BEPS insights – Business with High Value Intangible Assets

BEPS insights – High Value Intangible Assets

Although this is still an early stage of review, based on the BEPS Plan measures that we expect countries to enact, KPMG has set out below the potential international impact of BEPS measures for groups operating internationally with high value intangible assets.

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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 into law in the Plan's implementation phase.

Business with high value intangible assets

Although this is still an early stage of review, based on the BEPS Plan measures that we expect countries to enact, KPMG has set out below the potential international impact of BEPS measures for groups operating internationally with high value intangible assets.

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. We do not expect substantive changes to it from BEPS measures. The tax regime is expected to remain highly competitive in its taxation of profits arising from the exploitation of intangible assets.

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 a ‘wait and see’ approach before adopting measures that might potentially affect the international competitive position of its tax regime.

Acceptable tax regimes for intangible assets – is the group eligible for Irish tax incentives related to intangible assets? 

If the group benefits from existing patent box regimes, you will need to monitor the impact of recommended transitional arrangements under Action 5 for jurisdictions closing down existing patent box regimes and moving to adopt patent boxes that are compliant with the approved Modified Nexus Approach. We expect that the EU’s view and approach to existing patent box regimes will be aligned with the Forum on Harmful Tax Practices recommendations under Action 5.

For groups with material research and development activities in Ireland, there will be opportunities to review whether Ireland’s Knowledge Development Box (KDB) might offer the potential for a reduced rate of tax under a regime which is intended to be compliant with the Modified Nexus Approach under Action 5. Measures to enact the KDB will be included in Ireland’s Finance Bill 2015.

The framework for acceptable patent box regimes is likely to limit the extent of the tax benefit available to companies. However, even where the KDB will not provide material benefits, Ireland’s R&D tax credit regime and capital allowances regime for intangible assets may still offer an attractive opportunity for business investing in innovation and intangible assets in Ireland. Ireland’s 12.5 percent corporation tax regime still remains a comparatively attractive regime for taxation of profits from intangible assets and is expected to remain so in a post BEPS future.

KPMG can help you understand if your group is taking best advantage of Irish tax incentives on innovation and intangible assets.

Intangible assets - offshore versus onshore

The OECD recommendation is that where intangibles are located in a jurisdiction without significant economic substance in terms of employees and decision makers, the return should be limited to a financial return linked to the amount of funds invested by the offshore entity. Any return in excess of the limited financial return should be attributed to jurisdictions with the substance, e.g. key decision makers.

Where groups have offshore holding structures for intangible assets, they will need to consider existing pricing under such structures and perhaps consider whether their preference will be to bring the intangible assets into a jurisdiction with greater economic substance. Ireland is well placed to benefit from any such decisions to transfer intangible assets onshore as it has a comparatively attractive regime.

Life in the spotlight – tax authorities will have more insights on value drivers for high value intangible assets at group and local level and will know where key people and business operations are located

We believe that many countries will enact in the near term measures to apply the transfer pricing documentation standards and Country-by-Country (CbyC) information reporting template (for larger groups) which are set out under Action 13 of the Plan. This is because it will give their local taxing authorities greater information at both parent and subsidiary country level on the group’s business and presence across the jurisdictions in which the group operates.

The Action 13 report provides guidance for adoption into OECD guidelines of more extensive transfer pricing documentation to be made available annually in master files and local files to taxing authorities at parent company and local subsidiary level. This information would allow them form a more comprehensive view on the main drivers of value in a business and understand more fully where the people and business activities that create and exploit this value are located across the group. This is likely to lead to a greater risk of challenge by tax authorities.

Measures are proposed to improve the effectiveness and timeliness of existing Mutual Agreement Procedures (MAP) for taxpayers through mandated standards for applying MAP and country peer review to ensure compliance. A number of countries, including Ireland, have committed to adopting a mandatory binding arbitration provision to be negotiated during 2016. This may be attractive to some groups as a new dispute resolution mechanism.

You will have to assess if you are confident that the group’s transfer pricing policies and documentation are aligned with the group’s current business operating model and are capable of withstanding robust scrutiny in the spotlight of this additional information.

It is likely that countries’ adoption of the documentation guidance will not be uniform - local variations will remain. Group documentation efforts and resources will need to accommodate this.

The CbyC measures include proposals that groups with consolidated revenues in excess of €750 million complete a country-by-country reporting template of information which will provide a breakdown of profits, taxes and employee presence to the parent company taxing authority to be shared with taxing authorities in other countries.

Ireland is expected to introduce CbyC measures aligned with the OECD proposals in Finance Bill 2015. These are expected to require Irish parented groups to complete the template and also to require reporting of information related to the Irish based subsidiaries of international groups which meet the size threshold where the parent country does not report. Other countries are already enacting the measures to report in 2017 information in relation to 2016 accounting periods.

KPMG can help you assess where gaps in your current documentation might arise. They can help you assess whether CbyC reportable information appears consistent with the wider business picture presented by group transfer pricing policies.

If tax outcomes on intangible assets are dependent on tax rulings a less certain future lies ahead

Proposed measures for the spontaneous compulsory exchange of rulings on preferential tax regimes under Action 5 on the BEPS Plan mirror closely European Union (EU) proposals for the automatic exchange of rulings between EU taxing authorities. It is possible that 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).

The EU proposals potentially encompass tax rulings on intangible assets and group royalty flows. In addition to transfer pricing rulings which could be presented to tax authorities under the expanded transfer pricing documentation recommendation under Action 13, measures to exchange rulings may well bring other group rulings on intangible assets to the attention of international tax authorities. This could lead to challenges by tax authorities in other countries which consider themselves affected by the ruling outcomes.

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 in future for business 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 on intangible assets which are based on tax rulings.

Transfer pricing guidance on intangibles – more classes of intangible are recognised with ‘more value in play’

One of the main areas of interest in the transfer pricing report issued under Actions 8 to 10 lies in the expanded guidance on transfer pricing related to intangibles. The guidance has yet to be implemented and adopted formally into the OECD guidelines. Still missing is guidance on profit split methodologies which might be applied to allocate profits in closely integrated supply chains. Final implementation guidance is awaited on Hard-to-Value Intangibles. Work on these guidance areas is to continue in 2016.

The transfer pricing guidance on intangibles recognises that goodwill and other classes of assets are intangible assets for transfer pricing purposes. Business with high value, self -generated intangible assets will likely find that future transfer pricing requirements under OECD guidelines will apply to classes of assets not recognised for accounting purposes and not currently in the scope of transfer pricing. This may well result in the group facing greater tax at risk and ‘value at play’ when pricing intra group asset transfers in the course of group restructurings or in relation to intra group royalties or payments for services.

Even though the October 2015 guidance on intangibles has not yet found its way into final OECD guidelines and therefore may not formally be part of a jurisdiction’s transfer pricing requirements, taxing authorities are clearly using the insights in the draft and emerging guidance to direct their audit review and challenges of transfer pricing on intangible assets. Taxpayers need to be aware of evolving guidance to anticipate these challenges and to prepare to defend their position.

KPMG can help you identify these trends as they emerge across the jurisdictions in which the group operates.

For questions on these or other BEPS related matters, please contact your KPMG team members.

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