BEPS Webcast 4 - The Transfer Pricing...

LIVE WEBCASTUPDATE ON BEPS PROJECT2015 DELIVERABLES AND BEYOND

15 December 20143:00pm – 4:00pm (CET)

Pascal Saint-AmansDirector, Centre for Tax Policy and Administration

Raffaele RussoHead of BEPS Project

Achim ProssHead of International Cooperation and Tax Administration Division

Marlies de RuiterHead of Tax Treaty, Transfer Pricing and Financial Transactions

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Speakers

Ask questions and comment throughout the webcast

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Join the discussion

Directly: Enter your question in the space provided

Via email: [email protected]

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2014 DELIVERABLES

PRESENTED TO THE

G20 FINANCE MINISTERS

AND LEADERS

Explanatory Statement 3 Reports:

• Two final reports on the Digital Economy (Action 1) and theFeasibility of a Multilateral Instrument (Action 15)

• One interim report on harmful tax competition (Action 5) 4 Instruments

• Hybrid Mismatch Arrangements• Treaty Abuse• TP Intangibles• TP Documentation and CBC template

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The 2014 Deliverables

Communiqué Meeting of G20 Finance Ministers and Central Bank GovernorsCairns, 20-21 September 2014 […] Today, we welcome the significant progress achieved towards the completion of our two-year

G20/OECD Base Erosion and Profit Shifting (BEPS) Action Plan and commit to finalising all actionitems in 2015. We are deepening developing country engagement in tackling BEPS issues andensuring that their concerns are addressed.

G20 Leaders’ Communiqué Brisbane Summit, 15-16 November 2014 […] We welcome the significant progress on the G20/OECD Base Erosion and Profit Shifting

(BEPS) Action Plan to modernise international tax rules. We are committed to finalising this workin 2015, including transparency of taxpayer-specific rulings found to constitute harmful taxpractices. We welcome progress being made on taxation of patent boxes. We welcome deeperengagement of developing countries in the BEPS project to address their concerns.

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G20 Reactions

STRENGTHENING THEENGAGEMENT WITHDEVELOPING COUNTRIES

New structureddialogue process

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Developing countriesparticipating in the BEPS Project:

Albania, Bangladesh, Jamaica, Kenya,Morocco, Nigeria, Peru, Philippines,Senegal, Tunisia, plus CIAT (Inter-American Center of TaxAdministrations) and ATAF (AfricanTax Administration Forum)

• Asia: Seoul, 12-13 February 2015• Francophone countries: Gabon,23 February 2015, with CREDAF• LAC: Lima, 26-27 February 2015,with CIAT• Eurasia: March 2015 TBC• Africa: March 2015 TBC, withATAF

To be developed by OECD, IMF, UN, WBG and regionalorganisations on:

• Tax incentives• Comparables• Indirect transfers of assets• Transfer Pricing documentation requirement• Strengthen capacity development on treatynegotiation• Base eroding payments between MNEsaffiliates• Artificial profit shifting through supply chainrestructuring• Successful implementation of assessment ofBEPS risks

1. Direct participation inthe Committee on FiscalAffairs and its subsidiary

bodies

2. Regional Networksof tax policy and

administration officials

3. Capacity buildingsupport

FOLLOW-UP WORK ONTHE 2014 DELIVERABLES

• The Action Plan was conceived to provide solutions in a holistic andcomprehensive manner and the first set of deliverables must be seen in thatcontext.

• As a result the recommendations remain in draft form so that the potentialimpact of the 2015 deliverables can be incorporated before finalising them.

• The highly technical nature of the actions requires careful implementation,and guidance is being developed in a number of areas, including hybridmismatch arrangements, treaty abuse, and the country-by-countryreporting template.

• Further work is also being carried out in relation to the digital economyand to patent boxes and rulings in the context of the work on harmful taxpractices.

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Follow-up work on2014 deliverables

• Ensure that BEPS work appropriately takes into account and addressthe key features of the digital economy in other areas: on Action 3(strengthening CFC rules), Action 7 (preventing artificial avoidance ofPE status), and Actions 8-10 (transfer pricing).

• Advance the work on the broader direct tax challenges related tonexus, character, and data and the options to address them.

• Evaluate how the outcomes of the BEPS Project affect the broadertax challenges raised by the digital economy, consider the economicincidence of value added tax (VAT) and corporate income taxation andits impact on the options to address them.

• On that basis decide on the options in light of the framework agreed inthe 2014 Report.

• Supplementary report due in 2015.11

Digital Economy (Action 1)

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Hybrid MismatchArrangements (Action 2)

Substantive issues• Application of hybrid instrument rule to intragroup hybrid regulatory

capital and certain on-market stock-lending and repos.• Further consideration of application of imported mismatch rule.• Further consideration of whether CFC inclusion should be treated as

inclusion under rule.Implementation issues• Transitional rules and Commentary on implementation and

operation of rules.Output• Finalise outstanding issues in Report and develop Commentary and

Transitional Rules by September 2015.

• Follow-up work with respect to:1. Practical issues related to the implementation of the minimum standard2. The policy considerations relevant to the treaty entitlement of collective

investment vehicles (CIVs) and non-CIV funds3. The precise contents of the model provisions and related Commentary included in

Section A of the report, in particular the LOB rule

• A discussion draft dealing with items 2 and 3 was released on 21 November• Deadline for comments is 9 January 2015• Public consultation meeting to be held on 22 January 2015

• The results of the follow-up work will be delivered in September 2015

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Treaty Abuse (Action 6)

Substantial activities in IP regimes:• Moving forward on the modified nexus approach• Further work on providing guidance on number of issues, e.g. tracking

and tracing and how this could be applied in practice.Improving transparency:• Compulsory spontaneous exchange of information on rulings is a key

part of the HTP / BEPS work.• Need to keep exchanges broad, but focused.• The principles and framework for such exchanges agreed.• Exchanges to commence in 2015.

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HTP and Patent Boxes(Action 5)

• Report on Guidance on Transfer Pricing Documentation andCountry-by-Country Reporting issued September 2014– Sets out revised standards based on local file, master file, and CbC

report– Notes need for further work to ensure effective implementation

• That work will include– Timing of filing of first CbC-reports– The MNE groups covered by the CbC-filing requirements– Means to ensure consistency, confidentiality, and appropriate use– Filing mechanisms and government-to-government exchange

• February 2015: publication of guidance15

CbC Reporting(Action 13)

2015 DISCUSSION

DRAFTS FOR PUBLIC

COMMENTS

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ARTIFICIAL AVOIDANCE

OF PE (ACTION 7)

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• Discussion draft released on 31 October– Includes specific proposals for changes to the Model Tax

Convention– Recognises insurance/re-insurance better dealt with

through Actions 4 and 9– Recognises that on profit attribution no substantial

changes are needed, but that clarification is necessary• Deadline for comments 9 January 2015• Public consultation on 21 January 2015

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Artificial Avoidance of PE(Action 7)

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Develop changes to the definition of PE to prevent the artificialavoidance of PE status in relation to BEPS …

Work on these issues will also address related profit attribution issues

… and the specific activity exemptions.

…including through the use of commissionnaire arrangements …

Artificial Avoidance of PE(Action 7)

• A commissionnaire arrangement may be loosely definedas an arrangement through which a person sells productsin a given State in its own name but on behalf of a foreignenterprise that is the owner of these products

• Since the person that concludes the sales does not ownthe products that it sells, it cannot be taxed on the profitsderived from such sales and may only be taxed on theremuneration that it receives for its services (usually acommission)

Commissionnairearrangements

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• Four alternative options to ensure that there will be a PEwhere the activities that an intermediary (other thanindependent agent) exercises in a country result in theregular conclusion of contracts to be performed by aforeign enterprise

• Company acting almost exclusively for related partieswill be unable to claim to be an independent agent

Changes to PE definition toaddress commissionnaire andsimilar strategies

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• Art. 5(4) of the OECD Model deems a PE not to exist where a placeof business is used solely for activities that are listed in thatparagraph

• First option: only activities that are preparatory or auxiliary would becovered

• Second option: more targeted changes– Removal of the reference to “delivery” (which will catch situations where

an enterprise maintains a warehouse, unless purely preparatory orauxiliary)

– Removal of the exception for “purchasing offices” or for both “purchasingoffices” and places maintained for the “collection of information ”

Specific activityexceptions (Art. 5(4))

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• Proposal to address the abuse of Art. 5(4) through fragmentation ofactivities between related parties– Art. 5(4) will not apply with respect to a specific place of

business if taxable activities that constitute “complementaryfunctions that are part of a cohesive business operation”are carried on in the country by the same enterprise or byassociated enterprises

• Another rule to address the splitting-up of construction contractsbetween related parties

New anti-fragmentation rules

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INTEREST DEDUCTIBILITY

(ACTION 4)

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Interest deductibility(Action 4)

Develop recommendations regarding best practices in the design of rules to preventbase erosion through the use of interest expense …

In connection with and in support of the foregoing work, transfer pricing guidance willalso be developed regarding the pricing of related party financial transactions

… to achieve excessive interest deductions or to finance the production of exempt ordeferred income …

… for example, through the use of related party and third party debt …

… and other financial payments that are economically equivalent to interest.

• Discussion draft to be released this week seeks input on:– What is interest and what are payments economically equivalent to interest– Who a rule should apply to– Whether a rule should be based on the level of debt or interest expense in a company– Whether a small entity exception or threshold should apply– Whether deductions should be limited with reference to the position of a company’s group– Whether deductions should be limited with reference to a fixed ratio– Whether a combination of these approaches could be applied– The role of targeted rules– The treatment of non-deductible interest expense and double taxation– Considerations for groups in specific sectors 26


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Group-widetests

Fixed ratiotests

Combination of the two tests

• A group-wide test would limit a company’s net interest deductions to a proportion of itsgroup’s actual net third party interest expense, based on a measure of economicactivity such as earnings or asset value

• Aims to allow groups to claim tax relief for their real cost of funds, while protectingcountries from excessive deductions

• Groups can continue to centralise third party borrowings in the entity/country which ismost efficient for non-tax purposes, while tax relief for interest is matched witheconomic activity

• A best practice recommendation could include an agreed approach to be appliedconsistently by all countries or provide flexibility for a country to incorporate existingtax principles within its rule.

• No country currently applies a group-wide test as a main rule 28


• A fixed ratio test operates by applying a fixed benchmark ratio to anentity’s earnings or asset value

• Relatively inflexible, applying the same benchmark ratio to all entitiesirrespective of the level of third party gearing

• Difficult to establish the “correct” benchmark ratio, for example currentfixed interest/EBITDA ratios are often in excess of groups’ actual ratios

• More straight-forward for groups and tax authorities toapply

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• A combined approach would allow lower risk companies to apply asimple fixed ratio test, while more highly geared companies could claimhigher deductions by applying a group-wide test:

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Approach 1 Approach 2Main rule Group-wide test Fixed ratio testCarve-out For companies which meet a

low fixed ratio test (or opt toapply the fixed ratio as a limit

on deductions)

For companies which exceedthe fixed ratio but can

demonstrate they are withinthe equivalent ratio of their

group

• Discussion draft to be released this week forcomment by 6 February 2015

• Public consultation to be held in Paris on17 February 2015

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LOW VALUE-ADDING

SERVICES (ACTION 10)

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• Discussion Draft released 3 November 2014 for comments by 14January 2015

• Proposes a simplified approach which reduces the scope for baseerosion through excessive management fees and head officeexpenses.

• The approach– Identifies a wide category of common intra-group services and

determines a very limited profit mark-up– Applies a consistent allocation key– Provides greater transparency through specific reporting requirements

including documentation showing the determination of the cost pool

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Low value-addingservices

MULTILATERAL

INSTRUMENT (ACTION 15)

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• In January 2015, the CFA will consider a draft mandatefor the negotiation of a multilateral instrument.

• The mandate will deal with the scope of the instrumentand the timeline to deliver.

• Once agreed the mandate will be presented to theOECD Council and the G20 with a view to convene anad hoc group of interested parties and start the work.

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Work on MultilateralInstrument

UPCOMING

DISCUSSION

DRAFTS

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Upcoming Discussion Drafts

• Interest deductions and other financial payments• Transfer Pricing, risk and recharacterisation• Transfer Pricing Aspects of commodity transactions• The use of profit splits in the context of global value

chains• More effective dispute resolution

JOIN THEDISCUSSION

Ask questions and comment

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Join the discussion

Directly: Enter your question in the space provided

Via email: [email protected]

Via Twitter: Follow us via @OECDlive using #BEPS

Further Information

Website: www.oecd.org/tax/beps.htm

Contact: [email protected]

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