Update PE’sanddigital economy · argument, the income-tax department liberally quoted OECD principles on taxing internet-based companies. • Google, for instance, was asked by

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Update PE’s and digital economy

Hans van den Hurk

© Cygnus Tax BV 2019

First one specific update

CCCTB


Update permanent establishments


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Some remarks re Action 7

• Art. 5.3• Art. 5.4• Art. 5.5• Art. 5.6

• En nu enige cases….


Mastercard India• A company is taxable in India like any other domestic company if it secures business through a

permanent establishment, whether it employs people or software to do the job

• The company argued that since its global network and infrastructure were located outside India to process card payment transactions for customers in India, the service was not taxable in India

• However, the income-tax department claimed the only way this sort of a business could be done was by creating a permanent establishment in India, hence it was taxable

• Until 2014-15, Mastercard had a liaison office, through which it ran its business in India. The next year, as part of its global changeover, it created an India subsidiary, MasterCard India Services Private Ltd.


Mastercard India• The subsidiary would own and maintain the swipe machines but would bill their cost, including upgrades and

other functions, to Mastercard Holding. The latter holds 99 per cent in the Indian company.

• The remaining one per cent is held by MasterCard Singapore Holding Pte Ltd the holding company of the Singapore firm. Mastercard made the changes in 2015-16.

• AAR in its ruling quoted the decisions handed down by the Bangalore tax tribunal on Google, and the Madras High Court in the case of Verizon Communications, Singapore, to make the larger point about taxability. In its argument, the income-tax department liberally quoted OECD principles on taxing internet-based companies.

• Google, for instance, was asked by Ireland to pay Euro 163.8 million as tax on the plea that the company did have a permanent establishment in the country based on OECD guidelines.

• It is expected that Mastercard will appeal the AAR decision in a high court.


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Home of a salesmanager a PE, Denmark

• In a binding ruling dated 28 February 2017 (SKM2017.213.SR), the Danish Tax Board (the Tax Board) ruled that a Scandinavian sales manager’s occasional use of a so-called home office (work from home) constituted “core business activities” of the nonresident taxpayer, a German corporation, thereby creating a permanent establishment

• Correct?

• Would it make a difference if the employee is demanded to work from home?


Glencore , PE and DPT December 2018• From Glencore’s annual report:

– “UK Tax AuditIn December 2018, HMRC issued formal transfer pricing, permanent establishment and diverted profits tax assessments for the 2008 – 2017 tax years, amounting to $680 million. The Group intends to appeal and vigorously contest these assessments, following, over the years, various legal opinions received and detailed analysis conducted, supporting its positions and policies applied, and therefore the Group has not provided for the amount assessed. Management does not anticipate a significant risk of material changes in estimates in this matter in the next financial year.“


Nokia Networks, subsidiary and virtual projection

• Can an Indian subsidiary be said to be the permanent establishment of its overseas parent on the ground that it is a virtual projection of the latter even if the tests explicitly stipulated in the permanent establishment Article of a tax treaty are not met?


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Nokia Networks, subsidiary and virtual projection

• The dissenting opinion notes that a subsidiary should be treated as a permanent establishment of its foreign parent for the reason that “the way and manner in which it carries out its business activities, it is nothing but an avatar of, a virtual projection of, or an extension of, its foreign parent.”

• According the dissenting member, a subsidiary should be termed as “unassociated” or “indirect” permanent establishment (as against “associated” or “direct” permanent establishment comprising office, branch etc.) and the fixed place of business test and disposal test are not relevant to cases of “unassociated” or “indirect” permanent establishments.

• Important? See also OECD March 2018, profit allocation to a permanent establishment


Services PE issues in South Africa

• Article 5(1) of the DTA in turn provides as follows:

• “for the purpose of this Convention, the term ‘permanent establishment’ means a fixed place of business through which the business of an enterprise is wholly or partly carried on.”

• In addition thereto, Article 5(2) of the DTA (comparable to 5, 3 OECD) provides that the term ‘permanent establishment’ includes especially:

• “(k) the furnishing of services, including consultancy services, within a contracting state by an enterprise through which employees or other personnel engaged by the enterprise for such purposes, but only if activities of that nature continue (for the same or connected project) within that state for a period or periods aggregating more than 183 days in any 12 month period commencing or ending in the taxable year concerned.”


Services PE issues in South Africa

• The court had to decide how the DTA should be interpreted and whether it was necessary for AB and BD to have met the requirements of both Articles 5(1) and 5(2)(k) of the DTA.

• The taxpayer contended that it is necessary that a permanent establishment be created first under Article 5(1) and only once that has occurred, is it then necessary to take account of the

provisions of Article 5(2)(k) of the DTA.

• SARS on the other hand, argued that if AB and BD fell within the provisions of Article 5(2)(k), a permanent establishment exists and it is not necessary that AB and BD meet the requirements of Article 5(1) of the DTA.


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Services PE issues in South-Africa

• ‘It must be remembered that Article 5(1) of the DTA, in defining a permanent establishment, refers to a ‘fixed place of business through which the business of an enterprise is wholly or partly carried on’. The court expressed the view that it is not necessary that the non-resident carries out all of its business from the fixed place of business which is established in South Africa. The court reached the conclusion that a permanent establishment is created where AB and BD performs only some of its obligations in terms of a contract concluded with its client, and even if it concluded part of its business from its client’s boardroom.’


Denmark and partnerships• Decision

The ruling established that the limited partnership as such constituted 'an enterprise', as referred to in Article 5 of the OECD Model Treaty. Accordingly, the determination of whether there was a permanent establishment in Denmark should be made in relation to the partnership, not the individual foreign limited partners; if the limited partnership had a permanent establishment in Denmark, each foreign limited partner would be deemed to have a permanent establishment in Denmark.

• In considering whether the limited partnership had a fixed place of business in Denmark, the National Tax Board concluded that the fact that the general meetings of the partnership were to be held at the offices of the management company would in itself result in the partnership being deemed to have a fixed place of business through these offices.


Spain and finance PE in Switzerland• This was the case of an international group (engaged in activities related to the orthopedic and

medical devices market), whose Spanish subsidiary had a branch in Switzerland. This branch was registered before the Swiss authorities, had a few employees and premises at its disposal, and its activity consisted of managing a couple of intragroup loans, duly documented as well. Income from the branch was included in the tax base of its Spanish head office but considered exempt for being income obtained by a permanent establishment located abroad (under article 23 of the Double Tax Treaty between Spain and Switzerland and confirmed by article 22 of the Spanish Corporate Income Tax Act).

• Based on the above, the Spanish High Court denied the exemption on the basis that there was no permanent establishment under the definition of article 5 of the Treaty, which was also the relevant definition for domestic purposes. In particular, the Court held that

• “the mere collection of interest and, when applicable, the renewal of the principal of a loan at maturity without any payment or need to negotiate of any kind cannot be considered a substantial and essential financial activity for the company as a whole but merely an auxiliary activity.”


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Spain and finance PE in Switzerland

• Is an office whose tasks are limited to collecting interest from intragroup loans enough of a fixed place of business to deserve a full tax exemption in the head office residence state?

• The Spanish tax inspection took the view that such tasks were not enough to create a permanent establishment because they were not of a substantial but rather an auxiliary nature, which was confirmed by the High Court.


Dutch company with Belgium employee

• Will a sales manager from a Dutch multinational who lives close toBrussels and works all over Europe create a PE?


The digital economy and OECD

Marketing intangibles…..


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Background

Copyright Cygnus Tax BV 2019

Digitalized Economy Taxation Roadmap


Three types of issues with digital economy

• Scale without mass– A lot of business without (hardly any) presence

• A heavy reliance on intangible assets– Which are located elsewhere

• Role of data and user participation– Think of Google, Facebook etc.


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Core remark OECD• Finally, if “remote” participation in the absence of a taxable physical presence, or in the

absence of one that attracts substantial taxable profits, is considered to be a concern in relation to certain highly digitalised businesses, there is an important question as to whether this concern is not relevant to a broader set of businesses – for example, businesses that, due to digitalisation and changes in the global economy, can build their brand, develop an engaged customer base and create value in the absence of local activities or in the absence of local activities that attract a significant share of taxable profits.

• Source states around the globe will love this….


Three alternative approaches

• The “user participation” proposal

• The “marketing intangibles” proposal

• The “significant economic presence” proposal


The “user participation” proposal

• Essence:– This proposal is premised on the idea that soliciting the sustained engagement

and active participation of users is a critical component of value creation for certain highly digitalised businesses. The activities and participation of these users contribute to the creation of the brand, the generation of valuable data, and the development of a critical mass of users which helps to establish market power.

• Suitable for– Social media platforms, search engines and online marketplaces


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Some elements

• Soliciting the sustained engagement and active participation of users is a critical component of value creation for certain highly digitalised businesses

• Limited to those business models which benefit from this type of user base through hypothesising the user base as a separate enterprise and asking what return it would receive at arm's length in its dealings with other group entities to reallocation a proportion of the non-routine profits of the business, e.g. could rely on formulas that would approximate the value of the users, and the users of each country, to a business


User participation… weighing the arguments

• Discrimination between industries?

• An import duty on services (WTO)?

• Economic arguments to hypothesize a ‘separate enterprise = local customers'?

• How does this impact the 4 freedoms in EU?

• How similar is this vis-a-vis the political triggered 'state aid' cases?

• Why should it be a 'a proportion of the non-routine profits of the business'?

• What if there are global/regional losses?

• How to use the 'approximate value of users' for allocation purposes? Copyright Cygnus Tax BV 2019

The “marketing intangibles” proposal

• Intro with this chapter: – “Like the user participation proposal, it would change the profit allocation and

nexus rules. But unlike the user participation proposal, it would not be intended to apply only to a subset of highly digitalised businesses. Instead, it would have a wider scope in an effort to respond to the broader impact of the digitalisation on the economy.”

– So these new rules (formulary apportionment) can also be used for the traditional economy


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Policy rationale

• The marketing intangible proposal addresses a situation where an MNE group can essentially “reach into” a jurisdiction, either remotely or through a limited local presence (such as an LRD), to develop a user/customer base and other marketing intangibles. It sees an intrinsic functional link between marketing intangibles and the market jurisdiction


Policy rationale

• Two ways:– some marketing intangibles, such as brand and trade name, are reflected in

the favourable attitudes in the minds of customers and so can be seen to have been created in the market jurisdiction.

– other marketing intangibles, such as customer data, customer relationships and customer lists are derived from activities targeted at customers and users in the market jurisdiction, supporting the treatment of such intangibles as being created in the market jurisdiction


Proposal

• Taking into account this link between marketing intangibles and the market jurisdiction, the proposal would modify current transfer pricing and treaty rules to require marketing intangibles and risks associated with such intangibles to be allocated to the market jurisdiction. The proposal considers that the market jurisdiction would be entitled to tax some or all of the non-routine income properly associated with such intangibles and their attendant risks, while all other income would be allocated among members of the group based on existing transfer pricing principles

• So first step: deduct routine income for routine activities

• Second step: divide non-routine income via revised profit split…


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Marketing- versus trade intangibles

• A trade intangible is an intangible that demands certain R&D and other activities in a precise allocable location

• An example as why a trade intangible cannot be a marketing intangible:– A patent used to build an efficient car engine will allow it to achieve the same mileage in

one country as it does in another, and does so regardless of who made it or who bought it.

• Still OECD recognizes that it is sometimes different to distinct between those two…


Concerns OECD

• The marketing intangible proposal would also help mitigate BEPS concerns. Although BEPS Actions 8-10 achieved significant progress, the shifting of income attributable to marketing intangibles may still be accomplished through the exercise of only a relatively modest degree of decision-making capacity outside the market jurisdiction.

• See next slide…– With marketing intangibles the link between specific and substantial activities and the

return is less readily apparent


Again marketing and trade intangibles• The proposal is premised on the view that MNE groups now have less ability to shift profits attributable to

trade intangibles, which generally arise from substantial, observable activities arising in a specific location. In contrast, the proposal contemplates that the situation is significantly more challenging with respect to marketing intangibles, where the link between specific and substantial activities and the return is less readily apparent.

• Similar considerations also influenced the decision in the context of BEPS Action 5 to permit certain incentive regimes for trade intangibles but not for marketing intangibles.

• While MNE groups for a long time have had the ability to capture marketing intangible profits outside the market jurisdiction in low tax jurisdictions, recent developments have enhanced their ability to do so which in turn justifies taking a fresh look at this point in time


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Three key fact patterns

• The first is where a highly digitalised business derives revenue from sales and marketing activities targeting a particular market jurisdiction in which it does not have a taxable presence.

• The second key fact pattern is where the same highly digitalised business has a local presence but operates it as an LRD. The marketing intangible proposal would provide that some or all of the non-routine profit allocable to marketing intangibles associated with the market jurisdiction would be taxable by that market jurisdiction

• The final key fact pattern is a consumer product business not traditionally thought of as a highly-digitalised business, operating either remotely or through an LRD structure.


Companies from the third category

• Media companies• Pharmaceutical companies• Food companies• Mobility providers

– Cars – Bicycles

• Etc.


Mechanics

• The proposal would modify current profit allocation and nexus rules to require that the non-routine or residual income of the MNE group attributable to marketing intangibles and their attendant risks be allocated to the market jurisdiction. – See also OECD Profit Allocation Permanent Establishment March 2018

• All other income, such as income attributable to technology-related intangibles generated by research and development and income attributable to routine functions, including routine marketing and distribution functions, would continue to be allocated based on existing profit allocation principles.


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About ‘regardless’…

• The special allocation of some or all non-routine returns from marketing intangibles, and the related expansion of the market country’s taxation rights, would apply regardless of which entity in the MNE group owns legal title to the marketing intangibles, regardless of which entities in the group factually perform or control DEMPE functions related to those intangibles (though as noted above, routine marketing functions would receive a routine return in the location where carried out), regardless of how risks related to the marketing intangibles would be allocated under existing transfer pricing rules, and regardless of how those rules would ordinarily allocate income related to the marketing intangibles and their associated risks.


About ‘regardless’…

• The proposal assumes that in many instances the type of MNE group to which this special allocation rule applies will already have a taxable presence in the market jurisdiction, but accepts that there will be instances where a taxing right would be assigned to the market jurisdiction in cases where no such right exists under the international tax rules as they stand, taking compliance and administrative cost considerations into account


How to allocate profit?

• OECD does not really have a solution– Several alternatives have been mentioned– In the below a few of the systems OECD considers worthwhile


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Standard TP Approach

• Apply normal transactional transfer pricing principles. Conceptually, the approach would be quite straightforward. First, marketing intangibles would need to be determined and thentheir contribution to profit would need to be determined under two sets of assumptions: (i) an assumption that the marketing intangibles (and their attendant risks) are allocated under the current rules; and (ii) an assumption that the marketing intangibles (and their attendant risks) are allocated to the market jurisdiction.


Standard TP Approach

• This calculation could create a marketing intangible adjustment which would be the difference between those two numbers (new versus old situation).

• The income allocation would be dependent entirely on the facts of each case and the economic contribution to profits provided by the marketing intangibles.

– This would retain the existing rules requiring an identification of the specific marketing intangibles and a calculation of their contribution to profit.


Revised residual profit split

• As with any residual profit split this would require a number of steps including the determination of relevant profit, the determination of routine functions and their compensation, the deduction of routine profit from total profit and finally the division of the remaining or “residual” profit.

• In this regard, there are different ways in which routine profit could be determined for purposes of computing the amount of non-routine income to be subject to the profit split, ranging from a full transfer pricing facts and circumstances analysis to a more mechanical approach (e.g. a mark-up on costs or on tangible assets).


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Revised residual profit split

• Second, and once the amount of routine profit is determined and subtracted from total profit, there are different ways of determining the portion of non-routine or residual profit attributable to marketing intangibles, ranging from, e.g., cost based methods (e.g. costs incurred to develop marketing intangibles versus costs incurred for R&D and trade intangibles) to more formulaic approaches (e.g. using fixed contribution percentages, which may differ by business model).


Worrisome…

• To address concerns that the implementation of the proposal would result in significant controversy and double taxation for business, the proposal should offer taxpayers the possibility of early certainty on the taxation under this approach and come with a strong dispute resolution component.


Some last considerations

• Shift to new nexus rules, i.e. does this lower the PE-thresholds?– See first slides, global PE developments

• What is the difference between marketing versus trade intangibles in this context, i.e. why/how to differentiate?

• How do the three fact patterns relate to each other?


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The “significant economic presence” proposal

• Under this proposal, a taxable presence in a jurisdiction would arise when a nonresident enterprise has a significant economic presence on the basis of factors that evidence a purposeful and sustained interaction with the jurisdiction via digital technology (i.e number of user based, volume of digital content, billing in local currency, etc) and other automated means.


Some elements ‘significant economic presence’

• The allocation of profit would be based on a fractional apportionment methods by following these steps:1. Define the tax base to be divided à applying the global profit rate of MNE

group to revenue generated in particular jurisdiction2. Determine the allocation keys to divide that tax base by taking into account

sales, assets, and employees3. Weighting these allocation keys

• Possibility to impose withholding tax on gross basis at low rate as enforcement tools


Some last remarks re SEP

• Why is B2B treated differently than B2C in this context?

• How will the 'fractional apportionment method’ work in practice?

• And last but not least…..

– Didn’t OECD want the world to tax there where value creation takes place???


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Comparing the proposals (1)

• The three proposals would require changes to nexus and profit allocation rules. On nexus they all argue for a re-thinking of the traditional nexus concept and, within their different parameters, they go beyond the limitations on taxing rights determined by reference to a physical presence. On profit allocation, the significant economic presence proposal contemplates the use of a fractional apportionment approach with the possibility of using a withholding mechanism for collection while the user contribution and marketing intangible proposals would use a residual profit split approach.

• All three proposals apply a global approach to determination of profit.


Comparing the proposals (2)

• While the user contribution and marketing intangible proposals proceed from different conceptual origins and scope they can be conceptualised in a similar way as discussed in further detail below. Furthermore they both use a residual profit split methodology for allocating profit.

• Accordingly, the remainder of this section focuses on the commonalities and design challenges of these two proposals, while recognising that other commonalities may exist between these proposals and the proposal based on the concept of significant economic presence, including their possible use of a withholding tax as a collection mechanism or enforcement rule, to the extent that this does not result in double taxation.


Different conceptual origins

• Despite commonalities the proposals have different conceptual origins and resulting differences in scope. The user participation proposal emphasizes the value that digital businesses generate from the engagement, interaction and contributions of users, including content, data and powerful network effects. Its premise is that this justifies the reallocation of profits of relevant businesses to countries in which users are located.


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• In contrast, the marketing intangible proposal emphasizes the intrinsic factual link between a market jurisdiction and marketing intangibles related to that jurisdiction, while suggesting that loyalty of an active and engaged user itself could be considered a type of marketing intangible. Its premise is that this intrinsic link justifies the reallocation of profits of relevant businesses to countries in which customers are located, or rather being awarded taxing rights over some portion of profits attributable to marketing intangibles.



• The marketing intangible proposal is also intended to help mitigate BEPS concerns, where the income attributable to marketing intangibles may be allocated outside the market jurisdiction through the exercise of only a relatively modest degree of decision-making capacity outside the market jurisdiction.

• Questions– These rules will also be applicable to traditional businesses where consumer loyalty

plays a role

– How to distinct this? B to B never a problem since it seems not to relate to end consumers?


Why I expect that system 2 will be chosen

• System 2 is the ‘marketing intangible’ proposal– Preference US

• These differences in emphasis inform the different scopes of the two proposals. The user participation proposal could apply only to social media platforms, search engines, and online marketplaces while the marketing intangibles proposal instead potentially could apply to a much broader range of businesses that have significant marketing intangibles.

• Revised profit split is easier than global formulary apportionment


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Another balance…

• Under the user participation proposal, it could be argued that the value created by the contribution and engagement of users does not constitute value created by the business, and instead constitutes value created by third-parties, that are more akin to suppliers than employees, and are remunerated at arm’s length through the provision of a free service. Furthermore, if one accepts the conceptual motivation behind the user participation proposal, there is a question as to whether it has relevance beyond the digital-centric businesses identified above, and whether the narrow scope proposed will prove sustainable over time as digitalisation impacts on more traditional businesses.


Another balance

• Under the marketing intangibles proposal, the intrinsic link between marketing intangibles and a market jurisdiction could be questioned, particularly where marketing activities are undertaken outside of that jurisdiction and not significantly tailored to local customer habits and preferences. There is also a question as to whether the justification is of equal relevance to companies that sell business-to business, such as industrial goods and professional services companies, that may have substantial marketing expenditure and valuable trademarks, brands, or goodwill but may not leverage digital technology and customer data in delivering highly targeted/personalised marketing in the same way as consumer-facing businesses.– See my last comment…


An essential question• Both proposals share the position that, under a value creation principle, the cross-border sale

of goods and services to customers in a jurisdiction should not alone lead a business to have an active presence or participation in that jurisdiction, irrespective of the volume of those sales. Both proposals instead interpret active presence or participation to be a function of a business’s active outreach to and interaction with users or customers, including the use of digital technologies to cultivate, interact with and leverage a local customer or user base in a way that creates meaningful value for the enterprise.


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An essential question

• The question then is whether this is relevant: – only in situations in which digital-centric businesses engage, interact with and leverage

contributions from a participatory user base on a digital platform, as per the user participation proposal;

– in a broader range of situations in which, for example, consumer facing businesses use digital technologies to develop a customer base, collect customer data or deliver highly targeted marketing and personalization of products; or

– in all situations in which businesses have significant marketing intangibles that can be attributed to customers of a jurisdiction, as per the marketing intangibles proposal.


Scope and potential limitations• Despite the different starting points, both proposals contemplate some express scope

limitations to align the proposals with the policy objectives outlined above and limit compliance and administration concerns.

• These limitations could be structured in different ways, but the proposals would need to be limited to businesses in which the contribution of marketing intangibles and/or user participation to the production of income is substantial. This could be determined, for example, through the use of some materiality thresholds (e.g. cost ratios, size of customer and user base, or other metrics) and exclusions (e.g. de minimis rules, exemptions of certain industry sectors, exclusion of commodities).

• Additional limitations, related for instance to the size or profitability of the taxpayer, could also be used to further focus the scope and reduce associated compliance costs, though differentiation also raises issues of fairness.


Profit determination

• The amount of profit (or loss) to be re-allocated would likely not be determined by using existing transactional transfer pricing methods. Instead, a new type of residual profit split method could be mandated, relying on more simplified conventions for determining such profit and approximate results consistent with an application of the arm’s length principle. Apart from this special treatment of profit attributable to user participation, marketing intangibles, or some alternative formulation, the existing profit allocation rules would continue to apply.

• This proposal would involve the following steps: – 1. the determination of the total or combined profits to be split;

– 2. the identification of the residual (i.e. non-routine) portion of this total or combined profits by subtracting the returns allocable to routine functions; and

– 3. the determination of the portion of the residual profit to be re-allocatedCopyright Cygnus Tax BV 2019

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Relation to existing profit split method• While this proposal would retain many similarities to the existing profit split method, it may apply

to a broader aggregate – combined profit of multiple entities – and introduce simplifying conventions that are intended to make the calculations easier. This is because the more the above steps are based on detailed and factual determinations (e.g. conventional transfer pricing analysis), the greater is the risk of disputes and uncertainty in the outcome produced by the proposal. Reducing complexity in the implementation of the various above steps, while at the same time making sure that any approximation is principle-based, will thus be a key policy consideration.

• The various implications of any simplified method would also need to be assessed as the proposals are further developed, including an examination of their effect on revenue and taxpayer behaviour. In some businesses such as those which are highly digitalised, the separation of non-routine returns attributed to trade intangibles relative to those attributed to user participation or marketing intangibles, with which they are often interconnected, will be important in terms of results and also potentially challenging.


Elimination of double taxation

• Because the new profit allocation proposals envisage a reallocation of the MNE group residual profits to user or market jurisdictions, some changes to existing treaty provisions to address the elimination of double taxation seem necessary. Adjustments to the amount of profits allocated to MNE group members under the proposals should be designed so as to prevent double taxation among associated enterprises.

• In addition, the new proposals may need to incorporate strong dispute prevention and resolution components to prevent their implementation from resulting in double taxation for businesses.


Nexus and treaty considerations• New nexus requirements would be necessary to implement the profit allocation proposals. The

essential task would be to provide user or market jurisdictions with the right to tax the additional income, even if the entity earning that income would have no taxable presence under existing treaty principles. This could conceivably be achieved by amending or supplementing the Article 5 definition of “permanent establishment”, allied with changes to the distributive rules in Articles 7 and 9.

• However, those existing provisions look at transactions between enterprises or parts of an enterprise, whereas the new proposals look at the combined profit of multiple entities within an MNE group. Therefore, an alternative approach might be to introduce the new nexus through a new standalone rule allocating taxing rights over the additional income.

• In all cases, the proposals recognise the need for a new nexus which would be based on an alternative threshold. There are similarities between this and nexus rules based on a concept of significant economic presence which should be further explored. Of course countries may also need to amend their domestic laws, such that any new article can become operational and there may be benefits in coordinating the development of any such domestic rules.


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Last but not least

• To address concerns that the implementation of the proposals would result in additional controversy and double taxation for businesses, the proposals would need to incorporate strong dispute prevention and resolution components, and focus on simplicity. For example, early certainty features could range from improved multilateral risk assessment procedures, drawing on the current International Compliance Assurance Programme (ICAP) pilot, to multilateral advance pricing agreement programmes, and joint audit programmes, all following co-ordinated or unified procedures to reduce controversy in the application of the rules and to minimise the risk of double taxation. The objective of any potential dispute prevention and resolution features would be to ensure a consistent application of the proposals across tax administrations in multiple participating jurisdictions.


ICAP, 1st paper published January ‘18 • Participating countries:

• Australia

• Canada• Italy

• Japan

• The Netherlands

• Spain

• United Kingdom

• United States


What ICAP requests from MNE’s

• Pilot documentation package:

• CbyCR

• MF

• selection of LFs

• group tax strategy frameworks

• financials

• uncertain tax positions

• business structure

• value chain analysis

• PE documentation © Cygnus Tax BV 2019

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ICAP 2.0 (Decided March 28-29 in Chile)

• participating states;

– Australia, Austria, Belgium, Canada, Denmark, Finland, Germany, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Poland, Spain, United Kingdom, United States

– MNEs with a parent entity in one of these jurisdictions that wish to discuss possible participation in ICAP 2.0 should contact the relevant tax administration by 30 June 2019


Responses from the world

• Germany and France see these proposals as a good step in the correct direction• They want to combine this with GILTI (BEPS 2.0)• United States is worried

– Like GILTI– But not the plans regarding the digital economy


Responses from the United States

• US officials: – Chip Harter, Deputy Assistant Secretary US Department of the Treasury said that if consensus

among nations can, in fact, be reached to change the international tax rules in a coordinated way, any additional taxing rights granted to market countries would be “relatively modest” and likely based on the US-favored “marketing intangibles” approach.

• He predicted that countries would agree to a simple formula allocating more income to market jurisdictions that would allow tax administrations from less developed countries to easily apply the rules.

– Harter further assured that countries would not agree to full formulary apportionment or a tax only on highly digitalized business models, as proposed in the OECD consultation document. The “significant digital presence” permanent establishment proposal and call for full unitary apportionment were advanced at the last minute by a group of 24 developing countries, he said.


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• US officials:

– Brian Jenn, Deputy International Tax Counsel at the US Department of the Treasury, said that although in theory, any business could have marketing intangibles, it is probably best as a policy matter to limit this rule only to certain businesses.

– “I think it could make sense to focus this proposal on businesses that ultimately, directly or indirectly, are dealing with individual consumers rather than with other businesses just because I think marketing intangibles are most relevant in that context,” Jenn said.

– Jenn said the greatest political pressure causing countries to seek a change to the international tax system comes from the popular perception that companies with high-profile brands are not paying their fair share of taxes to local jurisdictions. Thus, the focus of any changes to the international tax rules should be on visible brands that drive customers to that product or service, he said.


Responses from the United States• US officials:

– Jenn said that is possible to “bridge the gap” between the user participation proposal, favored by the UK, and the marketing intangible proposal, favored by the US.

– There is a distinction between highly digitalized businesses models — such as the types of businesses that prompted calls for a digital services tax — and other business models, he said.

– “I think you might treat the highly digitalized business models that have businesses as their customers but are advertising or providing services to individual users differently . . . .You could think about the marketing intangible being the value of having the users or the value of the positive associations of the users with the business,” Jenn said. This would contrast with the “normal case,” Jenn said, where the marketing intangible would be with respect to individual consumers.



• US officials: – Asked what would qualify as a marketing intangible, Jenn said that the items listed in the

OECD discussion draft, such a brand names and customer relationships were illustrative only. Something like goodwill could also be covered, he said. He added, though, that it ultimately may not matter because is likely that that amount allocated to market jurisdictions under a marketing intangibles theory would be based on a simple formulaic approach.


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Globe (BEPS 2.0)

• GLObal anti-Base Erosion proposal

– Part of BEPS 2.0

• Part 1. Income inclusion rule

– Based on Global Intangible Low-Taxed Income

• Part 2. Tax on base erosion payments

– Based on US BEAT (Base Erosion and Anti-Abuse tax)

• Applicable for MNE’s with revenues above USD 500m

– Intended to trigger payments as interest, royalty’s, intragroup service costs to low taxed

group companies.


Thanks !!


Documents

Update PE’sanddigital economy · argument, the income-tax department liberally quoted OECD principles on taxing internet-based companies. • Google, for instance, was asked by