The 71st Congress of the International Fiscal Association (IFA) was held in Rio de Janeiro on August 27-September 1, 2017. Thomson Reuters was proud to be a Gold sponsor at the Congress, showcasing how we can help businesses navigate BEPS compliance.
Thomson Reuters hosted an expert panel discussion during the Congress on the impact the OECD’s BEPS Multilateral Instrument (MLI) and country-by-country (CbC) reporting are expected to have on taxpayers.
In 2015, the OECD published the final recommendations for the BEPS project.
Under BEPS Action 13, the OECD was charged with the development of rules regarding transfer pricing documentation to enhance transparency for tax administrations. The Action 13 final report recommends a new three-tiered standardized approach to documentation, which includes CbC reporting.
Under Action 15, the OECD analyzed the possibility of developing a MLI to allow countries to amend their bilateral tax treaties to implement the tax treaty-related BEPS recommendations. About 100 countries participated in drafting the MLI, and in November 2016, the OECD released the MLI to the public.
In June 2017, the OECD hosted the first signing ceremony for the MLI. Sixty-eight countries and jurisdictions signed the MLI and supplied the OECD with provisional lists of their notifications and reservations. Approximately 1,100 tax treaties could be amended based on this development. The OECD expects an additional 25 to 30 countries to sign the MLI in 2017.
With more than 70 jurisdictions having already signed the MLI and ratification procedures underway, taxpayers will need to be prepared to evaluate the possible effect on their operations from changes that could take effect as soon as 2018, and more likely beginning in 2019.
MLI Reservations as a Concern
Dan Berman, a Principal with RSM US LLP in Boston, said that the large amount of country reservations on the MLI should not be a concern, because all income tax treaties (about 3,000) are different and not identical to OECD and U.N. model treaties. All treaties are negotiated individually, so they have differences. The U.S. has its own model, but not all U.S. treaties follow the U.S. model, depending on the tax system of the treaty counterparty. The MLI layers additional language that should be read alongside existing treaties.
Jesse Eggert, Principal with the Washington National Tax office of KPMG, was involving in drafting the MLI while at the OECD in 2015-2016, so he was not present for submission of MLI reservations and notifications in 2017. The MLI provisions are meant to be flexible for countries, as there were multiple ways to address tax issues that countries recognize. The MLI is meant to be complex, yet be flexible. Notifications are meant to ensure that any mismatches in MLI positions are addressed mechanically and not left to bilateral negotiations.
Jeremy Cape, a Tax Partner with Squire Patton Boggs in London, said that the MLI reservations will not bring down the MLI, but we may find ourselves at a point in two years on the MLI that the OECD did not envision originally.
Impact of MLI on Developing Countries
Mr. Eggert said that there is a growing trend to using subjective anti-abuse measures, such as in the MLI, that require more sophisticated country tax authorities, so capacity may become a problem for developing countries. While a fair number of developing countries may sign the MLI, there may be questions about their implementation.
Mr. Cape said that the delay of African countries in signing the MLI is due to other more pressing tax issues for them, including development of domestic tax rules and increasing sophistication of tax authorities. African countries feel that to address tax system issues does not mean that all MLI measures need to be implemented.
End of Bilateral Tax Treaties
Asked whether the MLI marks the end of bilateral tax treaties, Mr. Berman said that we have to see how the MLI develops, but no, because the MLI is not modifying tax treaties yet, and due to layering of interpretation of treaties with MLI provisions. Some countries may sign a protocol to their treaties to implement MLI provisions, so the MLI may become a streamlined way to update tax treaties. The MLI is structured only to modify existing tax treaties, not to serve as template for a treaty between countries that do not have a treaty.
Mr. Eggert said that the MLI can only modify existing tax treaties, so it cannot serve as a standalone treaty instrument. The MLI measures are targeted to address only BEPS project measures. The MLI will likely not be the last word on multilateralism in the tax treaty area, and it is not reasonable to expect it to replace bilateral tax treaties. Certain MLI provisions are subject to bilateral treaty negotiations for good reason.
Mr. Cape said that tax treaties are considered an egregious form of tax avoidance in African countries. Mr. Cape also said that tax treaties are odd, because they essentially say that domestic tax rules are insufficient to address transactions.
Consolidated Tax Treaties
Asked whether countries should follow the U.K. in preparing consolidated treaties that reflect their MLI modifications, Mr. Eggert said some countries may have to as part of their domestic ratification process for tax treaties. The more specific the guidance countries prepare on the impact of the MLI on their tax treaties, the better. Determining which treaty provisions the MLI affects is not rocket science. Mr. Eggert also said that bilateral negotiations between countries on MLI interpretation would be ideal.
Mr. Berman said that that maybe the U.K. should get together with other large treaty partners to agree on how the MLI will affect various treaties, instead of producing unilateral consolidated version that are not binding on the treaty partners.
Impact of U.S. Not Signing MLI
Mr. Eggert said that it would have been nice for the OECD if the U.S. had signed the MLI, but the U.S. already has many of the treaty anti-abuse provisions (e.g., limitation on benefits and treatment of dual resident companies) in its treaties that are fairly robust. The U.S. was not interested in the permanent establishment (PE) measures of the BEPS project. Also, it is difficult now for the U.S. to ratify any tax treaties, let alone a complicated multilateral treaty. The Obama Administration opposed the MLI, and the Trump Administration does not seem inclined to move in a multilateral position.
Mr. Berman said that the U.S. does not want the BEPS project PE provisions. The U.S. does not like subjective treaty tests such as the MLI’s principal purpose test (PPT). The U.S. tried a PPT approach once and it failed ratification in Congress, so it does not make sense for the U.S. to sign the MLI just for the arbitration provisions.
With respect to ongoing U.S. tax reform negotiations, Mr. Eggert said it is hard to predict if a shift to a territorial system in the U.S. would change its tax treaty positions, especially since no tax proposals have been released yet.
Impact of MLI on Taxpayers
Mr. Cape said that the MLI PPT is likely to affect his clients the most. Mr. Cape also said that ten to 15 years ago, you could structure some pretty aggressive tax avoidance positions through treaty shopping, which would take place through holding companies in certain jurisdictions with lower withholding rates. However, in recent years, Mr. Cape hesitates to sign on to a proposed tax structure where the PPT is present, as it is too risky. It is really hard to apply the PPT measures in his experience, but the subjectivity of the PPT rules is by design.
With respect to Latin America, Enrique Díaz Tong, TP Consulting associate and lawyer in Lima, said that the MLI is not a big issue at present, but CbC reporting is, as the latter rules are already in place. He added that you have to analyze figures as part of CbC report to ensure that filings have substance. One big issue for taxpayers is to file their CbC reports on time.
Mr. Berman said that clients have two main concerns on the MLI– intellectual property movement, and holding company structures, which BEPS is threatening to turn inside out. Each country has sovereignty to determine its own tax system and laws. There is a good likelihood that most BEPS project measures may turn into a book on a shelf, with no meaningful impact on tax systems.
Mr. Eggert said that countries are at various stages in implementing the BEPS project recommendations. While the PE provisions were not adopted uniformly via the MLI, they are causing a fair amount of concern for many clients, including on distribution structures and procurement activities that are underappreciated. Taxpayers want some degree of tax certainty. Taxpayer concern over the subjectivity of the MLI PPT measures will change over time as tax authorities get experience in applying the measures.
Thoroughness of BEPS Project
Asked whether the BEPS project should have covered any additional topics, Mr. Cape said that digital issues did get parked by BEPS project, as discussed at the IFA Rio Congress. The U.K. adopted the diverted profits tax (DPT) early on to address the perceived problem of tech giants generating substantial profits in the U.K. but not paying U.K. tax based on transaction structures. The DPT does seem to have an effect on these operations.
Mr. Eggert said that unilateral adoption of digital rules following the release of the BEPS Action1 report shows that there needs to be deeper discussions into digital issues. The OECD was originally supposed to revisit digital issues as part of its 2020 review, due to lack to general consensus by countries on how to address digital transactions, but is now attempting to address the issue sooner.
Mr. Tong said that the BEPS project is one of the best efforts worldwide to have a reasonable tax system in each country. Mr. Tong also said that documentation is critical, so will see how the BEPS rules play out over time.
Public CbC Reporting
Asked about their thoughts on a potential shift to public CbC reporting by the EU, and what their clients are saying, Mr. Eggert said that there is a general concern that publicity leads to potential for misinterpretation of complex tax issues. It is a challenging issue that requires a lot of thought, because it is not necessarily true that more sunlight (i.e., public CbC reporting) will lead to more principled results. Public CbC reporting represents a significant departure from agreed measures in the BEPS project.
Mr. Berman said that public disclosure of tax figures leads to disclosure of commercially sensitive information and trade secrets. This issue is already present in disclosure of transfer pricing comparability data, which contains trade secrets. This is not acceptable to U.S. multinationals, and likely also unacceptable for those in other countries. Tax authorities have to be careful with tax information that they receive at present. Public CbC reports may be misleading, without containing supporting information that explains results.