impact of beps and eu initiatives on intercompany … of beps and eu initiatives on intercompany...

1© 2015. For information, contact Deloitte Touche Tohmatsu Limited.

Impact of BEPS and EU initiatives on

intercompany treasury and financing

Deloitte Academy Seminar

10 November 2015


Agenda

1. Introduction

2. BEPS papers and EU initiatives affecting I/C treasury and financing

• Selected Final OECD BEPS papers

• EU Commission initiatives

3. Which treasury and financing solutions are affected and which not (part I)?

Coffee break

4. Which treasury and financing solutions are affected and which not (part II)?

5. What do we expect still to come?

6. What are the related documentation implications?

7. What are the related operational treasury implications?

8. Tax audits trends

9. Q&A


Introduction


Introduction

High Taxed Countries Low Taxed Countries

Central question: Are countries getting their fair share of tax revenue?

What is it all about?

Interest

Royalties

Products

Services

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Introduction

True / false?

• MNE affiliates in low tax countries report c. 2 x the profit

rate relative to assets

• Global corporate tax revenue losses estimated between 4%

to 10% of global corporate tax revenues (USD 100 to 240

billion annually)

Policy objectives

of initiatives

• Align substance and taxing rights

• Address double non-taxation

• Increase transparency

Intercompany

financing in tax

optimisation

• Well-known tool for managing a MNC’s ETR

• Intercompany financing (e.g. hybrids) a major focus area for

the OECD and EU

What is it all about?


Introduction

EU Initiatives

• EU PS Directive (modified)

• EU IR Directive (to be modified)

• State aid investigations (e.g. Fiat case)

• Tax Transparancy Package

• CCCTB (common consolidated corporate tax base)

• Financial transaction tax

OECD BEPS

initiatives

• Action 2 (hybrids)

• Action 3 (CFC)

• Action 4 (interest deductions)

• Action 5 (harmful tax practices)

• Action 6 (treaty abuse)

• Action 8-10 (aligning TP outcome with value creation)

• Action 13 (TP documentation and country-by-country

reporting)

Relevant initiatives for intragroup financing


Selected Final OECD

BEPS Reports


Final OECD BEPS Reports

Minimum standards• Action 5 on Harmful Tax Practices

• Action 6 on Treaty Abuse• Action 7 on PE’s

• Action 8 – 10 on TP

• Action 13 on Country by Country reporting• Action 14 on Dispute Resolution

Common approach• Action 2 on Hybrid Mismatches

• Action 4 on Interest Deductions

Recommendations• Action 3 on Controlled Foreign Company (CFC’s)• Action 12 on Disclosure of Aggressive Tax Planning

Implementation categories


Final OECD BEPS Reports

Interest

deductions

• Further defining of the “group ratio rule” (end of 2016)

• Specific rules to take into account features of the banking and

insurance sectors (end of 2016)

Transfer pricing

• Further revised guidance on transactional profit splits (mid 2017)

• Further revised guidance on financial transactions (2016 - 2017)

• Consolidation of other parts of the transfer pricing guidelines with the

new guidance

Follow up work still to be done

Permanent

Establishments

• Additional guidance on the amount of profits resulting from changes

to the definition of PE (profit attribution) (December 2016)

Harmful Tax

Practices

• Expand participation of non-OECD non-G20 members

• Revision of harmful tax practises criteria

Treaty abuse• Treaty entitlement of non-collective investment funds (non-CIVs)

(2016)

• Low tax PE specific anti-abuse provision (first half of 2016)


BEPS – Action 2

Neutralising hybrid

mismatch arrangements


BEPS - Action 2 Hybrid Mismatches

Part II

• Ensure hybrid instruments / entities and dual resident

entities not used to unduly obtain treaty benefits

• Ensure treaties do not prevent application of domestic rules

Part I

• General recommendations for domestic rules to address

mismatches in tax outcome arising in respect of payments

made

- under hybrid financial instruments

- to or by a (reverse) hybrid entity

- to a payee not directly caught by hybrid mismatch rules

(imported mismatch)

• Linking rules (primary and secondary / defensive) designed

to align tax treatment of instrument or entity with

counterparty jurisdiction

• Specific tax policy recommendations

Two parts – domestic vs. treaty law



Policy

recommendations

• Tax treatment of financial instruments

• Tax treatment of reverse hybrids

Rule

recommendations

• Hybrid financial instrument rule

• Disregarded hybrid payment rule

• Reverse hybrid rule

• Deductible hybrid payments rule

• Dual-resident payer rule

• Imported mismatch rule

Part I – 12 chapters

Design principles

and definitions

• Targeted outcome

• Cooperation in relation to implementation and consistent /

effective application

• Structured arrangement

• Related persons, control group



Types /

classification

• Deduction/no inclusion (D/NI): deduction in payer

jurisdiction and no inclusion in ordinary income of payee

jurisdiction

• Double deduction (DD): two deductions for same payment

• Indirect deduction/no inclusion (Indirect D/NI):

deduction in payer jurisdiction and off-setting hybrid

mismatch arrangement deduction in payee jurisdiction

Hybrid mismatch

• Mismatch in tax outcome further to a hybrid element

- including : difference in tax treatment of entities

(opaque vs. transparent) and in characterisation of

instruments

- excluding : notional interest deduction and mismatch

solely due to differences in valuation

Part I – Hybrid mismatch and classification



Specific

• Financial instrument as defined under local law

• Payment in relation to loan agreement, incl. payment to

modify terms of or cancel financial instruments

• Payment includes amounts capable of being paid, incl.

future or contingent obligations to make a payment

General

• Payment under financial instrument (or substitutive payment

under arrangement to transfer financial instrument)

• to related person (or third-party under structured

arrangement)

• resulting in D/NI outcome (payment deducted in payer

jurisdiction and not included in (ordinary)income in payee

jurisdiction)

• further to different tax treatment / characterisation of

instrument and payment thereunder under local laws (tax

law, accounting law, valuation, timing)

• attributable to terms of instrument

Part I – Hybrid financial instrument rule



Questionable

positions ?

• Credit for distributed profit : credit is equivalent to deduction

/ deduction includes “equivalent tax relief”

• Mismatch in same jurisdiction

Specific

• Non-inclusion (NI) when different treatment leads to e.g.

- no recognition / treatment as ordinary income (within

reasonable time frame)

- no taxation or (partial) tax exemption

- taxation at separate (low) rate

• No non-inclusion (NI) further to e.g.

- low tax rate applies to all ordinary income from all

types of financial instruments

- tax exempt payee

- in no-tax or territoriality tax regime country

- sole difference in valuation of payment

Part I – Hybrid financial instrument rule

16© 2015. For information, contact Deloitte Touche Tohmatsu Limited.© 2015. For information, contact Deloitte Touche Tohmatsu Limited.

Recommended hybrid financial instrument rule

Primary rule Secondary /

defensive rule

Scope

Deny deduction in

payer jurisdiction

Include payment in

ordinary income in

payee jurisdiction

Related parties

(25%) and structured

arrangements


Part I - Hybrid financial instrument rule

ParentCo

PPL Payment

HoldCo

Equity

OpCo



Specific

• Only in case hybrid financial instrument rule does not apply

• Also applies to (disregarded) payment by PE of hybrid

payer

General

• (Disregarded) payment

• by hybrid payer

• to party of the same control group (or third party under

structured arrangement)


jurisdiction and not recognised in payee jurisdiction)

• further to tax treatment / characterisation of payer entity

under payee tax law (and insofar exceeding dual inclusion

income)

Part I – Disregarded hybrid payment rule



Part I - Disregarded hybrid payment rule

Recommended disregarded hybrid payment rule


defensive rule

Scope

Deny deduction in

payer jurisdiction

Include payment in

ordinary income in

payee jurisdiction

Control group and

structured

arrangements

Equity

Loan

Group

relief

regime

US ParentCo

HoldCo

OpCo



Specific

• Reverse hybrid is opaque for investor jurisdiction and

transparent for establishment jurisdiction



• Only applies in case no mismatch under direct payment to

investor and no inclusion in any jurisdiction

General

• Payment

• to a reverse hybrid payee

• by party of the same control group (or third party under

structured arrangement)


jurisdiction and not recognised in payee / investor

jurisdiction)

• further to different tax treatment / characterisation of payee

entity under payee and investor jurisdiction tax laws

Part I – Reverse hybrid rule



Part I - Reverse hybrid rule

Recommended reverse hybrid rule


defensive rule

Scope

Deny deduction in

payer jurisdiction

Unnecessary

(proposed CFC and

specific

recommendations)

Control group and

structured

arrangements

Loan(s)

Partnership

ParentCo

OpCo



Specific



• Only applies in case reverse hybrid rule does not apply

General

• Payment

• by a hybrid payer

• resulting in DD outcome (payment deducted in payer and

parent jurisdiction)

• further to different tax treatment / characterisation of payer

entity under payer and parent jurisdiction tax laws and

insofar exceeding dual inclusion income

Part I – Deductible hybrid payments rule



Part I - Deductible hybrid payments rule



defensive rule

Scope

Deny deduction in

parent jurisdiction

Deny deduction in

payer jurisdiction

No limitation

(primary rule) and

control group and

structured

arrangements

(secondary rule)

Loan

Partnership

OpCo

tax

consolidation

/ group relief

bank

ParentCo



Specific



• Hybrid deduction cf. definition in hybrid financial instrument,

disregarded hybrid payment, reverse hybrid, deductible

hybrid payment (and dual resident payer) rule

General

• Payment

• by a group company

• to another group company

• resulting in an indirect D/NI outcome (deduction in payer

jurisdiction and off-set against hybrid deduction in payee

jurisdiction)

• further to payee not being subject to hybrid mismatch rule

Part I – Imported mismatch rule



Part I - Imported mismatch rule



defensive rule

Scope

Deny deduction in

payer jurisdiction

Control group and

structured

arrangements

HoldCo 1

HoldCo 2

tax

consolidation /

group relief

Loan

Loan(s)

OpCo



Examples

• Examples per recommendation

• Many examples with elaborative application of different

recommendations / rules

• Practical guidance on interaction between different

recommendations

Part II chapters

• Dual resident companies

• Treaty provisions on transparent entities

• Interaction between Part I and tax treaties

Part II and Examples


BEPS – Action 3

Strengthen CFC rules


BEPS - Action 3 CFC rules

Recommendation

• Final Report provides for recommendations only: no

minimum standard to introduce CFC regime

• Provides building block for effective CFC rules that do

tackle BEPS concerns

Recommendations for CFC building blocks

Building Blocks

• Definition of CFC

• CFC exemptions and threshold requirements

• Definition of CFC income

• Computation of income

• Attribution of income

• Prevention and elimination of double taxation

CFC regimes

• 30 countries in the OECD / G20 Group currently have CFC

rules

• Many CFC rules considered having design features that do

not tackle BEPS effectively



Compatibility

with EU law

(Cadbury

Schweppes)

• CFC rules to be compatible with EU law.

- ECJ Cadbury Schweppes case: CFC regime only

justified under EU laws if it specifically targets “wholly

artificial arrangements” which do not reflect

economic reality and whose only purpose would be to

obtain a tax advantage.

- Final Report mentions two more recent developments

in the ECJ analysis that suggest that CFC rules may

be justified and proportionate even if they apply

beyond wholly artificial arrangements

- Cfr. ECJ Thin Cap Group Litigation: justified as

long as the transaction giving rise to the income

is at least “partly artificial”.

- Cfr. ECJ SGI / Oy AA: justified by the need to

maintain a balances allocation of taxing rights if

regime is designed to prevent conduct capable of

jeopardising the right of a Member State to

exercise its tax jurisdiction in relation to activities

carried out in its territory.




CFC exemptions

and threshold

requirements

• Final report clearer on tax rate exemptions and use of lists

such as a white list


Definition of a

CFC

• Includes transparent entities and PE’s where raising BEPS

concerns

• Report also includes a form of anti-hybrid rule to prevent

avoidance of CFC rules

Definition of CFC

income

• Recognising different policy objectives of countries, there is

more flexibility and options.

Elimination of

double taxation

• Stronger emphasis on ensuring that rules do not lead to

double taxation.


BEPS – Action 4

Interest deductions and

other financial payments


BEPS - Action 4 Interest deductions

Definition of

EBITDA

• “Tax” EBITDA as measurement of taxable economic activity,

possibly in relation to average of number of years (cf.

mitigate volatility)

• Alternatively, EBIT or asset-based measure with ratio being

adjusted accordingly

General rule

• Fixed ratio rule, based on EBITDA and (net) interest and

equivalent payments

• Restriction within corridor of 10% and 30% of EBITDA;

factors to help determine a respective country’s benchmark:

- Group ratio rule “fall back”

- Carry forward or carry back of excess deductions

and/or capacity

- Market interest environment

- Targeted rules

- Size of entity’s group

Best practice approach – General rule



Optional

rules

• Group ratio rule as a “fall back” (safe haven):

- Deduction of interest expense up to group’s net

interest / EBITDA ratio if higher

- Option to apply uplift to group’s net third party interest

expense by up to 10%

- Group ratio based on consolidated figures (entities

fully consolidated on line-by-line basis)

- Group ratio can be replaced by “equity escape” rule

(e.g. equity / total assets)

- Further work on whether tax adjustments should be

considered, and application to loss making entities

• Carry-forward or back of disallowed interest expense or

unused interest capacity

• De minimis rule to exclude low levels of debt

Best practice approach – Supplementary rules

Targeted rules • Targeted anti-avoidance rules to supplement best practice

approach and address specific risks



Interest and

equivalent

payments

• Interest on all forms of debt (group entities, related parties

and third parties)

• Payments “economically equivalent to interest”, including:

- Imputed interest on convertible / zero coupon bonds

- Interest element of finance leases

- (Amortisation of) capitalized interest

- Guarantee fees

- Payments under debt related derivative and hedging

instruments

• Expenses incurred in connection with the raising of debt

(arrangement fees, non-usage fees, …)

• Silent on treatment of preference shares and factoring, and

operating lease payments specifically excluded

• Deemed deductions on equity out of scope

Best practice approach – Scope / definitions



Entities covered

• All entities part of a multinational group

• Possibility to consolidate entities in one jurisdiction

• Targeted rules encouraged to prevent group ratio’s being

artificially inflated

Best practice approach – Implementation

Implementation

• Recommended to come into force in 2017

• Suggestion to give “reasonable time” to restructure existing

financial arrangements before fixed ratio rule comes into

effect

• Transitional rules could exclude interest on certain existing

third party loans (for a fixed period or indefinitely)



Business and

Industry

Advisory

Committee to the

OECD (BIAC)

study

• Based on data from publicly traded MNC with positive

EBITDA

• Various assumptions considered

• Results:

- At fixed ratio of 10%, 62% of net third party interest

expense tax deductible


- expense tax deductible


expense tax deductible

- Above fixed ratio of 30%, the rate of tax deductible

expense increase increases more slowly

Best practice approach - Potential impact


BEPS – Action 5

Harmful tax practices


BEPS - Action 5 Harmful tax practices

Retroactive

exchange

• Rulings issued on or after 1 January 2010 and still in effect

on 1 January 2014: to be exchanged by 31 December 2016

• Rulings issued on or after 1 April 2016: to be exchanged

within three months of issue date

• Subject to country’s legal framework

Minimum Standard – Tax Transparancy

Exchanged to

whom?

• Countries of residence of related parties with transaction

covered by ruling, or in case of PE ruling country of head

office / PE as case may be

• Country of immediate parent company

• Country of ultimate parent company

• Information to be kept confidential

Definition of

ruling

• “Any advice, information or undertaking provided by a tax

authority to a specific taxpayer or group of taxpayers

concerning their tax situation and on which they are entitled

to rely”.



Preferential

regimes

• Filter approach:

- within the scope of work of FHTP

- are preferential

- meet the low or no effective tax rate factor

Categories of

rulings to be

exchanged

1. Rulings related to preferential regimes

2. Unilateral APA’s and other cross-border unilateral TP

rulings

3. Cross-border rulings granting an unilateral downward

adjustment of taxable profits

4. Permanent establishment (PE) rulings

5. Related party conduit rulings

6. Other rulings subsequently agreed by the Forum for

Harmful tax practise (FHTP) to give rise to BEPS concerns




Downward

adjustment of

taxable profits

• Explicitly covers the following:

- Excess profit rulings

- Informal capital rulings

- TP adjustment on interest free loans

- Other transfer pricing adjustments (adjustment up to

the difference of the actual price paid and an arm’s

length price)

• If no ruling required to benefit from the adjustment,

information to be provided on all cases where the regime

has been utilized to other relevant tax authorities


PE rulings• Decision on the existence or absence of a PE

• Profit attribution to the PE


investors



Lower tier Co

OpCo

Interest

Loans

Higher tier Co

Related party conduit rulings

Conduit arrangement

• Cross border flow of funds or income

• Through an entity in the country giving the tax

ruling where those funds or income flow to

another country directly or indirectly

Example of an indirect conduit arrangement

• OpCo pays interest to Lower Tier Co

• Lower Tier Co pays interest onwards to Higher

tier Co leaving a small taxable margin

• Higher Tier entity treated as tax transparent

under domestic law and as non-resident

investors no taxation on income flow

Interest

investors

Loans




Best practices for

a country’s ruling

procedures

• Best practices for country’s ruling procedures, including :

- process of granting a ruling

- term of ruling (only for a fixed term) and subsequent

audit procedure

- publication and exchange of information


BEPS – Action 6

Treaty abuse


BEPS - Action 6 Treaty abuseMinimum standard - General

Express Statement in

Title / Preamble

OECD’s BEPS project

Introduction Anti-

Avoidance Rule

Common intention to eliminate double taxation without creating treaty shopping

opportunities

1. PPT rule 2. PPT rule + LOB3. LOB rule + mechanism dealing

with conduit arrangements


BEPS - Action 6 Treaty abuse

Targeted treaty abuse

• Source state WHT reduced under DTT source

state & residence state

• Income (e.g. interest income) allocated to a

branch in a third country benefitting from a

favorable tax treatment

• Residence state exempts or taxes at low rates

PE profits

Targeted rule (subject to change)

• Specific anti-abuse provision to be included in

the Model treaty

• Source state only to grant treaty benefits if

aggregate ETR of PE and FinCo is greater than

60% of the standard corporate tax rate of FinCo,

with some exceptions

• Exception: active trade of business

Low-taxed

PE

Minimum standard – Low-taxed PEs

FinCo

(Residence

state)

Foreign

Parent

OpCo

Loan(s)

Residence state

PE state

Source state


BEPS - Action 6 Treaty abuse

Follow up work

• Report states that “subsequent work revealed

that changes were required with respect to

different aspects”.

• In May 2015, the US released a new version of a

similar treaty provision on which public

comments were received by 15 September 2015

• Final version of the provision and OECD

commentary to be produced in the first half of

2016

• To be considered in the negotiation of a

multilateral instrument. Low-taxed

PE

Minimum standard - Low-taxed PEs

FinCo

(Residence

state)

Foreign Parent

OpCo

Loan(s)

Residence state

PE state

Source state


Action 6 – Treaty abuse

New tie-breaker

rule

• Residency to be determined by mutual agreement between

Competent Authorities

• Case by case basis analysis

• Various factors to be considered, incl. location of:

- BoD or equivalent body

- C-suits

- Senior day-to-day management

- Headquarter location

- Accounting records

• No entitlement to relief or exemption from tax provided by

the convention prior to agreement by Competent Authorities

Minimum standard - Dual resident companies

Old tie-breaker

rule• Place of effective management (article 4 §3)


BEPS – Action 8-10

Aligning Transfer Pricing

outcomes with value

creation


BEPS - Action 8-10 Aligning TP outcomes

General objective

• Prevention of allocation of profits to locations where no

contributions are made to these profits

• Achieved by accurate delineation (substance over form)

- Not based on contractual arrangements that do not

reflect economic reality

- Looking at actual contributions

• If the transaction lacks commercial rationality, the guidance

continues to authorize tax authorities to disregard

transactions for TP purposes

• Revised transfer pricing guidelines (guidance will take the

form of amendments to the Transfer Pricing Guidelines)

Minimum standard – General objective



Holistic approach

cfr. other BEPS

actions

• Marginal profits of cash rich entity also targeted by interest

deductibility rules at the level of the payer entity (Action 4).

• Extremely difficult to structure payments to country where

cash box is tax-resident in way that avoids withholding

taxes (Action 6)

• A cash box with limited activities is likely to be target of CFC

rules (action 3)

• “Secures that the role of cash boxes is seriously

discouraged”

Cash boxes

• Capital-rich entities without any other relevant economic

activities / substance (“cash boxes or capital without

functionality”) will not be entitled to excess profits

• Profits the cash box is entitled to retain will be equivalent to

no more than a risk-free return or less if e.g. the

transaction is not commercially rational

Minimum standard – Financial transactions



Follow up work

• Further guidance on economically relevant characteristics

for determining arm’s length conditions for financial

transactions

• Work will be undertaken in 2016 and 2017

Minimum standard – Financial transactions


EU initiatives


EU initiatives

Parent-

Subsidiary

Directive

• Art. 4 (1) (a): Neutralization of hybrid mismatches

- MS of parent company obliged to deny exemption for

dividends received to extent dividends are deductible

at subsidiary

- Debt qualification is not affected

- Capital gains on the instruments should still be exempt

• Art. 1 (2): de minimis GAAR

• Effective as of 1/1/2016

• Implementation: Belgium and most other MS still to adopt

legislation; Dutch government published draft bill

Interest-Royalty

Directive

• 2-step approach proposed (11/6/2015):

- Introduction of a de-minimis GAAR similar to EU PS

Directive and update of Annex 1 (list of eligible

companies); and

- Clear commitment to continue discussion on

remaining parts, including effective taxation

Amendments to EU Directives


EU initiatives

State aid investigations

Commission’s

Draft Notice 2014

• Tax rulings are acceptable if they merely provide legal

certainty

• Tax rulings are not acceptable if they lead to lower taxation

than that of other undertakings in similar legal & factual

situation (selective advantages)

• No presumption of aid if ruling merely contains

interpretation of relevant tax provisions (‘interpretative

ruling’)

Presumption of state aid if ruling departs from general

tax rules and benefits individual undertakings

(‘derogatory ruling’)

EC investigations

• Fiat and Starbucks cases held illegal by EC

• No update yet on other cases (Apple / Amazon / Belgian

excess profit rulings)


EU initiatives

CCTB - CCCTB

2011 Proposal on

CCCTB

Revisited CCCTB proposal in 2016

• Objective: avoid profit shifting (TP) and simplify cross

border operations within the EU

• Taxable bases are consolidated

• Optional regime to define taxable profits based on

same set of rules in every MS (incl. common tax rate)

• Becomes mandatory; Staged approach:

- First step: common corporate tax base (CCTB) –

no common tax rate

- Second step: CCCTB (consolidation = long term

objective) - until full consolidation is achieved:

cross-border loss offset (temporary relief subject

to recapture)

Too ambitious to implement in one single step


EU initiatives

Tax transparency

Tax Transparancy Package

Proposal for Directive

• What: mandatory automatic

exchange of info on cross-

border tax rulings and APA’s

every 6 months

• Retrospective: 5 years back

• Which info:

− Push: name of taxpayer and

group, issues addressed, MS

and other taxpayers that are

likely to be affected, etc.

− Pull: MS can as for more info

if relevant to them

• To whom: all other MS and the

EC

• As from 1/1/2017

Country by country reporting

• EC will examine feasibility of new

transparency requirements for

multinationals

• Revision of the Shareholder Rights

Directive

− Approved by European

Parliament on 8/7/2015

− Includes country by country

obligation for large companies

and PIES:

− What: profit or loss before

tax; tax on profit or loss;

public subsides received;

− How: specifying by member

state and by 3rd country

Country by Country Reporting

• Pending discussions on whether

(part of) info reported in Country by

Country should be made available

to the public

− UK disagrees

− Netherlands agree

− No Belgian position (yet)

Between tax

authoritiesTo the tax authorities To the public


EU action plan on corporate taxation

Financial transaction tax (FTT) - Developments

FTT

developments

• FTT initiative has been under discussion for several years

• Scope of 2013 FTT proposal:

- If financial institution is established in FTT zone and is involved

in the transaction, or if a financial institution is acting on behalf

of a party established in the FTT zone

- Financial instruments issued in one of the participating MS

- Applicable to all markets, all instruments and all actors

• Minimum rates: 0.1% on shares and bonds and 0.01% on

derivative transactions

• France (and Austria) leading initiative :

- Tax base as wide as possible with low tax rates

- Launch FTT as of 1 January 2016


Which treasury and financing

solutions are affected and

which not?


Hybrid instrument solutions

59

BE FinCo

ParentCo

Subsidiaries

PPL

Interest Loans

Payment

Commonly used financing solutions

Tax characteristics

• BE FinCo: PPL classified as debt and

payments made under PPL as interest, tax

deductible subject to limitations

• LuxCo: PPL classified as equity and payments

received under the PPL as dividend, tax

exempt under participations exemption regimeLuxCo

Hybrid instrument (1)

Equity

60

BE FinCo

ParentCo

Foreign

Subsidiaries

PPL / PPB

Interest

Loans

Interest


Tax characteristics


payments made under PPL as interest, tax

deductible subject to limitations

• LuxCo: PPL classified as equity and payments

received under the PPL as dividend, tax

exempt under participations exemption regimeLuxCo 2


LuxCo 1

PPL

95% 5%

61

BE FinCo

US ParentCo

Subsidiaries

CPEC /

MRPS

InterestLoans

Payment


Tax characteristics

• LuxCo: CPEC classified as debt and payment

made thereunder as interest, generally tax

deductible

• US ParentCo: CPEC classified as equity and

the payment received thereunder as dividend,

with possible stock dividend qualificationLuxCo


Loan(s)Interest


Hybrid entity solutions

63

Loans

Loan(s)

Interest

Interest

Partnership

(BE/ Lux / NL)

US ParentCo

FinCo

(BE / Lux / NL)


Hybrid entity – US outbound (1)

Tax characteristics

• FinCo: Interest payment by FinCo to hybrid

entity tax deductible subject to limitations

• Partnership: no income recognition in US

(CFC and disregarded loan), and no local

taxation because of insufficient nexus

Subsidiaries


Loan(s)

Equity

Equity

Loan

Group

relief

regime

Commonly used financing solutionsHybrid entity (tower) – US outbound (2)

US ParentCo

BE FinCo

UKCo 3

UKCo 1

UKCo 2

Tax characteristics

• UK: UKCo 1 interest cost off-set against

UKCo 3 interest income (group relief)

• US ParentCo: no interest income recognition

(disregarded loan transaction)

Subsidiaries

Loans


Loan

Loantax

consolidation

Commonly used financing solutionsHybrid entity (tower) – US inbound (1)

Tax characteristics

• UK/Lux: UKCo/LuxCo 2 interest cost off-set

against UKCo/LuxCo 1 interest income (group

relief, tax consolidation)

• US: no interest income recognition at USCo 1

(disregarded loan transaction); US CO 1

interest cost generally deductible (within tax

consolidation with USCo 2) provided loan

classification

UKCo/LuxCo 1

ParentCo

USCo 1

UKCo/LuxCo 2

USCo 2


Lux tax

consolidation

US tax

consolidation

Loan Loan(s)


Tax characteristics

• US: no interest income recognition at USCo1

(disregarded loan transaction); interest cost

on BE FinCo loan generally deductible

provided loan classification

• Luxembourg: interest cost at LuxCo 2 off-set

against interest income at LuxCo 1 (horizontal

tax consolidation)


payment made thereunder as interest,

deductible under limitations

USCo 1

ParentCo

LuxCo 2

US Co(s)

LuxCo 1

USCo 2 BE FinCo

PPL


Loan


BelCo 1

ParentCo

US GP

US Co(s)

BelCo 2

Tax characteristics

• Belgium: USGP interest cost deductible in

case no US PE, provided USGP is fiscally

transparent and subject to limitations

• US: USGP interest cost off-set against USCo

income (tax consolidation)

tax

consolidation

bank


Country regimes

69


Tax characteristics

• Interest income subject to low

corporate income tax rate

- Bulgaria: 10%

- Hungary (10% up to 500 mHUF

– 19% > 500 mHUF)

- Ireland: 12.5% (trading income)

- Latvia/Serbia: 15%

Notes

• Internal dealing (OECD / Authorized

Economic Approach - AEA)

FinCo

Foreign Parent

Subsidiaries

Interest

Loans

Equity

Low corporate income tax rate

Foreign Parent

FinCo

Finance

branchLoans

Subsidiaries

70

BE FinCo

ParentCo

Subsidiaries

Equity

InterestLoans


Tax characteristics

• BE Finco: interest income offset by a

(notional) deduction on adjusted equity

• ParentCo: interest expense deductible subject

to limitations

Debt

Notional interest deduction

71

BE FinCo

ParentCo

Subsidiaries

Interest

Loan(s)/

PPL


Tax characteristics

• BE FinCo: interest on PPL / loans deductible

subject to limitations

• SingCo / HKCo: interest income not effectively

taxed in Singapore or Hong Kong insofar

qualifying as foreign source income not

(deemed) remitted (territoriality based tax

regime)

Loans

SingCo/HK Co

Offshore tax regime

Interest

Interest

72

Loan(s)/

IFL

Loan(s)/

PPL

Loans

LuxCo 1

ParentCo


Tax characteristics

• LuxCo 1: US PE exemption

• LuxCo 2: notional deduction on IFL off-set

against interest income, subject to limitations

• US branch: no imputed interest income on IFL

(not effectively connected income to US trade

or business)

• Be FinCo: interest costs deductible subject to

limitations, off-set against interest income

Interest free loan(s) (1)

BE FinCo

US branch

Subsidiaries

LuxCo 2

73

0


Tax characteristics

• NLCo/LuxCo/HUCo: notional deduction on IFL

off-set against interest income subject to

limitations

• IRCo: no upward transfer pricing adjustments

on IFL

• Be FinCo: interest deductible subject to

limitations and off-set against interest income

Interest free loan(s) (2)

ParentCo

IR CoNLCo/LuxCo/

HUCoBE FinCo

Subsidiaries

Loans

Interest free

loan (IFL)

Loan(s)


Branch solutions

75

(Deemed) head-office loan/IFL

ParentCo

BE FinCo

Branch

(Lux / CH /

Dubai)

Commonly used financing structures

Tax characteristics

• Branch: tax-exemption (Dubai) or notional

deduction on deemed head-office loan/IFL,

off-set against interest income, subject to

limitations

• BE FinCo: no imputed interest income on

(deemed) head-office loan/IFL

Subsidiaries

Finance branch (1)

Loans


Commonly used financing solutionsFinance branch (2)

ParentCo

LuxCo

(Deemed)

HO loan /

IFL

Belgian

Branch

Tax characteristics

• Belgian branch: notional deduction on

(deemed) head-office loan/IFL off set against

interest income, subject to limitations ?

• LuxCo: no imputed interest income on

(deemed- head-office loan/IFL; Belgian PE

exemption

Subsidiaries

Loans


Commonly used financing solutionsFinance branch (3)

Tax considerations

• Luxembourg: interest cost LuxCo 2 off-set

against interest income LuxCo 1 (tax

consolidation)

• US branch: LuxCo 2 interest proportionally

deductible (provided debt classification)

• BelCo: US PE exemption

ParentCo

LuxCo 1

BelCoBelCo

Subsidiaries

Loans

US branch

Loan(s)

LuxCo 2

tax

consolidation

78

ParentCo

LuxCo

Lux

branch


Tax characteristics

• Lux branch: notional deduction on IFL off set

against imputed interest income, subject to

limitations

• LuxCo: notional deduction on IFL offset

against interest income, subject to limitations

• ParentCo: no imputed interest income on IFL

(disregarded loan)

Subsidiaries

Loan(s)/PPL

Finance branch (4)

Bel FinCo

Loans

IFL

IFL


Other solutions

80

Loan(s)

Loans

ParentCo

LuxCo


Tax characteristics

• LuxCo: interest income off-set against tax

losses carried forward (flexible changes of

control rules)

• BE FinCo: interest cost deductible, off-set

against interest income subject to limitations

Subsidiaries

BE FinCo

Tax losses carried forward

81

Interest loans

convertible

loan

BE FinCo

Subsidiaries


Tax characteristics

• BE FinCo: interest differential (between

contractual and hypothetical non-

convertible/straight loan rate) is accounted for

as financial cost on actuarial basis and, by

lack of deviating tax provisions, deductible

and off-set against interest income

• LuxCo: interest differential is not accounted

for. Capital gain upon conversion is not

taxable / rolls-up into share value

Convertible loan

ParentCo

LuxCo

Interest

82

Loan(s)

Interest

Zero

coupon

convertible

bondLuxCo2

BE FinCo


Tax characteristics

• LuxCo 2: interest differential is accounted for

as financial cost and by lack of deviating tax

provisions, deductible and off-set against

interest income

• LuxCo 1: interest differential is not accounted

for. Capital gain upon conversion is not

taxable and rolls up in LuxCo 2 share value

• BE FinCo : interest cost deductible and off-set

against interest income subject to limitations

Zero coupon convertible bond

Foreign Parent

LuxCo 1

Interest

Subsidiaries

Loan(s)


What do we expect still

to come?


Timeline BEPS / EU initiatives

Countries sign Multilateral Convention

Review of country-by-

country reporting

2016Oct 2015

Nov 2015

Sept 2015

2017 2020

Committee on Fiscal

Affairs approves Actions

G20 Finance Ministers

G20 leaders

approve

actions

Release of updated OECD

model treaty

Countries implement

agreed actions – 2016-18?

CbyC Treaty

Updated OECD

Transfer Pricing

guidelines

CC(c) TB Proposal

EU BEPS Directive

Amendment to PS Directive

Tax transparency Directive

FTT


Translation into law

Transfer pricing

guidelines

• Practice

• Treaty interpretation

• Domestic law

EU Directive/

Domestic law

• Interest restrictions

• Hybrid mismatches

• Country by country reporting

• Disclosure rules

• CFC rules

• Tax transparency

• FTT

Multilateral

convention

• Treaty abuse

• Permanent establishment

• Dispute resolution


TP documentation

implications


Action 13 – TP documentation and CbC reporting

Minimum standard

Country-by-Country Template• Key financial information on all group members on an aggregate country basis with an activity

code for each member

Master File• Key information about the group's global operations including a high-level overview of a

company’s business operations along with important information on a company’s global

transfer pricing policies with respect to intangibles and financing

Local File• Information and support of the intercompany transactions that the local company engages in

with related parties

3-tiered approach



Minimum standard - Timing

Filing of the 1st

CbC

Preparation of

the 1st CbC

Transmission of the 1st CbC

to concerned tax authorities

2016 2017 2018

Next steps

• Adoption of new documentation requirements in

domestic legislations

• Creation of a centralized exchange platform for tax

authorities

• Formal signing ceremony of MCAA (January 2016)



Te

ch

no

log

ica

l M

atu

rity

Functional Capabilities

Minimum standard - Deloitte CbC reporting

CDX

CDX+

• Multiple ERP

or no ERP

• No dual GAAP

capabilities in

system or not

maintained /

used currently

• No uniform

Statutory

Accounts

Process /

System (Excel

based

adjustments)


Action 13 – TP documentation and CbC reportingMinimum standard - Deloitte CbC reporting

CDX overview

A user–driven tool that organizations can use to self–assess their readiness

CDX

1. Business HQ

Business administrator accesses

CDX online to manage the input of

basic data regarding the

organization, entities, locations, and

data providers; companies can run

multiple simulations including top–

down and bottom–up scenarios

5. Deloitte

As countries enact and/or

amend the OECD

requirements, follow on

options may allow

businesses to see updated

visualizations or be

prompted for additional data

requirements

2. Business data providers

Provisioned individuals, in

various locations, receive an

access link to upload data in

flexible formats

3. Business HQ

Once data has been uploaded, teams can

review online CbC reports to see their data in

the prescribed OECD format as well as

sort/filter aggregated data in the reports to

help set priorities

4. Business HQ

Teams can download

their aggregate data in a

generic CbC template or

their entire data set for

offline use

• Percent of related

revenues to total revenue

• Cash ETR

• ETR

• Unrelated party revenues vs. numberof employees

• PBT vs. number of

employees

• Stated capital vs. number

of employees

• Tangible assets vs.

number of employeesVisualizations

and ratio analyses:



Minimum standard - Deloitte CbC reportingCDX+ overview

A modular and scalable approach that delivers flexible CbC data analytics with drilldown

capabilities and compliance reporting

CDX+ can

help you:

Business HQ

Business provides insight

into all data sources and

IT landscape, and all

intercompany

transactions

Deloitte

Deloitte develops a

process to extract and

transform necessary data

in an automated and

repeatable manner

Deloitte & Business HQ

Deloitte works with

business to perform

necessary quality checks

and testing of CDX+

Business HQ

Client utilizes CDX+ for:

• CbC compliance

reporting and analysis

• Drilldown analytics

• Standard and custom

reporting

• Track CbC reporting

requirements across

countries and entities on

a regular basis

• Automate and

standardize the

CbC process

• Facilitate root–cause

analyses of deviations

from policies/target and

determine corrective

actions


Operational treasury

implications


Operational treasury implications

Business Model

OperationsTreasury Operations

Intercompany Leverage

Structures

Risk Management

Structures

Location, administration and

value of the treasury

function

Greater visibility of risk and

function allocation

Increased Substance

Qualified personnel

Technology supports

decision making

Head office guidance/

coordination NOT

execution

Intra group services

Liquidity model changes

Financing entities

Back-to-Back lending

Intercompany lending

Cash pooling

Factoring

Working capital

management

Revised cash forecasting

Timing and manner of

repatriation of built up cash

Treasury/Shared Service

Centers (SSC)

Types of Instruments used

Related party loan

structures

Routing of funds through

intermediaries to obtain tax

benefits

Excessive debt push downs

Level of interest

deductibility

Rate setting and review

Documentation

Tax rulings and requisite

substance

Exposure Identification

Payments/Receipts on

behalf of

Foreign exchange risk

management and interest

risk management



1) Does the group provide cross-border financial services ‘remotely’? (e.g., FX management)

2) Are there any payment flows that are deductible to the payer but not included as taxable income of the

recipient?

3) Does the group have any funding structures that result in two or more deductions for the same payment?

4) Does the group own foreign subsidiaries through territories that either do not have or have limited controlled

foreign company rules such as Ireland, Switzerland or Luxembourg?

5) Does the group have intercompany loan guarantees in place for which no guarantee fees are charged?

6) Are the group’s worldwide net interest deductions for tax purposes greater than the group’s third party cost

of borrowing?

7) Does the group contain subsidiaries in low tax jurisdictions that, when compared to the group’s overall

debt/equity position, may be regarded as ‘over-capitalized’?

8) Does the group have interest or royalty flows which benefit from treaty relief between intermediary

companies that are not the ultimate owners of the assets?

9) Does the group operate any sales principal/commissionaire structures?

10) Does the group have material sales in any territories, supported by local teams that are not booked as a sale

revenue to that territory?

11) Are there high profits within low tax in locations with a limited number of employees compared to other

operations?

12) Has the group valuable IP owned by one entity that has been developed/contributed by another and which

further develops such IP primarily through funding only?



Revisit Liquidity & FX (including in-house banks) to reflect revised

operational structures

Contractual arrangements must

allocate risk to reflect underlying

economic substance

more oversight, controls,

governance and documentation

Offshore cash mobilization

structures may need to be revised

Intercompany financing

structures and lending agreements

may be effected

Substance Requirements affect People, Process, and Technology


Operational treasury implicationsTreasury

Build

Assess current state and

identify gaps

Identify business requirements,

processes and tools

Build tools for Business Model

readiness

Execute quality assurance and

systems testing

Meet Data, Reporting and

Technology Requirements

Treasury

Go-Live

Impact

Analysis

Treasury

Test

Treasury

Design

• Identify risky areas from

BEPS “Actions” for Treasury

Operating model

Financing

Technology

• Analyze substance factors

(People, Property, Functions)

• Evaluate current financial

systems readiness to satisfy

proposed data, reporting

requirements

• Perform GAP analysis of

current state compared to

future state and prioritize

action items

Operating model

System functionality and

capability

Data & Documentation

Reporting Compliance

• Prioritize business requirements

that address both current and

support future treasury functions

from an organizational and

technology perspective

• Refine Operating model

Structures to modify (e.g.

Finance company/In-house

banking strategy, Cash pooling

etc.)

People to deploy (Treasury/

Shared Service centers)

Data sources involved

(Documentation & Reporting)

Technology capabilities (ERP,

TMS and other core systems)

• Design a treasury support model

for potential new structures

(central vs. de-centralized model),

costs and scope of treasury

services (People, Property,

Function)

• Business Model

Increased substance

Qualified Personnel

Head Office

guidance/coordination NOT

execution

• Treasury Operations

Liquidity model changes

Risk management needs

FX and Interest risk needs

Cash management needs

Cash transfer methods

Cash concentration

Cash forecasting

Working capital management

• Financing Model

Debt management

Equity management

Investment management

Intercompany structures

Supply chain finance

• Test financial systems readiness

to gather and consolidate data

ERP

TMS

Ancillary systems

• Assess timely availability of

source data required for group-

wide reporting purposes

• Perform analysis on customized

reports to test system flexibility for

accurate reporting on

Capital allocation

Cash forecast changes due to

Financing (Interest expenses)

Investing

Operations

Intercompany funding

(Medium, Long-term)

Cash pooling (Short-term)

Rates (e.g. Transfer prices)

Risk management (FX/IR)

• Global visibility enabled

through new technology

(ERP/TMS/Other ancillary

systems)

• Strong alignment between

treasury and other finance

functions to enable timely data

gathering for reporting and

analytics

• Monitor cross border

structures/initiatives and

identify those potentially

impacted by reforms meet

requirements

• Collaborate with the tax teams

to ensure the key treasury

functions are integrated into

the tax strategy

• Educate key stakeholders

around potential impacts of

non-compliance

Technology Considerations

• Determine countries and

entities to understand data

sourcing, data volume, data

complexity and technical risk

issues

• Determine original data

formats can be leveraged

• Review if new systems need

to be implemented or existing

systems could be leveraged

• Determine data sources and

extraction formats

• Review IHB structure changes

• Intercompany loan relationships

• Possible unwinding of existing

loan structures in TMS

• Transfer prices

• Evaluate system core

configuration

• Accounting

• Rate setting (FX & IR)

• Onboard countries and legal

entities to TMS where partially

integrated into financial systems

• Build and update core

configurations

• Customize and build reports to

satisfy compliance requirements

• Examine reports for

inconsistencies that require

interpretation or adjustment

• Administer system entitlements

(new people/locations)

• Define test strategy and test

scenarios

• Execute and evaluate end-to-end

test scenarios

• Track test results and remediate

system defects

• Facilitate and support end user

training

• Examine results of disaster

recovery plan (data backup and

data restore)

• Review KPIs and re-measure

to address performance

outliers phase by phase

• Measure post go-live

stabilization and performance

• Monitor and perform ongoing

refinement

• Implement contingency plan

for treasury systems


Major trends in tax

audits across Europe

103

Major Trends in tax audits across Europe

83%

11%

89%

28%

11%

22%

72%

28%

17%

89%

11%

28%

61%

78%

28%

72%

44%

28%

I N C R E AS E D T AX AU T H O R I T I E S ' AG G R E S S I V E N E S S

S P E C I AL T AX AU D I T D E P AR T M E N T F O R F & T

I N C R E AS E D F O C U S O N I N T E R E S T D E D U C T I B I L I T Y

I N C R E AS E D F O C U S O N I N T E R E S T W H T I S S U E S

I N C R E AS E D C H A L L E N G E S O F D O M E S T I C T AX …

B L AC K L I S T

T AR G E T E D J U R I S D I C T I O N S

B E P S P R I N C I P L E S AL R E AD Y B E I N G U S E D

TAX AUDIT EXPERIENCE

Yes No NA

© 2015. For information, contact Deloitte Touche Tohmatsu Limited.


Key take aways


Key take aways

Assume

transparency

Expect disputes &

uncertainty

Ensure substance1.

2.

3.


Speakers

Tax Senior Manager

Deloitte Brussels

+32 2 600 65 08

[email protected]

Steven Byloos

Tax Partner

Deloitte Brussels

+ 32 2 600 67 60

[email protected]

Brecht Sohier

Tax Senior Manager

Deloitte Brussels

+32 600 67 34

[email protected]

Mourad Chatar

Treasury Solutions Director

Deloitte Brussels

+ 32 2 800 26

[email protected]

Kristine Dooreman

mailto:[email protected]

mailto:[email protected]


Questions

109

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