How will BEPS impact on the government’s tax policies?
Tax (2nd Edition)
The enforcement of the Multilateral Agreement for the prevention of the OECD/G20’s BEPS modifies the bilateral agreements for the prevention of double taxation, regarding the BEPS relating to hybrids, breach of agreements and branch offices. The Agreement also strengthens the articles referring to amicable settlements, even by means of a binding and compulsory arbitration.
From the date of the signing of the Multilateral Agreement, each party State shall implement the necessary internal proceedings in order to warranty its enforcement. There are already five States which have finalized these internal proceedings and have ratified the Agreement. The Multilateral Agreement will enter into force on the 1st of July 2018.
In the case of Spain, both the signing and the reference to Spanish Parliament by Ministers Cabinet shall be confirmed because the signing was made “ad referendum”.
The implementation of the measures from BEPS project will determine certain key changes in the Romania tax legislation. As a first impact, taxpayer should be aware of a greater transparency related to their assets, activities, functions, cash movements, etc. Also, one key focus of the BEPS project is to increase the collection of funds in the source states, where activities are performed. We will need to see which will be the impact on tax policy but it is clear that these changes will increase the attention of tax authorities on cross-border transactions and transfer pricing.
As Australia has implemented most of the BEPS Action items, it is clear that BEPS has had a significant impact on the Australian government’s tax policies. That said, in our view, ultimately, the Australian government’s tax policies will remain driven by the needs of Australia’s economy and by reference to the prevailing political climate in Australia.
BEPS is not likely to have a significant impact on Canadian tax policies, as its tax system already addresses most of the concerns raised by BEPS. The BEPS initiative coincides with a period in which the Canadian government has been placing a greater focus on the international tax system, including devoting greater resources to international tax audits and tweaking its domestic tax legislation to address aggressive international tax planning strategies by taxpayers. These legislative changes include the introduction of foreign tax credit generator rules, foreign affiliate dumping rules and tightening the thin capitalization rules. These changes occurred independently of the BEPS initiative. Further, the Canadian government had introduced an anti-treaty shopping rule to its domestic tax legislation. However, this proposal was abandoned in favour of participating in the BEPS initiative on treaty shopping.
It is expected that Belgium will continue to implement BEPS items into its national tax legislation.
In the beginning the tax authorities will need serious education on the new regime. Their lack of experience will lead to a number of lawsuits on the implementation of the BEPS rules.
The collection of taxes will increase as a final result.
It remains to be seen what the impact of BEPS will be in the United States. Aspects of BEPS were addressed in the United States prior to BEPS, such as the adoption of anti-hybrid and anti-treaty shopping provisions. Throughout the BEPS initiative, certain other aspects have been or currently are being addressed through regulation and revisions to the U.S. Model Income Tax Convention. However, the United States has stated that it will not adopt certain aspects of BEPS, such as the loosening of the definition of permanent establishment through revisions to the dependent and independent agent rules and the exemption for preparatory and auxiliary activities.
Implementing other aspects of BEPS may require the United States Congress to pass legislation, such as rules that would address issues related to the management and control of risk and related allocation of profits. The United States Congress may not have an interest in changing existing law and the current President and his Administration may not have an appetite to follow such recommendations.
However, even if the IRS does not adopt all aspects of BEPS, there have been instances where IRS examiners will take positions that use BEPS like principles and do so under existing regulations.
As every country that started the process of implementation of the BEPs recommendations, Ukraine has to enter a set of tax reforms that it required by OECD. The implementation of the BEPS Minimum Action Plan standard will effectively counteract aggressive tax planning, erosion of the tax base and the elimination of tax-free profits. And the first reforms will refer to CFC rules, new types of reports for transfer pricing operations and prevention of abuse of international tax treaties.
As any elements of taxes and charges can not be made later than six months before the start of the new budget period, the process of implementation of the BEPS Plan will be take a few years.
The policy of successive Cyprus governments over the years has been to provide a competitive tax environment that is fully compliant with international best practice, and Cyprus has always been an early complier with OECD and other international initiatives. We expect that policy to continue.
The world is becoming transparent by the day. Ecuador is not an exception. Ecuador just adhered to the Global Forum. Ecuador tax system will continue to change over the years to include OECD recommendations including BEPS and CRS. A tax amnesty program is expected soon. We foresee a sophisticated tax administration combating aggressive tax planning to increase tax revenue.
The UK Government considers it is ahead of the curve. Therefore unlikely to be any change in existing policies.
Already, BEPS and other initiatives have resulted in tax legislation being introduced, through amendments to the Income Tax Act 2010, to levy tax on interest received or receivable by Gibraltar companies, and on royalties.
As stated previously (see 11. above), the Swiss government has taken very seriously the BEPS recommendations and is actively working on implementing them into Swiss law.
However, it should be noted that Swiss voters have the power to oppose changes to legislation through a referendum. This ability means that the government’s plans are sometimes thwarted due to popular sovereignty, such as what happened regarding the Corporate Tax Reform Act III.
We expect the impact of the OECD BEPS reports on government tax policy to be similar in Israel to that in other OECD countries. As a general matter, we would expect to see amendments to domestic legislation, adoption of regulations and the publication of guidance and ITA positions as well as entering into treaty discussions with Israel’s treaty partners, aimed at implementing the OECD recommendations. Israel is a signatory to the Multilateral Instrument (“MLI”) which we expect will be gradually implemented in the coming few years.
In addition, the ITA has independently been taking steps in this direction. For example, last year the ITA published guidance addressing income taxation of non-Israeli Internet companies selling goods or providing services to the Israeli market through the Internet as well as the VAT liability of Internet services companies. The guidance generally provides new and broader interpretations to the definitions of a permanent establishment through dependent agents and fixed places of business and expands the VAT registration obligation of non-Israeli companies active in the Israeli market. In addition, and consistent with the OECD’s so-called “nexus approach” relating to intellectual property preferential tax regimes, recently enacted legislation provides for preferential tax rates to technology and hi-tech companies with respect to income derived from intellectual property development activities carried out in Israel (see more below).
Italy participated to the works of the OECD on the BEPS initiative and is likely to implement BEPS related measures. From an international perspective, Italy signed the OECD Multilateral Convention and included some of the measures recommended by the OECD in some of its most recent tax treaties (such as the treaty with Chile).
Priorities of the BEPS project in Portugal must be placed in the context of Portugal’s membership of international organizations and their tax policies.
Because Portugal is an OECD member country, its tax policy has complied with the OECD recommendations on tax transparency and measures aimed at aggressive tax planning and abuse.
These are some current impacts on Portuguese tax policy:
- Higher taxation of outbound investment in non-cooperative jurisdictions;
- Anti-abuse rules such as CFC rules; and
- Limitations on interest deductibility, through the implementation of Earnings Stripping Rules.
In the future, it is expected that Portugal will continue to be guided by OECD standards, in particular through the implementation of the BEPS Actions that have not yet been completely transposed into the Portuguese tax system.
BEPS is expected to increase the focus of the government’s tax policies to international trade and taxation. It is expected that the exchange of information with other jurisdictions under the CRS and country-by-country reporting will also lead to more focus on multinational companies operating in Kenya.
BEPS recommendations are fully in line with the current approach of the Polish government regarding taxation policy. The government is focused on increasing its fiscal revenue through fighting aggressive tax optimization and fiscal offences (e.g. as in the case of VAT carousel practices). Therefore, the Polish tax authorities will use all of the instruments provided in the BEPS recommendations to reduce the scale of tax evasion and tax avoidance in Poland.
Japanese multinational corporations are generally far less active in aggressive tax planning as compared to those in Western jurisdictions, and the Japanese government is not very much concerned about BEPS to be caused by Japanese multinational corporations. Rather, Japan seems to be of a view that the BEPS initiatives may be a good opportunity for Japanese multinational corporations to enhance their international competitiveness, where Western multinational corporations would have much more difficulty to continue their aggressive tax planning. As such, the main focus of Japan in terms of the BEPS initiatives seems to be to be in concert with the international community in the domestic adoption of the Action Plans and at the same time to take care so that the adoption will not cause overly onerous administrative burden on the side of Japanese multinational corporations (where they are not doing any aggressive tax planning). In any event, it is fair to say that Japan will continue to domestically implement the remainder of the BEPS Action Plans from these viewpoints.
Considering the comments made under 12, most of the BEPS Project initiatives have been addressed by the MoF. We therefore do not foresee that the MoF's tax policies will be further formed by the BEPS philosophy.
The BEPS Action Plan has already had a considerable impact on Mexican tax authorities and on the local set of laws. Accordingly, more stringent criterions concerning the applicability of tax benefits, such as the use of tax treaties, the conditions necessary to acquire (avoid) a permanent establishment status, the deductibility of certain expenses, transfer pricing rules, amongst other concepts, have been driving the government’s tax policies for the past few years. What is more, the Mexican government has been actively participating in the development and application of multilateral international instruments and broadening its network of tax information exchange agreements.
BEPS have already largely influenced the French government's tax policies by anticipating the enforceability of the hybrid-mismatches and also the country-by-country reporting, and will keep making a difference. French government's negotiations of new and/or renewal of double tax treaties will be impacted in a major way by the signature of the multilateral international convention. This situation may even bring up again the European discussions around a common taxation (ACCIS project).
Norway has already made changes to the tax legislation in accordance with the recommendations, and more changes are soon to come. Thus, the BEPS Project has had, and will continue to have a great impact on the Norwegian Government’s tax policies.
While Germany has many features of the BEPS project already in place, it is reviewing its existing laws for specific additional changes necessary to be in line with the BEPS project.
The governmental program of the new Austrian government states per December 2017 that within the next 5 years the issue of a digital PE (see also BEPS Action 1) shall be addressed by the Austrian legislator, but we are not aware of any concrete plans how the implementation is planned.
There is some ongoing discussion in Austria, on how to implement the new abuse rules suggested by BEPS Action 6 (i.e. whether to change the domestic Austrian GAAR provision, see in that respect also question 11 above). Some of the Austrian double tax conventions will be amended by the MLI in this respect, implementing the principal purpose test of Art 7 of the MLI.
As regards the provisions relating to the creation of a PE by commissionaire structures, as suggested by BEPS Action 7, Austria has made a reservation in the MLI, as it is of the opinion that its interpretation of the existing treaties already allowed such interpretation in some cases. Whether this will be accepted by the courts remains to be seen.