Transfer Pricing Circle & International Tax Update 2017 · · 2017-06-09PwC Transfer Pricing...

Transfer Pricing Circle & International Tax Update 2017

www.pwc.ch/transferpricing

Thursday, June 8 2017

An event presentedby PwC’s Academyfor Transfer Pricing Specialists

PwC

Agenda

• International Tax & Exchange of Information update

• Intercompany Financing – rien ne va plus?

• Coffee break

• Substance – Silver bullet or poison pill?

June 2017Transfer Pricing Circle & International Tax Update 20172

International Tax & Exchange of Information update

Monica Cohen-DumaniPatricia More

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Agenda• Introduction• EU Directive on hybrid mismatches involving third countries (ATAD II)

– key points of attention

• EU and OECD Tax policy update

• Directive on double taxation dispute resolution mechanism

• MLI

• Unilateral measures and OECD BEPS update

• German royalty capping rule

• Standard Audit Files for Tax Purposes

• Toward a Real time reporting

• The Co-operative tax compliance Framework (Ireland)

• Key Points


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Introduction


• Governments Worldwide believe they are losing billions of revenue each year through non compliance, evasion, tax avoidance, fraud and non-collection.

• Starting on 2005 with the publication on May 2005 of the “Guidance for the Standard Audit File – Tax” by OECD, Tax authorities are clearly driving for better tax control framework and increased transparency.

• BEPS, CBCR, anti-avoidance package, Tax strategy’s publication requirements, real time reporting are illustrations of this trend.

Authorities are under pressure to take action to increase transparency and close the tax gap

PwCJune 2017Transfer Pricing Circle & International Tax Update 2017

6

TransparencyBEPS

Measures

implementation

Introduction

Technology


7

‘Big Picture’Timeline of Main EU Developments

• ‘DAC 3’ Automatic information exchange on tax rulings • (Non-public) Country-by-Country Reporting (CbCR)

2017

• Common EU list of non-cooperative tax jurisdictions (ongoing)• Dispute Resolution Directive (if adopted)

2018

• General Anti-Abuse Rule (GAAR) Art. 6 ATAD• Interest limitation rule Art. 4 ATAD• CFC rules Art. 7, 8 ATAD• Hybrid mismatches within EU Art. 9 ATAD (effective 2019);• CCTB (if adopted)

2019

Automatic exchange of information on financial account information2016

Exit taxation Art. 5 ATAD; ATAD II: Extension of hybrid mismatch rules to third countries2020

CCCTB (if adopted)2021

2022 Hybrid mismatches third countries – reverse hybrids

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Agenda• Introduction

• EU Directive on hybrid mismatches involving third countries (ATAD II) – key points of attention



• MLI






• Key points


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ATAD II


ATAD I: Included minimum standard rules on hybrid entities and hybrid financial instrument mismatches between MS.- Double deduction (DD) -> only deduction in MS where

payment has its source. - Deduction without inclusion (D/NI) -> MS of payer to

deny deduction. Not so much principle-based, but rather effect-based!

ATAD II: Mismatches resulting from conflicts in the characterization or allocation of payments, from PE income allocation or recognition, hybrid transfers, imported mismatches, reverse hybrid mismatches and tax residency mismatches.

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ATAD II Aim scope


Political agreement on 21 February 2017: Expansion of (hybrid) mismatch types covered Hybrid mismatches with third countries:- Extend rules to hybrid mismatches involving non-EU countries (third countries),- At least one of the parties involved is a corporate taxpayer in a MS.

Rules on reverse hybrid mismatches also apply to all entities treated as transparent for tax purposes by a MS.

Mismatches covered are only those that arise between head office and PE, between PEs, between associated enterprises and those resulting from structured arrangements - Hybrid entity mismatches only covered in case of effective control

ATAD II is still debated in the EU Council (last debate was on 23 May 2017).


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ATAD II hybrid mismatches

a) Hybrid loans

b) Reversed hybrid entities

c) PE – Head Office allocation mismatches

d) Disregarded PEs

e) Disregarded payments

f) Disregarded payments between PEs or PE and Head Office

g) Double deduction structures

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ATAD IIExamples


Hybrid mismatch definition ATAD II A situation involving a taxpayer or an entity where:a) a payment under a financial instrument gives

rise to D/NI and the mismatch outcome is attributable to differences in the characterization of the instrument or the payment made under it.

b) a payment to a hybrid entity gives rise D/NI and that mismatch outcome is the result of differences in the allocation of payments made to the hybrid entity under the laws of the jurisdiction where the hybrid entity is established or registered and the jurisdiction of any person with a participation in that hybrid entity.

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ATAD IIExamples


Hybrid mismatch definition ATAD II A situation involving a taxpayer or an entity

where:c) a payment to an entity with one or more

permanent establishments gives rise toD/NI and that mismatch outcome is theresult of differences in the allocation ofpayments between the head office andpermanent establishment or between twoor more permanent establishments of thesame entity under the laws of thejurisdictions where the entity operates.

d) a payment gives rise to D/NI as a result ofa payment to a disregarded permanentestablishment

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ATAD IIExamples


Hybrid mismatch definition ATAD II A situation involving a taxpayer or an entity

where:e) a payment by a hybrid entity gives rise to D/NI

and that mismatch is the result of the fact that the payment is disregarded under the laws of the payee jurisdiction.

f) a deemed payment between the head office and permanent establishment or between two or more permanent establishments gives rise to D/NI and that mismatch is the result of the fact that the payment is disregarded under the laws of the payee jurisdiction.

US M S

US

MS

-

-

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• MLI






• Key Points


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Proposed or adopted EU measures


Directive on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States • pending in Council – no solid progress expected in the near future: main subject: suggested

inclusion of effective minimum taxation clause.

Amendment of directive on administrative cooperation • Adopted on 6 December 2016: Revision in the field of taxation in order to give tax

authorities access to AMLA files as of 1 January 2018 which identify economic beneficiaries of corporations.

Public CbCR• Pending proposal of April 2016.• EC Technical discussions ongoing (technical matters expected to be clarified by 30 May 2017).

Measures against intermediaries and harmful practices• Potentially to be published in June 2017.• Measures against intermediaries (including consultants, lawyers, financial and investment

advisors, accountants, financial institutions, insurance intermediaries and ‘Trust and Company Service Providers’) who design complex financial structures to help clients avoid paying tax.

Fiscal State aid

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EU Policy Update


Consultation on disincentives for intermediaries/legislative proposal in summer

Legislative agenda of the Commission(directive on effective dispute resolution mechanisms, CCCTB, FTT, pCBCR)

European Parliament:

- PANA Committee

- public CBCR

- perceived conflicts of interest is top of mind

Code of conduct group: list non cooperative jurisdictions

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OECD work-in-progress – BEPS related


Digital (action 1) – Digital economy task force held its first meeting since report just recently. Focus on mandate going forward.

Hybrid branch mismatches (action 2) – Published compilation of comments to summer discussion draft on 27 September, considered by WP11 at a meeting in October and revised Action 2 paper was due by the end of 2016. Adjustments expected and further thoughts will be coming, especially on deemed payments

Financial transactions (action 4) – Recommendations to be concluded by the end of 2017. Discussing captives, guarantees and cash pooling (on which progress made) as well as loans, commitment fees, line fees, derivatives and other financial transactions. Guidance on implementation of group ratio rule expected. Banking/ insurance –nuanced approach likely.

Harmful tax practices (action 5) – Peer review process in place. 20 regimes to be reviewed before the end of the 2016, including several not identified at time of final BEPS report. 11 countries have taken steps to comply with nexus on patent boxes. Some ruling exchanges have been taking place under existing processes.

Profit splits for transfer pricing (actions 8-10) – On the basis of consultation responses, some redrafting is expected but there appeared to be a lack of consensus on some key issues at the public meeting. Plan to agree recommendations by mid-2017 is challenging.

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OECD work-in-progress – BEPS related (Continued)


PE profit attribution (actions 7, 8-10) – Again based on the consultation responses and public meeting, there appeared to be a lack of consensus on risk issues and recommendations unlikely by the ‘before end of December 2016’ stated deadline. WP6 and WP1 expected to continue discussions, made more difficult by additional countries being involved under the Inclusive Framework. Tax administrations should not be quoting as authority the existing non-consensus discussion draft but have the flexibility of working within the current Commentary etc.

Hard to value intangibles or HTVI (actions 8-10) – Implementation guidance expected shortly will focus on when and how to make an adjustment.

Low value adding services (actions 8-10) – Follow-up work on the design of the threshold and other implementation issues expected imminently.

Consolidated version of TP Guidelines (actions 8-10) – Expected to be available early to mid 2017.

Country-by-country reports (action 13) –Wp6 and WP10 working on the review process ahead of a first meeting in December with proposals to be agreed in January Inclusive Framework meeting.

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OECD work-in-progress – non-BEPS


Inclusive growth – A very broad project being led by the Statistics division, it will include both tax and expenditure sides. Will update thinking on distributional impacts of individual taxes, mixes of taxes, etc.

Business Taxation online survey with 'certainty' a key focus – Deadline 16 December and business being strongly encouraged to participate, and this ‘uncertainty’ factor will feed into the growth work. Stated that tax administrations and policy makers as well as civil society organisations will have a later chance to comment on the findings. Report to G20 and conclusions expected by March 2017.

Beneficial ownership - Ongoing work from the Global Forum on Tax & Transparency mainly with the Financial Action Task Force (FATF [on money laundering]) plus other OECD work on gap analysis, wider potential use of FATCA/ CRS info, legal capacity and sharing.

Capacity building – Initiatives continuing, especially around TP audits via TIWB (jointly with the UN) and through other work with the Platform on Collaboration (including toolkits mentioned earlier but facing delays on indirect asset transfers, TP documentation, TP comparables and negotiating treaties all originally expected before 31 December). Q1 2017 Task Force on Tax and Development likely to be forum for concerns to be raised.

Tax design – Statistics and other work comparing policies pursued by OECD members and more broadly, but including helping individual countries e.g. Argentina major tax reform planned.

VAT/ GST – Reviewing trends and assisting particular countries, like India and China, as well as actions being taken in accordance with BEPS action 1. Particular focus on the mechanism for the collection of VAT from foreign suppliers.

Tax certainty

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• MLI






• Key Points


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Directive on Double Taxation Dispute Resolution Mechanisms in the EU I/II(if adopted, to be implemented by MS as of 31.12.2017)


4

Dispute Resolution

4

ContentProposed directive builds on EU Arbitration Convention which stipulates the elimination of double taxation by agreement between the contracting states

before 31.12.2017 after

Obligation to eliminate double taxation for businesses in some cases, but not enforced

Explicit and enforceable requirement to eliminate double taxation for businesses in all cases

Often no recourse for taxpayers when mechanisms not applied properly

Recourse for taxpayers to national courts to unblock procedures

Timeframe for procedure not predictable Clearly defined and enforceable timelines, with a maximum period of 15 months for the arbitration phase

Scope limited to transfer pricing and permanent establishment issues

Scope extended to all cross-border issues in the context of business profits

No transparency requirements Obligations for notification of taxpayers and publication of arbitration decision


23

Directive on Double Taxation Dispute Resolution Mechanisms in the EU II/II(if adopted, to be implemented by MS as of 31.12.2017)

4

Dispute Resolution

4

2 years (+6 months)

MS’ Competent Authorities can agree to appoint an Alternative Advisory Commission (Option)

Competent Authority verifies the Admissibility

Mutual Agreement Procedure (MAP)

Appeal to the National Court

MAP successfulMutual AgreementNotification &Implementation Dispute Resolution

Competent Authorities of MS appoint the Advisory Commission

National Court appoints the Advisory Commission

Final Opinion

Notification & Implementation

Competent Authorities of MS must decide on how to eliminate Double Taxation

Double Taxation occurs Taxpayer makes a Complaint

Source: European Commission (2016), https://ec.europa.eu/taxation_customs/business/company-tax/resolution-double-taxation-disputes_en_de

3 years

6 months 6 months

6 months

50 days

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• MLI






• Key Points


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The MLI - overview


The report under Action 15 of the BEPS Project concluded:• feasible and desirable • to develop a multilateral instrument • to swiftly amend tax treaties (more than 3000 exist worldwide)• to implement the tax treaty-related BEPS recommended

Timing• 24 November 2016: published following work by Ad Hoc Group (98-100

countries eventually participating) • 7 June 2017: A formal signing ceremony at the OECD• ? Ratification, Entry into force, Coming into effect

“Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS” (MLI)

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BEPS treaty-related actions – Arbitration (voluntary) +


Minimumstandards

Reinforced international standards

Common approaches & best practices

Analytical reports & measuring BEPS

Action 2Neutralise the effects of hybrid

mismatch arrangements

Action 3Strengthen CFC rules

Action 4Limit interest deductibility

Action 5Counter harmful tax practices

Action 6Prevent treaty abuse

Action 7Prevent the artificial avoidance of

PE status

Actions 8 - 10Aligning transfer pricing outcomes

with value creation:Intangibles;

Risk and capital; andOther high-risk transactions

Action 1Digital economy

Action 11Data analysis

Action 12Mandatory disclosure rules

Action 13Re-examine transfer pricing

documentation

Action 14Dispute resolution

Action 15Develop a multilateral instrument

MLI

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Contents and interpretation of the MLI


The MLI is 49 pages long and comprises seven parts:

• Part I. Scope and Interpretation of Terms (Articles 1-2)

• Part II. Hybrid Mismatches (Articles 3-5)

• Part III. Treaty Abuse (Articles 6-11)

• Part IV. Avoidance of Permanent Establishment Status (Articles 12-15)

• Part V. Improving Dispute Resolution (Articles 16-17)

• Part VI. Arbitration (Articles 18-26)

• Part VII. Final Provisions (Articles 27-39)

An Explanatory Statement is 86 pages long

Commentary material reflected in the Final BEPS Package

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How the MLI works


Supplements and ‘modifies’ existing bilateral or multilateral tax conventions (not override nor substitute for them)

Mainly symmetry between countries to apply but options allow for some asymmetry

OECD is the Depositary, receiving notifications and providing matchingservices as well as reporting events and publishing a lot of information

Countries etc. can sign up to the MLI or rely on bilateral/ multilateral renegotiations

Signatory notifies which treaties it wants included – Covered Tax Agreements

Certain core provisions are obligatory – the BEPS minimum standards (signatory needs to notify its choice where options are available)

For other Articles, some where signatory can opt-out (e.g. PE threshold) or opt-in (e.g. to the Arbitration standard), with appropriate notifications

Reservations allow a signatory to notify it will exclude operation of a particular rule in specific circumstances

Compatibility clauses for each rule address how the rule interacts with provisions in the existing agreements that the MLI will modify

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• MLI






• Key Points


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‘Big Picture’Selected unilateral measures


UK• UK diverted profits tax [1.4.2015] • Changes to existing CFC rules [1.1.2016] • Corporation Tax: anti-hybrid rules [1.1.2017]

Australia• Diverted profits tax [1-7-2017]

Austria• Non-deductibility of interest and licence

payments to low taxed affiliate entities [1.3.2014]

Germany• (Proposed legislation): Introduction of sub-

stantive requirements according to action 5 OECD on IP regime if not in line with nexus approach. Limitation of tax deductibility of IP-related payments if such costs enjoy prefer-ential tax treatment at recipient level; royalty limitation rules [1.1.2018]

Italy• Several black list-related rules on deductibility

of payments, CFC rules. With respect to Switzerland still black list considerations for privileged companies and dividends paid out of Italy.

Luxemburg• New TP circular for fiscal treatment of intra-

group financial transactions, entailing enhanced substance requirements [1.1.2017]

Finland [1.1.1995]• CFC-Rules for certain blacklisted countries

(including Switzerland if taxed < 12%)

France• CFC Rules [1.3.2010]• Up to 75% WHT on payments to non-

cooperative jurisdictions [1.3.2010]• No participation exemption for payments

from non-cooperative jurisdictions [1.3.2010]• Anti-hybrid rules [25.9.2013]

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‘Big Picture’OECD BEPS Action Plan EU Initiatives


OECD BEPS Actions Adopted/Proposed EU Measures

Hybrids (2) Hybrid mismatches; Art. 9 ATAD

Interest Deductions (4) Interest limitation rule; Art. 4 ATAD

CFC Rules (3) CFC rules; Art. 7, 8 ATAD

Harmful Tax Practices (5) Automatic information exchange on tax rulings; EU ‘black list’

Transfer Pricing Documentation & Country-by-Country Reporting (CbCR) (13)

Country-by-Country Reporting (CbCR)

Dispute Resolution (14) Initiative on Improving Double Taxation Dispute Resolution Mechanisms (planned)

Multilateral Instrument on Tax Treaty related Measures (15) Recommendation on Tax Treaties (ATAP)

List of uncooperative tax havens/Global Forum on Trans-parency and Exchange of Information for Tax Purposes

Common EU list of non-cooperative tax jurisdictions (ongoing)

Public Country-by-Country Reporting (public CbCR) (pending)

Exit taxation; Art. 5 ATAD

No corresponding BEPS Actions General Anti-Abuse Rule (GAAR); Art. 6 ATAD

CCTB (planned)

CCCTB (planned)

State Aid (max. 10 years retrospectively)

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• MLI






• Key points


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Draft Bill: German Royalty Capping Rule –Limitation of the Deductibility of Royalty Expenses


• Key Elements:1/2

• Background: OECD-BEPS-Project (Action 5); transparency and substance

• Subject: expenses for the granting of certain rights, especially royalties

• Preconditions: Royalty-earnings (gross income) are subject to a preferential tax treatment

o e.g. lower tax rate, partly tax exemption, notional deduction of expenses in relation to the earnings

o Questions: special tax regime for different categories of income / special tax regime which depends on the place of source

Low taxation: tax burden of earnings is below 25 %

Creditor must be a related party (Section 1 para. 2 German Foreign Tax Act)

• Back-to-back licencing („Zwischenschaltungs-Fälle“): rule affects not only harmful taxation at the level of the creditor itself, but also harmful taxation at the level of the final recipient

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Draft Bill: German Royalty Capping Rule –Limitation of the Deductibility of Royalty Expenses


• Key Elements:2/2

• Exceptions: Foreign tax regime is compliant with the OECD-Nexus-Approach (Action 5;

subject to changes) Royalty-earnings are subject to German CFC Rules

• Consequence:

Deductibility of expenses is limited; ratio to calculate the non-deductible part:

- 25 % - tax burden of the earnings in %

◦ 25 %

Example:

o Tax burden: 15 % 40 % of the expenses are not deductibleo with increasing tax burden, the non-deductible part of the expenses is reduced

• Application to expenses which arise after 31 December 2017

• Legislative process: law should be finalised before summer (elections in September); some slight amendments to be expected

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• MLI






• Key points


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Standard Audit Files for Tax Purposes (SAF-T)


• In May 2005 : first version of the SAF-T guidance.

• Version 1.0 was based on entries as found in a General Ledger Chart of Accounts, together with master file data for customers and suppliers and details of invoices, orders, payments, and adjustments. The revised version (2.0) published in 2010 extended the standard to include information on Inventory and Fixed Assets.

• The objective of the implementation of SAF-T is :

◦ To allow efficient and accurate data interchange – easy electronic access, unified readable format;

◦ To help exchange of transaction data from organization to tax authorities;

◦ To improve substantive testing at invoice line-level for tax authorities;

◦ To be able to conduct audit of few taxes at once (e.g. CIT-VAT comparison);

◦ To reduce the costs and duration of audit (ability to conduct audit remotely).

• A growing number of tax administrations around the world are implementing e-audits of a business financial records and systems or SAF-T reporting as a route for the tax offices to gain complete records of tax transactions, and produce their own assessments of tax liabilities.

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Standard Audit Files for Tax Purposes (SAF-T)Key questions


Who ?

What ?

Duty of generating SAF-T /e-files differs between the countries :

≥ X employees or > X mln EUR or

Example :

• France: French companies, branches, permanent establishment of foreign companies and even only VAT registration (simplified FEC);

• Poland: companies with a total of employees exceeding 250 or a turnover higher than EUR 43 m (requirement will come into force for medium and small enterprises respectively as from 2017 and 2018)

The format requested by tax authorities might vary between the countries :

ALL

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Standard Audit Files for Tax Purposes (SAF-T)Key questions


Penalties ?

SAF-T works worldwide in two compulsory models:

• on demand (e.g. France: 1st day of audit)

• compulsory periodic data handling to the tax authorities (e.g. monthly basis for VAT Ledger structure in Poland or Control Statement in Czech Republic, etc.).

Penalties for not remitting a compliant e-file at due date vary between the countries but are in general substantial penalties.

Example :

• France : 10% fine on additional tax liability reassessed (min. EUR 5’000 per fiscal year) and possibility of self assessment by tax authority (a potential 100% penalty on additional liability if lack of FEC treated as «obstruction» to audit)

• Czech Republic : CZK 30’000 (CHF 1’200) each time an error is identified by the tax authority and not explained within 5 days

• Poland : Max approx. EUR 750’000 penalty for not submitting the SAF-T file

• Reputation risk for companies (i.e. Lithuanian Tax authority publishes on their website various lists of tax payers that fail to fulfil their obligations)

How ?

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Standard Audit Files for Tax Purposes (SAF-T)Country coverage overview


SAF-T based on OECD’s format (full or partial content)

Other e-files or additional reporting (some of SAF-T content covered - usually GL or billing, but not same data aggregation/ specific formats)

Discussion about implementing SAF-T/e-files

No e-file /no information

Last updates:- Control statement in Italy since Q1 2017- New correlation tables in Portugal since January 2017

Coming up soon:- New real-time VAT reporting regime in Spain - 1 July 2017- New real time reporting in Hungary postponed to July 2017- Suggestion to postpone the mandatory implementation of SAF-T in

Norway to 1st January 2018- Amended SAF-T structure in Portugal since July 2017

DENMARK

LUXEMBOURG

PORTUGAL

SPAIN

FRANCE

ITALY

FRANCE

IRELAND

UNITEDKINGDOM

NETHERLANDS

BELGIUM

GERMANY

SWITZERLAND

AUSTRIA

CZECHREPUBLIC

POLAND

SLOVAKIA

NORWAY

SWEDEN

FINLAND

ESTONIA

LATVIA

LITHUANIA

SLOVENIA

HUNGARY

ROMANIA

BULGARIA

GREECE

ANDORRA

LIECHTENSTEIN

MONACOITALY

Edinburgh

Stavanger

Goteborg

Krakow

GdanskHamburg

Bremen

Leipzig

Leeds

Porto

Gibraltar

Sevilla ValenciaBarcelona

Palermo

Cagliari

Naples

Bordeaux Lyon

MarseilleVenice

Geneva

Genoa

StrasbourgMunich

Belfast

Amsterdam

Copenhagen

Stockholm

Ljubljana

Athens

AndorraLa Vella

VaduzBratislava

Budapest

Madrid

Bern Vienna

Berlin

PragueLuxembourg

London

Brussels

Vilnius

Tallinn

SofiaRome

Bucharest

Paris

Lisbon

Dublin

Warsaw

Riga

HelsinkiOslo

HERBRIDES

Öland

Gotland

Bornholm

BALEARICISLANDS

Corsica

Sarinia

Sicily

Crete

IrishSea

TyrrhenianSea

IonianSea

LigurianSea

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Standard Audit Files for Tax Purposes (SAF-T)Content coverage comparison


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Standard Audit Files for Tax Purposes (SAF-T)Content coverage comparison


A coverage not only limited to EU :

• Brazil, Australia, Singapore,

• Russia where tax payers are required to submit VAT transactional data along with their electronic VAT return

• India where the provision of electronic data is included in the good and services tax reform

• Gulf countries with the implementation of VAT as from January 2018

• Initially mainly use by the tax authorities for transactional tax. They now globally use the information include in SAFT for CIT, TP…

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• MLI






• Key points


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Toward a Real time reportingThe Spanish example


The Immediate Supply of Information on VAT : SII : A change to the current VAT management system

The VAT records will be kept through the AEAT’s electronic Office by the supply of invoicing records ( the invoice is not sent only information about the invoice, investment assets and intracommunity transactions)

The supply of the information related to the invoices issued and received should be done within 4 calendar days (excluding Saturdays, Sundays and Spanish national holidays) from the date of issue of the invoice or from the invoice’s accounting date.

Mandatory for large companies, VAT group Members, Monthly VAT refund Register with Monthly settlement period

Objectives: greater transparency, release of information obligations, possibility to match information, reduced the number of errors in compliance

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• MLI






• Key Points


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The co-operative Tax compliance Framework


In 2008, OECD published a study promoting relationships between tax authorities and taxpayers based on trust co-operation and transparency

24 out of 26 countries involved in this study has implemented a co-operative compliance framework.

Collaborative approach is seen as giving significant benefit for both taxpayers and tax authorities :

Businesses want to be tax compliant, certainty on tax position and when something turns out to be wrong for non fraud reason to be able to regularize quickly with limited costs.

Tax authorities are looking for a greater knowledge of businesses and industry sectors, self-corrections, voluntary disclosure to mobilize resource on effective fraud.

Co-operative tax compliance framework delivers for both side.

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The co-operative Tax compliance Framework


What do the participant get ?

For businesses :

- A dedicated spoke to person within the tax authorities

- In case of self-voluntary disclosure no audit will be undertaken –only profile interviews or queries

- An annual meeting with the tax authorities

- A streamlined process to get CIT or VAT refund

- Exceptional tax audit

For tax authorities:

- Greater transparency

- Real time insight on the business and industry sector

- Release of resource

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• MLI






• Key Points


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Key points:

- Coherent tax strategy needed: tax policy and risk framework

- Organisational model of the tax function to maximise its efficiency and effectiveness within business

- Process and responsability: redesigning processes to maximise efficiency across organisation and clear allocation of responsability, governancedocumented

- Focus on data quality and consistency

- Systems and Technology: Using technology more effectively to enable process efficiency and face the increasing use of data analytics

- Tax function, KPI need to be aligned with business objectif


Intercompany Financing – rien ne va plus?

Nicolas BonvinKarl-Heniz Winder

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Agenda

• Interest rate pricing approaches

• BEPS developments for intercompany financing

• Situation in Switzerland

• Cases in Switzerland


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Transfer Pricing MethodsStand-Alone Pricing Method


Transfer Pricing Documentation

Credit Rating Analysis

Borrower(Financial data and

qualitative information)

Analysis of the individual loan

agreements

Comparability Analysis

Determination of an arm’s length

interest rate

BB

BBB

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Transfer Pricing MethodsCost of Funds Method


Loan Interest

Arm’s Length or Safe

Harbour

Significant deteriorating results compared to external price comparison?

Administrative Costs Country Risk

Difference between

Lender and Borrower (e.g. Credit Default

Swap)

Credit Costs Equity Costs

Refinancing Costs

• Base rate• Credit margin• Additional

costs

• Equity backing• Equity quote

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Agenda






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BEPS Action 8 – 10Substance in financing Structures


Step 1: Form/Agreement Step 2: Transfer Price

Are contracts at arm‘s length?

• Economic substance

• Control of risks

• Actual conduct

Potential requalification

Are the agreed Transfer Prices at arm‘s length?

Transfer Pricing methods

Potential changes of Transfer Prices

Two-step arm’s length test according BEPS Action 8 – 10?

• New Chapter of Transfer Pricing Guidelines• Alignment between form and actual conduct of parties


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Risk and capital – Cash Boxes (Action 9)Introduction

• Chapter 1 Section D OECD Transfer Pricing Guidelines (update)• Explicit reference of ‘capital-rich MNE group member performing

few activities’• Implementation of arm’s length principle• Comparison criteria:

– Contractual terms– Functional analysis

• Provision of capital without executing of functions (so-called cash boxes)

• BEPS through allocation of risk premiums offshore

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Risk and capital – Cash Boxes (Action 9)Example


Lender(no activity)

Borrower

Risk-free return

Associated enterprise

Risk premium

Case 2

Lender

Borrower

Risk-free return + Risk premium

Case 1

‘cash box’ Credit checkTakeover of Investment

risk

Credit checkTakeover of Investment

risk

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Limitation of Interest Deduction (Action 4)Overview


Restriction of profit shifting through deducting interests and other financial expenses

Option 1: Fixed-ratio rule Option 2: Group-ratio rule

• Performance-related rule• Limits deductibility of net interests

(internal and external financing) to EBITDA within a corridor between 10% and 30%

• Performance-related rule• Limits deductibility of net interests

(internal and external financing) up to a specific group net interests/EBITDA ratio

Determine the ratio of countries within the corridor

Consolidated financial statement: Net interest expense of third parties/ Consolidated-EBITDA

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Measures influencing financing Activities


Measures reflecting Minimum Standards to be enacted by EU Member State (EU MS) Directive does not prohibit other (domestic or agreement-based) anti-avoidance rules designed to give greater protection to corporate tax bases Measures are equivalent to OECD/BEPS recommendations but not fully aligned

Anti Tax Avoidance Directive

Exit Taxation Art. 5 [2020]

General Anti Abusive Rule (GAAR) Art. 6 [2019]

Interest Limitation Rule Art. 4 [2019/2024]

Hybrid Mismatch Rules Art. 9 [2019]

CFC Rules Art. 7, 8 [2019]

Extension to third countries (as of 2020) (‘ATAD II’)

Directive contains five measures [adopted on 12.7.2016]

ATAD (Anti Tax Avoidance Directive)

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Agenda






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Switzerland has a Tradition of safe harbor Rules…


Circular letters published by the Federal Tax Administration:

https://www.estv.admin.ch/estv/fr/home/direkte-bundessteuer/direkte-bundessteuer/fachinformationen/rundschreiben.html

• Acceptable interest rates on loans in CHF (annually – last on 13/2/2017 applicable starting 1/1/2017)

• Acceptable interest rates on loans in foreign currencies(annually – last on 14/2/2017 applicable starting 1/1/2017)

• Thin capitalization (Circular 6 dated 6/6/1997)

Almost always used as a starting basis by tax authorities in Switzerland

Different rates can be applied if they can be justified (e.g., market rates)

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Swiss safe harbor rates vs. market rates (2004 – today)…


0.00 %

1.00 %

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9.00 %Ja

n-04

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-09

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7

AFC interestrate (EUR)

Market Rate

Applicable interest rate for 5-year loan in 2012

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Safe harbor spread in % of interest rates (2004 – today)…


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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

AFC InterestRate (EUR)

Spread

Spread /AFC Interestrate

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Agenda






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Case 1 – Thin-capitalization Rules vs. Market Approach

− Determine “acceptable” level of debt based on thin-cap circular

− Apply safe harbor rate calculate “acceptable” level of interest double hit for taxpayer

• Calculations by tax authorities:

64June 2017Transfer Pricing Circle & International Tax Update 2017

− Determine credit rating of OpCo− Search for loans in the market with similar or

lower rating Confirm OpCo has an acceptable level of debt

• Market approach:

HoldCo

OpCo

loansinterest

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Case 2 – Interest Spread required on external Funding


− Minimum interest spread required: 0.5% Adjustment +2%

• Calculations by tax authorities:

− Determine credit rating of OpCo2− Search for comparable loans Range 1.5% - 2.5%

Support “best available option” Confirm loan 2 is @ arm’s length

• Market approach:OpCo 1

HoldCo

Bank

OpCo 2

Loan 1(5-years)

4% interest

loan 22.5% interest

Substance –Silver bullet or poison pill?

Carl Bellingham

PwC

Example: continuum of substance in Principal jurisdiction

SubstanceWhat is the substance we need?

Real substance in the business model is required to avoid any material tax leakages. A necessary component of substance is the physical location of decision makers. Accordingly, substance can take the form of:

Functions Assets Risks

Value-adding functions Financial ownershipControl & key decision making

Full employment and relocation of all ‘critical’ and ‘recommended roles

to the Principal

All key decisions are made elsewhere and

no employees are based in the Principal

No permanent employees are located in the Principal’s

jurisdiction but key decisions are taken by management in

the Principal

Most ‘critical’ / ‘recommended’ roles

commuting to the Principal

BEPS

Robust Requires Strong Governance Unsustainable

The ‘tipping point’ (or the minimum required substance for a sustainable

model) will vary case-by-case.


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• Legal ownership alone does not generate a right to all (or any) intangible-related profit return

• Merely funding does not result in residualprofits/losses

• Economic substance is key and can be demonstrated by: – Exercising strategic decision-making, – Controlling of key risks, – Executing value contributing functions and can

be substantiated using OECD approach ‘DEMPE’ to value the IP (i.e. development, enhancement, maintenance, protection and exploitation)

• Example of important functions in accordance to the OECD: Design and control of research or marketing

programmes Blue sky research Management and control of budgets

SubstanceOECD guidance on substance assessment for Intellectual Property – ‘DEMPE’ approach

BEPS action 8 – Intangibles Value Creation

Development

Exploitation

Protection Maintenance

Enhance-ment

DEMPE

Controlling economically significant risks


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SubstanceWhy Substance is an increasingly important attribute?

- Creating the right substance gives a stronger defence profile

- Reliance – a more natural an business friendly profile

- Sustaining – documentation is self fulfilling

- Business evolution is incorporated in the model

- Provides cornerstone for future planning that is aligned to BEPS and other evolving legislations


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SubstanceDealing with business change

Scenario 1: BEPS in practice, a real-life example: Spin-off

• BETA GmbH spun off from a larger group that operated with a centralised Swiss HQ that owned intellectual property.

• As a stand-alone entity, BETA’s operations in Switzerland were relatively limited, especially in relation to R&D, which was carried out primarily at its laboratory in Germany.

• Management were keen to maintain the existing tax operating model, but wanted to understand how to ensure it was sustainable.


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Scenario 2: BEPS in practice – a real life example: Procurement

• Ace SA centralised their group procurement function in the Netherlands in 2012.

• They moved two key buyers to the Netherlands and routed the ‘buying and selling’ of certain key raw materials and commodities through a new Dutch subsidiary.

• Centralised a significant amount of profit in the Procurement Company.

• What is the assessment post BEPS?

SubstanceCritical importance of alignment between the business model and transfer pricing approach

Operating site, incl. local buyers for key commodities 500 people in total (ETR 25%)

Spain Mfg

HQ including Group Supply Chain Function 125 people in total (ETR 15%)

Swiss HQ

2 Key Buyers and 3 admin staff (ETR 3%)

ProCo


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… the poison pill??

- Business evolution needs to be managed

- Documentation needs to be maintained

- Cost of maintenance falls on the business (i.e. operational cost)

- Increased collaboration between tax and the operational business

- Significant business change is obvious – incremental / slower change needs to be maintained

- Increased awareness and burden on both tax and operations


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BEPS

ATAD

Public CbCREU State Aid

C(C)CTB

Exchange of information

Code of Conduct Group

Tax Good Governance

The trend is clear:

Coherence –Improving interaction of corporate tax in different territories

Substance –Realignment of taxation and substance

Transparency –Increased visibility and sharing of tax-related information


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• Tax is now more than ever an important board topic, and increasingly there should be a formal tax strategy at corporate level.

• The business will keep pushing the boundaries and determining the model that best meets its needs, but tax will become more visible and a more vocal voice at the table.

• Purely tax-driven business models that can be implemented without requiring significant business changes or disruption will disappear.

• Increasing digitalisation and virtual teams will continue to put stress on the tax view of the world.

• We may see an increase in branch structures to give business the flexibility it needs.

Potential future developments and business model trends


PwC

Thank you!

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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers AG, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2017 PwC. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers AG which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Nicolas BonvinPartner, Transfer Pricing & Value Chain TransformationGeneva/[email protected]

Carl BellinghamPartner, Value Chain TransformationLausanne/[email protected]

Karl-Heinz WinderSenior Manager, Transfer Pricing & Value Chain [email protected]

Monica Cohen-DumaniPartner, Partner, International Tax Services, Central Cluster ITS LeaderGeneva/[email protected]

Patricia MorePartner, TLS VAT - VAT WestGeneva/[email protected]

Transfer Pricing Circle & International Tax Update 2017 · · 2017-06-09PwC Transfer Pricing...

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