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Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
Tax Evasion and Tax Avoidance - Parliamentary Days 2014
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Tax Evasion and Tax Avoidance - Parliamentary Days 2014

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In July 2013 the OECD unveiled the Action Plan on Base Erosion and Profit Shifting (BEPS), which aims to develop a new set of standards to prevent double non-taxation and ensure that profits are taxed …

In July 2013 the OECD unveiled the Action Plan on Base Erosion and Profit Shifting (BEPS), which aims to develop a new set of standards to prevent double non-taxation and ensure that profits are taxed where they are actually generated. By Grace Perez-Navarro, Deputy Director, and Raffaele Russo, Head of the BEPS Project, Centre for Tax Policy and Administration.

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  • 1. OECD/ G2O EFFORTS TO TACKLE TAX EVASION AND TAX AVOIDANCE 06 February 2014
  • 2. Importance of this agenda • Tax evasion and avoidance deprive governments of revenues needed to foster growth, job creation and income distribution • If left unchecked, will undermine voluntary compliance of all taxpayers • Undermines trust in government more generally • Shifts more of the tax burden on to honest citizens 2
  • 3. Global Forum on Transparency and Exchange of Information • Making a difference in offshore tax evasion and improving ability of tax administrations to apply their laws  Over 120 member jurisdictions, including all financial centres  Over 1100 new EOI arrangements up to the standard  Over 600 recommendations made and about 300 recommendations addressed relating to bank secrecy, bearer shares, access to accounting and ownership information and removing other barriers to effective international co-operation in exchange of information on request  GF published ratings of jurisdictions as Fully Compliant, Largely Compliant, Partially Compliant or Not Compliant. 3
  • 4. Global Forum Ratings • New compliance ratings for 50 jurisdictions: • • – Compliant: Australia, Belgium, Canada, China, Denmark, Finland, France, Iceland, India, Ireland, Isle of Man, Japan, Korea, New Zealand, Norway, South Africa, Spain and Sweden – Largely Compliant: Argentina, the Bahamas, Bahrain, Bermuda, Brazil, Cayman Islands, Estonia, Germany, Greece, Guernsey, Hong Kong, Italy, Jamaica, Jersey, Macao, Malta, Mauritius, Monaco, the Netherlands, Philippines, Qatar, San Marino, Singapore, Turks and Caicos, United Kingdom, United States – Partially Compliant: Austria and Turkey – Non-Compliant: British Virgin Islands, Cyprus, Luxembourg and the Seychelles 14 jurisdictions not rated, pending further improvements to their legal and regulatory frameworks for exchange of information in tax matters. Botswana, Brunei, Dominica, Guatemala, Lebanon, Liberia, Marshall Islands, Nauru, Niue, Panama, Switzerland, Trinidad and Tobago, the United Arab Emirates and Vanuatu . 4
  • 5. From Exchange on Request to Automatic Exchange • In April 2013 the G20 Finance Ministers and Central Bank Governors first endorsed automatic exchange as the expected new standard. Leaders welcomed in St. Petersburg • This is another step change in international tax transparency driven by developments around the globe, with unprecedented political support for automatic exchange of information. • Release of new global standard: 13 February 2014 5
  • 6. Basic approach Account Holder Bank   Country A 1. Model 1 IGA reporting 2. Model 1 IGA exchanges 3. Leveraging on Model 1 IGA implementation to develop standardised automatic exchange in a multilateral context   US   Bank Account Holder Country B  Account Holder  Bank 6
  • 7. CRS + CAA = exchange standard Account Holder Bank Country A Reporting of information based on Common Reporting and Due Diligence Standard (CRS) implemented via domestic law Automatic exchange of information based on MTC Article 26 or MAC, & Model CAA Country B Account Holder Bank Reporting of information based on Common Reporting and Due Diligence Standard (CRS) implemented via domestic law 7
  • 8. Key features To prevent taxpayers from circumventing the CRS, it is specifically designed with a broad scope across three dimensions: Broad scope of information reported: • Personal data: name, address, tax residence, TIN • Financial data: account balance, all investment income (including sales proceeds) Broad scope of financial institutions required to report: • Banks, custodians, and other financial institutions (brokers, certain collective investment vehicles, and certain insurance companies) Broad scope of account holders subject to reporting: • Individuals • Entities (including trusts and foundations) • Controlling persons (i.e., beneficial owners) of entities 8
  • 9. Present Main differences from FATCA Individuals • Residence (not citizenship) • No thresholds • Residence address test for pre-existing accounts building on EU Savings Directive • Simplified indicia search Entities • Look-through for professionally managed investment entities in non-participating jurisdictions Low risk FIs and products General exclusion for country specific low-risk reporting financial institutions and accounts 9
  • 10. Future Next steps Ongoing business consultation Post Sep ’14 Feb ‘14 Presentation of CRS to G20 Jun ‘14 Sep ‘14 Presentation of commentaries and other technical modalities to G20 CFA approval of commentaries and other technical modalities 1. Continued work on commentaries and other technical modalities 2. Consistent implementation (‘living’ system) 3. Effective use of information exchanged 4. Alignment with TRACE 5. AEOI of other types of income (in collaboration with the EU) 10
  • 11. Future Roles & responsibilities Country WP10 1. Enact legislation adopting CRS 2. Issue regulations and guidance incorporating more detailed rules of CRS 3. Enter into CAAs 4. Commence IT and other process implementation including exchange infrastructure 5. Ensure confidentiality of information 6. Effective use of information exchanged 7. Ensure consistent implementation going forward 1. Continued work on commentaries and other technical modalities 2. Develop best practices on the effective use of information exchanged GFTEI / AEOI Group 1. Assist developing countries 2. Monitor and review implementation 3. Liaise with WP10 (including via delegation to WP10) 3. Resolve issues arising during implementation to ensure consistent application going forward and achieve objectives of CRS 4. Alignment with TRACE 5. AEOI of other types of income (in collaboration with the EU) 11
  • 12. Automatic Exchange • The Multilateral Convention on Mutual Administrative Assistance in Tax Matters provides a legal basis for automatic exchange. – The Multilateral Convention also provides a basis for assistance in collection. – Bilateral treaties (and some TIEAs) may also provide a legal basis for bilateral exchange. – Over 60 countries have signed Convention and UK and others have extended coverage to their dependencies and overseas territories 12
  • 13. BASE EROSION AND PROFIT SHIFTING (BEPS) PROJECT February 2014
  • 14. I. WHAT IS BEPS? 14
  • 15. Background • International constraints due to tax sovereignty lead to double taxation • Core work of the OECD is to remove barriers to cross-border trade and investment. In tax area we do this by designing international standards / rules to eliminate double taxation • Many rules work well but have also resulted in double nontaxation • Post-crisis priorities: governments not only need money but they need to ensure the fairness of the tax system • If we want to maintain our ability to eliminate double taxation, better to have respected and internationally aligned rules and therefore to fix deficiencies 15
  • 16. OECD Work on Taxation • Prevention of double taxation remains core work but there is now recognition that the issue of double non-taxation due to base erosion and profit shifting (BEPS) should also be tackled What is BEPS? • There are a number of structures which take advantage of asymmetries in domestic and international tax rules • Artificial separation of taxable profits from the jurisdiction where economic activities take place • Most BEPS planning is legal – if governments and parliaments are unhappy with results, the rules should be changed 16
  • 17. Why is BEPS a problem? • It distorts competition o Businesses that operate cross-border may profit from BEPS opportunities which gives them competitive advantages compared to enterprises that operate mostly at the domestic level • It distorts investment decisions o …towards activities that have lower pre-tax rates of return but higher after tax rates of return – this may lead to an inefficient allocation of resources • It is an issue of fairness o If other taxpayers think that MNEs can legally avoid paying income tax, it will undermine voluntary compliance by all taxpayers 17
  • 18. Increased Attention on BEPS • Increased attention on corporate tax affairs • Spreading perception that MNEs dodge taxes all around the world and in particular in developing countries • Debate on BEPS issues has reached a high political level • Parliamentary hearings in a number of countries • G20 discussions 18
  • 19. Increased Attention on BEPS 19
  • 20. II. FEBRUARY 2013 – THE DIAGNOSIS REPORT 20
  • 21. Report: Addressing BEPS • Addressing Base Erosion and Profit Shifting published on 12 February 2013   • identifies main pressure areas leading to opportunities for BEPS calls on governments to address these areas: in a nutshell, if governments are not happy with the results under the laws, they must change the laws Sent to and discussed at G20 Finance Ministers meeting in Moscow on 15-16 February 2013: “[W]e welcome the OECD report on addressing base erosion and profit shifting and acknowledge that an important part of fiscal sustainability is securing our revenue bases. We are determined to develop measures to address base erosion and profit shifting, take necessary collective actions and look forward to the comprehensive action plan the OECD will present to us in July” 21
  • 22. How Big a Problem Is BEPS? (1) • Debate on Statutory vs. Effective Corporate Income Tax Rates – Statutory tax rates do not provide a reliable measure of the burden that a tax system imposes on corporate income while ETRs, in particular backward-looking ones, could in principle provide useful indications of whether base erosion and profit shifting is indeed taking place. • Review of studies relating to BEPS – Available studies on Effective Tax Rates (ETRs) of MNEs are useful but there are barely two studies using the same methodology. The use of different methodologies to calculate ETRs (in particular backward-looking ones) results in very divergent conclusions regarding the level of taxation imposed on MNEs.
  • 23. How Big a Problem Is BEPS? (2) • Data on corporate income tax revenues: – Corporate tax receipts vs. GDP have remained stable even though tax rates have been falling over time (although applied to a broader tax base). – Further analysis is needed to assess the importance of all the different factors and therefore arrive at a conclusive view on the relevance of these data. • Data on Foreign Direct Investments (FDIs): – substantial share of investments is made through shell companies , e.g. • In 2010 the British Virgin Islands were second largest investor into China (14%) after Hong Kong (45%) and before USA (4%) • Mauritius is the top investor into India (24%), while Cyprus (28%), the British Virgin Islands (12%), Bermuda (7%) and the Bahamas (6%) are among the top five investors into Russia – further analysis of these data is also warranted
  • 24. Tax Principles and Opportunities for BEPS • In practice any structure aimed at BEPS incorporates a number of coordinated strategies, which often can be broken down into four elements – minimisation of taxation in a foreign operating or source country either by shifting gross profits via trading structures or reducing net profit by maximising deductions at the level of the payer – low or no withholding tax at source – low or no taxation at the level of the recipient (via low-tax jurisdictions, preferential regimes, hybrid mismatch arrangements) with entitlement to substantial non-routine profits via intra-group arrangements – no current taxation of the low taxed profits at level of ultimate parent. Further, effective cash repatriation strategies and “permanent” foreign reinvestment of low taxed cash
  • 25. Tax Principles and Opportunities for BEPS (2) • Effect of strategies is that more profit is associated with legal constructs and intangible rights and obligations, and to legally shift risk intra-group, with the result of reducing the share of profits associated with substantive operations involving the interaction of people with one another and the use of physical capital • There are a number of structures, technically legal, which take advantage of asymmetries in domestic and international tax rules
  • 26. What to do about that? • The February Report calls for coordinated and holistic action • No country acting on its own can fix it • If you only fix one issue, pressure on other areas • A Comprehensive Action Plan on BEPS by June 2013 • to provide countries with instruments, domestic and international, aiming at better aligning rights to tax with real economic activity • requiring “out of the box” thinking as well as ambition and pragmatism to overcome implementation difficulties 26
  • 27. III. JULY 2013 – THE BEPS ACTION PLAN 27
  • 28. Developing the Action Plan on BEPS • Following the February report, the work focused on the development of an action plan • The development of the action plan was also informed by engagement with business and civil society (consultations with BIAC, TUAC and NGOs) • The action plan was approved at the meeting of the Committee on Fiscal Affairs on 25 June 2013. All G20 countries participated • It was published on 19 July 2013 on the occasion of the G20 Finance Ministers meeting 28
  • 29. The BEPS Action Plan • The action plan calls for 15 actions organised around the following three main pillars: – The coherence of corporate tax at the international level. – A realignment of taxation and substance – Transparency, coupled with certainty and predictability • It also calls for targeted work in the area of the digital economy, and for the development of a multilateral instrument to implement the measures developed under the action plan. 29
  • 30. The Digital Economy (Action 1) • Spread of the digital economy poses challenges for international taxation. • The digital economy is characterised by an unparalleled reliance on intangible assets, the massive use of data (notably personal data), the widespread adoption of multi-sided business models capturing value from externalities generated by free products, and the difficulty of determining the jurisdiction in which value creation occurs. • Fundamental questions as to how enterprises in the digital economy add value and make their profits, and how the digital economy relates to the concepts of source and character of income for tax purposes. 30
  • 31. Coherence (Actions 2 through 5) The Action Plan calls for the development of international standards to ensure the coherence of corporate tax at the international level • This relates to the need to complement existing rules to prevent double taxation with instruments that prevent double non-taxation.  Neutralise the effects of hybrid mismatch arrangements (Action 2)  Strengthen controlled foreign companies (CFC) rules (Action 3)  Limit base erosion via interest deductions and other financial payments (Action 4)  Counter harmful tax practices more effectively (Action 5) 31
  • 32. Substance (Actions 6 through 10) The Action Plan calls for a realignment of taxation and substance: • This is about treaty abuse and transfer pricing, where the current rules do not always produce appropriate results.  Prevent treaty abuse (Action 6)  Prevent the artificial avoidance of Permanent Establishment status (Action 7)  Assure that Transfer Pricing outcomes are in line with value creation – Intangibles / Risk & capital / High-Risk Transactions and Other Payments (Actions 8, 9, 10) 32
  • 33. Transparency and Certainty (Actions 11 through 14) BEPS requires greater transparency and certainty  Establish methodologies to collect and analyse data on BEPS and the actions to address it (Action 11)  Require taxpayers to disclose their aggressive tax planning arrangements (Action 12)  Re-examine transfer pricing documentation (Action 13)  Make dispute resolution mechanisms more effective (Action 14) 33
  • 34. Developing a Multilateral Instrument (Action 15) • Some actions will result in changes to the OECD Model Tax Convention and changes to the OECD Model Tax Convention are not directly effective without amendments to bilateral tax treaties. • If undertaken on a purely treaty-by-treaty basis, the sheer number of treaties in effect will make such a process very lengthy. • There is a need to consider innovative ways to implement the measures resulting from the work on the BEPS Action Plan. 34
  • 35. IV. NOW – THE OECD/G20 BEPS PROJECT 35
  • 36. OECD/G20 BEPS Project • All eight non-OECD G20 countries (Argentina, Brazil, China, India, Indonesia, Russia, Saudi Arabia and South Africa) and OECD Accession countries (Colombia and Latvia) are Associates in the BEPS Project • Associates in a Project participate on an equal footing with OECD countries, including participation in its bureau in the Committee overseeing the project in the discussions and in the decision-making process 36
  • 37. Organisation of work • Work on the actions is done by CFA through subsidiary bodies (where the experts from capitals sit): – – – – – – – Working Party 1 on Tax Conventions and Related Questions Working Party 2 Tax Policy Analysis and Tax Statistics Working Party 6 on Taxation of Multinational Enterprises Forum on Harmful Tax Practices Working Party 11 on Aggressive Tax Planning Task Force on Digital Economy Informal Expert Group on developing a Multilateral Instrument 37
  • 38. Developing countries’ input • Task Force on Tax and Development • OECD Global Relations Program • Global Fora on Tax Treaties, on Transfer Pricing and on VAT • The United Nations – UN participates in the tax work of the OECD – UN Subcommittee on Base Erosion and Profit Shifting Issues for Developing Countries (October 2013) 38
  • 39. Stakeholders’ input • Consultation with non-governmental stakeholders is also key: – Business and Industry Advisory Committee (BIAC) – Trade Union Advisory Committee (TUAC) – Non-governmental organisations, think tanks, and academia • Mechanisms: – Requests for input published on the OECD website – Discussion drafts published for comments – Public consultations organised to discuss the comments received on the discussion drafts – Regular updates regarding progress of the work provided via Webcast sessions 39
  • 40. An ambitious timeline September 2014  Digital Economy Report  Hybrid Mismatches  Review of HTP Regimes (phase 1)  Preventing Treaty Abuse September 2015      Addressing TP aspects of Intangibles (phase 1)   Addressing TP Documentation   Multilateral Instrument Report     CFC Rules Interest Deductibility Strategy on expansion of FHTP (phase 2) Addressing avoidance of PE status Addressing TP aspects of Intangibles (phase 2) Addressing TP aspects of Risks and Capital Addressing TP aspects of other High Risk Transactions Report on Data and Economic Analyses Mandatory Disclosure Rules Dispute Resolution December 2015  Addressing TP Interest Deductions  Revision of HTP Criteria (phase 3)  Multilateral Instrument 40
  • 41. V. WHAT IS NEXT ? UPDATE ON 2014 DELIVERABLES 41
  • 42. The Digital Economy • First meeting of the Task Force in October 2013 – Analysis of business models and identification of special features of digital economy players (such as mobility, reliance on data, network effects, multi-sides business models) – Effects of these features on BEPS strategies – Actions to tackle BEPS in the digital economy – Broader, systemic issues raised by the digital economy and options to address them • • • • Second meeting this week Discussion Draft out for comments in March 2014 Public Consultation in April 2014 Report to be finalised by September 2014 42
  • 43. Treaty Abuse • Aim: – Restore full effects and benefits of international standards • Tools: – Anti treaty abuse provisions in treaty and domestic law – Clarify tax treaties not intended to generate double non-taxation – Clarify policy considerations before entering into a bilateral tax treaty • Process: – Scoping by Working Party 1 in September 2013 – Full discussions by Working Party 1 in February/March 2014 – Discussion draft will be released in March 2014 – Public consultation meeting will take place in April or May 2014 43
  • 44. Hybrid Mismatch Arrangements • Action item requires development of model treaty provisions and recommendations for domestic rules by September 2014. • First meeting held in October 2013, followed by a meeting in December. • Consideration of hybrid mismatch arrangements that give rise to either: – a double deduction – or a deduction with no matching income inclusion. • This includes scenarios involving – a hybrid financial instrument – a hybrid transfer and – a hybrid entity (whether it receives or makes payments) • A discussion draft will be issued for comments in early April with a public consultation in May. 44
  • 45. Addressing TP aspects of Intangibles • Major media attention on transfer pricing (especially intangibles) • Conclusion BEPS Action Plan: the current transfer pricing system leads to serious BEPS concerns, but replacing the arm’s length principle is not the solution. Special measures may be necessary. 4 Action Points on TP. • Aim: assure that transfer pricing outcomes are in line with value creation • Process intangibles: – Project started in 2010 and scoping included various consultations – First discussion draft was published in June 2012. A public consultation was held in November 2012 – A revised discussion draft was published in July 2013. A public consultation was held in November 2013 – Finalisation will take place during the Working Party 6 meetings in March and May 2014 45
  • 46. Harmful Tax Practices • First meeting following the publication of the BEPS action plan held in December. Follow up meetings in February and May 2014. • By September 2014 need to review member regimes, with a priority on transparency, including compulsory exchange of information on rulings, and on requiring substantial activity for preferential regimes. • Review of G20, non OECD members regimes also to be started before September 2014. • A report on the outcome of the Forum’s review to be published by September 2014. 46
  • 47. Transfer Pricing Documentation • Tax administrations need for ‘big picture’ information on the global value chain versus compliance burden MNEs • Action Point includes: Country-by-Country reporting of income, economic activity and taxes to governments • Process: – – – – – TP documentation: one of five work streams targeted at TP simplification White paper on TP documentation published in July 2013 Questionnaire on Country-by-Country reporting published in October 2013 Public consultation held in November 2013 30 January 2014: release of a discussion draft of Chapter V of the Transfer Pricing Guidelines, including a Country-by-Country reporting template – March 2014: public consultation – May 2014: finalisation by WP6 47
  • 48. The Multilateral Instrument Report • First phase of the work being carried out by the Secretariat with input from eminent public international and tax law experts and in consultation with Working Party 1 of the CFA • Focus is on feasibility of use of a multilateral instruments to implement BEPS measures and amend bilateral tax treaties • Several difficult issues but none appears unsurmountable • Report to be finalised by September 2014 48
  • 49. VI. THE ROLE OF NATIONAL PARLIAMENTS 49
  • 50. Making reform happen! • Blogger: “The 44-page Action Plan is definitely a glimmer of hope. The actions outlined in the plan, if translated into law by OECD countries, could mark a turning point in the history of international tax cooperation and provide governments with the necessary means to prevent profit shifting”. • PwC's 17th Annual Global CEO Survey: – 73% of CEOs accept the international tax system has not kept pace with how multinational corporations operate and needs reforming. – Only a quarter of them thought that current OECD attempts to overhaul the international tax system will bear fruit over the next few years while 40% didn't count on these efforts reaching consensus 50
  • 51. A range of anti-BEPS measures • BEPS Project will result in a range of measures: – Tax Treaty changes – Changes to the Transfer Pricing Guidelines – Recommendations regarding domestic law design • Domestic law measures – Require Parliamentary approval • Tax treaties ratification – Multilateral instrument may save time and resources 51
  • 52. ANNEX 52
  • 53. 15 Actions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Address the Tax Challenges of the Digital Economy Neutralise the Effects of Hybrid Mismatch Arrangements Strengthen Controlled Foreign Companies Rules Limit Base Erosion via Interest Deductions and Other Financial Payments Counter Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance Prevent Treaty Abuse Prevent the Artificial Avoidance of PE Status Assure that Transfer Pricing Outcomes are in Line With Value Creation / Intangibles Assure that Transfer Pricing Outcomes are in Line With Value Creation / Risks and Capital Assure that Transfer Pricing Outcomes are in Line With Value Creation / Other High-Risk Transactions Establish Methodologies to Collect and Analyse Data on BEPS and the Actions to Address It Require Taxpayers to Disclose Their Aggressive Tax Planning Arrangements Re-examine Transfer Pricing Documentation Make Dispute Resolution Mechanisms More Effective Develop a Multilateral Instrument 53
  • 54. Action 1 Address the Tax Challenges of the Digital Economy Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation. Issues to be examined include, but are not limited to, the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, the attribution of value created from the generation of marketable location-relevant data through the use of digital products and services, the characterisation of income derived from new business models, the application of related source rules, and how to ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services. Such work will require a thorough analysis of the various business models in this sector. 54
  • 55. Action 2 Neutralise the Effects of Hybrid Mismatch Arrangements Develop model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect (e.g., double non-taxation, double deduction, long-term deferral) of hybrid instruments and entities. This may include: (i) changes to the OECD Model Tax Convention to ensure that hybrid instruments and entities (as well as dual resident entities) are not used to obtain the benefits of treaties unduly; (ii) domestic law provisions that prevent exemption or non-recognition for payments that are deductible by the payor; (iii) domestic law provisions that deny a deduction for a payment that is not includible in income by the recipient (and is not subject to taxation under controlled foreign company (CFC) or similar rules); (iv) domestic law provisions that deny a deduction for a payment that is also deductible in another jurisdiction; and (v) where necessary, guidance on co-ordination or tie-breaker rules if more than one country seeks to apply such rules to a transaction or structure. Special attention should be given to the interaction between possible changes to domestic law and the provisions of the OECD Model Tax Convention. This work will be co-ordinated with the work on interest expense deduction limitations, the work on CFC rules, and the work on treaty shopping. 55
  • 56. Action 3 Strengthen Controlled Foreign Companies Rules Develop recommendations regarding the design of controlled foreign corporation rules. This work will be co-ordinated with other work as necessary. 56
  • 57. Action 4 Limit Base Erosion via Interest Deductions and Other Financial Payments Develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income, and other financial payments that are economically equivalent to interest payments. The work will evaluate the effectiveness of different types of limitations. In connection with and in support of the foregoing work, transfer pricing guidance will also be developed regarding the pricing of related party financial transactions, including financial and performance guarantees, derivatives (including internal derivatives used in intra-bank dealings), and captive and other insurance arrangements. The work will be co-ordinated with the work on hybrids and CFC rules. 57
  • 58. Action 5 Counter Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime. It will take a holistic approach to evaluate preferential tax regimes in the BEPS context. It will engage with non-OECD members on the basis of the existing framework and consider revisions or additions to the existing framework. 58
  • 59. Action 6 Prevent Treaty Abuse Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be co-ordinated with the work on hybrids. 59
  • 60. Action 7 Prevent the Artificial Avoidance of PE Status Develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific activity exemptions. Work on these issues will also address related profit attribution issues. 60
  • 61. Action 8 Assure that Transfer Pricing Outcomes are in Line With Value Creation / Intangibles Develop rules to prevent BEPS by moving intangibles among group members. This will involve: (i) adopting a broad and clearly delineated definition of intangibles; (ii) ensuring that profits associated with the transfer and use of intangibles are appropriately allocated in accordance with (rather than divorced from) value creation; (iii) developing transfer pricing rules or special measures for transfers of hard-to-value intangibles; and (iv) updating the guidance on cost contribution arrangements. 61
  • 62. Action 9 Assure that Transfer Pricing Outcomes are in Line With Value Creation / Risks and Capital Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value creation. This work will be co-ordinated with the work on interest expense deductions and other financial payments. 62
  • 63. Action 10 Assure that Transfer Pricing Outcomes are in Line With Value Creation / Other High-Risk Transactions Develop rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: (i) clarify the circumstances in which transactions can be recharacterised; (ii) clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains; and (iii) provide protection against common types of base eroding payments, such as management fees and head office expenses. 63
  • 64. Action 11 Establish Methodologies to Collect and Analyse Data on BEPS and the Actions to Address It Develop recommendations regarding indicators of the scale and economic impact of BEPS and ensure that tools are available to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS on an ongoing basis. This will involve developing an economic analysis of the scale and impact of BEPS (including spillover effects across countries) and actions to address it. The work will also involve assessing a range of existing data sources, identifying new types of data that should be collected, and developing methodologies based on both aggregate (e.g. FDI and balance of payments data) and micro-level data (e.g. from financial statements and tax returns), taking into consideration the need to respect taxpayer confidentiality and the administrative costs for tax administrations and businesses. 64
  • 65. Action 12 Require Taxpayers to Disclose Their Aggressive Tax Planning Arrangements Develop recommendations regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures, taking into consideration the administrative costs for tax administrations and businesses and drawing on experiences of the increasing number of countries that have such rules. The work will use a modular design allowing for maximum consistency but allowing for country specific needs and risks. One focus will be international tax schemes, where the work will explore using a wide definition of “tax benefit” in order to capture such transactions. The work will be co-ordinated with the work on co-operative compliance. It will also involve designing and putting in place enhanced models of information sharing for international tax schemes between tax administrations. 65
  • 66. Action 13 Re-examine Transfer Pricing Documentation Develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules to be developed will include a requirement that MNE’s provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template. 66
  • 67. Action 14 Make Dispute Resolution Mechanisms More Effective Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under MAP, including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases. 67
  • 68. Action 15 Develop a Multilateral Instrument Analyse the tax and public international law issues related to the development of a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties. On the basis of this analysis, interested Parties will develop a multilateral instrument designed to provide an innovative approach to international tax matters, reflecting the rapidly evolving nature of the global economy and the need to adapt quickly to this evolution. 68
  • 69. Timeline and Output (actions 1-8) Action Expected Output Deadline Report identifying issues raised by the digital economy and possible actions to address them September 2014 Changes to the Model Tax Convention September 2015 Recommendations regarding the design of domestic rules September 2014 Recommendations regarding the design of domestic rules September 2015 Recommendations regarding the design of domestic rules September 2015 Changes to the Transfer Pricing Guidelines December 2015 Finalise review of member country regimes September 2014 Strategy to expand participation to non-OECD members September 2015 Revision of existing criteria December 2015 Changes to the Model Tax Convention September 2014 Recommendations regarding the design of domestic rules September 2014 7- Prevent the Artificial Avoidance of PE Status Changes to the Model Tax Convention September 2015 8- Assure that Transfer Pricing Outcomes are in Line With Value Creation / Intangibles Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention 1- Address the Tax Challenges of the Digital Economy 2- Neutralise the Effects of Hybrid Mismatch Arrangements 3- Strengthen CFC Rules 4- Limit Base Erosion via Interest Deductions and Other Financial Payments 5 - Counter Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance 6- Prevent Treaty Abuse September 2014 September 2015 69
  • 70. Timeline and Output (actions 9-15) Action Expected Output Deadline 9- Assure that Transfer Pricing Outcomes are in Line With Value Creation / Risks and Capital Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention September 2015 10- Assure that Transfer Pricing Outcomes are in Line With Value Creation / Other High-Risk Transactions Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention September 2015 11- Establish Methodologies to Collect and Analyse Data on BEPS and the Actions to Address It Recommendations regarding data to be collected and methodologies to analyse them September 2015 12- Require Taxpayers to Disclose Their Aggressive Tax Planning Arrangements Recommendations regarding the design of domestic rules September 2015 13- Re-examine Transfer Pricing Documentation Changes to Transfer Pricing Guidelines and Recommendations regarding the design of domestic rules September 2014 14- Make Dispute Resolution Mechanisms More Effective Changes to the Model Tax Convention September 2015 Report identifying relevant public international law and tax issues September 2014 Develop a multilateral instrument December 2015 15- Develop a Multilateral Instrument 70
  • 71. Timeline and Output by September 2014 Action Address the Tax Challenges of the Digital Economy Expected Output Report identifying issues raised by the digital economy and possible actions to address them Changes to the Model Tax Convention Neutralise the Effects of Hybrid Mismatch Arrangements Recommendations regarding the design of domestic rules Counter Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance – phase 1 Prevent Treaty Abuse Finalise review of member country regimes Changes to the Model Tax Convention Recommendations regarding the design of domestic rules Assure that Transfer Pricing Outcomes are in Line With Value Creation / Intangibles – phase 1 Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention Re-examine Transfer Pricing Documentation Changes to Transfer Pricing Guidelines and Recommendations regarding the design of domestic rules Develop a Multilateral Instrument –phase 1 Report identifying relevant public international law and tax issues
  • 72. Timeline and Output by September 2015 Action Expected Output Strengthen CFC Rules Recommendations regarding the design of domestic rules Limit Base Erosion via Interest Deductions and Other Financial Payments Recommendations regarding the design of domestic rules Counter Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance – phase 2 Strategy to expand participation to non-OECD members Prevent the Artificial Avoidance of PE Status Changes to the Model Tax Convention Assure that Transfer Pricing Outcomes are in Line With Value Creation / Intangibles – phase 2 Assure that Transfer Pricing Outcomes are in Line With Value Creation / Risks and Capital Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention Assure that Transfer Pricing Outcomes are in Line With Value Creation / Other High-Risk Transactions Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention Establish Methodologies to Collect and Analyse Data on BEPS and the Actions to Address It Require Taxpayers to Disclose Their Aggressive Tax Planning Arrangements Make Dispute Resolution Mechanisms More Effective Recommendations regarding data to be collected and methodologies to analyse them Recommendations regarding the design of domestic rules Changes to the Model Tax Convention
  • 73. Timeline and Output by December 2015 Action Expected Output Limit Base Erosion via Interest Deductions – phase 2 Changes to the Transfer Pricing Guidelines Counter Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance – phase 3 Revision of existing criteria to identify harmful tax practices Develop a Multilateral Instrument – phase 2 Multilateral instrument 73
  • 74. Expected Outcomes (Actions 1 - 9) Action Item MTC TPG Domestic Rules 1. Address the tax challenges of the digital economy 2. Neutralise the effects of hybrid mismatch arrangements Other √ √ √ 3. Strengthen CFC rules √ 4. Limit base erosion via interest deductions and other financial payments √ √ 5. Counter harmful tax practices more effectively, taking into account transparency and substance √ 6. Prevent treaty abuse √ 7. Prevent the artificial avoidance of PE status √ 8. Assure transfer pricing outcomes are in line with value creation/intangibles ? √ 9. Assure transfer pricing outcomes are in line with value creation/risks and capital ? √ √ 74
  • 75. Expected Outcomes (Actions 10 - 15) Action Item 10. Assure transfer pricing outcomes are in line with value creation/high-risk transactions MTC TPG ? Domestic Rules √ 11. Establish methodologies to collect and analyse data on BEPS and actions to address it √ 12. Require taxpayers to disclose their aggressive tax planning arrangements √ 13. Re-examine transfer pricing documentation 14. Make dispute resolution mechanisms more effective 15. Develop a multilateral instrument Other √ √ √ √ 75
  • 76. Questions and further information QUESTIONS? Further information: http://www.oecd.org/ctp/beps.htm Register to receive free e-mail alerts on the latest tax news from the OECD Centre for Tax Policy and Administration  www.oecd.org/oecddirect 76

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