OECD – Recent Developments – an update

In this
issue, we have covered major developments in the field of International
Taxation so far in the year 2017 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 various OECD Newsletters as available on its website.

 In this write-up, we have
classified the developments into 4 major categories viz.:

1)  Transfer
Pricing 

2)  Tax Treaties

3)  BEPS
Action Plans

4)  Exchange
of Information

1) Transfer Pricing

(i)  OECD releases latest updates to the Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administrations

     The OECD released the 2017 edition of the OECD
Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations on 10.07.2017.

    The OECD Transfer Pricing Guidelines
provide guidance on the application of the “arm’s length principle”, which
represents the international consensus on the valuation, for income tax
purposes, of cross-border transactions between associated enterprises. In
today’s economy where multinational enterprises play an increasingly prominent
role, transfer pricing continues to be high on the agenda of tax administrations
and taxpayers alike. Governments need to ensure that the taxable profits of
MNEs are not artificially shifted out of their jurisdiction and that the tax
base reported by MNEs in their country reflects the economic activity
undertaken therein and taxpayers need clear guidance on the proper application
of the arm’s length principle.

   The
2017 edition of the Transfer Pricing Guidelines mainly reflects a consolidation
of the changes resulting from the OECD/G20 Base Erosion and Profit Shifting
(BEPS) Project. It incorporates the following revisions of the 2010 edition
into a single publication:

–   The substantial revisions introduced by the
2015 BEPS Reports on Actions 8-10 “Aligning Transfer Pricing Outcomes with
Value Creation” and Action 13 “Transfer Pricing Documentation and
Country-by-Country Reporting”. These amendments, which revised the guidance in
Chapters I, II, V, VI, VII and VIII, were approved by the OECD Council and
incorporated into the Transfer Pricing Guidelines in May 2016;

–   The revisions to Chapter IX to conform the
guidance on business restructurings to the revisions introduced by the 2015
BEPS Reports on Actions 8-10 and 13. These conforming changes were approved by
the OECD Council in April 2017;

–  The revised guidance on safe harbours in
Chapter IV. These changes were approved by the OECD Council in May 2013; and

–  Consistency changes that were needed in the
rest of the OECD Transfer Pricing Guidelines to produce this consolidated
version of the Guidelines. These consistency changes were approved by the
OECD’s Committee on Fiscal Affairs on 19 May 2017.

    In
addition, this edition of the Transfer Pricing Guidelines include the revised
Recommendation of the OECD Council on the Determination of Transfer Pricing
between Associated Enterprises. The revised Recommendation reflects the
relevance to tackle BEPS and the establishments of the Inclusive Framework on
BEPS. It also strengthens the impact and relevance of the Guidelines beyond the
OECD by inviting non-OECD members to adhere to the Recommendation. Finally, it
includes a delegation by the OECD Council to the Committee on Fiscal Affairs of
the authority to approve by consensus future amendments to the Guidelines which
are essentially of a technical nature.

   To
read the full version online: www.oecd.org/tax/transfer-pricing/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-20769717.htm

(ii) Release of a discussion draft containing Additional Guidance on
Attribution of Profits to Permanent Establishments

   The
Report on Action 7 of the BEPS Action Plan (Preventing the Artificial Avoidance
of Permanent Establishment Status) mandated the development of additional
guidance on how the rules of Article 7 of the OECD Model Tax Convention would
apply to PEs resulting from the changes in the Report, in particular for PEs
outside the financial sector. The Report indicated that there is also a need to
take account of the results of the work on other parts of the BEPS Action Plan
dealing with transfer pricing, in particular the work related to intangibles,
risk and capital. Importantly, the Report explicitly stated that the changes to
Article 5 of the Model Tax Convention do not require substantive modifications
to the existing rules and guidance on the attribution of profits to permanent
establishments under Article 7 (see paragraph 19-20 of the Report).

   Under
this mandate, this new discussion draft has been developed which replaces the
discussion draft published for comments in July 2016. This new discussion draft
sets out high-level general principles outlined in paragraph 1-21 and 36-42 for
the attribution of profits to permanent establishments in the circumstances
addressed by the Report on BEPS Action 7. Importantly, countries agree that
these principles are relevant and applicable in attributing profits to
permanent establishments. This discussion draft also includes examples
illustrating the attribution of profits to permanent establishments arising
under Article 5(5) and from the anti-fragmentation rules in Article 5(4.1) of
the OECD Model Tax Convention.

(iii)   Discussion Draft on the Revised Guidance on Profit Splits

    Action
10 of the BEPS Action Plan invited clarification of the application of transfer
pricing methods, in particular the transactional profit split method, in the
context of global value chains.

    Under
this mandate, this revised discussion draft replaces the draft released for
public comment in July 2016. Building on the existing guidance in the OECD
Transfer Pricing Guidelines, as well as comments received on the July 2016
draft, this revised draft is intended to clarify the application of the
transactional profit split method, in particular, by identifying indicators for
its use as the most appropriate transfer pricing method, and providing
additional guidance on determining the profits to be split. The revised draft
also includes a number of examples illustrating these principles. 

   Public Consultation:  The OECD intends to hold a public
consultation on the additional guidance on the attribution of profits to
permanent establishments and on the revised guidance on the transactional
profit split method in November 2017 at the OECD Conference Centre in Paris,
France. Registration details for the public consultation will be published on
the OECD website in September. Speakers and other participants at the public
consultation will be selected from among those providing timely written
comments on the respective discussion drafts.

(iv) Toolkit to provide practical guidance to developing countries to
better protect their tax bases

    The
Platform for Collaboration on Tax (PCT) – a joint initiative of the
International Monetary Fund (IMF), Organisation for Economic Co-operation and
Development (OECD), United Nations (UN) and World Bank Group – has published a
toolkit to provide practical guidance to developing countries to better protect
their tax bases on  22/06/2017.

   The
toolkit responds to a request by the Development Working Group of the G20,
and addresses an area of tax called “transfer pricing,” which refers
to the prices corporations use when they make transactions between members of
the same group. How these prices are set has significant relevance for the
amount of tax an individual government can collect from a multinational
enterprise.

   The toolkit, “Addressing
Difficulties in Accessing Comparables Data for Transfer Pricing
Analyses”, specifically addresses the ways developing countries can
overcome a lack of data needed to implement transfer pricing rules. This data
is needed to determine whether the prices the enterprise uses accord with those
which would be expected between independent parties. The guidance will also
help countries set rules and practices that are more predictable for business.

    The toolkit is part of a series of reports
by the Platform to help developing countries design or administer strong tax
systems. Previous reports have covered tax incentives and external support for
building tax capacity in developing countries.

     The delivery of the toolkit coincides with
the third meeting of the Inclusive Framework on Base Erosion and Profit
Shifting (BEPS), held in the Netherlands on 21-22 June 2017, and demonstrates
the commitment of the Platform partners to work together to tackle a wide range
of pressing tax issues.

    The
toolkit has been updated following comments on a consultation draft which was
made public in January 2017.

     For
more information on the PCT, visit: www.worldbank.org/en/programs/platform-for-tax-collaboration

(v)  OECD releases a discussion draft on the implementation guidance on
hard-to-value intangibles

     In
May 2017, OECD invited public comments on a discussion draft which provides
guidance on the implementation of the approach to pricing transfers of
hard-to-value intangibles described in Chapter VI of the Transfer Pricing
Guidelines.

    The
Final Report on Actions 8-10 of the BEPS Action Plan (“Aligning Transfer
Pricing Outcomes with Value Creation”) mandated the development of guidance on
the implementation of the approach to pricing hard-to-value intangibles
(“HTVI”) contained in section D.4 of Chapter VI of the Transfer
Pricing Guidelines.

     This
discussion draft, which does not yet represent a consensus position of the
Committee on Fiscal Affairs or its subsidiary bodies, presents the principles
that should underline the implementation of the approach to HTVI, provides
examples illustrating the application of this approach, and addresses the
interaction between the approach to HTVI and the mutual agreement procedure
under an applicable treaty.

2) Tax Treaties

(i)  The Platform for Collaboration on Tax invites comments on a draft
toolkit on the taxation of offshore indirect transfers of assets

     In
August, 2017, the Platform for Collaboration on Tax – a joint initiative of the
IMF, OECD, UN and World Bank Group – sought public feedback on a draft toolkit
designed to help developing countries tackle the complexities of taxing
offshore indirect transfers of assets, a practice by which some multinational
corporations try to minimise their tax liability.

    The tax treatment of ‘offshore indirect
transfers’ (OITs) — the sale of an entity located in one country that owns an
“immovable” asset located in another country, by a non-resident of
the country where the asset is located — has emerged as a significant concern
in many developing countries. It has become a relatively common practice for
some multinational corporations trying to minimise their tax burden, and is an
increasingly critical tax issue in a globalised world. But there is no unifying
principle on how to treat these transactions, and the issue was not addressed
in the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. This draft
toolkit, “The Taxation of Offshore Indirect Transfers – A
Toolkit,” examines the principles that should guide the taxation of
these transactions in the countries where the underlying assets are located. It
emphasises extractive (and other) industries in developing countries, and
considers the current standards in the OECD and the U.N. model tax conventions,
and the new Multilateral Convention. The toolkit discusses economic
considerations that may guide policy in this area, the types of assets that
could appropriately attract tax when transferred indirectly offshore,
implementation challenges that countries face, and options which could be used to enforce such a tax.

     The toolkit responds to a request by the
Development Working Group of the G20, and is part of a series the Platform is
preparing to help developing countries design their tax policies, keeping in
mind that those countries may have limitations in their capacity to administer
their tax systems. Previous reports have included discussions of tax incentives,
and external support for building tax capacity in developing countries. This
series complements the work that the Platform and the organisations it brings
together are undertaking to increase the capacity of developing countries to
apply the OECD/G20 BEPS Project.

     The
Platform aims to release the final toolkit by the end of 2017.

Questions to consider

1.  Does
this draft toolkit effectively address the rationale(s) for taxing offshore
indirect transfers of assets?

2.  Does
it lay out a clear principle for taxing offshore indirect transfers of assets?

3.  Is
the definition of an offshore indirect transfer of assets satisfactory?

4.  Is
the discussion regarding source and residence taxation in this context balanced
and robustly argued?

5.  Is
the suggested possible expansion of the definition of immovable property for
the purposes of the taxation of offshore indirect transfers reasonable?

6.  Is
the concept of location-specific rents helpful in addressing these issues? If
so, how is it best formulated in practical terms?

7.  Are
there other implementation approaches that should be considered?

8.  Is
the draft toolkit’s preference for the ‘deemed disposal’ method appropriate?

9.  Are
the complexities in the taxation of these international transactions adequately
represented?

(ii) OECD releases the draft contents of the 2017 update to the OECD
Model Tax Convention

    In
July 2017, the OECD Committee on Fiscal Affairs released the draft contents of
the 2017 update to the OECD Model Tax Convention prepared by the Committee’s
Working Party 1. The update has not yet been approved by the Committee on
Fiscal Affairs or by the OECD Council, although, as noted below, significant
parts of the 2017 update were previously approved as part of the BEPS Package.
It will be submitted for the approval of the Committee on Fiscal Affairs and of
the OECD Council later in 2017. This draft therefore does not necessarily
reflect the final views of the OECD and its member countries.

     Comments
are requested at this time only with respect to certain parts of the 2017
update that have not previously been released for comments.

    As part of the 2017 update, a number of
changes and additions will also be made to the observations, reservations and
positions of OECD member countries and non-member economies. These changes and
additions are in the process of being formulated and will be included in the
final version of the 2017 update. 

(iii) OECD releases BEPS discussion drafts on attribution of profits to
permanent establishments and transactional profit splits

     In
June 2017, OECD invited Public comments on the following discussion drafts:

–     Attribution of Profits to Permanent
Establishments, which deals with work in relation to Action 7
(“Preventing the Artificial Avoidance of Permanent Establishment
Status”) of the BEPS Action Plan;

–  Revised Guidance on Profit Splits,
which deals with work in relation to Actions 8-10 (“Assure that transfer
pricing outcomes are in line with value creation”) of the BEPS Action
Plan.

3) Base Erosion and Profit Shifting (BEPS) Action
Plans

(i)   OECD releases further guidance on Country-by-Country reporting
(BEPS Action 13)

     On
06/09/2017, the OECD’s Inclusive Framework on BEPS has released two sets of
guidance to give greater certainty to tax administrations and MNE Groups alike
on the implementation and operation of Country-by-Country (CbC) Reporting (BEPS
Action 13).

     Existing guidance on the implementation of
CbC Reporting has been updated and now addresses the following issues: 1) the
definition of revenues; 2) the treatment of MNE groups with a short accounting
period; and 3) the treatment of the amount of income tax accrued and income tax
paid. The complete set of interpretative guidance related to CbC Reporting
issued so far is presented in the document released today.

     Guidance has also been released on the
appropriate use of the information contained in CbC Reports. This includes
guidance on the meaning of “appropriate use”, the consequences of
non-compliance with the appropriate use condition and approaches that may be
used by tax administrations to ensure the appropriate use of CbCR information.

(ii)  Neutralising the tax effects of branch mismatch arrangements

     On
27/07/2017, the OECD released a report on Neutralising the Effects of
Branch Mismatch Arrangements (BEPS Action 2).

     In October 2015, as part of the final BEPS
package, the OECD/G20 published a report on Neutralising the Effects of
Hybrid Mismatch Arrangements (OECD, 2015). This report set out
recommendations for domestic rules that put an end to the use of hybrid
entities to generate multiple deductions for a single expense or deductions
without corresponding taxation of the same payment. While the 2015 Report
addresses mismatches that are a result of differences in the tax treatment or
characterisation of hybrid entities, it did not directly consider similar
issues that can arise through the use of branch structures. These branch
mismatches occur where two jurisdictions take a different view as to the
existence of, or the allocation of income or expenditure between, the branch
and head office of the same taxpayer. These differences can produce the same
kind of mismatches that are targeted by the 2015 Report thereby raising the
same issues in terms of competition, transparency, efficiency and fairness.
Accordingly, this new report sets out recommendations for changes to domestic
law that would bring the treatment of these branch mismatch structures into
line with outcomes described in the 2015 Report.

(iii) Major progress reported towards a fairer and more effective
international tax system

     The
latest Report from OECD Secretary-General Angel Gurría to G20 Leaders  describes the continuing fight against tax
avoidance and tax evasion as one of the major success stories of the G20,
founded on enhanced international co-operation. 
The report updates progress in key areas of OECD-G20 tax work, including
movement towards automatic exchange of information between tax authorities and
implementation of key measures to address tax avoidance by multinationals.

     The report to G20 Leaders highlights
progress in each of the areas where OECD has been mandated to boost
international co-operation on tax issues. 
This includes ongoing movement towards greater transparency, principally
through the work of the OECD-hosted Global Forum on Transparency and Exchange
of Information for Tax Purposes, which now includes 142 members and is managing
worldwide implementation of the Common Reporting Standard and the first
automatic exchanges of financial account information (AEOI), to take place in
September 2017.

    Global Forum members have established close
to 2,000 bilateral exchange relationships for AEOI. “These efforts are already
paying off, with 500000 people having disclosed offshore assets and around EUR
85 billion in additional tax revenue identified as a result of voluntary
compliance mechanisms and offshore investigations.” Mr Gurría said.

   Implementation also continues on measures to
reduce tax avoidance by multinational enterprises under the G20/OECD BEPS
Project. 101 countries and jurisdictions are now working on an equal footing
to set standards and monitor implementation via the OECD/G20 Inclusive Framework
on BEPS. The OECD has established a peer review process to assess
implementation of the BEPS minimum standards and work continues on pending
issues including transfer pricing.

     At the same time, countries are considering
measures to enhance tax certainty based on the joint OECD-IMF report to G20
Finance Ministers, as well as progressing discussions on the complex issues
around taxation of the digital economy. An interim report on taxation of the
digital economy will be delivered by the OECD/G20 Inclusive Framework on BEPS
in early 2018, followed by a final report in 2020.

4) Exchange of Information

     CFA
Approves New Manual on Information Exchange

     In 2006, the Committee on Fiscal Affairs
approved a Manual on Information Exchange. The Manual provides practical
assistance to officials dealing with exchange of information for tax purposes
and may also be useful in designing or revising national manuals.

   The Manual follows a modular approach. It
first discusses general and legal aspects of exchange of information and then
covers the following specific subject matters:

(1) Exchange of Information on Request,

(2) Spontaneous Information Exchange,

(3) Automatic (or Routine) Exchange of
Information,

(4) Industry-wide Exchange of Information,

(5) Simultaneous Tax Examinations,

(6) Tax Examinations Abroad,

(7) Country Profiles Regarding Information
Exchange, and

(8) Information Exchange Instruments and
Models.

(9) Module
on joint audits: the Forum on Tax Administration joint Audits Participants Guide

     Joint
Audits (JA) are an innovative form of cooperation between countries. Bilateral
or multilateral JA have great potential for transfer pricing audits etc.
A JA is defined as an arrangement whereby Participating Countries agree to
conduct a coordinated audit of one or more related taxable persons (both legal
entities and individuals) where the audit focus has a common or complementary
interest and/or transaction. This new module reproduces the FTA (Forum on Tax
Administration) joint Audits Participants Guide issued by the FTA at its 6^th
meeting on 15-16 September 2010 in Istanbul where tax commissioners met to
co-ordinate actions to address international compliance and taxpayer service.
They agreed that major improvements in compliance can be obtained through in
particular a Report on Joint Audits to support coordinated action through joint
audits and this  practical Guide intended
to inform tax auditors and their strategy team http://www.oecd.org/dataoecd/10/13/45988932.pdf.

     The modular approach allows countries to
tailor the design of their own manuals by incorporating only the modules that
are relevant to their specific exchange of information programmes.