OECD’S BEPS PROJECT - Nexdigm
OECD’S BEPS PROJECTWhy BEPS will change the way you operate?Mumbai Pune Hyderabad New Delhi Chennai Bengaluru
COVERAGE BEPS Project: Trigger PointsBEPS Project: Action PlansAction Plans with Focussed Transfer Pricing ImplicationsOther Action Plans: Transfer Pricing ImplicationsBEPS Project Impact: SKP Insights 2015 SKP Business Consulting LLP. All rights reserved.
BUILDING UPTO BEPS
BACKGROUND INFORMATION Globalisation benefited domestic economies and impacted corporate incometax regimes across countries As the economy became more globally integrated, it opened up opportunitiesfor MNEs to greatly minimise their tax burden For companies tax is a cost – feel legitimate right to reduce it especially inchallenging economic conditions post global financial crises Cash-strapped governments under significant pressures to reduce deficits Simultaneously countries are competing for profitable investments Taxation systems have not kept pace with changes in the business model Digital economy and increasing globalisation of businessTax Evasion versus Tax Planning and Avoidance – A Big Moral Debate 2015 SKP Business Consulting LLP. All rights reserved.
GLOBAL TRENDSStarbucks not a bean in taxes, thanks to transfer pricingStarbucks UK sales in 2011 were worth 398 million, but paid nil taxes by charging UKoperations high prices for ‘use of logo’AmazonWith sales of 3.35 billion reports tax paid of 1.8 million (0.005%) in UKApple uses subsidiaries to dodge billions in taxesUS Senate Panel alleged that Apple is using ‘so-called’ cost-sharing agreement totransfer valuable intellectual property assets offshore and shift resulting profits to taxhaven jurisdictionsDolce and Gabbana stylists face 320 million tax fraud caseAccused of evading more than 400 million in tax when they sold their D&G and D&Gbrand to a holding company Gado, which they set up in Luxembourg in 2004GoogleUK unit paid 6 million to treasury in 2011 on UK turnover of 395 million (1.5%) 2015 SKP Business Consulting LLP. All rights reserved.
CONSEQUENCES FOLLOW 2015 SKP Business Consulting LLP. All rights reserved.
WORLDWIDE PROTESTS 2015 SKP Business Consulting LLP. All rights reserved.
BASE EROSION AND PROFIT SHIFTINGBase Erosion and Profit Shifting (BEPS) Tax planning, which exploits gaps in taxrules, making profits shift to locationswith little or no activity and having lowtaxes Three popular mechanisms for profitshifting are Hybrid MismatchBEPS arises because underexisting rules MNEs areoften able to artificiallyseparate allocation of theirtaxable profits from thejurisdiction in which theseprofits arise Special Purpose Entity/Vehicle Transfer Pricing Not always illegal, but taking advantageof current archaic tax rules that isdisassociated with today’s environment– OECD 2015 SKP Business Consulting LLP. All rights reserved.
OECD BEPS PROJECT Group of G20* countries realised the needof preventing BEPS and approached OECDto address the issue related to BEPS OECD published a report on BEPS inFebruary 2013 In July 2013, OECD released an Action Planon BEPS which was presented to themeeting of G20 Finance Ministers in Moscow Action Plan covers 15 specific which arebroadly to be achieved over a 2 year periodi.e. by end of 2015* Worlds largest advanced and emerging economies which include Argentina, Australia, Brazil,Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia,Saudi Arabia, South Africa, Turkey, United Kingdom, United States of America and EuropeanUnion 2015 SKP Business Consulting LLP. All rights reserved.
BEPS ACTION PLANChanges to the international taxation landscape Action 1: Address the taxchallenges of the digitaleconomy Action 2: Neutralise theeffects of hybrid mismatcharrangements Action 3: Strengthen CFCrules Action 4: Limit base erosionvia interest deductions andother financial payments Action 5: Counter harmfultax practices moreeffectively, taking intoaccount transparency andsubstance Action 15: Development of amultilateral instrument for amendingbilateral treatiesACTION PLANON BASEEROSION ANDPROFITSHIFTING(BEPS) Action 11: Establishmethodologies to collect andanalyse data on BEPS andactions addressing it Action 12: Require taxpayersto disclose their aggressivetax planning arrangements Action 13: Re-examinetransfer pricingdocumentation Action 14: Making disputeresolutions more effectiveAction 6: Prevent treaty abuseAction 7: Prevent the artificial avoidance of permanent establishment statusAction 8: Consider transfer pricing for intangiblesAction 9: Consider transfer pricing for risks and capitalAction 10: Consider transfer pricing for other high-risk transactions 2015 SKP Business Consulting LLP. All rights reserved.
BEPS PROJECT TIMELINEOECD BEPS Action Plan – An ambitious timelineJune 2012Projectannounced/startedJul 2012July 2013Release of Action Planwith 15 separateactions/work streamsFeb 2013February 2013Release of documentaddressing BaseErosion and ProfitSharing (BEPS)Jul 2013December 2015Completion ofreminder ActionPlanSep/Oct/Nov 2014Sep 2015September 2014Release ofrecommendationspertaining to 7 out of 15Action Points and Oct/Novadditional 2 Action PointsDec 20152016 onwards2016 and onwardsMonitoringadditional/on-goingcompliance 2015 SKP Business Consulting LLP. All rights reserved.
OECD BEPS ACTION PLANSActionParticularsExpected OutputTimeline1Addressing tax challenges of a digitaleconomyReport identifying issues raised by digitaleconomy and possible actions to address themSeptember 20142Neutralising effects of “Hybrid MismatchArrangements”Changes to model tax convention andrecommendations regarding the design ofdomestic rulesSeptember 20143Strengthening Controlled ForeignCompany (CFC) RulesRecommendations regarding the design ofdomestic rulesApril 20154Limit base erosion via interestdeductions and other financial paymentsRecommendations regarding the design ofdomestic rules and changes to transfer pricingguidelinesDecember 20145Countering harmful tax practices moreeffectively, taking into accounttransparency and substanceFinalise review of member country regimes,strategy to expand participation to non-OECDmembers and revision of existing criteriaSeptember 20146Preventing granting of treaty benefits ininappropriate circumstancesChanges to model tax convention,recommendations regarding the design ofdomestic rulesMay 2015(Revised Draft Released)7Preventing the artificial avoidance of PEstatusChanges to model tax conventionMay 2015(Revised Draft Released) 2015 SKP Business Consulting LLP. All rights reserved.
OECD BEPS ACTION PLANSActionParticularsExpected OutputTimeline8Assuring transfer pricing outcomes arein-line with value creation – intangiblesChanges in transfer pricing guidelines andpossibly to model tax conventionDecember 2014April 2015June 20159Assuring transfer pricing outcomes arein-line with value creation – risks andcapitalChanges in transfer pricing guidelines andpossibly to model tax conventionDecember 201410Assuring transfer pricing outcomes arein-line with value creation – other highrisk transactionsChanges in transfer pricing guidelines andpossibly to model tax conventionNovember 2014December 2014February 201511Establishing methodologies to collect andanalyse data on BEPS and actions toaddress themRecommendations regarding data to becollected and methodologies to analyse themApril 201512Recommending mandatory disclosurerulesRecommendations regarding the design ofdomestic rulesMarch 201513Re-examining and providing guidance ontransfer pricing Documentation andCountry-by-Country ReportingChanges in transfer pricing guidelines andrecommendations regarding the design ofdomestic rulesSeptember 2014June 201514Making dispute resolution mechanismsmore effectiveChanges to model tax conventionDecember 201415Developing a multilateral instrument andmodifying bilateral tax treatiesReport identifying relevant public internationallaw and tax issues and develop a multilateralinstrumentSeptember 2014 2015 SKP Business Consulting LLP. All rights reserved.
TRANSFER PRICINGACTION PLANS
TRANSFER PRICING ACTION PLANSTransfer pricing landscape continues to evolve, heralding enormous future changesAction8910ParticularsAssuring transfer pricingoutcomes are in-linewith value creation –intangiblesAssuring transfer pricingoutcomes are in-linewith value creation –risks and capitalAssuring that transferpricing outcomes are inline with value creation –other high risktransactionsCurrent StatusSep 2014Revision of transfer pricing guidelines with respect to intangiblesDec 2014Revision of transfer pricing guidelines (includes intangibles, risks,re-characterisation and special measures)Apr 2015Transfer pricing guidelines with respect to Cost ContributionAgreementsJun 2015Transfer pricing guidelines relating to hard to value intangiblesDec 2014Revision of transfer pricing guidelines (includes intangibles, risks,re-characterisation and special measures)Nov 2014Transfer pricing guidelines relating to low value-adding intragroup servicesRevision of transfer pricing guidelines (which includes intangibles,risks, re-characterisation and special measures)Dec 2014Transfer pricing aspects of cross-border commodity transactionsUse of profit splits in the context of global value chains13Guidance on transferpricing documentationand Country-by-CountryreportingSept 2014Guidance on three tier transfer pricing documentationJun 2015Release of implementation package for CbC Reporting 2015 SKP Business Consulting LLP. All rights reserved.
ACTION PLAN 8: INTANGIBLESKey features of Action Plan and major changesBroader definition of intangible property (6 specific categories)Allocation of returns should be in line with value creationOwnership of intangibles and entitlement to returnsSpecial focus on marketing intangibles and R&D arrangementsInclusion of “Valuation Techniques” as part of the five OECD transfer pricingmethods Detailed guidance on local market features (Location Savings), assembledworkforce and MNE group synergies Transfers of hard to value intangibles Distinguish between anticipated and actual remuneration and guidance ontreatment of profits or losses relating to unanticipated events (ex-post returns) andsharing of same between MNE group members Situations may demand use of transactional profit split method Guidance on Cost Contribution Arrangement (CCAs) 2015 SKP Business Consulting LLP. All rights reserved.
ACTION PLAN 9: RISKS AND CAPITALKey features of Action Plan Assuring transfer pricing outcomes are in line with value creation in areas of risk andcapital Crucial to delineate inter-company transactions – commercial and financial relations Enhanced focus on the risk allocation aspects – expressed as well as implicit risksshould be identified and considered for determining arm’s length nature Inappropriate returns should not accrue to an entity solely because it has contractuallyassumed risks or has provided capital Non-recognition of related party transaction – when the transaction does not have thefundamental economic attributes of arrangements between unrelated parties Sets out options for potential special measures to reduce the possibilities for BEPS thatare either within or beyond arms length principle 2015 SKP Business Consulting LLP. All rights reserved.
ACTION PLAN 10: HIGH RISK TRANSACTIONSIntra-group low-value adding services – a simplified approach Defining intra-group low value adding services Are of supportive natureAre not a part of the core business of the MNE groupDo not require the use of unique and valuable intangibles and do not lead to the creation ofunique and valuable intangiblesDo not involve the assumption or control of substantial or significant risk and do not give riseto the creation of significant risk Determination of Arm’s Length Price (ALP) Determination of cost pools and allocate costs to those group companies which benefit fromthose servicesSuggested profit markup of 2-5% Relevant documentation to be maintainedMeasures proposed would help reduce the scope for erosion of taxbase through management fees and Head Office expenses 2015 SKP Business Consulting LLP. All rights reserved.
ACTION PLAN 10: HIGH RISK TRANSACTIONSCross-border commodity transaction Reliable quoted price (commodity exchange, industry reports, etc.) can be used as ‘CUP’for commodity prices Important to consider the economic context, industry dynamics and business modelUse of profit splits in the context of global value chains Increased integrated business models – use of intangibles, digital platforms One sided methods are proving insufficient to reflect arm’s length result Lack of suitable comparable The above would necessitate increased use of profit split method 2015 SKP Business Consulting LLP. All rights reserved.
ACTION PLAN 13: DOCUMENTATION Enhancing transparency for tax administrations by providing them with adequateinformation to conduct transfer pricing risk assessments and examination Three-tiered approach to transfer pricing documentation which consists of Master file containing standardised information relevant for all MNE group membersLocal file referring specifically to material transactions of the local taxpayerCountry-by-country (CbC) report containing certain economic information within the MNEgroup Contents of CbC Report Aggregate information in relation to revenue, profit/loss, income taxes, stated capital,accumulated earnings, number of employees and tangible assets for each jurisdiction in whichthe MNE group operatesIdentification of each constituent entity including jurisdiction of tax residence, nature ofbusiness activity of each constituent activity, etc. MNE group with annual consolidated group revenue of less than 750 million (orequivalent amount in local currency) may be excluded from CbC reporting requirement CbC report to be filed by Ultimate Parent Entity or a Surrogate Parent Entity Government to government mechanism to exchange CbC Reports (Automatic Exchangeof CbC Reports) Proposed date for reporting is fiscal year beginning on or after 1 January 2016 2015 SKP Business Consulting LLP. All rights reserved.
OTHER ACTION PLANSAction Plan 1: Address tax challenges of the digital economy Many BEPS structures adopted in the digital economy involves the transfer of intangiblesor rights to intangibles to tax-advantaged locations Any restrictions on deductions for excessive interest whether in respect of related partyor third party debt and inbound or outbound investment scenarios, would apply equallyto the funding of innovative digital businesses The work on transfer pricing, and particularly intangibles, through action point 8, 9 and10, will be key to assisting in relation to valuable intangibles within innovative digitalbusinessesAction Plan 4: Limit base erosion via interest and other financial payments Arrangements where an entity has an excessive level of interest expense which does notreflect its actual economic activity Options for approaches to tackle BEPS in addition to CFC rules Group-wide interest allocation or ratio approach (group-wide tests) linking interestdeductibility to the position of groupFixed ratio test – interest deduction up to a specified proportion of entity’s earnings, assets orequity CbC reporting will require disclosure of financial indicators across the MNE group at aconsolidated and entity level 2015 SKP Business Consulting LLP. All rights reserved.
SKPINSIGHTS
BEPS PROJECT IMPACT: SKP INSIGHTSClear signs of global impact Following countries have already proposed to revise/rewrite their transfer pricingregulatory rules in alignment with BEPS project recommendations Australia, Germany, France, Singapore, United Kingdom and Mexico Major developing countries which are non-OECD members – such as India, China, SouthAfrica, Brazil are actively supporting the BEPS Project and expressed their intention toadopt the outcomes Demands for Mutual Agreement Procedures (MAPs) have increased General rise in demand for Advanced Pricing Agreements (APAs)Key challenges to watch out for Different countries adopting BEPS Project recommendations in piece meal United States of America does not appear to follow the BEPS Project outcomes in totality Resultant risk of double taxation 2015 SKP Business Consulting LLP. All rights reserved.
BEPS PROJECT IMPACT: SKP INSIGHTSEmergence of new concepts in the international tax world Tax inspectors without borders Automatic exchange of information Gradual movement from bilateral to multilateral instrumentsKey takeaways for your business No longer be possible to look at value creation, transfer pricing and tax planningstrategies in isolation – all should work in harmony Crucial to ensure that transfer pricing and relevant supporting documentation are keptup to date in the robust manner Thorough internal process within the organisation, with clear responsibility andaccountability between departments to ensure a proper audit trail Increased scrutiny by the tax authorities because of the big picture economic informationat their disposal Better to avoid fire fighting – proactive study of your existing business models andtransfer pricing positions will be advantageous 2015 SKP Business Consulting LLP. All rights reserved.
BEPS PROJECT IMPACT: SKP INSIGHTSGearing up your business for BEPS Perform a global BEPS check and ask various questions: Is the nature of group business clearly defined?How much of international and domestic transfer pricing is involved in your business?Do you have transfer pricing documentation that demonstrates your positions?What is the company’s global supply chain policy?Does that policy have substance for each function performed and risk assumed in each localtaxing jurisdiction?Is transfer pricing documentation in-line with economic reality of current supply chain in eachjurisdiction and the supply chain as a whole?Do you have robust systems to align group-level as well as country-specific economic detailsand generate convincing audit trail documents?Do the existing business models need to be altered in view of the BEPS? Devise a strategic plan to be consistent in the responses so that if exchange ofinformation is invoked between governments, the responses to one jurisdiction are notcontradicted or incriminating in another jurisdiction 2015 SKP Business Consulting LLP. All rights reserved.
AT A GLANCE: BEPS PROJECTCONSEQUENCE Tax avoidance strategiesthrough business structures Disconnect between legalstructure and economicsubstance Inadequate transfer pricingdocumentation at presentOECD FOCUS ANDSIGNIFICANCE Increase in level ofdocumentation Bringing more clarity withregards to value creatingeconomic activities Need of strengtheninginternal processes Crucial to maintain adequatedata at an individual entitylevel and at a group level Internal exchange ofinformation between taxauthorities of differentcountries Long term litigations withrevenue departments Cross-border taxassessments Heavy penalties for noncompliances andinadequate documentationRISK 2015 SKP Business Consulting LLP. All rights reserved.
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OECD published a report on BEPS in February 2013 In July 2013, OECD released an Action Plan on BEPS which was presented to the meeting of G20 Finance Ministers in Moscow Action Plan covers 15 specific which are broadly to be achieved over a 2 year period i.e. by end of 2015 OECD BEPS PROJECT
BEPS Action 13 Three tier transfer pricing documentation Organisation for Economic Co- RSHUDWLRQDQG'HYHORSPHQW¶V 2(&' BEPS Action 13 has provided for a three-tier structure for TP documentation, namely Master File, Local File and Country E\&RXQWU\ ³ CbC reporting framework. Majority of the countries having TP regulations have
Overview Under the OECD*/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), more than 125 countries are collaborating to put an end to tax avoidance strategies that exploit gaps and mismatches in tax rules to avoid paying tax MLI is an outcome of BEPS Action Plan (AP) 15 of the OECD/G20 In
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