Select the Action Plan below to access information.
We will be updating this page with more content regularly.
“BEPS has already resulted in behavioral change in some form or fashion; everyone is (or should be) sensitive to BEPS, it adds another layer of rules and regulations that need to be considered. ”
“Anyone operating cross-border should review their structures. The anti-hybrid rules have the potential to catch reasonably common arrangements.”
“Sustainable and responsible financing structures have always been important to us. With the new BEPS driven changes, we are paying particular attention to detailed stress testing of financial modelling scenarios to ensure the limitations on tax deductions do not hinder free cash flow for business operation and/or strategic growth plans. Clearly some industries are impacted more than others, driven by their relative natural appetite for leverage, and we are addressing each on a bespoke basis for that business need. The analysis is complex, especially for businesses generating EBITDA internationally, and particular care needs to be taken on a case by case basis.”
“Substance is at the heart of the BEPS project and this is clearly evidenced in Action 6. The rules will apply to existing structures, therefore any group that relies on a holding company obtaining treaty benefits needs to determine whether they need to take action to protect against losing future treaty benefits.”
Something piqued your interest? Get in contact, we’d be very happy to help.
Debevoise has experienced tax professionals in the USA, UK, France and Hong Kong. The resources below consider how BEPS is being implemented and provide detail about some of the issues that are arising as part of this implementation process.
What You Need to Know About Structuring Your Fund in the BEPS Era
To misquote Star Trek, “It’s life, Jim, but not as we know it.” And so we must think of the global tax landscape as we head into a BEPS (base erosion and profit shifting) era. The BEPS Project, the brainchild of the OECD and the G20, is aimed at preventing tax avoidance caused by base erosion and profit shifting by multinationals. Over 100 countries, including the United States and most European countries, are collaborating in implementing some or all of the BEPS Project, meaning every fund is likely to be touched by the changes in some way (see our implementation tracker at http://beps.debevoise.com that follows the progress made by each of the United Kingdom, France, European Union and the United States).
BEPS appears frequently in private equity news and is commonly asked about by investors during fundraising and beyond. This article aims to provide readers with a working understanding of the BEPS Project and its potential impact on fund structures. You may also wish to view our 2.5-minute animated explainer video at http://beps.debevoise.com/#video1.
An entity’s tax base is the income, profits or gains (or other determining factor) against which tax is charged. At a basic level, corporate tax is calculated by:
[tax base] x [tax rate]
Base erosion is the process of reducing an entity’s tax base. This can obviously occur simply by not being profitable, but the base erosion targeted by the BEPS Project is erosion that has been “aimed for” or structured.
Profit shiftingProfit shifting is the practice of moving a multinational group’s profits from one (typically high tax) country to another (typically low/no tax) country (for example, through royalty payments or intercompany debt).
The BEPS Project consists of a 15-point Action Plan. The Actions are wide-ranging and consider, among other things, hybrid entities and instruments, interest deductibility, double tax treaty abuse, permanent establishment status and transfer pricing.
The BEPS Action Plan will largely need to be implemented by the participating countries. This means that, although there may be a multinational consensus as to the general approach that needs to be taken, the actual BEPS rules may change from country to country. The European Union has published its own response to BEPS in an Anti-Tax Avoidance Package and seeks to implement many of the BEPS Actions. This should bring some uniformity into how the 28 member states (27 following Brexit) will implement the BEPS Action Plan. In addition, the United States has already implemented some parts of the BEPS Project and may implement more (see our implementation tracker at http://beps.debevoise.com).
Set out below is a simple fund structure, highlighting some of the areas that may be impacted by the BEPS Project.
Action 2 aims to neutralize tax benefits that hybrid entities enjoy due to mismatched treatment by various tax jurisdictions. If a check-the-box election is made with respect to either a company or a partnership, this will make it a hybrid entity and therefore potentially subject to the Action 2 anti-hybrid rules. For a fund that is a partnership, these rules may be applicable if (i) the fund is checked to be treated as a corporation for US tax purposes, or (ii) there are certain investors in the fund for whom the fund is treated as opaque. If the Action 2 anti-hybrid rules apply, the investors may become subject to deemed taxable income. Alternatively, if there is an interest payment at the portfolio level in a participating country, the deductibility of this interest payment may be compromised. For a short animation explaining the anti-hybrid rules, see http://beps.debevoise.com/#video2.
Hybrid instrument 2A Preferred Equity Certificate (PEC) is typically treated as debt in Luxembourg but equity in the United States and is therefore a hybrid instrument. The anti-hybrid rules proposed under Action 2 may apply to disallow a portion of the interest deduction in LuxCo (or, surprisingly, could even impact interest deductibility at a portfolio company level). This may be the case even if the US investors are US tax exempt. For more on this, see https://www.debevoise.com/insights/publications/2017/06/the-anti_hybrids-rules_pe-fund-structures.
Treaty abuse 3One of the reasons many funds invest through a holding company is because of the treaty benefits offered by such holding company’s jurisdiction (i.e., the elimination of withholding tax on interest and distributions). BEPS Action 6 aims to prevent the granting of treaty benefits in inappropriate circumstances. Applying the anti-abuse provisions to a fund is tricky. One approach, the Limitation-on-benefits (LoB) rule, involves tracing through to all of the beneficial owners to establish whether they are obtaining better treaty benefits by investing through the fund. The other approach, the Principal Purpose Test (PPT) rule, tests whether one of the principal purposes of the arrangements is to obtain treaty benefits. Applying the LoB rule to a widely-held fund is administratively burdensome, and applying the PPT rule is technically challenging and will require a large degree of professional advice. The greater the holding company’s substance, the easier the analysis will become. For a short animation explaining the anti-treaty abuse provisions, see http://beps.debevoise.com/#video4, and for further analysis on this area, see http://www.debevoise.com/insights/publications/2017/07/treaty-benefits-in-a-fund-context.
Transfer pricing 4The transfer pricing guidelines have been updated significantly in response to a number of BEPS Actions and have put more pressure on the analysis of payments for services between related parties. The amount of management fees that each of the manager and the adviser(s) are allocated may need to be reviewed, with particular focus on the activities undertaken by people in each relevant jurisdiction and the functions that such people perform. This will be of particular relevance to sponsors with an offshore manager supported by a substantive onshore adviser. Further, Action 13 seeks to introduce a requirement for multinational enterprises (MNEs) to produce transfer pricing documentation on a country-by-country basis. This will require MNEs to provide high-level information regarding their global business operations and transfer pricing policies in a “master file” that is to be available to all relevant tax administrations. A detailed “local file” will be needed in each country of operation. Large MNEs will also be required to file a Country-by-Country (CbC) Report that will provide annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax, and income tax paid and accrued. These MNEs must also report their numbers of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction. Finally, the CbC Report requires MNEs to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities in which each entity engages.
Interest deductibility 5Action 4 seeks to limit “base erosion” through interest deductions, setting out a fixed ratio rule that will limit the deductibility of net interest costs to a percentage of EBITDA. Amounts above the fixed ratio may still be available to deduct for companies forming part of a worldwide group, where net interest expense will be deductible up to a level equal to the worldwide group’s net interest/EBITDA ratio. Related-party debt, or debt that would not ordinarily benefit from interest deductibility, is likely to be excluded from the group net interest calculation. For a short animation considering interest deductibility, see http://beps.debevoise.com/#video3.
BEPS is here to stay and has real implications for funds. Changes will be needed and serious thought given to many tried and tested structures for both existing and new funds. BEPS represents the new now, and we have every expectation that, with care, the private equity industry should, in the (correctly attributed) words of Mr. Spock, “Live long and prosper.”
This article was first published in the Debevoise & Plimpton Private Equity Report, Fall 2017, Volume 17, Number 2.
Please contact BEPS@Debevoise.com to discuss further.
Tax Treaty History – the Action 15 Multilateral Instrument
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Ask an expert – The anti-hybrids rules and private equity fund structures
• PECs may constitute a hybrid financial instrument because, although classed as debt instruments for Luxembourg tax purposes, can be structured to obtain equity treatment in the US. The hallmarks that you need to look for in the PEC instrument are (we assume for the purposes of this advice that the hallmarks are present):
■ Interest is paid only when declared by board (interest may accrue and roll over);
■ There are limited creditor rights on default, typically just ability for the lender to elect a new board; and
■ Interest is paid only if it won’t lead to the borrower’s insolvency; and
• There is an overarching arrangement that links a UK taxpayer to the PECs.
Mismatch activity: Payment under a financial instrument (chapter 3 of the rules).
Priority: Chapter 3.
UK connection: Payer within the charge to UK corporation tax.
Tax result: The interest will form part of LuxCo’s ordinary income, therefore, it is not reasonable to suppose that a hybrid or otherwise impermissible deduction/no inclusion mismatch arises.
Counteraction: None required.
Mismatch activity(ies): LuxCo will receive a deduction in resect of the accrual, therefore, even though there is no payment, there is a quasi-payment under a financial instrument (chapter 3 of the rules), there is also a payment (interest paid by UKCo to LuxCo) made as part of an overarching arrangement (chapter 11 of the rules).
Priority: Chapter 3.
UK connection: None.
Priority: Chapter 11.
UK connection: Payer under an overarching arrangement is within the charge to UK corporation tax.
Tax result: A payment is made by UKCo that is part of a series of arrangements pursuant to an overarching arrangement (the investment by the fund in UKCo). Looking to whether the PECs give rise to a hybrid or otherwise impermissible deduction/no-inclusion mismatch in respect of the PECS; for each investor you need to determine whether LuxCo’s deduction exceeds ordinary income by reason of the terms or feature of the PECs.
The UK investors are unlikely to trigger these rules because the interest should form part of their ordinary income.
The US taxable investors may have a mismatch because LuxCo will receive an interest deduction on an accruals basis but US taxable investors will not have a corresponding inclusion in their ordinary income until interest is declared. The hybrid rules expressly exclude short term deferral (12 months) from their remit and also make provision for HMRC to grant approval for longer deferral periods, where just and reasonable (s 259CC(2) of the rules). You will need to find out more from your client to establish whether an extended deferral period is just and reasonable and then make a claim with HMRC.
The US tax-exempt investors are trickier. The BVCA has asked HMRC to confirm that, for the purposes of calculating ordinary income, amounts allocated to a tax exempt investor should be deemed to be ordinary income on the basis that is not being brought into account by virtue of an exemption that applies to a particular type of receipt (s 259BC(3) of the rules). Absent confirmation, the rules state that ‘it does not matter whether the excess ... arises for another reason as well as the terms, or any other feature of the financial instrument’. To determine if the mismatch would arise by reason of the terms of the PECs we need to analyse what would happen if the tax exempt investors were fully taxable (s 295CB(4)(5) of the rules). As above, a fully taxable US investor would achieve a mismatch, therefore, counterintuitively, the US tax-exempt investors’ sharing percentage of the PECs also gives rise to a no-inclusion result. We note that, if an extended deferral period is granted by HMRC, this should also cover the US tax exempt investors.
Relationship: UKCo is in the same control group as LuxCo.
Counteraction: Absent receiving consent from HMRC to extend the permitted tax period for calculating the deduction/ordinary income mismatch (ideally to match the period that the PECs are likely to run), UKCo will have the part of its interest deduction excluded corresponding to the proportion of the interest receivable under the PECs that has resulted in the mismatch outcome (the US investors’ collective sharing percentage).
Your client is required to take a just and reasonable approach to determining this proportion. This is obviously
very difficult in some fund situations, especially where there are fund of fund investors. You should speak to
your client and work out a justifiable methodology.
This article was first published in the 9 June 2017 edition of Tax Journal.
Please contact BEPS@Debevoise.com to discuss further.
LMA Concerns: Hybrid Mismatch Rules (Action 2) and Interest Deductibility Rules (Action 4)
Please contact BEPS@Debevoise.com to discuss further.
Analysis - BEPS Action 6 and Private Equity Funds
Action 6, as set out by Michael McGowan and Andrew Thomson (‘BEPS: preventing treaty abuse’, Tax Journal, 31 October 2015), is about preventing treaty abuse. This will be achieved via the inclusion in double tax treaties of:
• a clear statement that the treaty’s aim is the prevention of tax avoidance; and
• some combination of a limitation on benefits (LoB) rule and/or principal purpose test (PPT).
• Fund is an institutional investor, tax resident in State T.
• Master HoldCo is subject to tax and regulation in State R.
• Master HoldCo is a regional investment platform holding a diverse portfolio. It employs a local team of investment managers.
• State R was chosen due to the availability of knowledgeable directors, skilled workforce, State R’s membership of a regional grouping and use of regional currency, and its extensive treaty network.
• In reviewing its investment, Master HoldCo considers the existence of a benefit under the State R/State S tax treaty (5% withholding in contrast to 10% withholding between State S and State T). The OECD concludes that ‘this alone would not be sufficient to trigger the application of [the PPT]’. Instead, ‘it is necessary to consider the context in which the investment was made, including the reasons for establishing [MasterCo] in State R and the investment functions and other activities carried out in State R’.
• Real estate fund is fiscally transparent with a range of institutional investors from various jurisdictions.
• Real estate fund invests in real estate via Master HoldCo.
• Master HoldCo is established ‘for a number of commercial and legal reasons’, including to shield the real estate fund from liabilities, to facilitate third-party borrowing and because applying for treaty clearances through one body is administratively easier.
• Real estate fund reviews a number of jurisdictions but settles on State R due to its political stability, its regulatory and legal systems, lender and investor familiarity, access to personnel and the extensive tax treaty network.
• State S is ‘allowed to tax the income derived directly from such investments’.
• Master HoldCo ‘does not obtain treaty benefits that are better than the benefits to which its investors would have been entitled if they had made the same investment directly’. Unsurprisingly, the OECD concludes that ‘it would not be reasonable to deny the benefit of the tax treaties’.
Please contact BEPS@Debevoise.com to discuss further.
State Aid and BEPS
Broadly, state aid is anti-competitive behaviour by an EU member state that:
• Seeks to give a financial benefit to a select undertaking or group of undertakings.
• Threatens to distort, or actually distorts, competition.
Undoubtedly, the state aid provisions have the ability to capture tax policies and tax rulings but some are claiming that the European Commission is overreaching with its latest set of tax decisions relating to Apple, Fiat and Starbucks.
• Take BEPS into account when considering financing arrangements, structure, and the ongoing operation and management of any investment.
• Consider the implications of the state aid tax decisions when undertaking tax due diligence. Particular care should be taken when drafting the tax indemnity provisions to ensure that potential losses arising from adverse state aid tax decisions are covered. After all, no-one wants to get stung.
Please contact BEPS@Debevoise.com to discuss further.
BEPS in France
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Diverted Profits Tax & BEPS
• the DPT may be open to challenge under the European Convention on Human Rights (because of the penal tax rate) and under EU law (because of the breadth of its scope);
• the DPT may not be compliant with the UK’s network of double tax treaties – the UK government claim that DPT is not a corporation tax and is therefore outside the scope of the treaties (which cover income, corporation and capital gains taxes), although there are some treaties which contain anti-discrimination clauses relating to all taxes; and
• from an administrative perspective, the way that the DPT is assessed and charged is somewhat unusual – it sits outside of the self-assessment process, allows HMRC wide discretion to levy tax on notional profits and gives taxpayers limited rights of appeal.
Please contact BEPS@Debevoise.com to discuss further.
BEPS Primer: Key Definitions
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10 Things You Should Know About BEPS
The Action Plans designed by the OECD are wide ranging and look at:
The digital economy *** hybrid entities and instruments *** taxation of controlled foreign companies *** interest deductibility *** harmful tax practices *** double tax treaty abuse *** permanent establishment status *** transfer pricing regimes *** BEPS data analysis *** international dispute resolution *** implementation.
Please contact BEPS@Debevoise.com to discuss further.
Brexit and BEPS
• BEPS is a supra-EU initiative lead by the G20 and the OECD, therefore the UK’s exiting the EU should not impact the UK’s implementation of BEPS.
• The EU Commission has introduced an Anti Tax Avoidance Package that includes an Anti Tax Avoidance Directive (“ATAD”) that seeks to impart a consistent EU approach to many of the BEPS proposals. The deadline for the first wave of implementation for ATAD is set for 31 December 2018, with the final wave set for 31 December 2019. The UK will therefore still be a member of the EU when ATAD first comes into force. Despite Brexit, the UK may still adopt the EU approach to BEPS.
• Once Brexit happens, the UK may have more flexibility as to how it implements BEPS. Given the UK’s enthusiasm for BEPS it is unlikely that this flexibility will be taken advantage of.
• Brexit may result in a diminished UK influence on future tax policy coming out of the OECD (BEPS II has been mentioned by Pascal Saint-Amans, Director of the OECD's Centre for Tax Policy and Administration) because the EU is a major force within OECD policy-making – although the UK will still retain its seat at the OECD table.
Please contact BEPS@Debevoise.com to discuss further.
BEPS Implementation Tracker
• Digital services tax proposed to apply from 2020.
• Withholding tax on royalty payments made in connection with UK sales to low or no-tax jurisdictions to be introduced from April 2019.
• A new tax on digital services is expected to apply retroactively from 1 January 2019: a draft bill was adopted by the National Assembly on 9 April 2019 and will be examined by the Senate in late May 2019.
• The new tax would apply at a rate of 3% to revenues generated in France by certain digital services.
• Ongoing work on two legislative proposals announced in March 2018:
■ reform of corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels; and
■ interim tax which covers the main digital activities that currently escape tax altogether in the EU, including selling online advertising space, digital intermediary activities and selling data generated from user-provided information.
• In January 2019, a US treasury official commented on the increased involvement of the US with the aim of reaching a broad political consensus on the allocation of taxing jurisdiction between countries.
• Released in February 2016, the General Expectations of the Administration’s Fiscal Year 2017 Revenue Proposals (under Obama) included proposals relating to digital goods and services.
• Luxembourg has expressed strong reservations about the EU proposals to tax digital companies.
• The Luxembourg Tax Authority issued an administrative circular providing guidance on the characterisation of virtual currencies in July 2018.
• The Netherlands have expressed strong reservations about the EU proposals to tax digital companies.
• OECD agreed rules in effect from 1 January 2017.
• Amendments in Finance Bill 2019 to comply with ATAD.
• Signatory to the MLI amending tax treaties in line with BEPS recommendations. (See Action 15 below.)
• Abuse of law theory (which allows the tax authorities to disregard legal arrangements and‚ accordingly‚ to tax the corresponding transaction on the basis of its actual substance when it is purely tax-motivated) may also be applied to hybrid arrangements.
• Specific anti-hybrid rules introduced in recent years:
■ 2015: Domestic parent-subsidiary regime excluded for distributions giving rise to a deduction by the distributing entity; and
■ 2014: Interest deduction denied on loans from an affiliated lender if such lender is not subject to a minimum tax on such interest.
• The general anti-abuse rule contained in the amended parent-subsidiary directive was implemented as of 1 January 2016.
• In March 2018, France and Luxembourg signed a new tax treaty which is in line with the 2017 OECD Model Convention and contains a provision dealing with fiscally transparent entities. Its preamble clarifies that the tax treaty is not intended to be used to generate double non-taxation or reduced taxation through tax evasion.
• The Finance Law for 2019 contains a general anti-abuse rule in line with ATAD, which provides that non-genuine arrangements put in place for the main purpose (or one of the main purposes) of obtaining a tax advantage that defeats the object or purpose of the applicable tax law should be ignored.
• ATAD includes a provision to address hybrid mismatches.
• ATAD II extends these provisions to non-EU Countries.
• Proposed regulations to implement anti-hybrid mismatch rules released in December 2018.
• The anti-hybrid mismatch rules, implementing ATAD, entered into force on 1 January 2019.
• Rules relating to non-EU countries, implementing ATAD II, are expected to be proposed and enacted in 2019 and to apply from 1 January 2020.
• Legislative proposals to comply with ATAD II are expected to be published in the first half of 2019 to come into force on 1 January 2020.
• Changes to the CFC rules (to comply with ATAD) in the Finance Bill 2019 in effect from 1 January 2019.
• Already existing CFC rules. No changes currently proposed.
• ATAD includes provisions on CFC rules‚ for within the EU and externally.
• Proposed regulations under the global intangible low-taxed income (GILTI) regime released in September 2018.
• Regulations package includes amendments to subpart F income and consolidated return regulations.
• New CFC rules, implementing ATAD, entered into force on 1 January 2019.
• New CFC rules, implementing ATAD, entered into force on 1 January 2019.
• A list of low-tax jurisdictions, to be used for the purposes of these rules, was published on 28 December 2018.
• Restriction on tax deductibility of corporate interest expense consistent with OECD recommendations introduced from 1 April 2017.
• Amendments to these rules (to comply with ATAD) in the Finance Bill 2019 have effect for periods commencing on or after 1 January 2019.
• The Finance Law for 2019 amends the existing interest deduction rules. Net interest expenses would be deductible only up to the greater of 30% of the adjusted taxable income or €3 million (lower thresholds of 10% and €1 million apply in respect of intra group debt). Interest expenses that would be excluded from the deductible expenses of a given fiscal year could be carried forward indefinitely.
• ATAD includes provisions to limit interest deductions within the EU and externally.
• On 21 October 2016‚ the IRS issued final regulations under section 385 addressing interest deductions from certain related-party indebtedness. Consistent with proposed regulations‚ the final regulations treat as stock certain related-party interests that otherwise would be treated as indebtedness. The IRS and Treasury concluded that the final regulations are consistent with Action 4.
• The law implementing ATAD includes provisions limiting interest deductions. It entered into force on 1 January 2019.
• The earnings stripping rule from ATAD came into force on 1 January 2019.
• Legislation reforming Patent Box in Finance Act 2016.
• Withholding tax on royalty payments made in connection with UK sales to low- or no-tax jurisdictions introduced from April 2019.
• Abuse of law theory may apply to abuse of tax treaty.
• The Finance Law for 2019 amends the existing tax regime for intellectual property, under which, under certain conditions, royalties may benefit from a lower rate of taxation. The tax advantages would now generally be linked to the amount of R&D expenditure incurred in France.
• Code of Conduct Group monitoring Member States for changes to existing patent box regimes to comply with the modified nexus approach.
• Ongoing work to identify and limit the instances of abuse of the Interest and Royalties Directive.
• The Tax Cuts and Jobs Act of 2017 was a complete overhaul of the US international tax regime. It introduced two new categories of income: GILTI and foreign derived intangible income (FDII).
• New IP regime compliant with the nexus approach introduced from 1 January 2018.
• The Dutch innovation box regime was brought in line with the modified nexus approach from 1 January 2017.
• Conditional withholding taxes on interest and royalty payments will be introduced as of 1 January 2021. The proposed withholding tax only applies to intercompany payments to companies that are tax resident in a jurisdiction with a low tax rate, or a jurisdiction listed on the EU blacklist for non-cooperative countries.
• Signatory to the MLI amending tax treaties in line with BEPS recommendations. (See Action 15 below.)
• In March 2018, France and Luxembourg signed a new tax treaty which is in line with the 2017 OECD model tax convention, and contains a ‘principal purpose test’ (PPT), denying a treaty benefit if it is reasonable to conclude that obtaining such benefit was one of the principal purposes of an arrangement or transaction.
• Abuse of law theory may apply.
• Signatory to the MLI amending tax treaties in line with BEPS recommendations. (See Action 15 below.)
• ATA Recommendation on Tax Treaties encourages Member States to use an EU-compatible PPT approach.
• Limitation-on-benefits (LOB) clauses are less easily adapted to the needs of the Single Market.
• ATAD also includes rules on exit taxation so that Member States can impose tax on the value of a product before it was moved out of the EU.
• Updated draft of Model Income Tax Convention released February 2016. US treaties already include LOB clauses and limited amendments were proposed. The US is currently in the process of negotiating a protocol to amend various provisions of the US-Luxembourg treaty and is in discussions with Ireland to update certain elements of the US-Ireland treaty in the context of the updated Model Income Tax Convention.
• Rev. Proc. 2015-40 issued by the IRS‚ giving guidance on obtaining assistance under US tax treaties from the US Competent Authority‚ has already incorporated new restrictions on discretionary grants of treaty benefits‚ based on similar BEPS concerns.
• Signatory to the MLI amending tax treaties in line with BEPS recommendations.
• It has signed treaties with France, Cyprus and Senegal that include Action 6 treaty-based recommendations.
• Signatory to the MLI amending tax treaties in line with BEPS recommendations.
• In November 2018, it amended its treaty with Denmark: the amending protocol included Action 6 treaty-based recommendations.
• Signatory to the MLI amending tax treaties in line with BEPS recommendations. (See Action 15 below.)
• Anti-fragmentation rule applies to exemption for ‘preparatory or auxiliary’ activities, in accordance with the MLI. Exemption does not apply if activities have been artificially fragmented to fall within the exemption.
• Signatory to the MLI amending tax treaties in line with BEPS recommendations. (See Action 15 below.)
• In March 2018, France and Luxembourg signed a new tax treaty that is in line with the 2017 OECD Model Convention. The PE clause contains an anti-fragmentation rule and the new definition of agency PE.
• ATA Recommendation encourages Member States to use the amended OECD approach for PEs.
• Draft Model Income Tax Convention does not include OECD recommendation to tighten PE threshold.
• PE definition in final CbCR Regulations is intended to be consistent with the final BEPS report.
• Signatory to the MLI amending tax treaties in line with BEPS recommendation.
• In February 2019, the Luxembourg Tax Authority issued an administrative circular explaining how the new domestic PE provision applies. The new PE provision came into force on 1 January 2019.
• In March 2018, France and Luxembourg signed a new tax treaty that is in line with the 2017 OECD Model Convention. The PE clause contains an anti-fragmentation rule.
• Signatory to the MLI amending tax treaties in line with BEPS recommendations. It has made a reservation in respect of Article 12 (commissionaire arrangements) until an effective dispute resolution mechanism between a sufficient number of signatories to the MLI and the Netherlands is in place.
• Legislation in Finance Act 2016 updates the link in UK’s transfer pricing rules to the BEPS guidelines.
• Continuing participation in OECD work on further developing guidelines as well as calling for targeted measures to be introduced to protect them from abuse.
• Tax charge on offshore receipts in relation to intangible property to apply from April 2019.
• No specific new legislation currently proposed.
• Joint Transfer Pricing Forum working on EU approach to review and update transfer pricing (TP).
• Work includes looking at more economic analysis in TP‚ better use of companies’ internal systems‚ and improving TP administration.
• Proposed changes to the transfer pricing regulations under section 482 include the use of subjective terminology and greater use of aggregation‚ mirroring the BEPS proposals.
• A new law on transfer pricing, in line with BEPS recommendations, was adopted in December 2016.
• A new law on transfer pricing, in line with BEPS recommendations, was published in May 2018.
• Nothing specific at country level.
• Nothing specific at country level.
• EU study underway on the impact of some types of aggressive tax planning on Member States’ effective tax rates.
• No official public comment.
• Nothing specific at country level.
• Nothing specific at country level.
• UK’s mandatory disclosure regime (DOTAS) has been in place since 2004. The DOTAS rules are not as wide as the new EU reporting rules.
• It is expected that the UK will implement the additional requirements under the new EU reporting rules, irrespective of the outcome of Brexit: Finance Bill 2019 enables HM Treasury to make regulations accordingly.
• Legislation was adopted at the end of 2013 which required the disclosure of tax optimisation schemes‚ but was never implemented as it was immediately rejected as unconstitutional by the Constitutional Court. No alternative legislation has yet been proposed.
• The new EU reporting rules are expected to be implemented under French law by the end of 2019.
• Amendments to the Directive for Administrative Cooperation (DAC) require Member States to enact rules obliging intermediaries and, in some cases taxpayers, to report information to tax authorities about cross-border arrangements that contain certain hallmarks.
• No official public comment.
• Luxembourg is required to implement the new EU reporting rules by 31 December 2019.
• The draft law implementing the new EU reporting rules is expected to be submitted to the House of Representatives in July 2019. A public consultation was held on the draft law in early 2019.
• UK multinationals required to file reporting template with HMRC for 2016 accounting periods onwards.
• Pressing for public CbCR on a multilateral basis. Finance Act 2016 allows HM Treasury to make rules requiring public CbCR. Not expected until there is international agreement.
• The Finance Law for 2018 includes provisions updating the required contents of transfer pricing documentation for companies that are members of large economic groups.
• CbCR was implemented as of the beginning of 2016 and France has recently ratified the Multilateral Competent Authority Agreement on the Exchange of CbC Reports.
• The French government supports public CbCR. A recent attempt to introduce public CbCR into French law was, however, struck down by the French Constitutional Court.
• CbCR in force by way of an amendment to the DAC.
• Proposal to introduce public CbCR in progress.
• Final regulations implementing CbCR adopted 30 June 2016. Regulations are generally consistent with proposed regulations issued in December 2015 and the OECD approach but have also been tailored to be consistent with the pre-existing information reporting requirements applicable to US persons.
• The U.S. has committed to enter into competent authority arrangements (CAAS) for exchanging country-by-country reports with other jurisdictions that have adopted Action 13 and have both (i) a legal instrument for exchange with the United States and (ii) adequate data safeguards in place. The U.S. is in the process of negotiating with its treaty and tax information exchange agreement partners towards implementing these agreements, which will allow U.S. companies to file their information directly with the IRS rather than foreign jurisdictions which have adopted similar filing requirements.
• It has signed CAAs with various jurisdictions.
• CbCR in force since 2016.
• CbCR in force since 2016.
• One of 20 countries committed to adopting mandatory binding arbitration in their tax treaties through the MLI.
• One of 20 countries committed to adopting mandatory binding arbitration in their tax treaties through the MLI.
• On 10 October 2017, the Council of the EU adopted new rules to better resolve tax disputes (directive on tax dispute resolution mechanisms in the European Union).
• One of 20 countries committed to adopting mandatory binding arbitration in their tax treaties developed through the MLI.
• One of 20 countries committed to adopting mandatory binding arbitration in their tax treaties through the MLI.
• One of 20 countries committed to adopting mandatory binding arbitration in their tax treaties through the MLI.
• Signatory to the MLI covering:
(i) Hybrid mismatches;
(ii) Preventing the granting of treaty benefits in inappropriate circumstances;
(iii) Artificial avoidance of PE status; and
(iv) Dispute resolution mechanisms.
• The MLI entered into force for the UK on 1 October 2018.
• It will apply to bilateral tax treaties from the date it is in force for the relevant treaty partner.
• Signatory to the MLI covering:
(i) Hybrid mismatches;
(ii) Preventing the granting of treaty benefits in inappropriate circumstances;
(iii) Artificial avoidance of PE status; and
(iv) Dispute resolution mechanisms.
• The MLI entered into force for France on 1 January 2019.
• It will only apply to bilateral tax treaties once it is in force for both parties. 67 bilateral treaties entered into by France are potentially impacted.
• ATA Recommendation sets out the Commission’s views on Treaty-related issues and their compatibility with EU law.
• Participated in development of the MLI‚ principally for purpose of advancing binding arbitration. General comment is that it is unlikely the US will sign the MLI‚ however.
• Luxembourg deposited its instrument of ratification on 9 April 2019. The MLI will enter into force for Luxembourg on 1 August 2019.
• It will apply to bilateral treaties from the date it is in force for both treaty partners.
• Luxembourg deposited its instrument of acceptance on 29 March 2019. The MLI will enter into force for the Netherlands on 1 July 2019.
• With its instrument of acceptance, the Netherlands covers Curaçao and the (European and Caribbean parts of the) Netherlands.
• It will apply to bilateral treaties from the date it is in force for both treaty partners.
• ATA Package includes a Communication on an External Strategy for Effective Taxation setting out an EU approach to working with third countries on tax good governance matters.
• The Council of the EU adopted an updated ‘EU list of non-cooperative jurisdictions for tax purposes’ on 12 March 2019. This list includes a “blacklist” of 12 jurisdictions.
• The European Parliament has approved (with suggested amendments) the proposed Council Directives on the Common Corporate Tax Base and Common Consolidated Corporate Tax Base.
Updated: 17 May 2019
Please contact BEPS@Debevoise.com to discuss further.
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We have selected below some of the most interesting and current reports
about BEPS from external news sources, allowing you to keep up to date easily.
OECD launches MLI matching database
1 April 2016
OECD Secretary-General Report to G20 Finance Ministers and Central Bank Governors
4 April 2016
Chancellor pushes for international action on tax rules for the digital era
4 April 2016
International community agrees on a road map for resolving the tax challenges arising from digitalisation of the economy
4 April 2016
European Parliament adopts TAX3 report on financial crimes, tax evasion and tax avoidance
4 April 2016
Global tax community welcomes new measures to enlist online marketplaces in the collection of VAT/GST in e-commerce
4 April 2016
OECD announces progress made in addressing harmful tax practices (BEPS Action 5)
4 April 2016
OECD Tax Talks
30 March 2016
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and our tax team more generally, please see below.
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