Cross-Border Business Restructuring
Recent international tax developments
Richard Newby
Partner, International Tax
23 September 2010
Agenda
•OECD
•Controlled Foreign Companies
•Exit taxes
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and
the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.
1
Business restructuring – OECD example
Sales and Marketing
(limited risk distribution]
Head Office
Management
services
Suppliers
Key to flows:
Legal title
Physical flow
Services
Sale 2
Principal
Purchase of
materials
Delivery of
materials
Sale 1
Manufacturing
services
Manufacturing
(consignment)
Customers
Distribution and
logistics services
Delivery of
goods
Distribution Centres
Delivery of
goods
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.
2
OECD developments
•Business restructuring:
 New Chapter IX, TPG
•Model Tax Convention
 July 2008: Report on the Attribution of Profits to Permanent Establishments -
guidance on applying the arm’s length principle in determining the profits
attributable under Article 7 to a PE
 2010:
 new version of Article 7 in the update of the Model Tax Convention
 modified Report: deletes obsolete cross-references and aligns the Report’s wording
with the text of the new Article 7 and the revised TPG.
•Intangibles:
 New TP project contemplated
 Possible revision of Chapters VI and VIII, TPG
 Comments on possible scope invited by 15 September
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and
the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.
3
OECD – Chapter IX – highlights?
•Non-recognition [9.168]:
 “…non-recognition of a transaction is not the norm but an exception to the
general principle that a tax administration’s examination of a controlled
transaction ordinarily should be based on the transaction actually undertaken
by the associated enterprises as it has been structured by them. The word
“exceptional” in this context is similar in meaning to “rare” or “unusual”. It
reflects that in most cases it is expected that the arm’s length principle under
Article 9 can be satisfied by determining arm’s length pricing for the
arrangement as actually undertaken and structured.”
•Tax purpose [9.182]:
 “Provided functions, assets and/or risks are actually transferred, it can be
commercially rational from an Article 9 perspective for an MNE group to
restructure in order to obtain tax savings. However, this is not relevant to
whether the arm’s length principle is satisfied at the entity level for a taxpayer
affected by the restructuring.”
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and
the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.
4
OECD – Chapter IX – regrets?
•Arm’s length principle:
 good discussion at June 2009 Conference e.g. bargaining power
 little since
•Out of scope:
 domestic anti-abuse rules and CFC legislation
 domestic tax treatment of an arm’s length payment e.g. deductibility
•Why not the MTC system of with Reservations?
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and
the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.
5
Controlled Foreign Companies
•UK
 Discussion document January 2010
 Interim improvements 2011
 Full reform 2012
•Japan
•US
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and
the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.
6
Exit taxes
•OECD position:
 [9.65-68]: “The arm’s length principle does not require compensation for a
mere decrease in the expectation of an entity’s future profits. When applying
the arm’s length principle to business restructurings, the question is whether
there is a transfer of something of value (rights or other assets) or a
termination or substantial renegotiation of existing arrangements and that
transfer, termination or substantial renegotiation would be compensated
between independent parties in comparable circumstances.”
•Germany:
 2008: ‘Transfer Package’ introduced
 2010: retrospective to 2008 - individual transfer prices can be applied for all
transferred items provided 1) less than a full business is transferred, together
with 2) at least one intangible asset
 Potential for no exit charge where no identifiable assets are charged
 “a great deal of confusion”
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG and
the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.
7
Presenter’s contact details
Richard Newby
+44 (0)20 7694 4955
richard.newby@kpmg.co.uk
Please include below disclaimer on all external material in which the member firm provides information that may otherwise be relied on by the reader without further consultation:
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be
no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough
examination of the particular situation.
© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. This document is confidential and its circulation and use are restricted. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.