OECD & BEPS

Stephen ColecloughPresident CIOT

Dubai Inaugural Meeting28 April 2014

• Background• Base erosion and profit shifting• The 15 action plans• What should you be doing?

Agenda

• OECD model treaty has always favoured capital exporting countries to the detriment of capital importing countries

• Tax competition between developed economies has given MNEs the opportunity to not pay tax on profits

• In the case of the USA, due to active CFC active income rules and check the box, holding companies in tax havens are treated as active traders. This allows US HQ’d MNEs to compete outside the US tax free (surely and unlawful export subsidy)

BEPS - background

Background

• Internet – mail order, digital down loads, cost reduction, volume

• Transparency – follows on from digitisation and low cost of processing – data is available.

• Data • The rise of the “sovereign” MNE• SME’s - ‹5% of EU SME’s operate in more than one

M.S.(post internet)• USA – export means the next state. • Technology – v – having to be physically

present/people buy people• OECD rules, designed to eliminate double traxation

but… result is no taxation

Background cont…

• Globalisation – nothing new – and look at Roman Empire (render unto Caesar) look at British Empire and 1776!

• Customs – movement of goods – Tariff and WTO• EU, NAFTA, ASEAN, etc. • Power to raise taxes – statehood.

Companies and International taxation

• In the beginning…. A US coffee shop opens in Germany

• US Co could have a German branch and a shop or a German subsidiary.

• German corporation taxes and Trade Taxes due (plus payroll taxes plus VAT etc).

• US tax payable after credit for German corporate tax

• Next result, bulk of tax in Germany, possible nil tax in USA.

• But what if… ?

US coffee shop

• What if US Co sets up a US Brand Co which charges royalty for brand to German Co?

• What if US Co sets up Irish Co managed in US to charge royalty to German Co?

• What if US Co sells coffee to German Co via a Swiss Co at 20% mark up (coffee goes nowhere near Switzerland)?

• And what about debt funding?• What if US Co puts all its trading companies under

a Lux Co held by a Gibraltar Co held by a Bermuda Co?

• US CFE apportionment of royalty and dividend income?

US coffee shop cont..

• No CFC apportionment because through check the box the royalty and dividend flows disappear and the Bermudan holdco becomes an active trading company.

• Net result a system designed to stop both the US & German governments taxing means no tax is paid.

So....

From this

To this...

US Co

German CO

US Co

Bermuda Co

Gibraltar Co

Luxemburg Sarl

Swiss Coffee Co

German Distribution Co Lux Fin Co German Co

Irish Co Managed in

USA

Lux Downloads co

Buy

Sell

• But don’t need to litigate, there is the BEPS consultation http://www.oecd.org/ctp/BEPSActionPlan.pdf

• Action by capital importing countries now?• Transparency and information exchange is the

key. Once the whole value chain is visible to tax authorities, some parts will be hard to sustain.

BEPS - background

• 1 Addressing the tax challenges of the digital economy (V)• 2 Neutralise the effect 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 (V)• 6 Prevent treaty abuse• 7 Prevent the artificial avoidance of PE status (V)• 8 Assure that transfer pricing outcomes are in line with value

creations – intangibles, 9 Risks and capital, 10 Other high risk transactions (V) (C)

The 15 action plans

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

• 12 Require taxpayers to disclose their aggressive tax planning arrangements

• 13 Re-examine transfer pricing documentation (V) (C)• 14 Make dispute resolution mechanisms more effective (MAP)• 15 Develop a multilateral instrument (V) (C)

The 15 action points

• 1 Addressing the tax challenges of the digital economy

• Touches also on • 7 Prevent the artificial avoidance of PE status • 8 Assure that transfer pricing outcomes are in

line with value creations – intangibles, • 9 Risks and capital, • 10 Other high risk transactions

Grouping the action plans

• Ensuring coherence (2 to 5)• 2 Neutralise the effect 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

Grouping the action plans

• Reforming international standards (6 to 10)• 6 Prevent treaty abuse• 7 Prevent the artificial avoidance of PE status• 8 Assure that transfer pricing outcomes are in

line with value creations – intangibles• 9 Risks and capital • 10 Other high risk transactions

Grouping the action plans

• Improving Transparency and Certainty (11 – 15)• 11 Establish methodologies to collect and analyse

data on BEPS and the actions to address it• 12 Require taxpayers to disclose their aggressive

tax planning arrangements• 13 Re-examine transfer pricing documentation • 14 Make dispute resolution mechanisms more

effective• 15 Develop a multilateral instrument

Grouping the action plans

• 1 Addressing the tax challenges of the digital economy

• 2 Neutralise the effect of hybrid mismatch arrangements

• 6 Prevent treaty abuse• 13 Re-examine transfer pricing documentation

Timing – September 2014

• 3 Strengthen CFC rules• 7 Prevent the artificial avoidance of PE status• 8 Assure that transfer pricing outcomes are in line with value

creations – intangibles– 9 Risks and capital– 10 Other high risk transactions

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

• 12 Require taxpayers to disclose their aggressive tax planning arrangements

• 13 Re-examine transfer pricing documentation • 14 Make dispute resolution mechanisms more effective

Timing – September 2015

• 4 Limit base erosion via interest deductions and other financial payments

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

• 15 Develop a multilateral instrument

Timing December 2015

• As tax advisers you have to – Ensure clients know what their tax liabilities and

risks are– Advise them of all lawful opportunities to reduce

their tax exposure and any associated risks, including adverse reaction from media and consumers

– Observe duties of confidentiality and their right to privacy

What should you be doing?

• As professional bodies I think you should…– Consult with your clients and governments– Lobby for local changes in advance of or in

anticipation of BEPS which are fair and workable– Make your views known both direct to OECD and

via your government– Your government will need your technical and

practical knowledge to understand the realities and rebut the assumption that tax is paid somewhere sometime

What should you be doing?

• Stephen Coleclough LL.B. (Hons), CTA (Fellow), FIIT, ATT, FInstCPD, FRSA, Solicitor, TEP

• Contact– President@ciot.org.uk– stephen.coleclough@hotmail.co.uk– +44 7802 878 045

Questions?