On September 5, 2018, the participants of the 72nd annual IFA Congress in Seoul, South Korea listened to OECD and other top tax officials discuss the most significant international tax developments over the past couple of months, including U.S. tax reform, digitalization of the economy, EU state aid cases, and country-by-country (CbC) reporting.
Editor’s Note: a member of the BEPS global currents team attended all the panel events on day three, except for a seminar on use of tax incentives to attract foreign direct investments without eroding the tax base.
Morning Panel: IFA/OECD Developments
The morning panel session focused on withholding taxes in the era of BEPS and the digital economy. The panel discussed the ongoing work at the OECD multilateral level, as well as the European Commission (EC) March 2018 proposed directives on taxation of the digital economy.
Editor’s Note: The EC proposes to establish the common system of a digital services tax (DST) of 3% on revenues resulting from the supply of certain digital services by certain entities. The DST would target revenues from the supply of digital services where users contribute significantly to the process of value creation. Only certain entities would qualify as taxable persons for the purposes of DST, regardless of whether they are established in an EU member state or in a non-EU jurisdiction.
The panel discussion began with Pascal Saint Amans of the OECD talking about the OECD’s July 2018 BEPS project implementation progress report provided to the G20 finance ministers, following the OECD June 2018 BEPS inclusive framework meeting in Lima, Peru.
Regarding the ongoing BEPS Action 6 country peer reviews on preventing treaty abuse, Pascal said that the OECD is working on a template for the peer review reports by January 2019.
Regarding exchanges of CbC report information that began in June 2018, Pascal said that the OECD does not yet have feedback from tax authorities on the initial CbC exchanges. Also, Pascal said that the International Compliance Assurance Program (ICAP) on CbC reporting is still in the pilot phase, which is set to be completed by mid-2019. However, the ICAP may be rolled out soon to include additional participating multinationals.
Editor’s Note: the ICAP is a voluntary program open for multinationals to have cooperative multilateral transfer pricing engagements with tax administrations. The ICAP provides a multilateral risk assessment of transfer pricing and permanent establishment (PE) risks, to provide increased certainty for both multinationals and tax administrations.
The panel then discussed the implementation of the BEPS multilateral instrument (MLI), focusing on arbitration provisions. The MLI entered into force on July 1, 2018, following the deposit of five instruments of ratification by participating jurisdictions, with dozens more expected by the end of 2018. A slide in the presentation was shown by the panel, containing a breakdown of the 28 jurisdictions that have opted-in so far to implement the arbitration provisions of the MLI, including jurisdictions selecting final offer, otherwise known as “baseball style” arbitration, and those selecting the independent opinion arbitration approach.
Pascal then announced the release of the OECD’s 2018 updated guide on country tax policy reforms for 38 countries, providing an overview of trends in the report, which cover personal income tax, corporate income tax, VAT/GST, among others. The 2018 guide depicts the widespread implementation of BEPS project measures.
Pascal touched on the OECD multilateral agreement to exchange CbC reports, reached in 2015, which includes provisions on confidentiality. He said there are positive and negative reasons to maintaining confidentiality.
Pascal said that the OECD is not considering additional dispute resolution mechanisms under BEPS Action 14 that would be just short of tax arbitration, such as mediation.
The panel then shifted to a discussion of the 2017 U.S. tax reform, and several of its international tax measures. Pam Olson of PwC said that following the 2017 U.S. tax reform, only five countries (Chile, Ireland, Israel, Mexico, and South Korea) still have a worldwide corporate international tax system. She then walked through a high-level calculation of the U.S. global intangible low-taxed income (GILTI), and the base erosion and anti-abuse tax (BEAT). She said that the BEAT rules are broad in their application, and can also pick up intercompany payments covered by advanced pricing agreements (APAs).
Shifting to the new U.S. interest deduction limitation rules in Section 163(j), Pam said that the rules may be amended by Congress in the coming years after they shift to a stricter earnings before interest and taxes (EBIT) limitation.
The panel then discussed several examples of recent unilateral tax measures that are likely to violate multilateral consensus, such as the diverted profits tax (DPT) rules introduced by Australia and the U.K., as well as India’s equilization levy.
The panel focused on the interaction of the U.S. BEAT rules with the non-discrimination provisions in Article 24 of the 2016 U.S. Model Tax Treaty, along with possible WTO issues resulting from BEAT and foreign-derived intangible income (FDII). A panelist said that the U.S. Treasury position on FDII under BEPS Action 5 is that is not a harmful tax practice, and has a different purpose and effect from a harmful tax practice regime.
Pascal said that the U.S. BEAT rules represent an “earthquake” in the global transfer pricing arena.
The panel then covered tax challenges arising from digitalization of the economy, focusing on the OECD’s March 2018 interim report. David Bradbury of the OECD said that the 2018 interim report was released a month earlier than the OECD had originally planned, based on requests from the G20. Bradbury said that the OECD is making progress on reaching the 2020 goal of multilateral consensus on digital tax measures. Also, the U.S. has become more involved in multilateral discussions.
Akhilesh Ranjan, a senior Indian tax official, told the audience that his country has indicated its preference to the OECD of reaching multilateral consensus on digital taxation, despite his country being an early adopter of unilateral measures in 2016 via the equalization levy. He added that the ongoing OECD discussions on digital taxes should lead to broader tax nexus rules, and profit allocation rules that are not constrained by the arm’s length standard.
With respect to intangibles, Akhilesh said that the BEPS Action 8 report did not go far enough in defining which intangibles are covered, but feels that U.S. tax reform comes closer to a broader definition for transfer pricing purposes.
Pascal said that the ongoing multilateral digital tax discussions at the OECD are complex, and feels that the work on digital taxes will fix the defects of the BEPS Action 7 report on profit attribution rules, before shifting to defining tax nexus.
Afternoon Panel: IFA/EU Developments
The afternoon seminar focused on recent notable EU international tax developments, including EU state cases and tax intermediary planning transparency, among others.
The panel mentioned the June 2018 U.S. Supreme Court ruling in the Wayfair case, and how it may impact ongoing EU digital tax proposal discussions. Public international law requires a “genuine link” for jurisdictions to tax transactions (i.e., sufficient nexus). A genuine link does not necessarily require physical presence within a territory to establish nexus to tax.
A panelist said that if the EU DST is enacted as currently proposed, EU member states will be prohibited from introducing related interim digital tax measures. A former U.S. Treasury official on the panel, Phil West, discussed the shortcomings of the DST proposals, and said that it is improper for the EU to apply the U.S. Wayfair decision as part of its DST negotiation, because the Wayfair case was decided in the context of consumption, not income taxes. He said there is also the issue of whether the DST would be creditable in the U.S.
The panel said that an improvised DST provision, which would serve as a temporary tax, can create double taxation, not only damaging businesses, but also economies. A significant part of the DST will ultimately be passed on to other businesses and consumers buying digital services.
The panel then walked through an example of allocating profits for Google under the DST, based on Google’s public financial filings in Germany.
West raised the question during the panel regarding whether now is the time for multilateral discussions at the OECD on whether to shift transfer pricing rules to a formulary apportionment-type system, instead of pushing forward with the DST.
Two-thirds of the participants attending the panel discussion said they feel that current international tax rules are insufficient to effectively tax the digital economy. In addition, approximately 71% of the audience said that the EU should not proceed with its digital tax proposals prior to a multilateral agreement being reached at the OECD level.
A panelist said that the business perspective is that transfer pricing within the boundaries of the OECD transfer pricing guidelines should not be punishable under EU state aid rules. West said that long-settled international tax standards are being up-ended by the recent EU state aid rulings that rely on non-tax legal principles. Consequently, application of the EU state aid rules implies considerable legal uncertainty. Unlike U.S. courts that tend to respect application of tax standards, West said that EU courts should not decide tax cases in favor of EU tax authorities that are looking to increase revenue. Also, multinational companies may be encouraged to place their activity outside the EU.
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