International Tax Insight - Baker Tilly International

International Tax Insight
December 2014
Editorial
Welcome to the latest edition of Baker Tilly International’s premier tax
publication. In an increasingly globalised world, the following content aims
to cover key tax topics which should be of interest to businesses operating
internationally.
This edition features recent international tax developments emanating from
Australia, the European Union, France, India, Ireland, New Zealand, the
Organisation for Economic Co-operation and Development (OECD), Poland,
South Korea, the UK, the United Nations and the US.
Should you require further information regarding any international tax
matters, please do not hesitate to contact a specialist from one of our
member firms, which can be located within our Worldwide Directory at www.
bakertillyinternational.com.
Chris Danes
I hope you find this document informative.
International Tax Executive,
Baker Tilly International
Australia
multilateral work being undertaken by
the ATO and asked the Commissioner
to do more in this area. The ATO’s
BEPS strategy aligns with the goals of
the G20 and recent statements by the
Treasurer,” Mills said.
ATO Commissioner Urges
International Collaboration on BEPS
Unprecedented international
collaboration is needed to overcome
a single, isolated country view to
tackling base erosion and profit
shifting (BEPS) issues, Andrew Mills,
Second Commissioner of Australian
Taxation Office (ATO) for Law Design
and Practice, has said.
In a speech delivered at the Second
Annual Tax Forum organised by the Tax
Institute of Australia on 9-10 October
2014, Mills said: “As multinationals
are operating across borders
seamlessly by taking a global, topdown view to structure their operations
across countries, administrators and
policy makers need to do the same.”
Mills said that Australia is at the forefront
of efforts to reform the international tax
system to keep pace with rapid advances
including with respect to globalisation
and the digital economy.
Mills reinforced the widely-held view
that “companies should pay tax in
the country where the real economic
activity occurs and where the
profit is earned.” He said that most
corporate taxpayers willingly comply
with their obligations, but there are
a minority who use sophisticated
tax arrangements to gain an unfair
advantage over others. He added that
the federal Government is committed
to tackling these tax arrangements.
“On many occasions, Treasurer Joe
Hockey has stated that Australia is
open for business. Recently, on 4
September, the Treasurer remarked that
‘opening our doors also means ensuring
multinational companies pay tax in
Australia on the income they earn
here.’ The Treasurer highlighted the
European Union
EU Value-Added Tax Reforms
Closing the VAT Gap
The European Commission has
published its latest VAT gap study,
which shows that an estimated €177bn
(US$223.9bn) in value-added tax (VAT)
revenues was lost due to non-collection
or non-compliance in 2012 — a figure
equal to 16% of expected VAT revenues.
Algirdas Semeta, European
Commissioner for Taxation, said: “The
VAT gap is essentially a marker of how
effective — or not — VAT enforcement
and compliance measures are
across the European Union (EU).”
The study calculates the VAT that
goes uncollected owing to fraud
and evasion, legal tax avoidance,
bankruptcies, financial insolvencies,
miscalculations, and the poor
performance of tax administrations.
The findings in the 2012 report show a
marked improvement on the 2011 level
of €193bn, which was equal to 18% of
expected VAT revenues and a gap worth
1.5% of the member states’ combined
gross domestic product (GDP).
In 2012, the lowest VAT gaps were
recorded in the Netherlands (5% of
expected revenues), Finland (5%) and
Luxembourg (6%). The largest gaps
were in Romania (44%), Slovakia
(39%) and Lithuania (36%). Eleven
member states decreased their VAT
gap between 2011 and 2012, while
15 saw theirs increase. Greece
showed the greatest improvement
between 2011 (€9.1bn) and 2012
(€6.6bn), although it still has a high
VAT gap of 33%.
Semeta concluded: “Today’s figures
show there is a lot more work to be
done. Member states cannot afford
revenue losses of this scale. They
must up their game and take decisive
steps to recapture this public money.
The Commission, for its part, remains
focused on a fundamental reform of the
VAT system, to make it more robust,
more effective, and less prone to fraud.”
EU Competition Commissioner
Defends Tax Ruling Probes
The European Commission’s
investigations into advance tax rulings
from EU member states are aimed
at ensuring a level playing field for
companies in the EU and are not
a back-door attempt at tax policy
harmonisation, Joaquín Almunia,
the European Commission’s Vice
President in charge of competition
policy, has said.
Speaking at the American Chamber
of Commerce EU’s 31st Annual
Competition Policy Conference in
Brussels on 14 October 2014, Almunia
said: “I am not trying to modify tax
legal systems. What I want is to avoid
that through their interpretation,
national authorities will grant selective
advantages to a few companies at the
expense of all the others present in the
same jurisdiction.”
“EU tax authorities are responsible to
ensure a level playing field, instead
of offering different treatments to
companies with comparable legal
standings and operations.”
Almunia said that the investigations
launched by the Commission into
advance tax rulings are not directed
against specific companies, but
look into the tax practices of certain
EU countries.
“In particular, the deals we have
identified benefit only a handful
of large multinationals that can
put enticing investments and job
opportunities on the negotiating table.
Smaller companies cannot wield the
same bargaining power,” he added.
Recently, the Commission opened
investigations into tax rulings for
Apple in Ireland, Starbucks in the
Netherlands, and Fiat in Luxembourg,
and more recently Amazon in
Luxembourg. It has also expanded
its review of Gibraltar’s corporate tax
regime to cover advance tax rulings.
“Similar aspects are being discussed
in the US, where public attention on
practices such as tax inversion is growing
and the US Government is taking
concrete measures. The OECD has also
been working on aggressive tax planning
with its BEPS project,” Almunia said.
France
France Releases 2015 Finance Act
Tax provisions in the 2015 Finance
Act, released on 1 October, are limited
to tax incentives for individuals and
the introduction of more favourable
tax credits in overseas departments,
according to law firm CMS Bureau
Francis Lefebvre.
The measures include:
A tax break for low incomes: The
first tax bracket (5.5%) is to be
withdrawn and the next bracket of
14% becomes applicable on annual
incomes of €9,690 (US$12,160)
A 30% rebate against capital gains
tax realised on the sale of land to
be developed
Relaxed rules on tax credits for the
acquisition of buildings to be leased
A rebate of up to €100,000
against the value of certain
transfers (land, new buildings) for
gift tax purposes
A reduced 5.5% VAT rate on
the acquisition of real estate in
distressed areas
The withdrawal of certain ‘small’
indirect taxes that bring in very
little revenue and are cumbersome
to administer
An increase in tax on diesel (€0.02
per liter), and
Increased tax credits in overseas
departments: The employment
tax credit (CICE) will be increased
from 6% to 7.5% in 2015, and
to 9% in 2016. The research and
development tax credit will be
increased from 30% to 50%.
Stéphane Gelin, Avocat Associé at
CMS Bureau Francis Lefebvre, said:
“It is expected that a few provisions
addressing enterprises will be included
in the 2014 Rectificative Finance Act
for 2014. For instance, the scope of
the Transfer Pricing (TP) documentation
could be expanded to include Countryby-Country (CbC) Reporting, further
to the OECD recommendations under
the BEPS initiative. Furthermore,
penalties for failure to provide such
documentation in the course of a tax
audit could be increased. Currently,
the penalty can be up to 5% of the TP
adjustment. The French Parliament
proposed to replace it with a penalty
equal to 0.5% of total sales, which was
rejected by the Constitutional Court as
being disproportionate. It is likely that
a higher penalty would apply to any
TP adjustment.”
India
Indian Businesses Urged to
Anticipate BEPS Project Outcomes
Businesses should begin to prepare for
changes to the Indian tax landscape
resulting from the OECD’s BEPS
project, Akhilesh Ranjan, joint
secretary, India’s Ministry of Finance,
has said, while noting the Government
will consider the views of industry
when developing its response.
Speaking at a Confederation of
Indian Industry event on 7 November
2014, Ranjan said: “BEPS is a
movement and not a business versus
tax administration debate. We must
understand where the world is
moving, and not just India – the rules
are important for multi-jurisdictional
transactions of both domestic and
international companies. It consists
of a set of rules that would be
acceptable worldwide.”
Ranjan said that the Government will
soon legislate to reflect the changes
proposed by the OECD in respect of
transfer pricing documentation and
said that businesses must be prepared
to deal with the new rules. “BEPS
is in the offing and the rules are just
months away,” he said.
The conference echoed the growing
calls of multinational corporations
and Indian businesses alike for a
stable, certain and less litigious tax
environment to ensure that investors
in the Indian economy are well
positioned to plan their investments
and estimate tax outcomes in a
reasonable and consistent manner.
Speaking at the conference, John
Staples, Senior Policy Adviser,
Corporation Tax Strategy, at the UK’s
HM Revenue and Customs, said that
against the backdrop of the current
global economic meltdown, concerns
have been raised about establishing
a fair and transparent international
tax system to support the growth of
businesses globally, with a uniform
set of rules. “BEPS aims to provide a
more level playing field across borders.
It is an opportunity to homogenise the
tax rules internationally and minimise
disputes,” he said.
Under the BEPS Action Plan, the
OECD has set out 15 areas of work to
be undertaken, within an ambitious
time schedule, across a range of tax
issues. The G20 Finance Ministers
recently endorsed the outcomes of the
project’s first phase, covering the first
seven areas of the BEPS project, with
phase two, covering mainly transfer
pricing-related topics, scheduled to be
concluded by the end of 2015.
India May Adopt Risk-Based
Approach to Transfer Pricing Scrutiny
India’s Central Board of Direct Taxes
(CBDT) has issued Instruction No. 6 of
2014, dated 2 September 2014, on the
procedure and criteria for compulsory
manual selection of cases for scrutiny
for the financial year 2014-15.
The guidelines are broadly in line
with last year’s Instruction but they
no longer include the INR150m
(US$2.48m) threshold for mandatory
scrutiny of arrangements between
a multinational company and its
Indian subsidiary. This suggests that
Indian authorities will now adopt a
risk-based approach to scrutinising
such transactions, consistent with
the Government’s stated objective of
cutting the number of cases that go
to court.
The guidelines state, however, that
tax authorities must scrutinise “cases
involving addition in an earlier
assessment year on the issue of
transfer pricing in excess of INR10m
or more on a substantial and recurring
question of law or fact, which is
confirmed in appeal or is pending
before an appellate authority”.
Another key change is a requirement
that any information sent to warn tax
authorities that a transaction may
involve tax evasion must be specific
and verifiable before a case must be
subject to scrutiny.
Ireland
New Budget Report Considers BEPS
Project Impact on Ireland
In a report released alongside the
2015 Budget, which maps out the
potential impact of the OECD’s BEPS
project on Ireland, the Government
has said, “Ireland supports the use
of the arm’s length principle and any
move away from this principle, in
special circumstances, would need
to be carefully considered with their
impacts fully examined”.
On the area of transfer pricing, the
report states that: “The Actions which
focus on value creation (Actions 8, 9,
and 10) are likely to result in changes
internationally. It is clear that certain
structures, with little substance, are
in their winter, and as such there are
opportunities for Ireland to become a
location of choice for groups who wish
to bring their intangible assets onshore
together with the relevant substance”.
It notes: “Ireland’s Foreign Direct
Investment (FDI) policy has always
centred on substance, and as such
Ireland is well positioned to compete
in the global FDI market for any
investment relocating as a result of the
BEPS process”.
Plans to reinforce Ireland’s ‘position’
were introduced in the 2015 Budget.
The Budget included measures to
strengthen Ireland’s residency rules,
in response to concerns raised during
the BEPS work, and create a regime
similar to that of the UK’s patent
box regime, which would introduce
preferential tax rates for intellectual
property income in Ireland.
The report moves on to suggest
consideration of the adoption of
controlled foreign corporation (CFC)
rules, stating: “While Ireland does not
operate a CFC regime, we do have
rules which seek to tax profits once
remitted to Ireland. Similarly Ireland
has significant legislation relating to
interest deductions and as such any
further recommended changes would
need to be brought about in line with
other potential reforms”.
The report notes Ireland’s concerns
about potential restrictions on interest
deductions as part of BEPS Action 4,
which seeks to prevent base erosion
through the use of related-party and
third-party debt to achieve excessive
interest deductions or to finance
the production of exempt, deferred
income, or other financial payments
that are economically equivalent to
interest payments. “At present it is
not possible to determine the level
of impact of any recommendations
which may be proposed under Action
4. However...it will be important that
these rules do not unduly impact on
some industry groups,” it says.
Lastly, the report rules out any
changes to the Irish 12.5%
corporation tax rate: “The BEPS
project as a whole, or via any of its
individual actions, is not focused
on Ireland’s, or indeed any other
jurisdiction’s tax rate. The BEPS
project is built upon two pillars which
are to align profits with substance
and to address double non-taxation.
Each country’s tax rate is not open
to discussion”. It says that Ireland
does not expect any impact on its
rules from the OECD’s work on
tackling harmful tax practices under
BEPS Action 5 either, but concludes:
“While the BEPS project offers a lot of
positives, there will also be challenges
for Ireland”.
New Zealand
New Zealand to Join Global Tax
Evasion Crackdown in 2018
New Zealand will automatically
share tax-related information with tax
authorities worldwide from 2018,
Revenue Minister Todd McClay
announced on 29 October 2014.
The announcement came as 51
jurisdictions signed a Multilateral
Competent Authority Agreement on the
automatic exchange of information that
will enable ‘early adopters’ to begin
sharing data by September 2017.
McClay said: “New Zealand intends
to align its timetable with Australia’s
and begin exchanging information on
a voluntary basis from 2018, aiming
for mandatory reporting in 2019.
This will give New Zealand’s financial
industry enough time to comply with
the initiative”.
“Multinational companies that use
BEPS measures to avoid tax is a global
problem, and we are committing to
joining other OECD countries in finding
a global solution,” he added.
adopting transfer pricing rules or
special measures to provide protection
against common types of base eroding
payments, such as management fees
and head office expenses”.
“The automatic exchange of
information initiative will set a global
standard for sharing information,” he
said. “It will operate much like the
recently introduced US Foreign Account
Tax Compliance Act where financial
institutions will provide information
on account holders’ financial assets to
their local tax authority.”
The discussion draft proposes
the following:
OECD
OECD Launches BEPS Consultation
on Intra-Group Services
On 3 November 2014, the OECD
invited public comments on a discussion
draft on BEPS Action 10, regarding low
value-adding intra-group services.
The discussion draft looks at
measures to reduce the scope for
erosion of the tax base through
excessive management fees and
head office expenses. It proposes
an approach that would identify
a wide category of common intragroup services that command a very
limited profit mark-up on costs, apply
a consistent allocation key for all
recipients, and would aim to provide
greater transparency through specific
reporting requirements.
The discussion draft responds to
calls for the OECD to “develop rules
to prevent BEPS by engaging in
transactions which would not, or
would only very rarely, occur between
third parties. This will involve
A standard definition of low valueadding intra-group services
Clarifications of the meaning
of shareholder activities and
duplicative costs, specifically in the
context of low value-adding intragroup services
Guidance on appropriate
mark-ups for low value-adding
intra-group services
Guidance on appropriate cost
allocation methodologies to be
applied in the context of low valueadding intra-group services
Guidance on the satisfaction of a
simplified benefit test with regard
to low value-adding services, and
Guidance on documentation that
taxpayers should prepare and
submit in order to qualify for the
simplified approach.
The OECD is to accept responses until
14 January 2015. The draft will be
subject to a public consultation at the
OECD Conference Centre in Paris on
19-20 March 2015.
ICC Calls For Policymakers to
Pre-empt BEPS Double Tax Risks
The International Chamber of
Commerce (ICC) has said that the
OECD’s BEPS Action Plan may
unintentionally increase the complexity
of the international tax system and, if
implemented in a fractured manner,
could cause an increasing number of
cases of double taxation.
During recent meetings with officials
from the United Nations (UN),
members of the ICC Commission on
Taxation said that, while they support
the BEPS Action Plan, they are
concerned that it may inadvertently
bring about severe collateral damage
for compliant tax-paying companies
of all sizes as a result of well-meaning
measures undertaken unilaterally by
states to mitigate double non-taxation.
The ICC called for co-ordination
between Governments in
implementing the BEPS project
deliverables to avoid inconsistencies
between national tax systems.
Uncoordinated actions could
lead to increased risks of double
taxation, more unfair competition,
and increased uncertainty over
the tax consequences of crossborder transactions, the ICC said,
noting that such would impede
and distort international trade and
investment decisions.
The ICC said that increased double
taxation is unavoidable but that this
foreseeable risk can be mitigated
through a solid dispute resolution
mechanism, with mandatory
agreements to force competent
authorities to agree on how to tax
certain transactions, or – as put simply
by the ICC – how to split the ‘tax cake’.
Lastly, while the ICC said that it supports
efforts to tackle tax fraud and evasion,
it called on policymakers to clearly
distinguish illegal activities from the
use of lawful methods of tax planning
and tax management, provided that
they are aligned with commercial and
economic activities. It said: “Because
taxes can only be levied on the basis of
laws and because countries design their
own tax regimes in pursuit of differing
macro-economic policy objectives, ICC
underscores that companies are often
encouraged to use the tax planning
measures made available to them by
individual Governments and should not
be condemned for choosing the least
costly route”.
OECD To Appoint Regional
Representatives For
Developing Countries
On 12 November 2014, the OECD
released a new strategy document
aimed at deepening developing
countries’ involvement in the OECD’s
BEPS project.
The strategy is intended to support
developing countries’ contribution to
the technical work, by inviting about
ten developing countries, including
Albania, Jamaica, Kenya, Peru,
Philippines, Senegal and Tunisia,
to participate in meetings of the
Committee on Fiscal Affairs (CFA)
and its technical working groups.
Several other developing countries are
expected to confirm their participation
in the coming weeks.
As part of the OECD’s strategy,
five regional networks of tax policy
and administration officials will be
established to co-ordinate an ongoing
and more structured dialogue on
BEPS issues with a broader group
of developing countries. These will
be situated to cover Asia, Africa,
Central Europe, the Middle East, Latin
America and the Caribbean.
The OECD said these regional
networks will play an important role
in the development of ‘toolkits’ to
support the practical implementation
of the BEPS outcomes, and in
particular the priority issues for
developing countries (harmful tax
breaks and the lack of comparables
data for transfer pricing purposes).
Lastly, these networks will act as a
voice for those developing countries
that seek to engage in the negotiation
of the multilateral instrument to
amend bilateral tax treaties, under
Action 15 of the BEPS project.
The African Tax Administration Forum
and the Inter-American Centre for
Tax Administration will continue to
play a critical role in leading regional
discussions on the BEPS priority
issues for developing countries,
and their representatives will be
encouraged to participate prominently
in multilateral discussions.
According to a recent two-part report
from the G20 Development Working
Group, BEPS poses acute problems for
developing countries, most of which
have smaller tax bases than advanced
economies and rely more heavily on
corporate taxes.
OECD to Revise Transfer Pricing
Guidelines on Intangibles
The OECD’s Action 8 BEPS report
proposes a number of changes to
the OECD Transfer Pricing Guidelines
in an effort to align transfer pricing
outcomes with value creation in the
area of intangibles.
The OECD aims to ensure that profits
associated with the transfer and use of
intangibles are appropriately allocated
in accordance with — rather than
divorced from — value creation. The
OECD intends to develop rules to
prevent BEPS by moving intangibles
amongst group members. This
will requirement the development
of transfer pricing rules or special
measures for transfers of hard-to-value
intangibles, it said.
The changes proposed in its Action 8
report aim to clarify the definition of
intangibles, to achieve “a broad and
clearly delineated definition”. The
report also offers guidance for related
parties, including on transactions
involving intangibles and the transfer
pricing treatment of local market
features and corporate synergies.
However, as some transfer pricing
issues relating to intangibles are
closely related to other issues that
will be tackled as part of its broader
BEPS Action Plan in 2015, final
recommendations on some matters
will not be released until next year.
The OECD said that it is the intention
of the countries involved in the
BEPS project to complete these
sections of the revised intangibles
guidance during 2015 in conjunction
with the BEPS work on risk, recharacterisation and hard to value
intangibles. This 2015 BEPS work
will likely include revisions to portions
of Chapters I, II, VI, VIII, and IX of the
Guidelines. The OECD said that “in
completing the 2015 BEPS transfer
pricing work, issues will be addressed
in an integrated manner in order
to provide coherent and consistent
transfer pricing guidance across
issues that involve intangibles and
those that do not”.
OECD Releases Report on Transfer
Pricing Documentation, County-byCountry Reporting
As part of its base erosion and
profit shifting work, the OECD
has recommended a number of
enhancements to transfer pricing
documentation requirements to assist
tax authorities in their risk assessment
and auditing activities.
The OECD said introducing the
transfer pricing documentation
requirements proposed in its
Action 13 Deliverable report will
bring a number of benefits. It said
that, “by requiring taxpayers to
articulate convincing, consistent,
and cogent transfer pricing positions,
transfer pricing documentation
can help to ensure that a culture
of compliance is created. Wellprepared documentation will give
tax administrations some assurance
that the taxpayer has analysed the
positions it reports on tax returns, has
considered the available comparable
data, and has reached consistent
transfer pricing positions”.
“Moreover, contemporaneous
documentation requirements will help
to ensure the integrity of the taxpayers’
positions and restrain taxpayers from
developing justifications for their
positions after the fact,” it said.
To achieve these objectives, the Report
confirms its earlier recommendation of
a standardised, three-tiered approach
to transfer pricing documentation,
consisting of a master file, containing
standardised information relevant for
all multinational enterprise (MNE)
group members; a local file, referring
specifically to material transactions
of the local taxpayer; and a Countryby-Country (CbC) report, containing
certain information relating to the
global allocation of the MNE’s income
and taxes paid together with certain
indicators of the location of economic
activity within the MNE group.
Taken together, these three documents
will require taxpayers to articulate
consistent transfer pricing positions,
will provide tax administrations with
useful information to assess transfer
pricing risks, make determinations
about where audit resources can
most effectively be deployed, and,
in the event audits are called for,
provide information to commence
and target audit inquiries. “This
information should make it easier for
tax administrations to identify whether
companies have engaged in transfer
pricing and other practices that
have the effect of artificially shifting
substantial amounts of income into
tax-advantaged environments,” the
OECD said.
The Report recommends the adoption
of uniform rules on time frames for
the preparation of documentation.
Namely, the OECD suggests that:
The local file should be finalised
no later than the due date for the
filing of the tax return for the fiscal
year in question
The master file should be reviewed
and, if necessary, updated by the
tax return due date for the ultimate
parent of the MNE group, and
As it is recognised that in some
instances final statutory financial
statements and other financial
information that may be relevant
for the CbC data may not be
finalised until after the due date
for tax returns in some countries
for a given fiscal year, the date
for completion of the CbC report
should be allowed to be extended
to one year following the last day
of the fiscal year of the ultimate
parent of the MNE group.
In a concession for multinationals,
the Report states that taxpayers
should not be expected to incur
disproportionately high costs and
burdens in producing documentation.
Where a taxpayer reasonably
demonstrates that either no
comparable data exists or that the
cost of locating the comparable data
would be disproportionately high
relative to the amounts at issue, the
taxpayer should not be required to
incur costs in searching for such data.
On documentation-related penalties,
the Report says also that MNEs
should not be penalised for failing to
submit data to which the taxpayer did
not have access. However, it goes on
to acknowledge the merit of penalties
in incentivising compliance by MNEs
with their transfer pricing obligations.
Lastly, the Report calls on tax
administrations to ensure that
there is no public disclosure of
confidential or commercially sensitive
information contained in the
documentation package. It suggests
that countries should implement the
recommendations of its ‘Keeping
It Safe’ guide on the protection of
confidential information exchanged for
tax purposes.
During the next several months,
Working Party No 6 of the Committee
on Fiscal Affairs (CFA) will undertake
an analysis of potential mechanisms
for filing and disseminating the
master file and the CbC report.
The implementation aspects of
the CbC reporting template, in
particular the modalities for filing and
disseminating the information to tax
administrations, will require detailed
work later this year and in 2015, the
OECD said.
Tax Administrations Commit to
Enhance MAP Co-operation
At a meeting on 24 October 2014,
the heads of tax administrations
from 38 economies underlined their
commitment to coordinated action to
deal with tax administration aspects
that may result from the OECD’s
ongoing work on BEPS.
In their communiqué released after
the Ninth Meeting of the OECD
Forum on Tax Administration (FTA),
which brought together nearly 40
delegations, including international
and regional tax organisations,
the FTA member states noted
that greater co-operation will be
necessary to implement the results
of the BEPS project. “We are taking
a significant step forward in global
tax cooperation. We have agreed a
strategy for systematic and enhanced
cooperation between our tax
administrations, based on existing
legal instruments that will allow
us to quickly understand and deal
with global tax risks whenever and
wherever they arise”.
The meeting discussed ways to
improve the practical operation of the
Mutual Agreement Procedure (MAP)
laid down in tax treaties to address
issues of double taxation quickly
and efficiently and to meet the
needs of governments and taxpayers
alike. The FTA also announced a
multilateral strategic plan on the
MAP and invited member states
to form a MAP Forum, which will
be used to collectively improve the
effectiveness of the MAP.
“We have advanced work in this
area which will be integrated with
the result from the related 2015
BEPS Action Item,” the FTA noted,
encouraging member states to
actively participate in the relevant
activities. The FTA also announced a
new international platform called the
JITSIC1 Network to focus specifically
on cross-border tax avoidance, which
will be open to all FTA member states
on a voluntary basis.
Set up in 2002, the FTA is the
leading international body of the
OECD to promote dialogue between
tax authorities and to identify
best practices.
Poland
Poland Adopts New Thin
Capitalisation Rules
On 17 September 2014, Polish
President Bronislaw Komorowski
signed into law changes to the
Corporate Income Tax Law to
further tighten the country’s thin
capitalisation regime. The new
measures will be effective from 1
January 2015.
The new law substitutes the existing
3:1 debt-to-equity thin capitalisation
ratio for a more stringent ratio of 1:1.
New definitions have been introduced
for the terms equity, loan and interest.
Under the changes, a broader range of
loans, including those from indirectly
related parties, should now be
included in the calculation.
An alternative method for satisfying
the thin capitalisation rules based on
assets, rather than the debt-to-equity
ratio, has also been introduced.
Other changes approved on 17
September 2014, included the
introduction of CFC rules and
the expansion of transfer pricing
documentation requirements to
partnerships and joint ventures.
South Korea
South Korea’s 2015 Budget
South Korea has released its 2015
Budget, which includes plans to
maintain expansionary fiscal policies,
funded by a review of tax incentives
and measures to boost compliance.
Given the fragile economic recovery
being experienced in South Korea,
with growth projections recently
revised down to 3.7% from 4.1%, the
2015 budget proposals are said to
focus on “investment in job creation,
domestic consumption and the
creative economy, in order to achieve
sustainable growth”.
Individual income tax collections are
forecast to rise by 5.7%, but both
corporate and value added taxes are
expected to increase only marginally
due to the weak economic recovery,
by 0.1% and 0.8%, respectively. In
addition, import duty collections are
budgeted to fall by 5.1% in 2015,
caused in part by lower tariffs under
free trade treaties.
Finance Minister Choi Kyung-hwan
had confirmed recently that South
Korea would maintain its stimulus
measures, including a ‘no tax increase’
policy for the foreseeable future, in
particular for personal and corporate
income taxes.
Proposed tax measures are few and far
between. It is merely stipulated that
those tax credits and exemptions that
are found to be no longer effective will
be ‘reformed,’ except for tax breaks
to support small and medium-sized
enterprises and lower and middle
income households. The Government
also plans to increase tax transparency
and continue to work on revising and
enacting laws to combat tax noncompliance, in particular with regards
to overseas tax evasion.
UK
UK Defends Its Patent Box Regime
David Gauke, the UK’s Financial
Secretary to the Treasury, has set out
the Government’s response on BEPS
and in particular defended the nation’s
patent box regime.
The UK’s patent box regime subjects
income from patents to a lower rate
of corporate income tax of 10%,
but has been criticised, including
by the European Union. It is a key
incentive that attracts multinationals
to the UK.
Discussing tax competition and
the UK’s relative advantages,
Gauke said: “The patent box was
introduced to encourage innovation
and to bring high value science and
technology jobs and investments
to the UK. It also ensures that the
jobs that are already here will stay
here. This policy has been widely
welcomed by businesses, and the
evidence of growth is already clear.
GlaxoSmithKline has attributed to the
patent box its additional investment of
£500m (US$809m) in manufacturing
in the UK, along with the creation of
1,000 new jobs and the construction
of a new factory. They have gone
as far as to say that the patent box
has ‘transformed the way [they]
see the UK as a place to invest.’
And pharmaceutical companies
aren’t the only sector set to gain
from this. Engineering, life sciences,
manufacturing, technology and
defence are all sectors who will see
a positive effect from the patent box.
The UK economy will see a positive
effect as a result of that”.
“I reject any suggestion that the
UK’s patent box facilitates profit
shifting... To gain the advantages
of the patent box, a company must
either have developed the intellectual
property itself, or actively manage
the commercial exploitation of
the intellectual property. This is a
substantial amount of activity for a
business to undertake. If all a business
wanted to achieve was to shift their
profits in order to receive a lower tax
rate, then this simply would not be
worth the hassle. For this purpose,
a business can find other countries’
regimes offering lower rates with less
activity required.”
Regimes such as the UK’s patent box
regime were discussed as part of the
OECD’s recommendations on harmful
tax practices (under BEPS Action 5),
in which the OECD recommended the
adoption of one of three approaches
to ensure ‘substantial activity’ in a
territory to allow the income deriving
from intangibles to be subject to
special arrangements: a ‘value
creation approach,’ a ‘transfer pricing
approach,’ or a ‘nexus approach.’
Since David Gauke’s original
comments, the Nexus approach
has been selected. According to the
OECD’s report, “The purpose of the
nexus approach is to grant benefits
only to income that arises from
[intellectual property] where the actual
research and development activity
was undertaken by the taxpayer itself.
This goal is achieved by defining
‘qualifying expenditures’ in such a
way that they effectively prevent mere
capital contribution or expenditures
for substantial research and
development activity by parties other
than the taxpayer from qualifying the
subsequent income for benefits under
an [intellectual property] regime”.
United Nations
Developing Nations Share BEPS
Experiences with United Nations
The United Nations (UN) Subcommittee
on BEPS Issues for Developing
Countries has released feedback
received from developing countries on
their experience with BEPS.
With a view to giving developing
countries a greater voice in
the OECD’s BEPS project, the
Subcommittee had sought frank
responses from developing nations
on how BEPS affects them, what
prevents them from protecting their
tax bases and their views on the
issues raised in the OECD BEPS
Action Plan.
The Subcommittee received
submissions from Brazil, Chile, China,
Ghana, India, Malaysia, Mexico,
Singapore, Thailand, Tonga and
Zambia. These countries provided
answers to the following questions,
which had been fielded in a
UN questionnaire:
How does BEPS affect your country?
If you are affected by BEPS, what
are the most common practices or
structures used in your country or
region, and the responses to them?
When you consider an MNE’s
activity in your country, how do
you judge whether the MNE has
reported an appropriate amount of
profit in your jurisdiction?
What are the main obstacles in
assessing whether the appropriate
amount of profit is reported in your
jurisdiction and in ensuring that tax
is paid on such profit?
Countries also expressed views on a
number of actions in the BEPS Action
Plan that impact the source country
as opposed to tax in the country of
residence, which were seen as being
of particular interest for developing
countries. These included preventing
treaty abuse; issues concerning
the taxation of intangibles; limiting
base erosion through the use of
interest deductions; the disclosure of
aggressive tax planning arrangements
and transfer pricing documentation.
The countries were asked:
Do you agree that these are
particularly important priorities for
developing countries?
Which of the OECD’s Action Points
do you see as being most important
for your country, and do you see
that priority changing over time?
Are there other Action Points in
the Action Plan that you would
include as being most important
for developing countries?
The responses, now available online,
will be used to inform the work of the
UN to represent developing countries
in ongoing work in relation to the
BEPS Action Plan.
US
US Expands FATCA Administrative
Relief Provisions
The Internal Revenue Service (IRS)
and the US Treasury, in Notice
2014-59, announced their intention
to amend certain provisions of the
temporary regulations concerning the
Foreign Account Tax Compliance Act
(FATCA) to expand administrative relief
provisions set out in Notice 2014-33.
Enacted by the US Congress in 2010,
FATCA is intended to ensure that
US authorities obtain information on
accounts provided by foreign financial
institutions (FFIs) to US persons.
Failure by an FFI to disclose information
about their US clients will result in a
requirement to withhold 30% tax on
payments of US-sourced income.
Notice 2014-33, allowed a
withholding agent or FFI under
FATCA to treat an obligation held
by an entity that is issued, opened
or executed on or after 1 July 2014
and before 1 January 2015, as a
preexisting obligation, on certain
conditions, for the purposes of the due
diligence, withholding and reporting
requirements under Chapter 4. While
reinforcing the effective date for
FATCA of 1 July 2014, the Notice was
intended to provide some transitional
relief for affected financial institutions.
As a result, a withholding agent was
allowed additional time to document
an entity that is a payee or account
holder with respect to the obligation to
determine whether the entity is a payee
subject to withholding under Chapter
4 — until 31 December 2014, if the
payee is a prima facie FFI, or by 30
June 2016, in all other cases.
A withholding agent would otherwise
be required to document the entity by
the earlier of the date a withholdable
payment is made or within 90 days
of the date the obligation is issued,
opened or executed.
The newly issued Notice 2014-59
applies to withholding agents, FFIs
and payors with respect to accounts
and obligations they open or enter into
before 1 January 2015, and provides
relief generally consistent with the
aforementioned Notice 2014-33.
Notice 2014-59 extends the
aforementioned relief by modifying
applicability dates with regards to:
The standards of knowledge
applicable to a withholding
certificate or documentary
evidence to document a payee that
is an entity, and
The rules under subsection
1.6049-5(c) providing the
circumstances under which a
withholding agent or payor may
rely on documentary evidence
provided by a payee instead of a
withholding certificate to document
the foreign status of the payee for
purposes of chapters 3 and 61.
Until the Treasury and the IRS issue
these amendments, taxpayers may
rely on this Notice regarding the
modified applicability dates.
US Treasury’s Inversion Work
to Take a While
While, earlier in August, United
States President Barack Obama
had confirmed his intention to act
quickly to reduce tax benefits for
corporate inversions by utilising his
administrative regulatory powers,
it now appears that the Treasury
Department’s studies on the various
options available to him will take
some time.
It has been reported that a quick
proposal is unlikely given the range
of possible administrative measures
that could be available. While
officials are working on providing
details to Treasury Secretary Jack
Lew of the available presidential
options as soon as possible, the
full range of administrative actions
is, apparently, so complex that a
decision is unlikely soon.
As Democrats in Congress continue to
seek a short-term bipartisan legislative
solution, it had been expected that
President Obama would look to take
whatever anti-inversion measures
he could. If the President is delayed
in taking action, it has been pointed
out that he may well not want to do
anything that might prejudice future
measures to be agreed in Congress,
especially if legislation is then near to
being agreed.
For example, congressional Democrats
are already pushing for the inclusion,
within future legislation, of an
‘earnings stripping’ provision, which
would seek to restrict the ability of an
inverted company that has moved its
tax residence abroad to use intergroup loans to allocate debt to the
US subsidiary, and use the increased
interest payable to further reduce its
tax liability in the US.
It has, however, also been noted that,
by way of Section 385 of the Internal
Revenue Code, current US law should
already provide Treasury with the
legal authority to write more stringent
rules governing the deduction of
interest expense.
Other measures that have been
proposed, such as increasing the
minimum foreign shareholding cap
to require that at least 50% of a US
company’s shares are held by the
foreign company’s shareholders after
a merger, up from 20% currently, are
outside of the President’s purview, and
would need legislation.
In fact, all political parties have
also recognised that comprehensive
tax reform legislation, to lower the
corporate tax rate and to introduce
a more internationally competitive
tax code, is the long-term solution
to corporate inversions. It is also
the Republican Party’s preference,
as they believe that the shortterm fixes proposed so far would
be ‘punitive’ and could have
unintended consequences.
The President will also be aware
that his use of further unilateral
administrative action could incur
the wrath of Republican lawmakers.
Earlier this month, House of
Representatives Speaker John
Boehner (Republican from Ohio) wrote
that “such a move sounds politically
appealing, but anything truly effective
would exceed his executive authority.
The President cannot simply re-write
the tax code himself”.
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