With an ever-evolving global taxation landscape, it has become essential to be in sync with the changing rules and regulations. The OECD BEPS global tax agenda has led to various countries proposing/implementing changes in their local laws to align with the themes laid out in the BEPS Action Plans.
Recently the OECD released the text and related explanatory statement of the multilateral instrument, which were formally adopted by approximately 100 countries, including OECD member countries, G20 countries and other developed and developing countries. The first high-level signing ceremony is expected to take place in the week beginning 5 June 2017. The multilateral instrument will be applied alongside existing tax treaties to modify and align them with tax-treaty related BEPS measures (namely, Action 2, Action 6, Action 7 and Action 14) in a flexible manner.
An updated version of OECD’s Guidance on the Implementation of Country-by-Country Reporting was released and subsequently agreed to by all members of the BEPS Inclusive Framework. The OECD has also launched a new website that provides country-wise information (currently 48 countries) on CbCR implementation.
The highlight of this Guidance is the adoption of a flexible approach on CbCR notifications, as a result of which a country requiring notifications can either delay the notification date or adopt a soft landing approach in which notifications could be amended or updated without carrying penalties. So far, 5 countries (Belgium, the Czech Republic, Finland, the Netherlands and Sweden) have adopted the flexible approach by delaying notifications for calendar year‐end groups until later next year. However, 8 jurisdictions (Austria, Bulgaria, Denmark, Ireland, Jersey, Luxembourg, Portugal and Spain) required notifications to be made by resident constituent entities belonging to calendar year‐end MNE groups to their country’s tax authorities by 31 December 2016.
Macau (China), Mauritius, Ukraine and Peru have joined the BEPS Inclusive Framework, taking the total number to 91.
The Australian Government released the Diverted Profits Tax (DPT) Exposure Draft (ED) on 29 November 2016 for public consultation. DPT is proposed to be applied to an entity if (i) the relevant taxpayer is a member of a group whose annual global income is at least AU$1 billion, (ii) it is reasonably concluded that any scheme was carried out for the primary purpose of obtaining a tax benefit or reduction in foreign tax liability and (iii) the relevant taxpayer obtains a tax benefit in connection with a scheme involving a foreign associate. The ED allows a higher penalty tax at the rate of 40% to be levied on entities in relation to profit-shifting schemes that fall within the ambit of DPT. Entities whose turnover is less than AU$25 million, or whose increase in foreign tax liability is equal to or exceeds 80% of the Australian tax reduction or that fulfil the “economic substance test” have been exempted from the proposed DPT.
Belgium has retrospectively, from 1 January 2016, adopted the bill to implement the 2014 and 2015 changes made to the EU Parent-Subsidiary Directive, which introduced linking rules to combat hybrid mismatches and a general anti-abuse provision, as well as the amendments to the exit tax regime (to partially implement the exit tax provisions as included in the EU Anti-Tax Avoidance Directive) introducing new rules for the collection of exit taxes due on transactions linked to tax year 2017.
Belgium also introduced mandatory transfer pricing documentation and CbC reporting requirements in accordance with BEPS Action Plan 13, to apply from 1 January 2016.
An “Innovation Deduction” in line with OECD’s “modified nexus approach” has been announced as an improvement over Belgium’s previous IP regime. The scope of this deduction has been widened to include other IP rights, including copyright protected software, orphan drug designations requested or acquired as of 1 July 2016 etc. Under the new regime, the deduction rate has been increased to 85% of the net qualifying IP income, resulting in an effective tax rate of 5.10%.
Brazil has published procedural and other rules on Mutual Agreement Procedure (MAP) under treaties for avoiding double taxation and has adopted the minimum standard for the resolution of treaty-related disputes under BEPS Action 14. However, it has not adopted the set of best practices set forth in BEPS Action 14, such as arbitration as a dispute-resolution mechanism. Further, CbCR rules broadly in line with Action 13 have also been proposed for fiscal years beginning on or after 1 January 2016.
The European Commission had proposed to address the hybrid mismatches involving member countries as well as non-EU members in June 2016 (as opposed to the present scenario, which only includes EU members) in order to make rules more consistent with guidelines issued under Action Plan 2, by amending the existing Anti-Tax Avoidance Directive. This proposal was discussed at the meeting held on 6 December 2016, where Member States agreed to a stable text for most provisions, leaving just two issues to resolve:
- rules that would allow member states to apply limited exemptions; and
- the date of implementation.
Germany has published a technical draft, in line with Action 5 of OECD BEPS project, to combat “Harmful Tax Practices” with regard to “Licensing of Rights.” It is intended to restrict royalty payments made to related parties if such payments are already subject to preferential rate of tax in the recipient’s jurisdiction (not being a general low tax jurisdiction) wherein such preferential treatment is not compliant with OECD. The draft law comes into force when the effective tax on such payments is less than 25%.
Israel has introduced an innovation box regime effective 1 January 2017, in which the tax rate on IP-based income and on capital gains from future sale of IP will be 6% for qualifying Israel companies that are part of a group with global consolidated revenue of over ILS10 billion and 12% for those with global consolidated revenue less than ILS10 billion. A company may qualify for the regime if it has invested at least 7% of the last three years’ revenue in R&D, or spent ILS75 million as R&D expense, and has (i) at least 20% R&D employees (or more than 200 R&D employees), or (ii) venture capital investment of ILS8 million previously made or (iii) average annual growth over three years of 25% in sales or employees.
Further, the standard corporate tax rate has been reduced from 25% to 23% in a phased manner — i.e., the rate will reduce to 24% from 1 January 2017 and further to 23% starting 1 January 2018.
Japan has issued select FAQs and answers regarding transfer pricing documentation/local filing requirements having greater relevance for MNEs that are headquartered outside Japan but have subsidiaries or branches in Japan. Chiefly, the FAQs include issues of “presumptive taxation” and use of “secret comparables.”
Luxembourg has adopted the draft law on CbC reporting with just one major change: the penalty of EUR250,000 (proposed in the earlier draft) has been extended to failure to notify/late notification to the tax authorities
The New Zealand Ministry of Revenue released an updated tax policy work program (2016—17), which covers New Zealand’s approach of working on BEPS initiatives. It is proposed to include anti-hybrid mismatch rules, interest-limitation rules in light of Action 4 and other measures that address BEPS and may be appropriate for New Zealand, such as DPT adopted by the UK and Australia and signing of the multilateral instrument.
Papua New Guinea
Papua New Guinea has proposed to introduce CbC reporting for fiscal year starting from 1 January 2017 applicable for MNE groups whose total consolidated group revenue is greater than PGK2 million (approximately EUR0.56 million) and is in line with Action 13 of OECD.
The Kingdom of Saudi Arabia (KSA) has joined the Common Reporting Standard (CRS) Multilateral Competent Authority Agreement (MCAA) and has committed to the first exchange of financial account information by September 2018.
Switzerland has adopted the administrative regulations required for the implementation of spontaneous exchange of information on tax rulings with effect from 1 January 2017.
Further, the dispatch on the MCAA on exchange of CbC reports along with the corresponding federal act required for its implementation in Switzerland has been adopted subject to the approval of the Swiss Parliament.
The draft clauses for the UK Finance Bill 2017, were published by the UK Government for consultation until 1 February 2017. The key developments included in the Bill are revised patent box rules, rules on restriction of interest deduction and minor changes to the hybrid mismatch regime. The new interest restriction rules will apply to groups whose interest expenses are greater than GBP2 million with respect to interest expenses accruing on or after 1 April 2017.
Additionally, draft guidance on hybrid and other mismatches was published to provide clarity and understanding on the application of the hybrids mismatch legislation, which is effective from 1 January 2017.
The US IRS has released a new draft form for the purposes of CbCR, with its link on the IRS website, particularly for the perusal of the ultimate parent entities of MNE groups in the US.
This certainly hints at an intentioned shift in domestic laws/introduction of new tax principles in various countries to align with the thought process propounded in the OECD BEPS action plans. It will be interesting to watch the extent to which each country/jurisdiction will embrace the proposed action plans and the developments that may unfold.
( Views expressed are personal)
(This article first featured on the ‘Global Taxation – A monthly Journal of International Taxation, Transfer Pricing and BEPS’ this month i.e. January 2017. Priya Bubna, Manager, International Tax Services, EY India, has also contributed to this article).