LIVE WEBCAST UPDATE ON BEPS PROJECT 2015 DELIVERABLES AND BEYOND

LIVE WEBCAST
UPDATE ON BEPS PROJECT
2015 DELIVERABLES AND BEYOND
8 June 2015
5:00pm – 6:00pm (CET)

Pascal Saint-Amans
Director, Centre for Tax Policy and Administration
Achim Pross
Head, International Cooperation and Tax Administration
Marlies de Ruiter
Head, Tax Treaty, Transfer Pricing and Financial Transactions
David Bradbury
Head, Tax Policy and Statistics
Andrew Hickman
Head, Transfer Pricing Unit
Speakers
3

Ask questions and comment throughout the webcast
Join the discussion
Directly: Enter your question in the space provided
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4

STATE OF PLAY AND
ROADMAP FOR
DELIVERY

• Work proceeding at BEPS Project pace
• Since the last webcast: 7 discussion drafts
published and 6 public consultations held
• Special meeting of the CFA in May to discuss
progress and approve CbC Implementation
Package
6
State of play

• 27 May 2015  First procedural meeting of the ad hoc group
• 5-6 November 2015  Inaugural meeting, Paris
• Members of the Group appointed the Chair (Mr. Mike Williams, UK) and
three Vice-Chairs (Mr. Liao Tizhong, China; Mr. Mohammed Amine
Baina, Morocco; and Mrs. Kim S. Jacinto-Henares, Philippines)
• International organisations have been invited as observers (UN,
IMF, World Bank, CIAT, ATAF, CREDAF, IOTA, SGATAR, CARICOM and
ATAIC)
• So far over 80 countries have joined the ad hoc group
Multilateral Instrument First procedural
ad hoc meeting
7

• Meetings of CFA subsidiary bodies to finalise
technical work on the action items
• Adoption at CFA meeting in September
• Delivery to OECD Council and to G20 Finance
Ministers (October) and Leaders (November)
Next steps towards delivery
8

UPDATE ON THE BEPS
WORK STREAMS

KEY ELEMENTS OF THE CBC
IMPLEMENTATION PACKAGE
10

11
Key elements of the CbC
implementation package
• Implementation package is third element of new transfer pricing
reporting provisions that will encourage transparency and contribute to
tackling BEPS.
• September 2014: report on transfer pricing documentation, requiring
master file, local file, and country-by-country (CbC) report which sets
out the MNE’s global allocation of income, taxes, and activity.
• February 2015: commitment to confidentiality, consistency, and
appropriate use, and guidance on: when CbC reporting starts (FY
2016), which taxpayers have to file (750m euros turnover), and how
(framework for implementation based on government-to-government
exchange--now developed in the implementation package).

Two elements of the CbC Implementation Package
Model domestic legislation Competent Authority Agreements
- Based on the Multilateral Convention
- Based on Double Tax Conventions
- Based on TIEAs
12
Implementation Package

13
• Key features of model domestic legislation
• Filing obligation on resident ultimate parent company
• Back-up local filing obligation on resident subsidiary, but only when:
– Ultimate parent company is not obliged to file in its jurisdiction, or
– There is no competent authority agreement under existing exchange instrument with
that jurisdiction, or
– There is a systemic failure to exchange after agreeing to do so.
• Where there are multiple subsidiaries in a jurisdiction, the MNE group
can designate one to file on behalf of all
• MNE groups can elect a surrogate parent entity to file on behalf of
ultimate parent (providing option to reduce scope of local filing)

14
Competent Authority Agreements
Multilateral Competent Authority Agreement, based on Article 6 of
the Multilateral Convention
Model Competent Authority Agreement on the basis of Article 26 of a
Double Tax Convention
Model Competent Authority Agreement on the basis of a TIEA

15
Outline of the CbC MCAA:
• Section 1 – Definitions
• Section 2 – Exchange of information with respect to MNE Groups
• Section 3 – Timing and manner of the exchange
• Section 4 – Collaboration on compliance and enforcement
• Section 5 – Confidentiality, data safeguards and appropriate use
• Section 6 – Consultations
• Section 7 – Amendments
• Section 8 – Term of agreement
• Section 9 – Co-ordinating Body Secretariat

16
Example of the timing of the exchange (Section 3 CbC MCAA):
09/15 12/15 01/16 03/19
2015 2016 2017 2018 2019
06/1812/17
Signing
of MCAA
Activation
under
Section 8
1st year
to report
6 months
for CA review
1st Filing
deadline
for MNEs
2nd Transmission
of CbC Report
(for 2017)
1st Transmission
of CbC Report
(for 2016)
12/18
2nd Filing
deadline
for MNEs
3 months
for CA review

• Confidentiality and data safeguards rules correspond to those of
the CRS MCAA
• The CbC MCAA contains specific rules on the appropriate use of
CbC Reports (Section 5 (2))
17

The CbC MCAA foresees consultations between Competent Authorities
on:
• Undesirable economic outcomes (Section 6 (1))
• Interpretation and implementation of the CbC MCAA (Section 6 (2))
• Systemic failure of the exchange of CbC Reports (Section 6(2))
• Significant non-compliance with the CbC MCAA (Section 8 (5))
18

ESTABLISHING
METHODOLOGIES TO COLLECT
AND ANALYSE DATA
19

20
Establishing methodologies to collect and analyse data
There are four elements to Action 11:
• Identify and assess a range of existing data sources
• Recommend indicators of the scale and economic impact of BEPS
• Undertake an economic analysis of:
– scale (fiscal effects) and economic impact of BEPS; and
– effectiveness of BEPS countermeasures
• Make recommendations regarding new data and tools to monitor
and evaluate BEPS and countermeasures on an ongoing basis

21
The public consultation process has included:
• Request for input – August 2014
• Discussion draft released - 16 April 2015, with chapters covering:
– Assessment of currently available data
– Proposed seven potential indicators of BEPS
– Preliminary economic analysis of scale and economic impact of BEPS and
countermeasures, detailing over 100 empirical studies finding the existence
of BEPS
• Public consultation held 18 May 2015

22
Feedback received from the public consultations included:
• Consensus regarding the conclusions that currently available data
sources are insufficient
• Concerns that indicators can be influenced by non-BEPS factors, but
strong support for the qualifications and caveats in the paper
• Some support for the general approach presented for the economic
analysis – i.e. multiple approaches to estimating the fiscal effects
• Many calls for new data to be made available, but concerns expressed
about confidentiality and compliance costs

23
The Final Action 11 report will include four chapters on:
• Data assessment
• Indicators
• Economic analysis of the fiscal and economic effects of BEPS
and BEPS countermeasures
• Future tools and data for monitoring BEPS on an ongoing
basis

UPDATE ON
TRANSFER PRICING
WORK STREAMS
24

• Discussion draft issued 4th June for comments by 18th
June, and public consultation 6-7th July
• HTVI present some of the hardest transfer pricing
challenges due to information asymmetry and therefore
scope for mispricing
• Third parties use different pricing strategies to address
uncertainties when setting prices, including pricing
arrangements linked to the actual results
25
Hard to ValueIntangibles (HTVI)

Definition:
– No comparables
– Lack of reliable projections of future cash flows
– Assumptions used in valuation highly uncertain
Consequence:
If actual results deviate from expected results the tax administration can require
adjustments based on actual results, unless:
– Deviation is not material
– Taxpayers can show that the difference results from events and developments
that were not foreseeable at the time of concluding the transaction
– The comprehensive ex ante projections by the taxpayer are considered by the
tax administration and found reliable
26
Approach to HTVI in DD

• DD seeks comments in particular on
additional exemptions and implementation
guidance.
27
Discussion draft

• Comments (341 pages) on DD published 1st June.
Public consultation 6-7th July.
• DD proposes more rigorous rules for CCAs, including
requiring participants to have certain capability and for
contributions to be measured at value.
• The proposals seek to align outcomes under CCAs
with those under the revisions to Chapter VI on
intangibles and Chapter I on risk, and to prevent the
scope for CCAs to be used inappropriately to transfer
intangibles at undervalue.
28
Cost Contribution Arrangements (“CCAs”)

• Commentators generally agree that pre-existing
contributions to a CCA should be at value, but argue
that current contributions (e.g. performance of R&D
activities) should continue to be made at cost.
• Some commentators suggest that targeted rules could
prevent the abuse of CCAs while preserving the
commercial effectiveness of cost-based CCAs.
• Strong interest in grandfathering provisions if
proposed changes are made, given the long-term
nature of some CCAs.
29
Update on Transfer Pricing work streams

FORUM ON HARMFUL
TAX PRACTICES
30

FHTP – status of discussion
31
• Substantial activity
– Three open issues i) tracking and tracing ii) definition of IP assets iii) safeguards.
– Very good progress on tracking and tracing with further guidance to be included
in the 2015 Report. Also progress on definition of income and safeguards.
• Transparency
– General agreement that compulsory spontaneous exchange should include all
rulings that could give rise to BEPS concerns in the absence of exchange.
– Limited to a number of defined categories and only exchanged with certain
affected jurisdictions.
– Closely coordinated with work in EU
– Differentiates between existing and future rulings
– Exchanged via a standard template

• Minimum standard with respect
to the resolution of treaty-related disputes so that:
– Treaty obligations related to MAP are fully implemented in good faith and cases
are resolved in a timely manner
– Administrative processes for prevention and timely resolution of treaty-related
disputes are implemented; and
– Ensure that taxpayers can access MAP when eligible.
• Arbitration for willing countries
– Will be included in the multilateral instrument
– See also G7 chair's summary: “…Establishing better and more effective dispute
resolution mechanisms between tax administrations to ensure that the risk of
double taxation does not act as barrier to trade and investment, enhancing the
collaboration of our tax administrations and conducting joint tax audits”. 33
Making Dispute Resolution
Mechanisms Effective

CFC rules
35
Action 3
CFCs
This work will be co-
ordinated with other
work as necessary.
Develop
recommendations
regarding the design of
controlled foreign
company rules.

CFC rules: 2015 Report
36
• Definition of a CFC, including control
• Low-tax exemption and threshold requirements
• Definition of income
• Rules for computing income
• Rules for attributing income
• Rules to prevent or eliminate double taxation
Building blocks for effective
CFC rules

CFC rules: policy considerations
37
• CFC rules are part of a jurisdiction’s overall tax system, so
the policy objectives of the tax system affect the policy
objectives of CFC rules
• CFC rules that are part of worldwide systems may focus
more on long-term deferral and foreign-to-foreign stripping
• CFC rules that are part of territorial systems may focus more
on shifting out of the parent jurisdiction
General agreement that different CFC rules prioritise different
policy objectives

CFC rules: indicia/factors
38
• Most jurisdictions have the same overall concern: income
has been shifted into the CFC and separated from
underlying value creation
• But different jurisdictions look at different indicia/factors:
legal classification, relatedness of parties, source of
income, substance
• Recommendations must be flexible and not overly
prescriptive
Different CFC rules also
look at different factors

CFC rules: definition of income
39
• Non-exhaustive list of approaches and combinations of
approaches:
• Categorical analyses – divide income based on legal
classification, relatedness of parties, and source of the
income
• Substance analyses – look at various proxies, including
people, premises, assets and risk
• Excess profits analysis – treats income above a normal
return as CFC income
Discussion and public comments have focused on definition
of income

Interest deductibility The problem
“no or low taxation associated
with practices that artificially
segregate taxable income from
the activities that generate it”
BEPS Action Plan, chapter 3
location of third
party interest in
high tax
countries
quantity of related
party interest, in
excess of group’s
actual interest
cost
use of interest
expense to fund
tax exempt
income
41

Interest deductibility Action Item 4
42
Develop recommendations regarding best practices in the design of
rules to prevent base erosion through the use of interest expense …
… to achieve excessive interest deductions or to finance the
production of exempt or deferred income …
… for example, through the use of related party and
third party debt …
… and other financial payments that are
economically equivalent to interest.
42

Interest deductibility Public Consultation
43
Targeted rules
Fixed ratio
rule
Combination of these two rules
Group-wide
rule

Interest deductibility
Developing a best practice – status of discussion
44
Group ratio rule
Optional carry forward of disallowed interest/unused capacity
Optional de minimis monetary threshold to remove low risk entities
Fixed ratio rule
Targeted rules to support general rules and address specific risks

Fixed ratio rule
EBITDA x Benchmark fixed ratio
• Objective measure
• Based on taxable income
• Supported in public
consultation
• No single ratio, but a range
• Principles to help countries
setting a ratio
45

46
Group ratio rule
Optional carry forward of disallowed interest/unused
capacity
Optional de minimis monetary threshold to remove low risk
entities
Targeted rules to support general rules and address
specific risks

47
Group ratio rule
capacity
entities
specific risks

48
Group ratio rule
capacity
entities
specific risks

49
Group ratio rule
capacity
entities
specific risks

Action 6: Follow-up work
51
September 2014 Report on Action 6 (“Prevent the granting of treaty
benefits in inappropriate circumstances”) mandated follow-up work in
the following three areas:
1. The implementation of the minimum standard included in the
Report.
2. The precise contents of the model provisions and related
Commentary included in Section A of the Report, in particular the
LOB rule.
3. The policy considerations relevant to the treaty entitlement of
collective investment vehicles (CIVs) and non-CIV funds.

• Various implementation issues discussed by the Committee on
Fiscal Affairs at its May meeting, including:
– How will minimum standard affect treaty negotiations
– How will the minimum standard be reflected in the OECD Model
(including reservations, observations, positions)
– How will the minimum standard apply to existing treaties
– Should there be monitoring of compliance with the minimum
standard
52
1. Implementation of the
minimum standard

• Discussion draft released on 21 November 2014 invited comments
on a number of technical issues related to the model provisions
included in the Report on Action 6
• These issues were further discussed on the basis of the comments
received and a revised discussion draft was released on 22 May
53
2. Model provisions included
in the Report on Action 6

The draft includes:
• A proposal for the addition of an alternative “simplified” limitation-on-benefits
(LOB) rule which is intended to be used in combination with the principal
purposes test (PPT) rule
• A proposal as to how the LOB rule would be presented in the OECD Model Tax
Convention (the main features of the LOB rule will be presented in the Articles of
the Model and the alternative formulations of each paragraph of the LOB rule
will be included in the Commentary)
• Two proposals for new treaty provisions dealing with special tax regimes and
with changes made to domestic law following the conclusion of a treaty
• A number of proposals dealing with more technical issues related to the model
provisions / Commentary included in the Report on Action 6 that were identified
in Issues 3 to 20 of the November 2014 discussion draft.
54
Revised discussion draft

As indicated in the revised Discussion draft:
• No need for additional changes to address issues related to CIVs
but the implementation of TRACE is important
• The Report on Action 6 should recognise the conclusions of the
2008 REIT (Real Estate Investment Trusts) Report
• WP1 will examine a proposal according to which a pension fund
would be considered to be a resident of the State in which it is
constituted
• WP1 will continue to explore solutions to the broader question of the
treaty entitlement of non-CIV funds. That work might continue after
the September 2015 adoption of the final Report on Action 6 55
3. Treaty entitlement
of CIV and non-CIV funds

• 14 options concerning commissionnaire arrangements and similar
strategies, artificial avoidance of Art. 5(4) of the OECD Model,
splitting-up of contracts for the purposes of benefiting from Art. 5(3),
insurance companies that sell insurance in a local market without
having a PE in that market
• 850 pages of comments; public consultation meeting on 21 January
2015
• The options were reviewed in the light of these comments and
narrowed down to a few detailed proposals included in a new
discussion draft released on 15 May
57
First discussion draft on Action 7
released on 31 October 2014

• Commissionnaire arrangements and similar strategies: Art. 5(5) and
5(6) of the OECD Model should be modified
– to apply where a person “concludes contracts, or negotiates the
material elements of contracts”;
– by referring to contracts in the name of the enterprise, for the transfer of
property of the enterprise or for the provision of services by the
enterprise”; and
– by modifying the “independent agent” exception in Art. 5(6).
• These changes to Art. 5(5) and 5(6) correspond to the option that a majority
of business commentators considered to be the least objectionable.
58
Second discussion draft of 15 May

• Art. 5(4) of the OECD Model should be modified so that
each of the exceptions included in that paragraph would
be restricted to activities that are otherwise of a
“preparatory or auxiliary” character
• A new paragraph be added to the definition of PE in
Article 5 of the OECD Model to prevent the application of
Art. 5(4) where activities have been fragmented (by one
enterprise or connected enterprises)
59
Art. 5(4) (specific activity exemptions)

• Splitting-up of contracts: Should be addressed through the
Principal Purposes Test rule drafted as part of the work on Action 6
(Treaty Abuse): the Commentary on that rule should include an
example of splitting-up of contracts. Commentary on Article 5
should also include an alternative provision to be used by States
that wish to deal expressly with that issue and States that do not
include the PPT in their treaties
• Insurance: No specific provision dealing with insurance activities
should be included in Article 5 ; insurance should be subject to the
general rules
• Profit attribution to PEs: Further work involving both WP1 and
WP6 delegates should be carried on in this area.
60
Other proposals

• The second discussion draft includes detailed
Commentary which clarifies various new concepts
introduced by the proposed changes to Article 5 (e.g.
meaning of “negotiates the material elements of
contracts” and of “preparatory or auxiliary”).
61
Detailed Commentary

Post-BEPS Agenda
63
Implementation and Monitoring:
• Achieve the objectives of the work
• Monitor implementation to level the playing field
• Ensure principled implementation: focus on administerability
of the standards/limiting cost of compliance
Inclusiveness:
• G20 countries on an equal footing
• Extending the approach to developing countries
• Global Forum type of approach

“…We are committed to achieving a fair and modern international tax system which is
essential to fairness and prosperity for all. We therefore reaffirm our commitment to
finalize concrete and feasible recommendations for the G20/OECD Base Erosion and
Profit Shifting (BEPS) Action Plan by the end of this year. Going forward, it will be crucial
to ensure its effective implementation, and we encourage the G20 and the OECD to
establish a targeted monitoring process to that end. We commit to strongly promoting
automatic exchange of information on cross-border tax rulings.
… We reiterate our commitment to work with developing countries on the international
tax agenda and will continue to assist them in building their tax administration capacities.
…Moreover, we will strive to improve existing international information networks and
cross-border cooperation on tax matters, including through a commitment to establish
binding mandatory arbitration in order to ensure that the risk of double taxation does
not act as a barrier to cross-border trade and investment. We support work done on
binding arbitration as part of the BEPS project and we encourage others to join us in this
important endeavour.” 64
Leadersʼ Declaration
G7 Summit 7-8 June 2015

• Action 6: deadline for comments on the
discussion draft is 17 June (this is the third
discussion draft on Action 6)
• Action 7: deadline for comments on the
discussion draft is 12 June (this is the
second discussion draft on Action 7)
• The comments will be reviewed at the WP1
meeting of 22-26 June
Comments on Discussion
Drafts on Actions 6 and 7
66

• Comments DD on CCAs published on June 1st.
• Deadline for comments on DD on HTVI on June18th.
• Chapter I on delineation of the actual transaction, risks and non-recognition:
presentation of the directions taken following the March 2015 Public
Consultation at the next Public Consultation in July.
• Chapter VI: Changes to align with Chapter I are being made. No substantial
changes to the approach. Presentation of relevant changes to the guidance
at next Public Consultation in July.
• WP6 meetings from June 29th until July 10th.
• Public Consultation on July 6th and 7th.
Comments and Public Consultation
on Transfer Pricing issues
67

Ask questions and comment
Join the discussion
Directly: Enter your question in the space provided
Via email: CTP.BEPS@oecd.org
Via Twitter: Follow us via @OECDtax using #BEPS
69

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Contact: CTP.BEPS@oecd.org
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