On July 12, 2016, the OECD Centre for Tax Policy and Administration held its second round of tax talks, which included details regarding the BEPS discussion drafts, recent country-by-country reporting (CbCR) guidance, and standardized XML Schema for the exchange of tax rulings and the Common Reporting Standard (CRS). The speakers included Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, Mayra Lucas, Advisor, Transfer Pricing Unit, Melinda Brown, also an Advisor in the Transfer Pricing Unit, and Achim Pross, Head of International Co-operation and Tax Administration.
Pascal spoke about several new BEPS discussion drafts, including changes to Chapter IX of the TP Guidelines (Actions 8-10), attribution of profits to a permanent establishment (PE) (Action 7), revised guidance on the profit split method (Actions 8-10), and interest deductibility (Action 4).
Mayra spoke in detail about the changes to Chapter IX of the TP Guidelines and the attribution of profits to a PE:
Conforming changes to Chapter IX of the TP Guidelines
The invitation for public review was published on July 4, 2016, the purpose of which was to identify inconsistencies. The deadline for comments is August 16, 2016
Attribution of profits to a PE
The OECD issued this draft following changes to the definition of a PE and of the TP guidelines. The draft considers the amount of profits that should be attributable to a PE, including a dependent agent PE (i.e., commissionaires) and fixed PEs. The public consultation will occur on October 11-12, 2016.
Melinda spoke about the guidance on the profit split method:
Revised guidance on profit split method
This draft was released on July 4, 2016, and the public consultation will occur on October 11-12, 2016. The guidance recommends that the most appropriate method should be applied. There are two ways to split profits, actual profits and anticipated profits. Profit split is likely to be the most appropriate method for (1) unique and valuable contributions and (2) highly integrated operations.
Achim talked about the discussion draft on interest deductibility:
The draft on interest deductibility was released on July 11, 2016, with a deadline for comments of August 16, 2016. The draft discusses the group ratio rule, which allows entities to deduct interest up to the net interest/EBITDA ratio of its worldwide group. Achim said that there will be an additional discussion draft focusing on insurance and banking.
The draft says that further work needs to be conducted on (i) the calculation of net third-party interest expense; (ii) the calculation of group-EBITDA; and (iii) the impact of losses.
For (i) and (ii) above, the draft recommends a consistent approach based on the group’s consolidated financial statements.
Achim also spoke about CbCR guidance, which includes:
- Transitional filing options for multinationals (i.e., parent surrogate filing).
- Application of CbC reporting to investment funds.
- Application of CbC reporting to partnerships.
- Impact of currency fluctuations on the agreed €750 million filing threshold.
In addition to the above, the OECD has released standardized IT-format (XML Schema) for the exchange of tax rulings between jurisdictions. (Action 5) The categories of rulings to which this applies includes the following:
- Rulings related to preferential regimes.
- Unilateral advance pricing agreements (APAs) and other TP rulings.
- Rulings giving a unilateral downward adjustment.
- PE rulings.
- Related party conduit rulings.
- Other rulings subsequently agreed to give rise to BEPS concerns.
These rulings are exchanged with:
- Countries of residence of related parties with a transaction covered by the ruling.
- Country of immediate parent company.
- Country of ultimate parent company.
The OECD has also released a standardized IT-format (XML Schema) and a related user guide for providing structured feedback on exchanged CRS information. The first exchanges under CRS are scheduled for September 2017.
Other Ongoing Projects and Next Steps
Pascal mentioned that during the week of August 8, 2016, the OECD will release a discussion draft on branch mismatch arrangements. There is also ongoing work related to hard-to-value intangibles and low value-adding intra-group services. With regard to tax transparency, the OECD has developed objective criteria to identify non-cooperative jurisdictions, including the following:
- Implementation of the Exchange of Information on Request Standard (EOIR) – at least a “largely compliant” rating.
- Implementation of the Automatic Exchange of Financial Account Information Standard (AEOI) – committed to implement CRS and begin exchanges by 2018.
- Exchange network – Participation in the Multilateral Convention on Mutual Administrative Assistance in Tax Matters or a sufficiently broad exchange network that provides for EOIR and AEOI.
A cooperative jurisdiction will meet at least two of the above criteria.
As for next steps, there will be a G20 Finance Ministers meeting in July and a Leaders’ Summit in September.
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