transparency & the impact of beps

TRANSPARENCY & THE IMPACT OF BEPS

Omleen AjimalWim Ritz, Managing Director, Vistra Luxembourg

www.istructuring.com

International tax structuring - WHAT THE BEPS???

What is the OECD’s BEPS project and what does it mean for SMEs?

19 November 2015

Omleen Ajimal


HOW DID WE GET HERE?


THE “DOUBLE IRISH DUTCH” SANDWICH

DUTCH CO

IRISH CO


THE BEPS ACTION PLAN


THE BEPS ACTION PLAN (1)

• ACTION 1 – The tax challenges of the Digital Economy

• ACTION 2 – Neutralising Hybrid Mismatch Arrangements

• ACTION 3 – Strengthening Controlled Foreign Companies rules

• ACTION 4 – Interest Deductions & other Financial Payments



• ACTION 5 – Countering Harmful Tax Practices

• ACTION 6 – Preventing Treaty Abuse

• ACTION 7 – Clarifying Permanent Establishments

• ACTIONS 8 – 10 and 13 – Transfer Pricing and Country-by-Country Reporting



• ACTION 11 – Collecting BEPS data

• ACTION 12 – Disclosure of Tax Avoidance Schemes

• ACTION 14 – Effective Dispute Resolution

• ACTION 15 – Developing a Multilateral Instrument


WHAT DOES THIS ALL MEAN FOR SMALL AND MEDIUM ENTERPRISES?


THE SHORT ANSWER…

• NOTHING MUCH??

• SMEs ARE NOT ROUTINELY INVOLVED IN CROSS-BORDER TAX AVOIDANCE?

• THE PROPOSED CHANGES WILL NOT GENERALLY APPLY TO SMEs??


THE CORRECT ANSWER…

THE CHANGES IN PUBLIC OPINION AND POLICY,

TOGETHER WITH THE TOUGHENED STANCES OF TAX AUTHORITIES,

– WHICH BOTH PRE-DATE, AND WILL OUTLAST, THE OECD’S WORK –

AFFECT EVERYONE


International tax structuring - WHAT THE BEPS???

What is the OECD’s BEPS project and what does it mean for SMEs?

19 November 2015

Omleen Ajimal


BEPS’ Countries score card A helicopter viewLondon, 18/11/2015


Agenda :

0. The Frame1. Cyprus2. China - Hong Kong3. Ireland 4. Jersey5. Luxembourg6. Malta7. Netherlands8. Switzerland9. UK10.US11.CIT : race to the bottom ?12.CbC-reporting : expected implementation

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17

0. The Frame

Note text

OECDs BEPS deliverables : modernisation of the international tax scene as implemented 100 years ago, adapting to new economic realities

Past : material world <-> Today : digital world

Key : concerted actions from governments/avoiding unilateral actions

How will countries and businesses implement BEPS? What are the likely time frames and treaty amendments?


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0. The Frame : Planning, Avoidance & Evasion

Note text

Tax Planning Tax Avoidance Tax Evasion Investing in permissible

avenues eligible for deduction

Conversion of sole proprietorship to a company to enjoy beneficial tax rates

Under-declaring income earned

Selecting an appropriate business structure

Recharacterising an income to gain a better tax rate

Overstating expenses incurred

= Ok = To be tackled by OECD/Countries

= Criminal


19

0. The Frame : OECD’s Issues, Actions & OutputIssue Action Output

1. Digital economy Adress challenges Report

2. Hybrids Neutralise Domestic law / model

3. CFCS Strengthen regimes Domestic law

4. Interest deductions Limit base erosion Domestic law / TPG

5. Harmfull tax practices Counter more effectively Identify and revise criteria

6. Treaty abuse Prevent Model / domestic law

7. Permanent establishment Prevent avoidance TPG/Model

8-10. Transfer Pricing Place of activity TPG/Model

11-13. Transparancy Disclosure Recommandations / TPG

14. Dispute resolution Make effective Model

15. Multilateral treaty Identify issues New treaty Note text


20

1. Cyprus (Nick Terry)

Note text

(source : KPMG Luxembourg)

Current legislative position

Government & Beps

Actions 2015

No WHT on interest payments

Much consideration to the BEPS action plan by Cyprus Tax Commissioner and the Head of Tax Policy unit at the Ministry of Finance

Notional interest deduction on equity => effective tax rate to be as low as 2,5%,

But only for 1 CypCo

No regulations for tax deductibility of interest payments

Taxation of dividends anti-abuse, but not applicable to CypCo (in)directly owned by non-res or non-dom SH’s

>15 % WHT on license fee payments


21

2. China - Hong Kong (John Aswood)

Note text


Government & Beps

Actions 2015

GAAR Amazingly response time, China’s State Administration of Taxation (SAT) conference Beijing 10 October 2015 to support BEPS

Increased scrutiny on TP

TP-rules Review royalty structures for the past 10 years

CFC-rules Increased focus on offshore indirect transfers

Thin-cap Increased attention to « disguised dividends » = large retained earnings and no dividend payment

UBO-definition Focus on PE-establishment (« furnishing of services » = substance)

Rules on deductibility of outbound payments

Tax treaties will be renegotiated and domestic tax-law to be updated


22Note text

3. Ireland (Maguire @ Deloitte)


Government & Beps

Actions 2015

No CFC rules Gov wish to perserve 12,5% CIT and Ireland’s reputation as competitive to attract investment

Looking to introduce an « onshore IP regime »

Thin-cap « Double Irish » : 01.01.15 : Irish Inc non-res are tax resident in Ireland, but 6 year transition

TP-rules

« Double Irish »


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4. Jersey (Jane Pearce)

Note text

Current legislative position Government & Beps

Actions 2015

No WHT Respectful, while committed to maintaining it current policies and expand DTA network

The Island is respectful of EU-law without being tied up in EU-regulation


24Note text

5. Luxembourg (Wim Ritz)


Government & Beps

Actions 2015

GAAR Intention to fully comply with OECD if compliant with EU law

Formalised ATA (tax-rulings)

Limits on intrest deductions Gov considering BEPS and potential impact on local economy

Draft tax law for 01.01.2017

TP-rules Improvement of participation exemption regime

Thin-cap rules Capping NWT

Tax consolidation vertical and horizontal

Reform IP-regime (grandfather 2021); indications thinking about renewed IP-box system (Nexus approach)

Modernisation company law


25Note text

6. Malta (Marco Bugelli)


Government & Beps

Actions 2015

No WHT on interest payments

Malta realises it might be impacted, but as a transparent jurisdiction we welcome the initiative

Budget 2016 : « fiscal consolidation » introduced (cfr CJ 12.06.14) : also between other EU co’s

No WHT on License fee payments

No limitations for tax deductibility of interest payment


26Note text

7. Netherlands (Maaskant@PWC)


Government & Beps

Actions 2015

No WHT on intrest payments « responsible tax debate » is high on the politcal agenda

DTA will be renegotiated

No WHT on License fee payments Gov states that to the extent BEPS results in undesired or unintended tax burdens for Dutch taxpayers, it will explore possible counter measures

Align existing GAAR with revised EU PSD

GAAR Anti-hybrid rule in Dutch participation exemption

Limits deduction of interest CbC reporting ; if not applicable than TP-rules

TP-rules IP-box might be renewed

Substance requirements in relation to intra-group structures

? Lower CIT and/or new WHT


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8. Switzerland (Ivo Hemelraad – Roger D’Allo @ taxand))


Government & Beps

Actions 2015

GAAR Finance Minister declared that the new corporate tax reform should be fully aligned with BEPS

? Harmonized federal rules, abolishing existing tax regimes

Thin-cap ? Cantonal patent box

NID has been dropped and is expected to come back to the table

Parlimentary debate until spring 2016, expected implementation 01,01,2018; with cantons 2 years to adapt to changes, so likely 01.01.2020

Note text


28Note text

9. United Kingdom (David Rudge)


Government & Beps

Actions 2015

CFC-provisions Gov is actively participating in OECD BEP’s initiative

Diverted Profit Tax (25%) : interaction with BEPS is unclear

TP-rules Update IP-box, grandfathering until june 2021

Anti-arbitrage rules to counter hybrids through purpose test

Consultation from Gov on « tax deductibility of corporate interest expense »

Mandatory disclosure scheme

« Worldwide debt cap »


29

10. EU : own actionplan

Note text

What are the main elements of the Action Plan?

Re-launching the Common Consolidated Corporate Tax Base

Ensuring fair taxation where profits are generated

Creating a better business environment

Increasing transparency

Improving EU coordination

PSD – adpated : GAAR


30

10. EU : Impact of the new GAAR

Note text

Based on the new rule, “Member States shall not grant the benefits of the PSD to an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the PSD, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part.”

For the purposes of the GAAR, “an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality,

However, the anti-abuse rule is subject to a limitation : according to the EU Council, the application of GAAR should be proportionate and should serve the specific purpose of tackling an arrangement or a series of arrangements which is not genuine, that is which does not reflect reality,


31

10. EU / OECD

Note text

Member states have FISCAL SOVEREIGNTY in the field of direct taxation

If an EU / EEA Member State would have to disallow the interest on a hybrid loan as a deductible expense upon application of the primary rule because the corresponding interest income is not taxed by the State in which the recipient is tax-resident, a domestic law which provided for this could, it seems, in principle violate the EU fundamental freedoms. See, inter alia, Eurowings (C-294/97) and SIAT (C-318/10). Compare also Cadbury Schweppes, (C-196/04).

If the State of the investee applies the secondary rule, a difference in treatment arises, depending on whether the investor is resident in a Member State that takes into account the investee’s losses/ payments. In our view, EU Law makes clear that the fact that losses / payments are (possibly) also taken into account in another Member State cannot justify discriminatory treatment in the source Member State. Philips Electronics (C-18/11).

It remains to be seen, however, whether the nexus approach, as currently envisaged, would comply with EU Law, either on the basis of the fundamental freedoms (by possibly excluding R&D activity with nexus in other EU / EEA Member States) or State Aid (by possibly granting selective advantages to R&D-intensive undertakings by excluding internal sub-contracting (Source : pwc)


32Note text

11. US (Sylvester Gooyers)


Government & Beps

Actions 2015

CFC-rules US Gov believes there must be a return to capital as well as people functions,

Congress is not in favour as it strongly believes in its fiscal sovereignity and democratic deficit is to be avoided

LOB exceptions to the arm’s length standard should be few

Transfer pricing rules Physical presence should be required for taxing jurisdiction


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12. CIT : Race to the bottom ?

Note text


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12. CIT : Race to the bottom ?

Note text


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13. CbC Reporting Expectation

Note text


Powerful partnerships, built to last.

Wim Ritz Managing Director

Vistra (Luxembourg) S.à r.l. Vistra Fund Services S.à r.l. 15, rue Edward Steichen, 4th Floor, L-2540 Luxembourg, G.D. Luxembourg [email protected]

Tel: +352 422 229 252 Mobile: +352 691 32 00 40

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