Transcript Slides

OECD & BEPS
Stephen Coleclough
President CIOT
Dubai Inaugural Meeting
28 April 2014
Agenda
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Background
Base erosion and profit shifting
The 15 action plans
What should you be doing?
BEPS - background
• OECD model treaty has always favoured capital
exporting countries to the detriment of capital
importing countries
• Tax competition between developed economies has
given MNEs the opportunity to not pay tax on profits
• In the case of the USA, due to active CFC active
income rules and check the box, holding companies in
tax havens are treated as active traders. This allows
US HQ’d MNEs to compete outside the US tax free
(surely and unlawful export subsidy)
Background
• Internet – mail order, digital down loads, cost reduction, volume
• Transparency – follows on from digitisation and low cost of
processing – data is available.
• Data
• The rise of the “sovereign” MNE
• SME’s - ‹5% of EU SME’s operate in more than one M.S.(post
internet)
• USA – export means the next state.
• Technology – v – having to be physically present/people buy
people
• OECD rules, designed to eliminate double traxation but… result is
no taxation
Background cont…
• Globalisation – nothing new – and look at Roman Empire (render
unto Caesar) look at British Empire and 1776!
• Customs – movement of goods – Tariff and WTO
• EU, NAFTA, ASEAN, etc.
• Power to raise taxes – statehood.
Companies and International taxation
• In the beginning…. A US coffee shop opens in Germany
• US Co could have a German branch and a shop or a German
subsidiary.
• German corporation taxes and Trade Taxes due (plus payroll taxes
plus VAT etc).
• US tax payable after credit for German corporate tax
• Next result, bulk of tax in Germany, possible nil tax in USA.
• But what if… ?
US coffee shop
• What if US Co sets up a US Brand Co which charges royalty for
brand to German Co?
• What if US Co sets up Irish Co managed in US to charge royalty to
German Co?
• What if US Co sells coffee to German Co via a Swiss Co at 20%
mark up (coffee goes nowhere near Switzerland)?
• And what about debt funding?
• What if US Co puts all its trading companies under a Lux Co held
by a Gibraltar Co held by a Bermuda Co?
• US CFE apportionment of royalty and dividend income?
US coffee shop cont..
• No CFC apportionment because through check the box the
royalty and dividend flows disappear and the Bermudan holdco
becomes an active trading company.
• Net result a system designed to stop both the US & German
governments taxing means no tax is paid.
So....
From this
To this...
US Co
US Co
Bermuda Co
German
CO
Gibraltar Co
Luxemburg
Sarl
Buy
Swiss Coffee
Co
German
Distribution Co
Sell
Lux Fin Co
German Co
Irish Co
Managed in
USA
Lux
Downloads co
BEPS - background
• But don’t need to litigate, there is the BEPS
consultation http://www.oecd.org/ctp/BEPSActionPlan.pdf
• Action by capital importing countries now?
• Transparency and information exchange is the
key. Once the whole value chain is visible to tax
authorities, some parts will be hard to sustain.
The 15 action plans
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1 Addressing the tax challenges of the digital economy (V)
2 Neutralise the effect of hybrid mismatch arrangements
3 Strengthen CFC rules
4 Limit base erosion via interest deductions and other financial
payments
5 Counter harmful tax practices more effectively, taking into
account transparency and substance (V)
6 Prevent treaty abuse
7 Prevent the artificial avoidance of PE status (V)
8 Assure that transfer pricing outcomes are in line with value
creations – intangibles, 9 Risks and capital, 10 Other high risk
transactions (V) (C)
The 15 action points
• 11 Establish methodologies to collect and analyse data on BEPS
and the actions to address it
• 12 Require taxpayers to disclose their aggressive tax planning
arrangements
• 13 Re-examine transfer pricing documentation (V) (C)
• 14 Make dispute resolution mechanisms more effective (MAP)
• 15 Develop a multilateral instrument (V) (C)
Grouping the action plans
• 1 Addressing the tax challenges of the digital
economy
• Touches also on
• 7 Prevent the artificial avoidance of PE status
• 8 Assure that transfer pricing outcomes are in
line with value creations – intangibles,
• 9 Risks and capital,
• 10 Other high risk transactions
Grouping the action plans
• Ensuring coherence (2 to 5)
• 2 Neutralise the effect of hybrid mismatch
arrangements
• 3 Strengthen CFC rules
• 4 Limit base erosion via interest deductions and
other financial payments
• 5 Counter harmful tax practices more
effectively, taking into account transparency
and substance
Grouping the action plans
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Reforming international standards (6 to 10)
6 Prevent treaty abuse
7 Prevent the artificial avoidance of PE status
8 Assure that transfer pricing outcomes are in
line with value creations – intangibles
• 9 Risks and capital
• 10 Other high risk transactions
Grouping the action plans
• Improving Transparency and Certainty (11 – 15)
• 11 Establish methodologies to collect and analyse
data on BEPS and the actions to address it
• 12 Require taxpayers to disclose their aggressive
tax planning arrangements
• 13 Re-examine transfer pricing documentation
• 14 Make dispute resolution mechanisms more
effective
• 15 Develop a multilateral instrument
Timing – September 2014
• 1 Addressing the tax challenges of the digital
economy
• 2 Neutralise the effect of hybrid mismatch
arrangements
• 6 Prevent treaty abuse
• 13 Re-examine transfer pricing documentation
Timing – September 2015
• 3 Strengthen CFC rules
• 7 Prevent the artificial avoidance of PE status
• 8 Assure that transfer pricing outcomes are in line with
value creations – intangibles
– 9 Risks and capital
– 10 Other high risk transactions
• 11 Establish methodologies to collect and analyse data
on BEPS and the actions to address it
• 12 Require taxpayers to disclose their aggressive tax
planning arrangements
• 13 Re-examine transfer pricing documentation
• 14 Make dispute resolution mechanisms more effective
Timing December 2015
• 4 Limit base erosion via interest deductions and
other financial payments
• 5 Counter harmful tax practices more
effectively, taking into account transparency
and substance
• 15 Develop a multilateral instrument
What should you be doing?
• As tax advisers you have to
– Ensure clients know what their tax liabilities and
risks are
– Advise them of all lawful opportunities to reduce
their tax exposure and any associated risks,
including adverse reaction from media and
consumers
– Observe duties of confidentiality and their right to
privacy
What should you be doing?
• As professional bodies I think you should…
– Consult with your clients and governments
– Lobby for local changes in advance of or in
anticipation of BEPS which are fair and workable
– Make your views known both direct to OECD and
via your government
– Your government will need your technical and
practical knowledge to understand the realities and
rebut the assumption that tax is paid somewhere
sometime
Questions?
• Stephen Coleclough LL.B. (Hons), CTA (Fellow),
FIIT, ATT, FInstCPD, FRSA, Solicitor, TEP
• Contact
– [email protected]
– [email protected]
– +44 7802 878 045