On 11 and 12 October 2016, the OECD held a public consultation with respect to the discussion drafts on Additional Guidance on Profit Attribution to Permanent Establishments and on Revised Guidance on Profit Splits that were released earlier this year. The consultation was an opportunity for stakeholders to engage directly with the OECD Secretariat and the country delegates who are responsible for the OECD’s transfer pricing work. The OECD Working Party will discuss the comments and next steps at its next meeting in November 2016.
See EY Global Tax Alert, OECD holds public consultation on attribution of profits to PEs and profit splits, dated 13 October 2016.
On 20 October 2016, the OECD released key documents , approved by the Inclusive Framework on BEPS, which will form the basis of the Mutual Agreement Procedure (MAP) peer review and monitoring process under Action 14 of the BEPS Action Plan. The compilation includes: (i) the ”Terms of Reference” which translate the minimum standard approved in the final Action 14 report into a basis for peer review; (ii) the ”Assessment Methodology” for the peer review and monitoring process; (iii) the ”MAP statistics reporting framework” which reflects the collaborative approach competent authorities will take to resolve MAP cases and also will ensure greater transparency on statistical information relating to the inventory, types and outcome of MAP cases through common reporting of MAP cases going forward; and (iv) ”Guidance on information and documentation to be submitted with a MAP request.” The Forum on Tax Administrations’ MAP Forum will conduct the peer review and monitoring process, with all members participating on an equal footing. Furthermore, the methodology released contains the possibility for developing countries to defer the peer review, recognizing their capacity constraints and often relatively small MAP pipeline. The actual peer reviews will be conducted in batches, with the first batch commencing in December 2016.
On 21 October 2016, five additional countries (namely, Brazil, Guernsey, Jersey, the Isle of Man and Latvia) signed the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of Country-by-Country (CbC) reports. This brings the number of signatories up to 49. The signing of the MCAA took place during an OECD’s meeting held in Paris.
On 14 October 2016, the BEPS Inclusive Framework welcomed Andorra as its 86th member. Andorra had initially joined the BEPS Inclusive Framework as an invitee. As a new BEPS Member, Andorra is committed to comply with the BEPS minimum standards contained in Action 5 (countering harmful tax practices), Action 6 (preventing treaty abuse), Action 13 (transfer pricing documentation) and Action 14 (enhancing dispute resolution). Andorra will also participate on an equal footing with the rest of BEPS members on the remaining standard setting under the BEPS project, as well as the review and monitoring of the implementation of the BEPS package.
On 12 October 2016, representatives of Belgium and Japan signed a revised income tax treaty (the Revised Treaty) and protocol (the Protocol) which will replace the existing 1970 treaty. The revised treaty is aimed at further promoting investment and economic activities between the two countries through, among others, the introduction of a full exemption of withholding tax on dividends, interest and royalties. Furthermore, the revised treaty is meant to align with the current OECD Model Convention as well as with the treaty-based recommendations in the OECD/G20 BEPS project, namely those contained in Actions 2, 6, 7 and 14.
The revised treaty contains a provision dealing with fiscally transparent entities/arrangement concept in Article 1 that is recommended under Action 2. Moreover, in relation to Action 6, the treaty does not use the place of management as a tie-breaker rule; instead, the competent authorities of the Contracting States shall endeavor to determine by mutual agreement the Contracting State of which the person, other than an individual, shall be deemed to be a resident. Likewise, the treaty contains a Limitation of Benefits clause and a Principal Purpose Test in line with Action 6. The treaty also contains various recommendations on the definition of permanent establishment (PE) (e.g., it has an anti-fragmentation rule and the new wording on agency PE (i.e., the new principal role test, the definition of an enterprise closely related, etc.)) and a clause on mandatory arbitration for any unresolved MAP if the person requests so.
See EY Global Tax Alert, Belgium and Japan sign revised income tax treaty, dated 17 October 2016.
On 14 October 2016, the Cypriot Parliament approved the laws amending the Income Tax Law with respect to the application of the Cypriot intellectual property regime (the IP box regime). The provisions of the IP box regime have been aligned with the recommendations of the OECD final report on BEPS Action 5. The new regulations introduce the OECD recommended “nexus approach,” which limits application of the IP box regime if research and development (R&D) is being outsourced to related parties. The approach links the benefits of the regime with the R&D expenses incurred by the taxpayer.
As per the new IP box regime, qualifying taxpayers will be eligible to claim a tax deduction equaling 80% of qualifying profits resulting from the business use of the qualifying assets. The amending legislation provides for a five-year transitional period. The new legislation is effective as of 1 July 2016. However, the relevant laws and regulations implementing the new IP Box regime will take legal effect once they are published in the Official Gazette of the Republic.
See EY Global Tax Alert, Cyprus introduces new rules for application of IP box regime, dated 19 October 2016.
On 11 October 2016, the Council of the EU issued a press release setting out the Council’s conclusions on Tax Transparency. Among others, it noted the intention of the Commission to explore possibilities for Mandatory Disclosure Rules inspired by Action 12 of the OECD BEPS project by way of drawing on the experiences in this area of some EU Member States and to possibly come forward with a legislative proposal in 2017.
On 13 October 2016, the Icelandic parliament passed Bill No. 787 that, among other things, implements some of the recommendations contained in Action 4 (interest deduction limitation), Action 7 (permanent establishment) and Action 13 (transfer pricing documentation) of the OECD/G20 BEPS project. In relation to Action 4, a fixed ratio rule will cap the amount of Icelandic tax relief for gross interest expense from related parties to 30% of taxable EBITDA calculated per entity. The rules include a de minimis allowance of ISK100 million (US$876k) of related-party interest expense per annum. Moreover, the fixed ratio rule would not apply if: (i) the lender is a tax resident in Iceland; (ii) the taxpayer demonstrates that his equity ratio is not lower than 2% of the consolidated equity ratio of the MNE Group to which he belongs; and (iii) if the taxpayer is a financial institution, insurance company or a company owned by the aforementioned companies and involved in similar operations.
Regarding Action 13, the legislation introduces CbC reporting. According to the legislation all multinational groups with annual consolidated group revenue equal to or exceeding ISK100 billion (approximately €750 million) will be required to file a CbC report. The CbC report shall be submitted in the jurisdiction where the group’s ultimate parent company is tax resident and shall be exchanged by using exchange of information agreements. In certain situations, other group companies may be required to file a CbC report instead. The legislation is aligned with Action 13 as regards the reporting obligation. However, further details on the information that will be in the CbC report will be put forward in a regulation by the Minister of Finance and Economic Affairs. The first reporting should be submitted by 31 December 2017 based on figures from financial year 2016. At the moment, master file and local file have not been introduced, but it is expected that the Minister of Finance and Economic Affairs will update regulation no. 1180/2014 by the end of this year.
See EY Global Tax Alert, Iceland passes bill to implement OECD BEPS Action 4 and Action 13 recommendations, dated 21 October 2016.
On 11 October 2016, Ireland released its 2017 Budget proposals. As part of this, the Irish Minister of Finance published a document entitled, Update on Ireland’s International Tax Strategy (2016 Strategy Update). The 2016 Strategy Update reaffirms Ireland’s international tax policy commitments including the 12.5% rate and its commitment to the OECD BEPS process. It also provides an overview of Ireland’s progress in its commitments under BEPS over the past 12 months.
Among these include implementation of CbC reporting, meeting the OECD exchange of information requirements for tax rulings and introduction of the Knowledge Development Box in Finance Act 2015 that fully complies with the international best practice in BEPS Action 5. As part of its commitment to the Anti-Tax Avoidance Directive (ATAD), it is noted that Ireland will implement three key OECD BEPS recommendations namely targeting hybrid mismatches, interest deductibility and controlled foreign company rules in line with agreed deadlines. Furthermore, the 2016 Strategy Update recognizes the need to ensure compliance with the new OECD Transfer Pricing guidelines and anticipated legislative proposals in this area in the Finance Bill that was published on 20 October 2016.
It further states that Ireland remains engaged in the OECD’s BEPS project and the new BEPS Inclusive Framework. In relation to the ongoing work of finalizing a multilateral instrument to modify bilateral treaties, the 2016 Strategy Update states that Ireland has played an active part in this work and will continue to do so.
See EY Global Tax Alert, Ireland updates international tax strategy, dated 14 October 2016.
On 20 October 2016, the Irish tax authorities released Finance bill 2016, which includes legislation to implement two important EU transparency Directives. One of these provides for the sharing of information between member states about tax rulings issued by tax authorities. It allows the Revenue Commissioners to supplement the information which is required to be automatically exchanged under Council Directive 2011/16/EU, as amended by Council Directive (EU) 2015/2376 of 8 December 2015 as regards mandatory automatic exchange of information in the field of taxation. The 2015 amendment to the Directive provides for the automatic exchange of information relating to advance cross-border rulings and advance pricing arrangements between Member States and to the European Commission. This section is subject to a commencement order.
Regarding another directive on CbC reporting, the bill outlines some minor amendments and clarifications to the CbC regulations introduced in 2015. In particular, it amends legislation to provide the Revenue Commissioners the power to make regulations in relation to the appointment of an EU designated entity that can file a CbC report on behalf of all EU constituent entities of a non-EU parented multinational enterprise (MNE) group. The amended section also gives the Revenue Commissioners the power to make regulations in respect of notification requirements of such an EU designated entity that is tax resident in Ireland. It also clarifies that a fiscal year for which a CbC report must be filed can be a period of less than 12 months if the ultimate parent entity of an MNE group prepares its financial statements for such a shorter period. The changes also require that the CbC report includes the tax identification numbers of all entities within the MNE group. The amendments apply for accounting periods ending on or after the date of the passing of this Act.
On 12 October 2016, the Luxembourg Government introduced the draft Budget Law for 2017. It reflects willingness to comply with the OECD BEPS project and related EU developments. Among other amendments, the Luxembourg Government proposes to insert a new article 56bis in the Luxembourg Income Tax law that aims to clarify the concept of the “arm’s length principle.” This article lays down the basic principles to be followed in a transfer pricing analysis, including the approach to be used and the methodology to be selected transposing the conclusions from Actions 8-10 of the BEPS Plan into domestic law. If adopted, these measures will enter into effect as from the fiscal year 2017.
See EY Global Tax Alert, Luxembourg introduces draft budget law 2017 including new article on arm’s length principle in line with Actions 8-10 of OECD BEPS Action Plan, dated 17 October 2016.
On 10 October 2016, the Inland Revenue Authority of Singapore (IRAS) released an e-Tax Guide containing guidelines on CbC reporting (CbCR) for Singapore headquartered MNE groups. The CbCR e-Tax Guide (CbCR guidance) is based to a large extent on the OECD guidance encompassed in BEPS Action Plan 13 and thus aligns with Singapore’s commitment to adopt the four minimum standards under the BEPS Project (as a BEPS Associate Member). The CbCR guidance addresses, among other things, CbCR filing obligations, format of CbC reports, notifications requirements, secondary mechanism, exchange of reports and penalties for non-compliance.
CbCR filing obligation is applicable for an MNE group if its Ultimate Parent Entity (UPE) is tax resident in Singapore with consolidated group revenue of at least S$1,125m (approx. US$800k) in the preceding financial year and has subsidiaries or operations in at least one foreign jurisdiction. The first year to be reported under the CbCR guidance is financial year 2017. The deadline to submit a CbC report to IRAS would be within 12 months from the end of a financial year wherein the earliest CbC report would be due by 31 December 2018. The format of the CbC reports is provided in a template containing three tables in line with BEPS Action 13. These CbC reports will be exchanged with the relevant jurisdictions provided Singapore has an agreement with the given jurisdiction covering the exchange of CbCR information.
No guidance has been issued on voluntary filing for Singapore MNEs subject to CbCR requirements of foreign jurisdictions in 2016. Thus, it is likely that Singapore MNEs subject to foreign jurisdictions’ CbCR requirements in 2016 may have to file with each of the relevant tax authorities or appoint a surrogate parent filing entity. The CbCR guidance also includes a Q&A section, which provides some clarity on the definition of certain financial items to be reported in the CbCR Report and other interpretation issues.
See EY Global Tax Alert, Singapore releases tax guide on Country-by-Country reporting, dated 20 October 2016.
On 4 October 2016, the United Nations (UN) Sub-committee on BEPS submitted its report Proposed BEPS-related Changes to the United Nations Model Double Taxation Convention (UNMC) between Developed and Developing Countries to the Committee of Experts on International Cooperation in Tax Matters for its consideration in the Twelfth Session held in Geneva on 11-14 October 2016. This revision was undertaken to keep a communication channel open between the developing and developed components of the UN membership in order to create greater awareness of BEPS issues and responses to them that work for developing countries and also to take account of developments in the area of international tax policies relevant to developed and developing countries. The main proposed BEPS related modifications to the UNMC are: (i) a modified title of the Model and a new Preamble; (ii) a new version of Article 1 that includes a principal purpose test, a third state PE rule, and a savings clause; (ii) a modified version of Article 4 that includes a new tie breaker rule for determining the treaty residence of dual-resident persons other than individuals; and (iv) a modified version of Article 5 to prevent the avoidance of PE status. These changes are largely in line with the BEPS work under Actions 6 and 7.
On 7 October 2016, the Subcommittee on Transfer Pricing submitted its report Update of the United Nations Practical Manual on Transfer Pricing for Developing Countries to the Committee of Experts on International Cooperation in Tax Matters for its consideration in the Twelfth Session held in Geneva on 11-14 October 2016. The updated TP Manual has taken account of recent developments, including those relating to the OECD/G20 BEPS Action Plan relevant to transfer pricing. Broadly, the changes in the model include a revised format and a rearrangement of some parts of the Manual for clarity and ease of understanding, new chapters on intra-group services, on cost contribution arrangements and on the treatment of intangibles, and significant updating of other chapters.
On 13 October 2016, the US Treasury Department and the Internal Revenue Service released final and temporary regulations under Internal Revenue Code Section 385, which follow the release of extremely controversial proposed regulations by just six months. In response to comments, the Final Regulations significantly narrow the scope of the Proposed Regulations. Although the Final Regulations retain much of the general approach of the Proposed Regulations, they also contain numerous and significant modifications. Like the Proposed Regulations, the Final Regulations target instruments issued to a member of the issuer’s “expanded group” that would otherwise constitute indebtedness for US federal tax purposes under common law principles (a debt instrument). Like the Proposed Regulations, the Final Regulations:
- Establish extensive documentation requirements that must be satisfied for a debt instrument to constitute indebtedness for US federal tax purposes (the Documentation Rule).
- Recharacterize a debt instrument issued after 4 April 2016, as stock if the instrument is: (i) issued in one of a number of specified transactions, or (ii) funds a tainted transaction (the Recharacterization Rule).
See EY Global Tax Alert, Final and temporary US Section 385 regulations significantly narrow the scope of earlier proposed regulations, dated 19 October 2016.
EYG no. 03522-161Gbl
DID YOU LIKE THIS ARTICLE?
Subscribe to the Tax Insights newsletter for the latest thinking in tax.