BEPS discussion documents issue
The OECD has been prolific in its publication of discussion documents since the start of the year. OECD discussion draft documents have been released in respect of:
- Action 13: Transfer pricing documentation and country by country reporting – 30 January 2014
The BEPS Action Plan issued on 19 July 2013 directed the OECD to develop rules regarding transfer pricing documentation to enhance transparency for tax administration taking into account the compliance costs for business. In response the OECD published its Discussion Drafton Transfer Pricing Documentation and CbC Reporting (the Discussion Draft) on 30 January 2014. The Discussion Draft contains an initial draft of revised guidance on transfer pricing documentation and country by country reporting and was subject to a public consultation process with comments to be submitted by 23 February 2014.
It is proposed by the Discussion Draft that Chapter V to the OECD current Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations adopted in 1995 will be deleted in its entirety and replaced with a new guidance.
- Action 6: Preventing the granting of Treaty benefits in inappropriate circumstances – 14 March 2014
Action 6 identified treaty abuse, in particular treaty shopping , as an important source of BEPS concerns. The report proposes a Limitation on Benefits (LOB) clause akin to that found in the Ireland-US Treaty as a way of preventing the granting of treaty benefits in inappropriate circumstances to be included as standard in treaties as well as a general anti-avoidance rule looking at the main purposes of the arrangement or transaction. The proposal to introduce a LOB provision in the Model Treaty is causing concern in Ireland given the significant number of investment funds established in Ireland that may not satisfy such a provision. Significant lobbying is taking place on this point.
- Action 2: Part 1 – Neutralise the effects of hybrid mismatch arrangements (recommendations for domestic laws) – 14 March 2014
Action 2 of the Action Plan calls for the development of model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect of hybrid instruments and entities. The Discussion Draft sets out recommendations for the design of hybrid mismatch rules designed to neutralise the effect of hybrid financial instruments. The Discussion Draft seeks to target three categories of hybrid mismatch: (a) hybrid financial instruments where a deductible payment is not treated as taxable income in the recipient’s country, (b) hybrid entity payments where differences in the characterisation of the payer results in a deductible payment being disregarded or giving rise to a second deduction in the recipient’s country and (c) reverse hybrid and imported mismatches where payments made to an intermediary payee are not taxed on receipt.
- Action 2: Part 2 – Neutralise the effects of hybrid mismatch arrangements (Treaty issues) – 14 March 2014
This Discussion Draft complements the draft document mentioned at (iii) above and focuses on changes to the OECD Model Tax Convention to ensure that hybrid instruments and entities are not used to obtain the benefits of treaties unduly. It examines treaty issues related to dual-resident entities, includes a proposal for a treaty provision dealing with transparent entities and addresses the issue of interaction with the recommendations for the domestic law treatment of hybrid financial instruments and hybrid entity payments.
Prior to the issue of the Discussion Draft, a number of countries (including Ireland in relation to profit participating securities in certain contexts) have taken unilateral action to address certain mismatch/ hybrid transactions. Some of the aspects of the Discussion Draft (e.g. deemed interest deductions not being in scope, hybrid instruments appearing to be more offensive than (say) interest being paid to a tax haven) are difficult to understand from a policy perspective. It would also be interesting to see the evidence supporting the statement that hybrid mismatches “harm competition, economic efficiency, transparency and fairness”.
- Action 1: Address the tax challenges of the digital economy – 24 March 2014
The BEPS Action Plan noted that the spread of the digital economy poses challenges for international taxation. There are fundamental questions as to how enterprises in a digital economy add value and make profits and how the digital economy relates to concepts of source and residence or the characterisation of income for tax purposes. The draft discussion examines the evolution of information and communication technology, the core elements of BEPS strategies in the digital economy, identifies the tax challenges raised and the potential options to address them.
The Discussion Draft puts forward proposals to change the source principle of corporation tax, through changes to the permanent establishment rules, in order to ensure that more of the profits earned by companies selling digital products are attributed to the countries in which their customers are based. Ireland will be following developments in this regard with great interest.