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Tuesday April 25 & Wednesday April 26 Metro Toronto Convention Centre

RECENT INTERNATIONAL DEVELOPMENTS

2017 IFA International Tax Conference

Recent International Developments

● Wei Cui, UBC, Canada● Marja de Best, Loyens & Loeff, Netherlands● Ray O’Connor, Ernst & Young, Ireland● David Rosenbloom, Caplin and Drysdale, US● Dominic Stuttaford, Norton Rose Fulbright, UK● Moderator: Brian Arnold, Canadian Tax

Foundation

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Panelists



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BEPS Implementation Score Card

BEPSAction Item

1 – Digital Economy 8‐10 –Transfer Pricing

2 ‐ Hybrids 11 – Measuring BEPS

3 –CFC Rules 12 – Disclosure Rules

4 – Interest Deductibility 13 –CBC Reporting

5 – Harmful Tax Practices 14 – Dispute Resolution

6 –Treaty Abuse 15 – MLI

7 ‐ PEs



A. Country-by-Country Reporting Regulations Were Finalized on June 30, 2016.

B. U.S. MNE Groups With at Least $850 Million of Group Revenue Are Required to File Form 8975 With Their Timely Tax Returns.

C. The Form Was Released in Draft on January 11, 2017, and Draft Instructions Were Published on February 23, 2017.

D. On January 19, 2017, the IRS Issued Revenue Procedure 2017-23, Which Provides for Voluntary Filing For Reporting Periods Beginning on or After January 1, 2016 and Prior to June 30, 2016.

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I. BEPS Implementation in the United States



E. IRS Is Currently Negotiating Approximately 90 Competent Authority Agreements That Allow Reports for 2016 To Be Filed With IRS Rather Than Foreign Jurisdictions.

F. New U.S. Model Income Tax Convention of February 17, 2016 Contains a Variety of New Anti-Abuse Provisions, Reflects BEPS Thinking in Regard to Treaties.

G. Apart From Country-by-Country Reporting and the New Model, BEPS Implementation in the United States Has Been Scant.

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BEPS Implementation in the United States



A. Altera Corp., 145 T.C. 91 (2015), Profoundly Changes the Rules in Regard to Judicial Review of Tax Regulations.

B. The Recent Decision in Amazon, 148 T.C. No. 8, Is Another in a Long String of Taxpayer Victories in the Cost-Sharing Area.

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II. Significant U.S. Court Decisions



● Historic position● New rules from 1 April 2017o30% of tax EBITDAoGroup ratio

● Which groups/industries affected?

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BEPS – UK Impact: Interest deductibility



●Historic position●New rules from 1 January 2017oHybrid Payments oHybrid EntitiesoWidth of rules

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Hybrids



●Treaty abuse:oBeneficial ownershipoPEsoResidence tie-breaker

●Arbitration/dispute resolution

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Multilateral Instrument



BEPS Actions Irish response

1. Digital Economy No specific OECD requirements

2. Hybrids3. CFC4. Interest Deductibility

Implementation under EU ATAD and ATAD 2, commencing 1 January of 2019 (CFC and intra-EU Hybrids), 2020 (Non-EU hybrids) and 2024 (interest)

5. Harmful Tax Practices • Exchange of Rulings in place from 1 April 2016• New IP Box (Knowledge Development Box)

introduced fully compliant with Action 5 principles

6. Treaty Benefits7. PE Status

Response through multi-lateral instrument (MLI) developed in Action 15

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BEPS responses - Ireland



BEPS Actions Irish response

Transfer Pricing8. Intangibles9. Risks and Capital10. High-Risk Transactions13. TP Documentation

8-10 – output through the updated TPguidelines & supported by Action 13

13 – introduced CBCR from 1 January 201613 – considering changes needed to reflect

May 2016 TP guidelines

11. Monitoring BEPS Continuing OECD participation

12. Anti-avoidance Disclosure Mandatory Disclosure regime since 2011

14. Dispute Resolution Commitment made to mandatory binding MAP arbitration

15. Multi-lateral Instrument Full participation in MLI process – signing in June

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BEPS responses - Ireland



● Non-BEPS elements of EU ATADo GAAR – long-established rule in Irelando Company exit charge (broader than existing rule)

● Irish Government International Tax Strategy Statement

o Published in 2014 and updated annually sinceo Commitment to BEPS, tax transparency, exchange of

information and competitive corporate tax system

● 2017 Review of Corporate Tax Code o Government-commissioned but independent chairo Recommendations to achieve International Tax Strategy

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Other international tax responses - Ireland



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Key BEPS/ATAD action points – Netherlands

Hybrids

PSD (2016; worldwide)

ATAD (2019)

Interest deduction

earnings stripping rule expected ATAD

(2019)

Anti-abuse rules

PSD GAAR (2016)ATAD (2019)

IP regimes

Innovation box change per 2017

(BEPS 5)

Exchange of informationon rulings

OECD (2016) EU (2017)

CbCR / MF/LF

BEPS 13(2016)

Transfer pricing policy

BEPS 8-10(pre BEPS)

CFC

ATAD (2019)



● Multilateral Instrument: oThe NL intends to accept all MLI provisions

except: hybrid entities, savings clause,splitting-up of contracts for offshore activities,dispute resolution for treaties alreadycontaining specific provisions

oPrevention of treaty abuse: PPT

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Other Developments: Netherlands



● Alignment dividend withholding tax treatment of cooperatives (“Coops”) and NVs/BVs in international structures (per 2018):

o Holding Coops to withhold dividend WHT for 5%+shareholders

o Exemption in entrepreneurial structures for distributionsby Holding Coops, NVs/BVs to parent entities resident inEU or treaty countries, unless abusive

● Investment Climate:Rate structureHead Quarter CompaniesOnshoring

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Other Developments: Netherlands



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Key BEPS/ATAD action points – Luxembourg

Hybrids

PSD (2016)ATAD (2019)

Interest deduction

ATAD (2019)

Anti-abuse rules

Lux & PSD GAAR (2016), ATAD (2019)

IP regimes

Old IP regimephased out, new to

come (BEPS 5)

Exchange of informationon rulings

OECD (2016) EU (2017)

CbCR / MF/LF

BEPS 13 / EU(2016)

Transfer pricing policy

BEPS 8-10(2017)

CFC

ATAD (2019)



● Multilateral Instrument: o No official guidance so far. Expected choices:

minimum standards; prevention of treaty abuse viaPPT.

● New Transfer Pricing Circular, effective January 1, 2017

o Equity at risk determined on case by case basiso Control of risks: substance, qualified personnelo Safe harbors: pure intermediary financing or when

similar to typical regulated entity● Investment Climate

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OTHER DEVELOPMENTS: Luxembourg



● Transfer pricing (TP) saw the most extensive policy development:

o Updated TP guidelines, comprising mostly of procedural details, issued in June 2016 and March 2017, reflecting some concepts from BEPS Actions 8-10

o Action 5: spontaneous exchange of unilateral APA rulings

o Action 13: updated TP documentation rules; signed Multilateral Competent Authority Agreement and Transfer Pricing CbC Reporting Competent Authority Agreement; initial guidelines for CbC reporting issued

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China’s BEPS “scorecard”



● Areas of limited (or no) substantive action oAction 6 (treaty abuse): anti-abuse initiatives

begun in 2009 (under the label of “beneficial ownership”) sustained; LOB provision introduced in treaty with Chile.

oActions 1, 3, 7, 14: no observable change oActions 2 and 4: Hybrid mismatches and

excessive interest deductions not urgent concern due to capital control and conservative organizational law

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China’s BEPS “scorecard”



● China’s BEPS initiatives, which are led by the national State Administration of Taxation (SAT) and implemented entirely through the issuance of informal administrative guidance (i.e. “soft law”), arguably have been countered by a number of national trends:

o Communist Party’s decision in 2016 to encourage subnational government policy experimentation, which in the past has often taken the form of aggressive (domestic) tax competition; crackdown on local tax preferences reversed;

o Many new initiatives to encourage FDI; led to the simplification of procedures for claiming treaty benefits

o Proposed SAT regulation (comparable to U.S. Treasury regulations) containing ambitious TP and anti-abuse rules dropped after broad opposition during notice and comment

● The OECD, in many ways, has been the SAT’s best friend

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Trends countering BEPS policy



● With a 25% corporate income tax rate and a maximum 10% withholding tax, what drive profit erosion and profit shifting vis-à-vis China?

● TP plays traditionally may have been as much about circumventing capital control as about tax minimization

● Severity of BEPS understudied—but this is not unique to China!

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Taking a step back



● Request to share financial and accounting information with tax authorities: “big data” through tax administration; collaboration or extortion?

● Controversial rules in proposed amendment of Law on the Administration of Tax Collection on accessing taxpayer information— viewed with skepticism even by many tax administrators, and unlikely to be adopted.

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Other developments that have concerned multinationals



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BEPSAction Item US UK IrelandNether‐lands

China

1 – Digital Economy

2 ‐ Hybrids ✔ ✔ ✔ ✔3 –CFC Rules ✔ ✔ ✔ ✔4 – Interest Deductibility ✔ ✔ ✔ ✔5 – Harmful Tax Practices ✔ ✔ ✔ ✔ ✔6 –Treaty Abuse ✔ ✔ ✔ ✔ ✔7 ‐ PEs ✔ ✔ ✔ ✔



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BEPSAction Item US UK IrelandNether‐lands

China

8‐10 –Transfer Pricing ✔ ✔ ✔ ✔ ✔11 – Measuring BEPS

12 – Disclosure Rules ✔ ✔ ✔ ✔13 –CBC Reporting ✔ ✔ ✔ ✔ ✔14 – Dispute Resolution ✔ ✔ ✔ ✔15 – MLI ? ✔ ✔ ✔ ?



A. Proposal of a Destination Based Cash Flow Tax Has Sparked Curiosity, Debate, and Consternation.

B. Significant Features Are a “Border Adjustment”; Reduction of the Corporate Rate to 20 Percent; Immediate Expensing of Business Assets; and Denial of the Deduction for Interest Expense.

C. Is This a VAT? Almost Assuredly Not.D. Is It Compatible With WTO Rules? Most

Probably Not.

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U.S. Income Taxation: To Reform or Deform?



E. Will It Survive Congressional Scrutiny? Very Doubtful.

F. What Are the Issues? Almost Too Numerous to Describe, But Direct Sales From Outside the U.S., Anticipated Currency Effects, and Structural Losses of Exporters Are Among the Most Important.

G. What is Plan B? There Is No Plan B.

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U.S. Income Taxation: To Reform or Deform?



●1973 – UK joined EU●2016 – June – Referendum Result●2017 – March – Article 50 notice given●2019 – Potential departure

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Brexit: What is it?



● Great Repeal BilloPreservesEU regulationsDirectivesEU Case law in force

oPost-departure UK law● Customs BilloSeparate bill

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Brexit: How implemented?



●Hard or Soft Brexit?oImmigration/Employment

●Customs and VAToNo longer part of the EUoChange to supply chainsoTransitional rules

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Brexit: Impact – Customs/VAT



● Parent-Subsidiary Directive● Interest and Royalties Directive● Reliance on Treaties● Which countries impacted?

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Brexit: Direct Tax – Withholding Tax



● Freedom to set Tax agendaoLowering rates

● UK as a holding companyoDividend exemptionoSSEoNo outbound WHToCFCsoInterest Relief

● BEPS

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Brexit: How will the UK Respond?



● Looking at options?● Financial institutionsoLoss of passportingoEU hubs

● ManufacturingoSupply chains

● Services industries

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Brexit: What are Businesses doing?



● Element of EU competition law, within responsibility of EU Commission Competition Directorate General (DG COMP).

● State aid described by DG COMP as “an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities”.

● Some exemptions to promote economic development, both sectoral (e.g. film production) and cross-sectoral thematic (e.g. R&D).

● DG COMP has powers relating to approval of notifiable aid measures, investigations, rulings and recovery of illegal State aid.

● Decisions can be appealed to European Court of Justice (ECJ).

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State aid in general



● As for any type of State aid, a tax measure can constitute State aid if an advantage:

- is enjoyed by a recipient,

- is granted by a State body or from State resources,

- distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods,

and

- may distort trade between Member States.

● Application of State resources includes foregoing tax.

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State aid and tax



● DG COMP list of casesSource: http://ec.europa.eu/competition/state_aid/tax_rulings/index_en.html

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State aid actions on tax rulings practices

Final decisions

Member State Title Date of decision

Ireland State aid implemented by Ireland to Apple 30.08.2016

Belgium Excess Profit exemption in Belgium – Art. 185§2 b) CIR92 11.01.2016

The Netherlands State aid implemented by the Netherlands to Starbucks 21.10.2015

Luxembourg State aid which Luxembourg granted to Fiat 21.10.2015



● DG COMP list of casesSource: http://ec.europa.eu/competition/state_aid/tax_rulings/index_en.html

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State aid actions on tax rulings practices

Open formal investigations

Member State Title Date of decision

Luxembourg Alleged aid to Amazon 07.10.2014

Luxembourg Alleged aid to McDonalds 03.12.2015

Luxembourg Possible State aid in favour of GDF Suez (ENGIE) 19.09.2016



● Profit attribution to Irish branches of 2 Apple companies incorporated, but not tax resident, in Ireland.

● Irish Revenue rulings in 1991 and 2007 agreeing attribution of profits by reference to activities of the Irish branch – procurement, manufacturing and distribution, but no ownership/management of intellectual property.

● DG COMP view: allocation of profit was artificial and inconsistent with arm’s length principles

● Ruled that Ireland had renounced an estimated potential tax amount of c.€13bn (c.Can$18bn) in 10-year clawbackperiod.

● Curiously, also stated the amount could be less if other countries asserted some taxing rights over the profits.

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The case against Ireland re alleged aid to Apple



Irish Government response:

● Fundamental disagreement with the decision.

● Appeal lodged with ECJ on 9 November 2016.

● Nine grounds of appeal specified, including:

- Absence of any selective advantage

- Misunderstanding of Irish tax law

- Incorrect application of arms’ length principles

- Procedural faults

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The case against Ireland re alleged aid to Apple



● Concerns: retroactivity, uncertainty of law and attractiveness of EU for foreign direct investment.

● US Department of the Treasury:“The Commission’s new approach is inconsistent with international norms and undermines the International tax system.”Source: https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/White-Paper-State-Aid.pdf

● Neelie Kroes (Margarethe Vestager’s predecessor as DG COMP Commissioner):“State aid cannot be used to rewrite those rules. However, the current state aid investigations into tax rulings appear to do exactly that, by suggesting a radical new approach to so-called transfer-pricing rules that determine where profits shall be allocated.”Source: https://www.theguardian.com/technology/2016/sep/01/eu-state-aid-tax-avoidance-apple

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State aid and tax rulings – adverse reaction



● Commission resolve strengthened

- Favourable decisions in ECJ in December (Spanish tax State aid cases).

- Tax rulings task force now a permanent unit in DG COMP.

● New scheme of exchange of tax rulings among EU Member States (also to EU Commission) may provide more material for investigations.

● Possible inhibitors (longer term)

- Future ECJ decisions?

- Economic concerns post Brexit?

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State aid and tax – where next?



● Minimum Standards● Anti tax avoidance rules:

− deductibility of interest− exit taxation− general anti-abuse rule− controlled foreign company rules− hybrid mismatches

● Implementation per January 1, 2019− exit taxation January 1, 2020− interest deduction limitation January 1, 2024 (certain

conditions)

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EU – ATAD I



Hybrid mismatches: new mismatches & extended to third countries● Hybrid instruments and entities (ATAD 1), but also

hybrid transfers, hybrid PE mismatches, reverse hybrids, imported mismatches, dual resident mismatches

● Neutralization by denial of deduction or inclusion as taxable income

● Reverse hybrids: taxable entity in MS where established and to be taxed there for income not otherwise taxed by a MS or third country

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EU – ATAD II



● BEPS 2 as a source of illustration and interpretationPSD GAAR prevails over ATAD II

● Hybrid mismatch rules should be effective as from January 1, 2020. Reverse hybrids to be treated as taxable entity as from January 1, 2022. Political Agreement February 21, 2017. Council to adopt once European Parliament has given opinion

● MS may decide to implement stricter rules and may implement sooner

● Evaluation in 2022

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EU – ATAD II



Other EU initiatives are e.g.: − CCCTB

− Interest/Royalty Directive (GAAR, minimum effectivetaxation)

− External strategy, non-cooperative jurisdictions/black list

− UBO Registers

− Tax certainty/Dispute resolution

− Public CBC

− Mandatory disclosure

− Conditions/Rules for issuing tax rulings (CoC Group)

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EU – Other Developments