beps action plan · assure that tp outcomes are in line with value creation: other high-risk...

BEPS Action Plan

September 2014

1 © 2014 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.

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Address the tax challenges of the digital economy

Neutralise the effects of hybrid mismatch arrangements

Strengthen CFC rules

Limit base erosion via interest deductions/other financial payments

Counter harmful tax practices more effectively taking into account transparency and substance

Prevent treaty abuse

Prevent the artificial avoidance of PE status

Assure that TP outcomes are in line with value creation: intangibles

Assure that TP outcomes are in line with value creation: risks and capital

Assure that TP outcomes are in line with value creation: other high-risk transactions

Establish methodologies to collect and analyse data on BEPS and the actions to address it

Require taxpayers to disclose their aggressive tax planning arrangements

Re-examine TP documentation and Country by Country Reporting

Make dispute resolution mechanisms more effective

Develop a multilateral instrument

Appendix I - OECD’s September 2014 Deliverables


KEY OUTCOMES OF THE SEPTEMBER 2014 REPORT (CONT.) i. Ensuring that core activities cannot inappropriately benefit from the

exception to PE status and that artificial arrangements relating to sales of goods and services cannot be used to avoid PE status

ii. The importance of intangibles, the use of data, and the spread of global value chains and their impact on transfer pricing

iii. The possible need to adapt CFC rules to the digital economy

iv. Addressing opportunities for tax planning by businesses engaged in VAT-exempt activities by encouraging implementation of the OECD’s Guidelines on the place of taxation for B2B supplies of services and intangibles

■ The Task Force will continue to review the challenges associated with nexus, data and characterisation, with a particular focus on multi-sided business models and the participation of users and consumers in value creation. The group is not expected to meet again until January 2015

THE EU POSITION ■ EC Report on Taxation of Digital Economy:

i. Digital Economy does not require a separate tax regime; current rules may need to be adapted to respond to digitisation

ii. Digitisation greatly facilitates cross border business; therefore essential to remove barriers, including tax barriers

iii. Tax systems should be simple, stable and, as far as possible, neutral; in general any departure from neutrality and simplicity should be justified on grounds of market failure including the benefits of positive externalities

iv. VAT should be based on the destination principle (namely taxation at the place of consumption). Eventually this principle should be applied to all goods and services

v. In the area of corporate taxation, the G20/OECD BEPS project will be fundamental to tackling tax avoidance and aggressive tax planning globally. EU Member States should take a common position to ensure a favourable outcome for the entire EU

■ Next phase for the paper will be consideration by the Commission

Action 1 – Address the tax challenges of the digital economy

OECD REPORT 19 JULY 2013 ■ Identify difficulties posed by the digital economy for existing tax rules, covering both direct and indirect

taxes ■ Significant digital presence in a country but lack of nexus under existing rules ■ Attribution of value created from the generation of marketable location-relevant data

WHEN AND EXPECTED OUTPUT ■ Report on how to address issues raised by digital economy presented at G20 meeting scheduled for

20-21 September 2014 ■ Second report on digital economy due by December 2015, although we are already seeing unilateral

action and interpretations of the direction laid out. The world is not going to wait to take action until a further report is issued

WHAT HAS HAPPENED SO FAR ■ OECD discussion draft published on 24 March 2014 ■ OECD public comments received published on 16 April 2014 ■ Public consultation held on 23 April 2014 ■ Action 1 2014 Deliverable published on 16 September 2014

KEY OUTCOMES OF THE SEPTEMBER 2014 REPORT ■ No longer the subject of debate is the concept of a separable digital economy, it has been unanimously

agreed that it is not possible to ring fence digital businesses within a special tax regime ■ The Deliverable presents five direct tax options addressing the tax challenges raised by the digital

economy: (i) modifications to the exemptions from PE status, (ii) a new nexus based on significant digital presence, (iii) replacing PE with significant presence, (iv) the imposition of a withholding tax on certain types of digital transactions, and (v) introducing a bandwidth or “Bit” tax

■ Indirect taxes, e.g. VAT/GST were specifically included within the digital action plan. With a move towards a ‘consumption tax’. This is a fundamental policy shift. The policy advocates that international services (including digital) should be taxed in the jurisdiction of consumption, or residence, of the consumer regardless of any fixed or permanent establishment of the company in the country of consumption

■ The Task Force is to continue its work until the end of 2015 to ensure that work carried out by other workstreams address BEPS issues in the digital economy. Specifically the work on the BEPS Project must examine:


KEY OUTCOMES OF THE SEPTEMBER 2014 REPORT ■ The deliverable proposes changes to domestic rules to neutralise the impact of various

hybrid mismatch arrangements (‘HMAs’) in respect of payments made under hybrid financial instruments (including hybrid transfers such as a ‘repo’) or payments made to or by a hybrid entity, and to the OECD Model Tax Convention in relation mainly to dual resident entities

■ Will there be reasonable exceptions for genuine commercial transactions? The Report does not say anything in this respect

■ The main characteristic for an arrangement to be neutralised under the new proposed legislation is that the arrangement is treated differently in two, sometimes more, tax jurisdictions producing an overall tax benefit. Focus areas are (i) arrangements giving rise to a double deduction (‘DD’), where duplicate deductions arise in the payer and the parent jurisdictions in respect of the same payment; (ii) arrangements giving rise to a deduction with no inclusion (‘D/NI’) where a payment is deductible in the payer jurisdiction, but not taxed in the payee jurisdiction; and (iii) indirect D/NI arrangements, where a D/NI outcome between two jurisdictions that do not have effective hybrid mismatch rules is shifted to a third jurisdiction through, for example, the use of a financial instrument

■ The OECD proposes domestic legislation to neutralise these HMAs. In order to ensure they are neutralised, the OECD recommends a primary rule that should be applicable in one jurisdiction with a defensive rule that should apply in the other jurisdiction in the absence of a primary rule in the first jurisdiction. The rules are recommended to operate automatically and in a hierarchical manner

■ The OECD recommendations follow a bottom-up (rather than top-down) approach, identifying specific transactions that should be within the scope of the hybrid mismatch rules, without providing exceptions for arrangements which have been implemented for genuine commercial transactions. A related party test (25%, not 10% as previously suggested) or a controlled group test (50%) applies in most cases to limit the application of the rules. In addition, there is a structured arrangement test that can capture a hybrid

■ The report indicates that further work needs to be carried out in four key areas: (i) capital market transactions (such as stock lending and repos); (ii) imported hybrid mismatches; (iii) intra-group hybrid regulatory capital instruments; and (iv) the interaction with the CFC rules. This work is scheduled to be completed by September 2015.

Action 2 – Neutralise the effects of hybrid mismatch arrangements

WHAT HAS HAPPENED SO FAR ■ OECD discussion draft published on 19 March 2014

■ Advisers discussion with OECD on 1 April and 15 April 2014

■ OECD public comments received published on 7 May 2014

■ Public consultation held on 15 May 2014

■ OECD draft recommendations released on 16 September 2014, although no consensus reached on some issues. Final outcome should be published by September 2015

OECD REPORT 19 JULY 2013 ■ Hybrid instruments and entities not used to obtain treaty benefits unduly

■ Domestic provisions that prevent exemption or non-recognition of payments that are deductible by the payor

■ Domestic provisions that deny a deduction for a payment that is not includible income by the recipient

■ Guidance on co-ordination between countries or tie breaker rules

WHEN AND EXPECTED OUTPUT ■ Report on changes to model tax convention and recommendations on domestic rules

presented at G20 meeting on 20-21 September 2014. Guidance on implementation and co-ordination to be published by September 2015, although report contains sufficient detail to allow governments to act on it immediately if they wish

■ Interaction with Action 3 (e.g. need to clarify whether income taxed under CFC regime should be treated as included in ordinary income) and Action 4 (interest deductions). Co-ordinated outcome expected by no later than September 2015


Action 2 – Neutralise the effects of hybrid mismatch arrangements (Cont.)

KEY OUTCOMES OF THE SEPTEMBER 2014 REPORT (CONT.)

■ Other changes recommended in relation to domestic law: i. the denial of a dividend exemption in respect of deductible payments made under

financial instruments;

ii. measures to prevent hybrid transfers being used to duplicate tax credits; iii. improvements to CFC and other offshore investment regimes to bring the income of

hybrid entities within the charge to taxation, together with certain reporting obligations; and

iv. rules restricting the tax transparency of reverse hybrids that are members of a controlled group.

■ Other changes recommended in relation to the OECD Model Tax Convention: i. changes to the OECD Model Tax Convention to ensure hybrid instruments and

entities (including dual resident entities) are not used to obtain the benefits of treaties unduly; and

ii. a focus on the interaction between changes to domestic law and the provisions of the OECD Model Tax Convention.

■ According to the OECD’s own words, the released recommendations contain sufficient detail to allow governments to act immediately if they wish, although the OECD has acknowledged that they need to provide guidance on implementation and co-ordinate the recommendations with certain of the 2015 actions, in particular Action 3 (the design of the CFC rules), and Action 4 (in relation to interest deductions). Guidance is expected to be published by September 2015.

THE EU POSITION ■ On 8 July 2014, the European Council formally adopted an amendment to EU tax rules

that will prevent the double non-taxation of dividends distributed within corporate groups deriving from hybrid loan arrangements: i. The member state of the parent company will henceforth refrain from taxing profits

from the subsidiary only to the extent that such profits are not tax deductible for the subsidiary

ii. Hybrid loan arrangements have enabled multinational groups to avoid paying taxes altogether by exploiting mismatches between national tax rules. In such cases, the received distributed profits were not taxable in the member state of the parent company, whilst they were treated as a tax-deductible expense in the member state of the subsidiary

■ Member states will have until 31 December 2015 to give effect to amendment in national law

■ Further work to take place in relation to the introduction of a common anti-abuse provision


WHAT HAS HAPPENED SO FAR ■ Works should only start in late 2014/early 2015

Action 3 – Strengthen CFC rules

OECD REPORT 19 JULY 2013 ■ Concerns on routing income of a resident enterprise through a non-resident affiliate

WHEN AND EXPECTED OUTPUT ■ September 2015

■ Recommendations to domestic rules


WHAT HAS HAPPENED SO FAR ■ 2015 action

■ Works should only start in late 2014/early 2015 although action is linked with other actions which are already in progress

Action 4 – Limit base erosion via interest deductions/other financial payments

OECD REPORT 19 JULY 2013 ■ Use of related-party or third-party debt to achieve excessive interest deductions or to

finance the production of exempt or deferred income

■ Financial payments economically equivalent to interest payments

■ Transfer pricing guidance to be developed regarding the pricing of related party financial transactions

WHEN AND EXPECTED OUTPUT ■ September/December 2015

■ Recommendations to domestic rules and changes to TP guidelines


Action 5 – Counter harmful tax practices more effectively taking into account transparency and substance

KEY OUTCOMES OF THE 2014 REPORT ■ The OECD’s BEPS Action Plan update report on Action 5 outlines progress made to

date by the Forum on Harmful Tax Practices (FHTP) in (i) determining the parameters within which preferential tax regimes should operate going forward, in relation to substantial activity, and (ii) in improving transparency through compulsory spontaneous exchange on rulings related to preferential regimes

■ Work so far on substantial activity has focussed on IP regimes and therefore directly impacts on the UK’s Patent Box

■ The FHTP’s starting point has been to develop a framework in order to assess whether particular regimes incorporate a suitable ‘substantial activities’ test to assess the quantum of any tax benefit available

■ The report references two approaches which could be adopted in order achieve this, a Transfer Pricing approach and a Nexus approach. Current focus is on the latter

■ The Nexus approach seeks to directly link the IP regime benefits to the claimant company’s contribution to the development of the IP in question, measured by reference to company R&D expenditure as a proportion of total R&D expenditure, with expenditure acting as a proxy for activity.

■ While the report focuses on the Nexus approach, it states that no decisions have yet been made and recognises that FHTP participants have yet to reach consensus.

■ The second priority under Action 5 is to improve transparency, including compulsory spontaneous exchange on rulings related to preferential regimes.

■ Lack of transparency may arise in (i) the way in which a regime is designed and administered (e.g. favourable application of laws and regulations, negotiable tax provisions), and in (ii) the existence of provisions such as secrecy laws or other information requirements that could prevent effective exchange of information.

■ The first step has focused on developing a framework for compulsory spontaneous information exchange on rulings. In the second step, the FHTP will focus on the application of the framework to preferential regimes.

■ Finally, the report provides a progress update on the review of member country preferential regimes. As all the intangible regimes of member countries are being considered, they are being considered not only in light of the factors as previously applied but also in light of the elaborated substantial activity factor.

OECD REPORT 19 JULY 2013 ■ Compulsory spontaneous exchange on rulings related to preferential regimes

■ Substantial activity for any preferential regime

THE EU POSITION ■ The EU is involved in some parallel initiatives that could be seen to relate to this action,

notably the investigation into IP box regimes including UK Patent Box.

■ While the OECD’s work is being conducted separately from the EU Code of Conduct’s review of IP regimes, the Code of Conduct Working Group is expected to follow the OECD’s position.

■ UK Government remain committed to the Patent Box and HM Treasury officials have confirmed to KPMG that the UK will continue to make the case for a Transfer Pricing approach, at an EU and OECD level, rather than Nexus and resist any changes which will prejudice the Patent Box regime.

■ KPMG does not support the Nexus approach as described in the report. In KPMG’s view the approach is inconsistent with many of today’s business models. The approach would also introduce disproportionate complexity, for example, in effect imposing a 20 year + record keeping requirement.

WHEN AND EXPECTED OUTPUT ■ The FHTP next meets in November to discuss a way forward, however it is unlikely any

final decisions will be reached. Prior to this, in October, HM Treasury is planning to hold a Patent Box Working Group session to seek further views from business and prepare for the November meeting.

■ To the extent any changes to Patent Box rules are required going forward it remains the case that these would not be expected before Financial Year 2016/17 (or later).

■ Also, to the extent compromises are made, suitable grandfathering provisions should be introduced to ensure early adopters of the Patent Box are not disadvantaged as a result of buying into and supporting UK Government tax policy.


Action 6 – Prevent treaty abuse

KEY OUTCOMES OF THE SEPTEMBER 2014 REPORT ■ The draft instrument follows the format of the Discussion Draft with a three pronged approach: A. Develop model treaty provisions

and domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. B. Clarify that tax treaties are not intended to generate double non-taxation. C. Identify tax policy considerations for entering into treaties.

■ The recommendations on treaty shopping rules consist of a general anti-abuse rule similar to that found in European treaties (which is referred to as a “Principal Purpose Test” (“PPT”)) and a Limitation on Benefits (“LOB”) rule similar to those found in the USA’s treaties. Changes from the Discussion Draft include an optional derivative benefits test and enabling the publicly quoted test to be satisfied, in the case of indirect ownership, even where intermediate companies are not resident in one of the Contracting States. The proposed derivative benefits provision is more limited than that in other treaties such as the UK/US treaty as all owners are required to be an equivalent beneficiary as opposed to just the ultimate indirect owners.

■ The preferred approach is to combine these two rules to cover the widest range of treaty abuses. However, some flexibility is allowed to accommodate constitutional and EU restrictions. At a minimum, however, countries should adopt either a LOB or a PPT rule with a mechanism at the domestic level to deal with conduit arrangements not dealt with at the treaty level. Further work is being undertaken regarding precise model provisions and commentary, in particular for the LOB provisions.

■ Further work is also acknowledged as being required to ensure that Collective Investment Vehicles (“CIVs”) and Non-CIV funds are not inadvertently prejudiced by these rules. No draft clauses are provided but the commentary refers to the Contracting States being able to agree either that CIVs should be entitled to benefits without restriction or only to the extent that the shareholders are resident in the Contracting State. In the latter case there should be a practical agreement on how to demonstrate the test is satisfied as the shareholders would usually change daily.

■ There are some changes to the recommendations for new specific anti-abuse rules for other non-treaty shopping strategies. These strategies include:

– Treaty exemptions for low taxed or exempt permanent establishments (“PEs”). The draft instrument recommends restricting the denial of treaty benefits to cases where the profits of a PE are exempt in the Contracting State of the enterprise and the overall taxation is less than 60% of the tax which would have been imposed in that State. However, the more wide-reaching provision within the Discussion Draft that is not restricted to exempt PEs and only looks at the level of taxation being below the 60% threshold has been included within the draft commentary for Contracting States to implement as an alternative.

– Short term dividend transfer transactions which benefit from reduced treaty rates of withholding tax. The draft instrument suggests a 365 day holding requirement including the date the dividend is paid. It is disappointing that the CFA has not taken up our recommendation that the holding period can be satisfied both before and after the dividend is paid.

– The tie breaker rules for dual-resident companies recommends agreement by the Competent Authority but now recognises some countries may want to apply the traditional effective place of management rule.

■ There is a new commentary which notes that exit taxes are not prevented by treaties. However, where there is a risk of double taxation resulting from exit taxation when leaving a Member State and a liability arising at a later date on the income or gains in the new State, the draft instrument recommends resolution through the Mutual Agreement Procedure (“MAP”).

OECD REPORT 19 JULY 2013 ■ Tighten treaty anti-abuse clauses

■ Identify tax policy considerations that countries should consider before deciding to enter into a tax treaty

WHAT HAS HAPPENED SO FAR ■ OECD discussion draft published on 14

March 2014

■ OECD public comments received published on 11 April 2014

■ Public consultation held on 14-15 April 2014

■ CFA have produced recommendations for the Finance Ministers which became public on 16 September 2014

WHEN AND EXPECTED OUTPUT ■ Output presented at G20 meeting on 16

September 2014

■ Changes to model tax convention and recommendations on domestic rules


WHAT HAS HAPPENED SO FAR ■ OECD issued a request for input on PE strategies that might be considered to result in

the artificial avoidance of the PE status by 15 November 2013

■ Comments received published on 16 January 2014

■ Working party to release discussion draft. Date not yet available

Action 7 – Prevent the artificial avoidance of PE status

OECD REPORT 19 JULY 2013 ■ Update the definition of PE to prevent abuses

■ Use of “commissionaire arrangements” by a local subsidiary acting as a distributor, resulting in a shift of profits out of the country where the sales take place without a substantive change in the functions performed in that country

■ Multinational companies (“MNEs”) artificially fragment their operations among multiple group entities to qualify for the exception of PE status for preparatory and auxiliary activities

WHEN AND EXPECTED OUTPUT ■ September 2014/December 2015

■ Changes to model tax convention


Action 8 – Assure that TP outcomes are in line with value creation: intangibles

KEY OUTCOMES OF THE SEPTEMBER 2014 REPORT ■ A substantial part of this new guidance is now issued as final, meaning there are

important changes to the OECD’s guidance on intangibles which now form part of the official Guidelines documents that may be relied on by taxpayers and tax authorities.

■ As expected, some areas of the document remain greyed out – indicating the drafting is interim, and that further work will be completed as part of ongoing OECD work to be undertaken during 2015. The interim guidance relates to the more difficult issues such as allocation of intangible returns and hard to value intangibles.

■ The drafting of the guidance has not substantially changed since the discussion draft published in July 2013.

■ The now final guidance includes amendments to Chapter I to discuss general issues with applying the arm’s length principle, specifically for assessing location savings and other local market features, considering the value of an assembled workforce and how to treat MNE group synergies.

■ The new Chapter VI contains now final guidance on identifying intangibles and determining arm’s length conditions, comparability in intangibles transactions, transfer pricing methods and use of valuation techniques for intangibles transactions, together with a number of examples to explain the application of the guidelines.

■ The new guidance emphasises the importance of substance and functions performed in allocating intangible related returns. Legal ownership and contractual arrangements are the key starting point for the transfer pricing analysis of intangibles. However, the legal owner will only be entitled to the anticipated returns from exploitation of the intangible if, in substance, it performs and controls functions, provides assets including funding, and bears and controls all of the risks related to the development, enhancement, maintenance and protection of the intangible.

■ The interim guidance relates to the allocation of returns derived from intangibles, pending further discussion and work on Actions 8-10 as part of the 2015 BEPS deliverables. The further work will take into consideration issues such as excessive capitalisation, ‘cash-box’ owners of intangibles with low functionality, mere contractual allocation of risk and hard to value intangibles.

■ The OECD will also consider the application of so called ‘special measures’ to tackle concerns raised in the BEPS Action Plan. The application of these measures, and the impact on intangible related transactions, is not clear at this stage.

OECD REPORT 19 JULY 2013 ■ Broad and clearly delineated definition of intangibles

■ Profits associated with the transfer and use of intangibles allocated in accordance with value creation

■ Develop TP rules or special measures for transfers of hard-to-value intangibles

■ Update guidance on cost contribution arrangements

WHAT HAS HAPPENED SO FAR ■ OECD revised discussion draft containing proposed revisions to the OECD TP Guidelines

on TP Aspects of Intangibles on 30 July 2013

■ Public consultation held on 12-13 November 2013 (discussions also on TP documentation and other TP aspects of the BEPS Action Plan)

■ Extensive working party meetings took place in March and May 2014

■ Published updates to Chapter I and the revised Chapter VI of the Transfer Pricing Guidelines on intangibles on 16 September 2014 - substantial part of guidance now issued as final, with some areas of the document remaining in draft as interim guidance

WHEN AND EXPECTED OUTPUT ■ September 2014 – updated guidance

■ Further discussions to conclude guidance on allocating intangible related returns and hard to value intangibles

■ Public release of final report expected in September 2015


Action 9 – Assure that TP outcomes are in line with value creation: risks and capital

OECD REPORT 19 JULY 2013 ■ Counter transfer of risks or allocating excessive capital to group members

■ Returns not to accrue to an entity solely because it has contractually assumed risks or provided capital

■ Alignment of returns with value creation, i.e., link to “substance” agenda in BEPS

WHEN AND EXPECTED OUTPUT ■ Scoping paper in September 2015

■ Changes to TP guidelines or special measures and possible changes to model tax convention

WHAT HAS HAPPENED SO FAR ■ OECD has consolidated Actions 9 and 10

■ Developments to date on a territory by territory basis. For example, UK tax legislation being discussed which will create a unilateral tax adjustment for certain payments to a connected party that might represent a significant part of profit

KEY ISSUES BEING DEBATED ■ Contractual arrangements will come under greater scrutiny and pressure as Key

Entrepreneurial Risk Taking functions (“KERTs”) and Significant People Functions (“SPFs”) will also inform the tax authorities analysis. Importantly, capital and risk could be allocated to individuals rather than relying on contractual entitlement or assumption

■ Structures, for example with offshore ownership of intellectual property or offshore marketing functions, are expected to come under greater scrutiny. While profit is often attributable to these locations, the key issue will be the seniority of the personnel involved and the amount of time spent in these offshore locations to substantiate the level of remuneration to these locations

■ The transfer of risk and the rewarding of capital is most prevalent in the banking industry and is the subject of Action 9 where the pressure is to ensure returns to risk and capital are aligned to value creation


Action 10 – Assure that TP outcomes are in line with value creation: other high-risk transactions

OECD REPORT 19 JULY 2013 ■ Prevent transactions which would not or would rarely occur between third parties

■ Clarify circumstances in which transactions can be recharacterised

■ Clarify application of TP methods of global value chains

■ Protection against common type of base eroding payments, such as management fees and head office expenses


■ Changes to TP guidelines and possible changes to model tax convention

WHAT HAS HAPPENED SO FAR ■ Works should start later this year/early next year although action is linked with other

actions (e.g. Action 4) which are already underway

KEY ISSUES BEING DEBATED ■ Action 10 brings a critical view to integrated value chains and appears to favour profit

splits as an approach to allocate group profit.

■ There is also a strong link with Action 4 to limit base erosion via interest deductions which may impact on many high risk transactions.


Action 11 – Establish methodologies to collect and analyse data on BEPS and the actions to address it

OECD REPORT 19 JULY 2013 ■ Develop indicators of scale and economic impact of BEPS

■ Ensure tools available to monitor and evaluate effectiveness and economic impact of BEPS actions

■ Will involve developing an economic analysis and assessing existing/required data sources


■ Recommendations regarding data to be collected and methodologies to analyse data

WHAT HAS HAPPENED SO FAR ■ Being handled by CFA Working party No. 2 on Tax Policy Analysis and Tax Statistics

and Action 11 Focus Group

■ Request for input published 4 August 2014. The deadline for comments was 19 September 2014


Action 12 – Require taxpayers to disclose their aggressive tax planning arrangements

OECD REPORT 19 JULY 2013 ■ Design of mandatory disclosure rules for aggressive or abusive transactions,

arrangements or structures

■ One focus will be international tax schemes and will explore using a wide definition of tax benefit

■ Will be co-ordinated with work on co-operative compliance programmes between taxpayers and tax administrations


■ Recommendations on domestic rules

WHAT HAS HAPPENED SO FAR ■ Works should start in late 2014/early 2015


Action 13 – Re-examine TP documentation and Country by Country Reporting

OECD REPORT 19 JULY 2013 ■ Develop rules regarding transfer pricing documentation to enhance transparency for tax

administrations.

■ MNEs to provide relevant governments information on their global allocation of the income, economic activity and taxes paid according to a common template – country by country reporting (“CbCR”).

WHEN AND EXPECTED OUTPUT ■ The final template was published on 16 September 2014. The implementation plan will be

announced by February 2015 and will most likely be a multilateral legally binding instrument. There are 3 key requirements in regards to this Action:

1. A Master File to provide an overall picture of the global business, overall transfer pricing policies and the global allocation of income and economic activity of the MNE.

2. A Local File that focuses on material transactions between the local country affiliate and associated entities in different countries.

3. A country by country reporting template that will require multinationals to report certain tax, finance and substance information on a country by country basis.

■ The UK is the first of 44 countries to formally commit to implementing the new country-by-country reporting template.

WHAT HAS HAPPENED SO FAR ■ 30 January 2014 – OECD discussion draft on transfer pricing documentation and country-

by-country reporting published

■ 24 March 2014 – Comments received discussed by working party at private consultation meeting

■ 2 April 2014 – OECD holds webcasts announcing tentative decisions

■ 19 May 2014 – Public consultation on revised draft

■ June 2014 – CFA reviewed and approved the template

■ 16 September 2014 – Final template published

KEY OUTCOMES OF THE SEPTEMBER 2014 REPORT ■ Groups will need to consider the format, content and process for the preparation of the Master

and Local File. Together these documents provide the narrative for the information contained in the CbCR. Therefore central oversight of the documentation preparation process is important to manage risk.

■ The Master File is going to multiple tax authorities and needs to provide information about how the global group generates value and put the CbCR in context. It needs to be clear, succinct and consistent with public information about the company.

■ The Local File needs to explain the results of the local entity in the context of its role and position in the global group and value chain.

■ Recognising that groups have different financial systems, accounting policies and approaches to tax management and reporting, the OECD has allowed flexibility in the source of data for CbCR. Although a consistent approach should be followed year on year it appears changes can be made if the reasons and implications for this are explained. Groups need to determine the best approach for them.

■ There has been much debate about the filing mechanism for CbCR. This mechanism will be determined between now and February 2015. Countries that have not previously required companies to submit transfer pricing documentation may change their local rules to require submission of the Master File and/or Local File.

■ There is no formal requirement for reconciliation of information in CbCR to group financial statements or local filings. However groups should consider whether it is appropriate to do this for internal control purposes, and to be prepared should local administrations raise queries.

■ The CbCR template requires data to be disclosed on a country basis, rather than an entity level. Groups may nevertheless need to gather data entity by entity and aggregate it to produce the country level data.

■ Independent contractors should be included where they are “participating in the ordinary operating activities of the Constituent Entity”. Groups will need to consider what this means for their business.

■ Permanent Establishments and Branches need to be reported separately in the country in which they operate. Groups will need to ensure data is separable and not double counted in the parent company. The scope of the requirements extends wider than corporations, to include partnerships, trusts and other structures as the guidance gives a loose definition.

■ There is no materiality level and so groups will need to review and include CbCR data for all operations.


OECD REPORT 19 JULY 2013 ■ Improve effectiveness of Mutual Agreement Procedure (MAP)

■ Supplement existing MAP provisions in tax treaties.


■ Changes to model tax convention

Action 14 – Make dispute resolution mechanisms more effective


Action 15 – Develop a multilateral instrument

KEY OUTCOMES OF THE SEPTEMBER 2014 REPORT ■ The Report notes that it may be necessary to amend 3000+ bilateral treaties worldwide

to implement the BEPS proposals on changes to treaties. However it concludes it would be feasible and desirable to implement changes through a MLI. While this would be an innovative approach there is precedent, for example in the Convention on Mutual Administrative Assistance in Tax Matters, which is now signed by 66 countries.

■ The MLI would only affect parties to existing bilateral agreements with the possible exception of multilateral dispute resolution which could apply to all signatories generally.

■ An MLI could provide a platform to implement future treaty changes more quickly than the current method of renegotiating treaties on a country by country basis.

■ Some of the clauses would apply generally - for example on third country triangulation - but others would need flexibility to deal with the way existing concepts have been implemented in different bilateral treaties. Signatories may be able to exclude the application of some clauses - e.g. through an opt-out. Other clauses will provide alternatives which could be an "either/or" choice, a list of options with a minimum requirement or an opt-in. It may also be possible to include additional commitments which a Contracting State could agree to through an optional protocol.

■ It is recognised that the MLI will have to address issues of compatibility with existing treaties and subsequent treaties, start dates for the various clauses and for new signatories and priority of language. Examples of how the above issues have been dealt with in other treaties are provided.

■ As regards transparency it is suggested Contracting States could publish consolidated versions of their treaties with the MLI changes included or could notify the depositary of the convention and the different stakeholders once they have signed up.

■ The Report does not, however, address the practicality of how the various options will be applied to the existing bilateral treaties. It is assumed, for example, that the UK would have to agree with all its treaty partners whether the general anti-avoidance clause or an LOB clause, or both, is to be read into each one of the UK's treaties and it is unclear how this will be documented.

■ An International Conference is expected to take place following publication of the remaining reports in late 2015. The purpose of the Conference would be to establish the parameters of the MLI and determine how best to apply the instrument across Contracting States.

OECD REPORT 19 JULY 2013 ■ Multilateral instrument (“MLI”) to amend bilateral treaties

WHAT HAS HAPPENED SO FAR ■ Group of international experts have agreed that changes to tax treaties could be done

through an MLI so that it is not necessary for each individual double tax treaty to be amended

■ Now looking at whether the same instrument can be used to implement domestic law changes

■ CFA have recommended using an MLI following a feasibility study involving analysis of past precedents in jurisdictions

WHEN AND EXPECTED OUTPUT ■ Output presented at G20 meeting on 16 September 2014

■ Develop MLI at the International Conference in late 2015


Contacts

Tim Sarson Partner, Tax Value Chain Management T: +44 (0)20 76944831 E: [email protected] A

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Chris Morgan Partner, Head of Tax Policy T: +44 (0)20 76941714 E: [email protected] A

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Russell Hampshire Partner, EMEA Tax Industry Leader Technology T: +44 (0)118 9642108 E: [email protected]

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Robin Walduck Partner, Head of International Tax and Treasury T: +44 (0)20 73111816 E: [email protected] A

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Chris Davidson Director, Tax Management Consulting T: +44 (0)20 76945752 E: [email protected] A

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Mandy Pearson Partner, Head of Tax Risk T: +44 (0)20 7694 3336 E:[email protected] A

ctio

n 12

Robin Walduck Partner, Head of International Tax and Treasury T: +44 (0)20 73111816 E: [email protected]

Act

ion

7

Tim Sarson Partner, Tax Value Chain Management T: +44 (0)20 76944831 E: [email protected] A

ctio

n 8

Komal Dhall Partner, Head of UK Transfer Pricing T: +44 (0)20 7694 4498 E: [email protected] A

ctio

n 9

&

Act

ion

10

Komal Dhall Partner, Head of UK Transfer Pricing T: +44 (0)20 7694 4498 E: [email protected]

Act

ion

13 (T

P)

Julie Hughff Partner, Head of Tax Management Consulting T: +44 (0)20 73113287 E: [email protected]

Act

ion

13 (C

byC

) &

Act

ion

14


ctio

n 15


Appendix I OECD’s September 2014 Deliverables

• Ensure the coherence of corporate income taxation at the international level, through new model tax and treaty provisions to neutralise hybrid mismatch arrangements (Action 2)

• Realign taxation and relevant substance to restore the intended benefits of international standards and to prevent the abuse of tax treaties (Action 6)

• Assure that transfer pricing outcomes are in line with value creation, through actions to address transfer pricing issues in the key area of intangibles (Action 8)

• Improve transparency for tax administrations and increase certainty and predictability for taxpayers through improved transfer pricing documentation and a template for country-by-country reporting (Action 13)

• Address the challenges of the digital economy (Action 1)

• Facilitate swift implementation of the BEPS actions through a report on the feasibility of developing a multilateral instrument to amend bilateral tax treaties (Action 15)

• Counter harmful tax practices (Action 5)

http://dx.doi.org/10.1787/9789264218819-en

http://dx.doi.org/10.1787/9789264219120-en

http://dx.doi.org/10.1787/9789264219212-en

http://dx.doi.org/10.1787/9789264219236-en

http://dx.doi.org/10.1787/9789264219236-en

http://dx.doi.org/10.1787/9789264218789-en

http://dx.doi.org/10.1787/9789264219250-en

http://dx.doi.org/10.1787/9789264218970-en

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