The OECD on December 18 released four more discussion drafts addressing aspects of the OECD/G20 base erosion and profit shifting (BEPS) action plan. The drafts concern the application of VAT/GST to business-to-consumer (B2C) supplies of services and intangibles, seek to limit BEPS through interest deductions, and propose ways to improve the mutual agreement procedure (MAP) dispute resolution process.
B2C VAT supplies of services and intangibles
A discussion draft on VAT/GST rules for B2C supplies of services and intangibles follows up, in part, on recommendations made in an OECD report on the tax challenges of the digital economy, prepared in connection with action 1 of the BEPS plan. The earlier report noted that strengthening B2C VAT/GST is critical to level the playing field between foreign and domestic suppliers of digital goods and services.
The draft seeks to establish common principles for determining place of taxation for B2C supplies of services and intangibles. According to the draft, the jurisdiction of taxation should be location of consumption, which, by proxy, is the customer’s usual residence. The draft offers governments guidelines on how to determine usual residence.
An exception is provided for “on-the-spot supplies” — supplies that are consumed where they are performed and in the presence of both the person performing the supply and the person consuming it — such as hairdressing services or theater performances. In such case, place of taxation is where consumption occurs.
Moreover, draft recommends that countries require nonresident suppliers of B2C services and intangibles to register and remit VAT/GST in the jurisdiction of taxation. It also provides suggestions for a simplified registration and compliance regime to collect and remit the tax.
Comments on the draft are due February 20, 2015; a public hearing on the draft is scheduled for February 25, 2015.
Interest deductions and other financial payments
As described during a December 15 update of work on the BEPS action plan, the discussion draft under action 4 recommends that governments limit MNE interest deductions through either a group-wide test, a fixed ratio test, or through some combination of the two tests.
The discussion draft states that the group-wide test has the greatest potential to tackle BEPS. Under this test, a company’s net interest deduction would be limited to a proportion of the MNE group’s net third-party interest expense. The deduction would be allocated among companies based on a measure of economic activity, such as earnings or asset value. A summary of an OECD official’s description of key points of this draft is available here.
Comments on the draft are due February 6, 2015; a public hearing on the draft is scheduled for February 17, 2015.
Dispute resolution
The OECD also released a draft under on action 14 of the BEPS plan concerning improving dispute resolution mechanisms. The draft identifies obstacles that prevent countries from resolving disputes through MAP and suggests possible measures to address those obstacles.
The draft notes that there is no consensus among nations on moving towards adoption of universal mandatory binding MAP arbitration, so a goal is to create other solutions with practical, measurable impact.
Comments on the draft are due January 16, 2015; a public hearing on the draft is scheduled for January 23 ,2015.
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