The latest on countries’ responses to the OECD’s BEPS recommendations

First published to ey.com as a Global Tax Alert.

OECD

On 5 January 2016, the OECD updated the list of BEPS members to include Bermuda, Côte d’Ivoire and Kazakhstan, bringing the total Members in the inclusive framework to 94. As BEPS Members, these countries have committed to comply with the BEPS minimum standards contained in Action 5 (countering harmful tax practices), Action 6 (preventing treaty abuse), Action 13 (transfer pricing documentation) and Action 14 (enhancing dispute resolution). Bermuda, Côte d’Ivoire and Kazakhstan will also participate on an equal footing with the rest of BEPS members on the remaining standard setting under the BEPS project, as well as the review and monitoring of the implementation of the BEPS package.

On 6 January 2017, the OECD released a Public Discussion Draft (the Discussion Draft) for comment that includes three draft examples with respect to treaty entitlement of non-collective investment vehicle (non-CIV) funds when the principal purposes test (PPT), one of the minimum standards to protect against treaty shopping, is applied. Although no final agreement has yet been reached on the inclusion of the examples, the Discussion Draft notes that they are being released for public comment to determine whether they are useful in clarifying the application of the PPT rule to common transactions involving non-CIV funds. Comments on the examples are requested by 3 February 2017.

Chile

On 28 December 2016, Chile’s Internal Revenue Service (IRS) issued Resolution No. 126, establishing an annual obligation to file Sworn Statement No. 1937 (i.e., the Country-by-Country (CbC) report). The CbC report must be filed by the last business day of June for the financial, functional and tax information of the prior fiscal year (a one-time-only three-month extension may be obtained). Therefore, Chilean groups required to file this statement must do so by the last business day of June 2017 (or September 2017 if an extension is requested). This obligation to file a CbC report applies to Chilean groups with consolidated revenue of at least €750 million as of the closing of the previous year, wherein the “ultimate parent” that consolidates the financial statements in Chile will be in charge of submitting the CbC report. A different entity may be appointed to submit the CbC report, and a notice of such an appointment must be given to the relevant Regional Bureau of the IRS within 30 days of the CbC report due date. Failure to submit the CbC report or submission of an erroneous, late or an incomplete one will result in fines pursuant to the provisions in No. 6 of Article 41 E of the Income Tax Law. If the submitted CBC report is intentionally false a fine will be apply.

Cyprus

On 30 December 2016, the Cypriot Ministry of Finance issued a Decree pursuant to Article 6 (16) of the Assessment and Collection of Taxes Law on Country-by-Country reporting (the Decree). The Decree is in accordance with a European Union (EU) Directive of 25 May 2016 requiring all EU Member States to implement a Country-by-Country reporting (CbCR) obligation in their national legislation in accordance with the recommendations of the OECD BEPS Action 13. All Cypriot tax resident entities that are ultimate parent entities of a multinational enterprise (MNE) group with annual consolidated group revenue equal to or exceeding €750 million will need to prepare a CbC report for financial years starting on or after 1 January 2016. Unless a surrogate parent entity (SPE) is appointed, any other entity of the group that is resident in Cyprus will have to prepare and submit the CbC report if the ultimate parent entity (UPE) is not resident in Cyprus and it is not required to file a CbC report in its country of residence, or although required to file the CbC report, there is no exchange of information instrument in place with Cyprus, or the jurisdiction has been notified regarding a systematic failure of exchanging information. Cyprus is a signatory to the OECD multilateral competent authority agreement (MCAA) on the exchange of CbC reports. Hence, any CbC report submitted in Cyprus will be exchanged with the tax authorities in those jurisdictions where a group operates provided that these jurisdictions have also signed the MCAA. One of the requirements that is provided under the Decree is that any Cypriot Constituent Entity of an MNE group (either a tax resident company or a Cypriot permanent establishment) shall notify the Cyprus tax authorities with the identification of the reporting entity, no later than the last day of the reporting fiscal year of such MNE group. By means of the Decree, the deadline for filing the notification for the first CbC report has been extended to the 20 October 2017. An administrative penalty of €100 may be imposed for a failure to comply with the CbCR submission requirements. The above penalty is expected to be amended in early 2017.

Finland

On 2 January 2017, the Finnish Tax Administration issued preliminary draft guidance on the filing of the CbC report and the notification duties related to the CbCR . The final version of the guidance will be published in early 2017. According to the guidance, both the CbC report and the notification can only be submitted electronically. The content of the CbC report is aligned with BEPS Action 13 and the EU Directive 2016/881. The notification should indicate the reporting role of the party submitting the notification, the accounting period for which the CbC report is to be given, identification details of the party submitting the CbC report, reporting role of the party submitting the CbC report and the name of the jurisdiction where the CbC report will be filed. The CbC report must be submitted within 12 months after the end of the accounting period for which the report is being prepared. The notification for accounting periods beginning on or after 1 January 2016 and ending before 31 May 2017 should be submitted by 31 May 2017 at the latest. A tax penalty up to €25,000 may be imposed for a failure to provide either the CbC report or the notification.

France

On 29 December 2016, the French Constitutional Court rendered its decision to strike down the provisions related to the new presumption of diversion of profits outside of France. Previously, the French Parliament had approved a new set of provisions establishing a presumption of diversion of profits outside France through which, a legal entity domiciled or established outside France could be subject to French corporate income tax on the deemed diverted profits. This entire new set of provisions has been invalidated by the French Constitutional Court.

Indonesia

On 30 December 2016, the Indonesian Ministry of Finance issued Regulation 213/PMK.03/2016 (PMK-213 or the regulation). The regulation implements the three-tiered approach to transfer pricing documentation developed as part of Action 13 of OECD’s BEPS project, consisting of a CbC report, Master File and Local File.

The CbCR obligation applies to Indonesian taxpayers that are classified as the parent entity of a multinational group with consolidated gross revenue of at least IDR11 trillion (approximately US$818 million) in a particular fiscal year. The broad definition of parent entity, and the absence of the concept of UPE, means that certain Indonesian taxpayers will need undertake CbCR in Indonesia despite not being the UPE of a group. In addition, the CbC report will also need to be filed by the Indonesian taxpayer where if the country of the parent entity of the Indonesian taxpayer does not require it to file a CbC report, there is no qualifying agreement for the exchange of CbC reports with the country of the ultimate parent, or an agreement is in place, but there has been systematic failure of the exchange. The CbC report has to be available no later than 12 months after the end of the respective fiscal year and has to be filed along with the corporate income tax return (CITR). The content of the CbC report is more detailed than that required by Action 13 report and in this sense, the regulation introduces a third report (the CbC report working paper) to be filed which requires information on gross revenues, taxes paid, capital, retained earnings, etc. for each entity within the group. PMK-213 states that further regulations on the CbC report are expected to be issued by the Directorate General of Taxation (DGT) in Indonesia.

The Master File and Local File (MF and LF) have to be prepared by Indonesian taxpayers conducting related party transactions if: (i) gross revenues in the prior fiscal year exceeded IDR50 billion (approximately US$3.7 million); or (ii) the value of related party tangible goods transactions exceeds IDR20 billion (approximately US$1.4 million) or the value of each service, interest payment, utilization of intangible properties or other affiliated transactions exceeds IDR5 billion (approximately US$372,000); or (iii) the related parties are located in countries or jurisdictions with income tax rates lower than the Indonesian corporate income tax rate of 25%. The content of the MF is largely consistent with the OECD BEPS recommendation under Action 13; however, the LF contents are broader. Under PMK-213, the MF and LF must be available no later than four months after the taxpayer’s fiscal year end. If taxpayers have not prepared the MF and LF prior to submission of the CITR, then their CITR may be considered as incomplete. Where a CITR is considered to be incomplete, there is a potential for penalties to be levied by the DGT on any unpaid tax of up to 200% as well as further criminal sanctions.

Japan

On 8 December 2016, Japan’s coalition leading parties released the 2017 tax reform outline (the Outline) that includes among others, an amendment to the current Japanese controlled foreign company (CFC) rules. Under the current rule, if a foreign subsidiary’s tax burden ratio is less than 20% (the 20% tax rate test), it is treated as a tax haven subsidiary and the Japanese shareholder must include the CFC income on a current basis, unless the active business exception is met. The amendment seeks to repeal the 20% tax rate test and to revise the exception criteria and the scope of the passive income. Under the new rules, income from the following foreign companies would be subject to CFC taxation:

  • A foreign subsidiary which does not meet one of the economic activity criteria, i.e., business criteria, substance criteria, control criteria and location criteria or unrelated party criteria, and its tax burden ratio is less than 20%.
  • A foreign subsidiary which meets all the above criteria but its tax burden is less than 20%. Only certain passive income is included as the CFC Income, unless the total passive income is JPY20 million (US$0.2 million) or less.
  • “Paper” companies, “cash box” entities and foreign subsidiaries located in the designated “black list” countries, whose tax burden ratios are less than 30%.

Passive income includes interest other than interest on certain group financing, dividend, capital gain on disposition of less than 25% investments, derivative trading income and royalties. This revision will apply to fiscal years beginning on or after 1 April 2018.

Luxembourg

On 27 December 2016, the Law of 23 December 2016 on CbCR (the CbCR Law) was published in Luxembourg’s Official Gazette. On the same date, the Luxembourg Tax Authorities extended the deadline for the first notification to 31 March 2017 and clarified administrative issues regarding CbCR notifications (e-filing). A Luxembourg group entity of an MNE group qualifying for the CbCR requirements is required to notify the Luxembourg tax authorities about the identity and tax residence of the entity filing the CbC report by the last day of their reporting fiscal year (i.e., by 31 December 2016 for MNE groups with a financial year ending 31 December 2016). With respect to the first CbC report, the deadline for filing the notification has been extended to 31 March 2017. Furthermore, the Luxembourg Tax Authorities have launched a specific e-filing system via MyGuichet online assistant (www.guichet.lu) for the purpose of CbCR notifications. At this stage, the system does not allow for a bulk notification and thus, each constituent entity tax resident in Luxembourg would need to file a notification. The electronic form of the notification includes among others the name, tax identification number, type (UPE or SPE) and contact details of the constituent entity along with the identity of the UPE and its country of residence.

On 27 December 2016, the Luxembourg Tax Authorities issued an administrative circular letter reshaping the transfer pricing framework for companies carrying out intra-group financing activities in Luxembourg. The circular letter elaborates on a new provision under Luxembourg domestic tax law which aims to incorporate the concept of the arm’s length principle, based on the OECD principles as revised by BEPS Actions 8-10. Both existing and future financing structures in Luxembourg are expected to be impacted. Among other considerations, the circular letter introduces new substance requirements and stresses the importance for group finance companies to have the capacity to accept, manage and assume risks in order to precisely delineate the controlled financing transaction.

On 22 December 2016, the Luxembourg Parliament adopted draft law n°7050 related to the budget law 2017 (the Law). The Law is in line with the initial draft law as introduced before the Luxembourg Parliament and in that sense, it foresees the introduction of a new article 56bis in the Luxembourg Income Tax Law (ITL) that aims to clarify the concept of the arm’s length principle. This new article contains the basic elements to be respected in the framework of a transfer pricing analysis and is based on the principles as revised in the context of the OECD’s BEPS Action Plan.

Malaysia

On 23 December 2016, the Minister of Finance in Malaysia published the Income Tax (CbCR) Rules 2016. These rules would be operational from 1 January 2017. According to these rules, all Malaysian tax resident entities that are UPEs of an MNE group with annual consolidated group revenue of at least three billion ringgit (approximately €711 million) will need to prepare a CbC report. Alternatively, if the UPE is not resident in Malaysia and it is not required to file a CbC report in its country of residence, or although required to file a CbC report there is not an exchange of information instrument in place with Malaysia or there is a systemic failure of the jurisdiction of tax residence of the UPE, then local filing of the CbC report would be triggered. Moreover, a constituent entity resident in Malaysia will need to notify the Malaysian tax authorities in writing whether it is the UPE or SPE on or before the last day of the reporting fiscal year. Likewise, if the constituent entity is neither the UPE nor the SPE, it shall notify about the identity and residence of the reporting entity. The CbC report should be filed annually, within 12 months of the last day of the reporting financial year in a form prescribed under section 152 of the Act in an electronic medium or through electronic transmission in an XML format. Penalty provisions consisting of fines between RM20,000 to RM100,000 (approximately US$4,484 to US$22,421) or imprisonment for maximum of six months or both (fines and imprisonment) have been proposed under the Finance Bill 2016 for failure to file the CbC report, furnishing incorrect information related to CbC report or failure to comply with any rules to implement or facilitate arrangements relating to the exchange of CbC reports.

Malta

On 25 November 2016, the Maltese Government adopted legislation implementing CbCR by Legal Notice 400 of 2016. The adopted law is in accordance with the EU Directive of 25 May 2016 requiring all EU Member States to implement a CbCR obligation in their national legislation. CbCR would be required annually for fiscal years beginning on or after 1 January 2016 and the filing date would be nine months after the last day of the reporting fiscal year. As an effect, all Maltese tax resident entities that are UPEs of a multinational group with annual consolidated group revenue equal to or exceeding €750 million will need to prepare a CbC report. Alternatively, if the UPE is not resident in Malta, and not obligated to file a CbC report in its country of residence, or although obligated to file CbC report there is no exchange of information instrument in place with Malta or there is a systemic failure of the jurisdiction of tax residence of the UPE, any other entity of the group that is resident in Malta would have to prepare the CbC report. A one-year reprieve is granted for filing under such a secondary mechanism, thus such local filing is only required for financial years starting after 1 January 2017. Moreover, a Maltese group entity will need to notify the tax authorities in its tax return whether it is the UPE or SPE. If it is neither a UPE nor an SPE, it will have to inform the tax authorities of the identity of the UPE or SPE along with its tax residency. Lastly, monetary penalties (of up to €20,000 or €50,000 depending the case) could be triggered when a Maltese Constituent Entity fails to report the required information within the time stipulated or fails to report the information in a complete and accurate manner.

Peru

On 31 December 2016, Peru published Legislative Decree N° 1312 (Legislative Decree) amending the Peruvian transfer pricing (TP) reporting requirements by implementing the changes proposed by the OECD under the BEPS Action 13 final report. The Legislative Decree expands the TP documentation requirements by introducing an obligation to submit both a MF and a LF, and CbCR. The changes regarding submission of the LF will apply for the 2017 fiscal year, while the MF and CbCR are mandatory beginning with the 2018 fiscal year, provided that certain revenue thresholds are reached. The Legislative Decree also introduces revised guidance for pricing cross-border commodity transactions. It provides that the comparable uncontrolled price (CUP) method is the most appropriate TP method for commodity transactions between associated enterprises using a quoted price as a reference to determine the arm’s-length price. In addition, it introduces general TP guidelines for intra-group services and, in particular, for services that qualify as “low value-adding intra-group services.”