1. OECD BEPS project & OECD guidance on country by country documentation
Nexia Tax Conference, 2014
Maulik Doshi - SKP

2. Background
Globalization has benefited our domestic economies and has impacted countries’ corporate income tax regimes
As the economy became more globally integrated, it opened up opportunities for MNEs to greatly minimize their tax burden
However, this has led to rise of tax fairness issues as follows:
governments have to cope with less revenue and a higher cost to ensure compliance
Individual taxpayers are harmed as they bear a greater share of the tax burden.
corporations that operate only in domestic markets have difficulty in competing with MNEs that have the ability to shift their profits across borders to avoid or reduce tax

3. Background
GE - $81 billion during the past decade, but paid an average of just 2.3% of its income in taxes since 2002.
DuPont - thanks to some interesting accounting practices, not only avoided paying taxes, but also got $109 million tax benefit from the government.
Google - in 2010, the company brought in a profit of $10.8 billion, paid only 2.4%.
Amazon - sales in the UK of £3.35bn in 2011, only reported a "tax expense" of £1.8m.

4. & Consequences follow...

5. World protests

6. What the BEPS is this ?

7. BEPS
What is BEPS ?
BEPS is tax planning, which exploits gaps in tax rules, making profits shift to locations with little or no activity and having low taxes
Three popular mechanisms for profit shifting are:
Hybrid Mismatch
Special Purpose Entity / Vehicle
Transfer Pricing
Not always illegal, but taking advantage of current archaic tax rules that is disassociated with today’s environment

8. Key pressure areas giving rise to opportunities for BEPS
Hybrid mismatches in entity and instrument
Profits from delivery of digital goods and services;
Financial transactions - debt-financing, captive insurance etc;
Transfer pricing - shifting of risks and intangibles;
The effectiveness of anti-avoidance measures - GAARs, CFC regimes etc; and
The availability of harmful preferential regimes

9. BEPS
Action Plan
In July 2013, having regard to the pressure areas, OECD has set forth 15 actions to address BEPS which are based on 3 core principles:
Coherence
Substance
Transparency
Each of the action plans lay down:
Expected output
Timelines

10. BEPS – Action plans 1
Address the tax challenges of the digital economy
Neutralize the effects of hybrid mismatch arrangements
Strengthen CFC rules
Limit base erosion via interest deductions and other financial payments
Counter harmful tax practices with transparency and substance
Prevent treaty abuse
Prevent the artificial avoidance of PE status
Assure, TP outcomes are in line with value creation - Intangibles
Assure, TP outcomes are in line with value creation - Risks and capital
Assure, TP outcomes are in line with value creation - Other high-risk transactions
Methodologies to collect and analyze data on BEPS and the actions to address it
Require taxpayers to disclose their aggressive tax planning arrangements
Re-examine transfer pricing documentation
Make dispute resolution mechanisms more effective
Develop a multilateral instrument 8 9 2 7 10 15 3 6 11 14 4 12 13 5

11. BEPS action plan – Transfer pricing areas
Specific action areas to ensure transfer pricing outcomes are in line with the value creation –
Action plans 8, 9 & 10 aims at aligning taxing rights with substance
Re-examine transfer pricing documentation-
Action plan 13 aims at ensuring transparency while improving certainty

12. Action plan – Transfer pricing areas
Action 8: Intangibles
The OECD will develop rules to prevent profit shifting by moving intangibles by:
Adopting a broad and clearly delineated definition of intangibles;
Ensuring profits are appropriately allocated in accordance with value creation;
Creating special guidelines for transfers of hard-to-value intangibles; and
Revisiting guidance on cost contribution arrangements.
Expected Output: Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention
Deadline: September 2014 – September 2015

13. Action plan – Transfer pricing areas
Action 9: Risks and capital
The OECD will develop rules to prevent profit shifting by transferring risks/allocating capital by:
Adopting TP rules so that returns do not accrue to an entity solely because it bears contractual risk or provides capital; and
Aligning returns with value creation
Expected Output: Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention
Deadline: September 2015

14. Action plan – Transfer pricing
Action 10: Other high-risk transactions
The OECD will develop rules to prevent profit shifting by entering into transactions that would not/only rarely occur between unrelated parties by:
Clarifying circumstances in which transactions can be recharacterised;
Clarifying the application of TP methods (in particular profit splits with respect to global value chains); and
Providing protection against common types of base eroding payments, such as management fees and head office expenses
Expected Output: Changes to the Transfer Pricing Guidelines and possibly to the Model Tax Convention
Deadline: September 2015

15. Action plan – Transfer pricing
Action 13: Re-examine transfer pricing documentation
The OECD will develop rules regarding TP documentation to enhance transparency, taking into consideration the compliance costs for business. This may include rules requiring disclosure to governments of:
Global allocation of income; and
Economic activity and taxes paid among countries
Expected Output: Changes to Transfer Pricing Guidelines and Recommendations regarding the design of domestic rules
Deadline: September 2014

16. Fast track progress till date
BEPS – Action plan
Fast track progress till date
Action
Issues
Progress 1
Digital Economy
A Task force is convened. Draft issued for public discussion in March 2014 2
Hybrid mismatch agreements
Drafts (recommendations for domestic laws and treaty issues) were issued in March 2014 for public discussion 6
Preventing treaty abuse
Draft issued for public discussion in March 2014 8
Intangibles
Revised draft issued in July 2013 for discussion pursuant to BEPS Project 13
Transfer Pricing documentation
Draft issued in Feb for public consultation

17. OECD Guidance on Country by Country (“CBC”) Reporting

18. BEPS – CBC documentation
Objectives
To provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment
To ensure that taxpayers give appropriate consideration to transfer pricing requirements –
While establishing prices and other conditions for transactions between AE’s, and;
While reporting the income derived from such transactions in their tax returns
To provide tax administrations with the relevant information
Conduct an appropriately thorough audit of the transfer pricing practices

19. BEPS – CBC documentation
Approach – 2 tier
Master file containing standardized information relevant for all MNE group members
A local file referring specifically to material transactions of the local taxpayer
This approach to transfer pricing documentation will provide tax administrations with relevant and reliable information to perform an efficient and robust risk assessment analysis

20. BEPS – CBC documentation
Documentation approach - Master File
The master file should contain common standardized information relevant for all MNE group members
The information required in the master file provides a “blueprint” of the MNE group and can be grouped in five categories :
the MNE group’s organisational structure
a description of the MNE’s business or businesses
the MNE’s intangibles
the MNE’s intercompany financial activities
the MNE’s financial and tax positions
The country-by-country data required in the master file may be helpful in risk assessment processes

21. BEPS – CBC documentation
Master file
Organisational structure
Chart illustrating the MNE’s legal and ownership structure and geographical location of operating entities
Description of the business
- Profit drivers, Supply chain
- Service arrangements
- Top 25 compensated employees
- FAR
Intangibles
- Development, ownership & exploitation
- List of intangibles & owners
- Agreements for intangibles
- Desc of group’s TP policy
- Details of trf of intangibles
Interco financial activities & tax positions
- Source of financing
- Central financing entity, if any
- MAP / APA / AAR
- CBC template

22. BEPS – CBC documentation
Documentation approach - Local File
The information required in the local file supplements the master file
Assuring compliance with arm’s length principle
material transfer pricing positions affecting a specific jurisdiction
Information relevant to the transfer pricing analysis related to transactions between a local country affiliate and AE’s in different countries
Material information in the context of the local country’s tax system

23. Income Tax Paid (on Cash Basis)
CBC – Model Template
Country
Constituent Entities Organized in the Country
Place of Effective Management
Important business activity code(s)
Revenues
Earnings Before Income Tax
Income Tax Paid (on Cash Basis)
Total Withholding Tax Paid
Stated capital and accumulated earnings
Number of Employees
Total Employee Expense
Tangible Assets other than Cash and Cash Equivalents
Royalties Paid to Constituent Entities
Royalties Received from Constituent Entities
Interest Paid to Constituent Entities
Interest Received from Constituent Entities
Service Fees Paid to Constituent Entities
Service Fees Received from Constituent Entities
(a) To Country of Organisation
(b) To All Other Countries 1. 2. 3 4
Total 3. 4.

24. CBC – Model Template contents
Draft requires reporting for each entity in MNC group arranged by country of organization, with branches treated as entities for this purpose
Information required in draft template:
Place of effective management
Important business activity codes
Revenues
Earnings before income tax
Income tax paid on cash basis to country of organization and to all other countries
Total withholding tax paid
Stated capital and accumulated earnings
Number of employees and total employee expense
Tangible assets (other than cash and cash equivalents)
Royalties paid to and received from related entities
Interest paid to and received from related entities
Service fees paid to and received from related entities
Space provided for any further brief information that taxpayer considers necessary or that would facilitate understanding of the required information
Entire template, with all entity and country information, would be provided to the tax authority in each country in which the MNC has an entity or branch

25. BEPS – CBC documentation
Practical Issues
Significant increase in compliance burden for MNEs and expanded audits
Significant increase in documentation for MNEs
Local file and the master template ask for much more information than companies currently collect and have readily available
Complexities in gathering specific information like;
Total number of employees on the payroll
Income tax paid by all entities for the relevant fiscal year
Withholding tax paid etc.
Possible reluctance amongst the group entities to owing to potential risk of exposure of confidential information

26. BEPS – CBC documentation
Practical Issues
Timing of information
Different reporting period of different entity in the group
Onerous for Small and Medium Enterprises (SME)
A lot of information at the disposal of tax authorities which could lead to risk of potential misuse of the information by tax authorities
Tax payers in jurisdictions pursuing aggressive tax administrative measures could be particularly vulnerable to this potential risk.

27. Thank You
Maulik Doshi
SKP