Transparency & the Impact of BEPS

TRANSPARENCY & THE IMPACT OF BEPS
Omleen Ajimal
Wim Ritz, Managing Director, Vistra Luxembourg
www.istructuring.com

International tax structuring
- WHAT THE BEPS???
What is the OECD’s BEPS project
and what does it mean for SMEs?
19 November 2015
Omleen Ajimal

HOW DID WE GET HERE?

THE “DOUBLE IRISH DUTCH”
SANDWICH
DUTCH CO
IRISH CO

THE BEPS ACTION PLAN

THE BEPS ACTION PLAN (1)
• ACTION 1 – The tax challenges of the Digital Economy
• ACTION 2 – Neutralising Hybrid Mismatch Arrangements
• ACTION 3 – Strengthening Controlled Foreign Companies
rules
• ACTION 4 – Interest Deductions & other Financial Payments

• ACTION 5 – Countering Harmful Tax
Practices
• ACTION 6 – Preventing Treaty Abuse
• ACTION 7 – Clarifying Permanent
Establishments
• ACTIONS 8 – 10 and 13 – Transfer Pricing
and Country-by-Country Reporting

• ACTION 11 – Collecting BEPS data
• ACTION 12 – Disclosure of Tax Avoidance
Schemes
• ACTION 14 – Effective Dispute Resolution
• ACTION 15 – Developing a Multilateral
Instrument

WHAT DOES THIS ALL MEAN FOR
SMALL AND MEDIUM ENTERPRISES?

THE SHORT ANSWER…
• NOTHING MUCH??
• SMEs ARE NOT ROUTINELY INVOLVED IN
CROSS-BORDER TAX AVOIDANCE?
• THE PROPOSED CHANGES WILL NOT
GENERALLY APPLY TO SMEs??

THE CORRECT ANSWER…
THE CHANGES IN PUBLIC OPINION AND POLICY,
TOGETHER WITH THE TOUGHENED STANCES
OF TAX AUTHORITIES,
– WHICH BOTH PRE-DATE, AND WILL OUTLAST,
THE OECD’S WORK –
AFFECT EVERYONE

International tax structuring -
WHAT THE BEPS???
What is the OECD’s BEPS project
and what does it mean for SMEs?
19 November 2015
Omleen Ajimal

BEPS’
Countries score card
A helicopter view
London, 18/11/2015

Agenda :
0. The Frame
1. Cyprus
2. China - Hong Kong
3. Ireland
4. Jersey
5. Luxembourg
6. Malta
7. Netherlands
8. Switzerland
9. UK
10.US
11.CIT : race to the bottom ?
12.CbC-reporting : expected implementation
www.istructuring.comwww.istructuring.com

17
0. The Frame
Note text
 OECDs BEPS deliverables : modernisation of the
international tax scene as implemented 100 years ago,
adapting to new economic realities
 Past : material world <-> Today : digital world
 Key : concerted actions from governments/avoiding unilateral
actions
 How will countries and businesses implement BEPS?
 What are the likely time frames and treaty amendments?

18
0. The Frame : Planning, Avoidance & Evasion
Note text
 Tax Planning  Tax Avoidance  Tax Evasion
 Investing in permissible
avenues eligible for
deduction
 Conversion of sole
proprietorship to a
company to enjoy
beneficial tax rates
 Under-declaring
income earned
 Selecting an appropriate
business structure
 Recharacterising an
income to gain a
better tax rate
 Overstating
expenses incurred
 = Ok  = To be tackled by
OECD/Countries
 = Criminal

19
0. The Frame : OECD’s Issues, Actions & Output
Issue Action Output
1. Digital economy Adress challenges Report
2. Hybrids Neutralise Domestic law / model
3. CFCS Strengthen regimes Domestic law
4. Interest deductions Limit base erosion Domestic law / TPG
5. Harmfull tax practices Counter more effectively Identify and revise criteria
6. Treaty abuse Prevent Model / domestic law
7. Permanent establishment Prevent avoidance TPG/Model
8-10. Transfer Pricing Place of activity TPG/Model
11-13. Transparancy Disclosure Recommandations / TPG
14. Dispute resolution Make effective Model
15. Multilateral treaty Identify issues New treaty
Note text

20
1. Cyprus (Nick Terry)
Note text
(source : KPMG Luxembourg)
Current legislative
position
Government &
Beps
Actions 2015
 No WHT on interest
payments
 Much consideration
to the BEPS action
plan by Cyprus Tax
Commissioner and
the Head of Tax
Policy unit at the
Ministry of Finance
 Notional interest
deduction on equity =>
effective tax rate to be
as low as 2,5%,
 But only for 1 CypCo
 No regulations for tax
deductibility of interest
payments
 Taxation of dividends
anti-abuse, but not
applicable to CypCo
(in)directly owned by
non-res or non-dom
SH’s
 >15 % WHT on license
fee payments

21
2. China - Hong Kong (John Aswood)
Note text
Current legislative
position
Government
& Beps
Actions 2015
 GAAR  Amazingly response time,
China’s State Administration
of Taxation (SAT) conference
Beijing 10 October 2015 to
support BEPS
 Increased scrutiny on TP
 TP-rules  Review royalty structures for
the past 10 years
 CFC-rules  Increased focus on offshore
indirect transfers
 Thin-cap  Increased attention to
« disguised dividends » =
large retained earnings and
no dividend payment
 UBO-definition  Focus on PE-establishment
(« furnishing of services » =
substance)
 Rules on deductibility of
outbound payments
 Tax treaties will be
renegotiated and domestic
tax-law to be updated

22Note text
3. Ireland (Maguire @ Deloitte)
Current
legislative
position
Government
& Beps
Actions 2015
No CFC rules Gov wish to perserve
12,5% CIT and
Ireland’s reputation
as competitive to
attract investment
Looking to introduce
an « onshore IP
regime »
Thin-cap « Double Irish » :
01.01.15 : Irish Inc
non-res are tax
resident in Ireland,
but 6 year transition
TP-rules
« Double Irish »

23
4. Jersey (Jane Pearce)
Note text
Current legislative
position
Government
& Beps
Actions 2015
 No WHT  Respectful, while
committed to
maintaining it
current policies and
expand DTA
network
 The Island is
respectful of EU-
law without being
tied up in EU-
regulation

24Note text
5. Luxembourg (Wim Ritz)
Current legislative
position
Government
& Beps
Actions 2015
 GAAR  Intention to fully comply with
OECD if compliant with EU law
 Formalised ATA (tax-rulings)
 Limits on intrest deductions  Gov considering BEPS and
potential impact on local
economy
 Draft tax law for 01.01.2017
 TP-rules  Improvement of participation
exemption regime
 Thin-cap rules  Capping NWT
 Tax consolidation vertical and
horizontal
 Reform IP-regime (grandfather
2021); indications thinking about
renewed IP-box system (Nexus
approach)
 Modernisation company law

25Note text
6. Malta (Marco Bugelli)
Current
legislative
position
Government
& Beps
Actions 2015
No WHT on interest
payments
Malta realises it
might be impacted,
but as a transparent
jurisdiction we
welcome the
initiative
Budget 2016 :
« fiscal
consolidation »
introduced (cfr CJ
12.06.14) : also
between other EU
co’s
No WHT on License
fee payments
No limitations for tax
deductibility of
interest payment

26Note text
7. Netherlands (Maaskant@PWC)
Current legislative
position
Government
& Beps
Actions 2015
 No WHT on intrest payments  « responsible tax debate » is
high on the politcal agenda
 DTA will be renegotiated
 No WHT on License fee payments  Gov states that to the extent
BEPS results in undesired or
unintended tax burdens for
Dutch taxpayers, it will
explore possible counter
measures
 Align existing GAAR with revised
EU PSD
 GAAR  Anti-hybrid rule in Dutch
participation exemption
 Limits deduction of interest  CbC reporting ; if not applicable
than TP-rules
 TP-rules  IP-box might be renewed
 Substance requirements in
relation to intra-group structures
 ? Lower CIT and/or new WHT

27
8. Switzerland (Ivo Hemelraad – Roger D’Allo @ taxand))
Current legislative
position
Government
& Beps
Actions 2015
GAAR Finance Minister declared that the
new corporate tax reform should be
fully aligned with BEPS
? Harmonized federal rules,
abolishing existing tax
regimes
Thin-cap ? Cantonal patent box
NID has been dropped and is
expected to come back to the
table
Parlimentary debate until
spring 2016, expected
implementation 01,01,2018;
with cantons 2 years to adapt
to changes, so likely
01.01.2020
Note text

28Note text
9. United Kingdom (David Rudge)
Current
legislative
position
Government
& Beps
Actions 2015
 CFC-provisions  Gov is actively
participating in OECD
BEP’s initiative
 Diverted Profit Tax
(25%) : interaction with
BEPS is unclear
 TP-rules  Update IP-box,
grandfathering until june
2021
 Anti-arbitrage rules to
counter hybrids through
purpose test
 Consultation from Gov
on « tax deductibility of
corporate interest
expense »
 Mandatory disclosure
scheme
 « Worldwide debt cap »

29
10. EU : own actionplan
Note text
What are the main elements of the Action Plan?
 Re-launching the Common Consolidated Corporate Tax Base
 Ensuring fair taxation where profits are generated
 Creating a better business environment
 Increasing transparency
 Improving EU coordination
 PSD – adpated : GAAR

30
10. EU : Impact of the new GAAR
Note text
 Based on the new rule, “Member States shall not grant the benefits of the PSD to
an arrangement or a series of arrangements which, having been put into place for
the main purpose or one of the main purposes of obtaining a tax advantage that
defeats the object or purpose of the PSD, are not genuine having regard to all
relevant facts and circumstances. An arrangement may comprise more than one
step or part.”
 For the purposes of the GAAR, “an arrangement or a series of arrangements shall be
regarded as not genuine to the extent that they are not put into place for valid
commercial reasons which reflect economic reality,
 However, the anti-abuse rule is subject to a limitation : according to the EU Council, the
application of GAAR should be proportionate and should serve the specific purpose of
tackling an arrangement or a series of arrangements which is not genuine, that is which
does not reflect reality,

31
10. EU / OECD
Note text
 Member states have FISCAL SOVEREIGNTY in the field of direct taxation
 If an EU / EEA Member State would have to disallow the interest on a hybrid loan as a
deductible expense upon application of the primary rule because the corresponding interest
income is not taxed by the State in which the recipient is tax-resident, a domestic law which
provided for this could, it seems, in principle violate the EU fundamental freedoms. See, inter
alia, Eurowings (C-294/97) and SIAT (C-318/10). Compare also Cadbury Schweppes, (C-
196/04).
 If the State of the investee applies the secondary rule, a difference in treatment arises,
depending on whether the investor is resident in a Member State that takes into account the
investee’s losses/ payments. In our view, EU Law makes clear that the fact that losses /
payments are (possibly) also taken into account in another Member State cannot justify
discriminatory treatment in the source Member State. Philips Electronics (C-18/11).
 It remains to be seen, however, whether the nexus approach, as currently envisaged, would
comply with EU Law, either on the basis of the fundamental freedoms (by possibly excluding
R&D activity with nexus in other EU / EEA Member States) or State Aid (by possibly granting
selective advantages to R&D-intensive undertakings by excluding internal sub-contracting
(Source : pwc)

32Note text
11. US (Sylvester Gooyers)
Current legislative
position
Government
& Beps
Actions 2015
CFC-rules US Gov believes
there must be a
return to capital as
well as people
functions,
Congress is not in
favour as it strongly
believes in its fiscal
sovereignity and
democratic deficit is
to be avoided
LOB exceptions to the
arm’s length
standard should be
few
Transfer pricing rules Physical presence
should be required
for taxing jurisdiction

33
12. CIT : Race to the bottom ?
Note text

34
12. CIT : Race to the bottom ?
Note text

35
13. CbC Reporting Expectation
Note text

Powerful partnerships, built to last.
Wim Ritz
Managing Director
Vistra (Luxembourg) S.à r.l.
Vistra Fund Services S.à r.l.
15, rue Edward Steichen, 4th Floor,
L-2540 Luxembourg,
G.D. Luxembourg
wim.ritz@vistra.com
Tel: +352 422 229 252
Mobile: +352 691 32 00 40
| www.vistra.com
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