BEPS the story so far - KPMG · 5 Harmful tax practices 6 Treaty abuse 7 Definition of PE 8 TP-Intangibles 9 TP-Risk and Capital 10 TP-High Risk 11 BEPS data 12 Mandatory Disclosure

BEPS – the story so far

Source: OECD

1© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

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Interaction/Role of OECD/G20 and domestic law

G20 – 20 major and emerging economies

OECD – 34 mainly developed countries

BEPS Project – Endorsed by G20 and OECD

Outcomes:

1. Policy Consensus (OECD);

2. Political endorsement (G20);

3. Implementation (Domestic Law)



Base erosion and profit shifting – Potential implications and expectations

Coherence

■ The business structure and global tax rules needs to be coherent and needs to be

supported by a coherent approach

Substance

■ Whatever structure is put in place needs to have business substance

Transparency

■ Reporting mechanisms need to be implemented that provide transparency at the

local and multilateral level

On 19 July 2013, the OECD released a 15 point Action Plan on Base Erosion and Profit Shifting (BEPS). This multilateral initiative

looks to implement a new set of international tax rules aimed at preventing double non-taxation by focusing on the need for:



BEPS principles

I keep hearing about

'BEPS'. What is it?

BEPS stands for 'Base Erosion and Profit Shifting'

It is the OECD’s policy response to perceived aggressive

tax avoidance by multinational corporations. The plan has

been endorsed by G20 Finance Ministers and Heads of

State.

'Base Erosion'? This catch-all term describes a range of tax planning

techniques that reduce (erode) the amount of corporate tax

paid in a country (the tax base) relative to the operating

profit disclosed in accounts.

And profit

shifting?

In broad terms, the use of 'Transfer Pricing' (pricing of

cross-border goods and services within a multinational)

to concentrate international profits in relatively low tax

locations.

What’s prompted the

debate?

There is a perception that, rightly or wrongly, multinational

companies are abusing the tax system and not paying their

'fair share' of tax. A number of governments have

collectively decided that something must be done. Global

media coverage has recently upped the pressure.

What is it?

Why is it here?

What does it mean for my organisation?

What is the BEPS

action plan?

The OECD member states have published a plan

containing 15 priority actions, which we describe

overleaf. The majority of the actions will be finalised and

implemented over the next 12 months.

How is this

relevant to

my organisation?

The BEPS actions will not only affect companies which

have implemented complex structures. Any business that

operates in multiple countries will be affected by some or

all of the BEPS changes.

■ BEPS will bring new international compliance and

documentation requirements (for example

country-by-country reporting)

■ In some cases it may change the basis on which a

company is taxed, and the locations where tax is due,

especially for digital business

■ Together with other OECD initiatives it is

fundamentally changing the way businesses,

governments and advisors approach transfer pricing

BEPS in a nutshell

November 2014

© 2015 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.



BEPS Roadmap

2014 2015

We are here

Consolidated

Final template Sep 2014; implementation mechanism final April 2015

First report TP Guidelines intangibles complete Sep 2014; Final report Sep 2015

Recommendations complete Sep 2014; guidance implementation Sep 2015

First report complete Sep 2014; discussion draft Collective Investment Vehicles Nov 2014, final late 2015

Initial report complete Sept 2014; strategy for non-OECD members Sep 15 final criteria Dec 2015

Discussion draft Dec 2014; recommendations Sep 2015, changes OECD guidelines Dec 2015

Discussion draft Oct 2014; changes OECD Model tax convention Dec 2015

Discussion draft Dec 2014, changes OECD Model Tax Convention Sep 2015

Feasibility report complete Sep 2014; draft mandate Jan 2015 with reports late 2015, with conference to follow

Report on challenges complete Sept 2014; VAT discussion draft Dec 2014, final report Dec 2015

Discussion draft April 2015; recommendations Sep 2015

Low value-adding intra group services, commodity transactions and use of profit splits – Discussion drafts Nov and

Dec 2014; Discussion draft Cost Contribution agreements April 2015; all final Sep 2015

Discussion draft March 2015; public consultation May 2015, recommendations Sep 2015

Request for input Aug 2014, discussion draft April 2015, recommendations Sep 2015

1 Digital Economy

2 Hybrid Mismatches

3 CFCs

4 Interest deductions

5 Harmful tax practices

6 Treaty abuse

7 Definition of PE

8 TP-Intangibles

9 TP-Risk and Capital

10 TP-High Risk

11 BEPS data

12 Mandatory Disclosure

13 TP-Documentation

14 Dispute Resolution

15 Multilateral Instrument

Transfer Pricing



Transfer pricing and dispute resolution actions

Topic Current Status Next Steps

Transfer Pricing

Documentation and CbCR

Action 13

■ Final version of Chapter V of OECD

Guidelines has been released

■ UK legislation referred to in Autumn

Statement

■ Additional work is being undertaken

regarding implementation

■ UK legislation to be released

Risk, Recharacterisation and

Special Measures

Actions 8, 9 and 10

■ Discussion draft – 19 December 2014

■ Public comments – 6 February 2015

■ Public meeting – 19-20 March 2015

Special Considerations for

Intangible Property

■ Revised discussion draft on the transfer

pricing aspects of intangibles released on

22 October 2014

■ Revised discussion draft to be

finalised once related BEPS Actions

have progressed

Low Value Services

Action 10

■ Discussion draft – 3 November 2014

■ Public comments – 20 January 2015


Commodity Transactions

Action 10




Profit Splits in the context of

Global Value Chains

Action 10




Dispute Resolution Mechanism

Action 14


■ Public comments – 19 January 2015

■ Public meeting – 23 January 2015

■ Discussion draft to be finalised

Interest



Interest deductions and other financials payments

Key points:

The approaches proposed in the discussion drafts are the

Group interest allocation rule, the Fixed ratio rule and a

combined approach

Group interest allocation rule

■ net interest expense of the group allocated to each entity

within the worldwide group

■ by reference to a measure of economic activity of the entity;

e.g. earnings or asset values

■ Interest above the amount allocated would be disallowed



Interest deductions and other financials payments

Key points:

Fixed ratio rule

■ deductible interest expense for an entity limited by applying a fixed

ratio to the entity’s earnings or assets e.g. X% of EBITDA

Combined approach – with a view to simplifying compliance:

■ apply the group interest allocation rule with a carve-out for entities

meeting a low fixed-ratio test (to exclude low risk entities); or

■ apply a fixed-ratio rule with a carve-out permitting entities to apply the

group interest allocation rule where this results in additional

deductible interest expense



Developments on other BEPS actions #1

■ OECD report presented September

2014

■ Relies on implementation via

domestic law

■ In the UK HMRC issued consultation

document December 2014 on the

UK domestic law, to come into force

from 1 January 2017

■ Final report due September 2015

■ OECD report presented

September 2014

■ Discussion ongoing on whether to

use Limitation of Benefit or Principal

Purpose Test or a mixture

■ Further work also require on

Collective Investment Vehicles

(‘CIV’) and non-CIV funds

■ Expecting revised changes to model

tax convention and

recommendations on domestic rules

in late 2015

Hybrids Treaty abuse



Developments on other BEPS actions #2

■ Update Article 5 definition to prevent

abuse

■ Changes address commissionaire

arrangements, remote trading via

the internet and fragmentation of

activities

■ Change dependent agent test (Art

5(5)) to a much broader one

■ Change exemptions – storage only

not delivery

■ Anti fragmentation rules

■ Revised draft imminent

■ OECD discussion draft April 2015

setting out model regime

■ Defines: what a CFC is, the

threshold for regime to apply, control

requirements, CFC income

■ Public consultation 12 May

■ Recommendations on design of

domestic rules due September 2015

PEs CFCs

Documents

BEPS the story so far - KPMG · 5 Harmful tax practices 6 Treaty abuse 7 Definition of PE 8 TP-Intangibles 9 TP-Risk and Capital 10 TP-High Risk 11 BEPS data 12 Mandatory Disclosure