www.pwc.dk Base Erosion - Profit Shifting What does it mean to you? September 2013 Jørgen Juul Andersen Søren Jesper Hansen Revision. Skat. Rådgivning.
Agenda 1. Welcome 2. Background why should we bother 3. Reflections from the G20 meeting 4. OECD Action plan on Base Erosion and Profit Shifting 5. Substance BEPS from a Transfer Pricing Perspective 6. BEPS from a Danish Perspective 7. What is next PPP 2014 May 2013 2
Welcome PPP 2014 May 2013 3
2.0 Why should we bother? PPP 2014 May 2013 4
Why should we bother Is it relevant for Danish MNCs? And if is, is it not just fluffy words and good intentions? Would it have an impact on how you do business? What it is in it for you?
3. Reflection from the G20 meeting PPP 2014 May 2013 6
Reflection for the G20 Summit What does it mean that a political mandate is given? September 6, 2013 G20 leaders ratchet up pressure on tax avoidance...into low tax countries. The G20 countries also stepped up...aid, a charity, called on the G20 to include developing countries...series Great tax race As the G20 pledges to crack down on multinational...a statement issued during the summit, businesses said they were working.. Base Erosion - Profit Shifting September 2013 7
4. Background and facts PPP 2014 May 2013 8
Baggrund for undersøgelsen BEPS rapport fra februar 2013..growing perception that governments lose substantial tax reveune.. Henviser til..increased media attention.. Politisk attention - G 20 møde i Mexico juni 2012: the need to prevent base erosion and profit shifting 9
Baggrund for undersøgelsen Data on corporate tax revenues Average OECD CIT revenue around 3% of GDP or about 10% of total tax revenues Trends? 1965: 2,3 % consistently increase over the years to 2007 (3,8%) Subsequently economic downturn, in up again in 2011 to 3,0% Corpotate income tax rate in OECD average 2000: 32,6% - 2011: 25,4% 10
Baggrund for undersøgelsen Sammenligning af investeringer foretaget ind i større lande BVI var i 2010 næststørste investor i Kina (14%) efter Hong Kong (45%) Mauritius top investor i Indien (24%) Cypern top investor i Rusland (28%) Studier relateret til BEPS Konklusion: Indikationer, men ikke rigtig bevis for stigende grad af BEPS! Skatteklima i DK 11
Lidt facts. Danske tal 2010 2011 2012 2013* Samlet beskatning 838,8 858,5 878,7 917,9 Indkomstskatter 513,2 523,2 542,0 576,0 - personlige 427,8 435,4 444,3 483,6 - selskabsskatter 48,9 49,8 55,6 56,0 Afgifter af varer og tjenester 265,1 272,2 275,7 278,7 - heraf moms 178,2 183,6 187,4 190,9 = 6% af provenu 762,3= 83% af provenu Skattetryk 47,6 47,9 48,2 49,6 BNP 1.761,1 1.791,5 1.824,0 1.852,1 Kilde: Danmarks Statistik og Finansministeriet, august 2013. 12
Lidt facts OECD Skøn for bnp pr. capita 2030 1995 1. Lux 2. Norge 3. USA 4. Schweiz 5. Holland 6. Danmark 2011 1. Lux 2. Norge 3. USA 4. Schweiz 5. Holland 6. Irland 7. Australien 8. Østrig 9. Canada 10. Sverige 11. Tyskland 12. Belgien 13. Storbritannien 14. Island 15. Danmark 2030 1. Lux 2. Norge 3. USA 4. Australien 5. Schweiz 6. Holland 7. Sverige 8. Irland 9. Tyskland 10. Canada 11. Østrig 12. Finland 13. Belgien 14. Korea 15. Island 16. Storbritannien 17. Frankrig 18. Japan 19. Danmark
Baggrund for undersøgelsen Så hvorfor fokus på BEPS nu? 1. Statskasserne er tomme 2. Historier i medierne (Starbucks, Google, Amazon) 3. 1+2 medfører politisk fokus 14
The OECD s work on BEPS Timeline 2012 Project announced/started 2013 Release of document, Addressing Base Erosion and Profit Shifting (February) Release Action Plan (July) with 15 separate actions/work streams 2014 Projected completion of approximately 1/3 of Action Plan (September) 2015 Completion of remainder of Action Plan (September/December) 2016 and forward Monitoring, additional/on-going actions September The2013 OECD's work 15
4.0 Action plan BEPS Base Erosion and Profit Shifting. PPP 2014 May 2013 16
What is the goal of BEPS? 1. Focus on double non-taxation (or less than single taxation) through cracks in the interaction of domestic tax systems creating gaps and frictions 2. Primary aim is to address situations where profits are perceived as geographically divorced from activities 17
OECD Action plan (1) Overview Address the tax challenges of the digital economy Neutralize the effects of hybrid mismatch arrangements Strengthen CFC rules Limit base erosion via interest deductions and other financial payments Counter harmful tax practices more effectively, taking into account transparency and substance Prevent treaty abuse Prevent the artificial avoidance of PE status Assure that transfer pricing outcomes are in line with value creation Base Erosion - Profit Shifting September 2013 18
Actionplan (2) Overview Establish methodologies to collect and analyse data on BEPS and the actions to address it Require taxpayers to disclose their aggressive tax planning Arrangements Re-examine transfer pricing documentation Make dispute resolution mechanisms more effective Develop a multilateral instrument Base Erosion - Profit Shifting September 2013 19
Spørgsmål 1 Tror du på, at OECD kan levere essensen af den comprehensive action plan som påstået? A. Ja - 9 B. Nej - 16 PPP 2014 May 2013 20
Comprehensive action plan Actions Action 1 - Address the tax challenges of the digital economy Issue: Traditional view that exports of goods and services are not taxable in the country of the customer Analysis of different business models, ever changing business landscape and a better understanding of the generation of value Focus on significant digital presence in a country without nexus Attribution of value created from generation of marketable locationrelevant data Focus on both direct and indirect taxes Action: 1 year 21
Comprehensive action plan (i) Establishing international coherence of corporate income taxation Action 2 - Neutralise effects of hybrid mismatch arrangements Develop model treaty provisions and recommendations regarding the design of DOMESTIC rules to neutralise the effect of hybrid instruments and entities This may include 1. Changes to the OECD Model Tax Convention prevent use of hybrid entities/instruments to obtain treaty benefits 2. Domestic law provisions on hybrids (co-ordinated with work on interest expense deduction limitations, CFC provisions and treaty shopping) Action: 1 year 22
Comprehensive action plan (i) Establishing international coherence of corporate income taxation Action 3 - Stregthen CFC rules Develop recommendations regarding the design of Controlled Foreign Company rules. Focus on low taxed interest income. Action: 2 years Consideration: More layers of CFC taxation Consensus is required but is it possible? 23
Comprehensive action plan (i) Establishing international coherence of corporate income taxation Action 4 - Limit base erosion via interest deductions and other financial payments Issue: Deduction at source and no/low taxation in the recipient country.. design.. rules to prevent base erosion through the use of interest expense.. through the use of.. debt to achieve excessive interest deductions or to finance the production of exempt or deferred income.. TP guidelines will be developed on pricing of related party financial transactions Work will be co-ordinated with work on hybrids and CFC rules Focus on preferential tax regimes Action: Recommendations for domestic law: 2 years Changes to TP guidelines: 2 years, 3 months 24
Comprehensive action plan (i) Establishing international coherence of corporate income taxation Action 5 - Counter harmful tax practices more effectively, taking into account transparency and substance Including exchange of information on rulings on preferential regimes Substance focus Action against states not corporates Engage with non-oecd members Action: Review of member country regimes: 1 year Strategy to expand participation to non-oecd members: 2 years Revision of existing criteria: 2 years, 3 months 25
Comprehensive action plan (ii) Restoring full effects and benefits of international standards Action 6 Prevent treaty abuse Issue: Double non-taxation OECD model art. 1 develop model treaty provisions and recommendations on DOMESTIC rules to prevent the granting of treaty benefits in inappropriate circumstances GAAR in treaties? Work will clarify that treaties are not intended to be used to generate double non-taxation Expectation: Attack on conduit companies Action: 1 year 26
Comprehensive action plan (ii) Restoring full effects and benefits of international standards Action 7 Prevent artificial avoidance of PE status Develop changes to the definition of PE art. 5 Special focus on Commissionaire arrangements Specific activity exemptions (auxiliary, preparatory etc.) Dependent agent (binding agreements) Action: 2 years 27
Comprehensive action plan (ii) Restoring full effects and benefits of international standards Action 8, 9 & 10 Assure that transfer pricing outcomes are in line with value creation No new TP system address flaws in the current system Focus on intangibles (action 9) Prevent BEPS by moving intangibles among group members Adopt clear definition of intangibles Ensure that profits are allocated in accordance with (rather than divorced from) value creation Develop rules for hard-to-value intangibles Update guidance on cost contribution arrangements 28
Comprehensive action plan (ii) Restoring full effects and benefits of international standards Action 8, 9 & 10 Assure that transfer pricing outcomes are in line with value creation Risk and capital (action 9) Prevent BEPS by transferring risks among, or allocating excessive capital, to group members Focus on contractually assumed risks or capital raised 29
Comprehensive action plan (ii) Restoring full effects and benefits of international standards Action 8, 9 & 10 Assure that transfer pricing outcomes are in line with value creation Other high-risk transactions (action 10) Prevent BEPS by engaging in transactions that would not occour between independent parties Clarify the circumstances in which transactions can be recharacterised Clarify application of e.g. profit splits in context of global value chains Protection against base eroding arrangements as eg management fees and head office expenses 30
Comprehensive action plan (ii) Restoring full effects and benefits of international standards Action 8, 9 & 10 Assure that transfer pricing outcomes are in line with value creation Action: Intangibles (8) 1-2 years Risks and capital (9) 2 years Other high-risk transactions (10)2 years 31
Comprehensive action plan (iii) Ensuring transparency while promoting increased certainty and predictability Action 11 Establish methodologies to collect and analyse data on BEPS and the actions to address it Recommendations regarding indicators of the scale and economic impact of BEPS Work will also involve assessing a range of existing data sources Country-by country not explicitly mentioned under action 11 but being discussed Action: 2 years Consider a Total Tax Contribution concept 32
Comprehensive action plan (iii) Ensuring transparency while promoting increased certainty and predictability Action 12 Require tax payers to disclose their aggressive tax planning arrangements Tax audits suffer from a number of constraints of tools for the early detection of tax planning techniques Focus on international tax schemes Wide definition of tax benefits to capture such transactions Design and putting in place enhanced models of information sharing between tax administration Reporting on uncertain tax positions Action: 2 years 33
Comprehensive action plan (iii) Ensuring transparency while promoting increased certainty and predictability Action 13 Re-examine transfer pricing documentation Enable tax administration to obtain a big picture view on the tax payers global value chain Important that adequate information about relevant functions are performed by other group members in respect of intergroup services Consideration: compliance cost Action: 1 year 34
Comprehensive action plan (iii) Ensuring transparency while promoting increased certainty and predictability Action 14 Make dispute resolution mechanisms more effective Improve effectiveness of MAPs Supplementing MAP provisions in tax treaties with a mandatory and binding arbitration provision Action: 2 years 35
Comprehensive action plan (iv) From agreed policies to tax rules: the need for a swift implementation of the measures Action 15 Develop multilateral instrument Recommendations regarding domestic law Changes to the OECD model convention Not effective without bilateral agreements (high number, takes time!) Multilateral instrument to change bilateral agreements Interested parties will develop a multilateral instrument Action: Report 1 year Develop instrument 2 years 36
5.0 Substance BEPS in a transfer pricing perspective. PPP 2014 May 2013 37
Substance how will it change your tax strategy A transfer pricing perspective Address the tax challenges of the digital economy Neutralize the effects of hybrid mismatch arrangements Strengthen CFC rules Limit base erosion via interest deductions and other financial payments Counter harmful tax practices more effectively, taking into account transparency and substance Prevent treaty abuse Prevent the artificial avoidance of PE status Assure that transfer pricing outcomes are in line with value creation Base Erosion - Profit Shifting September 2013 38
Substance how will it change your tax strategy A transfer pricing perspective Establish methodologies to collect and analyse data on BEPS and the actions to address it Require taxpayers to disclose their aggressive tax planning Arrangements Re-examine transfer pricing documentation Make dispute resolution mechanisms more effective Develop a multilateral instrument Base Erosion - Profit Shifting September 2013 39
Questions to be asked? 1. Will your current tax strategy be sustainable in the foreseeable future, in terms of: i. Substance, when is enough enough ii. iii. iv. Financial Structure Intercompany financing Supply chain Intangibles v. Allocations vi. Tax Benefits If the answer is yes no worries, if the answer is no or perhaps not all of the above, then. Base Erosion - Profit Shifting September 2013 40
6.0 BEPS from a Danish Perspective PPP 2014 May 2013 41
Hvad har vi gjort i Danmark og hvad kan vi forvente? SEL 2 A (Hybride enheder) SEL 2 B + SEL 13, Stk. 1, nr. 2 (Hybrid finansiering) SEL 2 C (Omvendte hybride enheder) SEL 2 D + SEL 11, 11B og 11 C (Base erosion og tynd kap) SEL 32 (CFC) SEL 2 (kildeskatter på udbytter og renter - substans) LL 2 og SKTL 3 B (Transfer pricing) Dobbelt ikke-beskatning har trange kår! Men. Hvad med dobbeltbeskatning? Hvad har DK gjort for at forbedre MAP er? Og hvad med voldgiftsklausuler i DBO er? 42
Hvad kan vi forvente? Mere dobbeltbeskatning Flere konflikter mellem skattemyndigheder skal løses MAP og voldgift Flere omkostninger til løsning af disse konflikter Hvad skal virksomhederne gøre? Pres på for 1. Voldgiftsklausuler i DBO er ( Baseball klausuler) 2. Reducer tid for MAP er 3. Gå i presseoffensiv tænk nyt! PPP 2014 May 2013 43
7.0 What is next PPP 2014 May 2013 44
What is next? Concentrated work on the action points by the OECD and Member States Business Consultation OECD reporting in the short term Timescale issues rapid turnaround given the scale of the issues taken on September The2013 OECD's work 45
What is next? 1. Initiate discussions internally to prepare for an updated Tax Strategy, 2. Rethink the TP policies 3. Seek certainty 4. Engage in programs to enhance dispute resolution mechanism 5. Multilateral instrument versus up-front decisions assuming appropriate capabilities with the Danish/EU tax authorities, what can be done to improve the existing process, should the Dutch model be copied or is the existing arrangement sufficient, how does it reconcile with the risk assessment project in both OECD and Denmark? Base Erosion - Profit Shifting September 2013 46
Spørgsmål 2 Tror du på, at OECD kan levere essensen af den comprehensive action plan som påstået? A. Ja 11 B. Nej 12 C. Delvis 12 PPP 2014 May 2013 47
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