Global Tax Alert | 20 November 2017
The Latest on BEPS – 20 November 2017
On 10 November 2017, Qatar joined the , bringing to 115 the total Members of the Convention. As a new Member, Qatar is committed to fight international offshore tax avoidance and evasion by rapidly expanding its network of information exchange partners. The Convention will allow Qatar to swiftly implement the transparency measures of the OECD/G20 BEPS project, in particular the automatic exchange of Country-by-Country (CbC) reports under Action 13.
On 6–7 November 2017, the OECD held a public consultation with respect to the discussion drafts on Additional Guidance on Profit Attribution to Permanent Establishments and on Revised Guidance on Profit Splits that were released earlier this year. The consultation was an opportunity for stakeholders to engage directly with the OECD Secretariat and the country delegates who are responsible for the OECD’s transfer pricing work.
See EY Global Tax Alert, OECD holds second public consultation on attribution of profits to PEs and profit splits, dated 8 November 2017.
On 6 November 2017, the OECD published updated (TPCPs) for 31 countries to reflect on their existing transfer pricing legislation and practices (namely, Austria, Belgium, Brazil, Bulgaria, Canada, Colombia, Croatia, Czech Republic, Denmark, Germany, Indonesia, Ireland, Japan, Latvia, Lithuania, Luxembourg, Malaysia, Malta, Mexico, Netherlands, New Zealand, Nigeria, Peru, Russian Federation, Singapore, Slovak Republic, Slovenia, Spain, Switzerland, United Kingdom, United States). The updated profiles, prepared by means of questionnaires filled out by the countries, focus on the domestic legislative measures based on major transfer pricing issues including the transfer pricing methods, arm’s-length principle, transfer pricing documentation, comparability analysis, intangible property, intra-group services, cost contribution agreements, administrative approaches to avoiding and resolving disputes, safe harbors and other implementation measures. The TPCPs also compared the state of the countries’ domestic legislation with the OECD Transfer Pricing Guidelines to reflect the extent to which the countries are following the guidelines. The TPCPs for another 21 countries is forthcoming (namely, Argentina, Australia, Chile, China, Estonia, Finland, France, Greece, Hungary, Iceland, India, Israel, Italy, Korea, Norway, Poland, Portugal, South Africa, Sweden, Turkey, Uruguay).
On 3 November 2017, Maldives and on 14 November 2017, Qatar and, Saint Kitts and Nevis joined the BEPS Inclusive Framework bringing to 106 the total Members in the framework. As new BEPS Members, they committed to comply with the BEPS minimum standards, which are contained in Action 5 (countering harmful tax practices), Action 6 (preventing treaty abuse), Action 13 (transfer pricing documentation) and Action 14 (enhancing dispute resolution). Maldives, Qatar and Saint Kitts and Nevis will also participate on an equal footing with the rest of BEPS members on the remaining standard setting under the BEPS project, as well as the review and monitoring of the implementation of the BEPS package.
On 27 October 2017, the Belgian administration issued a circular letter with respect to the updated list of countries that are considered by the OECD as jurisdictions that are not compliant with the international standard for the exchange of information.
Companies subject to Belgian corporate or nonresident corporate income tax are required to report all direct or indirect payments in excess of €100,000 made to beneficiaries who are located in so-called ”tax havens.” Failure to report tainted payments that qualify as professional business expenses (e.g., interest payments or royalties) automatically results in the non-deductibility for tax purposes of these expenses. In addition, if the reporting obligation has been duly complied with, the professional business expenses are tax deductible only provided that the taxpayer demonstrates that the payments have been made to persons other than artificial constructions and relate to genuine operations.
For the purpose of this measure, the concept of tax haven is considered to include: (i) countries that are considered by the OECD as jurisdictions that do not sufficiently apply its standard for the exchange of information; and (ii) zero- and low-tax jurisdictions, as determined by article 179 of the Royal Decree implementing the Income Tax Code, i.e., jurisdictions with a nominal corporate tax rate below 10%.
Following the meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes on 4 November 2016, Guatemala, the Marshall Islands, Micronesia (Federated States of) and Panama were removed from the OECD’s list of non-compliant countries. Consequently, the only country left on said list is Trinidad and Tobago. This implies that for Trinidad and Tobago, the reporting obligation remains in place, but for Guatemala and Panama, the reporting obligation applies only to payments made between 4 November 2016 and 21 June 2017. Because the Marshall Islands and Micronesia (Federated States of) are (still) considered as tax havens with a nominal corporate tax rate below 10%, qualifying payments made to these jurisdictions are still to be reported.
On 15 November 2017, the Bulgarian Council of Ministers authorized the Bulgarian Minister of Finance to sign the corresponding declaration for accession to the Multilateral Competent Authority Agreement on the Automatic Exchange of Country-by-Country reports (CbC MCAA). To date, the CbC MCAA has been signed by 65 jurisdictions.
On the sidelines of the OECD’s 10th Global Forum meeting on Transparency and Exchange of Information for Tax Purposes organized in Yaoundé, Cameroon on 15–17 November, 2017, an OECD delegation met with Cameroon’s Minister of Finance to discuss progress in the implementation of the new international standards to combat tax avoidance and tax evasion. Cameroon is actively involved in the BEPS project as a member of the Inclusive Framework and the Global Forum on Transparency and Exchange of Information.
The Induction Program to assist Cameroon in the implementation of the OECD BEPS package was launched during the meeting, with focus on the minimum standards and the standard for the automatic exchange of financial account information.
Equally as part of the Global Forum meeting, Cameroon’s Finance Minister Alamine Ousmane Mey, on 15 November 2017 led a discussion with Ministers, high level representatives and officials from Africa on tax fraud and avoidance that resulted to the Yaoundé Declaration, with a renewed call for action to address illicit financial flows through international tax cooperation.
On 27 October 2017, the Costa Rican Tax Authority published draft rules implementing CbC reporting. According to the draft rules, all Costa Rican tax resident constituent entities that are Ultimate Parent Entities (UPEs) of a multinational enterprise (MNE) group with annual consolidated group gross revenue equal to or exceeding €750 million during the reporting fiscal year would need to prepare a CbC report. The draft rules do not contain local filing rules but MNE groups from other jurisdictions can appoint a constituent entity in Costa Rica to prepare a CbC report as the Surrogate Parent Entity (SPE). For a reporting fiscal year commencing at any point in 2017, CbC reports shall be filed no later than 31 December 2018. For subsequent reporting fiscal years, a CbC report shall be filed no later than 31 December of the year following the last day of the reporting fiscal year. Moreover, any constituent entity tax resident in Costa Rica shall notify the tax authorities whether it is the UPE or SPE by the last day of the reporting fiscal year. Lastly, failure to submit any of the information contained in the draft rules would trigger monetary penalties of 2% of gross income up to a maximum amount of approximately US$80,000 pursuant to the Article 83 of the Income Tax Code.
On 31 October 2017, Guernsey published a CbC Guide to the Appropriate Use of Information Exchanged. This Guidance covers Guernsey’s approach to the requirement of CbC reporting that information exchanged is to be used by the recipient tax administration appropriately and is in line with the OECD Guidance on the appropriate use of information contained in CbC Reports.
In October 2017, Hong Kong signed a Memorandum of Understanding on the Exchange of Country-by-Country Reports, which entered into force on 26 October 2017 and generally applies from 26 October 2017. The Memorandum (MoU) applies to Hong Kong’s Double Tax Treaties with Austria, Belgium, Canada, France, Guernsey, Hungary, Indonesia, Ireland, Italy, Japan, Jersey, Korea, Latvia, Liechtenstein, Luxembourg, Malta, Mexico, Netherlands, Pakistan, Portugal, Romania, Russia, South Africa, Spain, United Kingdom (the Other Jurisdictions). According to the provisions of the MoU, Hong Kong will exchange the CbC reports for the fiscal years that have been voluntarily filed with Hong Kong with the Other Jurisdictions in which, on the basis of the information in the CbC reports, one or more Constituent Entities of the MNE group are either resident for tax purposes, or are subject to tax with respect to the business carried out through a permanent establishment. The exchange obligation will apply to voluntarily filed CbC reports by Hong Kong MNE groups with Hong Kong with respect to fiscal years commencing on or after 1 January 2016. Such CbC report will be exchanged as soon as possible and no later than 18 months after the last day of the fiscal year of the relevant MNE group. CbC reports with respect to fiscal years commencing on or after 1 January 2017 will be exchanged as soon as possible and no later than 15 months after the last day of the fiscal year of the relevant MNE group.
On 31 October 2017, the Indian Tax Administration issued the final rules for CbC reporting and furnishing of the master file. The final rules take into consideration a few suggestions made in relation to the draft rules, but retain substantially the key aspects of the reporting requirements from the draft rules, including the filing thresholds. Importantly, the deadlines for the CbC reporting and master file for the Indian financial year 2016–17 have been extended to 31 March 2018.
The rules require constituent entities to submit a master file in addition to the regular transfer pricing documentation if the consolidated revenue of the international group based on consolidated financial statements for the accounting year exceeds approximately US$77 million and either of the following conditions are satisfied – (i) the aggregate value of the international transactions of the constituent entity exceeds approximately US$7.7 million; or (ii) the aggregate value of the international transactions of the constituent entity in respect of purchase, sale, transfer, lease or use of intangible property exceeds approximately US$1.5 million. Part A of the master file, which contains limited and basic information, needs to be filed even if the above thresholds are not triggered. CbC reporting requirements would apply to an international group if the consolidated revenue based on consolidated financial statements of the group for the accounting year exceeds approximately US$846 million.
See EY Global Tax Alert, Indian Tax Administration releases final rules on Country-by-Country reporting and Master File implementation, dated on 6 November 2017.
On 17 October 2017, the Parliament launched the debate on the Budget proposal for 2018 and the accompanying draft amendments to tax laws. One of the most proposed amendments to the Law on Corporate Income Tax is the introduction of a knowledge box regime in accordance with the OECD’s modified nexus approach. Accordingly, profits derived from the use of intangible assets (e.g., copyright computer program or patented invention) generated through research and development activities would be subject to the reduced corporate income tax rate of 5% subject to conditions. If approved by the Parliament, the amendments will enter into force on 1 January 2018 and will be applicable for calculating corporate income tax for 2018 and future years.
On 8 November 2017, the President of Poland signed a law ratifying the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). The law was announced in the Polish Journal of Laws on 14 November 2017 and will formally come into force within 14 days following this publication. With the publishing of the law, the internal ratification procedure in Poland has been concluded. Poland needs to deposit now before the OECD its instrument of ratification and confirm its definite MLI positions.
On 24 October 2017, the Portuguese Secretary of State for Tax Affairs announced in Decree n. 87/2017-A-XXI, an extension of the deadline to submit the CbC notification with respect to reporting fiscal year 2016. The deadline has been extended to 31 December 2017. With respect to reporting fiscal year 2017, CbC notifications are due by the last day of the fifth month following the end of the reporting fiscal year. For an MNE group with a calendar year this would mean 31 May 2018.
On 2 October 2017, Portugal and the United States (US) signed a competent authority agreement (CAA) to exchange CbC reports. The CAA entered into force on the same date and generally applies from this date. The CAA was concluded under the double tax treaty and protocol between Portugal and the US. According to the provisions of the CAA, Portugal and the US will exchange annually on an automatic basis the CbC report received from each reporting entity that is resident for tax purposes in its jurisdiction, provided that, on the basis of the CbC report, one or more constituent entities of the reporting entity’s MNE group are resident for tax purposes in the other jurisdiction, or are subject to tax with respect to the business carried out through a permanent establishment in the other jurisdiction. The exchange obligation will apply to CbC reports with respect to fiscal years commencing on or after 1 January 2016. Such CbC report is intended to be exchanged as soon as possible and no later than 18 months after the last day of the fiscal year of the MNE group to which the CbC report relates. CbC reports with respect to fiscal years of MNE groups commencing on or after 1 January 2017 are intended to be exchanged as soon as possible and no later than 15 months after the last day of the fiscal year of the MNE group to which the CbC report relates.
On 14 November 2017, the President of the National Agency for Fiscal Administration in Romania issued the order approving the templates for CbC report filing and related notifications regarding the identity of the reporting entity which may be required to be submitted to the Romanian tax authorities by local constituent entities of an MNE group subject to CbC reporting requirements. CbC reporting and notification requirements had been previously introduced in Romania in June 2017, via an emergency ordinance issued by the Romanian Government to transpose the provisions of the Council Directive (EU) 2016/881.
Also, on 10 November 2017, the Ministry of Finance of Romania enacted an emergency ordinance for amending the Romanian Tax Code. Among others, the ordinance transposes certain provisions of the Anti-Tax Avoidance Directive 2016/1164 (2016) (ATAD). In particular, this would lead to the introduction of: (i) deductibility limitation of interest and of other economic equivalent costs rules: under the 10% EBITDA (earnings before interest, taxes, depreciation and amortization) interest deduction limitation rule. The tax deductibility of net interest charges and other economic equivalent costs can be deducted up to €200,000 while the exceeding part will be deductible up to 10% EBITDA. Furthermore, companies will be able to carry forward interest disallowed under the 10% EBITDA; (ii) rules on controlled foreign corporations (CFC) under which non-distributed income of the CFC entity or the income of the permanent establishment will be taxed at the level of Romanian entity, if certain tests are not passed; (iii) exit taxation rules: a tax regime for the transfer of assets, of tax residence and/or economic activity carried out through a permanent establishment in relation to which Romania no longer has the right to tax, is regulated; and (iv) general anti-avoidance rules. Based on the provisions from the emergency ordinance, the measures will apply from 1 January 2018.
On 15 November 2017, the Swedish Tax Agency published updated guidance on CbC reporting. Following the published clarifications, group contributions (profit transfers under the Swedish tax grouping regime) must be included in the profit/loss, but not in the revenue for CbC reporting. Furthermore, pension fund income derived by life insurance companies, foreign occupational retirement institutions and pension funds must be included in the CbC reporting. These institutions must report their flat-rate tax as income tax. This does not apply flat-rate tax on pension reserves of other enterprises.
In a further update of 16 November 2017, the Swedish Tax Agency provided a calculation example of the currency conversion at the average conversion rate as required by the OECD when the local statutory accounts are used as the basis for CbC reporting.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP, International Tax Services, Washington, DC
- Arlene Fitzpatrick
Ernst & Young LLP, Global Tax Desk Network, New York
- Gerrit Groen
- Jose A. (Jano) Bustos
- David Corredor-Velásquez
EYG no. 06613-171Gbl