On March 30, 2016, Portugal enacted its 2016 Budget (the “Budget) via Law No. 7-A/2016, which amends its existing Patent Box regime to be compliant with the OECD BEPS Action 5 recommendations, introduces country-by-country (CbC) reporting in line with the BEPS Action 13 recommendations, and implements the OECD’s Common Reporting Standard (CRS) regarding the automatic exchange of information. These Budget measures do not appear to have changed from the proposals presented to Portugal’s Parliament on February 5, 2016.
The Budget follows Portugal’s February 29, 2016 implementation of anti-hybrid amendments to the EU Parent-Subsidiary Directive (2015/121) via Law No. 5/2016, which entered into force retroactively as from January 1, 2016.
We address each of the Budget measures referenced above in turn, which entered into force following their publication (i.e. March 31, 2016).
CbC Reporting – BEPS Action 13
Article 134 of the Budget amends the Corporate Income Tax Code (CIT) by adding Article 121-A to introduce CbC reporting. Resident entities with annual global consolidated income equal to or greater than €750 million would need to prepare a statement of financial and tax information by country or tax jurisdiction for each tax period.
However, the Budget does not mention whether Portugal intends to also implement master and local files as part of the three-tiered documentation included in the OECD BEPS Action 13 recommendations.
Specifically, the CbC report will have to include the following indicators of economic activity for each country in which a Portuguese multinational group member conducts operations (new Article 121-A(5) of the CIT):
- Gross income earned from transactions with related and third parties;
- Profit before corporate tax and tax on profits of identical or similar nature to the Portuguese corporate income tax;
- Amount due in Portuguese corporate income tax or income taxes, of identical or similar nature to the Portuguese corporate income tax, including withholding taxes;
- Amount paid in Portuguese corporate income tax or income taxes, of identical or similar nature to the Portuguese corporate income tax, including withholding taxes;
- Capital and other items of equity, at the end of the tax period;
- Retained earnings;
- Number of full-time workers, or equivalent, at the end of the tax period;
- Net book value of tangible assets, other than cash values or cash equivalents;
- List of entities resident in each country or tax jurisdiction, including permanent establishments (PEs), and indication of the main activities undertaken by each; and
- Other relevant information and, if applicable, an explanation of the data included.
The CbC reporting group will consist of the following entities (new Article 121-A(6) of the CIT):
- Any company included in the consolidated financial statements, or that would be included if the securities representing the company’s capital are traded on a regulated market;
- Any company that has been excluded from the consolidated financial statements based on size or materiality; and
- Any PE of the companies described above.
Any entity with a tax presence in Portugal through a legal entity or a PE, and that is a member of a group in which at least one entity is required to submit a CbC report, has to inform the Portuguese tax authorities which group entity is the reporting entity, pursuant to new Article 121-A(7) of the CIT.
Automatic Exchange of CbC Report Information. On January 27, 2016, Portugal was one of 31 countries to sign the OECD Multilateral Competent Authority Agreement for the automatic exchange of Country-by-Country (CbC) reports (the “MCAA”). Under the MCAA, signatories may exchange CbC reports with other signatories if they have CbC reporting requirements in place and are a party to the OECD Convention on Mutual Administrative Assistance in Tax Matters.
Patent Box – BEPS Action 5
Specifically, the amendments will abolish the current Patent Box regime as of June 30, 2016, with grandfather provisions for patents and industrial designs acquired by the foregoing date to maintain the benefits of the current regime until June 30, 2021
The new regime will limit benefits in proportion to incurred eligible expenses according to the following formula, with a 30% uplift for eligible R&D expenses or from the acquisition of patents or other industrial property rights:
- (Assets protected by IP x Total Income) / Total expenditures incurred to develop the IP derived from the active IP tax benefits = eligible IP income
BEPS Action 5 background. The OECD BEPS Action 5 recommendations focus on countering harmful tax practices more effectively by taking into consideration preferential regimes that can be used to facilitate BEPS, among other things.
The OECD nexus approach allows a taxpayer to benefit from a patent box regime only to the extent that the taxpayer incurred qualifying research and development (R&D) expenditures that gave rise to the patent box income. It uses expenditure as a proxy for activity and builds on the principle that, because patent box regimes are designed to encourage R&D activities and to foster growth and employment, a substantial activity requirement should ensure that taxpayers benefiting from these regimes engaged in such activities and incurred actual expenditures on these activities.
Article 188 of the Budget implements into national law Directive 2014/107/EU, which includes the automatic exchange of information in the field of taxation and the exchange of information for financial reporting in compliance with the CRS.
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