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.
Ireland’s ability to remain competitive in both attracting and retaining international financial services business is central to Ireland’s international financial services strategy. Ireland’s 12.5 percent corporation tax rate remains at the heart of its corporation tax regime.
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 its tax regime to arise from BEPS measures.
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.
Although efforts to digest and understand the full impact of the planned outputs is still at an early stage, we have set out below initial insights on the combined effect of BEPS measures which may be adopted and are likely to be of interest to financial services companies operating in Ireland.
Tax benefits arising from cross border hybrid mismatches on financing flows - likely to be eroded in the near term
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. The measures in the final report are therefore 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 this 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.
If group tax outcomes on financing 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 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 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. This 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 financing arrangements which are based on tax rulings.
BEPS Plan recommended approach to general limitations on interest deductions potentially affect group and market debt
The report under Action 4 of the Plan sets out approaches which countries could adopt if they were minded to introduce measures to generally limit tax deductions for interest and related financial expense on debt. 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 under the Plan's proposals, potentially impose greater restrictions than those that currently apply under these regimes. The report suggests that countries exclude banking and insurance groups from these measures with further work to be done in 2016 to define rules targeted at these sectors.
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). If the group has debt deductions in other countries, the choices made by jurisdictions in response to these measures merits close monitoring and review.
Your KPMG team can assist you to understand if adoption by countries of general interest limitations could affect the group's forecasted tax position on intra group and market debt.
Life in the spotlight
To the extent that intra group financing arrangements reflect transfer pricing rulings or returns which have been benchmarked under transfer pricing principles, taxing authorities will have more immediate and greater insights on these through the transfer pricing documentation requirements and Country- by-Country (CbyC) information reporting requirements proposed under Action 13 of the Plan. This is because many countries can be expected to adopt these measures in the near term which will provide local taxing authorities with additional information on the group's group-wide and local position. This is likely to lead to more challenges.
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.
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.
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 teams can help you assess where gaps in the group’s transfer pricing documentation might arise and can assist in the preparation of key documentation.
Businesses with activities in foreign jurisdictions will need to review the possibility of new taxable presences being recognised in the foreign jurisdiction
Businesses conducting international financial services which involve remote supplies to markets where they have an on the ground presence or conduct marketing efforts 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 presences through permanent establishments are adopted into the tax treaties of countries where 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 a convention which is to commence in November 2015 to negotiate a multilateral instrument (Action 15 of the Plan) which will include a menu of treaty measures for countries to consider adopting through the instrument. The work on designing the multilateral instrument with its menu of provisions for countries to select and adopt is targeted for completion by the end of 2016. The treaty measures related to permanent establishments are expected to be included in this effort as are a wide range of measures designed to prevent the abuse of tax treaties.
International trade generally and financial services form an important part of Ireland’s economy. Ireland’s perspective on tax treaty measures and its 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 be closely monitoring these developments.
KPMG’s international network can assist financial services companies understand the changing landscape for local recognition of taxable presence for corporate income tax.
Does the Irish business rely on treaty based relief from source country taxes on income?
The measures to protect against abuse of tax treaties under Action 6 are likely over time to become part of Ireland’s tax treaty network. Although some measures may be adopted through a multilateral instrument, other measures may be adopted through variations negotiated by the contracting states in bilateral treaties over time as they are updated and renewed.
Financial services companies which are internationally owned will need to closely monitor the evolution and adoption into tax treaties of more targeted and general anti abuse measures. Business will also need to take care that future holding structures and local substance in the conduct and management of the Irish business will best place the group to meet treaty based tests. These can be expected in future to rely to a greater extent on claimants of treaty benefits evidencing the commercial purpose (and non-treaty related benefits) of transactions.
Work is on-going to develop guidance on access to tax treaty benefits for non-regulated Collective Investment Vehicles which is hoped to conclude in 2016.
Your KPMG team can help you to evaluate the extent to which future changes to the framework of tax treaties could potentially affect benefits currently available to Irish financial services companies.
You may need to review your transfer pricing methodologies for financial services transactions
One of the aims of the BEPS project is to realign the taxation of profits with substance and activity and to move away from the allocation of profits on the basis of contractually assumed risk or capital invested. The OECD plans to commence work on developing new guidance on transfer pricing methodologies for financial transactions post October 2015.
KPMG can help you monitor and evaluate future proposed changes to the transfer pricing methodologies for financial transactions and assess their impact on your business.
Information reporting obligations and financial institutions
The impetus to introduce measures to gather and share internationally information on taxpayers continues apace. The BEPS Plan measures are focused on corporate taxpayers and build upon many of the international platforms for exchange of information that are in development for sharing financial information related to individuals.
Financial institutions can be expected to face continued demands in future from a range of international measures to gather and report information on financial products held by their customers.
KPMG teams on FATCA and other international financial information reporting measures can assist your group in meeting international information reporting obligations.
For questions on these or other BEPS related matters, please contact your KPMG team members.