by Julie Martin
There appears to be no slow down in OECD activity even though work on the base erosion profit shifting (BEPS) deliverables is complete, Robert Stack, Treasury Deputy Assistant Secretary (International Tax Affairs) said January 21.
Speaking at a meeting of the DC bar in Washington, Stack said that the OECD is working on a number of projects, including responses to G20 requests to develop a plan to open up the BEPS process to more developing nations and to create a framework for monitoring the implementation of the BEPS project.
A plan will be presented next week to the OECD Committee on Fiscal Affairs (CFA) specifying that countries that agree to adopt the BEPS deliverables and minimum standards will be able to participate in the ongoing development of BEPS technical work on an equal footing, Stack said. If approved by the CFA, the plan will be presented to G20 finance ministers at their meeting in February.
Stack said the scope of the monitoring framework for BEPS implementation has not yet been developed. At a minimum, this will involve checking what laws are put into place and whether the BEPS minimum standards are being followed, Stack said.
He also assured the group that OECD transfer pricing work on profit splits will not result in any far-reaching changes; rather, the guidance will deal with the circumstances under which companies use profit splits, as well as mechanical issues. Similarly, he said that OECD work on attribution of profits to permanent establishments will “look like US practitioners would expect it to look.”
Stack said that he expected the OECD will produce more work on harmful tax practices. One outstanding question is how to broaden the identification of harmful tax practices now that more countries are involved in the BEPS process, he said.
Critical work is also being undertaken regarding how to handle exchange of tax rulings among tax administrations, he said.
Stack said that he did not expect any follow up work in 2016 on action 1, concerning the digital economy. There is no current appetite to create new deliverables, he said. Stack also said no new action in 2016 is likely on controlled foreign corporations, hybrid mismatches, or treaty abuse.
The OECD will be working on defining the group ratio for BEPS interest deduction limits, which will be key for countries that decide to use a low net interest/EBITDA ratio. He added that there is a broad agreement that the fixed ratio should be between 10 and 30 percent.
While the final BEPS guidance on interest deduction limits states that more work will be done to address risks posed by the banking and insurance industries, the US has asked countries to first consider if there really is an interest stripping problem from these highly regulated industries before work is undertaken to fix the problem, he said.
Stack also said there is “not a lot of appetite” within The OECD to take action against countries that act outside BEPS, such as the UK, which has adopted its diverted profits tax, and Australia, which has adopted its multinational anti-avoidance law.
Transfer pricing ex post returns
Michael McDonald, Financial Economist, US Treasury, noted that an important an issue on the agenda for 2016 and 2017, to be taken up as a part of transfer pricing work on financial transactions, is the question of how to allocate ex post returns.
McDonald said that the US believes that if a contract is priced correctly on an ex ante basis, then the contract should be respected and the ex post returns, namely, the residuals, may be allocated anywhere. He said the US believes this result gives no systematic bias or advantage to any party to the contract.
Such a view allows for funding to be considered the economic equivalent of an equity investment, McDonald said. In a cost sharing case, the party contributing cash takes risk, and thus should get the upside or the downside of the investment, he said.
Separate rules, such as commensurate with income rules, can deal with concerns about information asymmetry and systematic mispricing, he said.
McDonald said other countries disagree with the US viewpoint, arguing that there is a limit to the upside a funder can receive from a deal. Essentially the funder is viewed as holding a debt instrument, he said.
Stack added that countries also argue that when there is a big upside return, the ex ante pricing must have been incorrect.
Stack said he was “moderately optimistic” that countries will eventually agree on the right answer. “No answer is really bad for taxpayers because it leaves you with this extraordinary gap,” he said.
Country-by-county reporting
Stack said 1600–1800 US multinationals will meet the €750 million (USD 850 million) revenue threshold and will thus be subject to US country-by-country reporting rules.
Joshua Odintz, Baker & McKenzie LLP pointed out that, under the proposed country-by-country regulations issued last December, companies must report information on fiscal years beginning on or after date of regulations are finalized. As a result, if the regulations are finalized sometime during 2016, and a taxpayer uses a calendar year fiscal year, the regs will first apply to the taxpayer’s 2017 data. Odintz noted, though, that countries have agreed that 2016 country-by-country data should be exchanged and asked how taxpayers should handle this.
Stack said Treasury was aware of the issue and confirmed that countries may require companies to file the 2016 data locally.
The US is asking countries to apply a “rule of reason” and not require local filing in 2016, Stack said. He also said that some countries may not be ready to impose local filing in 2016. He said further that the US is exploring the idea of allowing companies to elect to file country-by-country reports in 2016.
Stack said, though, that it would be wise for companies to prepare for the contingency of filing in 2016.
State aid
Stack again charged that the EU Commission has been singling out American companies in its state aid investigations involving private rulings.
While acknowledging that the EU has brought cases against several European firms in its recently announced decision declaring Belgium’s excess profits tax regime illegal, he said the potential liabilities against US multinationals dwarf those of non-US firms.
He also reiterated his view that EU Commission is applying a novel theory by applying state aid rules to private rulings. Fairness dictates that any state aid recovery should not be retroactive, he said.
– Julie Martin is a US tax attorney and a member of MNE Tax’s editorial staff.
Be the first to comment