Headline Verdana Bold
18 months of BEPS
What should be on your tax agenda?
20 June 2017
Agenda
Topic
Content
Welcome & Registration (sandwich lunch)
Introduction
• BEPS Recap
BEPS Actions taken so far
• EU
• Country specific
BEPS in practice
• Business models
• Financing
• IP
Questions & close
© 2017 Deloitte Belgium
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Introduction
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BEPS: based on 15 different action points centered around 3 pillars
These actions should facilitate more coherent international taxation rules and increase
reporting transparency
Coherence
Substance
Transparency & certainty
Preventing tax treaty abuse (6)
Hybrid mismatch
arrangements (2)
Avoidance of PE status (7)
Measuring BEPS (11)
CFC rules (3)
TP aspects of intangibles (8)
Disclosure rules (12)
Interest deductions (4)
TP/Risk and capital (9)
TP documentation (13)
Harmful tax practices (5)
TP/High risk transactions (10)
Dispute resolution (14)
Multilateral instruments (15)
Digital economy (1)
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Final OECD BEPS reports
Implementation categories
Minimum standards
• Action 5 on Harmful Tax Practices
• Action 6 on Treaty Abuse
• Action 7 on PE’s
• Action 8 – 10 on TP
• Action 13 on Country by Country reporting
• Action 14 on Dispute Resolution
Common approach
• Action 2 on Hybrid Mismatches
• Action 4 on Interest Deductions
Recommendations
• Action 3 on Controlled Foreign Company (CFC’s)
• Action 12 on Disclosure of Aggressive Tax Planning
© 2017
Deloitte
Belgium
©
2015.
For information,
contact Deloitte Touche Tohmatsu Limited.
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BEPS actions so far
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EU actions further to BEPS
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ATAD I & II
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EU Anti-Tax Avoidance Directive I
28 January 2016
Directive proposal
25 May 2016
ECOFIN meeting
Set of legally binding antiavoidance measures
Failure to reach political
agreement
Three measures linked to BEPS
Disagreement on
• Interest limitation
• Scope of anti-hybrid rule
(EU vs. non EU)
• Hybrids
Three measures going beyond
BEPS
• Scope of controlled foreign
company (CFC) rules
(EU vs. non EU/substance
requirement/burden of proof)
• General Anti-Avoidance Rule
(GAAR)
• Switch-over clause (whether it
should be included at all)
• CFC rules
17 June 2016
ECOFIN meeting
As a result of discussions after
the ECOFIN meeting and
changes to the original
proposals a political
agreement was reached
between all Member States on
21 June 2016
• Exit taxation
• Switch-over clause
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EU Anti-Tax Avoidance Directive I
The measures listed
• Interest limitation: Interest charges exceeding interest revenues (and equivalent taxable revenues)
would be deductible up to 30% of the taxpayer’s EBITA or up to EUR 3mio (whichever is higher)
− Exceptions (group-wide test/standalone entity)
− Option for Member States to apply a carry-back or carry forward on exceeding interest cost
− Grandfather rule for loans concluded before 17 June 2016 if not subsequently modified
• Hybrid mismatches rules: Case whereby two EU Member States give a different characterization to
the same taxpayer/instrument
− In cases of double deduction: Deduction should occur only in the state of source of the payment
− In case of deduction without inclusion: Deduction should not be allowed
• Controlled foreign company (CFC) income rules: Anti deferral tax measure whereby the tax base of
a taxpayer would include the non-distributed income of an entity under conditions (basically where profits
of this entity are not taxed or taxed at much lower rate than the country of the taxpayer)
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EU Anti-Tax Avoidance Directive I
The measures listed
• General anti-abuse rule: Case whereby non-genuine arrangements or a series thereof carried out for
the essential purpose of obtaining a tax advantage that defeats the object or purpose of the otherwise
applicable tax provisions shall be ignored for the purposes of calculating the corporate tax liability.
Wording similar to the GAAR inserted in the Parent-Subsidiary Directive
• Exit taxation for cross-border transfer of assets, residence or business carried on by
permanent establishment:
− Tax base: Fair market value of the transferred assets, at the time of exit, less their value for tax
purposes
− Deferral provision by paying in instalments over a five-year period provided the assets/residence of a
taxpayer’s head office/permanent establishment are transferred to another Member State or a country
that is party to the EEA Agreement
• Switch-over clause: Removed
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EU Anti-Tax Avoidance Directive I
CFC highlighted
The EU corporate taxpayer should include in its taxable income:
• System A – Non-distributed income of a CFC from defined categories, being
− a) royalties, b) interest, c) financial leasing, d) income from insurance, banking and other financial
activities, e) dividends and capital gains on shares and f) income from invoicing companies that add no
or little economic value;
− Optional exclusion if income from defined categories is 33% or less;
− Unless, the CFC carries on substantive economic activity supported by staff, equipment and premises.
• System B – Non-distributed income of a CFC from non-genuine arrangements, which means that the CFC
would not own the assets or take the risk if it were not controlled by a company with the significant
people functions. Unless:
− The CFC has no accounting profits up to EUR 750,000, and non-trading income of no more than EUR
75,000;
− Entities where accounting profits amount to no more than 10 percent of its operating costs.
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EU Anti-Tax Avoidance Directive II
25 October 2016
Directive proposal
6 December 2016
ECOFIN meeting
Non-EU and EU hybrid
mismatches covered
Failure to reach political
agreement
Broadening the definition of
hybrid mismatches
Disagreement on
• Hybrid entity/PE mismatches
• Exceptions to anti-hybrid rule
(e.g., UK)
• Hybrid financial instruments
• Scope of anti-hybrid rule
• Imported mismatches
• Entry into to force (e.g.,
Netherlands)
• Dual resident mismatches
21 February 2017
ECOFIN meeting
A political agreement was
reached between all EU
Member States after
discussions and changes
to the original proposal
• Hybrid transfers
Multiple areas are covered
• Double deduction (DD) and
deduction/no inclusion (D/NI)
and no tax/no inclusion (NT/NI)
and DTR (double tax relief at
source)
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EU Anti-Tax Avoidance Directive I + II
2018
Deadline for EU
Member States to
transpose ATAD I in
their national laws
for all provisions
© 2017 Deloitte Belgium
2019
ATAD I Provisions
applicable (except
for exit taxation)
Deadline for EU Member
States to transpose
ATAD II in their national
laws for all provisions
except reverse
hybrids
2020
All ATAD I provisions
apply
2022
All provisions applicable
All ATAD II provisions
apply except for the
provision for reverse
hybrids
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Transparency
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Tax transparency
Between tax
administrations
EoI for tax rulings
• What: mandatory automatic
exchange of info (EoI) on
advance cross-border rulings
(ACBR) and APA’s every 6
months
To the public?
To the tax authorities
CBCR
• What: Country-by-country
reporting (CBCR) on key related
information on MNC’s
• Largely in line with OECD
• For financial years as from
1/1/2016
Public CBCR
• What: EU proposed public countryby-country reporting requirements
• Approval required by the European
Council and the European
Parliament
• When?
• To whom: all other MS and the
EC (secure central directory)
• As from 1/1/2017 + conditional
claw-back of 5 years
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Tax transparency
Between tax administrations – EoI for tax rulings
Exchange of rulings as of 2017
Directive
Cross-border
rulings
Transposition draft law
Competent authorities of
all other Member States
European Commission
BEPS 5
Cross-border rulings
related to preferential
regime
Cross-border ruling for
downward adjustment
of taxable profits
PE rulings
Exchange of rulings as of 2016
Residence countries of all related parties with
whom the taxpayer entered into a transaction
• For which a ruling is granted; or
• Giving rise to income from related parties
benefiting from a preferential treatment
Countries of residence of the immediate
and ultimate parent companies
Residence country of the head office
or country of the PE
Countries of residence of the immediate
and ultimate parent companies
Residence country of any related party making
payments to the conduit (directly or indirectly)
Related party
conduits rulings
Country of residence of the ultimate
beneficial owner
Countries of residence of the immediate
and ultimate parent companies
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Tax transparency
To the tax authorities - CBCR
•
Council Directive 2016/881
•
Implements Action 13 BEPS on CbCR across the EU
•
Automatic exchange of information via standard forms & CCN Network
•
EU & non-EU “MNE Group”s with consolidated group revenues ≥ EUR 750 mio
•
Reporting Entity: Ultimate (Surrogate) Parent Company or Constituent Entity (a.o. for non-EU
MNE’s)
• Relevant information:
Revenue
P/L before
tax
Number of
employees
Tangible
assets
Stated
capital
Accumulated
earnings
CE main
business
activities
CE tax
jurisdiction
Constituent
entities
© 2017 Deloitte Belgium
Income tax
paid
Income tax
accrued
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Tax transparency
To the public? – public CBCR
• 9 out of 12 Action 13 CbC reporting items: Nature of activities, number of employees, net turnover,
profit before tax, income tax due, income tax paid and accumulated earnings
− Excludes stated capital, tangible assets, revenue split
− Provided separately for each EU Member State, and in the aggregate outside the EU
− Provided on an individual country basis for non EU countries which “do not respect international tax
good governance standards”
• Reports should be publicly available for at least five years on company website and filed with a business
register in the EU
• Applicable to
− EU-based parents of multinational groups (MNCs) with over €750 million in net turnover
− MNCs headquartered in a third country, where the group has more than €750 million in net turnover
and it operates in the EU through medium or large subsidiaries or branches (based on existing EU
thresholds)
• Approval required by the European Council and the European Parliament
• When?
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CC(C)TB
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Background
History of the CC(C)TB project
Initial policy to work
towards CC(C)TB
European Commission
issued a public consultation
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‹
2015
2016
‹
2011
‹
2001
Original draft Directive
proposed
New draft CCTB and
CCCTB Directives released
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October 2016 relaunch of CCTB/CCCTB
Step 1: Adoption of Common
Corporate Tax Base (CCTB)
Step 2: Adoption of
Common Consolidated
Corporate Tax Base (CCCTB)
Intended to apply from
1 January 2019
Intended to apply from
1 January 2021
Automatic transition
•
Mandatory for groups with global sales of at least €750 million
•
Optional for companies falling below the threshold
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BEPS actions taken by
countries
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Multilateral Convention
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Background
24 November 2016 publications
Multilateral Convention to
Implement Tax Treaty
Related Measures
to Prevent Base Erosion and
Profit Splitting
Explanatory Statement to
the Multilateral Convention
(‘the Convention’)
(‘the Explanatory
Statement)’
48 Pages,
39 Articles in 7 Parts
86 pages,
359 paragraphs
Equally authentic versions in English and French
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Scope and mechanics
Which treaties are affected?
From: Country X
Y
To:From:
OECD Country
Depositary
To:From:
OECD
Depositary
Subject:
Notifications
Country
Z
Subject:
Notifications
To: OECD Depositary
• ListSubject:
of tax treaties
to be
Notifications
•
List
of
tax
treaties
to be
covered;
covered;
• List of tax treaties to be
• Reservations
covered made;
• Reservations made;
• Options
selected; made
• Reservations
• Options selected;
• Lists
of existing
treaty clauses
• Options
chosen
•
Lists
of
existing
affected by above; treaty clauses
affected
above;treaty clauses
• Lists ofby
existing
affected by above
• Covers BEPS treaty Actions only – no other
changes, or domestic law changes
• OECD is Depositary
• Countries will bring their list of treaties
potentially to be changed when signing.
• Capable of overriding both OECD and UN
models
• Provisional list of expected reservations and
notifications at signature - Confirm at
ratification
• OECD will publish covered treaties,
reservations and options
• Some countries will publish consolidated
versions of treaties to aid taxpayers
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BEPS Actions
Action 6: Treaty abuse
Preventing giving benefits in inappropriate circumstances
Article 7
Prevention of treaty abuse
Minimum standard
but three options
a) Principal Purposes Test (PPT) only
Asymmetry possible
b) Simplified Limitation on Benefit + Principal Purpose Test
c) Detailed Limitation on Benefit
No text in convention

Commitment to bilateral
negotiation
Must include anti-conduit
rules
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BEPS Actions
Action 6: Treaty abuse (cont’d)
Preventing giving benefits in inappropriate circumstances
Article 6
Update treaty preambles
Minimum standard
Article 8
Minimum holding period for dividend exemptions/relief
Article 9
Non-resident capital gains taxable if immovable property threshold met
in past year
Article 10
Anti-abuse rule for permanent establishments in third jurisdictions
Reservations
possible
Article 11
Preservation of right to tax one’s own residents
(‘savings clause’)
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BEPS Actions
Action 7: Permanent Establishment
Preventing artificial avoidance of a taxable presence
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Article 12
Update dependent agent permanent establishments:
‘habitually plays the principal role...’
Reservations
possible
Article 13(1)
Updating the exemption for specific activity creating
a fixed place of business permanent establishment
(preparatory or auxiliary)
Three options
Article 13(4)
Anti-fragmentation rule
Reservations
possible
Article 14
Splitting-up of contracts
Reservations
possible
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BEPS Actions
Action 2: Hybrid mismatches
Eliminating the tax advantages arising from hybrid instruments and entities
Article 3
Treatment of income received by fiscally transparent entities
Reservations
possible
Article 4
Dual resident entities:
Use of competent authority residency tie-breaker
Reservations
possible
Article 13(1)
Updating treaty articles on elimination of double taxation
Three options:
Credit/Exemption
Asymmetry
possible
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BEPS Actions
Action 14: Dispute resolution
Making dispute resolution mechanisms more effective
Article 16
Adopt mutual agreement procedure
in line with Model Tax Convention
Article 17
Requiring corresponding
adjustments
Limited variations allowed
under minimum standard
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Mandatory binding arbitration
Optional
Twenty-seven countries, including: Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy,
Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Slovenia, Spain, Sweden,
Switzerland, the United Kingdom, and the United States
Applies after case has spent two years in MAP (three years upon reservation)
Arbitration panel comprises three arbitrators
‘Final offer’ approach
(or ‘baseball arbitration’)
‘Independent opinion’
approach
• Each competent authority presents their
final offer for resolution
• Evidence presented by each competent
authority
• Arbitrator choses one outcome from the
two presented
• Results in a binding written opinion
from the arbitrator
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Commencement
When does the Convention itself enter into force?
Convention enters
into force
First day of the subsequent
calendar month
68 signatories, 9 intentions
Convention open for
signatures
Signing ceremony
‹
‹
‹
Three months
‘Speed dating’
© 2017 Deloitte Belgium
Jun 7
2017
Q3
2017?
Q4
2017?
‹
Feb
2017
‹
Dec
2016
Ratification completed
by five jurisdictions
Fifth instrument deposited
with OECD
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Commencement
Withholding taxes – next calendar year
e.g.,
1 Oct 2017
e.g.,
1 Nov 2017
In force in
Country A
In force in
Country B
Subsequent calendar year
1 Jan 2018
Payments after this date
• Jurisdictions can unilaterally opt to replace ‘calendar year’ with ‘taxable period’
(Potential for asymmetry)
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Commencement
Taxes levied with taxable periods – wait six months
1 Oct 2017
1 Nov 2017
In force in
Country A
In force in
Country B
Six months
1 May 2018
Start of next
taxable period
after
1 May 2018
First affected
taxable period
• Has effect for first taxable period commencing after six months has elapsed
(Potential for asymmetry)
• Jurisdictions can unilaterally postpone further – until first period of a new calendar year following the six
month period
• If jurisdictions agree, six months can be replaced with shorter period
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Country overview
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BEPS actions implementation
Belgium
Action 1:
VAT on B2C
digital services
Action 2:
Hybrids
EU VAT Directive
is transposed
•
•
France
EU VAT Directive
is transposed
•
•
Germany
EU VAT Directive
is transposed
•
•
NL
EU VAT Directive
is transposed
© 2017 Deloitte Belgium
Action 3:
CFC
Action 4:
Interest
deduction
Action 5:
Harmful
tax practices
Proposed
change to tax
treaties
EU P/S
directive and
ATAD I and II
ATAD I
ATAD I
•
Domestic
initiatives antihybrid rule for
interest
payments
EU P/S
directive and
ATAD I and II
Existing CFC
rules not
expected to be
amended
ATAD I
Domestic
initiatives antihybrid rule for
interest
payments
EU P/S
directive and
ATAD I and II
Existing CFC
rules, to be
amended to take
ATAD into
account
Existing interest
deduction
limitation rules,
to be amended to
take ATAD into
account
Currently no
plans to
introduce a
patent box
regime
•
ATAD I
Existing interest
deduction
limitation rules,
to be amended to
take ATAD into
account
Innovation box
regime adapted
to take into
account the
nexus approach
•
EU P/S directive
and ATAD I and
II
•
PID replaced
with IID
Directive on
ruling
exchange
Patent box
regime subject to
review
Action 6:
Prevent treaty
abuse
MLI:
• Title &
preamble
• PPT
•
•
•
•
Proposed
change to tax
treaties
MLI: PPT
Already
reflected in
some tax
treaties
MLI
PPT or LOB
reflected in
some tax
treaties
MLI: PPT
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BEPS actions implementation
UK
Action 1:
VAT on B2C
digital services
Action 2:
Hybrids
Action 3:
CFC
Action 4:
Interest
deduction
Actio 5:
Harmful
tax practices
Action 6:
Prevent treaty
abuse
EU VAT Directive
is transposed
• Quid Brexit?
Domestic
initiatives antihybrid rule for
interest
payments (ATAD
compliant)
Existing CFC
rules (ATAD
compliant)
Existing interest
deduction
limitation rules
(ATAD compliant)
Patent box
regime adapted
to take into
account nexus
approach
•
•
PPT reflected
in some tax
treaties
MLI: PPT
Ireland
EU VAT Directive
is transposed
EU P/S directive
and ATAD I and
II
ATAD I
ATAD and
current interest
deduction rules
Patent box
legislation
included in
Finance Act 2015
MLI: PPT
Switzerland
Not yet known
Current Swiss
law is sufficient
No CFC and no
plans to
introduce CFC
Current thin cap
rules are
sufficient
Patent box in line
with BEPS in
preparation
Both LOB and
PPT used
US
No VAT system
applies
Us has domestic
rules to tackle
hybrid
mismatches
Current CFC rules
already
incorporate many
of the proposals
Fixed ratio limit
for foreign owned
corporations
(50% instead of
10% or 30%)
•
ATAD and
current interest
deduction rules
Patent box
regime adapted
to take into
account nexus
approach
•
Patent box
regime takes into
account nexus
approach
Domestic law:
GAAR + P/S
GAAR
Spain
Italy
EU VAT Directive
is transposed
EU VAT Directive
is transposed
© 2017 Deloitte Belgium
EU P/S directive
and ATAD I and
II
Domestic rules
and ATAD
Implemented
Italian CFC rules
amended in 216
Current fixed
ratio (30%
EBITDA) might
be amended to
align to ATAD
•
No preferential
IP regime
US generally
does not issue
rulings other
than unilateral
APA’s
•
•
•
•
LOB in treaties
New US model
includes more
restrictive LOB
Opposed to
PPT
PPT reflected
in some tax
treaties
MLI: PPT
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BEPS actions implementation
Action 7:
PE
Action 8-10:
Transfer
Pricing
Action 12:
Disclosure of
aggresive tax
planning
Action 13:
TP doc & CbC
Action 14:
Dispute
resolution
Action 15:
Multilateral
instrument
Belgium
Antifragmentation
rule
Immediate
application by
Tax Authorities
Assessment to be
made by Belgian
Government
Implemented
Committed to
binding
arbitration and
close pending
cases within 24
months
Signed
France
Through MLI
Immediate
application by
Tax Authorities
No measure yet
Implemented
Committed to
binding
arbitration
Signed
Germany
Through MLI
Application
expected from
Tax Authorities
No measure yet
Implemented
Committed to
binding
arbitration
Signed
NL
Through MLI
Immediate
application by
Tax Authorities
Current
measures
considered
sufficient
Implemented
Committed to
binding
arbitration
Signed
UK
Antifragmentation
rule
Enacted into UK
law
Current
measures under
review
Implemented
Committed to
binding
arbitration
Signed
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BEPS actions implementation
Action 7:
PE
Action 8-10:
Transfer
Pricing
Action 12:
Disclosure of
aggressive
tax planning
Action 13:
TP doc & CbC
Ireland
May be
implemented
through MLI
Expected that
Ireland will adopt
the revised OECD
TP guidance
Mandatory
disclosure
regime and
general antiavoidance rule
already in
place
•
Switzerland
Awaiting position
on MLI
New guidelines
are valid with
immediate effect
No changes
planned
•
•
•
US
Awaiting
outcome report
on attribution of
profits
No “substantial”
changes to TP
rules required
Statutory and
regulatory
disclosure
rules
aggressive tax
planning
•
•
•
Action 14:
Dispute
resolution
Action 15:
Multilateral
instrument
Implemented,
(except for
MF/LF)
Expected to be
implemented
through MLI
•
•
No plans to make
TP doc
compulsory.
Masterfile must
be prepared upon
audit
CbC implemented
Committed to
binding
arbitration
Equivalent TP doc
requirements in
place
No master file
requirement
CbC implemented
US treaties:
mandatory
binding
arbitration
No intention to
modify US model
convention to
conform it with
MLI
Committed to
binding
arbitration
Will adopt MLI
Unilateral ruling
regime adopted
Not yet known
Spain
Changes are
expected
TP rules
amended
Not yet known
Imlemented
Italy
Not yet known
Not yet
implemented
Not yet known
•
•
© 2017 Deloitte Belgium
TP Doc: Not yet
known
CbC implemented
Will adopt MLI
Government’s
position on all
articles not yet
known
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BEPS in practice: current
trends and recommendations
for the future
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Business models
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Global Tax Reset – driving forces
Global Tax Reset
Substance
•
BEPS
•
Alignment of business/tax
structure for full principal
and sourcing
Location
Taxable presence
•
Hybrid mismatches
•
•
Location of DEMPE
functions, central
entrepreneur
Tighter Dependent Agency PE
Rule
•
Prep and auxiliary test
•
New Anti-Fragmentation Rule
•
Multilateral instrument
Alignment between IP
ownership and substance
•
State aid concerns
EU directives
•
Anti-hybrid provision
Potential US
tax reform
•
Border Adjustable Tax?
•
Lower Federal Tax rate?
Transparency
•
Country-by-Country (CbC)
reporting
•
Automatic exchange of
cross-border tax rulings
and advance pricing
arrangements
Global Tax Reset makes it more challenging to attain tax efficient IP, POC and sourcing models
In the long run, alignment on location of IP ownership and substance necessary
Will Border Adjustable Tax and Lower Federal Tax rate make US an attractive location?
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Case study: Navigating
the Global Tax Reset
© 2017 Deloitte Belgium
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Case study
Facts
Business overview
Parent Co
(US)
• The company assembles and distributes
health care products
• Also distributor for third party
manufacturers' products
• Products distributed in more than 20
countries through LRDs and sales agents
• US sources products worth $1 billion from
China.
Dutch CV
Royalty
payment
Contract
assembly
Operating model
• International business managed by a Dutch
Principal. Non-US IP owned/licensed by CV
• Advance Pricing Agreement negotiated
with the Dutch tax authorities for the
transfer pricing between CV and BV
© 2017 Deloitte Belgium
Commission
for sourcing Beneficiary
(NL)
services
(x% of Spend)
Dutch BV
(CBT
Trustee)
CBT
Cost+
service fee
Assembly
Co
Warehouse
Sales Co
Sale of
goods
SG HoldCo
Cost+
service fee
China
OpCo
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Case study
Facts
Operating model (cont’d)
• The CBT structure manages sourcing
activities in China
Parent Co
(US)
• Assembly units located in France,
Germany, Japan, and Australia
• Distributors located in Europe (UK,
Germany, France, Italy, and Spain) and
Asia (Australia and Japan)
• BV owns inventory in warehouses owned
by local entities in Australia, Germany and
France
• Logistics contracts are negotiated by
contract managers of local distributors
though concluded by BV
• A Singapore service company (not shown)
is contracted by BV to oversee Asia
business
© 2017 Deloitte Belgium
Dutch CV
Royalty
payment
Contract
assembly
Commission
for sourcing Beneficiary
(NL)
services
(x% of Spend)
Dutch BV
(CBT
Trustee)
CBT
Cost+
service fee
Assembly
Co
Warehouse
Sales Co
Sale of
goods
SG HoldCo
Cost+
service fee
China
OpCo
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Case study
Questions to be answered…
Substance
• Is there an appropriate level of substance in BV to manage the international business?
• Are the CV Board of Directors meetings enough to demonstrate performance of DEMP functions?
• Is the substance in Singapore sufficient to act as a span blocker for Asia operations?
• Is there a risk that income attributable to CBT is taxed by China due to greater transparency?
Location
• Is there a State Aid concern because of the CV/BV advance transfer pricing ruling?
• Could there be disallowance of deduction for COGS at the level of Sales Co due to Anti-hybrid
rules in the UK (2017) and likely in EU (2019) – Germany, France, Italy, and Spain?
• Will the US tax authorities analyze the sourcing commission payment to CBT?
© 2017 Deloitte Belgium
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Case study
Questions to be answered…(cont’d)
Taxable presence
• Does the BV have a fixed place of business PE due to the new anti-fragmentation rule (warehouse
and other key activities performed in the same location)?
• Does BV’s ownership of raw materials and inventory qualify as preparatory and auxiliary?
• Is there a dependent agent PE created by contract managers of Sales Cos in the process
of negotiating contracts?
Transparency
• What are the CbC Reporting requirements for CV and CBT income?
• What could be the impact of EU automatic exchange of international tax rulings and advance
pricing agreements?
© 2017 Deloitte Belgium
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Substance
Considerations and potential responses to substance questions…
Considerations
BV’s oversight and management
of key functions – procurement,
BV
sales and operations, assembly,
sales and services – necessary
Alignment of IP ownership and
performance of DEMP functions
CV
necessary for attributing IP
income to CV
Singapore Service Co should
Singapore
have oversight and management
Service of key functions in Australia and
Co Japan
BV’s Subcommittee as the
CBT trustee of CBT should perform its
activities as per the requirements
© 2017 Deloitte Belgium
Potential responses
• Onshore IP to
right location
Strategic decision making by key
people in BV and its robust
documentation
• Other interim
potential
responses
Alignment of job descriptions and
reporting lines to decision
making
Onshore CV to the right location
so that performance of DEMP
functions is aligned with IP
ownership. Other interim
potential responses available
Decision making by the key
people in Singapore Service Co
and its robust documentation
BV’s Subcommittee should meet
regularly, hold discussions for
taking decisions and prepare
meeting minutes
• Strategic
decision-making
and robust
documentation
• BV’s
Subcommittee
actively involved
in sourcing
Parent Co
(US)
Dutch
CV
Beneficiary
(NL)
Dutch BV
(CBT
Trustee)
CBT
Singapore
Service Co
SG
HoldCo
• Strategic decision
making and
robust
documentation
China
OpCo
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Location
Considerations and potential responses to location questions…
Considerations
Potential Planning Considerations
Long term
Anti-hybrid
Rules
To mitigate potential hybrid mismatches IP
income earned by a regarded entity
• On-shoring of IP to BV or other location (e.g., Singapore,
US); claim finance and amortization deductions
Interim
• Interpose a tax-efficient jurisdiction (e.g., HK, Barbados)
above or below CV
State
Aid
Selection of Dutch APA for State Aid
investigation by European Commission
• Inform Dutch Tax Authorities about the changes in fact
pattern (e.g., CV held by a Hong Kong entity) leading
to withdrawal of the Ruling
• Live the term of the Ruling before it expires (2017)
Location
of IP
IP should be located in a jurisdiction that
addresses the substance concerns and is tax
optimal
• Potential responses outlined under ‘Anti-hybrid’ rules also
applicable for location of IP
• In the case considered, CV would be held by a Hong Kong entity and DEMP functions performed by US LLC
under HK
• Use of US LLC being considered for performance of DEMP functions
© 2017 Deloitte Belgium
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Potential tax planning considerations Anti-hybrid Rules
CV held by Hong Kong and U.S. LLC performs DEMP functions
Parent Co
(US)
Key considerations
• US LLC performs “DEMP” functions with regards
to the non-US IP
• Hong Kong Co must be a regarded entity
• Royalty free license agreements between Hong Kong Co
and CV and CV and US LLC
• Activities in US LLC may give rise to ECI
Dutch BV
License
agreement
Hong Kong
Co
Dutch
CV
• No hybrid (royalty) payments from BV
Result of US Branch with Royalty Free License
• Because there is no payment or quasi payment made
to the hybrid payee (CV and/or US LLC), the application
of the hybrid mismatch rules are not relevant
© 2017 Deloitte Belgium
Royalty
free license
agreement
Royalty
free license
agreement
US LLC
US roles that perform the following
functions related to Non-US IP
• Development
• Enhancement
• Maintenance
• Protection
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Potential tax planning considerations Anti-hybrid Rules
Long term – onshore IP
Key considerations
Parent Co
(US)
• CV will become a fully taxable entity; remove
transparency of CV by removing “transferrable
limited partnership rights between partners” clause
• CV sale of non-US IP rights to BV is a taxable
transaction
Dutch CV
Sell IP
• IP and resulting income will be on BV’s Balance
Sheet and P&L
• Step up in basis and amortization at BV level
Contract
assembly
• No hybrid (royalty) payments from BV
Result of opening CV and selling IP
• With IP being sold by a regarded entity, the
payment for the IP is not considered for the
application of the hybrid mismatch rules
© 2017 Deloitte Belgium
Dutch BV
Finished
goods
Assembly
Co
Sales Co
Sale of
goods
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Taxable presence
An overview of key developments related to permanent
establishment risks
BEPS developments*
1
Tighter Agency PE Rule: A dependent
agent who works on behalf of an
enterprise and who “habitually plays the
principal role leading to the conclusion
of contracts that are routinely concluded
without material modification by the
enterprise” may give rise to a PE
All Article 5(4)
exceptions to the
definition of PE must
now be of a
preparatory or
auxiliary nature
2
3
• Anti-Fragmentation Rule: The rule would essentially require the determination of whether
activities in a particular jurisdiction are preparatory or auxiliary to be made on a group wide basis
* It should be noted that the new definition of PE is not in the OECD Model Tax Convention and it’s not clear which definition of PE the Multilateral Instrument
will finally adopt and which countries will be the signatory of the Multilateral Instrument.
© 2017 Deloitte Belgium
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Dependent agent PE risks
LocalCos participation in sales contract negotiations could trigger
PE risk
‘Dependent Agent’
test requirements
•
•
•
•
The agent is acting on behalf of
an enterprise
Has and habitually exercises in
the state concerned an authority
to conclude contracts in the
name of the enterprise
Not treated as an independent
agent
The agent habitually plays the
principal role leading to the
conclusion of contracts that are
routinely concluded without
material modification by the
enterprise
(BEPS – Action 7)
© 2017 Deloitte Belgium
Risks
•
•
The tax authorities can argue that sales agents bind BV into third party
contracts
The sales agents through initial discussions and negotiations play
the principal role leading to the conclusion of contracts that are routinely
concluded by BV without material modification
Recommendations
•
Convert to buy-sell
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New anti-fragmentation PE risks
Exceptions to fixed place of business PE no more available when
multiple activities performed
‘Anti-Fragmentation’
test requirements
Risks
•
•
•
•
BV conducts activities through a
fixed place of business in the
same jurisdiction as a related
entity
The overall activity resulting
from the combination of the
activities carried on by the same
enterprise or closely related
enterprises in a given territory is
not of a preparatory or auxiliary
character
The combination of activities
must constitute complementary
functions that are part of a
cohesive business operation
© 2017 Deloitte Belgium
•
•
BV has a fixed place of business based on inventory ownership in a
warehouse
The tax authorities can argue that multiple activities performed in local
countries, i.e. France and Germany, in combination with inventory ownership
by BV in a warehouse in the same country are complimentary function and
together constitute a cohesive business operation
Consequently, BV has a fixed place of business in these countries. Income
attributable to the deemed cohesive business operation should be allocated to
BV’s PE in France and Germany
Recommendations
•
•
BV employees do not have unfettered access to the warehouse where it holds
the inventory
From a long term perspective, conversion from an LRD to a stockholding LRD
could be considered and BV no longer owns inventory in a warehouse
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Transparency
Reporting CV and CBT income
Structure
CBT
Constituent
entity
Anticipated
treatment
Place of
organization
Tax
jurisdiction
of residence
Stateless
Report
revenue
and profit
BV
Corporate for
Netherlands
Netherlands
Netherlands
No
Netherlands
CBT
Non-Entity in China
(fiscally
transparent)
China
None
Yes
Stateless and
Netherlands
(Beneficiary)
SG Hold Co
Corporate for
Singapore
Singapore
Singapore
No
Singapore
China OpCo
Corporate for China
China
China
No
China
CV
Partnership/Fiscally
transparent in
Netherlands
Netherlands
None
Yes
Stateless and
US
BV
Corporate treatment in
Netherlands
Netherlands
Netherlands
No
Netherlands
CV/BV
* For CbC reporting, stateless income is not double counted, i.e. report as stateless only once as it all flows up to the first non-stateless entity
© 2017 Deloitte Belgium
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Future trends
© 2017 Deloitte Belgium
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Future trends
Aligning supply chain structures with the changes in the business
• Non-transactional service principal
• Capturing benefits of data analytics in a tax efficient manner
• Capturing synergies of post merger integration (PMI) in a tax efficient manner
Business changes require consideration of alternative operating models
© 2017 Deloitte Belgium
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Non-transactional service principal
Deriving value for inbound business
Foreign Service Principal Model
1. Principal function: The Foreign Service Principal provides business
concept, know-how, marketing support, strategic guidance,
i.e. ‘way of doing business’ in return for a high value service fee
2. The model is consistent to a central decision making executive team
and at the same time preserves the entrepreneurial character
of the US entity
3. The business disruption associated with implementation is limited
as the transactional flows with either suppliers or customers generally
do not change. The IT systems changes are limited
4. Critical requirements
− Supervision and management of the US business by Foreign Service
Principal and its robust documentation
− Floor and Cap transfer pricing approach so that US Co pays service
fees only after attaining certain threshold profit level
− Depending on the IP component of the business concept provided
by the Foreign Service Principal, the service fees may include royalty
component subject to withholding tax
© 2017 Deloitte Belgium
Foreign
Service
Principal
(Tax
Efficient
Location)
High value
service
fees
(X% of sales)
Service
agreement
US Co
Products/Services
transactions
Third-Party
Customers
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Data analytics
Data explosion has made data analytics a critical tool for
commercial differentiation
Data analytics
Access
Analyze
Extract
Identify
pattern
Deepen customer
relationship
• Targeted promotion
• Customized services
Boost operational
efficiency
• Enhanced utilization of assets
• Reduced downtime
Outmaneuver
competitors
• Optimal pricing
• Customer structure insight
Real time
analysis
Data driven growth
© 2017 Deloitte Belgium
• Data analytics by using artificial intelligence to identify
pattern from the ever expanding data stock has
significantly changed the business model of several
companies
• For example, airlines have abundant data providing
information on credit cards, shopping behavior,
frequency, travel patterns, aircraft maintenance and
weather. The information is potentially used for dynamic
pricing, management of routes and maintenance of
flights leading to higher profitability
• Data analytics enabled dynamic pricing tool and
identification of customer structure (high value customers
versus low value customers) could assist in increased
revenue and increased occupancy rate
• Data analytics is used in a wide range of industries
including airlines, hospitality, banking, insurance,
consumer products, healthcare
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BMO and data analytics
How does BMO drive value for data driven growth?
Value proposition
• BMO allows data analytics driven profit margin to be captured
in a most tax efficient manner, i.e. would you like your data
analytics driven profit to be taxed at 35% or 10%?
Data Analytics Service Principal Model
1. Principal function: The Data Analytics Service Principal provides
timely and effective data analytics in return for a service fee.
Through data analytics, the service recipients would have
a better understanding of their customers’ demand and can
better determine new customer services, recognize and enhance
customer value, and cultivate high-value customers. Data analytics
can also assist with increased operational efficiency based
on improved prediction
2. Service company function: Data Analytics Principal engages
Service Company to provide Data Analytics support under
its supervision
© 2017 Deloitte Belgium
US Parent
Products/Services
Transactions
High
Value
Service
Fees
Service
Agreement
Data
Analytics
Principal
(Tax
Efficient
Location)
Routine
Service
Fee
Third-Party
Customers
Routine
Service
Agreement
Service
Company
(Low Cost
Location)
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BMO and data analytics
How does BMO drive value for data driven growth?
Data Analytics Service Principal Model (cont’d)
3. Principal compensation: The Data Analytics Principal would be
compensated through service fees based on gain sharing and
benefits to the business (e.g., growth in unit revenues, new high
value customers and increased share of wallet from existing
customers, increased occupancy rate)
4. ServiceCo compensation: ServiceCo receives cost plus remuneration
from Data Analytics Principal
5. Critical requirements
− Key employees, including business intelligence analysts and data
scientists must be located in the Data Analytics Principal
− Maintain deferral from a US tax perspective which would involve
characterizing the payment received as a service fee, instead
of a royalty, i.e. no property rights
© 2017 Deloitte Belgium
US Parent
Products/Services
Transactions
High
Value
Service
Fees
Service
Agreement
Data
Analytics
Principal
(Tax
Efficient
Location)
Routine
Service
Fee
Third-Party
Customers
Routine
Service
Agreement
Service
Company
(Low Cost
Location)
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BMO and the M&A lifecycle
BMO can increase deal value by capturing PMI synergies in tax
efficient manner
Including BMO planning at critical points in the M&A lifecycle can increase deal value by identifying the
potential value of tax operating model integration which can be considered during transaction structuring
and so that related requirements can be included in PMI
Sample synergy benefits
before BMO planning
Sample synergy benefits
after BMO planning
Tax
Savings
Taxes
Synergy
Profits
After Tax
© 2017 Deloitte Belgium
BMO
Planning
Taxes
Synergy
Profits After
Tax
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BMO and the M&A lifecycle
High level model integration scenarios
Key questions
to answer
Objective
Target/Acquirer
model
Dual Principal Operating
Company (“POC”) optimization
A
A
POC
T
T
POC
Integration into
Acquirer POC
A
T
A
POC
Integration into
Target POC
A
T
T
POC
Integrate Acquirer and
Target into new POC
A
T
A,T
POC
Drive tax benefits through existing
POC synergies or integration
of existing POCs
Integrate Target operating model
into Acquirer POC to generate
accretive tax benefits
Integrate Acquirer operating model
into Target POC to generate
accretive tax benefits
Can Acquirer and Target
operations be integrated into a
new POC Model(s) to generate
tax benefits?
• Does functional and operational
integration create an opportunity to
combine POCs?
• What are market overlaps?
• What are current manufacturing and
sourcing footprints?
• Can Target functions be
realigned into existing Acquirer
POC model?
• How consistent are planned
organizational changes with
existing POC model?
• What are market overlaps?
• What are current manufacturing
and sourcing footprints?
• Can Acquirer functions be
realigned into existing Target POC
model?
• How consistent are planned
organizational changes with
existing POC model?
• What are market overlaps?
• What are current manufacturing
and sourcing footprints?
• Does centralization of functions
into POC model align with
planned integration?
• Can organizational changes be
aligned with requirements for
POC model?
• What are market overlaps?
• What are current
manufacturing and sourcing
footprints?
© 2017 Deloitte Belgium
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The importance of value chain analysis
A value chain analysis creates a context for the pricing of transactions between entities by
assessing the relative contributions made by each entity to the overall business
What is a Value
Chain Analysis?
BEPS Actions 8 – 10 require the
consideration of the overall value chain
to contextualise the transfer price of
transactions.
A value chain analysis separates a business
into a series of value generating functions.
To assess a value chain, products pass
through each level of value chain functions
and at each level gain some value.
© 2017 Deloitte Belgium
Why is it helpful?
The revised interpretation of the arm’s length
principle requires a more granular analysis of
the functions, assets and risks controlled by
a business.
A value chain analysis can provide a
foundation from which to identify the
functions, assets and risks, helping to
understand activities that create value.
Once the activities that create value are
identified, the relative contribution of each
entity/country to these value creating
activities can be further analyzed.
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VCAT – homepage
© 2017 Deloitte Belgium
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VCAT – identify and review key business profit drivers and
executives
© 2017 Deloitte Belgium
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VCAT – analytics
© 2017 Deloitte Belgium
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Financing
© 2017 Deloitte Belgium
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How to navigate in this new international tax environment?
General approach
The tax landscape governing Financing and Capital Structures for international groups is changing. International groups
will need to assess the impact, respond to change, report the impact.
Action 2: Hybrids
• Identify hybrids
• Evaluate the ‘as is’ position
• Analyze local variation
• Analyze local variation
• Model impact and
consider migration
strategy
• Model impact
• Scenario plan – what variables
will change?
Actions 8, 9, 10:
Transfer Pricing
Actions 3, 5, 6 but
also State Aid and EU
Directives
• Identify operational and
contractual risks
• Identify current
arrangements and rulings
• Evaluate how risk is
managed (contractually and
people) and what changes
can be made
• Expect local and treaty
change
• Consider legal advice
• Consider pricing of wider
Treasury activity (cash pool,
hedging etc.)
• Assess the impact in a holistic way. Actions (including non-financing ones) interact
• Accurate group forecasts will allow effective modelling (include impact of responses to other BEPS actions)
• Understanding variation in jurisdictions’ responses is vital – scenario planning
Respond to
change: Reset
the strategy
• Respond in line with group tax policy, strategy and governance, and group risk appetite
• Aligned with group profit forecast, potential future acquisitions and planned capital spend
• Likely to be a short term and a long term strategy
• Obtain stakeholder buy-in
Report the
impact
Groups will have to communicate their position to stakeholders and be ready for any further questions
© 2017 Deloitte Belgium
Overlay
Country-by-country reporting, multilateral
instrument, CFC recommendations
Assess the
impact
Action 4: Interest
Deductibility
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How to navigate in this new international tax environment?
General approach – designing a new financing strategy
Different factors need to be considered in the design of a new financing structure
© 2017 Deloitte Belgium
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How to navigate in this new international tax environment?
Intercompany financing – example structures and BEPS Action 2
impact
Finco in NID jurisdiction
Current analysis
Interest income at the level of NIDCo should be sheltered from
taxation up to the level of Notional Interest Deduction
Impact of Action 2
No hybrid benefit; therefore no disallowance of deduction
Parent
NIDCo
Debt
Opco
Finco in low tax jurisdiction/territorial tax regime jurisdiction
Parent
FinCo
Opco
Debt
Current analysis
Interest income at the level of FinCo should be taxable at a low tax
rate or should be treated as offshore income and not remitted to the
FinCo jurisdiction
Impact of Action 2
No hybrid benefit; therefore no disallowance of deduction. See Action
2, Examples 1.6 & 1.7. Discuss impact if Opco is UK (extended rules)
or France (lender minimum taxation rule)
But many other tax and non-tax aspects to consider…
© 2017 Deloitte Belgium
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How to navigate in this new international tax environment?
Intercompany financing – example structures and BEPS Action 2
impact
Interest Free Loan
Parent
Dutch OR
LuxCo
IrishCo
Debt
Interest
Free
Loan
Opco
Current analysis
IrishCo grants an interest-free loan to Dutch OR LuxCo, which onlends to Opco. NL and Lux provide a deemed deduction on the
interest free loan that offsets interest income received from Opco.
IrishCo does not deem a corresponding income inclusion with
respect to the interest free loan
Impact of Action 2
No interest income in IrishCo results in a deduction/no inclusion
(“D/NI”) outcome
Likely not a hybrid mismatch under Action 2 due to lack of
payment. See Action 2, Example 1.14
Non-Trading Irish Branch
Parent
LuxCo
Irish
Branch
Opco
Debt
Current analysis
An Irish branch of LuxCo grants loans to Opco. Interest income
is not taxed in Ireland as activities conducted through the Irish
branch are not considered trading. Lux interprets the PE
provision of the Irish/Lux Treaty to allocate taxing rights to
Ireland
Impact of Action 2
No interest income in IrishCo results in a D/NI outcome
Likely not a hybrid mismatch under Action 2 due to lack of
hybridity. See Action 2, Example 1.8.
Impact of BEPS discussion document on branch mismatches (and
UK implementation).
But many other tax and non-tax aspects to consider…
© 2017 Deloitte Belgium
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IP
© 2017 Deloitte Belgium
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Checklist for multinationals
What’s affecting IP?
Catalyst
Consideration
Transfer pricing under BEPS
• Substance: DEMPE functions
• Economic vs. legal ownership
Harmful tax regime
• Changes to IP tax regimes
• From gross to net profit basis
• Nexus requirement
© 2017 Deloitte Belgium
Timing?
2016
2016 (France: ?)
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Current areas of focus for restructuring: substance
Example IP holding companies
Key issues: Substance
• Remuneration for substance-light IP Co
Parent Co
(US)
• Uniting IP and substance
− Adding IP to substance
− Adding substance to IP
Irish Onshore
Royalties
Irish Offshore
IPCo
© 2017 Deloitte Belgium
Manufacturing
(Country Y)
Sales
(Country Z)
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Innovation incentives
IID regime vs PID regime – General concept
PID - Summary
•
80% gross income deduction on patent/SPC
income
IID - Summary
•
85% net income deduction on innovation
income
•
Patents/SPC’s or improvements of
acquired patented technologies/SPC’s
•
IP rights or improvements of acquired
protected technologies
•
Presence of R&D center
•
As from the filing of the IP right
•
As from the grant of the patent/SPC
•
5% effective tax rate
•
0% to 6.8% effective tax rate
06.8%
ETR
Income patents
initial tax rate
Effective tax rate
© 2017 Deloitte Belgium
5%
ETR
Income patents
initial tax rate
Effective tax rate
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IID regime vs PID regime
Quantification and application IID
Calculation of net
amount of qualifying
IP income
Application of
“modified
nexus” fraction
Application
deduction rate
of 85%
• Determining net IP income / recapture rule over maximum 7 years for historic
expenses after 30/06/2016 / track & tracing
• Apply modified nexus fraction
• Apply 85% deduction / carry-forward of excess IID
© 2017 Deloitte Belgium
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IID regime vs PID regime
Quantification and application IID
Calculation of net
amount of qualifying
IP income
Modified nexus fraction =
Application of
“modified
nexus” fraction
Application
deduction rate
of 85%
Qualifying expenditure (A+B+C)
-----------------------------------------Overall expenditure (A+B+C+D+E)
x 1,3 (max.)
Qualifying expenditure must directly* relate to a qualifying IP right:
(A) expenses made by the taxpayer;
(B) expenses made by the taxpayer in the context of outsourcing to an unrelated party; and
(C) expenses made by the taxpayer in the context of outsourcing to a related party, insofar as
that related person outsources the R&D and invoices, without mark-up, his outsourcing cost to
the taxpayer.
Overall expenditure comprises Qualifying expenditure and:
(D): expenses made by the taxpayer for acquiring the qualifying IP right (not included in (A));
(E): expenses made by the taxpayer in the context of outsourcing to a related party (except
expenses listed under item C).
*interest payments and costs related to real estate property excluded
© 2017 Deloitte Belgium
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Close
© 2017 Deloitte Belgium
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18 months of BEPS
What should be on your tax agenda?
Transparency
Substance
Fast evolving
legislation
Local presence
Value chain
Financing
© 2017 Deloitte Belgium
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Q&A
© 2017 Deloitte Belgium
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Contact details
Eric von Frenckell
(Laga)
Liesbet Nevelsteen
(Deloitte)
Tel. + 32 2 800 70 61
Tel : +32 2 600 66 53
[email protected]
[email protected]
Partner
Business Tax
Annelies Stragier
(Deloitte)
Charlotte Degadt
(Laga)
Tel. + 32 2 600 67 98
Tel. + 32 2 800 70 23
[email protected]
[email protected]
Director
Business Tax
© 2017 Deloitte Belgium
Partner
Indirect Tax
Contract Partner
Indirect Tax
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spanning multiple industries. With a globally connected network of member firms in more than 150 countries,
Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to
address their most complex business challenges. Deloitte has in the region of 225,000 professionals, all
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© 2017 Deloitte Belgium
About Laga
A top legal practice in Belgium, Laga is a full service business law firm, highly recommended by the most
authoritative legal guides. Laga comprises approximately 140 qualified lawyers, based in Brussels, Antwerp,
Ghent and Kortrijk. Laga offers expert advice in the fields of banking & finance, commercial, corporate/M&A,
employment, IT/IP, public/administrative, insolvency and reorganisations, real estate, tax law, tax and legal
services for high-net-worth families and individuals (Greenille by Laga), and litigation. Where appropriate to
ensure a seamless and comprehensive high-quality service, Laga lawyers work closely with financial,
assurance and advisory, tax and consulting specialists, and with select EU and US law firms.
Laga provides thorough and practical solutions tailored to the needs of clients ranging from multinational
companies, national large and medium-sized enterprises, and financial institutions, to government bodies.
More information: www.laga.be
© June 2017