Tax policy and controversy briefing
We can all be forgiven for thinking at the time that the September 2014 BEPS recommendations might have represented a high water mark in relation to output from the OECD's BEPS project. In fact (and accepting that September saw both discussion drafts and final recommendations — though certainly not as many as the OECD had hoped for), the September output was surpassed by both the OECD's pre-Christmas output and, more recently, a veritable flurry of new and revised discussion drafts, public comments, and consultation sessions on virtually every aspect of the BEPS Action Plan. Our BEPS timeline on page 16 summarizes the developments of the last few months, while all Actions are covered in individual articles.
Racing to the finish line: new drafts, revised drafts, public consultations
Many of pre-Christmas drafts were the catalyst for a series of January and February 2015 public consultations. Certain highlights (or perhaps, more accurately, lowlights) do stand out. In particular, Action 14 on dispute resolution, the only real “pressure valve” for the BEPS project, was a disappointment to the business community who hoped that the earlier discussion draft might have included agreement on mandatory, binding arbitration, which is viewed by many as a mechanism for resolving disputes. This is particularly concerning in light of the expectation that recommendations under other BEPS Actions will increase disputes and the associated risk of double taxation. Business will certainly be hoping for more from a revised Action 14 discussion draft in the coming months.
While Action 4 (deductibility of interest and other financial payments) may not have drawn such widespread disappointment, it did draw significant concern from business, with the OECD's Business and Industry Advisory Committee (BIAC) representative noting concerns about the group-wide approach contained in the discussion draft, including practical challenges and the potential creation of perverse incentives to increase third-party leverage.
The representative, Will Morris, expressed the preference of BIAC for a fixed ratio approach, noting that such an approach is relatively simple and stable, but further noting concern about the discussion draft's suggestion that the benchmark ratio should be lower than the ratios currently used in some countries. Again, a revised discussion draft is expected in coming months, further illustrating the very real issues the OECD is facing in trying to develop consensus around highly complex and sensitive issues in a very limited Similarly, business has raised significant concerns on other discussion drafts, including on Action 3 (Controlled Foreign Companies,) where BIAC also expressed concern that the lack of consensus reflected in the discussion draft represents a missed opportunity; here, it was noted that while the objective of CFC rules is to complement transfer pricing rules to discourage BEPS and to reduce harmful tax competition, the discussion draft failed to clearly articulate such goals.
Action 12 meanwhile (on mandatory disclosure regimes) may not have yet attracted much attention but has the potential to interact with many OECD and non-OECD developments of the few months, not least the European Commission's 27 January adoption of a binding general anti-abuse rule (GAAR) in the Parent-Subsidiary Directive (PSD). In slightly more positive news, the OECD in early February released three additional papers: An agreed approach on intangible property regimes under BEPS Action 5 (i.e., the UK/Germany proposal on patent boxes), implementation guidelines for country-by-country reporting under BEPS Action 13 (Article included) and the mandate for negotiation of multilateral instruments under BEPS Action 15. Action 5 and 13 developments are covered on pages 28 and 30, respectively.
European Commission developments
The adoption of the PSD GAAR is but one new development from the European Commission in the area of tax evasion and avoidance. 17 December 2014 saw the Commission extend its tax rulings practice inquiry to all Member States as well as announcing the intention for a new Action Plan to combat tax fraud and evasion, while 3 February 2015 saw the opening of yet another state aid investigation, this time into Belgium's “excess profit ruling” system. The Commission's stated intention was to introduce a new action plan that focuses on a “fairer and more transparent taxation approach within the European Union.” The first part of this action plan was delivered on 18 March 2015, when the Commission presented a package of tax transparency measures. A key element of the transparency Package is a proposal to introduce quarterly, automatic exchange of information between Member States regarding their cross-border tax rulings, including Advance Pricing Arrangements (APAs), while a second element also calls for a one-off exchange of tax rulings made within the last 10 years, where such rulings remain active at the point the revised Directive is adopted. As noted by the Commission itself:
“Member State Y would find out about the artificially high prices that the subsidiary is charging to the parent company, in order to shift profits to Member State X. As a result, it may be able to apply the anti-abuse element of the Parent-Subsidiary Directive, and deny the company the usual tax exemption for dividends.”
The second package from the Commission (whose June 17 launch date comes after the launch date of this publication) will focus on a new action plan on tax avoidance and will have a proposal for a Common Consolidated Corporate Tax Base - with the consolidation element postponed – at its heart, as well as containing a number of short term measures which are designed to integrate the results of the BEPS project at EU Member State level.
So, all things considered, the announcement of a Tax Transparency Package, the publication of a second package of measures focusing on the CCCTB and the many ongoing State Aid investigations all illustrate a rapid expansion of the existing tax work of the Commission in the anti-avoidance area.
Forum on Tax Administration
Our feature interview in this edition is with Josephine Feehily, outgoing chair of the OECD's Forum on Tax Administration (FTA). We interviewed Ms. Feehily shortly after the important Dublin FTA meeting, which included information on the strengthening of the JITSIC network, but also on the work that tax administrators feel is necessary to improve dispute resolution. Of course, aspirations for improvement are not always consistent with political objectives, and whether mandatory, binding arbitration can ever become a well-supported, global reality remains to be seen.
Multilateral developments, while critical to the future of the cross-border tax architecture, are of course not the only game in town. In this edition we provide coverage of our 2015 Tax policy outlook, which illustrates that the broad-based, low tax rate trend continues to play out globally. The growth of the taxation of consumption has been another tax “megatrend” of recent years, with companies being the unpaid tax collectors of government. In that regard, we hope that the executive summary of EY's “Indirect tax in 2015” publication will be an interesting read for all. At the country level, developments continue to play out at a high pace; highlights include the passing into law of the UK's Diverted Profits Tax, a similarly-focused multinational companies' anti-avoidance measure from Australia and a new Model Tax Treaty from the US.
While it will naturally be declared a success at November's G-20 meeting in Turkey, a common refrain today is that the BEPS project will by no means be over at that point. As a final thought, this is both the most challenging and perhaps exciting time to be involved in Tax. By working together we can achieve successful outcomes that will work both for business and regulators and deliver the certainty and assurance that we all seek. We hope you find this bumper edition of our publication a useful tool and please, do let either of us know if there are specific issues we should cover in the coming months.