The Organisation for Economic Cooperation and Development (OECD) released on 5 October 2015 much heralded final reports under its Action Plan on Base Erosion and Profit Shifting (BEPS Plan).
The reports represent the conclusion of the discussion and debate phase of the BEPS Plan. Substantial further multilateral and domestic tax law developments remain ahead as countries decide which measures to enact in the implementation phase of the Plan.
Ireland’s 12.5 percent rate of corporation tax remains unaffected by the BEPS Plan. Ireland’s tax regime is considered by the OECD to be well aligned with the framework of the BEPS Plan measures and is not expected to change substantially in response to BEPS measures.
We believe that Ireland is likely to respond to BEPS measures by following a mixed approach of early adoption of measures that have won widespread consensus and which enhance the transparency reputation of its tax regime and adopting a ‘wait and see’ approach before enacting measures that might potentially affect the international competitive position of Ireland's tax regime.
Although efforts to digest and understand the full impact of the October 2015 BEPS proposals are still at an early stage, if the effective rate of tax borne on group profits is dependent on tax outcomes from financing flows, you will need to consider whether countries' responses to the BEPS measures described below could affect your position.
The October 2015 report on Action 2 of the Plan contains detailed technical guidance for countries to use when designing measures for local adoption in order to deny the benefits of hybrid mismatches arising in their jurisdictions. These measures, although complex and detailed, have gained widespread political support.
Countries have already moved to adopt ‘anti-hybrid’ measures into their local law based on the BEPS Plan September 2014 interim report on hybrid mismatches. The October 2015 measures can therefore be expected to be widely enacted – but with local variations.
Ireland’s tax regime is largely unaffected by these mismatches. Groups with intra group financing structures that rely on hybrid mismatches to reduce foreign taxes are likely to find the benefits from these mismatches eroding in the near term. The pace of adoption by countries of measures to counter tax savings from hybrid mismatches is likely to accelerate following release of the final guidance.
European Union (EU) Member States are required to enact proposals to combat ‘hybrid’ debt arrangements within the EU to take effect from 1 January 2016. Luxembourg and the Netherlands which are jurisdictions where these benefits currently arise have released draft measures which are expected to tax previously tax exempt returns on certain hybrid debt financing arrangements from 1 January 2016. Common lending structures from Ireland to Luxembourg / the Netherlands are not expected to be affected in the near term.
The EU is likely to also move to try to coordinate the adoption across EU Member States of measures which are designed to eliminate other hybrid mismatches within the EU such as hybrid entities and branches.
KPMG teams can help you to monitor and assess the potential impact of responses to the BEPS hybrid mismatches across jurisdictions as countries take actions in response to these measures.
Proposed measures for the spontaneous compulsory exchange of rulings under Action 5 on the BEPS Plan mirror closely EU proposals for the automatic exchange of rulings between taxing authorities of EU Member States. The EU proposals could secure Member State agreement in 2015 with the potential for exchange of cross border rulings between EU tax authorities to commence from 2017 (with a proposed scope to include rulings given from 2012). These proposals potentially encompass tax rulings on group financing flows.
We have already seen the debate on the possibility of ruling exchange proposals affect the ruling practices of tax authorities in the EU. The is likely to result in less certainty for taxpayers as taxing authorities become less willing to provide certainty on the tax treatment of complex transactions through tax rulings.
Your KPMG team can help you to assess the implications of the group continuing to rely on tax outcomes for group financing arrangements which are based on tax rulings.
The BEPS Plan measures under Action 4 set out approaches which countries could adopt if they were minded to introduce measures to generally limit tax deductions for interest and related financial expense. These general limitation measures cover not just intra group expense deductions but also interest and financial expense on third party debt.
The suggested framework for limiting deductions is very similar to the ‘earnings stripping’ provisions already in place in Germany and the United States but, if adopted by countries, potentially impose greater restrictions than those that currently apply under these regimes.
Ireland is likely to adopt a ‘wait and see’ approach in order to evaluate the potential effect of these measures before deciding whether to adopt them (Ireland’s tax regime already has a range of targeted measures to limit interest deductions). For groups with interest expense deductions in other countries, the choices made by jurisdictions in response to these measures merits close monitoring and review.
You may need to consider whether adoption by countries of general interest limitations could affect the group’s forecasted tax position not just on expenses on intra group debt but also on market debt.
KPMG can assist you in taking action now to review and assess the extent to which these measures might affect your business.
To the extent that intra group financing arrangements reflect transfer pricing rulings or returns which have been benchmarked under transfer pricing principles, taxing authorities are likely to have more immediate and greater insights on these through the transfer pricing documentation requirements proposed under Action 13 of the Plan.
As these proposals will give local taxing authorities expanded information on the group’s transfer pricing policies (including rulings which have current effect), it can be expected that many countries that adopt OECD transfer pricing guidelines will move to adopt these expanded documentation requirements into local transfer pricing requirements.
KPMG can help you assess where gaps in the group’s transfer pricing documentation might arise.
For questions on these or other BEPS related matters, please contact your KPMG team members.