On 31 October 2016, the OECD published the BEPS Action 14 assessment schedule of peer reviews (the Schedule). The Schedule covers Stage 1 of the peer review process and catalogues the assessed jurisdictions into eight batches for review. The first batch is scheduled to be launched in December 2016 and comprises the review of Belgium, Canada, Netherlands, Switzerland, the United Kingdom and the United States. The assessment reports of the first batch would be published in the second half of 2017. The OECD also opened the possibility for business representatives to provide input into the peer review process through the completion of a questionnaire. Input is requested before 28 November.
See EY Global Tax Alert, OECD releases schedule of Action 14 peer reviews, dated 1 November 2016.
On 20 October 2016, the Austrian Ministry of Finance announced the issuance of a decree to transpose the Directive on Automatic Exchange of Information with respect to advance tax rulings under the amended Mutual Assistance Directive.
On 18 October 2016, China’s State Administration of Taxation (SAT) issued SAT Bulletin No. 64 (Bulletin on Issues Related to Improving the Administration of Advance Pricing Arrangements). Effective from 1 December 2016, the new Bulletin governs the administration of advance pricing agreements (APAs) in China. The Bulletin puts taxpayers on notice that their unilateral APAs will be exchanged as agreed under the Action 5 final report. Moreover, China has put attentional focus on its Mutual Agreement Procedure (MAP) and APA processes and has recently added a new anti-avoidance division under the international tax department.
See EY Global Tax Alert, China’s SAT issues new guidance on administration of advance pricing agreements, dated 21 October 2016.
On 19 October 2016, the Colombian Minister of Finance submitted a tax reform bill before the Congress. The bill proposes introducing a number of BEPS measures, inter alia, Controlled Foreign Company (CFC) rules (Action 3), recommendations on pricing commodities transactions (Actions 8-10), mandatory disclosure rules (Action 12), and the three-tiered approach on transfer pricing documentation (Action 13). The bill is in an early stage and thus the proposal could be substantially amended before the bill is passed.
Under the CFC rules proposal, both individual taxpayers and entities would be subject to CFC rules as long as they either hold, directly or indirectly, 10% or more of the capital of the CFC or are entitled to 10% or more of the profits of the CFC. A CFC is defined as a nonresident entity, trust, CIV, Private Interest Foundation, among other types of investment vehicles which meet certain criteria to be considered an associated enterprise for transfer pricing purposes. Taxpayers subject to the CFC rules would be required to include their pro-rata share of CFC passive income in their taxable income. Earnings which have been taxed under the CFC rules would be considered non-taxable income for corporate income tax when repatriated back to Colombia.
Furthermore, the bill proposes introducing mandatory disclosure rules (MDRs) requiring disclosure from users (the taxpayers that receive the scheme) and promoters (the person designing and providing an aggressive tax planning scheme). The main obligation to report a scheme lies on the promoter (if it is a Colombian promoter) and a secondary obligation lies on the user, who should report annually in its tax returns what schemes have been used during the reporting year. However, the main obligation will be in the hands of the user if the promoter is abroad. The MDRs are triggered by specific hallmarks, namely loss schemes, schemes involving entities located in low-tax jurisdictions, payments that are not subject to tax in the hands of the beneficial owner, application of tax treaties and any other that could potentially erode the base or shift profits abroad. If adopted the report should be due in January 2019, but it could include the reporting of transactions already implemented but that are currently generating tax effects.
Lastly, the bill proposes introducing Country-by-Country (CbC) reporting, master file and local file. Colombian headquartered multinational enterprise (MNE) groups with annual consolidated group revenue of at least 81 million tax units (approximately €707 million – one tax unit equals in 2016 to COP$29.753) are required to file a CbC reports. An MNE group could also appoint a constituent entity in Colombia to file a report on behalf of the group. The content of the CbC report, filing date and format will be prescribed by the Government at a later stage. Furthermore, taxpayers with gross equity greater than 100.000 tax units (approximately US$590.000) or gross revenue greater than 61.000 tax units (approximately US$970.000; with related party transactions in a given year, should prepare a master file and a local file. The CbC report, master file and local file should be kept for five years and would apply from fiscal years commencing on or after 1 January 2016.
See EY Global Tax Alert, Colombian Government proposes structural tax reform, dated 4 November 2016.
On 25 October 2016, the European Commission announced a new package of corporate tax reforms.The package includes three separate legislative initiatives, namely: (i) a two-stage proposal towards a Common Consolidated Corporate Tax Base; (ii) a Directive on Double Taxation Dispute Resolution Mechanisms in the EU; and (iii) amendments to the Anti-Tax Avoidance Directive agreed in June 2016, as regards hybrid mismatches with third countries.
See EY Global Tax Alert, European Commission proposes corporate tax reform package, dated 25 October 2016.
On 25 October 2016, the European Commission announced a new package of corporate tax reforms. The package includes a two-stage proposal towards a Common Consolidated Corporate Tax Base (CCCTB). This proposal has been split into two directives, the first covering only a common corporate tax base (CCTB) and the second introducing the consolidation elements of the CCCTB itself. The first directive contains a set of rules to create a CCTB, mandatory for groups with consolidated turnover in the preceding year greater than €750M. It also includes, inter alia, a permanent establishment (PE) definition closely aligned with the recommendations of the OECD in BEPS Action 7 report, covering only PEs situated within the EU and belonging to a taxpayer who is resident within the EU. The CCTB will have a broadly defined tax base, with all revenues taxable unless expressly exempted, and business expenses generally deductible, subject to specific exceptions. The CCTB also provides for an enhanced Research & Development allowance, and an “Allowance for Growth and Investment” which grants deductions for financing costs for both debt and equity within limits to avoid abuses and tax planning. Losses can be carried forward indefinitely, but no carry-back will be available. Transfer pricing rules will continue to operate intra-EU, though the need for these should be eliminated with the introduction of the CCCTB.
The proposals incorporate the measures included in the anti-avoidance directive (ATAD) which implement certain aspects of the OECD’s BEPS proposals in the EU. The key BEPS related measures are: (i) anti-hybrid mismatch rules (Action 2 of the BEPS action plan); (ii) an interest expense limitation for groups in line with the recommendation in the Action 4 report of the OECD BEPS project, although not including a Group Ratio Rule; and (iii) CFC rules broadly in line with Action 3 of the BEPS Action plan.
It is proposed that Member States should transpose these proposals by 31 December 2018 at the latest, and that it shall apply from 1 January 2019. The second draft directive, containing the CCCTB proposals, suggests that the regime should be in force by 1 January 2021. The CCCTB would enable businesses to file a single tax return for all of their EU activities. The taxable profits would be shared out between the Member States in which the company is actively using an apportionment formula. Each Member State can then tax its share of the company’s profits at its own national tax rate.
See EY Global Tax Alert, European Commission proposes staged approach towards harmonized group tax base, dated 26 October 2016.
On 25 October 2016, the European Commission announced a new package of corporate tax reforms. The package includes a Directive on Double Taxation Dispute Resolution Mechanisms in the EU. The proposed Directive includes a reinforced mandatory binding dispute resolution mechanism in the EU. Currently a double taxation dispute resolution in the EU is governed by an inter-governmental Convention which was signed on 23 July 1990 (the Arbitration Convention). The proposed Directive builds upon the Arbitration Convention, but broadens the scope to cover additional areas, beyond transfer pricing and allocation of profits to PEs, and provides features to address certain identified shortcomings of the existing process to enhance the enforceability and the effectiveness of the mechanism. It is proposed that Member States should transpose this Directive by 31 December 2017 at the latest.
See EY Global Tax Alert, European Commission announces proposal on double taxation dispute resolution mechanisms in the European Union, dated 26 October 2016.
On 25 October 2016, the European Commission announced a new package of corporate tax reforms. The package includes amendments to the Anti-Tax Avoidance Directive (ATAD) agreed in June 2016, as regards hybrid mismatches with third countries. Under this new proposal (ATAD 2), the Commission seeks to establish a comprehensive anti-hybrid abuse framework to prevent arrangements that involve Member States and third countries. In addition to expanding the territorial scope, ATAD 2 addresses the hybrid entity mismatches, hybrid financial instruments mismatches, hybrid transfers, hybrid PE mismatch, imported mismatches and dual resident mismatches. The rules are essentially modelled on the rules contained in the OECD BEPS report on Action 2, as well as the OECD discussion draft on branch mismatch structures. This legislative initiative proposes that Member States should transpose these proposals by 31 December 2018 at the latest, and that it shall apply from 1 January 2019
See EY Global Tax Alert, European Commission releases draft directive addressing hybrid mismatches with non-EU countries, dated 26 October 2016.
On 20 October 2016, the Finnish Government presented to the Parliament a law proposal implementing the Directive on Automatic Exchange of Information with respect to advance tax rulings under the amended Mutual Assistance Directive. The proposed law is scheduled to become effective from 1 January 2017.
On 26 October 2016, the Government of Hong Kong announced a consultation paper on measures to counter BEPS. As a member of the inclusive framework, Hong Kong is committed to implementing the BEPS minimum standards and thus the consultation paper focuses on the four actions containing minimum standards (Action 5, 6, 13 and 14) as well as measures of direct relevance to their implementation (Action 8-10 and Action 15). The Consultation paper proposes adopting the three-tiered approach to transfer pricing documentation developed as part of Action 13 from 2018. Moreover, Hong Kong is prepared to sign the multilateral instrument (MLI) in early 2017, but the effective date of each modified tax treaty will be determined at a later stage taking into account the timing of signature of the MLI by Hong Kong’s treaty partners and the progress of legislative implementation. The closing date of the consultation period is 31 December 2016 and relevant amendment bill(s) are expected in mid-2017.
See EY Global Tax Alert, Hong Kong publishes consultation paper on measures to counter BEPS, dated 28 October 2016.
On 26 October 2016, the Malaysian Government released the Finance Bill 2016. The Bill proposes to introduce penalty provisions for failure to furnish a CbC report or incorrect information. Upon conviction the taxpayer could be liable to either a fine of between RM20,000 (Approx. US$4,700) and RM100,000 (Approx. US$23,900) or imprisonment for a maximum of six months, or both. There may be a further court order to comply with the rules within 30 days or any other period as the court deems fit. It is expected that the CbC reporting and transfer pricing rules would apply for fiscal years commencing on or after 1 January 2017 and new rules and guidelines pertaining to Action 13 are expected to be issued soon.
On 14 October 2016, the US Internal Revenue Service (IRS) announced that US taxpayers seeking unilateral APAs with Mexico for their maquiladora operations will not be exposed to double taxation as long as the intercompany pricing is under the framework to which the US and Mexican competent authorities have agreed in advance. The Mexican Tax Authority (SAT) will be notifying eligible maquiladora taxpayers with pending unilateral APAs about an election to apply the “Fast Track” methodology agreed in advance with the IRS, which will produce arm’s-length results. The IRS, however, has explicitly stated that the transfer pricing results set forth in unilateral APAs executed between SAT and Mexican affiliates of US taxpayers under the framework will be regarded as “arm’s length” under Section 482.
See EY Global Tax Alert, US taxpayers seeking unilateral APAs with Mexico for maquiladoras will not be subject to double taxation as long as certain requirements are met, dated 20 October 2016.
On 28 October 2016, the Dutch Government announced in a letter to the Dutch Parliament its intention to sign the BEPS Multilateral Agreement. It was announced that the Ad Hoc Group reached an agreement and the MLI will likely be published by the end of November 2016. A signing ceremony is expected in the first half of 2017. After signing the MLI, governments will need to advance it through their normal domestic ratification procedures applicable to tax treaties. The MLI could result in some key BEPS recommendations taking effect potentially in 2017 through significant changes to existing bilateral tax treaties, including new limitations on access to treaty benefits, lower thresholds to recognize a PE and, in some cases, new arbitration mechanisms for dispute resolution. Regarding the possible new limitations on access to treaty benefits, the Dutch Government indicated that it prefers including a Principal Purpose Test (PPT) over a Limitation on Benefits (LOB) clause. Changes to a bilateral tax treaty however only become effective if both countries that concluded the treaty sign the MLI and only to the extent the same provisions are elected to apply by both countries.
On 31 October 2016, the BEPS Inclusive Framework welcomed Panama as its 87th member. Panama had initially joined the BEPS Inclusive Framework as an invitee. As a new BEPS Member, Panama is committed to comply with the BEPS minimum standards, which are contained in Action 5 (countering harmful tax practices), Action 6 (preventing treaty abuse), Action 13 (transfer pricing documentation) and Action 14 (enhancing dispute resolution). Panama 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 15 September 2016, the UK Finance Act 2016 received Royal Assent enacting legislation requiring certain businesses to publish their UK tax strategy publicly. Any multinational group with a turnover in excess of €750m and at least one UK subsidiary or a UK PE will be required to publish its UK tax strategy. There is no de minimis level in respect of the UK operations.
The legislation also gives the power for the UK Treasury to introduce regulations requiring the inclusion of a CbC report in the tax strategy. These regulations, if introduced, would effectively extend beyond what is envisaged under the OECD CbC reporting model, as they would require public disclosure. However, it is expected that the UK Treasury will only act to require public publication if an international consensus by way of an MLI is reached in this regard. In line with this understanding, the Finance Act 2016 does not set out a timeframe or detailed rules for public CbC reporting. It still remains uncertain as to what level of MLI will be required for the Government to consider implementing Public CbC reporting.
On 17 October 2016, the UK HM Revenue & Customs (HMRC) released updated guidance on Disclosure of tax avoidance schemes (DOTAS). The guidance supplements the DOTAS rules which determine whether arrangements relating to tax need to be disclosed, how to make the disclosure, how to notify HMRC of the disclosure etc. Under the rules, a tax arrangement may need to be disclosed even if HMRC is already aware of it or it is not considered to be avoidance.
A tax arrangement should be disclosed where:
- It will, or might be expected to, enable any person to obtain a tax advantage
- That tax advantage is, or might be expected to be, the main benefit or one of the main benefits of the arrangement
- It is a hallmarked scheme by being a tax arrangement that falls within any description (the ”hallmarks”) prescribed in the relevant regulations
The updated guidance included a number of changes which effectively broadened the scope of the rules.
Once a scheme has been disclosed, HMRC will normally assign a scheme reference number to the person who has made the disclosure and any co-promoters. This number must then be sent on to clients and, if appropriate, on again to further clients until the final user of the scheme has received it. The scheme user must report their use of the scheme to HMRC by including the number on their tax return or on form AAG 4. The disclosure of a tax arrangement, on its own, has no effect on the tax position of any person who provides it to HMRC. However, a disclosed tax arrangement may be rendered ineffective by Parliament, possibly with retrospective effect. Specific penalties are prescribed if a scheme is not disclosed accurately and at the right time.
On 3 October 2016, the Vietnam Ministry of Finance released a new version of a draft decree for public consultation. It proposes to adopt the three-tiered approach to transfer pricing documentation developed as part of Action 13 (CbC reporting, master file and local file). Moreover, it is proposed that the total interest expense payable to a Vietnamese subsidiary’s related parties is limited to 20% of a Vietnam subsidiary’s earnings before tax, interest and depreciation expenses (EBITDA). The Draft Decree is expected to be finalized and approved by December 2016. If adopted, the Decree would apply from fiscal years starting on or after 1 January 2017.
EYG no. 03737-161Gbl
DID YOU LIKE THIS ARTICLE?
Subscribe to the Tax Insights newsletter for the latest thinking in tax.