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.
Although this is still an early stage of review, based on our analysis of measures we expect countries to enact, we have set out below KPMG insights on the combined effect of future BEPS measures which are likely to be of interest to internationally owned businesses operating in Ireland.
Ireland’s ability to remain competitive in both attracting and retaining mobile business remains at the heart of Ireland’s international tax strategy. Ireland’s 12.5 percent corporation tax rate is unaffected by the BEPS Plan and remains central to its corporation tax regime.
Ireland’s tax regime is considered by the OECD to be well aligned with the framework of the BEPS Plan. We do not expect substantive changes to it from BEPS measures and the tax regime is expected to remain highly competitive in a post BEPS future.
We believe that Ireland is likely to respond to the BEPS measures by following a mixed approach. We expect that Ireland will adopt in the near term measures that have won widespread consensus and which enhance the transparency reputation of its tax regime. Ireland will adopt a ‘wait and see’ approach before adopting measures that might potentially affect the international competitive position of its tax regime. It is likely to adopt measures only where there is multilateral adoption so that Ireland’s tax regime retains its relative competitive position.
The OECD recommendation is that where intangible assets 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.
For US owned groups, the reaction from the US authorities to this will be interesting as it is at odds with their current view of the arm's length principle. Most groups will need to consider existing pricing under such structures and (depending on the US reaction) perhaps consider whether their preference will be to bring their 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.
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 which is set out by the Forum on Harmful Tax Practices in the report under Action 5. The European Union (EU) is expected to align its approach to EU patent box regimes with this guidance.
Measures to enact the KDB will be included in Ireland’s Finance Bill 2015.
The Modified Nexus Approach 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’ teams can help you understand if your group is taking best advantage of Ireland’s tax regime on innovation and intangible assets.
Businesses with high value intangible assets will need to review the updated guidance available on transfer pricing of intangible assets which is captured in the October 2015 on transfer pricing (Plan Actions 8 to10). OECD implementation guidance is not yet final on pricing Hard-to-Value Intangibles. The OECD’s recommended approach to profit split methodologies for businesses with closely integrated international supply chains is not yet available. Work on these areas has been deferred to 2016. Until final guidance emerges in these areas, it will not be possible for many businesses which operate internationally through closely integrated supply chains or exploit highly innovative intangible assets to fully understand the future transfer pricing landscape in countries that follow OECD guidelines.
Even where final guidance as adopted in OECD guidelines is some time away, taxing authorities are already basing audit strategies and transfer pricing challenges on local pricing of royalties and intra group transfers of intangibles on emerging OECD guidance. This evolution of on-the-ground challenge based on guidance not yet included in final guidelines (or formally adopted into local law) is likely to increase the uncertainty for business on transfer pricing outcomes. This could lead to business facing a greater number of disputes.
KPMG can help you identify these trends as they emerge across the jurisdictions in which the group operates.
Any countries have already signalled their intention to adopt into local transfer pricing requirements the Plan's detailed transfer pricing documentation requirements for master files and local files which are set out in the Action 13 report. The future availability of this information on an annual basis (instead of in response to specific audit queries) is likely to shift over time the perspectives that taxing authorities at both parent country and subsidiary country will have on the group’s business. More than ever, transfer pricing policies adopted within the group will need to be aligned with the group’s business model and greater local country consistency with a groupwide approach to transfer pricing will likely be required.
Guidance on Country-by-Country (CbyC) information reporting for transfer pricing (under Action 13) also appears likely to have widespread adoption. 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 in which the group operates. This is likely to lead to greater risk of challenge by tax authorities.
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.
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.
KPMG can help you to assess whether insights on Irish activities in the context of groupwide operations appear consistent with the wider business picture presented by group transfer pricing policies and can assist in the preparation of key documentation.
Businesses conducting international trade which involves the remote supplies of goods or services to markets where they have an on the ground presence may find in future that they will trigger taxable presences in countries where, to date, they may have relied on exceptions under tax treaties. Where measures which are proposed under Action 7 to broaden the scope of taxable permanent establishments are adopted into the tax treaties of countries in which Irish based business makes supplies, this could see groups having a greater number of taxable presences in customer markets. This could lead to increased tax compliance and transfer pricing obligations. OECD work continues on expanding guidance for allocating profits to branches.
Ireland will participate in the work of the convention which is to commence in November 2015 to negotiate a multilateral instrument (Action 15 of the Plan) that will present tax treaty measures for adoption by countries under the instrument. The work on designing the menu of provisions for countries to select and enact is targeted for completion by the end of 2016. Measures related to permanent establishments are expected to be included as are a wide range of other measures designed to prevent the abuse of tax treaties.
International trade forms an important part of Ireland’s economy. Ireland’s position on adopting measures into its tax treaties can be expected to reflect the importance to Ireland of securing the continued effectiveness of its tax treaty network in underpinning the ability of Irish based business to conduct international trade. KPMG will closely monitor these developments.
Separately, it is clear that, during the period of work on the Plan, taxing authorities have come alive to the opportunities for collection of tax revenues through VAT and sales taxes on cross border supplies of goods and services. Not only in the EU but as far afield as Australia, countries are reviewing and introducing VAT and local sales tax charges in the country of the consumer on a broader range of digital supplies. They are also considering reducing thresholds for the operation of taxes for cross border, low value supplies of goods.
These efforts can be expected to increase the VAT and sales tax compliance burden for Irish based businesses operating internationally which supply goods and services to consumers. They may lead to business having to register locally and collect VAT and sales taxes in a wider number of markets than at present.
KPMG’s international network can assist business understand the changing landscape for local recognition of taxable presence for corporate income tax and the scope of VAT and sales taxes on cross border supplies.
Measures to protect against abuse of tax treaties under Action 6 of the Plan are likely over time to be included in Ireland’s tax treaty network. Although some measures may be adopted at one time through local enactment of a multilateral instrument, other measures are likely to be adopted over time through variations negotiated by the contracting states as the treaties are updated and renewed.
Irish based business which is internationally owned will need to closely monitor the evolution and adoption of anti abuse measures into tax treaties which follow the OECD model treaty. Your group will also need to take care that holding structures and local substance in the conduct and management of business from an Irish base will best place the group to meet treaty based tests in future. These can be expected to rely to a greater extent on claimants of treaty benefits being in a position to evidence the commercial purpose (and non-treaty related benefits) of transactions with tax treaty states.
Your KPMG team can help you to evaluate the extent to which potential changes to the framework of tax treaties could potentially affect benefits currently available to the Irish business.
Proposed measures for the spontaneous compulsory exchange of rulings on preferential tax regimes under Action 5 on the BEPS Plan mirror closely 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).
These EU proposals potentially encompass tax rulings on group financing as well as 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, international measures to exchange rulings may well bring other group rulings to the attention of international tax authorities.This could lead to the group facing challenges by tax authorities in other countries potentially 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. This 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 which are based on rulings.
For questions on these or other BEPS related matters, please contact your KPMG team members.