e o f a du al - res ident ent it y s h o u l d b e
det erm ined m u t u al l y b y t h e c o m p et ent au t h o rit ies o f t h e
rel evant j u ris dic t io ns and t h at in t h e ab s enc e o f an agreem ent ,
the dual-resident entity cannot claim treaty benefits from any
of the jurisdictions involved. However, the Final Report states
t h at t reat y c h anges al o ne w o u l d no t ef f ec t ivel y m it igat e BEPS
c o nc erns as s o c iat ed w it h du al - res ident ent it ies . Su c h c h anges
w il l no t , f o r ins t anc e, addres s avo idanc e s t rat egies res u l t ing
f ro m an ent it y b eing a res ident o f a c o u nt ry u nder t h at c o u nt ry ’ s
do m es t ic l aw w h il e, at t h e s am e t im e, b eing a res ident o f ano t h er
country under a tax treaty concluded by the first country. This
situation may allow an entity to benefit from the advantages
ap p l ic ab l e t o res ident s u nder do m es t ic l aw w it h o u t b eing s u b j ec t
t o rec ip ro c al o b l igat io ns (e.g., b eing ab l e t o s h if t it s f o reign
lo al a
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5 3
A ction 2
The Final Report analyzes the potential application of the antidis c rim inat io n p ro vis io ns o f t h e OECD Mo del Tax Co nvent io n
and c o nc l u des t h at s u b j ec t t o an anal y s is o f t h e p rec is e w o rding
o f t h e do m es t ic ru l es t h at w o u l d b e draf t ed t o im p l em ent t h e
rec o m m endat io ns , t h e rec o m m endat io ns s et o u t in Part I o f
the Final Report would not appear to raise concerns about a
possible conflict with the provisions of Article 24.
l o s s es t o ano t h er res ident c o m p any u nder a do m es t ic l aw gro u p
rel ief s y s t em w h il e c l aim ing t reat y p ro t ec t io n agains t t ax at io n
of its foreign profits). For these situations, the Final Report
s u gges t s c h anges t o do m es t ic l aw t h at w o u l d deny res idenc y o f
an ent it y u nder do m es t ic l aw if t h e ent it y is t reat ed as res ident in
ano t h er j u ris dic t io n u nder t h e ap p l ic ab l e inc o m e t ax t reat y .
The Final Report does not reflect significant changes in
c o m p aris o n t o t h e 2014 rep o rt .
hapter
ransparent entities
Th e s ec o nd rec o m m endat io n addres s es t h e u s e o f t rans p arent
entities to benefit from treaty provisions inappropriately. In
this respect, the Final Report recommends an amendment to
Art ic l e 1(2) o f t h e OECD Mo del Tax Co nvent io n t o inc l u de a
rule on fiscally transparent entities whereby income derived by
o r t h ro u gh an ent it y o r arrangem ent t h at is t reat ed as w h o l l y
or partly fiscally transparent under the tax law of one of the
c o u nt ries w il l b e c o ns idered t o b e inc o m e o f a res ident o nl y t o
t h e ex t ent t h at t h e inc o m e is t reat ed, f o r p u rp o s es o f t ax at io n b y
t h at c o u nt ry , as t h e inc o m e o f a res ident o f t h at c o u nt ry .
Su c h c h ange w o u l d inc l u de addit io ns t o t h e Co m m ent ary .
The Commentary refers to the principles reflected in the 1999
report of the Committee of Fiscal Affairs that focused on the
ap p l ic at io n o f t h e OECD Mo del Tax Co nvent io n t o p art ners h ip s
(t h e Part ners h ip Rep o rt ). Th e p ro p o s ed new Co m m ent ary
ex p ands t h e p rinc ip l es in t h e Part ners h ip Rep o rt t o o t h er no nc o rp o rat e ent it ies .
The Final Report does not reflect significant changes in
c o m p aris o n t o t h e 2014 rep o rt .
hapter
treaties
nteraction etween art and ta
Part II nex t c o m m ent s o n t h e nec es s it y o f c o o rdinat ing w it h t h e
rules recommended under Part I of the Final Report and how the
suggested domestic law changes may affect specific articles of
t h e OECD Mo del Tax Co nvent io n.
Wit h res p ec t t o t h e ru l e p ro viding f o r t h e denial o f dedu c t io ns ,
the Final Report notes that treaties do not govern whether a
p ay m ent is dedu c t ib l e. Su c h dec is io n is l ef t t o t h e do m es t ic l aw s
and t h eref o re t h e rec o m m ended ru l e w o u l d no t inf ringe any
t reat y p ro vis io n.
5 4
lo al a
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Furthermore, with respect to the defensive rules that require
an inclusion of a payment as ordinary income, the Final Report
indic at es t h at s u c h a ru l e w o u l d direc t l y af f ec t t h e p ro vis io ns
in t h e OECD Mo del Tax Co nvent io n if s u c h ru l e s o u gh t t h e
im p o s it io n o f t ax o n a no nres ident w h o s e inc o m e w o u l d
no t , u nder t h e p ro vis io ns o f any t reat y , b e t ax ab l e in s u c h a
country. However, for all the rules recommended in this Final
Rep o rt , t h e t erm “ t ax p ay er” c o nt em p l at es t h e im p o s it io n
o f t ax b y a j u ris dic t io n o nl y w h en t h e rec ip ient is res ident
o f s u c h j u ris dic t io n o r h as a p erm anent es t ab l is h m ent in it .
Consequently, any interaction between the recommendations
and t h e p ro vis io ns o f t ax t reat ies w il l rel at e p rim aril y t o t h e ru l es
c o nc erning t h e el im inat io n o f do u b l e t ax at io n.
In t h is res p ec t , Art ic l e 23 A (Ex em p t io n Met h o d), as it is w o rded
in t h e OECD Mo del Tax Co nvent io n w o u l d no t c reat e p ro b l em s
f o r j u ris dic t io ns t h at ado p t t h e rec o m m endat io ns m ade in Part I
of the Final Report, because it specifies that the credit method of
Art ic l e 23 B (Credit Met h o d) o f t h e OECD Mo del Tax Co nvent io n
typically applies to dividends. However, the Final Report notes
t h at a nu m b er o f b il at eral t ax t reat ies dep art f ro m t h is ap p ro ac h
and ap p l y t h e ex em p t io n m et h o d w it h res p ec t t o dividends and
p ro vides general c o m m ent s o n h o w t o res o l ve t h is p ro b l em .
Th e m o s t c o m p l et e s o l u t io n s u gges t ed is f o r t h es e c o u nt ries t o
c o ns ider inc l u ding ru l es in t h eir t reat ies t h at w o u l d al l o w t h em t o
ap p l y t h e c redit m et h o d as o p p o s ed t o t h e ex em p t io n m et h o d.
Lik ew is e, Art ic l e 23 B is regarded as c o ns is t ent w it h t h e
recommendations in Part I of the Final Report. The only issue
no t ed rel at es t o s it u at io ns w h ere t h e p art ies t o a t ax t reat y
eit h er s u p p l em ent o r dep art f ro m t h e b as ic c redit ap p ro ac h o f
OECD Mo del Tax Co nvent io n Art ic l e 23 B.
Finally, the Final Report analyzes the potential application of the
ant i- dis c rim inat io n p ro vis io ns o f t h e OECD Mo del Tax Co nvent io n
and c o nc l u des t h at s u b j ec t t o an anal y s is o f t h e p rec is e w o rding
o f t h e do m es t ic ru l es t h at w o u l d b e draf t ed t o im p l em ent t h e
rec o m m endat io ns , t h e rec o m m endat io ns s et o u t in Part I o f t h e
Final Report would not appear to raise concerns about a possible
conflict with the provisions of Article 24.
A ction 2
I mplications
E Y contacts
Following the discussion drafts released in March
2
2014, ex t ens ive c o m m ent s f ro m s t ak eh o l ders o n
t h o s e dis c u s s io n draf t s and t h e 2014 rep o rt , t h is
Final Report is the conclusive output on Action 2.
The recommendations included in the Final Report
inc o rp o rat e s o m e o f t h e inp u t t h e OECD rec eived
from stakeholders and reflects the consensus
reac h ed o n t h o s e is s u es .
For additional information concerning
t h is Al ert , p l eas e c o nt ac t :
At t h is s t age, im p l em ent at io n via c h anges
in do m es t ic l aw and p rac t ic es and via t reat y
p ro vis io ns is at t h e dis c ret io n o f individu al
countries. The Final Report is an expansive
do c u m ent and it c o nt ains very c o m p l ex
rec o m m endat io ns . Co ns idering t h is c o m p l ex it y
and the difficulties countries may face in
inc o rp o rat ing t h es e rec o m m endat io ns int o t h eir
do m es t ic t ax s y s t em , it rem ains t o b e s een t o
w h at ex t ent c o u nt ries w il l ado p t t h es e ru l es .
Ho w ever, c o u nt ries h ave al ready b egu n ado p t ing
ant i- h y b rid m eas u res o f vario u s t y p es in advanc e
of the final output on Action 2 from the OECD.
In general , OECD c o u nt ries h ave agreed t o
c o nt inu e t o w o rk t o get h er t o ens u re a c o ns is t ent
and c o o rdinat ed im p l em ent at io n o f t h e BEPS
rec o m m endat io ns ac ro s s al l o f t h e Ac t io ns . To
f u rt h er t h is o b j ec t ive, b y earl y 2016 t h e OECD
and G20 w il l devel o p an inc l u s ive f ram ew o rk
f o r m o nit o ring, w it h al l int eres t ed c o u nt ries
participating on an equal basis. Progress on the
im p l em ent at io n o f Ac t io n 2 s h o u l d b e s u b j ec t t o
m o nit o ring and f u rt h er dis c u s s io ns are l ik el y t o
b e needed in o rder t o ens u re im p l em ent at io n b y
c o u nt ries in a c o ns is t ent m anner.
• Erns t & Y o u ng LLP
Gl o b al Tax Des k Net w o rk
New Y o rk
• Gerrit Gro en
+ 1 212 7 7 3 8 627
gerrit .gro en@ ey .c o m
• Ju rj an Wo u da Ku ip ers
+ 1 212 7 7 3 6464
j u rj an.w o u dak u ip ers @ ey .c o m
• Dirk Jan Sl o o f
+ 1 212 7 7 3 1363
dirk j an.s l o o f @ ey .c o m
• Jo b Gro ndh o u t
+ 1 212 7 7 3 0455
j o b .gro ndh o u t @ ey .c o m
• Karl Do y l e
+ 1 212 7 7 3 8 7 44
k arl .do y l e@ ey .c o m
• David Go l den
+ 1 202 327 6526
david.go l den@ ey .c o m
• Erns t & Y o u ng LLP
Int ernat io nal Tax Servic es
Was h ingt o n, DC
2
BEPS Ac t io n 2: Neu t ral iz e t h e Ef f ec t s o f Hy b rid Mis m at c h
Arrangem ent s (Rec o m m endat io ns f o r Do m es t ic Law s ) and
BEPS Ac t io n 2: Neu t ral iz e t h e Ef f ec t s o f Hy b rid Mis m at c h
Arrangem ent s (Treat y Is s u es ), b o t h dat ed 19 Marc h 2014.
lo al a
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5 5
BEPS Ac t io n 2:
Anal y s is
hat is the action tr ing
to achie e
Th e o b j ec t ive o f BEPS Ac t io n 2 is t o
neu t ral iz e h y b rid m is m at c h arrangem ent s
w h ic h ex p l o it dif f erenc es in t h e t ax t reat m ent
of an entity or financial instrument under
t h e l aw s o f t w o o r m o re t ax j u ris dic t io ns .
Bec au s e s u c h m is m at c h es m ay res u l t in
m u l t ip l e dedu c t io ns f o r a s ingl e ex p ens e o r
dedu c t io ns w it h o u t c o rres p o nding inc l u s io ns ,
t h ey are c o ns idered a t o o l f o r BEPS. Th e
solutions put forward in the Final Report are
in t h e f o rm o f b es t p rac t ic e rec o m m endat io ns
f o r c h anges t o do m es t ic l aw and t h e OECD
Mo del Tax Co nvent io n. Th e do m es t ic l aw
rec o m m endat io ns are ex t rem el y det ail ed and
c o m p l ex , and t h eir s u c c es s w il l dep end o n a
c o ns is t ent im p l em ent at io n and ap p l ic at io n b y
l o c al c o u nt ries .
G errit G roen
+ 1 212 7 7 3 8 627
gerrit .gro en@ ey .c o m
W ere any of the action
recommendations
ne pected
Th e b as ic des ign o f t h e rec o m m endat io ns
h as no t c h anged c o ns iderab l y f ro m earl ier
dis c u s s io n draf t s . Co m p ared t o t h o s e draf t s ,
the Final Report provides more language on
s o - c al l ed h y b rid t rans f ers , inc l u ding rep o s
and s h are l o ans , and al s o p ro vides a l arge
nu m b er o f ex am p l es w h ic h dem o ns t rat e
h o w t h e b es t p rac t ic e rec o m m endat io ns
are s u p p o s ed t o w o rk . Th e p ro p o s ed ru l es
are s t ru c t u red as s o - c al l ed l ink ing ru l es and
s h o u l d b e ap p l ied in a c ert ain o rder. Th e
p rim ary ru l e is t h e denial o f a dedu c t io n f o r
a p ay m ent t o t h e ex t ent it is no t inc l u ded
in t h e t ax ab l e inc o m e o f t h e rec ip ient .
If t h e p rim ary ru l e is no t ap p l ied, t h en
t h e c o u nt erp art y j u ris dic t io n c an ap p l y a
s ec o ndary ru l e, and inc l u de t h e dedu c t ib l e
payment in taxable income. The Final Report
5 6
lo al a
olic and ontro ers
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al s
w h
w h
ah
o inc l u des an im p o rt ed m is m at c h ru l e,
ic h is des igned t o c ap t u re s it u at io ns
ere a p ay m ent t h at do es no t it s el f c reat e
y b rid m is m at c h is m ade t o a h y b rid
m is m at c h s t ru c t u re.
I s there any interaction
between this action and the
others
Th ere is a c l o s e l ink b et w een Ac t io n 2
and t h e w o rk c arried o u t u nder o t h er
Ac t io ns deal ing w it h b as e ero s io n, s u c h
as Actions 3 (CFC), 4 (interest) and 6
(t reat y ab u s e). Th e im p l em ent at io n o f
s o m e o f t h e rec o m m endat io ns t h at h ave
c o m e o u t o f dif f erent BEPS Ac t io ns m ay
in f ac t m it igat e o r neu t ral iz e t h e negat ive
im p ac t o f h y b rid m is m at c h arrangem ent s .
For instance, the Action 3 Final Report
recommends improvements to CFC regimes
and o t h er o f f s h o re inves t m ent regim es
t h at m ay p revent h y b rid m is m at c h es f ro m
o c c u rring in res p ec t o f p ay m ent s t o c ert ain
h y b rid ent it ies .
H ave any countries made
specific comments in
relation to this action
Th e rec o m m endat io ns are in t h e f o rm o f b es t
p rac t ic es and w il l need t o b e im p l em ent ed
at t h e l o c al c o u nt ry l evel . Th ere is no h ard
p o l it ic al c o m m it m ent b y l o c al c o u nt ries t o
ado p t t h es e rec o m m endat io ns , and it s h o u l d
b e rem em b ered t h at m any c o u nt ries al ready
h ave ru l es t h at are aim ed at neu t ral iz ing
h y b rid m is m at c h es . Many c o u nt ries , f o r
ins t anc e, al ready deny dedu c t io ns in t h e
c as e o f h y b rid arrangem ent s and/ o r rat e
arb it rage t rans ac t io ns , and rec ent l y a
h y b rid l ink ing ru l e w as inc l u ded in t h e EU
Best practices
See p age 32 f o r m o re inf o rm at io n.
Parent - Su b s idiary Direc t ive w h ic h m andat es Mem b er St at es t o
1
deny t h e p art ic ip at io n ex em p t io n o n dedu c t ib l e p ay m ent s . A
2
nu m b er o f c o u nt ries l ik e Au s t ral ia and t h e UK h ave init iat ed
p u b l ic c o ns u l t at io ns o n w h et h er and h o w t h e Ac t io n 2 b es t
p rac t ic e rec o m m endat io ns s h o u l d b e ado p t ed. Ot h er c o u nt ries
h ave ex p res s ed t h e view t h at t h e rec o m m endat io ns s h o u l d
o nl y b e im p l em ent ed t h ro u gh a c o o rdinat ed h ard l aw ap p ro ac h ,
potentially within the EU. In this respect, the first half of 2016
(du ring w h ic h t h e Net h erl ands h o l ds t h e EU p res idenc y ) w il l
f o c u s h eavil y o n a p ro p o s ed Ant i- Tax Avo idanc e Direc t ive
rel eas ed b y t h e Eu ro p ean Co m m is s io n o n 28 Janu ary 2016
t h at w o u l d addres s t h e EU- w ide im p l em ent at io n o f Ac t io ns 2
(hybrid mismatches), 3 (CFC rules) and 4 (interest limitation
ru l es ), as w el l as p ro vis io ns o n u nif o rm ex it t ax at io n and a
s w it c h - o ver c l au s e as regards a m inim u m ef f ec t ive c o rp o rat e
t ax at io n rat e t h at w ere earl ier c o ns idered as p art o f t h e EU
Co m m o n Co ns o l idat ed Co rp o rat e Tax Bas e p ro p o s al .
Th e p ro p o s ed Ant i- Tax Avo idanc e Direc t ive’ s h y b rid m is m at c h
p ro vis io ns w o u l d ap p l y w h en t w o Mem b er St at es give a
dif f erent l egal c h arac t eriz at io n t o t h e s am e t ax p ay er (h y b rid
ent it y ), inc l u ding it s p erm anent es t ab l is h m ent s in o ne o r m o re
Mem b er St at e, and t h is l eads t o o ne o f t w o s it u at io ns :
• A dedu c t io n o f t h e s am e p ay m ent , ex p ens es o r l o s s es o c c u rs
b o t h in (i) t h e Mem b er St at e in w h ic h t h e p ay m ent h as it s
s o u rc e, t h e ex p ens es are inc u rred, o r t h e l o s s es are s u f f ered,
and (ii) in ano t h er Mem b er St at e
• Th ere is a dedu c t io n o f a p ay m ent in t h e Mem b er St at e in
w h ic h t h e p ay m ent h as it s s o u rc e w it h o u t a c o rres p o nding
inc l u s io n o f t h e s am e p ay m ent in t h e o t h er Mem b er St at e
In eit h er c as e, t h e l egal c h arac t eriz at io n given t o t h e h y b rid
ent it y b y t h e Mem b er St at e in w h ic h t h e p ay m ent h as it s
s o u rc e, t h e ex p ens es are inc u rred o r t h e l o s s es are s u f f ered
s h al l b e f o l l o w ed b y t h e o t h er Mem b er St at e.
Sim il arl y , w h en t w o Mem b er St at es give a dif f erent l egal
c h arac t eriz at io n t o t h e s am e p ay m ent (h y b rid ins t ru m ent )
and t h is l eads t o a s it u at io n w h ere t h ere is a dedu c t io n in t h e
Mem b er St at e in w h ic h t h e p ay m ent h as it s s o u rc e w it h o u t
a c o rres p o nding inc l u s io n o f t h e s am e p ay m ent in t h e o t h er
Mem b er St at e, t h e l egal c h arac t eriz at io n given t o t h e h y b rid
ins t ru m ent b y t h e Mem b er St at e in w h ic h t h e p ay m ent h as it s
s o u rc e s h al l b e f o l l o w ed b y t h e o t h er Mem b er St at e.
2
hat s going to happen ne t, and how
niform might implementation e
Bec au s e o f t h e c o m p l ex it y o f t h e rec o m m ended ru l es and t h e
f ac t t h at a l arge nu m b er o f c o u nt ries al ready h ave ru l es t h at
deal w it h h y b rid m is m at c h es , it s eem s rat h er u nl ik el y t h at
m any c o u nt ries w il l im p l em ent t h e rec o m m endat io ns in t h eir
ent iret y . Ins t ead, c o u nt ries w il l l ik el y c o ns ider if and h o w b es t t o
int egrat e t h e b es t p rac t ic e rec o m m endat io ns in t h eir do m es t ic
l egis l at ive f ram ew o rk , and t h ey w il l m o s t l ik el y p ic k and c h o o s e
those recommendations that best fit their tax policies. They
m ay al s o deal w it h h y b rid m is m at c h es in w ay s no t f o res een in
t h e rep o rt , s u c h as t h ro u gh t h e int ro du c t io n o f a s u b j ec t - t o - t ax
clause, or the introduction of withholding taxes. Furthermore,
a number of countries will likely not want to take the first move
in t h is area, and w il l w ait and s ee if and h o w o t h er c o u nt ries
im p l em ent t h e b es t p rac t ic e rec o m m endat io ns and t h en
s h ap e t h eir res p o ns e t o s u c h devel o p m ent s . It s h o u l d al s o b e
noted that structures involving hybrid financial instruments
and h y b rid ent it ies are m o s t c o m m o nl y u s ed in t h e US and
Eu ro p e, and it is in t h es e regio ns t h at l egis l at ive c h anges m ay
b e ex p ec t ed. It s eem s m o s t l ik el y t h at a u nif o rm ap p ro ac h t o
h y b rid m is m at c h es w il l no t b e ac h ieved and t h at Ac t io n 2 w il l
o nl y inc reas e t h e p at c h w o rk o f l o c al ant i- h y b rid m eas u res .
W hat are the potential impacts on
siness
Co m p anies need t o as s es s t o w h at ex t ent t h ey m igh t b e
im p ac t ed b y t h e b es t p rac t ic e rec o m m endat io ns , and w il l need
t o m o nit o r t h e l egis l at ive devel o p m ent s o n t h is t o p ic in t h e
c o u nt ries w h ere t h ey o p erat e. Co m p anies s h o u l d al s o c o ns ider
h o w b es t t o m igrat e o u t o f s t ru c t u res t h at m igh t b e im p ac t ed in
t h e f u t u re and ex am ine t h e im p ac t t h at t h is m ay h ave o n t h eir
overall financing and treasury strategies. Finally, companies
s h o u l d al s o b e p rep ared t o p art ic ip at e in l o c al c o u nt ry
c o ns u l t at io ns o n t h is t o p ic , s u c h as t h e o nes t h at are c u rrent l y
o n go ing in Au s t ral ia and t h e UK.
1
See EY Gl o b al Tax Al ert , EU formally adopts proposed linking rule for hybrid
loans under Parent-Subsidiary Directive, dat ed 9 Ju l y 2014
2
See EY Gl o b al Tax Al ert , UK issues consultation document on implementing
OECD proposals on hybrid mismatches, dat ed 9 Dec em b er 2014.
lo al a
olic and ontro ers
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5 7
ction
3
OECD releases final report
on CFC rules under BEPS
Ac t io n 3
Executive summary
On 5 Oc t o b er 2015, t h e Organiz at io n f o r Ec o no m ic Co - o p erat io n and Devel o p m ent
(OECD) released its final report on strengthening controlled foreign company (CFC)
rules under Action 3 of its Action Plan on Base Erosion and Profit Shifting (BEPS). This
report was released in a package that included final reports on all 15 BEPS Actions.
Th e do c u m ent , Designing Effective Controlled Foreign Company Rules (the Final
Report), reflects a significant change in tone from the Action 3 Discussion Draft,
1
Strengthening CFC rules, rel eas ed in Ap ril 2015. Like the discussion draft, the Final
Report provides recommendations for what it describes as the “building blocks” of CFC
rules. The Final Report specifies, however, that the recommendations are not minimum
s t andards , b u t ins t ead “ are des igned t o ens u re t h at j u ris dic t io ns t h at c h o o s e t o
im p l em ent t h em w il l h ave ru l es t h at ef f ec t ivel y p revent t ax p ay ers f ro m s h if t ing inc o m e
into foreign subsidiaries.” The Final Report also highlights the differences in countries’
p o l ic y o b j ec t ives as w el l as t h e dif f erenc es in p rio rit iz at io n o f t h o s e p o l ic y o b j ec t ives
and states that the recommendations provide flexibility to countries to act in a manner
c o ns is t ent w it h t h e p o l ic y o b j ec t ives o f t h eir o veral l t ax s y s t em .
The Final Report discusses six building blocks for the design of effective CFC rules:
• Definition of a CFC (including the definition of control)
• CFC exemptions and threshold requirements
• Definition of CFC income
• Co m p u t at io n o f inc o m e
• At t rib u t io n o f inc o m e
• Prevent io n and el im inat io n o f do u b l e t ax at io n
As in the discussion draft, the Final Report provides recommendations for the building
blocks, except for the definition of CFC income for which it sets out a non-exhaustive list
o f ap p ro ac h es t h at c o u l d b e u s ed b y c o u nt ries .
1
See EY Gl o b al Tax Al ert , OECD releases discussion draft on CFC rules under BEPS Action 3, dat ed 10 Ap ril
2015
5 8
lo al a
olic and ontro ers
riefing
A ction 3
Detailed discussion
The Final Report begins with a discussion of policy
considerations for CFC rules that reflects a significant shift in
t o ne f ro m t h e Ap ril 2015 dis c u s s io n draf t o n Ac t io n 3. It t h en
discusses each of the six elements that the OECD has identified
2
as the building blocks of effective CFC rules. The Final Report
s t at es t h at t h e rec o m m ended b u il ding b l o c k s “ w o u l d al l o w
countries without CFC rules to implement recommended rules
directly and countries with existing CFC rules to modify their
ru l es t o al ign m o re c l o s el y w it h t h e rec o m m endat io ns .”
P olicy considerations
The Final Report acknowledges that “the design and objectives
of CFC rules can differ from one jurisdiction to another because
they reflect different policy choices.” Therefore, it divides the
policy considerations in connection with the design of CFC
ru l es int o t w o c at ego ries : p o l ic y c o ns iderat io ns t h at are s h ared
by countries and specific policy objectives that countries may
p rio rit iz e dif f erent l y . Th e s h ared p o l ic y c o ns iderat io ns inc l u de:
(i) det errent ef f ec t ; (ii) int erac t io n w it h t rans f er- p ric ing ru l es ; (iii)
ef f ec t ivel y p revent ing avo idanc e w h il e redu c ing adm inis t rat ive
and c o m p l ianc e b u rdens ; and (iv) avo iding do u b l e t ax at io n.
For other policy objectives that may be implicated by CFC
rules, the Final Report identifies two fundamental differences
can affect the design of CFC rules: whether the country has a
w o rl dw ide t ax s y s t em o r a t errit o rial t ax s y s t em ; and w h et h er t h e
country is a Member State of the European Union (EU). The Final
Report further notes that two specific policies are influenced
b y w h et h er t h e c o u nt ry h as a w o rl dw ide o r a t errit o rial t ax
s y s t em : s t rik ing 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 ; and p revent ing b as e- s t rip p ing.
Finally, the Final Report indicates that limitations on CFC rules
w it h in t h e EU m eans t h at t h e rec o m m endat io ns o n Ac t io n 3
m u s t b e adap t ab l e w h ere nec es s ary t o al l o w EU Mem b er St at es
t o c o m p l y w it h EU l aw , no t ing t h at t h is is rel evant t o c o u nt ries
o u t s ide t h e EU as w el l b ec au s e o f c o m p et it ivenes s c o ns iderat io n.
efinition of a
The Final Report sets out two recommendations for defining a
CFC: (i) adopt a broad definition so that CFC rules would apply
b o t h t o c o rp o rat e ent it ies and c ert ain t rans p arent ent it ies
(p art ners h ip s and t ru s t s ) and p erm anent es t ab l is h m ent s (PEs )
and al s o inc l u de a h y b rid- m is m at c h ru l e t h at w o u l d p revent
entities from circumventing CFC rules through different
t reat m ent in dif f erent j u ris dic t io ns ; and (ii) ap p l y at l eas t
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
3
s at is f ac t io n o f eit h er res u l t s in a det erm inat io n o f c o nt ro l .
The Final Report recommends that CFC rules apply to
t rans p arent ent it ies t h at earn inc o m e t h at rais es BEPS c o nc erns
in t w o c as es : (i) ent it ies t h at are t rans p arent in t h eir h o m e
c o u nt ry b u t are t ax ab l e ent it ies in t h e p arent c o u nt ry ; 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
by another CFC. The Final Report also indicates that PEs may
need to be treated as CFCs in two circumstances: when a foreign
ent it y h as a PE in ano t h er c o u nt ry and w h en t h e p arent c o u nt ry
ex em p t s t h e inc o m e o f t h e PE.
The Final Report recommends that countries address the
potential avoidance of application of CFC rules for hybrid
ins t ru m ent s o r ent it ies . It indic at es t h at o ne p o s s ib l e ap p ro ac h
would be to require an intragroup payment to a CFC to be
taken into account if: (i) the payment is not included in CFC
income; and (ii) the payment would have been included in CFC
income if the parent jurisdiction had classified the entities 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.
Th e dis c u s s io n draf t h ad divided t h is rec o m m endat io n int o
a narro w er o p t io n and a b ro ader o p t io n, w it h t h e narro w er
o p t io n ap p l y ing o nl y if t h e int ragro u p p ay m ent w ere a b as eero ding p ay m ent .
2
Th e dis c u s s io n draf t h ad inc l u ded s even b u il ding b l o c k s . Th e b u il ding b l o c k s
are reduced to six in the Final Report through the combination of two of the
dis c u s s io n draf t ’ s b u il ding b l o c k s int o o ne.
3
The definition of control was a separate building block in the discussion draft.
lo al a
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5 9
A ction 3
The Final Report notes that most CFC rules
ap p l y b enc h m ark s t h at are at m o s t 7 5% o f t h e
s t at u t o ry c o rp o rat e t ax rat e b u t , u nl ik e t h e
dis c u s s io n draf t , it do es no t rec o m m end s et t ing
t h e b enc h m ark at s u c h a rat e o r l o w er.
Regarding the definition of control, the Final Report focuses on
two elements: (i) the type of control that is required; and (ii) the
level of that control. The Final Report recommends a control
t es t t h at inc l u des at l eas t l egal and ec o no m ic c o nt ro l and no t es
t h at c o u nt ries c o u l d s u p p l em ent t h is w it h a de f ac t o c o nt ro l
t es t o r a t es t b as ed o n c o ns o l idat io n f o r ac c o u nt ing p u rp o s es .
Regarding level of control, the Final Report recommends
treating a CFC as controlled when residents (including corporate
ent it ies , individu al s o r o t h ers ) h o l d, at a m inim u m , m o re t h an
50% control. The Final Report notes, however, that countries
may set their control threshold at a lower level. The Final Report
rec o m m ends u s ing o ne o f t h ree ap p ro ac h es t o aggregat e
s h areh o l ders f o r p u rp o s es o f t h e c o nt ro l t es t : an “ ac t ing- inc o nc ert ” t es t , aggregat io n o f rel at ed p art ies o r a c o nc ent rat ed
ownership test. The Final Report states that including the
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
control. Finally, the Final Report states that CFC rules should
ap p l y w h en t h ere is eit h er direc t o r indirec t c o nt ro l .
The Final Report recommends the use of the CFC’s effective
t ax rat e (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
statutory tax rate. For calculating the ETR, the Final Report
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
base in the parent jurisdiction had the CFC income been 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
accounting standard such as IFRS (International Financial
Reporting Standards) with adjustments made to reflect the tax
base reductions that result in low taxation of the CFC income.
The Final Report also notes that the ETR could be computed
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 .
C F C exemptions and threshold
req uirements
The Final Report outlines several approaches to defining income
but only recommends that CFC rules include a definition of
inc o m e “ t h at ens u res t h at inc o m e t h at rais es BEPS c o nc erns is
at t rib u t ed t o c o nt ro l l ing s h areh o l ders in t h e p arent j u ris dic t io n.”
The Final Report recognizes the need for flexibility to ensure
countries can design CFC rules that are consistent with their
do m es t ic p o l ic ies and indic at es t h at c o u nt ries “ are f ree t o c h o o s e
their rules for defining CFC income.”
The Final Report addresses CFC exemptions and threshold
requirements for the scope of CFC rules, recommending
inc l u s io n o f a t ax rat e ex em p t io n t h at w o u l d al l o w c o m p anies
that are subject to an effective tax rate that is sufficiently similar
t o t h e t ax rat e ap p l ied in t h e p arent j u ris dic t io n no t t o b e s u b j ec t
to CFC taxation. Such a tax rate exemption would subject all
CFCs with an effective tax rate meaningfully below the rate
applied in the parent jurisdiction to CFC rules. The Final Report
al s o no t es t h at t h is ex em p t io n c o u l d b e c o m b ined w it h a l is t s u c h
as a w h it e l is t .
Regarding 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
would compare the tax rate in the CFC jurisdiction either
to a particular fixed rate or to a percentage of the parent
jurisdiction’s rate. The Final Report notes that most CFC rules
ap p l y b enc h m ark s t h at are at m o s t 7 5% o f t h e s t at u t o ry
c o rp o rat e t ax rat e b u t , u nl ik e t h e dis c u s s io n draf t , it do es no t
rec o m m end s et t ing t h e b enc h m ark at s u c h a rat e o r l o w er.
Rather, the Final Report states that the benchmark should be
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 rules.
60
lo al a
olic and ontro ers
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The Final Report also discusses approaches involving a
de minimis threshold or an anti-avoidance requirement, but
do es no t rec o m m end eit h er ap p ro ac h .
efinition of
income
The Final Report further notes that it provides a non-exhaustive
list of approaches that the CFC rules could use to attribute
inc o m e. It f u rt h er s t at es t h at , regardl es s o f t h e ap p ro ac h a
country uses, “CFC rules should, at a minimum, capture the
f u nding ret u rn al l o c at ed u nder t h e t rans f er p ric ing ru l es t o a l o w f u nc t io n c as h b o x , ” al t h o u gh it al s o indic at es t h at t h e ex t ent o f
the income inclusion may be limited in the case of CFC rules that
f o c u s o n p revent ing s t rip p ing f ro m t h e p arent c o u nt ry .
The Final Report does not include the form-based analysis
des c rib ed in t h e Dis c u s s io n Draf t and ins t ead del ineat es f o u r
approaches to defining CFC income: (i) the categorical approach;
(ii) the substance approach; (iii) the excess-profit approach; and
(iv) the transactional or entity approaches. The Final Report also
indic at es t h at c o u nt ries c o u l d ap p l y a f u l l - inc l u s io n s y s t em .
A ction 3
ategorical anal sis
The Final Report’s discussion of a categorical analysis recognizes
that countries define the categories differently depending on
which of the following factors or indicia they find most relevant:
(i) legal classification; (ii) relatedness of parties; and (iii) source
of income. The Final Report notes that jurisdictions generally
categorize income according to legal classifications, such as: (i)
dividends , (ii) int eres t , (iii) ins u ranc e inc o m e, (iv) ro y al t ies and IP
inc o m e, and (v) s al es and s ervic es inc o m e.
The Final Report suggests that dividend income could be treated
as passive income but excluded from CFC income if it is paid
out of active income of an affiliate, if the dividends would have
b een ex em p t f ro m t ax at io n in t h e p arent c o u nt ry h ad t h ey b een
earned b y t h e p arent c o m p any , and if t h e dividends are l ink ed t o
the CFC’s active trade or business of dealing in securities.
For interest and financing income, the Final Report notes
t h at t h is t y p e o f inc o m e is m o re l ik el y t o rais e BEPS c o nc erns
when it has been earned from related parties, when the CFC is
o verc ap it al iz ed, w h en t h e ac t ivit ies c o nt rib u t ing t o t h e int eres t
were located outside the CFC jurisdiction, or when the income
was not earned from an active financing business.
The Final Report suggests that CFC rules could focus
on insurance income in three cases: (i) when the CFC is
o verc ap it al iz ed; (ii) w h en t h e p art ies t o t h e ins u ranc e c o nt rac t
or the risks insured are located outside the CFC jurisdiction; and
(iii) w h en t h e ins u ranc e inc o m e derives f ro m c o nt rac t s o r p o l ic ies
w it h a rel at ed p art y , p art ic u l arl y if t h e rel at ed p art y al s o rec eives
a 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 .
The Final Report notes the concern that income from royalties
and int el l ec t u al p ro p ert y (IP) is h igh l y m o b il e and c an b e
eas il y divert ed f ro m t h e l o c at io n w h ere t h e val u e w as c reat ed.
The Final Report states that IP income raises the following
c h al l enges : (i) IP inc o m e is p art ic u l arl y eas y t o m anip u l at e
b ec au s e it c an b e ex p l o it ed and dis t rib u t ed in m any dif f erent
forms, all of which may have different formalistic classifications
under the CFC rules of different countries; (ii) IP assets are often
h ard t o val u e b ec au s e t h ere are o f t en no ex ac t c o m p arab l es ; and
(iii) inc o m e t h at is direc t l y earned f ro m t h e u nderl y ing IP as s et
is often difficult to separate from the income that is earned from
associated services or products. The Final Report further states
t h at , given t h es e c h al l enges , f o c u s ing o n ro y al t y inc o m e is no t
eno u gh t o at t rib u t e al l inc o m e t h at ac t u al l y aris e o u t o f IP and
t h at rais es BEPS c o nc erns .
The Final Report indicates that income arising from the sale of
goods that were produced in the CFC country or from services
that were provided in the CFC country generally do not raise
BEPS c o nc erns b u t m ay rais e c o nc erns in t w o c irc u m s t anc es .
Invo ic ing c o m p anies rais e c o nc erns b ec au s e t h ey earn inc o m e
f o r go o ds and s ervic es t h at w ere p u rc h as ed f ro m rel at ed p art ies
and t o w h ic h t h ey h ave added l it t l e o r no val u e. IP inc o m e rais es
concerns because income from IP that was shifted into the CFC
and to which the CFC has added little to no value is generally
c o ns idered as s al es and s ervic es inc o m e and c o u l d again es c ap e
CFC inclusion. The Final Report indicates that categorical
analyses based on legal classification may not capture income
t h at rais es BEPS c o nc erns if t h ey ex c l u de al l s al es and s ervic es
inc o m e w it h o u t t ak ing t h es e t w o s it u at io ns int o ac c o u nt .
In addition to legal classifications, the Final Report notes that
c at ego ric al anal y s es al s o m ay l o o k at t h e rel at ednes s o f t h e
p art ies f ro m w h ic h inc o m e is earned and at t h e s o u rc e o f
income. The Final Report notes that many existing CFC rules
inc l u de rel at ed- p art y inc o m e o n t h e b as is t h at s u c h inc o m e c an
b e s h if t ed m o re eas il y . It f u rt h er no t es t h at t h e ex is t ing ru l es
c an dif f er b as ed o n h o w m u c h invo l vem ent b y a rel at ed p art y is
required for this purpose.
With regard to the source of income, the Final Report notes that
t h e c at ego ric al ap p ro ac h c an eit h er t ak e t h e f o rm o f an ant ib as e- s t rip p ing ru l e o r a s o u rc e- c o u nt ry ru l e, and t h e u nderl y ing
p rinc ip l e is t h at inc o m e earned f ro m a c o u nt ry o t h er t h an t h e
CFC jurisdiction is more likely to raise concerns about profit
s h if t ing. Co u nt ries t h at are f o c u s ed p rim aril y o n p revent ing
t h e s t rip p ing o f t h e p arent c o u nt ry ’ s b as e w il l o nl y c at ego riz e
income generated in the parent jurisdiction as CFC income.
Co u nt ries w it h ant i- b as e- s t rip p ing ru l es c o u l d t reat any inc o m e
generated in a country other than the CFC country as CFC
inc o m e. Th e b ro ader ap p ro ac h w o u l d b e h arder t o m anip u l at e
t h an a narro w er ru l e f o c u s ing o n j u s t t h e p arent c o u nt ry , b u t
it m ay at t rib u t e inc o m e t h at h as genu inel y b een earned f ro m
activities carried out by the CFC. A broad anti-base-stripping rule
c o u l d al s o t ak e t h e f o rm o f a s o u rc e- c o u nt ry ru l e, w h ic h ex c l u des
income from CFC income if it was earned in the CFC country.
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A ction 3
The Final Report states that substance
analyses increase the accuracy of CFC rules,
b u t t h is m u s t b e w eigh ed agains t t h e inc reas ed
c o m p l ex it y and ex p ens e t h at t h ey c reat e.
S ubstance analysis
The Final Report notes that substance analyses can use a
variety of proxies to determine whether the CFC’s income was
s ep arat ed f ro m t h e u nderl y ing s u b s t anc e, inc l u ding p eo p l e,
p rem is es , as s et s and ris k s . Regardl es s o f t h e p ro x ies u s ed,
however, the Final Report notes that the fundamental question
is whether the CFC has the ability to earn the income itself. The
Final Report further notes that most existing substance analyses
are no t s t and- al o ne ru l es b u t ins t ead ap p l y t o get h er w it h m o re
m ec h anic al ru l es .
The Final Report states that a substance analysis can use either
a t h res h o l d t es t o r a p ro p o rt io nat e anal y s is . Under a t h res h o l d
(or “all-or-nothing”) test, a set amount of activity (as identified
through one or more proxies) would allow all income of the CFC
to be excluded. Under the proportionate analysis, CFC income
w o u l d o nl y ex c l u de t h e inc o m e t h at w as p ro p o rt io nat e t o t h e
amount of activity that the CFC had undertaken.
Rec o gniz ing c o nc erns ab o u t c o m p l ex it y and int erac t io ns w it h
transfer-pricing rules, the Final Report sets out four options of
s u b s t anc e anal y s is and no t es t h at t h e anal y s is l o o k s t o w h et h er
the CFC engaged in substantial activities in determining what
income is CFC income.
The first option focuses on the relevant facts and circumstances
to determine whether the employees of the CFC have made a
substantial contribution to the income earned by the CFC. The
Final Report notes that the option could be designed to include
c ert ain s af e h arb o rs , rat io s and o t h er m ec h anic al t es t s .
The second option would look at all of the significant functions
performed by entities within the group to determine if the CFC
is t h e ent it y t h at w o u l d b e m o s t l ik el y t o o w n p art ic u l ar as s et s
o r u ndert ak e p art ic u l ar ris k if t h e ent it ies w ere u nrel at ed. Th is
o p t io n c o u l d b e des igned as a t h res h o l d t es t , u nder w h ic h al l
of the income of the CFC would be included if it fell below the
threshold of significant functions, or as a proportionate test,
under which only the income that the CFC did not have the
significant functions necessary to earn would be included.
The third option would measure whether the CFC had the
necessary business premises and establishment in the CFC
country to actually earn the income and whether the CFC had
the necessary number of employees with the requisite skills
in the CFC country to undertake the majority the CFC’s core
f u nc t io ns . Th is o p t io n c o u l d al s o b e des igned as a t h res h o l d t es t
o r a p ro p o rt io nat e t es t .
Th e f o u rt h o p t io n is a variat io n o n t h e t h ird o p t io n and is
m eant t o b e c o ns is t ent w it h o t h er areas o f t h e BEPS p ro j ec t
b y u s ing t h e nex u s ap p ro ac h t h at w as devel o p ed u nder Ac t io n
5. CFC rules could include a version of the nexus approach as
a substance analysis, under which income earned by the CFC
meeting the requirements of the nexus approach would not be
included in CFC income, while all other income from qualifying
IP as defined by the nexus approach would be treated as CFC
inc o m e. As t h is o p t io n w o u l d o nl y ap p l y t o inc o m e aris ing f ro m
qualifying IP assets, the Final Report indicates that it may need
t o b e c o m b ined w it h ano t h er s u b s t anc e anal y s is f o r o t h er t y p es
o f inc o m e.
The Final Report states that substance analyses increase the
accuracy of CFC rules, but this must be weighed against the
inc reas ed c o m p l ex it y and ex p ens e t h at t h ey c reat e.
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A ction 3
les for comp ting income
cess profits anal sis
Another approach to defining CFC income described in the
Final Report is a formulary excess-profits analysis. Under this
approach, a “normal return” would be calculated for equity
investment in the CFC. Any profit in excess of normal return
would be treated as CFC income. The Final Report notes that
some countries apply a substance-based exclusion as a final step
in s u c h an ap p ro ac h .
The Final Report defines the “normal return” as the “rate of
return,” multiplied by the “eligible equity.” The rate of return
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
Final Report notes that economic studies often estimate the
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
this varies by industry, leverage and country. The Final Report
defines “eligible equity” as equity associated with the assets
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
jurisdiction. The Final Report notes that the mechanical nature
o f t h is ap p ro ac h m u s t b e w eigh ed agains t w h et h er it c o u l d t arget
shifted income with sufficient accuracy. There is, however, no
c o ns ens u s o n w h et h er t h is ap p ro ac h s h o u l d b e c o m b ined w it h a
m andat o ry s u b s t anc e- b as ed ex c l u s io n.
T ransactional and entity approaches
Finally, the Final Report discusses whether the definition of CFC
inc o m e s h o u l d ap p l y 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 , dep ending o n
whether at least a specified percentage of the entity’s income
falls within the definition of CFC income. Under the transactional
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 s t ream o f inc o m e is
within the definition of CFC income. The report notes that the
t rans ac t io nal ap p ro ac h is general l y m o re ac c u rat e in c ap t u ring
inc o m e, al t h o u gh it m ay inc reas e adm inis t rat ive b u rdens and
c o m p l ianc e c o s t s .
The Final Report addresses the computation of income of a
CFC, providing recommendations on: (i) which country’s rules
should apply; and (ii) whether any specific rules for computing
CFC income are necessary. The Final Report recommends using
4
the rules of the parent country to compute a CFC’s income.
Th e rep o rt 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 .
The Final Report also recommends that countries should have a
specific rule limiting the offset of CFC losses so that they can be
used only against profits of the same CFC or other CFCs in the
s am e c o u nt ry . Su c h a ru l e c o u l d ap p l y w it h a ru l e l im it ing o f f s et
of losses to similar types of profits. The Final Report also notes
t h at ru l es regarding l o s s im p o rt at io n al s o c o u l d ap p l y t o t h e
computation of CFC income.
les for attri
ting income
The Final Report describes a five-step process for attributing
CFC income to shareholders: (i) determining which taxpayers
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.
The Final Report recommends tying the threshold for attribution
t o t h e m inim u m c o nt ro l t h res h o l d b u 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
the policy considerations underlying their CFC rules.
The Final Report recommends calculating the amount of
inc o m e at t rib u t ab l e t o eac h s h areh o l der b y ref erenc ing t h e
shareholder’s proportion of ownership in the CFC and the period
of such ownership or influence. It further notes that attribution
ru l es s h o u l d ens u re t h at it is no t p o s s ib l e t o at t rib u t e m o re t h an
100% of the CFC’s income when legal and economic control may
aggregat e t o m o re t h an 100%.
4
The Final Report considers, but does not recommend, use of the CFC
c o u nt ry ’ s ru l es f o r c o m p u t ing inc o m e, al l o w ing t ax p ay ers t o c h o o s e t h e p arent
or CFC country’s rules, or use of a common standard such as IFRS
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A ction 3
The Final Report further notes that double taxation
c o nc erns c o u l d aris e in o t h er s it u at io ns , f o r
ins t anc e w h en t h ere h as b een a t rans f er p ric ing
adjustment between two jurisdictions and a CFC
c h arge aris es in a t h ird j u ris dic t io n.
The Final Report recommends that countries determine when
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
their CFC rules operate in a manner that is consistent with their
do m es t ic l aw .
The Final Report recommends applying the tax rate of the parent
c o u nt ry . It 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
taxation
The Final Report focuses on three situations in which double
taxation may arise: (i) situations in which the attributed CFC
inc o m e al s o is 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
in which CFC rules in more than one jurisdiction apply to the
same CFC income; and (iii) situations in which a CFC actually
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
attributed to its resident shareholders under the CFC rules or a
resident shareholder disposes of the shares in the CFC. The Final
Rep o rt f u rt h er no t es t h at do u b l e t ax at io n c o nc erns c o u l d aris e
in o t h er s it u at io ns , f o r ins t anc e w h en t h ere h as b een a t rans f erpricing adjustment between two jurisdictions and a CFC charge
arises in a third jurisdiction. It states that CFC rules should be
des igned t o ens u re t h at t h es e and o t h er s it u at io ns do no t l ead t o
do u b l e t ax at io n.
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For the first two situations, the Final Report recommends
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,
including CFC tax on intermediate companies. Regarding the
t h ird s it u at io n, it rec o m m ends ex em p t ing dividends and gains o n
disposition of CFC shares if the income of the CFC has previously
been subject to CFC taxation. The precise treatment of dividends
and gains is l ef t t o c o u nt ries t o det erm ine s o t h at t h e t reat m ent
is consistent with their domestic law. The Final Report further
indic at es t h at c o u nt ries w il l need t o c o ns ider w h et h er t h eir
ex is t ing do u b l e t ax rel ief p ro vis io ns are ef f ec t ive at rel ieving al l
ins t anc es o f do u b l e t ax at io n.
A ction 3
I mplications
The Final Report concludes the OECD’s work
on CFC rules under Action 3. Importantly, the
Final Report states that the recommendations
are no t m inim u m s t andards , indic at ing t h at
it is t h e c h o ic e o f c o u nt ries w h et h er o r no t t o
implement the recommendations. The Final
Rep o rt rec o gniz es t h at c o u nt ries h ave dif f erent
p o l ic y o b j ec t ives and dif f erent p rio rit iz at io n
of those policy objectives. The Final Report
inc l u des , h o w ever, det ail ed rec o m m endat io ns f o r
the design of CFC rules for countries to consider
if t h ey are int eres t ed in im p l em ent ing a new
regim e o r m o dif y ing an ex is t ing regim e. Th es e
rec o m m endat io ns , if ado p t ed b y c o u nt ries , c o u l d
have significant implications for the taxation of
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 m ay af f ec t t h em
and s t ay inf o rm ed ab o u t 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 .
E Y contacts
For additional information concerning
t h is Al ert , p l eas e c o nt ac t :
• Erns t & Y o u ng LLP
Int ernat io nal Tax Servic es
Was h ingt o n, DC
• Andreia Leite Verissimo
+ 1 202 327 6034
andreia.l eit everis s im o @ ey .c o m
• Min Y u
+ 1 202 327 7 39 6
m in.y u @ ey .c o m
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65
BEPS Ac t io n 3:
Anal y s is
hat is the action tr ing
to achie e
Action 3 on Controlled Foreign Companies
(CFCs) was one of the most challenging (in
t erm s o f s ec u ring c o ns ens u s ) ac t io n it em s
o f t h e w h o l e BEPS p ro j ec t , b ec au s e it h ad
t o deal w it h t h e f ac t t h at c o u nt ries t y p ic al l y
approach the issue of CFCs with one of two
very dif f erent o b j ec t ives .
hris anger
+ 44 20 7 9 51 0150
c s anger@ u k .ey .c o m
On t h e o ne h and, y o u h ave a nu m b er
of countries that see a CFC regime as
protecting merely the headquarter location
agains t ab u s e and w h o t h eref o re ex p ec t
t h at every o t h er l o c at io n w il l h ave it s o w n
CFC regime carrying out the same role. On
t h e o t h er s ide o f t h e s p ec t ru m , y o u h ave
countries — such as France and Germany —
who see the role of the CFC regime being to
p ro t ec t t h e w o rl d f ro m ab u s e f ro m no t o nl y
the companies that are headquartered in
t h at c o u nt ry , b u t any s u b s idiaries t h at t h o s e
c o m p anies m ay h ave u nderneat h t h em .
Th at w as s o m et h ing o n w h ic h t h e OECD w as
t ry ing ac h ieve c o ns ens u s , b u t I t h ink it ’ s
f air t o s ay t h ey f ail ed in get t ing agreem ent
ac ro s s al l t h e m em b er c o u nt ries . So w e s t il l
h ave al t ernat ive int erp ret at io ns t h at m ade
it s w ay int o t h e o veral l do c u m ent . Wh at t h ey
did ac h ieve, t h o u gh , w as a l evel o f c ert aint y
and a l evel o f granu l arit y as t o t h e f ac t o rs
t o b e c o ns idered w h en ac t u al l y des igning
a CFC regime. There are six factors in this
regard, w h ic h t h e p ap er h as go ne t h ro u gh
in c o ns iderab l e det ail t o t ry t o give a l evel
o f c o ns is t enc y .
66
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W ere any of the action
recommendations
ne pected
Th ro u gh o u t t h e p ro c es s it w as b ro adl y
ac c ep t ed t h at Ac t io n 3 w as go ing t o
be a very difficult action to deliver,
specifically because of these fundamental
disagreements on the role of a CFC regime.
So t h e f ac t t h at w e h aven’ t res o l ved t h at
key policy question is not unexpected.
Th e OECD h as , h o w ever, ac h ieved a l o t in
t erm s o f l o o k ing at b es t p rac t ic es aro u nd
t h e gl o b e and t ry ing t o b ring s o m e l evel o f
c o m m o nal it y . Th e c h al l enge w il l b e w h at
h ap p ens no w t o t h at l evel o f det ail . Do t h e s ix
c h arac t eris t ic s get ado p t ed and c o nt ras t ed
b y o t h er go vernm ent s , f o r ex am p l e?
I s there any interaction
between this action and the
others
I t h ink y es , and t h e w h o l e es s enc e o f t h e
15 BEPS ac t io ns general l y is t h at t h ere is
c o ns iderab l e int erac t io n. Many p eo p l e h ave
questioned whether having a CFC regime is
even nec es s ary if y o u h ave t rans f er p ric ing
ru l es t h at are o p erat ed ap p ro p riat el y . In
t h e p as t , go vernm ent s h ave argu ed t h at
you need a CFC regime because transfer
p ric ing didn’ t nec es s ary deal w it h t h o s e
k inds o f it em s w h ic h w o u l dn’ t h ave h ap p ened
o t h erw is e. I t h ink as w e go t h ro u gh t h e
c h anges in Ac t io ns 8 - 10 o n t rans f er p ric ing
there may become less of a need for a CFC
regim e as a w h o l e.
Best practices
See p age 32 f o r m o re inf o rm at io n.
a e an co ntries made specific
comments in relation to this action
Th e dif f erent f o c u s and dif f erent needs o f t h e individu al
c o u nt ries h as m ade t h is ac t io n o ne o f t h e m o re c o nt ro vers ial .
Th e US it s el f h as c o m m ent ed t h at it w ant ed t o ac h ieve m o re in
relation to CFCs and expressed an element of disappointment in
t h e o veral l ru l es . Th is is m ay b e s o m ew h at s u rp ris ing given t h e
interaction of the CFC rules with the check-the-box rules. But
no net h el es s it ’ s c l earl y s o m et h ing t h at t h e US w o u l d h ave l ik ed
t o h ave s een s o m e great er p ro gres s o n.
hat s going to happen ne t, and how
niform might implementation e
Th e im p l em ent at io n c o m es do w n t o t h e s t at u s o f c o u nt ries
at the moment. If you’re a country without a CFC regime, this
rec o m m endat io n gives y o u a b l u ep rint t h at y o u c an ado p t ,
o nc e y o u h ave m ade t h e p o l ic y dec is io n o n w h ic h o f t h e t w o
o p t io ns y o u p ref er.
On the other side, if you’re a country that already has a CFC
regim e, t h is enab l es t h e b enc h m ark ing o f t h e ex is t ing regim es
agains t t h is b l u ep rint . Co u nt ries w il l b e m ak ing a dec is io n o n
whether the differences, if any, are sufficient for them to have
t o go and c h ange t h e l aw . Th is t h en p ro vides an o p p o rt u nit y f o r
b u s ines s es t o engage and t o m ak e s u re t h eir view s are h eard.
In an EU c o nt ex t , t h e Eu ro p ean Co m m is s io n o n 28 Janu ary
2016 is s u ed a p ro p o s ed Ant i- Tax Avo idanc e Direc t ive t h at
w o u l d addres s t h e EU- w ide im p l em ent at io n o f Ac t io ns 2 (h y b rid
mismatches), 3 (CFC rules) and 4 (interest limitation rules), as
w el l as p ro vis io ns o n u nif o rm ex it t ax at io n and a s w it c h - o ver
c l au s e as regards a m inim u m ef f ec t ive c o rp o rat e t ax at io n
rat e t h at w ere earl ier c o ns idered as p art o f t h e EU Co m m o n
Consolidated Corporate Tax Base proposal. The CFC provisions
c o nt ained in t h e p ro p o s ed Direc t ive w o u l d im p o s e a c h arge o n
undistributed profits of controlled non-listed entities that are
s u b j ec t t o t ax at io n at an ef f ec t ive rat e l o w er t h an 40% o f t h e
equivalent effective rate in the controlling Member State, where
the entity principally receives financial income (e.g., interest),
ro y al t ies , dividends , l eas ing inc o m e, c ert ain real es t at e inc o m e,
3
income from insurance, banking and other financial activities,
and int ragro u p s ervic e inc o m e. A c h arge w o u l d no t aris e w it h in
t h e Mem b er St at es o r t h e Eu ro p ean Ec o no m ic Area u nl es s t h e
establishment of the entity in question was ”wholly artificial”
o r t h e ent it y engages in no n- genu ine arrangem ent s w h ic h h ave
b een p u t in p l ac e f o r t h e es s ent ial p u rp o s e o f o b t aining a t ax
advant age. Arrangem ent s w o u l d b e regarded as no n- genu ine
t o t h e ex t ent t h at t h e ent it y w o u l d no t o w n t h e as s et s o r w o u l d
no t h ave u ndert ak en t h e ris k s if it w ere no t c o nt ro l l ed b y a
company where the relevant significant people functions are
carried out. The CFC provisions would also not be applicable
to financial undertakings. As yet, it is not clear how much of
t h e Ant i- Tax Avo idanc e Direc t ive init iat ive w il l rec eive Mem b er
State support and hence the final legislation may be less
ex p ans ive.
W hat are the potential impacts on
siness
Businesses need to focus on those jurisdictions where the CFC
rules may specifically impact them. And that won’t be every
j u ris dic t io n, b ec au s e a l o t o f c o m p anies w il l o nl y inves t int o t h at
c o u nt ry rat h er t h an h ave any t h ing u nderneat h it . Bu t f o r t h o s e
ones where there’s a potential CFC charge it’s very important to
u nders t and t h e s t at e o f t h e p o l ic y and t o u nders t and t h at earl y ,
b ec au s e a c o u nt ry t h at is go ing t o eval u at e w h et h er it needs
c h anges needs b u s ines s es t o b e f eed t h eir t h o u gh t s in earl y
t o avo id c h anges b eing b ro u gh t in t h at do no t nec es s aril y t ak e
int o ac c o u nt t h e im p ac t o n b u s ines s . So t h is is real l y a m at t er
o f engaging and k eep ing very c l o s e t o go vernm ent s in o rder t o
u nders t and w h at t h eir c h anges m igh t b e.
The same thing goes for when a country is creating a CFC
regime in the first place. This recommendation will also create
an appetite for certain countries which don’t have CFC regimes
t o go ah ead and int ro du c e o ne. And no w t h at y o u h ave a
b l u ep rint , t h is is t h e t im e f o r b u s ines s es t o b e t h ink ing ab o u t
w h ic h o f t h e t w o o p t io ns real l y w o rk f o r t h at c o u nt ry and h o w
s h o u l d t h ey des ign a s y s t em t h at is no t go ing t o im p o s e s u c h a
significant burden both in terms of rate, but also as important
in t erm s o f adm inis t rat io n t h at m ay m ak e t h e c o u nt ry
l es s c o m p et it ive.
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67
ction
4
OECD releases final report
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
Executive summary
On 5 Oc t o b er 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) released its final report on recommended limitations on interest expense
deductions (Action 4) under its Action Plan on Base Erosion and Profit Shifting
(BEPS). This report was released in a package that included final reports on all
15 BEPS Ac t io ns .
Th e do c u m ent , Limiting Base Erosion Involving Interest Deductions and Other
Financial Payments (the Interest Limitation Report or Final Report) largely reflects
t h e c h o ic es m ade b y t h e OECD b et w een t h e vario u s al t ernat ives t h at w ere inc l u ded in
1
t h e dis c u s s io n draf t rel eas ed o n 18 Dec em b er 2014. In the Final Report, the OECD
recommends that countries implement a “fixed ratio” rule that would limit net interest
dedu c t io ns c l aim ed b y an ent it y (o r a gro u p o f ent it ies o p erat ing in t h e s am e c o u nt ry )
to a fixed percentage of earnings before interest, taxes, depreciation and amortization
(EBITDA). Th is rat io s h o u l d b e s o m ew h ere b et w een 10% and 30% o f ap p l ic ab l e EBITDA.
The Final Report further recommends that countries adopt a “group ratio” rule to
supplement (but not replace) the fixed ratio rule and to provide additional flexibility for
h igh l y - l everaged gro u p s o r indu s t ry s ec t o rs . Under t h e gro u p rat io ru l e, f o r ex am p l e,
an entity with net interest expense above a country’s fixed ratio could deduct such
int eres t ex p ens e u p t o t h e l evel o f t h e net t h ird- p art y int eres t / EBITDA rat io o f t h e
w o rl dw ide gro u p t o w h ic h it b el o ngs . Co u nt ries c o u l d al s o ap p l y an u p l if t o f u p t o 10%
t o t h e gro u p ’ s net t h ird- p art y int eres t ex p ens e t o h el p p revent do u b l e t ax at io n. Bey o nd
this basic framework, the Final Report also recommends that countries consider the
following: (i) adopting an “equity escape” rule, which allows interest expense so long
as an entity’s debt-to-equity ratio does not exceed that of its worldwide group; (ii)
p ro viding f o r c arry f o rw ard and/ o r c arry b ac k o f dis al l o w ed int eres t ex p ens e and/ o r
u nu s ed int eres t c ap ac it y , w it h in l im it s ; (iii) p ro viding f o r ex c l u s io ns f o r int eres t p aid t o
third-party lenders on loans used to fund public-benefit (infrastructure) projects and
f o r ent it ies w it h net int eres t ex p ens e b el o w de m inim is t h res h o l ds ; and (iv) p ro viding
t arget ed ru l es t h at w o u l d c l o s e do w n any rem aining BEPS o p p o rt u nit ies .
1
See EY Gl o b al Tax Al ert , OECD releases discussion draft on interest deductions under BEPS Action 4,
dat ed 23 Dec em b er 2014.
68
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A ction 4
The fixed ratio rule was chosen as the linchpin of
t h e int eres t l im it at io n rec o m m endat io ns b ec au s e it
was felt to most efficiently link a group’s net interest
dedu c t io ns t o it s inc o m e- p ro du c ing ac t ivit ies .
Detailed discussion
I ntroduction
The Interest Limitation Report justifies the need for agreement
o n l im it ing dedu c t io ns f o r net int eres t ex p ens e b y p o int ing
t o t h e ab il it y o f m u l t inat io nal ent erp ris es t o s el ec t ivel y p l ac e
h igh er l evel s o f t h ird- p art y deb t in h igh - t ax c o u nt ries , t o u s e
int erc o m p any l o ans t o generat e int eres t dedu c t io ns in ex c es s
o f t h e gro u p ’ s ac t u al t h ird- p art y int eres t ex p ens e, and t o
b o rro w t o generat e t ax - ex em p t inc o m e s u c h as dividends f ro m
subsidiary corporations, all of which are BEPS techniques that
give multinationals an unjustified advantage relative to groups
o p erat ing o nl y in o ne c o u nt ry . To deal w it h t h is p erc eived
problem the Final Report adopts an approach founded on the
twin pillars of a fixed ratio rule and a group ratio rule, with
certain modifications and enhancements.
he fi ed ratio r le
Regardless of whether other recommendations in the Final
Rep o rt are ado p t ed, al l c o u nt ries are enc o u raged t o l im it t h e
net int eres t ex p ens e o f an ent it y (o r a gro u p o f rel at ed ent it ies
operating in that country) to a fixed percentage of EBITDA.
Application of the fixed ratio rule is described as a relatively
s t raigh t f o rw ard p ro c es s :
(1) Det erm inat io n o f t h e ent it y ’ s EBITDA, b eginning w it h
t ax ab l e inc o m e as det erm ined u nder ap p l ic ab l e c o u nt ry
l aw , and adding b ac k net int eres t ex p ens e, net p ay m ent s
equivalent to interest, and depreciation and amortization.
Tax - ex em p t inc o m e is no t t o b e inc l u ded in t h is c al c u l at io n;
the Final Report raises but does not resolve the question of
h o w t o t reat t ax - s h el t ered inc o m e, s u c h as dividend inc o m e
s h el t ered b y f o reign t ax c redit s .
Th e rec o m m ended b enc h m ark rat io s are b et w een 10% and
30% because, the Final Report indicates, around half of publicly
t raded m u l t inat io nal gro u p s w it h p o s it ive EBITDA h ave a net
t h ird- p art y int eres t / EBITDA rat io o f 5% o r l es s . Even at t h e 10%
benchmark, the data cited by the Final Report indicates that 62%
o f s u c h gro u p s w o u l d b e ab l e t o dedu c t al l t h eir net t h ird- p art y
int eres t ex p ens e, and 8 7 % o f s u c h gro u p s c o u l d do s o at t h e 30%
b enc h m ark . Th u s , al t h o u gh it rec eived a nu m b er o f c o m m ent s
t o t h e ef f ec t t h at b enc h m ark rat io s in t h is range w o u l d b e t o o
low, the Final Report bases its recommendation on the concerns
no t ed in t h e dis c u s s io n draf t , t h at b enc h m ark rat io s s et t o o
h igh w o u l d no t b e ef f ec t ive in p revent ing BEPS. Ho w ever, t h e
Final Report does note a number of factors that should guide
a c o u nt ry in c h o o s ing b et w een t h e h igh and l o w ends o f t h e
recommended ratio. For example, countries that do not also
ado p t a gro u p rat io ru l e s h o u l d c o ns ider ado p t ing a b enc h m ark
rat io at t h e u p p er end o f t h e range, as s h o u l d t h o s e t h at do no t
p erm it t h e c arry o ver o f u nu s ed int eres t c ap ac it y o r dis al l o w ed
int eres t ex p ens e, t h at h ave a ro b u s t s y s t em o f ru l es t arget ed
at int eres t - rel at ed BEPS ac t ivit y , o r t h at h ave h igh er int eres t
rat es t h an t h o s e general l y f o u nd in o t h er c o u nt ries . Co u nt ries
s h o u l d al s o c o ns ider s et t ing a h igh er b enc h m ark rat io f o r
s m al l er gro u p s , as t h ey are t y p ic al l y m o re l everaged t h an l arger
m u l t inat io nal s .
The fixed ratio rule was chosen as the linchpin of the interest
l im it at io n rec o m m endat io ns b ec au s e it w as f el t t o m o s t
efficiently link a group’s net interest deductions to its incomep ro du c ing ac t ivit ies . Ho w ever, it al s o h as a nu m b er o f draw b ac k s .
Mo s t o b vio u s l y , average l everage rat io s dif f er f o r c o m p anies in
dif f erent indu s t ries and at dif f erent s t ages o f t h eir l if e c y c l e, and
a fixed benchmark ratio cannot accommodate these variations.
In addit io n, earnings c an b e vo l at il e and gro u p s c anno t al w ay s
reas o nab l y p redic t , l et al o ne c o nt ro l , earnings o f f u t u re y ears .
Co u nt ries are enc o u raged t o c o ns ider u s ing an average EBITDA
figure, say from the current and two prior years, to deal with the
l at t er p ro b l em .
(2) Ap p l ic at io n o f t h e s t at u t o ry b enc h m ark rat io , b et w een 10%
and 30%, to the EBITDA figure, to determine maximum
al l o w ab l e int eres t ex p ens e.
(3) Det erm inat io n o f t h e al l o w ab l e net int eres t dedu c t io n as
t h e l o w er o f ac t u al net int eres t ex p ens e o r t h e m ax im u m
am o u nt as c al c u l at ed ab o ve.
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69
A ction 4
Because both the fixed benchmark ratio and the group
rat io ru l e rel y o n EBITDA, t h e am o u nt o f int eres t
ex p ens e an ent it y m ay dedu c t w il l b e im p ac t ed b y
c h anges eit h er in it s earnings o r in t h o s e o f o t h er
m em b ers o f it s gro u p , o r b y dif f erenc es b et w een
financial statement and taxable income.
Group ratio rule
Bec au s e t h e rec o m m ended b enc h m ark rat io s are s et l o w , t h e
Final Report recommends adoption of a group ratio rule to offer
rel ief t o c o m p anies in gro u p s t h at are, f o r no n- t ax reas o ns ,
m o re h igh l y l everaged. An ent it y t h at ex c eeds t h e b enc h m ark
fixed ratio would be allowed to deduct net interest expense up
t o it s gro u p ’ s net t h ird- p art y int eres t ex p ens e/ EBITDA rat io ,
if t h is is h igh er. Onl y net int eres t ex p ens e t h at ex c eeds b o t h
the benchmark fixed ratio and the ratio of the group should
b e dis al l o w ed.
etermination of gro p le erage ratio
Use of a group ratio rule raises a number of practical questions.
First, because the tax authorities in one country cannot audit
the net interest expense or EBITDA figures for the entire
m u l t inat io nal gro u p , it is rec o m m ended t h at c o ns o l idat ed
financial statements be used to determine the group leverage
rat io . Adj u s t m ent s m ay b e needed w h ere t h e c o m p anies
included in consolidated financial statements (generally, under
50% c o m m o n c o nt ro l ) do no t c o rres p o nd w it h t h o s e in t h e t ax
c o ns o l idat ed gro u p (u s u al l y b as ed o n a h igh er l evel o f c o nt ro l ).
Th e rep o rt do es no t p ro p o s e t h at adj u s t m ent s general l y b e m ade
to reflect other differences between tax and financial statement
p rinc ip l es . Ho w ever, t h ird- p art y int eres t ex p ens e as rep o rt ed o n
the financial statements may be adjusted to account for interest
c ap it al iz ed int o as s et s o r inc l u ded in c o s t o f go o ds s o l d o r t h e t ax
ex p ens e l ine, and t o ex c l u de it em s t h at are no t p ro p erl y view ed
as int eres t , s u c h as dividends , gains and l o s s es o n t h e dis p o s it io n
of financial instruments, and notional interest amounts (e.g.,
p ay m ent s o n s w ap s ).
pplication of gro p le erage ratio to in co ntr
entit
Al t h o u gh t h e gro u p l everage rat io s h o u l d b e det erm ined o n t h e
basis of financial statement information (that being the only
p rac t ic al ap p ro ac h ), c o u nt ries m ay ap p l y t h at rat io t o an ent it y ’ s
EBITDA determined on either a tax or a financial statement
b as is . Us ing an ent it y ’ s t ax - b as is EBITDA is m o re c o ns is t ent w it h
the fixed benchmark ratio method and is viewed as easier to
audit and administer. Non-taxable income such as branch profits
and dividends el igib l e f o r t h e p art ic ip at io n ex em p t io n s h o u l d b e
7 0
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ex c l u ded f ro m t ax - b as is EBITDA, and “ ap p ro p riat e adj u s t m ent s ”
s h o u l d b e m ade f o r o t h er it em s o f inc o m e s u b j ec t t o a s p ec ial
t ax regim e, s u c h as f o reign s o u rc e inc o m e s h iel ded b y f o reign
t ax c redit s . On t h e o t h er h and, u s ing an ent it y ’ s ac c o u nt ingb as is EBITDA is m o re c o ns is t ent w it h t h e det erm inat io n o f t h e
gro u p l everage rat io , even w h ere l o c al GAAP dif f ers f ro m t h e
accounting rules used in preparing the consolidated financial
s t at em ent s . Ac c o u nt ing- b as is EBITDA s h o u l d no t b e adj u s t ed t o
eliminate profit or loss arising from intragroup transactions, so
t h e aggregat e o f s ep arat e c o m p any EBITDAs m ay ex c eed t h e
EBITDA o f t h e c o ns o l idat ed gro u p as a w h o l e.
mpact of loss ma ing entities
Wh ere o ne o r m o re m em b ers o f a gro u p o p erat e at a l o s s , b u t
t h e gro u p as a w h o l e h as p o s it ive EBITDA, t h e l o s s es redu c e
t h e gro u p ’ s EBITDA and t h e rat io o f net t h ird- p art y int eres t t o
EBITDA is inc reas ed. Th e gro u p rat io ru l e c o u l d t h en y iel d an
artificially high result when applied to those group members that
are profitable. To manage this effect, the Final Report suggests
t h at int eres t ex p ens e al l o w ab l e u nder t h e gro u p rat io ru l e t o
any s ingl e ent it y c o u l d b e c ap p ed at t h e net t h ird- p art y int eres t
ex p ens e o f t h e ent ire gro u p . Wh ere t h e gro u p as a w h o l e h as
negat ive EBITDA, h o w ever, t h e gro u p rat io c anno t b e c al c u l at ed
at al l . In t h es e c irc u m s t anc es t h e rep o rt s u gges t s t h at an ent it y
with positive EBITDA could be allowed interest expense equal
t o t h e l o w er o f t h e ent it y ’ s ac t u al net int eres t ex p ens e o r t h e
net t h ird- p art y int eres t ex p ens e o f t h e gro u p . Ot h er ap p ro ac h es
m ay al s o b e c o ns idered, and t h e rep o rt indic at es t h at f u rt h er
w o rk w il l b e c o ndu c t ed o n h o w t o deal w it h t h e im p ac t o f
l o s s - m ak ing ent it ies .
C arryovers and carryback s
Because both the fixed benchmark ratio and the group ratio rule
rel y o n EBITDA, t h e am o u nt o f int eres t ex p ens e an ent it y m ay
dedu c t w il l b e im p ac t ed b y c h anges eit h er in it s earnings o r in
t h o s e o f o t h er m em b ers o f it s gro u p , o r b y dif f erenc es b et w een
financial statement and taxable income. The Final Report
ac k no w l edges t h at earnings vo l at il it y c o u l d m ak e l o ng- t erm
planning difficult and that permanent disallowance of interest
ex p ens e c o u l d res u l t in do u b l e t ax at io n, b ec au s e in m o s t c as es
t h e l ender w il l b e t ax ed o n t h e c o rres p o nding int eres t inc o m e.
A ction 4
Th e rep o rt ef f ec t ivel y res erves o n t h e t reat m ent o f
b ank s and ins u ranc e c o m p anies , indic at ing t h at t h e
fixed ratio and group ratio rules may not be effective
b ec au s e t h es e c o m p anies t y p ic al l y h ave net int eres t
inc o m e rat h er t h an net int eres t ex p ens e.
Co u nt ries m ay t h eref o re w is h t o al l o w ent it ies t o c arry f o rw ard
u nu s ed int eres t c ap ac it y and t o c arry f o rw ard and/ o r c arry b ac k
dis al l o w ed int eres t ex p ens e. Int eres t el igib l e f o r c arry f o rw ard
o r c arry b ac k s h o u l d b e l im it ed t o int eres t dis al l o w ed u nder t h e
fixed ratio and group ratio rules, since interest disallowed under
t arget ed ru l es m ay b e p res u m ed t o aris e f ro m b as e ero s io n and
profit shifting transactions. The report suggests limits be applied
t o al l c arry o vers , h o w ever, and in p art ic u l ar t o c arry b ac k s o f
dis al l o w ed int eres t ex p ens e. Su c h l im it s c o u l d inc l u de l im it s o n
t h e nu m b er o f y ears t h at dis al l o w ed int eres t ex p ens e o r u nu s ed
int eres t c ap ac it y m ay b e c arried f o rw ard o r dis al l o w ed int eres t
expense may be carried back; a fixed reduction in the amount
o f c arry f o rw ard (e.g., 10% eac h y ear); c ap p ing t h e am o u nt o f
the carryover at a fixed amount (e.g., US$1 million); and/or
el im inat ing c arry f o rw ards w h ere t h ere is a c h ange in o w ners h ip .
Co u nt ries w o u l d need t o c o ns ider h o w t h es e c arry o vers w o u l d
o p erat e w h ere int eres t l im it at io ns are ap p l ied o n a gro u p
rat h er t h an a s ep arat e ent it y b as is . Th o s e f am il iar w it h t h e US
earnings s t rip p ing ru l es o f Sec t io n 163(j ) w il l rec o gniz e m any o f
t h es e is s u es .
argeted r les
Ru l es t arget ed at t rans ac t io ns giving ris e t o BEPS m ay b e
nec es s ary t o c o u nt erac t p l anning u ndert ak en b y gro u p s t o
reduce the impact of the fixed ratio and group ratio rules. For
ex am p l e, ent it ies m ay at t em p t t o c o nvert int eres t ex p ens e int o
a dif f erent f o rm o f dedu c t ib l e ex p ens e, o r t o c o nvert o t h er
t ax ab l e inc o m e int o int eres t ; ent it ies m ay ent er int o s t ru c t u red
arrangem ent s w it h t h ird p art ies t o inc reas e t h e am o u nt o f net
t h ird- p art y int eres t ex p ens e t ak en int o ac c o u nt u nder t h e gro u p
rat io ru l e; o r gro u p s m ay b e res t ru c t u red, f o r ex am p l e b y p l ac ing
an u ninc o rp o rat ed h o l ding ent it y at t h e t o p o f a s t ru c t u re t o
c reat e t w o gro u p s . Bey o nd no t ing a f ew f u rt h er t y p es o f p o s s ib l e
responses to the limitations of the fixed ratio and group ratio
rules, the Final Report does not give much guidance on the
des ign o f t arget ed ru l es , p res u m ab l y b ec au s e s u c h ru l es w o u l d
be greatly influenced by the particular features of each country’s
ex is t ing t ax s y s t em .
S pecial rules for certain industries
Th e Dis c u s s io n Draf t o n Ac t io n 4 no t ed t h at s p ec ial
c o ns iderat io n m igh t b e needed f o r b ank s and ins u ranc e
companies; for other financial businesses such as leasing, asset
m anagem ent , and c redit c ard is s u anc e; f o r p u b l ic inf ras t ru c t u re
p ro j ec t s ; and f o r c o m p anies t h at m igh t b e s u b j ec t t o s p ec ial
t ax regim es , s u c h as t h o s e in t h e o il and gas and real es t at e
s ec t o rs . Of t h es e, o il and gas and real es t at e b u s ines s es ap p ear
t o h ave f al l en b y t h e w ay s ide; no m ent io n o f t h em is m ade in t h e
Int eres t Lim it at io n Rep o rt . Th e rep o rt ef f ec t ivel y res erves o n t h e
t reat m ent o f b ank s and ins u ranc e c o m p anies , indic at ing t h at t h e
fixed ratio and group ratio rules may not be effective because
t h es e c o m p anies t y p ic al l y h ave net int eres t inc o m e rat h er t h an
net int eres t ex p ens e. Addit io nal w o rk is t o b e c arried o u t in
2016 t o ident if y b es t p rac t ic e ru l es f o r b ank s and ins u ranc e
companies. Other financial businesses, however, are not to be
given s p ec ial t reat m ent .
Th e o nl y o t h er ex c ep t io n t o t h e general ru l es rec o m m ended
by the Final Report is for public-benefit projects that meet
a number of specified criteria, because such projects are
c o ns idered u nl ik el y t o p res ent any BEPS ris k . Co u nt ries m ay
c h o o s e no t t o l im it int eres t ex p ens e o n t h ird- p art y l o ans rel at ing
t o p ro j ec t s w h ere t h e o p erat o r u ndert ak es t o p ro vide, o p erat e,
and/ o r m aint ain as s et s f o r at l eas t 10 y ears ; t h ere is a general
p u b l ic int eres t in s u c h p ro j ec t s and t h e o p erat o r c o nt rac t s w it h a
public sector body or public benefit entity to provide the goods
or services; the loans in question are non-recourse, secured
o nl y b y t h e as s et s o f t h e p ro j ec t , and do no t ex c eed t h e val u e o r
es t im at ed val u e o f t h e p ro j ec t as s et s ; t h e o p erat o r, t h e int eres t ,
t h e p ro j ec t as s et s , and t h e inc o m e aris ing f ro m t h e p ro j ec t are
al l in t h e s am e c o u nt ry , w h ere t h e inc o m e is s u b j ec t t o t ax at
o rdinary rat es ; and t h e t h ird- p art y deb t o f t h e p ro j ec t do es no t
ex c eed t h at at t rib u t ab l e t o o t h er, s im il ar p ro j ec t s u ndert ak en b y
t h e o p erat o r o r it s gro u p . If t h is ex c ep t io n ap p l ies , t h e earnings
and rel at ed int eres t ex p ens e s h o u l d b e ex c l u ded f ro m t h e
determination of the fixed ratio rule and the group ratio rule for
t h e o p erat o r and it s gro u p .
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A ction 4
The Interest Limitation Report clarifies that any interest
dis al l o w ed u nder t h e ru l es im p l em ent ed in res p o ns e t o
Ac t io n 4 rem ains int eres t ex p ens e f o r o t h er p u rp o s es
and s h o u l d s t il l b e s u b j ec t t o w it h h o l ding t ax .
nterpla with other ctions definition
of interest expense
The Final Report specifically provides that rules to address
h y b rid m is m at c h arrangem ent s u nder Ac t io n 2 s h o u l d b e ap p l ied
t o det erm ine an ent it y ’ s t o t al net int eres t ex p ens e b ef o re t h e
fixed ratio rule or group ratio rule are applied. Where a country
applies controlled foreign company (CFC) rules alongside interest
limitation rules, CFC income that is subject to tax at the parent
c o m p any l evel m ay b e inc l u ded in t h e c al c u l at io n o f t h e p arent ’ s
EBITDA when applying the fixed ratio rule and group ratio rule.
Where this CFC income includes interest income or expense, the
c o u nt ry s h o u l d c o ns ider inc l u ding t h e int eres t in t h e c al c u l at io n
o f t h e p arent ’ s net int eres t ex p ens e and ex c l u ding t h at int eres t
f ro m t h e c al c u l at io n o f t h e p arent ’ s EBITDA. Target ed ru l es and
country-specific limitations on interest expense, such as those
aris ing f ro m ap p l ic at io n o f t h e arm ’ s - l engt h p rinc ip l e, s h o u l d
also generally be applied before the fixed ratio and group ratio
ru l es , b u t t h e dec is io n o n o rdering h ere is l ef t t o t h e individu al
c o u nt ries , w h o s h o u l d t ak e int o ac c o u nt t h e p art ic u l ar f eat u res
o f t h eir t ax s y s t em s .
Th e Int eres t Lim it at io n Rep o rt rec o m m ends t h at al l c o u nt ries
should include items economically equivalent to interest in the
s c o p e o f t h eir int eres t l im it at io n ru l es . Su c h it em s m ay inc l u de,
but are not limited to, profit participating loans; imputed interest
o n ins t ru m ent s s u c h as c o nvert ib l e b o nds and z ero c o u p o n
bonds; amounts under alternative financing arrangements,
such as Islamic finance; the finance cost element of finance
l eas e p ay m ent s ; c ap it al iz ed int eres t ; am o u nt s m eas u red b y
ref erenc e t o a f u nding ret u rn u nder t rans f er p ric ing ru l es ,
w h ere ap p l ic ab l e; no t io nal int eres t am o u nt s u nder derivat ive
ins t ru m ent s o r h edges o f a c o m p any ’ s deb t ; and c ert ain f o reign
ex c h ange gains and l o s s es o n deb t ins t ru m ent s . In addit io n,
ex p ens es inc u rred in c o nnec t io n w it h b o rro w ing, s u c h as
gu arant ee f ees and deb t is s u anc e c o s t s , s h o u l d b e s u b j ec t t o
t h e int eres t l im it at io ns .
7 2
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Further work on the transfer pricing aspects of financial
t rans ac t io ns is t o b e u ndert ak en in 2016 and 2017 . Ho w ever,
the Final Report notes that Revisions to Chapter 1 of the
Trans f er Pric ing Gu idel ines f o r Mu l t inat io nal Ent erp ris es and Tax
Adm inis t rat io ns u nder Ac t io ns 8 - 10 o f t h e BEPS Ac t io n Pl an
l im it t h e am o u nt o f int eres t p ay ab l e t o gro u p c o m p anies l ac k ing
ap p ro p riat e s u b s t anc e t o no m o re t h an a ris k - f ree ret u rn o n t h e
f u nding p ro vided.
Finally, the Interest Limitation Report clarifies that any interest
dis al l o w ed u nder t h e ru l es im p l em ent ed in res p o ns e t o Ac t io n 4
rem ains int eres t ex p ens e f o r o t h er p u rp o s es and s h o u l d s t il l b e
s u b j ec t t o w it h h o l ding t ax .
T ransitional rules
The Final Report leaves open the timetable for adopting new
ru l es in res p o ns e t o Ac t io n 4, b u t ac k no w l edges t h e c o s t s
associated with changing existing financing arrangements and
recommends that countries introducing the fixed ratio rule and
gro u p rat io ru l e s h o u l d give t ax p ay ers a reas o nab l e p erio d o f
t im e t o res t ru c t u re s u c h arrangem ent s . Co u nt ries m ay w is h t o
grandf at h er ex is t ing deb t , b u t t h e rep o rt rec o m m ends t h at any
grandf at h ering p ro vis io ns s h o u l d p rim aril y ap p l y t o t h ird- p art y
l o ans o u t s t anding o n t h e dat e t h e new ru l es are anno u nc ed.
A ction 4
I mplications
Wh il e it is no t p o s s ib l e t o p redic t ex ac t l y h o w
o r w h en vario u s c o u nt ries w il l ado p t t h e
rec o m m endat io ns o f Ac t io n 4, c o m p anies
s h o u l d ex p ec t addit io nal l im it at io ns o n int eres t
expense and should arrange any new financing
transactions with an eye toward flexibility
and t h e p o s s ib l e need t o u nw ind o r al t er s u c h
t rans ac t io ns b ef o re m at u rit y . Th u s , dec is io ns
o n w h et h er and h o w t o h edge c u rrenc y and
interest rate risk, whether to choose fixed rate
or floating rate debt, and whether or not to
m ak e int erc o m p any l o ans p rep ay ab l e w it h o u t
p enal t y , w il l b e im p ac t ed b y t h is need f o r
flexibility. Companies may also wish to comment
o n h o w t h e Ac t io n 4 f ram ew o rk m igh t b es t b e
im p l em ent ed in t h eir h o m e c o u nt ry .
E Y contacts
For additional information concerning
t h is Al ert , p l eas e c o nt ac t :
• Erns t & Y o u ng LLP
Int ernat io nal Tax Servic es
Was h ingt o n, DC
• David Go l den
+ 1 202 327 6526
david.go l den@ ey .c o m
• Erns t & Y o u ng LLP
Int ernat io nal Tax Servic es
New Y o rk
• Lee Ho l t
+ 1 212 7 7 3 9 636
l ee.h o l t @ ey .c o m
• Karl a Jo h ns en
+ 1 212 7 7 3 5510
k arl a.j o h ns en@ ey .c o m
• Co l l een Zel l er
+ 1 212 7 7 3 6463
c o l l een.z el l er@ ey .c o m
lo al a
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7 3
BEPS Ac t io n 4:
Anal y s is
hat is the action tr ing to
achie e
Th e s t at ed o b j ec t ive o f BEPS Ac t io n 4 is t o
p revent o r res t ric t BEPS b y w ay o f int eres t
and int eres t l ik e p ay m ent s , es p ec ial l y
c ro s s - b o rder int ra- gro u p p ay m ent s .
Wh il s t t h e OECD w ant ed t o addres s t h e
u s e o f int ra- gro u p int eres t p ay m ent s f o r
b as e ero s io n p u rp o s es , t h e b es t p rac t ic e
recommendation of a “fixed ratio rule”
p o t ent ial l y go es w ider and c o u l d w el l res u l t
in l im it at io ns o n int eres t dedu c t io ns o n
t h ird- p art y deb t in m any ins t anc es . Al o ne,
t h is ru l e h as o b vio u s def ec t s , given t h at
dif f erent b u s ines s es h ave dif f erent l evel s
of interest/EBITDA, reflecting, for example,
t h e p art ic u l ar indu s t ry s ec t o r t h ey o p erat e
in, t h e vo l at il it y o f t h eir EBITDA, w h et h er
they are acquisitive, have high levels of
ex c ep t io nal ex p ens es in c ert ain p erio ds and
s o o n. Th e Ac t io n al s o o f f ers a gro u p rat io
ru l e, w h ic h m ay b e ap p l ied in s o m e c as es t o
al l o w int eres t dedu c t io ns in ex c es s o f t h o s e
allowed by application of the fixed ratio rule
b u t t h is t h e w o rk o n t h is is no t c o m p l et e and
it is u nc l ear h o w t h is w o u l d w o rk in p rac t ic e.
J o M yers
+ 44 20 7 9 51 1127
j m y ers @ u k .ey .c o m
W ere any of the action
recommendations
ne pected
No t real l y . It h ad b een w idel y ant ic ip at ed
t h at t h e k ey rec o m m endat io n f ro m t h e OECD
w o u l d b e t h at c o u nt ries s h o u l d o p erat e s u c h
a fixed ratio rule which would limit interest
dedu c t io ns t o a m ax im u m o f aro u nd 30%
o f t h e b o rro w er’ s EBITDA. It h ad al s o b een
ant ic ip at ed — at l eas t s inc e t h e s p ring o f
t h is y ear — t h at t h e OECD w o u l d p ro vide a
l arge degree o f o p t io nal it y regarding any
addit io nal ru l es .
7 4
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olic and ontro ers
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Perh ap s t h e am o u nt o f l at it u de w it h
regard t o t h e nat u re and nu m b er o f t h e
addit io nal ru l es (inc l u ding s o m et h ing o f
a p o t ent ial rep rieve f o r t h e arm ’ s l engt h
t es t ) w as s o m ew h at s u rp ris ing, es p ec ial l y
c o ns idering w h ere t h e OECD s t art ed f ro m ,
b eing a s t at ed aim o f a c o ns is t ent s et o f ru l es
w it h s im u l t aneo u s im p l em ent at io n ac ro s s
different countries. But this reflects the
fact that there was a great deal of difficulty
reac h ing c o ns ens u s , w it h m any c o u nt ries
rel u c t ant t o c h ange ex is t ing ru l es , and m any
already having Fixed Ratio Rules.
Th ere is s t il l s c o p e f o r m o re s u rp ris es as
Ac t io n 4 w o rk is o n- go ing, w it h t h e OECD
s et t o b ring f o rw ard rec o m m endat io ns o n
h o w t o s t ru c t u re any gro u p rat io ru l e, and
o n t h e ru l es w h ic h s h o u l d ap p l y t o b ank s and
ins u ranc e b u s ines s es .
I s there any interaction
between this action and the
others
Y es , t h ere is a l arge degree o f int erac t io n
b et w een t h e Ac t io n 4 rec o m m endat io n and
those on Actions 2, 3, 5, 8-10 and 13. For
ex am p l e, w ides p read im p l em ent at io n o f t h e
Ac t io n 2 rec o m m endat io ns al o ngs ide t h e
int ro du c t io n o r c o nt inu ed o p erat io n o f a
fixed ratio rule could lead to double taxation,
w it h no c l ear m ec h anis m f o r res o l ving
t h is . Th e devel o p m ent o f t h e Mu l t il at eral
Ins t ru m ent m ay h el p w it h t h is .
Th e ap p l ic at io n o f t h e BEPS 8 - 10
rec o m m endat io ns and h o w t h es e int erac t
w it h Ac t io n 4 w il l al s o b e o f c o nc ern.
Finally, the interaction of Action 4 measures
w it h t h e arm ’ s l engt h t es t rem ains t o b e
s een — I s u s p ec t t h is w il l b e dif f erent in
dif f erent c o u nt ries , as at p res ent . Given t h at
b as e ero s io n via int eres t and int eres t - l ik e
Best practices
See p age 32 f o r m o re inf o rm at io n.
p ay m ent s w as a k ey t arget o f t h e ent ire BEPS p ro j ec t , it is no t
s u rp ris ing t h at a w ide nu m b er o f t h e BEPS ac t io ns c o u l d im p ac t
s u c h p ay m ent s .
a e an co ntries made specific
comments in relation to this action
Many c o u nt ries ap p arent l y f eel t h at t h ey need no t m ak e any
substantial modifications to their existing rules in order to
c o m p l y w it h BEPS Ac t io n 4, given t h ey al ready h ave w it h in
their individual regimes Fixed Ratio rules (and in many case
Gro u p Rat io Ru l es as w el l ). Th e UK h as no w c o nc l u ded a p u b l ic
c o ns u l t at io n t o invit e view s rel at ing t o w h et h er, and if s o h o w ,
t h e UK s h o u l d ado p t t h e OECD b es t p rac t ic e rec o m m endat io n.
Th e Eu ro p ean Co m m is s io n o n 28 Janu ary 2016 is s u ed a
p ro p o s ed Ant i- Tax Avo idanc e Direc t ive t h at w o u l d addres s t h e
EU- w ide im p l em ent at io n o f Ac t io ns 2 (h y b rid m is m at c h es ),
3 (CFC rules) and 4 (interest limitation rules), as well as
p ro vis io ns o n u nif o rm ex it t ax at io n and a s w it c h - o ver c l au s e as
regards a m inim u m ef f ec t ive c o rp o rat e t ax at io n rat e t h at w ere
earl ier c o ns idered as p art o f t h e EU Co m m o n Co ns o l idat ed
Co rp o rat e Tax Bas e p ro p o s al . Regarding Ac t io n 4, t h e p ro p o s ed
Directive reconfirms that its aim is to provide a fixed level of
m inim u m p ro t ec t io n t o Mem b er St at es , and an ent it y - b y - ent it y
l im it o n b o rro w ing c o s t s o f 30% o f t ax ab l e earnings b ef o re
int eres t , t ax es , dep rec iat io n and am o rt iz at io n (EBITDA), o r
€ 1m , if h igh er, s u b j ec t t o c o u nt ries b eing ab l e t o int ro du c e an
override if a taxpayer can demonstrate that its equity to total
as s et s rat io is no m o re t h an t w o p erc ent age p o int s l o w er t h an
the equivalent group ratio. The proposed Directive opts for an
equity-based group test rather than a group interest to EBITDA
rat io t es t w h ic h is al s o p erm it t ed u nder t h e BEPS Ac t io n 4
rec o m m endat io n. As y et , it is no t c l ear h o w m u c h o f t h e Ant i- Tax
Avo idanc e Direc t ive init iat ive w il l rec eive Mem b er St at e s u p p o rt
and hence the final legislation may be less expansive.
hat s going to happen ne t, and how
niform might implementation e
4
p art o f t h eir do m es t ic l aw m ay c o m e u nder p res s u re t o ac t s inc e
t h e OECD w o u l d l ik e t o s ee as m u c h c o nvergenc e as p o s s ib l e.
Tim ing- w is e, it is c o ns idered t o b e u nl ik el y t h at t h e US (w h ic h
currently has a fixed ratio rule at a level well in excess of the best
p rac t ic e rec o m m ended m ax im u m ) w il l l egis l at e t o b ring in any
c h anges u nt il af t er t h e US p res ident ial el ec t io n in 2016. Ot h er
c o u nt ries c o ns idering m ak ing c h anges m ay w ait t o s ee t h e US
res p o ns e, b u t t h e UK h as s aid t h at it m ay b ring in c h anges in
2017 o r 2018 , dep ending o n t h e o u t c o m e o f t h e c u rrent UK
p u b l ic c o ns u l t at io n o n Ac t io n 4.
W hat are the potential impacts on
siness
Businesses in countries which implement a mechanical fixed
rat io ru l e w il l f ac e res t ric t io ns o n t h e dedu c t ib il it y o f int eres t ,
inc l u ding o n l o ans f ro m t h ird p art ies , w it h negat ive im p l ic at io ns
f o r c o s t s o f c ap it al in m any c as es . Th ey w il l al s o f ac e an
inc reas ing ris k o f u nrel ieved do u b l e t ax at io n. Th e im p ac t s w il l
b e f el t m o s t in s ec t o rs w h ic h are h igh l y l everaged b y ref erenc e
t o t h ird- p art y deb t , s u c h as Inf ra, s o m e Oil & Gas and Real
Es t at e b u s ines s es .
The impact of such a mechanical rule may well be modified by
t h e addit io nal ru l es w it h in individu al c o u nt ry regim es , as in m any
c o u nt ries at p res ent , w h et h er b y an arm ’ s l engt h o verride and/ o r
a group ratio rule or debt/equity safe harbor test.
We rec o m m end t h at b u s ines s es m o del t h e im p ac t o f a p o t ent ial
widespread adoption of a fixed ratio rule on their existing
f u nding, ident if y ing c o u nt ries w h ere t h ey m ay b e im p ac t ed. If
p o s s ib l e, t h ey s h o u l d c o ns ider m ak ing rep res ent at io ns at l o c al
country level where they feel the adoption of a fixed ratio rule
without appropriate exemptions would produce inequitable
o u t c o m es . Th e addit io nal ru l es (inc l u ding a de m inim is ru l e, a
public benefit project exemption and a group ratio rule of some
s o rt ) c o u l d w el l m it igat e s o m e o f t h e m o s t ex t rem e o u t c o m es , s o
t h ere is a l o t t o p l ay f o r.
Th e b es t p rac t ic e rec o m m endat io n s t at u s al l o w s c o u nt ries
flexibility over whether or how they changes their rules.
Countries which currently do not have Fixed Ratio Rules as
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7 5
ction
5
OECD releases final report
o n c o u nt ering h arm f u l t ax
p rac t ic es u nder Ac t io n 5
Executive summary
On 5 Oc t o b er 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) released its final report on Action 5, Countering Harmful Tax Practices More
Effectively, Taking into Account Transparency and Substance (t h e Harm f u l Tax Prac t ic es
Report or the Final Report) under its Action Plan on Base Erosion and Profit Shifting
(BEPS). The Final Report was released in a package that included final reports on all
15 BEPS Ac t io ns .
The Final Report covers two main areas: (i) the definition of a “substantial activity”
c rit erio n t o b e ap p l ied w h en det erm ining w h et h er t ax regim es are h arm f u l ; and (ii)
im p ro ving t rans p arenc y . In do ing s o , it t o u c h es o n a w ide variet y o f t o p ic s , inc l u ding
substance requirements for intellectual property (IP) and other regimes, the
det erm inat io n o f w h ic h IP regim es are al l o w ab l e and w h ic h need t o b e p h as ed o u t , w h at
c o ns t it u t es a h arm f u l p ref erent ial regim e, w h ic h ru l ing inf o rm at io n is t o b e m andat o ril y
exchanged and to whom, what qualifies as a “ruling” and best practices for cross-border
ru l ings (t h e p ro c es s f o r grant ing ru l ings , t erm s , p u b l ic at io n).
In the first instance, the Harmful Tax Practices Report defines the substantial activity
requirement in relation to IP regimes by presenting the “nexus approach” as the agreed
ap p ro ac h . Under t h is ap p ro ac h , t h e ap p l ic at io n o f an IP regim e s h o u l d b e dep endent o n
t h e l evel o f res earc h and devel o p m ent (R& D) ac t ivit ies c arried o u t b y t h e t ax p ay er it s el f .
In addition, IP regimes should essentially be limited to patents (under a broad definition)
and c o p y righ t ed s o f t w are. Six t een ex is t ing IP regim es w ere review ed and f o u nd no t
t o m eet t h e nex u s ap p ro ac h . No new ent rant s s h o u l d b e p erm it t ed t o t h es e regim es
(and any other IP regime that does not meet the substantial activity requirement)
af t er 30 Ju ne 2016 (o r t h e ef f ec t ive dat e o f a new regim e c o ns is t ent w it h t h e nex u s
ap p ro ac h if t h is is int ro du c ed b ef o re t h at dat e). Th e grandf at h er p erio d m ay no t b e
longer than five years after the date the regime is closed to new entrants. Enhanced
transparency requirements will apply to new entrants into an IP regime after 6 February
2015 and the benefits of an IP regime should not be granted in respect of IP acquired
direc t l y o r indirec t l y f ro m rel at ed p art ies af t er 1 Janu ary 2016 (ex c ep t in c as es o f
acquisitions as a result of a domestic or international business restructuring).
7 6
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A ction 5
Wh en ap p l y ing t h e nex u s ap p ro ac h t o ac t ivit ies o t h er t h an IP,
there also would need to be a link between the income qualifying
for benefits and the core activities necessary to earn the income.
The Final Report lists types of activities that could be used
to establish a link with different types of financial and other
service activities, namely headquarters regimes, distribution and
service centers, financing or leasing, fund management, banking
and ins u ranc e and s h ip p ing. Wit h res p ec t t o h o l ding c o m p any
activities, the Final Report states that there may not in fact be
much substance required but many of the concerns raised by
h o l ding regim es m ay b e deal t w it h t h ro u gh ex is t ing f ac t o rs t h at
indic at e t h at a regim e is h arm f u l o r o t h er w o rk o f t h e OECD (e.g.,
t h ro u gh Ac t io ns 2 and 6).
Th e s ec o nd p rio rit y area o f Ac t io n 5 is im p ro ving t rans p arenc y
t h ro u gh a f ram ew o rk f o r t h e c o m p u l s o ry s p o nt aneo u s ex c h ange
o f inf o rm at io n o n c ert ain ru l ings . Th is f ram ew o rk w il l ap p l y
to taxpayer-specific rulings that are (i) rulings on preferential
regim es ; (ii) u nil at eral advanc e p ric ing agreem ent s (APAs )
o r o t h er c ro s s - b o rder u nil at eral ru l ings in res p ec t o f t rans f er
p ric ing; (iii) c ro s s - b o rder ru l ings p ro viding f o r a do w nw ard
adjustment of taxable profits (in particular excess profit and
inf o rm al c ap it al ru l ings ); (iv) p erm anent es t ab l is h m ent (PE)
ru l ings ; o r (v) rel at ed p art y c o ndu it ru l ings . Th e f ram ew o rk
m ay b e ex p anded t o o t h er t y p es o f ru l ing in t h e f u t u re. Th e
information exchange requirement would not relate to the ruling
it s el f , b u t t o c ert ain inf o rm at io n as c o nt ained in a t em p l at e
included in the Final Report. The ruling itself could, however,
be exchanged on request in a second step. The framework
also deals with questions such as time limits, legal basis,
confidentiality and the countries with which information would
h ave t o b e ex c h anged. Inf o rm at io n ex c h ange w il l no t o nl y ap p l y
t o f u t u re ru l ings , b u t al s o t o ru l ings t h at w ere is s u ed o n o r af t er
1 Janu ary 2010 and w ere s t il l in ef f ec t as f ro m 1 Janu ary 2014.
An o ngo ing m o nit o ring and review m ec h anis m , inc l u ding annu al
review , w il l b e p u t in p l ac e t o ens u re c o u nt ries ’ c o m p l ianc e.
Detailed discussion
On 5 October 2015, the OECD released final reports on all
15 focus areas in its Action Plan on Base Erosion and Profit
Shifting (BEPS). The final reports were presented at the G20
Finance Ministers’ meeting in Lima, Peru on 8 October 2015.
After review by the finance ministers, the BEPS package will
go t o t h e G20 l eaders f o r t h eir ap p ro val at t h e s u m m it m eet ing
s c h edu l ed f o r 15- 16 No vem b er in Ant al y a, Tu rk ey .
This Alert summarizes the OECD’s final report on Action 5,
Countering Harmful Tax Practices More Effectively, Taking into
Account Transparency and Substance.
I ntroduction
Th e OECD s t art ed w o rk o n addres s ing h arm f u l t ax c o m p et it io n
in t h e l at e 19 9 0s , res u l t ing in a 19 9 8 rep o rt Harm f u l Tax
Co m p et it io n: An Em erging Gl o b al Is s u e (t h e 19 9 8 Rep o rt ). It
also created the Forum on Harmful Tax Practices (FHTP) to take
t h is w o rk f o rw ard.
In Ac t io n 5, t h e OECD b u il ds o n t h e c o nc l u s io ns o f t h e 19 9 8
Report. It expands the role of the FHTP, by committing the
FHTP to “revamp the work on harmful tax practices.” The
FHTP is asked to focus particularly on defining substantial
activity as a requirement for any preferential regime; improving
t rans p arenc y , inc l u ding c o m p u l s o ry s p o nt aneo u s ex c h ange
o n ru l ings rel at ed t o p ref erent ial regim es ; and eval u at ing
p ref erent ial t ax regim es in t h e BEPS c o nt ex t .
Th e Harm f u l Tax Prac t ic es Rep o rt f o l l o w s a p ro gres s rep o rt
t h at w as rel eas ed o n 16 Sep t em b er 2014 (t h e 2014 Pro gres s
1
Rep o rt ).
1
See EY Gl o b al Tax Al ert , OECD releases interim report under BEPS Action 5 on
countering harmful tax practices, dat ed 21 Sep t em b er 2015.
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A ction 5
Wh ere a regim e is f o u nd t o b e h arm f u l , t h e rel evant
c o u nt ry is given t h e o p p o rt u nit y t o ab o l is h t h e regim e
o r rem o ve t h e f eat u res t h at c reat e t h e h arm f u l ef f ec t .
armf l ta practices as defined
the O EC D
Th e OECD u s es t h e f ram ew o rk u nder t h e 19 9 8 Rep o rt f o r
det erm ining w h et h er a regim e is a h arm f u l p ref erent ial regim e.
hich regimes are within the scope of wor
of F H T P
The FHTP focuses exclusively on regimes applying to income
from geographically mobile activities, such as financial and
o t h er s ervic e ac t ivit ies , inc l u ding t h e p ro vis io n o f int angib l es .
Pref erent ial regim es des igned t o at t rac t inves t m ent in p l ant ,
building, and equipment are outside the scope. Also, the focus
is m o s t l y o n b u s ines s t ax at io n, inc l u ding b o t h nat io nal and s u b nat io nal t ax es . Co ns u m p t io n t ax es are ex p l ic it l y ex c l u ded.
hat is a preferential regime
In o rder f o r a regim e t o b e c o ns idered p ref erent ial , it m u s t o f f er
s o m e f o rm o f t ax p ref erenc e in c o m p aris o n w it h t h e general
t ax ru l es in t h e rel evant c o u nt ry . Th is w o u l d inc l u de redu c ed
t ax rat es as w el l as redu c t io ns in t h e t ax b as e o r p ref erent ial
t erm s f o r t h e p ay m ent o r rep ay m ent o f t ax es . Even a s m al l
degree of preference is sufficient for the regime to be considered
preferential. However, the inquiry does not focus on whether a
regim e is p ref erent ial in c o m p aris o n w it h o t h er c o u nt ries .
hat ma es a preferential regime potentiall
harmful”
Once a regime has been identified as “preferential,” four key
f ac t o rs and eigh t o t h er f ac t o rs are u s ed t o det erm ine w h et h er
t h e p ref erent ial regim e is p o t ent ial l y h arm f u l . Th e f o u r k ey
f ac t o rs are:
i.
Th e regim e im p o s es no o r l o w ef f ec t ive t ax rat es o n inc o m e
from geographically mobile financial and other service
ac t ivit ies .
ii.
Th e regim e is ring- f enc ed f ro m
t h e do m es t ic ec o no m y .
iii. Th e regim e l ac k s t rans p arenc y (e.g., t h e det ail s o f t h e
regim e o r it s ap p l ic at io n are no t ap p arent , o r t h ere is
inadequate regulatory supervision or financial disclosure).
iv.
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Th ere is no ef f ec t ive ex c h ange o f inf o rm at io n w it h res p ec t
t o t h e regim e.
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The first factor (no or low effective tax) is a gateway criterion:
if t h is c rit erio n is no t m et , t h e regim e w il l no t b e c o ns idered
h arm f u l . If t h e c rit erio n is m et , t h e o t h er t h ree k ey f ac t o rs and,
w h ere rel evant , t h e eigh t o t h er f ac t o rs need t o b e eval u at ed. It
o nl y t ak es o ne o f t h e rem aining t h ree k ey f ac t o rs t o b e m et t o
h ave a regim e c h arac t eriz ed as p o t ent ial l y h arm f u l .
Th e eigh t o t h er f ac t o rs general l y h el p t o s p el l o u t , in m o re
det ail , s o m e o f t h e p rinc ip l es and as s u m p t io ns t h at s h o u l d b e
c o ns idered in ap p l y ing t h e k ey f ac t o rs t h em s el ves . Th ey are:
i.
Artificial definition of the tax base
ii.
Failure to adhere to international transfer pricing principles
iii. Foreign source income exempt from residence country
t ax at io n
iv.
Nego t iab l e t ax rat e o r t ax b as e
v.
Ex is t enc e o f s ec rec y p ro vis io ns
vi. Ac c es s t o a w ide net w o rk o f t ax t reat ies
vii. Pro m o t io n o f t h e regim e as a t ax m inim iz at io n veh ic l e
viii. Enc o u ragem ent o f o p erat io ns o r arrangem ent s t h at are
p u rel y t ax - driven and invo l ve no s u b s t ant ial ac t ivit ies
hat ma es a potentiall harmf l regime act all
harmful”
The final step is to determine whether a “potentially” harmful
regim e, ac c o rding t o t h e f ac t o rs des c rib ed ab o ve, is “ ac t u al l y
h arm f u l ” b y anal y z ing w h et h er it h as h arm f u l ec o no m ic ef f ec t s .
Th is anal y s is c o ns iders w h et h er t h e regim e res u l t s in a s h if t o f
ac t ivit ies f ro m o ne c o u nt ry t o t h e c o u nt ry p ro viding t h e regim e
rat h er t h an generat ing new ac t ivit ies , w h et h er t h e ac t ivit ies
in t h e h o s t c o u nt ry are c o m m ens u rat e w it h t h e am o u nt o f
inves t m ent o r inc o m e, and w h et h er t h e p ref erent ial regim e is t h e
p rim ary m o t ivat io n f o r t h e l o c at io n o f an ac t ivit y .
onse ences of a regime eing fo nd to e
harmful
Wh ere a regim e is f o u nd t o b e h arm f u l , t h e rel evant c o u nt ry
is given t h e o p p o rt u nit y t o ab o l is h t h e regim e o r rem o ve t h e
f eat u res t h at c reat e t h e h arm f u l ef f ec t . Ot h er c o u nt ries m ay t ak e
def ens ive m eas u res t o c o u nt er t h e ef f ec t s o f t h e h arm f u l regim e.
Al s o , u nder BEPS Ac t io n 5, ru l ings o n p o t ent ial l y h arm f u l
regim es w o u l d h ave t o b e s p o nt aneo u s l y ex c h anged w it h f o reign
tax authorities. This requirement would apply whether or not the
regim e is ac t u al l y h arm f u l .
A ction 5
The rationale behind the modified nexus approach
is that the FHTP considers it unlikely that a
c o m p any w il l o u t s o u rc e t h e f u ndam ent al val u ec reat ing ac t ivit ies t o an u nrel at ed p art y , regardl es s
o f w h ere t h at u nrel at ed p art y is l o c at ed.
New focus on substantial activity
Su b s t ant ial ac t ivit y w as al ready c o ns idered as o ne o f t h e
“ o t h er f ac t o rs ” in t h e 19 9 8 Rep o rt . Th is f ac t o r l o o k s at
w h et h er a regim e “ enc o u rages p u rel y t ax - driven o p erat io ns o r
arrangem ent s ” and s t at es t h at “ m any h arm f u l p ref erent ial t ax
regim es are des igned in a w ay t h at al l o w s t ax p ay ers t o derive
benefits from the regime while engaging in operations that are
p u rel y t ax - driven and invo l ve no s u b s t ant ial ac t ivit ies .”
Th e 2014 Pro gres s Rep o rt s u gges t ed t h at t h e nex u s ap p ro ac h
w as t h e m o s t ap p ro p riat e, indic at ing t h at t h e t rans f er p ric ing
ap p ro ac h w as o nl y s u p p o rt ed b y a f ew c o u nt ries and t h e val u e
c reat io n ap p ro ac h did no t h ave any s u p p o rt o ver t h e o t h er
t w o . Co ns ens u s o n t h e ap p l ic at io n o f t h e nex u s ap p ro ac h w as
reached in February 2015 when the G20 endorsed the nexus
ap p ro ac h as p res ent ed b y t h e OECD in a do c u m ent t it l ed Ac t io n
5: Agreement on Modified Nexus Approach for IP Regimes (the
February Action Paper). This approach is further developed in
the Final Report.
Action 5 elevates the “substantial activity requirement” in
im p o rt anc e. Go ing f o rw ard it w il l b e c o ns idered al o ngs ide
t h e f o u r k ey f ac t o rs w h en det erm ining w h et h er a regim e is
p o t ent ial l y h arm f u l . Th is m eans t h at a regim e t h at m eet s t h e
“ no o r l o w ef f ec t ive t ax rat es ” t es t (k ey f ac t o r 1, w h ic h ac t s as a
gat ew ay t es t ) w il l b e c o ns idered h arm f u l if t h ere is no s u b s t ant ial
activity in the country granting the regime. This is a significant
c h ange f ro m t h e p rac t ic e o f t h e OECD t o dat e. It is t h eref o re
critically important how “substantial activity” is defined. Very
l im it ed gu idanc e o n w h at c o ns t it u t es “ s u b s t ant ial ac t ivit y ” w as
inc l u ded in t h e 19 9 8 Rep o rt .
The substantial activity requirement applies to all preferential
regimes in scope. However, in the first instance the FHTP focused
on defining the concept of substantial activity in the context of
IP regim es (i.e., regim es p ro viding p ref erent ial t ax t reat m ent f o r
income arising from qualifying intellectual property).
Under the agreed nexus approach, benefits would only be
grant ed in res p ec t o f inc o m e aris ing f ro m IP w h ere t h e ac t u al
R& D ac t ivit y w as u ndert ak en b y t h e t ax p ay er it s el f . Ac c o rding t o
t h e OECD, “ ex p endit u res ac t as a p ro x y f o r s u b s t ant ial ac t ivit ies .”
Mere c ap it al c o nt rib u t io ns o r ex p endit u res f o r s u b s t ant ial R& D
activity by parties other than the taxpayer are not qualifying IP
ex p endit u res , ex c ep t w h ere s u c h ac t ivit ies are u ndert ak en b y
u nrel at ed p art ies , irres p ec t ive o f t h eir res idenc e. Ex p endit u res
f o r ac t ivit ies u ndert ak en b y rel at ed p art ies w o u l d no t c o u nt as
qualifying expenditures. The rationale behind this approach is
that the FHTP considers it unlikely that a company will outsource
t h e f u ndam ent al val u e- c reat ing ac t ivit ies t o an u nrel at ed p art y ,
regardl es s o f w h ere t h at u nrel at ed p art y is l o c at ed. In a c h ange
from the 2014 Progress Report, the Final Report gives countries
t h e o p t io n t o l im it u nrel at ed o u t s o u rc ing t o a c ert ain p erc ent age
o r p ro p o rt io n.
The proportion of income that may benefit from an IP regime
(“the nexus ratio”) is the same proportion as that of qualifying
ex p endit u res c o m p ared t o o veral l ex p endit u res . Th is is
summarized in the following formula given in the Final Report:
S ubstantial activity req uirement in the
conte t of regimes
efinition of s
stantial acti it
The FHTP considered the following approaches to defining the
substantial activity requirement in relation to IP regimes:
i.
A value creation approach that would require taxpayers
to undertake a set number of significant development
ac t ivit ies in o rder t o b e ent it l ed t o an IP regim e.
ii.
A transfer pricing approach that would require a set level
o f im p o rt ant f u nc t io ns b eing as s u m ed in t h e j u ris dic t io n o f
t h e regim e b y t h e t ax p ay er t h at int ends t o ap p l y t h e regim e.
Th e t ax p ay er w o u l d h ave t o b e t h e l egal o w ner o f t h e as s et s
giving rise to the tax benefits, use those assets, and bear
t h e ec o no m ic ris k s o f s u c h as s et s .
•
a+ b
a+ b + c + d
• “ a” rep res ent s R& D ex p endit u res inc u rred b y t h e t ax p ay er
it s el f
• “ b ” rep res ent s ex p endit u res f o r u nrel at ed- p art y o u t s o u rc ing
• “c” represents acquisition costs of IP
• “ d” represents expenditures for related-party outsourcing
Th e ex p endit u res c o vered in “ a” and “ b ” are ref erred t o as
“qualifying expenditure,” with the sum of all four categories of
ex p endit u res o r c o s t s c o ns t it u t ing “ o veral l ex p endit u re.”
iii. A nexus approach that links the benefits of the regime with
t h e R& D ex p ens es inc u rred b y t h e t ax p ay er.
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A ction 5
To c o u nt er any p o s s ib l e inc ent ives f o r t ax p ay ers t o u nderval u e
transfers between related parties, any related party acquisitions
of IP will require documentation substantiating the arm’s length
price. “Acquisitions” include any transfer of rights whether or not
a p ay m ent w as ac t u al l y m ade.
A number of the current IP regimes also apply to acquired IP.
Under t h e nex u s ap p ro ac h t h es e IP regim es need t o b e am ended
t o avo id b eing c o ns idered h arm f u l t ax regim es , b ec au s e c ap it al
expenditures to acquire IP will be excluded from qualifying
ex p endit u res . Onl y t h e ex p endit u res inc u rred f o r im p ro ving
the IP asset after it was acquired will be treated as qualifying
expenditures. Acquisition costs will, however, be included in
o veral l ex p endit u res and w il l t h eref o re redu c e t h e p o rt io n o f
qualifying expenditures compared to overall expenditures (which
in turn will reduce the income that could benefit from an IP
regim e). As a res u l t , if a t ax p ay er do es no t c o nt inu e t o devel o p
acquired IP, there will effectively be no benefit under an OECDc o m p l iant IP regim e u nder t h is ap p ro ac h . Wh ere t h e t ax p ay er
continues to develop the IP, the benefits will likely be reduced
under this approach compared to the benefits currently available
u nder a nu m b er o f IP regim es .
When calculating qualifying expenditures, countries may permit
t ax p ay ers t o ap p l y a 30% “ u p - l if t .” Th is u p - l if t m ay inc reas e
qualifying expenditures (i.e., “a” and “b” in the above formula)
but only to the extent that the taxpayer has non-qualifying
ex p endit u res (i.e., “ c ” and “ d” in t h e ab o ve f o rm u l a). Th is
means that the increased amount of qualifying expenditures
c anno t ex c eed t h e t ax p ay er’ s o veral l ex p endit u res . Th is u p - l if t
c o nc ep t w as no t inc l u ded in t h e 2014 Pro gres s Rep o rt , b u t
was introduced in the February Action Paper. According to the
Final Report, its purpose is to ensure that the nexus approach
does not penalize taxpayers excessively for acquiring IP or
outsourcing R&D activities to related parties. The Final Report
acknowledges that taxpayers that acquired IP or outsourced
a p o rt io n o f t h e R& D t o a rel at ed p art y m ay b e res p o ns ib l e f o r
m u c h o f t h e val u e c reat io n t h em s el ves . Nevert h el es s , t h e u p - l if t
still requires taxpayers to themselves carry out R&D activities, as
the up-lift is defined as a percentage of qualifying expenditure.
Co u nt ries m ay t reat t h e nex u s rat io as a reb u t t ab l e p res u m p t io n.
If t h is o p t io n is u s ed, t ax p ay ers w o u l d h ave t h e p o s s ib il it y
to prove that more income should qualify for the IP regime.
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Th is w o u l d b e l im it ed t o “ ex c ep t io nal c irc u m s t anc es ” and
requires that taxpayers be able to establish that the application
o f t h e nex u s rat io l eads t o an o u t c o m e t h at is no t c o m m ens u rat e
with the level of their R&D activity. The Final Report contains
s t ric t and det ail ed ru l es o n t h e ap p l ic at io n o f t h e reb u t t ab l e
presumption, including a mandatory annual review, specific
documentation requirements, the requirement to provide
certain information to the FHTP for monitoring purposes
as w el l as s p o nt aneo u s inf o rm at io n ex c h ange w it h o t h er
j u ris dic t io ns c o nc erned.
alif ing
Many o f t h e c u rrent IP regim es do no t o nl y ap p l y t o p at ent s , b u t
al s o ap p l y t o m ark et ing- rel at ed IP s u c h as t radem ark s . Under
the nexus approach, the only IP assets that could qualify for
tax benefits under an IP regime are patents and other IP assets
that are functionally equivalent to patents, if those IP assets
are b o t h l egal l y p ro t ec t ed and s u b j ec t t o s im il ar ap p ro val and
registration processes. IP assets that are functionally equivalent
t o p at ent s are:
i.
Patents defined broadly (i.e., utility models, IP assets that
grant p ro t ec t io n t o p l ant s and genet ic m at erial , o rp h an dru g
des ignat io ns , and ex t ens io ns o f p at ent p ro t ec t io n)
ii.
Co p y righ t ed s o f t w are
iii. Ot h er IP as s et s t h at are:
a.
No n- o b vio u s , u s ef u l and no vel
b.
Substantially similar to IP assets in the first two
c at ego ries
c.
Certified as such in a transparent certification
p ro c es s b y a c o m p et ent go vernm ent agenc y t h at is
indep endent f ro m t h e t ax adm inis t rat io n
Th is c at ego ry o nl y ap p l ies t o t ax p ay ers t h at h ave no m o re t h an
€ 50 m il l io n in gl o b al gro u p - w ide t u rno ver and t h at t h em s el ves
earn no m o re t h an € 7 .5 m il l io n p er y ear in gro s s revenu es f ro m
al l IP as s et s . Th is t h ird c at ego ry o f IP as s et s w il l b e review ed
b y 2020.
As a res u l t , m any c u rrent IP regim es w il l h ave t o b e am ended in
o rder f o r t h em no t t o b e c o ns idered as h arm f u l t ax regim es .
A ction 5
Many ex is t ing IP regim es , inc l u ding al l t h e 16 regim es
reviewed by the FHTP, do not meet the requirements
resulting from the modified nexus approach.
rac ing of e pendit res and income
Taxpayers that want to benefit from an IP regime will have to
t rac k ex p endit u res in o rder t o b e ab l e t o s u b s t ant iat e t h e nex u s
b et w een ex p endit u res and inc o m e and t o p ro vide evidenc e o f
t h is l ink t o t ax adm inis t rat io ns . In p rinc ip l e, t h is w o u l d b e a l ink
b et w een ex p endit u res , IP as s et s and IP inc o m e, and t ax p ay ers
w o u l d h ave t o t rac k t o IP as s et s . Ho w ever, w h ere s u c h t rac k ing
would be unrealistic and require arbitrary judgments, countries
m ay al s o al l o w a p ro du c t - b as ed ap p ro ac h . Under t h is ap p ro ac h
qualifying and overall expenditure would not be tracked in
relation to specific IP assets but in relation to specific products
to which IP assets contribute. This would require taxpayers to
include all qualifying expenditure linked to the development
of all IP assets that contributed to the product in “qualifying
ex p endit u res ” and t o inc l u de al l o veral l ex p endit u res l ink ed t o
t h e devel o p m ent o f al l IP as s et s t h at c o nt rib u t ed t o t h e p ro du c t
in “overall expenditures.” However, in certain cases (the Final
Rep o rt gives t h e ex am p l e o f m edic ines t h at are p ro du c ed in
dif f erent c o l o rs , do s ages o r s iz es ) t rac k ing o n an individu al
p ro du c t - b as is al s o w o u l d no t b e ap p ro p riat e. In t h o s e c as es
tracking could be in relation to product families. The Final Report
contains a list of mandatory documentation requirements,
inc l u ding, b u t no t l im it ed, t o inf o rm at io n o n h o w t h e ex p endit u re
w as t rac k ed.
randfathering for e isting
regimes
Many ex is t ing IP regim es , inc l u ding al l t h e 16 regim es review ed
2
by the FHTP, do not meet the requirements resulting from
the modified nexus approach. The Final Report contains the
f o l l o w ing gu idanc e o n grandf at h ering.
No new ent rant s s h o u l d b e p erm it t ed t o any ex is t ing IP regim e
af t er 30 Ju ne 2016. If a new regim e c o ns is t ent w it h t h e nex u s
ap p ro ac h t ak es ef f ec t b ef o re 30 Ju ne 2016, no new ent rant s
s h o u l d b e p erm it t ed af t er t h e new regim e h as t ak en ef f ec t . “ New
entrants” includes both taxpayers not previously benefiting
f ro m t h e regim e and new IP as s et s o w ned b y t ax p ay ers al ready
benefiting from the regime. Jurisdictions are permitted to allow
taxpayers to benefit from the existing regime until a specified
abolition date, which may not be later than five years after the
dat e t h e regim e is c l o s ed t o new ent rant s , w h ic h m eans t h at t h e
l at es t p o s s ib l e dat e is 30 Ju ne 2021. Legis l at ive p ro c es s es t o
im p l em ent a new IP regim e m u s t b egin in 2015.
Th e OECD b el ieves t h ere is a ris k t h at new ent rant s w il l s eek t o
structure into existing regimes with a view to benefiting from
grandfathering. Therefore, enhanced transparency requirements
will apply to new entrants into an IP regime after 6 February
2015. Th is w il l inc l u de s p o nt aneo u s ex c h ange o f inf o rm at io n
o n t h e ident it y o f new ent rant s , regardl es s o f w h et h er a ru l ing
is p ro vided. In addit io n, t h e IP regim e s h o u l d no t b e grant ed in
respect of IP acquired directly or indirectly from related parties
after 1 January 2016 (unless such assets already benefitted
f ro m an IP regim e p rio r t o s u c h t rans ac t io n). An ex c ep t io n w o u l d
apply to acquisitions from related parties if this acquisition
is p art o f a do m es t ic o r int ernat io nal b u s ines s res t ru c t u ring
int ended t o t rans f er IP as s et s t o regim es t h at are b eing
modified to comply with the nexus approach. No definition of
“ res t ru c t u ring” is given.
S ubstantial activity in the context of
regimes other than regimes
Substantial activity is not only required for IP regimes but for
al l p ref erent ial regim es . Wh en ap p l ied t o o t h er regim es , t h e
nex u s ap p ro ac h al s o s h o u l d es t ab l is h a l ink b et w een t h e inc o m e
qualifying for benefits and the core activities necessary to earn
t h e inc o m e. Th e c o re ac t ivit ies at is s u e in no n- IP regim es are
geographically mobile financial and other service activities (as
these are the exclusive focus of the FHTP).
Th e Harm f u l Tax Prac t ic es Rep o rt l is t s t y p es o f ac t ivit ies t h at
could be used to establish a link with different types of financial
and other service activities, namely headquarters regimes,
distribution and service centers, financing or leasing, fund
m anagem ent , b ank ing and ins u ranc e and s h ip p ing. Wit h res p ec t
t o h o l ding ac t ivit ies , t h e Harm f u l Tax Prac t ic es Rep o rt s t at es
that there may not in fact be much substance required but many
o f t h e c o nc erns rais ed b y h o l ding regim es m ay b e deal t w it h
t h ro u gh ex is t ing f ac t o rs t h at indic at e t h at a regim e is h arm f u l
o r o t h er w o rk c arried o n b y t h e OECD (e.g., t h ro u gh Ac t io ns
2 and 6). However, the substantial activity factor requires, at
a minimum, that all corporate law filing requirements are met
and t h at t h e h o l ding c o m p any h as t h e s u b s t anc e nec es s ary
to engage in the activities of holding and managing equity
p art ic ip at io ns , w h ic h p rec l u des l et t er b o x c o m p anies .
2
Belgium, China, Colombia, France, Hungary, Israel, Italy, Luxembourg,
Netherlands, Portugal, Spain, Spain (Basque Country), Spain (Navarra),
Sw it z erl and (Cant o n o f Nidw al den), Tu rk ey and t h e UK.
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A ction 5
pontaneo s e change of information
on ta r lings
Th e s ix c at ego ries o f ru l ings c o vered b y t h e ex c h ange o f
information requirement are:
i.
Ru l ings o n p ref erent ial regim es : Th is c at ego ry c o nc erns
rulings that are within the scope of work of the FHTP (i.e.,
ru l ings c o nc erning geo grap h ic al l y m o b il e ac t ivit ies , s u c h as
financial and other service activities, including intangibles),
are p ref erent ial and m eet t h e l o w o r no ef f ec t ive t ax rat e
f ac t o r des c rib ed ab o ve. Ru l ings w o u l d no t h ave t o h ave b een
reviewed by the FHTP or found to be potentially or actually
h arm f u l . Co u nt ries w o u l d t h eref o re h ave t o s el f - as s es s
whether a regime is preferential. This includes specifically
regim es in t h e f o l l o w ing areas : s h ip p ing, b ank ing, ins u ranc e,
financing and leasing, fund management, headquarters,
dis t rib u t io n c ent er, s ervic e c ent er, IP (even if t h e regim e
is c o ns is t ent w it h t h e nex u s ap p ro ac h o u t l ined ab o ve) and
h o l ding c o m p any regim es .
ii.
Unil at eral APAs o r o t h er c ro s s - b o rder u nil at eral ru l ings
in res p ec t o f t rans f er p ric ing (i.e., u nil at eral t ax ru l ings
c o vering t rans f er p ric ing o r t h e ap p l ic at io n o f t rans f er
p ric ing m et h o ds , f al l ing s h o rt o f an APA).
Im p ro ving t rans p arenc y is t h e s ec o nd p rio rit y u nder Ac t io n 5.
The FHTP was specifically asked to look into compulsory
s p o nt aneo u s ex c h ange o f inf o rm at io n o n ru l ings . Lac k o f
t rans p arenc y is al s o o ne o f t h e f ac t o rs in c o ns idering w h et h er a
regim e is h arm f u l .
The FHTP applied a three-step approach:
i.
The first step was the development of a framework for
c o m p u l s o ry s p o nt aneo u s ex c h ange o f inf o rm at io n o n
ru l ings rel at ed t o p ref erent ial regim es . Th is f ram ew o rk w as
set out in the 2014 Progress Report but was significantly
expanded under the Final Report.
ii.
In the second step, the FHTP considered whether
t rans p arenc y c an b e f u rt h er im p ro ved and c o ns idered t h e
ru l ing s y s t em s o f m em b er and as s o c iat ed c o u nt ries . Th is
res u l t ed in ex p anding t h e f ram ew o rk t o c o ver no t o nl y
ru l ings t h at rel at e t o p ref erent ial regim es .
iii. In the third step, the FHTP developed general best practices
f o r t h e des ign and o p erat io n o f ru l ing regim es .
The framework in the Final Report differs from that included in
the 2014 Progress Report. The most significant difference is
t h e ex p ans io n in s c o p e. Wh il e t h e 2014 Pro gres s Rep o rt o nl y
referred to rulings on preferential regimes, the Final Report
foresees information exchange on taxpayer-specific rulings that
fall in one of six categories. The Final Report defines rulings
as “ any advic e, inf o rm at io n o r u ndert ak ing p ro vided b y a t ax
authority to a specific taxpayer or group of taxpayers concerning
t h eir t ax s it u at io n and o n w h ic h t h ey are ent it l ed t o rel y .”
Information exchange only applies to taxpayer-specific rulings.
These are rulings that apply to a specific taxpayer in response
to a ruling request and can be given both pre-transaction and
p o s t - t rans ac t io n. Th is inc l u des ru l ings given inf o rm al l y b u t no t
s t at em ent s o r agreem ent s reac h ed as a res u l t o f an au dit c arried
out after the filing of tax returns or accounts. However, rulings
o r agreem ent s given as a res u l t o f an au dit are in s c o p e if t h ey
concern the treatment of future profits and fall within any of the
s ix c at ego ries .
8 2
lo al a
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iii. Cro s s - b o rder ru l ings p ro viding f o r a u nil at eral do w nw ard
adjustment of taxable profits that is not directly reflected
in the taxpayer’s financial/commercial accounts. The
Final Report gives the example of excess profit rulings,
inf o rm al c ap it al ru l ings and s im il ar ru l ings t h at rec o gniz e
t h e c o nt rib u t io n o f c ap it al o r an as s et and p ro vide f o r an
adjustment that reduces the taxable profits (e.g., through
a deem ed int eres t dedu c t io n o n an int eres t f ree l o an).
An agreem ent w as reac h ed t h at inf o rm at io n o n c as es o f
informal capital contribution or excess profit regimes will
be exchanged even if a country does not require a ruling to
benefit from the regime.
iv.
PE ru l ings : Ru l ings t h at (i) ex p l ic it l y det erm ine o r dec ide o n
t h e ex is t enc e o r ab s enc e o f a PE (eit h er ins ide o r o u t s ide o f
t h e c o u nt ry giving t h e ru l ing) o r (ii) p ro vide f o r h o w m u c h
profit will be attributed to a PE.
A ction 5
The Final Report makes it clear that countries will not be
ab l e t o invo k e t h e l ac k o f rec ip ro c it y as an argu m ent f o r
no t s p o nt aneo u s l y ex c h anging inf o rm at io n w it h an af f ec t ed
c o u nt ry w h ere t h e af f ec t ed c o u nt ry do es no t grant , and
t h eref o re c anno t ex c h ange, ru l ings t h at are s u b j ec t t o t h e
o b l igat io n t o s p o nt aneo u s l y ex c h ange inf o rm at io n.
v.
Rel at ed p art y c o ndu it ru l ings : Ru l ings c o vering
“arrangements involving cross-border flows of funds or
inc o m e t h ro u gh an ent it y in t h e c o u nt ry giving t h e ru l ing,
whether those funds or income flow to another country
direc t l y o r indirec t l y (i.e., t h ro u gh ano t h er do m es t ic
entity first).”
vi. In addit io n, inf o rm at io n ex c h ange w o u l d ap p l y t o any o t h er
type of ruling agreed by the FHTP that in the absence of
s p o nt aneo u s ex c h ange o f inf o rm at io n gives ris e t o BEPS
concerns. This category gives the FHTP flexibility to extend
t h e o b l igat io n t o ex c h ange inf o rm at io n t o addit io nal
c at ego ries o f ru l ings in t h e f u t u re.
The information exchange requirement would not relate to the
ru l ing it s el f , b u t t o c ert ain inf o rm at io n as c o nt ained in a t em p l at e
included in the Final Report. The tax authorities of the receiving
country could then determine whether to request the ruling
it s el f , w h ic h w o u l d t h en h ave t o b e ex c h anged in a s ec o nd s t ep .
Inf o rm at io n w o u l d h ave t o b e ex c h anged w it h any af f ec t ed
c o u nt ry . Wh ic h c o u nt ry is c o ns idered as af f ec t ed varies
dep ending o n t h e c at ego ry o f ru l ing c o nc erned, b u t inc l u des in
al l c as es t h e res idenc e c o u nt ry o f t h e u l t im at e p arent c o m p any
and t h e im m ediat e p arent c o m p any . In m o s t c as es inf o rm at io n
al s o w il l h ave t o b e ex c h anged w it h t h e c o u nt ries o f res idenc e
of related parties (as defined in the Final Report) with which the
t ax p ay er ent ers int o a t rans ac t io n t h at is c o vered b y t h e ru l ing.
The framework also deals with questions of confidentiality.
Th e 2014 Pro gres s Rep o rt ant ic ip at ed t h at t h e f ram ew o rk s et
out in that Final Report would apply as from autumn 2014.
However, the Final Report indicates framework has not been
ap p l ied y et du e t o t h e inc reas e in vo l u m e o f inf o rm at io n t h at w il l
need to be exchanged as a result of the significant expansion
of rulings covered. The Final Report therefore provides for new
k ey dat es :
• Th e o b l igat io n t o ex c h ange inf o rm at io n al s o ap p l ies t o ru l ings
t h at w ere is s u ed o n o r af t er 1 Janu ary 2010 and w ere s t il l
in effect as from 1 January 2014, including rulings modified
in t h is p erio d. Th e p ro c es s t o ex c h ange inf o rm at io n o n t h es e
ru l ings s h o u l d b e c o m p l et ed b y t h e end o f 2016.
The Final Report makes it clear that countries will not be
ab l e t o invo k e t h e l ac k o f rec ip ro c it y as an argu m ent f o r no t
s p o nt aneo u s l y ex c h anging inf o rm at io n w it h an af f ec t ed c o u nt ry
w h ere t h e af f ec t ed c o u nt ry do es no t grant , and t h eref o re
c anno t ex c h ange, ru l ings t h at are s u b j ec t t o t h e o b l igat io n t o
s p o nt aneo u s l y ex c h ange inf o rm at io n. Ho w ever, inf o rm at io n
ex c h ange m ay b e s u s p ended o r l im it ed in s c o p e if ap p ro p riat e
safeguards to ensure confidentiality are not in place or if there
has been a breach in confidentiality and the situation has not
b een ap p ro p riat el y res o l ved.
The Final Report also sets out best practices as regards the
process of granting a ruling, the term of rulings, subsequent
au dit / c h ec k ing p ro c edu res as w el l as p u b l ic at io n and ex c h ange
of information. These apply to taxpayer-specific rulings as well
as general ru l ings , i.e., ru l ings t h at ap p l y t o gro u p s o r t y p es
of taxpayers or may be given in relation to a defined set of
c irc u m s t anc es o r ac t ivit ies .
The FHTP will monitor and review compliance with the obligation
t o s p o nt aneo u s l y ex c h ange inf o rm at io n u nder Ac t io n 5. Th is w il l
involve an annual review by the FHTP starting at the beginning
of 2017. To that end, countries that provide taxpayer-specific
ru l ings t h at f al l w it h in t h e f ram ew o rk w il l b e ex p ec t ed t o p ro vide
c ert ain s t at is t ic al inf o rm at io n o n an annu al b as is .
• Inf o rm at io n o n ru l ings is s u ed o n o r af t er 1 Ap ril 2016 w il l
h ave t o b e ex c h anged at t h e l at es t w it h in t h ree m o nt h s af t er
t h e ru l ing h as b ec o m e avail ab l e t o t h e c o m p et ent au t h o rit y o f
t h e c o u nt ry grant ing t h e ru l ing.
lo al a
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8 3
A ction 5
To ensure a level playing field and avoid the risk
o f h arm f u l t ax p rac t ic es b eing s im p l y dis p l ac ed t o
third countries, the FHTP will engage with other
no n- OECD m em b er c o u nt ries o n t h e b as is o f t h e
framework developed in the Final Report.
rogress report on re iew of mem er
country and associated country tax
regimes
In 2010 the FHTP started a review process of preferential tax
regim es in m em b er c o u nt ries and as s o c iat ed c o u nt ries , w h ic h
c o vers 43 regim es . As t h e review c o m m enc ed in 2010, i.e.,
b ef o re t h e BEPS Ac t io n Pl an, t h e review is general l y b as ed o n
t h e f ac t o rs s et o u t in t h e 19 9 8 Rep o rt , u nder w h ic h “ s u b s t ant ial
ac t ivit y ” w as no t y et a k ey f ac t o r. Th is w as do ne t o ens u re
c o ns is t enc y in t h e ap p ro ac h . Onl y IP regim es w ere c o ns idered
in light of the substantial activity requirement. As mentioned
above, the FHTP concluded that all sixteen IP regimes that
w ere review ed are inc o ns is t ent w it h t h e nex u s ap p ro ac h . Of
t h e rem aining 27 regim es o t h er t h an IP regim es , no ne w as
c o ns idered as ac t u al l y h arm f u l . Ho w ever, t h e review o f f o u r
regim es h as no t y et b een c o nc l u ded and f o u r regim es are in t h e
p ro c es s o f b eing el im inat ed.
8 4
lo al a
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Next steps
In addit io n t o m o nit o ring t h e ap p l ic at io n o f t h e t rans p arenc y
f ram ew o rk (i.e., t h e f ram ew o rk f o r s p o nt aneo u s ex c h ange
of information on rulings), the FHTP will continue to monitor
p ref erent ial regim es . Wit h res p ec t t o p ref erent ial IP regim es ,
monitoring will specifically cover the legislative processes
u ndert ak en b y c o u nt ries t o u p dat e IP regim es t h at do no t
m eet t h e nex u s ap p ro ac h , t h e ap p l ic at io n o f t h e nex u s rat io as
reb u t t ab l e p res u m p t io n (if c o u nt ries dec ide t o ap p l y t h is o p t io n)
as w el l as t h e grant ing o f IP regim es t o “ o t h er IP as s et s ” as
defined above.
To ensure a level playing field and avoid the risk of harmful tax
practices being simply displaced to third countries, the FHTP will
engage w it h o t h er no n- OECD m em b er c o u nt ries o n t h e b as is o f
the framework developed in the Final Report.
Action 5 also required the FHTP to consider revisions or
addit io ns t o t h e ex is t ing f ram ew o rk t o eval u at e h arm f u l t ax
practices. The FHTP established two areas that could benefit
from further consideration, viz., “artificial definition of the tax
b as e” and ring- f enc ing. Ho w ever, t h e OECD and G20 c o u nt ries
involved in the FHTP considered it too early to accurately define
areas in w h ic h t h e ex is t ing c rit eria m ay f al l s h o rt b ec au s e it is
no t y et p o s s ib l e t o eval u at e t h e im p ac t o f t h e el ab o rat io n o f t h e
s u b s t ant ial ac t ivit y c rit erio n and inc reas ed t rans p arenc y .
A ction 5
I mplications
Ac c o rding t o t h e OECD, t h e w o rk o n h arm f u l t ax p rac t ic es is no t
int ended t o p ro m o t e t h e h arm o niz at io n o f t ax es , t ax s t ru c t u res o r t ax
rat es . Rat h er, it is ab o u t redu c ing t h e ro l e o f t ax at io n o n t h e l o c at io n
of mobile financial and service activities, including intangibles. The
OECD indicates the desire to create a “level playing field” in which
t ax c o m p et it io n c an t ak e p l ac e b y h aving c o u nt ries agree t o a s et o f
c o m m o n c rit eria and b y p ro m o t ing a c o - o p erat ive f ram ew o rk . To t h is
end, t h e OECD no t es t h e im p o rt anc e o f engaging al s o w it h no n- OECD
countries so that any such level playing field will not be limited to OECD
m em b er c o u nt ries .
Even t h o u gh t h e OECD h as b een review ing p ref erent ial t ax regim es o f it s
m em b er c o u nt ries f o r m o re t h an a dec ade, t h e new f o c u s o n s u b s t ant ial
ac t ivit y m ay res u l t in m o re regim es b eing c o ns idered p o t ent ial l y h arm f u l
t h an w as t h e c as e in t h e p as t and, as a res u l t , m ay t rigger c ert ain
am endm ent s b eing m ade t o s o m e t ax regim es . Al l s ix t een IP regim es
review ed w il l h ave t o b e am ended t o b ring t h em in l ine w it h t h e new
nex u s ap p ro ac h and c o u nt ries m ay dec ide t o ap p l y grandf at h ering ru l es
t o ex is t ing regim es . In t h e c as e o f EU c o u nt ries , c o ns iderat io n w il l need
to be given to the matter of how the substantial activity requirement
could be defined without violating EU law.
Finally, the framework for spontaneous exchange of rulings is a
significant step in the OECD’s push for more transparency and
inf o rm at io n ex c h ange. Mem b er c o u nt ries w il l no t o nl y h ave t o adap t
t h eir l aw s t o b e ab l e t o im p l em ent t h e f ram ew o rk , b u t al s o w il l h ave t o
adap t t h eir s y s t em s t o b e ab l e t o p ro c es s t h e inf o rm at io n. Des p it e t h es e
l egal and adm inis t rat ive is s u es , t h e OECD s eem s det erm ined t o m o ve
this forward as quickly as possible by prescribing that member countries
s t art ex c h anging inf o rm at io n as f ro m Ap ril 2016. To u nders c o re t h is ,
all preferential regimes will be reviewed on the basis of this requirement
as w el l . Ho w ever, ex c h ange o f inf o rm at io n p ro vis io ns m ay rais e
c o ns t it u t io nal l aw and p rivac y c o nc erns in s o m e c o u nt ries , w h ic h h ave
no t b een rais ed in t h e p ro j ec t .
E Y contacts
For additional information concerning
t h is Al ert , p l eas e c o nt ac t :
• Erns t & Y o u ng LLP
Gl o b al Tax Des k
New Y o rk
• Gerrit Gro en
+ 1 212 7 7 3- 8 627
gerrit .gro en@ ey .c o m
• Ju rj an Wo u da Ku ip ers
+ 1 212 7 7 3- 6464
j u rj an.w o u dak u ip ers @ ey .c o m
• Erns t & Y o u ng Tax Sarl
Int ernat io nal Tax Servic es
Lu x em b o u rg
• Anj a Taf erner
+ 352 42 124 7 542
anj a.t af erner@ l u .ey .c o m
• Erns t & Y o u ng LLP
Int ernat io nal Tax Servic es
Was h ingt o n, DC
With the development of the nexus approach to define substantial
ac t ivit y as w el l as t h e f ram ew o rk f o r ex c h ange o f inf o rm at io n o n ru l ings
no t o nl y c o vering p ref erent ial regim es b u t c o vering b ro ader c at ego ries
o f c ro s s - b o rder t rans ac t io ns , t h e OECD’ s w o rk is ex p ec t ed t o h ave
significant impact not only on the design of preferential tax regimes but
o n t ax p ay ers o p erat ing int ernat io nal l y in general , p o t ent ial l y l eading t o
an inc reas e in c h al l enges b y t ax au t h o rit ies and inc reas ed c o nt ro vers y .
lo al a
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8 5
BEPS Ac t io n 5:
Anal y s is
hat is the action tr ing
to achie e
Action 5 has two main goals: Requiring
“ s u b s t ant ial ac t ivit y ” f o r any p ref erent ial
t ax regim e and im p ro ving t rans p arenc y
t h ro u gh ex c h ange o f inf o rm at io n o n t ax
ru l ings . Th e OECD’ s earl ier w o rk o n h arm f u l
t ax p rac t ic es , w h ic h b egan in 19 9 8 , w as no t
particularly influential in reducing harmful
regim es . Ho w ever, Ac t io n 5 w il l l ik el y h ave
a b igger im p ac t , given t h e c o ns ens u s
ac h ieved du ring t h e BEPS p ro j ec t and it s
s im il arit y t o w h at t h e Eu ro p ean Co m m is s io n
is t ry ing t o ac h ieve in t h e EU, w h ic h inc l u des
es t ab l is h ing au t o m at ic ex c h ange o f t ax ru l ing
inf o rm at io n b y Mem b er St at es , review ing
s t at e aid ac t io ns , p h as ing o u t EU int el l ec t u al
p ro p ert y (IP) regim es , and p ro m o t ing a
c o m m o n c o ns o l idat ed c o rp o rat e t ax b as e.
J urj an Wouda K uipers
+ 1 212 7 7 3 6464
j u rj an.w o u dak u ip ers @ ey .c o m
W ere any of the action
recommendations
ne pected
A nj a T af erner
+ 352 42 124 7 542
anj a.t af erner@ l u .ey .c o m
8 6
lo al a
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Onc e Germ any and t h e UK h ad agreed in
early 2015 to a “modified nexus approach,”
it s eem ed c l ear t h at t h is w o u l d b e t h e
ap p ro ac h t h at t h e OECD w o u l d t ak e w h en
s et t ing o u t t h e s u b s t ant ial ac t ivit y c rit erio n
f o r al l o w ab l e IP regim es . Th eref o re, t h ere
w ere f ew s u rp ris es , ex c ep t p o s s ib l y f o r t h e
riefing
w el c o m e inc l u s io n o f c o p y righ t ed s o f t w are
and c ert ain no n- p at ent ed IP in t h e el igib l e IP
categories. The Final Report’s definition of
s u b s t ant ial ac t ivit y f o r ac t ivit ies o t h er t h an
IP is rat h er vagu e; s o m e m o re c l arit y w o u l d
h ave b een des irab l e t h ere.
Perh ap s t h e o nl y b ig s u rp ris e w as t h at
the Final Report’s conclusions regarding
ex c h ange o f inf o rm at io n o n t ax ru l ings
w il l c o ver es s ent ial l y al l c ro s s - b o rder
ru l ings , and no t j u s t t h o s e p ert aining t o
p ref erent ial regim es (as s t at ed in t h e 2014
draf t rec o m m endat io ns ). Th e ex c h ange
o f inf o rm at io n no w c o vers even c ert ain
s it u at io ns w h ere no ru l ing w as s o u gh t .
I s there any interaction
between this action and the
others
Pro viding inf o rm at io n o n a c o m p any ’ s t ax
ru l ings is al s o o ne o f t h e go al s o f Ac t io n 13,
which requires information on rulings to
be included in the master file (summary of
ruling) and/or local files (entire ruling). Also,
while not clearly stated, the definition of
“ s u b s t ant ial ac t ivit y ” m igh t al s o b e rel evant
in t h e f u t u re in t h e c o nt ex t o f t reat y ab u s e
(Ac t io n 6) w h en det erm ining w h et h er an
ent it y ’ s p rinc ip al p u rp o s e f o r ent ering int o a
t rans ac t io n o r arrangem ent w as o b t aining a
benefit under a tax treaty.
M inimum standards
See p age 32 f o r m o re inf o rm at io n.
a e an co ntries made specific
comments in relation to this action
The day after the BEPS final reports were released, the
Economic and Financial Affairs Council of the European Union
(ECOFIN) reached political agreement on automatic exchange
of information on tax rulings. There are significant differences
b et w een t h e EU init iat ive and Ac t io n 5. Ho w ever, t h e f ac t t h at
t h e EU w il l im p l em ent a direc t ive o n ex c h ange o f t ax ru l ing
information means that a significant number of countries will be
im p l em ent ing au t o m at ic ex c h ange o f inf o rm at io n. Th is in t u rn
m ak es Ac t io n 5 s t and o u t am o ng t h e BEPS Ac t io ns b ec au s e
t h ere is al ready an agreem ent b y a b l o c o f 28 c o u nt ries t o
im p l em ent o ne o f t h e BEPS p ro j ec t ’ s c ru c ial rec o m m endat io ns
(al b eit w it h a s o m ew h at dif f erent s c o p e and f o rm ).
hat s going to happen ne t, and how
niform might implementation e
Bec au s e al l review ed IP regim es w ere f o u nd t o vio l at e t h e new
s u b s t ant ial ac t ivit y c rit erio n, t h es e regim es w il l h ave t o b e
am ended o r ab o l is h ed. A nu m b er o f c o u nt ries h ave al ready
is s u ed draf t l egis l at io n, and m any m o re are ex p ec t ed t o do
t h at very s o o n. Bec au s e t h e Ac t io n 5 Rep o rt is very det ail ed
o n t h is s u b j ec t , it is ex p ec t ed t h at im p l em ent at io n o f t h e
grandf at h ering ru l es as w el l as t h e nex u s ap p ro ac h w il l b e f airl y
u nif o rm . In addit io n, c o u nt ries t h at did no t h ave an IP regim e
in t h e p as t m igh t no w c o ns ider int ro du c ing o ne b as ed o n t h e
OECD rec o m m endat io ns .
Th e EU is al s o go ing t o m o ve f o rw ard im p l em ent ing 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 . Th e deadl ines and k ey
dat es u nder Ac t io n 5 and t h e EU init iat ive are dif f erent , and w e
b el ieve it is m o re l ik el y t h at EU Mem b er St at es w il l adh ere t o t h e
deadlines agreed on by ECOFIN. This would mean that Member
States would be required to implement by 1 January 2017
(rat h er t h an 1 Ap ril 2016 u nder Ac t io n 5), and in t h e c o nt ex t
o f p as t ru l ings s u b j ec t t o ex c h ange, Mem b er St at es w o u l d b e
o b l igat ed t o ex c h ange inf o rm at io n o n ru l ings t h at h ave b een
is s u ed o n o r af t er 1 Janu ary 2012 (rat h er t h an t h o s e is s u ed o n
or after 1 January 2010, as set out in the Action 5 Final Report).
5
Ho w ever, it is p o s s ib l e t h at s o m e EU Mem b er St at es m igh t ap p l y
t h e dat es s et b y Ac t io n 5.
Tax au t h o rit ies ’ int ernal s y s t em s w il l h ave t o b e adap t ed s o t h ey
c an c o p e w it h p rep aring and t rans m it t ing t h e inf o rm at io n t o
(and rec eiving inf o rm at io n f ro m ) o t h er c o u nt ries in a w ay t h at
ensures confidentiality. This will be a significant challenge. The
EU f ram ew o rk , u nder w h ic h t h e Co m m is s io n c reat es and h o s t s
a c ent ral dep o s it o ry f o r ru l ing inf o rm at io n, w o u l d o nl y ap p l y t o
intra-EU exchanges. For information to be exchanged with or
b et w een no n- EU c o u nt ries , t ax au t h o rit ies w il l h ave t o des ign
p ro c es s es t o s u m m ariz e and ex c h ange t h e inf o rm at io n. Th is
m ay t ak e c o ns iderab l e t im e and res o u rc es , and m eet ing t h e
2016 deadl ine c o u l d b e a c h al l enge. Ho w ever, t h e OECD p l ans t o
im p l em ent an o ngo ing m o nit o r and review m ec h anis m t o ens u re
c o u nt ries ’ c o m p l ianc e w it h t h e o b l igat io n t o s p o nt aneo u s l y
ex c h ange inf o rm at io n (w it h annu al review s s t art ing in 2017 ).
Wh et h er c o u nt ries w il l reac t t o p o t ent ial c rit ic is m b y t h e OECD
o n h o w t h ey ap p l y inf o rm at io n ex c h ange w il l al s o dep end o n
what consequences are attached to it.
W hat are the potential impacts on
siness
Aside from the fact that structures benefiting from current IP
regimes may need to be reviewed, the most significant impact of
Ac t io n 5 m ay b e t h e inc reas ed t rans p arenc y res u l t ing f ro m t h e
ex c h ange o f ru l ing inf o rm at io n. Co m p anies s h o u l d anal y z e t h e
t ax ru l ings t h ey h ave t o det erm ine any ris k s t h at m ay p o t ent ial l y
aris e f ro m t h is inc reas ed t rans p arenc y . A p o t ent ial s ide ef f ec t o f
inc reas ed ex c h ange o f inf o rm at io n is t h at b u s ines s m ay b ec o m e
m o re rel u c t ant t o s eek t ax ru l ings .
Finally, Action 5 highlights an increased focus on the link
b et w een ac t ivit ies and t h e inc o m e t h ey generat e. Th eref o re, w e
rec o m m end t h at c o m p anies review t h e s u b s t anc e and ac t ivit ies
of their IP, holding and financing companies to determine
w h et h er t h ey w o u l d m eet t h e reinf o rc ed s t andards o f Ac t io n 5.
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8 7
ction
6
OECD releases final report
u nder BEPS Ac t io n 6 o n
p revent ing t reat y ab u s e
Executive summary
On 5 Oc t o b er 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) released the final report with recommendations for addressing treaty abuse
in connection with Action 6 of the Action Plan on Base Erosion and Profit Shifting
(BEPS). Th e rep o rt t it l ed Preventing the Granting of Treaty Benefits in Inappropriate
Circumstances (2015 Final Report or Final Report), which supersedes the interim
1
vers io n is s u ed in Sep t em b er 2014 (2014 Del iverab l e), c o nt ains m o del t ax t reat y
p ro vis io ns and rel at ed c h anges t o t h e m o del c o m m ent ary t o addres s t h e inap p ro p riat e
granting of treaty benefits and other potential treaty abuse scenarios. The Final Report
no t es t h at a nu m b er o f c h anges h ave b een m ade t o t h e 2014 Del iverab l e and t h at
further work will be required with respect to certain provisions.
The 2015 Final Report is organized in three sections. Section A includes anti-abuse
p ro vis io ns t h at p ro vide s af egu ards agains t t h e ab u s e o f t reat y p ro vis io ns . In t h is regard,
the Final Report notes that countries have committed to a minimum standard to provide
a m inim u m l evel o f p ro t ec t io n agains t t reat y s h o p p ing. In addit io n t o t h e m inim u m
standard, the Final Report includes targeted rules to be included in tax treaties that
w o u l d addres s o t h er f o rm s o f t reat y ab u s e, inc l u ding s it u at io ns o f du al res ident ent it ies ,
and ru l es t h at ap p l y t o a p erm anent es t ab l is h m ent (PE) s it u at ed in a t h ird s t at e.
Sec t io n B c o nt ains revis io ns t o t h e t it l e and p ream b l e o f t h e OECD Mo del Tax
Co nvent io n (OECD Mo del ) t o c l arif y t h at t h e int ent io n is t o el im inat e do u b l e t ax at io n
w it h o u t c reat ing o p p o rt u nit ies f o r no n- t ax at io n o r redu c ed t ax at io n t h ro u gh t ax evas io n
and avoidance, including through treaty shopping arrangements. Section C identifies
t ax p o l ic y c o ns iderat io ns rel evant t o t h e dec is io n t o ent er int o a t ax t reat y w it h
ano t h er c o u nt ry .
Finally, as indicated above, the 2015 Final Report outlines further work that will be
required under Action 6. In particular, the Final Report notes that further work will
be required with respect to a US-style limitation on benefits (LOB) rule to prevent
treaty shopping, with final versions of the LOB rule and Commentary expected to be
completed in the first part of 2016. In addition, the Final Report specifies that further
w o rk is needed w it h res p ec t t o t h e t reat y ent it l em ent o f no n- c o l l ec t ive inves t m ent
vehicles (non-CIVs) and pension funds and indicates that such work would benefit
f ro m c o ns u l t at io n w it h s t ak eh o l ders . Any f u rt h er w o rk w o u l d need t o b e c o m p l et ed
in the first part of 2016 in order to be relevant for the negotiation of the multilateral
instrument, which is expected to be finalized in 2016.
1
See EY Gl o b al Tax Al ert , OECD releases report under BEPS Action 6 on preventing treaty abuse, dat ed
24 Sep t em b er 2014.
8 8
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A ction 6
Th e f o rm u l at io n o f t h e m inim u m s t andard
reflects the agreement that some flexibility
in implementation is required.
Detailed discussion
ac gro nd
Ac t io n 6 f o c u s es o n t h e p revent io n o f t reat y ab u s e, no t ing
t h at t reat y s h o p p ing is o ne o f t h e m o s t im p o rt ant s o u rc es
o f BEPS c o nc erns . Th e 2014 Del iverab l e s et o u t a s eries o f
rec o m m endat io ns f o r addres s ing t reat y ab u s e, in t h e f o rm
o f c h anges t o t h e OECD Mo del and rel at ed Co m m ent ary .
On 21 No vem b er 2014, f o l l o w ing t h e rel eas e o f t h e 2014
Del iverab l e, t h e OECD is s u ed a p u b l ic dis c u s s io n draf t t it l ed
Follow-Up Work on BEPS Action 6: Preventing Treaty Abuse
2
(Dis c u s s io n Draf t ), that identified a number of issues on which
f o l l o w - u p w o rk w it h res p ec t t o t h e c o nt ent s o f t h e m o del
p ro vis io ns and rel at ed Co m m ent ary w as t o b e c arried o u t b y
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 (Wo rk ing Part y ). 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 w as h el d o n 22 Janu ary 2015, and t h e Wo rk ing Part y
u ndert o o k f u rt h er c o ns iderat io n o f t h e c o m m ent s rec eived at
a Marc h 2015 m eet ing. On 21 May 2015, t h e OECD rel eas ed a
revised discussion draft reflecting the conclusions and proposals
t h at res u l t ed f ro m t h e Janu ary p u b l ic c o ns u l t at io n and Marc h
3
2015 m eet ing (Revis ed Dis c u s s io n Draf t ). Addit io nal c o m m ent s
rec eived w ere f u rt h er c o ns idered b y t h e Wo rk ing Part y at a
m eet ing in Ju ne.
T he 2015 F inal Report
Similar to the 2014 Deliverable, the 2015 Final Report is
o rganiz ed int o t h ree s ec t io ns w h ic h al ign w it h t h e t h ree
different areas identified by Action 6: (A) Treaty provisions
and domestic rules to prevent granting of treaty benefits in
inappropriate circumstances; (B) Clarification that tax treaties
are no t int ended t o b e u s ed t o generat e do u b l e no n- t ax at io n;
and (C) Identification of tax policy considerations that countries
s h o u l d c o ns ider b ef o re dec iding t o ent er int o a t ax t reat y w it h
ano t h er c o u nt ry .
The Final Report notes that countries have committed to
ens u re a m inim u m l evel o f p ro t ec t io n agains t t reat y s h o p p ing
(the minimum standard). That commitment will require that
c o u nt ries inc l u de in t h eir t ax t reat ies an ex p res s s t at em ent t h at
t h eir c o m m o n int ent io n is t o el im inat e do u b l e t ax at io n w it h o u t
c reat ing o p p o rt u nit ies f o r no n- t ax at io n o r redu c ed t ax at io n
t h ro u gh t ax evas io n o r avo idanc e, inc l u ding t h ro u gh t reat y
shopping arrangements. Section A of the Final Report contains
det ail s o f h o w t h at c o m m it m ent w o u l d b e im p l em ent ed. In
addit io n, c o u nt ries w il l im p l em ent t h e m inim u m s t andard b y
inc l u ding in t h eir t reat ies o ne o f t h e f o l l o w ing: (i) a c o m b ined
ap p ro ac h c o ns is t ing o f an LOB and a p rinc ip al p u rp o s e t es t (PPT)
ru l e; (ii) a PPT ru l e al o ne; o r, (iii) an LOB ru l e, s u p p l em ent ed b y
specific rules targeting conduit financing arrangements. The
formulation of the minimum standard reflects the agreement
that some flexibility in implementation is required.
The 2015 Final Report reflects the conclusions reached by the
Wo rk ing Part y w it h res p ec t t o s everal m at t ers in t h e f o l l o w - u p
and inc o rp o rat es t h es e c o nc l u s io ns w it h t h e p ro p o s al s t o m o dif y
t h e OECD Mo del and Co m m ent ary t h at h ad b een s et f o rt h in t h e
2014 Deliverable (with the Final Report superseding the 2014
Deliverable). The Final Report also indicates that further work
will be required under Action 6, including with respect to the
LOB rule and with respect to the treaty entitlement of non-CIVs
and p ens io n f u nds .
2
See EY Gl o b al Tax Al ert , OECD releases public discussion draft on follow up
work on treaty abuse under BEPS Action 6, dat ed 26 No vem b er 2014.
3
See EY Gl o b al Tax Al ert , OECD releases revised discussion draft on follow up
work on treaty abuse under BEPS Action 6, dat ed 28 May 2015.
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A ction 6
The Final Report does not contain any model
p ro vis io ns o r rel at ed Co m m ent ary in res p ec t o f
the treaty entitlement of non-CIVs and notes
t h at f u rt h er w o rk is needed in t h is area.
T reaty provisions and domestic rules to prevent
the granting of treat enefits in inappropriate
circumstances
In det erm ining h o w b es t t o p revent t h e inap p ro p riat e grant ing o f
treaty benefits, the 2015 Final Report considers two situations:
1) c as es w h ere a p ers o n t ries t o c irc u m vent l im it at io ns p ro vided
b y t h e t reat y it s el f , and 2) c as es w h ere a p ers o n t ries t o ab u s e
the provisions of domestic tax law using treaty benefits.
1 )
C ases where a person tries to circumv ent limitations
prov ided b y the treaty itself
In c as es w h ere a p ers o n t ries t o c irc u m vent l im it at io ns p ro vided
in the treaty itself, the section of the Final Report focusing
o n p revent ing t reat y s h o p p ing det ail s t h e rec o m m endat io ns
w it h res p ec t t o b o t h t h e LOB and PPT ru l es in t h e c o nt ex t o f
t h e m inim u m s t andard, as w el l as o t h er m o re t arget ed ru l es
resulting from other situations that have been identified as
prone to the inappropriate granting of treaty benefits.
Treaty Shopping — The LOB Rule
Paragrap h s 1 t h ro u gh 6 o f a new Art ic l e 10 (Ent it l em ent t o
Benefits) set forth the model treaty provisions for the LOB rule.
In general , t h es e p ro vis io ns c o ns is t o f a s eries o f o b j ec t ive t es t s
t h at w o u l d det erm ine w h et h er a p ers o n is c o ns idered t o b e
qualified and therefore eligible for treaty benefits. In this regard,
t h e o b j ec t ive t es t s are b as ed o n c h arac t eris t ic s s u c h as l egal
s t ru c t u re, o w ners h ip , o r ac t ivit ies , ens u ring a l ink b et w een t h e
person and the residence state. The 2015 Final Report notes
t h at w h il e it h as b een dec ided t h at s u c h a ru l e w il l b e inc l u ded in
t h e OECD Mo del , f u rt h er w o rk o n t h e LOB ru l e is nec es s ary . In
particular, the Final Report refers to the proposals by the United
St at es t o m o dif y t h e LOB ru l e in t h e US Mo del Treat y . It is no t ed
t h at t h e LOB ru l e, and Co m m ent ary rel at ed t h eret o , c o nt ained in
the Final Report should be considered as draft (and is therefore
b rac k et ed) and is s u b j ec t t o c h ange p ending f u rt h er review t h at
will take into account the finalization of the LOB rule in the US
Model Treaty. Final versions of the LOB rule and Commentary
are expected to be completed in the first part of 2016.
In addition to the LOB rule, the 2015 Final Report contains
model treaty provisions for an alternative, simplified LOB rule.
The simplified LOB rule sets forth general standards that could
b e u s ed t o addres s t h e m o s t o b vio u s c as es o f t reat y - s h o p p ing
w h il e rel y ing o n t h e PPT ru l e t o c o ver c as es no t c au gh t b y
9 0
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such an LOB rule. The Final Report clarifies that the simplified
LOB ru l e is o nl y int ended t o b e u s ed if t h e c o u nt ries agree
t o inc o rp o rat e t h e c o m b ined ap p ro ac h o f an LOB ru l e and a
PPT ru l e.
According to the 2015 Final Report, “qualified persons”
entitled to treaty benefits would include the following if such
p ers o ns are c o ns idered t o b e res ident u nder t h e t erm s o f t h e
ap p l ic ab l e t reat y : an individu al ; Co nt rac t ing St at es , it s p o l it ic al
s u b divis io ns and ent it ies t h at it w h o l l y o w ns ; c ert ain p u b l ic l y
listed entities and affiliates; certain charities and pension funds;
entities meeting certain ownership requirements; certain CIVs;
p ers o ns engaged in ac t ive b u s ines s ac t ivit ies in t h e c o u nt ry
of residence; persons meeting a derivative benefits test; and
persons that have been awarded benefits through a competent
au t h o rit y det erm inat io n.
A number of items related to the LOB rule were identified
f o r f o l l o w - u p w o rk af t er is s u anc e o f t h e 2014 Del iverab l e.
The discussion below identifies how the follow-up items are
addressed in the 2015 Final Report.
• CIVs: application of the LOB and treaty entitlement
As a result of the follow-up work on CIVs, it was concluded
t h at t h ere w as general s u p p o rt f o r t h e c o nc l u s io ns inc l u ded
in the 2010 OECD Report The Granting of Treaty Benefits
with Respect to the Income of Collective Investment Vehicles
(CIV Report). Subparagraph 2(f) of the LOB rule included in
the Final Report reflects the conclusions of the CIV Report.
Ho w ever, s u b p aragrap h 2(f ) is b rac k et ed t o indic at e t h at
whether a specific rule addressing issues related to CIVs
s h o u l d b e inc l u ded in t h e LOB ru l e o f a t reat y , and h o w t h at
ru l e s h o u l d b e draf t ed, w o u l d dep end o n h o w t h e t reat y
applies to CIVs and on the treatment and use of CIVs in
eac h c o u nt ry .
• Non-CIV funds: application of the LOB and treaty entitlement
The Final Report does not contain any model provisions or
rel at ed Co m m ent ary in res p ec t o f t h e t reat y ent it l em ent o f
non-CIVs and notes that further work is needed in this area.
The work will first address real estate investment trusts
(REITs), with the work to focus on confirming the conclusions
o f t h e 2008 OECD rep o rt o n t ax t reat y is s u es rel at ed t o
REITs. The Final Report indicates that it has been agreed to
incorporate a footnote to the final version of the Commentary
o f t h e LOB ru l e t o b e p ro du c ed in 2016 t h at direc t l y ref ers
to the treaty entitlement of REITs. Further, the Final Report
A ction 6
The Final Report indicates that further work is necessary to address
t w o general c o nc erns t h at go vernm ent s h ave ab o u t grant ing t reat y
benefits with respect to non-CIVs: that non-CIVs may be used to
provide treaty benefits to investors that are not themselves entitled
to treaty benefits and that investors may defer recognition of
income on which treaty benefits have been granted.
no t es t h at t h e OECD rec o gniz es t h e ec o no m ic im p o rt anc e o f
non-CIV funds and the need to grant treaty benefits where
appropriate. The Final Report indicates that further work is
nec es s ary t o addres s t w o general c o nc erns t h at go vernm ent s
have about granting treaty benefits with respect to non-CIVs:
that non-CIVs may be used to provide treaty benefits to
investors that are not themselves entitled to treaty benefits
and t h at inves t o rs m ay def er rec o gnit io n o f inc o m e o n w h ic h
treaty benefits have been granted. It is noted, however, that
t h e new t reat y p ro vis io n o n t rans p arent ent it ies as a res u l t o f
t h e w o rk do ne o n Ac t io n 2 (Hy b rid Mis m at c h Arrangem ent s ),
as well as the possible inclusion of a derivative benefits test in
t h e LOB ru l e, w il l l ik el y h el p t o addres s s o m e o f t h e c o nc erns
regarding the treaty entitlement of non-CIVs in which there are
no nres ident inves t o rs .
With respect to pensions, the Final Report notes that work will
c o nt inu e t o ens u re t h at a p ens io n f u nd s h o u l d b e c o ns idered a
res ident o f t h e c o u nt ry in w h ic h it is c o ns t it u t ed regardl es s o f
whether that pension fund benefits from a limited or complete
ex em p t io n f ro m t ax at io n in t h at c o u nt ry . In t h is res p ec t , t h e
Final Report notes that changes to the OECD Model, expected
to be finalized in the first part of 2016, will include a definition
o f “ rec o gniz ed p ens io n f u nd” t h at w il l c o ns ider el em ent s
s u c h as w h et h er t h e f u nd is c reat ed t o p ro vide ret irem ent o r
similar benefits to individuals and whether the laws of the
c o u nt ry in w h ic h t h e p ens io n f u nd is c reat ed t reat t h e f u nd as
a s ep arat e p ers o n.
• Is s u es rel at ed t o t h e dis c ret io nary rel ief p ro vis io n
In t h e LOB ru l e c o nt ained in t h e 2014 Del iverab l e, it w as
p ro p o s ed t h at at it s dis c ret io n, a c o m p et ent au t h o rit y w o u l d
b e ab l e t o grant t reat y rel ief t o a res ident w h en s u c h p ers o n
otherwise would be denied treaty benefits applying the
o b j ec t ive t es t s u nder t h e LOB ru l e. Th e p ro p o s ed Co m m ent ary
contained a general assertion that in order to request
discretionary relief under this rule, a clear identification of
reasons unrelated to obtaining benefits under the treaty
s h o u l d b e es t ab l is h ed. Th e Revis ed Dis c u s s io n Draf t p ro p o s ed
addit io nal gu idanc e c o nc erning t h e rel evant f ac t o rs t h at
s h o u l d b e t ak en int o ac c o u nt b y a c o m p et ent au t h o rit y in
considering a request for discretionary relief.
The Final Report incorporates the recommendations of the
Revised Discussion Draft. For example, in the case of a resident
s u b s idiary c o m p any w it h a p arent in a t h ird c o u nt ry , w h il e t h e
f ac t t h at t h e rel evant w it h h o l ding rat e p ro vided in t h e t reat y is
no t l o w er t h an t h e c o rres p o nding w it h h o l ding rat e in t h e t ax
t reat y b et w een t h e c o u nt ry o f s o u rc e and t h e t h ird c o u nt ry
w o u l d b e a rel evant f ac t o r, t h at f ac t w o u l d no t , in it s el f , b e
sufficient to establish that the conditions for granting the
dis c ret io nary rel ief are m et .
• Al t ernat ive LOB ru l es f o r EU c o u nt ries
The Revised Discussion Draft reflected a general concern
rais ed b y t h e Eu ro p ean Unio n (EU) t h at s o m e o f t h e t es t s
of the LOB rule might need to be adapted to reflect EU law
requirements. In addition, some countries were concerned
t h at s o m e p ro vis io ns o f t h e LOB ru l e, w h ic h m u s t b e m et
b y ref erenc e t o a c ert ain geo grap h ic l o c at io n, m igh t need
t o b e revis ed t o t ak e int o ac c o u nt c o nc erns rais ed b y
s m al l er c o u nt ries .
In response to these concerns, the Final Report allows for
t h e inc l u s io n o f al t ernat ives in t h e Co m m ent ary t h at w o u l d
address those issues. For example, whereas the publicly
traded test in the LOB rule generally requires that the shares
o f a c o m p any b e p rim aril y t raded o n o ne o r m o re s t o c k
ex c h anges l o c at ed in t h e res idenc e c o u nt ry o f t h e c o m p any ,
t h e Co m m ent ary no t es t h at c o u nt ries m ay m o dif y t h is
requirement in cases where they consider that the fact that
s h ares are p rim aril y t raded o n rec o gniz ed s t o c k ex c h anges
situated in other countries constitutes sufficient safeguards
agains t t reat y s h o p p ing (e.g., a c o u nt ry t h at is p art o f t h e
Eu ro p ean Ec o no m ic Area w it h in w h ic h ru l es rel at ing t o s t o c k
ex c h anges c reat e a s ingl e m ark et f o r s ec u rit ies t rading).
• Requirement that each intermediate owner be a resident of
eit h er c o nt rac t ing s t at e
In the Final Report, the LOB rule contains a provision dealing
w it h indirec t o w ners h ip in b o t h t h e “ Su b s idiary o f a Pu b l ic l y Lis t ed Ent it y ” t es t and t h e “ Ow ners h ip / Bas e Ero s io n” t es t ,
as well as in the “Derivative Benefits” provision. The indirect
ownership rule applicable to the first two tests would require
t h at eac h int erm ediat e o w ner o f t h e ent it y b eing t es t ed b e a
res ident o f eit h er Co nt rac t ing St at e (s u b s idiary o f a p u b l ic l y l is t ed ent it y t es t ) o r o f t h e c o nt rac t ing s t at e w h ere t h e ent it y
b eing t es t ed is a res ident (o w ners h ip / b as e ero s io n t es t ). Th e
indirec t o w ners h ip ru l e in t h o s e t w o t es t s is b rac k et ed and t h e
Commentary confirms that some countries may consider this
indirect ownership requirement to be unduly restrictive and
p ref er t o o m it s u c h a ru l e.
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A ction 6
The Final Report notes that the inclusion of a derivative
benefits test may also be affected by alternative means
o f addres s ing BEPS c o nc erns s u c h as t h e m eas u re o n
“ s p ec ial t ax regim es ” t h at w as p ro p o s ed b y t h e Unit ed
States and is discussed in Section C of the Final Report.
A dif f erent indirec t o w ners h ip ru l e is c o nt ained in t h e
detailed version of the “Derivative Benefits” provision. The
derivative benefits provision states that each intermediate
owner should itself be an equivalent beneficiary. The term
equivalent beneficiary generally refers to a person that would
b e ent it l ed t o a c o m p reh ens ive t ax t reat y in f o rc e b et w een it s
residence country and the country from which the benefits
o f t h e rel evant t ax t reat y are c l aim ed, p ro vided t h at u nder
s u c h t reat y , t h at p ers o n w o u l d h ave b een ent it l ed t o at l eas t
the same benefit had the income in question flowed directly
to that owner. As further noted below, the derivative benefits
p ro vis io n is b rac k et ed indic at ing t h at f u rt h er w o rk is nec es s ary
w it h res p ec t t o t h is p ro vis io n.
• Issues related to the derivative benefits provision
A derivative benefits test generally entitles certain companies
that are residents of a treaty country to treaty benefits if the
o w ner o f t h e c o m p any w o u l d h ave b een ent it l ed t o at l eas t
the same benefit had the income in question flowed directly
t o t h at o w ner. Th e 2014 Del iverab l e p ro p o s ed t o inc l u de s u c h
a provision and the subsequent Discussion Draft and Revised
Dis c u s s io n Draf t o u t l ined t h e c o m m ent s rec eived o n t h e
p ro p o s ed p ro vis io n as w el l as t h e t ec h nic al is s u es rel at ed t o it .
The Final Report includes a detailed version of the derivative
benefits test that is bracketed indicating that the inclusion of
s u c h a ru l e w il l b e c o ns idered f u rt h er in l igh t o f t h e o u t c o m e
o f t h e w o rk o n o t h er BEPS Ac t io ns (e.g., Ac t io n 5 (Harm f u l
Tax Prac t ic es )) and Ac t io n 8 (Trans f er Pric ing f o r Int angib l es ).
In addition, the Final Report notes that the inclusion of a
derivative benefits test may also be affected by alternative
m eans o f addres s ing BEPS c o nc erns s u c h as t h e m eas u re o n
“ s p ec ial t ax regim es ” t h at w as p ro p o s ed b y t h e Unit ed St at es
and is discussed in Section C of the Final Report.
• Pro vis io ns deal ing w it h du al - l is t ed c o m p any arrangem ent s
Dual-listed company arrangements present specific issues
in rel at io n t o t h e p u b l ic l y t raded t es t b ec au s e t h ey c o ns is t o f
arrangem ent s ado p t ed b y c ert ain p u b l ic l y - l is t ed c o m p anies ,
each with its own stock listing, that reflect a commonality of
m anagem ent , o p erat io ns , and s h areh o l ders ’ righ t s . In s o m e
c as es , s u c h an arrangem ent invo l ves t h e c reat io n o f s p ec ial
vo t ing s h ares . Af t er c o ns iderat io n o f t h e p u b l ic l y t raded t es t in
the LOB rule to address such arrangements, the Final Report
adopts a definition of “principal class of shares” that provides,
f o r ex am p l e, t h at if a c o m p any p art ic ip at es in a du al - l is t ed
c o m p any arrangem ent , t h e p rinc ip al c l as s o f s h ares w il l b e
det erm ined af t er ex c l u ding t h e s p ec ial vo t ing s h ares t h at w ere
is s u ed t o es t ab l is h t h e du al - l is t ed c o m p any arrangem ent .
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• Tim ing is s u es rel at ed t o vario u s p ro vis io ns in t h e LOB ru l e
As no t ed in t h e Revis ed Dis c u s s io n Draf t , t im ing c o ndit io ns
are deal t w it h dif f erent l y u nder t h e vario u s t es t s o f t h e LOB
rule in the 2014 Deliverable. For example, it may be possible
to meet the definition of “qualified person” under some tests
at a p art ic u l ar m o m ent in t im e, ex c ep t t h at u nder s o m e o t h er
t es t s , s u c h as t h e p u b l ic l y t raded t es t , t h e c o ndit io ns t o m eet
that test must be satisfied throughout the taxable period. The
2015 Final Report does not adopt any changes with respect
t o t im ing is s u es rel at ed t o t h e LOB ru l e (i.e., in t h e p u b l ic l y
t raded t es t and t h e o w ners h ip / b as e ero s io n t es t ). Ac c o rdingl y ,
t o s at is f y t h e c o ndit io ns o f t h e p u b l ic l y t raded t es t , t h o s e
c o ndit io ns m u s t b e m et t h ro u gh o u t t h e t ax ab l e p erio d o f t h e
c o m p any o r ent it y . In c o nt ras t , u nder t h e o w ners h ip / b as e
erosion test, the ownership condition must be met by qualified
p ers o ns o n at l eas t h al f t h e day s o f t h e t ax ab l e p erio d.
• Co ndit io ns f o r t h e ap p l ic at io n o f t h e p ro vis io n o n p u b l ic l y l is t ed ent it ies
As p ro p o s ed in t h e 2014 Del iverab l e, s o m e s t ak eh o l ders
no t ed t h at t h e al t ernat ive c o ndit io ns in t h e p u b l ic l y t raded
ent it y t es t o f t h e LOB ru l e (i.e., p rim ary t rading t es t and t h e
p rim ary p l ac e o f m anagem ent and c o nt ro l t es t ) m ay b e t o o
res t ric t ive f o r s m al l c o u nt ries t h at do no t h ave im p o rt ant
s t o c k ex c h anges and w h o s e c o m p anies are l is t ed o n f o reign
s t o c k ex c h anges . To addres s t h is c o nc ern, t h e Revis ed
Dis c u s s io n Draf t p ro p o s ed inc o rp o rat ing a l is t o f f ac t o rs in t h e
Co m m ent ary t o s erve as an aid t o t h e c o m p et ent au t h o rit ies
w h en det erm ining w h ic h s t o c k ex c h anges s h o u l d m eet t h e
definition of “recognized stock exchange.” The 2015 Final
Rep o rt ado p t s t h e l is t o f f ac t o rs w h ic h inc l u de, f o r ex am p l e,
standards or requirements to list a company on the stock
exchange, requirements to maintain such listed status, and
reporting and disclosure requirements.
• Clarification of the “active business” provision
Th e Revis ed Dis c u s s io n Draf t s u gges t ed c l arif y ing t h e “ ac t ive
b u s ines s ” c o nc ep t in t h e ac t ive t rade o r b u s ines s t es t in t h e
LOB ru l e t o deal w it h s it u at io ns w h ere, f o r ex am p l e, t h e s am e
c o m p any c arries o n b o t h inves t m ent and m anu f ac t u ring
o p erat io ns . Th e s u gges t ed c h anges w ere s im il ar t o t h e
p ro p o s al s t o m o dif y t h e ac t ive t rade o r b u s ines s t es t in t h e
US Mo del Treat y . As no t ed ab o ve, t h o s e c h anges t o t h e US
Model Treaty have not yet been finalized and therefore, no
f u rt h er c h anges t o t h is t es t h ave b een m ade t o t h e p ro vis io n
in the OECD Model pending finalization of the work by the
Unit ed St at es .
A ction 6
Treaty Shopping — The PPT Rule
As no t ed ab o ve, t h e m inim u m s t andard t o p ro t ec t agains t
t reat y s h o p p ing t h at w as agreed t o b y c o u nt ries m ay b e m et b y
inc l u ding in t reat ies a PPT ru l e al o ne o r a PPT ru l e in c o nj u nc t io n
w it h an LOB ru l e.
Paragraph 7 of new Article 10 “Entitlement to Benefits” contains
the PPT rule. In general, under this provision, treaty benefits
w o u l d b e denied w h en it is reas o nab l e t o c o nc l u de, h aving regard
t o al l rel evant f ac t s and c irc u m s t anc es , t h at o b t aining t reat y
benefits was one of the principal purposes of any arrangement
or transaction that resulted directly or indirectly in that benefit
unless it is established that granting that benefit in these
c irc u m s t anc es w o u l d b e in ac c o rdanc e w it h t h e o b j ec t and
purpose of the relevant provisions of the tax treaty. The Final
Rep o rt al s o inc l u des c o m m ent ary w it h res p ec t t o p aragrap h
7 . Th e Co m m ent ary p ro vides t h at t o det erm ine t h e p rinc ip al
p u rp o s e o f an arrangem ent , it is nec es s ary t o u ndert ak e an
o b j ec t ive anal y s is o f t h e aim s and o b j ec t s o f al l p ers o ns invo l ved
in p u t t ing t h at arrangem ent o r t rans ac t io n in p l ac e. Ac c o rding
to the Commentary, this requires consideration, on a case by
c as e b as is , o f al l c irc u m s t anc es s u rro u nding t h e arrangem ent
o r event .
A nu m b er o f f o l l o w - u p it em s in rel at io n t o t h e PPT ru l e w ere
identified in the Discussion Draft and Revised Discussion Draft.
Th e dis c u s s io n b el o w addres s es h o w t h es e f o l l o w - u p it em s w ere
addressed in the 2015 Final Report:
• Inc l u s io n in t h e Co m m ent ary o f t h e s u gges t io n t h at c o u nt ries
c o ns ider s o m e f o rm o f adm inis t rat ive p ro c es s ens u ring t h at
t h e PPT is o nl y ap p l ied af t er s enio r ap p ro val
The Final Report retains the suggested provisions and related
Co m m ent ary p ro p o s ed in t h e Revis ed Dis c u s s io n Draf t
indic at ing t h at c o u nt ries m ay w is h t o es t ab l is h s o m e f o rm
o f adm inis t rat ive p ro c es s t h at w o u l d ens u re t h at t h e PPT
ru l e is o nl y ap p l ied af t er ap p ro val at a s enio r l evel w it h in t h e
t ax adm inis t rat io n.
• Al igning t h e p art s o f t h e Co m m ent ary o n t h e PPT ru l e and o f
t h e Co m m ent ary o n t h e LOB dis c ret io nary rel ief p ro vis io n t h at
deal w it h t h e p rinc ip al p u rp o s e t es t
The Commentary to paragraph 7 clarifies the interaction
b et w een t h e LOB and PPT ru l es w h en t h es e ru l es are u s ed in
c o m b inat io n. Bo t h t h e PPT ru l e and t h e dis c ret io nary rel ief
p ro vis io n o f t h e LOB ru l e inc l u de a t es t b as ed o n w h et h er o ne
of the principal purposes is the obtaining of benefits under a
t ax t reat y . One is s u e t h at w as dis c u s s ed b y t h e Wo rk ing Gro u p
w as w h et h er p art s o f t h e Co m m ent ary o n t h e PPT ru l e and
t h e Co m m ent ary o n t h e LOB dis c ret io nary rel ief p ro vis io n
t h at deal w it h t h e p rinc ip al p u rp o s e t es t s h o u l d b e al igned.
In t h e Revis ed Dis c u s s io n Draf t , c h anges w ere m ade t o t h e
Co m m ent ary o n t h e dis c ret io nary rel ief p ro vis io n t o ex p l ain
t h e m eaning o f “ o ne o f t h e p rinc ip al p u rp o s es ” in p aragrap h
5 o f t h e LOB ru l e. Th e Co m m ent ary t o p aragrap h 7 al s o
p ro vides gu idanc e w it h res p ec t t o t h e m eaning o f “ o ne o f t h e
p rinc ip al p u rp o s es ” in p aragrap h 7 . Th e Co m m ent ary s et f o rt h
in the Final Report clarifies that the guidance provided in the
Co m m ent ary o n p aragrap h 7 s h o u l d no t b e u s ed t o int erp ret
p aragrap h s 1 t o 6 (LOB) and vic e- vers a.
• Wh et h er s o m e f o rm o f dis c ret io nary rel ief s h o u l d b e p ro vided
u nder t h e PPT ru l e
Ac k no w l edging t h at an ap p l ic at io n o f t h e PPT ru l e res u l t s
in the denial of treaty benefits, making the relevant income
t ax ab l e u nder t h e p ro vis io ns o f do m es t ic l aw , t h e Dis c u s s io n
Draft requested comments as to whether it would be
ap p ro p riat e t o p ro vide s o m e f o rm o f t reat y rel ief in c as es
where benefits are denied under the PPT rule. In the Revised
Dis c u s s io n Draf t , it w as p ro p o s ed t h at a dis c ret io nary rel ief
p ro vis io n b e inc l u ded in p aragrap h 8 , af t er t h e PPT ru l e,
which appears in paragraph 7. The Final Report, however,
p ro vides t h at inc l u ding s u c h a dis c ret io nary rel ief p ro vis io n
is o p t io nal and inc l u des t h e l angu age o f p aragrap h 8 in
t h e Co m m ent ary t o t h e PPT ru l e, no t ing t h at c o u nt ries are
f ree t o inc l u de p aragrap h 8 in b il at eral t reat ies t o al l o w t h e
c o m p et ent au t h o rit y o f t h e c o u nt ry t h at w o u l d o t h erw is e h ave
granted treaty benefits to have the possibility of treating that
person as being entitled to treaty benefits where that person
is denied a treaty benefit in accordance with the PPT rule in
p aragrap h 7 .
• Draf t ing o f t h e al t ernat ive “ c o ndu it - PPT ru l e”
As dis c u s s ed ab o ve, c o u nt ries m ay im p l em ent t h e m inim u m
s t andard t o p ro t ec t agains t t reat y s h o p p ing b y inc l u ding t h e
LOB ru l e s u p p l em ent ed b y a m ec h anis m t h at w o u l d addres s
t reat y - s h o p p ing s t rat egies c o m m o nl y ref erred t o as “ c o ndu it
arrangem ent s ” t h at w o u l d no t b e c au gh t b y t h e LOB ru l e.
The Final Report notes that these rules would deal with such
conduit arrangements by denying treaty benefits in respect of
inc o m e o b t ained u nder, o r as p art o f , a c o ndu it arrangem ent .
Further, they could take the form of domestic anti-abuse
ru l es o r j u dic ial do c t rines t h at w o u l d ac h ieve a s im il ar res u l t .
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A ction 6
The Final Report outlines a series of examples of conduit
arrangem ent s t h at w o u l d need t o b e addres s ed b y s u c h ru l es
as w el l as t rans ac t io ns t h at w o u l d no t b e c o ns idered t o b e
c o ndu it arrangem ent s . Th es e ex am p l es are l argel y draw n
f ro m t h e ex c h ange o f l et t ers b et w een t h e Unit ed St at es and
t h e Unit ed Kingdo m in c o nnec t io n w it h t h e b il at eral t reat y
b et w een t h o s e t w o c o u nt ries (w h ic h is rep ro du c ed in t h e 2002
Tec h nic al Ex p l anat io n t o t h e t reat y ).
• Lis t o f ex am p l es in t h e Co m m ent ary o n t h e PPT ru l e
Th e Co m m ent ary o n t h e PPT ru l e il l u s t rat es h o w t h e PPT
ru l e w o u l d ap p l y b y p ro viding a nu m b er o f ex am p l es . Th e
Discussion Draft, which incorporated five examples, noted
that the justification for the result in some of the examples
o riginal l y inc l u ded in t h e 2014 Del iverab l e c o u l d b e b et t er
art ic u l at ed and invit ed c o m m ent at o rs t o s u gges t addit io nal
ex am p l es t h at c o u l d b e inc l u ded in t h e Co m m ent ary . As a
res u l t , t h e Revis ed Dis c u s s io n Draf t p ro p o s ed f o u r addit io nal
ex am p l es t o b e inc l u ded in t h e Co m m ent ary o n t h e PPT ru l e.
The 2015 Final Report retains all nine examples as part of the
Co m m ent ary o n t h e PPT ru l e and adds a new t ent h ex am p l e t o
t h e Co m m ent ary o n t h e PPT ru l e.
A nu m b er o f t h e ex am p l es il l u s t rat e c o ns iderat io ns w it h
res p ec t t o t h e ap p l ic at io n o f t h e PPT ru l e in c as es invo l ving
h o l ding and regio nal c o m p anies . Th e new ex am p l e t h at
was added by the Final Report illustrates application of the
PPT ru l e t o addres s a s it u at io n in w h ic h a c o nt rac t f o r t h e
c o ns t ru c t io n o f a p o w er p l ant t h at w as t o l as t f o r 22 m o nt h s
is s p l it u p int o t w o c o nt rac t s , eac h l as t ing 11 m o nt h s . Th e
ex am p l e c o nc l u des t h at in t h e ab s enc e o f o t h er f ac t s and
c irc u m s t anc es s h o w ing o t h erw is e, it w o u l d b e reas o nab l e t o
c o nc l u de t h at o ne o f t h e p rinc ip al p u rp o s es f o r t h e c o nc l u s io n
of the separate contract was to obtain the benefit of
Art ic l e 5(3).
• Wh et h er t h e ap p l ic at io n o f t h e PPT ru l e s h o u l d b e ex c l u ded
f ro m t h e is s u es w it h res p ec t t o w h ic h t h e arb it rat io n p ro vis io n
o f p aragrap h 5 o f Art ic l e 25 is ap p l ic ab l e
As dis c u s s ed ab o ve, t h e PPT ru l e is int ended t o ap p l y w h ere
it is reasonable to conclude that obtaining treaty benefits
w as o ne o f t h e p rinc ip al p u rp o s es o f an arrangem ent o r
t rans ac t io n. Th e Revis ed Dis c u s s io n Draf t c o ns idered t h e
question of whether the application of the PPT rule should
b e s u b j ec t t o arb it rat io n u nder Art ic l e 25 o f t h e OECD Mo del ,
and c o nc l u ded t h at t h e is s u e s h o u l d b e addres s ed as p art o f
t h e w o rk o n Ac t io n 14 (Mak 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).
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The final report on Action 14 notes that the interpretation
o r ap p l ic at io n o f t h e PPT ru l e devel o p ed u nder Ac t io n 6
w o u l d c l earl y f al l w it h in t h e s c o p e o f t h e m u t u al agreem ent
p ro c edu re (MAP) in Art ic l e 25. Th at rep o rt f u rt h er no t es
t h at w it h regard t o t h e t h res h o l d is s u e o f t h e ac c ep t anc e o f
a MAP c as e f o r c o ns iderat io n (i.e., MAP ac c es s ), w h ere t h ere
is a dis agreem ent b et w een t h e t ax p ay er and t h e c o m p et ent
au t h o rit y t o w h ic h it s MAP c as e is p res ent ed as t o w h et h er
t h e c o ndit io ns f o r t h e ap p l ic at io n o f a PPT ru l e h ave b een
m et , t ax p ay ers s h o u l d b e p ro vided ac c es s t o t h e MAP w h ere
they meet the requirements of Article 25(1). The report also
no t es h o w ever, t h at if a c o u nt ry s eek s t o l im it o r deny MAP
access in all or certain of these cases, it should specifically and
ex p res s l y agree o n s u c h l im it at io ns w it h it s t reat y p art ners ,
by including a requirement to notify the treaty partner
c o m p et ent au t h o rit ies ab o u t s u c h c as es and t h e f ac t s and
c irc u m s t anc es invo l ved. Th e rep o rt no t es t h at it is int ended t o
m ak e am endm ent s t o t h e Co m m ent ary o n Art ic l e 25 as p art
o f t h e nex t u p dat e o f t h e OECD Mo del in o rder t o c l arif y t h e
c irc u m s t anc es in w h ic h a c o u nt ry m ay deny ac c es s t o t h e MAP.
• Application of the PPT rule where benefits are obtained under
dif f erent t reat ies
Th e 2014 Dis c u s s io n Draf t no t ed t h at it h ad b een s u gges t ed
that the wording of the PPT rule should be modified to make
c l ear t h at w h ere an arrangem ent is ent ered int o f o r t h e
purpose of obtaining benefits under a number of treaties or
u nder b o t h a t reat y and do m es t ic l aw , t h is s h o u l d no t l ead t o
the conclusion that obtaining one benefit under one treaty
w as no t a p rinc ip al p u rp o s e f o r t h at arrangem ent . Des p it e
c o m m ent s rec eived in res p o ns e t o t h e 2014 Dis c u s s io n Draf t
on the need for clarification with respect to the application of
t h e ru l e t o s it u at io ns w h ere m u l t ip l e j u ris dic t io ns are b eing
considered and both treaty benefits and domestic laws are
f ac t o rs in t h e b u s ines s dec is io n, t h e Revis ed Dis c u s s io n Draf t
c o nc l u ded t h at t h e l as t f o u r s ent enc es o f p aragrap h 13 o f
t h e Co m m ent ary o n t h e PPT ru l e al ready addres s ed t h e is s u e
in c l ear t erm s and t h at no c h anges w ere t h eref o re needed.
The Final Report retains the same language in paragraph 13
o f t h e Co m m ent ary o n t h e PPT ru l e as s et f o rt h in t h e 2014
Del iverab l e. Th u s , w h ere an arrangem ent is inex t ric ab l y
l ink ed t o a c o re c o m m erc ial ac t ivit y , and it s f o rm h as no t
been directed by an attempt to obtain a benefit, it is unlikely
t h at it s p rinc ip al p u rp o s e w il l b e c o ns idered t o b e t o o b t ain a
benefit. However, the 2015 Final Report clarifies that where
an arrangem ent h as b een ent ered int o f o r t h e p u rp o s e o f
A ction 6
The Final Report also concludes that additional anti-abuse
ru l es need t o b e ado p t ed t o deal w it h c as es w h ere c ert ain
int erm ediary ent it ies es t ab l is h ed in t h e c o u nt ry o f s o u rc e
are u s ed t o t ak e advant age o f t h e t reat y p ro vis io ns t h at
l o w er t h e s o u rc e t ax at io n o f dividends .
obtaining benefits under a number of treaties, it should
not be considered that seeking to obtain a benefit under a
number of treaties will prevent obtaining one benefit under
o ne t reat y f ro m b eing c o ns idered a p rinc ip al p u rp o s e f o r
t h at arrangem ent .
Other situations where a person seeks to circumvent treaty
limitations
In addit io n t o t h e m inim u m s t andard t o p revent t reat y s h o p p ing,
the 2015 Final Report includes recommendations for targeted
anti-abuse rules. These rules would cover specific scenarios
inc l u ding s p l it t ing- u p o f c o nt rac t s t o avo id PE t h res h o l ds , h iringo u t o f l ab o r c as es , t rans ac t io ns int ended t o avo id dividend
c h arac t eriz at io n, dividend t rans f er t rans ac t io ns , c ap it al gains
o n t h e s al e o f real p ro p ert y , t ie- b reak er ru l es f o r det erm ining
t h e t reat y res idenc e o f du al - res ident p ers o ns , and t riangu l ar
arrangem ent s invo l ving inc o m e at t rib u t ab l e t o a PE in a
t h ird c o u nt ry .
Wit h res p ec t t o t h e s p l it t ing u p o f c o nt rac t s t o avo id PE
thresholds, the 2015 Final Report notes that the inclusion of
the PPT rule and more specifically the new example explained
ab o ve regarding c o ns t ru c t io n c o nt rac t s w o u l d h el p l im it t h o s e
s it u at io ns . It f u rt h er no t es t h at t h e is s u e al s o h as b een deal t w it h
in Action 7 (Artificial Avoidance of Permanent Establishment).
The Final Report notes that hiring out of labor can also be
u s ed t o ab u s e a given t reat y w h ere t h e t ax p ay er at t em p t s
to obtain inappropriately the benefits of the exemption from
s o u rc e t ax at io n p ro vided f o r in Art ic l e 15(2) (Inc o m e f ro m
Employment). However, the Final Report notes that the existing
Commentary on that paragraph adequately addresses the
is s u e. Wit h res p ec t t o t rans ac t io ns t o avo id do m es t ic l aw ru l es
that characterize an item of income as a dividend to benefit
f ro m a t reat y c h arac t eriz at io n o f t h at inc o m e, f o r ex am p l e as
capital gain to prevent source country taxation, the 2015 Final
Rep o rt no t es t h at , in t h e c o nt ex t o f t h e w o rk b eing do ne o n
Ac t io n 2 (Hy b rid Mis m at c h Arrangem ent s ), t h e Wo rk ing Part y
has examined whether the treaty definitions of dividends and
int eres t c o u l d b e am ended t o p erm it t h e ap p l ic at io n o f do m es t ic
l aw ru l es t h at c h arac t eriz e an it em o f inc o m e as s u c h . Th e 2015
Final Report notes that further work to examine the possibility of
m ak ing s u c h c h anges w il l b e u ndert ak en af t er t h e c o m p l et io n o f
t h e w o rk o n t h e BEPS Ac t io n Pl an.
Dividend transfer transactions are described in the 2015 Final
Rep o rt as t rans ac t io ns w h ere a p ers o n ent it l ed t o t h e 15%
p o rt f o l io rat e o f Art ic l e 10(2)(b ) (Dividends ) s eek s t o o b t ain
a l o w er rat e (e.g., t h e 5% direc t dividend rat e) b y engaging in
t rans ac t io ns t o inc reas e t h e nu m b er o f s h ares h el d at t h e t im e
t h e dividend is l egal l y avail ab l e t o t h e s h areh o l der. In o rder
to deal with such transactions, the 2015 Final Report notes
t h at it w as c o nc l u ded t h at a m inim u m h o l ding p erio d o f 365
day s s h o u l d b e inc l u ded in Art ic l e 10 o f t h e OECD Mo del f o r
s h areh o l ders s eek ing t o ap p l y t h e redu c ed 5% w it h h o l ding rat e
on dividend payments (see Article 10(2)(a)). The Final Report
al s o c o nc l u des t h at addit io nal ant i- ab u s e ru l es need t o b e
ado p t ed t o deal w it h c as es w h ere c ert ain int erm ediary ent it ies
es t ab l is h ed in t h e c o u nt ry o f s o u rc e are u s ed t o t ak e advant age
o f t h e t reat y p ro vis io ns t h at l o w er t h e s o u rc e t ax at io n o f
dividends. For example, the Final Report refers to an alternative
p ro vis io n p ro vided in t h e Co m m ent ary t o Art ic l e 10 t o l im it
ac c es s t o t h e 5% rat e in c as es o f p ay m ent s b y do m es t ic REITs t o
no nres ident inves t o rs .
The 2015 Final Report also outlines some changes with respect
t o t h e ru l es o n im m o vab l e p ro p ert y in Art ic l e 13(4) (Cap it al
Gains ). In general , t h is p ro vis io n al l o w s t h e c o u nt ry in w h ic h
im m o vab l e p ro p ert y is s it u at ed t o t ax c ap it al gains real iz ed b y a
res ident o f t h e o t h er c o u nt ry o n s h ares o f c o m p anies t h at derive
m o re t h an 50% o f t h eir val u e f ro m s u c h im m o vab l e p ro p ert y .
The Final Report amends that article to ensure that the same
t reat m ent is ex t ended t o int eres t s in o t h er ent it ies s u c h as
partnerships and trusts. The Final Report also outlines another
revis io n t o t h e l angu age o f p aragrap h 4 t o c o ver s it u at io ns
w h ere as s et s are c o nt rib u t ed t o an ent it y s h o rt l y b ef o re t h e s al e
o f s h ares o r o t h er int eres t s in an ent it y in o rder t o dil u t e t h e
p ro p o rt io n o f val u e t h at is derived f ro m im m o veab l e p ro p ert y .
To addres s s u c h a s it u at io n, a h o l ding p erio d h as b een added
t o p res erve t h e ab il it y o f t h e c o u nt ry w h ere t h e im m o vab l e
p ro p ert y is l o c at ed t o t ax t h e gain if , f o r ex am p l e, at any t im e
du ring t h e 365 day s p rec eding t h e al ienat io n, t h e s h ares
derived m o re t h an 50% o f t h eir val u e direc t l y o r indirec t l y f ro m
im m o vab l e p ro p ert y in t h at c o u nt ry .
• Tie- b reak er ru l e f o r det erm ining t h e t reat y res idenc e o f du al
res ident p ers o ns o t h er t h an individu al s
To addres s s it u at io ns in w h ic h a p ers
a res ident o f b o t h c o nt rac t ing s t at es
o f Art ic l e 4 c o nt ains a t ie- b reak er ru
s ingl e t reat y res idenc e f o r p ers o ns o
lo al a
o n is c o ns idered
, s u b p aragrap h 3
l e t o det erm ine a
t h er t h an individu al s .
olic and ontro ers
riefing
9 5
A ction 6
Th e Wo rk ing Part y agreed t h at c h anges t o t h e t riangu l ar
p ro vis io n t h at w o u l d b e inc l u ded in t h e OECD Mo del
s h o u l d b e f u rt h er ex am ined o nc e t h e Unit ed St at es h as
finalized the work to update the US Model Treaty.
The Final Report notes that in the view of many countries
w h ere a c o m p any is a du al res ident t ax avo idanc e
arrangem ent s o f t en are invo l ved and c o nc l u des t h at t h e
c u rrent ru l e f o u nd in Art ic l e 4(3) s h o u l d b e rep l ac ed. Revis ed
p aragrap h 3 w il l p ro vide t h at in c as es w h ere a p ers o n o t h er
t h an an individu al is a du al res ident , t h e c o m p et ent au t h o rit ies
o f t h e t w o c o u nt ries s h al l endeavo r t o det erm ine b y m u t u al
agreem ent t h e c o u nt ry o f res idenc e h aving regard t o t h e p l ac e
o f ef f ec t ive m anagem ent , t h e p l ac e w h ere it w as inc o rp o rat ed
o r o t h erw is e c o ns t it u t ed and any o t h er rel evant f ac t o rs . In t h e
ab s enc e o f s u c h agreem ent , Art ic l e 4(3) p ro vides t h at s u c h
p ers o n w il l no t b e ent it l ed t o any rel ief o r ex em p t io n f ro m t ax
p ro vided b y t h e t reat y ex c ep t t o t h e ex t ent and in s u c h m anner
as m ay b e agreed u p o n b y t h e c o m p et ent au t h o rit ies . Th e
Co m m ent ary o n Art ic l e 4 o f t h e OECD Mo del no t es h o w ever,
t h at s o m e c o u nt ries c o ns ider it p ref erab l e t o deal w it h c as es
o f du al res idenc e t h ro u gh t h e ru l e b as ed o n “ p l ac e o f ef f ec t ive
m anagem ent .” In s u c h c as es , t h e Co m m ent ary ex p l ains t h at
s u c h c o u nt ries are f ree t o inc l u de an al t ernat ive p aragrap h 3
in t h eir b il at eral t reat ies .
The Commentary also clarifies the fact that a dual resident
entity is not entitled to treaty benefits would not prevent the
du al res ident ent it y f ro m b eing c o ns idered a res ident o f an
ap p l ic ab l e c o u nt ry f o r p u rp o s es o t h er t h an grant ing t reat y
benefits to that person. For example, in the case of a company,
it w il l b e c o ns idered t o b e a res ident o f eac h c o u nt ry f o r
p u rp o s es o f t h e ap p l ic at io n o f Art ic l e 10 t o t h e dividends t h at
it w il l p ay .
• Ant i- ab u s e ru l e f o r p erm anent es t ab l is h m ent s s it u at ed in
t h ird St at e
The 2015 Final Report notes that where the residence state
exempts, or taxes at low rates, profits attributable to a PE
s it u at ed in a t h ird s t at e, t h e s o u rc e s t at e s h o u l d no t b e
expected to grant treaty benefits with respect to that income.
It was concluded that a specific anti-abuse rule with respect to
s u c h t riangu l ar c as es s h o u l d b e inc l u ded in t h e OECD Mo del .
The 2014 Deliverable proposed such a rule. Subsequent work,
however, revealed that changes were required with respect
t o dif f erent as p ec t s o f t h e t reat y p ro vis io n and Co m m ent ary .
Further, in May 2015, the United States released proposed
c h anges t o a s im il ar p ro vis io n c o nt ained w it h in t h e US
Mo del t reat y . Th e Wo rk ing Part y agreed t h at c h anges t o
9 6
lo al a
olic and ontro ers
riefing
t h e t riangu l ar p ro vis io n t h at w o u l d b e inc l u ded in t h e OECD
Mo del s h o u l d b e f u rt h er ex am ined o nc e t h e Unit ed St at es h as
finalized the work to update the US Model Treaty. For that
reason, the provision and Commentary included in the Final
Rep o rt w il l need t o b e review ed and s h o u l d b e c o ns idered a
draft, subject to change. It is noted, however, that the final
version of the provision is expected to be produced in the first
p art o f 2016.
2 )
C ases where a person tries to ab use the prov isions of
domestic tax law sing treaty enefits
Th e f o c u s o f t h e w o rk u ndert ak en b y t h e Wo rk ing Part y o n t h e
is s u e o f do m es t ic t ax l aw avo idanc e, f ac il it at ed b y t ax t reat ies ,
w as t o ens u re t h at t ax t reat ies w o u l d no t o p erat e t o p revent t h e
application of specific domestic law provisions. The 2015 Final
Rep o rt no t es t h at in res p ec t o f c ert ain s t rat egies , inc l u ding t h in
c ap it al iz at io n, du al res idenc e, and t rans f er p ric ing s t rat egies ,
t h e Co m m ent ary o n t h e ap p l ic ab l e art ic l es o f t h e OECD Mo del
al ready p ro vides t h at t reat ies do no t p revent t h e ap p l ic at io n o f
s u c h ru l es .
To addres s t h e int erac t io n b et w een t ax t reat ies and do m es t ic
law for a number of other specific domestic anti-abuse rules,
the Final Report includes some new Commentary on Article 1
(Pers o ns Co vered), in addit io n t o ret aining m u c h o f t h e
existing Commentary. According to the Final Report, the new
Co m m ent ary art ic u l at es t h e rel at io ns h ip b et w een do m es t ic
anti-abuse rules and tax treaties and will reflect the conclusion
that as a general rule, there will be no conflict between tax
t reat ies and j u dic ial ant i- ab u s e do c t rine o r general do m es t ic ant iab u s e ru l es . Th e new Co m m ent ary no t es , f o r ex am p l e, t h at if a
do m es t ic ant i- ab u s e ru l e o r j u dic ial do c t rine s u c h as “ s u b s t anc e
o ver f o rm ” o r “ ec o no m ic s u b s t anc e” res u l t s in c h arac t eriz at io n
o f inc o m e o r in a redet erm inat io n o f t h e t ax p ay er t h at is
c o ns idered t o derive inc o m e, t h e p ro vis io ns o f t h e t reat y w il l b e
ap p l ied t ak ing int o ac c o u nt t h es e c h anges . Th e Co m m ent ary
notes however, that while these rules do not conflict with tax
t reat ies , t h ere is agreem ent t h at m em b er c o u nt ries s h o u l d
carefully observe the specific obligations enshrined in tax
t reat ies t o rel ieve do u b l e t ax at io n as l o ng as t h ere are no c l ear
evidenc e t h at t h e t reat ies are b eing ab u s ed.
Application of tax treaties to restrict a Contracting State’s right
to tax its own residents and “departure” or “exit” taxes
A ction 6
While the Final Report notes that tax treaties
s h o u l d no t p revent t h e ap p l ic at io n o f [ “ ex it ” o r
“ dep art u re” ] t ax es , it s u gges t s t h at t h e m u t u al
agreem ent p ro c edu re c o u l d b e u s ed t o p ro vide
rel ief as a p o t ent ial s o l u t io n f o r do u b l e t ax at io n
is s u es w h ic h m igh t aris e in s u c h s it u at io ns .
Two specific issues related to the interaction between treaties
and specific domestic anti-abuse rules are addressed in the 2015
Final Report: the right of a country to tax its own residents, and
“ ex it ” o r “ dep art u re” t ax es and t h e do u b l e t ax at io n is s u es t h at
m igh t aris e in t h at c o nt ex t .
In order to confirm a country’s right to tax their residents, the
Final Report notes that the OECD Model will be revised to include
a p ro vis io n s im il ar t o t h e “ s aving c l au s e, ” u s ed in US t ax t reat ies ,
to confirm a country’s right to tax its residents without regard to
t h e p ro vis io ns o f any t ax t reat y , o t h er t h an t h o s e p ro vis io ns t h at
are int ended t o ap p l y t o res ident s .
Second, the Final Report discusses “exit” or “departure” taxes,
w h ic h is general l y a t ax im p o s ed o n c ert ain t y p es o f inc o m e t h at
is t riggered in t h e event o f a res ident o f a c o u nt ry c eas ing t o b e
a resident. The 2015 Final Report notes that the application of
s u c h t ax es c reat es t h e ris k o f do u b l e t ax at io n w h ere a p ers o n
b ec o m es res ident in ano t h er c o u nt ry and t h at c o u nt ry s eek s t o
t ax t h e s am e inc o m e t h at w as s u b j ec t t o a dep art u re o r ex it t ax
at a different time. While the Final Report notes that tax treaties
s h o u l d no t p revent t h e ap p l ic at io n o f t h es e t ax es , it s u gges t s
t h at t h e m u t u al agreem ent p ro c edu re c o u l d b e u s ed t o p ro vide
rel ief as a p o t ent ial s o l u t io n f o r do u b l e t ax at io n is s u es w h ic h
m igh t aris e in s u c h s it u at io ns .
C larify that tax treaties are not intended to be used
to generate do le non ta ation
The 2015 Final Report recommends the inclusion of specific
l angu age c l arif y ing t h at t ax t reat ies are no t int ended t o b e u s ed
t o generat e do u b l e no n- t ax at io n. It no t es t h at t h e Co m m ent ary
o n Art ic l e 1 o f t h e Mo del Treat y h as s inc e 19 7 7 inc l u ded a
s t at em ent t h at t ax t reat ies s h o u l d no t h el p t ax avo idanc e o r
evas io n and t h at t h is s t at em ent w as f u rt h er s t rengt h ened in
2003. In order to provide additional clarification, the Final
Rep o rt rec o m m ends s t at ing c l earl y in t h e t it l e o f t reat ies t h at
t h e p revent io n o f t ax evas io n and avo idanc e is a p u rp o s e o f
tax treaties. The Final Report also recommends the inclusion
o f w o rding in t h e p ream b l e t h at ex p res s l y p ro vides t h at
t h e c o u nt ries ent ering int o t h e t reat y int end t o c o nc l u de a
t reat y f o r t h e el im inat io n o f do u b l e t ax at io n w it h o u t c reat ing
o p p o rt u nit ies f o r no n- t ax at io n o r redu c ed t ax at io n t h ro u gh
t ax evas io n o r avo idanc e. Las t , t h e Co m m ent ary t o t h e OECD
Model includes specific language referring to the BEPS project
and t h e int ent io n t o addres s BEPS c o nc erns aris ing f ro m t reat y
s h o p p ing arrangem ent s .
lo al a
olic and ontro ers
riefing
9 7
A ction 6
a polic considerations that, in general,
co ntries sho ld consider efore deciding to enter
into a tax treaty with another country
The 2015 Final Report discusses tax policy considerations
rel evant t o a c o u nt ry ’ s dec is io n w h et h er t o ent er int o , m o dif y ,
or terminate a tax treaty with another country. The Final Report
no t es t h at a c l ear art ic u l at io n o f t h es e c o ns iderat io ns w o u l d b e
u s ef u l f o r c o u nt ries in j u s t if y ing t h eir dec is io ns no t t o ent er int o
tax treaties with certain low or no-tax jurisdictions. The Final
Rep o rt rec o gniz es t h at t h ere are m any no n- t ax f ac t o rs t h at c an
l ead t o t h e c o nc l u s io n o f a t ax t reat y b et w een t w o c o u nt ries
and t h at a c o u nt ry h as a s o vereign righ t t o dec ide t o ent er
int o t ax t reat ies w it h any j u ris dic t io n. Al o ng w it h m o re general
considerations, the Final Report includes two proposals that are
bracketed that would specifically address some concerns with
res p ec t t o t h e do m es t ic l aw o f t h e p o t ent ial t reat y p art ner.
9 8
lo al a
olic and ontro ers
riefing
Su c h p ro p o s al s w ere inc l u ded in t h e Revis ed Dis c u s s io n Draf t
as int ro du c ed b y t h e US del egat e and are al s o p ro p o s al s w it h
respect to the US Model Tax Convention. In particular, the first
p ro p o s al w o u l d m o dif y Art ic l e 3 o f t h e OECD Mo del t o inc l u de a
definition of “special tax regime.” Further, new provisions would
b e added t o Art ic l es 11 (Int eres t ), 12 (Ro y al t ies ), and 21 (Ot h er
Income) of the OECD Model that would deny treaty benefits
w it h res p ec t t o int eres t , ro y al t y p ay m ent s , o r o t h er inc o m e
beneficially owned by residents benefiting from a “special
t ax regim e” in t h eir c o u nt ry o f res idenc e at any t im e du ring
t h e t ax ab l e y ear in w h ic h s u c h inc o m e w as p aid. Th e s ec o nd
p ro p o s al p ro vides a new general t reat y ru l e t h at w o u l d “ t u rn o f f ”
t h e t reat y p ro vis io ns o n dividends , int eres t , ro y al t ies , and o t h er
inc o m e if c ert ain c h anges t o a c o u nt ry ’ s do m es t ic l aw are m ade
in the future. The 2015 Final Report notes that these proposals
will be further considered once the United States finalizes the
w o rk o n t h e US Mo del Treat y .
A ction 6
I mplications
The 2015 Final Report reflects agreement among
countries on ensuring that treaties include sufficient
s af egu ards t o p revent t reat y ab u s e and in p art ic u l ar
t reat y s h o p p ing. To t h at end, c o u nt ries h ave
c o m m it t ed t o a m inim u m s t andard t h at s h o u l d b e
im p l em ent ed t o p ro vide p ro t ec t io n agains t t reat y
ab u s e. Ac k no w l edging t h at m o del p ro vis io ns m u s t
b e adap t ed f o r individu al c o u nt ries , and as s u c h
flexibility in implementation is required, the Final
Rep o rt rec o m m ends al t ernat ive w ay s t o m eet
t h at s t andard.
The 2015 Final Report indicates that further work
will be required under Action 6, in particular with
res p ec t t o t h e LOB ru l e, w h ic h is ex p ec t ed t o b e
finalized in the first part of 2016. In addition, the
Final Report specifies that further work is needed
with respect to the treaty entitlement of non-CIVs
and p ens io n f u nds and indic at es t h at s u c h w o rk
would benefit from consultation with stakeholders.
E Y contacts
For additional information concerning
t h is Al ert , p l eas e c o nt ac t :
• Erns t & Y o u ng LLP
Int ernat io nal Tax Servic es
Was h ingt o n, DC
• Arlene Fitzpatrick
+ 1 202 327 7 28 4
arlene.fitzpatrick@ey.com
• Maria Mart inez
+ 1 202 327 8 055
m aria.m art inez @ ey .c o m
• Lisa Findlay
+ 1 202 327 7 18 0
lisa.findlay@ey.com
Im p o rt ant l y , t h e vario u s ant i- ab u s e ru l es inc l u ded
in the 2015 Final Report will be among the changes
p ro p o s ed f o r inc l u s io n in t h e m u l t il at eral ins t ru m ent .
Wit h ap p ro x im at el y 9 0 c o u nt ries p art ic ip at ing, w o rk
o n t h e m u l t il at eral ins t ru m ent is al ready u nderw ay
w it h t h e go al o f c o nc l u ding t h e w o rk and o p ening
t h e m u l t il at eral ins t ru m ent f o r s ignat u re b y 31
Dec em b er 2016. Any f u rt h er w o rk u nder Ac t io n
6 would need to be completed in the first part of
2016 in o rder t o b e rel evant f o r t h e nego t iat io n o f
t h e m u l t il at eral ins t ru m ent . As t h is w o rk c o nt inu es ,
c o m p anies s h o u l d c o nt inu e t o m o nit o r t h e l at es t
devel o p m ent s w it h res p ec t t o Ac t io n 6, eval u at e
h o w any p ro p o s ed c h anges m ay im p ac t t h em , and
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 p ro c es s t o p ro vide
s t ak eh o l der inp u t .
lo al a
olic and ontro ers
riefing
9 9
BEPS Ac t io n 6:
Anal y s is
hat is the action tr ing
to achie e
M atthew M ealey
+ 44 20 7 9 51 07 39
m m eal ey @ u k .ey .c o m
Th e go al o f Ac t io n 6 w as t o devel o p m o del t reat y
p ro vis io ns and rec o m m endat io ns regarding t h e
des ign o f do m es t ic ru l es in o rder t o p revent
the granting of treaty benefits in inappropriate
c irc u m s t anc es . In it s Ju l y 2013 Ac t io n Pl an, t h e
OECD identified treaty shopping as one of the most
im p o rt ant s o u rc es o f BEPS c o nc erns . It s aid t h at
w h il e t h e Co m m ent ary o n Art ic l e 1 o f t h e OECD
Mo del Tax Co nvent io n inc l u des s everal ex am p l es
o f p ro vis io ns t h at c o u l d b e u s ed t o addres s t reat y s h o p p ing s it u at io ns and o t h er c as es o f t reat y ab u s e
t h at give ris e t o do u b l e no n- t ax at io n, devel o p ing
ro b u s t t reat y ant i- ab u s e c l au s es c o u p l ed w it h t h e
ex erc is e o f t ax ing righ t s u nder do m es t ic l aw s w il l
c o nt rib u t e t o res t o ring s o u rc e t ax at io n in a nu m b er
o f c as es .
W ere any of the action
recommendations ne pected
A lex C hristof orou
+ 44 121 535 29 22
ac h ris t o f o ro u @ u k .ey .c o m
No . Th e m inim u m s t andard c o nc ep t , w h ic h
requires countries to include a principal purpose
test (PPT), a limitation on benefits (LOB) provision
(s u p p l em ent ed w it h do m es t ic ant i- ab u s e ru l es ),
o r b o t h in t h eir b il at eral t ax t reat ies , h ad b een s et
o u t in t h e Sep t em b er 2014 Ac t io n 6 Rep o rt . Wh il e
some refinements have been made since then to the
draf t ing o f t h e PPT and LOB p ro vis io ns and m o del
c o m m ent ary , o veral l t h ere w ere no s u rp ris es in t h e
Final Report.
I s there any interaction between
this action and the others
Th e m u l t il at eral ins t ru m ent b eing devel o p ed u nder
Ac t io n 15 w il l b e c ru c ial t o enab l ing c o u nt ries t o
swiftly and efficiently amend their bilateral treaties
to implement the minimum standard required
b y Ac t io n 6. Given t h at t h e c u rrent p ro c es s f o r
am ending b il at eral c an t ak e s everal y ears , t h e
m u l t il at eral ins t ru m ent w il l b e a u s ef u l t o o l f o r
t ax au t h o rit ies (s ee t h e Ac t io n 15 Anal y s is o n
p age 17 0).
Th ere is al s o an indirec t int erac t io n b et w een Ac t io n
6 and s o m e o f t h e o t h er Ac t io n it em s . Th e u l t im at e
o b j ec t ive o f Ac t io n 6 is t o enc o u rage m u l t inat io nal
c o m p anies t o m o re c l o s el y al ign s u b s t anc e w it h t h eir
h o l ding ac t ivit ies — a go al t h at al igns p art ic u l arl y
s t ro ngl y w it h t h e w o rk c arried o u t o n t rans f er p ric ing
(Ac t io ns 8 - 10) and c o u nt ry - b y - c o u nt ry rep o rt ing
(Ac t io n 13).
H ave any countries made
specific comments in relation to
this action
Th e deb at e o ver w h et h er a PPT o r LOB is t h e m o re
ap p ro p riat e ap p ro ac h t o t ac k l ing t reat y s h o p p ing
and o t h er p erc eived t reat y ab u s es h igh l igh t ed t h e
deep divide b et w een t h e US and m u c h o f t h e res t
o f t h e w o rl d o n t h e is s u e. Af t er t h e OECD rel eas ed
it s init ial Ac t io n 6 dis c u s s io n draf t in Marc h 2014
(w h ic h p ro p o s ed a t w o - p ro nged ap p ro ac h o f l ay ering
a m ain p u rp o s e t es t o ver an LOB art ic l e), t h e US
made its objections loud and clear. US officials
reit erat ed t h at t h e US Treas u ry Dep art m ent ’ s
p o s it io n is t h at a PPT o r m ain p u rp o s e p ro vis io n is
t o o vagu e and s u b j ec t ive, and t h at Treas u ry ’ s t reat y
p o l ic y is t o inc l u de in it s t ax t reat ies a c o m p reh ens ive
LOB art ic l e c o nt aining o b j ec t ive, m ec h anic al t es t s
b ec au s e t h ey p ro vide m o re c ert aint y t o t ax p ay ers as
w el l as t o US t reat y p art ners . Several US Treas u ry
officials had said that the US would reserve if a
m ain p u rp o s e p ro vis io n w as added t o t h e OECD
Mo del Co nvent io n. Th e US c o nt ingent ’ s s t eadf as t
s t anc e l ik el y w eigh ed h eavil y in t h e dec is io n b y t h e
Ac t io n 6 w o rk ing gro u p t o ab ando n t h e t w o - p ro nged
ap p ro ac h in f avo r o f t h e m inim u m s t andard c o nc ep t ,
which provides a more flexible approach to tackling
t reat y s h o p p ing and enab l es c o u nt ries t o u s e t h e
p o l ic y c h o ic es t h at are m o s t ap p ro p riat e f o r t h em .
Lik ew is e, t h e Eu ro p ean Unio n rem ained s t ro ng in
it s p o s it io n t h at a PPT is m o re ap p ro p riat e f o r EU
Mem b er St at es ’ t ax t reat ies b ec au s e it c o vers a w ider
range o f t reat y ab u s e c as es and, u nl ik e a US- s t y l e
LOB, provides greater flexibility to tax authorities in
ens u ring t h at t reat y ac c es s is no t b l o c k ed w h en a
taxpayer meets the treaty’s eligibility requirements.
Th e EU h as al ready t ak en s t ep s t o im p l em ent a
PPT int o it s direc t ives . In Janu ary 2015 t h e Parent Su b s idiary Direc t ive (Direc t ive 2011/ 9 6/ EU) w as
amended to include a specific anti-abuse rule which
denies the benefits of the Directive’s provisions to
an arrangem ent o r a s eries o f arrangem ent s t h at
are no t “ genu ine” and h ave b een p u t in p l ac e “ f o r
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 o f
o b t aining a t ax advant age t h at def eat s t h e o b j ec t o r
1
p u rp o s e o f t h is Direc t ive.”
Member States were required to implement the new
ru l e int o nat io nal l aw b y 31 Dec em b er 2015, and
w e h ave al ready s een s everal t errit o ries int ro du c e
l egis l at io n t o t h is ef f ec t . Du ring an 8 Dec em b er 2015
meeting at which the Economic and Financial Affairs
Council of the European Union (ECOFIN) adopted
1
See EY Gl o b al Tax Al ert , European Council formally adopts
binding general anti-abuse rule in Parent-Subsidiary Directive,
dat ed 27 Janu ary 2015.
100
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riefing
M inimum standards
See p age 32 f o r m o re inf o rm at io n.
c o nc l u s io ns regarding, int er al ia, t h e EU im p l em ent at io n o f t h e
final BEPS recommendations, ECOFIN said that the insertion of a
s im il ar ant i- ab u s e ru l e is envis aged in t h e c o nt ex t o f t h e rec as t o f
2
t h e Int eres t and Ro y al t ies Direc t ive (2003/ 49 / EC).
Mo reo ver, as p art o f an ant i- t ax avo idanc e p ac k age rel eas ed
3
o n 28 Janu ary 2016, t h e Eu ro p ean Co m m is s io n is s u ed a
rec o m m endat io n t o EU Mem b er St at es regarding t h e EU
im p l em ent at io n o f t h e OECD’ s p ro p o s ed m eas u res addres s ing t ax
t reat y - rel at ed BEPS c o nc erns , i.e., t h e Ac t io n 6 rec o m m endat io n
t h at c o u nt ries inc l u de in t h eir t ax t reat ies a general ant i- ab u s e ru l e
b as ed o n a PPT, and t h e Ac t io n 7 rec o m m endat io n t h at c o u nt ries
adopt the new proposed changes to the definition of permanent
es t ab l is h m ent in Art ic l e 5 o f t h e OECD Mo del Tax Co nvent io n.
Regarding t h e Ac t io n 6 p ro p o s ed m eas u res , t h e Co m m is s io n
rec o m m ended t h at w h en Mem b er St at es inc l u de a PPT as
suggested by the Action 6 Final Report in tax treaties which they
c o nc l u de am o ng t h em s el ves o r w it h t h ird c o u nt ries , t h ey s h o u l d
insert in the PPT the following modification to ensure compliance
with EU law (modification in bold):
“ No t w it h s t anding t h e o t h er p ro vis io ns o f t h is Co nvent io n, a
benefit under this Convention shall not be granted in respect of
an it em o f inc o m e o r c ap it al if it is reas o nab l e t o c o nc l u de, h aving
regard t o al l rel evant f ac t s and c irc u m s t anc es , t h at o b t aining t h at
benefit was one of the principal purposes of any arrangement or
transaction that resulted directly or indirectly in that benefit, unless
it is es t ab l is h ed t h at it re ects a gen ine economic acti ity
or that granting that benefit in these circumstances would be in
ac c o rdanc e w it h t h e o b j ec t and p u rp o s e o f t h e rel evant p ro vis io ns
o f t h is Co nvent io n.” (See t h e Ac t io n 7 Anal y s is o n p age 112 f o r t h e
Co m m is s io n’ s rec o m m endat io n regarding t h e EU im p l em ent at io n o f
t h e Ac t io n 7 m eas u res .)
hat s going to happen ne t, and how
niform might implementation e
The OECD indicated in the Final Report that further work needs to
b e do ne o n s everal is s u es in 2016, inc l u ding t h e t reat y ent it l em ent
of non-CIVs. Clarifying the application of tax treaties to the fund
indu s t ry h as b een s een t o b e c h al l enging b ec au s e o f t h e p rac t ic al
difficulty in determining the position of the ultimate investor.
As f o r im p l em ent at io n o f t h e m inim u m s t andard, t h e Eu ro p ean
Co m m is s io n’ s 28 Janu ary 2016 rec o m m endat io n regarding Ac t io n
6 s h o u l d h el p ens u re t h at EU Mem b er St at es t h at inc l u de a PPT
in t h eir b il at eral t ax t reat ies do s o in a w ay t h at is c o ns is t ent w it h
EU l aw . In addit io n, t h e EU’ s dec is io n t o int ro du c e a PPT int o t h e
EU Parent - Su b s idiary Direc t ive (and it s p l an t o inc l u de a PPT in
t h e u p c o m ing rec as t o f t h e Int eres t and Ro y al t ies Direc t ive) is
no t ew o rt h y b ec au s e it h as ac c el erat ed t h e im p l em ent at io n o f
s o m e o f t h e Ac t io n 6 rec o m m endat io ns in t h e EU Mem b er St at es .
Co u nt ries o u t s ide t h e EU w il l h ave t o eit h er im p l em ent t h e new
6
ru l es via t h e Ac t io n 15 m u l t il at eral ins t ru m ent o r el s e int ro du c e
t h em o ver t im e b y am ending t h eir t ax t reat ies o ne b y o ne and/ o r
enac t ing do m es t ic l egis l at io n. In eit h er c as e, im p l em ent at io n m ay
not happen quickly; while the multilateral instrument is expected
t o ex p edit e t h e t reat y am endm ent p ro c es s , it m ay no t b e o p en f o r
s ignat u re u nt il at l eas t 2017 .
Ac h ieving a c o ns is t ent int erp ret at io n o f a PPT m ay al s o b e a
challenge. Due to its subjective nature, it is quite possible that
even w h ere c o u nt ries int ro du c e a PPT w it h t h e s am e s t at u t o ry
wording, each could potentially apply the PPT differently. For
ex am p l e, in int erp ret ing w h et h er a t ax p ay er’ s b u s ines s ac t ivit ies
in a particular country is sufficient to give rise to a “substantial
rel at io ns h ip ” w it h t h e St at e, s o m e t ax au t h o rit ies c o u l d ap p l y a
PPT w it h an aggregat io n m inds et and aggregat e t h e ac t ivit ies o f
s u b s idiaries u nder c o m m o n o w ners h ip (s im il ar t o t h e US ac t ive
t rade o r b u s ines s t es t ap p ro ac h ), w h il s t o t h er t ax au t h o rit ies m ay
apply the PPT more formalistically, requiring people resources to
be located in each individual recipient company. Further questions
may also arise when considering the functionality required, either
in aggregat e o r in individu al c o m p anies , t o b e c o ns idered t o b e
“ s u b s t ant ial .”
In rel at io n t o is s u es s u c h as t h e ab o ve, w e m ay s ee s o m e
inc o ns is t enc y earl y o n in t h e ap p l ic at io n o f t h e PPT, b u t w e ex p ec t
that to be resolved fairly quickly as tax authority practice evolves
and h arm o niz es .
W hat are the potential impacts on
business
As ex p l ained ab o ve, c o m p anies s h o u l d b e p rep ared f o r a p erio d o f
u nc ert aint y u nt il t h ey h ave a b et t er s ens e o f h o w t h e t ax au t h o rit ies
w il l ap p l y t h e PPT and w h at t y p es o f f ac t s and c irc u m s t anc es are
m o re l ik el y t o ac h ieve a p o s it ive res u l t . Th e ex am p l es inc l u ded in
the Final Report may provide some comfort to taxpayers in certain
c irc u m s t anc es , b u t t h e ex am p l es c anno t b e ent irel y rel ied o n, as
t h ey are f o r il l u s t rat ive p u rp o s es o nl y and do no t rep res ent m o del
l egis l at ive l angu age.
The uncertainty will be more acute for non-CIVs due to the lower
l evel o f h eadc o u nt f o u nd w it h in t h e as s et m anagem ent s ec t o r
general l y and t h e p rac t ic e o f es t ab l is h ing h o l ding s t ru c t u res f o r
eac h o f t h eir inves t m ent s . Th eref o re, c o m p anies (w h et h er t h ey
are non-CIVs or not) should review their holding structures to
det erm ine t h eir Ac t io n 6 ris k and ex p l o re al t ernat ive o p t io ns t h at
m inim iz e ex p o s u re.
2
http://www.consilium.europa.eu/en/press/press-releases/2015/12/08-ecofinc o nc l u s io ns - c o rp o rat e- t ax at io n/
3
See EY Gl o b al Tax Al ert , European Commission releases anti-tax avoidance
package designed to provide uniform implementation of BEPS measures and
minimum standards across Member States, dat ed 28 Janu ary 2016.
lo al a
olic and ontro ers
riefing 101
ction
7
OECD releases final report
on preventing the artificial
avo idanc e o f p erm anent
es t ab l is h m ent s t at u s u nder
Ac t io n 7
Executive summary
On 5 Oc t o b er 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) released its final report on preventing the artificial avoidance of permanent
establishment status (Action 7) under its Action Plan on Base Erosion and Profit
Shifting (BEPS). This report was released in a package that included final reports on all
15 BEPS Ac t io ns .
The document, Preventing the Artificial Avoidance of Permanent Establishment
Status (the Action 7 Report or Final Report), proposes changes to the permanent
establishment (PE) definition in Article 5 of the OECD Model Tax Convention (the OECD
Mo del ) t o p revent t h e u s e o f t h e f o l l o w ing arrangem ent s t h at are c o ns idered t o enab l e
a f o reign ent erp ris e t o o p erat e in ano t h er c o u nt ry w it h o u t c reat ing a PE:
• Co m m is s io naire arrangem ent s and s im il ar s t rat egies
• The use of specific preparatory or auxiliary activity exemptions, including the
artificial fragmentation of so-called “cohesive” business activities into several smaller
operations such that each part is able to benefit from the use of such specific activity
ex em p t io ns
The Final Report also proposes the use of the principal purpose test (PPT) rule that is
b eing rec o m m ended u nder Ac t io n 6 t o deal w it h s t rat egies invo l ving t h e s p l it t ing- u p o f
c o nt rac t s b et w een c l o s el y rel at ed ent erp ris es in t h e c o nt ex t o f c o ns t ru c t io n c o nt rac t s
o r t h e inc l u s io n o f an al t ernat ive p ro vis io n in t h e Co m m ent ary t o t h e OECD Mo del
(the OECD Commentary) consisting of an automatic rule requiring the aggregation of
t im e s p ent b y c l o s el y rel at ed ent erp ris es at t h e s am e b u il ding s it e o r c o ns t ru c t io n o r
ins t al l at io n p ro j ec t t o c al c u l at e t h e 12 m o nt h t h res h o l d.
102
lo al a
olic and ontro ers
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A ction 7
The Final Report, compared to the revised discussion draft on
1
Ac t io n 7 t h at w as is s u ed in May 2015, c o nt ains no f u ndam ent al
c h anges in t erm s o f t h e p o s it io n t ak en b y t h e OECD o n p erc eived
BEPS abuses arising from the artificial avoidance of PE status.
However, the Final Report reflects refinements from the earlier
discussion drafts. In particular, the Final Report modifies
t h e p ro p o s ed am endm ent s t o Art ic l e 5(5) as w el l as Art ic l e
5(6). Currently, Article 5(5) requires a person (other than an
indep endent agent ) ac t ing o n b eh al f o f a f o reign ent erp ris e t o
h ave t h e “ au t h o rit y t o c o nc l u de c o nt rac t s in t h e nam e o f t h e
enterprise” in order to create a PE. The final Action 7 Report
w o u l d ref er t o p ers o ns (o t h er t h an an indep endent agent ) t h at
h ab it u al l y c o nc l u de c o nt rac t s o r “ h ab it u al l y p l ay t h e p rinc ip al
ro l e l eading t o t h e c o nc l u s io n o f c o nt rac t s t h at are ro u t inel y
concluded without material modification by the enterprise,”
w h ere t h e revis ed dis c u s s io n draf t in c o nt ras t ref erred t o
“ p ers o ns t h at h ab it u al l y c o nc l u ded c o nt rac t s o r nego t iat ed t h e
m at erial el em ent s o f c o nt rac t s .”
The Final Report also reflects changes to the proposed wording
to tighten up the definition of independent agent in Article 5(6)
b y rep l ac ing t h e c o nc ep t o f “ c o nnec t ed p art ies ” w it h “ c l o s el y
related enterprises.” The Final Report includes, for this purpose,
c as es w h ere a p ers o n p o s s es s es direc t l y o r indirec t l y m o re t h an
50% of the beneficial interest in the other or, if a company, more
t h an 50% o f t h e aggregat e vo t e and val u e o f t h e c o m p any ’ s
shares or the beneficial equity interests.
Detailed discussion
ac gro nd
Art ic l e 5 o f t h e OECD Mo del des c rib es t h e c irc u m s t anc es in
w h ic h an ent erp ris e w il l b e t reat ed as h aving a PE in a c o u nt ry .
Th e Ac t io n 7 Rep o rt inc l u des s everal am endm ent s t o Art ic l e 5 t o
addres s t h e OECD’ s c o nc erns ab o u t t h e p o t ent ial f o r c o m p anies
to enter into arrangements that would, in its view, artificially
avoid the occurrence of PEs. These proposals have been refined
b as ed o n t h e c o m m ent s rec eived t o p rio r dis c u s s io n draf t s f ro m
several rounds of public consultation. The final proposals reflect
t h e OECD’ s f u rt h er c o ns iderat io n o f t h e is s u es rais ed and al s o
p ro vide new Co m m ent ary o n t h e p ro p o s ed c h anges t o Art ic l e 5.
Th e p ro p o s al s are s u m m ariz ed b el o w .
ommissionaire arrangement
Th e Ac t io n 7 Rep o rt p ro p o s es t o am end Art ic l e 5(5) s u c h t h at
an ent erp ris e w il l b e deem ed t o h ave a PE in a c o u nt ry w h ere
a p ers o n is ac t ing in t h at c o u nt ry o n b eh al f o f t h e ent erp ris e,
and, in do ing s o , s u c h p ers o n h ab it u al l y c o nc l u des c o nt rac t s ,
o r “ h ab it u al l y p l ay s t h e p rinc ip al ro l e l eading t o t h e c o nc l u s io n
o f c o nt rac t s t h at are ro u t inel y c o nc l u ded w it h o u t m at erial
modifications by the enterprise.” The relevant contracts for this
p u rp o s e are t h o s e t h at are:
(a) In t h e nam e o f t h e ent erp ris e, o r
(b) For the transfer of, or right to use, property that the
ent erp ris e o w ns o r h as t h e righ t t o u s e, o r
(c) For the provision of services by the enterprise
1
See EY Gl o b al Tax Al ert , OECD releases revised discussion draft on preventing
artificial avoidance of PE status under BEPS Action 7, dat ed 21 May 2015. See
al s o EY Gl o b al Tax Al ert , OECD releases discussion draft on preventing artificial
avoidance of PE status under BEPS Action 7, dat ed 4 No vem b er 2014.
lo al a
olic and ontro ers
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A ction 7
Th e ac t ivit ies des c rib ed, h o w ever, w il l no t c reat e a PE f o r t h e
ap p l ic ab l e ent erp ris e if :
• Th e ac t ivit ies are l im it ed t o t h e “ p rep arat o ry o r au x il iary ”
activities described in Article 5(4) (as modified by the Final
Rep o rt ’ s p ro p o s al b el o w ).
Or
• Th e ac t ivit ies are c arried o n b y c ert ain indep endent agent s
under Article 5(6) (as modified by the Final Report, also
dis c u s s ed b el o w ).
Regarding t h e indep endent agent ex c ep t io n, a p ers o n ac t ing
in a c o u nt ry o n b eh al f o f an ent erp ris e o f ano t h er c o u nt ry
will not cause the enterprise to have a PE in the first country
if that person carries on a business in the first country “as
an indep endent agent and ac t s f o r t h e ent erp ris e in t h e
o rdinary c o u rs e o f t h at b u s ines s .” Th e Ac t io n 7 Rep o rt al s o
p ro vides , h o w ever, t h at w h en a “ p ers o n ac t s ex c l u s ivel y o r
al m o s t ex c l u s ivel y o n b eh al f o f o ne o r m o re ent erp ris es t o
w h ic h it is c l o s el y rel at ed” t h at p ers o n c anno t b e c o ns idered
an indep endent agent u nder Art ic l e 5(6) w it h res p ec t t o
the applicable enterprise. For this purpose, the Final Report
general l y p ro vides t h at a p ers o n is “ c l o s el y rel at ed” t o an
ent erp ris e if b as ed o n al l t h e f ac t s and c irc u m s t anc es , o ne h as
c o nt ro l o f t h e o t h er o r b o t h are u nder t h e c o nt ro l o f t h e s am e
p ers o ns o r ent erp ris es . In any c as e, a p ers o n s h al l b e c o ns idered
t o b e c l o s el y rel at ed t o an ent erp ris e if :
a)
One p o s s es s es direc t l y o r indirec t l y m o re t h an 50% o f t h e
beneficial interest in the other (or, in the case of a company,
m o re t h an 50% o f t h e aggregat e vo t e and val u e o f t h e
company’s shares or of the beneficial equity interest in the
c o m p any ).
Or
b )
Ano t h er p ers o n p o s s es s es direc t l y o r indirec t l y m o re t h an
50% of the beneficial interest (or, in the case of a company,
m o re t h an 50% o f t h e aggregat e vo t e and val u e o f t h e
company’s shares or of the beneficial equity interest in the
c o m p any ) in t h e p ers o n and t h e ent erp ris e.
The Final Report also proposes new guidance in the OECD
Commentary on Article 5 on several significant issues around
t h e ab o ve- m ent io ned am endm ent s , inc l u ding t h e f o l l o w ing
k ey p o int s :
• Paragrap h 32.8 o f t h e OECD Co m m ent ary ex p l ains t h at
t y p ic al l y a PE aris es w h en c o nt rac t s are c o nc l u ded b y an
agent , p art ner o r em p l o y ee o f an ent erp ris e s o as t o c reat e
l egal l y enf o rc eab l e righ t s and o b l igat io ns b et w een t h e
ent erp ris e and it s c l ient s . Th e OECD Co m m ent ary al s o no t es ,
h o w ever, t h at Art ic l e 5(5) m ay ap p l y w h en t h e c o nt rac t s
ent ered int o do no t l egal l y b ind t h e ent erp ris e t o t h ird p art ies
w it h w h ic h t h o s e c o nt rac t s are c o nc l u ded, b u t are c o nt rac t s
f o r t h e t rans f er o f , o r righ t t o u s e, p ro p ert y t h at is o w ned b y
t h e ent erp ris e o r t h at t h e ent erp ris e h as t h e righ t t o u s e, o r f o r
the provision of services by the enterprise. For instance, the
p ro vis io n w o u l d ap p l y t o c o m m is s io naire s t ru c t u res in w h ic h
t h e c o m m is s io naire do es no t ent er int o c o nt rac t s w it h t h ird
p art ies t h at l egal l y b ind t h e ent erp ris e b u t t h e ent erp ris e’ s
p ro p ert y is nevert h el es s t rans f erred t o t h o s e t h ird p art ies .
Th eref o re, a c ru c ial c o ndit io n in as s es s ing p aragrap h (b ) and
(c ) o f Art ic l e 5(5) is w h et h er t h e p ers o n ac t ing o n b eh al f
o f t h e ent erp ris e h as c o nc l u ded o r h as p l ay ed t h e p rinc ip al
ro l e l eading t o t h e c o nc l u s io n o f c o nt rac t s t h at are ro u t inel y
concluded without material modification by the enterprise. The
OECD Co m m ent ary m ak es c l ear t h at t h is res u l t w o u l d ap p l y
even w h en t h e c o m m is s io naire do es no t dis c l o s e t h e ident it y
2
o f t h e ent erp ris e t o any t h ird p art ies .
• In c o nt ras t t o t h e t reat m ent o f c o m m is s io naire- t y p e
arrangem ent s , p aragrap h 32.12 o f t h e OECD Co m m ent ary
clarifies that Article 5(5) is not intended to apply when a
p ers o n c o nc l u des c o nt rac t s o n it s o w n b eh al f and, in o rder
t o p erf o rm t h e o b l igat io ns deriving f ro m t h es e c o nt rac t s ,
o b t ains go o ds o r s ervic es f ro m o t h er ent erp ris es . In s u c h
c as es , t h e p ers o n is no t ac t ing o n b eh al f o f ano t h er ent erp ris e
and t h e c o nt rac t s are no t t h e t y p e des c rib ed u nder Art ic l e
5(5). Th eref o re, a dis t rib u t o r, inc l u ding a s o - c al l ed l o w ris k
dis t rib u t o r, w o u l d no t c au s e t h e ent erp ris e s el l ing p ro p ert y
t o t h e dis t rib u t o r t o h ave a PE in t h e dis t rib u t o r’ s c o u nt ry o f
o p erat io n as l o ng as t h e t rans f er o f t it l e t o t h e p ro p ert y p as s ed
f ro m t h e ent erp ris e t o t h e dis t rib u t o r (regardl es s o f h o w l o ng
3
t h e dis t rib u t o r h o l ds t it l e in t h e p ro du c t s o l d).
2
Pro p o s ed new p aragrap h 32.8 o f t h e OECD Co m m ent ary o n Art ic l e 5,
Ac t io n 7 Rep o rt , p age 20.
3
Pro p o s ed new p aragrap h 32.12 o f t h e OECD Co m m ent ary o n Art ic l e 5, Ac t io n
7 Rep o rt , p age 21.
104
lo al a
olic and ontro ers
riefing
A ction 7
Th e c h ange t o “ c l o s el y rel at ed” ent erp ris es c o m es af t er c o m m ent s
requesting a more definite standard. The proposed Commentary
clarifies that the fact that the operation of this rule does not affect
t h e o p erat io n o f Art ic l e 5(7 ), w h ic h general l y p ro vides t h at t h e m ere
f ac t t h at a p arent ent erp ris e c o nt ro l s it s s u b s idiary w il l no t c au s e t h e
p arent t o h ave a PE in t h e s u b s idiary ’ s c o u nt ry o f res idenc e.
• Th e p h ras e “ o r h ab it u al l y p l ay s t h e p rinc ip al ro l e l eading t o t h e
c o nc l u s io n o f c o nt rac t s t h at are ro u t inel y c o nc l u ded w it h o u t
material modification by the enterprise” is aimed at situations
w h ere t h e c o nc l u s io n o f a c o nt rac t direc t l y res u l t s f ro m t h e
ac t io ns t h at t h e p ers o n p erf o rm s in a Co nt rac t ing St at e o n
b eh al f o f t h e ent erp ris e even t h o u gh , u nder t h e rel evant l aw ,
4
t h e c o nt rac t is no t c o nc l u ded b y t h at p ers o n in t h at St at e.
Th e OECD’ s view is t h at w h il e t h e p h ras e “ c o nc l u des c o nt rac t s ”
is a rel at ivel y w el l - k no w n t es t b as ed o n c o nt rac t l aw , it w as
nec es s ary t o s u p p l em ent t h at t es t w it h o ne f o c u s ing o n t h e
s u b s t ant ive ac t ivit ies t ak ing p l ac e in o ne St at e. Th is is t o
addres s c as es w h ere t h e c o nc l u s io n o f c o nt rac t s is c l earl y t h e
direc t res u l t o f t h es e ac t ivit ies even t h o u gh t h e c o nc l u s io n o f
t h e c o nt rac t t ak es p l ac e o u t s ide t h at St at e. In t h is regard, t h e
p h ras e m u s t b e int erp ret ed t o c o ver c as es w h ere t h e ac t ivit ies
t h at a p ers o n ex erc is es in a St at e are int ended t o res u l t in t h e
regu l ar c o nc l u s io n o f c o nt rac t s t o b e p erf o rm ed b y a f o reign
ent erp ris e (i.e., w h ere t h at p ers o n ac t s as t h e s al es f o rc e o f
the enterprise). For example, it applies where a person solicits
and receives (but does not formally finalize) orders that are
s ent direc t l y t o a w areh o u s e f ro m w h ic h go o ds b el o nging t o
t h e ent erp ris e are del ivered and w h ere t h e ent erp ris e ro u t inel y
ap p ro ves t h es e t rans ac t io ns . Ho w ever, it do es no t ap p l y w h ere
a p ers o n m erel y p ro m o t es and m ark et s go o ds o r s ervic es
o f an ent erp ris e in a w ay t h at do es no t direc t l y res u l t in t h e
c o nc l u s io n o f c o nt rac t s . Here t h e OECD Co m m ent ary p ro vides
t h e ex am p l e o f rep res ent at ives o f a p h arm ac eu t ic al ent erp ris e
ac t ivel y p ro m o t ing dru gs p ro du c ed b y t h at ent erp ris e b y
contacting doctors who subsequently prescribe these drugs.
Ac c o rding t o t h e OECD Co m m ent ary , s u c h m ark et ing ac t ivit y
do es no t direc t l y res u l t in t h e c o nc l u s io n o f c o nt rac t s b et w een
t h e do c t o rs and t h e ent erp ris e even t h o u gh t h e s al es m ay
significantly increase as a result of that marketing activity and
t h eref o re s h o u l d no t give ris e t o a PE.
• Paragraph 33.1 clarifies that the person must “habitually”
perform the specified acts in order to establish a PE for the
ent erp ris e, regardl es s o f w h et h er t h at p ers o n is c o nc l u ding
c o nt rac t s o r p l ay ing t h e p rinc ip al ro l e l eading t o t h e c o nc l u s io n
o f c o nt rac t s t h at are ro u t inel y c o nc l u ded w it h o u t m at erial
5
modification by the enterprise. Th u s , t h e p res enc e o f t h e
4
Pro p o s ed new p aragrap h s 32.5 and 32.6 o f t h e OECD Co m m ent ary o n
Art ic l e 5, Ac t io n 7 Rep o rt , p age 19 .
5
Pro p o s ed new p aragrap h 33.1 o f t h e OECD Co m m ent ary o n Art ic l e 5, Ac t io n
7 Rep o rt , p age 22.
p ers o n in t h e o t h er St at e s h o u l d b e m o re t h an m erel y
t rans it o ry in o rder t o c reat e a PE f o r t h e ent erp ris e. Th e OECD
Co m m ent ary p ro vides t h at it is no t p o s s ib l e t o p res c rib e a
precise frequency test to determine whether the “habitually”
s t andard is m et . No net h el es s , f ac t o rs s im il ar t o t h o s e u s ed f o r
Art ic l e 5(6) w o u l d b e rel evant in m ak ing s u c h a det erm inat io n.
• A PE t h at is c reat ed as a res u l t o f t h e am endm ent s t o
Art ic l es 5(5) and 5(6) w il l af f ec t t h e righ t s and o b l igat io ns
res u l t ing f ro m t h e c o nt rac t s t h at w il l b e al l o c at ed t o t h e PE.
Ac c o rding t o t h e p ro p o s ed Co m m ent ary , t h is do es no t m ean
that the entire profits resulting from the performance of
t h es e c o nt rac t s s h o u l d b e at t rib u t ed t o t h e PE. Ins t ead, t h e
determination of the profits to be attributed to the PE will be
governed by the rules of Article 7. It specifies that the profits
t o b e at t rib u t ed t o t h e PE in ac c o rdanc e w it h Art ic l e 7 w il l b e
o nl y t h o s e t h at t h e PE w o u l d h ave derived if it w as a s ep arat e
and indep endent ent erp ris e p erf o rm ing t h e ac t ivit ies o f
6
p aragrap h 5.
• Th e p ro p o s al t h at a p ers o n c anno t b e an indep endent agent
if it “ ac t s ex c l u s ivel y o r al m o s t ex c l u s ivel y o n b eh al f o f o ne
o r m o re ent erp ris es t o w h ic h it is c l o s el y rel at ed” rep res ent s
a c h ange f ro m t h e init ial dis c u s s io n draf t w h ic h p ro vided a
s im il ar l im it at io n w it h res p ec t t o a p ers o n ac t ing o n b eh al f
o f “ as s o c iat ed ent erp ris es ” and f ro m t h e revis ed dis c u s s io n
draf t w h ic h p ro vided a s im il ar l im it at io n o n a p ers o n ac t ing
o n b eh al f o f “ c o nnec t ed ent erp ris es .” Th e c h ange t o “ c l o s el y
related” enterprises comes after comments requesting a more
definite standard. The proposed Commentary clarifies that
t h e f ac t t h at t h e o p erat io n o f t h is ru l e do es no t af f ec t t h e
o p erat io n o f Art ic l e 5(7 ), w h ic h general l y p ro vides t h at t h e
m ere f ac t t h at a p arent ent erp ris e c o nt ro l s it s s u b s idiary w il l
no t c au s e t h e p arent t o h ave a PE in t h e s u b s idiary ’ s c o u nt ry
7
o f res idenc e. Art ic l es 5(5) and 5(6) m u s t s t il l b e ap p l ied t o a
p arent - s u b s idiary rel at io ns h ip t o det erm ine if t h e s u b s idiary ’ s
ac t ivit ies o n b eh al f o f it s p arent give ris e t o a PE f o r it s p arent .
Th ere al s o is gu idanc e o n w h at it m eans f o r a p ers o n t o ac t
“ al m o s t ex c l u s ivel y ” f o r c l o s el y rel at ed ent erp ris es . Here, t h e
p ro p o s ed Co m m ent ary indic at es t h at a p ers o n w il l b e t reat ed
as ac t ing “ al m o s t ex c l u s ivel y ” o n b eh al f o f c l o s el y rel at ed
enterprises if that person has no significant business activities
6
Pro p o s ed new p aragrap h 35.1 o f t h e OECD Co m m ent ary o n Art ic l e 5, Ac t io n
7 Rep o rt , p age 23.
7
Pro p o s ed new p aragrap h 38 .11 o f t h e OECD Co m m ent ary o n Art ic l e 5, Ac t io n
7 Rep o rt , p age 26.
lo al a
olic and ontro ers
riefing 105
A ction 7
Th e p ro p o s ed Co m m ent ary ex p l ains , u s ing s everal
ex am p l es f o r eac h ac t ivit y l is t ed in Art ic l e 5(4), t h at t h e
det erm inat io n o f w h et h er an ac t ivit y is p rep arat o ry o r
au x il iary m u s t b e m ade b y c o ns idering t h e ro l e o f t h o s e
ac t ivit ies w it h in t h e b u s ines s o f t h e ent erp ris e as a w h o l e.
ap art f ro m t h o s e c o ndu c
An ex am p l e il l u s t rat ing t
agent ac t s “ al m o s t ex c l u
w h en l es s t h an 10% o f t h
8
rel at ed ent erp ris es .
t ed f o r t h e c l o s el y rel at ed ent erp ris es .
h is c o nc ep t c o nc l u des t h at a s al es
s ivel y ” f o r c l o s el y rel at ed ent erp ris es
e agent ’ s s al es are f o r no n- c l o s el y
In conclusion, while the Final Report does not contain major
changes from the revised discussion draft, it does reflect some
refinements to the proposed amendments to Articles 5(5) and
5(6), s u m m ariz ed as f o l l o w s :
• Currently, Article 5(5) requires a person (other than an
indep endent agent ) ac t ing o n b eh al f o f a f o reign ent erp ris e
t o h ave t h e “ au t h o rit y t o c o nc l u de c o nt rac t s in t h e nam e o f
t h e ent erp ris e” in o rder t o c reat e a PE. Th e revis ed dis c u s s io n
draf t ref erred t o “ p ers o ns t h at h ab it u al l y c o nc l u de c o nt rac t s
o r nego t iat e t h e m at erial el em ent s o f c o nt rac t s .” Ho w ever,
the Final Report refers to persons that habitually conclude
c o nt rac t s o r “ h ab it u al l y p l ay t h e ro l e l eading t o t h e c o nc l u s io n
o f c o nt rac t s t h at are ro u t inel y c o nc l u ded w it h o u t m at erial
modification by the enterprise.”
• Th e indep endent agent ex em p t io n in Art ic l e 5(6) c u rrent l y
u s es t h e c o nc ep t o f “ as s o c iat ed p art ies .” Th e revis ed
discussion draft referred to “connected parties.” In the Final
Report, the tightened definition of independent agent uses the
c o nc ep t o f “ c l o s el y rel at ed ent erp ris es .”
pecific acti it e emptions
Currently, Article 5(4) of the OECD Model specifically exempts
c ert ain ac t ivit ies f ro m c reat ing a PE w h ere a p l ac e o f b u s ines s
is u s ed s o l el y f o r ac t ivit ies l is t ed in t h at p aragrap h . Th e Ac t io n
7 Rep o rt p ro p o s es t o m o dif y t h e w o rding o f Art ic l e 5(4) s u c h
t h at eac h o f t h e l is t ed ex em p t io ns f ro m PE s t at u s is res t ric t ed t o
ac t ivit ies t h at are o f a p rep arat o ry o r au x il iary c h arac t er o r t h e
overall activity of the fixed place of business is of a preparatory
9
o r au x il iary c h arac t er. Through this modification, the OECD
aims to prevent what it views as the artificial avoidance of a PE
t h ro u gh t h e u s e o f t h es e ex em p t io ns .
eaning of preparator or a
iliar
Th e Ac t io n 7 Rep o rt al s o p ro vides addit io nal Co m m ent ary
gu idanc e int ended t o c l arif y t h e m eaning o f “ p rep arat o ry o r
10
au x il iary ” u s ing a nu m b er o f ex am p l es . Th e dec is ive c rit erio n
is whether the activity performed at the fixed place of business
itself forms an essential and significant part of the activity of
t h e ent erp ris e as a w h o l e. In t erm s o f t h e dif f erenc es b et w een
w h at is c o ns idered p rep arat o ry o r au x il iary , t h e OECD p ro vides
t h at as a general ru l e, an ac t ivit y h as a p rep arat o ry c h arac t er
if it is c arried o n in c o nt em p l at io n o f t h e c arry ing o n o f w h at
constitutes the essential and significant part of the activities of
t h e ent erp ris e as a w h o l e. An ac t ivit y h as an au x il iary c h arac t er
if it is c arried o n t o s u p p o rt , w it h o u t b eing p art o f , t h e es s ent ial
11
and significant part of the activity of the enterprise as a whole.
Th e p ro p o s ed Co m m ent ary gu idanc e al s o p ro vides t h at t h e
ac t ivit ies l is t ed in Art ic l e 5(4) s u b - p aragrap h s a) t o e) ref er
t o ac t ivit ies t h at t h e ent erp ris e c arries o n s o l el y f o r it s el f . In
order to qualify for the exemption, an enterprise must be able
t o dem o ns t rat e t h at t h e ac t ivit ies p erf o rm ed at t h e p l ac e o f
b u s ines s are f o r it s el f and no t o n b eh al f o f o t h er ent erp ris es and
12
t h at s u c h ac t ivit ies are o f a p rep arat o ry o r au x il iary c h arac t er.
Th e p ro p o s ed Co m m ent ary ex p l ains , u s
f o r eac h ac t ivit y l is t ed in Art ic l e 5(4), t h
w h et h er an ac t ivit y is p rep arat o ry o r au
c o ns idering t h e ro l e o f t h o s e ac t ivit ies w
ent erp ris e as a w h o l e.
10
ing s everal ex
at t h e det erm
x il iary m u s t b
it h in t h e b u s
am p l es
inat io n o f
e m ade b y
ines s o f t h e
Ac t io n 7 Rep o rt , p age 31- 35.
11
8
Pro p o s ed new p aragrap h s 38 .7 and 38 .8 o f t h e OECD Co m m ent ary o n
Art ic l e 5, Ac t io n 7 Rep o rt , p ages 25- 26.
9
Paragrap h 12, Ac t io n 7 Rep o rt , p age 28 .
106
lo al a
olic and ontro ers
riefing
Pro p o s ed new p aragrap h 21.2 o f t h e OECD Co m m ent ary o n Art ic l e 5, Ac t io n
7 Rep o rt , p age 30.
12
Pro p o s ed new p aragrap h 21.3 o f t h e OECD Co m m ent ary o n Art ic l e 5, Ac t io n
7 Rep o rt , p age 30.
A ction 7
se of facilities solel for the storage, displa or
deli er of goods or merchandise elonging to the
enterprise
rticle
s paragraph a
Wit h res p ec t t o ac t ivit ies invo l ving t h e m aint enanc e o f s t o c k
b el o nging t o t h e ent erp ris e f o r t h e p u rp o s e o f s t o rage, dis p l ay
o r del ivery (Art ic l e 5(4) s u b - p aragrap h a)), t h e p ro p o s ed
Co m m ent ary p ro vides t h at in c ert ain s it u at io ns , s u c h ac t ivit ies
may not qualify for the exemption because they cannot be
c o ns idered p rep arat o ry o r au x il iary in c h arac t er w h en c o m p ared
t o t h e res t o f t h e b u s ines s ac t ivit ies o f t h e ent erp ris e as a w h o l e.
Examples of situations where such activities do not qualify for
t h e ex em p t io n inc l u de:
• Wh en an ent erp ris e’ s m ain b u s ines s is t h e o nl ine s al es o f
go o ds t o c u s t o m ers , t h e m aint enanc e o f a l arge w areh o u s e
where a significant number of employees work for the
m ain p u rp o s e o f s t o ring and del ivering t h o s e go o ds s o l d
b y t h e ent erp ris e w o u l d c o ns t it u t e an es s ent ial p art o f t h e
ent erp ris e’ s s al es and dis t rib u t io n b u s ines s s u c h t h at it w o u l d
13
no t h ave a p rep arat o ry o r au x il iary c h arac t er.
• When an enterprise maintains a fixed place of business for the
del ivery o f s p are p art s f o r m ac h inery t o c u s t o m ers b u t al s o
f o r t h e m aint enanc e and rep airs o f s u c h m ac h inery , t h is w o u l d
go beyond the pure delivery requirement of sub-paragraph a),
b ec au s e t h es e af t er- s al es ac t ivit ies (m aint enanc e and rep air)
constitute an essential and significant part of the services
14
p ro vided b y an ent erp ris e vis - à - vis it s c u s t o m ers .
he maintenance of a stoc of goods or
merchandise elonging to the enterprise solel
for the p rpose of storage, displa or deli er
rticle
s paragraph
Wit h res p ec t t o ac t ivit ies invo l ving t h e m aint enanc e o f a s t o c k
o f go o ds o r m erc h andis e b el o nging t o t h e ent erp ris e f o r t h e
p u rp o s e o f s t o rage, dis p l ay o r del ivery (Art ic l e 5(4), s u b p aragrap h b )), t h e p ro p o s ed Co m m ent ary p ro vides t h at t h e
ex em p t io n in s u b - p aragrap h b ) w o u l d b e irrel evant w h ere t h e
s t o c k o f an ent erp ris e is s t o red at a w areh o u s e m aint ained b y an
indep endent l o gis t ic s p ro vider b ec au s e s u c h w areh o u s e w o u l d
not constitute a fixed place of business as the enterprise does
no t h ave t h is t h ird- p art y w areh o u s e at it s dis p o s al . Ho w ever, if
t h e ent erp ris e w ere al l o w ed u nl im it ed ac c es s t o a s ep arat e p art
o f t h at w areh o u s e in o rder t o ins p ec t and m aint ain t h e s t o c k ,
t h en it w o u l d h ave t h at p l ac e o f b u s ines s at it s dis p o s al and
w h et h er s u b - p aragrap h b ) ap p l ies w o u l d dep end o n w h et h er t h e
ac t ivit y o f m aint aining s t o c k at t h e w areh o u s e is o f a p rep arat o ry
15
o r au x il iary c h arac t er.
he maintenance of a stoc of goods or
merchandise elonging to the enterprise solel for
the p rpose of processing
another enterprise
rticle
s paragraph c
Sim il arl y , w h ere a s t o c k o f go o ds is m aint ained f o r t h e p u rp o s e
o f p ro c es s ing b y ano t h er ent erp ris e (Art ic l e 5(4), s u b - p aragrap h
c )), t h e p ro p o s ed Co m m ent ary p ro vides t h at t h e m ere p res enc e
o f go o ds o r m erc h andis e b el o nging t o an ent erp ris e at t h e
p rem is es o f ano t h er (e.g., a t o l l - m anu f ac t u rer) w o u l d no t b e
sufficient to make the premises a fixed place of business of the
ent erp ris e u nl es s t h e ent erp ris e is al l o w ed u nl im it ed ac c es s
t o a s ep arat e p art o f t h e t o l l - m anu f ac t u rer’ s f ac il it ies . If s o , it
w o u l d h ave t h at p l ac e at it s dis p o s al and it w o u l d b e nec es s ary
t o det erm ine w h et h er t h e m aint enanc e o f s t o c k in t h es e
13
Pro p o s ed new p aragrap h 22 o f t h e OECD Co m m ent ary o n Art ic l e 5,
Ac t io n 7 Rep o rt , p age 31.
14
Pro p o s ed new p aragrap h 22.1 o f t h e OECD Co m m ent ary o n Art ic l e 5,
Ac t io n 7 Rep o rt , p age 31.
15
Pro p o s ed new p aragrap h 22.3 o f t h e OECD Co m m ent ary o n Art ic l e 5,
Ac t io n 7 Rep o rt , p age 32.
lo al a
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A ction 7
c irc u m s t anc es c o ns t it u t es a p rep arat o ry o r au x il iary ac t ivit y f o r
t h e ent erp ris e. Here, t h e p ro p o s ed Co m m ent ary il l u s t rat es t h at
the activity would qualify for the exemption if the enterprise
in question is merely a distributor of products manufactured
b y o t h er ent erp ris es . Bec au s e a dis t rib u t o r’ s m ain b u s ines s is
no t t h e m anu f ac t u re o f p ro du c t s , t h e m aint enanc e o f go o ds
f o r p ro c es s ing b y ano t h er w o u l d no t f o rm an es s ent ial and
significant part of the distributor’s overall activity. However,
t h e ap p l ic at io n o f s u c h ex em p t io n w o u l d s t il l b e s u b j ec t t o t h e
16
ap p l ic at io n o f t h e ant i- f ragm ent at io n ru l e (dis c u s s ed b el o w ).
In essence, an enterprise must be determined to have a fixed
place of business at its disposal first, before it can be determined
whether a specific activity exemption is applicable to the facts
and c irc u m s t anc es .
he maintenance of a fi ed place of siness
solel for the p rpose of p rchasing goods or
merchandise or of collecting information, for the
enterprise
rticle
s paragraph d
Th e p ro p o s ed Co m m ent ary al s o p ro vides t h at t h e ex em p t io n f o r
a fixed place of business used for purchasing goods would not be
avail ab l e in a s it u at io n w h ere t h e o veral l ac t ivit y o f t h e ent erp ris e
c o ns is t s o f s el l ing t h es e go o ds and w h ere t h e p u rc h as ing ac t ivit y
17
rep res ent s a c o re f u nc t io n o f t h at ent erp ris e’ s b u s ines s .
With respect to a fixed place of business used for collecting
inf o rm at io n, t h e p ro p o s ed Co m m ent ary p ro vides an ex am p l e
of an investment fund that sets up an office in another state
t o c o l l ec t inf o rm at io n o n p o s s ib l e inves t m ent o p p o rt u nit ies in
t h at s t at e and c o nc l u des t h at , in t h is c o nt ex t , t h e c o l l ec t ing
o f inf o rm at io n w o u l d b e a p rep arat o ry ac t ivit y . Th e s am e
conclusion would apply if an insurance company set up an office
18
t o c o l l ec t s t at is t ic al inf o rm at io n o n ris k s in a p art ic u l ar m ark et .
he maintenance of a fi ed place of siness solel
for the p rpose of carr ing on, for the enterprise,
an other acti it
rticle
s paragraph e
The list of specific activity exemptions is not limited only to
those specifically listed in sub-paragraphs a) to d) as evidenced
b y t h e w o rding in s u b - p aragrap h e) w h ic h m ak es c l ear t h at t h e
ex am p l es l is t ed in a) t o d) are ex am p l es o f ac t ivit ies and t h at
19
t h e l is t is no t ex h au s t ive. However, a fixed place of business
w h ic h h as t h e f u nc t io n o f m anaging an ent erp ris e, o r a p art
o f it , c anno t b e regarded as a p rep arat o ry o r au x il iary ac t ivit y ,
as m anagerial ac t ivit y c o ns t it u t es an es s ent ial p art o f t h e
20
b u s ines s o p erat io ns .
In essence, the proposed modifications to Article 5(4) are aimed
at ensuring that profits derived from core activities (i.e., not of
a p rep arat o ry o r au x il iary c h arac t er) p erf o rm ed in a c o u nt ry c an
be taxed in that country. This means that when a fixed place of
b u s ines s is u s ed b y an ent erp ris e no t o nl y f o r ac t ivit ies l is t ed in
p aragrap h 4 b u t al s o f o r o t h er ac t ivit ies t h at are no t p rep arat o ry
o r au x il iary in nat u re, p aragrap h 4 w il l no t ap p l y and a PE w il l b e
created such that the profits attributable to this PE with respect
t o b o t h t y p es o f ac t ivit ies m ay b e t ax ed in t h e s t at e w h ere t h e PE
21
is s it u at ed.
ptional paragraph
wording
Th e Ac t io n 7 Rep o rt al s o p ro p o s es o p t io nal w o rding f o r
Art ic l e 5(4) u nder w h ic h t h e ac t ivit ies l is t ed are no t s u b j ec t t o an
explicit “preparatory or auxiliary” requirement. This is to address
t h e c o nc ern o f c ert ain c o u nt ries t h at c o ns ider t h e ac t ivit ies l is t ed
in p aragrap h 4 as b eing int rins ic al l y p rep arat o ry o r au x il iary in
nat u re and t h at are o f t h e view t h at s u b j ec t ing t h es e ac t ivit ies
to such requirement would create greater uncertainty for both
t ax adm inis t rat io ns and t ax p ay ers . Th e p ro p o s ed Co m m ent ary
al s o p ro vides t h at any c o nc ern ab o u t t h e inap p ro p riat e u s e o f
t h e p aragrap h 4 ex c ep t io ns w o u l d b e addres s ed b y t h e new ant i22
f ragm ent at io n p ro vis io n (dis c u s s ed b el o w ).
19
Pro p o s ed new p aragrap h 23 o f t h e OECD Co m m ent ary o n Art ic l e 5, Ac t io n 7
Rep o rt , p age 34.
16
20
17
21
18
22
Pro p o s ed new p aragrap h 22.4 o f t h e OECD Co m m ent ary o n Art ic l e 5,
Ac t io n 7 Rep o rt , p age 32.
Pro p o s ed new p aragrap h 22.5 o f t h e OECD Co m m ent ary o n Art ic l e 5,
Ac t io n 7 Rep o rt , p age 33.
Pro p o s ed new p aragrap h 22.6 o f t h e OECD Co m m ent ary o n Art ic l e 5,
Ac t io n 7 Rep o rt , p age 34.
108
lo al a
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Pro p o s ed new p aragrap h 24 o f t h e OECD Co m m ent ary o n Art ic l e 5, Ac t io n 7
Rep o rt , p age 35.
Pro p o s ed new p aragrap h 30 o f t h e OECD Co m m ent ary o n Art ic l e 5, Ac t io n 7
Rep o rt , p age 38 .
Pro p o s ed new p aragrap h 30.1 o f t h e OECD Co m m ent ary o n Art ic l e 5,
Ac t io n 7 Rep o rt , p age 38 .
A ction 7
Th e p u rp o s e o f an ant i- f ragm ent at io n ru l e is t o p revent t h e u s e o f t h e
specific activity exemptions in paragraph 4 to artificially avoid PE status by
f ragm ent ing a c o h es ive o p erat ing b u s ines s int o s everal s m al l o p erat io ns in
o rder t o argu e t h at eac h p art is m erel y engaged in p rep arat o ry o r au x il iary
ac t ivit ies . Th e OECD t ak es t h e view t h at b ec au s e o f t h e eas e o f s et t ing u p
s u b s idiaries , t h e ex is t ing ant i- f ragm ent at io n ru l e s h o u l d t o b e ex t ended t o
c as es w h ere t h es e p l ac es o f b u s ines s b el o ng t o c l o s el y rel at ed ent erp ris es .
ragmentation of acti ities etween closel related
parties
Th e Ac t io n 7 Rep o rt al s o p ro p o s es t o inc o rp o rat e a new ant if ragm ent at io n ru l e b y adding a new s u b - p aragrap h 4.1 t o
Art ic l e 5. Th e p u rp o s e o f an ant i- f ragm ent at io n ru l e is t o p revent
the use of the specific activity exemptions in paragraph 4 to
artificially avoid PE status by fragmenting a cohesive operating
b u s ines s int o s everal s m al l o p erat io ns in o rder t o argu e t h at eac h
23
p art is m erel y engaged in p rep arat o ry o r au x il iary ac t ivit ies .
Th e OECD t ak es t h e view t h at b ec au s e o f t h e eas e o f s et t ing
u p s u b s idiaries , t h e ex is t ing ant i- f ragm ent at io n ru l e s h o u l d t o
b e ex t ended t o c as es w h ere t h es e p l ac es o f b u s ines s b el o ng t o
24
c l o s el y rel at ed ent erp ris es .
Th e ant i- f ragm ent at io n ru l e w o u l d w o rk t o p revent t h e
p rep arat o ry o r au x il iary ex em p t io ns u nder Art ic l e 5(4) f ro m
applying to a fixed place of business maintained by an enterprise,
“ if t h e s am e ent erp ris e o r c l o s el y rel at ed ent erp ris e c arries o n
b u s ines s ac t ivit ies at t h e s am e p l ac e o r ano t h er p l ac e in t h e
s am e c o u nt ry and eit h er:
a)
Th e p l ac e o r o t h er p l ac e c o ns t it u t es a PE, o r
b )
Th e o veral l ac t ivit y b y t h e t w o ent erp ris es at t h e s am e
p l ac e, o r b y t h e s am e ent erp ris e o r c l o s el y rel at ed
ent erp ris es at t h e t w o p l ac es , is no t p rep arat o ry o r au x il iary .
Al s o , t h e aggregat io n ru l e u nder t h e new p aragrap h 4.1 w o u l d
o nl y ap p l y if t h e b u s ines s ac t ivit ies c arried o n b y t h e t w o
ent erp ris es c o ns t it u t e “ c o m p l em ent ary f u nc t io ns t h at are p art
25
o f a c o h es ive b u s ines s o p erat io n.” Th e p ro p o s ed Co m m ent ary
p ro vides t h at in o rder f o r t h e ant i- f ragm ent at io n ru l e t o ap p l y ,
at l eas t o ne o f t h e p l ac es w h ere t h es e ac t ivit ies are ex erc is ed
m u s t c o ns t it u t e a PE o r, if t h is is no t t h e c as e, t h e o veral l ac t ivit y
res u l t ing f ro m t h e c o m b inat io n o f t h e rel evant ac t ivit ies m u s t go
26
b ey o nd w h at is m erel y p rep arat o ry o r au x il iary .
23
24
25
Th e p ro p o s ed Co m m ent ary il l u s t rat es t h e ap p l ic at io n o f t h e
ant i- f ragm ent at io n ru l e and w h en ac t ivit ies are s een as b eing
“ c o m p l em ent ary f u nc t io ns t h at are p art o f a c o h es ive b u s ines s
o p erat io n” u s ing t w o ex am p l es :
• A b ank in c o u nt ry R h as a nu m b er o f b ranc h es in c o u nt ry
S. Eac h b ranc h in c o u nt ry S is a PE o f t h e b ank . Th e b ank
also has an office in country S where employees verify client
inf o rm at io n m ade in t h e c o nt ex t o f l o an ap p l ic at io ns s u b m it t ed
at these branches. The verification results are forwarded to
t h e b ank in c o u nt ry R w h ere t h e inf o rm at io n is anal y z ed and
p ro vided b ac k t o t h e b ranc h es f o r t h e p u rp o s es o f dec iding
w h et h er t o grant t h e l o ans . Here, t h e ant i- f ragm ent at io n
ru l e w o u l d ap p l y b ec au s e t h ere is a PE in c o u nt ry S and t h e
business activities of the bank at its office in country S and
t h e rel evant b ranc h es are c o m p l em ent ary f u nc t io ns t h at are
p art o f t h e c o h es ive b u s ines s o f t h e b ank in p ro viding l o ans t o
c l ient s in c o u nt ry S.
• A m anu f ac t u rer and s el l er o f ap p l ianc es in c o u nt ry R (R
Co ) h as a s u b s idiary in c o u nt ry S (S Co ) t h at o w ns a s t o re
where it sells appliances that it acquires from R Co. R Co also
o w ns a w areh o u s e in c o u nt ry S w h ere it s t o res it em s t h at
are ident ic al t o t h o s e dis p l ay ed b y S Co in it s s t o re. Wh en a
c u s t o m er b u y s an it em f ro m S Co , S Co em p l o y ees go t o R Co ’ s
w areh o u s e t o t ak e p o s s es s io n o f t h e it em b ef o re del ivering
it t o t h e c u s t o m er. Here, t h e ant i- f ragm ent at io n ru l e w o u l d
ap p l y t o p revent t h e ex c ep t io ns in Art ic l e 5(4) f ro m ap p l y ing
b ec au s e R Co and S Co are c l o s el y rel at ed ent erp ris es , S Co ’ s
store is a PE of S Co (as the PE definition is not limited only
to situations where a fixed place of business is maintained by
an ent erp ris e in ano t h er s t at e b u t al s o in t h e s am e s t at e), and
t h e b u s ines s ac t ivit ies o f R Co at t h e w areh o u s e and S Co at
t h e s t o re are c o m p l em ent ary f u nc t io ns t h at are p art o f t h e
c o h es ive b u s ines s o f s t o ring go o ds (b y R Co ) in o ne p l ac e (R
Co’s warehouse) to fulfil the delivery obligations resulting from
t h e s al e o f t h es e go o ds (b y S Co ) t h ro u gh ano t h er p l ac e (S Co ’ s
s t o re) in c o u nt ry S.
Paragrap h 14, Ac t io n 7 Rep o rt , p age 39 .
Paragrap h 15, Ac t io n 7 Rep o rt , p age 39 .
Pro p o s ed new p aragrap h 4.1 t o Art ic l e 5, Ac t io n 7 Rep o rt , p age 39 .
26
Pro p o s ed new p aragrap h 30.2 t o t h e Co m m ent ary o n Art ic l e 5, Ac t io n 7
Rep o rt , p age 40.
lo al a
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A ction 7
plitting p of contracts
I nsurance
Th e Ac t io n 7 Rep o rt al s o addres s es c o nc erns ab o u t t h e
p o s s ib il it y o f rel at ed p art ies s p l it t ing- u p c o nt rac t s int o s everal
p art s , eac h c o vering a p erio d o f l es s t h an 12 m o nt h s and eac h
at t rib u t ed t o a dif f erent c o m p any in t h e s am e gro u p in o rder t o
avo id PE s t at u s u nder Art ic l e 5(3). Art ic l e 5(3) deal s w it h t h e
c reat io n o f c o ns t ru c t io n PEs if s u c h c o ns t ru c t io n, b u il ding o r
ins t al l at io n s it e l as t s f o r a p erio d o f at l eas t 12 m o nt h s .
The Final Report proposes that the principal purpose test (PPT)
ru l e t o b e added t o t h e OECD Mo del u nder BEPS Ac t io n 6 w o u l d
prevent such abuses. The Final Report further proposes the
inc l u s io n o f an ex am p l e in t h e OECD Co m m ent ary t o t h e PPT
ru l e il l u s t rat ing w h en it w o u l d b e c o ns idered ap p ro p riat e t o
aggregat e t h e t im e t h at t w o rel at ed c o m p anies w o rk ed o n a
c o ns t ru c t io n p ro j ec t b ec au s e it is reas o nab l e t o c o nc l u de t h at
o ne o f t h e p rinc ip al p u rp o s es o f s p l it t ing u p t h e c o nt rac t is t o
obtain the benefit of the 12 month rule under Article 5(3). For
c o u nt ries t h at c anno t addres s t h e is s u e via t h eir do m es t ic ant iab u s e ru l es , an al t ernat ive au t o m at ic aggregat io n ru l e al s o w il l
b e inc l u ded in t h e OECD Co m m ent ary as a p ro vis io n t o b e u s ed
in t reat ies t h at w o u l d no t inc l u de t h e PPT ru l e o r b y c o u nt ries
27
with specific concerns in this area.
Th e o p t io nal aggregat io n p ro vis io n inc l u des a de m inim is
ex c ep t io n, u nder w h ic h ac t ivit ies c arried o n f o r no t m o re t h an
30 day s w o u l d no t b e aggregat ed w it h o t h er p erio ds o f ac t ivit y .
Th e aggregat io n ru l e al s o is res t ric t ed t o s it u at io ns w h en
“ c l o s el y rel at ed” ent erp ris es p erf o rm “ c o nnec t ed ac t ivit ies .”
Henc e if an ent erp ris e o f o ne c o u nt ry c arries o n ac t ivit ies
des c rib ed in Art ic l e 5(3) in a s ec o nd c o u nt ry f o r a p erio d o f l es s
t h an 12 m o nt h s and o ne o r m o re c l o s el y rel at ed ent erp ris es
p erf o rm “ c o nnec t ed ac t ivit ies ” at t h e s am e s it e o r p ro j ec t f o r
a p erio d o f m o re t h an 30 day s , t h e p erio ds o f ac t ivit y o f t h e
c l o s el y rel at ed ent erp ris es w il l b e aggregat ed f o r p u rp o s es o f
ap p l y ing Art ic l e 5(3).
27
Paragrap h 17 , Ac t io n 7 Rep o rt , p age 42.
110
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As p art o f t h e w o rk o n Ac t io n 7 , BEPS c o nc erns w ere ex am ined
regarding s it u at io ns w h ere a l arge net w o rk o f ex c l u s ive agent s
is u s ed t o s el l ins u ranc e f o r a f o reign ins u rer. Ho w ever, it w as
c o nc l u ded t h at it w o u l d b e inap p ro p riat e t o t ry t o addres s t h es e
c o nc erns t h ro u gh a PE ru l e b ec au s e it w o u l d t reat ins u ranc e
dif f erent l y f ro m o t h er t y p es o f b u s ines s es and t h at BEPs
c o nc erns in t h o s e c as es s h o u l d b e addres s ed t h ro u gh t h e m o re
general c h anges t o Art ic l es 5(5) and 5(6).
rofit attri tion to s and interaction with action
points on transfer pricing
The Final Report also notes that the work on Action 7 focused
o n w h et h er t h e ex is t ing ru l es o f Art ic l e 7 o f t h e OECD Mo del
would be appropriate for determining the profits that would
b e al l o c at ed t o PEs res u l t ing f ro m t h e c h anges inc l u ded in t h e
report. The conclusion was that these changes do not require
substantive modifications to the existing rules and guidance
concerning the attribution of profits to a PE under Article 7 but
t h at t h ere is a need f o r addit io nal gu idanc e o n h o w t h e Art ic l e 7
ru l es w o u l d ap p l y t o PEs res u l t ing f ro m t h es e c h anges , in
particular for PEs outside the financial sector.
The Final Report states that work on attribution of profit issues
rel at ed t o Ac t io n 7 c o u l d no t b e do ne b ef o re t h e w o rk o n Ac t io n
7 and Actions 8-10 is completed. Therefore, the Final Report
indicates that follow-up work on attribution of profits issues
rel at ed t o Ac t io n 7 w il l b e c arried o n af t er Sep t em b er 2015
w it h a view t o p ro viding t h e nec es s ary gu idanc e b ef o re t h e
end o f 2016, w h ic h is t h e deadl ine f o r t h e nego t iat io n o f t h e
m u l t il at eral ins t ru m ent t h at is int ended as a m ec h anis m f o r
im p l em ent ing t h e t reat y - b as ed rec o m m endat io ns u nder t h e
BEPS Ac t io n Pl an.
A ction 7
I mplications
The Action 7 Report sets forth specific amendments
m o dif y ing p aragrap h s 4, 5 and 6 o f Art ic l e 5 o f t h e
OECD Mo del , t o get h er w it h p ro p o s ed Co m m ent ary
t o p ro vide gu idanc e o n t h e new ru l es .
Onc e im p l em ent ed, t h e Ac t io n 7 Rep o rt
am endm ent s w il l h ave im p l ic at io ns f o r h o w
c o m p anies o p erat e gl o b al b u s ines s es go ing f o rw ard
as c u rrent o p erat ing m o del s c o u l d c reat e new PEs
in o t h er c o u nt ries f o r t h es e c o m p anies . New PEs
would mean additional tax filing obligations and
inc reas ed p o t ent ial f o r c o nt ro vers y . Mo reo ver, t h e
issue of profit attribution to these new PEs is an
im p o rt ant m at t er f o r b u s ines s es , and t h e w o rk o n
t h at is s u e h as no t y et b een do ne.
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 al s
m ay af f ec t t h eir gl o b al b u s ines s es . Co m p anies al s o
s h o u l d s t ay inf o rm ed ab o u t PE 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
devel o p m ent s in t h e OECD rel at ed t o t h e o ngo ing
work on profit attribution to PEs.
E Y contacts
For additional information concerning
t h is Al ert , p l eas e c o nt ac t :
• Erns t & Y o u ng LLP
Gl o b al Tax Des k
New Y o rk , New Y o rk
• Jo s e Bu s t o s
+ 1 212 7 7 3 9 58 4
j o s eant o nio .b u s t o s @ ey .c o m
• Erns t & Y o u ng AG
Int ernat io nal Tax Servic es
Zu ric h
• Ai- Leen Tan
+ 41 58 28 6 42 29
ai- l een.t an@ c h .ey .c o m
lo al a
olic and ontro ers
riefing 111
BEPS Ac t io n 7 :
Anal y s is
hat is the action tr ing to
achie e
Ac t io n 7 ’ s o b j ec t ive w as t o c h ange t h e PE
definition to prevent multinationals from
ent ering int o arrangem ent s t h at , in t h e
OECD’s view, result in an artificial avoidance
o f PE s t at u s .
J ano Bustos
Ac t io n 7 s o u gh t t o ac h ieve t h is b y l o w ering
the threshold required to create a PE for the
f o l l o w ing ac t ivit ies :
+ 1 212 7 7 3 9 58 4
j o s eant o nio .b u s t o s @ ey .c o m
(i)
Co m m is s io naires and s im il ar
arrangem ent s
(ii) Facilities owned by a principal used
f o r s t o rage o r del ivery o r p u rc h as e o f
invent o ry
(iii) Invent o ry o w ned b y a p rinc ip al h el d at
f ac il it ies u s ed f o r s t o rage o r del ivery o r
p ro c es s ing
(iv) Pu rc h as ing and c o l l ec t io n o f inf o rm at io n
ac t ivit ies
(v) Mo del s w h ere c o nt rac t s f o r p ro j ec t s o r
s ervic es are al l o c at ed t o and p erf o rm ed
b y s everal rel at ed gro u p ent it ies
A ileen T an
+ 41 58 28 6 4229
ai- l een.t an@ c h .ey .c o m
112
lo al a
olic and ontro ers
(vi) Mo del s w h ere f u nc t io ns t h at c o u l d
b e s een as “ c o m p l em ent ary b u s ines s
ac t ivit ies f o rm ing p art o f a c o h es ive
b u s ines s o p erat io n” are c arried o u t b y
gro u p ent it ies at t h e s am e o r dif f erent
p l ac e(s ) in t h e s am e c o u nt ry
riefing
W ere any of the action
recommendations
ne pected
On t h e w h o l e, no . Th e o riginal Ac t io n 7
dis c u s s io n draf t c o nt ained an u nex p ec t ed
p ro p o s al f o r a deem ed ins u ranc e PE ru l e t o
addres s s it u at io ns in w h ic h f o reign ins u ranc e
c o m p anies c arry o u t l arge- s c al e b u s ines s in a
c o u nt ry w it h o u t h aving a PE in t h at c o u nt ry .
Th e p ro p o s al drew s o m u c h c rit ic is m t h at
it w as w it h draw n in t h e May 2015 revis ed
discussion draft. The OECD confirmed in
the Final Report that any perceived BEPS
c o nc erns aris ing o u t o f s u c h ins u ranc e agent
activity are adequately addressed through
t h e c h anges t o b e m ade t o Art ic l e 5(5) and
5(6) o f t h e OECD Mo del .
I s there any interaction
between this action and the
others
Y es , t h e rec o m m endat io ns in t h is Ac t io n
al s o int erac t w it h t h o s e in Ac t io ns 1 (Digit al
Ec o no m y ), 6 (Treat y Ab u s e), 9 (Ris k ) and 15
(Mu l t il at eral Ins t ru m ent ) as f o l l o w s :
(i)
ction — Th e Ac t io n 7 Rep o rt ’ s
proposed modifications to the list
of specific activities exempted from
c reat ing a PE u nder Art ic l e 5(4) are
int ended t o addres s BEPS c o nc erns
aro u nd b u s ines s es t h at o p erat e in t h e
digit al ec o no m y . Th e p ro p o s ed new
ant i- f ragm ent at io n ru l e (new Art ic l e
5(4.1)) will prevent the specific activity
ex em p t io ns f ro m ap p l y ing w h en c ert ain
b u s ines s ac t ivit ies are c arried o u t b y t h e
s am e o r rel at ed p art y at t h e s am e o r
einforced standards
See p age 32 f o r m o re inf o rm at io n.
different location(s). In addition, the proposed modifications
t o Art ic l e 5(5) and 5(6) w il l addres s arrangem ent s in w h ic h
t h e s al es o f go o ds o r s ervic es o f o ne c o m p any ef f ec t ivel y
res u l t in t h e c o nc l u s io n o f c o nt rac t s f o r ano t h er rel at ed
c o m p any , s u c h t h at t h e s al es s h o u l d b e t reat ed as if t h ey
had been made by that first mentioned company.
(ii)
ction — Th e addit io n o f t h e p rinc ip al p u rp o s e t es t t o
t h e OECD Mo del u nder Ac t io n 6 is int ended t o c o u nt er
situations in which contracts have been artificially split
u p w it h t h e p rinc ip al p u rp o s e o f c irc u m vent ing t h e t w el ve
m o nt h ru l e u nder Art ic l e 5(3).
(iii)
ction — Bec au s e t h e c h anges t o Art ic l e 5(5) w ere no t
int ended t o addres s BEPS c o nc erns regarding t h e t rans f er
o f ris k s b et w een rel at ed p art ies t h ro u gh l o w - ris k dis t rib u t o r
arrangem ent s , t h e OECD h as s t at ed t h at t h es e c o nc erns
are b es t addres s ed t h ro u gh t h e w o rk o n Ac t io n 9 (Ris k s and
Cap it al ) b ec au s e t h ey dif f er f ro m t h e c o nc erns t h at aris e
f ro m s it u at io ns in w h ic h s al es generat ed b y a l o c al s al es
w o rk f o rc e are no t at t rib u t ed t o a res ident t ax p ay er.
(iv)
ction
— Th e m u l t il at eral ins t ru m ent b eing devel o p ed
u nder t h is ac t io n it em is ex p ec t ed t o enab l e c o u nt ries t o
swiftly and efficiently implement BEPS tax treaty-based
c h anges t o t h eir ex is t ing b il at eral t ax t reat ies .
a e an co ntries made specific
comments in relation to this action
The UK and Australia set off a firestorm of controversy when
t h ey anno u nc ed p l ans t o im p l em ent l egis l at ive m eas u res
t arget ing m u l t inat io nal p l anning s t rat egies t h at t h ey c o nt end
divert profits from their taxing jurisdiction, including those
designed to avoid PE status. The UK’s Diverted Profits Tax, which
1
w as enac t ed in Marc h 2015 and t o o k ef f ec t 1 Ap ril 2015, and
Au s t ral ia’ s m u l t inat io nal ant i- avo idanc e l aw , w h ic h w as enac t ed
in December 2015 and applies to tax benefits obtained on or
af t er 1 Janu ary 2016 (w h et h er o r no t t h e s c h em e w as ent ered
2
int o , o r w as c o m m enc ed t o b e c arried o u t , b ef o re t h at day ),
w ere c h arac t eriz ed as u nil at eral m eas u res b y s o m e w h o b el ieved
t h at t h e UK and Au s t ral ia s h o u l d h ave w ait ed t o t ak e ac t io n u nt il
the OECD made its final BEPS recommendations.
7
Ro b ert St ac k , US Treas u ry Dep u t y As s is t ant Sec ret ary
(Int ernat io nal Tax Af f airs ), s p o k e c rit ic al l y o f b o t h m eas u res at a
Ju ne 2015 OECD c o nf erenc e in Was h ingt o n, s ay ing t h ey “ p o int
in a dis t u rb ing direc t io n” o n t h e need f o r h aving s t andard s et t ing
3
b o dies l ik e t h e OECD. St ac k s aid t h at b y int ro du c ing m eas u res
t h at “ t u rn PE o n it s h ead, ” t h e UK and Au s t ral ia are es s ent ial l y
“ s h o u t ing o u t l o u d t h at t h ey do no t b el ieve t h ey w il l get t h eir
es t im at io n o f w h at t h ey des erve u nder eit h er t h e c u rrent agreed
ru l es o r u nder any ru l es t o c o m e o u t o f t h e BEPS p ro c es s and
t h ey w il l b e go ing t h eir o w n w ay .” He p o int ed o u t t h at c o u nt ries
h ave agreed u nder t h e PE art ic l e o f t h eir t ax t reat ies t o draw
a b righ t l ine ru l e o n t h e c irc u m s t anc es in w h ic h a res ident o f
o ne c o u nt ry is t ax ed in t h e o t h er, p res u m ab l y b ec au s e s u c h
an ap p ro ac h p ro vides c l arit y o n t h e al l o c at io n o f t ax ing righ t s .
Th u s , w h en a c o m p any l im it s it s ac t ivit y in ano t h er j u ris dic t io n
s o as no t t o h ave a PE in t h at j u ris dic t io n, “ it is p l ay ing b y t h e
ru l es , and if c o u nt ries w ant t o c h ange t h o s e ru l es , t h ey ’ re f ree
t o s eek t o nego t iat e a new t reat y w it h t h eir p art ners , ” St ac k
s aid. Th e UK and Au s t ral ian m eas u res deviat e f ro m t h e agreed
PE ap p ro ac h , h e s aid, b ec au s e t h ey f o c u s no t o n w h at h ap p ens
in t h eir c o u nt ry b u t w h at h ap p ens o u t s ide o f it , w h ic h c o u l d
p o t ent ial l y l eave t ax p ay ers “ at t h e m erc y o f a t ax au dit o r w h o
dec ides w h at t h e righ t am o u nt o f t ax t h e t ax p ay er o u gh t t o p ay .”
In p u b l ic c o m m ent s m ade af t er t h e rel eas e o f t h e Ac t io n 7
Rep o rt , St ac k s aid t h e US w as h ap p y t h at l angu age in t h e
dis c u s s io n draf t t h at w o u l d h ave inc l u ded “ nego t iat es t h e
material elements of contracts” within the definition of a
dep endent agent PE w as rem o ved, and s aid t h at Treas u ry
s u p p o rt ed t h e new ant i- f ragm ent at io n ru l e. St ac k al s o
reiterated the US objection to the requirement that activities
be “preparatory and auxiliary” to qualify for the PE exceptions
u nder Art ic l e 5(4) o f t h e OECD Mo del , and s aid t h at Treas u ry
was happy to see that the final report made adopting that
l angu age o p t io nal .
Ot h er c o u nt ries h ave indic at ed h o w t h ey int end t o im p l em ent
the Final Report’s recommendations. On 5 October, the Dutch
go vernm ent anno u nc ed t h at it w il l t ak e t h e rec o m m ended
changes to the PE definition into account in future tax treaty
4
(re)nego t iat io ns . On 7 Oc t o b er, t h e No rw egian go vernm ent
p u b l is h ed a w h it e p ap er o u t l ining p ro p o s al s f o r a t ax ref o rm
1
See EY Gl o b al Tax Al ert , The Latest on BEPS — 30 March 2015, dat ed
30 Marc h 2015.
2
See EY Gl o b al Tax Al ert , Australian Parliament passes Bill for MAAL, CbC
reporting and increased penalties with wider ATO public reporting, dat ed
4 Dec em b er 2015.
3
See EY Gl o b al Tax Al ert , Report on recent US international tax developments —
12 June 2015, dat ed 12 Ju ne 2015.
4
See EY Gl o b al Tax Al ert , Dutch State Secretary of Finance outlines vision
concerning BEPS and Dutch tax policy, dat ed 7 Oc t o b er 2015.
lo al a
olic and ontro ers
riefing 113
BEPS Ac t io n 7 :
Anal y s is
(c o nt inu ed)
t o b e enac t ed o ver t h e c o u rs e o f 2016- 18 . Th e go vernm ent
s aid it w il l c o ns ider w h et h er t h e PE t h res h o l d u nder No rw egian
5
do m es t ic l aw s h o u l d b e l o w ered.
W hat are the potential impacts on
siness
As p art o f an ant i- t ax avo idanc e p ac k age rel eas ed o n 28 Janu ary
2016 , t h e Eu ro p ean Co m m is s io n is s u ed a rec o m m endat io n
t o EU Mem b er St at es regarding t h e EU im p l em ent at io n o f t h e
OECD’ s p ro p o s ed m eas u res addres s ing t ax t reat y - rel at ed BEPS
c o nc erns , i.e. t h e Ac t io n 6 rec o m m endat io n t h at c o u nt ries
inc l u de in t h eir t ax t reat ies a 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 , and t h e Ac t io n 7 rec o m m endat io n t h at
countries adopt the new proposed changes to the definition of
p erm anent es t ab l is h m ent in Art ic l e 5 o f t h e OECD Mo del Tax
Convention to make the definition more resilient against artificial
s t ru c t u res des igned t o c irc u m vent it s ap p l ic at io n. Regarding
t h e im p l em ent at io n o f Ac t io n 7 , t h e Co m m is s io n as k ed Mem b er
St at es t o adh ere t o t h e p ro p o s ed c h anges t o Art ic l e 5 o f t h e
OECD Mo del w h en c o nc l u ding t ax t reat ies am o ng t h em s el ves
o r w it h t h ird c o u nt ries . (See t h e Ac t io n 6 Anal y s is o n p age
100 f o r t h e Co m m is s io n’ s rec o m m endat io n regarding t h e EU
im p l em ent at io n o f t h e Ac t io n 6 m eas u res .)
In es s enc e, c o m p anies w il l need t o as s es s w h et h er t h eir c u rrent
o p erat ing m o del s are s t il l s u s t ainab l e o r w h et h er t h es e are no w
at a h igh ris k o f c reat ing PEs . Th is w il l ent ail a c aref u l review
o f t h e val u e c h ain t o det erm ine w h et h er f u nc t io ns o r ac t ivit ies
(s u c h as p ro c u rem ent , s al es , and t h e h o l ding o f p rinc ip al - o w ned
invent o ry at a t o l l - m anu f ac t u rer’ s p rem is es o r w areh o u s e) w il l
no w give ris e t o a PE ris k u nder t h e new l o w er PE t h res h o l ds .
Co m p anies s h o u l d al s o review and ens u re t h at t h eir ex is t ing
t rans f er p ric ing is s t il l ap p ro p riat e s o t h at if a PE is indeed
created, the risk that additional profit may have to be allocated
t o t h e PE is m it igat ed and/ o r p ro p erl y m anaged.
hat s going to happen ne t, and how
niform might implementation e
The recommendations in the Action 7 Report will require
am endm ent s t o ex is t ing do u b l e t ax t reat ies in o rder f o r t h em t o
t ak e ef f ec t . To t h is ex t ent , t h e OECD is p u s h ing h ard f o r t h es e
c h anges t o b e im p l em ent ed t h ro u gh t h e s igning o f a m u l t il at eral
ins t ru m ent b eing devel o p ed u nder Ac t io n 15, w h ic h w o u l d
enab l e t h e s w if t , s im u l t aneo u s am endm ent o f m any t reat ies .
Th e m u l t il at eral ins t ru m ent w il l b e nego t iat ed in 2016 and if
s u c c es s f u l , w e c o u l d s ee c h anges c o m ing int o ef f ec t in 2017 .
Ho w u nif o rm im p l em ent at io n w il l b e dep ends o n h o w s m o o t h l y
t h e nego t iat io ns go b et w een al l p art ic ip at ing c o u nt ries .
5
See EY Gl o b al Tax Al ert , Norwegian Government issues Fiscal Budget for
2016 and white paper on tax reform, dat ed 9 Oc t o b er 2015.
114
lo al a
olic and ontro ers
riefing
No w is al s o t h e t im e t o s t art t h ink ing ab o u t t h e real is t ic al l y
avail ab l e o p t io ns w h en deal ing w it h t h e Ac t io n 7 Rep o rt ’ s
rec o m m endat io ns — t h at is , ac c ep t t h at a PE ex is t s and m anage
t h e addit io nal c o s t s (t h e c o m p l ianc e c o s t s and/ o r addit io nal t ax
liability due to additional profits being attributed to the PE), or
c o ns ider m o ving f ro m t h e c u rrent o p erat ing m o del t o ano t h er
o p erat ing m o del (and w eigh ing w h et h er t h e c o s t s o f s u c h
restructuring would outweigh the anticipated benefits) or else
c o ns ider c h anging t h e ex is t ing o p erat ing m o del . Wit h al l o p t io ns ,
companies should consider the material impact by quantifying
t h e c o s t o f t h e as s o c iat ed ris k s t h at aris e if a PE is c reat ed.
By inves t ing t im e in s u c h an anal y s is , t h e c o m p any w il l b e in a
m u c h b et t er and m o re inf o rm ed p o s it io n w h en dec iding o n t h e
b es t c o u rs e o f ac t io n and p u t t ing in p l ac e b et t er p ro c edu res and
gu idel ines t o m anage t h e new ris k s .
The worldwide digital transformation has complex global tax implications.
EY tax professionals help leading companies find their way.
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ction
8
OECD issues final guidance
o n t rans f er p ric ing f o r
int angib l es u nder BEPS
Ac t io n 8
Executive summary
On 5 Oc t o b er 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) issued its final report on transfer pricing under Actions 8-10 of its Action Plan
on Base Erosion and Profit Shifting (BEPS). The document Aligning Transfer Pricing
Outcomes with Value Creation, c o nt ains revis io ns t o s ec 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 , gu idanc e o n c o m m o dit y t rans ac t io ns , revis io ns t o Ch ap t er
VI of the OECD Transfer Pricing Guidelines regarding intangibles, revisions to Chapter
VII of the OECD Transfer Pricing Guidelines regarding low value-adding intra-group
services, revisions to Chapter VIII of the OECD Transfer Pricing Guidelines regarding
c o s t c o nt rib u t io n arrangem ent s , and s c o p e o f w o rk f o r gu idanc e o n t h e t rans ac t io nal
profit split method.
This Alert discusses the new chapters on Intangibles (Chapter VI) and Cost Contribution
Arrangements Chapter VIII), as well as a new section on risk and the control of
ris k t h at w il l b e inc l u ded in Ch ap t er I and is rel evant t o int angib l e rel at ed ris k (t h e
2015 Gu idanc e).
This is the final update to the OECD Transfer Pricing Guidelines, with respect to
int angib l es , t h at is ex p ec t ed f ro m t h e BEPS p ro j ec t . Ho w ever, o ne s ec t io n w it h in
Chapter VI part D (on the application of the transactional profit split method for pricing
int angib l es t rans ac t io ns ) is l ik el y t o b e revis ed w h en t h e OECD c o m p l et es it s new
gu idanc e o n t h is t rans f er p ric ing m et h o d, ant ic ip at ed t o b e earl y in 2017 .
EY is hosting a series of webcasts that will provide a comprehensive review of the final
BEPS reports and outlook for country action. The final transfer pricing guidance under
Ac t io ns 8 - 10 w as addres s ed in t h e w eb c as t o n 12 No vem b er.
116
lo al a
olic and ontro ers
riefing
A ction 8
Detailed discussion
C ontext
In t h e BEPS Ac t io n Pl an t h e OECD ex p res s ed t h e view t h at
m u l t inat io nal gro u p s h ave in s o m e ins t anc es b een ab l e t o u s e
o r m is ap p l y t rans f er p ric ing ru l es t o s ep arat e inc o m e f ro m t h e
ec o no m ic ac t ivit ies t h at p ro du c e t h at inc o m e and t o s h if t it
t o l o w - t ax enviro nm ent s and t h at t h is o f t en h as res u l t ed f ro m
arrangem ent s invo l ving int angib l es . Ac t io n 8 t h eref o re h ad
t h e o b j ec t ive o f devel o p ing ru l es t o p revent BEPS f ro m aris ing
f ro m t h e m o vem ent o f int angib l es am o ng gro u p m em b ers .
The new version of Chapter VI contains guidance focused on
ensuring that the profits associated with the transfer and use of
int angib l es are ap p ro p riat el y al l o c at ed in ac c o rdanc e w it h val u e
c reat io n, as w el l as a new ap p ro ac h t o addres s t rans f ers o f h ardt o - val u e int angib l es .
Th e 2015 Gu idanc e is b as ed o n and c o ns is t ent w it h t h e int erim
1
version of Chapter VI issued in the 2014 Action 8 Deliverable
and al s o w it h int erim dis c u s s io n draf t s o n CCAs and h ard- t o 2
val u e int angib l es is s u ed du ring 2015. Ho w ever, s o m e el em ent s
are new , in p art ic u l ar t h e f ram ew o rk f o r anal y z ing ris k and t h e
c o nt ro l o f ris k . In devel o p ing t h e 2015 Gu idanc e, t h e OECD
has taken note of the significant discussions with business
representatives and the guidance reflects an effort to ensure
t h at it is p rac t ic al t o im p l em ent . In p art ic u l ar, a p o s it ive c h ange
f ro m t h e 2014 Ac t io n 8 rep o rt is t h e p ro vis io n o f a f ram ew o rk
f o r es t ab l is h ing ap p ro p riat e arm ’ s l engt h p ric es in t h e c o m m o n
int ragro u p s it u at io n w h ere an ent it y o w ns and f u nds t h e
devel o p m ent o f int el l ec t u al p ro p ert y w h il e t h e devel o p m ent ,
enh anc em ent , m aint enanc e, p ro t ec t io n and ex p l o it at io n
functions are performed by affiliates.
An additional significant change made by the OECD since the
2014 Ac t io n 8 rep o rt h as b een t h e redevel o p m ent o f t h e
ap p ro ac h f o r det erm ining arm ’ s l engt h p ric es and t erm s f o r
t rans ac t io ns t o avo id t h e need f o r ” re- c h arac t eriz at io n” o r t h e
no n- rec o gnit io n o f t rans ac t io ns in t h e great m aj o rit y o f c as es .
Under t h e new Ch ap t er I f ram ew o rk , o nc e a t rans ac t io n h as b een
ac c u rat el y del ineat ed f o r t rans f er p ric ing p u rp o s es , ap p l ic at io n
o f no n- rec o gnit io n w il l b e l im it ed t o ex c ep t io nal c irc u m s t anc es .
Ac c o rdingl y , al m o s t al l ref erenc es t o t h e no n- rec o gnit io n o f
transactions have been removed from the version of Chapter VI
is s u ed in t h e 2015 Gu idanc e.
pecial considerations for intangi les
The version of Chapter VI issued in the 2015 Guidance has
t h e s am e s t ru c t u re as earl ier OECD do c u m ent s o n int angib l es
is s u ed as p art o f t h e BEPS p ro j ec t . It c o nt ains f o u r s ec t io ns (A- D)
p ro viding gu idanc e o n:
( A ) Identifying intangibles
(B) Ow ners h ip o f int angib l es and t rans ac t io ns invo l ving t h e
devel o p m ent , enh anc em ent , m aint enanc e, p ro t ec t io n and
ex p l o it at io n o f int angib l es
(C) Trans ac t io ns invo l ving t h e u s e o r t rans f er o f int angib l es
(D) Su p p l em ent al gu idanc e f o r det erm ining arm ’ s l engt h
c o ndit io ns in c as es invo l ving int angib l es
1
See EY Gl o b al Tax Al ert , OECD issues updated guidance under BEPS Action 8
on transfer pricing aspects of intangibles, dat ed 21 Sep t em b er 2014.
2
See EY Gl o b al Tax Al ert , OECD releases discussion draft on cost contribution
arrangements under BEPS Action 8, dat e 4 May 2015 and EY Gl o b al Tax Al ert ,
OECD releases discussion draft on hard-to-value intangibles under BEPS Action
8, dat ed 8 Ju ne 2015.
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A ction 8
The 2015 Guidance defines an intangible asset for transfer
p ric ing p u rp o s es as s o m et h ing “ w h ic h is no t a p h y s ic al o r
financial asset, which is capable of being owned or controlled
f o r u s e in c o m m erc ial ac t ivit ies , and w h o s e u s e o r t rans f er
w o u l d b e c o m p ens at ed h ad it o c c u rred in a t rans ac t io n
b et w een indep endent p art ies in c o m p arab l e c irc u m s t anc es .”
efining intangi les for transfer pricing p rposes
Section A explains that difficulties can arise in transfer pricing
from a definition of intangible assets which is too narrow or too
broad. Too narrow a definition might result in governments or
taxpayers arguing that something falls outside the definition.
The consequence might be to permit the use or transfer
w it h o u t c o m p ens at io n w h ere t h at t rans f er w o u l d h ave b een
compensated at arm’s length. Too broad a definition might have
t h e o p p o s it e res u l t .
The 2015 Guidance therefore defines an intangible asset for
t rans f er p ric ing p u rp o s es as s o m et h ing “ w h ic h is no t a p h y s ic al
or financial asset, which is capable of being owned or controlled
f o r u s e in c o m m erc ial ac t ivit ies , and w h o s e u s e o r t rans f er
w o u l d b e c o m p ens at ed h ad it o c c u rred in a t rans ac t io n b et w een
indep endent p art ies in c o m p arab l e c irc u m s t anc es .” Su c h a
definition is absent from the 2010 OECD Guidelines (which is
t h e m o s t rec ent c o m p l et e edit io n o f t h e OECD Gu idel ines in b o o k
form), although the definition given in the 2015 Guidance is the
same as the definition included in the 2014 Action 8 report.
Th e 2015 Gu idanc e p ro vides s o m e ex am p l es o f t y p es o f
intangible that fall within this definition, including both
int el l ec t u al p ro p ert y , s u c h as p at ent s and t radem ark s , t h at c an
b e regis t ered, b u t al s o o t h er as s et s s u c h as k no w - h o w , t rade
secrets, and contractual rights. Furthermore, the guidance
no t es c ert ain f ac t o rs t h at m ay c o nt rib u t e t o t h e inc o m e earned
b y an ent erp ris e b u t are no t t h em s el ves int angib l es , s u c h as
group synergies and the specific characteristics of local markets.
Th es e l at t er f ac t o rs s h o u l d b e t reat ed as c o m p arab il it y f ac t o rs
in a t rans f er p ric ing anal y s is , ac c o rding t o c h ap t er I o f t h e
OECD Gu idel ines .
Chapter VI also updates the Glossary to the OECD TP Guidelines
by replacing the definition of “marketing intangible” in that
glossary with the definition “An intangible … that relates to
m ark et ing ac t ivit ies , aids in t h e c o m m erc ial ex p l o it at io n o f a
p ro du c t o r s ervic e, and/ o r h as an im p o rt ant p ro m o t io nal val u e
f o r t h e p ro du c t c o nc erned.”
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Th e 2015 Gu idanc e is c l ear t h at t h e p u rp o s e o f p ro viding a
definition of intangibles is exclusively to provide clarity to tax
au t h o rit ies and t ax p ay ers o n ident if y ing int angib l es f o r t rans f er
p ric ing p u rp o s es . It is no t int ended t o h ave any im p ac t o n o t h er
tax matters, such as the definition of “royalties” under Article 12
o f t h e Mo del Tax Co nvent io n, o r o n t h e rec o gnit io n o f inc o m e,
c ap it al iz at io n o f int angib l e devel o p m ent c o s t s , am o rt iz at io n, o r
o t h er t ax m at t ers rel at ing t o int angib l es .
dentif ing which entities are entitled to the ret rns
from e ploiting intangi les
Section B of Chapter VI contains guidance dealing with the
fundamental question of which entity or entities within a
m u l t inat io nal gro u p s h o u l d s h are in t h e ec o no m ic ret u rns
from exploiting intangibles. The 2015 Guidance clarifies and
confirms previous work, stating that mere legal ownership of an
int angib l e do es no t b y it s el f c o nf er any righ t t o t h e ret u rn f ro m
it s ex p l o it at io n. Ins t ead, t h e ec o no m ic ret u rn f ro m int angib l es ,
and t h e c o s t s and ec o no m ic b u rdens as s o c iat ed w it h int angib l es ,
w il l b e al l o c at ed t o t h e ent it ies t h at p erf o rm and c o nt ro l t h e
im p o rt ant val u e- c reat ing f u nc t io ns o f devel o p ing, enh anc ing,
m aint aining, p ro t ec t ing and ex p l o it ing t h e int angib l es (t h e
DEMPE f u nc t io ns ).
The new guidance in Chapter VI sets out a framework for
anal y z ing t rans ac t io ns invo l ving int angib l es , w h ic h draw s u p o n
and is c o ns is t ent w it h t h e gu idanc e devel o p ed o n ident if y ing t h e
commercial or financial relations between associated enterprises
t h at is c o nt ained in t h e u p dat ed vers io n o f Ch ap t er I o f t h e OECD
Gu idel ines and al s o w as is s u ed as p art o f t h e 2015 Gu idanc e.
Th is anal y t ic al f ram ew o rk is aim ed at “ ac c u rat el y del ineat ing
t h e c o nt ro l l ed t rans ac t io n” f o r t rans f er p ric ing p u rp o s es , in
o rder t o det erm ine t h e arm ’ s l engt h p ric e and o t h er t erm s f o r
t h e t rans ac t io n.
A ction 8
Wh il e t h e 2015 Gu idanc e is l argel y c o ns is t ent w it h t h e 2014
Ac t io n 8 rep o rt , t h e no vel p art o f t h e 2015 Gu idanc e is t h e
f ram ew o rk f o r anal y z ing int angib l es t rans ac t io ns and al l o c at ing
t h e as s o c iat ed ris k s in ac c o rdanc e w it h t h e c o nt ro l o f t h e ris k s ,
along with the specific guidance on the return that can be
ex p ec t ed f o r p ro viding f u nding f o r t h e devel o p m ent o f int angib l es .
In es s enc e, t h e ap p l ic at io n o f t h is f ram ew o rk t o t rans ac t io ns
involving intangibles will have the following consequences:
• Wh ere an ent erp ris e t h at is no t t h e l egal o w ner o f an
int angib l e p erf o rm s val u e- c reat ing DEMPE f u nc t io ns in rel at io n
t o t h e int angib l e, it c an ex p ec t arm ’ s l engt h rem u nerat io n.
Th e nat u re o f t h is rem u nerat io n w il l t ak e int o ac c o u nt w h ic h
ent erp ris e as s u m es and c o nt ro l s t h e ris k as s o c iat ed w it h t h e
DEMPE f u nc t io ns .
• Wh ere an as s o c iat ed ent erp ris e c o nt rac t u al l y as s u m es t h e
ris k as s o c iat ed w it h t h e DEMPE f u nc t io ns (f o r ex am p l e,
where it takes on the financial risk associated with intangible
devel o p m ent , o r w h ere it as s u m es t h e ris k o f def ending
an intangible against legal challenge) then the financial
consequences of the risk will be allocated to that enterprise,
s o l o ng as it f u nc t io nal l y ex erc is es c o nt ro l o ver t h e ris k . If
t h e ent erp ris e do es no t ex erc is e c o nt ro l o ver t h e ris k t h en
t h e ris k s h o u l d b e al l o c at ed t o t h e ent erp ris e t h at do es
ex erc is e c o nt ro l .
• For an enterprise to exercise control over a risk means that
it m u s t h ave t h e c ap ab il it y t o m ak e t h e dec is io n t o t ak e
o n, l ay o f f , o r dec l ine t h e ris k - b earing o p p o rt u nit y , and t h e
dec is io n- m ak ing c ap ab il it y t o dec ide w h et h er and h o w t o
res p o nd t o ris k as s o c iat ed w it h t h e o p p o rt u nit y . Th e day t o
day ris k m anagem ent f u nc t io ns c an b e o u t s o u rc ed t o o t h er
ent erp ris es , s o l o ng as t h e ent erp ris e c o nt ro l l ing t h e ris k h as
t h e c ap ac it y t o t ak e t h e dec is io n t o o u t s o u rc e t h e ris k and
o vers ee t h e p erf o rm anc e o f t h e ris k m anagem ent ac t ivit y .
The 2015 Guidance clarifies how the application of this
f ram ew o rk w il l det erm ine t h e arm ’ s l engt h ret u rn w h ere an
entity within an MNE group bears financial risk associated with
intangible development through financing the development
ac t ivit y . An ent it y t h at f u nds t h e devel o p m ent o f an int angib l e
b u t do es no t p erf o rm o r c o nt ro l any DEMPE f u nc t io ns rel at ing t o
t h e int angib l e c an general l y ex p ec t a ris k - adj u s t ed ret u rn o n it s
f u nding (i.e., an ex p ec t ed ret u rn s im il ar t o t h e ret u rn t h at c o u l d
b e ac h ieved b y f u nding a c o m p arab l e p ro j ec t o f s im il ar ris k ).
Where the entity does not exercise control over the financial
ris k s as s o c iat ed w it h t h e f u nding, t h en it is ent it l ed t o no m o re
t h an a ris k - f ree ret u rn.
Wh il e t h e 2015 Gu idanc e is l argel y c o ns is t ent w it h t h e 2014
Ac t io n 8 rep o rt , t h e no vel p art o f t h e 2015 Gu idanc e is t h e
f ram ew o rk f o r anal y z ing int angib l es t rans ac t io ns and al l o c at ing
t h e as s o c iat ed ris k s in ac c o rdanc e w it h t h e c o nt ro l o f t h e
risks, along with the specific guidance on the return that
c an b e ex p ec t ed f o r p ro viding f u nding f o r t h e devel o p m ent
o f int angib l es .
ransactions in ol ing the se of compan names
The final part of section B contains guidance on applying the
principles to specific types of intangibles transactions, one of
w h ic h addres s es s it u at io ns w h ere a p ay m ent is m ade f o r t h e
u s e o f a c o m p any nam e. Th e gu idanc e h ere, w h ic h is u nc h anged
f ro m t h e 2014 Ac t io n 8 rep o rt , o b s erves t h at det erm ining t h e
arm’s length payment will require considering the financial
benefit of using the name as well as the contribution made
t o t h e val u e o f t h e nam e b y b o t h t h e l egal o w ner and u s er. In
particular, it cannot be assumed that when an acquired business
is rebranded to use the name of the acquirer, any payment
should be made. Furthermore, if the acquirer is using the market
position and capabilities of the acquired business to promote its
o w n b rand nam e, arm ’ s l engt h c o m p ens at io n m igh t ins t ead b e
payable to the acquired business.
ransactions in ol ing the se or transfer of
intangi les
Sec t io n C o f t h e 2015 Gu idanc e is es s ent ial l y u nc h anged f ro m
t h e 2014 Ac t io n 8 rep o rt . It s et s o u t t h e t w o general t y p es
o f t rans ac t io n w h ere ident if y ing t h e int angib l es c o nc erned
and ac c u rat el y del ineat ing t h e t rans ac t io n u ndert ak en w il l
b e nec es s ary f o r t rans f er p ric ing p u rp o s es . Th es e are (i)
t rans ac t io ns invo l ving t rans f ers o f int angib l es o r righ t s in
int angib l es ; and (ii) t rans ac t io ns invo l ving t h e u s e o f int angib l es
in c o nnec t io n w it h t h e s al e o f go o ds o r t h e p ro vis io n o f s ervic es .
lo al a
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A ction 8
pplemental g idance on pricing intangi les
transactions
Sec t io n D c o nt ains gu idanc e o n ap p l y ing t h e p rinc ip l es s et
o u t in Ch ap t ers I- III o f t h e OECD Trans f er Pric ing Gu idel ines
t o det erm ine t h e arm ’ s l engt h c o ndit io ns (t erm s and p ric ing)
f o r t rans ac t io ns invo l ving int angib l es . Th e gu idanc e h ere is
es s ent ial l y u nc h anged f ro m t h e 2014 Ac t io n 8 rep o rt and m ak es
t h e f o l l o w ing k ey p o int s :
• Du e regard s h o u l d b e given t o t h e p ers p ec t ives o f b o t h p art ies
t o t h e t rans ac t io n, t h e o p t io ns real is t ic al l y avail ab l e, and t h e
at t rib u t io n o f ris k s . A ” o ne- s ided” c o m p arab il it y anal y s is ,
f o c u s ing o nl y o n o ne p art y t o t h e t rans ac t io n, w il l general l y
be insufficient to evaluate the transaction, including in those
s it u at io ns f o r w h ic h a o ne- s ided t rans f er p ric ing m et h o d is
u l t im at el y det erm ined.
• Th ere is s el do m a c o rrel at io n b et w een t h e c o s t o f devel o p ing
an int angib l e and it s val u e o nc e devel o p ed. Pric ing m et h o ds
b as ed o n c o s t are general l y dis c o u raged. Ins t ead, 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 o r t h e t rans ac t io nal
profit split method are likely to be the most useful transfer
p ric ing m et h o ds in m at t ers invo l ving t rans f ers o f int angib l es .
In s o m e c irc u m s t anc es o ne- s ided m et h o ds c an b e u t il iz ed t o
indirec t l y val u e int angib l es b y det erm ining val u es f o r s o m e
f u nc t io ns u s ing t h o s e m et h o ds and deriving a res idu al val u e
f o r int angib l es .
• I n using the CUP method, particular caution should be taken
w it h dat ab as e c o m p arab l es . It is im p o rt ant t o as s es s w h et h er
there is sufficient information on database comparables to
p ro p erl y t es t t h eir c o m p arab il it y t o t h e t es t ed t rans ac t io n.
• F
 inancial valuation techniques based on discounted cash
flow forecasts can be a useful tool in evaluating intangible
t rans ac t io ns in t h e ab s enc e o f rel iab l e c o m p arab l e
u nc o nt ro l l ed t rans ac t io ns and m ay p ro ve m o re rel iab l e t h an
any other pricing method. Where valuation techniques are
utilized, it is necessary to apply such techniques in a manner
t h at is c o ns is t ent w it h t h e arm ’ s l engt h p rinc ip l e and t h e
p rinc ip l es o f t h e OECD TP Gu idel ines . Cau t io n s h o u l d b e
applied in using financial forecasts and valuations prepared
f o r o t h er p u rp o s es , and c are s h o u l d b e t ak en t o u nders t and
and val idat e t h e as s u m p t io ns u nderl y ing any val u at io n m o del ,
as s m al l c h anges in t h e val u at io n p aram et ers c an h ave a
significant impact on the resulting estimate of intangible value.
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pecific g idance on hard to al e intangi les
Section D of Chapter VI in the 2015 Guidance contains a specific
t rans f er p ric ing ap p ro ac h t o b e t ak en in rel at io n t o “ h ard- t o value” intangibles (HTVIs). This is new guidance that has been
devel o p ed s inc e t h e 2014 Ac t io n 8 rep o rt , and it l argel y f o l l o w s
t h e dis c u s s io n draf t rel eas ed in Ju ne 2015.
HTVIs are defined as “intangibles or rights in intangibles
f o r w h ic h , at t h e t im e o f t h eir t rans f er b et w een as s o c iat ed
ent erp ris es , (i) no rel iab l e c o m p arab l es ex is t ; and (ii) at t h e
t im e t h e t rans ac t io n[ s ] w as ent ered int o , t h e p ro j ec t io ns o f
future cash flows or income expected to be derived from the
t rans f erred int angib l e, o r t h e as s u m p t io ns u s ed in val u ing t h e
intangible are highly uncertain, making it difficult to predict
t h e l evel o f u l t im at e s u c c es s o f t h e int angib l e at t h e t im e o f t h e
transfer.” Transactions involving HTVIs may typically involve,
am o ng o t h er f eat u res , s o m e o f t h e f o l l o w ing f eat u res :
• T
 he intangible is only partially developed at the time of
t rans f er
• T
 he intangible is not expected to be used commercially until
s everal y ears f o l l o w ing t h e t rans ac t io n
• T
 he intangible is expected to be exploited in a manner that is
novel at the time of transfer and the financial projections are
h igh l y u nc ert ain
• Th e int angib l e c o nc erned do es no t it s el f f al l w it h in t h e
definition of HTVI but is integral to the development or
enhancement of another intangible within the definition
of HTVI
• Th e int angib l e, in ab s enc e o f rel iab l e c o m p arab l es and
the financial projections being highly uncertain, has been
t rans f erred t o an as s o c iat ed ent erp ris e f o r a l u m p s u m
p ay m ent
• Th e int angib l e is eit h er u s ed in c o nnec t io n w it h o r devel o p ed
u nder a CCA o r s im il ar arrangem ent s .
A ction 8
Th e gu idanc e no t es t h at t h e as y m m et ry o f inf o rm at io n b et w een
t ax p ay ers and t ax adm inis t rat io ns ab o u t t h e p o t ent ial val u e o f
HTVIs, as well as the time that may have elapsed since the time
the transaction was entered into, make it particularly difficult
f o r t ax adm inis t rat io ns t o t es t t h e p ric ing o f t h e t rans ac t io n.
Th e t rans f er p ric ing ap p ro ac h in t h e 2015 Gu idanc e is int ended
t o p ro t ec t t ax adm inis t rat io ns f ro m t h e negat ive ef f ec t s o f
inf o rm at io n as y m m et ry , w h il e al s o al l o w ing t ax p ay ers t o
demonstrate that the pricing of HTVIs is at arm’s length through
a t h o ro u gh t rans f er p ric ing anal y s is .
Th e 2015 Gu idanc e au t h o riz es t ax adm inis t rat io ns t o u s e ex p o s t
evidence on the financial outcomes of an intangible transaction
(i.e., inf o rm at io n gat h ered in h inds igh t ab o u t h o w val u ab l e an
int angib l e h as t u rned o u t t o b e) as p res u m p t ive evidenc e o n
t h e ap p ro p riat enes s o f t h e ex ant e p ric ing arrangem ent s . Tax
adm inis t rat io ns m ay u s e s u c h ex p o s t evidenc e t o det erm ine t h e
p ric ing arrangem ent s t h at w o u l d h ave b een m ade at t h e t im e
o f t h e t rans ac t io n b et w een indep endent ent erp ris es , inc l u ding
any c o nt ingent arrangem ent s (s u c h as m il es t o nes p ay m ent s o r
s t ep p ed ro y al t ies ) t h at m igh t h ave b een agreed.
Ho w ever, s u c h p res u m p t ive evidenc e m ay no t b e u s ed w h ere
c ert ain c irc u m s t anc es o r s af e h arb o rs ap p l y , inc l u ding:
ost contri
tion arrangements
The 2015 Guidance also includes a new version of Chapter VIII
c o vering Co s t Co nt rib u t io n Arrangem ent s (CCAs ). Th e o b j ec t ive
h ere is t o al ign t h e gu idanc e o n CCAs w it h t h e new gu idanc e
el s ew h ere o n t h e c o nt ro l o f ris k , and o n int angib l es t rans ac t io ns .
In p art ic u l ar, t h e gu idanc e s eek s t o ens u re t h at t h e o u t c o m es
o f a CCA arrangem ent and t h e ret u rns t o p art ic ip ant s s h o u l d
b e s im il ar t o any o t h er arrangem ent t h at h as s im il ar ec o no m ic
c h arac t eris t ic s and w h ere t h e p art ic ip ant s m ak e s im il ar
c o nt rib u t io ns . Th e gu idanc e is b as ed o n t h e draf t rep o rt o n CCAs
is s u ed in Ap ril 2015, al t h o u gh s o m e as p ec t s h ave c l earl y b een
refined in light of the discussions with business representatives
at t h e OECD.
A CCA is defined as “a contractual arrangement among business
ent erp ris es t o s h are t h e c o nt rib u t io ns and ris k s as s o c iat ed
w it h t h e j o int devel o p m ent , p ro du c t io n o r t h e o b t aining o f
int angib l es , t angib l e as s et s o r s ervic es ” in t h e ex p ec t at io n o f
mutual benefit from the pooling of resources and skills for each
o f t h e p art ic ip ant s .
ligi ilit to participate in a
• Wh ere t h e t ax p ay er c an dem o ns t rat e t h at ex ant e p ro j ec t io ns
u s ed at t h e t im e o f t h e t rans f er t o det erm ine t h e p ric ing
arrangem ent s w ere rel iab l e, t ak ing int o ac c o u nt ris k s and
reas o nab l y f o res eeab l e event s t h at m igh t h ave af f ec t ed
t h e o u t c o m es . Th e t ax p ay er al s o needs t o p ro vide rel iab l e
evidence that any significant difference between the
p ro j ec t io ns and ac t u al o u t c o m es is du e eit h er t o u nf o res eeab l e
devel o p m ent s , o r t o t h e p l ay ing o u t o f f o res eeab l e o u t c o m es
w h o s e p ro b ab il it ies w ere o riginal l y reas o nab l y es t im at ed.
In l ine w it h t h e 2010 OECD Gu idel ines , t h e ex p ec t at io n o f
mutual benefit remains a pre-requisite to participate in a CCA.
Participants must expect to benefit from the output of the
CCA, for example by being able to exploit the rights acquired
o r s ervic es devel o p ed in t h eir o w n b u s ines s es . Wh ere t h is is
no t t h e c as e (f o r ins t anc e, w h ere an ent erp ris e s o l el y p erf o rm s
an ac t ivit y s u c h as res earc h and devel o p m ent (R& D) it s h o u l d
b e t reat ed as a s ervic e p ro vider ex t ernal t o t h e CCA and
c o m p ens at ed o n an ap p ro p riat e b as is .
• T
 he difference between financial projections and actual
o u t c o m es do es no t redu c e o r inc reas e c o m p ens at io n aris ing
from the HTVI by more than 20% of the compensation
det erm ined at t h e t im e t h e t rans ac t io n w as ent ered int o .
Wh at is no vel in t h e 2015 Gu idanc e is t h at c o nt ro l h as al s o
become a pre-requisite for an enterprise to be considered as
a CCA p art ic ip ant . Every p art ic ip ant in a CCA m u s t h ave t h e
f u nc t io nal c ap ac it y t o ex erc is e c o nt ro l o ver t h e ris k s it as s u m es
under the CCA, and the financial capacity to assume those risks.
Th is m eans t h at t h ey m u s t b e c ap ab l e o f (and ac t u al l y p erf o rm )
m ak ing t h e dec is io n t o t ak e o n t h e init ial ris k o f p art ic ip at io n in
t h e CCA, and h ave t h e o ngo ing dec is io n- m ak ing c ap ac it y (and
ac t u al l y p erf o rm it ) t o dec ide o n w h et h er o r h o w t o res p o nd t o
t h e ris k s as s o c iat ed w it h t h e CCA. It is no t nec es s ary f o r t h e CCA
• A
 commercialization period of five years has passed and the
difference between financial projections and actual outcome in
t h is p erio d h as no t b een m o re t h an 20%.
• T
 he transfer of an HTVI is covered by a bi- or multilateral
advanc e p ric ing agreem ent .
lo al a
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A ction 8
Wh ere c o nt rib u t io ns are no t in p ro p o rt io n t o
reasonably anticipated benefits, true-up payments
may be required. The value of each participant’s
c o nt rib u t io n s h o u l d b e det erm ined in l ine w it h t h e
val u e t h at w o u l d b e p l ac ed o n it b y indep endent
ent erp ris es in c o m p arab l e c irc u m s t anc es .
p art ic ip ant s t o p erf o rm al l o r p art o f t h e CCA ac t ivit ies t h ro u gh
t h eir o w n p ers o nnel . In s o m e c as es , t h e p art ic ip ant s in a CCA
m ay dec ide t o o u t s o u rc e c ert ain f u nc t io ns . Th e gu idanc e is al s o
c l ear t h at if t h e o b j ec t ive o f t h e CCA is t o devel o p an int angib l e,
it is sufficient for one of the CCA participants to exercise control
o ver t h e DEMPE f u nc t io ns rel at ing t o t h e int angib l e. Ot h er
participants providing funding should control the financial risk
at t ac h ed t o it s c o nt rib u t io ns .
eas ring the al e of contri
tions to a
A f u rt h er as p ec t o f t h e 2015 Gu idanc e is t h at t h e val u e o f t h e
c o nt rib u t io ns m ade b y CCA p art ic ip ant s m u s t b e in p ro p o rt io n
to their reasonably anticipated benefits from the CCA. Where
c o nt rib u t io ns are no t in p ro p o rt io n t o reas o nab l y ant ic ip at ed
benefits, true-up payments may be required. The value of each
p art ic ip ant ’ s c o nt rib u t io n s h o u l d b e det erm ined in l ine w it h t h e
val u e t h at w o u l d b e p l ac ed o n it b y indep endent ent erp ris es
in c o m p arab l e c irc u m s t anc es . Al t h o u gh t h is is t o a c ert ain
ex t ent c o ns is t ent w it h t h e 2010 OECD TP Gu idel ines , t h e 2015
Gu idanc e ex t ends t h e p revio u s gu idanc e b y m ak ing it c l ear t h at
in m o s t c as es it c anno t b e as s u m ed t h at t h e c o s t s c o nt rib u t ed
o r inc u rred b y CCA p art ic ip ant s are an ac c u rat e m eas u re o f
t h eir c o nt rib u t io n.
122
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Wh il e c o nt rib u t io ns s h o u l d b e m eas u red b as ed o n val u e, t h e
2015 Gu idanc e al s o rec o gniz es t h at it m ay b e m o re p rac t ic al f o r
t ax p ay ers t o p ay c u rrent c o nt rib u t io ns at c o s t (as o p p o s ed t o
c o nt rib u t io ns o f p re- ex is t ing val u e). If t h is ap p ro ac h is ado p t ed,
t h e p re- ex is t ing c o nt rib u t io ns s h o u l d rec o ver t h e o p p o rt u nit y
c o s t o f t h e ex ant e c o m m it m ent t o c o nt rib u t e res o u rc es t o t h e
CCA (e.g., t h e p res ent val u e o f t h e o f t h e arm ’ s l engt h m ark - u p
o ver t h e c o s t s ). Wh ere t h e dif f erenc e b et w een t h e val u e and
costs is relatively insignificant, for practical reasons current
c o nt rib u t io ns o f a s im il ar nat u re m ay b e m eas u red at c o s t in
s u c h c as es f o r s ervic es CCAs . Ho w ever, t h is ap p ro ac h m ay no t
b e ap p ro p riat e w h ere t h e c o nt rib u t io n o f dif f erent p art ic ip ant s
dif f er in nat u re (f o r ins t anc e, w h ere s o m e p art ic ip ant s c o nt rib u t e
s ervic es and o t h ers p ro vide int angib l es o r o t h er as s et s ).
Dis t inc t io ns w il l need t o b e draw n b et w een c o nt rib u t io ns o f
pre-existing value and current contributions. For example, the
val u e o f any p re- ex is t ing p at ent ed t ec h no l o gy c o nt rib u t ed b y
a p art ic ip ant w o u l d t o b e det erm ined u nder t h e arm ’ s l engt h
p rinc ip l e (u t il iz ing t h e revis ed gu idanc e o n ris k and int angib l es
as ap p ro p riat e) and inc o rp o rat ed w it h in t h e f u l l val u e o f t h e
c o nt rib u t io n. Th e val u e o f c u rrent R& D ac t ivit y b eing c o nt rib u t ed
w o u l d b e b as ed o n t h e c u rrent val u e o f t h o s e f u nc t io ns .
A ction 8
I mplications
Mu l t inat io nal ent erp ris es s h o u l d eval u at e w h et h er
t h eir ex is t ing t rans f er p ric ing p o l ic y is al igned w it h
the broad definition of intangibles as included
in t h e new gu idanc e, in p art ic u l ar f o r t h e new l y
defined marketing intangibles. Furthermore, they
s h o u l d es t ab l is h w h et h er t h eir p o l ic y c o rrec t l y
reflects comparability factors like market specific
c h arac t eris t ic s and s y nergies .
Th e aim o f t h e OECD’ s w o rk in t h is area is t o ens u re
that transfer pricing results reflect the reality of
what is happening, aligning profits with the valuec reat ing f u nc t io ns and t h e c o nt ro l o f ris k s . In gro u p s
t h at h ave s ep arat ed t h e f u nc t io ns t h at c o nt rib u t e t o
val u e c reat io n (i.e., t h e DEMPE f u nc t io ns as s o c iat ed
w it h int angib l es ) f ro m t h e ent it ies t h at real iz e t h e
profits from value drivers (such as the legal owners of
int angib l es ), t h e rel evant c o nt rib u t io ns o f eac h ent it y
w il l need t o b e c aref u l l y as s es s ed in t h e l igh t o f t h e
f ram ew o rk f o r as s es s ing w h ic h ent it y w it h in t h e gro u p
controls the economically significant risks. This should
b e do c u m ent ed ap p ro p riat el y in t h e gro u p ’ s m as t er
file and local file transfer pricing documentation.
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• Chris Faiferlick
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c h ris .f aif erl ic k @ ey .c o m
In addition, the guidance in Chapter VI on valuing and
p ric ing t rans ac t io ns invo l ving int angib l es , inc l u ding
the new guidance on HTVIs, makes it clear that groups
will need to employ robust valuation techniques and
m ay need al l o w f o r adj u s t m ent s t o p ric ing dep ending
o n t h e o u t c o m e o f f o res eeab l e c o nt ingent event s . Th is
al s o w il l need t o b e c aref u l l y do c u m ent ed in t h e l o c al
file documentation for the relevant entities.
Mu l t inat io nal ent erp ris es m ak ing u s e o f CCAs
o r s im il ar arrangem ent s s h o u l d eval u at e t h eir
ex is t ing arrangem ent s , in p art ic u l ar t h e el igib il it y
o f p art ic ip ant s , t h e c o nt ro l o ver ris k and t h e
m eas u rem ent o f t h e c o nt rib u t io ns .
lo al a
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ction
8 - 10
OECD rel eas es new
gu idanc e o n c ro s s - b o rder
c o m m o dit y t rans ac t io ns
u nder BEPS Ac t io ns 8 - 10
Executive summary
On 5 Oc t o b er 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 new gu idanc e o n c o m m o dit y t rans ac t io ns in c o nnec t io n w it h Ac t io ns
8 - 10 o n al igning t rans f er p ric ing o u t c o m es w it h val u e c reat io n u nder it s Ac t io n Pl an
on Base Erosion and Profit Shifting (BEPS). This guidance, together with other transfer
pricing guidance, was released in a package that included final reports on all 15
BEPS Ac t io ns .
Th e do c u m ent o n Ac t io ns 8 - 10, Aligning Transfer Pricing Outcomes with Value Creation
(the Final Report), contains revisions to section D of Chapter I of the OECD Transfer
Pricing Guidelines, guidance on commodity transactions, revisions to Chapter VI
o f t h e OECD Trans f er Pric ing Gu idel ines regarding int angib l es , revis io ns t o Ch ap t er
VII of the OECD Transfer Pricing Guidelines regarding low value-adding intra-group
services, revisions to Chapter VIII of the OECD Transfer Pricing Guidelines regarding
c o s t c o nt rib u t io n arrangem ent s , and s c o p e o f w o rk f o r gu idanc e o n t h e t rans ac t io nal
profit split method. This Alert discusses the revisions to Chapter II of the OECD Transfer
Pric ing Gu idel ines (t h e TP Gu idel ines ) o n c o m m o dit y t rans ac t io ns .
The Final Report modifies and finalizes an earlier discussion draft of guidance on
1
c o m m o dit y t rans ac t io ns t h at w as rel eas ed 16 Dec em b er 2014.
Key f eat u res o f t h e gu idanc e inc l u de:
• Clarification of the existing guidance on the application of the comparable
u nc o nt ro l l ed p ric e (CUP) m et h o d t o c o m m o dit y t rans ac t io ns and t h e u s e o f p u b l ic l y
quoted prices to apply the CUP.
• Rec o m m endat io n t h at t ax p ay ers do c u m ent t h eir p ric e- s et t ing p o l ic y f o r c o m m o dit y
t rans ac t io ns t o as s is t t ax au t h o rit ies in c o ndu c t ing inf o rm ed ex am inat io ns .
• Gu idanc e regarding t h e ado p t io n o f a deem ed p ric ing dat e f o r c o nt ro l l ed c o m m o dit y
t rans ac t io ns in t h e ab s enc e o f evidenc e o f t h e ac t u al p ric ing dat e agreed b y t h e
p art ies t o t h e t rans ac t io ns .
The final guidance reflects minor changes from the discussion draft, including a more
specific list of the types of adjustments applicable when using a CUP method and
clarification that, when using a CUP method, the functions performed by other entities
in t h e s u p p l y c h ain need t o b e c o m p ens at ed p ro p erl y .
1
See EY Gl o b al Tax Al ert , OECD releases Discussion Draft on cross-border commodity transactions under
BEPS Action 10, dat ed 22 Dec em b er 2014.
124
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A ctions 8 - 1 0
Detailed discussion
ac gro nd
The final guidance consists of a brief introduction and proposed
addit io ns t o Ch ap t er II o f t h e c u rrent TP Gu idel ines w h ic h
c o nt ained l im it ed gu idanc e o n t rans f er p ric ing f o r c o m m o dit ies .
Th e int ro du c t io n s t at es t h at t h e new gu idanc e p ro vides “ an
im p ro ved f ram ew o rk f o r t h e anal y s is o f c o m m o dit y t rans ac t io ns
f ro m a t rans f er p ric ing p ers p ec t ive w h ic h s h o u l d l ead t o great er
c o ns is t enc y in t h e w ay t h at t ax adm inis t rat io ns and t ax p ay ers
det erm ine t h e arm ’ s l engt h p ric e f o r c o m m o dit y t rans ac t io ns
and should ensure that pricing reflects value creation.” The new
gu idanc e w il l b e s u p p l em ent ed w it h f u t u re w o rk m andat ed b y
t h e G20 Devel o p m ent Wo rk ing Gro u p . Th e o u t c o m e o f t h is w o rk
w il l p ro vide k no w l edge, b es t p rac t ic es and t o o l s f o r c o m m o dit y ric h c o u nt ries in p ric ing c o m m o dit y t rans ac t io ns f o r t rans f er
p ric ing p u rp o s es .
K ey areas of the C hapter I I additions
he se of the
method for pricing commodit
transactions and the use of q uoted prices in
appl ing the
method
The guidance clarifies that the CUP method would generally be
t h e m o s t ap p ro p riat e t rans f er p ric ing m et h o d f o r det erm ining
t h e arm ’ s l engt h p ric e f o r c o nt ro l l ed c o m m o dit y t rans ac t io ns ,
and t h at , u nder t h e CUP m et h o d, t h e arm ’ s l engt h p ric e f o r t h e
c o nt ro l l ed c o m m o dit y t rans ac t io n c an b e det erm ined, no t o nl y
b y ref erenc e t o c o m p arab l e u nc o nt ro l l ed t rans ac t io ns , b u t al s o
by reference to a quoted price. The term “quoted price” refers
t o t h e c o m m o dit y p ric e in t h e rel evant p erio d t h at is o b t ained
f ro m an int ernat io nal o r do m es t ic c o m m o dit y ex c h ange m ark et .
A quoted price also includes prices obtained from recognized
and t rans p arent p ric e rep o rt ing, s t at is t ic al agenc ies o r f ro m
go vernm ent al p ric e- s et t ing agenc ies , w h ere s u c h s o u rc es are
u s ed as a ref erenc e b y u nrel at ed p art ies t o det erm ine p ric es .
A rel evant f ac t o r in det erm ining t h e ap p ro p riat enes s o f u s ing
a quoted price is the extent to which such price is widely and
ro u t inel y u s ed in t h e indu s t ry t o nego t iat e p ric es b et w een
t h ird p art ies .
For the CUP method to be reliably applied, the economically
rel evant c h arac t eris t ic s o f t h e c o nt ro l l ed t rans ac t io ns and t h e
third-party transactions represented by the quoted price need to
b e c o m p arab l e. Th e ec o no m ic al l y rel evant c h arac t eris t ic s t h at
need t o b e c o ns idered t o es t ab l is h c o m p arab il it y inc l u de:
• Physical features and quality of the commodity
• Th e c o nt rac t u al t erm s o f t h e c o nt ro l l ed t rans ac t io n, s u c h as
vo l u m es t raded, p erio d o f t h e arrangem ent s , t im ing and t erm s
o f del ivery , t rans p o rt at io n, ins u ranc e, and f o reign c u rrenc y
t erm s
Cert ain ec o no m ic al l y rel evant c h arac t eris t ic s m ay l ead t o eit h er
a premium or a discount. In addition, if quoted prices are used
as reference, the standardized contracts that define the terms
b as ed o n w h ic h t h e c o m m o dit ies are t raded o n t h e ex c h ange
m ay b e rel evant t o o .
If t h ere are m at erial dif f erenc es b et w een t h e c o ndit io ns o f t h e
c o nt ro l l ed t rans ac t io n and t h e c o ndit io ns o f t h e u nc o nt ro l l ed
transaction or the conditions determining the quoted price of the
c o m m o dit y , reas o nab l y ac c u rat e adj u s t m ent s s h o u l d b e m ade
t o ens u re t h at t h e ec o no m ic al l y rel evant c h arac t eris t ic s o f t h e
t rans ac t io ns are c o m p arab l e.
The final guidance includes the very important statement
t h at w h en ap p l y ing a CUP, c o nt rib u t io ns m ade in t h e f o rm
o f f u nc t io ns p erf o rm ed, as s et s u s ed and ris k s as s u m ed b y
o t h er ent it ies in t h e s u p p l y c h ain s h o u l d b e c o m p ens at ed in
ac c o rdanc e w it h t h e gu idanc e p ro vided in t h e TP Gu idel ines .
Al t h o u gh t h e rem u nerat io n o f o t h er p art ies in t h e val u e c h ain in
practice can be significant, limited guidance is provided on how
t o ap p l y t h is in p rac t ic e.
lo al a
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A ctions 8 - 1 0
If t h e p ric ing dat e agreed b y as s o c iat ed ent erp
is inc o ns is t ent w it h t h e ac t u al c o ndu c t o f t h e p
o r w it h o t h er f ac t s o f t h e c as e, t ax au t h o rit ies
det erm ine a dif f erent p ric ing dat e c o ns is t ent w
evidenc e p ro vided b y t h o s e o t h er f ac t s .
Documentation recommendations
In o rder t o as s is t t ax adm inis t rat io ns in c o ndu c t ing inf o rm ed
ex am inat io ns o f t ax p ay ers ’ t rans f er p ric ing p rac t ic es , as p art o f
t h eir t rans f er p ric ing do c u m ent at io n, t ax p ay ers s h o u l d p ro vide
rel iab l e evidenc e and do c u m ent at io n o f t h eir p ric e- s et t ing p o l ic y
f o r c o m m o dit y t rans ac t io ns . Th is s h o u l d inc l u de inf o rm at io n
needed t o j u s t if y any ap p l ic ab l e p ric e adj u s t m ent s and any o t h er
rel evant inf o rm at io n s u c h as :
ris es
art ies
m ay
it h t h e
eemed pricing date for commodit transactions
• Su p p l y c h ain inf o rm at io n
When using quotations to price the commodity transaction, the
pricing date is a particularly relevant factor. The final guidance
defines “pricing date” as the specific time, date or time period
selected (e.g., a specified range of dates over which an average
price is determined) selected by the parties to determine the
price for the commodity transactions. Wh en t h e t ax p ay er c an
p ro vide rel iab l e evidenc e o f t h e p ric ing dat e agreed in t h e
c o nt ro l l ed t rans ac t io n at t h e t im e t h e t rans ac t io n w as ent ered
int o and t h is is c o ns is t ent w it h t h e ac t u al c o ndu c t o f t h e p art ies ,
t h e t ax adm inis t rat io ns s h o u l d det erm ine t h e p ric e f o r t h e
c o m m o dit y t rans ac t io n b y ref erenc e t o t h e p ric ing dat e agreed
b y t h e as s o c iat ed ent erp ris es . Rel iab l e evidenc e o f t h e p ric ing
dat e m ay inc l u de:
• Inf o rm at io n p rep ared f o r no n- t ax p u rp o s es
• Pro p o s al s and ac c ep t anc es
• Pric ing f o rm u l as u s ed
• Th ird- p art y end c u s t o m er agreem ent s
• Prem iu m s o r dis c o u nt s ap p l ied
• Pric ing dat e
• Co nt rac t s o r regis t ered c o nt rac t s
• Ot h er do c u m ent s s et t ing o u t t h e t erm s o f t h e t rans ac t io n
If t h e p ric ing dat e agreed b y as s o c iat ed ent erp ris es is
inc o ns is t ent w it h t h e ac t u al c o ndu c t o f t h e p art ies o r w it h o t h er
f ac t s o f t h e c as e, t ax au t h o rit ies m ay det erm ine a dif f erent
p ric ing dat e c o ns is t ent w it h t h e evidenc e p ro vided b y t h o s e
o t h er f ac t s .
In t h e ab s enc e o f rel iab l e evidenc e o f t h e ac t u al p ric ing dat e
agreed b y t h e as s o c iat ed ent erp ris es , t ax adm inis t rat io ns m ay
deem t h e p ric ing dat e f o r t h e c o m m o dit y t rans ac t io n t o b e t h e
date of shipment as evidenced by the bill of lading or equivalent
do c u m ent . No net h el es s , t h e gu idanc e s t at es t h at it is im p o rt ant
t o p erm it t h e res o l u t io n o f do u b l e t ax at io n c as es aris ing f ro m
t h e ap p l ic at io n o f t h e deem ed p ric ing dat e t h ro u gh ac c es s t o t h e
m u t u al agreem ent p ro c edu re u nder t h e ap p l ic ab l e t ax t reat y .
126
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A ctions 8 - 1 0
I mplications
Th e new gu idanc e o n c o m m o dit ies is p art o f a
p ac k age o f do c u m ent s rel eas ed b y t h e OECD
w it h res p ec t t o Ac t io ns 8 – 10 o f t h e BEPS p ro j ec t .
Th es e addit io ns t o Ch ap t er II o f t h e TP Gu idel ines
res o nat e w it h t h e m o re general BEPS t h em es o f
improving the quality of information to facilitate
t ax adm inis t rat io ns in c o ndu c t ing t rans f er p ric ing
au dit s and p l ac ing em p h as is o n t h e ac t u al c o ndu c t
o f t h e as s o c iat ed ent erp ris es rat h er t h an o nl y t h eir
c o nt rac t u al arrangem ent s .
Th e addit io ns t o Ch ap t er II m ay c o nt rib u t e t o an
inc reas ed f o c u s b y t ax au t h o rit ies aro u nd t h e
w o rl d o n t rans ac t io ns invo l ving c o m m o dit ies .
Gl o b al b u s ines s es w il l w ant t o eval u at e t h eir
t rans f er p ric ing p o l ic y f o r c o m m o dit ies ,
t h e c o m p reh ens ivenes s o f t h eir rel at ed
do c u m ent at io n, and t h eir p rep arednes s t o
respond to tax administration queries for specific
inf o rm at io n s u p p o rt ing t h e p ric ing o f c o m m o dit y
t rans ac t io ns .
E Y contacts
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t h is Al ert , p l eas e c o nt ac t :
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Trans f er Pric ing
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olic and ontro ers
riefing 127
ction
8 - 10
OECD releases final
t rans f er p ric ing gu idanc e
o n ris k and rec o gnit io n
u nder BEPS Ac t io ns 8 - 10
Executive summary
On 5 Oc t o b er 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) released its final report on aligning transfer pricing outcomes with value
creation (Actions 8-10) under its Action Plan on Base Erosion and Profit Shifting
(BEPS). This report was released in a package that included final reports on all
15 BEPS Ac t io ns .
Th e do c u m ent Aligning Transfer Pricing Outcomes with Value Creation (the Final
Rep o rt ), c o nt ains revis io ns t o s ec t io n D o f Ch ap t er I o f t h e OECD Trans f er Pric ing
Guidelines, guidance on commodity transactions, revisions to Chapter VI of the OECD
Transfer Pricing Guidelines regarding intangibles, revisions to Chapter VII of the OECD
Trans f er Pric ing Gu idel ines regarding l o w val u e- adding int ra- gro u p s ervic es , revis io ns
to Chapter VIII of the OECD Transfer Pricing Guidelines regarding cost contribution
arrangements, and scope of work for guidance on the transactional profit split method.
Th is Al ert dis c u s s es t h e revis io ns t o s ec 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 rel at ing t o ris k anal y s is , rec o gnit io n o f t h e ac c u rat el y del ineat ed t rans ac t io n,
and c as h b o x es .
Th e k ey gu idanc e inc l u des :
• Th 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 b et w een as s o c iat ed
ent erp ris es t h ro u gh anal y z ing t h e c o nt rac t u al rel at io ns t o get h er w it h evidenc e o f t h e
ac t u al c o ndu c t o f t h e p art ies .
• Det ail ed gu idanc e o n anal y z ing ris k s as an int egral p art o f a f u nc t io nal anal y s is ,
including a new six-step analytical framework. For transfer pricing purposes, the party
assuming a risk should control the risk and have the financial capacity to assume
t h e ris k .
• A c ap it al - ric h m u l t inat io nal ent erp ris e (MNE) gro u p m em b er w it h o u t any o t h er
relevant economic activities that provides funding, but cannot control financial risks
in rel at io n t o t h e f u nding, w il l at t ain no m o re t h an a ris k - f ree ret u rn (and l es s if t h e
t rans ac t io n is c o m m erc ial l y irrat io nal ).
• In ex c ep t io nal c irc u m s t anc es o f c o m m erc ial irrat io nal it y , a t ax adm inis t rat io n m ay
disregard the actual transaction. The main question is whether the actual transaction
h as t h e c o m m erc ial rat io nal it y o f arrangem ent s t h at w o u l d b e agreed b et w een
u nrel at ed p art ies u nder c o m p arab l e ec o no m ic c irc u m s t anc es .
The Final Report contains significant changes compared to the discussion draft on risk
1
and rec h arac t eriz at io n in Dec em b er 2014 and c o m p ared t o t h e 2010 OECD Trans f er
Pric ing Gu idel ines .
1
See EY Gl o b al Tax Al ert , OECD releases discussion draft under BEPS Actions 8-10 on risk,
recharacterization, and special measures, dat ed 24 Dec em b er 2014.
128
lo al a
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A ctions 8 - 1 0
Detailed discussion
ac gro nd
BEPS Ac t io ns 8 , 9 and 10 rel at e t o as s u ring t h at t rans f er
p ric ing o u t c o m es are in l ine w it h val u e c reat io n. Th is inc l u des
t h e devel o p m ent o f ru l es o n a nu m b er o f c l o s el y rel at ed t o p ic s ,
inc l u ding:
1.
Devel o p m ent o f ru l es t o p revent BEPS b y t rans f erring ris k s
am o ng, o r al l o c at ing ex c es s ive c ap it al t o , gro u p m em b ers
2.
Devel o p m ent o f ru l es
t rans ac t io ns t h at w o u
o c c u r b et w een t h ird p
t rans f er p ric ing ru l es
c irc u m s t anc es in w h ic
3.
Trans f er p ric ing ru l es o r s p ec ial m eas u res f o r t rans f ers o f
h ard- t o - val u e int angib l es
t o p revent BEPS b y engaging in
l d no t , o r w o u l d o nl y very rarel y ,
art ies , inc l u ding im p l em ent ing
o r s p ec ial m eas u res t o c l arif y t h e
h t rans ac t io ns c an b e rec h arac t eriz ed
The Final Report contains specific revisions to section D of
Ch ap t er I o f t h e OECD Trans f er Pric ing Gu idel ines f o l l o w ing
w o rk u nder BEPS Ac t io ns 9 and 10. To deal w it h t h e p erc eived
f o c u s o n c o nt rac t u al al l o c at io ns o f f u nc t io ns , ris k s and as s et s
under the current guidance, the Final Report provides that the
revis io ns c l arif y and s t rengt h en t h e gu idanc e o n t h e arm ’ s l engt h
p rinc ip l e t o ens u re t h at t rans f er p ric ing o u t c o m es are c o ns is t ent
w it h t h e ec o no m ic ac t ivit y c o ndu c t ed b y MNE gro u p m em b ers .
Th e rep o rt h igh l igh t s 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 , p ro vides a new s ix - s t ep f ram ew o rk t o
det erm ine w h ic h p art y as s u m es ris k and u p dat es t h e gu idanc e
o n rec o gnit io n o f t h e ac c u rat el y del ineat ed t rans ac t 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 rec o gniz ed.
dentif ing the commercial or financial
relations
The Final Report extends the comparability analysis, an
im p o rt ant el em ent o f a t rans f er p ric ing anal y s is , w it h an
important first step. The Final Report notes two aspects of a
comparability analysis: i) the identification of the commercial or
financial relations between the associated enterprises and the
c o ndit io ns and ec o no m ic al l y rel evant c irc u m s t anc es at t ac h ing
t o t h o s e rel at io ns in o rder t h at t h e c o nt ro l l ed t rans ac t io n
is ac c u rat el y del ineat ed; and ii) a c o m p aris o n b et w een t h e
c o ndit io ns and t h e ec o no m ic al l y rel evant c irc u m s t anc es o f
t h e c o nt ro l l ed t rans ac t io n as ac c u rat el y del ineat ed, w it h t h e
c o ndit io ns and t h e ec o no m ic al l y rel evant c irc u m s t anc es o f
c o m p arab l e t rans ac t io ns b et w een indep endent ent erp ris es . Th e
first aspect is dealt with in Chapter I of the OECD Transfer Pricing
Gu idel ines , w h il e Ch ap t ers II and III f o c u s o n t h e s ec o nd as p ec t .
The Final Report states that the economically relevant
c h arac t eris t ic s o r c o m p arab il it y f ac t o rs o f a t rans ac t io n b et w een
associated enterprises should be identified in order to accurately
del ineat e t h e ac t u al t rans ac t io n. Th es e c o m p arab il it y f ac t o rs
c an b e b ro adl y c at ego riz ed as f o l l o w s : i) c o nt rac t u al t erm s ,
ii) f u nc t io ns p erf o rm ed t ak ing int o ac c o u nt as s et s u s ed and
ris k s as s u m ed, iii) c h arac t eris t ic s o f p ro p ert y and s ervic es ,
iv) ec o no m ic c irc u m s t anc es o f t h e p art ies and m ark et , and v)
b u s ines s s t rat egies .
Wh ere a t rans ac t io n h as b een f o rm al iz ed b y t h e t ax p ay er
t h ro u gh w rit t en c o nt rac t u al agreem ent s , t h o s e agreem ent s
p ro vide t h e s t art ing p o int f o r ident if y ing t h e c o m m erc ial and
financial relations between the associated enterprises. However,
information from the written contracts should be clarified and
s u p p l em ent ed b y c o ns idering evidenc e o f t h e c o m m erc ial and
financial relations provided by the other four economically
relevant characteristics. An analysis of all five characteristics
p ro vides evidenc e o f t h e ac t u al c o ndu c t o f t h e p art ies . In c as e
t h e ec o no m ic al l y rel evant c h arac t eris t ic s o f a t rans ac t io n are
inc o ns is t ent w it h c o nt rac t u al t erm s , t h e ac t u al t rans ac t io ns
should in general be identified based on the actual conduct of
the parties. The Final Report provides that where no written
t erm s ex is t , t h e ac t u al t rans ac t io n w o u l d need t o b e dedu c ed
from the evidence of actual conduct provided by identification of
t h e ec o no m ic al l y rel evant c h arac t eris t ic s o f t h e t rans ac t io n.
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A ctions 8 - 1 0
Risk assumption is defined as “taking on the upside and downside
consequences of the risk with the result that the party assuming
the risk will bear the financial and other consequences if the risk
m at erial iz es .” Th e rep o rt p ro vides t h at t h e det ail ed gu idanc e o n ris k s
do es no t m ean t h at ris k s are m o re im p o rt ant t h an f u nc t io ns and
assets, but arises from the practical difficulties introduced by risks.
Ris k s c an b e c at ego riz ed in vario u s w ay s , b u t a rel evant
f ram ew o rk in a t rans f er p ric ing anal y s is s h o u l d c o ns ider
t h e s o u rc es o f u nc ert aint y w h ic h c au s e ris k . Th es e s o u rc es
m ay inc l u de, b u t are no t l im it ed t o , s t rat egic o r m ark et p l ac e
risks, infrastructure or operational risks, financial risks,
t rans ac t io nal ris k s , and h az ard ris k s . Th e nat u re o f t h e ris k
m ay inf o rm w h ic h p art y in t h e gro u p w o u l d b e ex p ec t ed t o
p erf o rm t h e dec is io n m ak ing rel at ed t o t h e ris k .
The Final Report includes additional guidance regarding the
f u nc t io nal anal y s is , w h ic h s h o u l d f o c u s o n w h at t h e p art ies
ac t u al l y do and t h e c ap ab il it ies t h ey p ro vide. Su c h ac t ivit ies
and c ap ab il it ies inc l u de dec is io n- m ak ing, inc l u ding dec is io ns
ab o u t b u s ines s s t rat egy and ris k s . In p art ic u l ar, it is im p o rt ant
t o u nders t and h o w val u e is generat ed b y t h e gro u p as a w h o l e,
t h e int erdep endenc ies o f t h e f u nc t io ns p erf o rm ed, and t h e
c o nt rib u t io ns t h at t h e p art ies m ak e t o t h at val u e c reat io n.
The Final Report states that features of the parties, such as
c ap ab il it ies and ac t u al c o nt rib u t io ns , c an af f ec t t h e o p t io ns
real is t ic al l y avail ab l e t o t h e p art ies . Th eref o re, t h e p ro c es s o f
ident if y ing t h e ec o no m ic c irc u m s t anc es o f t h e c o m m erc ial and
financial relations should include consideration of the capabilities
o f t h e p art ies , h o w u nder t h e arm ’ s l engt h h y p o t h es is s u c h
c h arac t eris t ic s af f ec t o p t io ns real is t ic al l y avail ab l e, and w h et h er
similar capability is reflected in potentially comparable arm’s
l engt h arrangem ent s .
nal sis of ris s in commercial or
financial relations
The Final Report contains additional new guidance on the
anal y s is o f ris k s , w h ic h is an int egral p art o f a f u nc t io nal anal y s is .
Bec au s e t h e as s u m p t io n o f inc reas ed ris k w o u l d b e rem u nerat ed
b y an inc reas e in ex p ec t ed ret u rn, it is k ey t o det erm ine w h at
ris k s are as s u m ed, w h at f u nc t io ns are c o ndu c t ed in c o nnec t io n
w it h t h e as s u m p t io n o r im p ac t o f t h e ris k s and w h ic h p art y o r
parties assume these risks. Risk assumption is defined as “taking
on the upside and downside consequences of the risk with the
result that the party assuming the risk will bear the financial and
other consequences if the risk materializes.” The report provides
t h at t h e det ail ed gu idanc e o n ris k s do es no t m ean t h at ris k s are
m o re im p o rt ant t h an f u nc t io ns and as s et s , b u t aris es f ro m t h e
practical difficulties introduced by risks.
The Final Report provides the following six-step analytical
f ram ew o rk f o r anal y z ing ris k :
1.
13 0
tep
dentification of economicall significant ris s
with specificit — The Final Report introduces a materiality
t h res h o l d b y f o c u s ing o n ident if y ing ec o no m ic al l y
significant risks with specificity. Risk is defined as the
ef f ec t o f u nc ert aint y o n t h e o b j ec t ives o f t h e b u s ines s .
The significance of a risk depends on the likelihood and
size of the potential profits or losses arising from the risk.
lo al a
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2.
tep
etermination of contract al ass mption of the
specific ris — Writ t en c o nt rac t s b et w een t h e p art ies t o a
t rans ac t io n m ay des c rib e t h e p art y o r p art ies as s u m ing
the specific risks. Ex ante contractual assumption of
ris k p ro vides c l ear evidenc e o f a c o m m it m ent t o as s u m e
risk prior to the materialization of risk. The Final Report
p ro vides t h at it s h o u l d no t b e c o nc l u ded t h at t h e p ric ing
arrangem ent s in c o nt rac t u al arrangem ent s al o ne det erm ine
w h ic h p art y as s u m es ris k .
3.
tep
nctional anal sis in relation to ris — Th is s t ep
anal y z es t h e f u nc t io ns t h at t h e p art ies t o t h e t rans ac t io n
p erf o rm in rel at io n t o ris k s . Th is anal y s is p ro vides
inf o rm at io n ab o u t h o w t h e as s o c iat ed ent erp ris es o p erat e
in c o nnec t io n w it h t h e as s u m p t io n and m anagem ent o f
the specific, economically significant risks. In particular,
t h e anal y s is s h o u l d l o o k at w h ic h ent erp ris e o r ent erp ris es
p erf o rm c o nt ro l f u nc t io ns and ris k m it igat io n f u nc t io ns ,
w h ic h ent erp ris e o r ent erp ris es ex p erienc e u p s ide o r
downside consequences of risk outcomes, and which
enterprise or enterprises have the financial capacity to
as s u m e t h e ris k .
The Final Report defines risk management as the
f u nc t io n o f as s es s ing and res p o nding t o ris k as s o c iat ed
w it h c o m m erc ial ac t ivit y . Ac c o rding t o t h e rep o rt , ris k
m anagem ent c o m p ris es t h ree el em ent s : (i) t h e c ap ab il it y
t o m ak e dec is io ns t o t ak e o n, l ay o f f , o r dec l ine a ris k b earing o p p o rt u nit y , t o get h er w it h t h e ac t u al p erf o rm anc e
o f t h at dec is io n- m ak ing f u nc t io n; (ii) t h e c ap ab il it y t o
m ak e dec is io ns o n w h et h er and h o w t o res p o nd t o t h e
ris k s as s o c iat ed w it h t h e o p p o rt u nit y , t o get h er w it h t h e
ac t u al p erf o rm anc e o f t h at dec is io n- m ak ing f u nc t io n; and
(iii) t h e c ap ab il it y t o m it igat e ris k , t h at is t h e c ap ab il it y t o
t ak e m eas u res t h at af f ec t ris k o u t c o m es , t o get h er w it h t h e
ac t u al p erf o rm anc e o f s u c h ris k m it igat io n.
A ctions 8 - 1 0
The Final Report provides that the mere formalizing
o f t h e o u t c o m e o f dec is io n- m ak ing o r t h e s et t ing o f
t h e p o l ic y enviro nm ent rel evant f o r t h e ris k are no t
sufficient to conclude there is control over risk.
Control over risk requires the first two elements of risk
m anagem ent . Bo t h c ap ab il it y and f u nc t io nal p erf o rm anc e
are needed t o ex erc is e c o nt ro l o ver ris k . Perf o rm ing t h e
day-to-day risk mitigation is not required in order for a party
t o h ave c o nt ro l o ver t h e ris k . It is p o s s ib l e t o o u t s o u rc e t h e
day - t o - day ris k m it igat io n. Ho w ever, w h ere t h es e day - t o day ris k m it igat io n ac t ivit ies are o u t s o u rc ed, c o nt ro l o f ris k
would require the capability to determine the objectives
o f t h e o u t s o u rc ed ac t ivit ies , t o dec ide t o h ire t h e p art y
c o ndu c t ing t h e ris k m it igat io n f u nc t io ns , t o eval u at e
whether the objectives are sufficiently satisfied, and where
nec es s ary , t o dec ide t o ado p t o r t erm inat e t h e c o nt rac t
w it h t h e p ro vider, t o get h er w it h t h e p erf o rm anc e o f s u c h
as s es s m ent and dec is io n- m ak ing. Ris k m it igat io n ref ers t o
m eas u res t ak en t h at are ex p ec t ed t o af f ec t ris k o u t c o m es
(e.g., quality control audits), which include measures that
reduce uncertainty or measures reducing consequences if
t h e do w ns ide im p ac t o f ris k m at erial iz es .
If t h e p art y c o nt rac t u al l y as s u m ing t h e ris k c o nt ro l s t h e ris k
and has the financial capacity to assume the risk, the next
s t ep o f t h e anal y s is is St ep 6. If it do es no t , t h e anal y s is
c o nt inu es w it h St ep 5. In c o nt ras t w it h t h e dis c u s s io n draf t
of December 2014, which generally ignored the financial
c ap ac it y t o as s u m e t h e ris k , t h is f ac t o r h as b een added as
rel evant , o n p ar w it h c o nt ro l o ver ris k .
The Final Report provides that the mere formalizing of
t h e o u t c o m e o f dec is io n- m ak ing (e.g., m eet ings o rganiz ed
f o r f o rm al ap p ro val o f dec is io ns m ade in o t h er l o c at io ns ,
m inu t es o f b o ard m eet ings , and s igning o f agreem ent s
regarding t h e dec is io n) o r t h e s et t ing o f t h e p o l ic y
enviro nm ent rel evant f o r t h e ris k (e.g., t h e b o ard and
ex ec u t ive c o m m it t ees o f t h e gro u p m ay s et t h e ris k l evel
of the group) are not sufficient to conclude there is control
o ver ris k .
5.
tep
llocation of ris — If t h e as s o c iat ed ent erp ris e
(c o nt rac t u al l y ) as s u m ing t h e ris k do es no t ex erc is e c o nt ro l
over the risk or does not have the financial capacity to
as s u m e t h e ris k , t h en t h e ris k s h o u l d b e al l o c at ed t o t h e
enterprise exercising control and having the financial
c ap ac it y t o as s u m e t h e ris k . If m u l t ip l e p art ies ex erc is e
control over risk and have the financial capacity to assume
t h e ris k , t h en t h e ris k s h o u l d b e al l o c at ed t o t h e p art y o r
gro u p o f as s o c iat ed ent erp ris es ex erc is ing t h e m o s t c o nt ro l .
6.
tep
ricing the transaction, ta ing into acco nt
the conseq uences of risk allocation — Th e ac c u rat el y
del ineat ed t rans ac t io n s h o u l d t h en b e p ric ed in ac c o rdanc e
w it h t h e t o o l s and m et h o ds avail ab l e t o t ax p ay ers and
t ax adm inis t rat io ns s et o u t in Ch ap t ers II (t rans f er p ric ing
m et h o ds ) and III (c o m p arab il it y anal y s is ) o f t h e OECD
Trans f er Pric ing Gu idel ines and t ak ing int o ac c o u nt t h e
financial and other consequences of risk-assumption, and
t h e rem u nerat io n f o r ris k m anagem ent . Th is b as ic al l y
ent ail s t h e s el ec t io n o f t h e m o s t ap p ro p riat e t rans f er p ric ing
method and the identification of comparable transactions,
b as ed o n t h e ac c u rat el y del ineat ed t rans ac t io n.
Ref erenc es t o c o nt ro l o ver ris k s h o u l d no t nec es s aril y
be taken to mean that the risk itself can be influenced or
that the uncertainty can be nullified. Therefore, control
is relevant also for risks that cannot be influenced, for
ex am p l e t h ro u gh t h e t im ing o f inves t m ent s , t h e nat u re o f
devel o p m ent p ro gram s , t h e des ign o f m ark et ing s t rat egies ,
o r t h e s et t ing o f p ro du c t io n l evel s .
Financial capacity to assume a risk is defined as access to
f u nding t o t ak e o n t h e ris k o r t o l ay o f f t h e ris k , t o p ay f o r
the risk mitigation functions and to bear the consequences
o f ris k m at erial iz at io n. Ac c es s t o f u nding s h o u l d c o ns ider
t h e avail ab l e as s et s and o p t io ns real is t ic al l y avail ab l e t o
access additional liquidity, if required. The assessment of
t h e ac c es s t o f u nding s h o u l d b e m ade o n t h e b as is t h at t h e
p art y as s u m ing t h e ris k is o p erat ing as an u nrel at ed p art y
o p erat ing in s im il ar c irc u m s t anc es .
4.
Step
nterpreting steps
— Bas ed o n inf o rm at io n
c o l l ec t ed in St ep s 1- 3 regarding t h e as s u m p t io n and
m anagem ent o f ris k s , St ep 4 det erm ines w h et h er t h e
c o nt rac t u al as s u m p t io n o f ris k is al igned w it h t h e c o ndu c t
o f t h e p art ies and o t h er f ac t s b y anal y z ing (i) w h et h er
t h e p art ies f o l l o w t h e c o nt rac t u al t erm s ; and ii) w h et h er
t h e p art y as s u m ing t h e ris k c o nt ro l s t h e ris k and h as t h e
financial capacity to assume the risk.
lo al a
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A ctions 8 - 1 0
A “ c as h b o x ” t h at p ro vides f u nding, b u t c anno t
control financial risks in relation to the funding,
w il l at t ain no m o re t h an a ris k - f ree ret u rn, o r l es s
if t h e t rans ac t io n is c o m m erc ial l y irrat io nal and
m ay b e dis regarded o r rec h arac t eriz ed.
“ C ash boxes”
The Final Report aims to ensure that capital-rich entities without
any o t h er rel evant ec o no m ic ac t ivit ies (s o - c al l ed c as h b o x es ) w il l
not be entitled to any excess profits. A “cash box” that provides
funding, but cannot control financial risks in relation to the
f u nding, w il l at t ain no m o re t h an a ris k - f ree ret u rn, o r l es s if t h e
t rans ac t io n is c o m m erc ial l y irrat io nal and m ay b e dis regarded o r
recharacterized. By imposing the requirement for companies to
ex erc is e c o nt ro l o ver ris k as s u m ed, a “ c as h b o x ” w o u l d h ave t o
p erf o rm t h e f u nc t io ns c o nt ro l l ing t h e ris k s in o rder t o b e ent it l ed
t o t h e ris k rel at ed ret u rn. If no t , t h e ris k (and t h e rel at ed ret u rns )
w o u l d b e al l o c at ed t o t h e gro u p ent it y t h at is p erf o rm ing s u c h
control functions. The profits the “cash box” is entitled to retain
will be equivalent to no more than a risk-free return for the
f u nding it s el f . Addit io nal l y , no n- rec o gnit io n ru l es m ay al s o b e
ap p l ic ab l e. As a res u l t , a “ c as h b o x ” w it h no o r l o w f u nc t io nal it y
w o u l d get no m o re t h an a ris k - f ree rat e o f ret u rn f o r t h e f u nding
it s el f . Th e gu idanc e and ex am p l es are no t l im it ed t o “ c as h
box” companies investing in intangible assets, but are equally
ap p l ic ab l e t o inves t m ent s in o t h er as s et s .
Ot h er BEPS m eas u res t h at c o u l d im p ac t “ c as h b o x es ” inc l u de
int eres t dedu c t ib il it y (BEPS Ac t io n 4), c o nt ro l l ed f o reign
c o m p any ru l es (BEPS Ac t io n 3), and t h e m inim u m s t andard o n
t reat y ab u s e (BEPS Ac t io n 6), as w el l as ap p l ic at io n o f do m es t ic
ant i- ab u s e ru l es .
Th e BEPS Ac t io n Pl an indic at ed t h at s p ec ial m eas u res m igh t b e
introduced. However, the Final Report indicates that the newly
devel o p ed t rans f er p ric ing ru l es are s u c h t h at t h ere w as no need
t o devel o p s p ec ial m eas u res o u t s ide t h e arm ’ s l engt h p rinc ip l e.
ecognition of the acc ratel delineated
transaction
This section of the Final Report has been significantly changed
c o m p ared t o t h e Dec em b er 2014 dis c u s s io n draf t .
Th e gu idanc e em p h as iz es t h at every ef f o rt s h o u l d b e m ade t o
det erm ine t h e p ric ing f o r ac c u rat el y del ineat ed t rans ac t io ns
u nder t h e arm ’ s l engt h p rinc ip l e. It rec o gniz es t h at no nrec o gnit io n c an b e c o nt ent io u s and a s o u rc e o f do u b l e t ax at io n
and it h igh l igh t s t h at as s o c iat ed ent erp ris es m ay h ave t h e
ab il it y t o ent er int o a m u c h great er variet y o f arrangem ent s
t h an indep endent ent erp ris es c an. Wh ere t h e s am e t rans ac t io n
c an b e s een b et w een indep endent p art ies in c o m p arab l e
c irc u m s t anc es , no n- rec o gnit io n w o u l d no t ap p l y . Th e gu idanc e
em p h as iz es t h at t h e m ere f ac t t h at t h e t rans ac t io n m ay no t b e
s een b et w een indep endent p art ies do es no t m ean t h at it s h o u l d
no t b e rec o gniz ed.
Th e t rans ac t io n as ac c u rat el y del ineat ed m ay b e dis regarded
in ex c ep t io nal c irc u m s t anc es . Th is w o u l d b e t h e c as e if t h e
arrangem ent s m ade in rel at io n t o t h e t rans ac t io n, view ed in
t h eir t o t al it y , dif f er f ro m t h o s e w h ic h w o u l d h ave b een ado p t ed
b y indep endent ent erp ris es b eh aving in a c o m m erc ial l y rat io nal
m anner in c o m p arab l e c irc u m s t anc es . Th is w o u l d p revent t h e
determination of an arm’s length price. The main question is
w h et h er t h e ac t u al t rans ac t io n h as t h e c o m m erc ial rat io nal it y o f
arrangem ent s t h at w o u l d b e agreed b et w een u nrel at ed p art ies
u nder c o m p arab l e ec o no m ic c irc u m s t anc es . In t h is res p ec t it
is al s o rel evant t o c o ns ider w h et h er t h e m u l t inat io nal gro u p
as a w h o l e is l ef t w o rs e o f f o n a p re- t ax b as is as a res u l t o f
t h e t rans ac t io n.
The consequence of non-recognition is the replacement of the
t ax p ay er’ s s t ru c t u re b y an al t ernat ive s t ru c t u re t h at c o rres p o nds
c l o s el y w it h t h e f ac t s o f t h e ac t u al t rans ac t io n and ac h ieves a
c o m m erc ial l y rat io nal ex p ec t ed res u l t arriving at an ac c ep t ab l e
price. Examples are provided. The first example describes an
int ernal ins u ranc e arrangem ent o f a ris k t h at a t h ird- p art y
ins u ranc e c o m p any w o u l d no t ac c ep t , du e t o great u nc ert aint ies .
Th e s ec o nd ex am p l e des c rib es t h e s al e f o r a l u m p s u m p ay m ent
o f al l t h e f u t u re o u t c o m e o f res earc h and devel o p m ent ac t ivit ies .
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I mplications
In summary, the Final Report clarifies that arm’s
l engt h p ric ing s h o u l d b e b as ed o n ac c u rat el y
delineated transactions. This requires an analysis
o f t h e c o nt rac t u al rel at io ns t o get h er w it h
evidenc e o f t h e ac t u al c o ndu c t o f t h e p art ies ,
inc l u ding c o nt ro l o ver ris k s . Th ere is a s h if t
f ro m t h e l egal f o rm t o t h e ec o no m ic real it y o f
a transaction. Based on the final guidance, in
c as e t h e ec o no m ic al l y rel evant c h arac t eris t ic s o f
a t rans ac t io n are inc o ns is t ent w it h c o nt rac t u al
t erm s , t h e ac t u al t rans ac t io ns s h o u l d in general
be identified based on the actual conduct of
t h e p art ies .
Gl o b al b u s ines s es s h o u l d f u rt h er s u b s t ant iat e
t h e ac t ivit ies c o ndu c t ed and val u e c reat ed b y
t h e gro u p ent it ies in vario u s c o u nt ries t o s u p p o rt
t h eir t rans f er p ric ing. A m o re t h o ro u gh f u nc t io nal
anal y s is m ay b e needed. Trans f er p ric ing p o l ic ies
m erel y b as ed o n t h e c o nt rac t u al arrangem ent s
and l egal o w ners h ip s h o u l d b e review ed. Gl o b al
b u s ines s es s h o u l d eval u at e t h e im p l ic at io ns o f t h e
final guidance for their transfer pricing structure
and t h e do c u m ent at io n t h ereo f .
E Y contacts
For additional information concerning
t h is Al ert , p l eas e c o nt ac t :
• Erns t & Y o u ng Bel as t ingadvis eu rs LLP
Trans f er Pric ing
Ro t t erdam
• Ro nal d van den Brek el
+ 31 8 8 407 9 016
ro nal d.van.den.b rek el @ nl .ey .c o m
• Cl ive Jie- A- Jo en
+ 31 8 8 407 08 07
c l ive.j ie- a- j o en@ nl .ey .c o m
• Erns t & Y o u ng LLP
Trans f er Pric ing
Was h ingt o n, DC
• Chris Faiferlick
+ 1 202 327 8 07 1
c h ris .f aif erl ic k @ ey .c o m
• Erns t & Y o u ng Advis o ry Servic es
(Pt y ) Lt d
Trans f er Pric ing
Jo h annes b u rg
• Michel Verhoosel
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lo al a
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ction
8 - 10
OECD rel eas es new
gu idanc e o n t rans f er
p ric ing f o r l o w val u e- adding
int ra- gro u p s ervic es u nder
BEPS Ac t io ns 8 - 10
Executive summary
On 5 Oc t o b er 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) released its final 2015 reports under its Action Plan on Base Erosion and Profit
Sh if t ing (BEPS).
Th e rep o rt o n Ac t io ns 8 - 10 Aligning Transfer Pricing Outcomes with Value Creation (t h e
Final Report), contains revisions to section D of Chapter I of the OECD Transfer Pricing
Guidelines, guidance on commodity transactions, revisions to Chapter VI of the OECD
Transfer Pricing Guidelines regarding intangibles, revisions to Chapter VII of the OECD
Trans f er Pric ing Gu idel ines regarding l o w val u e- adding int ra- gro u p s ervic es , revis io ns
to Chapter VIII of the OECD Transfer Pricing Guidelines regarding cost contribution
arrangements, and scope of work for guidance on the transactional profit split method.
This Alert discusses the revisions to Chapter VII of the OECD Transfer Pricing Guidelines
o n int ra- gro u p s ervic es . Th e m ain f o c u s o f t h e revis io n is t h e new Sec t io n D c o nt aining
additional guidance with respect to an elective, simplified transfer pricing approach
f o r l o w val u e- adding int ra- gro u p s ervic es . In addit io n, t h e gu idanc e int ro du c es s o m e
1
changes and clarifications to other paragraphs of Chapter VII.
Th e OECD des c rib es t h e gu idanc e as b eing int ended t o ac h ieve a b al anc e b et w een
appropriate charges for low value adding services and head office expenses and the
need t o p ro t ec t t h e t ax b as e o f p ay er c o u nt ries .
Key f eat u res o f t h e new gu idanc e inc l u de:
• A standard definition of low value-adding intra-group services as being supportive
in nat u re, no t b eing p art o f t h e m u l t inat io nal ent erp ris e’ s (MNE) c o re b u s ines s , no t
requiring or creating valuable intangibles and not involving significant risks.
• A list of services that would typically meet the definition. The services listed generally
are back-office services.
1
Section D is the sole part of the guidance reflected in this chapter that should be considered part of the
t rans f er p ric ing o u t c o m es f o l l o w ing f ro m Ac t io ns 8 - 10 o f t h e BEPS Ac t io n Pl an as endo rs ed b y al l BEPS
As s o c iat e Co u nt ries .
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• An elective simplified approach to determine arm’s length
c h arges f o r l o w val u e adding s ervic es , inc l u ding:
• A p ro c es s f o r det erm ining t h e c o s t s as s o c iat ed w it h l o w
val u e adding s ervic es
• Ab il it y t o u s e general al l o c at io n k ey s
• Simplified benefits test
• St andard 5% m ark - u p
Detailed discussion
ac gro nd
• Pres c rip t ive gu idanc e o n do c u m ent at io n and rep o rt ing t h at
s h o u l d b e p rep ared f o r t h e MNE t o b e ab l e t o ap p l y t h e
simplified approach
• Th e ab il it y f o r t ax adm inis t rat io ns t o inc l u de a t h res h o l d ab o ve
which the simplified approach may be denied. Further work on
t h e t h res h o l d w il l b e p erf o rm ed as p art o f s t ep t w o m ent io ned
b el o w .
Im p l em ent at io n w il l t ak e p l ac e in t w o s t ep s . As s t ep o ne, a l arge
group of countries have agreed to endorse the elective simplified
m ec h anis m b y 2018 . Th e s ec o nd s t ep l o o k s t o ens u re o t h er
countries that the elective simplified mechanism will not lead
t o b as e- ero ding p ay m ent s . It w il l ent ail f u rt h er w o rk in rel at io n
to a potential threshold above which the elective simplified
m ec h anis m w il l no t ap p l y and o t h er im p l em ent at io n is s u es .
Finally, the revised guidance encourages tax administrations to
limit to the profit element in charge any withholding taxes on low
val u e adding s ervic es .
Chapter VII of the OECD Transfer Pricing Guidelines examines
“ is s u es t h at aris e in det erm ining w h et h er s ervic es h ave b een
p ro vided b y o ne m em b er o f an MNE gro u p t o o t h er m em b ers
o f t h at gro u p and, if s o , in es t ab l is h ing arm ’ s l engt h p ric ing f o r
t h o s e int ra gro u p s ervic es .” Bro adl y , t h e c h ap t er t h en go es o n
t o c o ns ider if a s ervic e h as b een p ro vided and w h at , f o r t ax
p u rp o s es , t h e int ra- gro u p c h arge f o r s u c h a s ervic e s h o u l d b e in
ac c o rdanc e w it h t h e arm ’ s l engt h p rinc ip l e.
As p art o f t h e OECD Ac t io n Pl an o n BEPS, Ac t io n 10 direc t ed
t h e OECD t o devel o p t rans f er p ric ing ru l es t o p ro vide p ro t ec t io n
agains t c o m m o n t y p es o f b as e ero ding p ay m ent s , s u c h as
management fees and head office expenses. This revision of
Chapter VII is a part of the OECD work under Action 10 and has
as a key feature an elective simplified approach for low valueadding services. As a first step, a large group of countries will
endorse the simplified approach by 2018, and further work will
b e c o ndu c t ed t o p ro vide c o m f o rt t o o t h er c o u nt ries t h at t h e new
ap p ro ac h w il l no t res u l t in b as e- ero s io n p ay m ent s . Th is w o rk
will include design of a threshold above which the simplified
ap p ro ac h w il l no t ap p l y and o t h er im p l em ent at io n is s u es o f
c o nc ern t o t h o s e o t h er c o u nt ries .
2
A p revio u s dis c u s s io n draf t w as is s u ed in No vem b er 2014.
The final guidance contains minor changes and clarifications.
2
See EY Gl o b al Tax Al ert , OECD releases discussion draft on low value-adding
intra-group services, dat ed 5 No vem b er 2014.
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The simplified approach for determining arm’s length
c h arges f o r l o w val u e- adding int ra- gro u p s ervic es is
el ec t ive f o r t ax p ay ers , b u t s h o u l d b e ap p l ied as f ar as
p rac t ic al o n a c o ns is t ent b as is eit h er gro u p - w ide o r o n a
regio nal o r divis io nal s u b gro u p .
e areas of new g idance and changes
to e isting g idance
tandard definition of low al e adding intra gro p
services
As the simplified approach can only be applied for low valueadding s ervic es , t h e new Sec t io n D o f t h e Pro p o s ed Revis ed
Chapter VII begins by defining such category of intra-group
s ervic es as “ s ervic es p erf o rm ed b y o ne m em b er o r m o re t h an
o ne m em b er o f an MNE gro u p o n b eh al f o f o ne o r m o re o t h er
gro u p m em b ers w h ic h :
• Are o f a s u p p o rt ive nat u re
• Are no t p art o f t h e c o re b u s ines s o f t h e MNE gro u p
• Do not require the use of unique and valuable intangibles and
do not lead to the creation of unique and valuable intangibles
and
• Do no t invo l ve t h e as s u m p t io n o r c o nt ro l o f s u b s t ant ial
or significant risk and do not give rise to the creation of
significant risk”
Ex am p l es o f l o w val u e- adding s ervic es inc l u ded in t h e gu idanc e
focus on typical back office activities including: human
res o u rc es , ac c o u nt ing, ac c o u nt s rec eivab l e and p ay ab l e
p ro c es s ing, inf o rm at io n t ec h no l o gy s ervic es (t o t h e ex t ent
t h ey are no t p art o f t h e p rinc ip al ac t ivit ies ), m o nit o ring and
c o m p il at io n o f h eal t h and s af et y dat a, int ernal and ex t ernal
c o m m u nic at io ns , t ax rel at ed ac t ivit ies , l egal s ervic es and general
adm inis t rat ive s ervic es .
Similarly, examples of services that do not qualify focus on core
activities of MNEs or those that involve significant intangibles or
ris k s , s u c h as res earc h and devel o p m ent (R& D), m anu f ac t u ring,
s al es and m ark et ing, ex t rac t io n, ex p l o rat io n and p ro c es s ing
of natural resources, insurance and re-insurance and financial
t rans ac t io ns . It al s o ex c l u des t h e s ervic es o f c o rp o rat e s enio r
m anagem ent and p u rc h as ing and p ro c u rem ent rel at ing t o raw
m at erial s and o t h er m at erial s u s ed in t h e p ro du c t io n p ro c es s .
Th e l as t ex c ep t io n is an addit io n c o m p ared t o t h e dis c u s s io n
3
draf t is s u ed in No vem b er 2014.
An ex am p l e il l u s t rat es c l earl y h o w an ac t ivit y c an b e a l o
adding s ervic e f o r o ne MNE, b u t a c o re ac t ivit y f o r ano t h
t h e ex am p l e, p erf o rm ing a c redit ris k anal y s is is l o w val u
f o r a dis t rib u t o r o f s h o es , b u t a c o re ac t ivit y f o r an inves
b ank ing gro u p p erf o rm ing s u c h an anal y s is f o r c o u nt erp
involving financial derivatives.
w val u eer. In
e add
t m ent
art ies
nal sis of ris s in commercial or financial
implified charge mechanism for low al e adding
intra gro p ser ices
The simplified approach for determining arm’s length charges for
l o w val u e- adding int ra- gro u p s ervic es is el ec t ive f o r t ax p ay ers ,
b u t s h o u l d b e ap p l ied as f ar as p rac t ic al o n a c o ns is t ent b as is
eit h er gro u p - w ide o r o n a regio nal o r divis io nal s u b gro u p .
Where a country has not adopted the simplified approach,
and as a consequence the MNE group complies with the local
requirements in that jurisdiction, such compliance would not
disqualify the MNE group from the application of the simplified
ap p ro ac h t o o t h er c o u nt ries .
3
See EY Gl o b al Tax Al ert , OECD releases discussion draft on low value-adding
intra-group services, dat ed 5 No vem b er 2014.
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Th e ap p ro ac h c o ns is t s o f t h e f o l l o w ing s t ep s :
• Application of the benefits test. While the service must provide
a benefit, a key advantage of the simplified approach is
t h at w h ere t h e MNE gro u p h as f o l l o w ed t h e gu idanc e o f t h e
simplified approach on documentation and reporting, this
should provide sufficient evidence that the benefits test is met.
Th u s , t h e t ax p ay er need o nl y dem o ns t rat e t h at as s is t anc e w as
provided rather than being required to specify individual acts
u ndert ak en t h at give ris e t o t h e c o s t s c h arged. A s ingl e annu al
invoice describing a category of services should suffice to
s u p p o rt t h e c h arge, and c o rres p o ndenc e o r o t h er evidenc e o f
individual acts should not be required.
• Det erm inat io n o f c o s t p o o l s :
• St ep 1: On an annu al b as is , c al c u l at e a p o o l o f c o s t s f o r
eac h c at ego ry o f l o w val u e- adding s ervic es inc u rred b y
gro u p m em b ers t h at c o ndu c t t h es e s ervic es . Th e c o s t p o o l
s h o u l d inc l u de direc t and indirec t c o s t s and w h ere rel evant
o verh ead c o s t s .
• Th e c o s t p o o l s h o u l d s ep arat el y ident if y p as s - t h ro u gh
c o s t s as no m ark - u p w il l b e ap p l ied f o r t h es e c o s t s .
• Th e c o s t p o o l s h o u l d ex c l u de c o s t s at t rib u t ab l e t o an inhouse activity benefitting solely the company conducting
t h e ac t ivit y , inc l u ding s h areh o l der ac t ivit ies .
• St ep 2: Ident if y and rem o ve f ro m t h e c o s t p o o l c o
t o s ervic es p erf o rm ed s o l el y o n b eh al f o f o ne o t h
c o m p any . Th es e c o s t s are s et as ide and b as ic al l y
as a s ep arat e c o s t p o o l t o b e al l o c at ed direc t l y t o
beneficiary of the service.
s t s rel at ing
er gro u p
t reat ed
th e
• Allocation of low value-adding service costs benefitting several
gro u p m em b ers u s ing al l o c at io n k ey s :
Documentation that taxpayers should prepare
and s mit in order to alif for the simplified
approach
An MNE group electing application of the simplified methodology
w o u l d need t o p rep are t h e f o l l o w ing inf o rm at io n and
documentation and make it available upon request to the tax
au t h o rit ies :
• A des c rip t io n o f t h e c at ego ries o f l o w val u e- adding int ra- gro u p
services provided, the (expected) benefits of such services
and t h e reas o ns s u b s t ant iat ing t h at s u c h s ervic es c o ns t it u t e
l o w val u e- adding s ervic es ; t h e rat io nal e f o r t h e p ro vis io n o f
s ervic es w it h in t h e c o nt ex t o f t h e MNE b u s ines s ; a des c rip t io n
o f t h e s el ec t ed al l o c at io n k ey s and t h e reas o ns s u b s t ant iat ing
t h at s u c h al l o c at io n k ey s res u l t in o u t c o m es t h at reas o nab l y
reflect the benefits received; and the profit mark-up used
• Writ t en c o nt rac t s o r agreem ent s f o r t h e p ro vis io n o f s ervic es
and any modifications to those contracts and agreements
• Do c u m ent at io n and c al c u l at io ns p res ent ing t h e det erm inat io n
of the cost pools and the application of the specified allocation
k ey s . Th is s h o u l d inc l u de a det ail ed l is t ing o f al l c at ego ries
and am o u nt s o f rel evant c o s t s , inc l u ding c o s t s f o r s ervic es
p ro vided s o l el y t o o ne gro u p m em b er
• Calculations showing the application of the specified allocation
k ey s
Co m p ared t o t h e dis c u s s io n draf t is s u ed in No vem b er 2014, t h e
final guidance includes a specific statement that “It is essential,
h o w ever, t h at rel iab l e do c u m ent at io n is p ro vided t o t h e t ax
adm inis t rat io n t o verif y t h at t h e c o s t s h ave b een inc u rred b y t h e
s ervic e p ro vider.”
• Sim il ar t o t h e general gu idanc e o n s ervic es , t h e al l o c at io n
keys should reflect the expected level of benefit.
• An al l o c at io n k ey s h o u l d b e ap p l ied c o ns is t ent l y ac ro s s a
t y p e o f s ervic e.
• Ap p l ic at io n o f a 5% m ark - u p o n al l c o s t s in t h e c o s t p o o l , w it h
t h e ex c ep t io n o f p as s - t h ro u gh c o s t s .
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Du p l ic at ive ac t ivit ies in general do
int ra- gro u p s ervic e. Th e revis ed gu
t h at any c o ns iderat io n o f p o t ent ial
s h o u l d anal y z e t h e nat u re o f s ervic
no t c o ns t it u t e an
idanc e m ak es c l ear
du p l ic at ive ac t ivit ies
es in det ail .
ithholding a
Ano t h er addit io n c o m p ared t o t h e No vem b er 2014
dis c u s s io n draf t is t h e inc l u s io n o f gu idanc e enc o u raging t ax
adm inis t rat io ns t o l im it any w it h h o l ding t ax es o n l o w val u e
adding services to the profit element in the charge. While
t h e ap p l ic at io n o f t h is s ec t io n w il l t y p ic al l y dep end o n t h e
specific local legislation and potential tax treaty provisions, the
c o m m ent h as an im p o rt ant s ignal ing f u nc t io n.
larifications of the meaning of shareholder
activities and duplicative costs
In addit io n t o t h e new gu idanc e o n l o w val u e- adding s ervic es ,
t h e new gu idanc e al s o c o nt ains c h anges in t h e general s ec t io ns
o n s ervic es . It p ro vides addit io nal ex am p l es regarding c o s t s
rel at ed t o s h areh o l der ac t ivit ies , inc l u ding c o s t s rel at ed t o s t o c k
exchange listings of the parent company; financial reporting and
au dit c o s t s c arried o u t in t h e int eres t o f t h e p arent c o m p any
or related to consolidated financial statements; costs related
t o inves t o r rel at io ns s u c h as c o m m u nic at io n s t rat egy ; c o s t s
rel at ed t o c o m p l ianc e o f t h e p arent c o m p any w it h t ax l aw s ; and
c o rp o rat e go vernanc e c o s t s .
Du p l ic at ive ac t ivit ies in general do no t c o ns t it u t e an int ra- gro u p
s ervic e. Th e revis ed gu idanc e m ak es c l ear t h at any c o ns iderat io n
o f p o t ent ial du p l ic at ive ac t ivit ies s h o u l d anal y z e t h e nat u re
o f s ervic es in det ail . As an ex am p l e, t h e f ac t t h at a c o m p any
p erf o rm s m ark et ing s ervic es in- h o u s e and al s o is c h arged f o r
m ark et ing s ervic es f ro m a gro u p c o m p any w o u l d no t o f it s el f
det erm ine du p l ic at io n, s inc e m ark et ing is a b ro ad t erm c o vering
m any l evel s o f ac t ivit y .
13 8
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A ctions 8 - 1 0
I mplications
The revised Chapter VII of the OECD Transfer
Pric ing Gu idel ines c o nt ains im p o rt ant gu idanc e
with respect to an elective, simplified transfer
p ric ing ap p ro ac h f o r l o w val u e- adding int ra- gro u p
services. This simplified approach has both
s im il arit ies and dif f erenc es rel at ive t o t h e rep o rt
o n l o w - val u e- adding int ra- gro u p s ervic es is s u ed
by the EU Joint Transfer Pricing Forum and to
ex is t ing regu l at io ns in c ert ain c o u nt ries .
Gl o b al b u s ines s es w il l w ant t o eval u at e t h e
im p l ic at io ns o f t h e gu idanc e f o r t h eir int ragro u p s ervic e arrangem ent s . Th e new gu idanc e
c o u l d p ro vide t h em an o p p o rt u nit y t o al l eviat e
t h e adm inis t rat ive b u rden w it h res p ec t t o s u c h
s ervic es .
E Y contacts
For additional information concerning
t h is Al ert , p l eas e c o nt ac t :
• Erns t & Y o u ng Bel as t ingadvis eu rs LLP
Trans f er Pric ing
Ro t t erdam
• Ro nal d van den Brek el
+ 31 8 8 407 9 016
ro nal d.van.den.b rek el @ nl .ey .c o m
• Erns t & Y o u ng
Trans f er Pric ing
Mel b o u rne
• Jean- Pau l Do nga
+ 61 3 9 28 8 8 065
j ean.p au l .do nga@ au .ey .c o m
• Erns t & Y o u ng LLP
Trans f er Pric ing
Ho u s t o n
• Kel l y Hal es
+ 1 7 13 7 50 8 141
k el l y .h al es @ ey .c o m
• Erns t & Y o u ng Advis o ry Servic es
(Pt y ) Lt d
Trans f er Pric ing
Jo h annes b u rg
• Michel Verhoosel
+ 27 11 502 039 2
m ic h el .verh o o s el @ z a.ey .c o m
lo al a
olic and ontro ers
riefing 13 9
BEPS Ac t io n 8 - 10:
Anal y s is
hat is the action tr ing
to achie e
oni
e an er sen
+ 1 202 327 627 6
monique.vanherksen@ey.com
Th e s t at ed o b j ec t ive o f BEPS Ac t io ns 8 - 10
is t o devel o p t rans f er p ric ing ru l es w h ic h
c reat e t rans f er p ric ing o u t c o m es in l ine
w it h val u e c reat io n, and in p art ic u l ar ru l es
t o p revent BEPS b y t rans f erring ris k s o r
m o ving int angib l es am o ng, o r al l o c at ing
ex c es s ive c ap it al t o , gro u p m em b ers , and b y
engaging in t rans ac t io ns w h ic h w o u l d no t ,
o r w o u l d o nl y very rarel y , o c c u r b et w een
t h ird p art ies . To ac h ieve t h es e res u l t s , t h e
Final Reports give significant importance to a
new l y int ro du c ed c o nc ep t c al l ed “ ac c u rat el y
del ineat ing t h e c o nt ro l l ed t rans ac t io n.”
This requires careful identification of the
ec o no m ic al l y rel evant c h arac t eris t ic s o r
c o m p arab il it y f ac t o rs in o rder t o t es t , in
es s enc e, w h et h er t h e t rans ac t io n b et w een
associated enterprises is sufficiently realistic
c o m p ared t o w h at indep endent ent erp ris es
w o u l d h ave do ne.
A new s ix - s t ep f ram ew o rk is int ro du c ed f o r
anal y z ing w h ic h gro u p m em b er as s u m es t h e
ris k in a c o nt ro l l ed t rans ac t io n in o rder t o
“ ac c u rat el y del ineat e” t h e ac t u al t rans ac t io n.
In cases where a transaction qualifies as
c o m m erc ial l y irrat io nal , t h e s t ru c t u re o f
the transaction may be modified or the
t rans ac t io n m ay no t b e rec o gniz ed in it s
ent iret y b y t h e t ax au t h o rit ies . Regarding
int angib l es , t h ere is new gu idanc e o n t h e
t rans f er o r u s e o f int angib l es t h at s erves
t o ens u re t h at m em b ers o f a MNE are
c o m p ens at ed b as ed o n val u e t h ey c reat e
t h ro u gh f u nc t io ns p erf o rm ed, as s et s u s ed
and ris k s as s u m ed in t h e devel o p m ent ,
enh anc em ent , m aint enanc e, p ro t ec t io n and
ex p l o it at io n o f int angib l es . Th is gu idanc e
in p art ic u l ar ex p l ic it l y p ro vides t h at
f u nding o f t h e devel o p m ent , enh anc em ent ,
m aint enanc e, p ro t ec t io n o r ex p l o it at io n
(“ DEMPE” ) o f an int angib l e b y an ent it y
t h at do es no t p erf o rm any o f t h e im p o rt ant
f u nc t io ns in rel at io n t o t h e int angib l e, and
does not exercise control over the financial
14 0
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ris k , w il l generat e no m o re t h an a ris k - f ree
ret u rn. Th ere is al s o gu idanc e o n l o w val u eadding s ervic es t o addres s t h e t reat m ent o f
management fees and head office expenses.
W ere any of the action
recommendations
ne pected
So m e o f t h e rec o m m endat io ns c an b e
c o ns idered s o m ew h at c o nt ro vers ial , o r in
any c as e m o re ex p l ic it and f o rm al iz ed t h an
t h ey w ere b ef o re. Th is is b ec au s e t h ey
are no w inc l u ded in t h e OECD Trans f er
Pric ing Gu idel ines , w h ereas p revio u s l y
t h ey c o u l d b e c o ns idered as m o re o r l es s
inc ident al t ax au t h o rit y p o s it io ns , b u t no t
nec es s aril y as gl o b al l y ap p l ic ab l e t rans f er
pricing concepts. First of all, the somewhat
t radit io nal as s u m p t io n t h at l egal o w ners h ip
o f int angib l es m erit s t h e al l o c at io n o f (al l )
res idu al int angib l e inc o m e is deb u nk ed in t h e
new gu idanc e. It is no w ex p l ic it l y s t at ed t h at
l egal o w ners h ip al o ne do es no t det erm ine
ent it l em ent t o ret u rns f ro m t h e ex p l o it at io n
o f int angib l es .
Furthermore, the concept of assuming risk in
rel at io n t o t h e devel o p m ent , m aint enanc e,
enh anc em ent , p ro t ec t io n and ex p l o it at io n
o f int angib l es w il l o nl y b e ac c ep t ed in c as es
w h ere t h ere is de f ac t o c o nt ro l o ver t h e ris k s
and there is financial capacity to assume
t h e ris k . Th is , in addit io n t o t h e c o nc ep t
o f ac c u rat el y del ineat ing t h e c o nt ro l l ed
t rans ac t io n, m o s t l ik el y m eans t h at even
c l o s er s c ru t iny w il l ap p l y t o int angib l e inc o m e
al l o c at io n t h an w e h ave s een b ef o re. As
regards h ard- t o - val u e int angib l es , it h as
been clarified that ex post outcomes may
b e c o ns idered b y t ax adm inis t rat io ns as
p res u m p t ive evidenc e o f t h e ap p ro p riat enes s
of ex ante pricing. This is a clarification and
argu ab l y go es f u rt h er t h an t h e p revio u s
gu idanc e o n t h e u s e o f p ric e adj u s t m ent
c l au s es if u nrel at ed p art ies w o u l d h ave
c o ns idered t h o s e. Al s o , t h e p o s it io n t h at
t h e m ere f u nding o f t h e devel o p m ent ,
einforced standards
See p age 32 f o r m o re
inf o rm at io n.
enh anc em ent , m aint enanc e, p ro t ec t io n o r ex p l o it at io n o f an
int angib l e b y an ent it y in and o f it s el f do es no t at t rac t m o re t h an
a ris k - f ree ret u rn, u nl es s im p o rt ant f u nc t io ns in rel at io n t o t h e
int angib l e are al s o p erf o rm ed, is an ex p l ic it c h ange t h at m ay no t
h ave b een ex p ec t ed b y every o ne.
I s there any interaction between this
action and the others
Yes, the transfer pricing-specific rules fit hand-in-glove in with
t h e o t h er BEPS Ac t io n it em s t o redu c e b as e ero s io n. So m e o f t h e
ru l es devel o p ed u nder o t h er Ac t io ns w il l b e p art ic u l arl y rel evant
in terms of the increased reporting requirements and heightened
s c ru t iny t h ey h ave p l ac ed o n int erc o m p any t rans ac t io ns . 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 is a direc t c o ro l l ary ac t io n it em in t h is res p ec t . Th e
refined rules on arm’s length income allocation developed under
Actions 8-10 will be relevant for Action 7 (artificial avoidance
of PE status) and are an immediate issue for CFCs (Action 3) as
w el l . Bec au s e t rans f er p ric ing is s u es are l ik el y t o b e t h e c au s e o f
(c ro s s - b o rder) dis p u t es , Ac t io n 14 o n dis p u t e res o l u t io n w il l b e
rel evant and (great l y ) im p ac t ed b y Ac t io ns 8 - 10 as w el l .
a e an co ntries made specific
comments in relation to this action
The transfer pricing Action items received a significant number
o f c o m m ent s w h en t h ey w ere is s u ed in draf t . No w t h at t h e
Final Reports have been issued, there may be more comments,
b u t t h ey w il l l ik el y f o c u s m o re o n h o w t h e new gu idanc e w il l
be interpreted and implemented. For example, the Dutch State
Secretary of Finance issued a letter on October 5, 2015, setting
o u t h o w t h e Net h erl ands w il l im p l em ent / int erp ret t h e t rans f er
1
p ric ing Ac t io n it em s . Th e l et t er s aid t h at t h e go vernm ent
ex p ec t s t o m ak e f ew c h anges t o it s t rans f er p ric ing regu l at io ns ,
b ec au s e t h ey al ready l argel y int erp ret t h e arm ’ s l engt h s t andard
u nder t h e new gu idanc e.
hat s going to happen ne t, and how
niform might implementation e
It is expected that the final transfer pricing Action items will
b e im p l em ent ed in t h e do m es t ic l aw o f m any c o u nt ries , eit h er
b ec au s e t h eir l egis l at io n al ready inc o rp o rat es t h e OECD Trans f er
8 - 10
Pric ing Gu idel ines b y ref erenc e o r b ec au s e t h ey w il l im p l em ent
the final text and principles into domestic law by way of separate
dec rees , l aw s o r c irc u l ars . Th is at l eas t ap p l ies f o r t h e G20/ OECD
m em b er c o u nt ries .
W hat are the potential impacts on
siness
Th e m o s t im m ediat e im p ac t o f Ac t io ns 8 - 10 o n MNEs w il l
l ik el y f o c u s o n t h e need t o ac c u rat el y del ineat e t h eir c o nt ro l l ed
transactions, which will require companies to conduct a far more
t h o ro u gh f u nc t io nal anal y s is t h an w h at w as as s u m ed ac c ep t ab l e
b ef o re, and t h en redu c e t h at t o p ro p er do c u m ent at io n w it h
p ers u as ive c o m p arab l es if t h ey w ant t o redu c e c o nt ro vers y
and adj u s t m ent ex p o s u re. Th is do es no t nec es s aril y m ean
t h at a c o m p any w il l need t o revis e it s t rans f er p ric ing/ val u e
c h ain s t ru c t u re as s u c h , b u t it do es m ean t h at w it h o u t s u c h
del ineat io n and t h o ro u gh do c u m ent at io n, t h ere are l ik el y t o b e
m any m o re c h al l enges t o t h e int erc o m p any inc o m e al l o c at io n.
To the extent there is insufficient support for income allocation
or there is insufficient evidence that the transaction is realistic,
int erc o m p any p ay m ent s m ay b e dis al l o w ed o r even rec h arac t eriz ed, l eading p o t ent ial l y t o do u b l e t ax at io n.
Int angib l es w il l b e h igh l y s c ru t iniz ed, b u t int erc o m p any
headquarter and service charges are likely to be reviewed
and c h al l enged as w el l if t h e c o s t t h ereo f are s een as
dis p ro p o rt io nal l y h igh b y t h e t ax au t h o rit ies o f t h e c o u nt ry
o f res idenc e o f t h e MNE m em b er t h at is t h e rec ip ient o f t h e
s ervic es . It c an b e ex p ec t ed t h at l o c al c o s t s f o r c o m p arab l e
s ervic es w il l b e c o ns idered rel evant evidenc e in m eas u ring
dis p ro p o rt io nal it y even t h o u gh f ew MNEs w o u l d w ant t o
o u t s o u rc e HQ and int erc o m p any s ervic es t o s everal dif f erent
ex t ernal p art ies .
We rec o m m end t h at any ent erp ris e w it h c ro s s - b o rder
int erc o m p any t rans ac t io ns s p end t h e nec es s ary t im e and
ef f o rt t o anal y z e it s t rans f er p ric ing p o l ic y , s t ru c t u re and
do c u m ent at io n, and ens u re t h at it s t rans f er p ric ing s t u dies
are updated to reflect an awareness/integration of the new
explicit requirements. Not doing so in advance may result in
inadequate time to prepare for audits as well as an increased
risk of significant double taxation and disallowed intercompany
c h arges , w h ic h in t u rn m ay c reat e an au dit h is t o ry t h at in and o f
it s el f m ay s erve t o at t rac t m o re au dit s in o t h er j u ris dic t io ns .
1
See EY Gl o b al Tax Al ert , Dutch State Secretary of Finance outlines vision
concerning BEPS and Dutch tax policy, dat ed 7 Oc t o b er 2015.
lo al a
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ction
11
OECD releases final
rep o rt o n m eas u ring and
m o nit o ring BEPS u nder
Ac t io n 11
Executive summary
On 5 Oc t o b er 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) released its final report on measuring and monitoring BEPS (Action 11) under
its Action Plan on Base Erosion and Profit Shifting (BEPS). This report was released in a
package that included final reports on all 15 BEPS Actions.
Th e do c u m ent , Measuring and Monitoring BEPS (the Final Report), does not include any
new p ro p o s al s f o r c h anging int ernat io nal t ax ru l es ; rat h er it is f o c u s ed o n m eas u ring
t h e s iz e and ex t ent o f BEPS ac t ivit ies . Ac t io n 11 is int ended t o es t im at e t h e s iz e o f
BEPS, t o ident if y indic at o rs o f BEPS, and t o p ro vide rec o m m endat io ns f o r im p ro ving
t h e m eas u rem ent o f BEPS. Th e rep o rt es t im at es t h at BEPS redu c es gl o b al c o rp o rat e
income tax revenue by 4%-10% (i.e., US$100 billion to US$240 billion annually).
The six indicators of BEPS identified in the Final Report are: (1) the concentration of
foreign direct investment (FDI) relative to gross domestic product (GDP), (2) the profit
rates of multinational enterprise (MNE) affiliates in low-tax countries compared to
those in high-tax countries, (3) the profit rates of MNE affiliates in low-tax countries
compared with the profit rate of their own MNE groups (4) the effective tax rates of
MNEs c o m p ared t o t h o s e o f do m es t ic - o nl y ent erp ris es , (5) t h e s ep arat io n o f int angib l e
p ro p ert y f ro m t h e l o c at io n o f it s p ro du c t io n, and (6) t h e c o nc ent rat io n o f deb t in MNE
affiliates located in higher-tax rate countries. The Final Report recommends greater
c o o p erat io n b et w een t h e OECD and t ax ing au t h o rit ies in t h e c o l l ec t io n and s h aring o f
data. It also identifies several additional measures of BEPS that will become possible
u s ing t h e dat a c o l l ec t ed u nder Ac t io ns 5 (h arm f u l t ax p rac t ic es ), 12 (dis c l o s u re o f
aggres s ive t ax p l anning), and 13 (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).
1
The Final Report is very similar to the discussion draft issued in April 2015. Th e
major differences from the draft are the addition of section providing a quantitative
estimate of the scale of BEPS and a greater recognition of the difficulty of establishing
a “counterfactual” with respect to how the identified BEPS indicators would look in a
w o rl d w it h o u t BEPS ac t ivit ies .
1
See EY Gl o b al Tax Al ert , OECD issues discussion draft on economic analysis of base erosion and profit
shifting under BEPS Action 11, dat ed 22 Ap ril 2015.
14 2
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A ction 1 1
Lim it ed go vernm ent c ap ac it y f o r anal y z ing t h e dat a
al ready c o l l ec t ed b y t ax au t h o rit ies w as dem o ns t rat ed
b y t h e f ac t t h at o nl y 8 o u t o f 37 c o u nt ries s u rvey ed
b y t h e OECD c o u l d rep o rt t h e t o t al am o u nt o f t ax
revenu e c o l l ec t ed f ro m MNEs in t h eir j u ris dic t io ns .
Detailed discussion
Ac t io n 11 is dif f erent f ro m o t h er BEPS ac t io n it em s b ec au s e it
is f o c u s ed o n m eas u ring BEPS ac t ivit y rat h er t h an c o rrec t ing it .
The Final Report covers an assessment of existing data sources
f o r BEPS anal y s is , indic at o rs o f BEPS, m eas u ring t h e s c al e and
im p ac t o f BEPS, and rec o m m endat io ns f o r im p ro ving dat a and
m o nit o ring o f BEPS.
ssessment of data so rces for
analysis
The Final Report acknowledges that analysis of BEPS is
es p ec ial l y c h al l enging in t erm s o f dat a b ec au s e t h e s t rat egies
u s ed t o ac h ieve w h at m ay b e c o ns idered t o b e BEPS are o f t en
complex and may involve financial entities and transactions
t h at are no t p u b l ic l y rep o rt ed. By it s nat u re, BEPS is no t direc t l y
o b s ervab l e and m u s t b e es t im at ed f ro m avail ab l e dat a. Th is
is m ade m o re c h al l enging b y t h e need t o s ep arat e BEPS f ro m
what the OECD calls “real economic effects.” The Final Report
indic at es t h at s o m e o f t h e go vernm ent inves t igat io ns int o BEPS
ac t ivit ies b y MNEs h ave h igh l igh t ed t h e l im it at io ns o f t h e p u b l ic
data by demonstrating the significance of data that is not public.
Even t h e t ax dat a direc t l y c o nt ro l l ed b y go vernm ent s is o f t en no t
m ade p u b l ic in a f o rm u s ef u l f o r anal y s is . Lim it ed go vernm ent
c ap ac it y f o r anal y z ing t h e dat a al ready c o l l ec t ed b y t ax
au t h o rit ies w as dem o ns t rat ed b y t h e f ac t t h at o nl y 8 o u t o f 37
c o u nt ries s u rvey ed b y t h e OECD c o u l d rep o rt t h e t o t al am o u nt
o f t ax revenu e c o l l ec t ed f ro m MNEs in t h eir j u ris dic t io ns .
B EP S I ndicators
Wh il e ac k no w l edging t h e s erio u s s h o rt c o m ings o f t h e avail ab l e
data, the Final Report proposes six indicators of BEPS activities.
Co l l ec t ivel y , t h es e s ix indic at o rs are int ended t o f o rm a
“ das h b o ard” t h at c an as s is t p o l ic y m ak ers in m o nit o ring t h e
direc t io n o f c h ange in BEPS ac t ivit ies o ver t im e.
The six indicators of BEPS identified in the report are: (1) the
concentration of FDI relative to GDP, (2) the profit rates of
MNE affiliates in low-tax countries compared to those in hightax countries, (3) the profit rates of MNE affiliates in low-tax
countries compared with the profit rate of their own MNE
gro u p s (4) t h e ef f ec t ive t ax rat es o f MNEs c o m p ared t o t h o s e
o f do m es t ic - o nl y ent erp ris es , (5) t h e s ep arat io n o f int angib l e
p ro p ert y f ro m t h e l o c at io n o f it s p ro du c t io n, and (6) t h e
concentration of debt in MNE affiliates located in higher-tax
rat e c o u nt ries .
C oncentration of F DI relative to GDP
This indicator compares the average ratio of FDI to GDP for
countries with the highest ratios to the FDI to GDP ratios for
other countries. The rationale provided in the Final Report is
t h at GDP is a m eas u re o f real ec o no m ic ac t ivit y t ak ing p l ac e
in a country and FDI is a measure of foreign investment within
related groups of companies. High concentrations of FDI relative
t o GDP t h eref o re c o u l d indic at e f o reign inves t m ent b y MNEs t h at
is no t p ro p o rt io nal t o real ec o no m ic ac t ivit y t ak ing p l ac e in t h at
country. The OECD uses a group of 14 high FDI to GDP countries
to form the numerator of the ratio while 200 lower FDI to GDP
countries form the denominator. The Final Report says that
t h is indic at o r m o re t h an do u b l ed in val u e f ro m 2005 t o 2012,
s u gges t ing an inc reas e in BEPS ac t ivit y . Ho w ever, am o ng t h e
l im it at io ns o f t h is indic at o r is t h at it inc l u des no m eas u re o f t ax
p o l ic y dif f erenc es and do es no t c o nt ro l f o r no n- BEPS reas o ns f o r
increased FDI concentration.
lo al a
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A ction 1 1
The Final Report says that the average large MNE
affiliate had an ETR 3.3 percentage points lower
t h an c o m p arab l e do m es t ic ent it ies . Th is indic at o r h as
dec l ined f ro m a h igh o f 4.5 p erc ent age p o int s in 2001
t o a dif f erenc e o f 3.3 p erc ent age p o int s in t h e m o s t
rec ent l y avail ab l e y ear, 2010.
rofit rates of
affiliates in low ta co ntries
compared to those in high ta co ntries
Effective tax rates of MNEs compared to those of
domestic- only enterprises
This indicator compares the distribution of profits within each
MNE group’s affiliates between low profit rate affiliates and
high profit rate affiliates, and between those with low effective
t ax rat es (ETRs ) and t h o s e w it h h igh ETRs , f o rm ing a t w o - b y two matrix. The rationale provided in the Final Report is that a
concentration of an MNE’s profits in its affiliates with the lowest
ETRs could be a result of BEPS activity. The Final Report says
that the lower ETR and higher profit quadrant accounts for 45%
o f t o t al inc o m e and t h at t h is indic at o r h as inc reas ed in val u e b y
32% f ro m 2007 t o 2011. Ho w ever, t h e m o s t s erio u s l im it at io n o f
this indicator is that random year-to-year variation in profit rates
w o u l d al s o res u l t in a l arger p ro p o rt io n o f inc o m e ac c ru ing t o
affiliates in the lower ETR and higher profit quadrant. This does
no t m ean t h at t h is indic at o r c o u l d no t c ap t u re BEPS b eh avio r,
b u t w it h o u t a go o d c o u nt erf ac t u al es t im at e o f w h at t h is indic at o r
would show in the absence of BEPS it is difficult to interpret.
This indicator compares the ETRs of large MNE affiliates with
domestic-only enterprises using a regression equation. The
rationale in the Final Report for this indicator is that if two
entities, one an MNE affiliate and the other not, are otherwise
s im il ar and y et h ave dif f erent ETRs , t h is indic at es t h at t h e MNE
affiliate may be using hybrid mismatch arrangements or other
BEPs measures to reduce its tax expense. The Final Report says
that the average large MNE affiliate had an ETR 3.3 percentage
p o int s l o w er t h an c o m p arab l e do m es t ic ent it ies . Th is indic at o r
h as dec l ined f ro m a h igh o f 4.5 p erc ent age p o int s in 2001
t o a dif f erenc e o f 3.3 p erc ent age p o int s in t h e m o s t rec ent l y
avail ab l e y ear, 2010. Ho w ever, in addit io n t o t h e l im it at io ns
im p o s ed b y t h e l im it ed avail ab il it y o f rel evant dat a, t h ere are
m any no n- BEPS rel at ed dif f erenc es b et w een MNE and no n- MNE
affiliated entities that may affect their ETRs, such as their capital
int ens it y , p ro du c t ivit y , and u s e o f avail ab l e l o c al p ref erent ial
t ax t reat m ent s .
rofit rates of
affiliates in low ta co ntries
compared with the profit rate of their glo al gro ps
This indicator compares the profit rate of MNE affiliates in
low-tax rate jurisdictions with the MNE’s worldwide profit rate.
The rationale in the Final Report for this indicator is that profit
shifting to low-tax rate jurisdictions should result in higher profit
rates (measured as profits/assets) than the MNE’s worldwide
profit rate. The Final Report shows that the ratio of the profit
rate of affiliates in lower-tax countries to MNEs’ worldwide profit
rat e is 1.9 in 2007 and ris es t o 2.0 in 2011. Ho w ever, am o ng t h e
l im it at io ns o f t h is indic at o r is t h at it c o u l d o nl y b e c al c u l at ed f o r
17 1 o f t h e l arges t MNEs , m ak ing it u s ef u l as a m eas u re f o r t h is
gro u p b u t o f u nc ert ain val u e as an indic at o r f o r t h e b ro ader s et
o f al l MNEs .
14 4
lo al a
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eparation of intangi le assets from the location of
their production
Th is indic at o r c o m p ares t h e c o nc ent rat io n o f ro y al t y rec eip t s
rel at ive t o res earc h and devel o p m ent (R& D) s p ending. It is
c al c u l at ed b y c o m p aring t h e rat io o f ro y al t y p ay m ent s t o R& D
s p ending in a gro u p o f h igh - rat io c o u nt ries t o t h e average rat io
for the other countries in the sample. The rationale in the Final
Rep o rt f o r t h is indic at o r is t h at m o ving int angib l e p ro p ert y f ro m
it s p l ac e o f o rigin t o a l o w er- t ax j u ris dic t io n f ac il it at es BEPS
and t h at t h eref o re m is m at c h es b et w een t h e l o c at io n o f R& D
spending and royalties may indicate BEPS. The Final Report says
t h at t h is indic at o r f el l f ro m 2.8 in 2005 t o 2.7 in 2009 b ef o re
inc reas ing t o 5.8 in 2011. Ho w ever, am o ng t h e l im it at io ns o f t h is
indic at o r is t h at t h e s u dden do u b l ing o f t h e indic at o r o ver t w o
y ears is no t f u l l y ex p l ained. Th ere w ere a t o t al o f 59 c o u nt ries
u s ed in t h e anal y s is , o f w h ic h o nl y f o u r w ere t h e h igh - rat io
c o u nt ries t h at m ak e u p t h e nu m erat o r o f t h is indic at o r, m ak ing
t h e indic at o r h igh l y s ens it ive t o any c h anges in t h is s m al l s et
o f c o u nt ries . Th e h igh - rat io c o u nt ries c o l l ec t ivel y ac c o u nt ed
f o r o nl y 3% o f ro y al t ies f o r t h e 59 c o u nt ries , m ak ing it u nc l ear
w h at t h e m agnit u de o f t h is BEPS c h annel m igh t b e. In addit io n,
ro y al t ies are al s o p aid o n int angib l e p ro p ert y s u c h as t radem ark s
and b rands t h at are no t general l y t h e p ro du c t s o f R& D s p ending.
A ction 1 1
oncentration of de t in
higher ta rate co ntries
affiliates located in
This indicator compares the interest-to-income ratio of affiliates
in h igh er s t at u t o ry t ax rat e and l o w er s t at u t o ry t ax rat e
countries. The rationale in the Final Report for this indicator
is that MNEs may strategically allocate debt to their affiliates
in c o u nt ries w it h t ax rat es h igh er t h an t h e average f o r t h eir
w o rl dw ide gro u p in o rder t o redu c e t h eir w o rl dw ide t ax l iab il it y .
The Final Report says that affiliates with above average interestt o - inc o m e rat io s , l o c at ed in c o u nt ries w it h s t at u t o ry t ax rat es
ab o ve t h e average f o r t h e MNE’ s w o rl dw ide gro u p , h ad int eres t t o - inc o m e rat io s o f 29 %. Th is w as 19 p erc ent age p o int s ab o ve
average for all affiliates. The OECD therefore calculates this
indic at o r t o b e 19 p erc ent age p o int s . Ho w ever, t h is indic at o r
h as o ne o f t h e s am e l im it at io ns as t h e s ec o nd indic at o r, nam el y
that affiliates with above average interest-to-income ratios will,
by definition, have higher income-to-interest ratios, so a finding
t h at t h is is t h e c as e is no t nec es s aril y evidenc e o f BEPS. Th e
o t h er l im it at io n o f t h is indic at o r is t h at al l ent erp ris es , b o t h
MNE and no n- MNE, h ave an inc ent ive t o inc reas e t h eir u s e o f
debt financing as statutory tax rates increase, so a finding that
affiliates in higher tax-rate countries have higher interest-toinc o m e rat io s is al s o no t nec es s aril y evidenc e o f BEPS. Tak en
together, these limitations make it difficult to know what the
val u e o f t h is indic at o r w o u l d b e in t h e ab s enc e o f BEPS.
This section of the Final Report concludes with a discussion
o f t w o addit io nal indic at o rs t h at m ay b ec o m e p o s s ib l e w it h
improved data availability. The first is profits compared to tax
rates for the MNE’s operations in its headquarters country and in
its foreign affiliates. The second is differential rates of return for
FDI made by special purpose entities (SPEs).
oward meas ring the scale and
economic impact of B EP S and
countermeasures
Th e m eas u rem ent o f BEPS w il l never b e s t raigh t f o rw ard.
Measuring BEPS will require sophisticated econometric
techniques to separate BEPS activities from non-BEPS activities
u ndert ak en b y MNEs . Sh if t ing real ec o no m ic ac t ivit y f ro m o ne
c o u nt ry t o ano t h er in res p o ns e t o dif f erenc es in t ax rat es is
not BEPS, but artificial arrangements that shift taxable income
w it h o u t s h if t ing real ec o no m ic ac t ivit y are c o ns idered BEPS
by the Final Report. The challenge for economists seeking to
es t im at e t h e m agnit u de o f BEPS is dis t ingu is h ing b et w een t h es e
two types of behavior while relying on financial and tax data.
A f u rt h er c h al l enge is det erm ining w h ic h ec o no m ic ac t ivit ies
generate profits and where those economic activities are taking
p l ac e. Every anal y s is o f BEPS h as t o m ak e c h o ic es o n t h es e
issues. The OECD’s analysis in the Final Report uses company
assets as described in financial accounting to determine the
location of activities and to calculate profit rates.
The Final Report surveys the academic literature on BEPS
and finds that it provides strong evidence for the existence
o f BEPS b eh avio rs . Us ing a w ide variet y o f dat a s o u rc es f ro m
m u l t ip l e c o u nt ries , res earc h ers h ave f o u nd evidenc e o n t h e
m agnit u de o f BEPS s u p p o rt ing a range o f es t im at es f ro m 5%
to 30% of MNE profits. Another notable finding is that BEPS
m ay h ave a m u c h great er im p ac t o n t h e c o rp o rat e inc o m e t ax
revenu e o f devel o p ing c o u nt ries as o n devel o p ed c o u nt ries . Th e
International Monetary Fund (IMF) estimated that BEPS reduces
c o rp o rat e inc o m e t ax revenu e gl o b al l y b y 5% and in devel o p ing
c o u nt ries b y 13%. Th e Unit ed Nat io ns Co nf erenc e o n Trade and
Devel o p m ent s im il arl y es t im at ed t h at BEPS redu c ed c o rp o rat e
inc o m e t ax revenu e gl o b al l y b y 8 % and in devel o p ing c o u nt ries
b y 7 .5- 14%.
Th e OECD’ s o w n es t im at e o f t h e gl o b al c o rp o rat e inc o m e t ax
revenu e l o s s f ro m BEPS u s es t h e s am e dat a s o u rc es as t h e
OECD’s six BEPS indicators introduced in the Final Report. The
es t im at e is t h e s u m o f t w o s ep arat e ec o no m et ric m o del s t h at
attempt to control for a variety of factors that may influence
an MNE affiliate’s profits so as to isolate the effect of BEPS
behaviors. The first model is intended to measure the corporate
income tax (CIT) revenues lost from profit shifting, and is similar
t o t h e t h ird BEPS Indic at o r. Th e s ec o nd m o del is int ended
lo al a
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A ction 1 1
The Final Report does not provide individual estimates
o f t h e CIT revenu e t h at c o u l d b e rais ed b y eac h o f t h e
BEPS Ac t io n It em s , b u t it review s t h e ex is t ing l it erat u re
o n eac h o ne and, w h ere t h e OECD h as do ne it s o w n
anal y s is , p ro vides it s es t im at es as w el l .
t o m eas u re CIT revenu e l o s t f ro m MNEs ’ u s e o f m is m at c h es
b et w een t ax s y s t em s and t h eir rel at ive u s e o f do m es t ic t ax
p ref erenc es . It is s im il ar t o t h e f o u rt h BEPS Indic at o r. Bo t h are
based on financial accounting data and define profit as a return
o n as s et s . Th es e es t im at es are c o m b ined t o reac h t h e OECD’ s
es t im at e o f t h e gl o b al CIT revenu e l o s t t o BEPS at 4%- 10% (i.e.,
US$100 billion to US$240 billion annually).
The Final Report does not provide individual estimates of the CIT
revenu e t h at c o u l d b e rais ed b y eac h o f t h e BEPS Ac t io n It em s ,
b u t it review s t h e ex is t ing l it erat u re o n eac h o ne and, w h ere t h e
OECD h as do ne it s o w n anal y s is , p ro vides it s es t im at es as w el l .
• Action 2 — Neutralizing the effects of hybrid mismatch
arrangements: Th e OECD es t im at es t h at l arge MNEs h ave
average ef f ec t ive t ax rat es 2.5 t o 5 p erc ent age p o int s l o w er
t h an s im il ar do m es t ic c o m p anies . Th is es t im at e c o m es f ro m
o ne o f t h e t w o m o del s t h at c o m p ris e t h e OECD’ s es t im at e o f
gl o b al CIT revenu e l o s t t o BEPS. By t h is es t im at e, Ac t io n 2
w o u l d addres s ro u gh l y h al f o f al l CIT revenu es l o s t t o BEPS.
• Action 3 — Strengthening CFC rules: The Final Report indicates
that research has found that controlled foreign company (CFC)
ru l es c an redu c e p as s ive inves t m ent s in l o w - t ax c o u nt ries and
reduce the activity of MNE affiliates in “tax haven” countries.
• Action 4 — Limit base erosion via interest deductions: The Final
Rep o rt review s an ex t ens ive l it erat u re s h o w ing evidenc e o f
greater use of leverage by MNE affiliates in high-tax countries.
Anal y s es o f Germ an int eres t l im it at io n ru l es are des c rib ed as
reducing the use of debt financing. The OECD estimates that
MNE affiliates raise their debt/equity ratios by 1.3% for every
1% inc reas e in t h eir s t at u t o ry c o rp o rat e t ax rat e ab o ve t h e
average affiliate tax rate for that MNE group.
• Action 6 — Prevent treaty abuse: The Final Report describes
o ne rec ent p iec e o f res earc h t h at f o u nd t reat y s h o p p ing
redu c es t h e w it h h o l ding ef f ec t ive t ax rat e f ro m nearl y 8 %
t o 3%.
• Actions 8-10 — Assure that transfer pricing outcomes are in
line with value creation: The Final Report describes research
s h o w ing t h at a 1% dif f erenc e in t ax rat es p ro du c es a 2%
increase in intra-firm import prices relative to non-intra-firm
go o ds . Evidenc e o n t h e m igrat io n o f int el l ec t u al p ro p ert y t o
l o w - t ax c o u nt ries is des c rib ed. Th e OECD’ s anal y s is in t h e
Final Report finds that the tax sensitivity of profit shifting is
al m o s t t w ic e as l arge f o r MNEs w it h p at ent s as it is f o r t h o s e
w it h o u t p at ent s .
14 6
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This section of the Final Report concludes with a discussion
o f t h e t ax inc idenc e and real ec o no m ic ef f ec t s o f BEPS
c o u nt erm eas u res . Th e dis c u s s io n is t h eo ret ic al and c o nc l u des
t h at , t o t h e ex t ent BEPS c o u nt erm eas u res s u c c eed in rais ing
t h e ETRs o f MNEs , c ap it al o w ners w il l l argel y p ay t h e c o s t and
real ec o no m ic ac t ivit y w il l dec l ine s o m ew h at in c o u nt ries t h at
rec o ver t h e m o s t t ax revenu e. Th e l es s c o m p et it ive t h e m ark et s
MNEs c o m p et e in are, t h e m o re t h e t ax inc idenc e w il l f al l
s o l el y o n c ap it al o w ners and t h e l es s real ec o no m ic ac t ivit y w il l
b e af f ec t ed.
T oward better data and tools for
monitoring
in the f t re
The final section of the Report offers six recommendations
t o im p ro ve t h e dat a and anal y t ic al t o o l s avail ab l e f o r t h e
u nders t anding o f BEPS and BEPS c o u nt erm eas u res .
(1) Th e OECD s h o u l d w o rk w it h c o u nt ries t o p u b l is h new
c o rp o rat e t ax s t at is t ic s rel evant t o BEPS anal y s is o n an
int ernat io nal l y c o ns is t ent b as is . Am o ng t h e dat a inc l u ded
s h o u l d b e aggregat ed and ano ny m iz ed dat a c o l l ec t ed u nder
t h e c o u nt ry - b y - c o u nt ry rep o rt ing p ro vided f o r in Ac t io n 13.
(2) Th e OECD s h o u l d w o rk w it h go vernm ent s t o p ro du c e
p erio dic rep o rt s o n t h e es t im at ed revenu e im p ac t s o f
p ro p o s ed and enac t ed BEPS c o u nt erm eas u res .
(3) Th e OECD s h o u l d c o nt inu e t o p ro du c e BEPS Indic at o rs t o
m o nit o r BEPS and BEPS c o u nt erm eas u res .
(4) Go vernm ent s s h o u l d im p ro ve t h e p u b l ic rep o rt ing o f
b u s ines s t ax revenu e s t at is t ic s .
(5) Go vernm ent s s h o u l d im p ro ve t h e no n- t ax dat a rel evant
for BEPS analysis on such topics as FDI, SPEs, and trade in
s ervic es and int angib l e p ro p ert y .
(6) Go vernm ent s s h o u l d s u p p o rt BEPS res earc h b y ac adem ic
and go vernm ent ec o no m is t s .
A ction 1 1
I mplications
The element of the Final Report that attracts
the most attention is likely to be its quantitative
es t im at e o f t h e CIT revenu e l o s t t o BEPS. Th e
range o f 4%- 10% o f gl o b al CIT is f airl y b ro ad
and enc o m p as s es earl ier es t im at es b y t h e
International Monetary Fund and the United
Nat io ns . It is ex p ec t ed t h at t h is es t im at e w il l b e
quoted in discussions regarding BEPS.
If t h e OECD’ s m et h o do l o gies f o r m eas u ring BEPS
b ec o m e ac c ep t ed, a m o re s u b t l e im p l ic at io n
of the analysis in the Final Report could be an
im p l ic it ac c ep t anc e o f as s et s as t h e k ey f ac t o r o f
production in assessing where profits are earned.
Sim il ar m et h o do l o gies c o u l d b e devel o p ed b as ed
o n l ab o r, s al es , o r s o m e o t h er f ac t o rs . Th e OECD’ s
c h o ic e t o no t dis c u s s t h es e o t h er p o s s ib il it ies
c o u l d b e revis it ed b y go vernm ent s o r o t h er
s t ak eh o l ders .
E Y contacts
For additional information concerning
t h is Al ert , p l eas e c o nt ac t :
• Erns t & Y o u ng LLP
Q u ant it at ive Ec o no m ic s and St at is t ic s
Was h ingt o n, DC
• Bo b Carro l l
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Another possible result of the Final Report
is t h e u s e o f t h e OECD’ s BEPS Indic at o rs as
t o o l s t o ex am ine individu al c o m p anies . Mo s t o f
t h e indic at o rs are c al c u l at ed at t h e individu al
c o m p any l evel and t h en aggregat ed t o f o rm
t h e gl o b al BEPS Indic at o rs . Go vernm ent s c o u l d
at t em p t t o u s e t h e s am e p u b l ic l y avail ab l e dat a
u s ed b y t h e OECD, o r t h e dat a p ro vided b y
c o u nt ry - b y - c o u nt ry rep o rt ing, t o p ro du c e BEPS
Indicators for each MNE with an affiliate in their
c o u nt ry . Dep ending o n w h at t h o s e indic at o rs
s h o w ed, p art ic u l ar MNEs c o u l d b e s u b j ec t t o
addit io nal s c ru t iny .
lo al a
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BEPS Ac t io n 11:
Anal y s is
hat is the action tr ing to
achie e
Th e go al o f Ac t io n 11 w as t o es t im at e t h e
s iz e o f BEPS ac t ivit ies , devel o p m et ric s t h at
c o u l d b e u s ed as indic at o rs o f BEPS, and
p ro vide rec o m m endat io ns f o r im p ro ving
the measurement of BEPS. The Final
Rep o rt es t im at ed t h at BEPS redu c es
gl o b al c o rp o rat e inc o m e t ax revenu es
b y 4%- 10%, and p ro p o s ed s ix indic at o rs
t h at go vernm ent s c an u s e t o m o nit o r t h e
direc t io n o f c h ange in BEPS ac t ivit ies : (1) t h e
c o nc ent rat io n o f f o reign direc t inves t m ent
rel at ive t o gro s s do m es t ic p ro du c t , (2) t h e
profit rates of multinational enterprise (MNE)
affiliates in low-tax countries compared to
those in high-tax countries, (3) the profit
rates of MNE affiliates in low-tax countries
compared with the profit rate of their own
MNE gro u p s , (4) t h e ef f ec t ive t ax rat es o f
MNEs c o m p ared t o t h o s e o f do m es t ic - o nl y
ent erp ris es , (5) t h e s ep arat io n o f int angib l e
p ro p ert y f ro m t h e l o c at io n o f it s p ro du c t io n,
and (6) t h e c o nc ent rat io n o f deb t in MNE
affiliates located in higher-tax rate countries.
Bob C arroll
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M uir M acpherson
+ 1 202 327 7 08 4
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14 8
lo al a
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W ere any of the action
recommendations
ne pected
No . Th e s ix indic at o rs and t h e
rec o m m endat io ns t o inc reas e c o o p erat io n
in t h e c o l l ec t io n and s h aring o f dat a w ere
inc l u ded in t h e OECD’ s init ial dis c u s s io n
draft. However, the Final Report went a
s t ep f u rt h er b y p ro viding an es t im at e o f
t h e gl o b al c o rp o rat e inc o m e t ax revenu e
lost to BEPS (the 4%-10% figure). There has
b een m u c h dis c u s s io n and deb at e o ver h o w
to measure BEPS, so to actually quantify
it and p u t a nu m b er o n t h e p ro b l em w as a
significant step.
I s there any interaction between this
action and the others
Th e OECD’ s es t im at e o f t h e gl o b al c o rp o rat e inc o m e t ax
revenue lost to BEPS was based on findings from two separate
econometric models: the first model measured corporate
tax revenue lost from profit shifting, while the second model
m eas u red c o rp o rat e t ax revenu e l o s t f ro m MNEs ’ u s e o f
m is m at c h es b et w een t ax s y s t em s and t h eir rel at ive u s e o f
do m es t ic t ax p ref erenc es . Th e OECD t h en c o m b ined t h e
estimates from both models to arrive at its finding that BEPS
redu c es gl o b al c o rp o rat e inc o m e t ax revenu e b y 4%- 10%.
Ac c o rding t o t h e OECD’ s anal y s is , ro u gh l y h al f o f t h at l o s s is
du e t o h y b rid m is m at c h arrangem ent s (Ac t io n 2), w h il e b as e
ero s io n via int eres t dedu c t io ns c o m p ris es (Ac t io n 4) m o s t o f t h e
o t h er h al f .
The Final Report also noted that additional data for measuring
BEPS w il l b ec o m e avail ab l e u nder Ac t io ns 5 (h arm f u l t ax
p rac t ic es ), 12 (dis c l o s u re o f aggres s ive t ax p l anning),
and 13 (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).
hat s going to happen ne t
The OECD can continue to update its quantitative estimate as
a w ay t o m o nit o r t h e p ro gres s o f t h e BEPS Ac t io n Pl an. In t h at
regard, it is p o s s ib l e t h at t h e 4%- 10% es t im at e m ay p o t ent ial l y
c h ange o ver t im e, if addit io nal and/ o r enh anc ed dat a b ec o m es
available or other indicators are identified. If the OECD measures
t h e im p ac t s o f BEPS in a f ew y ears af t er t h e Ac t io n it em s h ave
been implemented, and subsequently finds that there has not
been significant progress made in reducing BEPS activity, that
c o u l d p o t ent ial l y p ro vide t h e f o u ndat io n f o r ret h ink ing t h e
ap p ro ac h t o BEPS and l ead t o t h e devel o p m ent o f addit io nal
Ac t io n it em s .
W hat are the potential impacts on
siness
Bec au s e t h e OECD p erf o rm ed it s c al c u l at io ns u s ing p u b l ic l y
available financial data, some tax authorities could try to
produce indicators for MNE affiliates that operate in their
j u ris dic t io n t o get a s ens e o f w h ere t h ere is “ go o d” and
“ b ad” b eh avio r at p l ay . In addit io n, s o m e no n- go vernm ent al
o rganiz at io ns o r o t h er s t ak eh o l ders c o u l d c al c u l at e t h e nu m b ers
for individual companies, either publishing their findings or using
t h em t o s u p p o rt ris k as s es s m ent ac t ivit ies . If t h e c al c u l at io ns
s h o w t h at a c o m p any is an o u t l ier o n s o m e o f t h e OECD’ s
m et ric s , t h at c o u l d p o t ent ial l y at t rac t at t ent io n f ro m t h e t ax
au t h o rit ies as w el l as p o s e a t ax au dit / rep u t at io n ris k .
Th eref o re, MNEs s h o u l d p erf o rm t h eir o w n c al c u l at io ns no w
s o t h ey c an b e p rep ared and ready t o res p o nd. Th ey s h o u l d go
t h ro u gh al l o f t h e m et ric s , as m o s t o f t h em c an b e c al c u l at ed o n
a c o m p any - b y - c o m p any b as is .
lo al a
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ction
12
OECD releases final report
o n m andat o ry dis c l o s u re
ru l es u nder Ac t io n 12
Executive summary
On 5 Oc t o b er 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) released its final report on mandatory disclosure rules (Action 12) under its
Action Plan on Base Erosion and Profit Shifting (BEPS). The final report, Mandatory
Disclosure Rules (the Action 12 Report), was released in a package that included final
rep o rt s o n al l 15 BEPS Ac t io ns .
Th e Ac t io n 12 Rep o rt 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 Ac t io n
12 Rep o rt 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 s t at 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 avo idanc e m igh t no t b e
sufficient to capture cross-border arrangements and provides recommendations for an
al t ernat ive ap p ro ac h . Th e Ac t io n 12 Rep o rt m ak es c l ear t h at t h e m andat o ry dis c l o s u re
rec o m m endat io ns are no t a m inim u m s t andard and t h at c o u nt ries are f ree t o c h o o s e
w h et h er o r no t t o int ro du c e s u c h a regim e.
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A ction 1 2
Th e Ac t io n 12 Rep o rt m ak es c l ear t h at t h e
m andat o ry dis c l o s u re rec o m m endat io ns
are no t a m inim u m s t andard and t h at
c o u nt ries are f ree t o c h o o s e w h et h er o r
no t t o int ro du c e s u c h a regim e.
Detailed discussion
er iew of ction
eport
Th e Ac t io n 12 Rep o rt c l o s el y f o l l o w s t h e dis c u s s io n draf t o n
Ac t io n 12 is s u ed b y t h e OECD o n 31 Marc h 2015. Ho w ever, t h e
Ac t io n 12 Rep o rt inc l u des a dis c u s s io n o f inf o rm at io n s h aring
devel o p m ent s , and t h e p o t ent ial s h aring o f inf o rm at io n rec eived
u nder m andat o ry dis c l o s u res , t h at w as no t inc l u ded in t h e
dis c u s s io n draf t . Mo reo ver, t h e Ac t io n 12 Rep o rt ex p l ic it l y s t at es
t h at c o u nt ries are f ree t o c h o o s e w h et h er o r no t t o im p l em ent
a m andat o ry dis c l o s u re regim e. Unl ik e s everal o t h er BEPS
Ac t io ns , t h e rec o m m endat io ns s et o u t in t h e Ac t io n 12 Rep o rt
do no t rep res ent m inim u m s t andards . Rat h er, in t h e Ex p l anat o ry
Statement accompanying the release of the final reports, the
OECD des c rib es t h e rec o m m endat io ns in t h e Ac t io n 12 Rep o rt
as “ gu idanc e b as ed o n b es t p rac t ic es f o r c o u nt ries w h ic h s eek
t o s t rengt h en t h eir do m es t ic l egis l at io n rel at ing t o m andat o ry
dis c l o s u re b y t ax p ay ers o f aggres s ive o r ab u s ive t rans ac t io ns ,
arrangem ent s , o r s t ru c t u res .”
Th e Ac t io n 12 Rep o rt 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. 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.
Finally, it concludes with a brief discussion of information sharing
t h at w as no t inc l u ded in t h e dis c u s s io n draf t .
Mandatory disclosure recommendations
Th e Ac t io n 12 Rep o rt 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 Ac t io n 12 Rep o rt inc l u des c o m p aris o ns o f o t h er t y p es
o f dis c l o s u re regim e al ready in ex is t enc e. It c o nc l u des t h at
m andat o ry dis c l o s u re is 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 users of aggressive tax arrangements to be identified and
det erring t h e u s e o f s u c h arrangem ent s .
Th 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
Ac t io n 12 Rep o rt are eit h er ” t rans ac t io n- b as ed” o r ” p ro m o t erbased.” The former regime requires tax authorities to identify
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 Ac t io n 12 Rep o rt draw
o n el em ent s f ro m b o t h k inds o f regim es .
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A ction 1 2
W ho has to report
Th e Ac t io n 12 Rep o rt s t at es t h at c o u nt ries w il l need t o
c h o o s e w h et h er t h ey p l ac e t h e o nu s f o r rep o rt ing p rim aril y
o n p ro m o t ers o r w h et h er t o im p l em ent du al o b l igat io ns f o r
rep o rt ing b y b o t h p ro m o t ers and t ax p ay ers . Ho w ever, in t h e c as e
w h 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, it is
rec o m m ended t h at t h is o b l igat io n revert t o t h e t ax p ay er w h ere
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
(i.e., t h ere is no p ro m o t er).
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
Action 12 Report recommends that the promoter be required to
p rep are c l ient l is t s and t h at t h ere 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
disclosure requirement, although the Action 12 Report notes
t h at t h es e t o o l s m ay no t b e as es s ent ial w h ere a j u ris dic t io n h as
im p l em ent ed a du al - rep o rt ing o b l igat io n f o r dis c l o s u re.
Countries are free to choose their own definition of promoter
o r advis er, al t h o u gh t h e Ac t io n 12 Rep o rt p ro vides ex am p l es
of definitions from existing legislation that it recommends
countries use as a basis for their own definitions. For example,
a “promoter” might be defined as a person that is responsible
f o r t h e des ign, m ark et ing, o rganiz at io n o r m anagem ent o f a
s c h em e, and an “ advis er” as o ne w h o p ro vides as s is t anc e o r
advic e w it h res p ec t t o c reat ing, devel o p ing, p l anning, o rganiz ing
o r im p l em ent ing t h e t rans ac t io n. Th e Ac t io n 12 Rep o rt inc l u des
a f u rt h er no t e, no t inc l u ded in t h e dis c u s s io n draf t , t h at
inp u t f ro m rel evant do m es t ic s t ak eh o l ders w il l b e im p o rt ant
in establishing the appropriate definition of promoter for a
p art ic u l ar j u ris dic t io n.
T hreshold 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.
For example, this might be a test of whether obtaining a tax
advantage is a main benefit of the arrangement. Alternatively,
a de minimis filter can be used (e.g., based on transaction size).
Th e Ac t io n 12 Rep o rt 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 Ac t io n 12
Report indicates that a de minimis filter would be unnecessary
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in combination with a main benefit test, because the regime
w o u l d al ready b e t arget ing o nl y t h o s e s c h em es des igned t o
generate a tax benefit. However, the Action 12 Report indicates
that it may be appropriate to use a main benefit test as a precondition, with de minimis filters attached to specific hallmarks,
s o as t o eas e t h e adm inis t rat ive b u rden.
H allmark s
In ex is t ing dis c l o s u re regim es , dis c l o s u re is o f t en 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 Ac t io n 12 Rep o rt rec o m m ends t h at t h e ex is t enc e o f a s ingl e
hallmark in respect of a scheme should be sufficient to give rise
t o a dis c l o s u re o b l igat io n.
Hallmarks can either be general or specific, and the Action
12 Rep o rt rec o m m ends t h at eac h c o u nt ry ’ s h al l m ark s s h o u l d
inc l u de a m ix t u re o f b o t h t y p es . General h al l m ark s s h o u l d
include a promoter’s desire to keep the arrangement confidential
or the requirement of a contingent or premium fee. The
Ac t io n 12 Rep o rt indic at es t h at a c o u nt ry m ay al s o w ant t o
ado p t addit io nal generic h al l m ark s s u c h as o ne ap p l y ing t o
s t andardiz ed t ax p ro du c t s .
In addit io n, t h e Ac t io n 12 Rep o rt rec o m m ends t h at c o u nt ries
use specific hallmarks designed for their local circumstances.
Examples of specific hallmarks include leasing transactions,
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 , t h o s e
invo l ving u s e o f l o s s es o r inc o m e c o nvers io n s c h em es 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 .
Individual countries 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 m ay at t ac h a de
minimis filter to individual specific hallmarks.
Co u nt ries m ay c h o o s e t o ado p t a h y p o t h et ic al ap p ro ac h o r
p u rel y f ac t u al o b j ec t ive t es t s w h en det erm ining t h eir generic and
specific hallmarks. Unlike in the discussion draft, the Action 12
Rep o rt p ro vides ex am p l es o f f ac t o rs rel evant t o t h e h y p o t h et ic al
application of the confidentiality and premium fee hallmarks.
Under a hypothetical test, the confidentiality hallmark would be
met if a scheme were sufficiently new and innovative that the
designer of the scheme would have required the details of the
scheme to remain confidential irrespective of the existence of
actual terms of confidentiality.
A ction 1 2
Th e Ac t io n 12 Rep o rt rec
adm inis t rat io ns s et u p a s m
ris k as s es s m ent and c o o
w it h res p ec t t o t h e dis c
o m m ends t h at t ax
al l u nit f o c u s ed o n
rdinat io n o f ac t io n
l o s u res it rec eives .
T imeframe for disclosure
I nternational tax schemes
Th e Ac t io n 12 Rep o rt rec o m m ends t h at w h ere t h e p ro m o t er h as
t h e o b l igat io n t o dis c l o s e, t h e t im ef ram e f o r dis c l o s u re s h o u l d b e
l ink ed t o t h e avail ab il it y o f t h e arrangem ent t o u s ers . No t e t h at
t h is t im ef ram e c o u l d vary f ro m an arrangem ent b eing avail ab l e
f o r im p l em ent at io n (w h en a f u l l y - des igned p ro p o s al h as b een
communicated to a client), to a firm marketing approach being
m ade (as in t h e Unit ed Kingdo m , w h ic h c o u l d b e earl ier in t h e
p ro c es s ), t o an advis o r b eing ap p o int ed a ” m at erial advis o r” (as
in t h e Unit ed St at es ). 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 Ac t io n 12 Rep o rt rec o m m ends t h at t h e t im ing
o f dis c l o s u re b e l ink ed t o im p l em ent at io n o f t h e arrangem ent .
In both cases, the Action 12 Report notes the benefits of short
t im ef ram es f o r dis c l o s u re.
Th e Ac t io n 12 Rep o rt ac k no w l edges 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.
Th eref o re, an al t ernat ive ap p ro ac h is rec o m m ended f o r t h e
des ign o f a dis c l o s u re regim e f o r “ int ernat io nal t ax s c h em es .”
P enalties
Ac c o rding t o t h e Ac t io n 12 Rep o rt , m andat o ry dis c l o s u re
regimes should be enforced through financial penalties for nonc o m p l ianc e. Th e Ac t io n 12 Rep o rt no t es t h at c o u nt ries m ay al s o
im p l em ent o t h er t y p es o f p enal t ies (inc l u ding no n- m o net ary
p enal t ies ). In addit io n, t h e Ac t io n 12 Rep o rt rec o m m ends t h at
domestic law be explicit about the consequences of reporting
u nder a dis c l o s u re regim e (e.g., dis c l o s u re do es no t m ean
t h at t h e t ax adm inis t rat io n agrees w it h t h e p ro p o s ed t ax
consequences of the arrangement).
P rocedural matters
Th e Ac t io n 12 Rep o rt indic at es t h at t ax adm inis t rat io ns w il l need
to specify the information that must be disclosed. Furthermore,
m andat o ry dis c l o s u re regim es w il l need t o b e s u p p o rt ed b y
powers that allow the tax administration to inquire into the
reas o ns f o r a f ail u re t o dis c l o s e and t h e ident it y o f p ro m o t ers
and intermediaries and to request follow-up information. The
Ac t io n 12 Rep o rt rec o m m ends t h at t ax adm inis t rat io ns s et u p a
s m al l u nit f o c u s ed o n ris k as s es s m ent and c o o rdinat io n o f ac t io n
w it h res p ec t t o t h e dis c l o s u res it rec eives .
Th e Ac t io n 12 Rep o rt rec o m m ends t h at t h res h o l d c o ndit io ns ,
such as the main benefit test, should not apply to arrangements
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 t h e rec o m m ended
h al l m ark s w o u l d t arget o nl y arrangem ent s o f p art ic u l ar c o nc ern
t o t h e t ax adm inis t rat io n. Sp ec ial h al l m ark s s h o u l d 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 h al l m ark s s h o u l d f o c u s o n
BEPS- rel at ed ris k s p o s ed b y c ro s s - b o rder arrangem ent s and
s h o u l d b e b ro ad eno u gh t o c ap t u re dif f erent and inno vat ive
planning techniques. These hallmarks should be both specific (in
t h at t h ey ident if y p art ic u l ar c ro s s - b o rder t ax o u t c o m es w h ic h
rais e c o nc erns f o r t h e rep o rt ing j u ris dic t io n) and generic (in t h at
they are defined by reference to their overall tax effects and
are c ap ab l e o f c ap t u ring any arrangem ent des igned t o p ro du c e
t h o s e ef f ec t s ). In c o nt ras t t o t h e dis c u s s io n draf t , s o as t o avo id
u nnec es s ary dis c l o s u res , t h e Ac t io n 12 Rep o rt al s o s t at es t h at
each tax administration should provide a specific list of tax
regimes and outcomes that are not required to be disclosed. It
f u rt h er indic at es t h at as p art o f t h e f u t u re w o rk o n m o nit o ring
t h e o u t p u t s f ro m t h e BEPS p ro j ec t , c o u nt ries m ay c o ns ider
devel o p ing addit io nal h al l m ark s , inc l u ding m o del h al l m ark s t o
m inim iz e o verl ap p ing dis c l o s u re o b l igat io ns w it h res p ec t t o
c ro s s - b o rder t rans ac t io ns .
The Action 12 Report recommends that the definition of
rep o rt ab l e s c h em e in t h e int ernat io nal c o nt ex t s h o u l d b e b ro ad
and s h o u l d inc l u de any arrangem ent t h at inc o rp o rat es a m at erial
t rans ac t io n w it h a do m es t ic t ax p ay er and t h at gives ris e t o a
“ c ro s s - b o rder o u t c o m e.” In t h is regard, an arrangem ent s h o u l d
b e rep o rt ab l e o nl y if it invo l ves a t rans ac t io n t h at h as a m at erial
t ax im p ac t o n t h e rep o rt ing j u ris dic t io n. Th e Ac t io n 12 Rep o rt
proposes that transactions should be reportable in a specific
c o u nt ry o nl y in c irc u m s t anc es w h ere a do m es t ic t ax p ay er o r
t h eir advis er c o u l d reas o nab l y h ave b een ex p ec t ed t o b e aw are
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A ction 1 2
Sim il ar t o do m es t ic s c h
indic at es t h at c o u nt ries
dis c l o s u re o b l igat io n f o
b e im p o s ed o n t h e t ax p
em es , t h e Ac t io n 12 Rep o rt
s h o u l d c h o o s e w h et h er t h e
r int ernat io nal s c h em es s h o u l d
ay er o r p ro m o t er o r b o t h .
o f t h e c ro s s - b o rder o u t c o m e o f t h e arrangem ent . In c o nt ras t ,
the discussion draft would have required disclosure where the
c ro s s - b o rder o u t c o m e aris es w it h in t h e t ax p ay er’ s c o nt ro l l ed
gro u p o r w h ere t h e t ax p ay er w as a p art y t o t h e arrangem ent .
Th e Ac t io n 12 Rep o rt s u gges t s t h at a do m es t ic t ax p ay er o r
its advisor be required to disclose any material information
t h at is w it h in it s k no w l edge, p o s s es s io n o r c o nt ro l . It f u rt h er
rec o m m ends im p o s ing an o b l igat io n o n a do m es t ic t ax p ay er,
at t h e t im e it ent ers int o a m at erial int ra- gro u p t rans ac t io n,
to make reasonable inquiries as to whether the arrangement
t h at gave ris e t o t h e t rans ac t io n inc o rp o rat es a c ro s s - b o rder
outcome (as identified under any hallmark) and to notify the tax
adm inis t rat io n if t h e gro u p m em b er h as no t p ro vided rel evant
information, the information is inadequate or incomplete or
t h ere is u nreas o nab l e del ay in p ro viding t h e inf o rm at io n in
respect of these inquiries. The discussion draft did not propose
t h is o b l igat io n. Sim il ar t o do m es t ic s c h em es , t h e Ac t io n 12
Rep o rt indic at es t h at c o u nt ries s h o u l d c h o o s e w h et h er t h e
dis c l o s u re o b l igat io n f o r int ernat io nal s c h em es s h o u l d b e
im p o s ed o n t h e t ax p ay er o r p ro m o t er o r b o t h .
Th e Ac t io n 12 Rep o rt inc l u des an ex am p l e invo l ving an int ragro u p h y b rid m is m at c h arrangem ent — adap t ed f ro m an ex am p l e
included in the final report on Action 2 — to illustrate how the
rec o m m endat io ns regarding dis c l o s u re o f int ernat io nal t ax
s c h em es c o u l d ap p l y . Th e dis c u s s io n draf t h ad al s o inc l u ded t w o
addit io nal ex am p l es (invo l ving no t io nal int eres t dedu c t io n and
u s e o f a c l ient l is t ) t h at are no t inc l u ded in t h e Ac t io n 12 Rep o rt .
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nformation sharing
Th e Ac t io n 12 Rep o rt c o nc l u des w it h a b rief dis c u s s io n o f
inf o rm at io n s h aring devel o p m ent s general l y and u nder t h e
BEPS Ac t io n Pl an. It inc l u des c ro s s - ref erenc es t o t h e Ac t io n
5 requirement of compulsory spontaneous exchange of
information on rulings and the Action 13 requirement of a
t h ree- t ier ap p ro ac h t o t rans f er p ric ing do c u m ent at io n (inc l u ding
a master file, a local file and a country-by-country report).
Further, the Action 12 Report provides an update on the Joint
Int ernat io nal Tax Sh el t er Inf o rm at io n and Co l l ab o rat io n (JITSIC)
Net w o rk . It no t es t h at t h e inf o rm at io n t o b e s p o nt aneo u s l y
ex c h anged w it h in t h e JITSIC Net w o rk c o u l d inc l u de inf o rm at io n
o b t ained u nder a m andat o ry dis c l o s u re regim e and t h at t h e
JITSIC Net w o rk p ro vides a f o ru m f o r c o o p erat io n am o ng
t ax adm inis t rat io ns w it h res p ec t t o em erging is s u es t h at are
identified through such disclosure and exchange.
A ction 1 2
I mplications
The OECD’s final recommendations under Action
12 are in t h e f o rm o f b es t p rac t ic es f o r c o u nt ries
t o c o ns ider if t h ey are int eres t ed in devel o p ing a
m andat o ry dis c l o s u re regim e. Co m p anies s h o u l d
s t ay inf o rm ed ab o u t any devel o p m ent s w it h res p ec t
t o m andat o ry dis c l o s u re in t h e c o u nt ries w h ere t h ey
o p erat e o r inves t . In addit io n t o t im ing and ef f ec t ive
dat es , j u ris dic t io ns c o ns idering im p l em ent at io n o f
a m andat o ry dis c l o s u re regim e m ay vary o t h er k ey
f ac t o rs , inc l u ding:
• Wh et h er t o p l ac e t h e o nu s f o r rep o rt ing o n
p ro m o t ers o r t o em p l o y a du al - rep o rt ing
o b l igat io n t h at inc l u des rep o rt ing b y t h e t ax p ay er
as w el l ;
E Y contacts
For additional information concerning
t h is Al ert , p l eas e c o nt ac t :
• Erns t & Y o u ng LLP
Gl o b al Tax Des k Net w o rk
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• Gerrit Gro en
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• Th e t y p e o f t h res h o l d c o ndit io n (de m inim is l evel
or main benefit test) for reporting; and
• Wh et h er t o inc l u de addit io nal general h al l m ark s
and which specific hallmarks to include
lo al a
olic and ontro ers
riefing 15 5
BEPS Ac t io n 12:
Anal y s is
hat is the action tr ing to
achie e
In t h e b ro ades t s ens e, Ac t io n 12 s eek s
t o m o dif y t h e t ax c o m m u nit y ’ s p erc eived
t ax avo idanc e b eh avio r b y m inim iz ing t h e
inf o rm at io n gap b et w een t ax au t h o rit ies
and t ax p ay ers . Th e OECD b el ieves t h at
requiring taxpayers to provide timely
and c o m p reh ens ive inf o rm at io n o n w h at
are defined as aggressive or abusive
t rans ac t io ns , arrangem ent s o r s t ru c t u res
via m andat o ry dis c l o s u re ru l es w il l enab l e
t ax adm inis t rat io ns and p o l ic y m ak ers t o
quickly respond to tax risks — particularly
t h o s e aris ing f ro m c ro s s - b o rder p l anning —
t h ro u gh inf o rm ed ris k as s es s m ent , au dit s ,
o r c h anges t o l egis l at io n o r regu l at io ns .
J ean- P ierre L ieb
+ 33 1 55 61 16 10
j ean.p ierre.l ieb @ ey - avo c at s .c o m
In t h e OECD’ s view , m andat o ry dis c l o s u re
regim es s erve as b o t h a p o w erf u l
c o m p l ianc e t o o l f o r t ax au t h o rit ies and as a
det errent agains t aggres s ive o r ab u s ive t ax
p l anning. Bec au s e s everal c o u nt ries h ave
al ready im p l em ent ed m andat o ry dis c l o s u re
regimes, Action 12 sought to find ways to
b o l s t er ex is t ing regim es and enc o u rage
o t h er c o u nt ries t h at h ave no t y et int ro du c ed
s u c h ru l es .
15 6
lo al a
olic and ontro ers
riefing
W ere any of the action
recommendations
ne pected
Perh ap s t h e b igges t s u rp ris e is t h at f o r
a t o p ic t h at h as b een c h arac t eriz ed b y
s o m e as a c ru c ial c o m p o nent o f t h e BEPS
project, the Final Report probably takes
o ne o f t h e l eas t inno vat ive ap p ro ac h es
o f t h e 15 Ac t io ns . It es s ent ial l y p ro vides
a c o m p reh ens ive s u m m ary o f t h e p as t
ex p erienc es o f t h e c o u nt ries t h at h ave
im p l em ent ed m andat o ry dis c l o s u re
ru l es , and p res ent s t h e dif f erent and
b es t p rac t ic es , o p t io ns and f eat u res
t h at go vernm ent s s h o u l d c o ns ider w h en
im p l em ent ing s u c h a regim e. Th e w o rds
“recommendation” and “flexibility” appear
dozens of times. The Final Report imposes
no m inim u m s t andards , ins t ead o f f ering
rec o m m endat io ns in t h e f o rm o f gu idanc e
b as ed o n b es t p rac t ic es . It s t res s es t h at
c o u nt ries are f ree t o c h o o s e t h eir o w n
standards, hallmarks and filters, and even
w h et h er t h ey w ant t o h ave a dis c l o s u re
regime in the first place.
Best practices
See p age 32 f o r m o re inf o rm at io n.
12
While the Final Report is well-drafted, one cannot help but
f eel u nderw h el m ed t h at an Ac t io n w h o s e go al w as t o h el p t ax
au t h o rit ies c rac k do w n o n aggres s ive t ax p l anning — des c rib ed
b y t h e OECD as o ne o f t h e m ain s o u rc es o f BEPS — did no t t ak e a
m o re f o rc ef u l ap p ro ac h . Ho w t o ex p l ain t h is dic h o t o m y b et w een
w h at c o u l d h ave b een ex p ec t ed as a c o ns is t ent o u t c o m e (f o r
ex am p l e, a rep o rt p ro p o s ing a m inim u m s t andard f o r m andat o ry
disclosure rules) and the final result of Action 12? There could
b e t w o ex p l anat io ns :
I s there any interaction between this
action and the others
• First, it may simply be too difficult to set a minimum standard
f o r dis c l o s u re ru l es w h en t h ere are s o m any vas t dif f erenc es
ac ro s s m ark et s and j u ris dic t io ns . Th e ro l e o f advis ers
(es p ec ial l y t h eir s t at u s w h en it c o m es t o t h e s ens it ive is s u e
o f p rivil eged inf o rm at io n) and f ac t o rs s u c h as c o ns t it u t io nal
and h u m an righ t s c o ns t raint s c an dif f er s o m u c h f ro m o ne
j u ris dic t io n t o ano t h er t h at det erm ining a m inim u m s t andard
that adequately takes all of those differences into account
c o u l d b e an im p o s s ib l e t as k .
a e an co ntries made specific
comments in relation to this action
• Sec o nd, c o u nt ries h ave b as ic al l y t w o o p t io ns w h en t ry ing
t o gat h er real - t im e m ark et inf o rm at io n o n t ax p l anning — a
c o erc ive ap p ro ac h (im p l em ent ing a m andat o ry dis c l o s u re
s et o f ru l es ), o r a c o o p erat ive ap p ro ac h (s u c h as t h e
Du t c h h o riz o nt al m o nit o ring p ro gram , o r s im il ar p ro gram s
el s ew h ere). In s o m e c o u nt ries , b o t h ap p ro ac h es are u s ed
s im u l t aneo u s l y . Ho w ever, t h e OECD h as b een very s u p p o rt ive
o f t h e “ c o o p erat ive c o m p l ianc e” f ram ew o rk , u nder w h ic h l arge
c o rp o rat e t ax p ay ers and t ax au t h o rit ies es t ab l is h c o o p erat ive
rel at io ns h ip s b as ed o n m u t u al t rans p arenc y , u nders t anding
and justified trust. The OECD has never expressly said it
p ref ers o ne ap p ro ac h o ver ano t h er. Th u s , if t h e OECD h ad
p ro p o s ed a m inim u m s t andard f o r m andat o ry dis c l o s u re ru l es ,
o ne c o u l d argu e t h at it w as in es s enc e b ac k ing o f f it s s u p p o rt
o f c o o p erat ive c o m p l ianc e c o nc ep t .
While there is no specific interaction between Action 12 and
o t h er BEPS ac t io ns , t h e f u t u re direc t io n o f BEPS Ac t io n 13 m ay
u l t im at el y b e view ed as a b el l w et h er f o r t h e f u t u re, indic at ing
t h e l evel s o f addit io nal s c ru t iny t h at c o u nt ries w is h t o ap p l y t o
t rans ac t io ns , arrangem ent s o r s t ru c t u res .
Ac t io n 12 rec eived vas t l y l es s p u b l ic c o m m ent s t h an o t h er
ac t io ns , s ec u ring j u s t 27 5 p ages o f f eedb ac k f ro m 37
1
o rganiz at io ns and o ne individu al . On 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 f o c u s ed o n Ac t io n 12. 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
concerns. First, they stated that the proposed rules lack clarity.
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
of “cross-border outcomes” should be narrowly defined to cover
only transactions with material tax consequences. They noted
that overly broad disclosure would make risk identification more
difficult, especially for developing countries. Thresholds or filters
s h o u l d b e u s ed t o b et t er ex c l u de f ro m 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 w it h c l earl y
delineated non-BEPS tax benefits. Business participants also
ex p res s ed c o nc ern t h at t h e f ram ew o rk ap p ro ac h t ak en b y t h e
OECD c o u l d c reat e inc o ns is t enc ies ac ro s s j u ris dic t io ns and c o u l d
cause overlapping and duplicative reporting requirements. They
u rged t h e OECD t o c l earl y s t at e t h e o b j ec t ives o f t h e dis c l o s u re
ru l es t o h el p inc reas e c o ns is t enc y ac ro s s j u ris dic t io ns .
1
h t t p : / / w w w .o ec d.o rg/ t ax / aggres s ive/ p u b l ic - c o m m ent s - b ep s - ac t io n- 12m andat o ry - dis c l o s u re- ru l es .p df
lo al a
olic and ontro ers
riefing 15 7
BEPS Ac t io n 12:
Anal y s is
(c o nt inu ed)
Mo reo ver, a t rans ac t io n s h o u l d b e ex em p t f ro m m andat o ry
dis c l o s u re if rel evant inf o rm at io n regarding s u c h t rans ac t io n
is al ready dis c l o s ed (e.g., in a t ax ru l ing o r t rans f er p ric ing
do c u m ent at io n).
In c o nt ras t , t h e Mex ic an del egat e, t h e o
w h o s p o k e ex t ens ivel y du ring t h e c o ns u
“ advanc e” rep o rt ing o f t rans ac t io ns , w h
w o u l d al l o w go vernm ent s t o m anage ris
nl y go vernm ent del egat e
l t at io n, no t ed t h at
il e it c o u l d b e du p l ic at ive,
k m o re p ro ac t ivel y .
Ou t s ide t h e OECD’ s p u b l ic c o ns u l t at io n p ro c es s , w e h ave s een
l it t l e addit io nal dis c u s s io n o n Ac t io n 12.
hat s going to happen ne t, and how
niform might implementation e
The approach taken in the Final Report does not necessarily
m ean t h at t h o s e c o u nt ries w h o al ready p o s s es s m andat o ry
dis c l o s u re regim es w il l no t s ee any addit io nal c h anges . Th e
deb at e aro u nd t rans p arenc y t o day is m ainl y f o c u s ed o n c o u nt ry by-country reporting and the question of whether to make it
p u b l ic l y avail ab l e o r no t .
Ho w ever, if in a f ew y ears BEPS is s t il l view ed as a m at t er
o f great c o nc ern b y b o t h go vernm ent s and NGOs , w e c o u l d
p o t ent ial l y s ee m o re p res s u re p u t o n c o u nt ries t h at do no t
h ave m andat o ry dis c l o s u re ru l es , as w el l as a p u s h t o w iden t h e
c u rrent s c o p e o f t h o s e ru l es in c o u nt ries t h at h ave m andat o ry
dis c l o s u re. In t h at regard, t h e nex t t rans p arenc y and c o m p l ianc e
init iat ives em anat ing f ro m t h e Eu ro p ean Parl iam ent s h o u l d b e
c l o s el y m o nit o red, p art ic u l arl y t h o s e p ert aining t o t h e Eu ro p ean
Parl iam ent ’ s No vem b er 25 res o l u t io n in w h ic h it u rged Mem b er
St at es t o im p l em ent m andat o ry c o u nt ry - b y - c o u nt ry rep o rt ing,
int ro du c e an EU- w ide c o m m o n c o ns o l idat ed c o rp o rat e t ax b as e,
s y s t em at ic al l y s h are inf o rm at io n o n c ro s s - b o rder t ax ru l ings ,
and introduce common definitions of “economic substance” and
o t h er det erm ining f ac t o rs o f c o rp o rat e t ax b il l s .
At t h e end o f t h e day , t h o s e w h o w il l b e h el d ac c o u nt ab l e
f o r t h e im p l em ent at io n o f Ac t io n 12 w il l b e nat io nal t ax
administrations themselves. They will have to answer questions
in p u b l ic p arl iam ent ary h earings o n w h et h er t h ey real l y did
15 8
lo al a
olic and ontro ers
riefing
u s e and anal y z e in real t im e al l t h e inf o rm at io n gat h ered
u nder m andat o ry dis c l o s u re ru l es , and w h et h er t h ey real l y did
ex c h ange al l t h e rel evant dat a w it h t h eir c o u nt erp art s t h ro u gh
inf o rm at io n ex c h ange p ro gram s . Th ey w il l l ik el y al s o b e as k ed if
t h o s e m andat o ry dis c l o s u re ru l es h ave c h anged t h e b eh avio rs
o f t ax p ay ers , and w h et h er (and h o w ) t h e Ac t io n 12 Rep o rt
influenced the design of such rules.
Giving p rec is e and f air ans w ers w il l no t b e s o eas y . Tax
adm inis t rat io ns c o u l d p o int o u t t h at t h e Ac t io n 12 Rep o rt do es
no t p ro vide it s readers w it h m u c h in t h e w ay o f f ac t s and anal y s is
t h at w o u l d h ave b een u s ef u l t o do ing a p ro p er as s es s m ent o f
t h e m erit s o f ex is t ing m andat o ry dis c l o s u re regim es . Ano t h er
useful point is that the first mandatory disclosure regimes were
es t ab l is h ed in t h e earl y 2000’ s (b y t h e Au s t ral ia, Canada, t h e
Unit ed Kingdo m and Unit ed St at es ), w h ic h w as w el l b ef o re BEPS
w as view ed as a m at t er o f c o nc ern. Y et it c o u l d b e argu ed t h at
those regimes did not significantly stop tax planning behaviors
f ro m ex is t ing.
Inno vat ive and p o t ent ial l y dis ru p t ive ap p ro ac h es t o m andat o ry
dis c l o s u re m ay w el l b e ado p t ed b y c o u nt ries m o ving f o rw ard.
W hat are the potential impacts on
siness
As no t ed earl ier in t h is do c u m ent , b u s ines s p art ic ip ant s
at t h e OECD’ s p u b l ic c o ns u l t at io n ex p res s ed c o nc ern t h at
t h e f ram ew o rk ap p ro ac h t ak en b y t h e OECD c o u l d c reat e
inc o ns is t enc ies ac ro s s j u ris dic t io ns and c o u l d c au s e o verl ap p ing
and duplicative reporting requirements. This is already
o c c u rring, w it h Braz il , Mex ic o and So u t h Af ric a (am o ng o t h ers )
putting in place diverse and inconsistent reporting requirements.
Monitoring for new national requirements and then ensuring
c o m p l ianc e m ay b e a c h al l enge f o r m any b u s ines s es , es p ec ial l y
where new requirements are adopted in developing economies
w h ere t h e b u s ines s m ay no t h ave a s t ro ng t ax f u nc t io n p res enc e.
Ro b u s t m o nit o ring and ex ec u t io n p ro c es s es s h o u l d t h eref o re b e
im p l em ent ed in regard t o Ac t io n 12, w it h t h e o ngo ing im p ac t
o n o veral l t ax s t rat egy and gl o b al c o nt ro vers y and dis p u t e
m anagem ent al s o addres s ed.
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transformation. EY tax professionals are at the digital
forefront, helping leading companies find answers to
complex international tax issues.
ey.com/digitaltax #BetterQuestions
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ction
13
OECD releases final
rep o rt 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 u nder Ac t io n 13
Executive summary
On 5 Oc t o b er 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) released its final report on Action 13, Transfer Pricing Documentation and
Country-by-Country Reporting (the Final Report), under its Action Plan on Base
Erosion and Profit Shifting (BEPS). This Final Report was released in a package that
included final reports on all 15 BEPS Actions. The Final Report largely follows the prior
do c u m ent s is s u ed o n t h is t o p ic (i.e., t h e draf t rep o rt Trans f er Pric ing Do c u m ent at io n
1
and Co u nt ry - b y - Co u nt ry Rep o rt ing rel eas ed o n 16 Sep t em b er 2014, t h e rep o rt
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 2
Country Reporting released on 6 February 2015 and t h e rep o rt Co u nt ry - b y - Co u nt ry
3
Rep o rt ing Im p l em ent at io n Pac k age rel eas ed o n 8 Ju ne 2015), c o ns o l idat ing t h e t h ree
p rio r rep o rt s int o o ne rep o rt .
The Final Report contains revised standards for transfer pricing documentation and
a t em p l at e f o r c o u nt ry - b y - c o u nt ry (Cb C) rep o rt ing o f inc o m e, t ax es p aid and c ert ain
m eas u res o f ec o no m ic ac t ivit y , b o t h o f w h ic h w il l b e inc l u ded in t h e OECD Trans f er
Pric ing Gu idel ines . Th e revis ed s t andards ent ail a t h ree- t iered ap p ro ac h t o t rans f er
p ric ing do c u m ent at io n and Cb C rep o rt ing, w h ic h c o ns is t s o f :
• A “master file” that provides tax administrations with high-level information
regarding a m u l t inat io nal ent erp ris e’ s (MNE’ s ) gl o b al b u s ines s o p erat io ns and t rans f er
p ric ing p o l ic ies
• A specific “local file” that provides a local tax administration with information
regarding m at erial rel at ed p art y t rans ac t io ns , t h e am o u nt s invo l ved, and t h e
c o m p any ’ s anal y s is o f t h e t rans f er p ric ing det erm inat io ns t h ey h ave m ade w it h
regard t o t h o s e t rans ac t io ns
• A Cb C rep o rt ing t em p l at e t h at inc l u des inf o rm at io n o n revenu e (rel at ed and
unrelated party), profits, income tax paid and taxes accrued, employees, stated
c ap it al and ret ained earnings , and t angib l e as s et s f o r eac h t ax j u ris dic t io n in w h ic h
t h e MNE do es b u s ines s . In addit io n, t h e t em p l at e inc l u des inf o rm at io n ident if y ing
eac h ent it y w it h in t h e MNE gro u p do ing b u s ines s in a p art ic u l ar t ax j u ris dic t io n and
t h e b u s ines s ac t ivit ies eac h ent it y c o ndu c t s .
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, dat ed 23 Sep t em b er 2014.
2
See EY Gl o b al Tax Al ert , OECD issues implementation guidelines for country-by-country reporting under
BEPS Action 13, dated 9 February 2015.
3
See EY Gl o b al Tax Al ert , OECD issues implementation package for country-by-country reporting under
BEPS Action 13, dat ed 23 Ju ne 2015.
160
lo al a
olic and ontro ers
riefing
A ction 1 3
In producing the master file, taxpayers should
u s e p ru dent b u s ines s j u dgm ent in det erm ining
t h e ap p ro p riat e l evel o f det ail f o r t h e inf o rm at io n
s u p p l ied, k eep ing in m ind t h e o b j ec t ive o f t h e m as t er
file to provide tax administrations with a high-level
o verview o f t h e MNE’ s gl o b al o p erat io ns and p o l ic ies .
The new CbC reporting requirements are to be implemented
for fiscal years beginning on or after 1 January 2016 and
apply to MNEs with annual consolidated group revenue equal
t o o r ex c eeding € 7 50 m il l io n. Th e OECD m andat 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 c aref u l l y m o nit o r
t h e im p l em ent at io n o f t h es e new s t andards and reas s es s no
later than the end of 2020 whether modifications should be
made to the content of these reports to require reporting of
addit io nal dat a.
Detailed discussion
O verview
The Final Report contains revised guidance on documentation
and rep o rt ing t h at w il l b e inc l u ded in t h e OECD Trans f er
Pric ing Gu idel ines as a rep l ac em ent f o r t h e c u rrent c o nt ent
of Chapter V. The report sets out a three-tiered standardized
ap p ro ac h t o t rans f er p ric ing do c u m ent at io n and Cb C rep o rt ing,
which consists of a “master file,” a specific “local file” and
a “ Cb C rep o rt ing t em p l at e.” Ac c o rding t o t h e OECD, t ak en
together, these three documents will require taxpayers to
art ic u l at e c o ns is t ent t rans f er p ric ing p o s it io ns and w il l p ro vide
t ax adm inis t rat io ns w it h u s ef u l inf o rm at io n t o as s es s t rans f er
p ric ing ris k s , m ak e det erm inat io ns ab o u t w h ere au dit res o u rc es
c an m o s t ef f ec t ivel y b e dep l o y ed, and, in t h e event au dit s are
c al l ed f o r, p ro vide inf o rm at io n t o c o m m enc e and t arget au dit
inquiries. The Final Report further indicates that this information
s h o u l d m ak e it eas ier f o r t ax adm inis t rat io ns t o ident if y w h et h er
c o m p anies h ave engaged in t rans f er p ric ing and o t h er p rac t ic es
that have the effect of artificially shifting substantial amounts
of income into tax-advantaged environments. Finally, the OECD
s t at es 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 t h es e new rep o rt ing p ro vis io ns , and t h e t rans p arenc y t h ey
w il l enc o u rage, w il l c o nt rib u t e t o t h e o b j ec t ive o f u nders t anding,
c o nt ro l l ing, and t ac k l ing BEPS b eh avio rs .
In o rder t o ac h ieve t h es e o b j ec t ives , c o u nt ries s h o u l d ado p t a
s t andardiz ed ap p ro ac h t o t rans f er p ric ing do c u m ent at io n, t o b e
im p l em ent ed in t h eir do m es t ic l aw . Th e t h ree- t iered s t ru c t u re
consisting of a master file, a local file and a CbC report, is
des c rib ed b el o w .
aster file
The master file should provide an overview of the MNE group
b u s ines s , it s o veral l t rans f er p ric ing p o l ic ies , and it s gl o b al
al l o c at io n o f inc o m e and ec o no m ic ac t ivit y in o rder t o p l ac e t h e
MNE gro u p ’ s t rans f er p ric ing p rac t ic es in t h eir gl o b al ec o no m ic ,
legal, financial and tax context. The Final Report states that
there is no intention to require exhaustive listings of minutiae as
t h is w o u l d b e b o t h u nnec es s aril y b u rdens o m e and inc o ns is t ent
with the objectives of the master file. In producing the master
file, taxpayers should use prudent business judgment in
det erm ining t h e ap p ro p riat e l evel o f det ail f o r t h e inf o rm at io n
supplied, keeping in mind the objective of the master file to
p ro vide t ax adm inis t rat io ns w it h a h igh - l evel o verview o f t h e
MNE’ s gl o b al o p erat io ns and p o l ic ies . Th e u s e o f c ro s s - ref erenc es
t o o t h er ex is t ing do c u m ent s , t o get h er w it h c o p ies o f t h e
rel evant do c u m ent s , s h o u l d b e deem ed t o s at is f y t h e rel evant
requirement. The Final Report indicates that information is
c o ns idered im p o rt ant if it s o m is s io n w o u l d af f ec t t h e rel iab il it y o f
t h e t rans f er p ric ing o u t c o m es . It do es no t p ro vide m o re det ail ed
gu idanc e, s u c h as m at erial it y t h res h o l ds , o n w h at is c o ns idered
im p o rt ant .
The information required in the master file can be grouped in
five categories: (i) the MNE group’s organizational structure; (ii)
a des c rip t io n o f t h e MNE’ s b u s ines s o r b u s ines s es ; (iii) t h e MNE’ s
intangibles; (iv) the MNE’s intercompany financial activities; and
(v) the MNE’s financial and tax positions. Taxpayers generally
should present the information in the master file for the MNE as
a w h o l e b u t o rganiz at io n o f t h e inf o rm at io n b y l ine o f b u s ines s
is permitted where well justified by the facts. The Final Report
s t at es t h at w h ere l ine o f b u s ines s p res ent at io n is u s ed, c are
s h o u l d b e t ak en t o ens u re t h at c ent ral iz ed gro u p f u nc t io ns and
t rans ac t io ns b et w een b u s ines s l ines are p ro p erl y des c rib ed in
the master file.
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A ction 1 3
The information required in the local file should
supplement the master file and help in assessing
w h et h er t h e t ax p ay er h as c o m p l ied w it h t h e arm ’ s
l engt h p rinc ip l e in it s m at erial t rans f er p ric ing
positions affecting a specific jurisdiction.
The master file differs from typical current documentation
s t andards . It h as a gl o b al s c o p e and s h o u l d p ro vide a gl o b al
o verview . A des c rip t io n o f t h e s u p p l y c h ain f o r t h e gro u p ’ s
l arges t p ro du c t s and s ervic e o f f erings w il l h ave t o b e inc l u ded.
Important transactions with respect to intangibles, financial
transactions, and business restructurings must be listed. Finally,
the master file should contain a list and brief description of the
MNE gro u p ’ s ex is t ing u nil at eral advanc e p ric ing agreem ent s
(APAs ) and o t h er t ax ru l ings rel at ing t o t h e al l o c at io n o f inc o m e
among countries. These differences will require companies
t o review t h eir ex is t ing do c u m ent at io n and t h eir p ro c es s f o r
p rep aring t h e do c u m ent at io n.
ocal file
While the master file provides a high-level overview, the local
file should provide more detailed information relating to specific
material intercompany transactions. The information required
in the local file should supplement the master file and help in
as s es s ing w h et h er t h e t ax p ay er h as c o m p l ied w it h t h e arm ’ s
l engt h p rinc ip l e in it s m at erial t rans f er p ric ing p o s it io ns af f ec t ing
a specific jurisdiction. Individual country transfer pricing
documentation requirements should include specific materiality
t h res h o l ds t h at t ak e int o ac c o u nt t h e s iz e and t h e nat u re o f
t h e l o c al ec o no m y , t h e im p o rt anc e o f t h e MNE gro u p in t h at
ec o no m y , and t h e s iz e and nat u re o f l o c al o p erat ing ent it ies , in
addit io n t o t h e o veral l s iz e and nat u re o f t h e MNE gro u p . It is
rec o m m ended t h at s m al l and m ediu m - s iz ed ent erp ris es (SMEs )
not be required to produce the amount of documentation that
m igh t b e ex p ec t ed f ro m l arger ent erp ris es . Ho w ever, SMEs
should be required to provide information and documents about
their material cross-border transactions upon a specific request
o f t h e t ax adm inis t rat io n in t h e c o u rs e o f a t ax ex am inat io n o r
f o r t rans f er p ric ing ris k as s es s m ent p u rp o s es .
Like the new rules for the master file, the guidance for the
local file contains some specific deviations from typical current
documentation standards. First, it is clear that a specific local
file will have to be prepared, including financial information
and allocation schedules to show how the financial data used in
ap p l y ing t h e t rans f er p ric ing m et h o d m ay b e t ied t o t h e annu al
financial statements. This suggests that generic documentation
des c rib ing t h e t rans f er p ric ing p o l ic y f o r t h e gro u p as a w h o l e
could be used. Furthermore, the local file should contain
a des c rip t io n o f t h e reas o ns f o r c o nc l u ding t h at rel evant
t rans ac t io ns w ere p ric ed o n an arm ’ s l engt h b as is b as ed o n t h e
162
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ap p l ic at io n o f t h e s el ec t ed t rans f er p ric ing m et h o d. A c o m p any
w il l need t o b e ab l e t o s u p p o rt t h at b o t h t h e t rans f er p ric ing
p o l ic y and t h e ac t u al res u l t s are at arm ’ s l engt h .
The local file requires that the reported amount of intragro u p p ay m ent s and rec eip t s f o r eac h c at ego ry o f c o nt ro l l ed
t rans ac t io ns invo l ving t h e l o c al ent it y (i.e., p ay m ent s and
rec eip t s f o r p ro du c t s , s ervic es , ro y al t ies , int eres t , et c .) b e b ro k en
do w n b y t ax j u ris dic t io n o f t h e f o reign p ay er o r rec ip ient . It
should be noted that the Final Report refers to payments and
rec eip t s and no t t o c o ns iderat io n c h arged.
The Final Report indicates that various types of agreements
w il l h ave t o b e rep o rt ed, inc l u ding al l m at erial int erc o m p any
agreem ent s c o nc l u ded b y t h e l o c al ent it y and c o p ies o f ex is t ing
u nil at eral and b il at eral o r m u l t il at eral APAs and o t h er t ax ru l ings
t o w h ic h t h e l o c al t ax j u ris dic t io n is no t a p art y and w h ic h are
rel at ed t o c o nt ro l l ed t rans ac t io ns des c rib ed ab o ve.
As for the master file, the local file requirements and the
dif f erenc es f ro m t y p ic al c u rrent do c u m ent at io n ap p ro ac h es w il l
require companies to review their existing documentation and
t h e p ro c es s f o r p rep aring s u c h do c u m ent at io n.
C ompliance issues
The Final Report contains specific guidance with respect to
c ert ain “ c o m p l ianc e is s u es ” s u c h as t im ing and p enal t ies , am o ng
o t h ers . It s t at es t h at t ax p ay ers s h o u l d t ry t o det erm ine t rans f er
p ric es b as ed u p o n inf o rm at io n reas o nab l y avail ab l e at t h e t im e
of the transaction and should confirm the arm’s length nature of
their transactions at the time of filing their tax returns.
Am o ng t h e c o m p l ianc e is s u es l is t ed, s everal are o f p art ic u l ar
practical importance for taxpayers. The Final Report
rec o m m ends t h at t rans f er p ric ing do c u m ent at io n b e p erio dic al l y
review ed in o rder t o det erm ine w h et h er f u nc t io nal and ec o no m ic
analyses are still accurate and relevant as well as to confirm
t h e val idit y o f t h e ap p l ied t rans f er p ric ing m et h o do l o gy . In
general, the master file, the local file and the CbC report should
b e review ed and u p dat ed annu al l y . Wit h res p ec t t o dat ab as e
searches for comparables, the Final Report indicates that these
should be updated every three years. However, the financial data
for the comparables should be updated every year. The Final
Rep o rt f u rt h er ex p res s es a s t ro ng p ref erenc e f o r t h e u s e o f l o c al
c o m p arab l es o ver t h e u s e o f regio nal c o m p arab l es .
A ction 1 3
The Final Report emphasizes that the CbC report “should
no t b e u s ed as a s u b s t it u t e f o r a det ail ed t rans f er p ric ing
anal y s is o f individu al t rans ac t io ns and p ric es b as ed o n a
f u l l f u nc t io nal anal y s is and a f u l l c o m p arab il it y anal y s is ”
and “ do es no t c o ns t it u t e c o nc l u s ive evidenc e t h at
t rans f er p ric es are o r are no t ap p ro p riat e.”
Th e l angu age in w h ic h t rans f er p ric ing do c u m ent at io n
s h o u l d b e s u b m it t ed s h o u l d b e es t ab l is h ed u nder l o c al l aw s .
Countries are encouraged to allow for the filing of transfer
p ric ing do c u m ent at io n in c o m m o nl y u s ed l angu ages w h ere t h e
u s ef u l nes s o f t h e do c u m ent s w il l no t b e c o m p ro m is ed. Wh ere
t ax adm inis t rat io ns b el ieve t h at t rans l at io n o f do c u m ent s is
necessary, they should make specific requests for translation
and should provide sufficient time.
mplementation and filing
The master file and local file elements of the transfer pricing
do c u m ent at io n s t andard w il l h ave t o b e im p l em ent ed 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 . Th e
master file and local file will be filed directly with the tax
administrations in each relevant jurisdiction as required by
t h o s e adm inis t rat io ns .
reporting
The Final Report provides for CbC reporting to be done
separately from the master file and the local file. The CbC
rep o rt ing t em p l at e is divided int o t h ree t ab l es :
• Tab l e I. Overview o f al l o c at io n o f inc o m e, t ax es and b u s ines s
ac t ivit ies b y t ax j u ris dic t io n
• Tab l e II. Lis t o f al l Co ns t it u ent Ent it ies o f t h e MNE gro u p
inc l u ded in eac h aggregat io n b y t ax j u ris dic t io n, inc l u ding
des ignat io n o f Main Bu s ines s Ac t ivit y
• Tab l e III. Addit io nal Inf o rm at io n
The Final Report states that “the country-by-country report
w il l b e h el p f u l f o r h igh - l evel t rans f er p ric ing ris k as s es s m ent
p u rp o s es .” It f u rt h er em p h as iz es t h at s u c h inf o rm at io n “ s h o u l d
no t b e u s ed as a s u b s t it u t e f o r a det ail ed t rans f er p ric ing anal y s is
o f individu al t rans ac t io ns and p ric es b as ed o n a f u l l f u nc t io nal
anal y s is and a f u l l c o m p arab il it y anal y s is ” and s u c h inf o rm at io n
“ do es no t c o ns t it u t e c o nc l u s ive evidenc e t h at t rans f er p ric es
are or are not appropriate.” Finally, the Final Report states
t h at t h e inf o rm at io n s h o u l d no t b e u s ed “ t o p ro p o s e t rans f er
p ric ing adj u s t m ent s b as ed o n a gl o b al f o rm u l ary ap p o rt io nm ent
o f inc o m e.”
ramewor for go ernment to go ernment
mechanisms to e change
reports
The Final Report describes a framework under which
jurisdictions should require, in a timely manner, the filing of CbC
rep o rt s b y t h e u l t im at e p arent ent it ies o f MNE 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 MNE gro u p s o p erat e. Th e rep o rt
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 moving the obligation
for requiring the 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 .
reporting template
Th e u l t im at e p arent o f an MNE gro u p (t h e Rep o rt ing MNE) is
required to complete a template reporting the allocation of the
gro u p ’ s inc o m e, t ax es and b u s ines s ac t ivit ies o n a t ax j u ris dic t io n
b y t ax j u ris dic t io n b as is .
Th e Rep o rt ing MNE m ay c h o o s e t o u s e dat a f ro m c o ns o l idat io n
reporting packages, separate entity statutory financial
statements, regulatory financial statements, or internal
m anagem ent ac c o u nt s , b u t s h o u l d b e c o ns is t ent f ro m y ear t o
year. The Final Report states that a reconciliation of the CbC
report to the consolidated financial statements is not required.
Table I of the CbC reporting template requires the Reporting
MNE t o p ro vide t h e f o l l o w ing inf o rm at io n annu al l y :
• T ax j urisdiction: The required information is to be reported
o n a t ax j u ris dic t io n b y t ax j u ris dic t io n b as is . A s ep arat e l ine
s h o u l d b e inc l u ded f o r al l Co ns t it u ent Ent it ies deem ed b y t h e
Rep o rt ing MNE no t t o b e res ident in any j u ris dic t io n f o r t ax
p u rp o s es .
• Revenues: Sep arat e c o l u m ns are p ro vided f o r revenu es
generat ed f ro m u nrel at ed p art y t rans ac t io ns , revenu es
from transactions with related parties, and the sum. For
t h is p u rp o s e, revenu es s h o u l d inc l u de revenu es f ro m s al es
o f invent o ry and p ro p ert ies , s ervic es , ro y al t ies , int eres t ,
p rem iu m s and any o t h er am o u nt s derived f ro m t rans ac t io ns
w it h rel at ed o r u nrel at ed p ers o ns . Revenu es f ro m p ay m ent s
rec eived f ro m o t h er Co ns t it u ent Ent it ies t h at are t reat ed as
dividends in t h e p ay o r’ s t ax j u ris dic t io n are ex c l u ded.
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A ction 1 3
•
rofit oss efore income ta : The sum of the profit (loss)
b ef o re inc o m e t ax f o r al l Co ns t it u ent Ent it ies res ident f o r t ax
p u rp o s es in t h e p art ic u l ar j u ris dic t io n. Th is s h o u l d inc l u de al l
ex t rao rdinary inc o m e and ex p ens e it em s .
•
ncome ta paid on cash asis : Th e t o t al am o u nt o f
income tax actually paid during the relevant fiscal year by all
Co ns t it u ent Ent it ies res ident f o r t ax p u rp o s es in t h e p art ic u l ar
j u ris dic t io n t o t h e res idenc e t ax j u ris dic t io n and t o al l o t h er t ax
j u ris dic t io ns . Tax es p aid s h o u l d inc l u de w it h h o l ding t ax es p aid
b y o t h er ent it ies (b o t h rel at ed and u nrel at ed) w it h res p ec t t o
p ay m ent s t o a Co ns t it u ent Ent it y .
•
ncome ta accr ed c rrent ear : Th e s u m o f t h e ac c ru ed
current tax expense recorded on taxable profits or losses of
t h e y ear o f rep o rt ing o f al l Co ns t it u ent Ent it ies res ident f o r t ax
p u rp o s es in t h e p art ic u l ar j u ris dic t io n. Th e c u rrent t ax ex p ens e
should reflect only operations in the current year and should
no t inc l u de def erred t ax es o r p ro vis io ns f o r u nc ert ain t ax
l iab il it ies .
• St at ed c ap it al
• Ac c u m u l at ed earnings
• Number of full-time equivalent employees, with the option to
inc l u de indep endent c o nt rac t o rs
• Net b o o k val u e o f t angib l e as s et s o t h er t h an c as h and c as h
equivalents
Table II of the CbC reporting template would require the
Rep o rt ing MNE t o annu al l y p ro vide a l is t , b y l egal ent it y nam e, o f
al l t h e Co ns t it u ent Ent it ies t h at are res ident f o r t ax p u rp o s es in
each tax jurisdiction. For each Constituent Entity, identification
of the main business activity(ies) also is required.
Tab l e III o f t h e t em p l at e p ro vides ro o m f o r t h e Rep o rt ing MNE
t o inc l u de any inf o rm at io n o r ex p l anat io n t h at it c o ns iders
nec es s ary o r t h at w o u l d f ac il it at e t h e u nders t anding o f t h e
required information provided in the template.
164
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reporting implementation pac age
An im p l em ent at io n p ac k age h as b een devel o p ed f o r
go vernm ent - t o - go vernm ent ex c h ange o f Cb C Rep o rt s . Mo re
specifically it includes:
(i)
Mo del l egis l at io n t h at j u ris dic t io ns w il l b e ab l e t o adap t
t o t h eir o w n l egal s y s t em s , w h ere c h anges t o c u rrent
legislation are required. Further, key elements of secondary
m ec h anis m s f o r rep o rt ing h ave b een devel o p ed.
(ii) Im p l em ent ing arrangem ent s f o r t h e au t o m at ic ex c h ange o f
t h e Cb C rep o rt s u nder int ernat io nal agreem ent s h ave b een
devel o p ed.
ction
mplementation
The Final Report indicates that consistent and effective
im p l em ent at io n o f t h e t rans f er p ric ing do c u m ent at io n s t andards
and in p art ic u l ar o f t h e Cb C rep o rt is es s ent ial . Th eref o re,
c o u nt ries p art ic ip at ing in t h e OECD/ G20 BEPS Pro j ec t agreed
o n t h e c o re el em ent s o f t h e im p l em ent at io n o f t rans f er p ric ing
do c u m ent at io n and Cb C rep o rt ing. Th is agreem ent c al l s f o r t h e
master file and the local file to be delivered by MNEs directly
to local tax administrations. CbC reports should be filed in the
j u ris dic t io n o f t ax res idenc e o f t h e u l t im at e p arent ent it y and
s h ared b et w een j u ris dic t io ns t h ro u gh au t o m at ic ex c h ange
o f inf o rm at io n, p u rs u ant t o go vernm ent - t o - go vernm ent
m ec h anis m s s u c h as t h e m u 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 , b il at eral t ax t reat ies o r
t ax inf o rm at io n ex c h ange agreem ent s . In l im it ed c irc u m s t anc es ,
secondary mechanisms, including local filing may be used by
c o u nt ries as a b ac k u p .
A ction 1 3
I mplications
The guidance provided in the Final Report with
respect to the master file and local file differs
from current documentation requirements. These
differences will require companies to review their
ex is t ing do c u m ent at io n and t h e p ro c es s u s ed t o
p ro du c e it .
The CbC template introduced in the Final Report
is an entirely new reporting requirement.
Companies will have to review the requirements
c aref u l l y in o rder t o u nders t and t h e m o s t
ap p ro p riat e ap p l ic at io n o f t h e gu idel ines t o
their particular operating structure. For annual
c o m p l ianc e, c o m p anies need t o p l an 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 c o l l ec t
the required information as efficiently as possible,
inc l u ding devel o p ing s u s t ainab l e 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.
As t h e gu idanc e p ro vided b y t h e OECD regarding
the new reporting requirements now is final,
c o m p anies s h o u l d m o nit o r devel o p m ent s
w it h res p ec t t o t h e ado p t io n o f t h es e new
reporting requirements in the countries in which
t h ey o p erat e.
E Y contacts
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olic and ontro ers
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BEPS Ac t io n 13:
Anal y s is
hat is the action tr ing to
achie e
Ac t io n 13 h ad t w o p rim ary go al s : Th e
first was to increase transparency around
m u l t inat io nal c o m p anies ’ (MNC) t ax af f airs b y
requiring them to provide information to tax
au t h o rit ies regarding t h e gl o b al al l o c at io n o f
inc o m e, t ax es p aid, and c ert ain indic at o rs o f
t h e l o c at io n o f ec o no m ic ac t ivit y am o ng t h e
t ax j u ris dic t io ns in w h ic h MNC gro u p s o p erat e.
Th is w il l b e do ne t h ro u gh t h e c o u nt ry - b y c o u nt ry (Cb C) t em p l at e.
onald an den re el
+ 31 8 8 40 7 9 016
ro nal d.van.den.b rek el @ nl .ey .c o m
Th e s ec o nd go al w as t o s im p l if y t rans f er
p ric ing do c u m ent at io n c o m p l ianc e b u rdens
f o r t ax p ay ers , w h il e at t h e s am e m ak e
t h e do c u m ent at io n m o re val u ab l e f o r t ax
au t h o rit ies .
W ere any of the action
recommendations
ne pected
No . Th e OECD h ad s et o u t t h e t h ree- t iered
ap p ro ac h in it s draf t Sep t em b er 2014 Ac t io n
13 rep o rt , s o t h ere w ere no s u rp ris es in t h e
Final Report.
I s there any interaction
between this action and the
others
Th e Cb C t em p l at e w il l b e u s ed as a ris k
as s es s m ent t o o l b y t ax au t h o rit ies . It is
p o s s ib l e t h at any inc o ns is t enc ies in t h e
information provided could raise questions
in t h e au t h o rit ies ’ m inds as t o w h et h er
inap p ro p riat e t ax p l anning h as t ak en p l ac e,
s o o ne c o u l d s ay t h e t em p l at e m igh t p ro vide
an au dit ro adm ap f o r t h e t ax au t h o rit ies t o
l o o k int o is s u es addres s ed u nder o t h er BEPS
Ac t io n it em s .
Regarding t rans f er p ric ing do c u m ent at io n, t h e
inf o rm at io n t o b e inc l u ded in t h e m as t er and
local files relates to the substantive changes
devel o p ed u nder Ac t io ns 8 - 10 o n al igning
profits with value creation. The master/local
166
lo al a
olic and ontro ers
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file information is intended to provide tax
au t h o rit ies w it h det ail s o n is s u es s u c h as
int angib l es , t h e f u nc t io ns o f as s et - o w ning
ent it ies , and ris k al l o c at io n. Ru l ings , w h ic h
are s u b s t ant ivel y addres s ed u nder Ac t io n 5
(Harm f u l Tax Prac t ic es ), w il l b e p ro vided in t h e
master and local files (a summary of the ruling
in the master file, and a copy of the full text in
the local file).
H ave any countries made
specific comments in
relation to this action
Th ro u gh o u t t h e p ro c es s , t h ere w as m u c h
c o nt ro vers y and deb at e o n w h et h er t h e
dat a rep o rt ed o n t h e Cb C t em p l at es s h o u l d
b e m ade p u b l ic . Wh il e s o m e c o u nt ries and
vario u s no n- go vernm ent al o rganiz at io ns
p u s h ed f o r m ak ing t h e dat a p u b l ic , o t h er
c o u nt ries argu ed t h at t h e dat a s h o u l d b e
s h ared o nl y w it h t ax au t h o rit ies in o rder t o
p ro t ec t c o m m erc ial l y s ens it ive inf o rm at io n.
Th e OECD u l t im at el y dec ided t h at Cb C rep o rt s
should remain confidential, and chose a
m ec h anis m u nder w h ic h Cb C rep o rt s w il l
b e t u rned o ver t o t h e t ax au t h o rit y in t h e
c o u nt ry o f t h e u l t im at e p arent c o m p any .
Th at w il l enab l e c o u nt ries t o s t o p ex c h anging
inf o rm at io n w it h c o u nt ries ab o u t w h ic h t h ey
have confidentiality concerns.
In the European Union, the question of
w h et h er Cb C dat a s h o u l d b e p u b l ic l y dis c l o s ed
h as no t y et b een res o l ved. Wh il e t h e Eu ro p ean
Parl iam ent h as b een p u s h ing t o ex t end
p u b l ic Cb C rep o rt ing o b l igat io ns (w h ic h are
al ready im p o s ed in t h e EU o n t h e b ank ing
s ec t o r and l o gging and ex t rac t ive indu s t ries )
t o c ert ain m u l t inat io nal s in o t h er indu s t ries ,
a p ro p o s ed Cb C rep o rt ing direc t ive rel eas ed
b y t h e Eu ro p ean Co m m is s io n o n 28 Janu ary
2016 would not require the public disclosure
o f Cb C rep o rt s . Ho w ever, t h e Co m m is s io n
no t ed t h at t h e p ro p o s al do es no t p rec l u de
it f ro m dec iding in t h e f u t u re t o p ro p o s e
p u b l ic dis c l o s u re o b l igat io ns o n c o m p anies .
Th e Co m m is s io n is c u rrent l y c arry ing o u t an
im p ac t as s es s m ent t o det erm ine w h et h er
multinationals should be required to publicly
M inimum standards
See p age 32 f o r m o re inf o rm at io n.
dis c l o s e c ert ain inf o rm at io n o n a Cb C b as is . Th e Co m m is s io n
expects to finalize the impact assessment and announce a decision
o n t h e m at t er in s p ring 2016.
As ide f ro m t h e p u b l ic dis c l o s u re is s u e, s o m e go vernm ent s
s t il l h ave c o nc erns t h at o t h er t ax au t h o rit ies c o u l d m is u s e t h e
inf o rm at io n, f o r ex am p l e b y l eak ing it t o t h e p res s o r b as ing
t rans f er p ric ing adj u s t m ent s o n t h e dat a. Th e OECD’ s US del egat e,
Ro b ert St ac k , Treas u ry Dep u t y As s is t ant Sec ret ary (Int ernat io nal
Tax Affairs), said in public comments after the Final Reports were
is s u ed t h at p o t ent ial m is u s e o f Cb C dat a is “ ab s o l u t el y s o m et h ing
w e’ re go ing t o b e o n t h e l o o k o u t f o r, if c o u nt ries are go ing t o t ak e
t h ings l ik e h ead c o u nt and m ak e as s u m p t io ns ab o u t al l o c ab l e
profit.” Stack said the US would be “willing and able” to suspend
inf o rm at io n ex c h ange w it h c o u nt ries t h at m is u s e dat a t ak en f ro m
Cb C rep o rt s .
hat s going to happen ne t, and how
niform might implementation e
At l eas t a do z en c o u nt ries int ro du c ed l egis l at io n in 2015 t o
im p l em ent t h e new t rans f er p ric ing do c u m ent at io n and Cb C
requirements. Interestingly, the transfer pricing documentation
rec o m m endat io ns al s o s eem t o h ave b een p ic k ed u p b y a nu m b er
o f no n- OECD c o u nt ries , p ro viding t h em w it h a m ec h anis m t o b ring
t h em s el ves int o great er al ignm ent w it h OECD m em b ers . In 2016
w e are l ik el y t o s ee a s t eady dru m b eat o f c o u nt ries p ro p o s ing and
im p l em ent ing l egis l at io n as w el l as s igning c o m p et ent au t h o rit y
agreem ent s t o p ro vide t h e l egal b as is f o r ex c h anging Cb C rep o rt s .
Wh il e t h e c o u nt ries p art ic ip at ing in t h e BEPS p ro j ec t c o m m it t ed
t o t h e c o ns is t ent im p l em ent at io n o f Ac t io n 13, w e h ave al ready
s een s o m e variat io ns in t h e w ay t h at c o u nt ries are s et t ing o u t t h e
requirements on issues such as timing, materiality thresholds and
definition of terms. These issues have the possibility of creating
u nc ert aint y f o r rep o rt ing b u s ines s es .
In addit io n, t h e s ec o ndary rep o rt ing m ec h anis m is an is s u e t h at
c o u l d c reat e c o nf u s io n. So m e MNCs m ay b el ieve t h at if t h eir
u l t im at e p arent c o u nt ry do es no t int ro du c e Cb C rep o rt ing t h at
t h e c o m p any do es no t need t o w o rry ab o u t Cb C rep o rt ing in t h at
j u ris dic t io n. Ho w ever, even if t h at c o u nt ry do es no t int ro du c e it ,
t h e c o m p any m ay s t il l b e s u b j ec t t o Cb C rep o rt ing b ec au s e o t h er
c o u nt ries w il l l ik el y h ave a s ec o ndary rep o rt ing m ec h anis m in
place, requiring CbC reporting for the full group including the
u l t im at e p arent .
Many c o m m ent at o rs f o res ee c o u nt ries p u s h ing f o r m o re
inf o rm at io n, eit h er b ro ader o r deep er inf o rm at io n at t h e ent it y
l evel w h en Ac t io n 13 rec eives a f u l l review in 2020. Wh en as k ed
ab o u t t h is in an Oc t o b er 2014 int erview w it h EY , Jo s ep h ine
Feehily, who was at that time Chair of the Irish Revenue
13
Commission and Chair of the OECD’s Forum on Tax Administration,
s t at ed t h at : “ Wh et h er w h at is c u rrent l y envis aged u nder Cb C w il l
w h et adm inis t rat io ns ’ ap p et it e f o r m o re inf o rm at io n w il l dep end
o n w h at t rans p ires f ro m t h e anal y s is o f t h e dat a t h at is rec eived in
the first offering and their ability to leverage the data. But I think
you are right to ask the question (of whether tax administrations
will push for entity level reporting), and I think that question will be
as k ed w h en t h e t im e f o r review c o m es aro u nd.”
W hat are the potential impacts on
siness
For CbC reporting, companies should now be doing readiness
as s es s m ent s t o s ee w h et h er t h ey h ave t h e dat a t h at w il l b e
required and whether they are able to efficiently source such data
f ro m t h eir s y s t em s .
Co m p anies s h o u l d al s o review t h e dat a c aref u l l y t o det erm ine
w h et h er any o f t h e inf o rm at io n c o u l d b e m is int erp ret ed b y t h e
t ax au t h o rit ies , o r w h et h er t h e dat a m ay need t o b e ex p l ained
eit h er in Tab l e III o f t h e Cb C t em p l at e o r in t h e t rans f er p ric ing
do c u m ent at io n. EY ’ s 2015 rep o rt t it l ed “A new mountain to
climb: Tax reputation risk, growing transparency demands and
1
the importance of data readiness” p ro vides det ail ed anal y s is and
guidance that companies may wish to consider in fulfilling these
t w o im p o rt ant ac t ivit ies .
Many c o m p anies are addres s ing t h eir Cb CR readines s b y s p l it t ing
t h e w o rk s t ream int o t w o f u nc t io ns — o ne f o c u s ing o n t h e dat a
avail ab il it y , t h e o t h er o n t h e s u b s t anc e o f t h e c o nt ent . Bu s ines s
m ay al s o w is h t o c o ns ider o rganiz ing t h eir p ro j ec t t eam int o o ne in
w h ic h t h e m em b ers are f u l l y u p t o s p eed o n b o t h f u nc t io ns . Th is
w il l enh anc e t h e t eam ’ s ef f ec t ivenes s and p revent dis c o rdanc e.
For transfer pricing documentation, companies should perform a
gap anal y s is o f w h at inf o rm at io n t h ey al ready h ave f o r t h e new
transfer pricing documents, in particular for the master file, and
w h at t h ey w il l need t o o b t ain. Co m p anies s h o u l d al s o give very
careful thought to the structure they choose for the master file,
including definitions and what level of aggregation to use. The
c h o ic e o f s t ru c t u re w il l b e a c rit ic al o ne; am ending t h e s t ru c t u re
down the road could be seen as a red flag to tax authorities,
potentially triggering an audit or other scrutiny and enquiries.
Mo s t im p o rt ant l y , c o m p anies s h o u l d no t t ak e a “ s it and w ait ”
approach. While the 31 December 2017 date for filing the first
Cb C rep o rt s m ay s eem f ar o f f , c o m p anies s h o u l d al ready b e
preparing to implement the Action 13 requirements. Given the
t im e needed t o gat h er and review al l o f t h e inf o rm at io n t h at w il l b e
required, companies should not leave anything to the last minute.
1
See h t t p : / / w w w .ey .c o m / Pu b l ic at io n/ vw LUAs s et s / ey - m anaging- t ax transparency-and-reputation-risk/$FILE/ey-managing-tax-transparency-andrep u t at io n- ris k .p df .
lo al a
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ction
14
OECD releases final
rep o rt o n im p ro ving t h e
ef f ec t ivenes s o f 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
Executive summary
On 5 Oc t o b er 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) released its final report on improving the effectiveness of dispute resolution
mechanisms (Action 14) under its Action Plan on Base Erosion and Profit Shifting
(BEPS). This report was released in a package that included final reports on all 15 BEPS
Ac t io ns .
Th e Ac t io n 14 rep o rt , Making Dispute Resolution Mechanisms More Effective (the Final
Rep o rt ), p res ent s a c o m m it m ent b y c o u nt ries t o im p l em ent a s o - c al l ed “ m inim u m
s t andard” o n dis p u t e res o l u t io n, ac c o rding t o t h e OECD.
The Final Report clarifies that its publication means that the G20 and OECD countries
p art ic ip at ing in t h e BEPS p ro j ec t h ave agreed t o im p l em ent t h ree o verarc h ing p rinc ip l es
t h at rep res ent a m inim u m s t andard w it h res p ec t t o t h e m u t u al agreem ent p ro c edu re
(MAP) p ro c es s b y inc o rp o rat ing t h es e p rinc ip l es int o do m es t ic l aw and/ o r t h eir t reat y
int erp ret at io n/ ap p l ic at io n. Th e m inim u m s t andard p rinc ip l es inc l u de:
(1) Allowing taxpayers access to the MAP process when the requirements for
t ax p ay ers t o ac c es s t h e MAP p ro c es s are m et
(2) As s u ring t h at do m es t ic adm inis t rat ive p ro c edu res do no t b l o c k ac c es s t o t h e MAP
p ro c es s
(3) Im p l em ent at io n b y c o u nt ries o f Art ic l e 25 o f t h e OECD Mo del Tax Co nvent io n in
go o d f ait h
In addition, the Final Report introduces eleven so-called “Best Practices” that
c o m p l em ent t h e res p ec t ive m inim u m s t andard p rinc ip l es . Wh il e t h e m inim u m s t andards
reflect consensus by the participating countries to take specific measures that are
aim ed at res o l ving t reat y - b as ed dis p u t es in a t im el y m anner, t h e Bes t Prac t ic es h ave
no t b een ap p ro ved b y al l G20 and OECD c o u nt ries . Th e Bes t Prac t ic es general l y h ave
a more subjective and qualitative character, but reflect the OECD’s concern that these
is s u es o u gh t t o b e addres s ed in o rder t o im p ro ve t h e f u nc t io ning o f t h e MAP p ro c es s .
Finally, the Final Report lists a group of 20 countries that have declared their
c o m m it m ent t o p ro vide f o r m andat o ry b inding MAP arb it rat io n.
168
lo al a
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A ction 1 4
Go o d f ait h im p l em ent at io n o f Art ic l e 25 m eans t h at
unless the treaty specifically lists certain limitations,
o ne c o m p et ent au t h o rit y c anno t u nil at eral l y c it e
p erc eived ab u s e b y a t ax p ay er as reas o n t o b l o c k
t ax p ay er ac c es s t o MAP.
Detailed discussion
In addit io n, go o d f ait h im p l em ent at io n ent ail s t h e f o l l o w ing:
In c o nt ras t t o t h e OECD dis c u s s io n draf t o n Ac t io n 14 is s u ed
1
o n 18 Dec em b er 2014, w h ic h p res ent ed a s eries o f o p t io ns ,
questions and suggestions as to how to improve dispute
resolution mechanisms, the Final Report presents tangible and
agreed t o p ro p o s al s t o im p ro ve dis p u t e res o l u t io n.
(ii) Im p ro ving MAP ef f ec t ivenes s b y b ec o m ing m em b er o f t h e
Forum of Tax Administration MAP Forum (FTA MAP Forum)
(i)
Minimum dispute resolution standard
mplementing rticle
of the
on ention in good faith
odel a
The minimum standard requires that Article 25 is implemented
and ap p l ied in s u c h a w ay t h at it al l o w s c o m p et ent au t h o rit ies
to discuss and resolve differences or difficulties regarding the
int erp ret at io n o r ap p l ic at io n o f t h e OECD Mo del Tax Co nvent io n.
That means that participating countries are required to
im p l em ent p aragrap h s 1- 3 o f t h e OECD Mo del ent irel y in t h e
MAP art ic l e o f t h eir t reat ies and t h at c o u nt ries s h o u l d al l o w f o r
MAP filings that address the elimination of double taxation in
c as es no t (ex p l ic it l y ) p ro vided in t h e OECD Mo del . It al s o m eans
t h at t rans f er p ric ing is s u es l eading t o ec o no m ic do u b l e t ax at io n
should qualify for MAP relief.
A c o m m it m ent t o res o l ve a MAP c as e w it h in a 24- m o nt h s
t im ef ram e
(iii) Tim el y rep o rt ing o f a c o u nt ry ’ s MAP s t at is t ic s
(iv) Al l o w ing f o r review o f t h e m inim u m
FTA MAP Forum
MAP s t andards b y t h e
(v) Ex p l ic it l y p ro viding o r c l arif y ing w h et h er t h e c o u nt ry al l o w s
f o r MAP arb it rat io n o r no t
elated est ractice
Bes t Prac t ic e # 1: Co u nt ries s h o u l d inc l u de p aragrap h 2 o f Art ic l e
9 in t h eir t ax t reat ies . Th is regards t h e o b l igat io n o f t h e Ot h er
Co nt rac t ing St at e t o m ak e ap p ro p riat e adj u s t m ent s if a t rans f er
pricing adjustment is made in a Contracting State to reflect
t h e arm ’ s l engt h s t andard. So m e c o u nt ries are o f t h e o p inio n
t h at w it h o u t p aragrap h 2, t h ey c anno t m ak e a c o rres p o nding
adj u s t m ent , and t h is Bes t Prac t ic e is int ended t o res o l ve
t h is is s u e.
Go o d f ait h im p l em ent at io n o f Art ic l e 25 f u rt h erm o re m eans
that unless the treaty specifically lists certain limitations, one
c o m p et ent au t h o rit y c anno t u nil at eral l y c it e p erc eived ab u s e
b y a t ax p ay er as reas o n t o b l o c k t ax p ay er ac c es s t o MAP. Su c h
a dec is io n m u s t b e review ed b y t h e o t h er c o u nt ry ’ s c o m p et ent
authority. However, this does not mean that filing a MAP request
w il l event u al l y res u l t in avo idanc e o f do u b l e t ax at io n. Th at s t il l
rem ains t o b e dec ided b y t h e res p ec t ive c o m p et ent au t h o rit ies
du ring t h e MAP p ro c es s .
1
See EY Gl o b al Tax Al ert , OECD releases discussion draft on more effective
dispute resolution mechanisms under BEPS Action 14, dat ed 22 Dec em b er
2014.
lo al a
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A ction 1 4
ss ring that domestic proced res don t loc
access to the
process
The discussions on Action 14 identified a number of different
o b s t ac l es t o dis p u t e res o l u t io n t h ro u gh t h e MAP p ro c es s .
Th o s e c o u nt ries t h at h ave ac c ep t ed t h e m inim u m s t andard are
required to take steps to counter those obstacles and allow for
efficient dispute resolution through the use of MAP that include
t h e f o l l o w ing:
(i)
Pu b l is h ru l es , gu idel ines and p ro c edu res o n h o w t o ac c es s
and u s e t h e MAP p ro c es s and t ak e ap p ro p riat e m eas u res t o
ens u re t h is inf o rm at io n is avail ab l e t o t ax p ay ers
(ii) Pu b l is h MAP gu idanc e o n a s h ared p l at f o rm u s ing a
dedicated country MAP profile format that will be developed
by the FTA MAP Forum
(iii) As s u re t h at t h e s t af f in c h arge o f t h e MAP p ro c es s h as t h e
au t h o rit y t o res o l ve c as es t im el y and is no t dep endent o n
t h e ap p ro val o r direc t io n o f t h e t ax adm inis t rat io n p ers o nnel
w h o m ade t h e adj u s t m ent s
(iv) As s u re t h at p erf o rm anc e indic at o rs
s t af f do no t inc l u de s u s t ained au dit
m aint aining o f t ax revenu e, b u t rat h
o f MAP c as es res o l ved, c o ns is t enc y
t h e t im e t o res o l ve MAP c as es
f o rc o m
adj u s t m
er inc l u
in t reat
p et ent au t h o rit y
ent s o r t h e
de t h e nu m b er
y ap p l ic at io n and
(v) Assure that adequate resources are provided to the MAP
f u nc t io n
(vi) Clarification that audit settlements between tax authorities
and t ax p ay ers do no t p rec l u de ac c es s t o MAP (Th is m ay
be different in cases where a taxpayer voluntarily requests
a final audit settlement and it is clear that the settlement
is h andl ed b y an indep endent b o dy , b u t c o u nt ries s h o u l d
no t if y t reat y p art ners o f s u c h p ro c es s es .)
(vii) Al l o w ing f o r ro l l b ac k o f Advanc e Pric ing Agreem ent s (APAs )
in ap p ro p riat e c as es , if t h ere is an APA p ro gram in p l ac e
17 0
lo al a
olic and ontro ers
riefing
elated est ractices
Bes t Prac t ic e # 2: Co u nt ries s h o u l d h ave ap
in p l ac e t o p u b l is h , o n an ano ny m o u s b as is
u nder p aragrap h 3 o f Art ic l e 25 in o rder t o
b il at eral ap p l ic at io n o f t ax t reat ies and t o p
f u t u re dis p u t es .
p ro p riat e p ro c edu
, agreem ent s reac
enc o u rage c o ns is
ro vide gu idanc e f o
res
h ed
t ent
r
Bes t Prac t ic e # 3: Co u nt ries s h o u l d devel o p gl o b al aw arenes s o f
t h e au dit / ex am inat io n f u nc t io ns invo l ved in int ernat io nal m at t ers
through the delivery of the FTA’s “Global Awareness Training
Module” to appropriate personnel. The FTA encourages global
aw arenes s o f au dit f u nc t io ns , w h ic h inc l u des aw arenes s o f (i) t h e
p o t ent ial f o r c reat ing do u b l e t ax at io n; (ii) t h e im p ac t o f p ro p o s ed
adj u s t m ent s o n t h e t ax b as e o f o ne o r m o re t ax j u ris dic t io ns
and (iii) t h e p ro c es s es and p rinc ip l es t h at c o m p et ent au t h o rit ies
c o ns ider t o rec o nc il e c o m p et ing j u ris dic t io nal c l aim s . Th is
best practice encourages countries to participate in the FTA’s
ac t ivit ies in t h is res p ec t .
Bes t Prac
p ro gram s
c ert aint y
t rans f er p
t ic e # 4: Co u nt ries s h o u l d im p l em ent b il at eral APA
. Bil at eral agreem ent s p res ent an inc reas ed l evel o f
f o r b o t h go vernm ent s and t ax p ay ers and c an p revent
ric ing dis p u t es .
Bes t Prac t ic e # 5: Co u nt ries s h o u l d im p l em ent ap p ro p riat e
procedures to permit taxpayer requests for multi-year resolution
of recurring issues with respect to filed tax years through MAP, if
t h e rel evant f ac t s and c irc u m s t anc es are t h e s am e and s u b j ec t t o
verification of such facts and circumstances.
A ction 1 4
Participating countries are required to publish MAP guidance that
clearly identifies the specific information and documentation that
is needed to submit a request for MAP assistance. This serves to
avo id c o u nt ries l im it ing ac c es s t o MAP b as ed o n t h e argu m ent t h at
there is insufficient information provided by the taxpayer, once the
t ax p ay er h as c o m p l ied w it h t h e p u b l is h ed gu idanc e.
llowing ta pa ers access to the
process
when the re irements for access to
are met
To al l o w t ax p ay ers t o m ak e u s e o f Art ic l e 25, and in p art ic u l ar
p aragrap h 1 (p res ent ing a c as e w it h in t h ree y ears t o t h e
c o m p et ent au t h o rit y o f t h e St at e o f w h ic h t h e t ax p ay er is
resident), this component of the minimum standard requires
c o u nt ries t o m ak e s u re t h at b o t h c o m p et ent au t h o rit ies are
aware of MAP requests that are filed. This means that a taxpayer
should be able to file a request in either of the Contracting States
(which would require an amendment to the current wording
o f Art ic l e 25 p aragrap h 1) o r, al t ernat ivel y , t h at a b il at eral
notification or consultation process should be implemented
t o al l o w t h e o t h er c o m p et ent au t h o rit y t o b e inf o rm ed in c as e
o ne c o m p et ent au t h o rit y c o ns iders t h e t ax p ay er’ s o b j ec t io n
not justified.
Furthermore, participating countries are required to publish
MAP guidance that clearly identifies the specific information
and documentation that is needed to submit a request for MAP
as s is t anc e. Th is s erves t o avo id c o u nt ries l im it ing ac c es s t o MAP
based on the argument that there is insufficient information
p ro vided b y t h e t ax p ay er, o nc e t h e t ax p ay er h as c o m p l ied w it h
t h e p u b l is h ed gu idanc e.
Finally, the minimum standard requires countries to allow for
im p l em ent at io n o f MAP agreem ent s regardl es s o f t h e ap p l ic ab l e
t im e l im it s in do m es t ic l aw o f t h e Co nt rac t ing St at es . If c o u nt ries
are no t w il l ing t o do s o , t h en al t ernat ivel y t h o s e c o u nt ries s h o u l d
l im it t h e t im e in w h ic h t h ey m ay m ak e an adj u s t m ent u nder
Art ic l e 9 (1) (As s o c iat ed Ent erp ris es ) o r Art ic l e 7 (2) (Bu s ines s
Profits) to avoid the potential for taxpayers to be subject to late
adj u s t m ent s f o r w h ic h no MAP rel ief is avail ab l e.
elated est ractices
Bes t Prac t ic e # 6: Co u nt ries s h o u l d ens u re t h at ap
m eas u res are t ak en t o s u s p end c o l l ec t io n p ro c edu
c as e is p ending in MAP. At a m inim u m , t h e s am e s
o f c o l l ec t io n p ro c edu res s h o u l d ap p l y t o MAP t h at
do m es t ic adm inis t rat ive p ro c edu res o r j u dic ial rem
p ro p riat e
res w h il e a
u s p ens io n
ap p l y t o
edies .
Bes t Prac t ic e # 7 : MAP s h o u l d b e avail ab l e t o t ax p ay ers as an
o p t io n regardl es s o f t h e j u dic ial o r adm inis t rat ive rem edies
p ro vided u nder do m es t ic l aw , and c o u nt ries s h o u l d f ac il it at e
rec o u rs e t o MAP f o r t ax p ay ers . Th is m eans t h at t ax p ay ers
s h o u l d b e ab l e t o c h o o s e w h et h er t h ey go t o MAP o r ano t h er
dis p u t e res o l u t io n f o ru m .
Bes t Prac t ic e # 8 : A c o u nt ry ’ s p u b l is h ed MAP gu idanc e s h o u l d
inc l u de an ex p l anat io n o f t h e rel at io ns h ip b et w een MAP and
do m es t ic l aw adm inis t rat ive and j u dic ial rem edies . In p art ic u l ar,
it should be clarified whether the competent authority considers
it s el f l egal l y b o u nd b y a do m es t ic c o u rt dec is io n w h en h andl ing
a MAP c as e o r t h e c o m p et ent au t h o rit y m ay deviat e f ro m a
do m es t ic c o u rt dec is io n.
Bes t Prac t ic e # 9 : A c o u nt ry ’ s p u b l is h ed MAP gu idanc e s h o u l d
provide that taxpayers can file for MAP relief in the case of bona
fide taxpayer-initiated adjustments that are permitted under the
do m es t ic l aw o f a t reat y p art ner. To t h e ex t ent t h ere is a go o d
f ait h ef f o rt b y a t ax p ay er t o ens u re c o m p l ianc e in o ne c o u nt ry
and, f o r ex am p l e, adj u s t a p revio u s l y rep o rt ed at t rib u t io n o f
profits to a permanent establishment, taxpayers should be
able to file for MAP relief in the other country in order to avoid
res u l t ing do u b l e t ax at io n.
Bes t Prac t ic e # 10: Co u nt ries ’ MAP gu idanc e s h o u l d al s o p ro vide
gu idanc e o n t h e c o ns iderat io n o f int eres t and p enal t ies in
t h e MAP.
Bes t Prac t ic e # 11: Co u nt ries ’ MAP gu idanc e s h o u l d p ro vide
gu idanc e o n m u l t il at eral MAPs and APAs .
lo al a
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A ction 1 4
The final report lists a group of 20 countries (Australia, Austria,
Belgium, Canada, France, Germany, Ireland, Italy, Japan,
Lu x em b o u rg, t h e Net h erl ands , New Zeal and, No rw ay , Po l and,
Sl o venia, Sp ain, Sw eden, Sw it z erl and, t h e Unit ed Kingdo m
and t h e Unit ed St at es ) t h at h ave dec l ared t h eir c o m m it m ent t o
p ro vide f o r m andat o ry b inding MAP arb it rat io n.
The final report does not deliver on certain specific dispute
resolution solutions that were requested in comments with
res p ec t t o t h e Dec em b er 2014 dis c u s s io n draf t . Nam el y , t h e
request for some form of mediation as part of the MAP process
t o al l o w c o m p et ent au t h o rit ies t o res o l ve dis p u t es and t h e
request for the outsourcing of certain competent authority
f u nc t io ns rel at ed t o t h e MAP p ro c es s t o ano t h er int ernat io nal
b o dy are no t addres s ed. It ap p ears t h at t h e OECD view is t h at
these proposals can be best addressed by the FTA’s MAP Forum
or the FTA’s “Global Awareness Training Module.” This may
al s o h ave b een an area w h ere no f u rt h er c o ns ens u s o f t h e
p art ic ip at ing c o u nt ries w as p o s s ib l e.
In addition, the final report does not prescribe arbitration as the
p ref erred dis p u t e res o l u t io n s o l u t io n. Wit h res p ec t t o arb it rat io n,
it only requires countries to explicitly provide or clarify whether
the country allows for MAP arbitration or not. However, the final
rep o rt l is t s a gro u p o f 20 c o u nt ries (Au s t ral ia, Au s t ria, Bel giu m ,
Canada, France, Germany, Ireland, Italy, Japan, Luxembourg,
t h e Net h erl ands , New Zeal and, No rw ay , Po l and, Sl o venia, Sp ain,
Sw eden, Sw it z erl and, t h e Unit ed Kingdo m and t h e Unit ed St at es )
t h at h ave dec l ared t h eir c o m m it m ent t o p ro vide f o r m andat o ry
b inding MAP arb it rat io n. To t h is end, a m andat o ry b inding
arb it rat io n p ro vis io n w il l b e devel o p ed as p art o f t h e nego t iat io n
o f t h e m u l t il at eral ins t ru m ent envis aged b y Ac t io n 15 o f t h e
BEPS Ac t io n Pl an.
17 2
lo al a
olic and ontro ers
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A ction 1 4
I mplications
The Minimum Standards reflected in the final
rep o rt are t o b e im p l em ent ed t h ro u gh u p dat ed
Co m m ent ary t o t h e rel evant OECD Mo del Tax
Co nvent io n t reat y art ic l es . In s o m e c as es t h e
p rinc ip l es t h at m ak e u p t h e m inim u m s t andard
are t o b e inc l u ded as c h anges t o t h e t ex t o f t h e
OECD Mo del .
Th e c o u nt ries t h at h ave ac c ep t ed t h e m inim u m
s t andard al s o agreed t h at t h is m inim u m s t andard
w il l b e eval u at ed t h ro u gh a p eer review m o nit o ring
m ec h anis m . Al l OECD and G20 c o u nt ries w il l
u ndergo review s regarding t h e im p l em ent at io n o f
t h e m inim u m s t andard, w h ic h w il l b e m em o rial iz ed
in t h e f o rm o f a rep o rt t h at w il l ident if y and
des c rib e s t rengt h s and s h o rt c o m ings t h at m ay ex is t
and w il l p ro vide rec o m m endat io ns as t o h o w t o
addres s t h e s h o rt c o m ings . Th is m o nit o ring p ro c es s
is expected to be developed during the first quarter
o f 2016.
E Y contacts
For additional information concerning
t h is Al ert , p l eas e c o nt ac t :
• Erns t & Y o u ng LLP
Gl o b al Tax Des k
New Y o rk
• Gerrit Gro en
+ 1 212 7 7 3- 8 627
gerrit .gro en@ ey .c o m
• Jo ana Derm endj ieva
+ 1 212 7 7 3 3106
j o ana.derm endj ieva@ ey .c o m
• Vikita Shah
+ 1 212 7 7 3 339 5
vik it a.s h ah @ ey .c o m
• Erns t & Y o u ng LLP
Int ernat io nal Tax Servic es
Was h ingt o n, DC
• Monique van Herksen
+ 1 202 327 627 6
monique.vanherksen@ey.com
lo al a
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BEPS Ac t io n 14:
Anal y s is
hat is the action tr ing to
achie e
o
The goal of Action 14 was to find solutions
t o ens u re t h at t reat y - rel at ed dis p u t es c an b e
effectively and efficiently resolved under the
m u t u al agreem ent p ro c edu re (MAP). In t h e
dis c u s s io n draf t rel eas ed in Dec em b er 2014,
t h e OECD s aid it w as rec o gniz ed t h at , des p it e
earl ier ef f o rt s t o m ak e dis p u t e res o l u t io n
m ec h anis m s w o rk b et t er, f u rt h er w o rk w as
needed t o addres s t h e o b s t ac l es t h at p revent
c o u nt ries f ro m res o l ving dis p u t es t h ro u gh
t h e MAP p ro c es s . Ac c o rding t o t h e OECD,
Action 14 therefore presented a “unique
o p p o rt u nit y ” t o m ak e a dif f erenc e in dis p u t e
res o l u t io n and t o o verc o m e t radit io nal
o b s t ac l es .
anson
+ 1 202 327 569 6
ro b .h ans o n@ ey .c o m
Ac t io n 14 al s o s o u gh t t o ex p l o re w h y t h e
ado p t io n o f m andat o ry b inding arb it rat io n
h as no t b een as b ro ad as ex p ec t ed, and t o
addres s t h e p o l ic y and p rac t ic al c o nc erns
t h at s o m e c o u nt ries h ave regarding
arb it rat io n p ro vis io ns .
El in edgpeth
+ 1 202 327 8 319
el vin.h edgp et h @ ey .c o m
17 4
lo al a
olic and ontro ers
riefing
W ere any of the action
recommendations
ne pected
No t real l y . Many o f t h e b es t p rac t ic es
described in the Final Report are measures
t h at s o m e c o u nt ries h ad al ready ado p t ed
inf o rm al l y , and t h ey w il l no w b e f o rm al l y
rec o gniz ed in t h e Co m m ent ary t o t h e OECD
Mo del Tax Co nvent io n. On t h e arb it rat io n
is s u e, c o ns idering t h e s t ro ng o b j ec t io ns
ex p res s ed b y s o m e go vernm ent s and w h at
s o m e c o m m ent at o rs des c rib ed as “ t ep id”
s u p p o rt f o r arb it rat io n in t h e Ac t io n 14
dis c u s s io n draf t , in s o m e w ay s it s eem s
rem ark ab l e t h at at t h e end o f t h e p ro c es s w e
no w h ave 20 c o u nt ries t h at h ave f o rm al l y
c o m m it t ed t o p ro viding f o r m andat o ry
b inding arb it rat io n in t h eir t ax t reat ies .
Th at t h o s e 20 c o u nt ries are invo l ved in m o re
t h an 9 0% o f t h e o u t s t anding MAP c as es
(ac c o rding t o t h e OECD’ s MAP s t at is t ic s f o r
2013) could mark a significant advance
in res o l ving t reat y dis p u t es , and c o u l d p u t
great er p res s u re o n t h e rem aining c o u nt ries
t o c o m m it t o arb it rat io n at s o m e p o int in
t h e f u t u re.
M inimum standards
See p age 32 f o r m o re inf o rm at io n.
I s there any interaction between this
action and the others
In m any w ay s , Ac t io n 14 is t h e l inc h p in t o t h e s u c c es s o f t h e
entire BEPS project — to implement the significant changes
devel o p ed u nder BEPS and ens u re t h at t h ere is neit h er
u nint ended do u b l e t ax at io n no r do u b l e no n- t ax at io n, t h ere m u s t
b e s t ro ng and ef f ec t ive m ec h anis m s in p l ac e w h en dis p u t es
do (inevit ab l y ) aris e. Wh il e t h e go al o f t h e BEPS p ro j ec t is t o
c reat e a m o re c o h es ive int ernat io nal t ax f ram ew o rk , it w o u l d
b e naï ve t o as s u m e t h at go vernm ent s w il l s u ddenl y s t o p h aving
dis agreem ent s o ver h o w a p art ic u l ar t rans ac t io n s h o u l d b e t ax ed
o r h o w a t reat y p ro vis io n s h o u l d b e ap p l ied. Indeed, w e c o u l d
s ee dis p u t es inc reas e if c o u nt ries do no t im p l em ent t h e BEPS
rec o m m endat io ns in t h eir do m es t ic l aw in a b ro adl y c o ns is t ent
m anner. In p art ic u l ar, t h e new and/ o r revis ed ru l es regarding
limitation on benefits (Action 6), permanent establishment
(Ac t io n 7 ) and t rans f er p ric ing (Ac t io ns 8 - 10) c o u l d c reat e new
c h al l enges f o r t ax p ay ers and t ax adm inis t rat io ns al ik e. Having
ef f ec t ive MAP p ro c es s es in p l ac e c o u l d u l t im at el y s erve as a
c h ec k agains t an u np rinc ip l ed ap p l ic at io n o f t h o s e new ru l es and
h el p p revent t h e int ernat io nal t ax f ram ew o rk f ro m des c ending
int o c h ao s .
a e an co ntries made specific
comments in relation to this action
Several go vernm ent s (m any f ro m devel o p ing c o u nt ries )
ex p res s ed s t ro ng o b j ec t io ns t o inc l u ding arb it rat io n p ro vis io ns
in t h eir t ax t reat ies . Th is w as no t s u rp ris ing and s erved t o
u nders c o re t h e h is t o ric al divide b et w een t h e devel o p ed and
devel o p ing c o u nt ries o ver t h e p u rp o s e o f t ax t reat ies and t h e
al l o c at io n o f t ax ing righ t s .
Nevert h el es s , t h e argu m ent b y s o m e go vernm ent s t h at adding
arb it rat io n t o t ax t reat ies w o u l d inf ringe t h eir s o vereign righ t t o
dec ide MAP c as es do es s u gges t s o m e t ro u b l ing im p l ic at io ns , no t
o nl y o n t h e arb it rat io n is s u e b u t f o r t h e MAP p ro c es s in general .
One o f t h e b igges t reas o ns f o r t h e c u rrent MAP “ c ris is ” and
m as s ive b ac k l o g o f c as es is t h at s o m e c o m p et ent au t h o rit ies
14
ap p ear no t t o c o m e t o t h e t ab l e in c o m p l et el y go o d f ait h and
w il l no t m o ve f ro m aggres s ive and/ o r u nreas o nab l e p o s it io ns .
If t h e s o vereignt y argu m ent is a c o u nt ry ’ s w ay o f s ay ing t h at it
do es no t h ave t o c o m p ro m is e and w il l c o nt inu e t o t ak e p o s it io ns
t h at are o u t s ide t h e no rm o r inc o ns is t ent w it h t h e arm ’ s
l engt h p rinc ip l e, t h en a t reat y MAP art ic l e w il l h ave radic al l y
redu c ed ef f ec t ivenes s .
hat s going to happen ne t, and how
niform might implementation e
Making serious progress on MAP will benefit from the G20’s
invo l vem ent in o rder t o m ak e t h e nec es s ary rep airs o f t h e
current flaws in the process and ensure that competent authority
offices are properly staffed and resourced. That means that
political leaders, and not just finance ministers, will have to make
ef f ec t ive dis p u t e res o l u t io n a p rio rit y .
Th e p eer review m ec h anis m t h at w il l b e devel o p ed b y t h e
OECD’s Forum on Tax Administration (FTA) MAP Forum will
al s o b e c rit ic al t o inj ec t ing c o ns is t enc y and dis c ip l ine int o t h e
MAP p ro c es s . It is h o p ed t h at t h e p eer review m ec h anis m
w il l b e as f ar- reac h ing as t h e p eer review p ro c es s u s ed b y t h e
Global Forum on Transparency and Exchange of Information
f o r Tax Pu rp o s es t o ens u re t h at it s m em b ers im p l em ent
t h e int ernat io nal l y agreed s t andards o f t rans p arenc y and
information exchange. The FTA MAP Forum and OECD Working
Part y No . 1 ex p ec t t o devel o p t h e t erm s o f ref erenc e and t h e
as s es s m ent m et h o do l o gy f o r t h e new p eer review p ro c es s b y t h e
end of the first quarter of 2016.
W hat are the potential impacts on
siness
Th
th
to
go
au
e b u s ines s c o m m u nit y h as p l ay ed a k ey ro l e in p ro m o t ing
e need f o r m andat o ry b inding arb it rat io n. It s h o u l d c o nt inu e
endo rs e t h e val u e o f arb it rat io n and s eek t o ens u re t h at
vernm ent s are aw are o f t h e im p o rt anc e o f t h e c o m p et ent
t h o rit y p ro c es s t o gl o b al b u s ines s .
lo al a
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riefing 17 5
ction
15
OECD releases final
rep o rt o n devel o p ing a
m u l t il at eral ins t ru m ent t o
m o dif y b il at eral t ax t reat ies
u nder BEPS Ac t io n 15
Executive summary
On 5 Oc t o b er 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) released its final report on developing a multilateral instrument to modify
bilateral tax treaties (Action 15) under its Action Plan on Base Erosion and Profit
Shifting (BEPS). This report was released in a package that included final reports on all
15 BEPS Ac t io ns .
Th e Ac t io n 15 rep o rt , Devel o p ing a Multilateral Instrument to Modify Bilateral Tax
Treaties (the Multilateral Instrument Report or Final Report), provides an overview of
t h e c u rrent s t at u s o f t h e m u l t il at eral ins t ru m ent , w h ic h aim s t o s w if t l y and c o ns is t ent l y
im p l em ent t h e t ax t reat y - b as ed m eas u res devel o p ed du ring t h e c o u rs e o f t h e BEPS
project. This Final Report is mainly a reproduction of the previously published
deliverables under Action 15, specifically the September 2014 report on developing
a multilateral instrument to modify bilateral tax treaties and the subsequent mandate
issued in February 2015 authorizing the establishment of an ad hoc group to conduct
f u rt h er w o rk o n t h e m u l t il at eral ins t ru m ent . Th is gro u p is o p en t o al l int eres t ed
countries, including non-OECD or G20 members, with all participating on an equal
basis. The group began its work in May 2015 with the aim of finalizing the multilateral
ins t ru m ent and t o o p en it f o r s ignat u re b y 31 Dec em b er 2016. So f ar, ap p ro x im at el y
90 countries are participating. The Final Report indicates that participation in the
devel o p m ent o f t h e m u l t il at eral ins t ru m ent is vo l u nt ary and do es no t ent ail any
commitments to sign such instrument once it has been finalized.
Detailed discussion
O verview
On 5 October 2015, the OECD released final reports on all 15 focus areas in its
Action Plan on BEPS, including the final report on Action 15: Developing a Multilateral
instrument to Modify Bilateral Tax Treaties (the Multilateral Instrument or Final Report).
Ac t io n 15 c al l ed f o r a rep o rt t o “ Anal y z e t h e t ax and p u b l ic int ernat io nal l aw is s u es
rel at ed t o t h e devel o p m ent o f a m u l t il at eral ins t ru m ent t o enab l e j u ris dic t io ns t h at
w is h t o do s o t o im p l em ent m eas u res devel o p ed in t h e c o u rs e o f t h e w o rk o n BEPS
and amend bilateral tax treaties.” The Final Report reproduces the report issued
in Sep t em b er 2014 Developing a Multilateral Instrument to Modify Bilateral Tax
1
Treaties (t h e 2014 Rep o rt ). Draw ing o n t h e ex p ert is e o f p u b l ic int ernat io nal l aw and
t ax ex p ert s , t h e 2014 Rep o rt ex p l o red t h e t ec h nic al f eas ib il it y and des irab il it y o f a
multilateral instrument and its consequences on the current tax system. It concluded
t h at a m u l t il at eral ins t ru m ent is c o ns idered b o t h des irab l e and f eas ib l e, and t h at
nego t iat io ns f o r s u c h an ins t ru m ent s h o u l d b e c o nvened as s o o n as p o s s ib l e.
1
See EY Gl o b al Tax Al ert , OECD releases report under BEPS Action 15 on feasibility of developing
multilateral instrument to amend bilateral tax treaties, dat ed 19 Sep t em b er 2014.
17 6
lo al a
olic and ontro ers
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A ction 1 5
On t h e b as is o f t h e o u t c o m e o f t h e anal y s is in t h e 2014 Rep o rt ,
a mandate was subsequently approved by the OECD and G20
countries in February, which authorized the formation of an ad
h o c gro u p (t h e Gro u p ) t o devel o p 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 t h e t reat y - b as ed m eas u res devel o p ed as p art
2
o f t h e BEPS Pro j ec t . This mandate also is included in the Final
Rep o rt . Th e f o l l o w ing is a b rief o verview o f t h es e p revio u s l y
p u b l is h ed del iverab l es u nder Ac t io n 15, as rep ro du c ed in t h e
Final Report.
2014 Report
Th e Int ro du c t io n t o t h e 2014 Rep o rt s t at ed t h at t h e c u rrent
net w o rk o f o ver 3, 000 b il at eral t ax t reat ies ens u res b ro ad
c o ns is t enc y in c ro s s - b o rder t ax ru l es , b u t t h at “ gap s and
f ric t io ns ” h ave gro w n o ver t im e res u l t ing f o r ins t anc e in am o u nt s
o f inc o m e no t b eing t ax ed in any j u ris dic t io n. Du e t o t h e t im e
required to renegotiate each treaty, the treaty network is not
w el l - s y nc h ro niz ed w it h t reat y m o del s , s o t h at a c h ange in t reat y
m o del s w o u l d no t s at is f y t h e p o l it ic al im p erat ive t o addres s BEPS
in a reas o nab l e t im e f ram e. A m u l t il at eral ins t ru m ent w o u l d
h o w ever im p l em ent agreed t reat y m eas u res in a reas o nab l y
s h o rt t im e f ram e and at t h e s am e t im e w o u l d p res erve t h e
b il at eral nat u re o f t ax t reat ies .
Desirability and feasibility of a multilateral
instrument
Th e 2014 Rep o rt b egan w it h an ex am inat io n o f t h e des irab il it y
and f eas ib il it y o f a m u l t il at eral ins t ru m ent . It no t ed t h at a
m u l t il at eral ins t ru m ent f ac il it at es s w if t im p l em ent at io n o f t h e
t reat y - rel at ed BEPS o u t p u t s b y avo iding t h e need t o individu al l y
negotiate existing bilateral tax treaties. Furthermore, the 2014
Rep o rt indic at ed t h at s u c h an ins t ru m ent w o u l d al l o w devel o p ing
countries that could otherwise have difficulties concluding or
renegotiating treaties to fully benefit from the BEPS project.
In addit io n, it o u t l ined t h at a m u l t il at eral ins t ru m ent c an b e an
eas ier w ay t o addres s m u l t il at eral is s u es , s u c h as m u l t il at eral
m u t u al agreem ent p ro c edu res (MAPs ), t h an b il at eral t reat ies .
Finally, the 2014 Report stated that a multilateral instrument
c an inc reas e t h e c o ns is t enc y and c l arit y o f t h e t ax t reat y
net w o rk , and it al s o c o u l d al l o w c o u nt ries t o p ro vide as s u ranc e
t o eac h o t h er regarding t h eir det erm inat io n t o addres s BEPS
s im u l t aneo u s l y s o t h at eac h o f t h em w o u l d “ f eel c o m f o rt ab l e
moving ahead in tackling BEPS.” For all these reasons, the 2014
Rep o rt c o ns idered t h at s u c h an ins t ru m ent is des irab l e b u t t h at ,
in order to create a level playing field, broad participation in the
m u l t il at eral ins t ru m ent needs t o b e ac h ieved.
Th
ins
int
to
e 2014 Rep
t ru m ent f ro
ernat io nal t
addres s t h o
o rt go es o n t o ident if y o b s t ac l es t o a m u l t il at eral
m t ec h nic al (p u b l ic int ernat io nal l aw and
ax l aw ) and p o l it ic al p ers p ec t ives and t h e s o l u t io ns
s e o b s t ac l es .
First, in the choice between (i) a “self-standing instrument” that
w o u l d w h o l l y s u p ers ede ex is t ing t reat ies ; (ii) an ins t ru m ent t h at
w o u l d m erel y o p erat e as a s et o f p ro t o c o l s am ending eac h o f
the existing bilateral treaties specifically; and (iii) an instrument
t h at w o u l d c o ex is t w it h b il at eral t reat ies , o nl y t h e t h ird o p t io n
appeared to preserve tax sovereignty and achieve an efficient
o u t c o m e. Under t h at l at t er o p t io n, t h e ins t ru m ent w o u l d am end
a l im it ed nu m b er o f p ro vis io ns c o m m o nl y f o u nd in b il at eral t ax
t reat ies and, w h ere no t al ready inc l u ded in t h o s e t reat ies , w o u l d
add new ant i- BEPS m eas u res . Th e ins t ru m ent w o u l d b e l egal l y
b inding o n t h e c o nt rac t ing p art ies , b u t w o u l d o nl y go vern t h e
rel at io ns h ip b et w een t h o s e t h at al ready h ave a b il at eral t ax
t reat y in p l ac e am o ng t h em s el ves . Ho w ever, t h e 2014 Rep o rt
s u gges t ed t h at a m u l t il at eral dis p u t e res o l u t io n m ec h anis m c o u l d
o p erat e am o ng al l p art ies t o t h e m u l t il at eral agreem ent . Th e
instrument would be subject to standard domestic ratification
p ro c edu res .
Sec o nd, o n t h e m o re t ec h nic al c h al l enges aro u nd, f o r ex am p l e,
t h e int erac t io n w it h b il at eral t ax t reat ies , t h e 2014 Rep o rt
derived s o l u t io ns f ro m nu m ero u s ex am p l es o f m u l t il at eral
3
t reat ies in areas o t h er t h an t ax . For instance, “compatibility”
clauses to resolve a conflict with similar provisions in existing or
even f u t u re b il at eral t reat ies (giving p rio rit y t o t h e m u l t il at eral
ins t ru m ent ); an ex p l anat o ry rep o rt p ro viding int erp ret at ive
gu idanc e; dif f erent dat es o f ent ry int o f o rc e f o r dif f erent
p ro vis io ns ; m ec h anis m s f o r ex p edit io u s am endm ent p ro c edu res
in the future; and the use of official languages and unofficial
t rans l at io ns . Mo re im p o rt ant l y , t h e 2014 Rep o rt s u gges t ed t h at
flexibility could be provided to tailor the extent of rights and
o b l igat io ns c reat ed b y t h e m u l t il at eral t reat y b y t h e rec o u rs e
t o o p t - o u t o r o p t - in m ec h anis m s o r l eaving p art ies a c h o ic e
b et w een al t ernat ive p ro vis io ns .
Th e 2014 Rep o rt t h u s c o nc l u ded t h at a m u l t il at eral ins t ru m ent
al s o ap p ears t o b e f eas ib l e.
3
2
See EY Gl o b al Tax Al ert , OECD issues mandate for negotiation of multilateral
instrument under BEPS Action 15, dated 9 February 2015.
Th e Rep o rt c o nt ains a t ec h nic al annex c al l ed A toolbox for a multilateral
instrument for the swift implementation of BEPS measures based on input by a
group of experts in tax and public international law.
lo al a
olic and ontro ers
riefing 17 7
A ction 1 5
S cope of the multilateral instrument
Th e 2014 Rep o rt l is t ed s o m e o f t h e t reat y - rel at ed m eas u res t o
b e devel o p ed in t h e BEPS p ro j ec t t h at are m u l t il at eral in nat u re
and w o u l d b e m o re ef f ec t ive if im p l em ent ed b y a m u l t il at eral
ins t ru m ent . Th es e t reat y - rel at ed m eas u res inc l u de addres s ing
m u l t il at eral m u t u al agreem ent p ro c edu res , du al res ident
s t ru c t u res , h y b rid m is m at c h arrangem ent s , t riangu l ar c as es
invo l ving a p erm anent es t ab l is h m ent (PE) in t h ird s t at es , and
t reat y ab u s e.
Th e 2014 Rep o rt s u gges t ed t h at s o m e o r al l o f t h e ab o ve c o u l d
b e p art o f a s et o f c o re p ro vis io ns t o w h ic h al l p art ies t o t h e
m u l t il at eral ins t ru m ent s h o u l d adh ere. Ot h er o u t p u t s o f t h e
BEPS project that are more bilateral in nature would require that
more flexibility be granted to contracting parties in order to tailor
t h eir l evel o f c o m m it m ent t o w ards o t h er p art ies .
Finally, the 2014 Report indicated that the instrument also
c o u l d b e u s ed f o r a w ider range o f BEPS- rel at ed is s u es , s u c h
as rules regarding the confidentiality of information obtained
b y t ax adm inis t rat io ns (t h ereb y f ac il it at ing t h e 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 rep o rt ing t em p l at e devel o p ed u nder
Ac t io n 13 f o r ex am p l e), a m u l t il at eral int eres t ex p ens e al l o c at io n
4
agreem ent , o r new dis p u t e res o l u t io n m ec h anis m s t o avo id t h e
p o t ent ial f o r u nil at eral and u nc o o rdinat ed res p o ns es t o BEPS
res u l t ing in do u b l e t ax at io n.
Th e 2014 Rep o rt c o nc l u ded t h at t h e s c o p e o f t h e m u l t il at eral
ins t ru m ent s h o u l d init ial l y o nl y inc l u de agreed t reat y - b as ed
o u t p u t s o f t h e BEPS p ro j ec t in o rder t o ens u re t h at it c an b e p u t
in p l ac e w it h in a reas o nab l e t im ef ram e. Th e ins t ru m ent c o u l d
t h en b e u s ed t o h o s t addit io nal m u l t il at eral l y agreed p ro vis io ns
in t h e f u t u re and s h o u l d t h u s b e view ed as dy nam ic .
4
A p ro p o s al f o r al l o c at io n o f int eres t ex p ens es t h at w as c o ns idered u nder
Action 4 (Interest Deductions and Other Financial Payments) was not included
in the final report on Action 4. However, the 2014 Report, as reproduced in
the Final Report, still refers to the example of a multilateral interest expense
al l o c at io n agreem ent .
17 8
lo al a
olic and ontro ers
riefing
andate for negotiation of a m ltilateral
instr ment and progress made in
Co ns idering t h e f eas ib il it y and des irab il it y o f t h e m u l t il at eral
ins t ru m ent , t h e 2014 Rep o rt c o nc l u ded w it h and rec o m m ended
t h e c o nvening o f an int ernat io nal c o nf erenc e t o devel o p and
nego t iat e t h e c o nt ent o f s u c h m u l t il at eral ins t ru m ent .
Su c h m andat e w as ap p ro ved b y t h e OECD and G20 c o u nt ries
on 6 February 2015, which authorized the formation of the
Gro u p t o devel o p a m u l t il at eral ins t ru m ent t h at w o u l d init ial l y
b e l im it ed t o t h e t ax t reat y m eas u res as devel o p ed du ring t h e
BEPS Pro j ec t , in l ine w it h t h e rec o m m endat io ns o f t h e 2014
Rep o rt . Al t h o u gh t h e Mandat e do es no t p ro vide f o r a l is t o f
t h e t reat y - b as ed m eas u res t o b e inc l u ded, t h e ex p l anat io ns
t o t h e Mandat e indic at e t h at t h e nego t iat io ns s h o u l d inc l u de
t h e t ax t reat y p ro vis io ns as devel o p ed u nder Ac t io n 2 (h y b rid
m is m at c h arrangem ent s ), Ac t io n 6 (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 14 (dis p u t e res o l u t io n).
Th e m andat e f u rt h erm o re p ro vided t h at p art ic ip at io n in t h e
devel o p m ent o f t h e m u l t il at eral ins t ru m ent w il l b e o p en t o al l
int eres t ed c o u nt ries , inc l u ding no n- OECD o r G20 m em b ers , w it h
all countries participating on an equal basis. Participation in the
devel o p m ent o f t h e m u l t il at eral ins t ru m ent is vo l u nt ary and do es
no t ent ail any c o m m it m ent s t o s ign s u c h ins t ru m ent , o nc e it h as
been finalized.
The Group began its work in May 2015 with the aim of finalizing
t h e m u l t il at eral ins t ru m ent and t o o p en it f o r s ignat u re no l at er
t h an 31 Dec em b er 2016. Du ring t h e OECD w eb c as t h el d o n 5
October 2015, it was confirmed that the first working meeting
o f t h e Gro u p w il l t ak e p l ac e in No vem b er 2015 and t h at f u t u re
c o ns u l t at io ns w il l b e h el d w it h s t ak eh o l ders o n t h e dif f erent
as p ec t s o f t h e m u l t il at eral ins t ru m ent . So f ar, ap p ro x im at el y 9 0
c o u nt ries are p art ic ip at ing in t h e dis c u s s io n. Wo rt h no t ing is t h at
o n 2 Oc t o b er 2015, Ro b ert St ac k , US Dep u t y As s is t ant Treas u ry
Secretary for International Tax Affairs, confirmed that the United
St at es w il l p art ic ip at e in t h e dis c u s s io ns , b u t em p h as iz ed t h at
t h is dec is io n do es no t im p l y t h at t h e Unit ed St at es u l t im at el y w il l
j o in in s igning t h e ins t ru m ent .
A ction 1 5
I mplications
Th e m u l t il at eral ins t ru m ent o f Ac t io n 15 is a k ey p art o f t h e
OECD’ s ef f o rt t o w ard im p l em ent at io n o f t h e rec o m m ended
measures as quickly and consistently as possible. Although
t h e p rec is e c o nt ent o f t h e m u l t il at eral ins t ru m ent is no t
yet defined, the sense of direction is clear, as the mandate
indic at es t h at t h e nego t iat io ns o n t h e devel o p m ent o f t h e
m u l t il at eral ins t ru m ent w il l f o c u s o n t h e t ax t reat y p ro vis io ns
o n h y b rid m is m at c h arrangem ent s , t reat y ab u s e, p erm anent
es t ab l is h m ent s t at u s and dis p u t e res o l u t io n as devel o p ed
u nder Ac t io n 2, Ac t io n 6, Ac t io n 7 and Ac t io n 14, res p ec t ivel y .
Wit h res p ec t t o t h e t reat y p ro vis io ns rel at ed t o dis p u t e
resolution in particular, the final report on Action 14 states
t h at a p ro vis io n o n m andat o ry b inding arb it rat io n w il l b e
5
devel o p ed in t h e nego t iat io ns o f t h e m u l t il at eral ins t ru m ent .
Wh il e no t al l OECD and G20 c o u nt ries agree o n arb it rat io n
as a m ec h anis m f o r im p ro ving t h e res o l u t io n o f t h e m u t u al
agreement procedure, the Action 14 final report indicates
t h at a gro u p t h at inc l u des 20 c o u nt ries h ave c o m m it t ed t o
6
m andat o ry b inding arb it rat io n.
E Y contacts
For additional information concerning
t h is Al ert , p l eas e c o nt ac t :
• Erns t & Y o u ng LLP
Gl o b al Tax Des k
New Y o rk
• Gerrit Gro en
+ 1 212 7 7 3- 8 627
gerrit .gro en@ ey .c o m
• Dirk Jan Sl o o f
+ 1 212 7 7 3 1363
dirk j an.s l o o f @ ey .c o m
• Cel es t e Krens
+ 1 212 7 7 3 0458
c el es t e.k rens 1@ ey .c o m
Th e s u c c es s o f Ac t io n 15 w il l dep end o n t h e o u t c o m e o f t h e
nego t iat io ns b et w een t h e p art ic ip at ing c o u nt ries and t h e
ap p et it e o f s u c h c o u nt ries t o s ign t h e m u l t il at eral ins t ru m ent
and then advance it through their normal domestic ratification
p ro c edu res ap p l ic ab l e t o t ax t reat ies . Th is ins t ru m ent c o u l d
res u l t in s o m e k ey BEPS rec o m m endat io ns t ak ing ef f ec t as
early as 2017 through significant changes to bilateral tax
treaties, including new limitations on access to treaty benefits,
l o w er t h res h o l ds f o r p erm anent es t ab l is h m ent s t at u s and,
in s o m e c as es , new arb it rat io n m ec h anis m s f o r dis p u t e
res o l u t io n. Gl o b al b u s ines s es t h eref o re s h o u l d m o nit o r t h e
devel o p m ent s w it h res p ec t t o Ac t io n 15, w it h a p art ic u l ar
f o c u s o n t h e p art ic ip at io n o f t h e c o u nt ries w h ere t h ey o p erat e.
5
See EY Gl o b al Tax Al ert , OECD releases final report on improving the
effectiveness of dispute resolution mechanisms under Action 14, dat ed 8
Oc t o b er 2015.
6
The identified countries are Australia, Austria, Belgium, Canada, France,
Germ any , Irel and, It al y , Jap an, Lu x em b o u rg, t h e Net h erl ands , New Zeal and,
No rw ay , Po l and, Sl o venia, Sp ain, Sw eden, Sw it z erl and, t h e Unit ed Kingdo m
and t h e Unit ed St at es .
lo al a
olic and ontro ers
riefing 17 9
BEPS Ac t io n 15:
Anal y s is
hat is the action tr ing to
achie e
Th e am endm ent o f t ax t reat ies is a
c u m b ers o m e and l o ng p ro c es s . Ty p ic al l y ,
when a modification to the OECD Model is
agreed, a p erio d ranging b et w een 5 and
15 years is required to incorporate the
res p ec t ive c h anges int o t h e net w o rk o f
3, 000- p l u s b il at eral t reat ies .
Th e b igges t c h al l enges f o r t h e Gro u p w il l b e:
(i) m o dif y ing t reat ies w it h s im il ar o b j ec t ives
b u t dif f erent s c o p e, w o rding, t erm ino l o gy
and enu m erat io n, w it h o u t dis t o rt ing t h eir
architecture; (ii) providing flexibility for
s t at es t o enab l e ef f ec t ive c o o rdinat io n
in res o l ving BEPS w h il e p res erving t h eir
dif f erent int eres t s and t ax p o l ic ies ; (iii)
ens u ring t rans p arenc y and c l arit y f o r
s t ak eh o l ders ; and (iv) ac c o m p l is h ing t h e
nego t iat io ns o f t h e m u l t il at eral ins t ru m ent at
t h e s p eed ex p ec t ed b y p o l it ic ians .
J ef f rey O wens
+ 44 20 7 9 5 11401
j ef f rey .o w ens @ ey - avo c at s .c o m
Th is Ac t io n aim s t o t rans f o rm t h is
renego t iat io n p ro c es s b y devel o p ing a
m u l t il at eral ins t ru m ent w h ic h w il l s w if t l y
and in a c o o rdinat ed w ay , inc o rp o rat e
BEPS- rel at ed t reat y m eas u res int o
b il at eral t reat ies .
The Action 15 Final Report concluded that
devel o p ing a m u l t il at eral ins t ru m ent t o
u p dat e t h e c u rrent t ax t reat y net w o rk is
des irab l e and f eas ib l e. Th e OECD h ad al ready
agreed in February 2015 on a mandate to
l au nc h t h e nego t iat io ns o n t h e m u l t il at eral
ins t ru m ent . Th e ad h o c Gro u p t h at w il l
nego t iat e and draf t t h e ins t ru m ent w as
c reat ed in May 2015. Cu rrent l y , m o re t h an
8 0 c o u nt ries are in t h e Gro u p , w it h t h e US
b eing a l at e j o iner.
hich
ctions will
be implemented with the
m ltilateral instr ment
Th e inau gu ral m eet ing o f t h e Gro u p t o o k
p l ac e in Paris o n 5- 6 No vem b er 2015 and
s et an am b it io u s t im et ab l e w h ic h aim s t o
c o nc l u de t h e nego t iat io ns b y t h e end o f
2016 and t o h ave t h e agreem ent o p en f o r
s ignat u re in 2017 .
18 0
lo al a
olic and ontro ers
riefing
Th e s c o p e o f t h e m
w il l b e l im it ed t o m
t o im p l em ent t ax t
agreed t o in t h e c o
nam el y :
u l t il at eral ins t ru m ent
o dif y ing ex is t ing t reat ies
reat y - rel at ed m eas u res
u rs e o f t h e BEPS p ro j ec t ,
•
ction , ne trali e the effects of h rid
mismatch arrangements: Th is Ac t io n
aim s t o addres s du al - res idenc e s t ru c t u res
and t rans p arent ent it ies in t h e c o nt ex t
o f h y b rid m is m at c h arrangem ent s (w il l
require changes to Article 2 of the OECD
Mo del ).
•
ction , pre ent the a se of treaties:
Th is Ac t io n aim s t o p revent t h e grant ing
of treaty benefits in inappropriate
circumstances (will require changes to
Art ic l e 10 o f t h e OECD Mo del ).
•
ction , pre ent the artificial a oidance of
stat s: Th is
Ac t io n aim s t o t ac k l e s t rat egies des igned t o avo id PE s t at u s
(c o m m is s io naire arrangem ent s and s im il ar arrangem ent s ,
as well as specific activity exemptions, fragmentation of
ac t ivit ies , and s p l it t ing- u p o f c o nt rac t s ) and addres s t riangu l ar
cases involving PEs in third states (will require changes to
Art ic l e 5 o f t h e OECD Mo del ).
•
ction , ma e disp te resol tion mechanisms more
effective: Th is Ac t io n aim s t o im p ro ve dis p u t e res o l u t io n
p ro c edu res and p ro vide new m u l t il at eral MAP p ro c edu res t o
resolve multi-country disputes (will require changes to Article
25 o f t h e OECD Mo del ). Th e m u l t il at eral ins t ru m ent w il l al s o
b e u s ed as a f ram ew o rk f o r b inding m andat o ry arb it rat io n o f
int ernat io nal t ax dis p u t es .
It is im p o rt ant t o no t e t h at t h e nego t iat io n and im p l em ent at io n
p ro c es s w il l no t reo p en s u b s t ant ial is s u es al ready dec ided b y t h e
BEPS gro u p o f c o u nt ries .
W hat is its potential impact on
siness
So m e p art s o f t h e b u s ines s c o m m u nit y h ave b een am b ival ent
ab o u t t h e des irab il it y and f eas ib il it y o f t h e ap p ro ac h p ro p o s ed
b y t h e OECD, p erh ap s b ec au s e t h ey are h es it ant ab o u t t h e
rec o m m endat io ns m ade in t h e o t h er Ac t io ns . Y et it is very m u c h
in t h e int eres t o f b u s ines s t o h ave t h e great er p redic t ab il it y and
c o ns is t enc y in t h e t ax t reat y net w o rk t h at w o u l d b e ac h ieved b y
a s w if t im p l em ent at io n o f t reat y am endm ent s .
Th e c u rrent p l an o f
m u l t il at eral t ax ins t
devel o p ed in t h e c o
m u l t il at eral ins t ru m
net w o rk m igh t al s o
agreem ent s . Th e OECD h as al ready ex p res s ed it s w il l ingnes s
t o ado p t t h is ap p ro ac h . If t h is is t h e c as e, it w il l b e nec es s ary
t o anal y z e f u t u re init iat ives in o rder t o det erm ine w h ic h
agreed am endm ent s t o t h e OECD Mo del m ay b e ap p ro p riat el y
im p l em ent ed b y m eans o f s u c h a m u l t il at eral ins t ru m ent , h o w
t h is w il l im p ac t o n t h e b il at eral nat u re o f t reat ies , and w h ic h
s h o u l d f o l l o w t h e t radit io nal im p l em ent at io n p ro c es s . Th e OECD
noted in the Action 15 Final Report that “any decision to address
a broader range of international tax issues multilaterally would
represent a more significant step towards multilateralism in tax
matters than the current work to use a multilateral instrument to
address BEPS-related tax treaty issues.”
hat happens ne t
Ex p erienc e s u gges t s t h at t h e t im et ab l e s et f o r t h e p ro j ec t m ay
b e am b it io u s s inc e o t h er m u l t il at eral agreem ent s in t h e t ax area
h ave t ak en t w o t o t h ree y ears t o ac h ieve, es p ec ial l y w h ere a
l arge nu m b er o f c o u nt ries are invo l ved w h ic h h ave dif f erent t ax
s y s t em s and t ax p o l ic ies . Ex p erienc e al s o s h o w s t h at an even
longer period might be required before the minimum number
o f c o nt rac t ing s t at es nec es s ary f o r a m u l t il at eral ins t ru m ent t o
ent er int o f o rc e is at t ained.
Th e k ey t o t h e s u c c es s o f t
o n t h e p art o f t h e nego t iat
l aw is s u es are t ec h nic al l y c
t h ey c an b e o verc o m e if t h
h is Ac t io n is t h e l evel o f p o
ing s t at es , and al t h o u gh t h
h al l enging, p rec edenc e s u
ere is s t ro ng p o l it ic al s u p p
l it ic al w il l
e p u b l ic
gges t s t h at
o rt .
t h e OECD is t o l im it t h e s c o p e o f t h e
ru m ent t o t h e t ax t reat y - rel at ed m eas u res
u rs e o f t h e BEPS p ro j ec t . If , h o w ever, t h e
ent s u c c eeds , f u t u re c h anges t o t h e t reat y
b e im p l em ent ed t h ro u gh m u l t il at eral
lo al a
olic and ontro ers
riefing 18 1
C orporate income
ta
rates
a le
ote
1
lo al
rates
largest
here applica le, rates incl de an a erage s
economies or
risdictions
, sorted
ta rate
national state pro incial ta rate in addition to the national federal rate
Ju ris dic t io n
GDP
2015
(US$
b il l io ns )1
2016 CIT
rat e (nat io nal
s t at u t o ry rat e
o nl y )
2016 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
Co l o m b ia
365
40.00%
40.00%
Wo rl dw ide
Unit ed St at es
15, 653
35.00%
39 .00%
Wo rl dw ide
France
2, 58 0
33.33%
38 .00%
Territ o rial
Argent ina
47 5
35.00%
35.00%
Wo rl dw ide
India
1, 9 47
30% (f o r
do m es t ic
c o m p anies );
40% (f o r
f o reign
c o m p anies )
34.61% (f o r
do m es t ic
c o m p anies w it h
t ax ab l e inc o m e
in ex c es s o f
INR10m il l io n);
43.26%
(f o r f o reign
c o m p anies
h aving inc o m e
in ex c es s o f INR
10 m il l io n)
Wo rl dw ide
A s u rc h arge o f 7 % and 12%, and an edu c at io nal c es s o f 3% are
al s o added t o t h e s t at u t o ry c o rp o rat e t ax rat e. Af t er ap p l y ing t h e
s u rc h arge and edu c at io nal c es s , do m es t ic c o m p anies are t ax ed at
34.608 %, 33.063%, o r 30.9 0%2 and f o reign c o m p anies are t ax ed at
43.26%, 42.024%, o r 41.20%.3
Braz il
2, 425
15.00%
34.00%
Wo rl dw ide
Th e 10% addit io nal s u rt ax is l evied o n net t ax ab l e inc o m e ex c eeding
BRL 240, 000 p er y ear. In addit io n, a s o c ial c o nt rib u t io n t ax (CSLL)
o f 9 % is im p o s ed o n net t ax ab l e inc o m e.
Venezuela
338
34.00%
34.00%
Wo rl dw ide
Th e s t at u t o ry CIT is ap p l ied at a p ro gres s ive rat e, b as ed o n t h e t ax
u nit (UT). Th e 22% o r 15% t ax rat e is al s o ap p l ic ab l e f o r c o m p anies
m eet ing w it h c ert ain UT t h res h o l d.4
Bel giu m
47 7
33.9 9 %
(inc l u ding 3%
Su rc h arge)
33.9 9 %
Territ o rial
Co m p anies w it h t ax ab l e inc o m e l es s t h an EUR 322, 500 m ay b e
t ax ed at t h e m arginal rat es o f 24.25%, 31% and 34.5% (24.9 8 %,
31.9 3% and 35.54% inc l u ding 3% s u rc h arge).
Pak is t an
231
32.00%
32.00%
Wo rl dw ide
Th e CIT rat e w il l b e redu c ed t o 31% in t ax y ear 2017 and 30% in t ax
y ear 2018 and o nw ards . Th e CIT rat e f o r b ank ing c o m p anies is 35%.
It al y
1, 9 8 0
27 .50%
31.40%
Territ o rial
Th e 6.5% s u rc h arge p revio u s l y im p o s ed o n o il , gas and energy
c o m p anies (w it h revenu es ex c eeding EUR 3m il l io n and t ax ab l e
inc o m e ex c eeding EUR 300, 000) w as dec l ared u nc o ns t it u t io nal .
A regio nal t ax o n p ro du c t ive ac t ivit ies (IRAP) is im p o s ed o n t h e net
val u e o f p ro du c t io n at a b as ic t ax rat e is 3.9 %. Dif f erent rat es ap p l y
t o c ert ain s ec t o rs . In any c as e eac h regio n m ay ap p l y a h igh er o r
l o w er t ax rat e ac c o rding t o t h e t y p es o f t ax p ay er.5
Notes
Th e CIT rat e inc l u des c o rp o rat e inc o m e t ax o f 25%, inc o m e t ax f o r
equality of 9% (CREE) and CREE over rate of 6%.
Th e c o rp o rat e inc o m e t ax is inc reas ed b y a 3.3% s u rc h arge f o r
c o m p anies w it h a t u rno ver ex c eeding EUR 7 .63 m il l io n o n t h e p art
o f t h eir l iab l e t ax p ay m ent s in ex c es s o f EUR 7 63, 000. Co m p anies
w it h a t u rno ver ex c eeding EUR 250m il l io in are s u b j ec t t o a
t em p o rary s u rt ax o f 10.7 %.
IMF World Economic Outlook Database.
2
Co rp o rat e t ax rat e o f 34.608 % ap p l ies f o r do m es t ic c o m p anies w it h t ax ab l e inc o m e h igh er t h an INR 100 m il l io n, 33.063% f o r do m es t ic c o m p anies w it h
t ax ab l e inc o m e ex c eeding INR 10 m il l io n b u t no t INR 100 m il l io n, and 30.9 0% f o r do m es t ic c o m p anies w it h t ax ab l e inc o m e u p t o INR 10 m il l io n.
3
Co rp o rat e t ax rat e o f 43.26% ap p l ies f o r f o reign c o m p anies w it h t ax ab l e inc o m e ex c eeding INR 100 m il l io n, 42.024% f o r f o reign c o m p anies w it h t ax ab l e
inc o m e b et w een INR 10 m il l io n and INR 100 m il l io n, and 41.20% f o r f o reign c o m p anies w it h inc o m e u p t o INR 10 m il l io n.
4
Co m p anies w it h t h e UT b et w een 20, 000 and 30, 000 are s u b j ec t ed t o 22% c o rp o rat e t ax rat e. A 15% t ax rat e ap p l ies f o r c o m p anies w it h t h e UT u p t o 2, 000.
For 2016, the UT value is VEF150.
5
Decision n. 10/2015 issued by the Italian Constitutional Court, 9 February 2015.
18 2
lo al a
olic and ontro ers
riefing
Ju ris dic t io n
GDP
2015
(US$
b il l io ns )1
2016 CIT
rat e (nat io nal
s t at u t o ry rat e
o nl y )
2016 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
Au s t ral ia
1, 542
30.00%
30.00%
Territ o rial
Th e 30% o r 28 .5% o f c o rp o rat e t ax rat e is ap p l ic ab l e f o r s m al l
b u s ines s ent it ies .
Germ any
3, 367
15.00%
30.00%
Territ o rial
So l idarit y s u rc h arge o f 5.5% and t rade t ax ranging f ro m
19 .25% al s o ap p l y .
Mex ic o
1, 163
30.00%
30.00%
Wo rl dw ide
Nigeria
27 3
30.00%
30.00%
Wo rl dw ide
Ph il ip p ines
241
30.00%
30.00%
Wo rl dw ide
Jap an
5, 9 8 4
23.9 0%
29 .9 7 %
Territ o rial
Greec e
255
29 .00%
29 .00%
Territ o rial
So u t h Af ric a
39 1
28 .00%
28 .00%
Territ o rial
Canada
1, 7 7 0
38 .00%
27 .8 4%
Territ o rial
Do m inic an
Rep u b l ic
Dat a no t
avail ab l e
27 .00%
27 .00%
Territ o rial
Au s t ria
39 1
25.00%
25.00%
Territ o rial
Ch ina
8 , 250
25.00%
25.00%
Wo rl dw ide
Indo nes ia
8 9 5
25.00%
25.00%
Wo rl dw ide
Is l am ic Rep u b l ic
o f Iran
48 4
25.00%
25.00%
Wo rl dw ide
Is rael
247
25.00%
25.00%
Territ o rial
Net h erl ands
7 7 0
25.00%
25.00%
Territ o rial
No rw ay
500
25.00%
25.00%
Territ o rial
Notes
7 %t o
An edu c at io n s u rc h arge o f 2% is al s o im p o s ed o n net t ax ab l e
inc o m e.
Th e CIT rat e t h at ap p l ies t o c o rp o rat io ns w it h c ap it al ex c eeding
JPY 100 m il l io n redu c ed t o 23.9 % f ro m 25.5% o n 1 Ap ril 2015.
Co rp o rat io ns w it h c ap it al no t ex c eeding JPY 10m il l io n are t ax ed at
15% o r 23.9 %. Lo c al t ax is , inh ab it ant s t ax , c o ns is t ing o f m ax im u m
16.3% o f c o rp o rat e t ax p l u s nat io nal l o c al c o rp o rat e t ax o f 4.4% al s o
ap p l y .
Th e f ederal c o rp o rat e inc o m e t ax rat e m ay b e redu c ed b y 10% o n
t ax ab l e inc o m e earned in a p ro vinc e. Addit io nal l o c al inc o m e t ax
rat e ranges f ro m 1% t o 16%.
Al t h o u gh , Ch ina’ s general ent erp ris e inc o m e t ax (EIT) rat e is 25%,
there are exceptions to the rate for thin-profit companies, and high
and new technology companies; thin-profit companies are generally
s u b j ec t t o a 20% t ax rat e6 and h igh and new t ec h no l o gy c o m p anies
are s u b j ec t t o an EIT o f 15%.
Th e 25% o f c o rp o rat e t ax rat e o f ap p l ies f o r c o m p anies h aving
taxable income up to EUR 200,000. A flat tax rate of 5% applies
to qualifying income (innovation box” income) derived from “R&D
ac t ivit ies .”
6
However, between 1 October 2015 and 31 December 2017, a thin-profit enterprise is only taxed on 50% of its annual taxable income (at the same reduced
rat e o f 20%), res u l t ing in an ef f ec t ive rat e o f 10%.
lo al a
olic and ontro ers
riefing 18 3
C orporate income
ta
rates contin ed
a le
ote
lo al
rates
largest
here applica le, rates incl de an a erage s
economies or
risdictions
, sorted
ta rate
national state pro incial ta rate in addition to the national federal rate
Ju ris dic t io n
GDP
2015
(US$
b il l io ns )1
2016 CIT
rat e (nat io nal
s t at u t o ry rat e
o nl y )
2016 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
Sp ain
1, 340
25.00%
25.00%
Territ o rial
Gu at em al a
Dat a no t
avail ab l e
25.00%
(u nder t h e
net inc o m e
regim e);
o r 5– 7 % o n
gro s s revenu e
u nder o p t io nal
regim e
N/ A
Territ o rial
Notes
Tax p ay ers c an el ec t t h e CIT t o b e l evied o n (1) t ax ab l e earnings and
profits at a 25% rate, or (2) taxable revenue at a 7% rate (no tax
dedu c t io ns al l o w ed):
1. Net income regime (tax on profits from business activities):
Th is regim e is ap p l ic ab l e o n a net inc o m e b as is . Co m p anies t h at
el ec t t h e net inc o m e regim e c an dedu c t ex p ens es inc u rred t o
generat e t ax ab l e inc o m e, o r t o p res erve t h e s o u rc e o f s u c h inc o m e
w it h ex c ep t io ns w h ic h l im it t h e dedu c t ib il it y . Th e t ax ab l e inc o m e is
s u b j ec t t o a t ax rat e o f 25% f o r 2015 and 2016.
2. Optional simplified regime (tax on revenue from business
ac t ivit ies ): Th is regim e ap p l ies o n a gro s s rec eip t s b as is . Co m p anies
t h at el ec t t h e o p t io nal regim e are s u b j ec t t o inc o m e t ax o n t h eir
“ t ax ab l e inc o m e, ” w h ic h is t h e dif f erenc e b et w een gro s s inc o m e and
ex em p t inc o m e. Tax ab l e inc o m e u p t o GTQ 30, 000 (ap p ro x im at el y
$3,931) is subject to a tax rate of 5%, and taxable income exceeding
t h e am o u nt is s u b j ec t t o a t ax at rat e o f 7 %. No dedu c t io ns are
al l o w ed u nder t h is regim e.
1
Ko rea
1, 151
10% o n
24.20%
t ax ab l e
inc o m e u p
t o KRW 200
m il l io n; 22%
o ver KRW 200
m il l io n and
u p t o KRW 20
b il l io n; 22%
o n t ax ab l e
inc o m e o ver
KRW 20 b il l io n
Wo rl dw ide
Ch il e
268
24.00%
24.00%
Wo rl dw ide
Mal ay s ia
307
24.00%
24.00%
Territ o rial
Sw it z erl and
623
8 .500%
24.00%
Territ o rial
Mu nic ip al rat es vary w idel y ranging f ro m
Egy p t
255
22.50%
22.50%
Wo rl dw ide
Oil and gas ex p l o rat io n and p ro du c t io n c o m p anies are t ax ed at a
rat e o f 40.55%. Th e Cent ral Bank o f Egy p t , t h e Su ez Canal Au t h o rit y
and t h e Egy p t ian Pet ro l eu m Au t h o rit y are t ax ed at a rat e o f 40%
Po rt u gal
211
21.00%
22.50%
Territ o rial
In addit io n t o t h e s t at u t o ry t ax rat e o f 21%, a s t at e s u rt ax o f 3%
is imposed on taxable profit over EUR 1.5 million and up to EUR
7.5 million, 5% on profit over EUR 7.5 million but not exceeding
EUR 35 million, and 7% on profits exceeding EUR 35 million. Also a
m u nic ip al t ax o f 1.5% m ay b e added t o t h e f ederal rat e.
Denm ark
309
22.00%
22.00%
Territ o rial
Sl o vak Rep u b l ic
Dat a no t
avail ab l e
22.00%
22.00%
Territ o rial
Sw eden
520
22.00%
22.00%
Territ o rial
IMF World Economic Outlook Database.
18 4
lo al a
olic and ontro ers
riefing
A s p ec ial s u rt ax ranging f ro m 10% t o 40% is im p o s ed o n c ap it al
gains o n real p ro p ert y if c ert ain c o ndit io ns are m et . In addit io n, a
l o c al t ax is ap p l ic ab l e at a 10% rat e o n c o rp o rat e inc o m e t ax l iab il it y .
6% and 24%.
Ju ris dic t io n
GDP
2015
(US$
b il l io ns )1
2016 CIT
rat e (nat io nal
s t at u t o ry rat e
o nl y )
2016 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
Finland
247
20.00%
20.00%
Territ o rial
Ru s s ia
1, 9 54
20.00%
20.00%
Territ o rial
Th e 20% o f s t at u t o ry c o rp o rat e inc o m e t ax rat e c o ns is t s o f 2% w h ic h
is al l o c at ed t o t h e f ederal go vernm ent , and 18 % w h ic h is al l o c at ed
t o t h e regio nal go vernm ent s .
Sau di Arab ia
657
20.00%
20.00%
Wo rl dw ide
Th e CIT rat e f o r c o m p anies in u p s t ream b u s ines s o f o il and
h y dro c arb o n p ro du c t s is 8 5%. Th e rat e f o r ent it ies in nat u ral gas
investments ranges from 30% to 85%. Any remittance of profit to
no n- res ident p art ners is s u b j ec t t o w it h h o l ding t ax at 5%.
Th ail and
37 7
20.00%
20.00%
Territ o rial
Tu rk ey
7 8 3
20.00%
[ Inf o rm at io n
no t avail ab l e]
Territ o rial
Unit ed Kingdo m
2, 434
20.00%
20.00%
Territ o rial
Vietnam
Dat a no t
avail ab l e
20.00%
20.00%
Wo rl dw ide
Al geria
207
19 %/ 23%/ 26
19 %/ 23%/ 26%
Wo rl dw ide
Cz ec h Rep u b l ic
19 4
19 .00%
19 .00%
Territ o rial
Po l and
47 0
19 .00%
19 .00%
Wo rl dw ide
Singap o re
268
17 .00%
17 .00%
Territ o rial
Taiw an
466
17 .00%
17 .00%
Wo rl dw ide
Ho ng Ko ng SAR
258
16.50%
16.50%
Territ o rial
Ro m ania
17 1
16.00%
16.00%
Wo rl dw ide
Irel and
205
12.50%
12.50%
Wo rl dw ide
A 25% of corporate tax rate applies for specific industries including
p et ro l eu m ac t ivit ies , m ining and m ineral ex t rac t io n. Pas s ive inc o m e
inc l u ding int eres t , f o reign dividends and rent al inc o m e are al s o
s u b j ec t t o a 25% t ax rat e.
Unit ed Arab
Em irat es
362
0.00%
0.00%
N/ A
Al t h o u gh no f ederal t ax at io n c u rrent l y ex is t s in t h e Unit ed Arab
Em irat es (UAE), eac h o f t h e individu al Em irat es (Ab u Dh ab i, Aj m an,
Dubai, Fujairah, Ras Al Khaimah, Sharjah and Umm Al Quwain)
h as is s u ed c o rp o rat e t ax dec rees t h at t h eo ret ic al l y ap p l y t o al l
b u s ines s es es t ab l is h ed in t h e UAE.
Notes
From 1 April 2015, a diverted profits tax at a rate of 25% will
applicable for multinational companies that divert profits overseas
for the purpose of avoiding the UK tax through the use of artificial
arrangem ent s .
Th e CIT o f 19 % is ap p l ic ab l e f o r c o m p anies in p ro du c t io n o f go o ds
ac t ivit ies ; 23% f o r b u il ding, p u b l ic w o rk s , h y drau l ic and t o u ris t ic
ac t ivit ies ex c ep t t ravel agenc ies ; 26% f o r t h e o t h er ac t ivit ies .
A z ero t ax rat e is ap p l ic ab l e f o r c o m p anies w it h t ax ab l e inc o m e
under NTD120, 000. For companies with taxable income over
NTD120, 000 is t ax ed at a rat e o f 17 %.
Tax es are c u rrent l y im p o s ed at t h e Em irat e l evel o nl y o n o il and
gas producing companies in accordance with specific government
c o nc es s io n agreem ent s , and o n b ranc h es o f f o reign b ank s
under specific tax decrees or regulations or in accordance with
agreem ent s w it h t h e Ru l ers o f t h e Em irat es in w h ic h t h e b ranc h es
o p erat e.
lo al a
olic and ontro ers
riefing 18 5
18 6
lo al a
20%
20%
15%
15%
10%
10%
5%
5%
0%
0%
olic and ontro ers
riefing
Taiw an
economies or
risdictions ta ing
40%
35%
30%
25%
Franc e
Jap an
Bel giu m
Germ any
It al y
Au s t ral ia
Sp ain
So u t h Af ric a
No rw ay
Canada
Is rael
Greec e
Net h erl ands
Au s t ria
Mal ay s ia
Denm ark
Finl and
Po rt u gal
Th ail and
Sw eden
Unit ed Kingdo m
Sw it z erl and
Ru s s ia
Tu rk ey
Cz ec h Rep u b l ic
Singap o re
Ho ng Ko ng SAR
Irel and
Ro m ania
largest
Po l and
Ch il e
Sau di Arab ia
Ko rea
Al geria
rates
Co l o m b ia
Is l am ic Rep u b l ic o f Iran
ig re
conomies or
worldwide income
Indo nes ia
eadline
Ch ina
Egy p t
Ph il ip p ines
Nigeria
Mex ic o
Co l o m b ia
Unit ed St at es
Franc e
Argent ina
India
Braz il
Venez u el a
Bel giu m
Pak is t an
It al y
Au s t ral ia
Germ any
Mex ic o
Nigeria
Ph il ip p ines
Jap an
Greec e
So u t h Af ric a
Canada
Do m inic an Rep u b l ic
Au s t ria
Ch ina
Indo nes ia
Is l am ic Rep u b l ic o f Iran
Is rael
Net h erl ands
No rw ay
Sp ain
Ko rea
Ch il e
Mal ay s ia
Sw it z erl and
Egy p t
Po rt u gal
Denm ark
Sl o vak Rep u b l ic
Sw eden
Finl and
Ru s s ia
Sau di Arab ia
Th ail and
Unit ed Kingdo m
Viet nam
Al geria
Cz ec h Rep u b l ic
Po l and
Singap o re
Taiw an
Ho ng Ko ng SAR
Ro m ania
Irel and
Unit ed Arab Em irat es
ig re
India
Venez u el a
Braz il
Pak is t an
Argent ina
Unit ed St at es
2016 C I T rate
Note here applica le, rates incl de an a erage s national
state pro incial ta rate in addition to the national federal rate
risdictions
40%
35%
30%
25%
20%
15%
10%
5%
0%
ig re
conomies or
territorially
risdictions ta ing
40%
35%
30%
25%
nsights
S tatutory corporate income tax rates,
2000- 14
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 ,
Japan, Finland, Portugal, Slovak Republic, United Kingdom and Vietnam for
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.
ig re
tat tor corporate income ta rates,
and
60
OECD average in 2000 (32.6%) and 2014 (25.2%)
50
40
30
20
0
USA
JPN
FRA
BEL
PRT
DEU
AUS
MEX
ESP
LUX
NZL
ITA
NOR
CAN
GRC
AUT
DNK
ISR
NLD
KOR
SWE
SVK
CHE
GBR
EST
FIN
CHL
ISL
TUR
CZE
HUN
POL
SVN
IRE
10
2014
2000
lo al a
olic and ontro ers
riefing 18 7
EY contacts
lo al eaders
hris anger
lo al a olic eader
csanger
e com
+ 4 4 20 7 9 5 1 015 0
o
anson
lo al a ontro ers
ro hanson e com
+ 1 202 3 27 5 69 6
eader
mericas
J urisdiction
T ax policy
T ax controversy
T ax policy and
controversy leaders
C athy K och
cathy.k och@ ey.com
+ 1 2 0 2 32 7 7 4 8 3
o
anson
rob .hanson@ ey.com
+ 1 2 0 2 32 7 5 6 9 6
Carl o s Cas ano vas
c arl o s .c as ano vas @ ar.ey .c o m
+ 54 11 4318 1619
Felipe-Carlos Stepanenko
f el ip e- c arl o s .s t ep anenk o @ ar.ey .c o m
+ 54 11 4318 17 7 7
B raz il
Was h ingt o n Co el h o
w as h ingt o n.c o el h o @ b r.ey .c o m
+ 55 11 257 3 3446
Frederico God
f rederic o .h .go d@ b r.ey .c o m
+ 55 11 257 3 3232
C anada
Gary Zed
gary .z ed@ c a.ey .c o m
+ 1 403 206 5052
Gary Zed
gary .z ed@ c a.ey .c o m
+ 1 403 206 5052
C hile
Os iel Go nz á l ez
o s iel .go nz al ez @ c l .ey .c o m
+ 56 2 267 61261
Carl o s Mart í nez
c arl o s .m art inez .c @ c l .ey .c o m
+ 56 2 67 6 17 10
C olombia
Margarit a Sal as
m argarit a.s al as @ c o .ey .c o m
+ 57 1 48 4 7 110
Margarit a Sal as
m argarit a.s al as @ c o .ey .c o m
+ 57 1 48 4 7 110
C osta Rica
Raf ael Say agu é s
raf ael .s ay agu é s @ c r.ey .c o m
+ 506 2208 9 8 8 0
Raf ael Say agu é s
raf 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 s
raf ael .s ay agu é s @ c r.ey .c o m
+ 506 2208 9 8 8 0
Raf ael Say agu é s
raf ael .s ay agu é s @ c r.ey .c o m
+ 506 2208 9 8 8 0
Ecuador
Fernanda Checa
f ernanda.c h ec a@ ec .ey .c o m
+ 59 3 2 255 3109
Fernanda Checa
f ernanda.c h ec a@ ec .ey .c o m
+ 59 3 2 255 3109
El S alvador
Raf ael Say agu é s
raf ael .s ay agu é s @ c r.ey .c o m
+ 506 2208 9 8 8 0
Raf ael Say agu é s
raf ael .s ay agu é s @ c r.ey .c o m
+ 506 2208 9 8 8 0
rgentina
18 8
lo al a
olic and ontro ers
riefing
mericas
J urisdiction
T ax policy
T ax controversy
Guatemala
Raf ael Say agu é s
raf ael .s ay agu é s @ c r.ey .c o m
+ 506 2208 9 8 8 0
Raf ael Say agu é s
raf ael .s ay agu é s @ c r.ey .c o m
+ 506 2208 9 8 8 0
H onduras
Raf ael Say agu é s
raf ael .s ay agu é s @ c r.ey .c o m
+ 506 2208 9 8 8 0
Raf ael Say agu é s
raf ael .s ay agu é s @ c r.ey .c o m
+ 506 2208 9 8 8 0
I srael
Arie Pu ndak
arie.p u ndak @ il .ey .c o m
+ 9 7 2 3 568 7 115
Gil ad Sh o val
gil ad.s h o val @ il .ey .c o m
+ 9 7 2 3 623 27 9 6
Mexico
Jo rge Lib rero s
j o rge.l ib rero s @ m x .ey .c o m
+ 52 55 528 3 1439
Enrique Ramirez
enrique.ramirez@mx.ey.com
+ 52 55 528 3 1367
Raf ael Say agu é s
raf ael .s ay agu é s @ c r.ey .c o m
+ 506 2208 9 8 8 0
Raf ael Say agu é s
raf ael .s ay agu é s @ c r.ey .c o m
+ 506 2208 9 8 8 0
P anama
Lu is Oc ando
l u is .o c ando @ p a.ey .c o m
+ 507 208 0144
Lu is Oc ando
l u is .o c ando @ p a.ey .c o m
+ 507 208 0144
P eru
David de l a To rre
david.de.l a.t o rre@ p e.ey .c o m
+ 51 1 411 447 1
David de l a To rre
david.de.l a.t o rre@ p e.ey .c o m
+ 51 1 411 447 1
P uerto Rico
Teresita Fuentes
t eres it a.f u ent es @ ey .c o m
+ 1 7 8 7 7 7 2 7 066
Teresita Fuentes
t eres it a.f u ent es @ ey .c o m
+ 1 7 8 7 7 7 2 7 066
U nited S tates
Nic k Gio rdano
nic k .gio rdano @ w c .ey .c o m
+ 1 202 467 4316
Heat h er Mal o y
h eat h er.m al o y @ ey .c o m
+ 1 202 327 7 7 58
V enez uela
Jose Velazquez
jose.a.velazquez@ve.ey.com
+ 58 212 9 05 6659
Jose Velazquez
jose.a.velazquez@ve.ey.com
+ 58 212 9 05 6659
icarag a
lo al a
olic and ontro ers
riefing 18 9
sia acific
J urisdiction
T ax policy
T ax controversy
T ax policy and
controversy leaders
A lf C apito
alf .capito@ au.ey.com
+ 6 1 2 8 2 9 5 6 4 7 3
oward dams
howard.adams@ au.ey.com
+ 6 1 2 9 2 4 8 5 6 0 1
Al f Cap it o
al f .c ap it o @ au .ey .c o m
+ 61 2 8 29 5 647 3
Mart in Cap l ic e
m art in.c ap l ic e@ au .ey .c o m
+ 61 8 9 429 2246
Bec k y Lai
b ec k y .l ai@ h k .ey .c o m
+ 8 52 2629 318 8
Law renc e Ch eu ng
l aw renc e- f .c h eu ng@ c n.ey .c o m
+ 8 6 7 55 2502 8 38 3
Bec k y Lai
b ec k y .l ai@ h k .ey .c o m
+ 8 52 2629 318 8
Wil s o n Ch eng
w il s o n.c h eng@ h k .ey .c o m
+ 8 52 28 46 9 066
I ndonesia
Y u die Paim ant a
y u die.p aim ant a@ id.ey .c o m
+ 62 21 528 9 558 5
Y u die Paim ant a
y u die.p aim ant a@ id.ey .c o m
+ 62 21 528 9 558 5
Malaysia
Kah Fan Lim
k ah - f an.l im @ m y .ey .c o m
+ 60 3 7 49 5 8 218
Kah Fan Lim
k ah - f an.l im @ m y .ey .c o m
+ 60 3 7 49 5 8 218
New Z ealand
Aaro n Q u int al
aaron.quintal@nz.ey.com
+ 64 9 300 7 059
Kirs t y Keat ing
k irs t y .k eat ing@ nz .ey .c o m
+ 64 9 300 7 07 3
P hilippines
Wilfredo U. Villanueva
w il f redo .u .vil l anu eva@ p h .ey .c o m
+ 63 2 8 9 4 8 18 0
Luis Jose P. Ferrer
l u is .j o s e.p .f errer@ p h .ey .c o m
+ 632 8 9 4- 8 362
ingapore
Ru s s el l Au b rey
ru s s el l .au b rey @ s g.ey .c o m
+ 65 6309 8 69 0
Lee Kh o o n Tan
l ee- k h o o n.t an@ s g.ey .c o m
+ 65 6309 8 67 9
S outh K orea
Do ng Ch u l Kim
do ng- c h u l .k im @ k r.ey .c o m
+ 8 2 2 37 7 0 09 03
Do ng Ch u l Kim
do ng- c h u l .k im @ k r.ey .c o m
+ 8 2 2 37 7 0 09 03
T aiwan
So p h ie Ch o u
s 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 u
s o p h ie.c h o u @ t w .ey .c o m
+ 8 8 6 2 27 57 8 8 8 8
T hailand
Y u p a Wic h it k rais o rn
y 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 rn
y u p a.w ic h it k rais o rn@ t h .ey .c o m
+ 66 2 264 07 7 7
V ietnam
Huong Vu
h u o ng.vu @ vn.ey .c o m
+ 8 4 9 034327 9 1
Huong Vu
h u o ng.vu @ vn.ey .c o m
+ 8 4 9 034327 9 1
stralia
C hina
ong ong
19 0
lo al a
olic and ontro ers
riefing
J urisdiction
T ax policy
T ax controversy
T ax policy and
controversy leaders
J ean- P ierre L ieb
j ean.pierre.lieb @ ey- av ocats.com
+ 33 1 5 5 6 1 1 6 1 0
J ean- P ierre L ieb
j ean.pierre.lieb @ ey- av ocats.com
+ 33 1 5 5 6 1 1 6 1 0
Andreas St ef aner
andreas .s t ef aner@ at .ey .c o m
+ 43 1 2117 0 1040
Andreas St ef aner
andreas .s t ef aner@ at .ey .c o m
+ 43 1 2117 0 1040
Herw ig Jo o s t en
h erw ig.j o o s t en@ b e.ey .c o m
+ 32 2 7 7 4 9 349
Leen Ket el s
l een.k et el s @ b e.ey .c o m
+ 32 2 7 7 4 6022
Mil en Raik o v
m il en.raik o v@ b g.ey .c o m
+ 359 2 8 17 7 100
Mil en Raik o v
m il en.raik o v@ b g.ey .c o m
+ 359 2 8 17 7 100
C roatia
Denes Sz ab o
denes .s z ab o @ h r.ey .c o m
+ 38 5 248 0 540
Mas a Saric
m as a.s aric @ h r.ey .c o m @ h r.ey .c o m
+ 38 5 158 00 9 35
C yprus
Ph il ip p o s Rap t o p o u l o s
p 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 s
p 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
C z ech Republic
Lu c ie Rih o va
l u c ie.rih o va@ c z .ey .c o m
+ 420 225 335 504
Lu c ie Rih o va
l u c ie.rih o va@ c z .ey .c o m
+ 420 225 335 504
Denmark
Jens Wit t endo rf
j ens .w it t endo rf f @ dk .ey .c o m
+ 45 51 58 28 20
Jo h annes Lars en
j o h annes .r.l ars en@ dk .ey .c o m
+ 45 7 3 23 3414
stria
elgi m
lgaria
Bj arne Gim s ing
b j arne.gim s ing@ dk .ey .c o m
+ 45 25 29 369 9
Estonia
Ranno Tingas
ranno .t ingas @ ee.ey .c o m
+ 37 2 611 457 8
Ranno Tingas
ranno .t ingas @ ee.ey .c o m
+ 37 2 611 457 8
European U nion
Marnix Van Rij
m arnix .van.rij @ nl .ey .c o m
+ 31 7 0 328 67 42
Klaus Von Brocke
k l au s .vo n.b ro c k e@ de.ey .c o m
+ 49 8 9 14331 1228 7
F inland
Ju k k a Ly ij y nen
jukka.lyijynen@fi.ey.com
+ 358 207 28 0 19 0
Ju k k a Ly ij y nen
jukka.lyijynen@fi.ey.com
+ 358 207 28 0 19 0
F rance
Ch arl es Menard
c h arl es .m enard@ ey - avo c at s .c o m
+ 33 1 55 61 15 57
Ch arl es Menard
c h arl es .m enard@ ey - avo c at s .c o m
+ 33 1 55 61 15 57
Germany
Herm ann Ot t m ar Gau ß
h erm ann.gau s s @ de.ey .c o m
+ 49 30 2547 1 16242
Jü rgen Sc h im m el e
j u ergen.s c h im m el e@ de.ey .c o m
+ 49 211 9 352 219 37
lo al a
olic and ontro ers
riefing 19 1
J urisdiction
T ax policy
T ax controversy
Greece
St ef ano s Mit s io s
s 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 iadis
t as s o s .anas t as s iadis @ gr.ey .c o m
+ 302 102 8 8 6 59 2
Bo t o nd Renc z
b o t o nd.renc z @ h u .ey .c o m
+ 36 145 18 602
Bo t o nd Renc z
b o t o nd.renc z @ h u .ey .c o m
+ 36 145 18 602
I ndia
Ganes h Raj
ganes h .raj @ in.ey .c o m
+ 9 1 120 67 17 110
Rajan Vora
raj an.vo ra@ in.ey .c o m
+ 9 1 22 619 20440
I reland
Kevin Mc Lo u gh l in
k evin.m c l o u gh l in@ ie.ey .c o m
+ 353 1 2212 47 8
Kevin Mc Lo u gh l in
k evin.m c l o u gh l in@ ie.ey .c o m
+ 353 1 2212 47 8
I taly
Giac o m o Al b ano
gl 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 i
m aria- ant o niet t a.b is c o z z i@ it .ey .c o m
+ 39 02 8 514312
K az ak hstan
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
at ia
Il o na Bu t ane
il o na.b u t ane@ l v.ey .c o m
+ 37 1 67 04 38 36
Il o na Bu t ane
il o na.b u t ane@ l v.ey .c o m
+ 37 1 67 04 38 36
ith ania
Kes t u t is Lis au s k as
k es t u t is .l is au s k as @ l t .ey .c o m
+ 37 0 5 27 4 2252
Kes t u t is Lis au s k as
k es t u t is .l is au s k as @ l t .ey .c o m
+ 37 0 5 27 4 2252
Marc Sc h m it z
m arc .s c h m it z @ l u .ey .c o m
+ 352 42 124 7 352
Jo h n Ham es
j o h n.h am es @ l u .ey .c o m
+ 352 42 124 7 256
Malta
Ro b ert At t ard
ro b ert .at t ard@ m t .ey .c o m
+ 356 2134 2134
Ro b ert At t ard
ro 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
T he Netherlands
Arj o van Eij s den
arj o .van.eij s den@ nl .ey .c o m
+ 31 10 406 8 506
Arj o van Eij s den
arj o .van.eij s den@ nl .ey .c o m
+ 31 10 406 8 506
Norway
Arild Vestengen
aril d.ves t engen@ n0.ey .c o m
+ 47 24 002 59 2
Arild Vestengen
aril d.ves t engen@ n0.ey .c o m
+ 47 24 002 59 2
P oland
Zb igniew Lip t ak
z 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 z
agnies z k a.t al as iew ic z @ p l .ey .c o m
+ 48 22 557 7 2 8 0
Carl o s Manu el Bap t is t a Lo b o
c arl o s .l o b o @ p t .ey .c o m
+ 351 217 9 12 000
Pau l o Mendo nc a
p au l o .m endo nc a@ p t .ey .c o m
+ 351 21 7 9 1 2045
ngar
em o rg
ort gal
19 2
lo al a
olic and ontro ers
riefing
J urisdiction
T ax policy
T ax controversy
Romania
Al ex ander Mil c ev
al ex ander.m il c ev@ ro .ey .c o m
+ 40 21 402 4000
Jean- Marc Cam b ien
m arc .c am b ien@ ro .ey .c o m
+ 40 21 402 419 1
Russia
Al ex andra Lo b o va
al ex andra.l o b o va@ ru .ey .c o m
+ 7 49 5 7 05 9 7 30
Al ex ei A Nes t erenk o
al ex ei.nes t erenk o @ ru .ey .c o m
+ 7 49 5 662 9 319
S lovak Republic
Ric h ard Panek
ric h ard.p anek @ s k .ey .c o m
+ 421 2 333 39 109
Peter Feiler
p et er.f eil er@ s k .ey .c o m
+ 421 2 333 39 15
S lovenia
Denes Sz ab o
denes .s z ab o @ h r.ey .c o m
+ 38 5 248 0 540
Denes Sz ab o
denes .s z ab o @ h r.ey .c o m
+ 38 5 248 0 540
Ch arl es Mak o l a
c h arl es .m ak o l a@ z a.ey .c o m
+ 27 11 7 7 2 3146
Christel Van Wyk
c h ris t el .vanw y k @ z a.ey .c o m
+ 27 11 502 0100
S pain
Eduardo Verdun Fraile
edu ardo .verdu nf rail e@ es .ey .c o m
+ 34 9 15 7 27 419
Max im ino Linares
m ax im ino .l inares gil @ es .ey .c o m
+ 34 9 1 57 2 7 1 23
S weden
Erik Hu l t m an
erik .h u l t m an@ s e.ey .c o m
+ 46 8 520 59 4 68
Erik Hu l t m an
erik .h u l t m an@ s e.ey .c o m
+ 46 8 520 59 4 68
S witz erland
Claudio Fischer
claudio.fischer@ch.ey.com
+ 41 58 28 6 3433
Wal o St aeh l in
w al o .s t aeh l in@ c h .ey .c o m
+ 41 58 28 6 649 1
U k raine
Vladimir Kotenko
vl adim ir.k o t em k o @ u a.ey .c o m
+ 38 0 44 49 0 3006
Vladimir Kotenko
vl adim ir.k o t em k o @ u a.ey .c o m
+ 38 0 44 49 0 3006
Ch ris Sanger
c s anger@ u k .ey .c o m
+ 44 20 7 9 51 0150
Jam es Wil s o n
j w il s o n8 @ u k .ey .c o m
+ 44 20 7 9 51 59 12
J urisdiction
T ax policy
T ax controversy
T ax policy and
controversy leaders
lf apito
alf capito a e com
+ 61 2 8 29 5 64 7 3
oward dams
howard adams a e com
+ 61 2 9 24 8 5 601
J apan
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
o th frica
nited ingdom
J apan
lo al a
olic and ontro ers
riefing 19 3
EY | As s u ranc e | Tax | Trans ac t io ns | Advis o ry
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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
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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,
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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 .