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.
Irish headquartered groups
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 BEPS related changes to Ireland's tax regime.
We believe that Ireland is likely to respond to 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. Ireland is likely to adopt measures only where there is multilateral adoption so that Ireland’s tax regime retains its relative competitive position.
Although efforts to digest and understand the full impact of the October 2015 BEPS proposals are still at an early stage, an Irish headquartered group operating internationally will need to monitor and carefully evaluate the impact on its business of the following measures.
Life in the spotlight
Countries can be expected to enact in the near term BEPS Plan measures which will give their local taxing authorities greater insights on the local presence of international groups.
This should mean that, over time, taxing authorities will have increased insights on the Irish group’s business supply chain, the location of its key executives and the jurisdictions in which important business risks and functions are managed. This is likely to lead to greater risk of challenge by tax authorities.
You will need to consider whether the group’s current transfer pricing policies could withstand a robust scrutiny under the lens of this future expanded scope of information.
Irish headquartered groups with overseas operations that are substantial in comparison to headquarter location activities will need to carefully consider the impact of a potential increase in the volume of transfer pricing challenges in the countries in which they operate. Past experience suggests that likely areas of challenge by local taxing authorities will relate to pricing of intra group royalties and fees for management services. Taxing authorities may have more insights to assist them in their review of the relative weight and importance of oversight exercised in Ireland and operations at the subsidiary location.
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.
Transfer pricing documentation - more insights disclosed on group-wide and local pricing
Many countries have already signalled their intention to adopt into local transfer pricing requirements the more detailed transfer pricing documentation requirements included in the BEPS Plan Action 13 guidance for the master file and local file. The 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 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 consistency in the group-wide approach to transfer pricing will likely be required.
Guidance on Country-by-Country (CbyC) information reporting for transfer pricing (also under Action 13) appears likely to have widespread adoption. Ireland is expected to introduce CbyC reporting measures in Finance Bill 2015 for groups with consolidated revenues greater than €750 million to apply for accounting periods beginning on or after 1 January 2016. The UK has announced its intention to adopt the CbyC reporting measures.
KPMG teams can help you assess where gaps in your current documentation might arise. They can help you review and challenge whether CbyC reportable information appears consistent with the wider business picture presented by group transfer pricing policies.
If group tax outcomes are dependent on tax rulings a less certain future lies ahead
Proposed measures for the spontaneous compulsory exchange of rulings under Action 5 on the BEPS Plan mirror closely European Union (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 and on intangible assets and royalty 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 result is likely to be 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 which are based on tax ruling regimes.
Adoption by countries of the BEPS Plan approach to general limitations on interest deductions potentially affect group debt and market debt
The BEPS Plan recommendations 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 expense. These general limitation measures cover not just intra group debt but also interest and other financial expense arising on third party debt.
The suggested BEPS Plan approach to limiting interest 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 response to these measures (Ireland’s tax regime already has a range of targeted measures to limit interest deductions). If the group has tax deductions for interest and finance expense in other countries, the choices made by other jurisdictions in response to the interest deduction 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 intra group debt but also on market debt.
Countries are moving ahead to enact measures to deny tax benefits from hybrid mismatches arising from intra group financing flows. The pace of enacting these measures can be expected to accelerate following the release of final guidance in the Action 2 report.
KPMG can assist you in taking action now to review and assess the extent to which these measures might affect your business.
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 the 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.
Is the group eligible for tax incentives related to intangible assets?
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 set out by the Forum on Harmful Tax Practices in the report on Action 5. The EU approach to patent box regimes is expected to be aligned with the OECD approach. Measures to enact Ireland’s KDB will be included in Ireland’s Finance Bill 2015.
The framework for acceptable patent box regimes set out under Action 5 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 corporation tax regime is considered to be well aligned with the BEPS Plan measures. It is not expected to change substantially in a post BEPS world and remains a comparatively attractive regime for profits arising from innovation and intangible assets generally.
KPMG teams can help you understand if your group is taking best advantage of Irish tax incentives on innovation and intangible assets.
Does the group rely on treaty based relief from source country taxes on income?
Measures to protect against abuse of tax treaties under Action 6 and to extend the scope of permanent establishments under Action 7 are likely over time to become part of Ireland’s tax treaty network (and part of the worldwide population of over 3,000 treaties which follow the OECD model). Some treaty based measures may be adopted by countries through a multilateral instrument which is to be negotiated and designed by the end of 2016. Other measures are likely to be adopted through variations agreed by the contracting states in bilateral treaties over time as treaties are updated and renewed.
Where your group relies on group members with limited substance claiming benefits under tax treaties, the possible adoption into treaties of more targeted and general anti abuse measures will merit close monitoring and review. Groups will also need to take care that future group holding structures and cross border operating structures will place the group in the best position to claim expected treaty benefits. In future, treaty based benefits can be expected to rely to a greater extent on claimants evidencing the commercial purpose (and non-treaty related benefits) of transactions.
Your KPMG team can help you to evaluate the extent to which future changes to the framework and provisions in tax treaties could potentially affect benefits currently available to the group.
For questions on these or other BEPS related matters, please contact your KPMG team members.