obtaining certainty in a complex international environment · 9/23/2015 · substance –(sept...

Navigating the Maze

Obtaining Certainty in a Complex International Environment

23 September 2015

www.pwc.com/jg

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Agenda

Current International Tax Environment

BEPS – Nearing the Finish Line

EU Reform and Actions

Focus on the UK Tackling offshore tax evasion

How to retain certainty

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PwC

Navigating the Maze

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Unilateral Actions

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Navigating the Maze

Current International Tax Environment

Navigating the Maze 23 September 2015

The current environment

BlueCrest/Systematica

There is ongoing pressure from tax authorities, governments and the media to change international tax rules perceived to allow tax abuses by multinational corporations. This has created a complex new world of international tax for multinational corporations, including those that are based or have operations in the Channel Islands.

EU

Refo

rm a

nd

Actio

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BEPS Finalisation

Unilateral Actions Worldwide

UK

Sp

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easu

res

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Current viewpoints

[The US is] "extremely disappointed in

the output and our collective failure in

the BEPS project to do more and do

better work than we've done,"

Robert Stack, U.S. Treasury deputy

assistant secretary

The proportion of the largest

businesses that disagreed that “tax

avoidance is acceptable” has risen from

39% in 2013 to 56%, according to the

Revenue’s annual survey.

“I think the BEPS Project will go a long

way in addressing the current major

problem areas.” Pascal St Amans,

Director of the OECD’s Centre for Tax

Policy and Administration

“The OECD's proposals … are

wholly inadequate. They go

nowhere near far enough in helping

the world's poorest countries make

sure big businesses pay their fair

share of tax.”

Anders Dahlbeck, Action Aid tax

policy adviser

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Navigating the Maze

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Navigating the Maze

BEPS – Nearing the Finish Line


BEPS overviewTiming of impact of BEPS action plan workstreams

September2014

September2015

December2015

1. Address tax challenges of digital economy – (September 2014)

2. Neutralise hybrid mismatch arrangement effects – (September 2014)

3. Strengthen CFC rules – (September 2015)

4. Limit base erosion via interest deductions/other financial payments –(September/December 2015)

5. Counter harmful tax practices more effectively, taking into account transparency and substance – (Sept 2014/Sept 2015/December 2015)

6. Prevent treaty abuse – (September 2014)

7. Prevent the artificial avoidance of PE status – (September 2015)

8. Transfer pricing: Intangibles – (September 2014/September 2015)

9. Transfer pricing: Risks/Capital – (September 2015)

10. Transfer pricing: Other high-risk transactions – (September 2015)

11. Collect and analyse data on BEPS – (September 2015)

12. Disclose aggressive tax planning arrangements – (September 2015)

13. Re-examine transfer pricing documentation – (September 2014)

14. Make dispute resolution more effective – ( September 2015)

15. Develop a multilateral instrument (Sept. 2014/December 2015)

Output complete Output 2015 A Output 2015 B

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BEPSImplications for Jersey businesses

BEPS

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FinancingImplications on interest deductibility

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Fixed ratio rule(Primary rule)

• Allow a deduction for interest up to a specified proportion of EBITDA.

• Range of acceptable ratios (10%-30%?).

• Principles to help countries set ratio.

• Applicable on country (rather than legal entity) basis?

• Currently used in a number of countries: Germany based on taxable EBTIDA, US based on adjusted taxable income. Perceived that ratios are too high.

• Allow deduction for interest up to group ratio based on group’s actual net third party interest expense.

• Optional carve-out from fixed ratio test where fixed ratio exceeded.

• Further work required during 2016.

• Similar proposal in the Obama Administration’s annual budget.

• Similar rules operate in Australia, Germany and New Zealand as a carve-out from a ‘fixed ratio’ test.

Group ratio rule(Secondary rule)

OECD has recommended domestic rules to neutralise the following results arising from hybrid mismatch arrangements:

• Deduction with no taxable inclusion (D/NI)• Double deduction (DD)• Indirect D/NI (imported mismatch)

Addresses hybrid mismatch arrangements arising from:

• Hybrid financial instruments and transfers• Payments by hybrid payers• Payments made to reverse hybrids• Payments by dual residents• Imported mismatches

Potential impact for funds structures• CPECs• Check the box

FinancingImplications for Hybrids

PwC

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PwC

Holding and repatriationTaking treaty relief for granted could be a thing of thepast

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• Complexity, not publicly owned/traded, intermediate holding companies, no active trade or business

• Pension funds / CIVs

• Subjectivity, uncertaintyPotential issues with PPT

Navigating the Maze

Potential issues with LoB

Tax authorities refocussing on treaty access, even under existing rules (e.g. beneficial ownership)

• If substance needed in Luxembourg, where will it come from?

• What carve outs likely for CIVs or alternatives

Potential impact for islands

Potential Impact of BEPS

- Limitations of Benefits (LoB)

clause- Principal

purpose test (PPT)

- Other anti-abuse rules

PwC

Holding and repatriationExample of impacts for funds

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• Will CIV specific rules apply when funds are not regulated, and there is no third party capital?

• Hybrid structures

• Country by country reporting – lead of group?

• Increased investor information and disclosure

PE Investments

• Hybrid structures

• Treaty Abuse

• Base Erosion via interest deductions

• Country by Country Reporting

• Substance• Hybrid funding

• Focus on Treaty Abuse (granting benefits)

• Increased tax authority aggression

• Increased disclosure

• Country by Country Reporting

• CFC Rules

• Permanent Establishment Risk

• Transfer Pricing/Country by Country ReportingFund

UK/US Manager

Sub-Advisor

• Increased information required, Impact on value of investments

Liquid Investments

Luxembourg Platform

• Focus on Treaty Abuse (granting benefits)

• Increased disclosure

Investors

PwC

Navigating the Maze

Harmful tax practices

Focus on Substance

TP of intangibles

Country by country

reporting

Treaty abuse

TP Documentation

Digital

IP incentives and rulings

Allocation of income associated with IP

Alignment of profit and substance

WHT on royalty flows

TP policies for IP

Businesses with centralised IP

Intellectual propertyFocus on ‘substance’

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Intellectual propertyUnderstanding the meaning of andimportance of ‘substance’

Navigating the Maze

Text

Text

Are you able to identify where the value is added within your supply chain? Does this align with profit attribution?

What are the risks associated with the key value-driving assets? How are these managed with the business?

Are you able to identify what are the key assets of your business?

What are the key functions related to the assets and risks identified? Who/where are they performed?

1. Identification

3. Strategic functions

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Va

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Permanent establishmentChanging rules and a renewed focus

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23 September 2015Navigating the Maze

Fixed place of business

exemptions

Dependent Agent PE

Independent agent

exemption

• Intention is to narrow PE exemptions for warehouses etc. – With particular focus on facilities for delivering goods and ‘purchasing offices’

• Subject all specific activity exemptions to an overriding preparatory or auxiliary test

• Rule to prevent exemptions applying where business activities have been fragmented (by one enterprise or between related enterprises)

• Changes aimed at commissionaire and similar arrangements

• But likely to impact a broad range of taxpayer structures

• Key change from ‘concluding contracts’ to ‘negotiating material elements of contracts’

• Higher threshold to be considered independent

• Change of ‘exclusively’ test and greater focus on legal and operational independence

• Loss of test used for supporting ordinary course of business exemption

PwC

Permanent establishment example

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Insert text

Insert text

Investments

Sales and

marketing

activities

Trust (Jersey)

UK settlor

Fiduciary Company (Jersey)

Trustee

UK Sub

PwC

Operating modelSubstance in context

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Jersey Finance Company

Loans

Group Cos

1 Experience Employee

Senior/Capable Board

UK Parent Co

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Transparency and disclosureOECD’s Three Tier Approach

Three tierTP Documentation

Local file

• Provide information that supplements the master file and aims to ensure compliance in a specific jurisdiction.

• Focuses on ‘information relevant to the transfer pricing analysis related to the transactions taking place between a local country affiliate and associated enterprises in different countries’.

• Information to include detailed financials relevant to the specific transactions.

Country-by-country reporting

• CbCR for fiscal years beginning on or after 1 January 2016 if annual consolidated group revenue in preceding fiscal year of ≥ EUR 750 million

• CbCR contains a breakdown of:

- Revenue between third party and related party

- PBT

- Income tax (paid and accrued)

- Capital

- Earnings

- No. of employees; and

- Tangible assets (excl. cash)

• Does not contain any disclosure of royalties, interest or services/WHT, although this will be kept under review until 2020

Master file

• Contains ‘common standardised information relevant for all MNE group members’.

• Prepared either for ‘the MNE group as a whole or by line of business’.

• Purpose is to ‘elicit a reasonably complete picture of the global business’.

PwC

Transparency and disclosureWhat country-by-country reporting means in practice

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1. Understand the impact of regulatory requirements

• Undertake a technical assessment of how you’re impacted by each of the CBCR regimes.

• Consider how CBCR fits into your wider TP end to end process.

• Understand the view of your Board and other stakeholders on wider tax transparency reporting.

• Review what is already available publicly in respect of your tax affairs and how this might be impacted by CBCR.

2. Confirm reporting and systems readiness

• Undertake a systems readiness assessment.

• Where there are gaps in CBCR data, design an approach to how you’ll gather the additional information.

• If additional systems infrastructure is required to meet CBCR requirements, review the appropriateness of each of these and undertake a cost/benefit analysis for each option then design an effective implementation program.

• Gather CBCR data and undertake a risk assessment of how your tax position could be viewed by tax authorities.

• Consider how you’ll manage storing and reporting sensitive CBCR data and related confidentiality issues.

3. Ensure ongoing compliance

• Review existing tax governance frameworks to ensure that these are sufficiently robust to support CBCR and provide confidence over data being reported.

• Determine who within your organisation will be responsible for managing CBCR.

• Develop an action plan and an appropriate control framework for gaining ongoing comfort over CBCR.

• Consider likely future regulatory and voluntary reporting tax developments.

PwC

What to do next?Risk assessment

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PwC

Area 6

Transparency & Disclosure

Area 5

Other Operating Model

Area 4

Permanent Establishments

Area 3

Intellectual Property

Area 2

Holding & Repatriation

Area 1

Financing

Overall score

PwC

Navigating the Maze

EU Reform and Actions


PwC

State Aid Investigations

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Apple (Ireland)

Starbucks (Netherlands)

Fiat (Luxembourg)

Amazon (Luxembourg)

- Focus on transfer pricing arrangements and rulings given.

- Concern that tax authorities did not do sufficient analysis.

- Focus on technical aspects, as well as length and rationale (was there selective treatment?).

- Potential to go back up to 10 years of arrangements.

PwC

EU Parliament recommendations on taxation

Navigating the Maze

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• Public CBCR

• Mandatory notification of new tax measures

• Mandatory AEOI on tax rulings

Transparency

ConvergenceCoordination

• Anti-BEPS EU directive

• Common definition of tax haven

• Counter measures for use of tax havens

• GAAR clause in all directives

• Two step CCCTB

• Code of Conduct Group

• Patent Box = new nexus approach

• CFC regulation

• Coordination on tax audits

PwC

Navigating the Maze

Unilateral Actions


PwC

What are countries doing?Unilateral (and regional) actions already taking place

Brazil – Action 12: Annual disclosure

obligations for tax planning

Canada – Action 13: Updated Transfer Pricing

documentation rules

France – New interest rules and reporting requirements

South Korea -Action 13:

Introduction of new TP documentation

rules

Ireland – Changing residency rules to

abolish double Irish structures

Singapore – New guidance on hybrid

treatment

Mexico – Action 13: Introduction of

new TP documentation

rules

Italy – Action 5: Changes to

“patent box” type rules

USA – New competent authority

procedures

European Union–Pre-emptive changes to various directives

Germany–New PE rules

that deviate from OECD model

Australia – Action 13: New Transfer Pricing

Documentation requirements and Country-by-Country

reporting

UK – Hybrid rules and country-by-

country reporting

Spain – Action 13: Introduction

of new T P documentation

rules

Chile – Actions 6/7: New PE and treaty abuse rules

incorporated into China treaty

China – Actions 3, 4, 8-10 and 13: New master guide

on 'Special Tax Adjustments' for

TP and anti-avoidance rules

South Africa –New VAT rules

for online vendors

Japan – Action 2: Changes to net operating

deduction rules

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New Zealand –Action 1: New GST rules for offshore

companies

Netherlands–Action 13:

Introduction of new TP documentation

rules

Canada – New CFC and treaty

abuse rules

Russia –New bill on taxation of

CFCs

China – New rules on

redemptions of hybrid expenses

Austria– Anti-hybrid rule for interest and

royalty deduction

Australia – New ‘Diverted Profits

Tax’ and anti-avoidance rules

Australia – Action 2: Introduction of Hybrid Mismatch

rules

China – Actions 6/7: New PE and treaty

abuse rules incorporated into Chile

treaty

Brazil – New CFC rules and restrictions on deductions in low

tax jurisdictions

Chile – New interest deductibility rules and

digital regulations

PwC

Navigating the Maze

Focus on the UK


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The UK environment

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New penalties

Change in HMRC

behaviour

Corbyn and New Margaret

Hodge committee

Focus on tax avoidance

(DPT)

PwC

DPT update

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• HMRC resourcing

• HMRC engagement

• Offshore contract conclusion as evidence of design

• NRL structures not aimed at

• Section 86 on property developers, location of asset v SPFs

• DPT Analyser

Political environment

Who is legally responsible for the tax reporting:

• Trust

• Company – do you provide board directors?

How will HMRC and other tax authorities obtain information:

• CRS/FATCA reporting

• Country-by-Country Reporting

• Other Required Documentation

What will they do with the information?

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PwC

Navigating the Maze

UK Tackling offshore tax evasion


PwC

• Strengthening civil deterrents for offshore evaders.• Civil sanctions for enablers of offshore evasion.• A new corporate criminal offence of failure to prevent the

facilitation of evasion.• A new criminal offence for offshore evaders.

Current HMRC consultations

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• Acting as a middleman• Providing planning and bespoke

advice• Delivery of infrastructure• Maintenance of infrastructure• Financial assistance• Non-reporting

Civil sanctions for enablers of offshore evasion

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An enabler is “any person (whether legal or natural) who, whether knowingly or unknowingly, provides services which assist a UK taxpayer to evade UK tax”

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Civil sanctions for enablers of offshore evasion

Careless DeliberateUnaware

Behaviour based: Proposed sanctions – a penalty (up to 100% of the revenue loss to which the enabler’s actions contributed) for deliberate enablers

PwC

A new corporate criminal offence of failure to prevent the facilitation of evasion

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New criminal offence where corporates fail to prevent their agents from criminally facilitating tax evasion

Not intended to criminalise corporations that take reasonable steps to prevent the facilitation of tax evasion by their agents

Navigating the Maze

Due diligence defence –reasonable steps to put in place adequate compliance procedures

HMRC “We believe that many corporations…will already have put in place policies and procedures which would satisfy this defence”

PwC

Example (from condoc)

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ExampleCivil sanctions for enablers of offshore evasion

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ExampleFailure to prevent the facilitation of evasion

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How does this impact you?

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Build on existing AML training

HMRC view should not be onerous to comply

Consider whether any existing practices may encourage or reward bad behaviours

Document procedures in place

PwC

Navigating the Maze

How to retain certainty


PwC

Key messages for Jersey businesses

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The BEPS agenda is not specifically targeted at the Channel Islands - however there will be consequences for businesses to consider directly arising from changes in approach, interpretation or legislation. Expect collateral impact.

Substance is key – transfer pricing and some areas of taxation should follow the substance and functional arrangements of the group. There will be an increased focus on functions and less on legal arrangements, risk and capital.

The risk areas highlighted by BEPS (in particular PE threshold and transfer pricing related to risks and capital) are current issues not ones to leave for the future – businesses should be reviewing their positions now.

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As the BEPS agenda progresses there will be greater documentation and disclosure requirements – tax systems will need to be configured to make sure these requirements can be met. The right strategy needs to be implemented to tackle issues.

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A significant amount of the BEPS Action Plan approach is consistent with the current attitude of fiscal authorities – this will only serve to increase fiscal authorities’ confidence. There will be significant behavioural shift & likely more controversy.

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Monitor OECD output and domestic impacts, and

input into the process as needed

Review operation model to assess potential for

substance risks

Review operating guidelines and actual

location of activities to identify risks

Prepare a test country-by-country report and ensure documentation is robust

Consider engagement strategy with tax

authorities and potential for APAs


PwC

Questions?


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PwC

Contacts

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23 September 2015

Justin WoodhousePartner, PwC Channel Islands+44 (0) 1534 [email protected]

Debbie PayneTax director, PwC Channel Islands+44 (0) 1534 [email protected]

Jameson HydeSenior tax manager, PwC Channel Islands+44 (0) 1534 [email protected]

Iain SandersonSenior tax manager, PwC UK+44 (0) 117 928 [email protected]

This publication has been prepared for general guidance on matters of interest only, and does

not constitute professional advice. You should not act upon the information contained in this

publication without obtaining specific professional advice. No representation or warranty

(express or implied) is given as to the accuracy or completeness of the information contained

in this publication, and, to the extent permitted by law, PricewaterhouseCoopers CI LLP, its

members, employees and agents do not accept or assume any liability, responsibility or duty of

care for any consequences of you or anyone else acting, or refraining to act, in reliance on the

information contained in this publication or for any decision based on it.

© 2015 PricewaterhouseCoopers CI LLP. All rights reserved. In this document, “PwC” refers

to PricewaterhouseCoopers CI LLP (a limited liability partnership in the United Kingdom) which

is a member firm of PricewaterhouseCoopers International Limited, each member firm of which

is a separate legal entity.

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obtaining certainty in a complex international environment · 9/23/2015 · substance –(sept...

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