international tax planning after beps - a country spotlight

International Tax Planning after BEPS A Country Survey

TAG Alliances Lisbon Conference Tax Specialty Group Session May 4, 2016

Panel members

•  Russell Brown, LehmanBrown, China

•  Florence Bastin, Fiduciaire du Grand-Duché de

Luxembourg S.à r.l. (FLUX)

•  Fabrice Rymarz, Racine, France

•  Simone Hennessy, HSOC, Ireland

•  Fuad Saba, FGMK, Chicago, USA (Moderator)

Background - 1

The OECD initiative against “Base Erosion and Profit Shifting” was commissioned by the G-20 in 2013. Final deliverables were presented to the G-20 in November 2015.

“Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs.)” “Research undertaken since 2013 confirms the potential magnitude of the BEPS problem. Estimates conservatively indicate annual losses of anywhere from 4 - 10% of global corporate income tax (CIT) revenues, i.e. USD 100 to 240 billion annually.”

Background - 2

“BEPS is a global problem which requires global solutions. For the first time ever in tax matters, OECD and G20 countries worked together on an equal footing. More than a dozen developing countries have participated directly in the work and more than 80 non-OECD, non-G20 jurisdictions have provided input.” “Fifteen actions equip governments with the domestic and international instruments needed to tackle BEPS. The final BEPS package gives countries the tools they need to ensure that profits are taxed where economic activities generating the profits are performed and where value is created, while at the same time give business greater certainty by reducing disputes over the application of international tax rules, and standardizing compliance requirements.”

Overview: BEPS 15-item action plan

Neutralize hybrid mismatch arrangements

Strengthen CFC rules

Limit interest deductions and other financial payments

Counter harmful tax practices

Prevent treaty abuse

Prevent artificial avoidance of PE status

Identify challenges of a digital economy

4

7 3

6

5

2

1

Align transfer pricing with value creation – intangibles 8

Align transfer pricing with value creation – risk and capital

Align transfer pricing with value creation – high risk transactions

Establish methodologies to collect and analyze data on BEPS

Require disclosure of aggressive tax planning arrangements

Re-examine transfer pricing documentation

Make dispute resolution mechanisms more effective 14

Multilateral Instrument 15

12

11

10

9

13

Overview: BEPS 15-item action plan Continued

•  13 final reports (15 action items) published on October 5, 2015 •  Political commitment of all OECD and G20 Countries •  Presented to the G20 Finance Ministers on October 8, 2015

Outputs include: •  Agreed minimum standards •  Reinforced/Updated international standards •  Model Rules/Leading Practices/Convergent approaches •  Horizontal Issues

See - http://www.oecd.org/ctp/beps-about.htm Also see - http://www.oecd.org/ctp/myths-and-facts-about-beps.pdf

Final BEPS reports

Now what happens?

Implementation and inclusive monitoring “With the adoption of the BEPS package, OECD and G20 countries, as well as developing countries that participated in its development, will lay the foundations of a modern international tax framework under which profits are taxed where economic activity and value creation occur. Work will be carried out to support all interested countries in implementing the rules and applying them in a consistent and coherent manner, particularly those for which capacity building is an important issue.” “Monitoring implementation and the impact of the different BEPS measures is another key element of the work ahead. Following the G20 and OECD call for even increased inclusiveness, a new framework for implementing BEPS will be conceived and put in place in 2016, with all interested countries and jurisdictions on an equal footing.”

Outlook for 2016 – OECD work plan

Development of an overall Framework for Monitoring BEPS

Action 1 Monitoring the digital economy

Action 4 Further work on detailed design and operation of group ratio rule; specific rules for banking and insurance

Action 5 Engage with Non-OECD Countries in connection with identifying preferential regimes/Ongoing monitoring and review of patent boxes and preferential regimes

Action 6 Wording of LOB; treaty entitlement of non-CIVs Action 7 Refine PE language; Attribution of profits to a Permanent Establishment

Actions 8 – 10 Additional guidance on profit splits, financial transactions, and other guidance; transfer pricing toolkits for low-income countries

Action 13 Development of XL Schema; signing ceremony for MCAA; Review of implementation of new standard by 2020

Action 14 Develop terms of reference and assessment methodology for peer review Action 15 Draft and signing of the multilateral convention

Pascal Saint-Amans, Director OECD Center for Tax Policy and Administration

https://twitter.com/psaintamans

Mr. BEPS

•  Five countries are represented

•  We will provide you with our views about BEPS and

international tax planning from the perspective of the tax

authorities in our countries

•  Please ask questions at any time

•  We will not concentrate on CbC (Action 13) because of the €750

Million Turnover threshold

Panel discussion

Russell Brown, LehmanBrown

Through strengthening the management of anti-tax avoidance and survey, China tax bureau built 265 anti-tax avoidance investigations, 188 cases were solved. The increase of anti-avoidance tax for the year was expected to reach 60 billion RMB in 2015, which was 14.7% over the previous year, 129 times of the amount in 2005.

0.46

40.82

60

0

10

20

30

40

50

60

70

2005 2014 2015

Revenue/Billion (RMB) Revenue/Billion

BEPS – At domestic level

On 4 January 2015, the SAT modified the law on Tax Administration and its implementing rules, considering how to introduce the mandatory disclosure rules to Chinese domestic rules;

At the beginning of 2015, the SAT established a new department responsible for offshore tax administration and its aim is to provide better tax service and strengthen tax administration;

In the past two years, the SAT issued 4 anti-tax management regulations and regulatory documents which include the indirect transfer of property of a non-resident enterprise management solutions and the general anti-avoidance measures for the administration;

BEPS – At domestic level Continued


On 17 September 2015,the SAT released Discussion Draft of the revised Implementation Measures of Special Tax Adjustment;

On 25 May 2015, China and Chile signed the avoidance of double taxation and the prevention of tax evasion agreement, the 100th double tax agreement between China and foreign countries;

The SAT will consider to modify the Circular 75 (China-Singapore Treaty) , compared with the Circular 75 and the relevant results of BEPS.

Jurisdiction Signed on Effective from Applicable since

Bahamas 2009-12-01 2010-08-28 2011-01-01

British Virgin Islands 2009-12-07 2010-12-30 2011-01-01

The Isle of Man 2010-10-26 2011-08-14 2012-01-01

Guernsey 2010-10-27 2011-08-17 2012-01-01 Jersey 2010-10-29 2011-11-10 2012-01-01 Bermuda 2010-12-02 2011-12-31 2012-01-01 Argentina 2010-12-13 2011-09-16 2012-01-01 Cayman 2011-09-26 2012-11-15 2013-01-01

San Marino 2012-07-09 2013-04-30 2014-01-01

Liechtenstein 2014-01-27 2014-08-02 2015-01-01

China Signed Agreements for the Exchange of Tax Information


• China fully participated in the formulation of the new international tax rules

• BEPS Project is helpful for China in upgrading her tax regimes, as well as improving her tax legislations and tax administration system

• BEPS Project is a good opportunity for China to expand her cooperation with other jurisdictions, both bilaterally and multilaterally

• BEPS Project will help to protect China’s tax base and allow her to get a fairer share of the MNCs taxation

• Subject to resource constraint such as ability, experience, language, and resource, there is still a large gap in participating the international rule-making

• The final results of the action plan is not binding in law, however, because of the political commitment and tax revolution of other countries under the action plan framework, it is unavoidable that it will have an impact on China’s tax system

• The plan of modifications to tax treaties and transfer pricing system may make MNCs face stricter review. This will affect the cost of tax compliance and business environment

• China does not have a history of consistent application of regulations and it will challenge its own MNCs

Benefits Challenges

BEPS – Impact to China

•  Revision of the domestic tax laws and regulations;

•  Localization of the BEPS Package on an as-needed basis (e.g. Revision of Circular 2);

•  Adjustment of the tax authorities’ international tax administration divisions (completed at the SAT level with a new responsible for offshore tax administration and an additional TP division);

•  Establishment of the national tax risk monitoring and response system on MNC’s on a group basis by the end of this year, which means that the local-level tax authorities in charge of a MNC’s headquarter will be responsible for monitoring the tax risks of the whole group;

BEPS – China action plan

•  Use of information technology to facilitate international tax administration;

•  Establishment of the PE information sharing system between local-level state tax bureaus and local tax bureaus;

•  Enhance information exchange with the exit and entry Administration Department

BEPS – China action plan continued

•  More requirements for TP documentation;

•  Increased focus on conduct /activity as an important test in assessing TP compliance;

•  Tax treaty access and interpretation being constrained and in some situations uncertain;

•  Wider transparency agenda, including introduction of mandatory disclosure regimes;

•  Substance-tax alignment;

•  Generally unfriendly environment for a few years

BEPS – Challenges to MNCs

Florence Bastin, FLUX

•  Common Reporting Standard (CRS) : automatic exchange of financial accounts by banks to ACD

End of Banking Secrecy in 2015 area of improved and enhanced tax transparency

•  The general anti-abuse rule and the anti-hybrid rule (linked to BEPS)

Implementation of EU Parent-Subsidiary Directive

•  Specific provision on the doc requirements Transfer pricing rules (BEPS Action Items)

•  Deadline 30 June 2016 for existing regime •  New Regime to be put in place

IP Box regime modified (BEPS Action 5)

•  Exchange of ATA with other countries involved (linked to BEPS)

Advance tax (ATA) decision practice evolved

•  Coherence, transparency and attractiveness 2017 tax reform is underway

Recent tax changes in Luxembourg

Opportunities

•  Development of new tax planning and structure for clients

•  Use of different products or vehicles

•  Build economic substance •  Fairer and more ethical

competition

Challenges

•  Timing and decisions taken by EU Directive?

•  Implementation of BEPS measures for all OECD country?

•  National sovereignty on tax •  Cost of developing and

structuring new tax planning

Future changes in Luxembourg BEPS impact and EU directives

BEPS &

EU Tax measures

to be adopted

Increased Transparency

Coherence

More robust and

economically justified tax

planning

Increased substance

Challenge for existing

structures To adapt or disappear

The way forward

Fabrice Rymarz, Racine

BEPS–inspired measures implemented in France

Action 3: Limitation on the deduction of interest expense (Finance Bill 2013)

•  In addition to thin cap rules, a general limitation provides that when the net financial charges paid within a given financial year exceed EUR 3 million, only 75% is tax deductible

v Net financial charges correspond in practice to the total amount of interest charges incurred by the company, reduced by any interest income received by the company in relation to its financing activities

•  The participation exemption régime does not apply to dividends derived from profits that were not subject to corporate income tax (dividends distributed by investment companies, venture companies, listed REIT, etc.)

•  The French Tax Code provides for a detailed list of entities that do not qualify for the domestic participation exemption regime

Action 2: Limitation of the participation exemption régime (Addendum to the Finance Bill 2015)


Action 5: General anti-abuse clause (Addendum to the finance Bill 2015)

•  General anti-abuse clause in accordance with the amended EU Parent-Subsidiary Directive (2011/96) Under this new provision, benefits of the participation exemption regime are denied if the structure:

i.  Is mainly tax driven and;

ii.  Has no economic rationale. This concept is too vague and will certainly generate quite a significant amount of litigation (how to deal with such a concept for pure holding companies?)


Action 2: Anti-hybrid measure (Finance Bill 2014)

•  Objective: ending existing double dip results, based on a different tax treatment of the same instrument (e.g., debt in one country and equity in the other)

•  Under this new anti-hybrid mechanism, interest paid to a related company (established in France or not) that is not subject to corporate income tax at a minimum rate of 8.33% will not be deductible by the borrowing entity. This being said, there is no need for the interest income to be effectively taxed, but only to be taken into account for CIT computation purposes


Action 13: Reporting obligation : New transfer pricing documentation filing requirement (Bill on tax evasion 2013)

•  Scope: Companies with total assets or turnover exceeding EUR 400 million or part of a group reaching that threshold

•  TP filing requirement: annual filing of a simplified version of the transfer pricing documentation

•  Penalties in case of non-filing: 0.5% of the turnover for the

year


Action 13: Foreign tax ruling disclosure (Finance Bill 2014)

•  Companies subject to TP formalities now have to include in their TP documentation all foreign tax rulings obtained within the Group


Action 13: Country by country reporting (Finance Bill 2016)

•  French companies with a consolidated turnover exceeding EUR 750 million that have subsidiaries abroad must provide, on a yearly basis to the FTA, a country by country report detailing the main accounting and tax features of each subsidiary

NB: French subs of foreign companies that are subject to a similar reporting obligation in another country are exempt from such filing requirement

Penalty for non-filing: up to EUR 100,000


Action 13: Automatic exchange of information •  Country by country reporting will be subject to an automatic

information exchange by France to countries:

i.  That have signed a multilateral agreement with France and;

ii.  Where a subsidiary/permanent establishment of the declaring French company is resident

iii.  Provided that these countries are also effectively participating in this automatic exchange of information system

•  Entry into force: 2018

Expected measures in the French tax system

Action 6: Anti treaty shopping provisions •  When negotiating/renegotiating DTTs, France is now willing to

add a general provision denying the benefits of the treaty when the main objective (or one of the main objectives) sought by the taxpayer by forming an entity in a given country is to benefit from the treaty provisions


Action 7: New definition of permanent establishment in tax treaties

•  In the latest DTTs signed by France, the definition of PE has been slightly amended in order to avoid some abusive schemes, especially regarding the definition of a construction site. The latter is usually treated as a PE when its duration exceeds 183 days a year. As from now on, when two (or more) companies forming part of the same group are working on the same construction site, there will be a PE if the overall project lasts for more than 183 days (e.g., France – Colombia DTT dated June 2015)


Simone Hennessy, HSOC

Ireland’s International Tax Strategy in Relation to BEPS

•  Ireland’s Corporate Tax System is transparent – it is open, transparent, and all the rules are clearly set down in our national law

•  Ireland’s 12.5% tax rate is not up for negotiation – our low rate is one of the cornerstones of our strategy for attracting foreign direct investment

•  Ireland is countering aggressive tax planning…….. ü Through domestic legislation –constantly changing to

OECD and EU work, requirements and Directives ü Through engaging with Developing Countries- our policy

in relation to tax treaties is aimed at meeting the interest of both sides to these agreements

ü Supporting Country by Country Reporting

Ireland’s Tax Strategy - The 3 R’s

1.  Rate 100% commitment to retain 12.5%

2.  Reputation legislative changes to protect it

3.  Regime legislative changes to retain its attractiveness for Foreign Direct Investment “playing fair but playing to win”

BEPS Measure – What has Changed? Elimination of Double Irish What was the Double Irish? •  Based on exploiting different definitions of corporate

residency in Ireland and the US •  Irish taxed if managed & controlled in Ireland •  US tax charged based on country of incorporation

•  IP into an Irish registered company controlled in a tax haven,

say Bermuda. •  Ireland regarded company as resident in Bermuda, US

considers it Irish resident. Google Example •  Irish subsidiary collects Revenue from ads sold in UK,

France etc. •  Irish Company in turn pays royalties to another Irish

subsidiary, resident in Bermuda

Change in Residency Rules – Double Irish •  Changes from 1 January 2015 •  Move from central management & control rules •  Company incorporated in Ireland = resident, unless

treated as resident in treaty partner country under DTA

•  Still provides that a foreign incorporated company = resident, if centrally managed & controlled in Ireland

•  Transition period for companies incorporated pre 1 January 2015, new residency rules will take effect from 31 December 2020

Corporate Inversions in an Irish Context – Impact of BEPS •  Inversion – Form of Tax Avoidance •  Acquiring smaller business in Ireland and moving their tax

domicile •  Deals historically did not bring any benefits to Ireland –

increased economic or job creation •  Often inversion means establishing a head office- little more

than a brass plate. •  Recent US Treasury changes saw collapse of Allergan / Pfizer

deal on 6th April 2016 •  Reportedly would have cut Pfizer’s tax bill by an estimated $1

billion annually •  Reputational damage to Ireland – inaccurately seen as benefiting

from such deals at the expense of the taxpayers in the US and elsewhere

•  Going forward some potential benefits for Ireland from such deals down the line as companies facing with country by country reporting pressure look to add function to Irish headquarters operations to prove that they are businesses of substance.

Country by Country Reporting

•  Applies to fiscal years beginning on or after 1 January 2016

•  Irish Parented Multinational Enterprises (MNE’s) •  With consolidated annualised group revenue of €750m

or more •  Data to be provided includes income, taxes by territory •  Failure to report or provide incorrect/incomplete report

will trigger €19,046 penalty. In sum instances a further €2,535 may be charged for each date failure continues.

Other Measures implemented to date •  Focus of BEPS is the alignment of taxing rights with

substance •  To establish substance require decision makers,

strategic leaders to be based in Ireland. •  Require a tax regime that is attractive to talent. •  Introduced Special Assignee Relief

Programme (SARP) •  Employees employed by company incorporated &

tax resident in a DTA territory •  Assigned to Ireland for minimum period of 6

months •  30% of their income over €75,000 disregarded for

income tax purposes

Attracting R&D - Effective 6.25% Corporation Tax FIRST OECD Compliant Box in the WORLD

The Knowledge Development Box (KBD) is effective for accounting periods beginning on or after 1 January 2016 Offers companies an effective corporation tax

rate of 6.25% on profits arising from qualifying assets, where some or all of related R&D is undertaken by an Irish Company

The KDB follows the OECD’s nexus approach thereby closely linking the benefits of the regime to the proportion of R&D carried on by the Irish Company

Fuad Saba, FGMK

Select US tax Issues with BEPS

•  IP ownership and development – “DEMPE”

•  Pricing of intangibles – BEPS vs. Arm’s Length

• Hybrids under BEPS vs. the US view

•  Permanent establishment standards under BEPS

IP ownership and development

•  Traditional US offshore principal structures with high-value IP will not work under BEPS o No more “double Irish” or CV-BV structures? o Now require a “real base” in the offshore location with

“real people” to oversee foreign operations •  DEMPE functions: Develop, Enhance, Maintain,

Protect, Exploit o Returns to IP in line with value creation, not funding

risk

IP ownership and development Continued

•  Significant costs in re-gearing e.g. commission agent structures into buy-sell structures o IT, financial controls, tax and financial reporting o Uncertainty remains as to the best time to convert, and

the degree of conversion, from traditional US tax planning

•  Take the Money and Run: move IP development and management talent offshore?

Pricing of intangibles – BEPS vs. ALP •  US Law and TP Regulations don’t reference the OECD TP Guidelines

o  IRS position is that new OECD Guidelines are “consistent with the Arm’s Length Principle (ALP) in the Regulations”

o  Taxpayer concerns regarding Profit Split method in the Guidelines •  Ad hoc theoretical approach vs. marketplace 3rd party data

o  Potential impact on tax audits, MAP cases, court cases •  Courts already differ from IRS, e.g. on economic theories vs. empirical

evidence and actual facts., respect for contracts o  DEMPE and “management & control” vs. financial risk, legal ownership

– the investor model •  OECD report is at odds with current US regulations and court

decisions on the ALP o  Will the IRS “flex” and allow foreign tax credits on reallocations of

income from the application of the new Guidelines?

Substance: Intangibles – key messages

IP ownership and funding by itself not sufficient to earn IP return

“Dumb Cash” Risk-Free Return or Less

“Smart Cash” Risk-Adjusted Return

DEMPE Developer Return

BEPS vs. hybrids

•  450 pages, 80 examples of hybrids and their treatment, 12 areas of recommendation

•  Expectation of consistent legislative action in enacting countries (!?)

•  Significant impact on hybrid financial instruments, “disregarded payments,” “reverse hybrids,” dual resident / double tax deduction situations, “imported mismatches” and other hybrid situations

BEPS action 2

Neutralizing the effects of hybrid mismatch arrangements

Summary of Arrangements Targeted and Scope of Recommendations

•  Recommendation 4 of the Action 2 Report applies because CV is a reverse hybrid that has received a payment that would not have resulted in a mismatch (deductible in the Netherlands and not includable in the US) if BV had made the payment directly to USP

o  The Netherlands should deny BV’s interest deduction

•  Recommendation 5 could also apply and would require either USP to tax the payment under Subpart F or the Netherlands to treat CV as a resident (which would subject the interest income to Dutch tax)

•  Recommendation 8 could apply if the Netherlands does not deny BV’s deduction or tax CV as a resident, in which case the UK would deny UKCo’s royalty deduction with respect to the license

Loan Interest

USP US

CV NL

BV NL

UK Co GB

License Royalty

BEPS action 2


US LLC

USP US

•  USP makes loan to CanCo

•  US LLC is obligated to purchase additional Can Co shares on each interest payment date and on maturity equal to payments USP receives from CanCo

•  Recommendation 1 (hybrid financial instrument) applies because CanCo makes a payment that results in deductible interest expense in Canada, but no income inclusion in the US

o  Primary rule: Canada should deny CanCo’s interest deduction

o  Secondary rule: if Canada does not deny CanCo’s interest deduction, then the US should require USP to include the interest payment in ordinary income

Interest

Can Co CAN

Forward Subscription Agreement

Loan

BEPS action 2


US

•  Recommendation 3 (disregarded hybrid financing) applies because UK HoldCo is a hybrid payer that has made a disregarded payment that results in a hybrid mismatch (deductible in the UK and not includable in US Sub’s ordinary income)

o  Primary rule: the UK should deny UK HoldCo’s interest deduction

o  Secondary rule: if the UK does not deny UK HoldCo’s interest deduction, then the US should require US Sub to include the interest payment in ordinary income

•  The UK would not be required to deny a deduction and the US would not be required to force an inclusion to the extent that the deduction offsets income that is included in ordinary income in both the UK and the US (i.e., dual inclusion income)

•  Deductions that exceed dual inclusion income may be used in a later period to offset dual inclusion income

Loan Interest

USP US

US Sub US

UK Holdco GB

UK Target GB

BEPS action 2


BEPS action 2

Neutralizing the effects of hybrid mismatch arrangements •  Recommendation 1 likely would apply because

PECs are a hybrid instrument and create a mismatch if the timing between the deduction and ultimate inclusion is “unreasonable” or USP benefits from an indirect foreign tax credit

o  Primary rule: Luxembourg should deny LuxCo’s interest deduction

o  Secondary rule: if Luxembourg does not deny LuxCo’s interest deduction, then the US should require USP to include the interest in ordinary income

•  Recommendation 8 could apply if Luxembourg does not deny LuxCo’s deduction and the US does not require USP to include the interest in ordinary income. In such case, the UK would deny the interest deduction on the interest bearing loan

US

Luxembourg

LUXPECs

(-) Deduction

No Inclusion

Interest Bearing Loans

(+) Inclusion

(-) Deduction

U.K.

USP US

LuxCo LU

UK OpCo

GB

UK

Agents •  “Marketing agents” and “sales representatives” whose activities in a country result,

without material modification, in the regular conclusion of contracts to be performed by a foreign enterprise likely will create a PE even though they do not formally conclude the contracts o  “Rubber stamp” will not prevent a PE o  Exception for independent agents

Preparatory and Auxiliary Functions •  General Approach: Each of the exceptions to PEs found at Article 5(4) of the OECD

Model Convention must otherwise be of a “preparatory or auxiliary” nature: i.e., they cannot be core business activities

•  Anti-fragmentation rule •  Countries may reject the general approach (i.e., preserve current exceptions), as long

as they adopt the anti-fragmentation rule Commissionaires •  Contracts for sales, rentals, or services need not be “in the name of” the principal

Permanent Establishments (PEs)

BEPS and PE’s •  Action 7 changes to PE definition for dependent agents

o  New language includes as a dependent agent a person acting on behalf of a MNC who “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise.”

•  Potential actions:

o  Register a PE in each country for marketing and service employees?

o  Form a new legal entity in each country?

o  Move people to a Hubco, or to another country with a legal entity?

o  Transfer employees to an unrelated distributor?

o  Comply with BEPS?

•  Uncertainty likely to prevail for some time to come

•  Treasury has suggested that the US may “opt out” of the new BEPS PE terms

o  Traditional transfer pricing results should still be the “right answer.”

Chapter I: Guidance for applying the arm’s length principle (e.g., risk and recharacterisation)

Chapter II: Guidance on commodity transactions

Chapter VI: Guidance on intangibles including hard to value intangibles

Chapter VII: Guidance on services including low value-adding services

Chapter VIII: Guidance on cost contribution arrangements

The final report on Actions 8-10, Aligning Transfer Pricing Outcomes with Value Creation, contains the following:

Aligning transfer pricing outcome

With value creation

Identify economically significant risks with specificity

Identify contractual assumption of the specific risk Functional analysis: Establish which enterprises actually control risks through their people and the financial capacity to assume the risk Confirm that actual conduct is consistent with contractual risk allocation In case of insufficient control, re-allocate risk to the entities with actual control

Price transaction based on established risk allocation

Substance: Risk analysis 6-steps process

•  Proposed Regulation Section 1.6038-4 would require the parent entity of a US multinational enterprise (MNE) group with $850M or more of consolidated group revenue for the preceding annual accounting period to file an annual report

o  The annual report form would follow the template developed by the OECD in BEPS Action 13 (Transfer Pricing Documentation and Country-by-Country Reporting)

o  The annual report would be filed with the MNE parent entity’s income tax return for the tax year

o  The requirement would apply to the MNE’s tax year beginning on or after the date of publication of the Final Regulations

•  Financial and employee information would be reported for each tax jurisdiction and presented on an aggregate basis for all the entities in the respective tax jurisdiction

CbC reporting

Required reporting overview

Transfer pricing reporting

Action 13: C-by-C Reporting

•  Periods beginning on or after January 1, 2016

•  Filing of report will be within 12 months of the year-end

•  Six months for Competent Authority review before exchange

•  Groups with revenue of less than €750 million will be exempt

•  Mechanism:

o  Primary Mechanism: Filing for group with parent country tax authority

o  Secondary Mechanism: Local filing

•  Development of XML and user guide for electronic filing

•  Multilateral competent authority agreement

•  CbC reporting will provide greater transparency regarding operations and tax positions taken by US MNEs

•  The US may exchange CbC reports with other jurisdictions in which US MNEs operate

•  The preamble to the Proposed Regulations states the CbC reports will aid the IRS in performing “high-level transfer pricing risk identification and assessment”

o  A CbC report will not itself constitute conclusive evidence that transfer pricing practices are not consistent with arm’s-length standard, qualify as a substitute for a full transfer pricing analysis, or form the sole basis for adjustments

o  However, a CbC report may serve as the basis for further inquiry into transfer pricing practices

CbC reporting - USA

Objectives and confidentiality

•  The preamble also provides that CbC reports will be treated as confidential and used for no other purpose than the administration of taxes

•  The IRS and Treasury are to ensure the safeguard of confidentiality

o  They must ensure foreign jurisdictions maintain compliance with confidentiality requirements

o  Automatic exchange of CbC reports will “pause” if a tax jurisdiction is non-compliant

CbC reporting

Objectives and confidentiality