BEPS│Debevoise & Plimpton LLP

Implementation

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.

DebevoiseWhat You Need to Know About Structuring Your Fund in the BEPS Era

DebevoiseTax Treaty History – the Action 15 Multilateral Instrument

DebevoiseAsk an expert – The anti-hybrids rules and private equity fund structures

DebevoiseLMA Concerns: Hybrid Mismatch Rules (Action 2) and Interest Deductibility Rules (Action 4)

DebevoiseAnalysis - BEPS Action 6 and Private Equity Funds

DebevoiseState Aid and BEPS

Debevoise BEPS in France

Debevoise Diverted Profits Tax & BEPS

Debevoise BEPS Primer: Key Definitions

Debevoise 10 Things You Should Know About BEPS

Debevoise Brexit and BEPS

DebevoiseBEPS Implementation Tracker

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.

Key terminology

Base erosion

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 shifting

Profit 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 framework

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).

Impact on funds

Set out below is a simple fund structure, highlighting some of the areas that may be impacted by the BEPS Project.

Hybrid entity 1

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 2

A 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 3

One 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 4

The 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 5

Action 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.

Conclusion

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

Tax treaty history was made (as the OECD Secretary-General enthusiastically announced) on 7 June 2017 as 76 countries and jurisdictions came together to sign, or formally express their intention to sign, the Multilateral Convention on Tax Treaty Related Measures to Prevent BEPS. Through signing this multilateral instrument (MLI), these countries started the process of amending 1100 tax treaties. The signatories included the UK and France; the US is not expected to become a signatory.

What is the MLI?

The MLI allows jurisdictions to transpose results from the BEPS Project into their existing networks of bilateral tax treaties. Each signatory is required to set out its ‘MLI Position’, a list of reservations and notifications that state which of the jurisdiction’s tax treaties are covered by the MLI and which provisions apply to those covered tax agreements. From a UK perspective, HMRC has confirmed that it will produce a set of consolidated tax treaties showing how the MLI will apply to the UK’s network of tax treaties.

What does the MLI cover?

The MLI contains provisions covering hybrid mismatch arrangements, treaty abuse, permanent establishment, and mutual agreement procedures, including an optional provision on mandatory binding arbitration. Under the treaty abuse provisions, of particular note is the principal purpose test, which many tax treaties will soon include:

“a benefit under the [treaty] shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the [treaty].”

Treaty benefits – principal purpose test

The commentary and examples provided by the OECD (in the BEPS Action 6 Final Report) give an indication of how the OECD expects the test to apply, although in each case it will come down to the views of the relevant local tax authority and, as discussed in ‘Analysis – BEPS Action 6 and Private Equity Funds’ there is still uncertainty about the rule’s application in a fund context.

Entities seeking to benefit from a treaty will need to pay close attention to their reasons for choosing a particular jurisdiction. Taking into account a tax treaty network does not automatically mean that the test is failed but the entity must be able to show other substantive reasons for choosing that jurisdiction. These could include the availability of suitable human resources, a reliable legal system, a business friendly environment, political stability and a sophisticated banking industry. The final limb of the provision, which offers an exclusion from the test if it would be in accordance with the object and purpose of the tax treaty, should also not be overlooked: the examples note that tax treaties are intended to provide benefits to encourage cross-border investment.

The first modifications to bilateral tax treaties are expected to enter into effect in early 2018.

Please contact BEPS@Debevoise.com to discuss further.

Ask an expert – The anti-hybrids rules and private equity fund structures

My client is a private equity fund that has debt funded a UK company (UKCo) through a Luxembourg holding company (LuxCo). LuxCo is funded using preferred equity certificates (PECs), interest will accrue under the PECs until the investment is disposed of. The fund is a Luxembourg SCSp, the limited partners are a mixture of US taxable and tax exempt and UK taxable investors. I am concerned that the UK anti-hybrid rules may apply to this structure but I’m not sure where to start.

You are right to be concerned. A number of warning flags arise under this structure:

• 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.

Where to start

Part 6A of the Taxation (International and Other Provisions) Act 2010 (the ‘rules’) identifies eight standalone impermissible mismatches, together with the potential to import all eight of these offences into the UK where there is an overarching arrangement in place that somehow links a UK corporation tax payer to any of the eight mismatch behaviour. A methodical approach is therefore essential.

Your first step is to separate out the potentially problematic transactions:

Interest paid by UKCo in respect of the loan from LuxCo; and
LuxCo’s interest accrual in respect of the PECs.

We recommend drawing out your structure and labelling each problematic transaction to keep yourself focused:

Once the transactions are identified we suggest that you analyse each as follows:

What type of mismatch activity exists (bearing in mind that more than one mismatch activity may attach to each transaction);
If there is more than one activity, in what order should you consider them (the chapters should be considered as follows: 4, 3, 5 to 11 sequentially);
Is there the requisite UK connection;
Does the transaction’s mismatch activity give rise to a prohibited tax result; and
Do the parties satisfy the relationship test or are the arrangements ‘structured’; and
At any point during points 3 to 5, if the anti-hybrid rules are not triggered, do you need to consider any other activities triggered by the relevant transaction.

If you conclude that the anti-hybrid rules apply, you will need to consider the applicable counteraction.

Interest paid by UKCo

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.

Interest accrual in respect of the PECs

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)

The UK’s Loan Market Association (LMA) has highlighted its ongoing concerns about the guidance on the hybrid mismatch rules in the Finance Act 2016 and the rules restricting the deductibility of corporate interest. (The latter were due to come into effect on 1 April 2017 although this commencement date is now uncertain following the announcement of the snap general election and the resulting truncated Finance Act 2017.)

Hybrids
The LMA notes that the guidance, both the original and updated version, provides for a wide interpretation of the imported mismatch rules, with the result that normal commercial lending arrangements may be caught. Specifically, the LMA flags the risk that “a UK borrower could be denied a deduction for interest payments it makes on an ordinary commercial loan because it is reasonable to assume that the lender is funded by a further loan with another party which itself gives rise to a hybrid mismatch arrangement”.

Interest Deductibility
The LMA’s continued concern about the deductibility of corporate interest rules centres on the risk that loans provided by third party lenders could be considered related party debt resulting in restricted interest deductions. The LMA believes there should be a general exemption for third party lenders advancing loans in the ordinary course of business.

Please contact BEPS@Debevoise.com to discuss further.

Analysis - BEPS Action 6 and Private Equity Funds

Speed read: Since BEPS Action 6 was introduced, the OECD and the private equity industry have been grappling with how to apply anti-treaty abuse provisions to private equity fund structures. The OECD is concerned that private equity funds may be used by investors to achieve better treaty results than direct investments would achieve. After representations from the industry, the OECD has accepted that special provision needs to be made for private equity funds and on 6 January 2017 published examples designed to assist the industry. Unfortunately, the examples are not as helpful as they first appear and leave many unanswered questions.

Readers, or watchers, of Agatha Christie’s Murder on the Orient Express will know that anything involving group action is more complex and takes time to work out. Such is the case with the OECD’s approach to non-collective investment vehicle funds (non-CIV funds) and their interaction with the BEPS Action 6 on preventing the granting of treaty benefits in inappropriate circumstances.

Action 6 refresher

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).

Very broadly, the LoB seeks to limit treaty benefits to ‘goodies’ resident in the relevant treaty state (such as individuals, listed companies, and persons beneficially owned by ‘goodies’). The PPT prevents treaty benefits applying where the principal purpose of the transaction or arrangement is to obtain such treaty benefits.

Unhelpfully, the phrase ‘non-CIV fund’ is not defined; therefore, its meaning needs to be deduced as a fund that is not a CIV. Broadly, the OECD treats a CIV as a fund that is widely held, holds a diversified portfolio of securities and is subject to investor protection regulation. For the purposes of this article, we are going to take non-CIV fund to mean a private equity fund: an unregulated, closed ended, collective investment scheme, typically structured as a limited partnership with a regulated investment manager.

Action 6 and non-CIV funds

With the role of Hercule Poirot played by Pascal Saint-Amans, the OECD has been agitating its grey cells to work out how the proposed anti-abuse provisions apply to non-CIV funds; and, perhaps more importantly, how it would like them to apply. Just like in Murder on the Orient Express, the harm is easy to identify: tax avoidance (the tax world’s equivalent to murder).

In less dramatic terms, the OECD’s report identifies two specific concerns: ‘that non-CIV funds may be used to provide treaty benefits to investors that are not themselves entitled to treaty benefits, and that investors may defer recognition of income on which treaty benefits have been granted’.

The optimistic timetable governing the BEPS project meant that there was not time to solve the puzzle before publishing the final report on Action 6 in October 2015. Instead, the report was published with a reservation stating that further work was required on non-CIV funds.

In March 2016, the OECD published a consultation document on the treaty entitlement of non-CIV funds. The LoB -- or to give it the apt acronym coined by the multilateral instrument, the SLoB (simplified limitation on benefits) -- is technically an easy test to apply because it is mechanical. All a non-CIV fund (or, if the fund is transparent, the underlying holding company) needs to do is trace through to the fund’s beneficial owners and identify whether 75% (the threshold set in the SLoB) are ‘goodies’.

American readers will recognise this approach because funds investing in the US are already required to identify the withholding tax status of all of their investors. Factor in fund of fund investors and the tracing exercise may be enormous: we have seen nearly 1,000 pages of US withholding tax forms for one investor alone. If a fund has to collect tax forms for all of its investors for all jurisdictions in which it invests, the administrative burden is potentially phenomenal. Despite accepting these administrative issues, the OECD has declined to include non-CIV funds in the definition of ‘goodies’ for the purposes of the SLoB, concluding in its most recent discussion paper that ‘few non-CIV funds would fail to qualify for treaty benefits under the [SLoB]’.

It is therefore with some relief that most European countries, the UK included, have indicated that they are not inclined to adopt the SLoB, preferring instead the PPT. The PPT is not without its difficulties. Entirely subjective and open to widely differing interpretations, the PPT potentially creates an environment of uncertainty. Accepting these difficulties, the OECD has proposed including practical examples of how the PPT will apply to non-CIV funds and in March 2016 asked interested parties to submit such examples. The discussion paper issued on 6 January 2017 (www.bit.ly/2jAYGpp) is an update to this request.

Discussion draft on non-CIV examples

The OECD discussion draft contains three proposed examples, one of which seems irrelevant to private equity funds because it relates to securitisation vehicles. The number of examples is fairly disappointing. Many in the industry will feel that the difficulty in applying the PPT to a non-CIV fund, and the breadth of arrangements potentially falling within the non-CIV fund bucket, justify additional examples.

Pre-empting this response, the OECD states that there are currently 10 examples provided in the Commentary on the PPT (para 14, for those interested), meaning that any more than three non-CIV specific examples would be inappropriate. In terms of how it selected the examples, the OECD admits that it rejected all 50 examples received in response to its request for examples because they were 'too long, too specific or too controversial for inclusion’.

Shunning controversy and length, the OECD has produced two unhelpfully specific examples relevant to the funds industry, which make the prospect of practical application daunting. We are aware that many respondents to the OECD’s paper have made this comment; and have asked that a generalised statement be made that the examples are purely illustrative and neither reflect all of the relevant considerations nor specify a fixed definition of a safe harbour.

The regional investment platform example

• 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’.

Concerns with this example
The glaring issue for many private equity funds is the fact that the fund is an opaque vehicle that is tax resident in State T, whereas the majority of funds are structured as partnerships, and therefore not resident anywhere for tax treaty purposes. Without amendment, this example appears irrelevant to many private equity funds.

Assuming that the example may be interpreted to apply to fiscally transparent funds, the next issue is that there is only one investor, an institutional investor. The OECD does not clarify what it means by institutional investor but later comments suggest that it includes sovereign wealth funds and pension funds.

Moving down the structure, although many funds invest through a master holding company, many have a separate holding company for each investment. One of the considerations that this example seems to rely on in its conclusion is the fact that Master HoldCo holds a number of investments in a variety of jurisdictions. Given that the real estate example (discussed below) also includes a single holding company, funds with multiple holding company structures may be feeling a little uncomfortable.

Finally, one is left wondering whether the holding company must employ its own management team, or whether it would be sufficient for it to engage a team from the fund manager or another affiliate.

Immovable property non-CIV fund example

• 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’.

Concerns with this example
This is a somewhat odd example for the OECD to choose because, unlike the case in other asset classes, taxing rights relating to real estate are typically vested in the country where such real estate is located. It is therefore not entirely clear what treaty benefits Master HoldCo (or indeed the ultimate investors) will be obtaining. Assuming, however, that there are benefits, the value of this example is negated by the fact that Master HoldCo puts the investors in no stronger position than if they each invested directly. To be of use to the private equity industry, the example needs to include a mixture of ‘goodie’ and ‘baddie’ investors reflecting the reality of many situations. Similarly, the restriction to institutional investors is unhelpful. Would a single high net worth individual holding a small interest disqualify the whole fund?

Practical impact

The Action 6 train is currently between stations. The examples have been published, feedback has been submitted and we await the OECD’s determination. Private equity funds should take comfort from the fact that no country is yet applying the new PPT and so there is still time. The examples are not especially helpful, but they do highlight that, as with so much that is BEPS related, substance is increasingly important. If they have not done so already, we recommend that private equity funds take a serious look at what substance they have in their holding jurisdictions; and, for new investments, to document the considerations factored in when choosing a holding company jurisdiction.

If the examples are left as drafted, we will all need to take heed of Poirot’s approach when facing the murder on the Orient Express: ‘Lie back and think -- use ... the little grey cells of the mind.’

This article was first published in the 17 March 2017 edition of Tax Journal.

Please contact BEPS@Debevoise.com to discuss further.

State Aid and BEPS

Countering the honey trap

Just as Winnie the Pooh is always on the lookout for ways to get more honey, most countries are always on the lookout for ways to get more money. While Pooh uses a variety of ways to get more honey, many of which result in a bee sting, countries are left with trying to encourage businesses to operate within their borders so that they can generate income by taxing those businesses.

Key tools for countries to use in this regard are tax policy and tax rulings. Ireland, for example, granted tax rulings to Apple in 1991 and 2007 offering favourable tax treatment in return for Apple incorporating two subsidiaries in Ireland.

Illegal state aid
In August 2016, the European Commission (the Commission) announced that tax rulings granted by Ireland regarding profit allocations to Apple’s Irish branches amounted to illegal state aid (see News brief “Apple state aid decision: Irish tax rulings found illegal”, www.practicallaw.com/2-633-7660) (see box “State aid”). The sting, for both Ireland and Apple, is that Ireland has been ordered to recover €13 billion from Apple in lost tax revenue. Although this looks like a win for Ireland, it is facing a short-term gain but one with very severe long-term consequences. The Irish government therefore intends to fight the decision.

This was not the first time that the Commission has questioned an EU member state’s tax policy; in October 2015, the Commssion found that tax rulings given to Fiat by the Luxembourg tax authority and to Starbucks by the Netherlands tax authority were illegal state aid (see News brief “Fiat and Starbucks: tax rulings found to be illegal state aid”, www.practicallaw.com/7-620-4691). The Commission has been open about the fact that it is looking closely into tax rulings issued by member states to multinational entities.

US concerns
Many of the multinationals affected by the Commission’s state aid investigations are US entities. The US Treasury Department has therefore responded by publishing a white paper that airs its concern about the state aid investigations and expresses the hope that the EU and the US return to the system of international tax co-operation (www.treasury.gov/resource-center/taxpolicy/treaties/Documents/White-Paper-State-Aid.pdf).

State aid

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.

BEPS
As part of this co-operation and also the US’s commitment to prevent tax avoidance by multinational organisations, the white paper points to the US’s involvement with the G20 and the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) project. It states that the Commission’s new interpretation of the state aid doctrine threatens to undermine the well-established basis of mutual co-operation and respect that many countries have worked hard to develop and preserve, particularly in connection with the BEPS project (see News brief “The OECD’s action plan on BEPS: a taxing problem”, www.practicallaw.com/0-538-9745).

The BEPS project is the brainchild of the OECD and the G20. At its core, the project’s aim is to fundamentally change the behaviour of multinational organisations with a view to realigning taxation with economic substance and value creation. The steps to achieving this goal are set out in a series of 15 action plans aimed at preventing tax avoidance caused by actions or structures that erode a country’s taxable base or shift profits from one country to another country (typically, from a high tax country to a low tax country), or both.

The BEPS action plans are wide-ranging and cover, among other things: the use of hybrid entities and instruments; the taxation of controlled foreign companies; interest deductibility; treaty abuse; the definition of a permanent establishment; and transfer pricing, which includes the much vaunted country-by-country reporting requirement (see News brief “Country-by-country reporting for multinationals: EU transparency proposals”, www.practicallaw.com/0-627-0585).

The BEPS action plans will mostly need to be implemented by the participating countries, of which there are many, which could mean that, although there may be a multinational consensus as to the general approach that needs to be taken, the actual BEPS rules may differ from country to country.

EU initiatives
In January 2016, the Commission published an anti-tax avoidance package (the package) with the aim of ensuring a co-ordinated EU-wide response to corporate tax avoidance (see News brief “Corporate tax avoidance and BEPS: the EU grasps the nettle”, www.practicallaw.com/3-623-5185). As part of the package, a draft anti-tax avoidance directive (the draft directive) has been developed. In its fact sheet about the package, the Commission states that the initiatives in the package reflect discussions in the Council of the EU, recommendations from the European Parliament and the outcomes of the BEPS project.

In the Commission’s view, therefore, the groundwork has been done to allow member states to quickly adopt and implement the proposed measures in the package. Indeed, 31 December 2018 is set as the implementation deadline for most of the proposals, which leads to some interesting questions for the UK’s impending Brexit negotiations (see box “Impact of Brexit”).

Interaction of BEPS, state aid and the Directive
There are obvious philosophical crossovers between BEPS, state aid and the draft directive. The draft directive is clearly inspired by BEPS and the Commission has almost certainly taken inspiration from BEPS in the way that it has extended the scope of state aid. The development of state aid is not, however, on a par with the draft directive. Whereas the draft directive takes BEPS and simply uses the EU’s powers to force uniform application, state aid is rather a different beast.

State aid is outside of the carefully negotiated BEPS parameters; it is therefore questionable whether it is the appropriate tool with which to tackle perceived BEPS-style abuses. Instead of an internationally agreed approach to BEPS, with buy-in across the globe, using state aid in this way leads to a very EU-centric set of precedents that could damage the international consensus that has been built around BEPS and leave member states in a worse commercial position than their non-EU counterparts.

BEPS accepts that each country has, and will continue to have, a different tax code. In contrast, the state aid tax decisions appear to be a back-door method to achieve uniformity across the EU with regards to tax. The Commission has put forward a proposal for a common EU consolidated corporate tax base a number of times, and it appears that state aid is being used as a vehicle to achieve further consolidation (www.practicallaw.com/9-617-5372).

BEPS seeks to affect all taxpayers and potential taxpayers in each jurisdiction. State aid is much more targeted as, typically, each decision is specific to the circumstances of that taxpayer and ultimately applies only to that taxpayer, although broad principles may be extracted from decisions. The Commission is apparently reviewing all tax rulings granted across the EU, but with limited time and resources, it may be more likely to pursue high-value or high-profile state aid challenges. This appears to be a fundamentally unfair, scattergun approach.

BEPS is forward-looking and seeks to change future conduct. State aid, by its nature, looks backwards. The Commission has a ten-year limitation period on the recovery of illegal state aid, which is typically beyond the period of most statutes of limitation. A company can get caught by a state aid challenge even if it has since changed its practices. Given the extent and speed of BEPS-related changes, pursuing these state aid cases appears to be adding an extra layer of complexity to the tax avoidance debate, which may not be at all helpful.

The increased emphasis on transparency, including the transfer of tax rulings between countries, together with the implementation of BEPS, is likely to mean that the scope for state aid to challenge future arrangements is limited, unless the EU ends up with a regime that goes further than is required by the BEPS action plans. However, state aid has clearly not had its day as there are still many years’ worth of tax rulings for the Commission to sift through.

Impact of Brexit

Brexit should not affect the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) project, as BEPS is not an EU development but is driven by the OECD. The UK is already at the forefront of BEPS implementation, indeed, the UK has even developed an interim, or pre-BEPS, regime through the diverted profits tax (see News brief “Diverted profits tax: the next step down the road”, www.practicallaw.com/8-610-3069). Although seen by many as out of step with the BEPS project due to its unilateral approach, it is a clear statement of intent by the UK government to take proactive steps to prevent erosion of its tax base.

The future of state aid controls in the UK is more complex. At first glance, the UK leaving the EU would mean that the UK becomes free to provide state aid to whomever it wishes. Indeed, during the Brexit campaign, Brexiteers pointed to the Port Talbot steelworks as an example of EU rules preventing the UK from aiding the steel industry. Whether state aid becomes an unregulated tool in the UK’s armoury post-Brexit will depend on what the UK’s exit from the EU looks like. If any route with access to the single market is agreed, some form of state aid regulation seems likely. Given that Brexit is being negotiated by a political party known for its support of free market ideas, state aid may prove to be an easy bargaining chip to lose.

Even if the UK turns its back on the EU entirely and relies instead on the World Trade Organization (WTO) rules, the UK will still be bound by the WTO’s rules on subsidies. Although not as broad as the state aid rules and without the same mechanism of enforcement, the UK would still not have autonomy.

Actions for multinationals
A corporate group with EU operations should review its position, especially if it is currently operating under an EU tax ruling or has done so in the past ten years.

Companies considering an investment into, or acquisition in, a member state should:

• 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.

This article was first published in the January/February 2017 issue of PLC Magazine.

Please contact BEPS@Debevoise.com to discuss further.

BEPS in France

France has always been a strong supporter of the BEPS initiative and has not waited for the OECD’s final conclusion to unilaterally implement BEPS-inspired measures, often at the expense of legal certainty for businesses. In fact, French legislation includes various anti-abuse provisions (such as CFC rules and limitations on interest deductions) which predate the BEPS Project. In addition, extensive case law has been developed for many years on the concept of “abuse of law”, which enables 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. This concept can be applied to many situations, including tax treaty abuses.

Pre-BEPS anti-abuse provisions have generally been strengthened during recent years. This is particularly true for legislation limiting the deduction of interest expenses, which has been regularly reinforced since 2007. The latest illustration of this trend is the introduction, as of September 2013, of a rule targeting hybrid instruments, by denying the deduction of interest on loans from an affiliated lender if such lender is not subject to tax on such interest at a level which is at least 25% of the applicable corporation tax under French standard rules.

France broadened existing transfer pricing documentation applying to large companies in 2014, and implemented country-by-country reporting as of the beginning of 2016. The investigative powers of the French tax authorities were increased by a law of November 2013, which also enhanced information requirements and increased tax penalties. In fact, recent years have seen a surge of tax reassessments, with a record 21.2 billion for 2015, most of which from large companies.

Please contact BEPS@Debevoise.com to discuss further.

Diverted Profits Tax & BEPS

What is Diverted Profits Tax (“DPT”)?
The DPT is a UK tax aimed at preventing tax avoidance by multinationals operating in the UK. The DPT represents a significant change in approach for the UK tax authorities as it seeks to tax the profits of foreign companies even where there is no permanent establishment (previously UK tax was very clearly limited to UK resident companies and UK permanent establishments).

The DPT aims to prevent two circumstances:

where a foreign company exploits permanent establishment rules to avoid creating a UK taxable presence; and
where a UK company manufactures tax advantages by using entities or transactions that lack economic substance.

The rate of DPT is 25% (in contrast to the current UK corporation tax rate of 20%).

Is DPT just BEPS Beta?
DPT certainly has the look and feel of BEPS about it and the way in which it is assessed encourages transparency but despite initial similarities, the DPT is incompatible with the collaborative ethos of the BEPS Project. BEPS is a multiparty approach to tax evasion with the intention to implement rules in a consistent manner across signatory states. The DPT is also heavily reliant on the UK’s definition of permanent establishment, given that this definition is under review as part of the BEPS Project, the DPT may become out of date once the BEPS action plan has been fully implemented.

Why is DPT controversial?
The DPT is controversial for lots of reasons (not just its uncomfortable relationship with 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.

Is there a future for DPT alongside BEPS?
This remains to be seen. BEPS is not fully implemented. The UK has not indicated what will happen to DPT once BEPS is on the statute books; having the two regimes running in parallel certainly does not fall in line with the government’s stated aim of tax simplification. For now the DPT plugs a perceived gap but it is not inconceivable that, for example, as the UK’s definition of permanent establishment changes in line with BEPS, the DPT falls away.

Please contact BEPS@Debevoise.com to discuss further.

BEPS Primer: Key Definitions

Action Plan
In response to the challenges faced by BEPS, the OECD has set out a 15 point action plan to combat BEPS.

BEPS
The official definition: “Base erosion and profit shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.”

Base Erosion
An entity’s tax base is the income, profits, gains (or other determining factor) against which tax is charged. At a basic level, corporation tax is calculated by:

[tax base] x [tax rate]

Base erosion is the process of reducing an entity’s tax base; this can obviously happen by simply not being profitable but the base erosion targeted by the BEPS Project is erosion that has been “aimed for” (assuming that no one intends to run an unprofitable business).

Profit Shifting
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).

OECD
The Organisation for Economic Cooperation and Development (OECD) is a group of 34 countries around the world dedicated to improving people’s lives economically and socially. The OECD tries to understand what causes economic growth and works to promote it by measuring productivity, trade and investment, making predictions based on data it collects and offering policy recommendations.

Digital Economy
The universe of transactions, the sale of goods and services, which take place online.

Transfer pricing and mispricing
Transfer pricing rules aim to regulate the terms and conditions (including the price paid) for transactions between connected parties.

Please contact BEPS@Debevoise.com to discuss further.

10 Things You Should Know About BEPS

The BEPS Project is the brainchild of the OECD and the G20 and is a series of 15 Action Plans aimed at preventing tax avoidance caused by base erosion and profit shifting by multinationals.
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.
The OECD consists of 34 countries but many more have signed up to the BEPS Project. There are currently over 90 countries involved in discussions regarding an overarching amendment to all bilateral double tax implementation of some BEPS Action Plans via multilateral instrument. The BEPS Project is therefore very much a global anti tax avoidance movement.
The BEPS Action Plans will largely need to be implemented by the participating countries, meaning 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 BEPS Project is about more than just drafting new tax rules, it’s a project that aims to fundamentally change the behaviour of multinational organisations with a view to realigning taxation with economic substance and value creation.
The BEPS Project is not over; there are still a number of open issues, for example, how treaty entitlement will work for non-CIV funds.
The OECD asserts that the BEPS Project does not require participating countries to levy tax at a certain rate but rather aims to prevent countries seeking to attract investors without requiring economic substance.
FATCA and CRS (the Common Reporting Standard or global FATCA) are not part of the BEPS Project.
The EU has published its own response to BEPS in an Anti Tax Avoidance Package, including a directive that seeks to implement many of the BEPS Action Plans. This should bring some uniformity into how the 28 (27 when Brexit happens) will implement the BEPS Action Plans.
BEPS is here to stay, so should not be ignored.

Please contact BEPS@Debevoise.com to discuss further.

Brexit and BEPS

What, if any, impact will Brexit have on the UK’s implementation of BEPS? Although the details of Brexit are still to emerge, these are our initial reactions to Brexit and its impact on 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

Action 1 – Addressing the Tax Challenges of the Digital Economy

United Kingdom

• 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.

France

• 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.

European Union

• 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.

United States of America

• 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

• 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

• The Netherlands have expressed strong reservations about the EU proposals to tax digital companies.

Action 2 – Neutralising the Effects of Hybrid Mismatch Arrangements

United Kingdom

• 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.)

France

• 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.

European Union

• ATAD includes a provision to address hybrid mismatches.

• ATAD II extends these provisions to non-EU Countries.

United States of America

• Proposed regulations to implement anti-hybrid mismatch rules released in December 2018.

Luxembourg

• 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.

The Netherlands

• 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.

Action 3 – Designing Effective Controlled Foreign Company Rules

United Kingdom

• Changes to the CFC rules (to comply with ATAD) in the Finance Bill 2019 in effect from 1 January 2019.

France

• Already existing CFC rules. No changes currently proposed.

European Union

• ATAD includes provisions on CFC rules‚ for within the EU and externally.

United States of America

• 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.

Luxembourg

• New CFC rules, implementing ATAD, entered into force on 1 January 2019.

The Netherlands

• 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.

Action 4 – Limiting Base Erosion Involving Interest Deductions and Other Financial Payments

United Kingdom

• 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.

France

• 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.

European Union

• ATAD includes provisions to limit interest deductions within the EU and externally.

United States of America

• 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.

Luxembourg

• The law implementing ATAD includes provisions limiting interest deductions. It entered into force on 1 January 2019.

The Netherlands

• The earnings stripping rule from ATAD came into force on 1 January 2019.

Action 5 – Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance

United Kingdom

• 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.

France

• 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.

European Union

• 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.

United States of America

• 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).

Luxembourg

• New IP regime compliant with the nexus approach introduced from 1 January 2018.

The Netherlands

• 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.

Action 6 – Preventing the Granting of Treaty Benefits in Inappropriate Circumstances

United Kingdom

• Signatory to the MLI amending tax treaties in line with BEPS recommendations. (See Action 15 below.)

France

• 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.)

European Union

• 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.

United States of America

• 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.

Luxembourg

• 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.

The Netherlands

• 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.

Action 7 – Preventing the Artificial Avoidance of Permanent Establishment (‘PE’) Status

United Kingdom

• 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.

France

• 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.

European Union

• ATA Recommendation encourages Member States to use the amended OECD approach for PEs.

United States of America

• 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.

Luxembourg

• 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.

The Netherlands

• 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.

Actions 8-10 – Aligning Transfer Pricing Outcomes with Value Creation

United Kingdom

• 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.

France

• No specific new legislation currently proposed.

European Union

• 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.

United States of America

• 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.

Luxembourg

• A new law on transfer pricing, in line with BEPS recommendations, was adopted in December 2016.

The Netherlands

• A new law on transfer pricing, in line with BEPS recommendations, was published in May 2018.

Action 11 – Measuring and Monitoring BEPS

United Kingdom

• Nothing specific at country level.

France

• Nothing specific at country level.

European Union

• EU study underway on the impact of some types of aggressive tax planning on Member States’ effective tax rates.

United States of America

• No official public comment.

Luxembourg

• Nothing specific at country level.

The Netherlands

• Nothing specific at country level.

Action 12 – Mandatory Disclosure Rules

United Kingdom

• 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.

France

• 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.

European Union

• 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.

United States of America

• No official public comment.

Luxembourg

• Luxembourg is required to implement the new EU reporting rules by 31 December 2019.

The Netherlands

• 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.

Action 13 – Guidance on Transfer Pricing Documentation and Country-by-Country Reporting (‘CbCR’)

United Kingdom

• 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.

France

• 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.

European Union

• CbCR in force by way of an amendment to the DAC.

• Proposal to introduce public CbCR in progress.

United States of America

• 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.

Luxembourg

• CbCR in force since 2016.

The Netherlands

• CbCR in force since 2016.

Action 14 – Making Dispute Resolution Mechanisms More Effective

United Kingdom

• One of 20 countries committed to adopting mandatory binding arbitration in their tax treaties through the MLI.

France

• One of 20 countries committed to adopting mandatory binding arbitration in their tax treaties through the MLI.

European Union

• 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).

United States of America

• One of 20 countries committed to adopting mandatory binding arbitration in their tax treaties developed through the MLI.

Luxembourg

• One of 20 countries committed to adopting mandatory binding arbitration in their tax treaties through the MLI.

The Netherlands

• One of 20 countries committed to adopting mandatory binding arbitration in their tax treaties through the MLI.

Action 15 – Developing a Multilateral Instrument to Modify Bilateral Tax Treaties

United Kingdom

• 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.

France

• 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.

European Union

• ATA Recommendation sets out the Commission’s views on Treaty-related issues and their compatibility with EU law.

United States of America

• 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

• 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.

The Netherlands

• 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.

Other comments

European Union

• 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

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