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BEPS presentation -Final - Copy

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BEPS presentation -Final - Copy

  1. 1. KPMG BEPS Action Plan Informative Discussion CFO India Network 27th November 2014
  2. 2. Areas of discussion Tax Morality and Transparency1 3 OECD BEPS Action Plan3 9 Action 1 – Addressing the tax challenges of the digital economy4 15 Action 2 – Neutralizing effects of hybrid mismatch arrangements5 21 Action 6 – Preventing the granting of treaty benefits in inappropriate circumstances 6 26 Action 15 – Developing a Multilateral Instrument to Modify Bilateral Tax Treaties7 29 Need for Base Erosion Profit Shifting Action Plan- ‘BEPS’2 6 Action 5 – Countering harmful tax practices more effectively, taking into account transparency and substance 8 31 Action 8 – Transfer Pricing aspects of intangibles9 33 Action 10 – Transfer Pricing aspects – low value-add intra-group activities 10 40 Action 13 – Transfer Pricing Documentation and country-by-country reporting 11 45
  3. 3. Tax Morality and Transparency
  4. 4. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3 OECD – BEPS 2014Tax Morality and Transparency Do taxpayers have a “moral duty” to pay their “fair share” of taxes? Should corporations show what they are contributing to society via tax payments? Not merely a theoretical tax debate
  5. 5. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4 OECD – BEPS 2014Tax Morality and Transparency …continued Media Board Share- holders NGOs Lobbyists Communities Government  Tax systems have not kept up with changes in business model  Governments under significant pressure to reduce deficits  Simultaneously, countries compete for profitable investment considering tax rates  Reducing the “Tax Gap” – Underground Economy versus the Multinationals  Citizen pro tax fairness keeping the spotlight on this issue  Customers’ negative perceptions, particularly of household retail names The Tax Debate Customers / Suppliers
  6. 6. Need for Base Erosion Profit Shifting Action plan- ‘BEPS’
  7. 7. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 6 OECD – BEPS 2014Need to Curb BEPS – Some Insights One of Fortune 500 US based company Pre-tax Income ($b) Pre-tax contribution % Employee Nos. % Customers % Effective Tax Rate US 10.20 30% 67% 39% 46% Ireland 22.00 64% 4% 1% 0.06% Others 2.00 6% 29% 60% 29% With 4% employees and 1% customers- Ireland contributes to 64% to US based Company’s Profit
  8. 8. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 7 OECD – BEPS 2014 Tax planning or evasion or management ?? Double Irish Dutch Sandwich  Avoidance of Withholding tax owned by C in favour of B  No withholding tax on royalty payments made to entities based in Netherlands  C can charge royalty paid to D against its profit  B is the resident of tax haven and hence no tax is attracted on Royalty received  Ultimately Profit shifted to a jurisdiction with no significant tax rate
  9. 9. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 8 OECD – BEPS 2014Tax Heavens – benefits of being low/no tax jurisdiction  Four key factors to define a “tax haven”: a) No or nominal tax on relevant income b) Lack of effective exchange of information c) Lack of transparency d) No substantial activities  The cumulative profits of different countries recorded in various tax havens represents a substantial part of those countries GDP Tax Havens CFC profits as a % to GDP Bahamas 43.30% Bermuda 645.70% British Virgin Islands (‘BVI’) 354.70% Cayman Islands 546.70% Jersey 35.30% Liberia 61.60% Luxembourg 18.20% Marshall Islands 339.80% An illustrative example of US controlled foreign Company profits as a percentage of GDP of tax havens:
  10. 10. Organization for Economic Co-operation and Development (OECD) BEPS Action Plan
  11. 11. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 10 OECD – BEPS 2014OECD BEPS Action Plan “BEPS arises because under the existing rules MNEs are often able to artificially separate the allocation of their taxable profits from the jurisdictions in which these profits arise. This can result in income going untaxed anywhere, and significantly reduces the corporate income tax paid by MNEs in the jurisdictions where they operate, thus affecting competition, distorting investment decisions and reducing overall trust in the tax system.“ – OECD Webinar
  12. 12. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 11 OECD – BEPS 2014OECD BEPS Action Plan – In a nutshell  A group of twenty- ‘G20’ countries realized the need of preventing BESP and approached OECD to address the issue related to BEPS.  On 19 July 2013 the OECD released an Action Plan on Base Erosion and Profit Shifting (BEPS) which was presented to the meeting of G20 Finance Ministers in Moscow. The purpose of the Action Plan is “to prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from activities that generate it.” The report indicates that “no or low taxation is not per se a cause for concern, but it becomes so when it is associated with practices that artificially segregate taxable income from the activities that generate it.” The Action Plan covers 15 specific Actions which are broadly to be achieved within a two year time frame (i.e. by the end of 2015). September / October / November 2014, OECD released various recommendations for 9 out of 15 Action Points. The coherence of corporate tax at the international level Transparency, coupled with certainty and predictability Realignment of taxation and substance 15 Actions organized around three main pillars
  13. 13. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 12 OECD – BEPS 2014OECD BEPS Action Plan – An ambitious timeline Jul 2012 Feb 2013 July 2013 Sept / Oct / Nov 2014 Dec 2015 June 2012 Project announced / started February 2013 Release of Document addressing Base Erosion and Profit Shifting July 2013 Release of Action plan with 15 separate actions / work streams September 2014 – Release of recommendations pertaining to 7 out of 15 Action Points and Oct/Nov additional 2 Points December 2015 Completion of Reminder action plan 2016 onwards 2016 and onwards Monitoring additional / on –going compliance Sept 2015 September / October / November 2014 September 2015 December 2015  Digital Economy Report  Hybrids  Review of HTP Regimes  Preventing Treaty Abuse (including draft on follow-up work)  Addressing TP aspects of Intangibles  Addressing TP documentation  Multilateral Instrument Report  Addressing avoidance of PE status  Addressing TP aspects of other high risk transactions (Low Value-Adding Intra-Group Services)  CFC Rules  Interest Deductibility  Strategy on expansion of FHTP  Addressing TP aspects of Intangibles Addressing TP aspects of risks and capital  Report on Data and Economic Analyses  Mandatory Disclosure Rules  Dispute Resolution  Addressing TP Interest Deductions  Revision of HTP Criteria  Multilateral Instrument
  14. 14. Action 1: Addressing the Tax Challenges of the Digital Economy
  15. 15. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 14 OECD – BEPS 2014Digital Economy – Background  Key features: Mobility of business functions Reliance on Data Mobility of Users Excessive reliance on intangible Multi-sided business model Networks effect- impact of one user’s decision on other users Volatility- low barrier to entry and fast growth
  16. 16. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 15 OECD – BEPS 2014Digital Economy – Indian scenario  With 200+ million Internet users  Adding 4.5 million every month  India will surpass US and become the second largest user base globally  Five start-ups crossing a billion dollar in value  Currently, 100% FDI in E-commerce is allowed under automatic route in Business to Business (B2B) model and not B2C model − Under B2B model, the ecommerce portal Company sells its product to an intermediate buyer who then sells the product to the final customer, while under B2C model, the ecommerce portal Company sells the product to the final customer − Retail trading, in any form, by means of E-commerce is not permissible whether singe Brand / Multi Brand
  17. 17. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 16 OECD – BEPS 2014Digital Economy – Indian scenario Significant challenges in:  The determination of the jurisdiction where value creation occurs  The application of traditional concepts of source and residence X Co. (outside India) Indian Advertisers Online Advertising Fees India Co Marketing Support Y Co. (outside India) Transfer of IP Users of free online services Data Development of algorithms (IP) for targeted display of advertising through use of data Challenges in the digital economy – India Illustration
  18. 18. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 17 OECD – BEPS 2014 Digital Economy – BEPS recommendations Way forward:  Task force to continue work on broader challenges including nexus, data and characterization to ensure that these are addressed effectively  Supplementary report addressing impact of other BEPS initiatives to be released by December 2015  Key tax challenges of the digital economy to be addressed as part of other OECD/BEPS initiatives including Artificial avoidance of PE (AAPE), CFC Rules, Transfer Pricing and VAT  Action 7 (AAPE) to consider whether activities hitherto considered as preparatory or auxiliary activities may result in core activities in digital economy  Explore possibility of taxation based on concept of “Significant Digital Presence”  Explore possibility of introducing withholding tax on sale of digital goods / services
  19. 19. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 18 OECD – BEPS 2014Digital Economy – Impact of BEPS recommendations in India  Having regard to the BEPS recommendations, E-commerce business models likely to be subjected to increased scrutiny in India. Specifically: • PE assertions by the Tax office based on accessibility of websites from India, presence of equipment, agents in India, are likely to increase. Also potential tax exposure in India on account of “significant digital presence” in India • Value creation through use of customer data generated from India– increased possibility of attribution of profits to India • Increased focus on withholding tax implications on e-commerce payments to non-residents • Possibility of litigation over characterization of payments relating to new digital products and services (e.g. Cloud computing) as royalties / FTS Urgent need to evaluate business models and digital presence to assess risks and identify remedial measures
  20. 20. Action 2: Neutralising the effects of hybrid mismatch arrangements
  21. 21. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20 OECD – BEPS 2014Hybrid Mismatch – Background  Hybrid arrangements – Involve use of cross-border differences in characterisation of entities and instruments to produce mismatched tax outcomes  Objective of the BEPS Action plan is to develop model treaty provisions and design domestic rules to neutralize the effect of hybrid instruments / entities by not permitting: • Multiple deductions for a single expense • Deduction in one country without corresponding taxation in another • Generation of multiple foreign tax credits for one amount of foreign tax paid
  22. 22. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 21 OECD – BEPS 2014Hybrid Mismatch – Examples A Co. B Co. Country A Country BHybrid Financial instrument DEDUCTION IN ONE COUNTRY WITHOUT TAXATION IN ANOTHER:  B Co issues a hybrid financial instrument to A Co.  Instrument is characterized as debt in Country B and as equity in Country A  Country B allows deduction to B Co. for interest payments made on the instrument  Country A treats the payment as ‘dividend’, which is entitled to participation exemption BEPS Recommendations:  Country B to deny deduction to Payer (B Co.)  Defensive rule: Country A to treat receipt as ordinary income of A Co. Interest
  23. 23. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 22 OECD – BEPS 2014Hybrid Mismatch – Examples ….continued A Co. Country A Country B B Co.B Co. B Sub 1 (Operating Sub) Bank Interest Loan DOUBLE DEDUCTION ON PAYMENTS BY HYBRIDS:  B Co. is a 100% subsidiary of A Co.  B Co. is disregarded for Country A tax purposes  B Co. borrows money and pays interest in Country B (B Co. derives no other income)  Interest payment are deductible in the hands of A Co. in Country A, since B Co. is disregarded  B Co. is consolidated with B Sub 1 for tax purposes in Country B – Interest paid by B Co. claimed as deduction against operating income of B Sub 1 BEPS Recommendations:  Country A (Parent Jurisdiction) to deny deduction  Defensive rule: Country B (Payer Jurisdiction) to deny deduction
  24. 24. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 23 OECD – BEPS 2014Hybrid Mismatch – Impact of BEPS recommendations in India  BEPS recommendations (once implemented) are likely to impact cross-border arrangements / instruments where tax characterizations vary in both countries  In an Indian context, such risks may typically revolve around situations where : • Debt Instruments issued by Indian Cos (e.g. CCDs) may be considered as equity in the debenture holder’s jurisdiction • Indian partnerships / LLPs are considered pass-through in overseas jurisdictions • Dual-resident companies  There is a need to identify arrangements like the above which could be hit under BEPS and to take remedial measures.
  25. 25. Action 6: Preventing the granting of treaty benefits in inappropriate circumstances
  26. 26. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 25 OECD – BEPS 2014 Preventing the granting of treaty benefits in inappropriate circumstances  Treaty abuse and treaty shopping identified as one of the most important sources of BEPS concerns  Three pronged approach recommended to address treaty abuse and shopping arrangements Design rules to prevent granting of treaty benefits in inappropriate circumstances Tax treaties not intended to be used to generate double non-taxation Identification of tax policy consideration – required before entering into a tax treaty  Treaty shopping “Treaty shopping” generally refers to arrangements through which a person who is not a resident of one of the two Contracting States that concluded a tax treaty may attempt to obtain benefits that the treaty grants to residents of these States
  27. 27. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 26 OECD – BEPS 2014Treaty Abuse – An Indian perspective  Supreme Court Ruling in Azadi Bachao Andolan on India-Mauritius treaty  LOB - a key component of India’s recent tax treaty negotiations/ re-negotiations (such as treaties signed by India with UK, Spain and Poland) LOB meaning:  Subjective arrangement: This is entered into to obtain tax benefits in countries such as Malaysia, Ethiopia, Estonia and Finland.  Objective treaty: The benefits of this treaty are extended only if the claimant is a qualified person, generally a government entity, listed company, and so on. It is with countries such as Iceland, Tajikistan, Tanzania and the US.  Beneficial ownership: This ensures that the benefit of lower withholding tax rate is given to genuine tax residents of a contracting state. This is with the US, UK, Singapore and Finland.  Substance treaty: Entered into with Singapore, the benefits are given considering the substance of the entity (not merely a conduit/shell company).  GAAR provisions introduced in Indian Income-tax Act (proposed to be effective from FY 2015-16)  Indian tax office could use BEPS recommendations to deny treaty benefits for inbound investments in India through mere holding / shell companies.  Urgent need to evaluate investment holding structures and build appropriate commercial rationale for the same.
  28. 28. Action 15: Developing a multilateral instrument to modify bilateral tax treaties
  29. 29. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 28 OECD – BEPS 2014 Developing a multilateral instrument to modify bilateral tax treaties  Need to address current bilateral tax treaty system which facilitates BEPS • Updation of the current tax treaty network highly burdensome due to multiple number of bilateral treaties  Focus on feasibility of use of a multilateral instrument to implement BEPS measures and modify bilateral tax treaties • Multilateral instrument feasible and desirable based on precedents from various areas other than tax  Recommended to convene an International Conference in early 2015 to develop the multilateral instrument by OECD and G20 countries
  30. 30. Action 5: Countering harmful tax practices more effectively, taking into account transparency and substance
  31. 31. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 30 OECD – BEPS 2014 Countering harmful tax practices more effectively, taking into account transparency and substance  Forum on Harmful Tax Practices (‘FHTP’) to take necessary action to deliver: • Finalization of review of member country preferential regimes; • Strategy to expand participation to non-OECD member countries; and • Consideration of revisions or additions to the existing framework  For review of the existing preferential regimes, emphasis put on: • Elaborating a methodology to define the substantial activity requirement in the context of IP regimes; • Improving transparency through compulsory spontaneous exchange on rulings related to preferential regimes  A progress report provided on the review of regimes of OECD member and associate countries in the OECD / G20 Project on BEPS Substantial activity – Adverse impact on IP-holding companies which derive substantial profits on account of “legal ownership” of the IP
  32. 32. Action 8 Transfer Pricing aspects of intangibles
  33. 33. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 32 OECD – BEPS 2014Definition of ‘Intangible’- within India Marketing- Trade mark, Brand names, logos Customer- Customers lists, open purchase order Engineering- Industrial design, trade secrets Technology- Patents, technical Know- how Artistic- Copyrights, Literary work Intangible Data processing- software copyright, automated databases Contract License agreements , Franchise agreements , non-compete agreements Human Capital Trained & Organised work force, Union Contracts Location Leasehold interest, Air rights, Water rights Goodwill Institutional / Professional Practice / Celebrity goodwill , General business going concern value Others Methods, Systems, Procedures, Campaigns, Surveys, Forecasts
  34. 34. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 33 OECD – BEPS 2014Transfer Pricing aspects of intangibles Objective  A broad and clearly delineated definition of intangibles  Ensure that transfer pricing outcomes are in line with 'Value Creation”  Developing TP rules or special measure for transfer of hard to value intangibles OECD definition of intangible “something of value which is not a physical asset or a financial asset which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances” Six Categories of Intangibles defined including- Patents know-how and trade secrets Trademarks Trade name and Brands goodwill and ongoing concern value
  35. 35. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 34 OECD – BEPS 2014Transfer Pricing aspects of intangibles Guidance issued has certain areas in “interim draft” To be finalised in 2015 along with other BEPS action points that are closely related (risks and capital, high-risk transactions and hard to value intangibles Key areas covered in the Guidance  Detailed guidance on location savings, assembled workforce and MNE group synergies as part of Chapter I of OECD guidelines  Ownership of intangibles and entitlement to returns – who is entitled to returns from intangibles  Relevant considerations for various transactions involving intangibles  Importance of functions, assets and risk analysis in determining arms length price of transaction involving intangibles – Development, Enhancement, maintenance, protection and exploitation  Emphasis on ex-ante return adjustments  Determination of arm’s length price of intangible when the value is highly uncertain
  36. 36. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 35 OECD – BEPS 2014Marketing Intangible and R &D- India perspective  Marketing intangibles  Subject to huge adjustment in India  Application of ‘Bright-line-test’ by Indian Revenue authorities for examining advertising, marketing and promotional (‘AMP’) activities  Adopting the ‘‘significant people functions’’ approach in determining the economic owner of intangibles  R&D arrangements Even before the introduction of the BEPS action plan the Indian Revenue authorities issued Circular no. 6 which discusses circumstances in which profit split method will apply for determination of compensation in case of R&D centers developing intangibles. Contract R&D Entities with minimal functions, assets and risk, foreign entity funds and monitors progress Circular No. 6 Entrepreneurial R&D Centers Entities performing significantly Important functions, assets and risk Cost plus remuneration is appropriate and share in profits not necessary Intangible related return to be attributed to the Indian researchers under Profit Split Method
  37. 37. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 36 OECD – BEPS 2014Action 8 - Intangibles impact in India What do we expect  Possibility of in-depth scrutiny by the Indian Revenue authorities on transactions involving intangibles (location savings, assembled workforce, group synergies etc) based on OECD guidelines What needs to be done : Companies operating in India need to analyze  Legal ownership and contractual arrangements vis-à-vis intangibles to begin with  But as next steps more importantly focus has to be on thorough analysis of Functions, Assets and Risks (FAR) and actual conduct of the various entities 1. Who are the parties performing and controlling the functions related to the development, enhancement, maintenance, protection and exploitation of intangibles? 2. Who is contributing the assets, including intangibles, physical assets and funding? Only funding without assumption of other risks entitles to only return on funding, not the entire intangible related returns 3. Confirm the consistency between conduct of the parties and the legal arrangements 4. Recharacterise the transactions as necessary to reflect each party’s contributions towards the intangibles INDIAN tax authorities are likely to draw inference and support from OECD guidelines in determining the return from intangibles- Recent judgment in case of Mitsubishi Corporation India Private Limited ITAT relied on OECD guidelines for loaction savings and assembled workforce.
  38. 38. Action 10 Low value-adding intra- group services – Discussion Draft
  39. 39. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 38 OECD – BEPS 2014 Low value-adding intra-group services – Discussion Draft Objective  Measures proposed would help reduce the scope for erosion of tax base through excessive management fees and head office expenses Themes for Intervention / Approach Identify broad range of intra-group services, which command a very limited profit mark-up on costs Apply a consistent allocation key for all recipients Provide greater transparency through specific reporting requirements What constitutes ‘low value-adding intra-group services’  Services that are of supportive nature;  Don’t form part of the core business of Multi National Enterprise Group;  Don’t require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles;  Don’t involve the assumption or control of substantial or significant risk and don’t give rise to the creation of significant risk
  40. 40. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 39 OECD – BEPS 2014 Low value-adding intra-group services – Discussion Draft Activities that would not qualify as a low value-adding intra-group services  Services constituting the core business of a MNE group;  Research and development services;  Manufacturing and production services;  Sales, marketing and distribution activities;  Financial transactions;  Extraction, exploration, or processing of natural resources;  Insurance and reinsurance;  Services of corporate senior management. Activities that would qualify as a low value-adding intra-group services  Accounting and auditing;  Processing and management of accounts receivable and accounts payable;  Human Resources activities such as staffing and recruitment, training and employee development, remuneration services and developing and monitoring of staff health procedures, safety and environment relating to employment matters;  Monitoring and compilation of data relating to health, safety, environmental and other standards regulating the business;  Information technology services where they are not part of the principal activity of the group;  Internal and external communications and public relations support (but excluding specific advertising or marketing activities as well as development of underlying strategies);  Legal services;  Activities with regard to tax obligations;  General services of an administrative or clerical nature.
  41. 41. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 40 OECD – BEPS 2014 Low value-adding intra-group services – Discussion Draft Simplified determination of arm’s length charges for low value-adding intra-group services:  Profit Mark-up – MNE service provider shall apply a profit-mark to all costs in the pool. Same mark-up shall be utilized for all low-value adding intra-group services irrespective of the categories of services. Prescribed mark-up to be in the range of 2% to 5% of the relevant cost. Application of benefits test to low value-adding intra-group services:  Tax administration should consider benefits only by categories of services and not on a specific charge basis  Single annual invoice describing a category of services should suffice to support the charge and correspondence, or other evidence of individual acts should not be required.
  42. 42. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 41 OECD – BEPS 2014India Perspective  From a Captive Shared Service center perspective, certain points such as nature of services outlined as ‘low value-adding’, manner of classifying core and non-core business activities, and proposed mark-up in the range of 2 per cent to 5 per cent etc may be challenged by tax authorities;  A non-core activity for a Multinational National Corporation (MNC) could be a core activity from a shared services / back-office perspective and hence appropriate margins would need to determined from a transfer pricing perspective;  MNCs need to take cognizance while planning the cross charge for services which might be high value / low value.
  43. 43. Action 13 Transfer Pricing Documentation and Country-by-Country (CbC) reporting
  44. 44. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 43 OECD – BEPS 2014Action 13 - TP Documentation and CbC report Three-tier documentation structure proposed for all countries  Master file to provide the MNE’s blueprint i.e. • The group’s organizational structure • A description of the group's business, intangibles, intercompany financial activities, and financial and tax positions  Local file to provide material transfer pricing positions of the local entity/ taxpayer with its foreign affiliates • Demonstrates arm’s length nature of transactions • Contains the comparable analysis.  Country by Country (‘CbC’) Report to provide • Jurisdiction-wise information on global allocation of income, taxes paid / accrued, the stated capital, accumulated earnings, number of employees and tangible assets. • Entity-wise details of main business activities which will portray the value chain of inter-company transactions.
  45. 45. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 44 OECD – BEPS 2014Implementation and India perspective Implementation:  OECDs endeavor to balance: • Usefulness of TP documentation under 3-tier structure to tax authorities, and • Increased compliance cost and efforts for taxpayers  Though consented by OECD member countries and G20 countries, which includes India: • Mechanism for sharing information with tax administrations yet to be formalized • Whether Master File and CbC report to be filed by Parent Co. or local entity • Taxpayers concerns about sharing business sensitive data • CbC report ought not be used by tax administrations to propose transfer pricing adjustments based on a global formulary apportionment of income.  Indian Competent Authority commented – India is actively and closely involved in BEPS action plan and will seek to implement OECDs recommendations on TP documentation
  46. 46. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 45 OECD – BEPS 2014Country by Country Reporting template (1/2)
  47. 47. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 46 OECD – BEPS 2014Country by Country Reporting template (2/2)
  48. 48. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 47 OECD – BEPS 2014BEPS impact in India : Action 13 - Documentation What do we expect  Adoption of 3 tier documentation structure by The Indian Revenue authorities  Increased compliance cost and burden on taxpayers  Indian Revenue authorities may expect that the Master File and CbC report for all companies operating in India should be filed locally  As per OECD guidance the Master File and CbC Report should be used only for risk assessment procedures, but there may be a temptation to use it for allocation of revenue and profits based on functions of various group entities rather than only looking at Indian entities functions. What needs to be done  Detailed functional analysis- Companies operating in India especially Indian headquartered companies need to tie up the functional analysis of Indian operations vis-à-vis global operations as CbC report maps the groups functions  Re-alignment of Transfer pricing global policy- Have Management discussions to re-align functions and pricing to ensure that profits/income are allocated in accordance with value creation in each jurisdiction  Centralized Details/ Information- Should analyse their internal accounting systems and MIS data, and upgrade the same to enable gathering of information required in Master File and CbC report
  49. 49. Way Forward
  50. 50. © 2012 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 49 OECD – BEPS 2014Way Forward  Tax and Morality debate: Here to stay  BEPS – Game changer for the Revenue and the Taxpayers  Domestic anti-abuse tax legislations being adopted globally  Substance and Transparency – part of life  Corporate Tax Rates may be reducing, but the base is increasing Companies to not only adhere to compliance regulations but also review their operating structures in various jurisdictions, as countries are expected to incorporate the BEPS action points in their local regulations
  51. 51. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International Cooperative ("KPMG International"). Thank You

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