© Copyright 2016 by K&L Gates LLP. All rights reserved.

April 21, 2016Mary Burke Baker, Government Affairs Advisor, K&L GatesBetsy-Ann Howe, Partner, K&L GatesIgnasi Guardans, Partner, K&L GatesRainer Schmitt, Partner, K&L GatesAdam Tejeda, Partner, K&L Gates

Bracing for BEPS: How the Evolving Global Tax System Will Impact Your Company

AGENDA Introduction: What keeps you up at night? Are you ready for BEPS? Overview/background of BEPS Broad application on foreign investment

structures (e.g., funds and multinationals) German Overview Australian Overview Q&A

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INTRODUCTION: WHAT KEEPS YOU UP AT NIGHT?Are you ready for BEPS?

WHAT KEEPS YOU UP AT NIGHT? Instead of counting sheep, try counting BEPS:

1. FATCA2. Automatic Exchange of Information3. G-20/OECD BEPS Project4. European Commission Tax Action Plan5. European Union Proposed BEPS Directive6. European Parliament TAXE Committee, I&II7. European Commission State Aid Investigations

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WHAT KEEPS YOU UP AT NIGHT? (CONT.) 8. Unilateral Actions by UK, Australia, Others9. US Treasury Anti-inversion Regulations10.Lux Leaks 11.Panama Papers12.G-5 Beneficial Ownership Announcement13.Upcoming US Treasury Regulations on Beneficial

Ownership14.New Tax Haven Blacklist15.Collaborative Platform of IMF, World Bank, OECD

and UN

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WHAT KEEPS YOU UP AT NIGHT? (CONT.) 16.JITSIC17.Congressional Angst Over Inversions and Earnings

Stripping (Tax Reform)18.Administration’s Tax Reform Proposals19.Presidential Candidate Tax Reform Proposals

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WHY SHOULD I CARE? WHY IS THIS DIFFERENT? It’s not just talk – it’s happening The “infrastructure” is in place: FATCA

established relationships and framework for cooperative/collaborative initiatives

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ARE YOU READY FOR BEPS? Diagnostics: How Will BEPS Affect You? Taxes? Organizational structure? Reputation? Treasury function? Other?

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ARE YOU READY FOR BEPS? Is the C Suite Informed? Impact on Efficient Tax Planning? Treasury Functions? Compliance Functions?

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Overview and Background of BEPSPolicy and Political Considerations

Practical Application of BEPSHow OECD BEPS Affects Foreign

Investment Structures

ILLUSTRATION OF BEPS IMPACT ON SAMPLE PRIVATE EQUITY STRUCTURE

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Investors / LPs

Fund(LP)

General Partner

Fund Manager

Holding Platform

SPV

Target

Third party debt

Hybrid/related party loan

SELECTED OECD BEPS ACTIONS Action 2: Hybrid Mismatches Action 3: CFC Rules Action 4: Interest Deductibility Action 6: Treaty Abuse Actions 8 – 10: Transfer Pricing Action 13: Country by Country Reporting

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NEXT STEPS Internal analysis/structural changes needed? Must consider increased focus on substance

and business purpose Focus on one holding company jurisdiction to

provide substance, employees, directors, etc.? Organize funds in same jurisdiction as

acquisition/holding entities are located to strengthen business purpose and substance issues?

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ACTION 2 – HYBRID MISMATCH ARRANGEMENTS

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ACTION 2 – HYBRID MISMATCH ARRANGEMENTS

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Investors / LPs

Fund(LP)

General Partner

Fund Manager

Holding Platform

SPV

Target

Hybrid/related party loan

BEPS IMPACT

Third party debt

ACTION 3 – CFC RULESBuilding blocks for controlled foreign company (“CFC”) rules:1. Definition of a CFC2. CFC exemptions and threshold requirements3. Definition of CFC income4. Rules for computing of CFC income5. Rules for attributing CFC income6. Rules to prevent or eliminate double taxation

Not minimum standards but rather guidance Jurisdictions with CFC regimes may do nothing, but could cause

implementation of OECD CFC recommendations in countrieswithout CFC regimes

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ACTION 3 – CFC RULES

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Investors / LPs

Fund(LP)

General Partner

Fund Manager

Holding Platform

SPV

Target

Third party debt

BEPS IMPACT

Hybrid/related party loan

ACTION 4 – INTEREST DEDUCTIBILITY Recommendations designed to prevent base erosion through

interest payments.

Three base erosion scenarios: Selectively cherry-picking higher levels of third party debt in high tax

countries Related-party interest deductions in excess of third party interest

expense Incurring debt (third party or related party) to fund the generation of tax

exempt income OECD recommended approach → limiting an entity’s net interest

deduction to a percentage of EBITDA US Treasury weighing in with recent Section 385 proposed

regulations

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ACTION 4 – INTEREST DEDUCTIBILITY

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Investors / LPs

Fund(LP)

General Partner

Fund Manager

Holding Platform

SPV

Target

Third-party debt

BEPS IMPACT

ACTION 6 – TREATY ABUSEGoals: Prevent treaty shopping Avoid double non-taxation through use of tax-treaties Identify policy considerations for treaty negotiations

The OECD proposal – 3 options: i. simplified limitation-on-benefits test (“LOB”) and principal

purpose test (“PPT”), or ii. PPT, or iii. LOB test combined with anti-conduit arrangements rule

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ACTIONS 8 -10 – TRANSFER PRICING Allocate profits associated with intangibles in

accordance with value creation through functions performed, assets used and rights assumed in the development, enhancement, maintenance, protection and exploration of intangibles

Provide valuation guidance regarding hard-to-value intangibles

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ACTION 13 – CBC REPORTING Action 13 contains three-tiered approach to enhance transparency:

1. Master file containing standardized information (blueprint relevant for all group members)

2. Local file containing an overview of all material transactions per group company

3. CbC report to contain information regarding the allocation of income, taxes and business activities per jurisdiction

Large amount of information to be made available to tax authorities. Allows CbC comparison by tax authorities to scrutinize low-taxed profits in group.

Generally effective 2016; US Treasury final regulations July, 2016.

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BEPS: German Response

BEPS: Australian Response

THE TAX LANDSCAPE IN AUSTRALIA Comprehensive tax system: CFC rules,

thin capitalisation, transfer pricing, debt/equity rules

40+ treaties based on the Model OECD convention

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Why unilateral action on BEPS? Corporate tax a substantial portion of total taxes for Australia

relative to most other OECD countries Corporate tax enquiry into large multinational corporations in

2015 (Google, Apple, Microsoft and Newscorp) Increase in cross-border consumption not caught by GST

(intangibles and low-value goods)

Action 1- Tax Challenges of the Digital Economy

ACTION 1: DIGITAL ECONOMY Challenges for the current GST system:

Rules designed in 2000 focus on Australian-based, rather than cross-border supplies

Ongoing surge in digital downloading results in a growing proportion of consumption not being caught by GST

High volumes of low-value imports (under $1,000 threshold): 100 million items imported annually (from the Treasury’s 2013 Report)

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ACTION 1: DIGITAL ECONOMY ‘Netflix tax’

Rules due to commence from 1 July 2017 Will impose GST on supplies of anything other than goods or

real property to Australian consumers by non-residents Includes supplies of digital products: streaming or downloading

of movies, music, apps, games and e-books

GST on low-value imports (under $1,000).

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Action 2 – Anti-Hybrid Rules

ACTION 2: ANTI-HYBRID RULES BOT Discussion Paper

(November 2015) – covers a range of general and specific queries

Australia ahead of other OECD countries (except for the UK –Finance Bill 2016 introduced on 22 March 2016, new rules to apply from 1 Jan 2017).

Commencement date for the Australian rules still unclear.

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ACTION 2: ANTI-HYBRID RULES Australian approach vs the UK

UK had a form of anti-hybrid rules since 2005 - “international arbitrage” rules denying deductions where one of the main purposes is the avoidance of UK tax

New rules contained in the Finance Bill 2016 replace the arbitrage rules from 1 January 2017

Proposed definition of a “hybrid entity” in the Bill

Australia: Currently no anti-hybrid legislation. Tax Act defines a “foreign hybrid” as a foreign hybrid LP or a foreign hybrid

company. Not clear whether a new definition of a “hybrid entity” specifically for the

purposes of the new anti-hybrid legislation will be introduced. Australia has complicated rules applying to the taxation of financial arrangements

– current proposal would use the definition of financial arrangement under these rules and apply them to the anti hybrid rules

Would result in Australia’s definition being markedly different from that proposed by OECD and adopted in the UK

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Action 4 – Limit interest deductions

ACTION 4: LIMITING INTEREST DEDUCTIONS Thin capitalization rules (‘thin cap’)

Australia has had thin cap rules in place since 2001. The rules limit deductions for interest expense and borrowing costs where debt-

to-equity gearing ratios exceed prescribed debt limits. Specific debt limits vary depending on the kind of entity The rules were tightened from 1 July 2014.

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Action 7 – Artificial Avoidance of PE Status

ACTION 7: “GOOGLE TAX” Australia followed the UK, which introduced diverted profits tax

(DPT) in March 2015, which: targets arrangements similar to that of Google UK applies where a non-UK company avoids UK taxable presence

Australian Multinational Anti-Avoidance Law (MAAL): Received Assent in December 2015. applies to a “scheme” if certain conditions are satisfied.

Corporate tax avoidance enquiry into Google, Apple, Microsoft and NewsCorp –report indicates PE avoidance arrangements may be in place (final report due in April 2016)

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Action 13 – Country-by-Country Reporting

Action 13: Reporting1. Country-by-country reporting

– “significant global entities” (ie revenue over $1 billion) to give the ATO a statement within 12 months after the end of financial year.

2. ATO now required to publish information on Australian public and foreign owned corporate tax entities with income of $100 million or more.

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Q&A/Discussion