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BEPS impacts on your tax structures

Panelists:Stephen Blough, KPMG LLP Michael Plowgian, KPMG LLPJulio Cepeda, KPMG LLP Arco Verhulst, KPMG LLPChristian Kaeser, Siemens AG

2016 Latin America Tax Summit, Rio de Janeiro29 February to 2 March

Moderator: Manal Corwin, KPMG LLP


Agenda

2


AgendaIntroduction and overviewBEPS adoption around the globe by region— LatAm and U.S./Canada— ASPAC— EUAreas of focus— Transfer pricing documentation/reporting— Hybrid financing— Transfer pricing— Permanent establishmentsConclusion and practical considerations

3


Introduction and overview

4


BEPS current state – OECDOctober 2015 Reports

Agreed Minimum Standards

Updated/Reinforced Standards

Model Rules/Best Practices Convergent Approaches

Horizontal Actions

2016 Work Plan Digital economy (1)

Group ratio rule; rules for banking/insurance (4)

Review of Preferential regimes/patent boxes (5)

Treaty entitlement of non-CIVs (6)

PE profit attribution (7)

Guidance on profit splits, financial transactions (8)

TP toolkits for developing countries 8-10

MAP peer review (14)

Multilateral Instrument

Future Work Proposal for a new OECD

BEPS Forum/framework open to all countries

Presented to G-20 finance ministers Feb 2016

The framework’s mandate will focus on:

• review implementation of the 4 minimum standards

• Data gathering on the tax challenges of digital economy and BEPS impact

• Monitoring implementation

• Finishing standard-setting work (treaties and tp).

5


BEPS current state – Areas of focus

Documentation and Reporting (CbyC/Master

file)

Transfer Pricing Exposure

Permanent Establishment

Exposure

Hybrid Financing Structures

Treaties and Other Issues

6


Action 13: Implementation by Country

Source: KPMG International member firms

CbCRDraft Legislation

United States

Implemented Draft bills/Public discussion draft Intention to Implement

CbCR / MF / LF Final Legislation

Mexico

CbCRIntentions

Canada


Australia

CbCR / MF /LFDraft Legislation

China


Denmark


Poland

United Kingdom


Norway


Spain

CbCRFinal Legislation

France

CbCRIntentions

Luxembourg


Ireland


Netherlands

CbCR / MF /LFDraft Legislation

Japan

CbCRIntention

Korea

MF / LF Final l.

CbCR / MFIntentions

Argentina


Brazil

CbCRIntentions

Nigeria

CbCR / MF / LFIntentions

South Africa


New Zealand


Taiwan


Vietnam

CbCR / MF Intentions

Russia

CbCRDraft

Portugal

MF / LF Intention

CbCR / MF / LF Intentions

Sweden

CbCR / MF / LF Draft Legislation

Finland

CbCRIntentions

Singapore


Italy


Israel

CbCRDraft

MF / LF Intention


Austria


Germany


Greece


Signatories to MCAA on exchange of CBCR AustraliaAustriaBelgiumChileCosta RicaCzech RepublicDenmarkEstoniaFinlandFranceGermanyGreeceIrelandItalyJapanLiechtenstein

8

LuxembourgMalaysiaMexicoNetherlandsNigeriaNorwayPolandPortugalSenegalSlovak RepublicSloveniaSouth AfricaSpainSwedenSwitzerlandUnited Kingdom


Multilateral instrument ad hoc groupAndorraArgentinaAustraliaAustriaAzerbaijanBangladeshBarbadosBelgiumBeninBhutanBrazilBulgariaBurkina FasoCameroonCanadaChileChinaColumbiaCosta Rica

9

Côte d'IvoireCroatiaCyprusCzech RepublicDenmarkDominican RepublicFijiFinlandFranceGabonGeorgiaGermanyGreeceGuatemalaHaitiHungaryIcelandIndiaIndonesia

IrelandIsraelItalyJamaicaJapanKazakhstanKoreaLatviaLebanonLiberiaLiechtensteinLithuaniaLuxembourgMalaysiaMaltaMarshall IslandsMauritaniaMauritiusMexico

MoldovaMongoliaMoroccoNetherlandsNew ZealandNigeriaNorwayPakistanPhilippinesPolandPortugalQatarRomaniaRussiaSan MarinoSaudi ArabiaSenegalSerbiaSingapore

Slovak RepublicSloveniaSouth AfricaSpainSri LankaSwazilandSwedenSwitzerlandTanzaniaThailandTunisiaTurkeyUkraineUnited KingdomUnited StatesUruguayViet NamZambiaZimbabwe


BEPS adoption around the globe by region

10


BEPS developments in Latin AmericaBEPS Action 13 – Transfer

Pricing Documentation

Mexico

—Final legislation CbyC, Master File and Local File

Argentina

—New measures to pursue implementation of BEPS” including CbyC and Master File

Brazil

—Proposal CbyC

Colombia

—Introduction of CbyC very likely

BEPS Actions 8-10 – Transfer Pricing Guidelines

Chile

—Greater scrutiny

Mexico

—Greater scrutiny

—New Transfer Pricing group to increase scrutiny

Peru

—Increase in transfer pricing audits

—OECD guidelines are authoritative source of interpretation

BEPS Action 2 – Hybrid Arrangements

Chile

—GAAR that can be used to challenge hybrid mismatches

Mexico

—Anti-hybrid and double deduction provisions in effect

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BEPS developments in Latin America (continued)

* Chile, Costa Rica, Mexico: One of 32 countries signing the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of CbyC reports

BEPS Action 7 – Permanent Establishment

Chile

—No legislation to date. However, the PE definition in Chile’s tax treaties is typically broader than the OECD model definition and the exception for preparatory and auxiliary activities is narrower

BEPS Action 6 – Treaty Abuse

Brazil

—LOBs in most recent tax treaties

Chile

—New treaties include LOB, anti-treaty shopping clauses and a PPT

Panama

—New regulation on proper application of treaty benefits

Other BEPS Developments

Argentina

—Special rules for tax havens (CFC, deduction limits, higher WHT, and tp rules)

Brazil

—CFC rules

Chile

—CFC rules

Mexico

—New disclosure rules aggressive tax planning

12


Brazil overviewBackground— Brazil is not part of the OECD— Brazil is part of G20— Brazil (among others LatAm countries) was part of one of the Regional Networks

on the BEPS Project— UN´s work on BEPS (Brazil was one of the countries that answered the

questionnaire – along with Mexico and Chile from LatAm)

Tax Authorities’ Plans:— Action 13 – CbyC Report – 2017 <2016>?

– Exchange Information Treaties – share CbyC Report with other countries?— Action 15 – Multilateral Agreement – estimated date – Dec/16?

13


Brazil overview (continued) UN´s – Brazil

Most relevant— Action 4— Action 8,9 and 10— Action 12 — Action 13

Other relevant— Action 1— Action 3— Action 5— Action 7

Brazilian Tax Authorities’ Plan

Action 13

Action 15— Action 2— Action 6— Action 7— Action 14

14


Brazil overview (continued)Other issues:— Action 2 – Hybrid Instruments vs. Interest on Net Equity— Action 3 – CFC Rules— Action 7 – PE status— Action 8, 9 and 10 – Transfer Pricing— Action 12 – MDR (Mandatory Disclosure Rules) vs. PM 685

15


BEPS developments in the U.S./Canada

* Canada: One of 32 countries signing the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of CbyC reports

BEPS Action 13 – Transfer Pricing Documentation

Canada—Plans to introduce CbyC

reporting United States—Proposed CbyC regulations


Canada—Follow OECD guidelines—Cases where CRA already

applying in transfer pricing audits.


United States—Proposal in Administration’s

2017 budget to neutralize tax benefits from certain hybrid arrangements

BEPS Action 6 – Treaty AbuseUnited States—New US model treaty has

several BEPS provisionsCanada—Participating in MLI

Other BEPS DevelopmentsCanada—Tightening Thin Cap RulesUnited States—Administration’s Budget and

Legislative proposals to limit deductions, tighten CFC rules, consider innovation box

16


BEPS developments in the ASPAC region

* Australia, Japan, Malaysia: One of 32 countries signing the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of CbyC reports

BEPS Action 13 – Transfer Pricing Documentation

Australia—CbyC, Master, Local File China/Japan—proposed legislation CbyC,

Master File and Local File


Australia—Public consultation China—Public Discussion Draft


Australia—Public consultation paper Japan— No participation exemption

for deductible payments payments

BEPS Action 7 – Permanent Establishment

Australia—MAAL (de-facto DPT)China—likely to implement OECD

recommendations

BEPS Action 6 – Treaty Abuse

Australia—Treaty with Germany China/India/Japan/Taiwan—New treaties include LOB—China: public discussion draft

Other BEPS Action ItemsChina—Public consultation on updated

Thin Cap RulesAustralia/New Zealand/Japan—Proposal GST on imported

digital services

17


BEPS Developments in EUResponse to BEPS seen in Europe— EU (draft) legislation on BEPS topics (e.g. amendment of European

Parent-Subsidiary Directive and draft BEPS Directive)— Unilateral measures by countries inspired by BEPS — State Aid review

18


EU Institutional framework – understanding the role of the EU in EuropeTreaty on the Functioning of the European Union

Initiatives Adoption Advisory orCo-decision Jurisprudence Implementation

European Commission European Council European Parliament EU Member States EU Court of Justice

EU CCCTB EU JTPF EU Platform

EP TAXE and ECONCommittee

Communications and Action plans

2. Draft directives

1. State aid decisions Case-law

ECOFIN (MinFin) (tax legislation)

3. EU Code of Conduct Group (tax coordination)

Case-law


OECD and EU BEPS importance and timingTerm Topic Regimes – examples Timing? EU fast forward?

Minimum standard ■ BEPS 5

■ BEPS 6

■ BEPS 13

■ BEPS 14

■ IP regimes/exchange or rulings

■ Holding and conduit companies

■ CBCR

■ Dispute resolution

■ 2016

■ 2016-2020

■ 2016

■ 2016-2020

Mutual Assistance Directive amendment on exchange of cross-border rulingsAmendment Parent Subsidiary Directive

Updated standard ■ BEPS 7

■ BEPS 8/9/10

■ Permanent establishments

■ Transfer pricing

■ 2016-2020

■ 2016-2020

Common approach ■ BEPS 2

■ BEPS 4

■ Hybrid mismatches

■ Interest deductibility

■ 2016 -2020

■ 2016- 2020

Amendment Parent Subsidiary DirectiveAnti-tax avoidance Directive ?

Guidance ■ BEPS 3

■ BEPS 12

■ CFC rules

■ Mandatory disclosure tax planning

■ 2016 - 2020

■ 2018

Anti-tax avoidance Directive ?

Special attention ■ BEPS 1

■ BEPS 11

■ Digital economy

■ BEPS data analysis

■ 2016

■ 2020

Horizontal ■ BEPS 15 ■ Multilateral instrument ■ 2017 Anti-tax avoidance Directive ?


Amendment of Parent-Subsidiary Directive— Requirement to be implemented by Member States by 31 December 2015

— Benefits of the Directive will not be provided if main purpose or one of the main purposes is to obtain tax advantage that defeats objective or purposeof the Directive (e.g. not put in place for valid commercial reasons that reflect economic reality)

— In addition, the amended Directive included an anti-hybrid provision, mandated member states to only apply the benefits of the Directive to profits that are not deductible by the subsidiary and to tax profits to the extent these are deductible for the subsidiary

21


Exchange information on cross-border rulings— Amendment of Mutual Assistance Directive (6 October 2015) - Exchange as from Jan. 1, 2017

— Broadly in line with BEPS Action 5— What will be affected?

— APAs and ATRs but also other agreements with tax authorities (definitions in Directive are described in broad terms)

— Also: APAs with third countries (unless tax treaty prohibits such exchange— Not: purely domestic rulings; rulings relating solely to a natural person

— As of when?— Rulings concluded as of January 1, 2017— Rulings that were concluded during the five years before January 1, 2017, however: — rulings issued, amended or renewed between January 1, 2012 and January 1, 2014 only if

still in force on January 1, 2014 — exception to certain companies with consolidated group turnover of up to EUR 40 million

22


Proposal for Anti- Tax Avoidance Directive (released 28 January 2016)

— Ensuring minimum degree of uniformity in implementing measures final reports

OECD BEPS project

— Anti- tax avoidance rules in six areas: — limitations to the deductibility of interest — exit taxation— a switch-over clause— a general anti-abuse rule— controlled foreign company rules — framework to tackle hybrid mismatches

— Member States can apply stricter anti-avoidance rules (article 3)


Other measures anti-tax avoidance package — Revision of Administrative Cooperation Directive — Country by country reporting— Implementation of OECD BEPS 13 in EU

— Recommendation on implementation measures against treaty abuse— Implementation PPT OECD BEPS 6 in modified version: arrangements reflecting a genuine economic

activity should not be tackled — To align measure with ECJ case law— Implementation of OECD BEPS 7: tackling artificial avoidance of PE


Communication external strategy

— Reexamination EU good governance criteria 2012 third countries

— Tax transparency— Information exchange— Fair tax competition

— Common approach listing third countries: EU ‘black list’

— ‘Pan-EU list’ is interim solution

— Counter measures against third countries added to EU list

— Complementary to measures anti-tax avoidance directive— Options: withholding taxes and non-deductibility of costs — MS’s should decided exact nature before end of 2016

Other measures anti-tax avoidance package


Examples of unilateral implementationOECD BEPS action Related EU Unilateral examples

4 Limit base erosion via interest deductions/other financial payments

EU BEPS directive?

■ AT (2014): 10% min.

■ BE: thin cap strengthened

■ CZ (2014): WHT non-tax treaty countries

■ FIN (2014): earnings stripping

■ POR (2013): earnings stripping

■ SLO (2015): earnings stripping

■ SPA (2015): stricter

■ FRA (2014): no deduction when low taxed


■ EU tax rulings in general

■ Production and manufacturing – cost-plus■ Group synergies and economies of scale

■ Group financing – interest payments and margin■ Group licensing – royalty payments and stripping

■ Sales and profit allocation■ Profit allocation to permanent establishments

1

2

3

4

EU State Aid review: focus areas? EU State Aid review – Focus areas


EU State Aid review - Ruling practices Netherlands - Starbucks

Luxembourg – Fiat – McDonalds

Belgium – Excess profit rulings

Ireland

1

2

3

4

Source: European Commission Press Release IP/14/663 11 June 2014


■ Starbucks and Fiat and Excess profits ruling decisions:

■ Artificial and complex methods to reduce taxable base, not reflecting economic reality (contrary to arm’s length principle)

■ Exemption ‘excess profits’ due to group synergies, economies of scale, reputation, client and supplier networks, access to new markets = derogation from Belgian corporate tax rules AND

■ Contrary to arm’s length principle since the excess profits were notshared with and taxed at other group companies (unilateral downwardadjustment leading to double non-taxation)

1

2

3

4

EU State Aid review – Key concerns


Transfer pricing documentation/reporting

30


OECD BEPS action 13 guidanceBackgroundThe OECD is focusing on a three-tiered approach for documentation:

— Objective: Risk Assessment

— Approach: Provides an overview of the multinational group and business

Master file

— Objective: Appropriate considerations in setting transfer prices

— Approach: Provides additional detail on the operations and transactions relevant to that jurisdiction

Local file

— Objective: Prioritization of Audit Issues

— Approach: Provides summary data by jurisdiction including revenue, income, taxes, and indicators of economic activity

Country-By-Country(CbyC) Report

31


Country-By-Country (CbyC) reporting

32


OECD’s model CbyC template What was published

CbyC Template – Page 1

Revenue

Tax JurisdictionRelated Party

Unrelated Party Total

Profit (Loss) before Income

Tax

Income Tax Paid (on a Cash

Basis)

Income tax Accrued –

Current YearStated Capital

Accumulated Earnings

Number of Employees

Tangible Assets Other than

Cash and Cash Equivalents

Country A

Country B

CbyC Template – Page 2 (onwards)

Activities

Tax Jurisdiction Constituent

Entities Resident in Country

Country of Organization or Incorporation if Different from

Country of Residence R

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Country A Entity A Country B

Entity B

CbyC Template – Page 3

Opportunity to include any further information or explanation considered necessary or that would facilitate the understanding of the compulsory information provided in the CbyC report.

Source: Information obtained from Annex III to Chapter V of OECD/G20 Base Erosion and Profit Shifting Project: Guidance on Transfer Pricing Documentation and Country-by Country Reporting

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Summary of OECD recommendation re CbyC implementation

— The ultimate parent of the MNE group will be required to file the CbyC report in its residence jurisdiction; if CbyC report not required a surrogate may be appointed

— The first period in scope will be the MNE’s fiscal year beginning on or after January 1, 2016

— First filings will be due no later than December 31, 2017

— Annual reporting will be required, with an exemption for MNE groups with annual consolidated group revenue of less than €750 million

— There will be no other exemptions from reporting and no general exemption for investment funds

Source: OECD, Action 13: Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting

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Master file & local file

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Global transfer pricing documentationWhat to know— The Action 13 release includes information that should be presented in the master file and local file. While the master file is

intended to provide a “blueprint” for the MNE group, the local file is intended to provide detail on a legal entity’s intercompany transactions.

— The Action 13 implementation guidance calls for the master file and local file to be filed directly with the tax administrationsin each relevant jurisdiction as required by those administrations.

Master file for MNEOrganizational structure, description of MNEs business, intangibles, intercompany financial activities,

and financial and tax positions

Local file forEntity A

— Description of local entity (mgt & strategy)

— Description/amt of controlled transactions

— Functional analysis

— Selection of method

— Economic analysis

— Financial information

Local file forEntity B

— Same detailed requirements as specified forEntity A

Local file forEntity C

— Same detailed requirements as specified forEntity A

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OECD BEPS Action 13Global transfer pricing documentation – Master file

Your Company’s Readiness Data Item/Description*

Organizational structure

— Chart illustrating the MNE’s legal and ownership structure and geographical location of operating entities.

Description of MNE’s business(es)

— Important drivers of business profit.

— A description of the supply chain for the group’s five largest products and/or service offerings by turnover plus any other products and/or services amounting to more than 5 percent of group turnover. The required description could take the form of a chart or a diagram.

— A list and brief description of important service arrangements between members of the MNE group, other than research and development (R&D) services, including a description of the capabilities of the principal locations providing important services and transfer pricing policies for allocating services costs and determining prices to be paid for intra-group services.

— A description of the main geographic markets for the group’s products and services that are referred to in the second bullet point above.

— A brief written functional analysis describing the principal contributions to value creation by individual entities within the group, i.e., key functions performed, important risks assumed, and important assets used.

— A description of important business restructuring transactions, acquisitions and divestitures occurring during the fiscal year, including the entities, countries and compensation involved.

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OECD BEPS Action 13Global transfer pricing documentation – Master file (continued)


MNE’s intangibles (as defined in Chapter VI of these Guidelines)

— A general description of the MNE’s overall strategy for the development, ownership and exploitation of intangibles, including location of principal R&D facilities and location of R&D management.

— A list of intangibles or groups of intangibles of the MNE group that are important for transfer pricing purposes and which entities legally own them.

— A list of important agreements among identified associated enterprises related to intangibles, including cost contribution arrangements, principal research service agreements and license agreements.

— A general description of the group’s transfer pricing policies related to R&D and intangibles.

— A general description of any important transfers of interests in intangibles among associated enterprises during the fiscal year concerned, including the entities, countries, and compensation involved.

MNE’s intercompany financial activities

— A general description of how the group is financed, including important financing arrangements with unrelated lenders.

— The identification of any members of the MNE group that provide a central financing function for the group, including the country under whose laws the entity is organized and the place of effective management of such entities.

38


OECD BEPS Action 13Global transfer pricing documentation – Master file (continued)


— A general description of the MNE's general transfer pricing policies related to financing arrangements between associated enterprises.

MNE’s financial and tax positions

— The MNE’s annual consolidated financial statement for the fiscal year concerned if otherwise prepared for financial reporting, regulatory, internal management, tax or other purposes.

— A list and brief description of the MNE group’s existing unilateral advance pricing agreements (APAs) and other tax rulings relating to the allocation of income among countries.

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OECD BEPS Action 13Global transfer pricing documentation – Local file


Local entity

— A description of the management structure of the local entity, a local organization chart, and a description of the individuals to whom local management reports and the country(ies) in which such individuals maintain their principal offices.

— A detailed description of the business and business strategy pursued by the local entity including an indication whether the local entity has been involved in or affected by business restructurings or intangibles transfers in the present or immediately past year and an explanation of those aspects of such transactions affecting the local entity.

— Key competitors.

Controlled transactionsFor each material category of controlled transactions in which the entity is involved, provide the following information:

— A description of the material controlled transactions (e.g., procurement of manufacturing services, purchase of goods, provision of services, loans, financial and performance guarantees, licenses of intangibles, etc.) and the context in which such transactions take place.

— The amount of intra-group payments and receipts for each category of controlled transactions involving the local entity (i.e., payments and receipts for products, services, royalties, interest, etc.) broken down by tax jurisdiction of the foreign payor or recipient.

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OECD BEPS Action 13Global transfer pricing documentation – Local file (continued)


— An identification of associated enterprises involved in each category of controlled transactions, and the relationship amongst them.

— Copies of all material intercompany agreements concluded by the local entity.

— A detailed comparability and functional analysis of the taxpayer and relevant associated enterprises with respect to each documented category of controlled transactions, including any changes compared to prior years.

— An indication of the most appropriate transfer pricing method with regard to the category of transaction and the reasons for selecting that method.

— An indication of which associated enterprise is selected as the tested party, if applicable, and an explanation of the reasons for this selection.

— A summary of the important assumptions made in applying the transfer pricing methodology.

— If relevant, an explanation of the reasons for performing a multi-year analysis.

— A list and description of selected comparable uncontrolled transactions (internal or external), if any, and information on relevant financial indicators for independent enterprises relied on in the transfer pricing analysis, including a description ofthe comparable search methodology and the source of such information.

— A description of any comparability adjustments performed, and an indication of whether adjustments have been made to the results of the tested party, the comparable uncontrolled transactions, or both.

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OECD BEPS Action 13Global transfer pricing documentation – Local file (continued)


— A description of the reasons for concluding that relevant transactions were priced on an arm’s length basis based on the application of the selected transfer pricing method.

— A summary of financial information used in applying the transfer pricing methodology.

— A copy of existing unilateral and bilateral/multilateral APAs and other tax rulings to which the local tax jurisdiction is not aparty and which are related to controlled transactions described above.

Financial information

— Annual local entity financial accounts for the fiscal year concerned. If audited statements exist they should be supplied and if not, existing unaudited statements should be supplied.

— Information and allocation schedules showing how the financial data used in applying the transfer pricing method may be tied to the annual financial statements.

— Summary schedules of relevant financial data for comparables used in the analysis and the sources from which that data was obtained.

42


What are companies doing to prepare? Short-Term Action Steps— Identify potential data sources for required CbyC reported items, and

internal resources that can help explain scope, logic, inputs, etc.— Perform initial data mapping

– What items can be pulled electronically?– What items must be manipulated manually?– What items are subject to significant interpretation or discretion?

— Assess available master and local country transfer pricing documentation– How long would it take to prepare items not currently available?

— Perform “dry run” CbyC report and master and local documentation — Identify BEPS risks highlighted by your dry run reporting packages

– What are the risks for proposed adjustments?– How can you mitigate those risks?

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Hybrid financing

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Action 2 – BackgroundOECD Action 2 Releases— Initial draft – March 2014— Interim report – September 2014— Final report (with examples) – October 2015 (450+ pages)

Contents of Final Report— Domestic law rules to neutralize hybrid mismatches

– Hybrid financial instruments and other payments involving hybrid entities— Amendment to OECD model treaty to address fiscally transparent entities

– Similar to Article 1(6) of the U.S. model treaty

45


Action 2 – Domestic law recommendationsDomestic law recommendations require enactment by individual countries— Recommendation is for wholesale adoption by individual countries

(tailored to local law), but some countries may adopt only in part– Mexico has adopted provisions effective 1/1/14 that deny deductions in certain

dual deduction circumstances or when the recipient of the payment is not subject to a certain level of tax, but so far has not enacted certain other OECD recommendations (e.g., recommendations on forced inclusions or imported mismatches)

– UK apparently will adopt Action 2 in full

46


Action 2 – Domestic law recommendations (continued)As some countries adopt more quickly than others, a key provision in Action 2 is Recommendation 8 (imported mismatches)Timing of implementation will be determined country by country— UK draft legislation indicates effective 1-1-17 with no grandfathering— Possibility of enactment by Germany during 2016, with effect as of 1-1-16

47


Action 2 – Related EU and individual country actionsEU Parent-Sub Directive (PSD): no participation exemption w/r/t deductible payments— EU countries must adopt effective 1-1-16— Directive is EU only, but individual countries may adopt more broadly (e.g.,

NL)

EU Code of Conduct Group— Considering finance branches and notional deductions

EU considering Directive to adopt OECD Action 2 Recommendation more generally

48


Lux PECsRecommendation 1 applies if the timing between the deduction and ultimate inclusion is “unreasonable” or, e.g., USP benefits from an indirect foreign tax credit — Primary rule: Luxembourg should deny LuxCo’s interest

deduction

— Secondary rule: if Luxembourg does not deny LuxCo’s deduction, the U.S. should require USP to include the interest in ordinary income

Recommendation 8 could apply if neither Luxembourg nor the U.S. applies Recommendation 1— In such case, the U.K. would deny the interest deduction on

the interest bearing loan

A deduction is denied only to the extent that it gives rise to a D/NI outcome (i.e., no “cliff effect”) (See, e.g., Example 1.4)

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USP

LuxCo

PECs

UK OpCo

Interest Bearing Loans


Low-Tax Co.

Potential replacement structure –Lux PECs held in no or low-tax jurisdictionInsertion of a no-tax jurisdiction appears to prevent Recommendation 1 from applying (See ¶ 387, example 1.6, and definition of payee and payee jurisdiction)— If the holder of the PECs is organized in a low-tax

jurisdiction then must determine whether income is included in “ordinary income” and, if not, whether mismatch is a “hybrid mismatch” (See ¶¶ 83-98)

Consider potential application of other Actions

Withholding tax issues— U.K. quoted Eurobond/other

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No or Low-Tax

Co.

USP

LuxCo

PECs

UK OpCo

Interest Bearing Loans


Notional deductions on net equityDoes Brazilian deduction on net equity qualify for the “notional” payment exception?

Declaration results in equity holder’s right to payment, though may be deferred

OECD guidance states that notional payments must not create economic rights

Netherlands adoption of revised PSD may turn off dividend exemption for payment of dividend where deduction on net equity allowed

Imported mismatch rule could apply to interest on loan to UKCo

51

NL Co

BrazilCo

Equity

UKCo

Loan


Action 2 vs. Interest on Net Equity (INE)Tax treatment in home country

52

Country After BEPS Comments

Australia Still Not taxable"Under current law, the return should be exempt in Australia provided that the shareholder has a greater than 10% participation. It is anticipated that anti-hybrid rules, consistent with OECD final recommendations on Action 2, will be introduced in 2016/2017. Although no details are yet available, it is likely that the exemption would not be maintained given the deductibility to the Brazilian payer"

China Taxable No changes, it has always been taxable

India TaxableNo changes, it has always been taxable. "In case Brazil pays interest on equity to India, that is likely to be considered taxable in India because we tax both, dividends as well as interest, from foreign entities similarly. While there is a lower rate for dividends in some cases, the characterization as interest from Brazil side would result in litigation if such lower rate is claimed."

Netherlands Taxable It is anticipated that anti-hybrid rules, consistent with OECD final recommendations on Action 2, will be introduced in 2016/2017. Although no details are yet available, it is likely that the exemption would not be maintained given the deductibility to the Brazilian payer

Mexico Taxable No changes, it has always been taxable

France Taxable Taxable since 01/2015

Luxembourg Not taxable

Brazilian Interests on Net Equity (INE) should be tax exempt in Luxembourg if the conditions of the Luxembourg participation exemption are observed. We have new Luxembourg anti-hybrid rules (for instruments) but limited to EU-EU cases (applicable as from 1/1/2016). Rulings would usually be requested for INE but it may not be necessary anymore if the INE are booked as dividend in the Lux GAAPaccounts"

UK Taxable Taxable since 01/2015

Ireland Taxable No changes, it has always been taxable


Transfer pricing

53


Actions 8-10- Aligning transfer pricing outcome with value creation

Chapter I: Guidance for Applying the arm’s length principle (e.g., Risk and recharacterisation)

Chapter II: Guidance on Commodity transactions

Chapter VI: Guidance on Intangibles including hard to value intangibles (HTVI)

Chapter VII: Guidance on Services including low value-adding services

Chapter VIII: Guidance on Cost Contribution Arrangements

On October 5th, the OECD released a final report on Actions 8-10, Aligning Transfer Pricing Outcomes with Value Creation. It contains the following:

The OECD indicated that it will provide additional guidance for profits splits and financial transactions, implementation guidance on low value-adding services and HTVI, and will develop a transfer pricing toolkit for low income countries

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Chapter I & chapter VI

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Transfer pricing generally focuses on:

Historically, MNEs have:

— Used contracts to move assets and risks to principal companies

— Moved the economic responsibility for, and key benefits from, important local functions to principal companies

— Limited local returns

Chapter I – General theme—more focus on people & functions

The OECD and other key G20 countries pushed to:

— Increase the importance attached to people and local functions

— Focus on key decision makers and where they are located

— Limit profits associated with “naked” contractual rights

Risks

Assets Functions

Key Themes in Chapter I Guidance

— Contractual arrangements and actual conduct should be considered

— Need to look at the location of decision-makers and the decisions they have made, especially with respect to risk

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Chapter I – Analytical framework on risk Identify economically significant risks with specificity

Identify contractual assumption of the specific risk

Functional analysis. Establish conduct and which enterprises perform control functions and risk mitigation functions and have the financial capacity to assume the risk

Is the contractual assumption consistent with the conduct? Do the entities follow the contractual terms and does the party assuming risk exercise control and have the financial capacity to assume risk?

If the party assuming the risk does not control the risk or does not have the financial capacity to assume the risk, then allocate the risk to the group company having most control and having the financial capacity to assume the risk

Price the accurately delineated transaction taking into account the financial and other consequences of risk assumption, as appropriately allocated

1

2

3

4

5

6

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What is DEMPE?We Love Acronyms: BEPS, KERTF/SPF, FRA, DEMPE, PSM…

Understanding DEMPE Functions — Existing “IP” models did not always include an analysis of the parties

responsible for:– Legal ownership– Funding [economic ownership]– Important “IP” functions: Development, Enhancement, Maintenance,

Protection and Exploitation [new ownership concept?... shared ownership, like the shared economy]

— Many “IP” planning strategies did not clearly define “IP”. Often it means, “anything” leading to profits above “routine” or “normal” profits. Model was applied for all industries, from high tech to consumer goods, in a similar way

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What is DEMPE? (continued)— A review of DEMPE functions may require changes to the allocation of

profits in the value chain — New emphasis on control: people with the relevant knowledge to make

decisions— The importance on each function: Development, Enhancement,

Maintenance, Protection and Exploitation will be different for different sectors (e.g., mining, pharma, luxury goods, software) and may change with the life cycle of the business (e.g., start up vs. mature company)

— Does DEMPE put an emphasis on “IP” at the beginning of the supply chain or at the end?

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Determination of who is entitled to intangible returnsExample 16— Parent company with two research centers – one in parent itself and one

in a subsidiary, Company S (diff jurisdiction to Parent). — New manufacturing subsidiary, Company T (diff jurisdiction); parent

transfers technology intangibles to it— Company T enters into contract R&D arrangements with parent and

Company S— Company T contractually agrees to bear financial risks but has no technical

personnel capable of conducting or supervising the research activities— Parent continues to develop and design own R&D program and supervise

R&D in Company S

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Determination of who is entitled to intangible returns (continued)What returns are the Parent, Company S and Company T entitled to?— Although Company T contractually assumes the financial risk and has the

financial capacity to assume that risk it does not exercise control over that risk in accordance with the principles outlined in paragraphs 6.63 and 6.64.

— As a result, in addition to its manufacturing reward, Company T is entitled to no more than a risk-free return for its funding activities. (For further guidance see Section D.1 of Chapter I, and in particular paragraph 1.103.)

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Intangibles – Key messagesIP ownership & funding by itself not sufficient to earn IP return

“Dumb Cash” Risk-Free Return or less

“Smart Cash” Risk-Adjusted Return

DEMPE Developer Return

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Permanent establishments

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Action 7 – Overview of updated standards

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• Broadens the existing PE definition

• Does not propose industry-specific PE standards, e.g., for e-commerce or insurance

• Postpones consideration of the attribution of profits to PEs to 2016.

• Changes to be included in multilateral instrument ready in 2016.

– Targets commissionaires and similar strategies– Finds PE where a dependent agent “plays the principal

role” leading to the conclusion of contracts– Independent agent exception cannot apply where agent

acts exclusively or almost exclusively (90%) for connected persons

Dependent Agent

Standard (5.5)

– Two Options: (a) subject all specific activity exemptions to overall prep & aux condition, or (b) retain existing exemptions so long as the “anti-fragmentation rule” is adopted (grouping activities of connected enterprises)

Prep and Aux

Activities (5.4)

– Addresses installation, construction and service PEs– No specific rule in Article 5; instead relies on proposed

principal purpose test– New example in Commentary

Splitting Contracts (PPT rule)

Final Report Three issues addressed by proposed changes to Art. 5


Action 7 –Customer-Facing PEDescription:

RCO (State R resident), distributes products and services through its websites. RCO owns SCO (State S resident)

SCO’s employees convince customers to buy RCO’s products and services. Their remuneration is partially based on revenues derived by RCO from holders of S’s accounts

When an account holder agrees to purchase goods promoted by an SCO employee, the employee indicates the price that will be payable and that the contract must be concluded online with RCO, and explains the standard terms of RCO’s contracts. The employee cannot modify these terms

Results:

SCO’s employees play the principal role leading to the conclusion of the contracts routinely approved by RCO without modification

“The fact that SCO’s employees cannot vary the terms of the contracts does not mean that the conclusion of the contracts is not the direct result of the activities that they perform on behalf of the enterprise, convincing the account holder to accept these standard terms being the crucial element leading to the conclusion of the contracts between the account holder and RCO.” Proposed commentary on Art 5.5 (Para 32.6)

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Marketing Team

Country R

Country S

RCo.

SCo.

Tax engine Biz SMETax engine Biz SMETax engine Biz SMETax engine Biz SMETax engine Biz SMETax engine Biz SME

Tax engine Biz SMETax engine Biz SME

Customer

Server

RCo product/services promotion activities

Order concluded online for RCo

product/services


Conclusion and practical considerations

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