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Tax Advice

OECD Gaining Ground in Fight against Aggressive Tax Structuring

The objective of the OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS) is to curb the tax advantages associated with what is considered detrimental cross-border profit shifting by multinational enterprises.

The idea is that pro­fits should inc­rea­sin­gly be taxed where the eco­no­mic acti­vity actually takes place. The OECD has iden­ti­fied the key issues in a total of 15 main areas to be addres­sed, which it terms “ac­ti­ons.”

OECD Gaining Ground in Fight against Aggressive Tax Structuring © Fotolia

To date, 44 coun­tries acco­un­ting for some 90% of glo­bal out­put have sig­ned on to the BEPS pro­ject. In addi­tion to the OECD mem­ber sta­tes, their ranks include major emer­ging eco­no­mies such as China, India, Bra­zil, and Rus­sia. The OECD has already pub­lis­hed reports on seven of the 15 total action items, and these have been una­ni­mously embra­ced by the parti­ci­pa­ting coun­tries. Reports and recom­men­da­ti­ons on the remai­ning acti­ons are expec­ted to be com­p­le­ted by the end of 2015.

In parti­cu­lar, the effort to intro­duce coun­try-by-coun­try repor­ting, the rules on hybrid mis­match arran­ge­ments, and the anti­ci­pa­ted expan­sion of the defini­tion of what con­sti­tu­tes a per­ma­nent estab­lish­ment will be of practi­cal rele­vance for Ger­man com­pa­nies doing busi­ness inter­na­tio­nally.

Coun­try-by-coun­try (CbC) repor­ting is an effort by tax aut­ho­ri­ties in various coun­tries to obtain much more infor­ma­tion than before about the busi­ness rela­ti­onships of mul­ti­na­tio­nal enter­pri­ses in each coun­try. The key data here con­cerns the dis­tri­bu­tion of pro­fits, taxes, emp­loyees and the func­ti­ons they carry out in indi­vi­dual coun­tries, along with infor­ma­tion about an enter­prise’s capi­tal and assets. The requi­red infor­ma­tion for CbC repor­ting can gene­rally be deri­ved from the exis­ting repor­ting pro­ces­ses in place at com­pa­nies or in cor­po­rate groups. The com­pa­nies affec­ted by this rule must allow suf­fi­ci­ent time to deter­mine the extent to which the requi­red data is actually available. More­o­ver, the data must be recon­ci­led with exis­ting trans­fer pri­cing docu­men­ta­tion to avoid incon­sis­ten­cies.

There are already noti­ceable signs in Ger­many that cer­tain BEPS topics have caught the atten­tion of federal law­ma­kers. Ger­man tax law already inclu­des rules on hybrid mis­match arran­ge­ments that exp­loit (legal) tax advan­ta­ges ari­sing from dif­fe­ren­ces in the tax regi­mes of various coun­tries. These will be spel­led out in grea­ter detail this year. The OECD aims to pre­vent dou­ble non-taxa­tion or dou­ble deduc­ti­ons of busi­ness expen­ses in two coun­tries by using lin­king rules to make taxa­tion in one coun­try depen­dent on the tax tre­at­ment of the tran­sac­tion in the other coun­try. As a rule, busi­ness expen­ses asso­cia­ted with a hybrid finan­cial instru­ment will then no lon­ger be deduc­ti­ble in the source coun­try if the cor­res­pon­ding income is not repor­ted for tax pur­po­ses by the reci­pi­ent of the pay­ment in the other state. Iden­ti­fying and docu­men­ting these cases will sub­stan­tially inc­rease the effort requi­red to cal­cu­late and declare taxes.

The coun­try in which a per­ma­nent estab­lish­ment is loca­ted gene­rally has the right to tax the pro­fits gene­ra­ted by that per­ma­nent estab­lish­ment. In most cases, the state in which the parent com­pany is loca­ted exempts from tax the pro­fits gene­ra­ted by the per­ma­nent estab­lish­ment. This is the approach taken by many cur­rent dou­ble taxa­tion trea­ties based on the OECD Model Con­ven­tion. Now, the OECD is wor­king on ways to pre­vent the arti­fi­cial avo­i­dance of per­ma­nent estab­lish­ment sta­tus. In the cur­rent dis­cus­sion draft dated October 31, 2014, the OECD favors expan­ding the defini­tion of a per­ma­nent estab­lish­ment. It also calls for nar­ro­wing the set of cir­cum­stan­ces allo­wing for excep­ti­ons. If this view is in fact accep­ted by the coun­tries parti­ci­pa­ting in the Action Plan on BEPS and finds its way into the wor­ding of indi­vi­dual dou­ble taxa­tion trea­ties, then busi­ness acti­vity abroad would be clas­si­fied as a per­ma­nent estab­lish­ment more fre­qu­ently than before. Com­pa­nies that con­duct their busi­ness abroad through inde­pen­dent rep­re­sen­ta­ti­ves or using com­mis­sion struc­tu­res would be parti­cu­larly affec­ted.

If the OECD rules are trans­po­sed into natio­nal law, there is also a risk that Ger­man law­ma­kers would be inte­res­ted prin­ci­pally in one-time domestic taxa­tion or even in adding a new tax base. The most recent foray into this ter­ritory here in Ger­many was made by the Bun­des­rat in the 2015 Annual Tax Act, which con­ta­ins a pro­hi­bi­tion on deduc­ting busi­ness expen­ses that, as wor­ded, goes far beyond what is sug­ge­s­ted by the OECD. This rule has not (yet) been appro­ved by the federal govern­ment. Howe­ver, the dis­cus­sion during the legis­la­tive pro­cess indi­ca­tes that BEPS is already a high prio­rity among the law­ma­kers deci­ding tax policy in Ber­lin. As early as 2013, Ger­many’s legis­la­tive branch pres­sed ahead with spe­ci­fic mea­su­res in the same vein as the OECD’s recom­men­da­ti­ons - alt­hough not yet under the offi­cial ban­ner of BEPS - such as making the recogni­tion of los­ses wit­hin a domestic con­so­li­da­ted tax group depen­dent on the loss not redu­cing taxes abroad. In view of the inter­na­tio­nal nego­tia­ti­ons con­ti­nuing at full steam, addi­tio­nal moves such as this can be expec­ted shortly.

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