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International Tax and Transfer Pricing

Tuesday 5 March 2019

WHAT TREASURERS NEED TO KNOW

TAX DEVELOPMENTS

March 2019

Legislative Tax Update

Overview

►Interest Limitation Rules

►Transfer Pricing

►Controlled Foreign Corporation (CFC) Rules

►Multi‐Lateral Instrument (MLI)

►Anti‐Hybrid Rules

►Digital Taxation

►US Tax Reform

What’s happening?

EY | Assurance | Tax | Transactions | Advisory

Ernst & Young LLP

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ey.comEY‐000016378‐01 (UK) 12/16. CSG.

ED None

Current as at 1 March 2019

International Tax ServicesGlobal Developments Road‐Map

5 December 2016:Clauses introduced in Finance Bill 2016

5 April 2017 to 30 September 2018: Proposed period in which taxpayers must correct affairs before new Failure to Correct penalties

13 October 2016:Criminal Finances Bill introduced

New development/ legislative start

date

Consultation/other

1 January 2019 implementation date:• Interest limitation: 30% EBITDA (2024, latest,

if equivalent rules in place);• CFC • GAAR

1 January 2016: Country by country reporting in EU

2019/2020?: Possible introduction of mandatory CCTB:• For groups with turnover>€750m; Broadly defined base (NID regime, participation exemption,

NOL c/f, R&D); TP (upwards only); Includes ATAD measures

I January 2021?: CCTB converts into CCCT.One tax return for EU.

Profits shared across EU: allocation keys (sales, labour, assets (Excluding intangibles): 1/3 each

EU Common Corporate Tax reform: CCTB/CCCTB

EU Dev

elopmen

ts

Anti‐Tax Avoidance Directive 1 & 2

Country‐by‐Country Reporting in EU

2018 2020

2017 2021 1 July2021

1 July2018

1 July2017 2019 1 July

2019

OECD Multi‐lateral Instrument

Global D

eve

lopmen

ts

BREXIT

US Tax Reform

OECD Country‐by‐country reporting

Expected milestones Definite milestones

EU Intermediate Holding Company rules

Critical period of change

29 March 2017.Article 50 triggered.

30 December 2017:First filing of CBC Report.

I January 2020: • Anti‐ tax free exit rules• Anti‐Hybrid mismatch rules

1 January 2022:• anti‐reverse hybrid

taxation

Possible start date

EU Holding Company required for non‐EU Globally systemically Important Institutions or Third‐country groups that own two or more institutions (credit institutions or investment firms) established in the EU with total assets of at least EUR 30 billion (including assets of both subsidiaries and branches of the third‐country groups) ‐

Proposed 2019 implementation but subject to agreement

November 2018 now evolves: now 5 countries: US Virgin Islands, Samoa, American Samoa, Guam, Trinidad and Tobago.

Publication of Non‐cooperative jurisdictions by EU Commission

29 March 2019.UK Leaves the EU.

Many clients (particularly in FSO) are currently considering significant restructuring in advance of the UK formally leaving the EU. Many will need regulated operations to shift from the UK to other EU countries. The general position seems to be that transition is to be expected but institutions

cannot rely upon it. Likely details of transition will be agreed late in process.

Likely transition until 31 December 2020. Many tax rules (both at EU level and amongst Member States) hinge on the EU status of the companies involved (for example, cross‐border merger reliefs, interest and dividend withholding etc).Subject to transitional arrangements:• State aid rules may no longer apply to the UK.• EU fundamental freedoms such as freedom of establishment will no longer apply to the UK. There will also be obvious significant customs and VAT implications

Irelan

d

June 2017: Signing ceremony. 68

countries sign. More follow through 2017.

December 2017: US Tax Reform:

Tax Cuts and Jobs Act. Rate is lowered to 21%.

Irish Corporate Tax Reform

2018 + onwards. MLI enters into force for specific treaties 3 or 4 months after ratification in those states.

Likely 2019 and onwards. MLI begins to ‘take effect’ for relevant treaties. Exact dates depend on tax head applicable.

July 2018: MLI enters into force generally. Following

ratification by five countries.

February 2017: EU Commission writes to 92

jurisdictions in start of ‘screening’.

Proposed directive to take effect 1 January 2019. Major difference with OECD CBCR would be that the EU rules would require public disclosure.

1 July2020

December 2017: EU Commission publishes first list of 17 jurisdictions. Listed countries are

invited to ‘address deficiencies’.

01 January 2018, following key provisions become effective:--Interest limitation (163(j)) -Territorial system; one-time repatriation tax (Transition Tax, 965) -Introduction of Base Erosion and Anti-Abuse Tax (BEAT, 59A). -Denial of deduction for certain hybrid payments (267A). - GILTI – anti-deferral provision taxing global intangible low tax income

EU Mandatory Disclosure Rules,13 March 2018:

EU Council reach political agreement on the Mandatory Disclosure Directive.

25 June 2018:Reportable cross border arrangements where the first step of implementation occurs on/ after this

date will need to be reported.

EU Digital Services TaxMarch 2018:

EU Commission propose introduction of EU‐wide DST, on certain entities, at 3% of turnover.

31 August 2020: Reports under the Directive

due by 31 August 2020.

31 December 2019: Member States to translate Directive into national laws.

1 July 2020:Date of entry intoforce of the Directive.

Reportable transactions entered into between 25 June 2018 and 30 June 2020 due to be reported by 31 August 2020. Ongoing obligation for reportable transactions entered into from 1 July 2020 onwards.

10 October 2017: Minister for Finance opens consultation on

modernisation of the Irish corporate tax system. Closes 30 January 2018. Gives start dates for some

changes.

1 January 2019 implementation date:• CFC • Fully implement MLI (29 January 2019)

Sept/Oct 2018: ‘Road Map’ published.

Irish 2018 Finance Bill to be published Oct.

I January 2020: • Anti‐Hybrid mismatch rules

(Later for reverse‐hybrids)

• Updated TP rules• Mandatory Disclosure Rules• Interest limitation rules?

10 October 2018 – exit tax rules introduced.

Feb 2019 – Omnibus Brexit Bill –includes changes to tax rules (eg group

relief).

Proposed Regulations issued and if finalised on or before 22 June 2019 would have the following effective dates:• Section 163(j) Limitation on Interest Expense – not retroactive. Effective when regulations finalised; early adoption allowed if consistent and

entire. • Section 59A BEAT - taxable years beginning after 31 December 2017• Hybrid Arrangements - taxable years beginning after 31 December 2017 with exceptions for years beginning on or after 20 December 2018• GILTI - taxable years beginning after 31 December 2017(*Final rules on Transition Tax released 5 February 2019. Thus, applies to last tax year beginning before 1 Jan 2018, ).

December 2018: DST text proposed at Ecofin Council meeting on 4 December 2018 but no agreement. Ecofin Council continue to work on a

compromise text


Interest Limitation Rule

Limitation on the deduction of net borrowing costs (i.e. interest expense minus interest income) to 30% of the EBITDA

Consultation Update Impact

►Derogation sought to 2024 – “equally effective” domestic law as basis

►European Commission focused on ratio‐based approach

►Corporation Tax Roadmap points to potential early adoption of rules – 2020

►OECD could accelerate timeline if minimum standard agreed

►Public consultation to run in conjunction with hybrid mismatch process

►Applies to related party and third party debt arrangements

►Economically equivalent taxable revenues –key definition and no guidance available currently

►Application of exemptions or carve‐outs/grandfathering?

►Impact on shareholder debt financing structures – long term viability and value being achieved?

Base Rule


Transfer Pricing

Recommendations:

► Incorporate BEPS Actions 8‐10;

► Incorporate Master File, Local File requirements;

►Remove pre‐July 2010 grandfathering;

►Consider extending TP rules to:

i. SMEs

ii. Non‐trading income (which should include section 110 companies)

iii. Capital transactions

Timing: before end of 2020

The Coffey Report

What’s happening?

►Anticipated to be included in Finance Bill 2019 – Adopt 2017 OECD Transfer Pricing Guidelines which will incorporate DEMPE and master file, local file requirements

►DEMPE already being applied in practice by other jurisdictions

►2020 – Consultation process to commence on extension of TP rules to SMEs, non‐trading income and capital transactions


CFC Rules

CFC rules are an anti‐abuse measure, designed to prevent the diversion of profits to offshore entities in low or no tax jurisdictions.

►CFC rules aim to tax certain undistributed income of low taxed CFCs.

►Under ATAD provisions, Member States required to implement ATAD compliant CFC rules from 1 January 2019.

►Some optionality for Member States within ATAD:

Option A (Category of income approach) Option B (Significant people functions (SPFs) approach)

►CFC rules implemented for accounting periods beginning on or after 1 January 2019 (as part of wider implementation of ATAD). Specifics provided in the Finance Act 2018.

►Ireland adopted Option B approach.

►Anticipated guidance in early 2019.

Key Points

Irish Position

Base Rule

► Structures should be reviewed to determine impact.

► Irish SPVs may have subsidiaries which are CFC’s or alternatively Ireland could be a CFC of another company.

► Actual tax paid vs. headline rate.

► Additional compliance burden in assessing the rules and impact. Complexity in applying Irish rules to foreign subsidiaries.

► Revenue Guidance also important from a practical perspective.

Practical Impact


CFC Rules


MLI

Implementation Update FS Impact

►Ireland completed the ratification procedures on 29 January 2019.

►Irish tax treaties only updated after counter party also ratifies. Specific timing also varies dependent the type of treaty relief being claimed.

►Ratification process slowly moving forward as needs to be completed under each local country domestic laws.

►Limited practical application to date but changes will impact quickly in 2nd half of 2019 and through 2020.

►Important to monitor which countries have ratified and the timing of changes to specific treaties.

Base Rule

The MLI includes provisions for a minimum standard approach to combating treaty abuse, requiring tax treaties to include:

a Principal Purpose Test (“PPT”), or a PPT supplemented with a Limitation of Benefits (“LOB”) clause.

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Signature7 June 2017

Ratificationby 5 parties Entry into force

Domesticratification

3-4 months

Entry into forceA-B Tax Treaty

A-B Double Tax Treaty modified for

withholding tax

A-B Double Tax Treaty modified for all other

taxes

1st day of next calendar year

Taxable periods beginning at least 6 months after entry into force

Jurisdiction A signs and ratifies

Jurisdiction B signs and ratifies

A & B both deposit instrument to OECD

A-B Double Tax Treaty modified for MAP & Arbitration

MLI Implementation Timeline

Signed by Ireland & UK

Ratified in UK / Instrument deposited with OECD

Entry into forceEntry into effect for MAP /

Arbitration

1 May 2019June 2017 July 2018

Entry into effect for withholding tax

1 January 2020

Entry into effect for all other taxes

Taxable Periods beginning on/after 1 November 2019

29 January 2019

Ratified in Ireland/ Instrument deposited with

OECD

1 July 2018March 2018


Anti‐Hybrid Rules

Base Rule

The anti‐hybrid rules counter‐act double deduction or deduction without inclusion transactions, which arise due to hybrid mismatches. The rules must be implemented by 1 January 2020.

Applies to situations between:1. associated taxpayers in two or more jurisdictions; or2. structured arrangements between parties in two or more jurisdictions;that arise from differences in the characterisation of a financial instrument or entity resulting in:i. A double deduction (i.e. a deduction for the same payment, expense or loss in two

jurisdictions) – DD outcomeii. A deduction without inclusion (i.e. a payment that is deductible for tax purposes in the

payers jurisdiction but is not included in the taxable income of the receiving taxpayer) –D/NI outcome

Key Points

Deduction without InclusionIn case a hybrid mismatch results in deduction without inclusion:

►If the payer jurisdiction is a Member State, that Member State shall deny the deduction

Or

►If the payer jurisdiction is a third country that has not denied the deduction, the Member State that is the payee jurisdiction shall include the payment in its income

Double DeductionIn case a hybrid mismatch results in double deductions:

►If the investor jurisdiction is a Member State, that Member State shall deny the deduction

Or

►If the investor jurisdiction is a third country that has not denied the deduction, the Member State that is the payer jurisdiction shall deny the deduction

Hybrid financial instrument Hybrid entity Imported Mismatch Permanent Establishments

The tax treatment of a financial instrument differs between two jurisdictions.

A payment to or by an entity that is qualified as non‐transparent under the laws of one jurisdiction and qualified as transparent by another jurisdiction.

The effect of a hybrid mismatch between parties in third countries is shifted into the jurisdiction of a Member State through the use of a non‐hybrid instrument thereby undermining the effectiveness of the rules that neutralize hybrid mismatches. This includes a deductible payment in a Member State under a non‐hybrid instrument that is used to fund expenditure involving a hybrid mismatch.

Situations resulting in a deduction without inclusion due to differences in the allocation of payments between the head office and PE(s), payments to a disregarded PE and deemed payment between the head office and PE(s) whereby the payment is disregarded under the law of the payee jurisdiction.

Hybrid Transfers

Situations where an arrangement to transfer a financial instrument gives rise to a difference in tax treatment, if the underlying return of a financial instrument is treated as derived by more than one of the parties to the arrangement. As such, the payment could give rise to a deduction for the payer while being treated as a return on the underlying investment by the payee.


Anti‐Hybrid Rules

13

Hybrid financial instrumentImported Mismatch

Hybrid entity

Outcome: Deduction may be denied in Ireland.

Outcome: Deduction may be denied in

Luxembourg. If not, deduction may be denied in Ireland

Outcome: Deduction may be denied in Ireland

US Corp

Lux Finco

Irish AOE(Trading)

CPEC

Loan(Fixed)

NI

D

D

I

P & I

Non‐US

US LLC

Irish AOE(Trading)

NI

D

P & ILoan(Fixed)

Section IIO

US Taxable Investors

QDII or NI?

P & IPPN

D


Anti‐Hybrid Rules

Securitisation Transaction

PP

A,B,CNoteholders

S.110 Co(CI incorp. Irish tax

resident)

Irish AOE(Trading)

Loan(Fixed)

Irish AOE(Trading)

E Noteholders

Loan(Fixed)

PPN


Anti‐Hybrid Rules


Anti‐Hybrid Rules

Hybrid Risk Areas

US Taxables

S.110 Co(Issuer ‐ KY)

Irish AOE(Trading)

US Tax Exempts / Non‐US

KY LPFeeder

Irish AOE(Trading)

Irish AOE(Trading)

Irish AOE(Trading)

KY LPFeeder

KY LPFeeder

Company treated as a disregarded entity for US tax purposes

Partnership treated as a corporation for US tax purposes

E Note (PPN)(25%)

Particularly heavy reliance on intangible assets, including

intellectual property.

Reliance on intellectual property

Many evolving business models include elements of data, user participation,

user-generated content and network effects.

User participation and the value of data

Scale without mass

The ability to have a significant economic presence in a country

without a major physical presence.


Digital Services Tax

Three issues at the heart of the digital debate

11 12 13 14 15 16 17

1998

OECD report: Electronic Commerce Taxation Framework Conditions

2015

OECD final report on Action 1 published

2018

EuropeanCommission publishes proposals

2018

OECD publishes interim report

2019

OECD to publish interim

report to the G20

2020

EU Member States to apply provisions by 1 January (as currently drafted)

2020

OECD to publish final report to G20

13 February 2019: OECD consultation: “Addressing the

Tax Challenge of the Digitalisation of the Economy”



The digital tax debate: a timeline of key events

1 A new, full-scope DST via unanimity in 2019

2 EU Member States vote for reduced scope, as suggested by France/Germany

3 A group of (nine or more) EU Member States move forward under the enhanced cooperation mechanism – DST components yet to be agreed

A group of EU Member States move forward with a set of measures that arelargely consistent in terms of their design, but outside of the Commission’s remit

EU Member States (and potentially others, such as Australia) who want a DST move forward with their own unilateral measures

4

5



DST: Potential outcome scenariosFinish line approaching, or end of the first lap?

December

January 2019 | Austria | DST proposal

December 2018 | France | DST mentioned

June 2020 | Singapore | GST

October 2018 | Australia | DST consultation

October 2018 | UK | 2% DST proposed

August 2018 | Chile | 10% digital tax proposed

July 2019 | South Korea | 10% GST

December 2018 | Italy | DST replaces “Web Tax”

July 2018 | India | Comments sought SEP

DST

Indirect taxes

Digital PE concepts Note: This list is not exhaustive; it simply indicates some developments

February 2019 | New Zealand | DST consultation

October 2018 | Spain | DST proposed

February 2019 | Belgium | DST discussions



What’s different today? Summary of current developments

EMEIA Parent

US Sub

US operating income

CFC(Non-US)

13.125% tax rate

(16.406% after 2025)

US FDII

10% return on tangible

assetsGILTI

Non-US affiliateBase erosion

payment BEAT

Subpart F income

21% tax rate

10.5%tax rate

(13.125% after 2025)

0%tax rate

21% tax rate

0% - 21% tax rate

Potential costs

Base erosion anti‐abuse tax (BEAT)

Section 163(j) earnings stripping rules

Anti‐hybrid provision

Global intangible low taxed income (GILTI)

Transition tax

Net operating loss limitations

Potential opportunities

21% corporate rate (plus state and local taxes)

Foreign derived intangible income (FDII)

100% immediate expensing of certain tangible assets

Limited participation exemption

Potential for realignment of non‐US subsidiaries


US Tax Reform

Overview of the key corporate provisions


Overview

US Persons

PE Investor (Lux) 30%

Parent(Germany)

FinCo(IRL)

Loan100%Services

Loan

FeeInterest

Borrowers

Interest

InterestLoan

Interest Limitation?Hybrid Mismatch?

CFC?

Transfer Pricing

Interest Limitation?Hybrid Mismatch

MLI?

CPEC

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young accepts no responsibility for any

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Transfer Pricing

• Tax law generally requires taxable profits to be at least the amount of profits that would arise if all connected party transactions are conducted on an arm’s length basis

• Consequently, it is usually best to ensure the price actually paid under related party transactions is set to an arm’s length price

• Otherwise, adjustments to tax returns are needed, which can cause significant inefficiencies or costly disputes with and between tax authorities

Why Price at Arm’s Length

• The theory is really simple….….just set the price to be the same price that two independent parties would agree

• However, the practice can be much more difficult

• Firstly, careful consideration is needed to establish what the actual transaction is (‘delineation’):

• contractual terms between the connected parties

• actual conduct between the connected parties

• what unconnected parties might do

• need to consider perspective of both sides of transaction

Pricing Financial Instruments and Loans

• Once the transaction is delineated, establish how it should be priced based on its characteristics…all of them

• For example, when pricing a loan consider:


Size Term Payment Schedule Seniority

Location of Borrower Currency Collateral Currency

Guarantees Issue time Industry Factors

Group Strategy

Fixed or Variable Base Rate Purpose of

Loan Credit

Ratings

Status of Lender Listing Rating

AgencyLocal

Regulations

• Establishing an arm’s length price requires evidence of the pricing that exists for transactions between unconnected people, known as uncontrolled comparable price (‘CUP’s) method

• Finding CUP’s for financial instruments is typically easier than finding for other types of transactions

• However, finding an exact matching CUP is still unlikely. Therefore, necessary adjustments to a CUP can be needed


• Documentation is currently a legal requirement and the requirements are about to become more onerous

• To the extent possible, the transaction between related parties should be designed to reflect the transactions (including terms and conditions) that can be observed between independent enterprises

• To the extent possible, legal agreements should be in place which reflect the actual transaction in place

Documentation “Best Practices”

• Put in place a transfer pricing analysis document that includes:

• a detailed description of the transaction

• a functional analysis

• an economic analysis (including detailed consideration of why the chosen pricing method is considered appropriate)

• any contemporaneous observations on pricing unconnected transactions *

• For recurring transactions, detailed policies in relation to establishing pricing on an ongoing basis

Documentation “Best Practices”

Department of Finance Consultation

• Replace references to the OECD’s 2010 Transfer Pricing Guidelines to the OECD’s 2017 Guidelines

• Remove grandfathering of pre-July 2010 transactions

• Extend transfer pricing guidelines to SMEs

• Extend transfer pricing guidelines to non-trading and capital transactions

• Expand the requirements for documentation

• Apply transfer pricing to branches

Irish Law - What is coming down the tracks?Department of Finance Consultation

• Previously no specific guidance provided for pricing financial transactions

• Ongoing work under the OECD’s BEPS project

• Non-consensus draft for the moment and work is ongoing

• Nevertheless, content of the discussion draft serves as useful guidance for discussing transfer pricing aspects of financial transactions

Irish Law - What is coming down the tracks?OECD Discussion Draft

• The key themes include:

• Importance of accurate delineation of the actual transaction in advance of considering the pricing (e.g. loan or capital)

• Focus on both sides of the transaction and what arm’s length transactions are realistically possible

• Implicit group support


• Specific guidance also provided for:

• Intra-group loans

• Cash pooling

• Hedging

• Guarantees

• Captive insurance


The Tax / Treasury Partnership

CAPITAL ALLOCATION��

GEOGRAPHY

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INVESTMENT

An effective tax strategy is one that is grounded in compliance, it is connected to the market conditions whilst being externally focused on the global tax environment and it is one that evolves with changing circumstances. REPATRIATION

GROWTH

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Corporate Treasury moves cash from A to B

Daily and permanently

Raises cash internationally

Competitive cost with correct maturities

Manages currency in pools not by geography

Corporate Treasury moves cash from A to B

Daily and permanently

Raises cash internationally

Competitive cost with correct maturities

Manages currency in pools not by geographies

Borders create tax obligations and risks

The corporate treasury and tax partnership is key to the execution and delivery of a business financing strategy required to support growth.

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Capital Allocation

CAPEX Investment Choices

Debt Management

Dividends and Repatriation

Acquisitions

Disciplined capital allocation supports business growth

Treasury Management Tax Headwinds

Headline rate is not the effective rate.

Interest restrictions

Capital investment expensing

Repatriation easier

EU ATAD, OECD, & BEPS driving tax base consolidation

Significant EBITDA based interest restrictions increases the after tax cost of funds

Double taxation is now routine in an international context

Controlled low taxed foreign affiliates

Tax fragmentation risks to normal cash pooling systems

Supply chain risks leading to working capital increases

Repatriation and dividend questions

Withholding tax and EU Directives

Renewed reliance on tax treaties

Elimination of hybrid

financing

30% EBITDA based interest

restrictions

Unilateral transfer pricing

adjustments

• Accepted, but it should not limit treasury financing options

• In some key locations, the level of Ireland’s headline rate has been debated

• Unilateral challenges

• More competent authority

• TP within countries

• More uncertainty and complexity

• Broadening the base without reducing the rate increases ETR and lowers ROCE

• Discriminates against smaller economies

• Risks to longstanding policy supporting outbound international expansion

Financing Costs

Treasury Management

Secure funding by diversifying financing sources

Risk management discipline creates competing tax treatments

• Maturity Profile

• Foreign currency

• Interest rates and pricing

Debt issuances in international bond markets

Daily cash management using cash pools creating TP debate

• Cash and debt are not mutually exclusive – its about liquidity management not tax arbitrage

• OECD paper on allocation of risks and rewards

• Fragmentation risk to cash pooling systems

Free movement of cash through repatriation

Funding diversification using asset backed securities from Ireland can be undermined with increased after tax costs

Treasury voice now more than ever needs to be heard in the external tax policy environment

Ireland Competitive Investment Landscape

Lower statutory rate – Broader Base

EU ATAD, OECD, & BEPS driving tax base consolidation

Counties lowering statutory rates on this broader base

Lower statutory rate – Broader Base

o The competitive attractiveness of a historic low tax policy in Ireland will likely be eroded by rules that may be more sustainable in larger less open economies as they narrow the effective tax rate gap with other countries

o The 12.5%/25% two rate system and the distinction between trading and non-trading creates complexity and uncertainty that is unique to Ireland

o European participation exemption facilitates a free movement of cash for Treasury from A to B

o FDI and indigenous investment are both impacted but not necessarily in equal measure

o There has never been a policy imperative to deny Irish corporates deductions to finance international expansion

CAPITAL ALLOCATION��

GEOGRAPHY

�� TAX REFORM

INVESTMENT An effective tax strategy is one that is grounded in compliance, it is connected to the market conditions whilst being externally focused on the global tax environment and it is one that evolves with changing circumstances.

Ireland has the opportunity to re-imagine its competitive offering to attract investment and facilitate substantive treasury operations here.

REPATRIATION

GROWTH

Debt��

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