ibfd tax course · 2019. 9. 3. · benefit (= nexus principle) non-qualifying income taxed at...
TRANSCRIPT
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2nd IBFD International Tax Seminar
Substance and Transparency in
International Taxation
BEPS Action 5: Countering Harmful Tax Practices More
Effectively, Taking into Account Transparency and
Substance
Barry Larking, IBFD Special Counsel
4 September 2019
Training Institute, Ministry of Finance, Taipei, Taiwan
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Who is involved
2 © 2019 IBFD
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BEPS action 5: substance and transparency
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Objectives:
Combats profit shifting by aligning tax with substance
Improves transparency though exchange of tax rulings
Ensure level playing field/prevent race to the bottom
-> Inclusive Framework
How are objectives achieved:
Develops existing rules on “harmful preferential regimes”
Requires substantial activity for preferential regimes
Requires substantial activity for no/nominal tax jurisdictions
(2018)
Requires information exchange on ‘BEPS’ rulings
© 2019 IBFD
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BEPS 5: what is a harmful preferential regime (1)
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Preferential regime
Applies only to “geographically mobile activities”
Gives better tax treatment in comparison to normal tax rules
“no or low effective tax rate”
what is low?
not (yet) about minimum tax rates
A “potentially harmful regime”
Ring-fences, or
Is not transparent, or
Does not exchange information, or
Does not require substance
plus supplementary factors e.g. ‘bad’ transfer pricing,
territorial regime
© 2019 IBFD
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BEPS 5: what is a harmful preferential regime (2)
5 © 2019 IBFD
A regime is “actually harmful” if it creates “harmful economic effects”, e.g.
0%TAX
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Which companies must satisfy substance?
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Companies earning income from “geographically mobile activities”
headquarters, distribution centres, service centres, financing, leasing, fund
management, banking, insurance, shipping, holding companies and the provision of
intangibles (IP)
No/Low taxed
Regime (2015)
No/Nominal tax
Jurisdiction (2018)
In an Inclusive Framework
jurisdiction or “jurisdiction of
relevance”
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What substance is required for IP?
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No/low tax regimes
BEPS principle: tax should reflect substance
IP substance = the activities that created the IP (R&D)
So only income from IP created by taxpayer can have tax
benefit (= nexus principle)
Non-qualifying income taxed at standard tax rate
Qualifying income = income derived from IP that relates to
taxpayer’s own (R&D) expense
So not acquired IP or related party outsourcing
Level playing field with no/nominal tax jurisdictions?
Nexus principle does not work if no tax at all
So “Core Income Generating Activities” + enforcement
© 2019 IBFD
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What CIGA is required for IP income in no/nominal tax
jurisdictions?
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Patents etcMarketing Intangibles
R&DBranding, marketing,
distribution
Otherwise:
Strategic decisions
Risk management
Trading
But reversed burden of proof if high risk i.e. involvement of foreign related parties
e.g. for acquired IP, licensed IP, outsourced R&D
Passive IP holding created/exploited outside jurisdiction X
Non-resident board decisions taken locally X
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What CIGA is required for non-IP income (preferential
regimes or no/nominal tax jurisdictions)?
9 © 2019 IBFD
Regime/activity Core Income Generating Activities
HQ Management, expenditure, coordination
Distribution and
service centre
Transportation and storage; order fulfilment;
administrative services
Banking Fund raising; risk and capital management;
treasury; lending; reporting
Insurance Risk analysis, insuring/re-insuring, client services
Shipping Crew management; maintenance; goods and
voyage logistics
(Pure equity) Holding Corporate law filing; “necessary” people and
premises
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How are substance requirements applied?
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Key CIGA rules (IP and non-IP)
CIGA must be performed by the taxpayer/entity or outsourced
in same jurisdiction
CIGA must be carried out with
“adequate” number of qualified employees, and
“adequate” operating expenditure
Jurisdictions must have legislation to
Define CIGA for each activity
Ensure CIGA carried out
Ensure employee/opex conditions met
Monitor and enforce
Reporting requirements
© 2019 IBFD
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Special enforcement rules for no/nominal tax
jurisdictions
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Entity must report information on
type of activity and CIGA
type and amount of income and expenses and assets
employees
Sanction mechanism for non-compliant entities
taxation not applicable
example: striking off register
information exchange with immediate/ultimate parent and
ultimate beneficial owner jurisdiction
Information exchange even if compliant entity
With same jurisdictions
Details depend on whether high-risk activities and whether
effective monitory process in place© 2019 IBFD
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Which no/nominal tax jurisdictions have been reviewed
under BEPS substance/CIGA rules?
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Anguilla
Bahamas
Bahrain
Barbados
Bermuda
British Virgin Islands
Cayman Islands
Guernsey
Isle of Man
Jersey
Turks & Caicos Islands
United Arab Emirates
© 2019 IBFD
All have introduced Economic
Substance legislation from 2019
All satisfy OECD rules so not harmful
Will be annually monitored
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What if a country does not satisfy the substance rules?
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Country is “invited” to abolish/amend harmful regimes:
Close off to new entrants (2016/2018)
Grandfathering: 30 June 2021
Yearly monitoring of potentially harmful regimes (e.g. to see
if economic circumstances change)
Latest peer review: July 2019
Other countries can take “defensive measures”
Don’t forget other BEPS actions:
OECD BEPS actions 8-10 (transfer pricing)
BEPS action 13 (country-by-country reporting)
© 2019 IBFD
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Transparency rules
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Rulings
Preferential regimes
Unilateral APAs
Downward adjustments (e.g. info cap)
Permanent establishments
Conduits
Other to be agreed
Exchange with residence country of
Related parties involved
Immediate and ultimate parent
Summary may be followed by full ruling on request
Ruling best practices
EU equivalent© 2019 IBFD
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EU-listing of non-cooperative jurisdictions
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► EU has equivalent rules to OECD Harmful Tax Practices for EU
member states including Economic Substance requirement
(Code of Conduct)
► EU non-cooperative jurisdiction initiative (Dec 2017):
► Transparency (information exchange)
► Fair taxation (= harmful preferential measures + substance)
► BEPS minimum standards
► If not and no commitment -> blacklist
American Samoa, Belize, Fiji, Guam, the Marshall Islands,
Oman, Samoa, Trinidad and Tobago, the United Arab Emirates,
the US Virgin Islands, and Vanuatu (June 2019)
► Commitments include:
► Economic substance legislation
► Monitoring and enforcement/sanctions
► Exchange with relevant EU Member States © 2019 IBFD
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EU economic substance requirements
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► Key substance elements:
► local directors and management
► local Core Income Generating Activities (CIGA)
► ‘adequate’ local people, premises and expenditure
► Focus on ‘geographically mobile business’ e.g. group
finance, IP, HQ, distribution, fund management (not CIVs),
holding
► Specific requirements for High Risk IP (based on OECD)
© 2019 IBFD
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Tax Haven
EU Co
EU-listing of non-cooperative jurisdictions
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Interest,
royalty etc.
a) Non-deductibility of costs;
b) Controlled Foreign Company (CFC) rules;
c) Withholding tax measures;
d) Limitation of participation exemption;
e) Switch-over rule;
f) Reversal of the burden of proof;
g) Special documentation requirements;
h) Mandatory disclosure by tax intermediaries
+ reputational damage
EU Blacklist: POSSIBLE ‘Defensive’
Measures
Non-cooperative
jurisdiction
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Next steps on substance and transparency
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Ongoing peer reviews and monitoring
Consideration whether no or low tax rate could be harmful
per se
Consideration whether territorial tax systems should
introduce economic substance requirements
Will low tax regimes and no/nominal tax jurisdictions survive
OECD Global Inclusion initiative?
EU plans to add exchange of beneficial ownership
information as part of transparency blacklisting criteria
EU may include information exchange, beneficial ownership
and mandatory disclosure rules as part of blacklisting
substance criteria
© 2019 IBFD
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© 2019 IBFD 19
Thank you for your attention!