Jill Gatehouse and Susanna Brain (Freshfields Bruckhaus Deringer) provide an expert practitioner review of the OECD’s initiative to tackle base erosion and profit shifting.
The BEPS project has reached something of a landing point with the publication on 5 October of the final package of OECD recommendations to reform the international tax system. It is a massive undertaking and the recommendations are detailed; the final reports alone extend to around 2,000 pages, covering 15 identified areas for action. The publication of the final reports represents the end of the first phase: the second phase is implementation. Questions do remain as to what exactly will be implemented and, in many areas, how this will be achieved; however, the publication of the final reports represents the culmination of a highly ambitious project and it should be recognised as a great achievement within the timescale.
The focus of this article is what the proposals mean for the UK tax system and what key points can be identified at this stage in the BEPS process for tax professionals. Much has been written recently on the background and overarching aims of the project and we have sought not to repeat those points here.
Certain proposals will have
Other proposals, such as those relating to hybrid mismatch arrangements and interest deductibility, are likely to be on an only slightly longer timeframe, with consultations now underway on tax deductibility of corporate interest expense and real potential for legislative change as early as 2017. The implementation of actions involving treaty amendments will be highly dependent on the success of the discussions next year on the multilateral instrument.
There are some new proposals in the final reports, but the vast majority of
Nonetheless, George Osborne has already said he is committed to introducing the new rules into domestic law. We anticipate (although it has not been confirmed) that some of the UK implementation measures will be included in the Autumn Statement on 25 November.
The short answer is: substantially. The discussion draft published by the OECD in December 2014 outlined two possible approaches for consultation: a group ratio rule (more stringent than the UK’s worldwide debt cap (WWDC)); and a fixed ratio rule.
The final report recommends the fixed ratio rule as ‘best practice’, which can be supplemented by a group ratio rule permitting additional deductions where the group ratio is higher. The fixed ratio rule, subject to certain exceptions, limits a company’s interest deductions to a percentage of the entity’s EBITDA (recommended in the final report to be between 10% and 30%). The group ratio rule would allow groups that are highly leveraged with
Further technical work is continuing on the detailed operation of these rules, including additional guidance on the group-wide ratio, and is intended to be completed in 2016. It is interesting though that, on the basis of data included in the report, if a ratio of 10% were adopted, then 38% of publicly traded multinational groups may not be able to deduct all of their net
In addition to the key proposals regarding fixed and group ratios, the OECD recommends that countries consider introducing targeted anti-avoidance rules. For example, these might target payments to related parties (which might take a number of forms, including interest payments to a low tax jurisdiction), the direction of interest income to other countries, and back-to-back arrangements designed to increase group finance costs with no true equivalent economic cost. These rules have received relatively little attention by comparison with the ratio tests. However, they would provide scope for a tax authority which was so minded to introduce
The introduction of a rule which works by reference to a fixed ratio would be a significant change for the UK system. The UK has a number of rules targeting excessive debt deductions (transfer pricing/thin cap, loan relationship regime, deemed dividend rules, anti-hybrid/anti-arbitrage rules, worldwide debt cap), but these work very differently from a fixed ratio rule. The government has previously rejected suggestions that it should introduce additional interest deductibility restrictions, but with a relatively low corporation tax rate currently helping competitiveness, it may prove too good an opportunity to miss to do something in this area.
The UK government has confirmed its broad support for the OECD proposals and on 22 October launched a wide-ranging consultation document with consultation open until 14 January 2016. The consultation document does not provide any clear indication of what proposals the UK government will adopt on Action 4 or how these would be implemented,
Given the UK’s commitment to maintaining competitiveness and consistency with the worldwide debt cap approach, it is to be hoped that the outcome of the consultation will contemplate some form of group-wide safety net alongside any fixed ratio rule to prevent significant issues for highly-levered groups. The OECD report allows for grandfathering of existing
A key issue continues to be the special rules on interest deductibility which may be needed for certain industry sectors.
The final report anticipates the development of special rules for banks and insurance companies, which would take into account the role of interest expense for those businesses. Further detail is promised on these proposals in 2016 and the HM Treasury consultation is clear that the UK will work with the OECD and business in the development of these rules.
A number of industry-specific representations have been made to HM Treasury, notably in respect of infrastructure/project financings, property and upstream oil and gas. As anticipated, these are not specifically addressed in the final report, except to the extent that a narrowly drawn ‘public benefit exemption’ is contemplated for public infrastructure projects (which are considered to be low tax risk). Given the potential flexibility available in implementing the proposals, we can expect domestic lobbying in this area to continue as the UK’s legislative proposals are developed.
The proposals will be of particular concern to sectors that are often highly leveraged, such as infrastructure, real estate and private equity. Conglomerates comprising several different businesses, some of which are highly geared and others of which are not, will need to consider the impact of the different levels of leverage across the businesses. Similarly, groups acquiring or disposing of businesses will need to consider the impact on the ratios; what the optimum level of leverage is for the local and wider group; and where debt should be located, by reference to whether or not states have implemented the beneficial group ratio.
Action 5 tackles ‘preferential tax regimes’, which are regimes within a jurisdiction that
The key requirement for any type of preferential regime to be compliant is that it meets the substantial activity requirement in the relevant jurisdiction. For IP regimes, this requirement is in the form of a new ‘modified nexus approach’. This requires tax benefits to be connected directly to the proportion of R&D expenditure incurred in developing the patent or product in the jurisdiction; it uses R&D expenditure as a proxy for the substantial activity requirement. The new ‘modified nexus approach’ was adopted by the BEPS project following joint proposals made by the UK and German governments last November.
On 2 December 2014, the UK government published a summary of likely changes to the patent box regime based on the ‘modified nexus approach’. HM Treasury has confirmed its commitment to retaining a patent box regime and to having a compliant regime in place when the existing regime is closed to new IP. Countries with non-compliant regimes must either make the regime compliant or close the regime to new IP by 30 June 2016 and abolish it by 30 June 2021.
It had been anticipated that the Summer Budget might provide an update on exactly what the new regime might look like. It did not, but following the finalisation of the BEPS report, HM Treasury has now published a consultation document based on the OECD recommendations. There will be an accelerated and truncated consultation process, due to the relatively short timeframe available.
This first consultation document focuses on policy objectives and principles, with an opportunity for consultation until 4 December (although responding to the consultation by mid-November will provide a better opportunity for comments to be taken into account ahead of the first draft legislation). Draft legislation for further consultation is then expected on 9 December as part of the draft Finance Bill 2016. Companies already elected into the existing regime may find themselves needing to run both the existing and the new regime during the transitional period, even potentially in respect of patents used in a single product.
In terms of what the new regime will look like, it is complex and the consultation raises a number of practical challenges. Under the compliant regime, profits derived from a patent will be eligible for the 10% effective tax rate after applying the ‘nexus fraction’ for that patent, which is derived from the formula:
Qualifying expenditure incurred to develop IP asset
Overall expenditure incurred to develop IP asset
The difference between the ‘qualifying’ and ‘overall’ expenditure is essentially related party outsourcing costs and IP acquisition costs (subject to a potential uplift to ‘qualifying expenditure’ of up to 30% in certain circumstances) and these are therefore the items that will reduce how much benefit is available. The outcome of this calculation produces a ‘rebuttable presumption’ in terms of the level of income eligible for the regime.
The rebuttable presumption as to the level of income eligible for the preferential tax regime can be challenged by the taxpayer, on the basis that an alternative approach would produce a more just and reasonable result. The final report includes only one example of when it might be appropriate to override that presumption, which relates to the situation where the acquisition cost exceeds the written down value of an asset. The inclusion of a single example is not because the circumstances in which challenge would be appropriate are so narrowly confined but rather, it is understood from HM
Another key area for engagement is exactly how and at what level the requirement to ‘track and trace’ R&D to each patent, product or product family is implemented. This lends itself to further questions in terms of how the grandfathered and compliant regime will work in tandem. Grandfathering provisions will allow patents within the current regime at 30 June 2016 to benefit from the existing regime until 30 June 2021 (other than intra-group transfers of IP into the UK from territories without a preferential regime which, unless there are good commercial reasons for the transfer, have an earlier deadline of 1 January 2016). The consultation document is clear that a single product or product family may incorporate a number of patents developed at different times and therefore conceivably which fall within different regimes – the example given being that of a mobile phone where an enhanced product is launched each year, possibly, for reasons of market competition without any price increase. The income attributable to each patent, rather than just to the product, would need to be identified and potentially adjusted over time. Exactly what level of proportionality or principles for apportionment might be appropriate here will no doubt be another topic for discussion.
Some of them, yes. The final report provides further details on a mandatory information exchange requirement in respect of six specified categories of rulings:
This mandatory information exchange has effect from 1 April 2016 for new rulings. Exchange of certain past rulings will need to be completed by 31 December 2016. While the administrative burden here sits with the tax authorities, it will bring into focus on a case by case basis the question of whether it is desirable to seek a ruling, given the broader distribution of potentially sensitive information.
Concurrent with the publication of the final OECD proposals, the EU has also agreed to the automatic exchange of information between member states on cross-border tax rulings (to take effect from 1 January 2017). This has taken place against the background of an investigation that has subsequently culminated in the EC’s decision on 21 October that tax rulings given to Starbucks and Fiat artificially reduced their tax burden; endorsed artificial and complex transfer pricing methods which did not reflect economic reality; unduly shifted profits to reduce taxes; and amounted to illegal state aid. The Commission has ordered Luxembourg and the Netherlands to recover the unpaid taxes amounting to €20-€30 million in each case. The rationale and the summary of the offensive actions resonate closely with the BEPS project. The general expectation is that the decisions will be appealed. There are three further ongoing investigations concerning Apple in Ireland, Amazon in Luxembourg and a Belgian tax scheme.
The final action paper in relation to hybrid mismatches, published in 2014, has been updated to include further guidance and examples. The paper also reflects further work on stock lending/
The rules are complex and will require domestic law changes. The OECD intends that states should implement the rules consistently, both in respect of their terms and their timing. The Netherlands has already publicly stated that it will not be introducing these rules, other than as part of an international, co-ordinated implementation.
It would be wrong to dismiss these rules as applying only to ‘funny’ loans/shares held by connected persons. Even in relation to hybrid instruments, one of the examples of where the rules could apply involves deferred purchase price for an asset where the accounting generates
With regard to hybrid instruments, the rules provide that the mismatch must arise from the terms of the instrument and not, for instance, the status of the taxpayers; however, a very broad approach is taken in relation to this. In particular:
Timing differences are not intended to be caught by the rules; therefore, provided that the recipient would ‘include the payment in ordinary income within a reasonable period of time’, the income should not be treated as not taxed. However, the amount does need to be included as income and there is a necessity to prove a reasonable expectation that the income would be taxed within that reasonable period. Allowing a deduction for rolled up interest where the lender is taxed on a paid basis will not be caught, provided the terms of the arrangement are such that it is reasonable to assume the loan will be repaid in a reasonable time. However, if the loan were treated as equity, it may be that even on
When determining whether income deductible in one state is taxed as income in the other state, the OECD recommendations permit states to take into account CFC taxation, but only where the income is subject to tax ‘at the full rate’ and no reliefs are permitted. It seems doubtful that the UK’s CFC partial exemption regime for non-trade finance profits would satisfy this test. Therefore, if these rules were implemented by the state of an entity making interest payments to a partially exempt UK CFC, one might expect such deductions to be denied to the extent of the UK’s partial
The short answer is that yes, it should. In any event, the aim of the report is simply to set out recommendations for effective CFC provisions for jurisdictions that decide to operate a CFC regime; and the six key building blocks provide for a high level of optionality. A more interesting question is whether with the UK’s corporation tax rate potentially being reduced to 18% in the short term robust CFC regimes introduced by other states might result in UK subsidiaries being CFCs.
Changes to the transfer pricing approaches will be the first of the BEPS initiatives to take effect. Work on these actions has led to an extensive rewrite of the OECD Transfer Pricing Guidelines, with a focus on intangibles but also impacting guidance on commodities, low value-adding intra-group services and cost contribution arrangements (CCAs). These changes are outlined in a series of six interlinked sections of the final report. A consolidated version of the OECD’s Transfer Pricing Guidelines will not be published until 2017.
How will these revisions be incorporated in the UK transfer pricing regime? UK domestic legislation provides that the domestic arm’s length principle is to be read in such a manner as best secures consistency with the principles set out in the OECD’s 2010 transfer pricing guidelines, or any subsequent version of those guidelines designated for the purpose by Treasury Order. A Treasury Order is therefore expected soon to incorporate reference to the amended guidelines. Following this, HMRC could be expected to follow the revised principles with immediate effect.
The OECD’s stated aim is to align transfer pricing outcomes with value creation, responding to concerns about structures which shift profits without true economic substance. The revisions, at least in part, bring into focus particular indicators which arguably would already fall within the general arm’s length principle if applied rigorously. Now that they are expressly set out, however, they may ease the path for tax authorities to demand greater scrutiny of what was actually done, rather than what was contractually agreed, and provide greater ammunition for tax authorities in tackling arrangements lacking substance.
The country by country reporting (CBCR) discussed below can also be expected to lead to an increase in enquiries from tax authorities, so that multinationals will want to ensure that they have robust policies compliant with the revised guidelines in place.
There is an increased focus throughout on what is referred to as ‘delineating’ the transaction: breaking it down by reference to the conduct of the parties and focusing on the underlying substance, risk assumption and control of risk and on value creation over legal ownership and straightforward provision of funding. This is a response to a perception that the previous guidance focused too heavily on the terms of the contract between the parties driving pricing, rather than the substance of the arrangement. However, it isn’t obvious that HMRC or the UK courts have felt constrained here, in any event. In DSG Retail Ltd and
There is also
The guidelines also authorise the disregarding of the actual transaction once accurately delineated, although this is in exceptional circumstances, where the economic substance of the transaction departs from the form or where the arrangement would not be ‘commercially rational’. This acknowledges that the delineated arrangements may prevent the determination of a price if they differ from anything that might be agreed between unrelated parties and may need to be effectively replaced by another transaction before an arm’s length price can be determined.
The report advises that further guidance will be provided on transfer pricing for financial transactions, with further work to be undertaken in 2016 and 2017.
The need to evidence a close level of scrutiny of the actual transaction is reflected in the guidance considering transfer pricing methodologies appropriate to intangibles. It is also emphasised that the ownership of an intangible does not mean that the returns generated will be retained by that owner. In addition, the revised guidance discusses the difficulty in identifying (truly) comparable uncontrolled transactions in this area. It also questions whether the database comparables used to support transfer pricing of intangibles are capable of providing sufficiently detailed information as to the specific characteristics of a transaction as to be of real value.
In relation to ‘hard to value intangibles’ (identified as intangibles for which there are no sufficiently reliable comparators and a lack of reliable future cash flows or income, or where the assumptions used are highly uncertain), a new approach included in the guidelines now allows for the use of hindsight. This enables tax authorities to use the actual financial outcome of the asset transferred as ‘presumptive evidence
While new to the OECD’s guidance, this reflects
This work stream is ongoing. Further work will be undertaken on guidance for the use of the profit split method for intangibles pricing, which will be carried out in 2016 and finalised in the first half of 2017.
Action 13 aims to create a framework to provide sufficient information to tax authorities to enable them to assess transfer pricing risks. The final report consolidates guidance but does not really provide anything ‘new’.
The BEPS report provides for a tripartite approach to transparency, requiring multinationals to:
(i.) provide high level information regarding their global business operations and transfer pricing policies in a ‘master file’ that is to be available to all relevant tax administrations;
(ii.) maintain a ‘local file’ specific to each country, identifying material related party transactions, relevant amounts and transfer pricing analysis; and
(iii.) provide annual CBCR of the amount of revenue, PBIT, income tax paid and accrued, number of employees, stated capital, retained earnings and tangible assets in each jurisdiction in which they operate and to provide an indication of the business activities each entity engages in.
With regard to (iii) above (the CBCR), OECD model legislation requiring the ultimate parent of a large ($750m turnover) multinational group to file the CBCR in its jurisdiction of residence was published on 8 June 2015, as part of an implementation package which also included draft Model Competent Authority Agreements to facilitate this. In the UK, FA 2015 s 122 permits the implementation of CBCR in the UK. The draft statutory instrument bringing this into effect for accounting periods commencing on or after 1 January 2016 was issued on 5 October 2015, for consultation until 16 November 2015. The UK is not introducing a requirement to routinely provide a ‘master file’ or ‘local file’, on the basis that it considers it already has the power to request this information under existing legislation. The first information is to be delivered to tax authorities by 31 December 2017 with
There will inevitably be significant compliance burdens and there are also concerns about whether the proposals will give unnecessary access to sensitive information. A further concern is that making comprehensive information available so widely may, notwithstanding guidance on how such information should be used, give rise to an unprecedented level of (perhaps unsubstantiated) challenges from tax authorities under pressure to secure their share, leading to additional compliance issues for the multinational.
The first point to make about the ‘final report’ in relation to Action 6 is that it is far from final and there are areas for further discussion during the course of 2016. Indeed, certain provisions are expressed to be in draft only.
The second point to make is that, in contrast to the clear definitional changes to the model treaty proposed under Action 7, the report does not set out a single set of provisions to be included in the model treaty. Instead, the report contains some suggested changes to the preamble (clarifying that treaties are not intended to avoid double taxation at the expense of double non-taxation); and a recommendation as to a minimum standard of anti-treaty shopping provisions (but with a great deal of optionality within the drafting of such rules). It also contains comments and suggestions regarding other rules that states might like to consider to deal with certain other types of abuses or to protect themselves when negotiating treaties (e.g. to deal with special tax regimes or planning regarding permanent establishments).
The report does set out a recommendation as to a minimum standard to be reached in terms of treaty shopping provisions. The minimum standard recommended is the inclusion of:
This is very reflective of the US model treaty approach. Indeed, the US’s approach is so influential that the reason why certain of the provisions remain in
The report itself is at pains to note that while states commit to implementing and permitting the minimum standard, they do not commit to renegotiating treaties within any particular timeframe. The implication is that some states may seek to kick these changes into the long grass if possible. It remains to be seen whether significant trading partners to those states can apply pressure. One might have expected that the multilateral instrument to be finalised in 2016 would be the method of implementing the recommended minimum standard concluded on in this report. However, the minimum standard includes (as described below) optionality both as to the type of rule or rules adopted and, in relation to the limitation of benefits clause, the drafting of the provisions. This means it is difficult to see that the multilateral instrument is going to effect an immediate and uniform change to all the bilateral treaties of each signatory, in the manner which might once have been envisaged.
One can only speculate as to the approach that might be taken. Will, for instance, each signatory to the multilateral instrument choose the rule or combination of rules to be applied where it is the source state, such that it is perfectly possible that, in a bilateral treaty, different treaty abuse provisions would apply depending on the state which is the source state? Alternatively, will states be able to specify in the multilateral instrument what rule or combination of rules will apply vis-à-vis each signatory individually? This latter approach would require states to negotiate bilaterally before entering into the multilateral instrument, which was presumably something the instrument was intended to avoid.
The formulation denies a treaty benefit where it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that
In the UK, we are relatively familiar with tests requiring consideration of whether tax advantages were ‘a main/principal purpose’, but that
The OECD has sought to calm fears through the inclusion of suggested examples, but predictably they largely describe scenarios at one end or another of the spectrum and there is a lot of grey in between. One example, for instance, provides that the PPT will not deny treaty benefits in the case where a manufacturing group identifies three potential states for the site of a new factory and, where all other factors are equal between the states, the group chooses the state with the best treaty position. In UK case law terms, we might see this as a fairly straightforward ‘icing on the cake’ case. But what about the case where the other factors are not equal and the treaty benefits tip the scales in favour of one state over another? Following IRC v Sema (2002) 74 TC 593, one might think that such a situation could be caught. It may therefore often be necessary to consider whether a tax benefit is in line with the object and purpose of the treaty.
Given that one aim of double tax treaties is to encourage cross-border trade to states with treaty networks, one might well conclude this example is consistent with such purpose, but it is a shame the examples do not address this type of point.
There isn’t a single standard being proposed. Because the US model has been followed, which seeks to define ‘qualified persons’ (i.e. those who are eligible for treaty benefits), rather than (as some had suggested would be preferable) ‘disqualified persons’, there will necessarily be state-specific points that need to be addressed within each treaty.
At a very high level, for those readers unfamiliar with this type of treaty provision, the limitation on benefit (LOB) clause acts to deny treaty benefits unless the relevant person is a ‘qualified person’. Individuals are qualified persons. In the case of corporates, however, the LOB clause seeks to prevent entities in third states from indirectly benefiting from the terms of the relevant treaty; and so there are a series of conditions that must be satisfied for a company (
However, this brief description of the rules is extremely simplified and some of the optionality permitted in the final report drafted could have real implications for taxpayers. For instance, depending on the way the provision is drafted, it may make a difference whether the listed parent of
If LOB clauses are widely adopted, it is likely to be unattractive for groups to have entities located in states without good treaty networks as intermediary holding companies. Structures
The OECD notes that EU law considerations may influence the drafting of LOB provisions. In particular, there is a risk that such provisions could be discriminatory and so a derivative benefits clause might at least need to be provided in respect of EU member states (in the way the UK/US double tax treaty currently does).
Here is a simple example of a practical point that may result from widespread use of LOB clauses: it is not clear that borrowers under Loan Market Association (LMA) style loan documents should be on risk to gross-up lenders on interest payments, in circumstances where the lender’s position under
It was noted above that certain types of regulated collective investment vehicle (CIV) might be automatically treated as qualified persons. So-called CIVs are not defined, but this term is most likely to cover regulated vehicles such as authorised investment funds (AIFs) and open-ended investment companies (OEICs), rather than, for instance, private equity partnerships and other ‘
First, the OECD model treaty will be updated, so that there will be no effective management tie-breaker for dual residence. In all cases of dual treaty residence, the resolution will need to come through the operation of the mutual agreement procedure. Second, the paper suggests a clause for dealing with avoidance using branch structures. Third, the paper suggests additions to the model convention commentary, encouraging states to challenge the residence of subsidiaries that are lacking in
These can be summarised as follows:
The drafting of the extension of the dependent agent definition is a welcome change from that proposed in the previous report, which referred simply to ‘negotiation’. While it remains the case that there is much scope for
One could speculate that the Autumn Statement might include a proposal to align our domestic law definition with the final BEPS proposal. In terms of the basic definition of dependent agent, arguably nothing needs to change. The domestic definition in CTA 2010 s 1141 refers to ‘doing business’, which one would probably say is no narrower than the revised OECD definition. The restriction on connected independent agents is different, though. It would not be surprising in our view to see the treaty change reflected in domestic law. Arguably, this is trailed in the way in which the DPT rules treat connected independent agents – they can be avoided PEs. It might be expected that the investment management exemption (IME), independent broker and Lloyd’s agent specific provisions would remain unaffected (and that is also reflected in the DPT rules). In the fund manager context, it is sometimes the case that where it is difficult to find comfort with the IME, it is possible to fall back on an independent agent for treaty purposes. Once these changes are adopted, that may be more difficult.
The implementation of several of the BEPS actions requires amendments to double tax treaties (of which there are over 3,000 worldwide and over 100 with the UK). Action 15 analysed the possibility of a multilateral instrument to make that implementation rapid and consistent.
While tax practitioners are generally more familiar with bilateral treaties, there are existing examples of multilateral instruments. In the tax context, the OECD Convention on Mutual Administrative Assistance in Tax Matters, which governs information exchange and assistance in the recovery of taxes, has 66 signatory states. It co-exists with and essentially supplements the bilateral treaties of those states, so the concept is not new.
The OECD’s interim report on Action 15, published in September 2014, concluded that such an instrument was both ‘feasible and desirable’. The final report doesn’t really add anything. It confirms, as previously announced, that work started on 27 May 2015 with the establishment of an ad hoc group, of which Mike Williams of HM Treasury is chair, in which over 90 countries (including notably, now the US) are participating. The intention is to have a final form of the instrument by December 2016; however, it does not provide any insight into what that instrument might look like or how it will address the high level of optionality now provided for in respect of a number of relevant Actions.
It is this last question which is of particular interest. How can a single instrument be designed to have a multilateral effect where, for example, the minimum standard required under Action 6 contemplates the adoption of one of three alternatives? Might an instrument be able to provide for asymmetrical provisions to be adopted, based on a pre-agreed level of discretion being given to the source state? It seems hard to see how bilateral negotiation can be totally avoided and we will follow developments keenly. Assuming that the draft instrument is in final form by December 2016 as planned, it could still take some time to be implemented, although this will be heavily impacted by the form of that instrument and the extent of any bilateral negotiation required.
On a number of
In terms of changes to the patent box regime, there is already quite a developed understanding of what the UK is expected to introduce and further detail is expected in the draft Finance Bill 2016 as to how a compliant regime might operate in practice. It would be appropriate to start to consider how track and trace might work and at what level it is undertaken; and to do so with an eye to how patents within the existing regime might be grandfathered during the five-year period for which the two regimes will be running in tandem.
On transfer pricing, we now have a clear picture of what is required for CBCR and of the new transfer pricing guidelines which can be expected to be applied by tax authorities imminently. We can prepare to provide the information required by CBCR and also to ensure transfer pricing policies are sufficiently robust to withstand the potential greater level of scrutiny driven both by the information sharing itself and also the principles set out in the revised guidelines.
We will be watching the outcome of discussions on the multi-lateral instrument with great interest as its progress is key to the implementation of actions involving treaty amendments.
With acknowledgement to the contribution from Murray Clayson, partner and head of transfer pricing, Freshfields Bruckhaus Deringer.
Jill Gatehouse and Susanna Brain (Freshfields Bruckhaus Deringer) provide an expert practitioner review of the OECD’s initiative to tackle base erosion and profit shifting.
The BEPS project has reached something of a landing point with the publication on 5 October of the final package of OECD recommendations to reform the international tax system. It is a massive undertaking and the recommendations are detailed; the final reports alone extend to around 2,000 pages, covering 15 identified areas for action. The publication of the final reports represents the end of the first phase: the second phase is implementation. Questions do remain as to what exactly will be implemented and, in many areas, how this will be achieved; however, the publication of the final reports represents the culmination of a highly ambitious project and it should be recognised as a great achievement within the timescale.
The focus of this article is what the proposals mean for the UK tax system and what key points can be identified at this stage in the BEPS process for tax professionals. Much has been written recently on the background and overarching aims of the project and we have sought not to repeat those points here.
Certain proposals will have
Other proposals, such as those relating to hybrid mismatch arrangements and interest deductibility, are likely to be on an only slightly longer timeframe, with consultations now underway on tax deductibility of corporate interest expense and real potential for legislative change as early as 2017. The implementation of actions involving treaty amendments will be highly dependent on the success of the discussions next year on the multilateral instrument.
There are some new proposals in the final reports, but the vast majority of
Nonetheless, George Osborne has already said he is committed to introducing the new rules into domestic law. We anticipate (although it has not been confirmed) that some of the UK implementation measures will be included in the Autumn Statement on 25 November.
The short answer is: substantially. The discussion draft published by the OECD in December 2014 outlined two possible approaches for consultation: a group ratio rule (more stringent than the UK’s worldwide debt cap (WWDC)); and a fixed ratio rule.
The final report recommends the fixed ratio rule as ‘best practice’, which can be supplemented by a group ratio rule permitting additional deductions where the group ratio is higher. The fixed ratio rule, subject to certain exceptions, limits a company’s interest deductions to a percentage of the entity’s EBITDA (recommended in the final report to be between 10% and 30%). The group ratio rule would allow groups that are highly leveraged with
Further technical work is continuing on the detailed operation of these rules, including additional guidance on the group-wide ratio, and is intended to be completed in 2016. It is interesting though that, on the basis of data included in the report, if a ratio of 10% were adopted, then 38% of publicly traded multinational groups may not be able to deduct all of their net
In addition to the key proposals regarding fixed and group ratios, the OECD recommends that countries consider introducing targeted anti-avoidance rules. For example, these might target payments to related parties (which might take a number of forms, including interest payments to a low tax jurisdiction), the direction of interest income to other countries, and back-to-back arrangements designed to increase group finance costs with no true equivalent economic cost. These rules have received relatively little attention by comparison with the ratio tests. However, they would provide scope for a tax authority which was so minded to introduce
The introduction of a rule which works by reference to a fixed ratio would be a significant change for the UK system. The UK has a number of rules targeting excessive debt deductions (transfer pricing/thin cap, loan relationship regime, deemed dividend rules, anti-hybrid/anti-arbitrage rules, worldwide debt cap), but these work very differently from a fixed ratio rule. The government has previously rejected suggestions that it should introduce additional interest deductibility restrictions, but with a relatively low corporation tax rate currently helping competitiveness, it may prove too good an opportunity to miss to do something in this area.
The UK government has confirmed its broad support for the OECD proposals and on 22 October launched a wide-ranging consultation document with consultation open until 14 January 2016. The consultation document does not provide any clear indication of what proposals the UK government will adopt on Action 4 or how these would be implemented,
Given the UK’s commitment to maintaining competitiveness and consistency with the worldwide debt cap approach, it is to be hoped that the outcome of the consultation will contemplate some form of group-wide safety net alongside any fixed ratio rule to prevent significant issues for highly-levered groups. The OECD report allows for grandfathering of existing
A key issue continues to be the special rules on interest deductibility which may be needed for certain industry sectors.
The final report anticipates the development of special rules for banks and insurance companies, which would take into account the role of interest expense for those businesses. Further detail is promised on these proposals in 2016 and the HM Treasury consultation is clear that the UK will work with the OECD and business in the development of these rules.
A number of industry-specific representations have been made to HM Treasury, notably in respect of infrastructure/project financings, property and upstream oil and gas. As anticipated, these are not specifically addressed in the final report, except to the extent that a narrowly drawn ‘public benefit exemption’ is contemplated for public infrastructure projects (which are considered to be low tax risk). Given the potential flexibility available in implementing the proposals, we can expect domestic lobbying in this area to continue as the UK’s legislative proposals are developed.
The proposals will be of particular concern to sectors that are often highly leveraged, such as infrastructure, real estate and private equity. Conglomerates comprising several different businesses, some of which are highly geared and others of which are not, will need to consider the impact of the different levels of leverage across the businesses. Similarly, groups acquiring or disposing of businesses will need to consider the impact on the ratios; what the optimum level of leverage is for the local and wider group; and where debt should be located, by reference to whether or not states have implemented the beneficial group ratio.
Action 5 tackles ‘preferential tax regimes’, which are regimes within a jurisdiction that
The key requirement for any type of preferential regime to be compliant is that it meets the substantial activity requirement in the relevant jurisdiction. For IP regimes, this requirement is in the form of a new ‘modified nexus approach’. This requires tax benefits to be connected directly to the proportion of R&D expenditure incurred in developing the patent or product in the jurisdiction; it uses R&D expenditure as a proxy for the substantial activity requirement. The new ‘modified nexus approach’ was adopted by the BEPS project following joint proposals made by the UK and German governments last November.
On 2 December 2014, the UK government published a summary of likely changes to the patent box regime based on the ‘modified nexus approach’. HM Treasury has confirmed its commitment to retaining a patent box regime and to having a compliant regime in place when the existing regime is closed to new IP. Countries with non-compliant regimes must either make the regime compliant or close the regime to new IP by 30 June 2016 and abolish it by 30 June 2021.
It had been anticipated that the Summer Budget might provide an update on exactly what the new regime might look like. It did not, but following the finalisation of the BEPS report, HM Treasury has now published a consultation document based on the OECD recommendations. There will be an accelerated and truncated consultation process, due to the relatively short timeframe available.
This first consultation document focuses on policy objectives and principles, with an opportunity for consultation until 4 December (although responding to the consultation by mid-November will provide a better opportunity for comments to be taken into account ahead of the first draft legislation). Draft legislation for further consultation is then expected on 9 December as part of the draft Finance Bill 2016. Companies already elected into the existing regime may find themselves needing to run both the existing and the new regime during the transitional period, even potentially in respect of patents used in a single product.
In terms of what the new regime will look like, it is complex and the consultation raises a number of practical challenges. Under the compliant regime, profits derived from a patent will be eligible for the 10% effective tax rate after applying the ‘nexus fraction’ for that patent, which is derived from the formula:
Qualifying expenditure incurred to develop IP asset
Overall expenditure incurred to develop IP asset
The difference between the ‘qualifying’ and ‘overall’ expenditure is essentially related party outsourcing costs and IP acquisition costs (subject to a potential uplift to ‘qualifying expenditure’ of up to 30% in certain circumstances) and these are therefore the items that will reduce how much benefit is available. The outcome of this calculation produces a ‘rebuttable presumption’ in terms of the level of income eligible for the regime.
The rebuttable presumption as to the level of income eligible for the preferential tax regime can be challenged by the taxpayer, on the basis that an alternative approach would produce a more just and reasonable result. The final report includes only one example of when it might be appropriate to override that presumption, which relates to the situation where the acquisition cost exceeds the written down value of an asset. The inclusion of a single example is not because the circumstances in which challenge would be appropriate are so narrowly confined but rather, it is understood from HM
Another key area for engagement is exactly how and at what level the requirement to ‘track and trace’ R&D to each patent, product or product family is implemented. This lends itself to further questions in terms of how the grandfathered and compliant regime will work in tandem. Grandfathering provisions will allow patents within the current regime at 30 June 2016 to benefit from the existing regime until 30 June 2021 (other than intra-group transfers of IP into the UK from territories without a preferential regime which, unless there are good commercial reasons for the transfer, have an earlier deadline of 1 January 2016). The consultation document is clear that a single product or product family may incorporate a number of patents developed at different times and therefore conceivably which fall within different regimes – the example given being that of a mobile phone where an enhanced product is launched each year, possibly, for reasons of market competition without any price increase. The income attributable to each patent, rather than just to the product, would need to be identified and potentially adjusted over time. Exactly what level of proportionality or principles for apportionment might be appropriate here will no doubt be another topic for discussion.
Some of them, yes. The final report provides further details on a mandatory information exchange requirement in respect of six specified categories of rulings:
This mandatory information exchange has effect from 1 April 2016 for new rulings. Exchange of certain past rulings will need to be completed by 31 December 2016. While the administrative burden here sits with the tax authorities, it will bring into focus on a case by case basis the question of whether it is desirable to seek a ruling, given the broader distribution of potentially sensitive information.
Concurrent with the publication of the final OECD proposals, the EU has also agreed to the automatic exchange of information between member states on cross-border tax rulings (to take effect from 1 January 2017). This has taken place against the background of an investigation that has subsequently culminated in the EC’s decision on 21 October that tax rulings given to Starbucks and Fiat artificially reduced their tax burden; endorsed artificial and complex transfer pricing methods which did not reflect economic reality; unduly shifted profits to reduce taxes; and amounted to illegal state aid. The Commission has ordered Luxembourg and the Netherlands to recover the unpaid taxes amounting to €20-€30 million in each case. The rationale and the summary of the offensive actions resonate closely with the BEPS project. The general expectation is that the decisions will be appealed. There are three further ongoing investigations concerning Apple in Ireland, Amazon in Luxembourg and a Belgian tax scheme.
The final action paper in relation to hybrid mismatches, published in 2014, has been updated to include further guidance and examples. The paper also reflects further work on stock lending/
The rules are complex and will require domestic law changes. The OECD intends that states should implement the rules consistently, both in respect of their terms and their timing. The Netherlands has already publicly stated that it will not be introducing these rules, other than as part of an international, co-ordinated implementation.
It would be wrong to dismiss these rules as applying only to ‘funny’ loans/shares held by connected persons. Even in relation to hybrid instruments, one of the examples of where the rules could apply involves deferred purchase price for an asset where the accounting generates
With regard to hybrid instruments, the rules provide that the mismatch must arise from the terms of the instrument and not, for instance, the status of the taxpayers; however, a very broad approach is taken in relation to this. In particular:
Timing differences are not intended to be caught by the rules; therefore, provided that the recipient would ‘include the payment in ordinary income within a reasonable period of time’, the income should not be treated as not taxed. However, the amount does need to be included as income and there is a necessity to prove a reasonable expectation that the income would be taxed within that reasonable period. Allowing a deduction for rolled up interest where the lender is taxed on a paid basis will not be caught, provided the terms of the arrangement are such that it is reasonable to assume the loan will be repaid in a reasonable time. However, if the loan were treated as equity, it may be that even on
When determining whether income deductible in one state is taxed as income in the other state, the OECD recommendations permit states to take into account CFC taxation, but only where the income is subject to tax ‘at the full rate’ and no reliefs are permitted. It seems doubtful that the UK’s CFC partial exemption regime for non-trade finance profits would satisfy this test. Therefore, if these rules were implemented by the state of an entity making interest payments to a partially exempt UK CFC, one might expect such deductions to be denied to the extent of the UK’s partial
The short answer is that yes, it should. In any event, the aim of the report is simply to set out recommendations for effective CFC provisions for jurisdictions that decide to operate a CFC regime; and the six key building blocks provide for a high level of optionality. A more interesting question is whether with the UK’s corporation tax rate potentially being reduced to 18% in the short term robust CFC regimes introduced by other states might result in UK subsidiaries being CFCs.
Changes to the transfer pricing approaches will be the first of the BEPS initiatives to take effect. Work on these actions has led to an extensive rewrite of the OECD Transfer Pricing Guidelines, with a focus on intangibles but also impacting guidance on commodities, low value-adding intra-group services and cost contribution arrangements (CCAs). These changes are outlined in a series of six interlinked sections of the final report. A consolidated version of the OECD’s Transfer Pricing Guidelines will not be published until 2017.
How will these revisions be incorporated in the UK transfer pricing regime? UK domestic legislation provides that the domestic arm’s length principle is to be read in such a manner as best secures consistency with the principles set out in the OECD’s 2010 transfer pricing guidelines, or any subsequent version of those guidelines designated for the purpose by Treasury Order. A Treasury Order is therefore expected soon to incorporate reference to the amended guidelines. Following this, HMRC could be expected to follow the revised principles with immediate effect.
The OECD’s stated aim is to align transfer pricing outcomes with value creation, responding to concerns about structures which shift profits without true economic substance. The revisions, at least in part, bring into focus particular indicators which arguably would already fall within the general arm’s length principle if applied rigorously. Now that they are expressly set out, however, they may ease the path for tax authorities to demand greater scrutiny of what was actually done, rather than what was contractually agreed, and provide greater ammunition for tax authorities in tackling arrangements lacking substance.
The country by country reporting (CBCR) discussed below can also be expected to lead to an increase in enquiries from tax authorities, so that multinationals will want to ensure that they have robust policies compliant with the revised guidelines in place.
There is an increased focus throughout on what is referred to as ‘delineating’ the transaction: breaking it down by reference to the conduct of the parties and focusing on the underlying substance, risk assumption and control of risk and on value creation over legal ownership and straightforward provision of funding. This is a response to a perception that the previous guidance focused too heavily on the terms of the contract between the parties driving pricing, rather than the substance of the arrangement. However, it isn’t obvious that HMRC or the UK courts have felt constrained here, in any event. In DSG Retail Ltd and
There is also
The guidelines also authorise the disregarding of the actual transaction once accurately delineated, although this is in exceptional circumstances, where the economic substance of the transaction departs from the form or where the arrangement would not be ‘commercially rational’. This acknowledges that the delineated arrangements may prevent the determination of a price if they differ from anything that might be agreed between unrelated parties and may need to be effectively replaced by another transaction before an arm’s length price can be determined.
The report advises that further guidance will be provided on transfer pricing for financial transactions, with further work to be undertaken in 2016 and 2017.
The need to evidence a close level of scrutiny of the actual transaction is reflected in the guidance considering transfer pricing methodologies appropriate to intangibles. It is also emphasised that the ownership of an intangible does not mean that the returns generated will be retained by that owner. In addition, the revised guidance discusses the difficulty in identifying (truly) comparable uncontrolled transactions in this area. It also questions whether the database comparables used to support transfer pricing of intangibles are capable of providing sufficiently detailed information as to the specific characteristics of a transaction as to be of real value.
In relation to ‘hard to value intangibles’ (identified as intangibles for which there are no sufficiently reliable comparators and a lack of reliable future cash flows or income, or where the assumptions used are highly uncertain), a new approach included in the guidelines now allows for the use of hindsight. This enables tax authorities to use the actual financial outcome of the asset transferred as ‘presumptive evidence
While new to the OECD’s guidance, this reflects
This work stream is ongoing. Further work will be undertaken on guidance for the use of the profit split method for intangibles pricing, which will be carried out in 2016 and finalised in the first half of 2017.
Action 13 aims to create a framework to provide sufficient information to tax authorities to enable them to assess transfer pricing risks. The final report consolidates guidance but does not really provide anything ‘new’.
The BEPS report provides for a tripartite approach to transparency, requiring multinationals to:
(i.) provide high level information regarding their global business operations and transfer pricing policies in a ‘master file’ that is to be available to all relevant tax administrations;
(ii.) maintain a ‘local file’ specific to each country, identifying material related party transactions, relevant amounts and transfer pricing analysis; and
(iii.) provide annual CBCR of the amount of revenue, PBIT, income tax paid and accrued, number of employees, stated capital, retained earnings and tangible assets in each jurisdiction in which they operate and to provide an indication of the business activities each entity engages in.
With regard to (iii) above (the CBCR), OECD model legislation requiring the ultimate parent of a large ($750m turnover) multinational group to file the CBCR in its jurisdiction of residence was published on 8 June 2015, as part of an implementation package which also included draft Model Competent Authority Agreements to facilitate this. In the UK, FA 2015 s 122 permits the implementation of CBCR in the UK. The draft statutory instrument bringing this into effect for accounting periods commencing on or after 1 January 2016 was issued on 5 October 2015, for consultation until 16 November 2015. The UK is not introducing a requirement to routinely provide a ‘master file’ or ‘local file’, on the basis that it considers it already has the power to request this information under existing legislation. The first information is to be delivered to tax authorities by 31 December 2017 with
There will inevitably be significant compliance burdens and there are also concerns about whether the proposals will give unnecessary access to sensitive information. A further concern is that making comprehensive information available so widely may, notwithstanding guidance on how such information should be used, give rise to an unprecedented level of (perhaps unsubstantiated) challenges from tax authorities under pressure to secure their share, leading to additional compliance issues for the multinational.
The first point to make about the ‘final report’ in relation to Action 6 is that it is far from final and there are areas for further discussion during the course of 2016. Indeed, certain provisions are expressed to be in draft only.
The second point to make is that, in contrast to the clear definitional changes to the model treaty proposed under Action 7, the report does not set out a single set of provisions to be included in the model treaty. Instead, the report contains some suggested changes to the preamble (clarifying that treaties are not intended to avoid double taxation at the expense of double non-taxation); and a recommendation as to a minimum standard of anti-treaty shopping provisions (but with a great deal of optionality within the drafting of such rules). It also contains comments and suggestions regarding other rules that states might like to consider to deal with certain other types of abuses or to protect themselves when negotiating treaties (e.g. to deal with special tax regimes or planning regarding permanent establishments).
The report does set out a recommendation as to a minimum standard to be reached in terms of treaty shopping provisions. The minimum standard recommended is the inclusion of:
This is very reflective of the US model treaty approach. Indeed, the US’s approach is so influential that the reason why certain of the provisions remain in
The report itself is at pains to note that while states commit to implementing and permitting the minimum standard, they do not commit to renegotiating treaties within any particular timeframe. The implication is that some states may seek to kick these changes into the long grass if possible. It remains to be seen whether significant trading partners to those states can apply pressure. One might have expected that the multilateral instrument to be finalised in 2016 would be the method of implementing the recommended minimum standard concluded on in this report. However, the minimum standard includes (as described below) optionality both as to the type of rule or rules adopted and, in relation to the limitation of benefits clause, the drafting of the provisions. This means it is difficult to see that the multilateral instrument is going to effect an immediate and uniform change to all the bilateral treaties of each signatory, in the manner which might once have been envisaged.
One can only speculate as to the approach that might be taken. Will, for instance, each signatory to the multilateral instrument choose the rule or combination of rules to be applied where it is the source state, such that it is perfectly possible that, in a bilateral treaty, different treaty abuse provisions would apply depending on the state which is the source state? Alternatively, will states be able to specify in the multilateral instrument what rule or combination of rules will apply vis-à-vis each signatory individually? This latter approach would require states to negotiate bilaterally before entering into the multilateral instrument, which was presumably something the instrument was intended to avoid.
The formulation denies a treaty benefit where it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that
In the UK, we are relatively familiar with tests requiring consideration of whether tax advantages were ‘a main/principal purpose’, but that
The OECD has sought to calm fears through the inclusion of suggested examples, but predictably they largely describe scenarios at one end or another of the spectrum and there is a lot of grey in between. One example, for instance, provides that the PPT will not deny treaty benefits in the case where a manufacturing group identifies three potential states for the site of a new factory and, where all other factors are equal between the states, the group chooses the state with the best treaty position. In UK case law terms, we might see this as a fairly straightforward ‘icing on the cake’ case. But what about the case where the other factors are not equal and the treaty benefits tip the scales in favour of one state over another? Following IRC v Sema (2002) 74 TC 593, one might think that such a situation could be caught. It may therefore often be necessary to consider whether a tax benefit is in line with the object and purpose of the treaty.
Given that one aim of double tax treaties is to encourage cross-border trade to states with treaty networks, one might well conclude this example is consistent with such purpose, but it is a shame the examples do not address this type of point.
There isn’t a single standard being proposed. Because the US model has been followed, which seeks to define ‘qualified persons’ (i.e. those who are eligible for treaty benefits), rather than (as some had suggested would be preferable) ‘disqualified persons’, there will necessarily be state-specific points that need to be addressed within each treaty.
At a very high level, for those readers unfamiliar with this type of treaty provision, the limitation on benefit (LOB) clause acts to deny treaty benefits unless the relevant person is a ‘qualified person’. Individuals are qualified persons. In the case of corporates, however, the LOB clause seeks to prevent entities in third states from indirectly benefiting from the terms of the relevant treaty; and so there are a series of conditions that must be satisfied for a company (
However, this brief description of the rules is extremely simplified and some of the optionality permitted in the final report drafted could have real implications for taxpayers. For instance, depending on the way the provision is drafted, it may make a difference whether the listed parent of
If LOB clauses are widely adopted, it is likely to be unattractive for groups to have entities located in states without good treaty networks as intermediary holding companies. Structures
The OECD notes that EU law considerations may influence the drafting of LOB provisions. In particular, there is a risk that such provisions could be discriminatory and so a derivative benefits clause might at least need to be provided in respect of EU member states (in the way the UK/US double tax treaty currently does).
Here is a simple example of a practical point that may result from widespread use of LOB clauses: it is not clear that borrowers under Loan Market Association (LMA) style loan documents should be on risk to gross-up lenders on interest payments, in circumstances where the lender’s position under
It was noted above that certain types of regulated collective investment vehicle (CIV) might be automatically treated as qualified persons. So-called CIVs are not defined, but this term is most likely to cover regulated vehicles such as authorised investment funds (AIFs) and open-ended investment companies (OEICs), rather than, for instance, private equity partnerships and other ‘
First, the OECD model treaty will be updated, so that there will be no effective management tie-breaker for dual residence. In all cases of dual treaty residence, the resolution will need to come through the operation of the mutual agreement procedure. Second, the paper suggests a clause for dealing with avoidance using branch structures. Third, the paper suggests additions to the model convention commentary, encouraging states to challenge the residence of subsidiaries that are lacking in
These can be summarised as follows:
The drafting of the extension of the dependent agent definition is a welcome change from that proposed in the previous report, which referred simply to ‘negotiation’. While it remains the case that there is much scope for
One could speculate that the Autumn Statement might include a proposal to align our domestic law definition with the final BEPS proposal. In terms of the basic definition of dependent agent, arguably nothing needs to change. The domestic definition in CTA 2010 s 1141 refers to ‘doing business’, which one would probably say is no narrower than the revised OECD definition. The restriction on connected independent agents is different, though. It would not be surprising in our view to see the treaty change reflected in domestic law. Arguably, this is trailed in the way in which the DPT rules treat connected independent agents – they can be avoided PEs. It might be expected that the investment management exemption (IME), independent broker and Lloyd’s agent specific provisions would remain unaffected (and that is also reflected in the DPT rules). In the fund manager context, it is sometimes the case that where it is difficult to find comfort with the IME, it is possible to fall back on an independent agent for treaty purposes. Once these changes are adopted, that may be more difficult.
The implementation of several of the BEPS actions requires amendments to double tax treaties (of which there are over 3,000 worldwide and over 100 with the UK). Action 15 analysed the possibility of a multilateral instrument to make that implementation rapid and consistent.
While tax practitioners are generally more familiar with bilateral treaties, there are existing examples of multilateral instruments. In the tax context, the OECD Convention on Mutual Administrative Assistance in Tax Matters, which governs information exchange and assistance in the recovery of taxes, has 66 signatory states. It co-exists with and essentially supplements the bilateral treaties of those states, so the concept is not new.
The OECD’s interim report on Action 15, published in September 2014, concluded that such an instrument was both ‘feasible and desirable’. The final report doesn’t really add anything. It confirms, as previously announced, that work started on 27 May 2015 with the establishment of an ad hoc group, of which Mike Williams of HM Treasury is chair, in which over 90 countries (including notably, now the US) are participating. The intention is to have a final form of the instrument by December 2016; however, it does not provide any insight into what that instrument might look like or how it will address the high level of optionality now provided for in respect of a number of relevant Actions.
It is this last question which is of particular interest. How can a single instrument be designed to have a multilateral effect where, for example, the minimum standard required under Action 6 contemplates the adoption of one of three alternatives? Might an instrument be able to provide for asymmetrical provisions to be adopted, based on a pre-agreed level of discretion being given to the source state? It seems hard to see how bilateral negotiation can be totally avoided and we will follow developments keenly. Assuming that the draft instrument is in final form by December 2016 as planned, it could still take some time to be implemented, although this will be heavily impacted by the form of that instrument and the extent of any bilateral negotiation required.
On a number of
In terms of changes to the patent box regime, there is already quite a developed understanding of what the UK is expected to introduce and further detail is expected in the draft Finance Bill 2016 as to how a compliant regime might operate in practice. It would be appropriate to start to consider how track and trace might work and at what level it is undertaken; and to do so with an eye to how patents within the existing regime might be grandfathered during the five-year period for which the two regimes will be running in tandem.
On transfer pricing, we now have a clear picture of what is required for CBCR and of the new transfer pricing guidelines which can be expected to be applied by tax authorities imminently. We can prepare to provide the information required by CBCR and also to ensure transfer pricing policies are sufficiently robust to withstand the potential greater level of scrutiny driven both by the information sharing itself and also the principles set out in the revised guidelines.
We will be watching the outcome of discussions on the multi-lateral instrument with great interest as its progress is key to the implementation of actions involving treaty amendments.
With acknowledgement to the contribution from Murray Clayson, partner and head of transfer pricing, Freshfields Bruckhaus Deringer.
