The 71st Congress of the International Fiscal Association (IFA) was held in Rio de Janeiro between August 27 and September 1, 2017. Thomson Reuters was proud to be a Gold sponsor at the Congress, showcasing how we can help businesses navigate BEPS compliance.
Understandably, BEPS was the major topic at the Congress, but other topics that were discussed included:
- The future of transfer pricing.
- Fragmentation of contracts and taxation.
- Automatic exchange of information.
- Cost-sharing and cost contribution agreements.
- APAs and international tax impacts.
- International indirect taxation of enterprise services.
- International tax impacts of foreign exchange effects.
IFA’s Porus Kaka and OECD’s Pascal Saint-Amans talk with Thomson Reuters about BEPS
Kaka said he considered it was huge achievement to get the BEPS MLI up and running in the timeframe it took. He acknowledged however that there were still a few loose ends to tie up, especially getting the U.S. on board. Brian Peccarelli, President of Tax and Accounting at Thomson Reuters, said the reality had set in with BEPS (including of course CbC reporting, etc.) and companies were now looking actively at how to implement it and the issues that relate to that. Companies can no longer really wait and see.
The IFA President said he was personally against public CbC reporting. He said other tax details are not publicly disclosed, so why should public CbC reporting be any different. Kaka said that with respect, the debate on this in the public arena was not necessarily very well informed and tends to get emotional and not discuss the reporting issues themselves. Saint-Amans said he would prefer that countries stick to the OECD agreement on CbC reporting that it not be public, but he acknowledged that in the long term, it will be difficult to resist the pressure for public reporting. He cautioned that too early public CbC reporting could jeopardise the usefulness of CbC reports.
The digital economy was a major talking point. BEPS Action 1 seeks to address this but no consensus has been reached on this. This was recognised as a problem by both Kaka and Saint-Amans. The IFA President said countries were starting to go their own way with taxes, like the Diverted Profits Tax (DPT) in the U.K. and Australia, and India’s new equalisation levy. He said the digital economy business model has changed and the tax laws must reflect that. Saint-Amans acknowledged that digital economy issues were proving very difficult to come to grips with and was disappointed that the OECD had not reached consensus on Action 1 to avoid unilateral actions being taken that had happened with companies such as Apple and Google and others. Saint-Amans said the major issue confronting taxing authorities was – how do we tax digital companies that do massive business in a country, but have no (or very little) presence in that country? He said an OECD report on the digital economy was due in Spring 2018 and he was optimistic that work would move ahead on this major issue.
As a sidenote, Saint-Amans said the OECD also needed to do work on things such as digital disruption like blockchain. Brian Peccarelli said the conversation with customers about blockchain is starting to pick up, and some are even wanting to work jointly with Thomson Reuters on it. Nonetheless, it is still very early days in the blockchain story.
Other BEPS snippets from the Congress
Some other interesting snippets from the Congress on BEPS and related issues included:
- IFA President Porus Kaka said Rio was the first time the IFA Congress looked at BEPS as its main subject,
- BEPS implementation so far – some key figures:
- Action 5 (Countering harmful tax practices): 125 preferential regimes have been identified; 12+ harmful IP regimes have already been abolished or amended; Information on 6,000+ rulings has already been exchanged.
- Action 6 (Preventing treaty abuse): All 70 jurisdictions covered by the MLI have adopted the Principal Purpose test (PPT); 1,100+ treaties will soon include a PPT.
- Action 13 (Re-examine transfer pricing documentation): 55 jurisdictions have taken steps to implement CbC filing obligations; there are 65+ CbC MCAA signatories; 850+ bilateral exchange relations are active.
- Action 14 (Dispute Resolution): 60+ peer reviews are scheduled; 6 jurisdictions have already been positively reviewed; 27 jurisdictions have implemented MAP arbitration.
- The OECD’s Pascal Saint-Amans said the digital economy was still a matter to be considered in detail by the BEPS package. He said Action 1 on the digital economy had no consensus beyond VAT/GST.
- The BEPS project changes transfer pricing rules from a focus on contract terms to the conduct of the parties.
- The time is now for creating an international tax court to handle disputes. There is an obligation to resolve treaty conflicts in good faith as a general international law principle.
- Multilateral treaties require coherence and coordination in their interpretation. It will be impossible to prevent BEPS even with coherent rules if there is no coherence in interpretation.
- The use of formulary apportionment is more genuine than the arm’s length approach.
- CbC reporting opens the door to the use of formulary apportionment by tax authorities.
- Most jurisdictions (both developed and developing) are committed to the adoption of the BEPS project outcomes – at least to some extent.
- Uruguay has however raised a concern about the BEPS project impacting a jurisdiction’s tax sovereignty.
- BEPS and EU Anti-Tax Avoidance Directive (ATAD)-type rules will have a substantial impact on source country base erosion planning to reduce tax – depending on the degree to which countries adopt BEPS. [Note that in May this year, ATAD 2 extended the scope of ATAD to hybrid mismatches involving third (i.e., non-EU) countries.]
- In a survey, over 90% of IFA Rio attendees feel:
- That more work is needed by the OECD to properly address transfer pricing issues.
- That BEPS Action 5 automatic exchanges will not stop use of APAs.
That future transfer pricing rules will adequately address intangible transactions. [It was noted that U.S. courts keep struggling with the application of transfer pricing rules on intangibles.]
- Over 80% of attendees feel the future of transfer pricing is not all about assets, functions and risks.
- Some 40% of IFA Rio attendees say they feel their country has insufficiently been involved in BEPS.
- It has been suggested that a deficiency of the BEPS project has been the lack of deep analysis on what creates value. There is concern of uncertainty on the perspective that each tax authority/judge may assert.
- Brazil has not yet signed the MLI, but intends to do so.
- Brazil’s fixed margin system is the only significantly divergent transfer pricing regime compared to OECD standards.
- The European Commission claims that 70% of profit shifting would be eliminated by adoption of CCCTB (Common Consolidated Corporate Tax Base) by the EU. In addition, it is claimed that the administrative burden of compliance costs (different tax jurisdictions in the EU and transfer pricing rules) would be reduced by 8%.
- Issues with the CCCTB include: (1) its geographical scope being the EU (the BEPS project covers a larger geographical scope to address profit shifting); (2) difficulty in getting all parties to agree on one single formula; (3) CCCTB is unconnected to actual value creation.
- India Ministry of Finance official said India is one of the few countries that is willing to adopt as many BEPS measures as possible.
- India Ministry of Finance official said India’s equalisation levy is an interim measure due to the lack of consensus on BEPS Action 1, although it may be expanded. The levy is a withholding on cross-border payments to non-residents – it is set at 6% of the gross payment. There is no levy if the recipient has a PE in India and the payment in question is effectively connected with the PE. With the levy, there is an underlying option – declare the PE and pay tax on a net basis, or pay the levy on a gross basis.