Have any of the OECD BEPs recommendations been implemented or are any planned to be implemented and if so, which ones?
Tax (3rd edition)
Switzerland is a signatory to the CRS MCAA (see 6 above), as well as to the Multilateral Competent Authority Agreement for the automatic exchange of Country-by-Country reports (‘CbC MCAA’). As a result, starting in 2018, multinationals in Switzerland have to draw up country-by-country reports; the first automatic exchanges of country-by-country reports are scheduled to take place in 2020.
Switzerland is also a signatory to the MLI (see 10 above).
In addition, Switzerland drafted the Corporate Tax Reform Act III to bring the Swiss tax system in line with OECD and EU standards by repealing special tax regimes. However, the Reform bill was rejected by Swiss voters on 12 February 2017. A replacement bill called ‘Tax Proposal 17’, is currently under development. Tax Proposal 17 must now go before the Swiss Parliament; this is expected to happen at the earliest during the autumn 2018 session.s If Tax Proposal 17 is not subject to a referendum, it will enter into force progressively from 1 January 2019, with the majority of provisions taking effect 1 January 2020.
The US has adopted by regulations requirements of Country-by-Country (“CbC”) Reporting (OECD BEPS Action 13). The Regulations 1.6038-4 apply to US corporations with one or more foreign subsidiaries that, if the US corporation were publicly traded, would be required to file consolidated financial statements with the US corporation. Only groups with more $850 million of revenue in the preceding year are subject to the requirement. Where it applies, the US corporation provides to the IRS the CbC reporting data for each of its foreign subsidiaries through an attachment to its corporate tax return. The IRS intends to enter competent authority agreements with countries with which it has a tax treaty to share CbC information under appropriate safeguards.
As part of TCJA, Congress enacted anti-hybrid legislation in new Code Section 267A. New Code Section 267A disallows the US tax deduction for interest or royalties paid to related parties as part of a hybrid transaction or arrangement involving hybrid entities, where the amount is not included in income of the recipient. New Code Section 267A is intended to operate similarly BEPS Action 2.
The US has not become a party to the OECD’s multilateral instrument (MLI) and is not expected to do so. The US has stated publicly that it does not believe the changes to the permanent establishment definition and Treaty’s principal purpose test are appropriate.
Canada is a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “MLI”). Initially, Canada had only agreed to adopt the minimum standards relating to anti-treaty shopping (BEPS Action 6) and the optional provision related to binding arbitration (BEPS Action 14). With respect to treaty shopping, Canada has confirmed that it will adopt the principal purpose test rather than the comprehensive limitation of benefits rule. However, it has indicated that it plans to negotiate LOB provisions in new tax treaties, to the extent possible. In June 2018, legislation was tabled in the Canadian House of Commons to implement the MLI into law. Once this legislation is approved by Parliament and receives Royal Assent, the OECD will be notified that the ratification procedures are complete. The government announced its intention to adopt Article 4 (Dual Resident Entities), Article 8 (Dividend Transfer Transactions) and Article 9 (Capital Gains from the Alienation of Shares or Interests of Entities Deriving thir Value Principally from Immovable Property) of the MLI.
Canada has also enacted country-by-country reporting (BEPS Action 13).
In addition, Canada has indicated that it will follow the revised OECD transfer pricing guidelines (BEPS Actions 8-10).
Pursuant to the EU Anti-BEPS Directive EU member states have to implement an interest limitation rule, exit taxation, a general anti-abuse rule, CFC rules and rules against hybrid mismatches.
The Austrian Ministry of Finance assumes that the provision denying deductibility of interest and royalty payments if they are subject to low taxation at the foreign related recipient company are regarded as targeted rule for preventing BEPS risks which is equally effective to the interest limitation rule set out in the Directive. If so, Austria has to transpose the interest limitation rule at the latest until 1 January 2024.
The existing Austrian exit taxation system only requires minor adjustments. Moreover, the Austria tax law already provides for an effective general anti-abuse rule.
The implementation of CFC rules as from 2019 will have strong impacts on the Austrian tax landscape. Provisions with respect to hybrid mismatches shall, in principle, be transposed by the end of 2019. It has to be noted that the Austrian tax law already contains provisions dealing with measures preventing tax avoidance due to certain hybrid structures (like addressed in BEPS Action 2).
As regarding transfer pricing, Austria has implemented Action 13 of the BEPS Action Plan by its Transfer Pricing Documentation Act (described above in point 10). Austria also takes part in the mandatory automatic information exchange regarding the CbC-reporting with other EU member states and countries having implemented the Multinational Authority Agreement (the list of currently participating countries is provided in the following link:http://www.oecd.org/tax/automatic-exchange/about-automatic-exchange/CbC-MCAA-Signatories.pdf).
On 7 June 2017 Austria has signed the Multilateral Instrument (MLI), as stipulated in BEPS Action 15, which entered into force in Austria on 1 July 2018. Austria fulfils the minimum standard of the MLI and has additionally adopted e.g. option A of Art 5 and accepts Article 10 regarding the anti-abuse provision for low-taxed PEs in third states. Austria has also largely implemented BEPS Action 14 by opting for the arbitration provision of the MLI and is ready in its treaty negotiations to extend the arbitration further.
The Directive UE/2016/1164 dated July 12, 2016 called 'ATAD I' provides for five anti-avoidance measures relating to the interest limitation, the exit taxation, the general anti-abuse rules (GAAR), the controlled foreign companies (CFC) and the hybrid mismatches, all derived from the OECD BEPs recommendations. This Directive shall be transposed by the end of 2018 for an application as from 1 January 2019, except for the interest limitation that should be enforced no later than 1 January 2024.
France has already implemented similar tax measures but will have to amend the existing provisions (here above thin cap) in order to comply with the Directive's requirements.
The Directive UE/2017/952 dated May 29, 2017 called 'ATAD II' amends the Directive ATAD I and provides for the implementation of Action 2 of the BEPS' recommendations which is related to the hybrids mismatches. As the French rules only tend to remedy to double deeps (i.e. double non-taxation) situations, the European requirements will have to be transposed by the end of 2019 in order to strengthen this limitation.
For many years Cyprus tax policy has been based on offering an internationally competitive tax environment that is fully compliant with international best practice and the highest standards of transparency and fairness. In line with this commitment Cyprus revised its intellectual box regime in 2016 to comply with the modified nexus approach put forward by the OECD.
Cyprus is also one of the initial 68 signatories to the Multilateral Convention on Tax Treaty Related Measures to Prevent BEPS (the MLI). New and updated double tax agreements are aligned with the latest OECD standards.
In 2017 new transfer pricing rules were introduced for financing transactions involving connected parties, in line with the relevant BEPS actions.
Draft legislation is in hand to implement the BEPS actions on hybrid instruments and interest deductibility by implementing the EU Anti Tax Avoidance Directives.
Brazil has already implemented various OECD BEPS recommendations and intends to be in compliance with the remaining actions soon. The actions already implemented are the following:
In relation to action 3, Brazil has amendment is CFC rules in order to Broaden its scope. As a general rule, the CFC rules impose taxation on undistributed profits from foreign controlled and affiliated companies. Accordingly, profits from foreign controlled companies should be considered deemed distributed to the Brazilian controlling company by December 31 of each calendar year. On the other hand, provided that some conditions are met, profits derived from foreign affiliates not located in tax have or privileged tax regimes jurisdictions are only subject to taxation in Brazil when they are effectively distributed.
As to action 4, Brazil has thin capitalization rules that are applicable to foreign intercompany loans. According to such rules, interest paid to related parties not located in a tax haven or privileged tax regime jurisdiction may only be deducted if the interest expenses are deemed necessary for the company and if the debt-to-equity ratio with the related party does not exceed 2:1.
Interest paid to related parties located in a tax haven or privileged tax regime jurisdictions is deductible provided that the expenses are necessary and the debt with such related party does not exceed 30% of the Brazilian company’s equity.
It is worth noting that as per Brazilian transfer pricing rules, interests paid or credited to a related party abroad are only deductible for corporate income tax purposes up to the amount which does not exceed the following rules plus a spread previously determined by the Brazilian Ministry of Finance:
(i) In case of transactions in US Dollars with prefixed rates: the market rate for Brazilian sovereign bonds issued in the external market in US Dollars;
(ii) In case of transactions in Brazilian Reais with prefixed rates: the market rate for Brazilian sovereign bonds issued in the external market in Brazilian Reais;
(iii) In all other cases: Libor for a 6-month period.
Currently, the pre-determined spread for cross border intercompany loan transaction is 3.5%.
In other to accomplish with BEPS recommendations, Brazil has included additional low jurisdictions to its “black list”.
In addition to that, several foreign country regimes were added to the “grey list” as privileged tax jurisdiction.
Besides, for purposes of identifying new privileged tax jurisdictions, the new tax regulations introduced the concept and definition of substantive economic activities for holding companies.
Moreover, Normative Instruction 1.689/17 establishes that upon the request of ruling regarding R&D incentives, permanent establishment and transfer pricing, taxpayer will have to disclosure the name of its controlling company abroad, final beneficiary, including the identification of their country of residence, among other information for purposes of exchanging of information with such jurisdictions.
Country by Country reporting requirements was implemented as of 2016 and is now part of the Annual Electronic Income Tax Return (ECF).
Brazilian IRS, through the issuance of Normative Instruction 1.669/46 established mutual agreement procedural rules in relation to tax treaties signed by Brazil.
It is worth noting that Brazil has recently signed a protocol with Argentina to amend the tax treaty between both countries. The amendments related to mutual agreement procedures show that Brazil is line with BEPS’ minimum requirements. Notwithstanding, there was no adoption of mandatory and binding arbitration to the tax treaty between the parties as recommended by Action 14 of BEPS.
Germany had already implemented many rules which are part of the OECD BEPs recommendations prior to the recommendations, like the ones relating to transfer pricing, the CFC regime, treaty abuse (in particular treaty shopping) and the interest barrier rule. Moreover, Germany has introduced several new measurements in its recent BEPS-Transformation Act in 2016, such as a country-by-country reporting (see above 9), exchange of information and several specific changes to the German tax laws. In 2017, Germany also introduced a license barrier rule.
Ireland has been a committed participant in the BEPS project to date and remains committed to implementation. Ireland was one of the first countries to implement Country by Country Reporting. Ireland’s Knowledge Development Box (“KDB”) is a modified nexus based incentive, recognized as the first fully BEPS and Harmful Tax Practices compliant patent box in the world. Ireland as signed the Multilateral Instrument (“MLI”) adopting all the BEPS minimum standards and is a strong advocate of Mandatory Binding Arbitration (“MBA”).
Other BEPS implementation measures have progressed at an EU level through the first and second ATAD. Ireland will introduce CFC rules from 1 January 2019. As from 1 January 2020 Ireland will adopt a new Exit Tax and Anti-Hybrid rules and from 2024 Ireland will adopt new interest deductibility rules. Ireland’s GAAR is under review but it is believed to be ATAD compliant in its current form.
The ITA has indicated that it intends to follow and implement the OECD’s recommendations in the BEPS reports. The ITA has not signalled out any of the OECD BEPS recommendations as irrelevant to Israel. We note that Israel has already begun to implement certain of these recommendations (see more below) and we expect this will continue gradually. So far, implementation has mostly been done through changes in interpretation of existing law and tax treaties rather than through changes in legislation.
Malaysia is the signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI); it recently joined the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Package as an Associate Member and has implemented various regulations in line with the BEPS Action Plans, especially on the following:
Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances
Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting
Action 14: Making Dispute Resolution Mechanisms More Effective
On top of participation in the Convention on Mutual Administrative Assistance in Tax Matters, Malaysia is also a signatory to the Multilateral Competent Authority Agreement (MCAA) on Common Reporting Standards and Country by Country Reporting and is scheduled to start its automatic exchange of information with the other participating jurisdictions in September 2018.
Mexico has incorporated most of the OECD BEPS recommendations.
For instance, Action 2 recommendations aimed to counter the effects of hybrid mismatch arrangements has been addressed through a set of rules that will disallow deductions if payments are made to transparent vehicles that meet certain characteristics.
Action 3 items related to the design of effective CFC rules that Mexico had in place have evolved to achieve compatibility with BEPS recommendations.
Action 4 recommendations directed to limiting base erosion involving interest deductions already existed in Mexico prior to the publication of the BEPS Action plans (i.e., thin-capitalization rules, back to back rules).
Action 6 recommendations to prevent treaty abuse have also been addressed in Mexico by, for instance, denying the application of treaty benefits unless taxpayers prove, if so required, that (i) they are resident for tax purposes in the relevant country by providing with a residence certificate; and (ii) for related party transactions, file a sworn statement declaring that juridical double taxation will arise in the recipient’s country of residence if treaty benefits are not granted.
Based on Actions 8-10, Mexican transfer pricing regulations have been amended to include provisions to allocate profits within Multinational Enterprises based on value creation and on the importance of the economic activities that are being carried out.
As of 2018 and in accordance to Action 12, taxpayers are required to file trimestral reports providing detailed information on certain relevant transactions (as defined by the tax authorities), which include financing operations, corporate restructurings, sale or contribution of assets, among others.
Under recommendations pertaining to Action 13 (transfer pricing documentation and country-by-country reporting), companies that carry out transactions with related parties and derive income equal or greater than MXN$755,898,920.00, must file a master and local file. In addition, multinational enterprises that derive income that is equal or greater than MXN$12 billion must also file a country-by-country report.
As explained in the OECD’s report on Mexico’s compliance with Action 14, Mexico has partially implemented Action 14 Minimum Standard by including a Mutual Agreement Procedure program in most of its double taxation treaties. However, according to the OECD’s report, the average time to close a Mutual Agreement Procedure in Mexico is of 22 months, making it necessary to dedicate additional resources to the handling of cases in order to make it more efficient.
Mexico, as a signatory to the OECD’s Multilateral Instrument (although still pending to be approved by the Senate), will incorporate several provisions to its tax treaties that will aim to avoid abusive practices.
Norway is fully participating in the BEPS project and has already implemented – or are in the process of implementing – a large number of the BEPS recommendations.
The Norwegian participation exemption was amended in 2016 so that dividends received by a Norwegian company will not benefit from the participation exemption if the distributing company has a right to a tax deduction for the payment. In light of BEPS Action 2 (targeting hybrid mismatches), the Ministry of Finance has said that it will continually assess the need for further amendments.
As for CFC rules, the Ministry of Finance has indicated that it will do an assessment of the current Norwegian regime in order to analyse whether adjustments should be made in light of BEPS Action 3.
The Norwegian Tax Act already contains interest deduction limitation rules (BEPS Action 4). The Ministry of Finance has, however, proposed amendments, which aim to align the Norwegian rules even more with the BEPS Action 4 recommendation. The amendments has not yet been implemented.
Pursuant to BEPS Action 6 (preventing the granting of treaty benefits in inappropriate circumstances), the countries have committed to implementing a minimum anti-avoidance standard, either a "Limitation of Benefits" rule (LOB) or a "Principal Purpose Test" (PPT). The Ministry of Finance has said it will go for the PPT alternative.
The Norwegian transfer pricing rules are generally in accordance with the OECD Guidelines, and changes made to the Guidelines are immediately implemented as Norwegian law (cfr. BEPS Action 8-10).
Norway has implemented the country-by-country reporting rules (BEPS Action 13).
Further, Norway is part of the BEPS Inclusive Framework and the MLI.
Panama joined the Inclusive Framework of the Base Erosion and Profit Shifting (BEPS) Project of the Organization for Co-operation and Economic Development (OECD) on 31 October 2016.
The Inclusive Framework currently consists of 87 member jurisdictions, all of which will have a chance to intervene on equal terms in all of the CFA’s meetings and its work teams on the BEPS project.
Panama as a member of the Inclusive Framework has committed to implementing the four minimum BEPS standards: (i) harmful tax practices (Action 5), (ii) treaty abuse (Action 6), (iii) country-by-country reporting (Action 13) and (iv) dispute resolutions (Action 14).
The Philippines has not yet implemented any of the OECD BEPS recommendations. Moreover, it is not yet a member of the BEPS Inclusive Framework.
i) Action 1 (digital economy) has been addressed only in the EU realm and VAT context. Without significant international changes to the concept of Permanent Establishment and/or to the rights of the source country and its definition (along with amending countless agreements on double taxation), we do not see how the taxation of profits of multinational companies in the Portuguese market or in any other market can be satisfactorily addressed;
ii) Action 2 on hybrid mismatch arrangements is under implementation, following Council Directive (EU) 2016/1164 of 12 July 2016;
iii) Actions 3 and 4 have been addressed through the CFC rules and interest deduction rules which already existed under Portuguese law, albeit with some limitations imposed by the prohibition of discrimination (freedom of establishment, etc.) provided for in the EU Treaty;
iv) Action 5 on harmful tax practices has been addressed on the side of the intellectual property income: patent box was amended (see infra);
v) Action 6 on treaty abuse has been addressed through the adhesion of Portugal to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS;
vi) Action 7 on the artificial use of the permanent establishment has no implementation yet;
vii) Actions 8, 9 and 10 on transfer pricing issues, which aims to prevent base erosion triggered by the transfer of valuable IP rights to low tax locations where there is no or little business activity, were addressed from an outbound perspective by requiring in the context of the patent box regime that the acquirer met some requirements, and from the inbound perspective by requiring that the amount of the tax benefit be dependent on substantial activity (research and development) requirements;
viii) Action 11 on monitoring BEPS has no known specific measure;
ix) Action 12 on the disclosure of aggressive tax planning was already implemented in Portugal prior to BEPS;
x) Action 13 (rules regarding transfer pricing documentation in order to enhance transparency for tax administration) is being implemented following Portugal adherence to the automatic exchange of information under the Country-by-Country (CbC) report. Portugal already set up a tax form for this purpose;
xi) Action 14 on dispute resolution mechanisms has no known specific measure in Portugal;
xii) Action 15 relates to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting which was already signed by Portugal but has not entered into force yet.
No specific plans to implement the BEPS Recommendations have been designed. However, it shall be considered that Italian tax legislation already includes provisions broadly in line with the OECD BEPS Recommendation (such as the limits on the deduction of interest) and will implement the provisions of the anti-tax avoidance Directives (ATAD I and II).
Turkey is mainly concerned with the adoption of a digital economy, base erosion through the use of interest deductions, treaty shopping and transfer pricing. However, to date, Turkey has taken very limited action on the implementation of BEPS actions. In 2016 the Turkish parliament empowered the Council of Ministers to adopt the country-by-country reporting procedures only for transfer pricing. The Council of Ministers prepared a draft communiqué, but the draft communiqué has not entered into force and studies on it continue. The draft communiqué is related to the BEPS action plans on transfer pricing. Draft Transfer Pricing Communiqué Serial No. 3 states that new additions must be applied to the comparability section of the effective transfer pricing communiqué. The purpose is to take into account local market qualities, the experienced work force, and group synergies in the benchmark analysis. This article aims to bring transfer pricing documentation in Turkey into conformity with the 13th BEPS action plan, and foresees reporting in three phases.
Yes, Japan is very active in following the BEPS Action Plans so far published, as the country that chaired the OECD Committee on Fiscal Affairs.
To date, Japan has implemented or will implement the following BEPS Action Plans by amending its domestic tax law or tax treaties:
(i) Action Plan 1: Japan has amended the consumption tax law to impose tax upon digital or electronic services transactions conducted by foreign enterprises having no base in Japan.
(ii) Action Plan 2: Japan has amended the corporation tax law so that Japan’s foreign dividend exemption system does not apply to dividends that are deductible under the local tax law of the jurisdiction of the foreign subsidiary (e.g., Brazil), in order to prevent double exemption.
(iii) Action Plan 3: Japan has overhauled its current CFC regime by amending the income tax law and the corporation tax law by the 2017 annual tax reform, in line with the BEPS Action Plan 3, to give more focus upon the substance of the business conducted by the CFC, as explained above.
(iv) Action Plan 4: As explained above, Japan is now reviewing whether the earnings stripping rules should be more tightened, in response to the BEPS Action Plan 4, by lowering the threshold percentage rate from 50% to some 10-30%.
(v) Action Plan 6: Japan has incorporated in its tax treaties particularly with advanced countries (such as the U.S., the U.K., the Netherlands, Switzerland and Germany) various anti-abuse measures suggested by the BEPS Action Plan 6, such as the limitation on benefits (LOB), the principal purpose test (PPT) and the beneficial owner concept.
(vi) Action Plan 7: Japan has amended the definition of a permanent establishment in the income tax law and the corporation tax law by the 2018 annual tax reform, in response to the BEPS Action Plan 7, so as to more properly define an agent permanent establishment in order to prevent avoidance of an agent permanent establishment through artificial measures.
(vii) Action Plans 8-10: Japan is reviewing whether it should incorporate the so-called “commensurate with income” standard as to certain hard-to-value intangibles, by amending its transfer pricing regulations, in line with the BEPS Action Plans 8-10.
(viii) Action Plan 12: Japan is reviewing whether or not to introduce mandatory disclosure rules regarding tax planning.
(ix) Action Plan 13: Japan has amended its transfer pricing documentation rules to introduce the master file, the country-by-country reporting and the local file, in line with the BEPS Action Plan 13.
(x) Action Plan 16: Japan has signed the MLI (the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting), and is expected to complete the ratification procedures soon.
In addition, Japan will continue its review of whether it is necessary, and if so, by what measures the action plans should be implemented, as to the other action plans.
The Netherlands implemented various of the OECD BEPS recommendations and intends to adopt others. Among these are the OECD framework for exchange of information (reference is also made to question 6)
The Netherlands signed the multilateral instrument (MLI). The Dutch Government submitted the ratification bill to parliament on 20 December 2017 and initially aimed to obtain parliamentary approval for the MLI in Q1/Q2 of 2018, with entry into effect at the earliest as of 2019. Parliamentary approval has not yet been obtained. Based on the answers to questions from parliament of 4 July 2018, the government currently expects the MLI to enter into effect for the Netherlands as of 1 January 2020 Based on the (provisional) choices of the Netherlands and its treaty partners, it is expected that more than 50 of the tax treaties concluded by the Netherlands will be affected by the MLI.
Modified Nexus Approach
The Dutch IP regime, the so-called ‘innovation box’ regime, provides for the possibility to be effectively taxed at a reduced rate of 7% (instead of the regular corporate income tax rate of currently 20%-25%) with respect to qualifying benefits derived from qualifying intangible assets. Further reference is made to question 19.
Several aspects of the rules for applying the innovation box regime have changed as of 1 January 2017, in order to bring the regime more in line with Action 5 of the OECD BEPS-project.
The innovation box applies to benefits (including capital gains) derived from qualifying intangible assets. The benefits derived from the qualifying intangible assets are determined in the most suitable way, taking into account the nature of the business enterprise and the R&D activities that resulted in the qualifying intangible asset.
In line with OECD BEPS Action 5, the calculated qualifying benefits can be restricted if a substantial part of the R&D activities of the taxpayer has been outsourced to a group company (the 'nexus approach').
The nexus approach aims to ensure that the taxpayer conducts a sufficient amount of R&D-activities itself.
Transfer pricing documentation obligations
In addition to the general transfer pricing documentation obligations contained in Dutch law, a company that forms part of a multinational group may have additional obligations as of 1 January 2016. Multinational groups that meet certain revenue thresholds will be required to: (i) prepare a master file (Master File) and local file (Local File), and (ii) provide a country-by-country (CbC) report. The thresholds in the Netherlands are EUR 50 million of ‘total consolidated group revenue’ in the year preceding the reporting year for the Master File and Local File and EUR 750 million for the CbC report. The Netherlands introduced the Master File, Local File and CbC reporting obligations in line with OECD BEPS Action 13.
The Master File has to contain a general overview of the business of the multinational group. The Local File has to contain an overview of the transactions between the Dutch entity and the foreign related entities. The Master File and the Local File have to be included in the administration of the taxpayer before the deadline for filing of the corporate income tax (CIT) return. If an extension for filing the CIT return was granted (reference is made to question 2), the term for the including of the Master File and Local File also includes the extension period (i.e. filing the CIT return early does not have an impact on the Local File and Master File deadline).
The CbC report relates to the providing of certain information items per country in which the multinational group is active (e.g. the amount of the income, realized profit, payed taxes, number of employees). The CbC report has to be filed with the Dutch tax authorities (DTA) within twelve months after the end of the reporting year of the ultimate parent entity of the multinational group. These obligations do not apply when a qualifying foreign ultimate parent entity or surrogate parent entity exists that files the CbC report and the foreign authorities actually exchange this CbC report (on time) with the DTA.
A penalty of up to EUR 820,000 could be imposed by the DTA if the CbC reporting obligation and / or CbC reporting notification obligation are not met. The maximum fine of EUR 820,000 will only be imposed when the CbC reporting obligations have not been met more than once. Not including the Master File and Local File in the administration within the term, may be punished with: (i) (a) imprisonment of up to four year or a fine of up to € 20,500 (intentionally) or (b) imprisonment of up to six months or a fine of up to € 8,200 (unintentionally), (ii) an administrative fine of up to 100% of the transfer pricing adjustment and (iii) a reversal of the burden of proof.
EU Anti-Tax Avoidance Directive
Furthermore, the implementation of the BEPS recommendations within the EU has among others been conducted through the launch of the EU Anti-Tax Avoidance Directive (ATAD).
In June 2016, the EU Member States reached political agreement on the ATAD1. In May 2017 the EU adopted an ‘upgrade’ of the ATAD by adding provisions to combat hybrid situations with third countries (ATAD2).
On 18 September 2018, the Dutch Ministry of Finance published the 2019 Budget. The Budget includes proposals for implementation of ATAD1 by introducing an earnings stripping rule to limit interest deductibility and rules for taxation of controlled foreign companies (CFC rules) as of 2019.
The Budget includes proposals for implementation of CFC rules as per ATAD1. The Ministry of Finance takes the position that the Dutch at arm’s length principle already provides for a sufficient implementation of ATAD1 “Model B” CFC rules. Based on this principle, the income of a controlled company should already be attributed to the Dutch controlling company to the extent this income is generated by significant people functions performed in the Netherlands.
Nevertheless, it is proposed to introduce a light version of ATAD1 “Model A” CFC regime specifically geared towards controlled companies in jurisdictions:
- With a statutory profit tax rate of less than 7%; or
- That are EU blacklisted.
Each year before year end the Dutch Ministry of Finance will publish an exhaustive list of jurisdictions that qualify as low taxed or EU blacklisted jurisdictions for the following year. Consultation of the public list has started on 25 September 2018.
If the Dutch tax payer (indirectly) holds shares in a CFC, the Dutch taxpayer needs to include in its tax base specific types of non-distributed tainted income of the CFC. Tainted income is the net amount of:
- interest or any other income derived from financial assets;
- royalties or any other income derived from intellectual property;
- dividends and income from the disposal of shares;
- income from financial leasing;
- income from insurance, banking and other financial activities; and
- income from invoicing companies that earn sales and services income from goods and services purchased from and sold to associated enterprises, and that add no or little economic value.
Earnings stripping rule
The earnings stripping rule that will be introduced pursuant to ATAD 1 will limit interest deductibility without distinguishing between third party and related party debt.
The Dutch proposal provides that the deduction of net interest expenses is limited to the highest of:
(i) 30% of the earnings before interest, taxes, depreciation and amortization (EBITDA); and
(ii) a threshold of Euro 1 million.
The net interest expenses are defined as the balance of a taxpayer’s interest expenses, including certain related costs and foreign exchange losses, on the one hand, and a taxpayer’s interest income, including foreign exchange gains, on the other hand. EBITDA is calculated on the basis of tax accounts and excludes tax exempt income. Any excess net interest expenses can be carried forward indefinitely. The proposal includes measures that may limit the carry forward in case of a change of control.
The Dutch corporate income tax act already provides for exit taxation in relation to corporate entities and permanent establishments in conformity with EU-law and ATAD1. Therefore, the proposals only include minor adjustments in relation to the deferral of taxation.
According to the Dutch government, Dutch domestic legislation already provides for a GAAR, by way of the abuse of law-doctrine (fraus legis) as developed in Dutch case law. Therefore, there is no need to implement the GAAR separately in Dutch domestic legislation.
The Dutch implementation in relation to hybrid mismatch rules pursuant to ATAD2 will need to take place by 1 January 2020. This will be addressed in a separate proposal, to be published at a later stage: a consultation document may be published towards the end of 2018.
At the level of EU, the BEPS measures were centralized in the provisions of ATAD. The Romanian tax legislation transposed 4 out of 5 measures included in ATAD starting 1 January 2018 (i.e. 1 year before the deadline for the transposition of the respective measures). More specifically, Romania transposed the following measures:
- interest limitation rule based on EBITA;
- Controlled Foreign Company (CFC) rules;
- exit taxation rules;
- general anti-abuse rule (GAAR).
Additionally, the recent amendments brought to the Directive 2011/16/EU with respect to mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (inspired by Action 12 BEPS), with effect from 25 June 2018, should be carefully considered and closely monitored by the business environment. Although the potential reporting obligation begins with 2020, the retrospective effect provided by the Directive should be considered.
Separately, Romania signed the multilateral instrument (‘MLI”) which will implement BEPS treaty measures. For instance, Romania is going to implement: (i) the principal purpose test for applicability of double tax treaties, (ii) it opted to include the treaty measures related to “avoidance of permanent establishment status” and (iii) the provisions related to mandatory mutual agreement procedure.
Specifically on the TP side, as the Romanian TP regulations make reference to OECD TP Guidelines to be considered for local TP purposes, any amendments of these guidelines resulting from the BEPS project would be considered for Romanian purposes as well.
Starting 2016, major changes were introduced in the Romanian legislation regarding the TP documentation requirements applicable to Romanian taxpayers. The information that should be included in the TP documentation has been significantly expanded, considering the amendments of the OECD TP Guidelines further to the BEPS project, Action 13.
Also, the Romanian legislation was amended so as to implement the mandatory automatic exchange of information on the country-by-country reports, following the adoption of Directive 2016/881/EU, with effect from 13 June 2017. The new reporting requirements apply to multinational enterprise groups having consolidated income reported in the last fiscal year prior to the reporting period equal to or exceeding EUR 750 million.
Yes, Actions 5 and 13 of the OECD’s 15 measures against Base Erosion Profit Shifting (“BEPS”) were given effect to in Gibraltar by virtue of our implementation of Council Directive (EU) 2015/2376 and Council Directive (EU) 2016/881 respectively, both amending Directive 2011/16/EU. OECD Action 5 focuses on compulsory spontaneous exchange of tax rulings. OECD Action 13 contains revised guidance on transfer pricing documentation, including the template for country-by-country reporting.
Gibraltar is committed to transpose further measures against BEPS as they are coordinated as well as further measures against double non taxation. Gibraltar has asked to join the OECD framework on BEPS.
In March 2016, the UK government confirmed the implementation of hybrid mismatches (Action 2), interest deductibility (Action 4), intellectual property (Action 5), transfer pricing (Actions 8-10), and country-by-country reporting measures. In September 2016, UK rules on hybrid mismatches and patent box have been enacted. In April 2017, the UK government implemented rules on interest deductibility.
The UK already follows the transfer pricing guidelines Actions 8-10 as well as the disclosure of aggressive tax planning (Action 12). The UK has signed a multilateral competent authority agreement for the automatic exchange of CbC reports and is one of the countries committed to binding arbitration. Regarding CFCs, the UK considers that its CFC rules are compliant with the BEPS Action 3.