Base Erosion and Profit Shifting - BEPS -Summary

The debate over BEPS tax planning strategies has reached last few years the front pages of the newspapers (i.e. Luxembourg leaks, Apple, Starbucks) and also the agendas of the OECD and non-OECD member countries governments. Upon request of the G20, the OECD published in July 2013 a document identifying the 15 Actions through which these BEPS tax strategies can be tackled. These 15 Action Plans are focused on :

1. establishing coherence in international taxation,
2. aligning taxing rights with substance and
3. improving transparency.

In essence, the BEPS project pretends to align taxation with activity. Companies should be taxed in the country/ies in which the activities are developed.

Recommendations to modify domestic law and tax treaties

The outcome of the BEPS projects would be the deliverable of recommendations per each of the 15 detailed Action Plans. Part of these deliverables has been published in September 2014 while others will be published in September and December 2015.

The BEPS recommendations will be modifications of domestic tax laws of each country or their bilateral tax treaties. 

Also a multilateral instrument will be developed in order to swiftly implement the tax treaty related BEPS measures in a rapid and consistent manner with respect to potentially more than 3000 tax treaties currently in force.

The G20 endorsed during various recent occasions the BEPS action plans and is pushing all developed countries and also developing countries to participate. Already 60 countries participate to the BEPS project.

Tax professionals have expressed their concerns regarding the uncertainty of timing and level of implementation of the BEPS recommendations by each of the countries in the foreseeable future. While there are countries that are already introducing tax reforms in line with BEPS initiatives, other countries may postpone such implementation and / or may only partially implement recommended adjustments.

Impact to many tax planning structures

The implementation of the BEPS recommendations will be a game changer in international taxation. The BEPS project would not only spread its effects on the biggest multinational groups such as Apple or Starbucks, it would also affect almost all the multinational groups (i.e. groups with entities in more than one jurisdiction).

Holding, royalty and finance structures which lack economic substance and are set up for treaty shopping purposes may be impacted by the recommended introduction of Limitation on Benefits provision (LoB) and/or the Principle Purpose Test (MPT) in tax treaties. Hybrid mismatch arrangements and thinly capitalised entities will be combatted. 

Transfer pricing structures the allocation of taxable profits needs to be aligned with economic activities and value creation in the respective countries. Aggressive structures have to be disclosed and transfer pricing transactions needs to be properly documented and filed to give tax authorities more transparent information. 

TRANSFER PRICING & INTRA GROUP SERVICES

Almost every Multinational Enterprises Group (MNEG) must arrange for a wide scope of services to be provided and availed to the entities in its organization. Examples of these are commercial, administrative, financial, technical and legal services.

These services might also include management, coordination and control functions applicable within the whole group.

The cost of providing such services may be borne by the parent company; by a dedicated member entity such as a ‘group services center’ or by any other member of the group.

When realizing about the need of service, an independent company usually considers two options: (i) if the service needed should be hired from an external source; or (ii) if it can be done in-house.

The same exercise should be made by a group company in the way that the services can be performed in-house or received from a fellow member group company.

In light of the above, it is more likely than not that services like accounting and legal advice are hired from an external party; when services like central auditing, financing advice or staff training are performed internally.

In some cases, intragroup services arrangements are linked to arrangements for the transfer of property of tangible or intangible goods, or the license for the latters. Some other times, there are cases where know-how is obtained resulting from a services agreement. This cases are particularly complex when attempting to determine where the exact border lies between the transferring and licensing of property, on the one hand, and the transfer of a service on the other.

MAIN ISSUES

There two main issues in the transfer pricing analysis for intragroup services:

(i)                  Have intra group services been rendered?

Under the arm’s length principle, the answer to the above question depends on whether the activity provides a respective group member with economic or commercial value to enhance its commercial position.

This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed itself in-house.

If the activity is not one for which the independent enterprise would have been willing to pay or performed in-house, then the activity would ordinarily should be considered as an intra-group service under the arm’s length principle.

When a service is provided by a group member to meet identified need of one or more specific fellow group members, it is relatively straightforward to determine if an intragroup services has been provided. Commonly yes, because it is something that an independent enterprise would have hired from an independent party or would have provided for itself in-house.

A more complex analysis is required when a group member (usually the parent company or a regional holding company) performs an activity solely based on its ownership interest in one or more other group companies, i.e. in its capacity as shareholder.

This type of activity should give basis to justify any charges to the recipient companies and it may be referred to “shareholder activity” (which is different from the so called “stewardship activity” which is a broader term that would also include the provision of services like the ones provided by a coordination centre).

The following are examples of shareholder activity that should give rise to any charge to the recipient enterprise:

-          Costs of activities relating the juridical structure of the parent company itself, such as meetings of the shareholders of the parent; issuance of shares in the parent company and costs of the supervisory board;

-          Costs relating to reporting requirements of the parent company including the consolidation of reports; and

-          Costs of raising funds for the acquisition of its participation in the recipient company.

In contrast, if for example, a parent company raises funds on behalf of other group member enterprise which uses these funds to acquire a new company, then the parent company would be entitled to charge as it will be considered to be providing a service (e.g. broker or funds raiser).

Another type of these shareholder activity are the costs of managerial and control (monitoring) activities related to the management and protection of the investment such as participations.

Another issue regarding intra group services that is worth to comment on is the concept of “services on call”. This type of services require that the services provider dedicates and keep available specific resources (e.g. employees, equipment, etc.)  in order to be on a standby mode so that the potential recipient of the service can get the provision of said services on a faster manner. An intra-group service would be deemed to exist if to the extent that it would be reasonable to expect an independent enterprise in comparable circumstances to incur in some “stand-by” charges to ensure the availability of the services when the need for them materializes.

(ii)                How can the companies determine an arm’s length charge for said services?

Once determined that there has been an intragroup service rendered, it is necessary to verify that the consideration or price charged for said services was set in accordance to the principle of arm’s length.

This mean that the charge for the intragroup service should have been that which would have been made an accepted by independent enterprises in comparable circumstances.

To identify the amount (if any) that was charged to the recipient of the service, the tax authority will need to identify what arrangements (if any) have actually been put in place between the associated enterprises to facilitate the charge made for the provision of the service between them.

There are certain cases where the multinational enterprises group uses the “direct charge method. This method is where the associated enterprises are charged for specific services, in those cases where the arrangements can be easily identified.

Direct charge method can certainly and clearly be used where there are specific services provided by a group member whose core business is providing these services to independent parties as well.

But direct charge method is not always feasible to apply and MNEG have to incur in alternative methods when dealing with services provided by a parent company or group member service centre.

In these cases, the practice of MNEG for charging for intragroup services is often to make arrangements that are either (i) readily identifiable but not based on a direct-charge method; or (ii) not readily identifiable and either incorporated into the charge for other transfers allocated amongst group members in same basis or, in some cases, not allocated amongst group members at all.

When calculating the arm’s length consideration the matter should be considered from both the perspective of the services provider and the services recipient.

In this respect, relevant considerations include the value of the service for the recipient and how much comparable independent enterprise would be prepared to pay for that service in comparable circumstances as well as the costs incurred by the services provider, considering that a services provider will most likely provide the service for a consideration higher than its cost, so that it can make a profit out of it.

The method to be used to determine the arm’s length price should be one that has the support of the OECD thorough it transfer pricing guidelines, such as the CUP (Comparable Uncontrolled Price) or the Cost Plus Method.

It may be required the elaboration of a functional analysis of then various members of the group in order to establish the relationship between the relevant services and the relationship between the relevant services and the member’s activities and performance.

In addition, it may be necessary to consider not only the impact (immediate impact) of a service, but also its long-term effect, bearing in mind that some costs will never actually produce benefits that were reasonably expected when they were incurred into.

Determining the method will depend on if the charge is such as it results in a profit for the service provider. As said before, in an arm’s length deal, an independent provider would normally seek to charge for services in a way as to generate profit rather than providing the services merely at cost.

The economic alternatives available to the recipient of the services also need to be considered.

In addition, sometimes the market value of intra-group services is not greater than the costs incurred by the provider. This could happen when the services are not within the ordinary scope of activities of the provider, but they are still offered incidentally as a convenience for the MNEG.

REFORM OF FIFA’S PLAYERS’ AGENTS REGULATION SYSTEM

The topic of Sports Law is quite interesting and new for me. Since 2013, I have been involved in advising a company about certain transactions regarding the intermediation in the transfer of football players. These transactions fall under the scope of regulation of the Fédération Internationale de Football Association (FIFA).

New regulations on working with intermediaries replaced the FIFA Players’ Agents Regulations that have been so far regulating these activities within the transfer of football players. These new regulations introduce a new approach based on the concept of intermediaries and came into force on April 1st, 2015.

The immediate consequence is that now, individuals and companies wishing to conduct any intermediary activity as defined by FIFA Regulations, will be able to do so without being FIFA Registered Agents (in fact this register will no longer exist).

These changes have as key elements:

a) Transparency: full disclosure and publication of remuneration made to intermediaries as a result of transactions involving football players.

b) Protection of minors: non-payment of commission if the player concerned is a minor.

c) Payment of intermediary fees: the regulations recommend that fees to be paid to intermediaries are limited to 3% of the player’s gross basic income or value of the transfer and that there is full disclosure on these payments, identifying the intermediary, the paying entity and the percentage paid to the intermediary.

The new approach does not regulate the access to the activity. It provides a framework for tighter control and supervision of the transactions relating to transfer of football players in order to enhance transparency.

This approach includes:

1. a set of minimum standards to be introduced by the Football Associations of the FIFA Member Countries; and 

2. a registration system for intermediaries who represent players and / or clubs in concluding: (i) employment contracts and (ii) transfer agreements.

3. the deposit before the association system of contracts concluded between intermediaries and players or clubs. This includes renegotiation of an employment contract.

Regarding the above points, the only Football Association that has so far included these new FIFA recommendations is the English. These changes will have retrospective effect, hence, any transaction involving English football players and / or clubs and the intermediary involved (regardless the nationality) will also have to be registered before the English Football Association.

In this sense, the registration system for intermediaries, as mentioned, will be open to individuals and companies. Individuals wishing to register a company as intermediary will have to register themselves first in order to have access to register the company.

Registration will involve the payment of fees and annual renewal  (500 GBP + VAT registration fee and 250 GBP +VAT for the annual renewal, in the case of England). The English registration system is on-line on the following link: https://wholegame.thefa.com

In my opinion, foreseeable consequences of the implementation of these new FIFA recommendations by Member States Associations are not only the full disclosure of intermediaries’ details, remunerations, contracts, etc., but also the possibility that Football Associations will share with national Tax Authorities, following the worldwide trend on transparency.

SLR

Understanding Tax Havens

Tax havens are also known as financial centers, secrecy jurisdictions, and offshore jurisdictions, among other given names. Tax havens can be whole countries, certain administrative dependencies of bigger countries, special tax regimes within a country’s tax system or even some areas within countries boundaries. In fact, and quite surprising is that several experts and professionals among the tax industry state that the City of London is a tax haven itself.

These territories and countries offer to foreign investors an environment with zero or nominal taxation which is usually coupled with a reduction in regulatory or administrative constraints.  The activity is usually not subject to information exchange because, for example, of strict bank secrecy provisions.

Having said the above, there should be made a distinction between countries that themselves are tax havens and those that can have, within its taxation systems, a potentially harmful tax regime.

This latter countries are those able to finance their public services with zero or nominal income taxes, i.e. which raise significant revenues from their income tax but whose tax system has features constituting harmful tax competition.

On the other hand, countries that deliberately open themselves as a refuge for non-resident investors to escape from tax liability in their country of residence.

In the latter case, these countries are actively contributing to the erosion of income tax revenues in other countries.  For that reason, they are very unlikely to join the OECD and worldwide efforts in curbing harmful tax competition. 

By contrast, in the first case, a country that has significant amount of revenues which are at risk from the spread of harmful tax competition, it is more likely to agree on concerted action to curb this practices.

In order to identify either a tax haven or a potentially harmful tax regime, it is necessary to conduct an evaluation.

The absence of tax or a low effective tax rate on the relevant income is the starting point of any evaluation. 

Zero or only nominal taxation combined with the fact that a country offers itself as a place, or is perceived to be a place, to be used by non-residents to escape tax in their country of residence may be sufficient to classify that jurisdiction as a tax haven.  Similarly, zero or nominal taxation combined with serious limitations on the ability of other countries to obtain information from that country for tax purposes would typically identify a tax haven. 

Regarding those preferential tax regimes, some key factors, other than zero or low effective tax rates on the relevant income, include: whether the regime is restricted to non-residents and whether it is otherwise isolated from the domestic economy i.e., ring-fencing, non-transparency and a lack of access to information on taxpayers benefiting from a preferential tax regime.

Another key factor to identify a tax haven is the absence of a statutory requirement of substantial activity to be performed in the country. This lack of requirement will suggest that this  jurisdiction may be attempting to attract investment or transactions that are purely tax driven. These transactions may be booked in the substance-less jurisdiction  without the requirement of adding value so that there is little  or zero real activity, i.e. these jurisdictions are essentially “booking centers”.

SLR

TEQUILA BEPS

MEXICAN INCOME TAX LAW 2014 - REFORMS APPLICABLE TO DEDUCTIONS OF INTRA GROUP PAYMENTS

According to the latest tax reform introduced by the Government of Enrique Peña Nieto in January of this year, certain payments realized within related parties are not allowed as deductions according to the Mexican Income Tax Law (MITL).

Before the reform to the MITL, when a company made payments to its foreign holding company or to a subsidiary for any concept, sai

d payment were fully deductible from the taxable income of the payer.

However, changes introduced to Article 28. XXXI have limited this allowance, and nowadays, payments made by a resident company to a foreign vertically related company, i.e. that has its control (holding company) or that is controlled by it (subsidiary), or payments deemed as passive income for the receiving party i.e. dividends, interests or royalties. 

In addition to the above, the payee has to be among the following concepts:

- The foreign company is considered transparent for tax purposes according to Article 176 of the MITL i.e. an entity subject to the special tax regime applicable to low tax entities and territories named REFIPRE. This will not be applicable whenever the shareholders or partners of the foreign entity are fully subject to an income tax for their income received from the foreign entity, and when the payment made by the Mexican company is according to the arm’s length principle.

- That the amount paid has no tax consequences in the country or territory where the payment is received.

- The payment is not considered as taxable income for the payee according to the applicable tax law of its country of residence i.e. a possible mismatch according to BEPS Action Plan 2.

For the interpretation of this article, it must be considered as payment any amount accrued in favor of another party creditor or payee.

Finally, the amounts deemed as not deductible will have to be considered as for the fiscal year when is effectively paid and not in the fiscal year when it was accounted as cost of goods sold.

The Arm’s Length Principle

The Arm’s Length Principle is the condition aiming that the parties to a transaction treat each other as independent and on an equal terms and conditions

It is broadly used in business law to establish equitable conditions to an agreement that will stand up to legal and tax scrutiny, even when the parties involved are related.

The arm’s length principle requires that any compensation happening between companies of the same group have the same economic value as if it has happen between unrelated parties.

It’s easier said than done. The actual determination and implementation of the arm’s length principle is highly complex and must consider diverse important factors that can influence and determine the fair market value of the compensation including the type of transaction under analysis, the amount of the payment, the form of payment, the time frame for the payment as well as the economic and regulatory environment surrounding the transaction.

The Organisation for Economic Co-operation and development (OECD) has included in its model of tax convention for avoiding double international taxation and promote the exchange of information, in the Article 9, the provision of the Arm’s Length principle when establishing that in such cases where an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or when the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

The above serves the purpose of providing It provides the legal framework for tax authorities and for enterprises and multi-national companies I order to avoid double taxation conflicts and get the proper taxes paid at the fairest rate.

TENDENCIES ON GLOBAL TAX TRANSPARENCY

Since the last couple of years, there has been strong tendency towards tax transparency around the world, with the United States (U.S.) and the G20 Countries as protagonists.

Some of the most important developments so far are the tax information exchange agreements (TIEAs), the Foreign Account Tax Compliance Act (FATCA), the Intergovernmental Agreements (IGAs) and the adoption of a system for automatic exchange of information (EOI).

Under EOI systems and procedures, Tax and Finance Authorities can obtain information through requests made to Authorities in another country or even automatically. This will depend on the kind of agreement that the relevant countries have entered into. The character of the information requested will also determine the procedure to be followed by the requesting Authority and only in those situations where it has strong belief that its local legislation has been breached by certain tax payer.

Once the requesting Authority has submitted its request, the providing Authority will process it in accordance to the IGA or EOI in place. Once the information is furnished, the providing Authority will be granted with reciprocity by receiving the same type of information from the requesting Authority, without using banking secrecy as a reason not to provide such information.

Besides the mechanisms where Authorities are the main characters, countries around the world will also be relying more and more on financial institutions (FI) in order for these to act as cross-border tax agents. FI are, above all, required to provide certain financial information regarding the ultimate beneficial owner (UBO) holding an account or more with them.

As per FATCA, its worth to say that is a mechanism impulsed by the Internal Revenue Service (IRS) of the U.S. having as main objective gathering information of U.S. taxpayers holding foreign accounts. This applies to U.S. passport holders or citizens with green card. These individuals are obliged to report all their financial information to IRS, including details regarding any offshore structure.

Since July 1^st, 2014, any foreign FI (FFI) must be registered with the IRS and report certain financial details regarding their U.S. clients’ accounts. In case that a FFI fails to provide such information, the IRS foresees penalties based on a 30% withholding tax on diverse U.S. sourced payments including bank deposit and other interests, dividends and proceeds from U.S. debt or securities.

In addition, the U.S. government has imposed penalties for those FFI assisting individuals in tax evasion. Such are the cases of UBS fined with $780 Million, Credit Suisse Group AG with $2.6 Billion and the potential $9 Billion to BNP Paribas.

SLR