Global Tax Alert | 28 August 2017
The Latest on BEPS – 28 August 2017
On 16 August 2017, the Senate approved Senate document No. 177, which amends Act no. 164/2013 on International Cooperation in Tax Administration and related acts to transpose amendments made to the European Union (EU) Directive on Administrative Cooperation in the Field of Taxation (2011/16/EU) concerning the exchange of Country-by-Country (CbC) reports (Council Directive (EU) 2016/881). The bill will become law once it is signed by the President and published in the Official Gazette.
The CbC reporting obligation applies to multinational enterprise (MNE) groups with annual consolidated group revenue equal to or exceeding €750 million (this fact is assessed for the period immediately preceding the reporting period). The ultimate parent entity (UPE) will primarily be required to prepare and submit the CbC report for the entire group. However, if one of the following criteria is met:
- The UPE is not an EU resident and has no obligation to submit CbC reporting in its country of residence
- The UPE is not an EU resident and for the reporting period, the country of residence of the UPE is not a country automatically exchanging CbC reports
- The UPE is from a country that systematically failed to automatically exchange CbC reports and the Ministry of Finance publicized this failure
then the Czech constituent entity of a qualifying MNE group will be required to submit the CbC report for the entire group to the Czech tax administrator (secondary reporting).
The secondary reporting obligation of a Czech constituent entity is waived if a surrogate parent entity (SPE), an EU resident or an EU nonresident (though none of the foregoing criteria are met), is selected, and both the SPE as well as the Czech constituent entity notify their local tax administrators accordingly (the SPE by the end of the reporting period) and the SPE submits the CbC report to its local tax administrator.
The first obligation (for the UPE or SPE) to prepare and submit the CbC report will be for fiscal years beginning on or after 1 January 2016. The amendment first imposes the secondary reporting obligation for a Czech (non-SPE) constituent entity for fiscal years beginning on or after 1 January 2017.
The CbC report will be submitted to the tax administrator within 12 months after the end of the reporting period. Moreover, the Czech constituent entity of a qualifying MNE group will be required – by the end of the reporting period – to notify the tax administrator whether it is the UPE or SPE, or whether it is otherwise required to locally file under the secondary mechanism. If it is neither a UPE nor an SPE, it will have to notify the tax administrator of the identity of the UPE or SPE along with its tax residency (with a general deadline of 15 days to report any changes to the notification). For fiscal years ending on or before 31 October 2017, this notification deadline for Czech constituent entities is deferred to 31 October 2017. Reporting will be done on an electronic form to be published by the tax administration.
The Czech Republic signed the OECD multilateral competent authority agreement (MCAA) on the exchange of CbC reports on 27 January 2016, thus the Czech Republic will be exchanging CbC reports with other tax authorities provided an exchange relationship between the Czech Republic and the other jurisdictions has been activated under the CbC MCAA.
Monetary penalties of up to CZK1.5 million could be triggered when a Czech entity fails to fulfil its obligations regarding CbC reporting.
On 2 August 2017, Korea’s Ministry of Strategy and Finance announced the 2017 tax reform proposals (the 2017 Proposal), aiming to create jobs, redistribute wealth and expand the tax revenue base. The 2017 Proposal also includes provisions in line with the OECD’s BEPS Action Plans 2 (Neutralizing the effects of hybrid mismatch arrangements) and 4 (Limiting base erosion involving interest deductions and other financial payments), among others. Unless otherwise specified, the amendments put forth in the 2017 Proposal will generally become effective for fiscal years beginning on or after 1 January 2018.
See EY Global Alert, Korea announces 2017 tax reform proposals, dated 18 August 2017.
On 4 August 2017, Bill No.7163 on a new intellectual property (IP) box regime was submitted to the Luxembourg Parliament. The new IP regime intends to reinforce research and development (R&D) activities inside the country and encourage foreign investors to consider R&D spending in Luxembourg. The IP regime is in line with the “modified nexus approach” developed by the OECD in the final BEPS report on Action 5. Similar to the current IP regime, eligible net income from qualifying IP rights would benefit from an 80% tax exemption. Qualifying IP rights would also benefit from a full net wealth tax exemption. If enacted, the provisions of the bill would become effective beginning in tax year 2018 and apply (non-cumulatively) in parallel with the former Luxembourg IP regime until the expiration of the latter’s grandfathering period on 30 June 2021.
See EY Global Tax Alert, Luxembourg introduces draft law on new IP regime, dated 25 August 2017.
On 15 July 2017, Malaysia’s updated transfer pricing guidelines became effective, modifying its transfer pricing rules and introducing documentation requirements that conform to the OECD’s BEPS recommendations (Actions 8-10 and Action 13 respectively). The guidelines adopt a substance over conduct principle associated with contracts and require a more detailed analysis of functions performed, assets employed and risks assumed. The analysis should emphasize the substance and value creation between the affiliates to ascertain the transfer pricing outcomes. The guidelines also require the functional analysis to align value creating activities with transfer pricing outcomes by increasing remuneration for significant functions undertaken, with an emphasis on financial capacity to assume risk and exercise control over risk. Failure to conform to the terms of the written contract may cause the transaction to be recharacterized according to the factual substance, and transactions without commercial substance can be disregarded.
In addition, the guidelines require companies to file a master file upon request including an organizational structure, the description of the business and industry conditions, pricing policies, application of transfer pricing method and financial information. The master file requirement applies to taxpayers that are required to file a CbC report, which are multinational corporations with at least RM3 billion (US$680 million) of revenue, including Malaysian subsidiaries of a foreign multinational corporation.
See EY Global Alert, Malaysia updates its transfer pricing guidelines and introduces master file requirements, dated 11 August 2017.
On 5 June 2017, Pakistan’s Federal Board of Revenue (FBR) released draft guidelines providing details on the requirements for the CbC reporting and transfer pricing documentation for public consultation. Under the draft guidelines, a Pakistani entity would need to prepare a master file if it is part of an MNE group and has revenue exceeding PKR100 million (approx. US$950,000), and a local file would be required for Pakistani entities with annual related party transactions exceeding PKR50 million (approx. US$475,000). The master file and local file should be maintained by taxpayers and need to be provided to the tax authority within 30 days from the date of request.
In addition, an MNE group where the UPE is a Pakistan tax resident with consolidated annual revenue of at least €750 million would need to prepare and submit a CbC report to the FBR within 12 months of the last day of any financial year ending on or after 1 July 2017. Furthermore, a secondary filing obligation is provided for Pakistani resident companies, that are neither the UPE nor the SPE, if they are part of the MNE group in a country, and: (i) the UPE is not required to file a CbC report in its country of residence; (ii) the country does not automatically exchange CbC reports with Pakistan; or (iii) the country requires the filing of a CbC report and has an automatic exchange of CbC report with Pakistan, but no effective exchange of information takes place due to a systematic failure. Under the proposed guidelines, qualifying Pakistan companies and establishments will have to comply with the master file and local file requirements from financial years ending on or after 1 July 2016 and CbC reporting requirements for financial years ending on or after 1 July 2017.
See EY Global Alert, Pakistan implements formal transfer pricing documentation and Country-by-Country Reporting requirements, dated 7 August 2017.
On 26 July 2017, the Slovenian Tax Authorities published the CbC reporting notification form on its website. The CbC reporting notification should be filed alongside the corporate income tax (CIT) return in electronic format and in the Slovene language. Generally, the CIT return is due no later than three months after the end of fiscal year of the constituent entity. The first notifications will be due with 2017 CIT return. Every constituent entity in Slovenia is required to submit a CbC reporting notification form. Failure to notify can trigger penalties of up to €30.000.
On 15 August 2017, HM Revenue & Customs (HMRC) released long-awaited guidance on Country-by-Country reporting in the UK. The guidance can be found in HMRC’s International Exchange of Information manual and includes guidance on the format and method of filing CbC reports and notification requirements. As expected, the OECD guidance on Action 13 is referenced heavily throughout the UK’s guidance as HMRC is keen to ensure that CbC reporting is being applied in a globally consistent manner. The HMRC manual therefore instructs UK entities to use the definitions and examples provided by the OECD.
Note the guidance confirms that there may be an additional one-off notification requirement for MNE groups voluntarily filing a CbC report for the 2016 reporting period in a jurisdiction outside of the UK. Under this requirement, the top UK entity of the MNE group must notify HMRC when the CbC report has actually been filed in the other jurisdiction in order to meet the CbC reporting regulations and to discharge the requirement to locally file a CbC report in the UK. This additional notification is due by the UK CbC reporting filing deadline, which is 12 months after the end of the reporting period. Note that this is a one-off requirement for the 2016 reporting period only.
See EY Global Tax Alert, UK may require additional notification for multinational groups filing a Country-by-Country Report on a voluntary basis for 2016, dated 18 August 2017.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP, International Tax Services, Washington, DC
- Arlene Fitzpatrick
+1 202 327 7284
Ernst & Young LLP, Global Tax Desk Network, New York
- Gerrit Groen
+1 212 773 8627
- Jose Bustos
+1 212 773 9584
- David Corredor-Velásquez
+1 212 773 6259
EYG no. 04876-171Gbl