BEPS Submissions
Re: PUBLIC DISCUSSION DRAFT: BEPS ACTION 6: Prevent the granting of treaty benefits in inappropriate circumstances
47 – 49 Pearse Street, Dublin 2, IRELAND
Ms Marlies de Ruiter
Head, Tax Treaties, Transfer Pricing and Financial Transactions Division, OECD/CTPA
Organisation for Economic Cooperation and Development
2 rue André-Pascal
75775, Paris Cedex 16
France
by email to taxtreaties@oecd.org
8 January 2015
Dear Ms de Ruiter,
Re: PUBLIC DISCUSSION DRAFT: BEPS ACTION 6: Prevent the granting of treaty benefits in inappropriate circumstances
We welcome the opportunity to comment on the above document issued on 21 November 2014. We propose to limit our observations to certain of the questions raised in the discussion draft. As we understand it, the Limitation of Benefits (“LOB”) clause could limit or refuse access to treaty benefits where the taxpayer in question is owned or financed from abroad or where its shares are traded on a foreign stock exchange. As we have already signalled to you in previous correspondence, we feel that this approach is harmful to smaller countries which have more limited access to local capital markets and finance providers. Such countries therefore will be at a disadvantage as compared to taxpayers based in larger economies in meeting a LOB test which was designed for a larger country with large capital markets and broader access to local finance.
1. Collective investment vehicles: application of the LOB and treaty entitlement
We would support the recommendations of the 2010 CIV Report and would advocate their inclusion in the BEPS Deliverables. That report recommended that CIV’s should obtain treaty protections if they qualify in their own right or if they are able to claim on behalf of investors who are eligible for treaty relief (as per the TRACE project which has already been endorsed by the OECD).
We feel it is important, particularly to smaller countries, that CIVs distributed cross border are not disadvantaged relative to funds that are distributed within their home jurisdiction.
3. Commentary on the discretionary relief provision of the Limitation on Benefits (LOB) rule
The approach to the management of LOB gives rise to 2 overarching problems.
The first of these is that it places very considerable discretion on the Revenue Authorities concerned who will be required to act as gatekeepers for access to treaty benefits. We make this point not by way of any criticism of the Revenue Authorities, but to emphasise that many jurisdictions are attempting to reduce the size of their Revenue Authorities. Both of the Revenue Authorities with which we in CCAB-I are most concerned, HM Revenue and Customs and the Irish Revenue Commissioners, have in recent years engaged in significant staff reduction programmes. A generally applicable LOB will increase the administrative role for Revenue Authorities against a backdrop of their reducing resources.
The second is that, while a principal concern of the OECD BEPS project has been to minimise uncertainty in international tax matters, a discretionary regime will in our view both slowdown the cross-border investment process and hamper the establishment of commercial projects by virtue of the uncertainty created by a discretionary LOB. At the very least, an efficient appeals mechanism against decisions taken by Revenue Authorities would have to be put in place.
4. Alternative LOB provisions for EU countries
This is a positive development. It would have been untenable to restructure the Treaty framework fundamentals without reference to the binding agreements entered into by the 28 EU Member States which guarantee freedom of establishment, along with free movement of capital, persons and services.
The Introduction to the Model Tax Convention states (at page 12, 8th edition 2010) that “it is scarcely necessary to stress the importance of removing the obstacles that double taxation presents to the development of economic relations between countries”. The possibility of alternative LOB provisions for EU countries offers reassurance that the concern to remove the obstacle of double taxation has not been lost.
8. Timing issues related to the various provisions of the LOB rule
There has to be recognition that with the growth of cross-border trade and commercial activity, multinational groups are not static, rarely changing entities. It may be necessary to introduce grandfathering provisions, whereby treaty benefits do not cease to be granted immediately following a change of ownership, or a change in the location of the public listing. We also suggest that there may have to be an accommodation for companies which are EU Member State resident, by reference to the operation of the Parent Subsidiary directive (2003/123/EC) and the Mergers directive (90/434/EEC).
10. Clarification of the “active business” provision
We suggest that it be made clear that business support activities can qualify as an active business. This would help mitigate the difficulties encountered by taxpayers in smaller markets whose workforce is engaged in substantial managerial and operational activities in connection with support services, but where there are limited sales of the group’s actual products and services by virtue of the small market size.
11. Application of the PPT rule where benefits are obtained under different treaties
We think it may be instructive to view a PPT rule through the lens of General Anti-Avoidance Provisions or Rules. Such Provisions tend to rely on the decisions taken by the Revenue Authority concerned, and thus we are back to the difficulties described above with Discretionary Relief provisions – an over reliance on the resources of the Revenue Authority coupled with greater uncertainty.
We are concerned that the PPT rule will also give rise to a greater incidence of cross-border treaty disputes. Currently treaty disputes are typically resolved in accordance with the domestic procedures applicable in the country seeking to apply the charge to tax. Resolution in these instances is not straightforward, and the complexity of the current Action 6 proposals will not help.
You may wish to note that this response is from a representative body. The Consultative Committee of Accountancy Bodies – Ireland is the representative committee for the main accountancy bodies in Ireland. It comprises Chartered Accountants Ireland, the Association of Chartered Certified Accountants, the Institute of Certified Public Accountants in Ireland, and the Chartered Institute of Management Accountants, which represent a combined membership of some 40,000 accountants. Brian Keegan, Director of Taxation at Chartered Accountants Ireland (brian.keegan@charteredaccountants.ie, +353 1 6377 347) may be contacted if any further details in relation to this letter are required.
Yours sincerely
Paul Dillon, Chairman, CCAB-I Tax Committee
Re: PUBLIC DISCUSSION DRAFT: BEPS ACTION 7: Preventing the Artificial Avoidance of PE Status
47 – 49 Pearse Street, Dublin 2, IRELAND
Ms Marlies de Ruiter
Head, Tax Treaties, Transfer Pricing and Financial Transactions Division, OECD/CTPA
Organisation for Economic Cooperation and Development
2 rue André-Pascal
75775, Paris Cedex 16
France
by email to taxtreaties@oecd.org
8 January 2015
Dear Ms de Ruiter,
Re: PUBLIC DISCUSSION DRAFT: BEPS ACTION 7: Preventing the Artificial Avoidance of PE Status
We welcome the opportunity to comment on the above document issued on 31 October 2014. We wish to make two general observations on the work in the discussion draft.
Role and function of the PE concept
The PE concept has given governments over the years a legal basis for charging taxes on the activities of foreign enterprises, particularly in situations where no legal entity (such as an incorporated subsidiary) is present in the destination country. Changing the definitions of a PE will not necessarily raise additional tax overall, but it will relocate where those taxes are to be levied. Our concern is that this relocation will tend to be towards countries with larger domestic markets. Therefore any redefinition of PE is a challenge to the taxing rights of smaller nations.
Proposed revisions to the concept of commissionaire arrangements may be contrary to the freedom to provide services principles of the EU treaties. In common with the LOB proposals under Action 6, it may be necessary to make special provision for EU Member States.
We have concerns that the proposed revisions to the concept of commissionaire arrangements may overextend the scope of the PE provisions and not tax commissionaire arrangements in like manner to other agency type arrangements which have equivalent functions. We suggest that it is reasonable to tax in like manner agency arrangements (whether disclosed or undisclosed) where there are equivalent functions performed in the source State but that the proposals to address concerns on the abuse of commissionaire structures should not extend beyond this.
PE definitions
One of the strengths of the existing PE article in the model Tax Convention is its reliance on clear definitions. This has reduced the incidence of cross-border disputes by reference to what constitutes a PE or otherwise. If it is ultimately deemed necessary to revise the current PE definitions along the lines proposed in the discussion draft, we strongly urge that the clarity of the definitions be retained as far as possible. Other proposals within the BEPS mechanisms will, in our view and as we have outlined in separate correspondence, open opportunities for dispute with perhaps protracted resolution mechanisms. This would be counter-productive and should be avoided. A resultant proliferation of cross border treaty disputes and PE’s (especially administrative PE’s to which no profit might be actually attributable) would be without benefit to either national Exchequers or to business.
For example, the language of Option B (in relation to the artificial avoidance of PE status) may well address concerns with the current language insofar as it would capture scenarios where a person negotiates the material terms of a contract in a State which is then “rubber stamped” and approved by the enterprise in another State. However, further clarity would be welcome on the meaning of the words “concludes contracts or negotiates the material elements of a contract”.
We would be concerned that the suggested language could be read to imply that any negotiation of the material terms of a contract in a State could give rise to a PE, even if the material terms are not concluded through these negotiations. Guidance would be welcome to confirm that this phrase is only intended to cover the negotiation of the final material terms of a contract in a State and not situations which can commonly occur in business where preliminary or interim discussions of terms of a contract occur in a State which do not reflect the final agreement of terms.
Other examples arise in the proposals related to specific activity exemptions. We have concerns that these proposals for smaller countries on the periphery of large markets could result in the creation of multiple PEs for enterprises with low value activities and increase the compliance costs as well as the uncertainty for business in smaller economies in carrying out these activities in the course of provision of goods and services to customers in large markets.
We suggest that the concerns surrounding the availability of a general exemption from PE status for the activities listed at subparagraphs (a) to (d) of Article 5(4) might be addressed by adopting a variation to General Option E. This variation might work by including a presumption in the lead in statement in paragraph 4 of Article 5 that the specific activities in subparagraphs (a) to (d) in article 5(4) could continue to be eligible for exemption unless those activities are core to the business activities of the enterprise - perhaps using wording such as “form a significant and essential part of the enterprise as a whole”. This approach might achieve a balance between preserving certainty and clarity for the majority of potentially affected business with low value in country activities which are not core to the business model of the enterprise and changing the PE status for enterprises where these activities are core to their business model.
You may wish to note that this response is from a representative body. The Consultative Committee of Accountancy Bodies – Ireland is the representative committee for the main accountancy bodies in Ireland. It comprises Chartered Accountants Ireland, the Association of Chartered Certified Accountants, the Institute of Certified Public Accountants in Ireland, and the Chartered Institute of Management Accountants, which represent a combined membership of some 40,000 accountants. Brian Keegan, Director of Taxation at Chartered Accountants Ireland (brian.keegan@charteredaccountants.ie, +353 1 6377 347) may be contacted if any further details in relation to this letter are required.
Yours sincerely
Paul Dillon, Chairman, CCAB-I Tax Committee
Re: PUBLIC DISCUSSION DRAFT: BEPS ACTION 10: PROPOSED MODIFICATIONS TO CHAPTER VII OF THE TRANSFER PRICING GUIDELINES RELATING TO LOW VALUE-ADDING SERVICES
47 – 49 Pearse Street, Dublin 2, IRELAND
Mr Andrew Hickman
Head of the Transfer Pricing Unit
Centre for Tax Policy and Administration
Organisation for Economic Cooperation and Development
2 rue André-Pascal
75775, Paris Cedex 16
France
8 January 2015
Dear Mr Hickman,
Re: PUBLIC DISCUSSION DRAFT: BEPS ACTION 10: PROPOSED MODIFICATIONS TO CHAPTER VII OF THE TRANSFER PRICING GUIDELINES RELATING TO LOW VALUE-ADDING SERVICES
We welcome the opportunity to comment on the above document issued on the 3rd November 2014.The introduction of a simplified methodology for Multinational Enterprises (“MNE’s”) in the area of low value-adding services should bring more certainty and clarity. This is an issue that tends to result in a significant investment of resources by MNE’s and taxing authorities. However, failure to achieve a consensus approach would result in missing the current opportunity for simplification.
Any simplification measure should be one that is easy to understand and administer and bring certainty of treatment. It should mitigate the need for dispute or the need for resolution mechanisms. While we acknowledge a clear intention to move in this direction by the OECD with this current discussion draft, we believe that the approach could be further improved with relatively minimal changes and have outlined a number of suggestions:
- Introduction of some flexibility for MNE’s to apply a common simplified approach to something less than all entities and all costs. The guidance should make clear that an MNE group is not disqualified from using the simplified method simply because it complies with the transfer pricing rules of jurisdictions that do not accept the OECD endorsed simplified method, or because some portion of otherwise eligible services are handled for transfer pricing purposes in a different manner, e.g., through an APA. The key is to apply the simplified method in a reasonable manner, to a reasonable population of entities and to a reasonable population of costs. Imposing a flat-footed requirement for all entities and all costs will severely restrict the application and usefulness of the simplified method. Making the application of a mark-up (Paragraph 7.57) elective in most cases to ensure a consistent approach across an MNE’s affiliates globally which may also be more acceptable to tax authorities in payor countries by reducing the level of charges made to affiliates there. It is not suggested that a nil mark-up or cost recovery approach should apply in circumstances where the sole business of an in-house service provider is the provision of low value-adding services.
- In circumstances where, in accordance with the guidelines, an allocation has been applied for low value-adding services, the guidelines should suggest that requests to ‘look’ through to the underlying expenses of the service provider by a tax authority in the jurisdiction of the recipient are not warranted. This aligns with the proposed objective of the guidelines which is to frame guidelines for pricing services with a view to treating them in like manner to services provided by an independent party. It may also be relevant to point out here that MNE’s do not incur costs unnecessarily or unintentionally. Costs incurred by MNE’s should be deductible, whether at the HQ country level or at the receiving country level.
- Further guidance would be welcome to address transitional matters likely to arise upon implementation in the case of first time adoption of the simplified approach e.g. the move to adoption of single annual invoice suggested at para 6.70.
We acknowledge that there will be overlap with other Actions under the BEPS Plan. In particular, we suggest there should be:
- Confirmation that the proposal for Action 10 would override the Transfer Pricing requirements of the local file in BEPS Action 13.
- Expectation that the interaction of Guidelines on Transfer pricing of Intangibles under Action 9 would be explored especially in the pricing of high value-adding services.
- Consideration given to framing a Memorandum of Understanding (MOU) encompassing low value-adding services for use and adoption by states in accordance with Section E on Safe Harbours in Chapter IV of the Transfer Pricing Guidelines. The provision of such a framework for a safe harbour for low value-adding services could provide certainty for taxpayers in those states that adopt the MOU.
Furthermore, we believe that specific guidance incorporating examples would be useful to all parties, and could clarify how the proposed approach outlined is to be implemented at the country level. This would include further clarification on the election mechanism in 7.45, the interaction with Action 13 and at the MNE by citing examples such as in terms of shareholder activities in 7.11.
Especially in the case of SMEs, it might be appropriate to suggest that they could somewhat modify the approach of applying a single factor to a bundle of services rather than being required to identify and apply a factor for each service.
In conclusion, there is merit in simplifying the approach to determine and document the area of Low-Value-Adding Services. With minor changes and additional guidance, the approach could be more beneficial to MNE’s, practitioners and taxing authorities alike. Current practices by tax authorities with regard to assessing the benefit of such services may from time to time currently exceed the proposed simplified standard set out in D3 in the Draft.
You may wish to note that this response is from a representative body. The Consultative Committee of Accountancy Bodies – Ireland is the representative committee for the main accountancy bodies in Ireland. It comprises Chartered Accountants Ireland, the Association of Chartered Certified Accountants, the Institute of Certified Public Accountants in Ireland, and the Chartered Institute of Management Accountants, which represent a combined membership of some 40,000 accountants. Brian Keegan, Director of Taxation at Chartered Accountants Ireland (brian.keegan@charteredaccountants.ie, +353 1 6377 347) may be contacted if any further details in relation to this letter are required.
Yours sincerely
Paul Dillon, Chairman, CCAB-I Tax Committee
Source: Chartered Accountants Ireland. www.charteredaccountants.ie
