- Okay.
Our final panel for the day,
will address selected
foreign country reactions
to BEPS and tax reform.
The panel is going to be moderated
by visiting professor Louis Schowery
of NYU Law School representing Brazil.
KPMG panelists include Penny
Chen representing China,
Adrian Crawford representing Ireland,
Justin Davis representing Australia,
Peter Kramer representing Luxembourg,
and Russell Fielder representing
the United Kingdom.
Professor.
- Thank you Larry.
Good afternoon, the last panel.
I'd like to inform you, of
how we're going to act today.
We have divided BEPS in three themes here,
you'll have Action Two and Four first.
Then we're going to
discuss Actions six and 15,
And, beep, it should be back.
In the last, we're going to
have Transfer Pricing
issues and Action five.
Since we have only 50 minutes,
we should just begin and Russell please,
do what, theme one.
- Thanks Louis.
And hey everyone says, so.
I think the aim of this is
we're gonna talk through
some of the differences really
in the way foreign countries
are approaching BEPS and
that some of the different
attitudes and some of the ways
that they're applying the rules.
And I suppose I've sort of
answered my first question,
which is probably the obvious,
which is other countries are responding
and are they are implementing BEPS
and an albeit in fairly different ways.
So what I think clearly in
consensus and coordination
among the countries is fairly key.
And we are seeing that on various levels,
particularly amongst, for
example, the European union,
which is adopting a very
much a coordinated approach.
We're still seeing countries
act somewhat unilaterally
and taking their own actions.
So this is a sort of
an exercise in looking
at how different countries
are viewing things.
I think to my mind anyway,
before you sort of get into
those actual changes is just
a sort of reminding ourselves
why some of these differences exist.
I mean, I've had others on the panel
when I've been this side of the Atlantic
for nearly six years now.
And so I've sort of had
one foot in this side
and one foot in the, in Europe.
And it's been hugely interesting to see
the different reactions and the reasons
for the difference in changes
why the Europeans in particular
and I think to some extent
the Australians have really grasped BEPS
and taken it by the horns,
whereas in a much different
way to the Americans have.
And I think one of the
key reasons for that,
at least in my mind is
in addition to, you know,
near the aim to attack genuine instances
of base erosion and profit shifting.
It's really been the public
pressure, the media focus
and the public debate around tax morality
and multinational tax
avoidance in particular
when it really got to a
various stages but certainly
a year or two ago it
seemed like across Europe
every day there was
almost a one multinational
on the front page of
a mainstream newspaper
with a story about how
little tax it was paying.
And that became very, very,
very good and that really
pushed it into the light.
And then I think even things
like the Panama papers,
although that's not largely
focused on corporates,
it still brings the debate around taxes
back into the limelight
and we've, you know,
we've seen European
prime ministers resigning
or close to resigning anyway.
So that's really driven that
and I think that's resulted
in this sort of somewhat
mismatch or hodgepodge
of different implementation,
they're saying
the Europeans taking it some
way and we've got the Europeans
who have probably gone above and beyond
what BEPS proposed in many ways.
And then maybe the other side,
the US which aside from maybe
country by country reporting
perhaps isn't that close to that yet.
And then I think probably
fair to say Australia
is somewhere in the middle.
- Yeah, I mean Australia had
the presidency of the J 20
when a lot of the OACD
work was being done.
And it's fair to say Australia
is an enthusiastic supporter
of the BEPS of the OECD work around BEPS
obviously not subject
to the same EU pressures
that the UK is subject to.
And so Australia, but Australia again
has also been hijacked,
I think by that the
public perception issue
that there's a Senate inquiry
into corporate anti avoidance
that is now entering its
second year that led to us
to meet electoral action.
But it's also, yeah, the concern
I have is that tax policy
in Australia is being
driven by non-taxation.
It's being driven by the BEPS debate,
and some of the policy issues
around national interest,
around tax competition are being lost.
And that's,
that's one of the concerns
that I think has come out
of the BEPS debate, particularly
from an Australian context.
- Yeah, and I think that's
been echoed in the UK
and elsewhere as well and
that pressure's become
fairly immense and is
pushing all the change.
So we just want you to
sort of bring that to life
with a few examples really in
a couple of BEPS specifics.
And the first one I'm just gonna cover
is around hybrid mismatches.
This is BEPS action two.
And I think this is quite a good example
because it's where there's actually
been quite a lot of
action taken and I think
that one of the reasons
for that, it's probably
because of all the instances
of BEPS hybrid mismatches
or the abuse of hybrid
mismatches is probably seen
as one of the more egregious.
And so we've seen various
actions taken so far.
And so for example, you know,
the EU, again at the EU level,
I mean for some time now
to a couple of years ago,
changes were made to the
parent subsidiary directive,
which effectively is a, in many ways,
it's a pan European tax
treaty, that have always
double taxation, but
that was amended to avoid
or to stop instances of
mismatches advising through,
hybrid financial
instruments and the EU said
that it will implement
the full OECD proposals
in an intra-EU context
as part of the upcoming BEPS directive.
So that's the EU's example.
But even within the EU,
we've got unilateral action.
So the UK was even before we
got the final OECD report,
and UK announced that
it would be introducing
hybrid mismatch proposals
consistent with the OECD proposals
or the recommendations and
it's done so we very recently
got, or is near final draft
legislation, which by and large
does follow the OECD recommendations.
So that's a good example
of even within the EU
where this is really high
level of coordination.
Some countries are taking it
upon themselves to push forward
on their own agenda.
And again, Australia is
in a similar position.
- Yes, so the hybrid mismatches
is an interesting one
from an Australian context.
So back in 2001 Australia
introduced some dead equity rules
and back then they went through
all the other jurisdictions,
looked at how they've
brought debt equity rules
into their tax regimes and then Australia
went to introduce something
that was completely unique,
different from every
other regime out there.
So that gave rise to
a whole lot of hybrid,
hybrid instruments.
And so when the action
two final report came out,
they did refer to the
board of tax to initially
do a review of the debt equity rules.
And then coming out of that
review, they've now asked them
to look at the implementation
of the anti hybrid rules
and to make a recommendation as to how
they should be implemented but have also
asked them to look at the
economic costs for Australia.
Now it's not clear
whether the economic costs
that they're being asked to
look at are the economic costs
from having hybrids in place or whether
it's the economic cost of
introducing anti hybrid rules.
And the reason I say
that is, the expectation
is that in the budget in early May,
they're going to announce
basically a full implementation
of the the final OECD report,
both inbound and outbound.
Now, from an inbound
perspective, I can understand
why you have anti hybrid rules in place,
because at the end of the day,
Australia has given that deduction.
But from an outbound perspective, yeah,
if I look at very simply a,
say, a US domestic partnership structure,
where if the US is happy
to give me a deduction
on external debt, which I'm
already getting in Australia,
and that helps my Australian
multinational be competitive
in the US market, why does
Australia want to shut that down?
But there is no benefit to Australia
and this is part of the, I think concern
around the BEPS implementation,
is you can take a holier
than thou approach
which is, let's fully implement it,
let's be good global
citizen, or do we want
to put a bit of realism into it and say,
"Well, okay, we want to
implement it but what's gonna be
"the implications for
employment in our country,
"our businesses?"
Because at the end of
the day, the competition
for global resources is
still gonna be there.
At the end of the day,
you're not gonna get
full globalization around tax policy.
So that issue is something that, I think,
that the current government is aware of,
but there is a lot of political pressure
because of the inquiry
that's in play at the moment.
And so how some of these
things such as the hybrids
are going to end up being implemented,
will be interesting to
see and it will show you
what policy has driven the legislation.
- Yeah, and I think
that's consistent, I mean
that sort of approach of
why do we care if someone
else isn't taxed?
Or how well someone
else is dealing with it?
Is this how the UK kind of went?
And it's a good illustration
on changing policies, happened in the UK
it's had anti arbitrage
rules, which really
looked at hybrid arrangement
since about 2007.
It was quite adamant, it
wasn't gonna change those.
But I mean, there's now
as Colin mentioned earlier
that countries are kind of being dragged
through this, in many respects,
if they don't implement,
they're seen as a bad corporate citizen.
And that's one of the
drivers behind why the UK
scrapped those rules and had replaced them
with OECD compliant rules.
So I think that gets back to you know,
where we have got these
changes, I think, you know,
you obviously got the US
where it's pretty fair to say
that they check the box rules
were a key target of the OECD
when they formulated the hybrid rules,
and clearly they're not
likely to change anytime soon.
And then just funny you've got
a number of other approaches
as well, I think France
and Mexico for example
have implemented their own
versions of hybrid rules
which, how they do tax
hybrids, that don't apply
in the same way the OECD
proposes, you do end up
with this kind of mismatch
of different rules
and whether they may change
France might get dragged
into line with the rest of
the EU or remains to be seen.
So just a very quick example.
This is, I won't go into any detail,
this is a fairly common
structure that doesn't actually
involve a hybrid, it's, it
plays on the differences
all the way that Luxembourg and the US
treats interest incomes, so here we get a,
you have a loan from a US
branch (mumbles) company
lending to the UK.
And you get a UK interest
deduction traditionally,
but with no taxation of the income
and that's because effectively Luxembourg
gives the taxing rights to
the US, but the US doesn't tax
the income because the income
doesn't rise to the level
of a trade or business.
And this is specifically
addressed by the OECD.
But it leaves it kind
of open as to whether
countries want to shut down
these types of structures.
And the UK has done so by
written in its legislation
that this will no longer work into the UK,
it will probably continue to
work into other countries.
I think including it works
on to Australia as well,
but I will in the interest of time,
I won't stick into that too much.
And certainly that's
the hybrid mismatches.
And we also wanted to touch on action four
which is Interest Deductibility.
- Yeah, so, as you know, yeah, action four
was focused around base erosion from,
through interest payments,
and the OECD recommended
the introduction of an
earnings stripping rules.
So they recommended a 10 to 30% EBITDA,
so fixed ratio with a
worldwide group ratio
if you're in excessive that.
The Australian response to
that, you know Australia
has its own think cap
regime, Australia has decided
we don't need an earnings stripping rule.
They had already reduced the
gearing ratio from three to one
to 1.5 to one and just last
night, there was actually
this rumor that when the
budget comes out in early May,
this talk about going
down to a 50% hearing,
so one to one ratio, to
support long term reductions
in corporate tax rates.
And that reduction in
corporate tax rate leads on to,
I think what's a very
interesting issue, which is,
if I look at action four is
very focused around base erosion
through interest deductions,
but you can't just look
at your earnings stripping
or think cap rules
in isolation from the
rest of your tax regime,
particularly around foreign investment.
So you know, in Australia, for example,
we've got a 30% corporate tax, rate.
We have a rate regime that
works for state infrastructure.
If I look at the UK, you
look at moving down to what,
a 17% corporate tax, rate?
- Yeah, that's right, yeah.
- Introducing an earnings stripping rule,
which originally wasn't going
to be happening.
- Right.
- Which will probably be at the 30% level,
we have caveats for certain
public benefit infrastructure.
- Right, yeah.
Yeah.
- But then if I look at the US,
you know, it's a 50% EBITDA.
But then as a very high
headline corporate tax, rate.
I then have a high dividend
withholding tax rate
on top of that.
And I think one thing that's interesting
that's recently come out
is whether the three,
you know, you can look at
the the proposed 385 rates
and you know, query, whether
that's a response to or an IRS,
enactment of the BEPS action
four to the extent they can,
because that is going to
impact some of the related
party leverage that does get put into,
in a number of transactions.
And then finally, what I
just wanted to cover is,
so there's some certainly,
some of what we talked about
so far, although there's differences
there's at least some level
of coordination there I think,
many countries implementing
action four and action two.
Just finally to mention,
there's been some sort of completely
or arguably not unilateral
action by countries
which it's been mentioned before.
I'm sure it's come up a few times.
The UK's diverted profits tax and again,
Australia fairly close
to the UK in its respects
has implemented its almost,
its own version of them all.
And the DPT was really an
entirely politically driven move.
I mentioned it before.
But it was the UK had a
general election last year
and again, the incumbent
government was in a position
where it had to do
something to be tackling
what was perceived to
be artificial avoidance
of profit from the UK.
So the DPT was really a,
getting a start on that.
And it's really the UK
government's position
is that, it's really
just getting an advance
on future changes to the permit
establishment definition,
it actually goes much
more broad than that.
But that's the crux of it
and that's probably true
to an extent.
But certainly it was it was interesting,
because whereas the OECD has tried to keep
a sort of a moving together type approach,
this was the, one of the first instances
of one of those countries,
particularly ones
that were very, very
supportive of the BEPS process,
taking a step out of
line with everyone else
and there was a lot of
criticism at the time.
And probably same again
in Australia, right?
- Yeah.
I mean, the model was
introduced at exactly the time
when the Public Media was at its highest
in relation to the Senate inquiry
on corporate tax avoidance.
But I just want to let, spend
the last literally 10 seconds
on the Australian German
DTI, which literally
got signed a month after the
the final reports came out
from the OECD.
And it's got all of the best bits
of the OECD final report in there.
So they've dealt with, you
know, PE avoidance issues.
they've dealt with map issues,
they've dealt with treaty avoidance
or treaty shopping issues.
But what's missing there is again,
the things that are the non BEPS stuff.
And the biggest example there
is Australia pension funds,
becoming one of the
largest outbound investors
from an Australian perspective.
Again, there is no focus
on getting an exemption
for those guys from interest
in dividends withholding tax.
So to me, it's another example
of the OECD BEPS debate
hijacking tax policy from
an Australian perspective.
- Thank you.
Maybe now we could move
to treaty developments.
Pierre, why don't you
introduce the theme for us.
- Sure.
Hi everyone, so
the OECD considered treaty shopping
as certainly a key aspect
and one of the most important
sources for BEPS concerns.
Tax treaties are there
to avoid double taxation.
But they're not there to
allow double non-taxation,
and therefore, the participating countries
to the BEPS action plan
have agreed to include
as a standard minimum
anti abuse provisions
in the respective tax treaties.
And what those provisions
are, while they are twofold.
We have this Limitation On
Benefits provision, the LOB
and also the PPT so the
Principal Purpose Test.
There are three options because again,
these are recommendations,
so there is certain freedoms,
to countries to develop them.
There are three options,
which are considered
for the inclusion of those
provisions in the tax treaties.
First, quite detailed LOB provision
with some intricate rules.
Second is simply
implementing the PPT rule.
And the third one is
combining a more light version
of the LOB provision
together with the PPT.
What does that mean?
I mean, the LOB, what is it?
I mean, it's actually
limiting treaty benefits
to entities that meet a
certain number of conditions,
such as based on the legal
structure, the ownership,
or even the general
activities of the entity.
And for the PPT, under the PPT rule.
It's one of the principal
purpose of the rule
is to obtain treaty benefits,
then those treaty benefits
would be denied, unless those benefits
would be in accordance
with the treaty purpose
and objectives.
So that's one other thing
we will be discussing.
The second aspect is action 15,
the so called Multilateral Instrument.
This is an extremely important element
because it really aims at accelerating
the implementation of
BEPS related measures
in existing tax treaties,
by allowing the signatories
to the multilateral agreement to adhere
to those new provisions
being automatically applied
without having to renegotiate
the respective bilateral tax treaties.
And finally, what we will address is also
as a result of those changes,
action six, action 15,
how will this impact
on the way to structure
cross border investments?
That's certainly a key discussion point
in particular for intermediary
countries such as Luxembourg.
And this is certainly also
what we will be discussing
and especially the increasing importance
of the substance topic.
- Thank you Pierre.
Now I enter the theme of Treaty Abuse.
Maybe the first question
we should have is actually,
what does it mean to abuse?
Abuse, use a treaty against
its aims, its purpose.
And what's the purpose of a tax treaty?
One would say, "Well, the purpose
"is to avoid double taxation."
Is it true?
Is this why, the reason why
countries sign treaties?
I have here a concrete example.
I chose Luxembourg, Brazil and US.
Brazil has no treaty
with the United States.
However, Brazil does have
a treaty with Luxembourg.
And it is obvious that Luxembourg
is not such a big economy
for the present rehabilitation Brazil.
Just for you to have an idea, this year,
the second greatest,
the second biggest investor
in Brazil was Luxembourg.
So what is happening most probably?
Of course, third countries
are using the treaty
to invest in Brazil, what
you call treaty shopping.
The question is, is
this against the purpose
of the parties of the treaties?
Didn't Brazil know that
Luxembourg was a jurisdiction
through which holdings were established
to invest in third countries?
Just didn't Luxembourg
know what it was doing?
Who is being abused here?
The bodies, Brazil or
Luxembourg, all they are,
is all these investments just according
to the target of the treaties?
The only jurisdiction
which is being abused here
is a jurisdiction which is
not a party of the treaty.
This is the United states that
because of this structure,
there is no reason for Brazil
to have to sign a treaty
with with the United States
or at least not this reason,
because US investors can find
a way out to invest in Brazil.
So if we would apply the test LOB test
or principal purpose test, most probably
both of them would fail.
And in case the countries
Brazil and Luxembourg
would introduce LOB or PPT in the treaty,
the treaty itself would
have no substance anymore,
unless of course for the
few residents in Luxembourg,
who desire to invest in Brazil.
- Now, if we speak about the action six,
if we speak about
intermediary jurisdictions
such as Luxembourg,
there is really a topic
which is becoming critical
and this is substance
because you need to somehow
justify to the eyes of the world
the role and business
rationale of why you introduce
a Luxembourg entity for instance,
in those cross border
investment schemes, and again,
if the sole reason or the
main purpose of structure
is to abuse the treaty and
the BEPS six, forget about it,
it will be useless.
So another question is
between the LOB or the PPT,
who is basically going for which approach?
I think there is a big
distinction to be made
between the US, which certainly will go
for the LOB provision, they are very used
to LOB in their tax treaties.
And in Europe, the focus
is clearly much more
on the PPT rule.
So that's also very
important and Luxembourg
is certainly following this approach.
So, on that basis, what
are also the trends
that we should be expecting
in terms of the whole
of those intermediary
jurisdictions such as Luxembourg?
Well, we believe that as
a result of those changes,
which are in a way a bit dramatic
for countries such as Luxembourg,
Netherlands, et cetera.
There will be a real shift
in mindset of many people
being active in cross border structuring
and there will certainly
be a key word that will,
always be more on the
table, it's substance.
And by substance, we mean
many different things.
My background is Alternative Investments.
So if I use example in the
Investment Fund Industry,
Luxembourg is a very
popular place, as you know,
we're ranking number two
worldwide after the US
for investment funds.
What we expect is that we
will see a consolidation,
a concentration of substance.
That means actually, that when
you have an investment fund,
which is typically
managed by a fund manager,
for which you have the need
to have a sub investment
structure, we are likely to see
always more concentration of substance
in one single jurisdiction,
which very often
always more will be
different jurisdiction,
so it could be Luxembourg.
What we also are likely to
see always more is attempts
to simply try to avoid
the consequence of BEPS.
And what I mean by this,
again in the context
of alternative investment
funds, what we see always more
and this is an immediate consequence
of all of these BEPS discussion
are structures where tax transparency
or assimilated structures
are really targeted.
So, the aim being to try to shift taxation
solely to the level of the investors
and try to achieve
neutrality without the need
to formally rely on a country
tax treaty in particular.
So, this is a trend we see, we observe.
And what is also very interesting
is the context of those
draft public discussion paper
from the OECD on treaty
access for non CIV funds
or non collective investment vehicles.
There is this proposal from
certain industry players
to go at least to consider
the concept of global stream funds.
And the idea would be, irrespective
of the cross border nature of a given
investment fund structure,
the idea would be to go
for full exemption, from
the investment country,
through the intermediary
jurisdictions, if need be,
up to the fund level, and then the fund,
being itself typically tax exempt,
would need to compute certainly distribute
all of its income, and
then taxation would happen.
And where the innovation
is that withholding tax
that would be divided for
the respective distribution
to the values investors
would then be refunded
to the source countries
because, don't forget,
one of the consequences of BEPS
is to increase source taxation.
So it's a very interesting
and innovative proposal
which is not certainly enacted as of now,
but it's part of the general discussion
on how to structure
cross border investments.
- Well, now let's change action.
Let's go to Multilateral
Instrument Action 15.
Pierre.
- Yes, thank you.
So this multilateral instrument,
we've been briefly considering,
is likely to be a very complex process.
Certainly from a legal point of view.
There is a big political
will to go quickly,
and it's also a very ambitious deadline
by the end of this year.
Normally, all participating
countries would diversify
this multilateral
instrument, de facto, meaning
implementing automatically all these BEPS
action plan measures in
existing tax treaties.
And there are two main
approach we could consider
in the context of those
discussion because no final view
has been taken to our knowledge,
either keep certain
flexibility because again,
we speak about the standard minimum
we speak about recommendation,
the flexibility
being to allow a country
to go for the LOB the PPT
or a combination of those two measures,
anti violence measures, abuse measures.
Or be more directive, forcing countries
to go in a certain direction,
but then it is very likely
that it will be more
challenging and the risks,
there is a real risk of
failure from this initiative.
Just a few words on Luxembourg.
We certainly support the BEPS proposals.
We are part of this
multilateral agreement,
instrument initiative and the new treaties
that we will be concluding,
a recent example
is the Luxembourg-Senegal
Treaty, from February.
Well, we certainly push for
the PPT as the main measures
for NTA and anti avoidance.
And we also allow specific
anti abuse provisions
in relation to interest,
dividend, royalties
and investment income.
At the same time, we
also allow the respective
domestic anti abuse provisions to apply
to the extent that would
not lead to taxation
or to be contrary to the treaty.
- Thank you.
Well, when we talk about
multilateral instrument,
we should think about
countries where they are really
consistent in their policies.
We like to believe
countries have their models,
they negotiate their models
and they don't move from their models.
However, this is not necessarily true.
Usually, I use the image of
this god, this Roman god Janus,
that god of the doors,
to refer to countries
when they negotiate treaties.
That means depending on
who is your treaty partner,
you will have one treaty.
And these treaties do not show one policy,
but different policies.
For instance, my country,
Brazil, we have some treaties
which have LOB clauses,
other treaties have something
similar to anti abuse the guard, a guard,
I would today would say PPT, which is not
more or less a guard.
Well, you have different solutions,
depending on your treaty partner.
Now we are talking about
a multilateral instrument.
And from now on this, once you sign
the multilateral instrument,
this will be valid for
all of your treaties.
When you sign a multilateral instrument,
you may be forgetting that
you, treaty was negotiated
on a bilateral basis, that
some concessions were made
for you to get something in return.
Suddenly, what you're going
to have is, you are losing
what you got and still maintaining
the concessions you gave
during your negotiation.
So the project, the idea of
a multilateral instrument
with only some clauses will
bring some very interesting
challenges such as, which will prevail,
if you have a concrete treaty with LOB.
However, in your
multilateral treaty, you are,
you accepted only the PPT,
will this multilateral treaty
with PPT revoke the LOB or the country?
And you may consider this
for all of the provisions,
which may be included in the future
in this multilateral instrument.
That's enough for this action.
Now, we should move to
theme three Transfer Pricing
and IP rights.
Adrian, please.
- Thanks, Louis.
It was a lot of focus on
IP and the taxation of IP
in the BEPS reports.
And actions eight to 10 basically sought
to align transfer pricing
outcomes with value
and basically, you know, try
to attack perceived mischief
in various ways.
One was to say that
contractual allocations of risk
would only be received and
respected where supported
by actual decision making,
so getting, I guess
at the heart of things like
cost sharing agreements.
Capital without
functionality would generate
no more than a risk free return.
Legal ownership of intangibles on its own,
doesn't determine returns.
And of course, the importance
of what we now refer to as
DEMPE, Development, Enhancement,
Maintenance, Protection and
Exploitation of intangibles.
Now it's gonna be very interesting to see
how these all funds out
in practice and simply
from an Irish perspective,
we would probably say,
aren't in many ways has been a supporter
of one of the principal thrusts
of BEPS which is to align,
I guess, value with substance and our 10,
our 12 and a half percent
race is dependent on substance
and Irish revenue in some ways,
have been ahead of the game
here because they've had
statements to practice on
this going back many years.
So as I say, I think there's
going to be a lot of interest
and probably disputes
over this whole question
of control over DEMFE and I
think, you know, being an Irish
I think of all of the
typical types of structures
we have in Ireland, we
have big subsidiaries
of pharma companies,
of software companies,
new digital companies,
often with very significant
numbers of employees, often parties
to car sharing agreements
directly or maybe licensing
in the IP from an NRI.
And, you know, some are
looking at unsuring this IP
into Ireland.
And the question I think, is
going to be in the new world,
you know, how does one
in practice determine
what level these DEMFE
functions need to be?
Because for a lot of these
multinationals, of course,
the really tough guys will
naturally tend to be in the US
and that's just the way things happen.
So, you know what's gonna
happen if for example,
country A thinks that there
are adequate DEMFE functions
over whatever heading in its own country
to justify the transfer
pricing that's been adopted?
But on the other hand, country
B disputes that so, you know,
for country A you might
substitute Ireland,
for country B we might suggest France.
So a dispute breaks out and France says,
"Look, we don't really
think the real control
"over maintenance or
development or enhancement
"or exploitation is actually in Ireland.
"We don't think it's there."
Ireland disagrees.
If you really got stuck
into that, if you accept,
it's not in Ireland, the
odds are it's very possibly
in the US, but that dispute
is between Ireland and France.
And the question is, you
know, how does the US
get involved in this dispute?
Because if anyone deserves
that residual profit,
certainly not France and
Ireland is probably saying,
"Well, we don't want it if
it doesn't belong to us."
So I think that's really
gonna be very interesting.
How do you get DEMFI aligned with your IP
if it's outside the US?
And there are lots of functions
of us, what is the threshold
that you got to satisfy in practice?
So I really think there's going
to be lots of disputes here.
I think we're going to get
into a lot of the issues
that were covered by the
last panel and the sole issue
of resources and pressure and resources,
I think is going to be
really, really fascinating.
Going to hand over now to Penny.
- Last part so,
so when it comes to China,
China has been acting very
extensively in terms of you know,
involving in BEPS, OECD
work, including, you know,
some 18 different options, especially
from a developing country
perspective, you know,
how are these different
issues, should be addressed,
you know more from the
developing country perspectives.
And one of the very important update come,
coming up is that China is going to issued
a revised transfer pricing guidance,
which will be the principal
transfer pricing rules in China,
later this year.
The last public draft was announced
by the end of September last year.
And we expect that the
official and final version
will be issued towards the
second half of this year.
And in this upcoming
transfer pricing rules,
we expect to see you know, the,
a lot of the BEPS ideas
and development plans
will be included into the China context.
So looking at this app,
this map, so, traditionally many MMCs
they have set up their presses in China.
You know as a manufacturing company or
a local sales and
marketing support entity,
that are compensated
on a cost price basis.
Now, over the recent
years the Chinese SDT,
the State Demonstration
of Taxation in China
which basically is the central
taxing authority in China,
they have brought up the
concept of cost saving
and market premium as the
location saving advantage concept.
And this concept has
been formally included
in SDT's contribution to
the UN practical manual
for transfer pricing in 2013.
So, in particular the Chinese
SDT they have taken the view
that some level of upstream
value chain activities
for example, like the product designed
and some downstream value chain activities
such as brand building,
which are typically taken up
by the non Chinese MMCs you
know there has been too much
waiting given to these type
of activities, you know,
under the transfer
pricing practice evolved
in a developed countries.
So, as a result the location
saving advantage concept
has been brought up by China you know
to sort of correct this by
placing a different emphasis
on the unique advantage
in the Chinese market
as in the middle supply
chain, so, for example,
the manufacturing activities.
So these concepts are
expected to be included
in the upcoming China
transfer pricing guidance.
The other very important aspect
that are going to be included
in the upcoming you know,
revised transfer China,
transfer pricing rules
is the DEMPE analysis.
So, like agent just, you
know, introduced the,
you know, what is involved
in a DEMPE analysis.
Basically, overall, China has
adopted a consistent approach
when it comes to a DEMPE analysis as OECD,
however, there are some,
you know, local variants
purely from a China perspective.
For example, on top of a DEMPE, D-E-M-P-E,
China has add one more
character as P at the end
representing Promotion.
So, that actually implies
enforcement by China
by emphasizing the importance
of the local Chinese
market promotion and also
you know, the consumer
product awareness brand building
in the local Chinese market, you know,
as a significant contribution
to the value creation.
And in addition, for example,
agent also mentioned,
you know, the OECD, under the OECD works,
obviously they actually emphasize
the centrality of controls
of functions are risks.
However, China only, you
know, barely mentioned control
as a factor to consider.
And it does not mention
the decision making at all.
So that's a different
perspective, you know,
when China views you know,
how DEMPE should be performed.
And on the other hand,
China does emphasize again,
the importance of the local
market adaptation, for example,
the maintenance of the local
Chinese customer relationship,
you know, the local brand
building, and for example,
the establishment of the
market channels in China,
that has been emphasized
in China's DEMPE analysis,
but this remains to be
kind of, you know, silent
under the OECD work.
And on the other hand, OECD
does mentioned you know,
for example, the management of budgets
when it comes to the development of IP
as well as the you know, the legal defense
on intangibles, but China
does not mention that at all.
And last but not the least,
China also introduced
a concept that, you know,
in certain circumstances,
the economic ownership may
be residing with the entity
that is different from the legal ownership
and who will be contributing
a significant value
to the intangibles,
while OECD only speaks,
simply speaks on you know,
compensating such entity.
So how does that, whether that
will make a distinguishing
effect in practice, and
that remains to be seen.
So, while we're waiting for
the issuance of the, you know,
significant revised TP transfer,
transfer pricing rules,
over the past two years,
China actually has already
issued a number of specific
text circulars, for example,
targeting the Chinese
outbound payment in the form
of a service fee and royalty.
So I believe many companies
who have subsidiaries in China
over the past 18 to 24
months have either received
a tax audit notice from the
local Chinese tax authorities
or have increased or have
incurred an increase in difficulty
in terms of you know, getting
remittance from China.
And in implementing
this kind of, you know,
outbound service fees
slash royalty payment,
the Chinese tax authorities,
they have actually
been implementing the concept
and the DUMPE analysis
in practice, before everything you know,
is you know, formalized
and put into return.
And last but not the
least, I do want to mention
another important update, that
is expected to be included
in terms of pricing rules revision,
which will be the
disclosure of information,
because traditionally under the current
China transfer pricing
reporting requirement,
there is a threshold over
which the Chinese entities
they need to perform a
transfer pricing study
and prepare a transfer pricing
documentation in China.
The threshold is basically 36 million US
for related party purchase and sales
that is on an annual basis.
Or a 6000000 euros transaction
for non trade transactions,
including royalty service
fee or interest payment.
So once the threshold is reached,
the local Chinese companies
will need to prepare
the transfer pricing documentation
but the current template
of that documentation
only requires the analysis
of the local country
functional risk analysis.
So in an upcoming rules on
top of their requirement,
the China, we are additionally required
a disclosure of the global
supply chain analysis,
which is, you know, a
additional requirement
because it's not required by OECD
but China will have that requirement.
So, once you reach that
threshold, the entire group
the you know, how the global
operating structure, you know,
is designed, how the financing
structure is designed,
what is the method to be used to allocate
different profits, of
course, different countries?
Which entity is doing what?
Also including the financial statements
for the, for all the (chuckles)
other non Chinese affiliates
will be required to disclose.
So that will actually
raise a lot of concerns
to multinational companies
because by then, they will then
be disclosing the global structure
to the Chinese tax authorities.
So, that is then another
important update to be expected
in the upcoming transfer
pricing revision rules.
- Thank you Penny.
This brings us to the
questions and answers.
Any question from the.
- [David] I have a question.
- David Rosenblum,
yes, please.
- What is the experience?
Would you know?
Do you know the experience of
the Chinese tax authorities
and the mutual agreement
procedure, with the United States
or with other countries?
How is that function?
Have there been?
Is there any public
information about that?
- Yeah, we haven't, honestly
speaking, we haven't seen
a lot of, you know, mutual
agreement procedures
that have actually been
adopted by the companies.
But instead, we have seen
more cases whereby a APA,
for example, when it comes to
a dispute on transfer pricing,
a APA procedure will be established.
And the issue with China is
that the Chinese tax authorities
the SDT, they have very limited resources
when when it comes to APA.
As compared to the US maybe
we probably have more than 90
different IRS officials,
you know, to the API work,
in China, we only have nine, nine people.
And these nine people, they
are responsible for concluding.
They are responsible
for drop in the rules,
they are responsible for
reviewing all the transfer pricing
all the cases in China,
as well as providing
the guidance and trainings
to the local tax authorities.
So because of that reason,
although, they have been,
you know, quite a few
bilateral APA concluded.
I believe that has been more
than 20, although not many
when compared to other
countries, but yes, I mean,
the bilateral API will be most, you know,
common ways to resolve the
disputes we have (mumbles).
- Further questions?
Barry.
- Okay.
Well, thank you, Louis, Penny, Adrian,
Justin, Pierre and Russell.
We've covered a lot of ground today
and hope that you're now
better at able to navigate
the global tax client and change.
This 16th Annual Symposium
has been an outstanding event
with a registration count
of approximately 500
and with an all star cast.
Exploring the issues from
the varying perspectives
of that academia, the tax
practice, corporate America
and the United States government.
As a reminder for CPE or a CLE credits,
please remember to hand
in your evaluation forms
as you depart and if you
wish to obtain CLE credits,
please make sure to drop your
CLE badge, your name badge
in the basket designated for CLE credits.
Please join me in thanking
each of our distinguished
speakers who presented today.
And thanks to each of you for
attending and participating
at the 16th Annual NYU KPMG Tax lecture.
Meeting adjourned.
