Welcome to the EFS-seminar - Home - EFS, Erasmus ... · EU and BEPS (1) • The EU has embraced the OECD/G20 base erosion and profit shifting (BEPS) project and is working to integrate

Welcome to the EFS-seminar

“BEPS and transfer pricing, but

what about VAT and Customs?”

Rotterdam – February 3, 2016

Conference Chairman: René van der Paardt

Agenda Seminar

“An update on the transfer pricing related elements of the

OECD BEPS project” Ronald van den Brekel

“BEPS and VAT” Herman van Kesteren

“BEPS and Customs” Walter de Wit

An update on the transfer

pricing related elements

of the OECD BEPS project

February 3, 2016

Ronald van den Brekel

Agenda

• Introduction to BEPS

• The BEPS deliverables

• Overview transfer pricing related points

• EU and BEPS

The OECD BEPS Project Reasons for BEPS

Aggressive Tax Planning / Harmful

Tax Practices

Lack of relevant information at level of

tax administrations

Domestic Tax Systems not co-ordinated

across borders

Estimated Global CIT revenue losses: 4%-10% of Global CIT

USD 100-240 billion

Lack of transparency and coordination

between tax administrations

International tax standards not

keeping pace with changing global

environment

Limited country enforcement

resources

The OECD BEPS Project What is BEPS (Base Erosion and Profit Shifting)?

“Fundamental changes are needed to effectively prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it.”

“The G20 finance ministers called on the OECD to develop an action plan to address BEPS issues in a co-ordinated and comprehensive manner.”

OECD Action Plan on Base Erosion and Profit Shifting, 2013

“The measures we are presenting today represent the most fundamental changes to international tax rules in almost a century: they will put an end to double non-taxation, facilitate a better alignment of taxation with economic activity and value creation, and when fully implemented, these measures will render BEPS-inspired tax planning structures ineffective.”

OECD Secretary-General Angel Gurría

Final BEPS reports

Minimum standards

► Action 5 – Harmful tax practices

► Action 6 – Treaty abuse

► Action 13 – Country-by-country reporting

► Action 14 – Dispute resolution

Reinforced standards

► OECD Transfer Pricing Guidelines

► Actions 8-10 (transfer pricing)

► Action 13 (transfer pricing documentation)

► OECD Model Tax Convention

► Action 2 (hybrid mismatch arrangements)

► Action 6 (treaty abuse)

► Action 7 (permanent establishment status)

► Action 14 (dispute resolution)

Common approaches and best practices

► Action 2 – Hybrid mismatch arrangements

► Action 3 – Controlled foreign company (CFC) rules

► Action 4 – Interest deductions and other financial payments

► Action 12 – Mandatory disclosure rules

► The output also includes analytical reports on Action 1 (digital economy, Action 11 (economic analysis) and Action 15 (multilateral instrument)

Further development

► Follow on work on several Actions

► Framework for monitoring country implementation and involvement of additional countries

Impact of BEPS final reports

Immediate impact

► Action 8 – Transfer pricing for intangibles

► Action 9 – Transfer pricing for risks and capital

► Action 10 – Transfer pricing for other high-risk transactions

► Action 13 – Transfer pricing documentation and country-by- country reporting

Treaty-based action

► Action 2– Hybrid mismatch arrangements

► Action 6 – Treaty abuse

► Action 7 – Permanent establishment status

► Action 14 – Dispute resolution

► Action 15 - Multilateral instrument

Legislative action

► Action 2 – Hybrid mismatch arrangements

► Action 3 – CFC rules

► Action 4 – Interest deductions and other financial payments

► Action 5 – Harmful tax practices

Interrelationship between BEPS Action Plan,

VAT and Customs

2 Neutralizing the

effects of hybrid

mismatch arrangements

4 Limiting base erosion

via interest deductions

and other financial

payments

5 Countering harmful tax

practices

6 Preventing the

granting of treaty benefits

in inappropriate

circumstances

7 Prevent the artificial

avoidance of PE status

8 Considering transfer

pricing for intangibles


pricing for risks and

capital


pricing for other high-risk

transactions

11 Collecting and

Analyzing data on BEPS

12 Disclosing

aggressive tax planning

arrangements

13 Guidance on

transfer pricing

documentation and

country-by-country

reporting

14 Making dispute

resolution mechanisms

more effective

15 Developing a

multilateral instrument to

modify bilateral tax

treaties

1 Addressing the tax

challenges of the digital

economy

3 Strengthening CFC

rules

2 Neutralizing the

effects of hybrid

mismatch arrangements

4 Limiting base erosion

via interest deductions

and other financial

payments

5 Countering harmful tax

practices

6 Preventing the

granting of treaty benefits

in inappropriate

circumstances

11 Collecting and

Analyzing data on BEPS

14 Making dispute

resolution mechanisms

more effective

15 Developing a

multilateral instrument to

modify bilateral tax

treaties

3 Strengthening CFC

rules

Action 1: Tax Challenges of the digital

economy

► Only action point that officially includes VAT.

The Final Report recommends:

► Modifying the list of PE exceptions regarding preparatory and auxiliary activities

related to the digital economy

► Introduction of an anti-fragmentation rule

► Modifying the definition of a PE to address artificial arrangements through the

conclusion of certain contract arrangements

► A correlative update to the TP Guidelines - To prevent the transfer of intangibles or

right to intangibles to tax-advantaged jurisdictions

► Changes to the CFC rules

The fundamental conclusion is that the digital economy “cannot be ring-fenced

as it is increasingly the economy itself”.

Action 7: Areas of focus

Areas of focus Significant changes

Commissionaire arrangements and similar strategies

Art. 5(5) and Art. 5(6) are amended to lower the PE threshold.

Specific activity exemptionsApplication of the specific activity exemptions from PE status in Art. 5(4) is limited to activities of a preparatory or auxiliary character. Alternatively, states may opt to retain the existing version of Art. 5(4) if they adopt a new anti-fragmentation rule.

Fragmentation of activitiesNew anti-fragmentation rule whereby the specific activity exemptions in Art. 5(4) would not apply to a place of business maintained by the enterprise or a closely related enterprise in specific circumstances.

Splitting-up of contracts (projects where activities are carried out by several closely

related entities)

Application of a principal purposes test rule or, alternatively, aggregation of time spent on connected activities (to be included in the Commentary)

Actions 8-10: Overview of the final report

BEPS Actions 8, 9 and 10 aims to

assure that transfer pricing outcomes are in line with value creation

Action 8: Intangibles

Action 8 provides a broader and

more specific definition of

intangibles.

Introduction of a six step

framework to analyse intangibles

Focus on DEMPE functions:

Development, Enhancement,

Maintenance, Protection and

Exploitation

Hard-to-Value Intangibles (HTVIs)

Cost-Contribution Arrangements

(CCAs)

Action 10: Other high-risk

transactions

Intra-group services / low value-

add services

Profit Splits (work to be continued

in 2016)

Recognition of transactions

Commodity transactions

Action 9: Risk and Capital

Focus on conduct of parties and

their financial capacity to assume

and functionality to manage risks.

Separate consideration regarding

an appropriate return to any cash

investment

Introduction of a six step

framework to analyse risks

Actions 8-10: Allocation of Risk (1)

Revised Section D of Chapter I of the OECD Guidelines:

► Accurately delineate the actual transactions

► Detailed guidance on analyzing risks as integral part of a functional analysis

► Introduction of the six-step framework

► The party assuming a risk should control the risk and have the financial

capacity to assume the risk

► ‘Cash boxes’ will attain no more than a risk-free return

Shift from the contractual reality to the economic reality with respect to risk

allocation between related parties

Actions 8-10: Allocation of Risk (2)

Identification of economically significant risks with specificity 1

Determination of contractual assumption of the specific risk 2

Functional analysis in relation to risk 3

Interpreting steps 1-34

Allocation of risk 5

Pricing the transactions taking into account the allocation of

risks6

If the associated

enterprise

(contractually)

assuming the risk

does not exercise

control over the

risk or does not have

the financial

capacity to assume

the risk, then

the risk should be

allocated to the

enterprise exercising

control and

having the financial

capacity to

assume the risk

New Six-step Framework for Analysis of Risks

Actions 8-10: New six-step analytical

framework for intangibles

Identify the intangibles and economically significant risks associated with the DEMPE

of the intangibles1

Identify the full contractual arrangements and determine legal ownership2

Detailed functional analysis to identify the parties performing functions, using assets,

and managing risks related to DEMPE3

Confirm the consistency between the terms of the relevant contractual arrangements

and the conduct of the parties4

Delineate the actual controlled transactions related to the DEMPE of intangibles5

Where possible, determine arm’s length prices for these transactions consistent with

each party’s contributions6

Actions 8-10: DEMPE functions are key

Development of

intangible asset

Enhancing

value of

intangible

asset

Maintenance

of intangible

asset

(e.g. quality

control)

Protection

of intangible

asset against

infringement

Exploitation

Action 13: Re-examining Transfer Pricing

Documentation

Master FileHigh level information about group’s business, TP policies and

agreements with tax authorities in a single document available

to all tax authorities where the MNE has operations

Local FileDetailed information about the local business, including related

party payments and receipts for products, services, royalties,

interest, etc.

Country-by-Country ReportHigh level information about the jurisdictional allocation of

profits, revenues, employees and assets

Implementation

Master / Local File: to be maintained/delivered

directly by the parent company in all countries

where it does business

Filing: generally ultimate parent to file CbC

report in jurisdiction of residence (but: EUR 750

million consolidated revenue threshold)

Timing: First set of CbC reports to be filed by

31 December 2017 for fiscal years beginning on

1 January 2016 (in other cases, the term for

filing will be one year from the close of the fiscal

year)

Implementation package Released on June

8th 2015 containing model legislation

Dutch legislation entered into force on 1

January 2016.

Country-by-country reporting, table 1

IrelandUnited Kingdom

Mexico

France

Brazil

Spain

China

United States of America

Italy

Norway

Denmark

PolandNetherlands

Australia

Non compliance is a criminal offense in the Netherlands

Spain: Group definition based on control Equity rather than stated capital and

accumulated earnings No surrogate parent provision – local filing

required

US will require CbC for calendar year 2017.

China: Filing due with tax return on 31

May No surrogate parent provision –

local filing required

Mandatory for large UK parented groups only

Already implemented

Implementation in progress

AustriaSwitzerlandCzech Republic

Belgium

Luxembourg

Implementation status

OECD United Kingdom Spain Poland Netherlands

Status Implementation

packages released in

February and June

2015 with model

legislation and model

competent authority

agreements

Draft statutory

instrument

implementing rules

issued on 5 October

2015

Legislation in force Legislation in force Legislation in force

Who Ultimate Parents of

group with revenue

of EUR 750 million

or greater

Threshold of £586

million (approximately

EUR 790 million)

WhenFor fiscal years starting

in 2016, with filing within

12 months from fiscal

year end

Secondary filing

rule1. Local filing, or

2. Filing by named

“Surrogate Parent”

entity

Voluntary local filing Local filing Not required

Penalties

Left to countriesSpecific penalty for non

compliance

General penalty for non

compliance

Transfer pricing

documentation

penalties

Criminal penalty for non

compliance

Consistent with OECD recommendations

Country-by-Country Reporting (2/2)

CBCR Implementation specifics

Action 15: Developing a Multilateral Instrument

to modify bilateral tax treaties

► The Final Report on Action 15 provides an overview of the current status

► The aim is to consistently implement the tax treaty-based measures

developed during the BEPS project

► Ad hoc group of countries have begun negotiations in May 2015. Goal is to

have multilateral instruments open for signing by December 31, 2016.

► The instrument will focus on tax treaties provisions with respect to:

► Hybrid mismatch arrangements (Action 2)

► Treaty abuse (Action 6)

► PE Status (Action 7)

► Dispute resolution (Action 14)

This instrument could result in some key BEPS recommendations taking effect

as early as of 2017 through significant changes to bilateral treaties

EU and BEPS (1)

• The EU has embraced the OECD/G20 base erosion and profit shifting

(BEPS) project and is working to integrate the results of the project at the

EU level where appropriate.

• The EU aims to coordinate on a common EU approach to avoid risk of

fragmentation in the internal market.

• The EU has already introduced legislation to implement BEPS

recommendations:

– Exchange of information on rulings between EU Member States.

– Introduction of hybrid mismatch rule and general anti-avoidance rule

(GAAR) in the Parent-/Subsidiary (P/S) Directive.

• The European Commission has launched State aid investigations into ruling

practices of Member States.

EU and BEPS (2)

• The EC Commission’s has published its EU Anti-Tax Avoidance

Package on January 28, 2016. The constituent parts are:

– The EU Anti-Tax Avoidance Directive (‘ATA Directive’);

– The Revised Administrative Cooperation Directive;

– The Communication on External Strategy; and

– The Recommendation on Tax Treaties.

Draft EU Anti-Tax Avoidance Directive

Background

• The draft ‘EU Anti-Tax Avoidance Directive (‘ATA Directive’) was released

January 28, 2016. An earlier draft (from the Council) was made public on December

11, 2015.

• The ATA Directive lays down rules against tax avoidance practices that directly affect

the functioning of the internal market.

• This ATA Directive is a first step to introduce of a European Common Consolidated Tax

Base, as its initial anti-avoidance provisions are converted into this separate Directive.

Next Steps

• The ATA Directive is currently subject to review by the EU Council and unanimous

consent in the EU Council is required for the ATA Directive to be adopted.

• Cannot be ruled out that final ATA Directive may differ significantly from current draft

and that the timetable set for agreement by July 2016 / implementation by 2017 may

not be met.

Draft EU Anti-Tax Avoidance Directive

Framework

• The scope of the ATA Directive includes all taxpayers that are subject to corporate tax in one of

more Member States, including permanent establishments (in one or more Member States) of

entities that are resident in third countries (art. 1).

• The proposed ATA Directive sets out certain minimum standards EU Member States need to

adhere to, and does not preclude the application of domestic or agreement-based provisions

aimed at safeguarding a higher level of protection for domestic corporate tax bases (art. 3).

Measures / Scope

• Having the aim of combating tax avoidance practices which directly affect the functioning of the

internal market, the ATA Directive lays down anti-tax avoidance rules in 6 specific fields:

– Uniform interest deduction denial rule in the form of an EBITDA-limit (interest limitation rule,

art. 4);

– Uniform exit taxation (art. 5);

– General Anti-Abuse Rule (‘GAAR’) (art. 7);

– Switch Over Clause, (art. 6)

– Controlled Foreign Company Rules (art. 8 and 9); and

– Rules for the avoidance of mismatches due to hybrid entities and hybrid instruments between

EU Member States (art. 10).

The BEPS project is not over, it has just started!

Also for VAT and Customs …

BEPS and VAT

February 3, 2016

Prof. Herman van Kesteren

(Tilburg University/ PwC)

Agenda

• Direct and indirect taxes

• Impact of BEPS Actions on Indirect Taxes• BEPS Action 1 Digital economy

• BEPS Action 7 (PE issues)

• BEPS Action 8 and 13 (Intangibles, Country-by-Country reporting)

28

ConsumptionIncome

Taxable person Person bearing thetax burden

Direct Indirect

Direct and indirect taxes: a comparison

Higher revenuesHigh revenues

29

The estimated impact of BEPS on the total tax revenue mix

30

2% Increase of tax revenue if BEPS actions are successful8%

Corporate income tax has currentlya 8% share in total tax revenue VAT vs CIT

ConsumptionIncome


Visible Invisible

Slow Fast

Profit shifting Consumption shifting

Direct Indirect



31

Shifting the recipient

?

Shifting the chargeableevent

Direct and indirect taxes: a comparisonConsumption shifting

32

FlightTicket

Right

ConsumptionIncome


Visible Invisible

Slow Fast


Direct Indirect



Profit erosion Consumptionerosion/VAT Gap

33

Profit erosion vs VAT/GST erosion (VAT Gap) 2012-2013 figures for EU-28

34

ConsumptionIncome


Visible Invisible

Slow Fast


Direct Indirect



Profit erosion VAT Gap (erosion)

Volatile

35

Robust/solid

Direct and indirect taxes: a comparisonPercentage of GDP EU-28

36

ConsumptionIncome


Visible Invisible

Slow Fast


Direct Indirect



Profit erosion VAT Gap (erosion)

VolatileInternational European

37

VAT

National VAT Act

EU Treaty

VAT Directive

38

CIT

EU Treaty

National CIT Act


OECD

Consumption/expendituresIncome/profit


Visible Invisible

Slow Fast

Volatile Solid/robustInternational

European

InterestingAlso interesting!


Direct Indirect



39

OECD Guideline 1: taxing services in jurisdiction of consumption

OECD Guideline 2: taxing services in jurisdiction of the customer

Nexus and data challenges

Simplified registration andcompliance, but separate VAT refundclaims

Impact of BEPS actions on Indirect taxesAction 1 Digital economy

40

CIT VAT/GST

Impact of BEPS actions on Indirect taxesAction 7 Permanent establishment

41

Comm.

NL

Purchase fixed establishment Welmory C-605/12

42

Without fixedestablishment

Welmory ltdCyprus

Welmory ltdPoland

Welmory LtdCyprus

WelmoryPoland

Cyprus

Polen

With fixedestablishment

Purchase fixed establishment Welmory C-605/12

43

Without fixedestablishment

Welmory ltdCyprus

Welmory ltdPoland

Welmory LtdCyprus

WelmoryPoland

Cyprus

Polen

With fixedestablishment

CIT VAT/GST

Impact of BEPS actions on Indirect taxesAction 7 Permanent establishment

44

Principal Principal

Comm.Comm.Comm.

NL

Impact of BEPS actions on Indirect taxesAction 8 and 13 Intangibles, Country-by-country reporting

• Connection transfer pricing and VAT –

impact of country-by-country reporting• What if the final price of the goods is higher/lower after all?

• Corrective documentation and lump-sum credit notes (no period-specific line

item details are available)

45

1 2

Transfer pricing (related parties) – Issue 1

• Final price is higher; adjustment at moment 1? …

1 2


• … or adjustment at moment 2?

47

Taxable amount ?


• Included in taxable amount?

48

Separate supply?


• Or separate supply?

Transfer Pricing and VAT49

October 2015

Transfer pricing and supply of goods

50

Principal

TP adjustment

MS 1 correction at moment 1

MS 2 correction at moment 2

1

2

Transfer pricing / VAT and goods

• Issue 1, tax authorities with different

views

51

Principal

Customs authorities claim late payment fines for VAT and customs duties

In some cases also excise duty issues.


• Issue 2 – Additional payments

52

Principal

= additional marketing service in some non-EU countries (Turkey), place of supply in non-EU country (effective use)

= no refund for principal

= fines and interests imposed on LRD for late payment


Issue 3 - Discounts

53

Principal

Conclusions

• BEPS impact on VAT

• BEPS action 1: Digital economy

• BEPS Action 7: PE issues

• BEPS Action 8 and 13: Intangibles, Country by Country reporting

54

BEPS and Customs

February 3, 2016

Prof. Walter de Wit (Erasmus University Rotterdam/EY)

Customs & Transfer Pricing

• Customs value based on transaction value

method is preferred method;

• When transaction takes place between

two related parties, relationship may not

influence the transaction value

(transaction value must be at arms’

length);

• If not, alternative valuation method;

Customs & Transfer Pricing (II)

• Royalties and license fees related to the

goods imported into the EU to be added to

the customs value if paid as ‘a condition of

sale’ of the goods.

WCO Guide on transfer pricing and

customs

Pragmatic approach to utilizing transfer pricing

documentation to support customs value

A list of ”good practices” for customs

administrations, including the encouragement to

customs administrations to consider information

derived from transfer pricing studies when

examining related party transactions

WCO Guide on transfer pricing and

customs

A list of ”good practices” for international business,

including:

• Coordination among tax and customs departments and advisors on

transfer prices

• Consider the needs of customs authorities when preparing transfer

pricing documentation or developing Advance Pricing Agreements

• With appropriate consideration of local requirements, provide customs

administrations with advance notification that post importation

adjustments may occur

• Work with customs authorities to provide interpretation into a customs

framework of transfer pricing analyses and data

BEPS and customs: overview

• Direct consequences for customs resulting

from BEPS Actions (which regard transfer

pricing)

• EU customs measures in the same vein as

BEPS: changes to customs valuation

Aligning Transfer Pricing Outcomes with

Value Creation & customs (I)

• Relevant BEPS Actions for customs:

– Actions 8 to 10: Aligning Transfer Pricing

Outcomes with Value Creation: “(…) the Report

determines that risks contractually assumed by a

party that cannot in fact exercise meaningful and

specifically defined control over the risks, or does not

have the financial capacity to assume the risks, will

be allocated to the party that does exercise such

control and does have the financial capacity to

assume the risks.”

Aligning Transfer Pricing Outcomes with

Value Creation & customs (II)

– Actions 8 to 10: Aligning Transfer Pricing

Outcomes with Value Creation: “For intangibles,

the guidance clarifies that legal ownership alone does

not necessarily generate a right to all (or indeed any)

of the return that is generated by the exploitation of

the intangible.”

– In other words: economic reality over legal reality?

Value of goods for customs purposes

• Customs value is generally based on the transaction value

of goods

– “The price actually paid or payable for the goods when sold for

export to the customs territory of the Union, adjusted, where

necessary …”

• UCC Implementing Act:

– The transaction value of the goods sold for export to the customs

territory of the Union shall be determined at the time of acceptance of

the customs declaration on the basis of the sale occurring immediately

before the goods were brought into that customs territory.

Value of goods for customs purposes

• The CCC allows the use of the “First Sale for Export”

– In case of chain transactions, all of which result in an export to

the EU, the first sale can be used to determine the transaction

value, if it can be demonstrated that at the time of that sale the

goods are destined for export to the EU

ManufacturerUS

US Co US

Related Distribution

CoEU

€80 €100

Goods are shipped directly to EU

CCC (current legislation): Customs duty calculated on €80 rather than €100 (subject to certain conditions being met).

EU

Example

ManufacturerUS

US Co US


CoEU

€80 €100


UCC: Customs duty calculated on €100 rather than €80

EUExample

Physical flow

Legal flow

Value of goods for customs purposesChanges under UCC (Union Customs Code)

• The UCC changes this rule to refer to the “Last Sale for

Export”

– Transaction value must be determined based on the sale

occurring immediately before the goods were brought into the

customs territory of the EU

ManufacturerUS

US CoUS


CoEU

€80 €100


UCC: Customs duty calculated on €80, but what if goods were already sold to Distribution co before the goods were brought into the customs territory of the EU?

Example

Physical flow

Legal flow

Value of goods for customs purposesChanges under UCC (Union Customs Code)

• The UCC changes this rule to refer to the “Last Sale for

Export”

– Transaction value must be determined based on the sale

occurring immediately before the goods were brought into the

customs territory of the EU

The sale occurring immediately before the

goods were brought into the customs

territory? (I)

• What is a last sale?

• What is a sale?

• Sale vs supply of goods (VAT definition)

• See also Notice on Bona Fide Sales from US customs

The sale occurring immediately before the goods

were brought into the customs territory? (II)

• Broad definition of ‘sale’ (case

Christodoulou, C-116/12) :

44. Since, for the purposes of the customs

valuation, priority is to be given to the transaction

value in accordance with Article 29 of the Customs

Code, that method of determining the customs value

is assumed to be the most appropriate and the most

frequently used.

45 In order to maintain that priority, it is necessary

to interpret the term ‘sale’ in Article 29(1) broadly.

Royalties & License Fees

• Payments in respect of patents, designs,

trademarks, copyrights etc. are added to

the price paid or payable if:– related to the goods being valued (imported)

– The buyer must pay these elements, either directly or indirectly,

as a condition of sale

– If royalties or license fees are paid to a third party, these

payments are currently only considered a condition of sale if the

seller or a person related to the seller requires that payment to

be made

Royalties & License Fees

• Under the UCC, the “condition of sale” requirement is deemed

to be met if:

– The seller or a person related to the seller requires the buyer to

make this payment; or

– The payment by the buyer is made to satisfy an obligation of the

seller, in accordance with contractual obligations; or

– The goods cannot be sold to, or purchased by the buyer without

payment of the royalties or license fees to a licensor.

THANK YOU!

Documents

Welcome to the EFS-seminar - Home - EFS, Erasmus ... · EU and BEPS (1) • The EU has embraced the OECD/G20 base erosion and profit shifting (BEPS) project and is working to integrate