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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

18 months of BEPS© 2017 Deloitte Belgium 3

Introduction


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


BEPS actions so far


EU actions further to BEPS


ATAD I & II


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


The measures listed


• 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)


The measures listed


• 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


CFC highlighted


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.


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


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


Transparency


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?


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


Related partyconduits rulings

Residence country of any related party making payments to the conduit (directly or indirectly)

Country of residence of the ultimatebeneficial owner


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


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


• 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


CC(C)TB


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


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


BEPS actions taken bycountries


Multilateral Convention


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


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



covered;

• Reservations made;

• Options selected;


affected by above;

From: Country Z

To: OECD Depositary



covered

• Reservations made

• Options chosen


affected by above


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


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


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


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


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


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


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


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


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


Country overview


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


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


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



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


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


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



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



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


BEPS in practice: current trends and recommendations for the future


Business models


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

© 2017 Deloitte Belgium 44

Case study: Navigatingthe Global Tax Reset


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


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


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?


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


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


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


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


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


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*


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


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


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


Future trends


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


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


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


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


Products/ServicesTransactions

Data Analytics Principal



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


Products/ServicesTransactions

Data Analytics Principal



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


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


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.


VCAT – homepage


VCAT – identify and review key business profit drivers and executives


VCAT – analytics


Financing


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


General approach – designing a new financing strategy


Different factors need to be considered in the design of a new financing structure


Intercompany financing – example structures and BEPS Action 2 impact


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


Intercompany financing – example structures and BEPS Action 2 impact


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


IP


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: ?)


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


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


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


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


Close


What should be on your tax agenda?

18 months of BEPS

Transparency SubstanceFast evolving

legislation

Local presence Value chain Financing


Q&A


Contact details

Eric von Frenckell (Laga)PartnerBusiness Tax

Tel. + 32 2 800 70 61

[email protected]

Annelies Stragier (Deloitte)DirectorBusiness Tax

Tel. + 32 2 600 67 98

[email protected]

Charlotte Degadt(Laga)Contract PartnerIndirect Tax

Tel. + 32 2 800 70 23

[email protected]

Liesbet Nevelsteen(Deloitte)PartnerIndirect Tax

Tel : +32 2 600 66 53

[email protected]

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

Deloitte provides audit, tax and legal, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte has in the region of 225,000 professionals, all committed to becoming the standard of excellence.

This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this publication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

© 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

http://www.laga.be/

headline verdana bold 18 months of beps what should be on your tax … · · 2018-05-0418 months...

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