International Tax Forum September 19 th 2013 St. Petersburg Prof. Dr. Wolfgang Kessler Lehrstuhl für Betriebswirtschaftliche Steuerlehre Albert-Ludwigs-Universität Freiburg – Lehrstuhl für Betriebswirtschaftliche Steuerlehre – StB Prof. Dr. W. Kessler Werthmannstr. 8 – 79085 Freiburg i.Br. – Telefon 0761/203-9200 – Telefax 0761/203-9202 BEPS: Base Erosion and Profit Shifting – the lack of harmonization and the double taxation as a result
Transcript
International Tax ForumSeptember 19th 2013
St. Petersburg
Prof. Dr. Wolfgang KesslerLehrstuhl für Betriebswirtschaftliche SteuerlehreAlbert-Ludwigs-Universität Freiburg – Lehrstuhl für Betriebswirtschaftliche Steuerlehre – StB Prof. Dr. W. Kessler
1.Fundamentals (4/6) - US Corporate Income Taxes -
• Federal tax: Corporate Income Tax- residence: place of incorporation (not place of management)- U.S. taxation of worldwide income – as a basic principle- stepped rates up to 35% + state/local taxes (approx. 2-6%)- avoidance of international double taxation: foreign tax credit-method
(FTC) with option to “deemed paid tax credit” (gross up)- Subpart F: current inclusion of passive income (e.g. dividends, interest,
royalties) from controlled foreign corporations (CFC)- “check the box”-regulation (Form 8832): option to treat a
corporation as permanent establishment (disregarded entity)
• US-GAAP - expected effective tax rate (ETR) of 35-41%!- exception: no deferred taxes, “if sufficient evidence shows that the
subsidiary has invested or will invest the undistributed earnings indefinitely …” (APB 23)
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intangible assets
USA
US Inc.
BM
Offshore-Co
EUEU-OpCo
② cost sharing agreement (buy-in)
③ IP transfer
1.Fundamentals (5/6) - transfer of intangible assets from the USA -
intangible assets
① research & development
④ license
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1.Fundamentals (6/6) - jurisdiction to tax for CIT purposes -
state of residence USA U.K. IrelandGerman
y OECD
place of incorporation (or place of formation) X X X (*) X -
place of (effective) management ( daily business)
- - X X X
place of management ( strategic decisions) - X - - -
*) There is an exception to this rule if a related company is controlled or is regularly traded on a recognized stock exchange.
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Google Inc.
Google Ireland Holdings (*)
⑦ royalties
⑧ dividends
(deferred)
⑤ feesclients
① IP transfer
② license
③ sublicense
④ online promotion
⑥ royalties
*) The Google Ireland Holdings was founded in Ireland, but the place of management is in Bermuda.
• USA: - Google Inc.: US CIT on dividends (but deferral in Bermuda) and
no CFC taxation (active income from Irish subsidiaries)- Google Ireland Holdings: intangible assets transferred via cost sharing
arrangement (APA) from the USA to Bermuda (no super royalty rule)- Google Ireland Ltd. / Google NL Holding B.V.:
no tax resident (both companies are not incorporated in the USA) no CFC taxation (check-the-box-election active revenues from Irish subs)
• Bermuda: Google Ireland Holdings: no CIT and no withholding tax (tax haven)• Netherlands:
- Google Ireland Holdings: no withholding tax on royalties outgoing (local tax code)- Google NL Holding B.V.: ruling on royalty net income (handling fee)
• Ireland: - Google Ireland Holdings: no tax resident (no place of management in Ireland)- Google NL Holding B.V.: no withholding tax (Council Directive 2003/49/EC)- Google Ireland Ltd.: CIT = 12,5%, but low net income (high TP on royalties)
• Germany: Google Ireland Ltd.: no CIT (no permanent establishment)
no CFC taxation (active income from disregarded “Irish” sub-subsidiaries)- Apple OpCo International / Apple OpCo Europe / Apple Sales International:
incorporated in IE, but have no tax residency in Ireland (no employees, no PE) and in the USA (ghost company) – board meetings in CA!
intangible assets transferred via cost sharing arrangement from the USA no CFC taxation (check-the-box-election sales income of Irish subsidiaries is
active income of AOI)• Ireland:
- Apple OpCo International / Apple OpCo Europe / Apple Sales International: subject to non-resident taxation, but special tax rate of 2%
- Apple Distribution International / Apple Retail Holding Europe: tax resident, but low net income (TP: low risk distributor)
• Germany: - Apple Distribution International: no CIT (no permanent establishment)- Apple Retail Germany: tax resident, but low net income (TP: low risk distributor)
• Taiwan: Foxconn: tax resident, but low net income (TP: low risk distributor)
2.Tax planning structures (4/4) - Apple: CIT -
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3.OECD measures & EU Code of Conduct - timeline -
1997 EU: Code of Conduct for business taxation
1998 Report: Harmful Tax Competition – An Emerging Global Issue
2001 Discussion paper: The Impact of the Communications Revolution on the Application of “Place of Effective Management" as a Tie Breaker Rule
2004 TAG Final Report: Are the Current Treaty Rules for Taxing Business Profits Appropriate for E-Commerce?
12/02/2013 BEPS-Report (diagnosis)
15/02/2013 G20 Finance Ministers meeting in Moscow
19/07/2013 G20 Finance Ministers meeting in Moscow
OECD Action Plan on BEPS (therapy)
05/09/2013 G20 Leader’s Summit in St. Petersburg
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Barbados / Bermuda / British Virgin Islands (5,11%)
Germany (4,77%)
Japan (3,76%)
other (86,36%)
Source: OECD, 2013.
3. OECD report addressing BEPS (10/02/2013) - Global Foreign Direct Investments in 2010 -
value of retained offshore profits ≈ 1.7 trillion $==> deferred US CIT ≈ 600 billion $
(Source: Pinkernell, IStR 2013, p. 180-187)
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(1) address the tax challenges of the digital economy
(2) neutralise the effects of hybrid mismatch arrangements
(3) strengthen CFC rules
(4) limit base erosion via interest deductions and other financial payments
(5) counter harmful tax practices more effectively, taking into account transparency and substance
(6) prevent treaty abuse
(7) prevent the artificial avoidance of PE status
(8) assure that transfer pricing outcomes are in line with value creation (intangibles)(9) assure that transfer pricing
outcomes are in line with value creation (risks and capital)
(10) assure that transfer pricing outcomes are in line with value creation (other high-risk transactions)
(11) establish methodologies to collect and analyse data on BEPS and the actions to address it
(12) require taxpayers to disclose their aggressive tax planning arrangements
(13) re-examine transfer pricing documentation
(14) make dispute resolution mechanisms more effective
(15) develop a multi-lateral instrument
3. OECD action plan on BEPS (19/07/2013) - 15 actions -
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• Action 1: address the tax challenges of the digital economy- expected output:
report identifying the main difficulties that the economy poses for the application of existing international tax rules
development of detailed options to address these difficulties- object of investigation:
companies with a significant digital presence in the economy of another country without being liable to taxation (no nexus)
attribution of value for digital products and services and characterization of income of these digital products and services
application of related source rules ensure the effective collection of VAT/GST with respect to the cross-
border supply of digital goods and services- implications for the tax structures of Google & Apple:
possibly non-resident tax liability in EU via the fiction of a (virtual) PE possibly tax residency of the „ghost“ companies in the USA or in Ireland global formulary apportionment?
4. Implications of the OECD measures (1/5) - actions -
recommendations regarding the design of domestic rules- object of investigation:
design of rules for controlled foreign companies- implications for the tax structures of Google & Apple:
currently: US CFC taxation is avoided via check-the-box-election in theory the CFC taxation in the USA could be strengthened so that
CFC legislation would work properly companies which are resident in EU member states:
no relevance due to the judgments of the ECJ (Cadbury Schweppes), if the subsidiary has substance (not fully artificial)
thus CFC legislation is in fact a phase-out model
4. Implications of the OECD measures (2/5) - actions -
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• Action 5: counter harmful tax practices more effectively, taking into account transparency and substance- expected output:
finalized review of member countries’ regimes revision of existing criteria
- object of investigation: revamping the work on harmful tax practices with a priority on improving
transparency (including compulsory spontaneous exchange on rulings related to preferential regimes)
requirement of a substantial activity for any preferential regime- implications for the tax structures of Google & Apple:
no rulings for conduit companies in the Netherlands no special tax rates for IP companies (IE) or IP-boxes (NL, Lux, UK) no preferential tax regimes for artificial holding companies
4. Implications of the OECD measures (2/5) - actions -
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• Action 7: prevent the artificial avoidance of permanent establishment status- expected output:
changes to the OECD Model Commentary and Tax Convention recommendations regarding the design of domestic rules
- object of investigation: prevention of the artificial avoidance of the PE status – e.g.
commissionaire arrangements and specific activity exemptions- implications for the tax structures of Google & Apple:
currently: non-taxable direct business activities in EU member states in the future: non-resident tax liability in EU member states via a sales
agent PE, no exemption for facilities solely for the purpose of storage, display … and activities of preparatory or auxiliary character (Art. 5 P 4)
4. Implications of the OECD measures (3/5) - actions -
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• Action 8: assure that transfer pricing outcomes are in line with value creation (intangibles)- expected output:
changes to the Transfer Pricing Guidelines (WP6 discussion draft on intangibles)
changes to the Model Tax Convention
- object of investigation: broad and clearly delineated definition of intangibles appropriate allocation of the profits associated with the transfer and use of
intangibles (in accordance with the creation of economic value) development of TP rules for transfers of hard-to-value intangibles updating the guidance on cost contribution arrangements
- implications for the tax structures of Google & Apple: preventing a tax-free transfer of intangible assets from the USA to a tax haven
4. Implications of the OECD measures (4/5) - actions -
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• missing measures- Coordination of tax residency of corporations
place of incorporation vs. place of (effective) management ( daily business) vs. place of management ( strategic decisions) OECD Discussion paper: The Impact of the Communications
Revolution on the Application of “Place of Effective Management” as a Tie Breaker Rule (2001)
- withholding tax on interest and royalties (for non-EU countries!)
- alternative taxation concepts global formulary apportionment full inclusion system
4. Implications of the OECD measures (5/5) - actions -
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Conclusions
• Controversial and open-ended project due to the clash of interests / distortion of competition- biggest problems in USA, massive export subsidy and offshore dilemma- while Germany is a model student who does even more than enough –
earning stripping rule, taxation at „transferring“ and transfer of functions, strength CFC taxation, treaty override, intentional double taxation, …
- CH, NL, Lux, UK, … are juvenile delinquents due to their preferential regimes
• E-Commerce discussion: New Wine into Old Wineskins• Possible improvements:
- country-by-country-reporting- abolition of preferential regimes („level playing field“)- revised version of Art. 5 P 4 OECD Model Tax Convention- tie-breaker rule for anti-avoidance measures- fundamental US tax reform
