International Tax Forum
September 19th 2013
St. Petersburg
BEPS: Base Erosion and Profit Shifting
– the lack of harmonization and the
double taxation as a result
Prof. Dr. Wolfgang Kessler
Lehrstuhl für Betriebswirtschaftliche Steuerlehre
Albert-Ludwigs-Universität Freiburg – Lehrstuhl für Betriebswirtschaftliche Steuerlehre – StB Prof. Dr. W. Kessler
Werthmannstr. 8 – 79085 Freiburg i.Br. – Telefon 0761/203-9200 – Telefax 0761/203-9202
Agenda
1. Fundamentals
2. Tax planning structures
 Google
 Apple
3. OECD measures
 Report Addressing BEPS (10/02/2013)
 Action plan on BEPS (19/07/2013)
4. Implications of the OECD measures
19.09.2013 | Prof. Dr. Wolfgang Kessler
2
1. Fundamentals (1/6)
- tax credit method vs. exemption method USA
DE
Inc.
AG
dividend
87,5
+ 12,5
FTC
./. 35
CIT
OpCo
100
EBT
active
income
65
profit
dividend
87,5
./. 1,3 * 86,2
CIT
profit
OpCo
./. 12,5
CIT
IE
19.09.2013 | Prof. Dr. Wolfgang Kessler
87,5
profit
100
EBT
active
income
./. 12,5
CIT
87,5
profit
IE
*) Exemption method (tax base = 0), but 5% of
dividend deemed as non deductible expenses.
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1. Fundamentals (2/6)
- tax deferral vs. CFC rules USA
USA
Inc.
Inc.
no
dividend
0
EBT
./. 0
CIT
0
profit
OpCo
100
EBT
active
income
0
EBT
./. 35
CIT
+ 12,5
FTC
100
EBT
./. 12,5
CIT
87,5
profit
no
dividend
-22,5
loss
CFC
./. 12,5
CIT
IE
19.09.2013 | Prof. Dr. Wolfgang Kessler
87,5
profit
passive
income
IE
4
1. Fundamentals (3/6)
- calculation tax credit method
exemption method
tax deferral
IE-OpCo
100 EBT
./. 12,5 CIT (IE)
= 87,5 profit
IE-OpCo
100 EBT
./. 12,5 CIT (IE)
= 87,5 profit
US-Inc.
87,5 EBT=dividend
DE-AG
US-Inc.
US-Inc.
87,5 EBT=dividend
0 EBT=dividend
0 EBT=dividend
[+
[./. 87,5 exemption
method]
./.
0
CIT (IE)
./. 1,3 CIT (DE)
= 86,2 profit
=
0
profit
affiliated group
= 86,2 profit
affiliated group
= 87,5 profit
12,5 gross up]
./. 35 CIT (US)
+ 12,5 tax credit
= 65 profit
affiliated group
= 65 profit
19.09.2013 | Prof. Dr. Wolfgang Kessler
IE-OpCo
100 EBT
./. 12,5 CIT (IE)
= 87,5 profit
CFC-rules
IE-OpCo
100 EBT
./. 12,5 CIT (IE)
= 87,5 profit
[+ 100
CFC-income]
./. 35 CIT (US)
+ 12,5 tax credit
= - 22,5 loss
affiliated group
= 65 profit
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1. Fundamentals (4/6)
- US Corporate Income Taxes • Federal tax: Corporate Income Tax




residence: place of incorporation (not place of management)
U.S. taxation of worldwide income – as a basic principle
stepped rates up to 35% + state/local taxes (approx. 2-6%)
avoidance of international double taxation: foreign tax creditmethod (FTC) with option to “deemed paid tax credit” (gross up)
 Subpart F: current inclusion of passive income (e.g. dividends,
interest, royalties) from controlled foreign corporations (CFC)
 “check the box”-regulation (Form 8832): option to treat a
corporation as permanent establishment (disregarded entity)
• US-GAAP
 expected effective tax rate (ETR) of 35-41%!
 exception: no deferred taxes, “if sufficient evidence shows that
the subsidiary has invested or will invest the undistributed
earnings indefinitely …” (APB 23)
19.09.2013 | Prof. Dr. Wolfgang Kessler
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1. Fundamentals (5/6)
- transfer of intangible assets from the USA BM
USA
US Inc.
② cost sharing agreement (buy-in)
① research &
development
Offshore-Co
intangible
assets
③ IP transfer
EU-OpCo
EU
19.09.2013 | Prof. Dr. Wolfgang Kessler
④ license
intangible
assets
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1. Fundamentals (6/6)
- jurisdiction to tax for CIT purposes state of residence
USA U.K. Ireland Germany OECD
place of incorporation
(or place of formation)
X
X
X (*)
X
-
place of (effective)
management
( daily business)
-
-
X
X
X
place of management
( strategic
decisions)
-
X
-
-
-
*) There is an exception to this rule if a related company is controlled
or is regularly traded on a recognized stock exchange.
19.09.2013 | Prof. Dr. Wolfgang Kessler
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2. Tax planning structures (1/4)
- Google: structure Google Inc.
① IP
transfer
USA
⑧ dividends
(deferred)
BM
Google Ireland
Holdings (*)
⑦ royalties
② license
Google NL
Holding B.V.
IE
NL
③ sublicense
Google Ireland Ltd.
④ online promotion
clients
19.09.2013 | Prof. Dr. Wolfgang Kessler
⑥ royalties
⑤ fees
DE
*) The Google Ireland Holdings was founded in Ireland,
but the place of management is in Bermuda.
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2. Tax planning structures (2/4)
- Google: CIT • USA:
 Google Inc.: US CIT on dividends (but deferral in Bermuda) and
no CFC taxation (active income from Irish subsidiaries)
 Google Ireland Holdings: intangible assets transferred via cost sharing
arrangement (APA) from the USA to Bermuda (no super royalty rule)
 Google Ireland Ltd. / Google NL Holding B.V.:
 no tax resident (both companies are not incorporated in the USA)
 no CFC taxation (check-the-box-election  active revenues from Irish subs)
• Bermuda: Google Ireland Holdings: no CIT and no withholding tax (tax haven)
• Netherlands:
 Google Ireland Holdings: no withholding tax on royalties outgoing (local tax code)
 Google NL Holding B.V.: ruling on royalty net income (handling fee)
• Ireland:
 Google Ireland Holdings: no tax resident (no place of management in Ireland)
 Google NL Holding B.V.: no withholding tax (Council Directive 2003/49/EC)
 Google Ireland Ltd.: CIT = 12,5%, but low net income (high TP on royalties)
• Germany: Google Ireland Ltd.: no CIT (no permanent establishment)
19.09.2013 | Prof. Dr. Wolfgang Kessler
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2. Tax planning structures (3/4)
- Apple: structure Apple Inc.
IE
Apple „OpCo“
International
① IP
transfer
USA
TW
Apple OpCo
Europe
Apple Sales
International
Foxconn
19.09.2013 | Prof. Dr. Wolfgang Kessler
DE
Apple Distribution Int.
② sale
clients
Apple Retail
Holding Europe
③ sale
Apple Retail
Germany
④ sale
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2. Tax planning structures (4/4)
- Apple: CIT • USA:
 Apple Inc.:
 no CFC taxation (active income from disregarded “Irish” sub-subsidiaries)
 Apple OpCo International / Apple OpCo Europe / Apple Sales International:
 incorporated in IE, but have no tax residency in Ireland (no employees, no PE)
and in the USA (ghost company) – board meetings in CA!
 intangible assets transferred via cost sharing arrangement from the USA
 no CFC taxation (check-the-box-election  sales income of Irish subsidiaries is
active income of AOI)
• Ireland:
 Apple OpCo International / Apple OpCo Europe / Apple Sales International:
 subject to non-resident taxation, but special tax rate of 2%
 Apple Distribution International / Apple Retail Holding Europe:
 tax resident, but low net income (TP: low risk distributor)
• Germany:
 Apple Distribution International: no CIT (no permanent establishment)
 Apple Retail Germany: tax resident, but low net income (TP: low risk distributor)
• Taiwan: Foxconn: tax resident, but low net income (TP: low risk distributor)
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19.09.2013 | Prof. Dr. Wolfgang Kessler
3. OECD measures & EU Code of Conduct
- timeline 1997
EU: Code of Conduct for business taxation
1998
Report: Harmful Tax Competition – An Emerging Global Issue
2001
Discussion paper: The Impact of the Communications
Revolution on the Application of “Place of Effective
Management" as a Tie Breaker Rule
2004
TAG Final Report: Are the Current Treaty Rules for Taxing
Business Profits Appropriate for E-Commerce?
12/02/2013
BEPS-Report (diagnosis)
15/02/2013
G20 Finance Ministers meeting in Moscow
19/07/2013
G20 Finance Ministers meeting in Moscow
OECD Action Plan on BEPS (therapy)
05/09/2013
G20 Leader’s Summit in St. Petersburg
19.09.2013 | Prof. Dr. Wolfgang Kessler
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3. OECD report addressing BEPS (10/02/2013)
- Global Foreign Direct Investments in 2010 Barbados / Bermuda /
British Virgin Islands (5,11%)
Germany
(4,77%)
Japan
(3,76%)
other
(86,36%)
value of retained offshore profits ≈ 1.7 trillion $
==> deferred US CIT ≈ 600 billion $
Source: OECD, 2013.
(Source: Pinkernell, IStR 2013, p. 180-187)
19.09.2013 | Prof. Dr. Wolfgang Kessler
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3. OECD action plan on BEPS (19/07/2013)
- 15 actions (15) develop a multilateral instrument
(1) address the tax challenges
of the digital economy
(14) make dispute resolution
mechanisms more effective
(13) re-examine transfer
pricing documentation
(12) require taxpayers to
disclose their aggressive tax
planning arrangements
(11) establish methodologies to
collect and analyse data on BEPS
and the actions to address it
(10) assure that transfer pricing
outcomes are in line with value
creation (other high-risk transactions)
(9) assure that transfer pricing
outcomes are in line with value
creation (risks and capital)
19.09.2013 | Prof. Dr. Wolfgang Kessler
(2) neutralise the effects of
hybrid mismatch arrangements
(3) strengthen CFC rules
(4) limit base erosion via interest
deductions and other financial payments
(5) counter harmful tax practices
more effectively, taking into account
transparency and substance
(6) prevent treaty abuse
(7) prevent the artificial
avoidance of PE status
(8) assure that transfer pricing
outcomes are in line with value
creation (intangibles)
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4. Implications of the OECD measures (1/5)
- actions • Action 1: address the tax challenges of the digital economy
 expected output:
 report identifying the main difficulties that the economy poses for the
application of existing international tax rules
 development of detailed options to address these difficulties
 object of investigation:
 companies with a significant digital presence in the economy of another
country without being liable to taxation (no nexus)
 attribution of value for digital products and services and
characterization of income of these digital products and services
 application of related source rules
 ensure the effective collection of VAT/GST with respect to the crossborder supply of digital goods and services
 implications for the tax structures of Google & Apple:
 possibly non-resident tax liability in EU via the fiction of a (virtual) PE
 possibly tax residency of the „ghost“ companies in the USA or in Ireland
 global formulary apportionment?
19.09.2013 | Prof. Dr. Wolfgang Kessler
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4. Implications of the OECD measures (2/5)
- actions • Action 3: strengthen CFC rules
 expected output:
 recommendations regarding the design of domestic rules
 object of investigation:
 design of rules for controlled foreign companies
 implications for the tax structures of Google & Apple:
 currently: US CFC taxation is avoided via check-the-box-election
 in theory the CFC taxation in the USA could be strengthened so that
CFC legislation would work properly
 companies which are resident in EU member states:
no relevance due to the judgments of the ECJ (Cadbury Schweppes),
if the subsidiary has substance (not fully artificial)
 thus CFC legislation is in fact a phase-out model
19.09.2013 | Prof. Dr. Wolfgang Kessler
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4. Implications of the OECD measures (2/5)
- actions • Action 5: counter harmful tax practices more effectively,
taking into account transparency and substance
 expected output:
 finalized review of member countries’ regimes
 revision of existing criteria
 object of investigation:
 revamping the work on harmful tax practices with a priority on
improving transparency (including compulsory spontaneous exchange
on rulings related to preferential regimes)
 requirement of a substantial activity for any preferential regime
 implications for the tax structures of Google & Apple:
 no rulings for conduit companies in the Netherlands
 no special tax rates for IP companies (IE) or IP-boxes (NL, Lux, UK)
 no preferential tax regimes for artificial holding companies
19.09.2013 | Prof. Dr. Wolfgang Kessler
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4. Implications of the OECD measures (3/5)
- actions • Action 7: prevent the artificial avoidance of
permanent establishment status
 expected output:
 changes to the OECD Model Commentary and Tax Convention
 recommendations regarding the design of domestic rules
 object of investigation:
 prevention of the artificial avoidance of the PE status – e.g.
commissionaire arrangements and specific activity exemptions
 implications for the tax structures of Google & Apple:
 currently: non-taxable direct business activities in EU member states
 in the future: non-resident tax liability in EU member states via a sales
agent PE, no exemption for facilities solely for the purpose of storage,
display … and activities of preparatory or auxiliary character (Art. 5 P 4)
19.09.2013 | Prof. Dr. Wolfgang Kessler
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4. Implications of the OECD measures (4/5)
- actions • Action 8: assure that transfer pricing outcomes are in line
with value creation (intangibles)
 expected output:
 changes to the Transfer Pricing Guidelines (WP6 discussion draft on
intangibles)
 changes to the Model Tax Convention
 object of investigation:
 broad and clearly delineated definition of intangibles
 appropriate allocation of the profits associated with the transfer and
use of intangibles (in accordance with the creation of economic value)
 development of TP rules for transfers of hard-to-value intangibles
 updating the guidance on cost contribution arrangements
 implications for the tax structures of Google & Apple:
 preventing a tax-free transfer of intangible assets from the USA to a
tax haven
19.09.2013 | Prof. Dr. Wolfgang Kessler
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4. Implications of the OECD measures (5/5)
- actions • missing measures
 Coordination of tax residency of corporations
 place of incorporation vs.
 place of (effective) management ( daily business) vs.
 place of management ( strategic decisions)
 OECD Discussion paper: The Impact of the Communications
Revolution on the Application of “Place of Effective
Management” as a Tie Breaker Rule (2001)
 withholding tax on interest and royalties
(for non-EU countries!)
 alternative taxation concepts
 global formulary apportionment
 full inclusion system
19.09.2013 | Prof. Dr. Wolfgang Kessler
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Conclusions
• Controversial and open-ended project due to the clash of
interests / distortion of competition
 biggest problems in USA, massive export subsidy and offshore dilemma
 while Germany is a model student who does even more than enough –
earning stripping rule, taxation at „transferring“ and transfer of functions,
strength CFC taxation, treaty override, intentional double taxation, …
 CH, NL, Lux, UK, … are juvenile delinquents due to their preferential regimes
• E-Commerce discussion: New Wine into Old Wineskins
• Possible improvements:





country-by-country-reporting
abolition of preferential regimes („level playing field“)
revised version of Art. 5 P 4 OECD Model Tax Convention
tie-breaker rule for anti-avoidance measures
fundamental US tax reform
• Worst case scenario:
 massive treaty override, massive double taxation, endless TP disputes, …
19.09.2013 | Prof. Dr. Wolfgang Kessler
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Thank You
for Your Attention!
19.09.2013 | Prof. Dr. Wolfgang Kessler
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