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Headline Verdana Bold18 months of BEPSWhat should be on your tax agenda?20 June 2017
© 2017 Deloitte Belgium 18 months of BEPS 2
Agenda
Topic Content
Welcome & Registration (sandwich lunch)
Introduction • BEPS Recap
BEPS Actions taken so far • EU
• Country specific
BEPS in practice • Business models
• Financing
• IP
Questions & close
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Introduction
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These actions should facilitate more coherent international taxation rules and increase reporting transparency
BEPS: based on 15 different action points centered around 3 pillars
Coherence Substance Transparency & certainty
Hybrid mismatch arrangements (2)
CFC rules (3)
Interest deductions (4)
Harmful tax practices (5)
Preventing tax treaty abuse (6)
Avoidance of PE status (7)
TP aspects of intangibles (8)
TP/Risk and capital (9)
TP/High risk transactions (10)
Measuring BEPS (11)
Disclosure rules (12)
TP documentation (13)
Dispute resolution (14)
Digital economy (1)
Multilateral instruments (15)
© 2017 Deloitte Belgium 18 months of BEPS 55© 2015. For information, contact Deloitte Touche Tohmatsu Limited.
Final OECD BEPS reports
Minimum standards• Action 5 on Harmful Tax Practices• Action 6 on Treaty Abuse• Action 7 on PE’s
• Action 8 – 10 on TP• Action 13 on Country by Country reporting• Action 14 on Dispute Resolution
Common approach• Action 2 on Hybrid Mismatches• Action 4 on Interest Deductions
Recommendations• Action 3 on Controlled Foreign Company (CFC’s)• Action 12 on Disclosure of Aggressive Tax Planning
Implementation categories
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BEPS actions so far
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EU actions further to BEPS
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ATAD I & II
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EU Anti-Tax Avoidance Directive I
28 January 2016 Directive proposal
25 May 2016ECOFIN meeting
17 June 2016ECOFIN meeting
Set of legally binding anti-avoidance measures
Three measures linked to BEPS
• Interest limitation
• Hybrids
• CFC rules
Three measures going beyond BEPS
• General Anti-Avoidance Rule (GAAR)
• Exit taxation
• Switch-over clause
Failure to reach political agreement
Disagreement on
• Scope of anti-hybrid rule(EU vs. non EU)
• Scope of controlled foreign company (CFC) rules(EU vs. non EU/substance requirement/burden of proof)
• Switch-over clause (whether it should be included at all)
As a result of discussions after the ECOFIN meeting and changes to the original proposals a political agreement was reached between all Member States on 21 June 2016
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The measures listed
EU Anti-Tax Avoidance Directive I
• Interest limitation: Interest charges exceeding interest revenues (and equivalent taxable revenues) would be deductible up to 30% of the taxpayer’s EBITA or up to EUR 3mio (whichever is higher)
− Exceptions (group-wide test/standalone entity)
− Option for Member States to apply a carry-back or carry forward on exceeding interest cost
− Grandfather rule for loans concluded before 17 June 2016 if not subsequently modified
• Hybrid mismatches rules: Case whereby two EU Member States give a different characterization to the same taxpayer/instrument
− In cases of double deduction: Deduction should occur only in the state of source of the payment
− In case of deduction without inclusion: Deduction should not be allowed
• Controlled foreign company (CFC) income rules: Anti deferral tax measure whereby the tax base of a taxpayer would include the non-distributed income of an entity under conditions (basically where profits of this entity are not taxed or taxed at much lower rate than the country of the taxpayer)
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The measures listed
EU Anti-Tax Avoidance Directive I
• General anti-abuse rule: Case whereby non-genuine arrangements or a series thereof carried out for the essential purpose of obtaining a tax advantage that defeats the object or purpose of the otherwise applicable tax provisions shall be ignored for the purposes of calculating the corporate tax liability. Wording similar to the GAAR inserted in the Parent-Subsidiary Directive
• Exit taxation for cross-border transfer of assets, residence or business carried on by permanent establishment:
− Tax base: Fair market value of the transferred assets, at the time of exit, less their value for tax purposes
− Deferral provision by paying in instalments over a five-year period provided the assets/residence of a taxpayer’s head office/permanent establishment are transferred to another Member State or a country that is party to the EEA Agreement
• Switch-over clause: Removed
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CFC highlighted
EU Anti-Tax Avoidance Directive I
The EU corporate taxpayer should include in its taxable income:
• System A – Non-distributed income of a CFC from defined categories, being
− a) royalties, b) interest, c) financial leasing, d) income from insurance, banking and other financial activities, e) dividends and capital gains on shares and f) income from invoicing companies that add no or little economic value;
− Optional exclusion if income from defined categories is 33% or less;
− Unless, the CFC carries on substantive economic activity supported by staff, equipment and premises.
• System B – Non-distributed income of a CFC from non-genuine arrangements, which means that the CFC would not own the assets or take the risk if it were not controlled by a company with the significant people functions. Unless:
− The CFC has no accounting profits up to EUR 750,000, and non-trading income of no more than EUR 75,000;
− Entities where accounting profits amount to no more than 10 percent of its operating costs.
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EU Anti-Tax Avoidance Directive II
25 October 2016 Directive proposal
6 December 2016ECOFIN meeting
21 February 2017ECOFIN meeting
Non-EU and EU hybrid mismatches covered
Broadening the definition of hybrid mismatches
• Hybrid entity/PE mismatches
• Hybrid financial instruments
• Imported mismatches
• Dual resident mismatches
• Hybrid transfers
Multiple areas are covered
• Double deduction (DD) and deduction/no inclusion (D/NI) and no tax/no inclusion (NT/NI) and DTR (double tax relief at source)
Failure to reach political agreement
Disagreement on
• Exceptions to anti-hybrid rule (e.g., UK)
• Scope of anti-hybrid rule
• Entry into to force (e.g., Netherlands)
A political agreement was reached between all EU Member States after discussions and changesto the original proposal
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EU Anti-Tax Avoidance Directive I + II
Deadline for EU Member States to transpose ATAD I in their national lawsfor all provisions
ATAD I Provisions applicable (exceptfor exit taxation)
Deadline for EU Member States to transpose ATAD II in their national laws for all provisions except reverse hybrids
2018 2019 2020 2022
All provisions applicable All ATAD I provisions apply
All ATAD II provisions apply except for the provision for reverse hybrids
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Transparency
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Tax transparency
Between tax
administrationsTo the tax authorities To the public?
EoI for tax rulings
• What: mandatory automatic
exchange of info (EoI) on
advance cross-border rulings
(ACBR) and APA’s every 6
months
• To whom: all other MS and the
EC (secure central directory)
• As from 1/1/2017 + conditional
claw-back of 5 years
CBCR
• What: Country-by-country
reporting (CBCR) on key related
information on MNC’s
• Largely in line with OECD
• For financial years as from
1/1/2016
Public CBCR
• What: EU proposed public country-
by-country reporting requirements
• Approval required by the European
Council and the European
Parliament
• When?
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Exchange of rulings as of 2016Exchange of rulings as of 2017
Cross-border rulings related to preferential
regime
Residence countries of all related parties with whom the taxpayer entered into a transaction • For which a ruling is granted; or• Giving rise to income from related parties
benefiting from a preferential treatment
Countries of residence of the immediateand ultimate parent companies
Cross-border ruling for downward adjustment
of taxable profits
PE rulings
Residence country of the head officeor country of the PE
Countries of residence of the immediateand ultimate parent companies
Related partyconduits rulings
Residence country of any related party making payments to the conduit (directly or indirectly)
Country of residence of the ultimatebeneficial owner
Countries of residence of the immediateand ultimate parent companies
BEPS 5
Transposition draft law
Cross-borderrulings
Competent authorities of all other Member States
European Commission
Directive
Tax transparency Between tax administrations – EoI for tax rulings
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Tax transparency To the tax authorities - CBCR
• Council Directive 2016/881
• Implements Action 13 BEPS on CbCR across the EU
• Automatic exchange of information via standard forms & CCN Network
• EU & non-EU “MNE Group”s with consolidated group revenues ≥ EUR 750 mio
• Reporting Entity: Ultimate (Surrogate) Parent Company or Constituent Entity (a.o. for non-EU MNE’s)
• Relevant information:
RevenueP/L before
taxNumber of employees
Tangibleassets
Statedcapital
Accumulatedearnings
CE mainbusiness activities
CE taxjurisdiction
Constituent entities
Income taxpaid
Income taxaccrued
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• 9 out of 12 Action 13 CbC reporting items: Nature of activities, number of employees, net turnover, profit before tax, income tax due, income tax paid and accumulated earnings
− Excludes stated capital, tangible assets, revenue split
− Provided separately for each EU Member State, and in the aggregate outside the EU
− Provided on an individual country basis for non EU countries which “do not respect international tax good governance standards”
• Reports should be publicly available for at least five years on company website and filed with a business register in the EU
• Applicable to
− EU-based parents of multinational groups (MNCs) with over €750 million in net turnover
− MNCs headquartered in a third country, where the group has more than €750 million in net turnover and it operates in the EU through medium or large subsidiaries or branches (based on existing EU thresholds)
• Approval required by the European Council and the European Parliament
• When?
Tax transparency To the public? – public CBCR
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CC(C)TB
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History of the CC(C)TB project
Background
2001 2011 2015 2016
‹ ‹
‹ ‹
Initial policy to work towards CC(C)TB
Original draft Directiveproposed
European Commissionissued a public consultation
New draft CCTB andCCCTB Directives released
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October 2016 relaunch of CCTB/CCCTB
Step 1: Adoption of Common Corporate Tax Base (CCTB)
Intended to apply from 1 January 2019
Step 2: Adoption of Common Consolidated
Corporate Tax Base (CCCTB)
Intended to apply from 1 January 2021
• Mandatory for groups with global sales of at least €750 million
• Optional for companies falling below the threshold
Automatic transition
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BEPS actions taken bycountries
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Multilateral Convention
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24 November 2016 publications
Background
Equally authentic versions in English and French
Multilateral Convention to Implement Tax Treaty
Related Measures to Prevent Base Erosion and
Profit Splitting
(‘the Convention’)
48 Pages, 39 Articles in 7 Parts
Explanatory Statement to the Multilateral Convention
(‘the Explanatory Statement)’
86 pages,359 paragraphs
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Which treaties are affected?
Scope and mechanics
• Covers BEPS treaty Actions only – no other changes, or domestic law changes
• OECD is Depositary
• Countries will bring their list of treaties potentially to be changed when signing.
• Capable of overriding both OECD and UN models
• Provisional list of expected reservations and notifications at signature - Confirm at ratification
• OECD will publish covered treaties, reservations and options
• Some countries will publish consolidated versions of treaties to aid taxpayers
From: Country X
To: OECD Depositary
Subject: Notifications
• List of tax treaties to be
covered;
• Reservations made;
• Options selected;
• Lists of existing treaty clauses
affected by above;
From: Country Y
To: OECD Depositary
Subject: Notifications
• List of tax treaties to be
covered;
• Reservations made;
• Options selected;
• Lists of existing treaty clauses
affected by above;
From: Country Z
To: OECD Depositary
Subject: Notifications
• List of tax treaties to be
covered
• Reservations made
• Options chosen
• Lists of existing treaty clauses
affected by above
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Action 6: Treaty abuse
BEPS Actions
No text in convention
Commitment to bilateral
negotiation
Must include anti-conduit
rules
Minimum standard
but three options
Article 7
Prevention of treaty abuse
b) Simplified Limitation on Benefit + Principal Purpose Test
a) Principal Purposes Test (PPT) only
c) Detailed Limitation on Benefit
Asymmetry possible
Preventing giving benefits in inappropriate circumstances
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Action 6: Treaty abuse (cont’d)
BEPS Actions
Minimum standard
Reservations
possible
Article 6
Update treaty preambles
Article 8
Minimum holding period for dividend exemptions/relief
Article 9
Non-resident capital gains taxable if immovable property threshold met
in past year
Article 10
Anti-abuse rule for permanent establishments in third jurisdictions
Article 11
Preservation of right to tax one’s own residents
(‘savings clause’)
Preventing giving benefits in inappropriate circumstances
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Article 12
Update dependent agent permanent establishments:
‘habitually plays the principal role...’
Reservations
possible
Article 13(1)
Updating the exemption for specific activity creating
a fixed place of business permanent establishment
(preparatory or auxiliary)
Three options
Article 13(4)
Anti-fragmentation rule
Reservations
possible
Article 14
Splitting-up of contracts
Reservations
possible
Action 7: Permanent Establishment
BEPS Actions
Preventing artificial avoidance of a taxable presence
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Article 4
Dual resident entities:
Use of competent authority residency tie-breaker
Reservations
possible
Article 13(1)
Updating treaty articles on elimination of double taxation
Three options:
Credit/Exemption
Action 2: Hybrid mismatches
BEPS Actions
Article 3
Treatment of income received by fiscally transparent entities
Reservations
possible
Eliminating the tax advantages arising from hybrid instruments and entities
Asymmetry
possible
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Action 14: Dispute resolution
BEPS Actions
Article 16
Adopt mutual agreement procedure
in line with Model Tax Convention
Article 17
Requiring corresponding
adjustments
Limited variations allowed
under minimum standard
Making dispute resolution mechanisms more effective
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Optional
Mandatory binding arbitration
• Each competent authority presents their final offer for resolution
• Arbitrator choses one outcome from the two presented
‘Final offer’ approach(or ‘baseball arbitration’)
• Evidence presented by each competent authority
• Results in a binding written opinionfrom the arbitrator
‘Independent opinion’ approach
Twenty-seven countries, including: Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Slovenia, Spain, Sweden, Switzerland, the United Kingdom, and the United States
Applies after case has spent two years in MAP (three years upon reservation)
Arbitration panel comprises three arbitrators
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When does the Convention itself enter into force?
Commencement
‹
‹
Signing ceremony
Ratification completedby five jurisdictions
Fifth instrument depositedwith OECD
Convention open forsignatures
‹
Convention entersinto force
First day of the subsequentcalendar month
Three months
Feb2017
‹
‘Speed dating’
Dec2016
‹
Jun 72017
‹
Q32017?
‹
Q42017?
‹
68 signatories, 9 intentions
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Withholding taxes – next calendar year
Commencement
In force in Country A
In force in Country B
e.g., 1 Nov 2017
e.g., 1 Oct 2017 1 Jan 2018
• Jurisdictions can unilaterally opt to replace ‘calendar year’ with ‘taxable period’(Potential for asymmetry)
Subsequent calendar year
Payments after this date
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Taxes levied with taxable periods – wait six months
Commencement
In force in Country A
In force in Country B
1 Nov 20171 Oct 2017 1 May 2018
• Has effect for first taxable period commencing after six months has elapsed(Potential for asymmetry)
• Jurisdictions can unilaterally postpone further – until first period of a new calendar year following the six month period
• If jurisdictions agree, six months can be replaced with shorter period
First affectedtaxable period
Start of next taxable period
after1 May 2018
Six months
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Country overview
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BEPS actions implementation
Action 1:VAT on B2C digital services
Action 2: Hybrids
Action 3: CFC
Action 4: Interestdeduction
Action 5:Harmfultax practices
Action 6: Prevent treatyabuse
Belgium EU VAT Directive is transposed
• Proposed change to tax treaties
• EU P/S directive and ATAD I and II
ATAD I ATAD I • PID replaced with IID
• Directive on ruling exchange
MLI:• Title &
preamble• PPT
France EU VAT Directiveis transposed
• Domesticinitiatives anti-hybrid rule for interest payments
• EU P/S directive and ATAD I and II
Existing CFCrules not expected to be amended
ATAD I Patent box regime subject to review
• Proposedchange to taxtreaties
• MLI: PPT
Germany EU VAT Directiveis transposed
• Domesticinitiatives anti-hybrid rule for interest payments
• EU P/S directive and ATAD I and II
Existing CFC rules, to be amended to take ATAD into account
Existing interest deduction limitation rules, to be amended to take ATAD into account
Currently no plans to introduce a patent box regime
• Already reflected in some taxtreaties
• MLI
NL EU VAT Directiveis transposed
EU P/S directive and ATAD I and II
ATAD I Existing interest deduction limitation rules, to be amended to take ATAD into account
Innovation box regime adaptedto take intoaccount the nexus approach
• PPT or LOB reflected in some taxtreaties
• MLI: PPT
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BEPS actions implementation
Action 1:VAT on B2C digital services
Action 2: Hybrids
Action 3: CFC
Action 4: Interest deduction
Actio 5:Harmful tax practices
Action 6: Prevent treaty abuse
UK EU VAT Directiveis transposed• Quid Brexit?
Domesticinitiatives anti-hybrid rule for interest payments (ATAD compliant)
Existing CFC rules (ATAD compliant)
Existing interest deduction limitation rules (ATAD compliant)
Patent box regime adapted to take into account nexus approach
• PPT reflected in some tax treaties
• MLI: PPT
Ireland EU VAT Directiveis transposed
EU P/S directive and ATAD I and II
ATAD I ATAD and current interest deduction rules
Patent box legislation included in Finance Act 2015
MLI: PPT
Switzerland Not yet known Current Swiss law is sufficient
No CFC and no plans to introduce CFC
Current thin cap rules are sufficient
Patent box in line with BEPS in preparation
Both LOB and PPT used
US No VAT systemapplies
Us has domestic rules to tackle hybridmismatches
Current CFC rules already incorporate manyof the proposals
Fixed ratio limit for foreign owned corporations (50% instead of 10% or 30%)
• No preferentialIP regime
• US generally does not issue rulings other than unilateral APA’s
• LOB in treaties• New US model
includes more restrictive LOB
• Opposed to PPT
Spain EU VAT Directiveis transposed
EU P/S directive and ATAD I and II
Implemented ATAD and current interest deduction rules
Patent box regime adapted to take into account nexus approach
• PPT reflected in some tax treaties
• MLI: PPT
Italy EU VAT Directiveis transposed
Domestic rulesand ATAD
Italian CFC rulesamended in 216
Current fixedratio (30% EBITDA) mightbe amended toalign to ATAD
Patent box regime takes into account nexus approach
Domestic law: GAAR + P/S GAAR
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BEPS actions implementation
Action 7:PE
Action 8-10: Transfer Pricing
Action 12: Disclosure of aggresive taxplanning
Action 13: TP doc & CbC
Action 14:Dispute resolution
Action 15: Multilateralinstrument
Belgium Anti-fragmentation rule
Immediate application by Tax Authorities
Assessment to be made by Belgian Government
Implemented Committed to binding arbitration and close pending cases within 24 months
Signed
France Through MLI Immediate application by Tax Authorities
No measure yet Implemented Committed to binding arbitration
Signed
Germany Through MLI Application expected from Tax Authorities
No measure yet Implemented Committed to binding arbitration
Signed
NL Through MLI Immediate application by Tax Authorities
Currentmeasures considered sufficient
Implemented Committed to binding arbitration
Signed
UK Anti-fragmentation rule
Enacted into UK law
Currentmeasures underreview
Implemented Committed to binding arbitration
Signed
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BEPS actions implementation
Action 7:PE
Action 8-10: Transfer Pricing
Action 12: Disclosure of aggressivetax planning
Action 13: TP doc & CbC
Action 14:Dispute resolution
Action 15: Multilateralinstrument
Ireland May be implemented through MLI
Expected that Ireland will adopt the revised OECDTP guidance
Mandatory disclosure regime and general anti-avoidance rule already in place
• Implemented, (except forMF/LF)
Expected to beimplementedthrough MLI
• Will adopt MLI• Government’s
position on all articles not yet known
Switzerland Awaiting position on MLI
New guidelines are valid with immediate effect
No changes planned
• No plans to make TP doccompulsory.
• Masterfile must be prepared upon audit
• CbC implemented
Committed to binding arbitration
US Awaiting outcome report on attribution of profits
No “substantial” changes to TP rules required
Statutory and regulatory disclosure rules aggressive tax planning
• Equivalent TP doc requirements in place
• No master file requirement
• CbC implemented
US treaties: mandatory binding arbitration
No intention to modify US model convention to conform it with MLI
Spain Changes are expected
TP rulesamended
Not yet known Imlemented Committed tobinding arbitration
Will adopt MLI
Italy Not yet known Not yetimplemented
Not yet known • TP Doc: Not yetknown
• CbC implemented
Unilateral ruling regime adopted
Not yet known
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BEPS in practice: current trends and recommendations for the future
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Business models
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Global Tax Reset Substance Location Taxable presence Transparency
BEPS
• Alignment of business/tax structure for full principal and sourcing
• Alignment between IP ownership and substance
• Hybrid mismatches
• Location of DEMPE functions, central entrepreneur
• Tighter Dependent Agency PE Rule
• Prep and auxiliary test
• New Anti-Fragmentation Rule
• Multilateral instrument
• Country-by-Country (CbC) reporting
EU directives
• State aid concerns
• Anti-hybrid provision
• Automatic exchange of cross-border tax rulings and advance pricing arrangements
Potential UStax reform
• Border Adjustable Tax?
• Lower Federal Tax rate?
Global Tax Reset makes it more challenging to attain tax efficient IP, POC and sourcing models
In the long run, alignment on location of IP ownership and substance necessary
Will Border Adjustable Tax and Lower Federal Tax rate make US an attractive location?
Global Tax Reset – driving forces
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Case study: Navigatingthe Global Tax Reset
© 2017 Deloitte Belgium 18 months of BEPS 45
Case study
Business overview
• The company assembles and distributes health care products
• Also distributor for third party manufacturers' products
• Products distributed in more than 20 countries through LRDs and sales agents
• US sources products worth $1 billion from China.
Operating model
• International business managed by a Dutch Principal. Non-US IP owned/licensed by CV
• Advance Pricing Agreement negotiated with the Dutch tax authorities for the transfer pricing between CV and BV
Facts
Parent Co(US)
Dutch CV
Dutch BV(CBT
Trustee)
Royalty payment
Contractassembly
Sale ofgoods
Assembly Co
Sales Co
Warehouse
Beneficiary(NL)
SG HoldCo
CBT
China OpCo
Commissionfor sourcing
services(x% of Spend)
Cost+service fee
Cost+service fee
© 2017 Deloitte Belgium 18 months of BEPS 46
Case study
Operating model (cont’d)
• The CBT structure manages sourcing activities in China
• Assembly units located in France, Germany, Japan, and Australia
• Distributors located in Europe (UK, Germany, France, Italy, and Spain) and Asia (Australia and Japan)
• BV owns inventory in warehouses owned by local entities in Australia, Germany and France
• Logistics contracts are negotiated by contract managers of local distributors though concluded by BV
• A Singapore service company (not shown) is contracted by BV to oversee Asia business
Facts
Parent Co(US)
Dutch CV
Dutch BV(CBT
Trustee)
Royalty payment
Contractassembly
Sale ofgoods
Assembly Co
Sales Co
Warehouse
Beneficiary(NL)
SG HoldCo
CBT
China OpCo
Commissionfor sourcing
services(x% of Spend)
Cost+service fee
Cost+service fee
© 2017 Deloitte Belgium 18 months of BEPS 47
Questions to be answered…
Case study
• Is there an appropriate level of substance in BV to manage the international business?
• Are the CV Board of Directors meetings enough to demonstrate performance of DEMP functions?
• Is the substance in Singapore sufficient to act as a span blocker for Asia operations?
• Is there a risk that income attributable to CBT is taxed by China due to greater transparency?
Substance
Location
• Is there a State Aid concern because of the CV/BV advance transfer pricing ruling?
• Could there be disallowance of deduction for COGS at the level of Sales Co due to Anti-hybrid rules in the UK (2017) and likely in EU (2019) – Germany, France, Italy, and Spain?
• Will the US tax authorities analyze the sourcing commission payment to CBT?
© 2017 Deloitte Belgium 18 months of BEPS 48
Questions to be answered…(cont’d)
Case study
• Does the BV have a fixed place of business PE due to the new anti-fragmentation rule (warehouse and other key activities performed in the same location)?
• Does BV’s ownership of raw materials and inventory qualify as preparatory and auxiliary?
• Is there a dependent agent PE created by contract managers of Sales Cos in the processof negotiating contracts?
• What are the CbC Reporting requirements for CV and CBT income?
• What could be the impact of EU automatic exchange of international tax rulings and advancepricing agreements?
Taxable presence
Transparency
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Considerations and potential responses to substance questions…
Substance
CV
SingaporeService
Co
Considerations
BV
BV’s oversight and management of key functions – procurement, sales and operations, assembly, sales and services – necessary
CBT
Alignment of IP ownership and performance of DEMP functions necessary for attributing IP income to CV
Singapore Service Co should have oversight and management of key functions in Australia and Japan
Potential responses
Strategic decision making by key people in BV and its robust documentation
Alignment of job descriptions and reporting lines to decision making
BV’s Subcommittee as the trustee of CBT should perform its activities as per the requirements
Onshore CV to the right location so that performance of DEMP functions is aligned with IP ownership. Other interim potential responses available
Decision making by the key people in Singapore Service Co and its robust documentation
BV’s Subcommittee should meet regularly, hold discussions for taking decisions and prepare meeting minutes
DutchCV
Dutch BV(CBT
Trustee)
Beneficiary(NL)
SGHoldCo
CBT
ChinaOpCo
• Onshore IP to right location
• Other interim potential responses
• Strategic decision-making and robust documentation
• BV’s Subcommittee actively involved in sourcing
Singapore Service Co
Parent Co(US)
• Strategic decision making and robust documentation
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Considerations and potential responses to location questions…
Location
StateAid
Locationof IP
Considerations
Anti-hybridRules
To mitigate potential hybrid mismatches IP income earned by a regarded entity
Selection of Dutch APA for State Aid investigation by European Commission
IP should be located in a jurisdiction that addresses the substance concerns and is tax optimal
Potential Planning Considerations
Long term
• On-shoring of IP to BV or other location (e.g., Singapore, US); claim finance and amortization deductions
Interim
• Interpose a tax-efficient jurisdiction (e.g., HK, Barbados) above or below CV
• Inform Dutch Tax Authorities about the changes in fact pattern (e.g., CV held by a Hong Kong entity) leadingto withdrawal of the Ruling
• Live the term of the Ruling before it expires (2017)
• Potential responses outlined under ‘Anti-hybrid’ rules also applicable for location of IP
• In the case considered, CV would be held by a Hong Kong entity and DEMP functions performed by US LLC under HK
• Use of US LLC being considered for performance of DEMP functions
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CV held by Hong Kong and U.S. LLC performs DEMP functions
Potential tax planning considerations Anti-hybrid Rules
Key considerations
• US LLC performs “DEMP” functions with regardsto the non-US IP
• Hong Kong Co must be a regarded entity
• Royalty free license agreements between Hong Kong Coand CV and CV and US LLC
• Activities in US LLC may give rise to ECI
• No hybrid (royalty) payments from BV
Result of US Branch with Royalty Free License
• Because there is no payment or quasi payment madeto the hybrid payee (CV and/or US LLC), the applicationof the hybrid mismatch rules are not relevant
Parent Co(US)
Hong Kong Co
Dutch BVLicense
agreement
DutchCV
US LLC
Royaltyfree licenseagreement
Royaltyfree licenseagreement
US roles that perform the following functions related to Non-US IP
• Development
• Enhancement
• Maintenance
• Protection
© 2017 Deloitte Belgium 18 months of BEPS 52
Potential tax planning considerations Anti-hybrid Rules
Long term – onshore IP
Key considerations
• CV will become a fully taxable entity; remove transparency of CV by removing “transferrable limited partnership rights between partners” clause
• CV sale of non-US IP rights to BV is a taxable transaction
• IP and resulting income will be on BV’s Balance Sheet and P&L
• Step up in basis and amortization at BV level
• No hybrid (royalty) payments from BV
Result of opening CV and selling IP
• With IP being sold by a regarded entity, the payment for the IP is not considered for the application of the hybrid mismatch rules
Parent Co(US)
Dutch CV
Dutch BV
Sale ofgoods
Assembly Co
Sales Co
Sell IP
Finished goods
Contractassembly
© 2017 Deloitte Belgium 18 months of BEPS 53
An overview of key developments related to permanent establishment risks
Taxable presence
* It should be noted that the new definition of PE is not in the OECD Model Tax Convention and it’s not clear which definition of PE the Multilateral Instrumentwill finally adopt and which countries will be the signatory of the Multilateral Instrument.
• Anti-Fragmentation Rule: The rule would essentially require the determination of whether activities in a particular jurisdiction are preparatory or auxiliary to be made on a group wide basis
Tighter Agency PE Rule: A dependent agent who works on behalf of an enterprise and who “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise” may give rise to a PE
1
2
3
All Article 5(4) exceptions to the definition of PE must now be of a preparatory or auxiliary nature
BEPS developments*
© 2017 Deloitte Belgium 18 months of BEPS 54
LocalCos participation in sales contract negotiations could trigger PE risk
Dependent agent PE risks
‘Dependent Agent’ test requirements
Risks
• The agent is acting on behalf of an enterprise
• Has and habitually exercises in the state concerned an authority to conclude contracts in the name of the enterprise
• Not treated as an independent agent
• The agent habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise(BEPS – Action 7)
• The tax authorities can argue that sales agents bind BV into third party contracts
• The sales agents through initial discussions and negotiations playthe principal role leading to the conclusion of contracts that are routinely concluded by BV without material modification
Recommendations
• Convert to buy-sell
© 2017 Deloitte Belgium 18 months of BEPS 55
Exceptions to fixed place of business PE no more available when multiple activities performed
New anti-fragmentation PE risks
‘Anti-Fragmentation’ test requirements
Risks
• BV conducts activities through a fixed place of business in the same jurisdiction as a related entity
• The overall activity resulting from the combination of the activities carried on by the same enterprise or closely related enterprises in a given territory is not of a preparatory or auxiliary character
• The combination of activities must constitute complementary functions that are part of a cohesive business operation
• BV has a fixed place of business based on inventory ownership in a warehouse
• The tax authorities can argue that multiple activities performed in local countries, i.e. France and Germany, in combination with inventory ownership by BV in a warehouse in the same country are complimentary function and together constitute a cohesive business operation
• Consequently, BV has a fixed place of business in these countries. Income attributable to the deemed cohesive business operation should be allocated to BV’s PE in France and Germany
Recommendations
• BV employees do not have unfettered access to the warehouse where it holds the inventory
• From a long term perspective, conversion from an LRD to a stockholding LRD could be considered and BV no longer owns inventory in a warehouse
© 2017 Deloitte Belgium 18 months of BEPS 56
Reporting CV and CBT income
Transparency
StructureConstituent
entityAnticipated treatment
Place of organization
Tax jurisdiction of residence Stateless
Report revenue
and profit
CBT
BVCorporate for Netherlands
Netherlands Netherlands No Netherlands
CBTNon-Entity in China
(fiscally transparent)
China None YesStateless and Netherlands (Beneficiary)
SG Hold CoCorporate for
SingaporeSingapore Singapore No Singapore
China OpCo Corporate for China China China No China
CV/BV
CVPartnership/Fiscally
transparent in Netherlands
Netherlands None YesStateless and
US
BVCorporate treatment in
NetherlandsNetherlands Netherlands No Netherlands
* For CbC reporting, stateless income is not double counted, i.e. report as stateless only once as it all flows up to the first non-stateless entity
18 months of BEPS© 2017 Deloitte Belgium 57
Future trends
© 2017 Deloitte Belgium 18 months of BEPS 58
Aligning supply chain structures with the changes in the business
Future trends
• Non-transactional service principal
• Capturing benefits of data analytics in a tax efficient manner
• Capturing synergies of post merger integration (PMI) in a tax efficient manner
Business changes require consideration of alternative operating models
© 2017 Deloitte Belgium 18 months of BEPS 59
Deriving value for inbound business
Non-transactional service principal
Foreign Service Principal Model
1. Principal function: The Foreign Service Principal provides businessconcept, know-how, marketing support, strategic guidance, i.e. ‘way of doing business’ in return for a high value service fee
2. The model is consistent to a central decision making executive teamand at the same time preserves the entrepreneurial characterof the US entity
3. The business disruption associated with implementation is limitedas the transactional flows with either suppliers or customers generallydo not change. The IT systems changes are limited
4. Critical requirements
−Supervision and management of the US business by Foreign ServicePrincipal and its robust documentation
−Floor and Cap transfer pricing approach so that US Co pays servicefees only after attaining certain threshold profit level
−Depending on the IP component of the business concept providedby the Foreign Service Principal, the service fees may include royaltycomponent subject to withholding tax
Foreign Service Principal
(Tax Efficient Location)
Third-Party Customers
High value servicefees
(X% of sales)
Serviceagreement
US Co
Products/Servicestransactions
© 2017 Deloitte Belgium 18 months of BEPS 60
Data explosion has made data analytics a critical tool for commercial differentiation
Data analytics
Access Analyze Extract
Data analytics
Data driven growth
Identify pattern
Deepen customer
relationship
Boost operational
efficiency
Outmaneuver
competitors
• Targeted promotion
• Customized services
• Enhanced utilization of assets
• Reduced downtime
• Optimal pricing
• Customer structure insight
Real time analysis
• Data analytics by using artificial intelligence to identify pattern from the ever expanding data stock has significantly changed the business model of several companies
• For example, airlines have abundant data providing information on credit cards, shopping behavior, frequency, travel patterns, aircraft maintenance and weather. The information is potentially used for dynamic pricing, management of routes and maintenance of flights leading to higher profitability
• Data analytics enabled dynamic pricing tool and identification of customer structure (high value customers versus low value customers) could assist in increased revenue and increased occupancy rate
• Data analytics is used in a wide range of industries including airlines, hospitality, banking, insurance, consumer products, healthcare
© 2017 Deloitte Belgium 18 months of BEPS 61
How does BMO drive value for data driven growth?
BMO and data analytics
Value proposition
• BMO allows data analytics driven profit margin to be capturedin a most tax efficient manner, i.e. would you like your dataanalytics driven profit to be taxed at 35% or 10%?
Data Analytics Service Principal Model
1. Principal function: The Data Analytics Service Principal providestimely and effective data analytics in return for a service fee.Through data analytics, the service recipients would havea better understanding of their customers’ demand and canbetter determine new customer services, recognize and enhancecustomer value, and cultivate high-value customers. Data analyticscan also assist with increased operational efficiency basedon improved prediction
2. Service company function: Data Analytics Principal engagesService Company to provide Data Analytics support underits supervision
RoutineService
Fee
US Parent
Service Company(Low Cost Location)
HighValue
Service Fees
ServiceAgreement
RoutineServiceAgreement
Third-Party Customers
Products/ServicesTransactions
Data Analytics Principal
(Tax Efficient Location)
© 2017 Deloitte Belgium 18 months of BEPS 62
How does BMO drive value for data driven growth?
BMO and data analytics
Data Analytics Service Principal Model (cont’d)
3. Principal compensation: The Data Analytics Principal would becompensated through service fees based on gain sharing andbenefits to the business (e.g., growth in unit revenues, new highvalue customers and increased share of wallet from existingcustomers, increased occupancy rate)
4. ServiceCo compensation: ServiceCo receives cost plus remunerationfrom Data Analytics Principal
5. Critical requirements
−Key employees, including business intelligence analysts and datascientists must be located in the Data Analytics Principal
−Maintain deferral from a US tax perspective which would involvecharacterizing the payment received as a service fee, insteadof a royalty, i.e. no property rights
RoutineService
Fee
US Parent
Service Company(Low Cost Location)
HighValue
Service Fees
ServiceAgreement
RoutineServiceAgreement
Third-Party Customers
Products/ServicesTransactions
Data Analytics Principal
(Tax Efficient Location)
© 2017 Deloitte Belgium 18 months of BEPS 63
BMO can increase deal value by capturing PMI synergies in tax efficient manner
BMO and the M&A lifecycle
Including BMO planning at critical points in the M&A lifecycle can increase deal value by identifying the potential value of tax operating model integration which can be considered during transaction structuring and so that related requirements can be included in PMI
Synergy
Profits After Tax
Taxes
Sample synergy benefitsbefore BMO planning
Synergy Profits After
Tax
Taxes
Sample synergy benefits after BMO planning
TaxSavings
BMO
Planning
© 2017 Deloitte Belgium 18 months of BEPS 64
High level model integration scenarios
BMO and the M&A lifecycle
Dual Principal OperatingCompany (“POC”) optimization
Integration intoAcquirer POC
Integration intoTarget POC
Integrate Acquirer and Target into new POC
Drive tax benefits through existingPOC synergies or integrationof existing POCs
Integrate Target operating model into Acquirer POC to generate accretive tax benefits
Integrate Acquirer operating model into Target POC to generate accretive tax benefits
Can Acquirer and Target operations be integrated into a new POC Model(s) to generate tax benefits?
• Does functional and operational integration create an opportunity to combine POCs?
• What are market overlaps?• What are current manufacturing and
sourcing footprints?
• Can Target functions be realigned into existing Acquirer POC model?
• How consistent are planned organizational changes with existing POC model?
• What are market overlaps?• What are current manufacturing
and sourcing footprints?
• Can Acquirer functions be realigned into existing Target POC model?
• How consistent are planned organizational changes with existing POC model?
• What are market overlaps?• What are current manufacturing
and sourcing footprints?
• Does centralization of functions into POC model align with planned integration?
• Can organizational changes be aligned with requirements for POC model?
• What are market overlaps?• What are current
manufacturing and sourcing footprints?
A T
A POC
TPOC
A T
APOC
A T
TPOC
A T
A,TPOCT
arg
et/
Acquir
er
model
Obje
ctive
Key q
uestions
to a
nsw
er
© 2017 Deloitte Belgium 18 months of BEPS 65
A value chain analysis creates a context for the pricing of transactions between entities by assessing the relative contributions made by each entity to the overall business
The importance of value chain analysis
What is a ValueChain Analysis? Why is it helpful?
BEPS Actions 8 – 10 require the consideration of the overall value chainto contextualise the transfer price of transactions.
A value chain analysis separates a business into a series of value generating functions.
To assess a value chain, products pass through each level of value chain functions and at each level gain some value.
The revised interpretation of the arm’s length principle requires a more granular analysis of the functions, assets and risks controlled by
a business.
A value chain analysis can provide a foundation from which to identify the
functions, assets and risks, helping to understand activities that create value.
Once the activities that create value are identified, the relative contribution of each
entity/country to these value creating activities can be further analyzed.
© 2017 Deloitte Belgium 18 months of BEPS 66
VCAT – homepage
© 2017 Deloitte Belgium 18 months of BEPS 67
VCAT – identify and review key business profit drivers and executives
© 2017 Deloitte Belgium 18 months of BEPS 68
VCAT – analytics
18 months of BEPS© 2017 Deloitte Belgium 69
Financing
© 2017 Deloitte Belgium 18 months of BEPS 70
General approach
How to navigate in this new international tax environment?
The tax landscape governing Financing and Capital Structures for international groups is changing. International groupswill need to assess the impact, respond to change, report the impact.
Assess the impact
Respond to change: Reset the strategy
Report the impact
Action 2: HybridsAction 4: Interest
DeductibilityActions 8, 9, 10: Transfer Pricing
Actions 3, 5, 6 but also State Aid and EU
Directives
Country
-by-c
ountry
reportin
g, m
ultila
tera
l in
stru
ment, C
FC re
com
mendatio
ns
• Respond in line with group tax policy, strategy and governance, and group risk appetite• Aligned with group profit forecast, potential future acquisitions and planned capital spend• Likely to be a short term and a long term strategy• Obtain stakeholder buy-in
Groups will have to communicate their position to stakeholders and be ready for any further questions
• Assess the impact in a holistic way. Actions (including non-financing ones) interact• Accurate group forecasts will allow effective modelling (include impact of responses to other BEPS actions) • Understanding variation in jurisdictions’ responses is vital – scenario planning
• Identify hybrids
• Analyze local variation
• Model impact and consider migration strategy
• Evaluate the ‘as is’ position
• Analyze local variation
• Model impact
• Scenario plan – what variables will change?
• Identify operational and contractual risks
• Evaluate how risk is managed (contractually and people) and what changes can be made
• Consider pricing of wider Treasury activity (cash pool, hedging etc.)
• Identify current arrangements and rulings
• Expect local and treaty change
• Consider legal advice
Overlay
© 2017 Deloitte Belgium 18 months of BEPS 71
General approach – designing a new financing strategy
How to navigate in this new international tax environment?
Different factors need to be considered in the design of a new financing structure
© 2017 Deloitte Belgium 18 months of BEPS 72
Intercompany financing – example structures and BEPS Action 2 impact
How to navigate in this new international tax environment?
Current analysis
Interest income at the level of NIDCo should be sheltered from taxation up to the level of Notional Interest Deduction
Impact of Action 2
No hybrid benefit; therefore no disallowance of deduction
Parent
NIDCo
Opco
Debt
Finco in NID jurisdiction
But many other tax and non-tax aspects to consider…
Parent
OpcoFinCo
Debt
Current analysis
Interest income at the level of FinCo should be taxable at a low tax rate or should be treated as offshore income and not remitted to the FinCo jurisdiction
Impact of Action 2
No hybrid benefit; therefore no disallowance of deduction. See Action 2, Examples 1.6 & 1.7. Discuss impact if Opco is UK (extended rules) or France (lender minimum taxation rule)
Finco in low tax jurisdiction/territorial tax regime jurisdiction
© 2017 Deloitte Belgium 18 months of BEPS 73
Intercompany financing – example structures and BEPS Action 2 impact
How to navigate in this new international tax environment?
But many other tax and non-tax aspects to consider…
Current analysis
An Irish branch of LuxCo grants loans to Opco. Interest income is not taxed in Ireland as activities conducted through the Irish branch are not considered trading. Lux interprets the PE provision of the Irish/Lux Treaty to allocate taxing rights to Ireland
Impact of Action 2
No interest income in IrishCo results in a D/NI outcome
Likely not a hybrid mismatch under Action 2 due to lack of hybridity. See Action 2, Example 1.8.
Impact of BEPS discussion document on branch mismatches (and UK implementation).
Parent
LuxCo Opco
IrishBranch Debt
Non-Trading Irish Branch
Parent
IrishCoDutch OR
LuxCo
Opco
InterestFreeLoan
Debt
Current analysis
IrishCo grants an interest-free loan to Dutch OR LuxCo, which on-lends to Opco. NL and Lux provide a deemed deduction on the interest free loan that offsets interest income received from Opco. IrishCo does not deem a corresponding income inclusion with respect to the interest free loan
Impact of Action 2
No interest income in IrishCo results in a deduction/no inclusion (“D/NI”) outcome
Likely not a hybrid mismatch under Action 2 due to lack of payment. See Action 2, Example 1.14
Interest Free Loan
18 months of BEPS© 2017 Deloitte Belgium 74
IP
© 2017 Deloitte Belgium 18 months of BEPS 75
What’s affecting IP?
Checklist for multinationals
Catalyst Consideration Timing?
Transfer pricing under BEPS • Substance: DEMPE functions• Economic vs. legal ownership
2016
Harmful tax regime • Changes to IP tax regimes• From gross to net profit basis• Nexus requirement
2016 (France: ?)
© 2017 Deloitte Belgium 18 months of BEPS 76
Example IP holding companies
Current areas of focus for restructuring: substance
Key issues: Substance
• Remuneration for substance-light IP Co
• Uniting IP and substance
− Adding IP to substance
− Adding substance to IP
Parent Co(US)
Irish Onshore
Irish OffshoreIPCo
Manufacturing(Country Y)
Sales(Country Z)
Royalties
© 2017 Deloitte Belgium 18 months of BEPS 77
Innovation incentives
PID - Summary
• 80% gross income deduction on patent/SPC income
• Patents/SPC’s or improvements of acquired patented technologies/SPC’s
• Presence of R&D center
• As from the grant of the patent/SPC
• 0% to 6.8% effective tax rate
Income patents
initial tax rate
Effective tax rate
0-6.8%
ETR
IID - Summary
• 85% net income deduction on innovation income
• IP rights or improvements of acquired protected technologies
• As from the filing of the IP right
• 5% effective tax rate
Income patents
initial tax rate
Effective tax rate
5%ETR
IID regime vs PID regime – General concept
© 2017 Deloitte Belgium 18 months of BEPS 78
Quantification and application IID
IID regime vs PID regime
Calculation of net amount of qualifying IP income
Application of “modified nexus” fraction
Applicationdeduction rate of 85%
• Determining net IP income / recapture rule over maximum 7 years for historicexpenses after 30/06/2016 / track & tracing
• Apply modified nexus fraction
• Apply 85% deduction / carry-forward of excess IID
© 2017 Deloitte Belgium 18 months of BEPS 79
Quantification and application IID
IID regime vs PID regime
Calculation of net amount of qualifying IP income
Application of “modified nexus” fraction
Applicationdeduction rate of 85%
Qualifying expenditure (A+B+C)
Modified nexus fraction = ------------------------------------------ x 1,3 (max.)Overall expenditure (A+B+C+D+E)
Qualifying expenditure must directly* relate to a qualifying IP right:
(A) expenses made by the taxpayer;
(B) expenses made by the taxpayer in the context of outsourcing to an unrelated party; and
(C) expenses made by the taxpayer in the context of outsourcing to a related party, insofar as that related person outsources the R&D and invoices, without mark-up, his outsourcing cost to the taxpayer.
Overall expenditure comprises Qualifying expenditure and:
(D): expenses made by the taxpayer for acquiring the qualifying IP right (not included in (A));
(E): expenses made by the taxpayer in the context of outsourcing to a related party (except expenses listed under item C).
*interest payments and costs related to real estate property excluded
18 months of BEPS© 2017 Deloitte Belgium 80
Close
© 2017 Deloitte Belgium 18 months of BEPS 81
What should be on your tax agenda?
18 months of BEPS
Transparency SubstanceFast evolving
legislation
Local presence Value chain Financing
18 months of BEPS© 2017 Deloitte Belgium 82
Q&A
© 2017 Deloitte Belgium 18 months of BEPS 83
Contact details
Eric von Frenckell (Laga)PartnerBusiness Tax
Tel. + 32 2 800 70 61
evonfrenckell@laga.be
Annelies Stragier (Deloitte)DirectorBusiness Tax
Tel. + 32 2 600 67 98
astragier@deloitte.com
Charlotte Degadt(Laga)Contract PartnerIndirect Tax
Tel. + 32 2 800 70 23
cdegadt@laga.be
Liesbet Nevelsteen(Deloitte)PartnerIndirect Tax
Tel : +32 2 600 66 53
lnevelsteen@deloitte.com
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© 2017 Deloitte Belgium
About Laga
A top legal practice in Belgium, Laga is a full service business law firm, highly recommended by the most authoritative legal guides. Laga comprises approximately 140 qualified lawyers, based in Brussels, Antwerp, Ghent and Kortrijk. Laga offers expert advice in the fields of banking & finance, commercial, corporate/M&A, employment, IT/IP, public/administrative, insolvency and reorganisations, real estate, tax law, tax and legal services for high-net-worth families and individuals (Greenille by Laga), and litigation. Where appropriate to ensure a seamless and comprehensive high-quality service, Laga lawyers work closely with financial, assurance and advisory, tax and consulting specialists, and with select EU and US law firms.
Laga provides thorough and practical solutions tailored to the needs of clients ranging from multinational companies, national large and medium-sized enterprises, and financial institutions, to government bodies.
More information: www.laga.be
© June 2017