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Starbucks’ Transfer Pricing & The EU Commission Decision

Posted by William Byrnes on December 7, 2015


Starbucks Manufacturing BV (SMBV), based in the Netherlands, is the only coffee roasting company in the Starbucks group in Europe. It sells and distributes roasted coffee and coffee-related products (e.g. cups, packaged food, pastries) to Starbucks outlets in Europe, the Middle East and Africa.

The EU Commission’s decision challenges the outcome of the Advanced Pricing Agreement (APA) between the Netherlands Tax Authority (Tax Authority) and SMBV. The Tax Authority respondedEU Commission that within the Dutch tax system profit is taxed where value is created. The Tax Authority concluded an Advance Pricing Agreement (APA) with SMBV which includes an arm’s length business remuneration for the roasting of coffee beans.  The Tax Authority collects taxes on profit made by SMBV for roasting coffee beans. Because the intellectual property rights of Starbucks are not located in The Netherlands, the royalties for the use of these cannot be taxed in The Netherlands.

The Tax Authority, acting in accordance with the international OECD framework for transfer pricing, agreed with Starbucks that it may apply the Transactional Net Margin Method (TNMM) to determine an arm’s length result to attach to its Netherlands based activities. The TNMM requires that members of multinational enterprises be treated as independently operating national enterprises: profits are taxed wherever value is created, attaching to the specific enterprise of the activity creating the value.

In its decision, the Commission establishes a unique interpretation the OECD guidelines concerning the choice and application of the globally accepted transfer pricing methods.  Based upon its interpretation, the Commission’s alleges that Starbucks should have applied the Comparable Uncontrolled Price (CUP) method to each activity of each enterprise instead of the TNMM. However, the Netherlands Tax Authority does not agree that the CUP method should have been applied in the Starbucks case in this fashion because of the absence of suitably similar, comparable data to the situation of Starbucks’ operations and value creating activities and assets. Starbucks graph

After its misapplication of CUP to Starbucks’ operations, the Commission then creates a new criterion for profit calculation.  While the methodologies and underlying criteria of application are not a closed universe for determining an arm’s length price, the Commission’s new criterion is incompatible with domestic regulations and the OECD framework. The Tax Authority will contend that the Commission does not adequately understand the nature and context of the value add of Starbucks’ myriad of activities.

The Commission states in its Starbucks decision that the arm’s length principle it has applied is not the same as the arm’s length principle stemming from Section 9 of the OECD treaty. The Commission’s application of a variant will cause confusion and uncertainty among tax authority of member states, among trade partners’ tax authorities, and the underlying enterprises subject to their audit authority.  For a tax authority, such uncertainty relates to the question of what rules are to be applied and in which fashion. And for enterprises, such uncertainly relates to the proper application of rules in rulings. So as to obtain more clarity and jurisprudence in this matter, the Dutch Cabinet has appealed the Commission’s Starbucks decision.

The Commission alleges that the methodological choices in the transfer pricing report provided by the tax adviser for Starbucks to the Netherlands Tax Authority, and agreed to in the APA between Starbucks and the Tax Authority, are not a reliable approach to a market result and thereby do not fulfil the arm’s length principle. The Commission alleges that the transactional net margin method (TNMM) is not the most appropriate method to forecast a taxable profit because the OECD guidelines and the Transfer Pricing Decree show a preference for the Comparable Uncontrolled Price Method (CUP).  The Commission determined that if the CUP had been applied to Starbucks’ coffee roasting of SMBV, the taxable profit would be substantially higher.

Most Appropriate Method?

The OECD adopted in 2010 a “most appropriate method” concept, similar to the U.S. “best method rule”. The most appropriate method concept replaced the previous OECD rule that transactional profit methods, profit split and TNMM were only to be leveraged as methods of last resort (with TNMM being in last spot). Regarding the “most appropriate method” the 2010 Guidelines states:

[T]he selection process should take account of the respective strengths and weaknesses of the OECD recognised methods; the appropriateness of the method considered in view of the nature of the controlled transaction, determined in particular through a functional analysis; the availability of reliable information (in particular on uncontrolled comparables) needed to apply the selected method and/or other methods; and the degree of comparability between controlled and uncontrolled transactions, including the reliability of comparability adjustments that may be needed to eliminate material differences between them. No one method is suitable in every possible situation, nor is it necessary to prove that a particular method is not suitable under the circumstances.

However, in spite of the foregoing, the 2010 Guidelines indicate a preference for traditional methods in applying the most appropriate method rule:

[W]here, taking account of the criteria described at paragraph 2.2, a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, the traditional transaction method is preferable to the transactional profit method.

Comparability Analysis?

The 2010 OECD Guidelines for comparability analysis contains nine, non-linear, steps.

Step 1: Determination of years to be covered.

Step 2: Broad-based analysis of the taxpayer’s circumstances.

Step 3: Understanding the controlled transaction(s) under examination, based in particular on a functional analysis, in order to choose the tested party (where needed), the most appropriate transfer pricing method to the circumstances of the case, the financial indicator that will be tested (in the case of a transactional profit method), and to identify the significant comparability factors that should be taken into account.

Step 4: Review of existing internal comparables, if any.

Step 5: Determination of available sources of information on external comparables where such external comparables are needed taking into account their relative reliability.

Step 6: Selection of the most appropriate transfer pricing method and, depending on the method, determination of the relevant financial indicator (e.g. determination of the relevant net profit indicator in case of a transactional net margin method).

Step 7: Identification of potential comparables: determining the key characteristics to be met by any uncontrolled transaction in order to be regarded as potentially comparable, based on the relevant factors identified in Step 3 and in accordance with the comparability factors ….

Step 8: Determination of and making comparability adjustments where appropriate.

Step 9: Interpretation and use of data collected, determination of the arm’s length remuneration.

What Is the Value of Starbucks Roasting “Know How”?

The Commission alleges that the payment of royalties by SMBV to the Starbucks UK subsidiary (Alki) owning the “know-how” intellectual property rights does not provide a correct representation of the value of the intellectual property rights and therefore cannot be deemed to be arm’s length. This incorrect representation led Starbucks to exaggerate the value attaching to its coffee bean roasting “know-how”, in turn leading to an excessive royalty payment.

The royalty payment is based upon an “adjustment variable”, the level of which is determined by the accounting profits of SMBV subtracting the compensation agreed in the APA in the form of a fixed mark-up on the operational costs of SMBV.  The APA does contain a fixed method of being able to assess the arm’s length nature of the level of the royalties.

The Commission alleges that, on the basis of its application of an arm’s length transaction price via a CUP test, SMBV would not have been willing to pay any royalty for know-how.  The Commission’s allegation is based upon a comparison of Starbuck’s agreements for roasting coffee with other coffee roasters worldwide. Thus, Alki should not have been paid any royalties. Moreover, the Commission contends that the royalties, paid over for many years, cannot be arm’s length because SMBV does not appear to gain any business advantage from the use of the intellectual property in the area of roasting coffee.  An independent company, argues the Commission, will not pay for a license if it is unable to earn back the royalties paid.

Additionally, the Commission contends that payment for royalties does not represent a payment for Alki taking upon itself the risks of SMBV. The Commission dismissed the Tax Authority argument that Alki bore the economic risk of SMBV’s loss of stock (wastage).  The Commission points to Alki’s lack of  employees as justification that Alki’s capacity is too limited to actually bear such risk.  Finally, the Commission dismissed Alki’s payment for technology to Starbucks US as a justification of its royalty payment from SMBV.

What Is the Value of Starbucks Sourcing of Green Beans?

The Commission alleges that SMBV overpays Starbucks coffee sourcing operation in Switzerland (SCTC) for acquisition of ‘green beans’, which are then roasted by SMBV and distributed to Starbucks’ various national operations.  The purchase price of green beans paid by SMBV to SCTC is abnormally high and therefore does not comply with the arm’s-length principle.

The Commission alleges that Starbucks did not investigate an arm’s length relationship for which the transactions between SCTC and SMBV, being the purchase and delivery of green coffee beans.  Secondly, the Commission did not accept Starbucks’ underlying grounds for the justification of the significant increase from 2011 of the mark-up in the costs for the green beans supplied by SCTC.  Starbucks’ contends that SCTC’s activities became increasingly important from 2011 partly due to the evolving “C.A.F.E. Practices” program (e.g. ‘fair-trade’).  Comparing the costs of similar fair-trade programs, the figures provided by Starbucks in connection with its C.A.F.E. Practices program, argues the Commission, are problematic both in terms of consistency as well as the arm’s length nature. The Commission contends that the Tax Authorities should have rejected the additional deduction from the accounting profits. Moreover, the increased mark-up can be connected directly to the losses incurred by SMBV’s coffee roasting activities since 2010, which highlights the non arm’s length relationship of this mark-up.

Least complex function

The Commission posits a secondary argument that Starbucks misapplied the TNMM to its supply chain.  Firstly, the Commission alleges that Starbucks incorrectly categorized SMBV as the “least complex function” of the Starbucks’ value added supply chain, basically as a contract manufacturer, in comparison with Starbucks’ UK subsidiary that owns the manufacturing and processing “know how”.  This misapplication of the TNMM led Starbucks to incorrectly led Starbucks to select SMBV as the subsidiary to be the “tested party”.  Secondly, the Commission posits that when SMBV is compared to other market participants in the coffee trade sector, SMBV incorrectly applied two upward adjustments to its cost base.  Consequently, Starbucks inappropriately limited its Netherlands taxable basis.

Determining the least complex function takes place prior to the application of the TNMM as transfer price method. In order to determine the entity with the least complex function, a function comparison must be made. The outcome of the function comparison indicates an entity, to which the transfer price method can be applied in the most reliable manner and for which the most reliable comparison points can be found.

In its coffee roasting function, the Commission contends that SMBV does not only carry out routine activities. SMBV conducts market research reflected by its payments for market research.  Also, SMBV holds significant intellectual property reflected by the amortisation of intangible assets in its accounts.  Moreover, SMBV performs an important resale function. A routine producer is not involved in such activities. On the other hand, Alki activities are very limited. Alki does not have employees and it thus operates with limited capacity.  The Commission contends that the financial capacity of Alki is not the total financial capacity of the worldwide Starbucks Group.

StarbStarbucks_Coffee_Logo.svgucks Reaction?

Starbucks released a statement: “The dispute between the European Commission and the Netherlands as to which OECD rules we and others should follow will require us to pay about €20m to €30m on top of the $3 billion in global taxes we have already paid over the seven years in question (2008-2014).  Starbucks complies with all OECD rules, guidelines and laws and supports its tax reform process. Starbucks has paid an average global effective tax rate of roughly 33 percent, well above the 18.5 percent average rate paid by other large US companies.

Netherlands Government Reaction?

In October the European Commission has decided that the Netherlands provided State aid to Starbucks Manufacturing. The Commission decision is placed in the context of the fight against tax avoidance by multinationals.  The Dutch government greatly values its practice of offering certainty in advance. The Dutch practice is lawful and compliant with the international system of the OECD. However the European Commission’s verdict in the Starbucks case deviates from national law and the OECD’s system. In the end this will cause a lot of uncertainty about how to enforce regulations.

In order to get certainty and case law on the application of certainty in advance by way of rulings, the government appeals the Commission decision in the Starbucks case. The government is of the opinion that the Commission does not convincingly demonstrate that the Tax Authority deviated from the statutory provisions. It follows that there is no State aid involved.

AmCham Reaction?

OECD rules for setting internal transfer prices constitute an international standard whereby double taxation is prevented. These rules require that each transaction is assessed on the basis of the most appropriate transfer pricing method. The TNMM method can be used to establish an at arm’s length remuneration for production activities, such as those of the Dutch coffee roaster Starbucks Manufacturing BV, and is widely used internationally.

“This decision is a staggering,” says Arjan van der Linde, Chairman of AmCham’s Tax Committee and fiscal spokesman for AmCham. “By disregarding OECD rules, the European Commission is creating considerable uncertainty about the tax implications for foreign investment in the Netherlands. This has a direct effect on new investments and future employment. Uncertainty about such a fundamental component of an investment is unacceptable for many companies,” predicts Van der Linde.

He also highlights the expertise of the Dutch tax authorities, “The Dutch tax authorities have years of experience with the application of OECD rules and work thorough and carefully in considering transfer pricing requests.  A separate APA practice exists.  In addition, the Dutch tax authorities are consistent in their approach, with all sorts of coordination groups looking over the shoulder of the inspector. This thorough approach cannot simply be cast aside.”

 

Professor William Byrnes’ Reaction?

Starbucks represents the first salvo by the EU Commission to establish that it has the authority, under a State Aid premise, to step into the shoes of the national revenue authority and re-allocate profits of an enterprise according to the EU Commission’s interpretation and analysis of the arm’s length concept.  American attorneys will appreciate that this is a Marbury v Madison moment of Adam’s Federalists v. Jefferson’s Anti-Federalist.

The EU Commission’s finding of a range of two – three Euro million annual difference from its own assessment of the scenario versus the assessment of the Dutch revenue authority likely reflects its trepidation to venture into the area of interposing its own judgement call for that of a sovereign national revenue authority’s arm’s length determination, especially one memorialized in an advance pricing agreement (APA) with a taxpayer.  The trepidation probably results from several causes, including weaknesses of the EU Commission’s choice and implementation of an arm’s length methodology, justification thereof, and even more so, from the geopolitical ramifications of its decision.

The trepidation is exemplified by the very low adjustments the EU Commission found, after its nearly year of investigation.  The adjustments are enough to be noticed by the EU state authorities and the companies, but de minimis in the context of corporate annual profits, corporate profit accumulation over time (e.g. perpetual deferral), corporate tax reserves, and de minimis in the context of revenue collection for either The Netherlands or Luxembourg.

Starbucks’ potential 30 million Euro re-capture tax bill by The Netherlands (EU Commission required), dating back to accumulation from 2008, will, assuming the tax bill stands after Starbucks’ appeal and after Starbucks’ challenge the decision up through the EU Court Of Justice, be offset by a US tax credit of like amount.  Consequently, the low adjustment is a wash out, albeit could require a cash flow payment in the nearer future than the perpetual one under U.S. tax deferral accounting.  30 million Euro is too small to be noticeable to Starbucks shareholders or to the U.S. Treasury, especially when the tax credits are applied.  Viewed from an annual perspective though, the two to three million Euro per annum over 10-years finding against Starbucks annual three billion dollars paid in global taxes from a global effective tax rate of 33%, it is not even a rounding error.

Had the EU Commission found, as it alluded that it is able to, that the State Aid amounted to the hundreds of millions or even billions of Euro, the intensity of the EU Commission-National government conflict would have changed, and the EU Commission would have lost that battle with the stakes so high.  Fiat would have drawn Italy into the fray, to align with Netherlands, Ireland and Luxembourg.  As more advance pricing agreements are challenged, more national government would align against the EU Commission.  At some tipping point, the EU Commission would have to withdraw from the fight or face a bloodied nose.

Yet, more so a danger for the EU Commission, had the EU Commission’s decision been an exaggerated amount, then the U.S. Treasury would have been forced to act as if a trade war had broken out. Treasury beating up on Starbucks for transfer pricing out of the U.S. tax base is OK because Starbucks in a U.S. company, as far as the U.S. Treasury is concerned.  Starbucks represents potential U.S. deficit reduction tax dollars.

Had the EU Commission decided for a large amount well beyond any tax credit relief, thus which would have represented a significant subsidy from the U.S. to EU national budgets and/or a significant subsidy from US retirement system shareholders to EU budgets, one might imagine the joint-Republican Democratic Senate hearing called by Washington state’s two Democratic senators Patty Murray and Maria Cantwell. That hearing would conclude a joint statement to Treasury demanding it report back how it intends to implement a tit-for-tat strategy against EU companies to extract an equal amount to that the EU Commission pulled from the bowels of Starbucks reserves.

Throw in enough U.S. multinationals with HQs in the various states such as New York, Illinois, California and Texas,  Congress may actually in rare bipartisan stature pass tit-for-tat legislation by year end requiring Treasury to act.  Perhaps a $5 billion Section 482 adjustment against each of the top 50 European companies measured by revenues.  The EU would respond, and the U.S. retort, to and fro, until the weight of taxation slowed cross border investment to a trickle.

But the EU Commission instead chose to bark very loudly and withhold its bite.  Probably it has avoided the worst case scenarios of political warfare presented above.  With such a small award, the various stakeholders will let the appeals and ECJ process run its course before acting.  The US Congress and US Treasury may not understand the Marbury v Madison moment of the EU Commission’s decision – that the “perpetual deferral” reserves of U.S. MNEs such as Starbucks, Apple, Microsoft, Google, Amazon etc, may be put “up for grabs” by European revenue authorities to fill their bloated social spending expenditure gaps (instead of flowing into U.S. investment needs or back to U.S. institutional shareholders representing our collective national retirement savings).  [But Treasury has now released the below response to the EU Commission decision].

US Treasury Response

Treasury has followed the state aid cases closely for a number of reasons. First, we are concerned that the EU Commission appears to be disproportionately targeting U.S. companies.

Second, these actions potentially undermine our rights under our tax treaties. The United States has a network of income tax treaties with the member states and has no income tax treaty with the EU because income tax is a matter of member state competence under EU law.  While these cases are being billed as cases of illegal state subsidies under EU law (state aid), we are concerned that the EU Commission is in effect telling member states how they should have applied their own tax laws over a ten-year period.  Plainly, the assertion of such broad power with respect to an income tax matter calls into question the finality of U.S. taxpayers’ dealings with member states, as well as the U.S. Government’s treaties with member states in the area of income taxation.

Third, the EU Commission is taking a novel approach to the state aid issue; yet, they have chosen to apply this new approach retroactively rather than only prospectively. While in the Starbucks case, the sums were relatively modest (20 to 30 million Euros), they maybe substantially larger – perhaps in the billions – in other cases. The retroactive application of a novel interpretation of EU law calls into question the basic fairness of the proceedings. Fourth, while the IRS and Treasury have not yet analyzed the equally novel foreign tax credit issues raised by these cases, it is possible that the settlement payments ultimately could be determined to give rise to creditable foreign taxes. If so, U.S. taxpayers would wind up footing the bill for these state aid settlements when the affected U.S. taxpayers either repatriate amounts voluntarily or Congress requires a deemed repatriation as part of tax reform (and less U.S. taxes are paid on the repatriated amounts as a result of the higher creditable foreign income taxes).

Finally, and this relates to the EU’s apparent substantive position in these cases, we are greatly concerned that the EU Commission is reaching out to tax income that no member state had the right to tax under internationally accepted standards. Rather, from all appearances they are seeking to tax the income of U.S. multinational enterprises that, under current U.S. tax rules, is deferred until such time as the amounts are repatriated to the United States. The mere fact that the U.S. system has left these amounts untaxed until repatriated does not provide under international tax standards a right for another jurisdiction to tax those amounts. We will continue to monitor these cases closely.

Book CoverProfessor William Byrnes is the primary author of Practical Guide to U.S. Transfer Pricing that is used extensively by multinationals to cope with the U.S. transfer pricing rules and procedures, taking into account the international norms established by the Organization for Economic Co-operation and Development (OECD).

Download Summary-of-the-decision-from-the-european-commission-concerning-the-starbucks-tax-ruling

Download Cabinet-response-to-the-european-commission-decision-on-starbucks-manufacturing-bv

EU State Aid – Starbucks Webpage

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Starbucks and Fiat – EU Commission finds Transfer Pricing State Aid, Rules Must Pay Back Since 2008

Posted by William Byrnes on October 22, 2015


Both these cases (replicated below) represent the first salvo by the EU Commission to establish that it has the authority, under a State Aid premise, to step into the shoes of the national revenue authority and re-allocate profits of an enterprise according to the EU Commission’s interpretation and analysis of the arm’s length concept.  

But importantly, these cases also, I think, exhibit the trepidation  of the EU Commission because of several weaknesses in its arguments, and even more so, in the geopolitical ramifications.   The trepidation is illustrated by the very low adjustments the EU Commission made – enough to be noticed but de minimis in the context of corporate annual profits, corporate profit accumulation over time (e.g. perpetual deferral), and corporate tax reserves.  

Starbucks potential EU alleged 30 million Euro re-capture tax bill, dating back to accumulation from 2008, will  – if Starbucks did not challenge the decision up through the EU Court Of Justice which is highly unlikely – be offset by a tax credit of like amount and thus a wash out.  To small to be noticeable to Starbucks shareholders or to the US Treasury.

Had the EU Commission found, as it alluded that it is able to, that the State Aid amounted to the hundreds of millions or even a couple billion, the intensity of the EU Commission-National government conflict would have changed, and the EU Commission would have lost that battle with the stakes so high.  

More so a danger, the US Treasury would have been forced to act as if a trade war had broken out. Treasury beating up on Starbucks for transfer pricing out of the US tax base is OK because Starbucks in a US company, as far as the US Treasury is concerned.  Starbucks represents potential US deficit reduction tax dollars.  

Had the EU Commission decided for a large amount, which would have represented a significant subsidy from the US to EU national budgets and/or a significant subsidy from US retirement system shareholders to EU budgets, one might imagine the joint-Republican Democratic Senate hearing called by Washington state’s two Democratic senators Patty Murray and Maria Cantwell. That hearing would conclude a joint statement to Treasury demanding it report back how it intends to implement a tit-for-tat strategy against EU companies to extract an equally amount pulled from the bowels of Starbucks reserves.   Throw in enough US multinationals with HQs in the various states such as New York, Illinois, California and Texas,  Congress may actually in rare bipartisan stature pass tit-for-tat legislation by year end. 

But the EU Commission instead chose to bark loudly but withhold its bite.  Probably it has avoided the worst case scenarios of political warfare presented above.  With such a small award, the various stakeholders will let the inevitable ECJ process run its course.  Or maybe, the US Congress and US Treasury will understand that true ramifications of today’s EU Commission decisions, and even for one US dollar at stake, will go to the mat on behalf of Starbucks, Apple, Microsoft, Google, Amazon etc 

___________

Today the European Commission decided that Luxembourg and the Netherlands have grantedEU Commissionselective tax advantages to Fiat Finance and Trade and Starbucks, respectively. These are illegal under EU state aid rules.

Commissioner Margrethe Vestager, in charge of competition policy, stated: “Tax rulings that artificially reduce a company’s tax burden are not in line with EU state aid rules. They are illegal. I hope that, with today’s decisions, this message will be heard by Member State governments and companies alike. All companies, big or small, multinational or not, should pay their fair share of tax.”

Following in-depth investigations, which were launched in June 2014, the Commission has concluded that Luxembourg has granted selective tax advantages to Fiat’s financing company and the Netherlands to Starbucks’ coffee roasting company. In each case, a tax ruling issued by the respective national tax authority artificially lowered the tax paid by the company.

Tax rulings as such are perfectly legal. They are comfort letters issued by tax authorities to give a company clarity on how its corporate tax will be calculated or on the use of special tax provisions. However, the two tax rulings under investigation endorsed artificial and complex methods to establish taxable profits for the companies. They do not reflect economic reality. This is done, in particular, by setting prices for goods and services sold between companies of the Fiat and Starbucks groups (so-called “transfer prices”) that do not correspond to market conditions. As a result, most of the profits of Starbucks’ coffee roasting company are shifted abroad, where they are also not taxed, and Fiat’s financing company only paid taxes on underestimated profits.

This is illegal under EU state aid rules: Tax rulings cannot use methodologies, no matter how complex, to establish transfer prices with no economic justification and which unduly shift profits to reduce the taxes paid by the company. It would give that company an unfair competitive advantage over other companies (typically SMEs) that are taxed on their actual profits because they pay market prices for the goods and services they use.

Therefore, the Commission has ordered Luxembourg and the Netherlands to recover the unpaid tax from Fiat and Starbucks, respectively, in order to remove the unfair competitive advantage they have enjoyed and to restore equal treatment with other companies in similar situations. The amounts to recover are €20 – €30 million for each company. It also means that the companies can no longer continue to benefit from the advantageous tax treatment granted by these tax rulings.

Furthermore, the Commission continues to pursue its inquiry into tax rulings practices in all EU Member States. It cannot prejudge the opening of additional formal investigations into tax rulings if it has indications that EU state aid rules are not being complied with. Its existing formal investigations into tax rulings in Belgium, Ireland and Luxembourg are ongoing. Each of the cases is assessed on its merits and today’s decisions do not prejudge the outcome of the Commission’s ongoing probes.

Fiat

Fiat Finance and Trade, based in Luxembourg, provides financial services, such as intra-group loans, to other Fiat group car companies. It engages in many different transactions with Fiat group companies in Europe.

The Commission’s investigation showed that a tax ruling issued by the Luxembourg authorities in 2012 gave a selective advantage to Fiat Finance and Trade, which has unduly reduced its tax burden since 2012 by €20 – €30 million.

Given that Fiat Finance and Trade’s activities are comparable to those of a bank, the taxable profits for Fiat Finance and Trade can be determined in a similar way as for a bank, as a calculation of return on capital deployed by the company for its financing activities. However, the tax ruling endorses an artificial and extremely complex methodology that is not appropriate for the calculation of taxable profits reflecting market conditions. In particular, it artificially lowers taxes paid by Fiat Finance and Trade in two ways:

  • Due to a number of economically unjustifiable assumptions and down-ward adjustments, the capital base approximated by the tax ruling is much lower thanthe company’s actual capital.
  • The estimated remuneration applied to this already much lower capital for tax purposes is also much lower compared to market rates.

As a result, Fiat Finance and Trade has only paid taxes on a small portion of its actual accounting capital at a very low remuneration. As a matter of principle, if the taxable profits are calculated based on capital, the level of capitalisation in the company has to be adequate compared to financial industry standards. Additionally, the remuneration applied has to correspond to market conditions. The Commission’s assessment showed that in the case of Fiat Finance and Trade, if the estimations of capital and remuneration applied had corresponded to market conditions, the taxable profits declared in Luxembourg would have been 20 times higher.

Fiat graph

Starbucks

Starbucks Manufacturing EMEA BV (“Starbucks Manufacturing”), based in the Netherlands, is the only coffee roasting company in the Starbucks group in Europe. It sells and distributes roasted coffee and coffee-related products (e.g. cups, packaged food, pastries) to Starbucks outlets in Europe, the Middle East and Africa.

The Commission’s investigation showed that a tax ruling issued by the Dutch authorities in 2008 gave a selective advantage to Starbucks Manufacturing, which has unduly reduced Starbucks Manufacturing’s tax burden since 2008 by €20 – €30 million. In particular, the ruling artificially lowered taxes paid by Starbucks Manufacturing in two ways:

  • Starbucks Manufacturing pays a very substantial royalty to Alki (a UK-based company in the Starbucks group) for coffee-roasting know-how.
  • It also pays an inflated price for green coffee beans to Switzerland-based Starbucks Coffee Trading SARL.

The Commission’s investigation established that the royalty paid by Starbucks Manufacturing to Alki cannot be justified as it does not adequately reflect market value. In fact, only Starbucks Manufacturing is required to pay for using this know-how – no other Starbucks group company nor independent roasters to which roasting is outsourced are required to pay a royalty for using the same know-how in essentially the same situation. In the case of Starbucks Manufacturing, however, the existence and level of the royalty means that a large part of its taxable profits are unduly shifted to Alki, which is neither liable to pay corporate tax in the UK, nor in the Netherlands.

Furthermore, the investigation revealed that Starbucks Manufacturing’s tax base is also unduly reduced by the highly inflated price it pays for green coffee beans to a Swiss company, Starbucks Coffee Trading SARL. In fact, the margin on the beans has more than tripled since 2011. Due to this high key cost factor in coffee roasting, Starbucks Manufacturing’s coffee roasting activities alone would not actually generate sufficient profits to pay the royalty for coffee-roasting know-how to Alki. The royalty therefore mainly shifts to Alki profits generated from sales of other products sold to the Starbucks outlets, such as tea, pastries and cups, which represent most of the turnover of Starbucks Manufacturing.

Starbucks graph

Recovery

As a matter of principle, EU state aid rules require that incompatible state aid is recovered in order to reduce the distortion of competition created by the aid. In its two decisions the Commission has set out the methodology to calculate the value of the undue competitive advantage enjoyed by Fiat and Starbucks, i.e. the difference between what the company paid and what it would have paid without the tax ruling. This amount is €20 – €30 million for each of Fiat and Starbucks but the precise amounts of tax to be recovered must now be determined by the Luxembourg and Dutch tax authorities on the basis of the methodology established in the Commission decisions.

New investigative tools

In the two investigations the Commission has for the first time used information request tools under a Council decision by Member States of July 2013 (Regulation 734/2013). Using these powers the Commission can, if the information provided by the Member State subject to the state aid investigation is not sufficient, ask that any other Member State as well as companies (including the company benefitting from the aid measure or its competitors) provide directly to the Commission all market information necessary to enable it to complete its state aid assessment. These new tools form part of the State Aid Modernisation initiative launched by the Commission in 2012 to allow it to concentrate its enforcement efforts on aid that is most liable to distort competition.

Further background

Since June 2013, the Commission has been investigating the tax ruling practices of Member States. It extended this information inquiry to all Member States in December 2014. The Commission also has three ongoing in-depth investigations where it raised concerns that tax rulings may give rise to state aid issues, concerning Apple in IrelandAmazon in Luxembourg, and a Belgian tax scheme.

The fight against tax evasion and tax fraud is one of the top priorities of this Commission. In June 2015, the Commission unveiled a series of initiatives to tackle tax avoidance, secure sustainable tax revenues and strengthen the Single Market for businesses. The proposed measures, part of theCommission’s Action Plan for fair and effective taxation, aim to significantly improve the corporate tax environment in the EU, making it fairer, more efficient and more growth-friendly. Key actions included a framework to ensure effective taxation where profits are generated and a strategy to re-launch the Common Consolidated Corporate Tax Base (CCCTB) for which a fresh proposal is expected in the course of 2016. The Tax Transparency Package presented by the Commission in March also had its first success in October 2015 when Member States reached a political agreement on an automatic exchange of information on tax rulings following only seven months of negotiations. This legislation will contribute to bringing about a much greater degree of transparency and will act as a deterrent from using tax rulings as an instrument for tax abuse – good news for businesses and for consumers who will continue to benefit from this very useful tax practice but under very strict scrutiny in order to ensure a framework for fair tax competition.

The non-confidential version of the decisions will be made available under the case numbers SA.38375 (Fiat) and SA.38374 (Starbucks) in the State aid register on the DG Competition website once any confidentiality issues have been resolved. The State Aid Weekly e-News lists new publications of State aid decisions on the internet and in the EU Official Journal.

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New Lexis Advance® Tax Platform Now Available to Law School Faculty & Students; Cutting-Edge International Tax Titles

Posted by William Byrnes on October 22, 2015


On June 1, LexisNexis launched its new online tax research platform called Lexis Advance® Tax.

Already available to America’s law school faculty and students, it includes a rich, comprehensive package of nearly 1,400 sources, including tax news, primary law, journals and nearly 300 treatises, practice guides and forms products for both tax and estates lawyers.

Along with news, another strong area for L.A. Tax is its subpage devoted to International Tax. There, users will find a selection01701_11_1_cover of titles examining hot, cutting-edge issues like: Lexis Guide to FATCA Compliance, the Lexis global guide to anti-money laundering laws around the world, and the recently-revised Foreign Tax & Trade Briefs, 2nd Ed, which provides summaries of each country’s tax system and laws.

All of these titles are produced by a team of tax experts led by Professor William H. Byrnes, Associate Dean, International Financial Law, at Texas A&M University Law School, in Fort Worth, the newest law school in Texas. See https://law.tamu.edu/

Looking for Lexis Advance Tax?
Sign in to www.lexisadvance.com, look for the pull-down menu called “Lexis Advance Research” in the upper-left corner. Click the down arrow and select Lexis Advance Tax.

If you have questions or would like to schedule a short training, please contact your LexisNexis® Account Executive.

– See more at: http://www.lexisnexis.com/lextalk/legal-content-insider/f/21/t/2525.aspx?utm_content=2015-10-20+15:00:04#sthash.szct2yk6.dpuf

Posted in BEPS, FATCA, Financial Crimes, Money Laundering, Taxation, Transfer Pricing | Tagged: , , , | Leave a Comment »

EU Agrees on the Automatic Exchange of Tax Rulings – Transfer Pricing Audits Expected

Posted by William Byrnes on October 8, 2015


European Union (EU) Ministers for Economy and Finance met in Luxembourg EU Commissionfor an ECOFIN Council chaired by the Luxembourg Minister for Finance Pierre Gramegna. The Ministers expressed their political agreement on a proposed Directive on the automatic exchange of information (AEI) on tax rulings.

On the basis of a compromise agreement brokered by the Luxembourg Presidency, the Council expressed its political agreement on a proposed Directive designed to improve transparency in the context of advance cross-border tax rulings, by making their automatic exchange between tax administrations compulsory.

The proposed Directive [Download EU AEOI TP] is part of a series of measures presented in March 2015 which aim to prevent tax avoidance and aggressive tax planning by companies. It aims to modify Directive 2011/16/EU on administrative cooperation in the field of taxation, which defines the practical terms and conditions for exchanging information in order to include advance tax rulings.  The Directive requires Member States to proceed with AIE in the field of advance cross-border tax rulings, as well as advance pricing agreements. The Commission will implement a secure central directory, accessible to all Member States and the Commission, where the information exchanged will be stored.

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OECD BEPS Explanatory Video & PPT (90 minutes)

Posted by William Byrnes on October 6, 2015


Senior members from the OECD’s Centre for Tax Policy and Administration (CTPA) commented on the final outputs of the OECD/G20 Base Erosion and Project Shifting Project, including the next steps and the involvement of developing countries.  See yesterday’s post with the download link for each BEP report: OECD Releases All Final BEPS Reports – Links Herein

—> Download PPT “Beps-webcast-8-launch-2015-final-reports”.

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OECD Releases All Final BEPS Reports – Links Herein

Posted by William Byrnes on October 5, 2015


The OECD presented today the final package of measures for a comprehensive, coherent and co- OECDordinated reform of the international tax rules to be discussed by G20 Finance Ministers at their meeting on 8 October, in Lima, Peru.  The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project provides governments with solutions for closing the gaps in existing international rules that allow corporate profits to « disappear » or be artificially shifted to low/no tax environments, where little or no economic activity takes place.

READ THE REPORTS

Arrow actions 13 2015 Explanatory Statement 2015 (EN / FR / ES / DEU)
Arrow Action 1 Action 1: Addressing the Tax Challenges of the Digital Economy
Arrow Action 2 Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements
Arrow Action 3 2015 Action 3: Designing Effective Controlled Foreign Company Rules
Arrow Action 4 2015 Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments
Arrow Action 5 Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
Arrow Action 6 Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances
Arrow action 7 2015 Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status
Arrow Action 8 Actions 8-10: Guidance on Transfer Pricing Aspects of Intangibles
Arrow actions 11 2015 Action 11: Measuring and Monitoring BEPS
Arrow actions 12 2015 Action 12: Mandatory Disclosure Rules
Arrow Action 13 Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting
Arrow actions 14 2015 Action 14: Making Dispute Resolution Mechanisms More Effective
Arrow Action 15 Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties

Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues. Given developing countries’ greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is particularly significant.

“Base erosion and profit shifting affects all countries, not only economically, but also as a matter of trust,” said OECD Secretary-General Angel Gurría. “BEPS is depriving countries of precious resources to jump-start growth, tackle the effects of the global economic crisis and create more and better opportunities for all. But beyond this, BEPS has been also eroding the trust of citizens in the fairness of tax systems worldwide. The measures we are presenting today represent the most fundamental changes to international tax rules in almost a century: they will put an end to double non-taxation, facilitate a better alignment of taxation with economic activity and value creation, and when fully implemented, these measures will render BEPS-inspired tax planning structures ineffective,” Mr Gurría said.

Undertaken at the request of the G20 Leaders, the work to address BEPS is based on the 2013 G20/OECD BEPS Action Plan, which identified 15 actions to put an end to international tax avoidance. The plan was structured around three fundamental pillars: introducing coherence in the domestic rules that affect cross-border activities; reinforcing substance requirements in the existing international standards, to ensure alignment of taxation with the location of economic activity and value creation; and improving transparency, as well as certainty for businesses and governments.

The OECD will present the BEPS measures to G20 Finance Ministers during the meeting hosted by Turkey’s Deputy Prime Minister Cevdet Yilmaz on 8 October, in Lima, Peru.

Following delivery of the BEPS measures to G20 Leaders during their annual summit on 15-16 November in Antalya, Turkey, the focus will shift to designing and putting in place an inclusive framework for monitoring BEPS and supporting implementation of the measures, with all interested countries and jurisdictions invited to participate on an equal footing.

The final package of BEPS measures includes new minimum standards on: country-by-country reporting, which for the first time will give tax administrations a global picture of the operations of multinational enterprises; treaty shopping, to put an end to the use of conduit companies to channel investments; curbing harmful tax practices, in particular in the area of intellectual property and through automatic exchange of tax rulings; and effective mutual agreement procedures, to ensure that the fight against double non-taxation does not result in double taxation.

The BEPS package also revises the guidance on the application of transfer pricing rules to prevent taxpayers from using so-called “cash box” entities to shelter profits in low or no-tax jurisdictions, and redefines the key concept of Permanent Establishment, to curb arrangements which avoid the creation of a taxable presence in a country by reliance on an outdated definition.

The BEPS package offers governments a series of new measures to be implemented through domestic law changes, including strengthened rules on Controlled Foreign Corporations, a common approach to limiting base erosion through interest deductibility and new rules to prevent hybrid mismatch arrangements from making profits disappear for tax purposes through the use of complex financial instruments.

Nearly 90 countries are working together on the development of a multilateral instrument capable of incorporating the tax treaty-related BEPS measures into the existing network of bilateral treaties. The instrument will be open for signature by all interested countries in 2016.

The BEPS measures were agreed after a transparent and intensive two-year consultation process between OECD, G20 and developing countries and stakeholders from business, labour, academia and civil society organisations.

“Everyone has a stake in reversing base erosion and profit shifting,” Mr Gurria said. “The BEPS Project has shown that all stakeholders can come together to bring about change. Swift implementation by governments will ensure a more certain and more sustainable international tax environment for the benefit of all, not just a few.”

Examples of BEPS schemes to be eliminated

 

 

Previous webcasts

» Webcast 7: An update on the project (8 June 2015)

» Webcast 6: Update on 2015 Deliverables (12 February 2015)

» Webcast 5: Update on 2014 Deliverables (15 December 2014)

» Webcast 4: Update on 2014 Deliverables (16 September 2014)

» Webcast 3: Update on BEPS Project (26 May 2014)

» Webcast 2: Update on BEPS Project (2 April 2014)

» Webcast 1: Update on 2014 Deliverables (23 January 2014)

FATCA Update

Download FATCA chapter 1 from SSRN here.  4th edition FATCA and CRS Updates will be posted on SSRN in December 2015.

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Attacking BEPS through the Profit Split Method

Posted by William Byrnes on August 5, 2015


Prof. Jeffery Kadet‘s explains – Why Expansion of the Profit Split Method is Required to Combat BEPS…

Recognizing the reality that multinational corporations are centrally managed and not groups ofJeffrey-M-Kadet-244x300entities that operate independently of one another, the OECD base erosion and profit-shifting project is considering expanded use of the profit-split method.

This article provides background on why expanded use of the profit-split method is sorely needed. In particular, resource-constrained tax authorities in many countries are unable to administer or intelligently analyze and contest transfer pricing results presented by multinational groups. Most importantly, this article suggests a simplified profit-split approach using set concrete and objective allocation keys for commonly used business models that should be welcomed by multinational groups and tax authorities alike.

Read Prof Jeffery Kadet’s full analysis on SSRN http://ssrn.com/abstract=2593548

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Attacking BEPS Through ECI? Prof. Jeffery Kadet’s Approach

Posted by William Byrnes on July 29, 2015


Attacking Profit Shifting by Prof. Jeffery Kadet – In recent years the financial press has turned Jeffrey-M-Kadet-244x300increasing attention to MNCs that shift income to low taxed jurisdictions overseas in order to avoid US taxation. What’s generally missing from these discussions is any serious focus on possible IRS attacks on these companies, most of which are CFCs. There’s little apparent concern by anyone that the IRS will try to disallow the profit-shifting structures that have moved so much taxable income out of the US and other countries and into low-taxed foreign jurisdictions.

This is changing. Early this year Caterpillar Inc. in an SEC filing disclosed that the IRS had issued a Revenue Agent’s Report to currently tax certain income earned by one of its Swiss entities. Presumably this is income earned as a result of a certain restructuring conducted in the late 1990s and referred to as the Swiss Tax Strategy when examined in 2014 in hearings held by the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations (PSI).

The IRS basis for its RAR, as disclosed by Caterpillar, is application of the ‘substance-over-form’ or ‘assignment-of-income’ judicial doctrines. This, however, is not the only approach that the IRS might have chosen to impose taxation on the shifted profits.

Various Congressional hearing documents, the work of investigative journalists, and other sources (all publicly available) provide evidence that the businesses within some profit-shifting structures continue to be managed and substantially conducted from the U.S. and not from any business locations outside the U.S. Where this is the case, the IRS may have a strong case for imposing direct taxation on the effectively connected income (ECI) of these low-taxed foreign subsidiaries.

Just the threat of imposing direct taxation may cause many MNCs to consider scaling back their profit shifting and for them and their outside auditors to start worrying about exposure on prior years. If the IRS were to sustain such direct taxation, it would mean:

·      The regular up-to-35% corporate tax,
·      The ‘branch profits tax’ applied at a flat 30% rate (unless lower by treaty),
·      A loss of deductions and credits for any tax year if the foreign corporation has not filed Form 1120-F for that year, and
·      An open statute of limitations on IRS assessment of tax for any tax year if the foreign corporation has never filed a US tax return on Form 1120-F for that year.
The combined effect of the above is a 54.5% or higher effective tax rate (lower if tax treaty coverage reduces the 30% branch profits tax rate).

Considering these terribly high effective tax rate percentages, where the IRS chooses to examine for possible ECI and develops a credible case, they can use the high effective tax rate as strong leverage to secure agreement for reversal of profit shifting structures. Such agreements would presumably see MNCs agreeing to current taxation within U.S. group members of the shifted profits that had originally been booked in low-taxed foreign subsidiaries.

To demonstrate how significant ECI likely exists within many MNCs that have conducted profit-shifting planning, this article includes a number of realistic examples inspired by the above-mentioned publicly available information on MNC profit-shifting structures.

Recognizing that it can sometimes be a challenge to apply the very old existing regulations to current business models, the article strongly encourages Treasury to prioritize the issuance of modernized income sourcing and ECI regulations that reflect the business models and structures now commonly used and that are often found in profit-shifting structures.

read the full article on SSRN Attacking Profit Shifting by Prof. Jeffery Kadet

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What Can Regulatory Competition Can Teach About Tax Competition?

Posted by William Byrnes on July 27, 2015


from International Financial Law Prof Blog

Critics argue that such competition leads inevitably to a “race to the bottom,” with the result ofOECDreducing tax rates and revenue everywhere. But Dr. Andrew Morriss, Texas A&M Law explains, that anyone who has ever filled out a tax return knows, tax rates are just one facet of tax competition. Jurisdictions can compete over a wide range of tax system attributes – all the way from the complexity of the system to special provisions designed to advantage particular forms of investment to general depreciation rules.

Read this article at Competing For Captives: What Regulatory Competition Can Teach About Tax Competition  by authors Dr. Andrew P. Morriss, Dean & Anthony G. Buzbee Dean’s Endowed Chairholder, Texas A&M University School of Law; and Drew Estes, a JD/MBA Candidate, Class of 2016, University of Alabama.

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OECD Launches Tax Inspectors Without Borders

Posted by William Byrnes on July 20, 2015


The Tax Inspectors Without Borders (TIWB) initiative enables the transfer of tax auditOECDknowledge and skills to tax administrations in developing countries through a real time, “learning by doing” approach. Experts – currently serving or recently retired tax officials – are deployed to work directly with local tax officials on current audits and audit-related issues concerning international tax matters, and to share general audit practices.

read the post at International Financial Law Prof Blog.

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OECD Releases BEPS Proposed Action 8 on Cost Contribution Arrangements & Transfer Pricing

Posted by William Byrnes on May 1, 2015


Logooecd_enPublic comments are invited on a discussion draft which deals with work in relation to Action 8 of the Action Plan on Base Erosion and Profit Shifting (BEPS).

Action 8 (“Assure that transfer pricing outcomes are in line with value creation: Intangibles”) requires the development of “rules to prevent BEPS by moving intangibles among group members” and involves updating the guidance on cost contribution arrangements. The discussion draft sets out a proposed revision to Chapter VIII of the Transfer Pricing Guidelines and is intended to align the guidance in that chapter with the other elements of Action 8 already addressed in the Guidance on Transfer Pricing Aspects of Intangibles released in September 2014.

Interested parties are invited to submit written comments by 29 May 2015 (no extension will be granted) and should be sent by email to TransferPricing@oecd.org in both PDF and Word format. They should be addressed to Andrew Hickman, Head of Transfer Pricing Unit, Centre for Tax Policy and Administration.

Check out William Byrnes’ Lexis’ Practical Guide to U.S. Transfer Pricing, available within LexisNexis, which is updated Book Coverannually to help multinationals cope with the U.S. transfer pricing rules and procedures, taking into account the international norms established by the Organisation for Economic Co-operation and Development (OECD). It is also designed for use by tax administrators and tax professionals, corporate executives, and their non-tax advisors, both American and foreign.  Fifty co-authors contribute subject matter expertise on technical issues faced by tax and risk management counsel. Chapter 13 covers Cost Sharing Arrangements.

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Fair Approaches for Taxing Previously Untaxed Foreign Income

Posted by William Byrnes on April 6, 2015


In connection with any transition to a new USA international tax system, we need an approach that effectively deals with the trillions of dollars of previously untaxed foreign income held by CFCs. There is logic and fairness in applying a rate on those earnings that is less than the 35 percent home country rate because the rules of the game are being changed significantly.  Guest Financial Law Prof Blogger Jeffery Kadet has written a three part series on the fair approaches for taxing previously untaxed foreign income that will be posted this week on Monday, Tuesday and Wednesday, available on International Financial Law Prof Blog.

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OECD Releases 9 Country Evaluations On Implementation of Exchange of Tax Information To Combat Tax Evasion   

Posted by William Byrnes on March 17, 2015


The Global Forum on Transparency and Exchange of Information for Tax Purposes released 9 peer review reports, including a Phase 1 Supplementary Report for Switzerland, demonstrating continuing progress toward implementation of the international standard for exchange of information on request.  read them at International Financial Law Prof Blog.

 

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OECD Discloses Letters & Comments About BEPS Action Plans

Posted by William Byrnes on January 13, 2015


read and download the comments and letters released – International Financial Law Prof Blog

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OECD Releases Strategy for Deepening Developing Country Engagement For BEPS

Posted by William Byrnes on November 12, 2014


OECD_globe_10cm_HD_4c

The OECD released today its new Strategy for Deepening Developing Country Engagement in the Base Erosion and Profit Shifting (BEPS) Project, which will strengthen their involvement in the decision-making processes and bring them to the heart of the technical work. The BEPS Project aims to create a coherent set of international tax rules to end the erosion of national tax bases and the artificial shifting of profits to jurisdictions solely to avoid paying tax.

The strategy has three key elements:

 

  1. Building on their engagement in the earlier phase of the BEPS Project, about 10 developing countries, including: Albania, Jamaica, Kenya, Peru, Philippines, Senegal, and Tunisia, will be invited to participate in meetings of the key BEPS decision making body – the Committee on Fiscal Affairs (CFA) – and its technical working groups. Several other developing countries are expected to confirm their participation in the CFA or the technical working groups in the coming weeks.
  2. Five regionally organised networks of tax policy and administration officials will be established, to coordinate an ongoing and more structured dialogue with a broader group of developing countries on BEPS issues. Building on the effective BEPS consultations that took place in 2013 and 2014; these networks will strengthen the involvement of developing countries in Asia, Africa, Central Europe and the Middle East, Latin America and the Caribbean, and Francophone countries.
  3. Support for capacity building to address BEPS issues in developing countries is imperative. The regional networks will play an important role in the development of toolkits needed to support the practical implementation of the BEPS measures and as well as some of the priority issues for developing countries (tax incentives and transfer pricing comparable data) which are outside the BEPS Action Plan. The regional networks will also be a forum for interested developing countries to discuss the negotiation and implementation of the multilateral instrument under Action 15 of the BEPS Project.

The African Tax Administration Forum (ATAF) and the Inter-American Centre for Tax Administration (CIAT) will continue to play a critical role in leading regional discussions on the BEPS priority issues for developing countries. They will help ensure those views are reflected in discussions on the development of the BEPS measures and the practical tools for supporting implementation. They will also be invited to join the meetings of the CFA and the technical working groups, together with the international organisations (the IMF, the World Bank Group and the UN), which already participate.

two-part report from the G20 Development Working Group shows that BEPS issues pose acute problems for developing countries, most of which have lower tax bases than advanced economies and raise a far higher share of tax revenues from corporate taxes than developed countries. The report drew extensively on engagement with developing countries: more than 80 developing countries and other non-OECD/non-G20 economies were consulted through four in-depth regional consultations and five thematic global fora in the first phase of the BEPS Project.

The report was presented last September to the G20 Finance Ministers who called on the OECD to develop a new structured dialogue process for deepening developing country engagement in tackling BEPS issues and ensuring that their concerns are addressed. Developing countries have consistently recognised the importance of addressing base erosion and profit shifting as part of wider measures to increase domestic resource mobilisation, in order to promote stable economic growth and invest in infrastructure, education and health, among other government priorities.

A two-day workshop in December 2014 will allow developing countries interested in participating in the BEPS work of the Committee on Fiscal Affairs (CFA) and its technical working groups to discuss the practical aspects of deepened engagement in the Project, as well as their priority issues. At the same time, the donor community will meet to discuss plans to ensure that developing countries have the resources necessary to engage in the BEPS project effectively.

The OECD released last September its first recommendations towards coherent international tax rules to end the erosion of national tax bases and the artificial shifting of profits to jurisdictions to avoid paying tax. The recommendations were endorsed by G20 Finance Ministers during a meeting in Cairns, Australia last September and will be discussed during the Leaders’ Summit that will take place on15-16 November in Brisbane.

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Heads of Tax Administration agree global tax actions

Posted by William Byrnes on October 27, 2014


OCDE_10cm_4c

The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project and the move to automatic exchange of financial account information took centre stage when Heads of Tax Administration met on 23-24 October in Dublin, Ireland.  The FTA is the leading international body concerned with tax administration, bringing together the heads of tax administrations from the OECD, members of the G20 and large emerging economies.

More than forty delegations participated in the Ninth Meeting of the OECD Forum on Tax Administration (FTA) and agreed that ever greater co-operation will be necessary to implement the results of the BEPS project and automatic exchange of information.

Specifically they agreed:

  • A strategy for systematic and enhanced co-operation between tax administrations;
  • To invest the resources needed to implement the new standard on automatic exchange of information; and
  • To improve the practical operation of the mutual agreement process.

The communiqué released at the close of the meeting contains more details and contains links to the following publications that have just been released by the FTA:

Excerpted from the communiqué:  To support the implementation of these global initiatives, while improving service levels and operational efficiency, we as Commissioners with responsibility for tax administration and compliance management must work ever more closely together, share our knowledge, co-ordinate our actions and deal with tax administration aspects that may result from the BEPS work. Recognising the support of G20 Finance Ministers for further “co-ordination and collaboration by tax administrations on compliance activities on entities and individuals involved in cross border tax arrangements” we agreed the following actions:

• We are taking a significant step forward in global tax co-operation. We have agreed a strategy for systematic and enhanced co-operation 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. Along with the strategy, we have created a new international platform called the JITSIC1 Network to focus specifically on cross border tax avoidance, which is open to all FTA members on a voluntary basis. This new network integrates the existing cooperation amongst some of us into the larger FTA framework.

• We will invest the resources necessary to implement the new standard on automatic exchange of information and use the information to counter tax evasion wherever it arises, while protecting taxpayer confidentiality and ensuring the proper use of the information. We will ensure that common, secure and effective transmission systems are in place.

• We will improve the practical operation of the Mutual Agreement Procedure (MAP) so that issues of double taxation are addressed more quickly and efficiently in order to meet the needs of both governments and taxpayers and so assure the critical role of those procedures in the global tax environment. We have advanced work in this area which will be integrated with the result from the related 2015 BEPS action item. We will encourage competent authorities of all member countries to actively participate in the relevant activities (www.oecd.org/site/ctpfta/map-strategic-plan.pdf).

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BEPS – China and India: Official Responses to UN BEPS Questionnaire | Let’s Talk Tax

Posted by William Byrnes on October 6, 2014


BEPS – China and India: Official Responses to UN BEPS Questionnaire | Let’s Talk Tax.

, a tax manager at Mazars, has written am informative article:

United Nations Subcommittee on Base Erosion and Profit Shifting (BEPS) had invited the developing countries to provide feedback by answering the UN Questionnaire including 10 questions. This summary focuses on the responses provided by China and India.

China and India responses to BEPS QuestionnaireBoth China and India confirmed that BEPS is very important issue for them and shared the global concern. ….

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Meeting of G20 Finance Ministers and Central Bank Governors

Posted by William Byrnes on September 23, 2014


Cairns, 20-21 September 2014

OCDE_10cm_4c• Part I – Base Erosion and Profit Shifting, Automatic Exchange of Information and Tax and
Development and Part II – Global Forum on Transparency and Exchange of Information for Tax Purposes, OECD Secretary-General Report to the G20 Finance Ministers and Central Bank Governors, September 2014.

• G20 Common Reporting Standard Implementation Plan, September 2014.
G20 Response to 2014 Reports on Base Erosion and Profit Shifting and Automatic Exchange of Tax
Information for Developing Economies, G20 Development Working Group, September 2014.
o Two other reports which support our agreement on tax and development can be found at
http://www.g20.org/official_resources.
Financial Action Task Force Progress Report to the G20, September 2014

download for free –> LexisNexis® Guide to FATCA Compliance

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OECD and G20 pursue efforts to curb multinational tax avoidance and offshore tax evasion in developing countries

Posted by William Byrnes on September 22, 2014


OCDE_10cm_4cThe OECD and its Global Forum on Transparency and Exchange of Information have today been mandated by the G20 to develop toolkits to support developing countries addressing base erosion and profit shifting (BEPS) and to launch pilot projects to assist them to move towards automatic exchange of information. This mandate comes in response to two reports:

  • a Report on the Impact of Base Erosion and Profit Shifting in Low Income Countries (Part 2); and
  • a Roadmap for developing country participation in the new global standard for the automatic exchange of information between jurisdictions.

The OECD will report to the G20 Leaders in November on its plan to deepen the involvement of developing countries in the OECD/G20 BEPS project and ensure that their concerns are addressed.

Detection of tax evasion is critical for developing countries in particular: US$8.5 trillion of household assets are held abroad. In 2012, more than 25% of all Latin American and almost 33% of all Middle Eastern and African household wealth was held abroad compared to the worldwide average of 6%7.  Estimates of tax revenue and illicit financial flows lost by developing countries generally range in the hundreds of billions of US dollars per year, exceeding the amount of official development assistance.

BEPS in Low Income Countries

Following-up on the release of the first set of BEPS recommendations last week, this new report recognises that the risks faced by developing countries from BEPS, and the challenges faced in addressing them, may differ to those faced by advanced economies. It draws on extensive consultations with developing countries to discuss BEPS issues which are a key priority to them, for example transfer pricing and the abuse of tax treaties, as well as issues that are not part of the BEPS Action Plan, such as tax incentives which may erode the tax base in the developing world but do little to attract inward investment.

Acknowledging that developing countries face specific policy issues and implementation challenges that are not always shared with developed countries, the report sets out areas where additional guidance and tools are required to ensure that the BEPS outcomes fully benefit lower capacity countries. It also highlights the actions developing countries have taken, many with international support, that indicate there are good opportunities to raise additional revenues from addressing BEPS issues and to create a more certain and stable investment climate for business.

Many Global Forum members reported this as a key benefit of AEOI and evidence supports this conclusion. For example, in Denmark, a 2010 study found that tax evasion occurred only in 0.3% of cases where income was subject to third-party reporting, but in 37% cases for self-reported income. In the US, 99% compliance was achieved for individuals whose income was reported to the tax administration by financial institutions whereas misreporting by individuals was found in 56% of cases in which there was little or no third party reporting.

Roadmap for developing country participation in AEOI

The Roadmap points the way to developing country participation in the new standard on automatic exchange of information. Drawing on the Global Forum’s extensive consultations with developing countries, the World Bank Group, other international organisations and civil society, the Roadmap provides a stepped approach to ensuring developing countries can overcome obstacles in implementing the new standard. It identifies the benefits, costs and the fundamental building blocks that developing countries need in order to meet the standard.

Pilot projects with developing countries are one of the key ways in which the Roadmap will be implemented. The pilot projects will take a progressive approach to implementation, with a focus on meeting the particular needs of each developing county pilot and ensuring that all confidentiality standards are reached. The pilot projects will be undertaken with the support of the World Bank Group and G20 countries, and include partnerships with more experienced countries. The results of these pilot projects will help to redress the knowledge imbalance between tax administrations in developing countries and tax evaders.

Over half of the Global Forum’s 121 member jurisdictions are developing countries and stand to benefit from the Roadmap and its implementation.

book cover

download for free –> LexisNexis® Guide to FATCA Compliance (Chapter 1, Background and Current Status of FATCA)

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OECD releases first BEPS recommendations for international approach to combat tax avoidance

Posted by William Byrnes on September 16, 2014


Full Video of BEPS release and the Post link is here.

The first 7 elements of the Action Plan released today focus on helping countries to:

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OECD releasing recommendations for combating international tax avoidance by multinational enterprises

Posted by William Byrnes on September 10, 2014


International Financial Law Prof BlogThe OECD will release its first recommendations for a coordinated international approach to combat tax avoidance by multinational enterprises under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project on Tuesday 16 September 2014. …

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Senate Hearing recorded for streaming: U.S. Tax Code: Love It, Leave It or Reform It!

Posted by William Byrnes on July 24, 2014


Senate-Finance-Committee

 The U.S. Tax Code: Love It, Leave It or Reform It!

 JCT Report: Present Law And Background Related To Proposals To Reform The Taxation Of Income Of Multinational  Enterprises

Watch the recorded hearing’s webcast (link via Logo above)

Wyden Statement on Corporate Inversions and the Need for Comprehensive Tax Reform (excerpt):

The U.S. tax code is infected with the chronic diseases of loopholes and inefficiency. These infections are hobbling America’s drive to create more good-wage, red, white and blue jobs here at home. They are a significant drag on the economy and are harming U.S. competitiveness. The latest outbreak of this contagion is the growing wave of corporate inversions, where American companies move their headquarters out of the U.S. in pursuit of lower tax rates.

The inversion virus now seems to be multiplying every few days. Medtronic, Mylan, Mallinckrodt and many more deals have either occurred recently or are currently in the works. Medtronic’s proposed $42 billion merger with Covidien was record-breaking when it was announced in June. But the ink in the record books had barely dried when AbbVie announced its intention on Friday to acquire Shire for almost $55 billion. According to the July 15th edition of Marketplace, “What’s going on now is a feeding frenzy … Every investment banker now has a slide deck that they’re taking to any possible company and saying, ‘you have to do a corporate inversion now, because if you don’t, your competitors will.’”

Over the past few months, we’ve seen a handful of legislative proposals to address the issue of inversions. Most of them are punitive and retroactive. Rather than incentivizing American companies to remain in the U.S., these bills would build walls around U.S. corporations in order to keep them from inverting. …

Hatch Statement at Finance Committee Hearing on International Taxation (excerpt):

For example, in 2013, the OECD launched its Base Erosion & Profit Shifting, or BEPS, project. While we appreciate the OECD’s efforts in bringing tax authorities together to discuss and work through issues, many of us have expressed concern that the BEPS project could be used by other countries as a way to increase taxes on American taxpayers. ….

This approach, in my view, completely misses the mark.

While it may put a stop to traditional inversions it could actually lead to more reverse acquisition inversions as our U.S. multinationals would, under this approach, become more attractive acquisition targets for foreign corporations.

Whether it is traditional corporate acquisition inversion or a reverse acquisition inversion, the result is the same: continued stripping of the U.S. tax base. …

Ron Wyden (D-OR)

Witness Testimony

Mr. Robert B. Stack, Deputy Assistant Secretary for International Tax Affairs, U.S. Department of the Treasury, Washington, DC
Mr. Pascal Saint-Amans, Director, Centre for Tax Policy and Administration, Organisation for Economic Co-operation and Development (OECD), Paris, France
Dr. Mihir A. Desai, Mizuho Financial Group Professor of Finance & Professor of Law, Harvard University, Cambridge, MA
Dr. Peter R. Merrill, Director, National Economics and Statistics Group, PricewaterhouseCoopers, Washington, DC
Dr. Leslie Robinson, Associate Professor of Business Administration, Tuck School of Business, Dartmouth College, Hanover, NH
Mr. Allan Sloan, Senior Editor at Large, Fortune, New York, NY

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2014 Update of OECD Model Tax Convention

Posted by William Byrnes on July 18, 2014


OCDE_10cm_4cOn June 16, 2014 the OECD Council approved the contents of the 2014 Update to the OECD Model Tax Convention.  The OECD stated that this update will be incorporated in a revised version of the Model Tax Convention that will be published in the next few months.

The 2014 Update includes the changes to Article 26 and its Commentary that were approved by the OECD Council on July 17, 2012.  It also includes the final version of a number of changes that were previously released for comments through the following discussion drafts:

The 2014 Update does not include any results from the ongoing work on the BEPS Action Plan. Moreover, the 2014 Update does not include the changes included in the discussion draft of November 15, 2013 on Proposed changes to the provisions dealing with the operation of ships and aircraft in international traffic (except for a change to the Introduction); as indicated in that discussion draft, further work is needed with respect to these changes before they are included in the OECD Model Tax Convention.  The 2014 Update also does not include any of the changes put forward in the discussion draft of October 19, 2012 on Revised proposals concerning the interpretation and application of Article 5 (Permanent Establishment); since it is expected that work on Action 7 (Prevent the Artificial Avoidance of PE Status) of the BEPS Action Plan will result in changes to Article 5, the proposed Commentary changes included in that discussion draft will not be finalised until the work on Action 7 has been completed.

See http://www.oecd.org/tax/treaties/2014-update-model-tax-convention.htm

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OECD releases BEPS draft for Tax Challenges of the Digital Economy

Posted by William Byrnes on March 25, 2014


The OECD released Monday, March 24, a discussion draft on the Tax Challenges of the Digital Economy.

In July 2013, the OECD published its Action Plan on Base Erosion and Profit Shifting. The Action Plan identifies 15 actions to address BEPS in a comprehensive manner and sets deadlines to implement these actions. Excerpting from the Report, Action 1 reads as follows:

Action 1 Address the tax challenges of the digital economy

Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation. Issues to be examined include, but are not limited to, the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, the attribution of value created from the generation of marketable location-relevant data through the use of digital products and services, the characterisation of income derived from new business models, the application of related source rules, and how to ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services. Such work will require a thorough analysis of the various business models in this sector.

The OECD’s March 24 discussion draft on the Tax Challenges of the Digital Economy, after surveying the elements of the new global digital economy, outlines the tax minimization techniques and then provides broad proposals to reduce the BEPS resulting therefrom. Below, I have excerpted and paraphrased the relevant aspects to provide an overview.

Section IV “Identifying Opportunities for BEPS in the Digital Economy” undertakes a general discussion of the common features of tax planning structures that raise BEPS concerns. Section IV then describes the core elements of BEPS strategies with respect to both direct and indirect taxation.  The common features of digital economy tax planning features include:

Eliminating or reducing tax in the market country

  • Avoiding a Taxable Presence
  • Minimizing Functions, Assets and Risks in Market Jurisdictions
  • Maximizing Deductions in Market Jurisdictions

Eliminating or reducing tax in the intermediate country

Eliminating or reducing tax in the country of residence of the ultimate parent

Avoiding withholding tax

Opportunities for BEPS with respect to VAT

  • Remote digital supplies to exempt businesses
  • Remote digital supplies to a multi-location enterprise (MLE)

Section V “Tackling BEPS in the Digital Economy” of the discussion draft examines how work on the actions of the BEPS Action Plan and in the area of indirect taxation will address BEPS issues arising in the digital economy. This section also highlights the particular characteristics of the digital economy that must be taken into account to ensure that the measures developed effectively address BEPS in the digital economy.

Restoring Taxation on Stateless Income

Measures that will restore taxation in the market jurisdiction

  • Prevent Treaty Abuse (Action 6)
  • Prevent the Artificial Avoidance of PE Status (Action 7)

Measures that will restore taxation in both market and ultimate parent jurisdictions

  • Neutralize the Effects of Hybrid Mismatch Arrangements (Action 2)
  • Limit Base Erosion via Interest Deductions and Other Financial Payments (Action 4 and Action 9)
  • Counter Harmful Tax Practices More Effectively (Action 5)

Assure that transfer pricing outcomes are in line with value creation (Actions 8-10)

  • Intangibles, including hard-to-value intangibles, and cost contribution arrangements
  • Business risks
  • Characterization of transactions
  • Base eroding payments
  • Global value chains and profit methods

Addressing BEPS Issues in the Area of Consumption Taxes

Section VI “Broader Tax Challenges Raised by the Digital Economy” discusses the challenges that the digital economy raises for direct taxation, with respect to nexus, the tax treatment of data, and characterization of payments made under new business models. Section VI also discusses the indirect tax challenges raised by the digital economy with respect to exemptions for imports of low-valued goods, and remote digital supplies to consumers. Thereafter, Section VI lists administrative challenges faced by tax administrations in applying the current rules.

An overview of the tax challenges raised by the digital economy includes:

  • Nexus and the Ability to have a Significant Presence without Being Liable to Tax
  • Data and the Attribution of Value Created from the Generation of Marketable Location-Relevant Data through the Use of Digital Products and Services
  • Characterization of Income Derived from New Business Models
  • Collection of VAT in the Digital Economy

Section VII “Potential Options to Address The Broader Tax Challenges Raised by the Digital Economy” provides a brief framework for evaluating options to address the broader tax challenges raised by the digital economy. This section then provides an overview of potential options that have been received by the Task Force, along with a description of some of the issues that will need to be addressed in developing and evaluating those options.

Modifications to the Exemptions from Permanent Establishment Status

A New Nexus based on Significant Digital Presence

Virtual Permanent Establishment

Creation of a Withholding Tax on Digital Transactions

Consumption Tax Options

  • Exemptions for Imports of Low Valued Good
  • Remote digital supplies to consumers

Submitting Comments to OECD

Interested parties are invited to submit comments electronically in Word on this discussion draft, before 5.00pm on April 14, 2014 to CTP.BEPS@oecd.org.

Persons and organisations who intend to send comments on this discussion draft are invited to indicate by April 7 whether they wish to speak in support of their comments at a public consultation meeting on Action 1 (Address the tax challenges of the digital economy), which is scheduled to be held in Paris at the OECD Conference Centre on April 23, 2014. Persons wishing to attend this public consultation meeting should fill out their request for registration on line as soon as possible but by April 7, 2014.

This meeting will also be broadcast live on the internet and can be accessed on line. No advance registration is required for this internet access.

practical_guide_book

Lexis’ Practical Guide to U.S. Transfer Pricing (William Byrnes & the late Robert Cole (2013)) is designed to help multinationals cope with the U.S. transfer pricing rules and procedures, taking into account the international norms established by the Organisation for Economic Co-operation and Development (OECD). It is also designed for use by tax administrators, both those belonging to the U.S. Internal Revenue Service and those belonging to the tax administrations of other countries, and tax professionals in and out of government, corporate executives, and their non-tax advisors, both American and foreign.  Fifty co-authors contribute subject matter expertise on technical issues faced by tax and risk management counsel.

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OECD releases two BEPS reports of recommendations to combat hybrid mismatch arrangements

Posted by William Byrnes on March 24, 2014


In July 2013, the OECD published its Action Plan on Base Erosion and Profit Shifting. The Action Plan identifies 15 actions to address BEPS in a comprehensive manner and sets deadlines to implement these actions.

The OECD states that a Hybrid Mismatch Arrangement “is a profit shifting arrangement that utilises a hybrid element in the tax treatment of an entity or instrument to produce a mismatch in tax outcomes in respect of a payment that is made under that arrangement.”  The hybrid mismatch arrangements targeted by the OECD rules are “those where the resulting mismatch results in a lower aggregate tax burden for the parties to the arrangement.”  (See Page 8 of OECD Discussion Draft Neutralise the effects of Hybrid Mismatch Arrangements – Recommendations for Domestic Laws).

Action 2 of the BEPS Action Plan calls for the development of model treaty provisions and recommendations for the design of domestic rules to neutralise the effect of hybrid mismatch arrangements:  

ACTION 2

Neutralise the effects of hybrid mismatch arrangements

Develop model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect (e.g. double non-taxation, double deduction, long-term deferral) of hybrid instruments and entities. This may include: (i) changes to the OECD Model Tax Convention to ensure that hybrid instruments and entities (as well as dual resident entities) are not used to obtain the benefits of treaties unduly; (ii) domestic law provisions that prevent exemption or non-recognition for payments that are deductible by the payor; (iii) domestic law provisions that deny a deduction for a payment that is not includible in income by the recipient (and is not subject to taxation under controlled foreign company (CFC) or similar rules); (iv) domestic law provisions that deny a deduction for a payment that is also deductible in another jurisdiction; and (v) where necessary, guidance on co-ordination or tie-breaker rules if more than one country seeks to apply such rules to a transaction or structure. Special attention should be given to the interaction between possible changes to domestic law and the provisions of the OECD Model Tax Convention. This work will be co-ordinated with the work on interest expense deduction limitations, the work on CFC rules, and the work on treaty shopping.

In connection with this work the Committee on Fiscal Affairs (CFA) has now released two consultation documents on Action Item 2 as a single proposal for public consultation.  

The first discussion draft (Neutralise the effects of Hybrid Mismatch Arrangements – Recommendations for Domestic Laws) sets out recommendations for domestic rules to neutralise the effect of hybrid mismatch arrangements and the second discussion draft (Neutralise the effects of Hybrid Mismatch Arrangements – Treaty Aspects of the Work on Action 2 of the BEPS Action Plan) discusses the impact of the OECD Model Convention on those rules and sets out recommendations for further changes to the Convention to clarify the treatment of hybrid entities.  

The OECD recommendations of the first discussion draft Neutralise the effects of Hybrid Mismatch Arrangements – Recommendations for Domestic Laws target three categories of hybrid mismatch arrangement:

(a) Hybrid financial instruments (including transfers); where a deductible payment made under a financial instrument is not treated as taxable income under the laws of the payee’s jurisdiction;

(b) Hybrid entity payments, where differences in the characterisation of the hybrid payer result in a deductible payment being disregarded or triggering a second deduction in the other jurisdiction;

(c) Reverse hybrid and imported mismatches, which cover payments made to an intermediary payee that are not taxable on receipt. There are two kinds of arrangement targeted by these rules:

(i) arrangements where differences in the characterisation of the intermediary result in the payment being disregarded in both the intermediary jurisdiction and the investor’s jurisdiction (reverse hybrids);
(ii) arrangements where the intermediary is party to a separate hybrid mismatch arrangement and the payment is set-off against a deduction arising under that arrangement (imported mismatches).

The second discussion draft Neutralise the effects of Hybrid Mismatch Arrangements – Treaty Aspects of the Work on Action 2 of the BEPS Action Plan focuses on ensuring that (1) dual resident entities and (2) transparent entities are not used to obtain the benefits of treaties unduly.

The OECD stated that the recommendations set out in these discussion drafts do not represent the consensus views of the CFA or its subsidiary bodies but rather are intended to provide stakeholders with substantive proposals for analysis and comment.  The CFA requested that such comments on these documents should be submitted electronically (in word format) before 5.00 pm on May 2, 2014 and should be addressed as follows:

Hybrid Mismatch Arrangements: Please send comments addressed to Achim Pross, Head, International Co-operation and Tax Administration Division, OECD/CTPA to aggressivetaxplanning@oecd.org.

OECD Model Convention: Please send comment addressed to Marlies de Ruiter, Head, Tax Treaties, Transfer Pricing and Financial Transactions Division, OECD/CTPA to taxtreaties@oecd.org.

Public Consultation:

The OECD invited Persons and organisations who intend to submit comments on these two Consultation Documents to indicate by May 2 whether they wish to speak in support of their comments at a public consultation meeting on Action 2 (Neutralise the effects of hybrid mismatch arrangements), which is scheduled to be held in Paris at the OECD Conference Centre on 15 May 2014.  Persons wishing to attend this public consultation meeting should fill out their request for registration on line by May 2, 2014.  This meeting will also be broadcast live on the internet and can be accessed on line.

Book Binder

Handle your critical international business ventures with confidence using the indispensable content you can only find in LexisNexis® Foreign Tax & Trade Briefs, the one information service that provides the latest tax and trade information for 128 foreign countries and territories on a regular quarterly basis.  Looseleaf, updated with revisions four times each year.  Professor William Byrnes is the author of six Lexis treatises, including Tax Havens of the WorldLexisNexis® Guide to FATCA ComplianceMoney Laundering, Asset Forfeiture and Recovery and Compliance — A Global GuidePractical Guide to US Transfer Pricing and International Withholding Tax Treaty Guide.

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OECD Publishes Proposals to Prevent Treaty Shopping

Posted by William Byrnes on March 18, 2014


On Friday (March 3) the OECD released its discussion draft of > proposals produced with respect to Action 6 < (Prevent Treaty Abuse) of the BEPS Action Plan.  The OECD stated that the draft proposals set out do not represent the consensus views of either the Committee on Fiscal Affairs or its subsidiary bodies but rather are intended to provide stakeholders with substantive proposals for analysis and comment.  The proposals follow upon the July 2013 OECD > Action Plan on Base Erosion and Profit Shifting <. The Action Plan identifies 15 actions to address BEPS in a comprehensive manner and sets deadlines to implement these actions.

Prevent Treaty Abuse

The Action Plan identifies treaty abuse, and in particular treaty shopping, as one of the most important sources of BEPS concerns. Action 6 (Prevent Treaty Abuse) reads as follows:

Action 6 Prevent treaty abuse

Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be co-ordinated with the work on hybrids.

US Limitation of Benefits Approach 

The OECD’s primary recommendation is the inclusion of a Limitation of Benefits (LOB) provision in tax treaties.  The detailed OECD proposal refers to the US’ LOB articles and follows a US approach to combatting treaty shopping.

Public Consultation

As part of that consultation process, interested parties are invited to send comments on this discussion draft, which includes the preliminary results of the work carried out in the three different areas identified in Action 6:

A. Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances.

B. Clarify that tax treaties are not intended to be used to generate double non-taxation.

C. Identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country.

The Action Plan also provided that “[t]he OECD’s work on the different items of the Action Plan will continue to include a transparent and inclusive consultation process” and that all stakeholders such as business (in particular BIAC), non-governmental organisations, think tanks, and academia would be consulted.  The comments must be received by April 9, 2014.  The comments received by that date will be examined by the Focus Group at a meeting that will be held on the following week.  Comments on this discussion draft should be sent electronically (in Word format) by email to taxtreaties@oecd.org and should be addressed to: “Tax Treaties, Transfer Pricing and Financial Transactions Division OECD/CTPA”.  It is the policy of the OECD to publish all responses (including the names of responders) on the OECD website.

Persons and organisations who intend to send comments on this discussion draft are invited to indicate as soon as possible, by April 3rd, whether they wish to speak in support of their comments at a public consultation meeting on Action 6 (Prevent Treaty Abuse), which is scheduled to be held in Paris at the OECD Conference Centre on April 14-15, 2014.

This consultation meeting will be open to the public and the press.  Persons wishing to attend this public consultation meeting should fill out their request for registration on line as soon as possible, with a deadline of April 3, 2014.  This meeting will also be broadcast live on the internet and can be accessed on line. No advance registration is required for this internet access.

OECD Proposal Topics

A. Treaty provisions and/or domestic rules to prevent the granting of treaty benefits in inappropriate circumstances

1. Cases where a person tries to circumvent limitations provided by the treaty itself 

a) Treaty shopping

i) Limitation-on-benefits provision
ii) Rules aimed at arrangements one of the main purposes of which is to obtain treaty benefits

b) Other situations where a person seeks to circumvent treaty limitations

i) Splitting-up of contracts
ii) Hiring-out of labour cases
iii) Transactions intended to avoid dividend characterisation
iv) Dividend transfer transactions
v) Transactions that circumvent the application of Art. 13(4)
vi) Tie-breaker rule for determining the treaty residence of dual-resident persons
vii) Anti-abuse rule for permanent establishments situated in third States

2. Cases where a person tries to abuse the provisions of domestic tax law using treaties

B. Clarification that tax treaties are not intended to be used to generate double non-taxation

C. Tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country.

Book Binder

Handle your critical international business ventures with confidence using the indispensable content you can only find in LexisNexis® Foreign Tax & Trade Briefs, the one information service that provides the latest tax and trade information for 128 foreign countries and territories on a regular quarterly basis.  Looseleaf, updated with revisions four times each year.  Professor William Byrnes is the author of six Lexis treatises, including Tax Havens of the WorldLexisNexis® Guide to FATCA Compliance; Money Laundering, Asset Forfeiture and Recovery and Compliance — A Global Guide; Practical Guide to US Transfer Pricing and International Withholding Tax Treaty Guide.

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OECD transfer pricing documentation and country-by-country reporting released as discussion draft for public comment

Posted by William Byrnes on January 31, 2014


Yesterday (January 30, 2014) the OECD released an initial draft of revised guidance on transfer pricing documentation and country-by-country reporting for comment by interested parties.

Action 13 of the BEPS Action Plan released on July 19, 2013 calls for a review of the existing transfer pricing documentation rules and the development of a template for country-by-country reporting of income, taxes and economic activity for tax administrations.

The OECD Announcement stated that its Committee on Fiscal Affairs believes that it is essential to obtain input from stakeholders on this Discussion Draft to advance the work.  Specific issues on which comments would be appreciated are noted in the draft.

The OECD requests that comments be submitted in writing to transferpricing@oecd.org by February 23, 2014.

A public consultation event will be held at the OECD in Paris at the end of March 2014 with specifically invited persons selected from among those who provide written comments. An open discussion of the draft with all interested persons will take place at a future date to be determined in April or May.

practical_guide_book

Transfer pricing rules are an inescapable part of doing business internationally, and the LexisNexis Practical Guide to U.S. Transfer Pricing provides an in-depth analysis of the U.S. rules. This product is designed to help multinationals cope with the U.S. transfer pricing rules and procedures, taking into account the international norms established by the Organisation for Economic Co-operation and Development (OECD). It is also designed for use by tax administrators, both those belonging to the U.S. Internal Revenue Service and those belonging to the tax administrations of other countries, and tax professionals in and out of government, corporate executives, and their non-tax advisors, both American and foreign.

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International Tax Reform – Senator Baucus fires a volley

Posted by William Byrnes on November 20, 2013


In his first volley to start a serious discussion for reform of the U.S. taxation of the international activities of U.S. parent companies, Max Baucus, Senate Finance Committee Chairman released several draft tax bills yesterday.  His release statement included, “The proposal — the first in a series of discussion drafts to overhaul America’s tax code — details ideas on how to reform international tax rules to spark economic growth, create jobs, and make U.S. businesses more competitive.” 

The primary components of the proposed draft Bills include:

  • Income from selling products and providing services to U.S. customers is taxed annually at full U.S. rates.
  • Passive and highly-mobile income is taxed annually at full U.S. rates.

The drafts include two options that apply an annual minimum tax to income from products and services sold into foreign markets:

(1)   apply a minimum tax rate to all such income, or

(2)   tax such income at a lower minimum tax rate if derived from active business operations and at the full U.S. rate if not

Examples provided of a minimum rate include 60% and 80% of applicable U.S. tax, with an allowance for tax credit maintained.

The proposal calls for a ‘deemed repatriation’ of all historical earnings of foreign subsidiaries that have not been previously subject to U.S. tax, imposing a one-off tax at an example rate of 20%, payable over eight years.  Tax credits would also be allowed as offset against this one-off tax.

The proposal seeks to eliminate of the international aspects of the “check-the-box” rule.  Finally, the proposal explores mitigating ‘base profits erosion’ (BEPS) arrangements used by foreign multinationals to avoid U.S. tax.

Senator Baucus is quoted, “Over the past three years, the Finance Committee has examined every aspect of the tax code in an effort to fix a broken system.  Through hearings, option papers and blank slate proposals, we’ve received input from key stakeholders and nearly every member of the Senate.  These discussion drafts are the next step. They represent proposals collected throughout this process and provide a path forward on tax reform.  Some are Democratic ideas. Some are Republican ideas. The common link is they are all ideas worth exploring.

The Ranking (aka Minority) Member of the Committee, Republican Senator Orrin Hatch, released a statement that significant policy differences must still be bridged before international tax reform is realized: “…. but the fact is that significant policy differences remain between both sides and a final agreement was never reached.  I hope that once the budget conference negotiations have concluded that we can renew our discussions to determine whether we can find common ground to overhaul our tax code.”

The discussion draft is available at > Senate international tax proposals<

The proposed bills with legislative language are available at:

> International Tax Provisions Bill (Option 1) <

> International  Tax Provisions Bill (Option 2) < and

> International Tax Provisions Bill (Option 3)

For the entire series of Tax Reform Discussion Papers, see http://www.finance.senate.gov/issue/?id=6c61b1e9-7203-4af0-b356-357388612063

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