The OECD’s senior tax leadership delivered a rapid-fire 1 hour webinar from Paris on 12 February, 2015. The presentation provided an update on BEPS development since late 2014, and outlined the (very heavy) 2015 work program as the BEPS project enters its second and final year.
The webinar followed directly on the heels of the G20 Finance Ministers meeting in Istanbul (9-10 February 2015), and as Pascal Saint-Amans delivered his on-line summary of the Finance Ministers strong support for the BEPS work, it seemed he was still recovering from the taxi ride from the airport.
There have been three recent developments of note:
Action 15: multilateral convention
A mandate has been agreed between the BEPS States which sets a framework for negotiating the multilateral convention. An ad hoc body will be established; drafting will commence mid 2015; and the aim is to have the convention open for signing by December 2016. Developing countries to be incorporated in the process.
Action 13: county-by-country reporting (CbCR)
Important implementation guidance has been released. The start date is recommended as 1 January 2016, for a 31 December 2016 year end. This first year CbCR would need to be lodged by 31 December 2017, with the Revenue Authority of the parent company jurisdiction.
Domestic legislation will be required for implementation, and if none is forthcoming (as is anticipated in limited circumstances) a secondary mechanism is envisaged, which would permit Revenue Authorities in subsidiary company jurisdictions to access the report.
MNE groups should only have to file a CbCR if annual consolidated revenue in the preceding year exceeds€750million. This threshold is expected to exclude 85% of global MNE’s, but still capture 90% of global MNE revenue. The threshold is to be reviewed in 2020.
The CbCR initiative has continued to generate significant business concern. Pascal emphasised the unequivocal commitment of all States to the maintenance of data confidentiality, and shared that States do appreciate that the quality of the data (important to user States) is highly correlated to the level of MNE acceptance of the initiative, which is directly related to the maintenance of data confidentiality. A virtuous circle perhaps, but the spate of recent ‘whistle blowers’ and leaked data will provide little comfort to business.
But to protect data, States will develop a procedure for exchange at the G-to-G level. It seems this will be a new mechanism, but one which will build upon the existing legal infrastructure: double tax agreements, the multilateral convention on mutual administrative assistance in tax matters, and tax information exchange agreements.
Details of the proposed mechanism are expected by April, 2015.
Action 5: harmful tax practices and ‘patent boxes’
All States have now adopted the work on patent boxes, with the UK and Germany reaching final agreement. The result is now described as the ‘modified nexus approach’ for IP regimes.
The core principle remains – proportionality between the qualifying IP expenditure, and the resultant income which qualifies for concessional treatment. But there can now be a 30% uplift of qualifying expenditure.
Existing regimes must be closed to new participants by 30 June 2016, or an earlier date if a new regime, compliant with the modified nexus approach, comes into effect.
All existing regimes must be made compliant, or be closed, no later than 30 June 2021.
It is expected that by June 2015, further guidance will be available to address reporting requirements; integrity measures to avoid regime ‘shopping’ or inappropriate access to ‘grandfather’ protection; and to refine the definition of qualifying IP assets.
2015 work program
Participation of developing countries
Pascal outlined the extensive efforts planned to support the participation of developing countries in the BEPS process. The objective is to include as many States as practicable, thus strengthening the credibility of the BEPS project outcomes. Whilst a laudable objective, one does wonder at its practicality.
Risk and transfer pricing
Marlies de Ruiter spoke, outlining proposed changes to Chapter 1 of the Transfer Pricing Guidelines (TPG), and the supporting work aimed at the misalignment of form and substance in the identification, assessment and pricing of risk. Marlies denied that contractual arrangements are now irrelevant; but it has become necessary to look beyond the contractual arrangements alone, in order to determine how the parties actually interact.
A two-step process is proposed: accurately delineate the actual transaction (substance over form), and then price the identified risk.
If the gap between form and substance is too great, so as not to make commercial sense, then the transaction can be “reconstructed”. (The new term for reconstruction is now “non-recognition”.)
An example was given – a parent company provides (in fact) valuable IT services and support to a subsidiary. There is no contract covering the provision of this support, nor is there a charge levied by the parent company. The first step is to delineate the actual transaction. Here, there is the provision of IT services and that transaction should be priced. The absence of contractual documentation is no bar to finding the existence of a transaction.
New guidance on risk
It will be necessary to identify the risks which are assumed in reality. This will require a high degree of “specificity”. How are risks mitigated by the company apparently subject to the risk? This will not be determined simply by contractual documentation, but will be assessed having regard to active management measures taken to control and mitigate risks. Emphasis will be on pricing the business reality, not the paper reality.
‘Muscling-up’ the arm’s-length standard
The speakers were quite positive that these developments are not seen as undermining the arm’s length principle, but to the contrary are strengthening it. There will be some scope for “special measures”, but the speakers do not see developments in this area as foreshadowing the end of the arm’s-length standard.
In this area there has been a high level of agreement between the participating States, but there is not yet total consensus. The material contains options, with the intent of keeping as many countries in the process as possible, and thus reducing the risk of double taxation.
Outsourcing of risk management is still possible, but it becomes necessary to demonstrate that the company allegedly bearing the risk remains capable of controlling the risk, but more importantly can demonstrate that it actively manages the risk in fact. The focus is on the actual performance of risk management, not merely the paper attribution of the risk.
Further work in the year ahead is planned for Action 11 (methodologies to collect and analyse BEPS data); Action 12 (taxpayers required to disclose aggressive tax planning arrangements); Action 3 (controlled foreign companies rules to be strengthened); and more work in the area of Actions 8-10, in particular with respect to “hard to value intangibles”.
Action 14: making dispute resolution mechanisms more effective
Pascal acknowledged the public responses to the discussion draft reflected great frustration, particularly from business. The concern is that the proposals are insufficiently strong to protect business from the risks of double taxation. The OECD understands the risk, and there is support amongst the G20 nations to exert greater peer pressure on countries currently not prepared to accept arbitration. Pascal seemed very upbeat and confident that the next discussion draft will satisfy the legitimate concerns expressed by business.
Guidelines on place of taxation for B2C supplies of services and intangibles
VAT/GST had a cameo appearance. In the case of remote supplies of services and intangibles, the recommendation is for taxation in the consumer’s jurisdiction. However the only practical way to achieve this is to impose the liability on the remote supplier. In order to alleviate the administrative burden placed upon remote suppliers, simplified registration systems are proposed.