OECD – RECENT DEVELOPMENTS – AN UPDATE

In this issue,
we have covered major developments in the field of International Taxation from
July 2018 till date and work being done at OECD in various other related
fields. It is in continuation of our endeavour to update the readers on major
developments at OECD at regular intervals. Various news items included here are
sourced from OECD Newsletters available on its website.

In this
write-up, we have classified the developments into 5 major categories viz.:

1)    BEPS Action Plans

2)    Transfer Pricing

3)    Common Reporting Standard (CRS)

4)    Multilateral Convention on Mutual
Administrative Assistance in Tax Matters

5)    Exchange of Information

1)  BEPS ACTION PLANS

OECD and IGF
release first set of practice notes for developing countries on BEPS risks in
mining industries

For many
resource-rich developing countries, mineral resources present a significant
economic opportunity to increase government revenue. Tax base erosion and
profit shifting (BEPS), combined with gaps in the capabilities of tax
authorities in developing countries, threaten this prospect. The OECD’s Centre
for Tax Policy and Administration and the Intergovernmental Forum on Mining,
Minerals, Metals and Sustainable Development (IGF) are collaborating to address
some of the challenges developing countries face in raising revenue from their
mining sectors. Under this partnership, a series of practice notes and tools
are being developed for governments.

Three practice notes have now been finalised
in October 2018. In addition, interested parties were invited to provide
comments on preliminary versions of these reports. OECD has also published the
public comments submitted. Building on BEPS Action 4, this practice note guides
government policy-makers on how to strengthen their defences against excessive
interest deductions in the mining sector.

2)  TRANSFER PRICING (BEPS ACTIONS 8 TO 10)

i)     BEPS discussion draft on the transfer
pricing aspects of financial transactions

In July, 2018, OECD
had invited Public comments on a discussion draft on financial transactions,
which deals with follow-up work in relation to Actions 8-10 (” Aligning
transfer pricing outcomes with value creation”) of the BEPS Action Plan.

The 2015 report on
BEPS Actions 8-10 mandated follow-up work on the transfer pricing aspects of financial
transactions. Under that mandate, the discussion draft, which does not yet
represent a consensus position of the Committee on Fiscal Affairs or its
subsidiary bodies, aims to clarify the application of the principles included
in the 2017 edition of the OECD Transfer Pricing Guidelines, in particular, the
accurate delineation analysis under Chapter I, to financial transactions. The
work also addresses specific issues related to the pricing of financial
transactions such as treasury function, intra-group loans, cash pooling,
hedging, guarantees and captive insurance.

ii)    OECD releases new guidance on the
application of the approach to hard-to-value intangibles and the transactional
profit split method under BEPS Actions 8-10

The OECD released
on 21.06.2018 two reports containing Guidance for Tax Administrations on the
Application of the Approach to Hard-to-Value Intangibles, under BEPS Action
8; and Revised Guidance on the Application of the Transactional Profit Split
Method, under BEPS Action 10.

In October, 2015,
as part of the final BEPS package, the OECD/G20 published the report on
Aligning Transfer Pricing Outcomes with Value Creation (OECD, 2015), under BEPS
Actions 8-10. The Report contained revised guidance on key areas, such as
transfer pricing issues relating to transactions involving intangibles;
contractual arrangements, including the contractual allocation of risks and
corresponding profits, which are not supported by the activities actually
carried out; the level of return to funding provided by a capital-rich MNE
group member, where that return does not correspond to the level of activity
undertaken by the funding company; and other high-risk areas. The Report also
mandated follow-up work to develop.

Guidance for Tax
Administrations on the Application of the Approach to Hard-to-value Intangibles
(BEPS Action 8)

The new guidance
for tax administration on the application of the approach to hard-to-value
intangibles (HTVI) is aimed at reaching a common understanding and practice
among tax administrations on how to apply adjustments resulting from the
application of this approach. This guidance should improve consistency and
reduce the risk of economic double taxation by providing the principles that
should underlie the application of the HTVI approach. The guidance also
includes a number of examples to clarify the application of the HTVI approach
in different scenarios and addresses the interaction between the HTVI approach
and the access to the mutual agreement procedure under the applicable tax
treaty.

This guidance has
been formally incorporated into the Transfer Pricing Guidelines as an annex to
Chapter VI.

Revised Guidance
on the Application of the Transactional Profit Split Method (BEPS Action 10)

This report
contains revised guidance on the profit split method, developed as part of
Action 10 of the BEPS Action Plan. This guidance has been formally incorporated
into the Transfer Pricing Guidelines, replacing the previous text on the
transactional profit split method in Chapter II. The revised guidance retains
the basic premise that the profit split method should be applied where it is
found to be the most appropriate method to the case at hand, but it
significantly expands the guidance available to help determine when that may be
the case.

It also contains more guidance on how to apply the method, as well as numerous
examples.

3)   COMMON REPORTING STANDARDS

i)     OECD releases further guidance for tax
administrations and MNE Groups on Country-by-Country reporting (BEPS Action 13)

In September, 2018,
the Inclusive Framework on BEPS has released additional interpretative guidance
to give certainty to tax administrations and MNE Groups alike on the
implementation of Country-by-Country (CbC) Reporting (BEPS Action 13).

The new guidance
includes questions and answers on the treatment of dividends received and the
number of employees to be reported in cases where an MNE uses proportional
consolidation in preparing its consolidated financial statements, which apply
prospectively. The updated guidance also clarifies that shortened amounts
should not be used in completing Table 1 of a country-by-country report and
contains a table that summarises existing interpretative guidance on the
approach to be applied in cases of mergers, demergers and acquisitions.

The complete set of guidance concerning the interpretation of BEPS
Action 13 issued so far is presented in the document released in September
2018. This will continue to be updated with any further guidance that may be
agreed.

ii)    OECD clamps down on CRS avoidance through
residence and citizenship by investment schemes

Residence and
citizenship by investment (CBI/RBI) schemes, often referred to as golden
passports or visas, can create the potential for misuse as tools to hide assets
held abroad from reporting under the OECD/G20 Common Reporting Standard (CRS).

In particular,
Identity Cards, residence permits and other documentation obtained through
CBI/RBI schemes can potentially be abused to misrepresent an individual’s
jurisdiction(s) of tax residence and to endanger the proper operation of the
CRS due diligence procedures.

Therefore, and as
part of its work to preserve the integrity of the CRS, the OECD has published
the results of its analysis of over 100 CBI/RBI schemes offered by CRS-committed
jurisdictions, identifying those schemes that potentially pose a high-risk to
the integrity of CRS.

Potentially
high-risk CBI/RBI schemes are those that give access to a low personal tax rate
on income from foreign financial assets and do not require an individual to
spend a significant amount of time in the jurisdiction offering the scheme.
Such schemes are currently operated by Antigua and Barbuda, The Bahamas,
Bahrain, Barbados, Colombia, Cyprus, Dominica, Grenada, Malaysia, Malta,
Mauritius, Monaco, Montserrat, Panama, Qatar, Saint Kitts and Nevis, Saint
Lucia, Seychelles, Turks and Caicos Islands, United Arab Emirates and Vanuatu.

Together with the results of the analysis, the OECD is also publishing
practical guidance that will enable financial institutions to identify and
prevent cases of CRS avoidance through the use of such schemes. In particular,
where there are doubts regarding the tax residence(s) of a CBI/RBI user, the
OECD has recommended further questions that a financial institution may raise
with the account holder.

Moreover, a number
of jurisdictions have committed to spontaneously exchanging information
regarding users of CBI/RBI schemes with all original jurisdiction(s) of tax
residence, which reduces the attractiveness of CBI/RBI schemes as a vehicle for
CRS avoidance. Going forward, the OECD will work with CRS-committed
jurisdictions, as well as financial institutions, to ensure that the guidance
and other OECD measures remain effective in ensuring that foreign income is
reported to the actual jurisdiction of residence.

4) MULTILATERAL CONVENTION ON MUTUAL ADMINISTRATIVE ASSISTANCE IN TAX MATTERS

i) Multilateral
Convention to Implement Tax Treaty Related Measures to Prevent BEPS

In November, 2016,
over 100 jurisdictions concluded negotiations on the Multilateral Convention to
Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit
Shifting (“Multilateral Instrument” or “MLI”) that will
swiftly implement a series of tax treaty measures to update international tax rules
and lessen the opportunity for tax avoidance by multinational enterprises. The
MLI already covers over 75 jurisdictions and has entered into force on 1^st
July, 2018. Signatories include jurisdictions from all continents and all
levels of development.

A number of jurisdictions have also expressed their intention to sign the MLI
as soon as possible and other jurisdictions are also actively working towards
signature.

ii)   Signatories
and Parties (MLI Positions)

The MLI offers
concrete solutions for governments to close the gaps in existing international
tax rules by transposing results from the OECD/G20 BEPS Project into bilateral
tax treaties worldwide. The MLI modifies the application of thousands of
bilateral tax treaties concluded to eliminate double taxation. It also
implements agreed minimum standards to counter treaty abuse and to improve
dispute resolution mechanisms while providing flexibility to accommodate
specific tax treaty policies.

The text of the
Multilateral Instrument (MLI) and its Explanatory Statement were developed
through a negotiation involving more than 100 countries and jurisdictions and
adopted on 24^th November, 2016, under a mandate delivered by G20
Finance Ministers and Central Bank Governors at their February 2015 meeting.
The MLI and its Explanatory Statement were adopted in two equally authentic
languages, English and French.

iii)     Translation
in Other Languages

Members of the ad
hoc Group have prepared translations of the MLI in Chinese, Dutch, German,
Italian, Japanese, Serbian, Spanish and Swedish. The OECD Secretariat has
prepared a translation of the MLI in Arabic. Other MLI translations, including
translations in Greek and Russian, are being prepared by members of the ad hoc
Group and will be made available shortly and further MLI translations are
expected by year end. The translations of the MLI in other languages are
provided only for information purposes. Only the signed English and French MLI
are the authentic MLI texts applicable.

iv)     Saudi
Arabia signs landmark agreement to strengthen its tax treaties

Saudi Arabia has
signed the Multilateral Convention to Implement Tax Treaty Related Measures to
Prevent Base Erosion and Profit Shifting (the Convention) on 18.09.2018. It has
become the 84^th jurisdiction to join the Convention, which now
covers over 1,400 bilateral tax treaties.

5)   EXCHANGE OF INFORMATION

i)  Major enlargement of the global network for
the automatic exchange of offshore account information as over 100
jurisdictions get ready for exchanges

The OECD has
published on 05.07.2018, a new set of bilateral exchange relationships
established under the Common Reporting Standard Multilateral Competent
Authority Agreement (CRS MCAA).

In total, the international legal network for
the automatic exchange of offshore financial account information under the CRS
now covers over 90 jurisdictions, with the others expected to follow suit in
due course. The network has allowed over 100 committed jurisdictions to
exchange CRS information from September 2018 under more than 3200 bilateral
relationships that are now in place.

The full list of automatic exchange relationships that are currently in
place under the CRS MCAA is available online.

There has been a
significant increase of jurisdictions participating in the multilateral
Convention on Mutual Administrative Assistance in Tax Matters, which is the
prime international instrument for all forms of exchange of information in tax
matters, including the exchange upon request, as well as the automatic exchange
of CRS information and Country-by-Country Reports. The total number of
participating jurisdictions now amount to 124. These recent developments show
that jurisdictions are completing the final steps for being able to commence
CRS exchanges from September 2018, therewith delivering on their commitment
made at the level of the G20 and the Global Forum.

ii)    Global Forum publishes compliance ratings on
tax transparency for further seven jurisdictions

The Global Forum is
the leading multilateral body mandated to ensure that jurisdictions around the
world adhere to and effectively implement both the standard of transparency and
exchange of information on request and the standard of automatic exchange of
information. This objective is achieved through a robust monitoring and peer
review process. The Global Forum also runs an extensive technical assistance
programme to provide support to its members in implementing the standards and
helping tax authorities to make the best use of cross-border information
sharing channels. The Global Forum also welcomed Oman as a new member. This
takes its membership to 154 members who have come together to cooperate in the
international fight against cross border tax evasion.

The Global Forum on
Transparency and Exchange of Information for Tax Purposes published on
15-10-2018 seven peer review reports assessing compliance with the
international standard on transparency and exchange of information on request
(EOIR).

These reports
assess jurisdictions against the updated standard which incorporates beneficial
ownership information of all relevant legal entities and arrangements, in line
with the definition used by the Financial Action Task Force Recommendations.

Two jurisdictions –
Bahrain and Singapore – received an overall rating of “Compliant”. Five others
– Austria, Aruba, Brazil, Saint Kitts and Nevis and the United Kingdom were
rated “Largely Compliant”.

The jurisdictions
have demonstrated their progress on many deficiencies identified in the first
round of reviews including improving access to information, developing broader
EOI agreement networks; and monitoring the handling of increasing incoming EOI
requests as well as taking measures to implement the strengthened standard on
the availability of beneficial ownership.

Note: The reader
may visit the OECD website and download various draft reports and Public
Comments referred to in this article for his further studies.