BEPS & transfer pricingMay 2015
Suchint Majmudar, Taxand India
Amit Rana, GE
Polly Mak, Michelin
Tim Wach, Taxand Global
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1. Introduction: background to BEPS
2. What is BEPS?
3. Key BEPS concerns
4. BEPS Action 8 – Intangibles
5. BEPS Action 9 – risk and capital
6. BEPS Action 10 low value adding intra-group services
7. BEPS Action 13 country-by-country reporting
8. Taxand’s Take
Contents
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Introduction:Background to BEPS
3
Introduction: the background to BEPS
Evolution of BEPS
Globalisation and technological advances, increased
pace of integration of national economies and evolution
of new business models
Shift from country specific business models to global
models
4
Introduction: the background to BEPS
Evolution of BEPS
Domestic laws of countries do not consider tax systems
of other countries - gaps remain in international
standards (say in bilateral agreements)
Exploitation of the legal arbitrage opportunities and
boundaries of acceptable tax planning to minimise tax
burden (say Double Irish Dutch Sandwich)
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What is BEPS?
6
What is BEPS?
Shifting of profits / income to low-tax jurisdictions or other
locations enabling a more favorable tax treatment
Arrangements involving double non-taxation or less than
single taxation
Transfer of intangibles to favorable tax jurisdictions
Stripping legal entities of business functions, assets and
risks
7
What is BEPS?
Use of “tax attributes” such as tax credits, loss-carry
forwards, etc
Use of intermediary companies / jurisdictions in
investment and financing structures
Use of hybrid arrangements to exploit mismatches in tax
treatment
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Key BEPS concerns
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Harm to governments
Loss of substantial corporate tax revenues
High cost of tax administration
Undermines integrity of tax system
Tax fairness issue
Critical under-funding of public investment
Key BEPS concerns
10
Harm to individual tax payers
To bear a greater share of tax burden
Harm to businesses
Significant reputational risk for MNEs whose effective tax rate is low
Competitive disadvantage for domestic businesses
Risk of unilateral actions by certain tax jurisdictions
Key BEPS concerns
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BEPS Action 8 -Intangibles
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Assure that TP outcomes are in line with value creation -
intangible
Develop rules to prevent BEPS by moving intangibles
among group members, including:
Broad and clearly delineated definition of intangibles
Ensure that profits associated with the transfer and
use of intangibles are appropriately allocated in
accordance with (rather than divorced from) value
creation
Develop TP rules or special measures for transfers of
hard-to-value intangibles and
Update the guidance on Cost Compensation
Agreements (CCAs)
BEPS Action 8 – Intangibles
13
Locations savings – savings attributable to working in a
particular market
Whether locational savings exist?
Amount of location savings
Extent to which savings are retained or passed on
to customer
Where savings are not passed on - allocation of net
retained locational savings
BEPS Action 8 – Intangibles (scope / coverage)
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Assembled workforce
Existence of uniquely qualified or experienced
employees
Such workforce impact arm’s length price on
account of efficiency with which services are
provided or goods produced
Transfer of such employees may necessitate
comparability adjustment in the form of time and
expense savings
BEPS Action 8 - Intangibles (scope / coverage)
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MNE group synergies
Distinction between incidental benefits and benefits
arising on account of deliberate group actions
Incidental benefits require no compensation (eg non
explicit guarantee on loan)
Deliberate group action related synergies to be
shared in proportion of contribution to its creation (eg
group wide centralised purchasing)
BEPS Action 8 – Intangibles (scope / coverage)
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Identification of intangibles – broad definitions
Ownership of intangibles – legal versus contributions
Marketing intangibles and R&D – risk assumed by each
party towards creation of intangibles
Determination of arm’s length conditions – consider
realistically available options
BEPS Action 8 – Intangibles (scope / coverage)
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BEPS Action 9 -Risk and capital
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Assure that transfer pricing outcomes are in line with value
creation
Action 9 – Risks and capital
Shareholders activities
“Develop rules to prevent BEPS by transferring risks
among, or allocating excessive capital to, group
members. This will involve adopting transfer pricing
rules or special measures to ensure that inappropriate
returns will not accrue to an entity solely because it has
contractually assumed risks or has provided capital.
The rules to be developed will also require alignment of
returns with value creation. This work will be
coordinated with the work on interest expense
deductions and other financial payments”
BEPS Action 9 – Risk and capital
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Part 1
Updated guidance on the identification of the
commercial or financial relations
New guidance on identifying risks in commercial or
financial relations
New guidance on non-recognition of a transaction
Part II
Potential special measures to reduce possibilities for
BEPS
Discussion draft of revised section D, chapter 1
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Agreement terms ambiguous … transaction deduced
from the conduct
Functional analysis to focus on parties actions /
capabilities
Characteristics of property / services (unchanged)
Economic circumstances of the parties / market
(unchanged)
Business strategies (unchanged)
Identification of commercial or financial relations
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Nature of risk
Allocation of risk
How risks are assumed
Risk management
Actual conduct vs arrangements
Impact of ‘moral hazard’ and ‘risk-return trade-off’
Identifying and allocating risks
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Transactions lacking economic attributes
Do not enhance commercial / economic position
Not conducted between 3rd parties (not an essential
condition)
Illustration … S1 (high-taxed) transfer TM to S2 (low
taxed) to manage risk and enhance value by marketing,
exploitation of TM by S1
Non recognition / re-characterisation
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Hard to value intangibles
Independent investor
Thick capitalisation
Minimal functional entities
Taxation of excess (low-taxed) returns
Potential special measures
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BEPS Action 10low value adding intra-group services
25
Draft aims to tackle excessive management fees and
head office expenses
Defines low value-adding intra-group services which
warrants limited mark-up on cost
Application of a consistent allocation key for all service
recipients
Specific reporting requirements in determining specific
cost pool
BEPS Action 10: Low value-adding intra-group services
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Low value-adding intra-group services
Supportive in nature
Not a part of the core group business
Do not require or lead to creation of intangibles
Do not assume or create significant risk
BEPS Action 10: Low value-adding intra-group services
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Specifically excluded
Services constituting core business
Research and development
Manufacturing and production
Sales, marketing and distribution
Financial transactions
Extraction, exploration, or processing or natural
resources
Insurance and reinsurance
Services of corporate senior management
BEPS Action 10: Low value-adding intra-group services
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Benefit testing
Asia tax environment continues to change rapidly
Specifically excluded:
Independent enterprise in comparable circumstances
would have been willing to pay or perform for itself
Shareholders activities
“Performs solely because of it’s ownership interest in
one or more other group members” v “stewardship
activity”
Duplication
“activities that duplicate what another group member is
performing itself or is being by a third party”
BEPS Action 10: Low value-adding intra-group services
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Mark up
Cost plus or CUP is acceptable
Cost
Direct and indirect (subject to allocation using methods
chosen consistent with would be acceptable in 3rd party
situation)
Simplified benefits test
Prove benefits by categories of services as opposed to
a specific charge
Documentation
BEPS action 10: Low value-adding intra-group services
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Paper discusses various aspects of risks but does not
define “high risk transactions”
Should “high risk transactions” be defined, paper also
does not specify any particular treatment
What does that mean to taxpayer?
Continue what is normally expected to support arm’s
length principle such as proper transfer pricing
documentation until further clarification is available.
Action 10 – other high risk transactions
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BEPS action 13country by country reporting
32
6 February 2015, OECD releases “Guidance on the
Implementation of Transfer Pricing Documentation and
Country-by-Country Reporting”
Follows CbC report issued on 16 September 2014
Action 13: Country by country reporting
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One of the BEPS objectives is transparency / greater
information for tax administrators
CbC fits this objective
The others are:
Action 5: Counter harmful tax practices more
effectively, taking into account transparency and
substance
Action 11: Establish methodologies to collect and
analyse data on BEPS and the actions to address it
Action 12: Require taxpayers to disclose their
aggressive tax planning arrangements
Action 13: Country by country reporting
34
The purpose of CbC reporting is risk assessment
Intent is to give tax authorities an overview of where
the profits, sales, employees, and assets are located –
where taxes are paid
Intended to serve as an initial high-level risk
assessment to make a decision about where the tax
authority should allocate its limited resources – what
should be reviewed further, where to focus
Action 13: Country by country reporting
35
The 6 February 2015 Guidance
Still some practical implementation issues to be
determined
Guidance provides answers to:
which companies are subject to reporting
requirements
timing of preparation and filing of the CbC report
use of the CbC report
Action 13: Country by country reporting
36
The 6 February 2015 Guidance indicates that:
CbC reporting will be required only of MNEs with annual
consolidated group revenues that exceed €750 million
OECD has indicated that this will exclude about 85-90% of
all MNE groups, but it covers MNE groups that control
about 90 % of all corporate revenue
Action 13: Country by country reporting
37
The 6 February 2015 Guidance indicates that:
first CbC reports must be filed for MNE fiscal years
beginning on or after January 1, 2016. Given the
recommendation in the September 2014 report that
MNEs be allowed one year from the close of the fiscal
year to which the CbC report relates to prepare and file
the CbC report, the first reports are due December 31,
2017
Action 13: Country by country reporting
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Concerns?
OECD has stated that CbC should not be used for a
formulary apportionment approach
Reports will be a mix of tax information and financial
information – so could be misleading
Some public interest groups have been pushing for public
disclosure of CbC-type information
With greater dissemination of confidential information,
there is inherently greater risk
Action 13: Country by country reporting
39
Comments
CbC should not be a mindless exercise
Just as with any documentation, you need to think about
how your information might be misread or misconstrued
In particular, think strategically about what you say under:
Action 13: Country by country reporting
Additional information: Please include any
further brief information or explanation you
consider necessary or that would facilitate
the understanding of the compulsory
information provided in the country by
country template.
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Status:
German: Federal Ministry of Finance recently introduced
plans for the implementation of CbC reporting
India: Country-by-country reporting has been proposed,
and will likely coincide with the implementation of other
BEPS actions in 2017
Action 13: Country by country reporting
41
Status:
Spain: The Minister for Finance announced that country-
by-country reporting obligations will be introduced in the
legislature soon
UK: Will adopt the OECD’s CbC reporting template
effective from 1 January 2016
Action 13: Country by country reporting
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Status:
US: Has made an informal commitment to introducing
country by country reporting in the near future, although a
formal discussion of timetables and structure is yet to
occur
Action 13: Country by country reporting
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Taxand’s Take
44
Taxand’s Take
OECD’s work on intangibles is commendable and sheds
to light some of the thorny issues of transfer pricing
Practical illustrations have been provided at several
instances which take root from matters litigated in India
and elsewhere
It is expected that OECD shall deal with pending issues
including re-characterisation and guidance on hard to
value intangibles by September 2015
45
Much deliberations amongst stakeholders (consultants,
industry, government) shall continue before finalisation
CbC is coming - so start preparing
Consider what your group will look like under CbC –
prepare a pro forma now
Start thinking about what “additional information” you
will provide
Taxand’s Take (cont)
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