Private Equity Information Briefnewsletter.pwc.lu/newsletter/private-equity/... · PwC Luxembourg While we wished you a restful summer in our latest PE Newsletter, the ... the SIF

Private Equity Information Brief

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Find the latest news in the Private Equity Industry

October 2015 Edition

ContentIntroduction 2

CSSF Circular 02/77 – applicability to SIFs 3

VAT deduction for holding companies: happy ending or another milestone in a never-ending story? 4

European Long-Term Investment Fund (ELTIF) 5

IFRS 2 6

EuVECA 7

Exit strategy – IFRS 5 and Luxembourg GAAP 8

Appendix 9

Flash News – FATCA in Luxembourg: official guidelines published 10

Flash News – OECD Action Plan for BEPS - the package is final 16

Contacts 27

PwC · PE Information Brief - October 2015 22

Introduction

2

Vincent LebrunPrivate Equity Industry LeaderPwC Luxembourg

PwC · PE Information Brief - October 2015

While we wished you a restful summer in our latest PE Newsletter, the reality is that the deals market has been busier than ever over the past few months. The strong position of the US dollar continues to drive acquisitions in Europe.

In the meantime, fundraising activities continue and the appetite for Luxembourgish fund vehicles seems to be growing. Despite the current volatile environment, with many impactful events such as the Greek crisis, BEPS or tumbling stock markets following Volkswagen’s situation, Private Equity keeps going full steam ahead.

Enjoy the read and have a fruitful autumn!

PwC Luxembourg Private Equity Team


CSSF Circular 02/77 – applicability to SIFs

In its 2013 annual report, within the section dedicated to the supervision of UCIs and SICARs, the Commission de Surveillance du Secteur Financier (CSSF), Luxembourg’s financial-sector regulator, clarified its position on the application of Circular 02/77 (“the Circular”) to Specialised Investment Funds (SIFs).*

The purpose of CSSF Circular 02/77 on the protection of investors is to set out minimum rules of conduct to be followed by collective investment professionals in Luxembourg in the event of NAV calculation errors or when correcting the consequences resulting from non-compliance with the investment rules of Undertakings for Collective Investment (UCIs).

Previously, the Circular did not apply automatically to SIFs. Nevertheless, the CSSF considers that SIFs can either opt to apply the rules in CSSF Circular 02/77, or choose to set other internal rules. These rules must stay within reasonable limits considering the investment policy and features of the SIF. Moreover, as regards the notification process, any NAV calculation error, as well as any instance of non-compliance with investment rules by a SIF, must be notified to the CSSF, whether the SIF chooses to apply the Circular or to set other specific internal rules.

In this context, the CSSF considers that SIFs which have not implemented internal rules must by default apply the minimum rules defined in the Circular. This imposes a maximum threshold of 1% of the Net Asset Value (NAV) for a full reporting and compensation process for NAV errors.

So far, we have observed a large number of market players who use the SIF vehicle for their alternative investment strategies setting up specific rules for their funds.

In this context, and when investors’ returns would not be affected by calculation errors, a maximum of 1% as a threshold for a NAV calculation error might be seen as very low. In particular, in the private equity sector, corporate governance tends to consider the specifics of the industry, where most private equity funds are of the closed-ended type and where the fair-valuation exercise is largely based on assumptions and judgement factors.

* Reference: Annual Report 2013 – Chapter 7: Supervision of UCIs and SICARs, Section 4.5.3.

Should you have any questions, please contact:

Valérie Tixier, Audit Partner, Private Equity Funds Leader (+352 49 48 48 2107)Nicolas Payet, Audit Senior Manager (+352 49 48 48 2282)


Joined cases Larentia + Minerva (C-108/14) and Marenave Schiffahrts (C-109/14) – judgment dated 16 July 2015

1. Background

In both cases, companies engaged costs to raise capital with the aim of acquiring shares in undertakings.

In the first case, a management company acquired the majority of the shares in two limited partnerships and then provided them with administrative and business services for consideration.

This management company fully deducted the Value-Added Tax (VAT) incurred on expenses linked to the acquisition of these entities and to its services, in particular administrative and consultancy services.

In the second case, a company increased its capital and incurred issue costs connected with that increase.

That company, as a holding company, also acquired shares in limited partnerships in which it was involved in business management for consideration. It also fully deducted the VAT incurred on the costs connected with its increase in capital.

2. Decision

In these joined cases, the Court of Justice of the European Union (CJEU) first issues a reminder that holding companies whose sole purpose is to acquire and hold shares in undertakings without being involved in their management do not qualify as VAT-taxable persons and are not entitled to deduct input VAT incurred on their costs. However, the Court reiterates that such companies are allowed to recover input VAT incurred on their expenses – both linked to their economic activities and to the acquisition of shares in their subsidiaries – to the extent that they are involved in the management of these subsidiaries.

The new element in these joined cases is that the CJEU makes a distinction between cases where a management company is involved in the management of all the subsidiaries acquired and situations where a management company only participates in the management of some of these subsidiaries.

When there is involvement in the management of all acquired subsidiaries, input VAT on acquisition costs is either fully or partially recoverable using one of the partial deduction methods provided by the VAT Directive.

When there is involvement in the management of only some of the acquired subsidiaries, input VAT on acquisition costs (which cannot be attributed to the acquisition of a specific subsidiary) cannot be fully deducted. It is up to the EU Member States to determine the most appropriate method which objectively reflects the part of the expenditures attributable to economic and non-economic activities.

3. Impact

This jurisprudence is welcome as it makes the rules applicable to the VAT incurred on the cost of acquiring shares somewhat clearer, particularly in the case of active holding companies. However, the CJEU does not provide any guidance concerning the deduction method to be used when a parent company participates in the management of only some of its subsidiaries.

This is a good opportunity for companies to (re)assess their VAT recovery method.

VAT deduction for holding companies: happy ending or another milestone in a never-ending story?


Laurent Grençon, VAT Partner for Private Equity Structures (+352 49 48 48 2060)

Silvin Leibengut, VAT Senior Advisor (+352 49 48 48 3772)


1. Political background

An analysis by the European Commission led to the conclusion that it is increasingly difficult for the real economy to find adequate financing for its projects. Indeed, businesses in the banking sector have to deleverage their balance sheets and face increasingly high capital requirements, which make their lending activities expensive. Additionally, EU Member States are facing significant costs to build or renovate their infrastructure in times of severe budgetary constraints, and are increasingly looking towards public-private partnerships to finance those projects. To be able to tap into the non-banking market to increase the available pool of capital, a new instrument is required as the currently existing ones are not geared towards long-term financing goals.

The Commission therefore proposed a new vehicle, the European Long-Term Investment Fund (ELTIF), whose aim is to close this gap in the current product range.

2.Eligible assets

In order to achieve the goal of financing the real economy, ELTIFs will be limited to investing mostly in real assets. In concrete terms, 70% of their investments have to be made in:

• infrastructure and/or real estate,• unlisted companies (equity or debt);

and• European Venture Capital Funds

(EuVECA) and European Social Entrepreneurship Funds (EuSEF).

Up to 30% of their investments may be in UCITS-eligible assets.

An ELTIF may not:

• invest in commodities (either directly or indirectly);

• short-sell assets;• use derivatives, except to hedge

currency or interest-rate risk; or• enter into securities lending or

repurchase agreements.

3. Regulatory setup

As the eligible assets are by definition unlisted and illiquid, they fall within the scope of alternative investments.

The manager of an ELTIF therefore needs to be authorised as an AIFM. This condition in the ELTIF Regulation allows the manager to leverage the entire Alternative Investment Fund Managers Directive (AIFMD) framework and, most importantly, the cross-border registration process and passporting within the EU for distribution purposes.

Due to the illiquid nature of the investments, the Commission sees the need to align the investment horizon with the redemption conditions. In practice, the life cycle of the fund should match the holding requirements for a given target portfolio, which means that the ELTIF will be closed for redemptions for a determined period of time to be defined in the fund’s offering documents. Early redemption possibilities are not provided for, in order to avoid the issues faced by open-ended long-term funds as they existed under certain national regimes during the financial crisis.

The liquidity needed for investors seeking early redemption will have to be provided by secondary markets through listing the shares and providing the possibility to sell without redeeming.

4. Distribution

An interesting feature of the ELTIF is that even though it will be an AIF, it will be possible to market it to retail investors, thus giving them access to a new asset class to diversify their investments.

A caveat here is that the Regulation falls within the scope of Markets in Financial Instruments Directive (MiFID), with all the implications this has for marketing to retail investors.

5. Entry into force

The ELTIF Regulation was published in the Official Journal of the European Union on 19 May 2015 and will be effective seven months later, meaning on 9 December 2015. As it is a European Regulation, it will not need to be transposed into national laws in order to take effect.

European Long-Term Investment Fund (ELTIF)


Patrick Ries, Audit Partner (+352 49 48 48 2859)


IFRS 2 applies when goods or services (from employees and non-employees alike) are received in exchange for a consideration whose value is based on an equity instrument issued by the company or another entity in the group. The underlying agreement does not have to be in writing and may have a variety of forms and names, such as stock option plan, management equity plan, management package, etc.

This accounting standard (IFRS 2) requires a profit or loss charge for your employee share-based plan in nearly all cases.

The timing of the recognition of this charge might be counterintuitive because the charge starts with the grant date, which is often well in advance of the settlement date. The Company will have to establish whether the plan is cash-settled or equity-settled.

The main implication of this difference is that the credit entry will impact liability in the first instance, and equity in the second instance. This is significant when considering indicators such as coverage ratio, etc. The other major implication is that the fair value of the liability is re-measured each year, while the fair value of the equity is frozen, only being impacted by the change in the estimation of the total number of shares that will vest. This is significant when considering profit and loss volatility and the operational burden of yearly fair-value calculations.

The charge is recognised in full at grant date, or over the vesting period when there is a condition whereby the employee must work for the Company for a certain length of time before being entitled to fully benefit from the plan.

In conclusion, there may be significant accounting and operational implications before a share-based plan is settled.

IFRS 2


Marc Minet, Audit Partner (+352 49 48 48 2120)

Ionela Marcela Poenaru, Audit Senior Manager (+352 49 48 48 2621)


With the entry into force of the (AIFMD) and with Member States increasingly requiring distribution under national private placement regimes, the distribution of funds for non-authorised managers has become a lot more complex. In the context of “Europe 2020”, the European Parliament and the European Council jointly adopted the final text of the European Venture Capital Funds Regulation (EuVECA Regulation) in April 2013.

This Regulation proposes harmonised requirements for EuVECA funds and allows managers to benefit from an EU-wide distribution passport to present to professional investors.

Why a new regulation?

The purpose of this Regulation is to enhance the growth and innovation of small and medium-sized businesses in the European Union. It is available for managers falling below the AIFMD threshold. The Regulation aims at:

• providing a framework of quality requirements;

• securing investors’ confidence, thanks to harmonised rules throughout the European Union;

• preventing diverging national requirements resulting from the transposition of AIFMD; and

• allowing qualifying venture capital funds to be marketed in a new regulatory landscape.

What is a EuVECA fund?

A qualifying venture capital fund must be established in an EU Member State and invest at least 70% of its aggregated capital contributions and uncalled commitments in qualifying investments, as defined below. In addition, it cannot use leverage.

What is a qualifying investment?

Qualifying investments are equity or quasi-equity instruments issued by companies not admitted to trading on a regulated market, and which are established in an EU Member State or in a third country, under certain conditions. Companies must respect the EU criteria for small and medium-sized businesses: no more than 250 employees, a maximum turnover of 50 million euros and a balance sheet total not exceeding 43 million euros.

In addition, qualified investments cannot be a credit institution, an investment firm, an insurance company, a financial holding or a mixed-activity holding.

What are the obligations for EuVECA managers?

EuVECA managers must prepare an annual report for the competent authority of their host Member State for each qualifying venture capital fund that they manage, within six months of the end of the financial year.

The qualifying venture capital fund will be audited annually.

What opportunities are there for venture capital managers?

The political wish to maintain – and even increase – the financing of small and medium-sized businesses is beneficial for managers of smaller funds who now have an opportunity to enhance their access to capital, with a reduction in the cost of raising capital and subsequent regulatory reporting. The EuVECA regime is voluntary, rather than mandatory:

• The EuVECA regime is only available to EU managers established in the EU.

• The authorisation process for prospective EuVECA managers is less stringent than for AIFMs.

• Subsequent reporting is done to a single regulator in the EU.

• No depositary is required (still required for some funds depending on their type, e.g. SIF, SICAR).

EuVECA


Valérie Tixier, Audit Partner, Private Equity Funds Leader (+352 49 48 48 2107)Talat Kadret, Audit Senior Manager (+352 49 48 48 2338)


Is it time to think about your exit strategy?

Many private equity firms have set a medium or long-term exit strategy for their initial investments. This may occur by partially or fully divesting their targets in an Initial Public Offering (IPO) or a sale to another party. So far, we have seen several cases where the entity has either disposed of one or several targets or is in discussions to dispose of them. These two scenarios require a specific accounting assessment and additional disclosure requirements under IFRS and Luxembourg GAAP.

If you prepare your consolidated financial statements under IFRS and you have disposed of one of your investments, an assessment to determine the magnitude of the sale and the potential additional disclosure requirements must be undertaken. If your divestment can be clearly distinguished operationally and for financial reporting purposes, it should be presented as a single amount in the statement of comprehensive income.

The single amount comprises the post-tax profit and the post-tax gain or loss from the sale of the investment. Further details need to be presented, either on the statement of comprehensive income or in the notes to the accounts. The additional information is generally included in the notes to the accounts.

Another scenario might be that you are in discussions with a potential purchaser or that you have entered into a sale agreement which is subject to conditions precedent, such as approval by an external party/commission. In this case, you need to assess whether this requires the investment to be classified as assets held for sale.

To determine this classification, the following should be taken into account:

• the probability of the sale happening;• the asset being available for immediate sale;• loss of control over the entity;• management’s commitment to sell;• whether the investment is marketed at a

reasonable price; and• how likely/unlikely the entity is to change

its plan and whether it is actively searching for a buyer.

The timing of the different points mentioned above will impact your assessment. The table below shows when an asset should be classified as assets held for sale:

Assets held for sale are presented on the balance sheet as one line and are measured at the lower of their carrying amounts and fair values less cost to sell. The considerations for classification as assets held for sale may be subjective and will require a detailed assessment. At a later date, the asset (if it still belongs to the company) can be reclassified as assets held for use if the criteria for assets held for sale no longer apply.

For accounts prepared under Luxembourg GAAP, the disclosure is less exhaustive, as the presentation of discontinued operations in a separate line in the profit and loss account is not defined.

However, specific disclosure requirements for significant divestments should be detailed in the notes to the accounts. The extent of the disclosure will depend on the importance of the divestment in the overall accounts.

The concept of assets held for sale as defined in IFRS is not followed under Luxembourg GAAP, and therefore no specific assessment needs to be performed.

Overall, any significant divestment requires additional disclosure under IFRS and Luxembourg GAAP, and should be assessed individually in order to meet the disclosure requirements of the applicable accounting standard.

Exit strategy – IFRS 5 and Luxembourg GAAP

30.06.XX

ManagementCommitment

Asset available for immediate sale

Sale is highly probable normally < 1 yr

Management commits to plan to sell

Marketed at reasonable price

Unlikely to change plan

Active search for buyer

Classified as held for sale at earlisest date when all 6

criteria are met

Reporting date

30.09.XX 31.12.XX

Earliest date Latest date

Recognition


Malik Lekehal, Audit Partner, Private Equity and IFRS (+352 49 48 48 5280)Monika Reschka, Audit Manager (+352 49 48 48 5688)


Appendix

Flash News – FATCA in Luxembourg: official guidelines published 10

Flash News – OECD Action Plan for BEPS - the package is final 16


Flash News

FATCA in Luxembourg: official guidelines published

Following the adoption (24 July) and publication (29 July) of the law enacting the IGA (“the Law”), the Luxembourg direct tax authorities (Administration des contributions directes (ACD)) have issued, on 31 July 2015, two circulars:

ECHA – n° 2, which provides comments on legal obligations and interpretations of technical terms under the IGA, and

ECHA – n° 3, which contains technical aspects and explains the transmission of information.

The ECHA – n° 3 corresponds, in general, to the draft version, initially published on 2 February 2015 and updated end-June. However, the final version of ECHA – n° 2 brings significant changes to the first draft version dated 6 January 2015. This news focuses on the key elements of ECHA – n° 2 (“the Circular”). As a general remark, it seems that Luxembourg tax authorities intend to align, to a certain extent, their guidelines with the OECD commentary to the Common Reporting Standard (CRS). However, it is important to take into account the local features. Luxembourg Financial Institutions:

An entity is a Financial Institution (FI) if it falls into one of the following categories:

Custodial Institution; Depository Institution; Investment Entity; Specified Insurance Company.

10 August 2015 The law adopting the US-Luxembourg Intergovernmental Agreement (the IGA) under the terms of which the US “Foreign Account Tax Compliance Act” (FATCA) will be applicable, has recently become effective. On 31 July 2015, Luxembourg tax authorities published two circulars providing more guidance.

www.pwc.lu/fatca


As far as Custodial Institutions1 are concerned, the Circular requires the term “financial asset” to be understood in line with the CRS definition. Furthermore, it lists some types of entities (partially with reference to the Law of 5 April 1993 on the financial sector), that must not be considered Custodial Institutions. The Circular states that banks authorised to exercise their activity under Art. 2 of the Law of 5 April 1993 qualify as Depository Institutions2. However, the Circular confirms that an entity doesn’t perform a banking or similar business if it accepts deposits only as collateral or security pursuant to a sale or lease of property or pursuant to a similar financing arrangement between such entity and the person holding the deposit with the entity. For Luxembourg, the category of Investment Entities is the most important in terms of number of entities in scope. According to the Circular, an Investment Entity’s activities must be exercised “commercially” and “in the name of a client”. Furthermore, each entity whose gross income is primarily attributable to investing, reinvesting, or trading in financial assets, qualifies as Investment Entity. In this respect, the Circular defines the term “primarily” similar to the US FATCA Regulations. For Specified Insurance Companies3, the Circular clarifies that reinsurance companies that only offer agreements with indemnifying character, don’t qualify as FI. In addition, insurance brokers are not Specified Insurance Companies. Each FI residing in Luxembourg is considered subject to Luxembourg laws and regulations. All entities that have their seat or effective place of management in Luxembourg are considered residents. Foreign branches of Luxembourg FIs are excluded. Branches of foreign FIs are Luxembourg FIs, only if they are:

1. supervised by the Commission de Surveillance du Secteur Financier (CSSF) or the Commissariat aux Assurance, or

2. registered with the Luxembourg register of commerce. The Circular mentions that the same logic applies for legal arrangements and Luxembourg investment funds that are Fonds Commun de Placement (FCPs). In addition, certain regulated vehicles (such as UCIs and UCITS, Specialised Investment Funds (SIFs), SICARs and securitisation vehicles) are also considered Luxembourg FIs according to the Circular’s provisions. Non-Reporting Luxembourg FIs are those

1. listed in Annex II of the IGA, or 2. otherwise qualifying as deemed-compliant FI under the US FATCA

Regulations.

The Circular states that Non-Reporting Luxembourg FIs are neither required to register with the IRS to obtain a GIIN, nor to submit a Zero-Report to the Luxembourg tax authorities; exceptions from this rule apply to FIs with local client base and to Sponsored Investment Entities that have identified US Reportable Accounts.

1 Custodial Institutions are defined as entities whose main business is to hold financial assets on behalf of others. 2 Depository Institutions are entities that accept deposits in the ordinary course of a banking or similar business. 3 Specified Insurance Companies are entities that issue, or have to make payments for a Cash Value Insurance Contract or an Annuity Contract.


Luxembourg Specific Cases:

Taking the example of a “Société de participations financières (SOPARFI)”, the Circular comments on the treatment of holding companies and similar vehicles (like the Société de patrimoine familial (SPF)). This kind of entities can have industrial and/or commercial activities, in addition to holding interest in related entities. According to the Circular, a SOPARFI usually qualifies as Passive Non-Financial Foreign Entity (NFFE) but, depending on the assets, income and/or shareholders, it could also qualify as FFI or Active NFFE. In particular, a SOPARFI can qualify as Investment Entity if its activities and/or operations are exercised “commercially” and “in the name of a client”. The Circular explains that this could particularly be the case if the SOPARFI goes public or if its capital is open to a certain number of unrelated investors and/or it rather functions as an investment vehicle. Unregulated securitisation vehicles are classified according to the same rules as SOPARFIs, whereas regulated securitisation vehicles are classified as Investment Entities. Financial Accounts

The Circular describes the different types of Financial Accounts. Specific points of attention are the following:

Amounts accepted by insurance companies for certain products can qualify as Depository Account;

Annuities related to products exempted under Annex II and re-insurance contracts related annuity contracts are not considered Annuity Contracts under the IGA;

Re-insurance compensation contracts between two insurance companies do not qualify as Depository Account.

Annex II of the IGA contains certain instruments that are exempt from the definition of Financial Accounts. According to the Circular, this exemption applies to the following instruments:

Contracts for old age provision (Art. 111bis Luxembourg Income Tax Law), if the annual contributions do not exceed USD 50,000 or the total contributions do not exceed USD 1 million;

Building saving agreements, if the annual contributions do not exceed USD 50,000;

Complementary (company) pension schemes (Régime complémentaire de pension (RCP)), regardless of the annual or total contributions. In this respect and by application of the exception for Partner Jurisdiction Accounts in Annex II of the IGA, the circular refers to similarity of Luxembourg complementary pension schemes to the Belgian regime and the fact that similar Belgian pension regimes are exempt.

Due Diligence Procedures

The Circular authorises Luxembourg FIs to apply industry codes, and lists other types of “publicly available information” based on which FIs can perform their account holder due diligence. There will be no prescribed self-certification form. Luxembourg FIs may choose to use a specific form, to include the relevant questions in a more complex account opening form, or to use the US forms (W-8, W-9 Forms).


A Luxembourg FI may apply the procedures set out in the US FATCA Regulations when performing the account holder due diligence for each section of Annex I of the IGA, for all Financial Accounts, or only for a clearly identified group of accounts. Financial Institutions may delegate their FATCA obligations to third party service providers. However, the Circular highlights that FIs are still responsible for their FATCA obligations and that the delegation must not compromise the verification of FI’s compliance by Luxembourg tax authorities. The Circular provides several examples for cut-off rules and change of circumstances. In general terms, the end of the calendar year (or any other appropriate period) is the decisive date to see what documentation has been identified and made available as per that date. But FIs have the full periods given by Annex I of the IGA to perform the pre-existing account due diligence. As a reinforcement of the due diligence rules on TIN (Taxpayer Identification Numbers), for the reporting of the 2017 and of following years’ data, the Reporting Luxembourg FIs should do everything possible to obtain and report the US TIN. Reporting:

Reporting Luxembourg FIs cannot invoke any professional secrecy to refuse to report. Furthermore, they must inform each reported individual that information will be collected and reported. The Law and the Circular explicitly refer to the Luxembourg law on data privacy and protection for what has to be communicated to the client before the reporting. Data elements used in the context of FATCA cannot be stored longer than required by the IGA and must comply with the legal provisions applicable to data controllers. The Circular lists the data to be exchanged with respect to the relevant years. As explained earlier, it clarifies. It also specifies that the TIN for the data referring to 2017 must be reported in 2018. Closed accounts identified as US Reportable Accounts must be reported. If a pre-existing individual account has not yet been finally classified in line with the relevant due diligence procedures, the FI must perform certain due diligence and classification steps when closing it. Besides, unless the FI decides otherwise, the rollover of a rollover deposit is not considered as an account closure. For the years 2015 and 2016, the IGA requires a temporary reporting of payments made to Non-Participating FIs. The Circular clarifies that this applies only to payments related to Financial Accounts held by Non-Participating FI. Each Luxembourg Reporting FI registered with the IRS must submit a reporting; if it doesn’t have Reportable Accounts, it must submit a Zero-Report. Luxembourg FIs that have de-registered with the IRS have to submit a reporting for the year of de-registration. However, an entity registered with the IRS as Sponsoring Entity is not compelled to submit a Zero-Report if, after applying the due diligence procedures for its Sponsored Investment Entities or Controlled Foreign Corporations (CFCs), it hasn’t identified US Reportable Accounts. This exception applies if the Sponsored Investment Entity or CFC hasn’t yet registered to obtain its own GIIN. Luxembourg FIs must submit the reporting to the Luxembourg tax authorities, using mandatory transmission channels, no later than 30 June following the end of the calendar year to which the reporting refers. The deadline for the reporting for 2014 has been exceptionally extended to 31 August 2015.


Most Favoured Nation Clause:

The Circular confirms the application of the most favoured nation clause to the Art. 4 of the IGA, as well as to the procedures in Annex I of the IGA. As far as Annex II is concerned, the most favoured nation clause applies only to the exception for Partner Jurisdiction Accounts. The Circular includes a reference to Notice 2014-33, in which the IRS authorised FATCA Partner Jurisdictions to treat entities that opened accounts after 30 June 2014 but before 1 January 2015 as pre-existing accounts. Controls and Sanctions:

The Circular does not provide detailed information about the concrete control mechanism the Luxembourg tax authorities intend to use. However, it indicates what the areas of attention might be. Luxembourg tax authorities will control the FI’s compliance with the due diligence obligations and verify the functioning of the mechanisms, in particular the information technology used to transmit the communication. Furthermore, the tax authorities will verify that Luxembourg FIs haven’t adopted procedures to circumvent the information exchange. The Circular allows Luxembourg FIs to apply US FATCA Regulations when this is foreseen by the IGA. If the FI chooses to do so, it must document it in its FATCA procedures. This choice is only available for clearly defined situations and not on a case-by-case basis. If a Reporting Luxembourg FI doesn’t apply the due diligence rules or doesn’t put in place procedures in view of the reporting, it risks a penalty of maximum EUR 250,000. In case of absence, late, incomplete or erroneous reporting, a Reporting Luxembourg FI would be subject to a penalty of 0.5% of the amounts that should have been reported, with a minimum of EUR 1,500. To avoid circumvention of the information exchange rules, the Circular states that a depository of bearer shares issued by a Financial Institution must be a Reporting FI. What’s next? Financial Institutions subject to reporting obligations as set out in the Law and the Circular must submit their reporting before 31 August 2015, even if Zero-Report. The next level of automatic exchange of information will be reached with the implementation of the CRS and the European Directive implementing the CRS. Compared to FATCA, the CRS will involve the exchange of significantly more information. Under FATCA, many FIs could handle the due diligence and reporting obligations with semi-manual procedures, but CRS will require enhanced processes and systems. Last but not least, banks should not forget to look at the requirements under the QI agreement, which has been updated in 2014. In particular, the requirements to have a compliance program (including written policies and procedures) should not be underestimated.


For more information, please contact us:

…………………………………………………………………………………………………………………….

Kerstin Thinnes Partner +352 49 48 48 3177 [email protected] ……………………………………………………………………………………………………………………. Marie Laffont Director +352 49 48 48 3069 [email protected] ……………………………………………………………………………………………………………………. Camille Perez Manager +352 49 48 48 4618 [email protected] ……………………………………………………………………………………………………………………. Frauke Anna Maria Ortmann Senior Advisor +352 49 48 48 3762 [email protected] …………………………………………………………………………………………………………………….

PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,450 people employed from 55 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. It helps its clients create the value they are looking for by giving comfort to the capital markets and providing advice through an industry focused approach. The global PwC network is the largest provider of professional services in audit, tax and advisory. We’re a network of independent firms in 157 countries and employ more than 195,000 people. Tell us what matters to you and find out more by visiting us at www.pwc.com and www.pwc.lu. © 2015 PricewaterhouseCoopers, Société coopérative. All rights reserved. In this document, “PwC Luxembourg” refers to PricewaterhouseCoopers, Société coopérative (Luxembourg) which is a member firm of PricewaterhouseCoopers International Limited (“PwC IL”), each member firm of which is a separate and independent legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms.


Flash News

OECD Action Plan for BEPS – the package is final

In detail

The OECD’s BEPS Action Plan has three main themes. “Substance” is one key focus, and making the international tax system more coherent and less susceptible to “double non-taxation” is another. Thirdly, enhancing transparency, through increased disclosure to tax authorities and efficient sharing between tax authorities, is seen as a critical need – as these measures are introduced, groups will have to adapt internal reporting and information gathering processes. The OECD is not a legislating body, but some of the OECD Action Plan output must be seen as “soft law”. Our Tax Policy Bulletin explains how this material now published might translate into real changes, and looks at timescales. In some areas, the tax law in some countries is already changing – in other areas the OECD has now given guidance on common approaches which countries might adopt when legislating, or has simply set out best practice. What remains crucial in the process is how and when countries will effectively implement these approaches in their legislation in order for them to become applicable. The BEPS Action Plan has already influenced important changes to EU tax Directives, and it is going to be an important factor in the 2017 tax reform in Luxembourg.

7 October 2015

In brief

On Monday 5 October 2015, the Organisation for Economic Development and Development (OECD) published its set of 15 final reports (together over 1,600 pages of material) that set out its recommendations and proposals under its Action Plan to address base erosion and profit shifting (BEPS). This is the culmination of over two years work, built on consensus between OECD member countries and other G20 economies, intended to modernise the entire framework of international tax, and curb aggressive tax planning.

PwC’s global tax specialists have published a Tax Policy Bulletin, making an initial assessment of the key points in this BEPS package of OECD reports.

www.pwc.lu/beps


The most important consequence of the BEPS Action Plan for businesses is likely to be behavioural – building on media pressure, many tax administrations will not only be introducing tougher measures into laws and practices and restricting tax treaty benefits, but will also be making more and tougher challenges to arrangements that they feel lack “substance” or a truly commercial purpose.

The text of the Tax Policy Bulletin follows overleaf. PwC Luxembourg are currently making assessments of how the BEPS measures might affect businesses operating in Luxembourg, and we intend to publish this month a number of analyses which each have a specific industry focus. While many of the measures are highly technical in nature, all parts of any large business with international operations, or managing funds with an international dimension, need to appreciate the changes the BEPS project will bring. These can affect many areas of business strategy and reporting, and are not just issues for the tax functions.

For more information, please contact us:

……………………………………………………………………………………………………………………. Alina Macovei BEPS Lead Partner +352 49 48 48 3122 alina. [email protected] ……………………………………………………………………………………………………………………. Wim Piot Tax Leader +352 49 48 48 3052 [email protected] ……………………………………………………………………………………………………………………. Valéry Civilio Tax Partner +352 49 48 48 3109 [email protected] …………………………………………………………………………………………………………………….

PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,450 people employed from 55 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. It helps its clients create the value they are looking for by giving comfort to the capital markets and providing advice through an industry focused approach. The global PwC network is the largest provider of professional services in audit, tax and advisory. We’re a network of independent firms in 157 countries and employ more than 195,000 people. Tell us what matters to you and find out more by visiting us at www.pwc.com and www.pwc.lu. © 2015 PricewaterhouseCoopers, Société coopérative. All rights reserved. In this document, “PwC Luxembourg” refers to PricewaterhouseCoopers, Société coopérative (Luxembourg) which is a member firm of PricewaterhouseCoopers International Limited (“PwC IL”), each member firm of which is a separate and independent legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms.


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Multinationals receive OECD recommendations on BEPS proposals for G20 and wider take-up

5 October 2015

In brief Multinational enterprises (MNEs) received on 5 October final recommendations from the OECD’s base erosion and profits shifting (BEPS) project. This week the G20 Finance Ministers are likely to agree on these OECD recommended changes to the international tax rules and to implementation plans. A number of non-G20 countries have also been involved in work on the Action Plan and contributed to the proposals.

The OECD’s BEPS Action Plan categorised its various areas of focus into three themes: addressing substance; coherence of the international tax system; and transparency. Substance actions seek to align taxing rights with the relevant value-adding activity. Coherence actions aim to remove gaps and ‘black holes’. Transparency actions look to provide significant additional disclosure. In addition to the various actions grouped under these three themes, the BEPS Action Plan also seeks to address digital business, improve dispute resolution and create a multilateral instrument for rapid updating of bilateral tax treaties. Finalised proposals on all of these areas are now included in the package of measures just released by the OECD.

We see three fundamental ways in which this OECD BEPS work will have a practical impact. First, and most obvious, there will be the direct application of the BEPS package itself, whether in the shape of changes to tax treaties (through amendment of the OECD Model Tax treaty and/or the multilateral instrument) and the Transfer Pricing Guidelines or through changes to domestic legislation as a result of individual recommendations of the BEPS action points. Second, there will be the change the OECD does not want to see, namely unilateral actions by states. Countries adopting such alternative unilateral measures will typically be doing so because they disagree with the direction the BEPS package is taking or think the recommendations don’t go for enough. Third, and in our view perhaps the most important direct impact of BEPS, is its behavioural impact – specifically in emboldening the behaviour of tax administrations the world over. This is likely to lead to tougher and more protracted anti-avoidance challenges, higher thresholds for rulings, etc.

The policy formulation stage of BEPS Action Plan will conclude at the end of this year, although it has been agreed that certain follow-on actions will take place during 2016 and beyond. The major focus of 2016 however will shift to the implementation and monitoring of the package.


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In detail The totality of the BEPS package Changes recommended under the BEPS Action Plan will fundamentally alter the international tax rules. There will also be a renewed vigour to some of the challenges made by tax authorities in applying revised OECD guidelines, the proposed new multilateral treaty and existing or new domestic legislation.

We expect to see more tax disputes arising in the short term.

There may well be some differences in the ways that ‘consensus’ countries make the agreed changes that could itself still lead to dispute. The timing may also differ, which could add to the potential problem.

There will be some countries or economic communities that take alternative ‘unilateral’ measures because they disagree with the direction the Action Plan has taken or think that the recommendations don’t go far enough. These outliers could be developed countries, emerging nations or developing countries.

We’ve already been seeing changes in the attitudes of various tax authorities toward particular activity. We’ve noticed this particularly in relation to permanent establishment (PE) challenges and transfer pricing (TP) discussions. This will inevitably spread more widely.

BEPS Action Plan themes

In overview, the issues being addressed by the recommendations fall into the following categories.

Substance actions, aligning taxing rights with value-adding activity –

treaty abuse, some of the TP changes and PE deliverables.

Coherence actions, removing gaps and ‘black holes’ – matters affecting hybrid arrangements, interest and other financial deductions, controlled foreign companies (CFCs) and Harmful Tax Practices.

Transparency actions, with significant additional disclosure required – country-by-country reporting to tax authorities and TP documentation, data on BEPS and ‘Tax scheme’ reporting.

Digital business – VAT and other specific measures notwithstanding the acceptance of digital as just part of business as a whole.

Other – potential improvements to dispute resolution processes and the development of a multilateral instrument to amend or overwrite a number of bilateral treaties in one instrument.

Future work post-2015

Some countries have already begun to take action, but the majority of changes will take place in the coming months.

Whilst the OECD’S 2015 BEPS objectives are overwhelmingly now delivered by the release of the 5 October package, some related work by the OECD will also go on during 2016 and beyond. This relates to the following:

TP aspects of financial transactions – essentially, this is a new project.

Attribution of profit to PEs –no changes are anticipated in the authorised OECD approach (AOA) but additional guidance will be needed in how this is applied in the

case of commissionaire structures, etc.

Use of profit split methods – this is likely to be largely clarification of existing guidelines.

Implementation of hard to value intangibles proposals – again clarification is required of the practical approach that will be required.

Other related work – this might include, for example, details of how to apply rules to tackle treaty abuse and hybrid arrangements.

The monitoring of the effects of changes made by the BEPS project is also likely to be a major area of work by the OECD for years to come.

Some of the key areas of impact on MNEs are discussed below.

TP/PE

There are various TP changes proposed by the final package but it is worth highlighting certain general areas where changes will be felt:

Relevance of Conduct - there will clearly be greater scrutiny on the part of the tax authorities on the actual conduct of parties to a TP arrangement and this will mean less automatic acceptance of the mere contractual or legal arrangements. People functions that relate to decision making will be of particular interest to the tax authorities.

Delineation of arrangements – how to properly interpret the TP arrangements entered into by taxpayers will also be another area of focus; tax authorities will be interested in how risk is dealt with and allocated in the arrangements and whether ’control’ (e.g., of


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assets) is exercised in the way that the TP assumes.

Transparency - there is obviously a huge increase in transparency obligations on taxpayers (and some on states). This is commented on separately below.

The TP/PE relationship - the BEPS changes to the PE rules are clearly not in themselves a TP development as such, yet the expected increase in focus in this area seems likely to mean that some tax authorities may view the PE rules as an alternative to the TP rules. This raises questions as to how well taxpayers are equipped to deal with such challenges in the context of the TP arrangements adopted.

Given the increased profile of PE issues and the lowering of the threshold in some cases, it remains likely that the PE rules will feature commonly in future dispute and controversy.

Financing implications

The treatment of debt and the financing of operations and investments will be one significantly impacted area. The treatment of capital markets still needs to be addressed.

The rules for hybrid instruments and entities are likely to be the most widely adopted of the coherence actions, even though they are enormously complex (but should lead to replacement of some existing rules). They would apply automatically, without a motive or purpose test. They rely on counteraction, based on the nature or effect of the arrangement and the approach of the ‘other’ territory – so one side or the other may take the appropriate action. This would apply to ‘payments’, including interest,

royalties and payments for goods, but not to deemed payments like notional interest deductions.

Interest deductibility recommendations represent a best practice approach, so there is some flexibility in the way of their adoption. They refer to interest expense and similar payments, particularly among related parties, although a de minimis monetary threshold may be applied. The choice of a company restriction primarily based on a maximum interest/ EBITDA ratio per year, subject to any higher external threshold debt mix, or alternatively based on a group-wide ratio reflects the options a number of countries have pursued recently. More countries may be spurred into action.

Treaty changes may also prevent or restrict access to reduced rates of withholding tax (WHT) on interest.

The pricing of financing arrangements is to be considered further.

Holding and repatriation

The application of bilateral tax treaty benefits may be harder to secure in relation to dividends and interest and will inevitably lead to increased uncertainty.

The proposals for tackling perceived treaty abuse will place considerable reliance on the Commentary. In this respect the behavioural response of the tax authority in a particular territory will be significant. Many states will in practice ignore the limitations on benefits (LOB) test and opt for the principal purpose test (PPT).

A possible knock-on effect may be the increased focus given to beneficial ownership issues. OECD guidance in this area at the moment is too vague to support a robust and consistent approach.

The CFC discussions are the least likely of the coherence action points to lead to material change. Some countries, like China, may be encouraged to take-up the recommendations but those with existing regimes are unlikely to change.

Transparency and disclosure

Apart from the TP and related reporting to tax authorities of master file/ local file and country-by-country information, MNEs should note the perceived importance of greater transparency and sharing of information. These transparency requirements also potentially apply to tax authorities, in relation to certain rulings given to MNEs, etc., and potentially, arrangements by taxpayers that constitute reportable ‘tax schemes’.

Actions have already been developed on intellectual property/ patent box regimes, leading to a commoditisation of relevant requirements – in particular, the modified nexus approach. But wider progress (i.e., chiefly in the prescription of general substance requirements) seems likely to be very challenging for the OECD. There is a wide range of possible competitive incentives and some states remain un-cooperative in this area.

The range of options discussed for mandatory reporting of domestic ‘tax schemes’ is not likely to lead to major changes. The fate of the proposals for international schemes seems uncertain on account of the lack of a pragmatic solution to the inherent uncertainty of how any such regime could work.

MNEs are unlikely to be asked to report additional information in order for the OECD to estimate the impact of the BEPS actions.


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Significant changes since latest consultations There are over 1600 pages in the BEPS package published on 5 October. We have discussed in some detail in earlier Tax Policy Bulletins the previously outlined proposals. The sections below focus on the main changes reflected in the current deliverables.

They include, in effect, four levels of action (with examples specified by the OECD):

new minimum standards to tackle issues where no action by some countries would have created negative spillovers on other countries (including adverse impacts of competitiveness), e.g., treaty shopping, country-by-country reporting, harmful tax practices and dispute resolution

revision of existing standards, where not all BEPS participants have endorsed the underlying standards, e.g., on tax treaties or transfer pricing

common approaches where countries have agreed on a general tax policy direction, e.g., hybrid mismatch arrangements and interest deductibility, which will facilitate the convergence of national practices and guidance drawing on best practices

best practice guidance aimed at supporting countries intending to act on other areas, e.g., mandatory disclosure initiatives or CFC legislation.

Action 1 - Digital

As expected, the main conclusions on digital are in line with the previous work and announcements to date, namely that:

it is impossible to ring fence the digital sector for purposes of applying separate tax rules, and

business models involving the digital sector raise complex issues relating to both BEPS practices (given the exacerbating effect of digital issues on such practices) and broader tax challenges irrespective of any BEPS issues.

The OECD has sought to address the relevant BEPS issues in digital by a combination of its TP, PE and CFC proposals.

On the broader tax challenges, there has been a VAT response, but otherwise there is no fully-formed consensus on actions related to corporate income taxation that can be taken in response to digital challenges to the international tax system.

Somewhat alarmingly however, the finalised position of the OECD seems open to countries adopting a variety of possible new measures in this area with a view to monitoring individual country experience on what options might in the future be worth considering more widely. Although the OECD position is caveated on the basis of needing to comply with existing tax treaties, we are concerned that this OECD position opens the door to a range of unilateral measures based on, for example, digital nexus, data collection levies, withholding tax, etc. This may materially complicate the task of maintaining an orderly approach by states to the highly complex tax challenges of digital business.

Action 2 – Hybrid mismatch arrangements

The final Report confirms an agreed outcome of the September 2014 deliverable recommending domestic rules to neutralise the following results arising from hybrid mismatch arrangements:

deduction with no taxable inclusion (D/NI)

double deduction (DD)

indirect D/NI (imported mismatch).

There is now much enhanced guidance on both the implementation of the rules and transitional arrangements. These cover the complex situations that may arise in the appropriate counteraction measures. This depends on the arrangement and its effect, so that in essence the payer jurisdiction denies deduction for payment or the payee jurisdiction includes payment as income.

Many more examples show how it might apply to structures involving ‘payments’ of interest, or royalties or for goods (but not notional interest deductions).

There are still outstanding issues for a number of matters including in particular stock lending, hybrid regulatory capital and interaction with CFC regimes.

Action 3 – CFC rules

No consensus was agreed on the Action on CFC rules. The final recommendations in the form of the six building blocks reflect the situation as previously reported, covering:

definition of a CFC

CFC exemptions and threshold requirements

definition of income

computation of income

attribution of income

prevention and elimination of double taxation.

The Report more clearly identifies that there are different policy drivers


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for CFC regimes. It also recognises that there is no ‘one size fits all’ solution even then, so provides only a more co-ordinated approach to countries looking to introduce CFC rules in the future. Those with existing regimes are unlikely to introduce changes as a result solely of this Report.

Action 4 – Interest deductions, etc.

The perceived risks identified in the BEPS Action Plan have been addressed by linking net interest deductions to taxable economic activity, although the proposals do not represent a required minimum standard and are only a recommendation by the OECD.

The proposed primary fixed ratio rule has been confirmed with a range of acceptable EBITDA thresholds for countries to adopt between 10-30%. The Report now identifies various factors which it hopes will help countries set the appropriate ratio. It also provides optional elements for a de minimis floor below which all interest could be allowed plus carry forward and carry back provisions.

A group ratio rule which could be adopted alongside the fixed ratio rule would allow for net interest expense above a country’s fixed ratio to be deductible up to the level of the net interest/ EBITDA ratio of its worldwide group. The earnings-based worldwide group ratio rule could also be replaced by different group ratio rules, as already adopted by some countries providing a lot of flexibility for existing regimes.

The Report now includes specific rules to prevent circumvention of the basic rules.

More work is anticipated in 2016 on the worldwide group ratio.

Action 5 – Harmful Tax Practices

Since the September 2014 report on Harmful Tax Practices, the February 2015 follow-up on the nexus approach to IP regimes also provided a few indications of updated thinking. In looking at the need for substance in preferential regimes, nexus in the form of using expenditure as a proxy for activity has come to the fore.

Since February, the IP box approach has been finessed so tracking and tracing of expenditure has been agreed. On qualifying assets, definitions now seek to bring into scope patents, copyrighted software and similar assets but rule out marketing intangibles like trademarks. There are tighter transitional rules as well.

Automatic exchange of rulings has been confirmed in relation to various named areas of particular risk, with clarification of the exchange being with the countries of the immediate parent and the ultimate parent plus residence countries of affected related parties (and those of the corresponding head office or PE for PE rulings). This compulsory exchange must take place within three months for rulings issued after 1 April 2016 (rulings from 1 January 2010 still extant at 1 January 2014 need to be exchanged by 31 December 2016).

The review of the non-IP regimes in the list of 43 preferential regimes originally identified appears not to have made much progress. This review will continue in 2016 along with the development of a strategy for wider implementation which draws in more non-OECD countries plus a clearer statement of the new criteria for what is ‘harmful’ (and an ongoing monitoring mechanism).

Action 6 – Treaty abuse

The final recommendations amount to a minimum standard to counter treaty

shopping but with some flexibility in the implementation of that standard to allow adaptation to each country’s specific circumstances and negotiated bilateral tax treaties.

In addition to an express statement to be added to treaties, the range and combination of options – for a LOB plus anti-conduit rule, PPT or both – remains the same as in the latest revised discussion draft of 5 May 2015. So too, in most respects do the specific rules on various dividend transfers, shares taking their value from immovable property, dual residence and third country PE exempt income situations.

The other issues, including changes to the Model Tax Convention (the preamble and Commentary on interaction with domestic anti-abuse rules) and the tax policy considerations to consider before entering into a bilateral treaty, round off this Action item as before.

Examination of the treaty entitlement of investment funds and US work on amending its current LOB position are reasons this report will be revisited in the first part of 2016.

All the required treaty changes will then be incorporated into the work on Action 15.

Action 7 – PE status

The final PE report is broadly in line with the earlier proposals in BEPS and therefore proposes: a widening of the dependent agent test; a narrowing of the independent agent exemption; a tightening of the specific activity exemptions from PE status for facilities used for storage, display or delivery of goods, etc. (including an anti-fragmentation test to prevent activities being split across separate legal entities); and certain measures to prevent abuse of the 12 month building site PE rule.


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As had already been disclosed, the earlier proposal to develop a special PE rule for the insurance sector is not being progressed. It has also been re-confirmed that further work on the allocation of profits to PEs, which had originally planned for completion with all these other measures, will not be addressed until 2016.

The major difference in these finalised PE proposals is that the OECD has backed away from extending the scope of the dependent agent PE rule so that it expressly includes certain contract negotiation activities (the previous proposal encompassed "negotiating the material elements of contracts"). However, the new test is arguably only a little less open-ended given that it focuses on agency activities that involve concluding contracts or playing "the principal role leading to the conclusion of contracts that are routinely concluded without material modification [by the principal]". The relevant proposed guidance on what these tests amount to is somewhat foggy, probably because of the last minute nature of the agreement reached for this new approach. This explains why the OECD has indicated the guidance will be reviewed in 2016.

It seems likely that these finalised PE rules will lead to significant dispute in practice.

Actions 8-10 – Transfer pricing outcomes

The OECD's thinking on a number of matters covered by Action Points 8-10 has evolved in recent months and some parts of the finalised proposals (in particular, relating to the fundamentals of the arm's length approach) are appreciably different from what has previously been seen, though some of the reports that have already been released in draft are not materially changed (e.g., the work on intangibles). The TP output of the BEPS project is significant by any measure with separate workstreams

and reports on: the fundamentals of the arm's length principle; commodity transactions; profit splits; intangibles; low value-adding intra-group services; and cost contribution arrangements. This makes it difficult to provide an overall perspective. However, it is worth noting that perhaps the major theme of the whole TP package relates to aligning the substance (i.e., real value contribution) with the location of profits for tax purposes and there has been a particular emphasis on the treatment of the returns associated with risks, capital and intangibles (including now a new multi-step approach to dealing with risk for TP purposes).

Key aspects of this theme are as follows:

Taxpayer reliance on legal contracts alone is not enough - rather the arrangements should be tested by a focus also on the relevant conduct of the parties. Under this approach, the accurate delineation of the transaction is fundamental. Where contracts appear to be inconsistent with the conduct of the parties, the OECD papers authorise adjustments to be made based on the conduct, not legal form.

The provision of funding alone without control over the underlying risks does not entitle the funder to anything above a risk-free return. In particular the OECD has gone further than in previous drafts to give specific examples of functions which do not evidence control. These include: meetings organised for formal approval of decisions that were made in other locations, minutes of a board meeting and signing of the documents relating to the decision, and the setting of the policy environment relevant for the risk.

The new approach is intended to materially impact artificial arrangements. Given these themes, which tax authorities likely will want to take up in practice, taxpayers should put greater emphasis on the functions performed and on evidencing the location in which the control of risks and intangibles, etc. is exercised in supporting their transfer pricing arrangements. This will be of particular importance to entities that earn a return for setting group strategy/ policies and place a heavy reliance on sub-contractors (e.g., sub advisors).

Action 11 – BEPS analysis

One significant development is that the OECD has carried out its own research and now estimates that BEPS may result in corporate tax losses of 4-10% (which at 2014 levels it calculates as USD 100-240bn).

There are two main areas of focus for the necessary supply of data for ongoing BEPS analysis which place reliance under this Action firmly on tax authorities:

information already collected by tax administrations which has not been used effectively, and

new data proposed to be collected under Actions 5, 13 and, where implemented, Action 12 of the BEPS Project.

The OECD has carved out a role for itself in working with governments to analyse these two forms of data in an internationally consistent manner.

The Report specifically recognises the need to maintain appropriate safeguards to protect the confidentiality of taxpayer information.


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Action 12 – Disclosure of aggressive tax planning

Countries are still free to choose whether or not to introduce mandatory disclosure regimes.

For domestic arrangements, the recommendations are not materially different and aim to provide options on how to balance a country’s need for better and more timely information with the compliance burdens for taxpayers.

The Report’s specific recommendations for rules targeting international tax schemes have been considerably reined in. They refer now to situations in which a country has particular concerns in relation to cross-border BEPS outcomes. The Report also now limits the recommendation to disclosures only where a taxpayer in that country enters into a transaction with material domestic tax consequences for it:

if it was aware or ought to have been aware of the cross-border BEPS outcome, or

if, after making reasonable enquiries, it becomes aware that it is an intra-group transaction that forms part of an arrangement that includes a cross-border BEPS outcome that would have been domestically reportable.

Greater reliance is, as a result, placed on specific recommendations for the development and implementation of more effective information exchange and co-operation between tax administrations. The Joint International Tax Shelter Information Centre (JITSIC) network of tax administrations will be used as a platform for such sharing.

Action 13 – TP documentation and CbC reporting

The work on TP documentation was started early on in the project and has been the subject of intense - and sometimes controversial - discussion in the BEPS consultation process. So, not surprisingly there are no material additional issues emerging in the finalised package which has just been released.

However, this is not to understate the significant obligations that are contained within these BEPS transparency requirements - and which will inevitably fall on taxpayers.

Further, given the required timescales involved (the country-by-country (CbC) reporting requirements go live from 1 January 2016), this will be one of the earliest tasks that taxpayers will necessarily face in getting to grips with the BEPS package.

The relevant obligations will require a three-tiered approach to documentation, comprising:

the high-level CbC report which is to be made available via treaty exchange to taxing authorities in each country in which a MNE operates (a brand new report)

a master file giving an overall perspective on the business, and

a local file which contains specific TP information for each relevant country of operation.

The OECD has an agreed template for the CbC report and has introduced a new master file requirement and new standards for the local file.

Early experience has suggested that most taxpayers seeking to ensure they will comply with the rules on a timely basis are finding the systems tasks required to knit the relevant information together somewhat daunting. There have also been

concerns about ensuring the continued confidentiality of commercially-sensitive information.

Action 14 – Dispute resolution

We now have more details to add to the political commitment in the form of a minimum standard to enable taxpayers to access improved cross-border tax dispute resolution on bilateral treaty matters (via the mutual agreement procedure, or MAP) and the specific procedural measures that will give effect to it. Adding to the commitment to adequate resourcing, there is in particular a set of 11 best practices that cover things like training of dispute resolution staff, implementation of advance pricing agreements (APAs) and a number of items that should be included in countries’ published MAP guidance. A monitoring process will be agreed in 2016 in conjunction with the Forum on Tax Administration.

Notwithstanding the minimum standard, a group of 20 states has also committed to a program of developing improved measures. This includes mandatory binding arbitration, which is likely to lead to a potentially broad coverage of open issues (e.g., according to the OECD it would cover something in the order of 90% of outstanding MAP cases).

Work is underway to enable the work in both these areas to be implemented under the multilateral instrument developed under Action 15.

Action 15 – Multilateral instrument

The development of the multilateral instrument for overriding bilateral tax treaties for BEPS changes is being taken forward by an ad hoc Group. Its Chair Mike Williams (UK) had previously said the group would aim to have the instrument ready for signature by the end of 2016.


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The Group of about 90 countries is due to meet on 5-6 November 2015 (back-to-back with the 20th Annual Tax Treaty Meeting for government officials). One significant development is that we understand the US is now participating, although it had initially said it was not ready to do so. A number of international organisations will be invited to participate in the work as Observers.

The takeaway There are a number of legislative and other regulatory changes which will result from the BEPS package. But the biggest issue is likely to be the impact on the behaviour of tax authorities, which are increasingly emboldened in their approach to dealing with MNEs.

For taxpayers, the most significant impacts are likely to be in the following areas:

tax treaty access being more widely constrained and in some cases uncertain

huge system requirements for TP documentation and the wider transparency agenda

an increased focus on conduct as a relevant test in assessing TP compliance

materially wider PE risks and challenges – especially the increased proliferation of PEs and erratic interpretation of PE attribution rules

a wide variety of responses related to restrictions in the relief for interest and other financial payments

overall, a significant rise in the levels of controversy and numbers of disputes.

All taxpayers will be affected in some way by the BEPS package. Typically, we would expect one or more immediate vulnerabilities will need urgent consideration and possibly remediation (e.g., specific treaty

access or PE issues). There will of course also be the need to address general systems issues raised by the broad transparency and documentation requirements. A wider consideration of the business of the group and group structure and financing arrangements, etc., in light of the BEPS changes is also likely to be warranted. It will also be useful to monitor the response of the tax authorities in the states where businesses conduct key operations given the possible variety in standards of enforcement and application of the BEPS package from country to country.

Tax departments will need to ensure they are equipped to deal with the expected uptick in levels of controversy and dispute in the post BEPS environment. Finally, it will be important to ensure all parts of business understand the general impacts of the BEPS project regarding required substance and other standards underpinning their tax and business strategy.

Let’s talk

For a deeper discussion of how these issues might affect your business, please call your usual PwC contact. If you don’t have one or would otherwise prefer to speak to one of our global specialists, please contact one of the people whose details are set out below. Richard Collier, London +44 (0) 20 7212 3395 [email protected] Phil Greenfield, London +44 (0) 20 7212 6047 [email protected] Suchi Lee, New York +1 (646) 471-5315 [email protected] Michael Bersten, Sydney +61 (2) 8266 6858 [email protected]

Stef van Weeghel, Amsterdam +31 (0) 88 7926 763 [email protected] Edwin Visser, Amsterdam +31 (0) 887923611 [email protected] Mark Schofield, London +44 (0) 20 7212 2527 [email protected] Ine Lejeune, Brussels +32 2 710 78 05 [email protected]

Pam Olson, Washington +1 (202) 414 1401 [email protected] Isabel Verlinden, Brussels +32 2 7104422 [email protected] David Swenson, Washington +1 (202) 414 4650 [email protected] Nelio Weiss, São Paulo +55 11 3674 3557 [email protected]


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SOLICITATION

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This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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To get started, call:

Vincent Lebrun Tax Partner Private Equity Industry Leader +352 49 48 48 3193 [email protected]

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PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,600 people employed from 58 different countries. PwC Luxembourg provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice. The firm provides advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. The firm helps its clients create the value they are looking for by contributing to the smooth operation of the capital markets and providing advice through an industry-focused approach. The PwC global network is the largest provider of professional services in the audit, tax and management consultancy sectors. We are a network of independent firms based in 157 countries and employing over 208,000 people. Talk to us about your concerns and find out more by visiting us at www.pwc.com and www.pwc.lu.

Michiel Roumieux Personal Tax Partner +352 49 48 48 [email protected]

Loek de PreterTransfer Pricing Leader +352 49 48 48 [email protected]

Laurent Grençon Tax Partner - VAT services for Private Equity and Real Estate Structures +352 49 48 48 2060 [email protected]

Véronique Lefebvre Audit PartnerAssurance Private Equity Leader+352 49 48 48 2019 [email protected]

Jean-François Kroonen Corporate Finance Partner and Advisory Leader - Private Equity+352 49 48 48 2149 [email protected]

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Private Equity Information Briefnewsletter.pwc.lu/newsletter/private-equity/... · PwC Luxembourg While we wished you a restful summer in our latest PE Newsletter, the ... the SIF