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OECD Base Erosion andProfit Shifting (BEPS) UpdateASC 740 Accounting for Income Taxes:Foreign Tax Provisions and US International Tax Issues
Eric Ryan, Partner, DLA Piper – Silicon ValleyChris Kotarba, Associate, DLA Piper – Silicon Valley
June 3, 2014
*This presentation is offered for informational purposes only, and the content should not be construed as legal advice on any matter.
OECD BEPS update agenda
US tax regime and relationship to BEPS
OECD BEPS updates
Selected country reactions to BEPS
US reactions to BEPS Administration statements discussion
Proposed legislation
Possible corporate action items now
2June 3, 2014OECD BEPS Update
Current US corporate tax regime
The US now has highest statutory corporate tax rate among all OECD members Many OECD members have gradually
reduced rates, year after year US is also one of the few remaining
OECD members with a worldwide (WW) tax system (but has a Foreign Tax Credit mechanism) Others include Chile, Ireland, Israel,
Korea and Mexico Most OECD members now use a territorial
system (generally not taxing foreign profits)
Highest corporate tax rate + WW tax system = US may also have the highest average tax rate of any OECD member
Notwithstanding, US companies (Apple, Google, Starbucks and Caterpillar) are at forefront of criticism for inappropriate tax planning – particularly “mailbox” companies or “stateless income”
3
Source: OECD Tax Database (2012)
June 3, 2014OECD BEPS Update
US MNEs – offshore earnings
June 3, 2014OECD BEPS Update 4
BEPS timeline to date
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March 24, 2014: OECD publishes discussion draft on the Digital Economy (Action 1)
February 12, 2013: OECD publishes first report “Addressing Base Erosion and Profit Shifting,” listing 6 key pressure areas
January 30, 2014: OECD publishes discussion draft on CbCReporting (Action 13)
July 19, 2013: OECD publishes second report “Action Plan on Base Erosion and Profit Shifting,” listing 15 actions with deadlines
June 2012: G20 asks OECD at leaders’ meeting to report on “the need to prevent base erosion and profit shifting”
January 23, 2014: OECD presents webcast on 2014 deliverables
September 6, 2013: G20 leaders endorse OECD’s work on BEPS at Russian summit
June 3, 2014OECD BEPS Update
April 11, 2014: OECD releases public comments on Treaty Abuse (Action 6)
May 7, 2014: OECD releases public comments on Hybrids (Action 2)
April 16, 2014: OECD releases public comments on the Digital Economy (Action 1)
February 23, 2014: OECD releases public comments on CbC Reporting (Action 13)
March 14, 2014: OECD publishes discussion draft on Treaty Abuse (Action 6)
March 19, 2014: OECD publishes two discussion drafts on Hybrids (Action 2)
July 30, 2013: OECD published revised discussion draft on Intangibles (Action 8)
May 26, 2014: OECD presents webcast on BEPS project update
October 22, 2013: OECD releases public comments on Intangibles (Action 8)
BEPS action plan
Action Deadline Action Deadline
1. Tax challenges of the digital economy
Sept. 2014 9. TP for risks and capital Sept. 2014
2. Hybrid mismatch arrangements
Sept. 2014 10. TP for other high-risk transactions
Sept. 2015
3. CFC rules Sept. 2015 11. Data on BEPS and actions addressing it
Sept. 2015
4. Deductibility of interest and other financial payments
Sept. 2015/Dec. 2015 12. Aggressive tax planning arrangements
Sept. 2015
5. Harmful tax practices Sept. 2014/Sept.2015/Dec. 2015
13. TP documentation Sept. 2014
6. Prevent treaty abuse Sept. 2014 14. Treaty dispute resolution mechanisms
Sept. 2015
7. Artificial avoidance of PE status
Sept. 2015 15. Multinational instrument for amending bilateral tax treaties
Sept. 2014/Dec. 2015
8. TP for intangibles Sept. 2014/Sept. 2015
6June 3, 2014OECD BEPS Update
= Discussion draft already released
Action 1 – digital economy
Discussion draft released: March 24, 2014 Public comments released: April 14, 2014 Five “options” proposed to the Task Force:
1. Modify/eliminate “preparatory or auxiliary” exception to PE2. New nexus – enterprises engaged in “fully dematerialised digital activities”
would have a PE if they maintain a “significant digital presence” in a country
3. Virtual PE – three alternatives from the Business Profits TAG: Virtual fixed place of business PE Virtual agency PE On site business presence PE
4. Withholding tax on digital transactions Tax could be withheld by credit card institutions
5. Consumption tax options – agreement that VAT options should be pursued
Sample public comment: “These options are all generally unworkable” – TEI
7June 3, 2014OECD BEPS Update
Action 2 – hybrid mismatch arrangements
Discussion drafts released: March 19, 2014 Unique to Action 2, the OECD released two discussion drafts: one for domestic law and
one for treaties Public comments released: May 7, 2014 Key domestic law recommendations:
Hybrid instruments – deny deduction or require payee to include in income at ordinary rates
Hybrid entities – prevent “deduction no inclusion” outcomes and “double deduction” outcomes through denial of deduction or mandatory inclusion in income
Reverse hybrid entities – require that investor include payment in income or, alternatively, intermediate jurisdiction follows tax treatment of controlling investor
Key OECD model treaty recommendation: New Article 1 language – income derived by/through an entity/arrangement “that is treated as
wholly or partly fiscally transparent” under the law of either state shall be income of a resident, “but only to the extent that the income is treated, for purposes of taxation by that State, as the income of a resident of that State”
Sample public comment: The policy basis for recommended rules should be “more fully articulated so that the advisability
and content of the rules can be better evaluated.” – NFTC What’s missing? General attack on CTB (except as mentioned). Will likely come with
Action 3 (CFC rules)
8June 3, 2014OECD BEPS Update
Action 6 – prevent treaty abuse
Discussion draft published: March 14, 2014 Public comments released: April 11, 2014 Key treaty recommendations: Include explicit preamble statements that the treaty partners intend to prevent tax
avoidance Introduce US-style Limitations of Benefits (LOB) clause But proposal specifically rejects a derivative benefits test due to base erosion potential
General anti-abuse provision that applies if a “Main Purpose” is to obtain treaty benefits But OECD recognizes comment that having both LOB and Main Purpose could result in
double disadvantage for some taxpayers Look to competent authority determinations of residency country for dual-resident
persons (other than individuals) Include explicit references to tax policy considerations
Sample public comment: The USCIB has concerns about the “singular focus on combating treaty abuse without due regard for the impact it would have” on upstanding beneficiaries of income tax treaties
9June 3, 2014OECD BEPS Update
Action 8 – TP for intangibles
Originally a separate project, the OECD’s work on Chapter VI will influence the BEPS project
Revised discussion draft published: July 30, 2013 Public comments released: October 22, 2013 Key changes: Starting point for TP analysis is location where material functions relating to
intangible assets are performed. Legal ownership of an intangible is not sufficient to entitle an entity to profits from that intangible Departs from the arm’s length principle
Broad definition of “intangible” -> any asset that is not physical or financial New section addressing intangibles arising from the local market, location savings
(e.g., lower wage costs), assembled workforce and corporate synergies New section on TP aspects of use of corporate names
Sample public comment: “The mission of the OECD…should be to stand firm on the [arm’s length] principle, which is embodied in Article 9’s respect for the contractual arrangements of the parties, and to draft guidelines that reinforce this principle instead of creating exceptions to it” – TEI
Revised deadline: December 2014 Will incorporate work on risk, recharacterization, capital and special measures
June 3, 2014OECD BEPS Update 10
Action 13 – CbC reporting
Discussion draft published: January 30, 2014 Public comments released: February 23, 2014 Three-tiered approach: CbC Template, Master File and
Local FileMaster File needs to include: Detailed description of the overall business (full legal entity chart, flows
of goods globally, services, etc.) Detailed description of all intangibles (where are they, who pays for
them, etc.) Detailed description of intercompany loans
Proposed Master File includes things like: Who are your top 25 employees in terms of remuneration? Where are they located? and a requirement to disclose all APAs and ATRsMaster File can be in English; Local File in the local language
11June 3, 2014OECD BEPS Update
CbC reporting – public comments
The “income tax paid” column, which would require a multinational group to report income tax paid, on a cash basis, to its country of organization, has “nothing to do with transfer pricing” – BIAC
“TEI urges the OECD to clearly delineate the purpose or purposes behind the CbC reporting template and conduct a detailed assessment of what the template should be used for, before enshrining the template in Chapter V or anywhere in official OECD guidance. As currently proposed, the risk that many tax authorities will use the information in the current template to propose transfer pricing adjustments that are inconsistent with the arm’s length principle is palpable. Thus, TEI strongly recommends that the OECD sever the CbC reporting template from Chapter V and change the deadline for its completion to the end of the BEPS project (i.e., December 2015) to allow for proper development of the template with considered stakeholder input” – TEI
“Taxpayer burden must be reduced. Multinational enterprises already provide an enormous amount of information to tax authorities to explain their operations and, in particular, justify their transfer prices. The goal of the TP documentation revision is to improve the quality of the information while at the same time reducing taxpayer burden. It seems that the burden reduction aspects have been given short shrift” – USCIB
12June 3, 2014OECD BEPS Update
CbC reporting – initial outline
Recent statements from OECD indicate scope will be scaled back somewhat and CbC will not be part of Master File
13June 3, 2014OECD BEPS Update
CbC reporting – open issues
Will reporting use local financials (Statutory Accounts) or common parent company financials (US GAAP)? Likely Statutory Accounts
Will the Master File be provided to all jurisdictions, and if so, how? Likely Master File will be provided to parent company tax authorities, and thereafter provided on request by other tax authorities
Will CbC reporting be on an accrual or cash-tax basis? Likely cash-tax basis
Will CbC reporting be publicly available? Likely not
Will new data be required to be generated by taxpayers? Yes
When will CbC reporting be required? Likely 2015
June 3, 2014OECD BEPS Update 14
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Selected country reactions to BEPS
June 3, 2014OECD BEPS Update
Ireland passed a law eliminating double Irish “stateless” structures -> Companies incorporated in Ireland but managed and controlled in an EU / treaty partner country (e.g., the US) will be treated as Irish tax resident unless such companies are tax residents in those countries Still allows Irish Non-Residents to be resident in Cayman, Bermuda, etc.
No plans to increase 12.5% tax rate or eliminate Irish non-resident regime
The Netherlands codified substance requirements for obtaining treaty benefits, requiring an executive declaration on tax returns
But has indicated it will not eliminate its CV-BV regime
APAs for BV functional activities still encouraged
16June 3, 2014OECD BEPS Update
Selected country reactions:incentive jurisdictions
Selected country reactions:incentive jurisdictions
Switzerland is currently undergoing major corporate tax reform Three cantonal ruling regimes will be abolished: Holding
Company, Domiciliary Company and Mixed Company Principal Company Regime may also no longer be available in its
current form
Different proposed alternatives: Flat low federal rate – similar to Ireland (12-14%) License box – combined ETR between 10-12% Notional interest deduction Abolishment of 1% capital tax / stamp duty
Effective date is expected to be 2018 Will likely be grandfathering available for rulings that extend beyond
2018
June 3, 2014 17OECD BEPS Update
Selected country reactions:consumer markets
French government published a commissioned report written by two economists (Colin & Collin), which recommended that the treaty definition of PE be expanded to include “users” of social media websites Report also proposed a tax on the collection of data Also, the French tax authorities recently asserted a €1b fine against Google relating
to a commissionaire structure Italian parliament passed the first BEPS legislation, the “Google tax,” which
requires that local Italian companies purchase Internet ads only from companies registered for Italian VAT Due to controversy, Italy delayed implementation of the law until July 2014 – now
repealed Also, Italian news agency ANSA recently reported that Apple only paid €8m tax in
2013 on €300m revenue (2.66% ETR) Australia strengthened its general anti-avoidance rules, modernized its transfer
pricing regime and proposed legislation for publication of taxes paid by largest Australian companies, proclaiming such measures were enacted to combat BEPS
Vietnam now imposes a withholding tax on outbound payments for digital services and online advertising Taiwan has a similar rule, and India is considering one
18June 3, 2014OECD BEPS Update
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US reactions to BEPS andselected provisions of key US tax
reform proposals
June 3, 2014OECD BEPS Update
US tax reform proposals
In the past few years, President Obama and members of Congress have held extensive hearings and introduced a number of plans. These generally involve lowering the US corporate income tax rate while overhauling the international tax system. Each varies somewhat: Camp Discussion Draft (Oct. 2011) – options A, B and C Microsoft / HP Hearings (Sept. 2012) – transfer pricing and §956 Levin Stop Tax Haven Abuse Act (Sept. 2013) Baucus Discussion Draft (Nov. 2013) – options Y and Z Camp Discussion Draft (March 2014) – territorial system with option C Obama “Green Book” (March 2014) – digital economy / inversions Caterpillar Hearings (April 2014) – arm’s length standard / economic
substance Wyden WSJ Op-Ed (May 2014) – inversions reform However, other democrats want inversions to be part of comprehensive reform
EXPIRE Act (ongoing) – would retroactively extend research credit, §954(c)(6) and §954(h) through 2015
Our prediction: comprehensive tax reform will be enacted in 2015
20June 3, 2014OECD BEPS Update
Camp discussion draft (2014)
Repatriation holiday – one-time mandatory 8.75% tax imposed on US shareholders (10% or more) of their foreign subs’ E&P (accumulated since 1986) not previously subject to tax Non-cash E&P reinvested in PPE taxed at 3.5% Can elect to pay tax in installments over 8 years Foreign taxes can be credited against this tax
Participation exemption – 95% of dividends by foreign corps to US corporate shareholders (10% or more) would be excluded At the 25% statutory rate, results in a 1.25% effective tax rate FTCs not allowed for foreign taxes paid/accrued; §902 indirect credit repealed Parent must reduce basis in foreign sub by amount of exempt dividend
Option C – US parents would be currently taxed under Subpart F on their and their CFC’s “foreign base company intangible income” (FBCII) at a reduced 15% rate FBCII defined as excess of CFC’s gross income over 10% of CFC’s adjusted basis
in depreciable tangible property Exception for income subject to foreign tax at 15% or greater Income from property sold for use/consumption/disposition in US still taxed at 25%
21June 3, 2014OECD BEPS Update
Obama “green book” (2015)
Digital economy – new Subpart F category, “foreign base company digital income” (FBCDI), for income derived from the sale/lease of a digital copyrighted article or provision of a digital service, where the CFC uses IP developed by a related party – including through a CSA – and the CFC does not make a “substantial contribution” to the development of the article/service Exception for customers located in the CFC’s country of incorporation that use/consume the
article/service in that country Mfg. service arrangements – FBCSI is expanded to include income from the sale of
property “manufactured” on behalf of the CFC by a related person Hybrid instruments – denies deductions for interest paid to a related party and, because
the instrument is a hybrid, the income is not included by the recipient Would also deny a deduction for hybrid payments to a recipient subject to a “preferential
regime” (≤75% statutory rate) Reverse hybrids – denies relief under §954(c)(3) (same-country exception) and §954(c)(6)
(CFC look-thru rule) for deductible payments made to foreign reverse hybrid entities Inversions – for inversion transactions, reduces the 80% shareholder continuity test to only
50%, and eliminates the 60% shareholder continuity test Regardless of shareholder continuity, expatriated entity treated as US corp if “substantial
business activities” in the US and foreign corp “managed and controlled” in US Earnings stripping – for groups with foreign parents, limits a US member’s interest
expense deduction to its interest income plus a proportionate share of the group’s net interest expense
22June 3, 2014OECD BEPS Update
23
BEPS implications andpotential action items now
June 3, 2014OECD BEPS Update
Example – two-tier IP / ops
Digital Co has a to two-tier deferral structure (e.g., IR / INR). Reduction of foreign ETR
Problem? Disaggregation of functions (i.e., people) from profits (based on contractual risk)
Action 1 (digital economy) – Will Italy… assert that OpCo has a “significant digital presence”? impute a withholding stream from Italian subscribers? charge more VAT?
Action 3 (CFC rules) – US Tax Reform may tax offshore profit under new Subpart F rules, eliminating benefit from two-tier structure
Actions 8, 9 and 10 (TP of intangibles and risk): Higher substance requirement / functional alignment
in TP Guidelines Criteria to test whether IP ownership should be
accepted Could Italy assert that S&M Provider has created /
exploited valuable marketing intangibles? Could Italy use profit split methods?
Action 13 (TP documentation) – Digital Co will need to document its global profits on a CbCbasis
Action 15 (multilateral instrument) – Will OECD members deny treaty benefits to Ireland if it doesn’t tax IPCo as a resident?
June 3, 2014OECD BEPS Update 24
Digital Co(Delaware)
IPCo(Irish
Nonresident)
S&M Provider(Italy)
Cost-PlusService Fee
Servers
OpCo(Ireland
Resident)
Non-US Subscribers
Users
Engineers / Servers
$
US Subscribers
$
US IP
ROW IP
Royalty
CSA
Anticipated changes in tax environment
1. Numerous OECD position papers on the 15 BEPS Actions will be issued in 2014 and 2015
2. Likely many countries will jump the gun and implement anti-BEPS initiatives before all OECD work is completed
3. Substantial pressure on “stateless income” and entities in structures with no operational substance
4. Likely required CbC disclosure of complete taxpayer structures and legal entity profits to all relevant tax authorities in 2015
5. Likely more tax authority assertions of PE6. New country restrictions on use of hybrid entities / hybrid
transactions7. Some enhanced US CFC rules, perhaps accompanied by a
territorial system, in 2015 or 20168. Enhanced taxpayer need for reliance on tax treaty networks
25June 3, 2014OECD BEPS Update
Action items now
1. Hold off on any discretionary repatriations of low-tax earnings to the US No sense incurring 35% US tax now if future rates are lower But see eBay’s $9b Q1 2014 taxable repatriation for acquisitions Exception for expiring US NOLs
2. Model impacts of US tax reform proposals GAAP ETR Cash tax payment rates Compare impact under status quo v. alternative structures
3. Assess all critical pressure points from OECD BEPS within entire corporate international structure Consider alternative structures to reduce BEPS impact
26June 3, 2014OECD BEPS Update
Possible strategic actions
Assess whether all legal entity management and control activities are properly managed and documented
Align operational substance with key entities Add employees or functions in-country, or move entities to
operations
Consider whether / how to collapse certain structures For example, significant interest in collapsing INR into IR Restructure hybrid instruments / hybrid entities Consider accompanying new tax rulings
Obtain APAs for principals / distributors / licensees Lock in one-sided TNMM / royalty rates as the appropriate method
Country-specific issues Re-negotiate / extend tax rulings as necessary
27June 3, 2014OECD BEPS Update
Speaker contact information
Eric RyanDLA Piper
2000 University AvenueEast Palo Alto, CA 94303
Office Phone: 650.833.2118Cell: 408.398.9912
eric.ryan@dlapiper.com
Chris KotarbaDLA Piper
2000 University AvenueEast Palo Alto, CA 94303
Office Phone: 650.833.2156Cell: 650.810.3331
chris.kotarba@dlapiper.com
www.dlapiper.com
Circular 230 Notice: In compliance with U.S. Treasury Regulations, please be advised that any taxadvice given herein (or in any attachment) was not intended or written to be used, and cannot
be used, for the purpose of (i) avoiding tax penalties or (ii) promoting, marketing orrecommending to another person any transaction or matter addressed herein.
June 3, 2014 28OECD BEPS Update
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