BEPS: THE FINAL PACKAGE

Grace Perez-Navarro, Deputy DirectorOECD Centre for Tax Policy and Administration

15 Actions around 3 main pillars

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CoherenceHybrid Mismatch Arrangements (2)

Harmful TaxPractices (5)

InterestDeductions (4)

CFC Rules (3)

SubstancePreventing Tax

Treaty Abuse (6)

Avoidance ofPE Status (7)

TP Aspects of Intangibles (8)

TP/Risk andCapital (9)

TP/High RiskTransactions (10)

Transparency

Methodologies and Data Analysis (11)

DisclosureRules (12)

TP Documentation (13)

DisputeResolution (14)

Digital Economy (1)

Multilateral Instrument (15)

“no or low taxation associated with practices that artificially

segregate taxable income from the activities that generate it”

BEPS Action Plan, chapter 3

location of third party interest in

high tax countries

quantity of related party interest, in

excess of group’s actual interest cost

use of interest expense to fund tax

exempt income

3

Action 4 – Interest deductibilityWhat is the problem?

Action 4 – Interest deductibilityThe key building blocks

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• Allows net interest deductions up to a fixed net interest/tax EBITDA ratio• Applies to interest paid to third parties and intragroup • Fixed ratio between 10%-30%• Factors assist countries in setting ratio

Fixed ratio rule

• Allows interest deductions up to net interest/EBITDA ratio of group • Countries may instead apply a different group ratio rule (e.g. equity

escape) or no group ratio rule

Group ratio rule

Harmful Tax Practices

Action 5

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Action 5 - Countering harmful tax practices more effectively

What we have delivered:• An agreed approach on defining substance for all preferential regimes,

whether IP regimes or non-IP regimes • A completed review of 43 regimes in OECD and G20 countries • An agreed framework for the exchange of rulings in 5 clearly defined risk

categories pursuant to agreed deadlines and in an agreed format• Agreement on integrated approach for engagement with third countries• Agreement that revisions or additions need to take account of impact of

work on substance and transparency

Harmful Tax Practices

Action 5

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Action 5 - Countering harmful tax practices more effectively

Transparency – Compulsory spontaneous exchange

1. Rulings related to preferential regimes

2. Unilateral APAs and other TP rulings3. Rulings given a unilateral downward

adjustment4. Permanent establishment (PE)

rulings5. Related party conduit rulings6. Other rulings subsequently agreed to

give rise to BEPS concerns

1. Countries of residence of related parties with a transaction covered by the ruling, or in the case of PE ruling country of head office/PE as case may be

2. Country of Immediate Parent Co3. Country of Ultimate Parent Co

Categories of rulings To be exchanged with

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• Action 6 report includes a minimum standard on preventing abuse through treaty shopping:

− an express statement that countries common intention when they enter into a tax treaty is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance

− inclusion in tax treaties of: • a combined approach of an LOB and PPT rule • the PPT rule alone,• the LOB rule supplemented by a mechanism that would deal with

conduit financing arrangements

− a number of specific anti-abuse provisions to tackle commonly-used structures

Actions 13 Treaty Abuse

These changes address techniques used to inappropriately avoid being taxed in a State, including

Replacing a distributor with a “commissionnaire

arrangement” through which a local member of a multinational group sells

products belonging to foreign members of that

group

Taking advantage of exceptions that were

initially adopted to prevent the taxation of mere

preparatory or auxiliary activities carried on by foreign enterprises, in particular by artificially fragmenting business

activities between parts of a multinational enterprise

Splitting-up construction contracts in order to qualify for an exception based on the time during which an enterprise is active on a

construction site

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Action 7 – Prevent the Artificial Avoidance of PE Status

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Action 12 – Mandatory disclosure rules

• Tax authorities face a lack of timely, comprehensive and relevant information on aggressive tax planning which can be addressed by mandatory disclosure rules (“MDR”).

• MDR requires disclosure, often before returns are filed, of certain transactions, by promoters, taxpayers or both

• Advantages over other disclosures:• Information received early • Disclosure mandatory but no ruling on substance. • Can apply to a broad range of taxpayers including promoters of

schemes as well as users• Can be targeted at risks / transactions of particular concern (via

“hallmarks”) • Report suggests greater information sharing and cooperation via JITSIC

• Master file: high level info on global business operations and TP policies

• Local file: detailed transactional info

• CBC: applies only to MNEs with annual consolidated group revenue equal to or exceeding EUR 750 million

• How many Indian MNEs does that cover? 10

Action 13: TP Documentation

Mandatory binding MAP arbitration

Supplementary commitment

Over 20 countries>90% of MAP

cases

Minimum Standard

Peer review+

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Action 14: Dispute Resolution

Technical Follow up!

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Transfer pricing aspects of Financial Transactions

Finalise group ratio rule and special rules dealing with the financial sector Action 4

Engagement with third countries Action 5

Possible revisions to existing criteria

Work on treaty entitlement of non-CIVsAction 6

Finalise aspects of the model provisions, LOB and its CommentaryGuidance on profit attribution to PEs resulting from the changes proposed

Action 7Integrate changes resulting from Action 7 report into the Multilateral tax instrument Clarify new treaty wording introduced by the Report Address any unintended consequences of the changes resulting from that Report

Revising guidance on and practical examples of application of profit-split methods Actions 8, 9 and 10Develop implementation guidance on Hard to Value Intangibles.

Implementation!Other recommendations

1. Hybrid entities

2. LOB and/or PPT

3. Preamble

4. Other treaty anti-abuse measures (e.g. dividend washing, etc.)

5. Permanent Establishment definition

6. Minimum standard on Dispute Resolution (Arbitration)

Changes to MTC

1. Country-by-Country Reporting and TP Documentation

2. Harmful tax practices

3. Hybrid mismatches

4. Interest deductibility

5. CFC rules

6. Mandatory disclosure rules

1. Chapter I: recognising actual transactions; allocations of risk; group synergies, location savings and other local market features; assembled workforce

2. Chapter II : Commodities

3. Chapter V TP documentation and CbC report

4. Chapter VI: Intangibles

5. Chapter VII: Low value-adding services

6. Chapter VIII: Cost contribution arrangements

Maybe immediately applicable depending on the legal and tax

system

Amend bilateral treaties Multilateral instrument to be open for signature in 2016

Changes to domestic laws or practices depending on the

system

Changes to TP Guidelines

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• Effectiveness of project will be determined by its widespread and consistent implementation

• Monitoring implementation key also to ensure level playing field • G20 FM Ankara: We will continue to work on an equal footing as we monitor the

implementation of the BEPS project outcomes at the global level, in particular, … call on the OECD to prepare a framework by early 2016 with the involvement of interested non-G20 countries and jurisdictions, particularly developing economies, on an equal footing […]

• Monitoring may take different forms depending on the item concerned

• Capacity building will also be a key element of the monitoring framework.

• Interest of non-OECD non-G20 countries is clear: 14 already happily participate in the work and around 120 in total participated. More than 90 countries are negotiating the multilateral instrument.

• Proposal for an inclusive framework in early 2016 and then set up in 2016.

Monitoring!

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15 - 16 Nov. 2015

G20 Leaders Summit - Endorsement of BEPS Package

January 2016 MCAA (on exchange of country-by-country reports) open for signature

February 2016 Report to G20 Finance Ministers on an inclusive framework for the implementation of the BEPS Project

End of Q1 2016 Terms of Reference and Assessment Methodology developed for the monitoring of implementation of Action 14 (Peer monitoring begins 2016)

First part of 2016

Finalise work on LOB (and related commentary) in light of new U.S. model; finalise work on treaty entitlement of non-CIV funds in Action 6

1 April 2016 Exchange of information on future rulings begins (Action 5)

October 2016 Delivery of 2 transfer pricing toolkits to G20 Development Working Group

By 31 Dec. 2016 Multilateral instrument under Action 15 open for signature

By 31 December 2016

Exchange of information on past rulings for Harmful Tax Practices in Action 5 must be completed

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Key implementation dates (1)

By end of 2016 Work on the operation of group ratio rule and design of special rules for interest deductibility for Action 4 to be completed

By end of 2016 Guidance on follow up work on attribution of profits in Action 7

By end of 2016 Follow up work on design of threshold for the simplified approach for low value-adding approach under Actions 8 - 10

During 2016 Mandate to be developed in the context of designing an inclusive post-BEPS monitoring process for the digital economy (Action 1)

2016 - 2017 Regularising legal instruments, consolidating Model Tax Convention and Transfer Pricing Guidelines changes

2016 - 2017 Further guidance will be provided on the economically relevant characteristics for determining the arm’s length conditions for financial transactions.

First half of 2017

Mandate for follow-up work on transactional profit split method finalised Actions 8 - 10 16

Key implementation dates (2)

End of 2017 Publish first reports of peer monitoring process conducted by FTA MAP Forum in Action 14

2017 - 2018 On-going monitoring: Hybrid mismatch arrangements (Action 2), Interest deductions (Action 4), Harmful tax practices (Action 5), Treaty Abuse (Action 6), Measuring and Monitoring BEPS (Action 11), Country-by-country reporting (Action 13), Mutual agreement procedure (Action 14)

By 2020 Review country-by-country reporting under Action 13 By 2020 Review of practical application of hard-to-value-

intangibles exemptions, including the measurement of materiality and time periods (Actions 8 - 10)

By 2020 Review of the corridor for setting a benchmark fixed ratio and the optional exclusion for interest funding certain public-benefit projects under Action 4 

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Key implementation dates (3)