Global Tax Alert | 4 December 2017
The Latest on BEPS – 4 December 2017
On 28 November 2017, an OECD delegation made an on-site visit in Astana to discuss with the Kazakhstan Minister of Finance, Bakhyt Sultanov, the progress of the country in implementing the new international standards against tax avoidance and tax evasion. An induction program was launched to assist Kazakhstan in the implementation of the BEPS package with a focus on Country-by-Country (CbC) reporting and other minimum standards. Kazakhstan is an active member of the Inclusive Framework on BEPS, which brings together 108 countries and jurisdictions on an equal footing to tackle international tax avoidance.
On 27 November 2017, the OECD released its annual statistical publication on the Mutual Agreement Procedure (MAP) caseloads of more than 65 jurisdictions (all members of the OECD’s Inclusive Framework that joined prior to 2017) for the 2016 reporting period. The report covers opening and ending inventory of MAP cases for 2016, the number of new MAP cases initiated, the number of MAP cases completed, cases closed or withdrawn, and the average cycle time for cases completed, closed or withdrawn cases.
The statistics provide great insight into the development of MAPs in the various countries. Slightly more than half of the MAP cases in inventory are transfer pricing cases. Almost 85% of MAPs concluded in 2016 resolved the issue.
See EY Global tax alert, OECD releases mutual agreement procedure statistics for 2016, dated 1 December 2017.
On 24 November 2017, the OECD announced an invitation for taxpayers to provide input on the fourth batch of Dispute Resolution peer reviews. According to the schedule of review, the OECD is now gathering input for the Stage 1 peer reviews of Australia, Ireland, Israel, Japan, Malta, Mexico, New Zealand and Portugal. To that end, the OECD invites taxpayers to submit input on specific issues relating to access to MAP, clarity and availability of MAP guidance and the timely implementation of MAP agreements for each of these jurisdictions using the taxpayer input questionnaire. Taxpayers can complete the questionnaire and return it via email by 22 December 2017 at the latest.
On 23 November 2017, Trinidad and Tobago joined the BEPS Inclusive Framework bringing to 108 the total Members in the framework. As a new BEPS Member, Trinidad and Tobago 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). Trinidad and Tobago 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 21 November 2017, the OECD Council approved the (the 2017 update) to the OECD Model Tax Convention (the OECD MTC). The 2017 update comprises the treaty-based recommendations developed through the BEPS project, and a few other changes that were not developed as part of the work on BEPS (e.g., changes to the international shipping provision and changes to the Commentary on Article 5 on Permanent Establishments). The 2017 update also includes the changes and additions made to the observations and reservations of OECD member countries and the positions of non-OECD economies.
The 2017 update, will be incorporated in the 2017 OECD MTC that will be published during the next few months.
See EY Global Tax Alert, OECD Council approves 2017 update to OECD Model Tax Convention, dated 1 December 2017.
On 24 November 2017, Australia’s Treasurer released draft legislation to address hybrid mismatch measures. The hybrid mismatch rules will apply to payments made on or after the day six months following the date of Royal Assent. The earliest likely start date will be in the second half of 2018. Pre-existing arrangements will not be grandfathered. The hybrid mismatch rules will apply to a wide range of arrangements, including interest, royalties, decline in value of assets and payments for inventory and services. Multinational groups should assess the impact of these rules on their cross-border related party arrangements and/or hybrid entity structures and identify arrangements which may require restructuring. Broadly, the proposed rules will operate to neutralize the effect of hybrid mismatches by (1) disallowing deductions for the payer (or alternatively including taxable income in the hands of the payee) where an entity is able to claim a tax deduction in one jurisdiction but not include an income amount in the other tax jurisdiction, and (2) denying duplicate deductions where an entity is able to claim a tax deduction in both tax jurisdictions for the same payment.
The hybrid mismatch measures include an imported hybrid mismatch rule. An imported hybrid mismatch arrangement arises where (1) a payment is made either directly or indirectly by an Australian taxpayer to a nonresident, and (2) that payment funds the return on a hybrid arrangement (that is not otherwise neutralized by hybrid mismatch rules in a foreign jurisdiction).
This is an integrity rule aimed at stopping arrangements that seek to avoid hybrid mismatch rules by interposing one or more entities between the hybrid mismatch and a country that has hybrid mismatch rules. It is now critical that Australian entities, and their foreign parent and associated entities, be aware of the foreign tax treatment of payments made to and between jurisdictions outside of Australia. Under the imported mismatch rule, Australian deductions can be denied even when the Australian entity is not directly entering into any hybrid arrangements or dealing with hybrid entities. If hybrid arrangements exist anywhere in the global group and indirectly relate or fund Australia, the imported hybrid mismatch rule may apply to deny deductions.
Submissions on the draft legislation must be made no later than 22 December 2017. Australia’s Treasurer also announced further draft legislation will be released with a targeted integrity rule and branch mismatch rules. The start date for these rules will be the same as for the general hybrid mismatch measures. There is no timetable yet for this draft law but we expect it will be issued in early 2018.
See EY Global Tax Alert, Australia releases draft anti-hybrids law, dated 28 November 2017.
On 23 November 2017, the Australian Taxation Office (ATO) announced that for the first reporting year, taxpayers with years ended 31 December 2016 and 31 January 2017 (i.e., December and January balancers) have until 15 February 2018 to file their CbC report, master file and local file without incurring failure to lodge penalties. In general, Australian entities are required to submit the documentation within 12 months from the last day of the reporting fiscal year.
On 14 November 2017, the Ministry of Finance in cooperation with the Cyprus Tax Department opened a public consultation on the proposed amendments in the Cyprus tax legislation implementing the Anti-Tax Avoidance Directive 2016/1164 (ATAD) by inviting interested parties to submit their comments and suggestions by 8 December 2017. The draft proposed legislation addresses all the measures of the ATAD of 12 July 2016 and as this was amended on 21 February 2017. The transposition of ATAD is expected to significantly amend the Cyprus tax system.
On 21 November 2017, the OECD approved the contents of the 2017 Update to the OECD MTC and Commentary 2014, which largely contains changes agreed as part of the BEPS project and the follow-up work thereon. Although India is not a member of the OECD, it was granted “Observer Status” in July 2006 and on this basis has communicated its positions on the 2017 Update on areas including Permanent Establishments (PEs) and MAP.
On PEs, India continues to reflect a liberal approach and has expressed positions favoring broad application of Agency PE provisions, disposal test, home office as PE, short duration activity to create a PE and stricter application of specific activity exemption. India has expressed its intent to deem a PE in digital arrangements based on significant economic presence, including where such presence is due to a website.
In respect of MAP, India has reiterated its stand on non-adoption of mandatory binding arbitration. India has done away with its earlier reservation that MAP access cannot be provided in transfer pricing cases in the absence of Article 9(2) (also supported by a recent press release by the Indian administration). India has deviated from the OECD Model in certain cases. For instance, on MAP, India has observed that undefined terms in a tax treaty are to be understood as per the law existing in the state applying the tax treaty and cannot be defined by competent authorities under MAP. India has also observed that a MAP application can be made by a taxpayer only in cases where it is certain that the action of the tax authorities will result in taxation not in accordance with the tax treaty.
India’s positions serve as guides to taxpayers on the likely approach of the Indian Tax Administration, and also as a broad outline of India’s tax treaty policy to countries seeking to negotiate a tax treaty with India.
On 24 November 2017, the Irish Revenue published an eBrief update (eBrief No. 107/17 ) stating that “Due to the late availability of the CbC Reporting filing facility, it will remain open for, and accept, CbC Reports for fiscal years ending in 2016 up to 28 February 2018.“ The first CbC reports for 2016 were due to be filed by taxpayers in Ireland by 31 December 2017. For filings due after 31 December 2017 but before the extended deadline of 28 February 2018, the exemption will in principle not apply.
The reason given for the two-month extension is that the Irish Revenue has developed an electronic CbC reporting filing system which includes a standard validation module that is being provided by the European Commission. However, due to late changes to the CbC reporting schema, the final version of the validation module is not yet available.
It is important to note that this change does not affect the CbC notification requirements, whereby the Regulations require an annual notification to be made to the Revenue Commissioners by the last day of the fiscal year to which the CbC report relates.
See EY Global Tax Alert, Irish Revenue grants extension for Country-by-Country Reporting filing, dated 28 November 2017.
On 30 November 2017, the Italian Senate approved some amendments to the draft Budget law for 2018 (the Draft) which is currently undergoing parliamentary discussion and is expected to be adopted by 31 December 2017. According to the current version of the Draft, a new “Tax on digital transactions,” as well as other tax measures related to the digital economy, mostly affecting the concept of PE, would be introduced. Such measures mainly consist of: (i) a new tax on digital transactions (Web Tax); (ii) a mandatory discussion with the competent tax office about the possible presence of an Italian PE for nonresidents that in a six-month period have implemented more than 1500 transactions with an overall value of €1.5m; (iii) an amended domestic definition of PE.
See EY Global Tax Alert, Italy considers Web Tax and other measures for digital economy, dated 4 December 2017.
On 12 September 2017, the Inland Revenue Board of Malaysia released two CbC notification templates. CbC reporting applies to reporting fiscal years commencing on or after 1 January 2017. According to the CbC rules in Malaysia, every Malaysian constituent entity of a multinational enterprise (MNE) group subject to CbC reporting must electronically submit a notification identifying the reporting entity of the MNE group no later than the last day of reporting fiscal year of the ultimate parent entity (UPE). For example, an MNE group with a Reporting Fiscal Year that is the calendar year would need to notify the Inland Revenue Board of Malaysia by 31 December 2017.
The Notification Letter for Reporting Entity is to be filed by constituent entities that are also the reporting entity of the MNE group. The Notification Letter for Non-Reporting Entity, is to be filed by constituent entities that are not reporting entities. Both forms need to be filed in English.
On 27 November 2017, the Ministry of Finance made some changes to the regulations to the CbC reporting rules. The terms bokført egenkapital (book capital) and akkumulert fortjeneste (retained profits) have been changed to innskutt egenkapital (stated capital) and opptjent egenkapital (accumulated earnings). The main purpose of the changes is to align the information to be reported in Norway with the information required by the OECD in its CbC model legislation.
On 16 November 2017, Pakistan’s Federal Board of Revenue (FBR) finalized the draft rules previously issued in June 2017 to provide details on the requirements for the CbC reporting and transfer pricing documentation.
Under the new rules, all MNE groups with annual consolidated group revenue equal to or exceeding €750 million, or an equivalent amount in Pakistan Rupees, would be required to prepare and file a CbC report providing detailed information about the activities of the group, such as certain key financial figures of the group entities in different countries. The CbC report would be submitted in the jurisdiction where the group’s UPE or the surrogate parent entity (SPE) is tax resident and would be exchanged with the jurisdictions where the group has constituent entities by using exchange of information agreements between the competent authorities. Also, a Pakistani constituent entity of a multinational group would be required to locally file the CbC report if the country of the UPE does not require the preparation of a CbC report, or although requiring a CbC report there is no qualifying agreement for the exchange of CbC reports, or having an agreement is in place, there has been systematic failure of the exchange. Under the final rules, it is mandatory for every prescribed constituent entity (or the UPE/SPE, as the case maybe) to file a CbC report for the financial year ending on or after 1 July 2016. For financial years ending before 30 June 2017, the deadline for filing the CbC report is 31 March 2018. For financial years ending on or after 1 July 2017, the CbC report has to be filed with the competent tax office within 12 months after the end of the respective reporting tax year of the MNE group.
Furthermore, every Pakistani constituent entity, UPE or SPE, as the case may be, will need to submit a notification to the tax authority about the identity and country of residence of the reporting entity. The notification must be submitted before the tax return filing deadline. However, for the financial year ending before 30 June 2017, the deadline is 15 February 2018. The FBR shall transmit and exchange CbC reports within 15 months after the end of the tax year of a group of companies. However, for the financial year ending before 30 June 2017, the CbC report must be transmitted and exchanged by 30 June 2018.
A master file must be maintained by every Pakistani constituent entity if its revenue exceeds PKR100 million during the reporting fiscal year. A master file must include the group’s organizational chart and geographical location of operating entities, general written description of the MNE’s business, information regarding intangibles, intercompany financial activities, and annual consolidated financial statement for the fiscal year.
A local file needs to be prepared and maintained by every taxpayer in Pakistan if related party transactions exceed PKR50 million. The local file must contain information regarding the local entity’s organizational structure, business activities, business strategies, key competitors, information for each category of controlled transactions including transfer pricing analysis, and financial information. The master file and local file should be available to the tax authority within 30 days from the date of request.
Failure to furnish CbC report is subject to penalties of PKR2,000 each day of default with a minimum penalty of PKR25,000. Failure to maintain the master file or local file is subject to penalties of 1% of the transaction value.
On 17 November 2017, the Peruvian Government issued transfer pricing regulations (Supreme Decree N° 333-2007-EF), which contain guidance on the preparation and submission of the local file, master file and CbC report in Peru. The content requirements for the local file, master file and the CbC report adopted in Peru are largely consistent with the recommendations specified in Action 13 of the BEPS Action Plan. Filing of the local file, master file and CbC report are expected to be made electronically in accordance with specifications to be prescribed by the Peruvian Tax Authorities (SUNAT) and should be translated into Spanish. SUNAT has not yet set the deadline for filing these three documents.
See EY Global Tax Alert, Peru issues much-anticipated transfer pricing regulations implementing local file, master file and CbC reporting, dated 29 November 2017.
On 27 November 2017, the bill significantly amending Poland’s Corporate Income Tax law was published in the official Journal of Law. No significant amendments were made compared to the measures set out in previous tax alerts. The bill transposes a number of the measures set out in the European Union ATAD. As such, this Bill includes among others 30% EBITDA (earnings before interest, taxes, depreciation and amortization) interest limitation rule and changes to the controlled foreign company (CFC) legislation, which may broaden the scope of foreign subsidiaries that meet CFC criteria. Majority of royalties and service fees might become non-deductible (restrictions go much further than the OECD BEPS recommendations), if exceeding certain thresholds. These restrictions would not apply to transactions for which a taxpayer obtains an Advanced Pricing Agreement with the Polish Ministry of Finance. The new rules become effective 1 January 2018.
See EY Global Tax Alert, Poland passes 2018 corporate income tax reform, dated 27 November 2017.
On 27 November, Russian President signed the Law No. 340-FZ
Concerning the Introduction of Amendments to the Tax Code of the Russian Federation (in Connection with the Implementation of the International Automatic Exchange of Financial Account Information and Documentation Relating to Multinational Groups).
The Law comes into force from the day of its official publication, and its provisions – relevant for CbC reporting and the master file – apply to financial years commencing on or after 1 January 2017. An exception is made for the BEPS Action 13 local file, which should be required only for fiscal (calendar) years starting from 2018. There is an option for MNE groups to voluntarily submit the CbC report for financial years starting within 2016 (parent surrogate filing), the voluntary submission applies only to CbC reporting and notification.
See EY Global Tax Alert, Russian State Duma adopts draft law on BEPS Action 13 implementation, dated 17 November 2017.
On 14 November 2017, the Taiwanese Government published CFC implementation rules for individual shareholders (the Rules). Based on the Rules, a CFC is defined as: (i) a non-Taiwanese company based in a low-tax jurisdiction; and (ii) a Taiwanese individual and related person directly or indirectly hold more than 50% of the company’s shares or have substantial control of the company’s operations. The same conditions under the CFC rules for corporate shareholders apply regarding the definition of low-tax jurisdiction, exemption and threshold requirements and documentation and disclosure requirements. The effective date will be determined on a later date and is expected to be effective on the same date as the CFC rules for corporate shareholders and place of effective management rules.
Also on 14 November 2017, Taiwan’s Ministry of Finance issued new rules to adopt the three-tiered approach to transfer pricing documentation developed as part of Action 13 of OECD’s BEPS project, consisting of a CbC report, master file and local file.
Under the new rules, MNE groups with annual consolidated group revenue above a prescribed threshold would be required to prepare and file a CbC report providing detailed information about the activities of the group, such as certain key financial figures of the group entities in different countries. The revenue threshold has not been announced as of 23 November 2017, but will likely be NTD27 billion (which is equivalent to €750 million). The CbC report is generally required for financial years starting on or after 1 January 2017 and has to be filed with the competent tax office within 12 months after the end of the respective fiscal year. Specifically, the CbC report would be submitted in Taiwan where the group’s UPE is a Taiwan tax resident. If the group’s UPE is not a Taiwan tax resident, the CbC report could be either (1) exchanged with the jurisdictions where the group’s UPE or the SPE is a tax resident by using exchange of information agreements with Taiwan, or (2) filed locally by a Taiwanese constituent entity of the group. Also, every Taiwanese constituent entity will need to submit a notification to the tax authority about the identity and country of residence of the reporting entity. If there has been systematic failure of the exchange with the jurisdictions of the group’s UPE and SPE, the Taiwan constituent entity of the group is required to submit the CbC report within one month following the receipt of written notice from the competent tax office.
The master file would need to be prepared by constituent entities resident in Taiwan with annual turnover exceeding a prescribed threshold. The master file should include the organizational structure, business performance, financing activities, financial and tax positions among MNE entities, and intangible-related information. The master file is generally required for financial years starting on or after 1 January 2017 and shall be available when submitting the income tax return and be submitted to the tax authorities within 12 months from the last fiscal day of the Taiwanese entities. The Traditional Mandarin Chinese version shall be provided to the tax authority within one month after receipt of a notice of examination. The submission deadline can be extended for one month with the justification of extension.
Taiwan already has transfer pricing documentation rules which are in line with the local file requirements of Action 13, and the documentation should be prepared by Taiwan entities during the fiscal year. Transfer pricing documentation should include an overview of the company, company organization structure, information about related party transactions, and details of the transfer pricing analysis including function, risk analysis and transfer pricing methodology. The transfer pricing documentation shall be available when submitting the income tax return and must be submitted to the tax authorities within one month after the receipt of the tax authority’s written request. The transfer pricing documentation should be translated into Traditional Mandarin Chinese unless the tax authorities have agreed to accept English versions.
Failure to file or submit the requirement information and documents may be subject to a fine between NTD3,000 and NTD30,000 as prescribed under Article 46 of the Tax Collection Act.
United Kingdom (UK)
On 22 November 2017, the UK Chancellor of the Exchequer, Philip Hammond, presented the UK budget.
This included publication of a position paper on corporate tax and the digital economy. The paper notes that the UK Government will push for reforms to the international tax framework, to ensure that the value created by the participation of users in certain digital businesses is recognized in determining where those businesses’ profits are subject to tax.
Certain “technical amendments” will be made to the new corporate interest restriction rules which came into effect on 1 April 2017. Some of these amendments have effect from the 1 April 2017 start date, with the rest being effective from 1 January 2018. Among the changes are amendments to the infrastructure rules.
There are also further technical changes to the hybrid and other mismatches regime to ensure that those rules operate as intended. The change in relation to taxes which are charged at a nil rate will have effect on or after 1 January 2018. The remaining changes will have effect on or after 1 January 2017.
See EY Global Tax Alert, UK 2017 Autumn Budget: Key business tax announcements, dated 22 November 2017.
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. 06869-171Gbl