However, while some countries are implementing the BEPS project, others are seeking to strengthen companies within their own national borders and attract new investment by radically reducing tax rates and offering further tax incentives.
The current challenge of international tax policy is therefore to mediate between these two poles. To this end, partners from our Nexia network will give an insight into the tax policy trends in their respective countries at the event entitled “Trump, Brexit & Co. – A Turning Point in International Tax Policy” to be held in Cologne, Germany, on June 12, 2017. We asked them three questions beforehand:
- Which measures has your country taken as part of the BEPS project to ensure taxation of a share of the taxation substratum commensurate with the actual activities of the companies in your national territory?
- What, in your opinion, will strengthen a country as a business location in the long term - new tax incentives or consistent, reliable tax legislation?
- Which tax policy is your country currently pursuing?
Dr. Gerald Neumann
Managing Director, Fan, Chan & Dr. Neumann Business Advisory (Shanghai) Co., Ltd, China
1. BEPS actions already implemented in China
The tax authorities (State Administration of Taxation, SAT) have progressively implemented the BEPS actions in China. To date, the SAT has issued the following guidance in connection with the BEPS project:
- Bulletin on Matters Related to Enhancing the Declaration of Related Party Transactions and the Administration of Contemporaneous Documentation;
- Bulletin on Issues Related to Improving the Administration of Transfer Pricing Arrangements;
- Bulletin on Administrative Measures on Special Tax Harmonization, Adjustment and Mutual Agreement Procedures.
Through the above-mentioned guidance, the Chinese government has implemented the BEPS proposals concerning documentation requirements, country-by-country reporting, intangible assets, and services between related parties, etc. The last bulletin in particular contains extensive changes regarding specific tax probes, transfer pricing methods, comparability analysis, and negotiation methods, etc. to give taxpayers more concrete guidelines.
2. China’s tax policy for strengthening China as a business location
Without consistent, reliable taxation, I believe that even aggressive tax incentives are not the key to attracting investors.
The Chinese government tried to make the tax laws more reasonable. The promise of aggressive tax incentives to attract investment from abroad is no longer supported by the central government.
3. The tax policy China will pursue in the future
On the one hand, the government is attempting to reduce the tax burden on smaller companies. On the other, there are special tax regulations aimed at creating incentives for new and high-tech companies with a view to steering the national economy. However, these are not designed as a general means of attracting as many investors as possible.
© John Voyez
Partner, Business Tax Services, Smith & Williamson LLP, London, United Kingdom
1. BEPS actions already implemented in the UK
- BEPS Action 2 - Hybrid Mismatch Arrangements: The United Kingdom has implemented the OECD’s recommendations with effect from January 1, 2017.
- BEPS Action 4 - Interest Deductions: In accordance with the OECD’s proposals, new interest deductibility rules were introduced with effect from April 1, 2017. These set out that an interest deduction will be disallowed where net interest expense exceeds GBP 2 million. The existing guidelines in the United Kingdom on interest deductibility (worldwide debt cap provisions) were rescinded. In these, the qualifying expenditure had been GBP 500,000.
- BEPS Action 5 - Harmful Tax Practices: An amendment of the UK patent box regime entered into force with effect from July 1, 2016 to reconcile this with the OECD’s BEPS Action 5.
- BEPS Action 6 - Prevent Treaty Abuse in relation to royalty withholding tax: The scope of guidance on royalty withholding tax has been extended and measures to prevent abuse have been introduced.
- BEPS Actions 8 to 10 - Transfer Pricing: The transfer pricing guidelines in the United Kingdom have been amended to bring them into line with the OECD Transfer Pricing Guidelines. These apply to accounting periods beginning on or after April 1, 2016.
- BEPS Action 13 - Transfer Pricing Documentation and Reporting: Country-by-country reporting has been introduced for certain groups of companies effective for accounting periods beginning on or after January 1, 2016. In addition, the tax strategy for certain groups of companies is required to be published online.
2. The United Kingdom is focusing on granting tax relief, especially:
- a low corporation tax rate that will be reduced from 19% at present to 17% from 2020;
- tax incentives and tax breaks for research and development (R&D), as well as through the patent box regime;
- numerous double taxation treaties, advantageous regulations for the holding structure: generally no taxation of dividends received, no withholding tax on dividends to be paid, advantageous regulations for a controlled foreign regime, advantageous equity participation scheme for share sales subject to certain criteria;
- new rules which allow flexibility in the use of losses incurred after April 1, 2017;
- fair tax authorities (HMRC);
- specific disallowance of interest deduction where net interest expense exceeds GBP 2 million, possibility of clarifying the effects on transfer prices with HMRC;
- other advantages that are not directly related to taxation, for example a strong legal system and judiciary as well as relative reliability of British legislation.
3. The tax policy the United Kingdom will pursue in the future
Obviously, everyone is currently focused on Brexit and the outcome of the negotiations with the EU. However, the aim is to continue to attract investment and business from abroad. This requires an active, growing economy supported by low corporate taxation and legal certainty – something that could be difficult in the next two years.
Chartered Accountant, Partner, SKP Group, Mumbai, India
1. BEPS actions already implemented in India
The Indian government has ushered in a whole series of steps in accordance with the BEPS Action Plan to prevent profit shifting and erosion of the tax base:
- country-by-country reporting – the transfer pricing documentation requirements have been strengthened and now include CbCR in accordance with BEPS Action 13;
- introduction of an equalization levy – a 6% tax on online advertising, which will effectively override the provisions of the double taxation treaties;
- limitation of the interest deduction to 30% of EBITDA as regards interest paid to related parties or in the case of debt secured by related parties;
- renegotiation of double taxation treaties with Singapore, Mauritius, and Cyprus – capping of treaty benefits in compliance with the principal purpose test;
- introduction of a license box system;
- introduction of guidelines on the location of the actual executive board (comparable with the controlled foreign company guidelines).
2. India’s tax policy for strengthening the country as a business location
I believe that consistent, reliable, extrajudicial tax positions and their administration are important to make India more attractive to foreign investors. The new government has also taken several steps to reduce the number of legal disputes.
3. The tax policy India will pursue in the future
The government is cracking down on illicit funds and illicit enrichment. In addition, international best practices are being applied and tax rates are being made more competitive. As mentioned above, the government is also taking several steps to reduce the number of legal disputes.
John C. Berens
CPA, NE Regional Tax Partner, Global Tax Leader, CliftonLarsonAllen LLP, Charlotte, USA
1. BEPS actions already implemented in the USA
In response to the pressure exerted by the OECD for increased transparency between member states, the United States Department of the Treasury and the Internal Revenue Service (IRS) released final regulations in 2016 that require country-by-country reporting (CbCR) by entities that are the ultimate parent entity of a multinational enterprise with annual revenue of USD 850 million or more in the immediately preceding reporting period. The form for the CbC report, which is still being developed, must be attached to the parent entity’s income tax return and filed with the IRS by the due date for that return, including any extensions. Failure to comply with the regulations on disclosure of the report could lead to sanctions being imposed, specifically fines of up to USD 10,000 for each annual reporting period in which the report is not filed.
Also in 2016, the Treasury Department and the IRS released final regulations that could have serious repercussions for the tax treatment of transactions in the United States. The new regulations allow the IRS to reclassify debt as equity in cases in which certain standards for documentation of loans are not met or debt securities are used in certain types of transactions that are classified by the government as abusive. Such a reclassification means interest expense is no longer deductible. The regulations are highly complex.
2. USA focusing on tax relief
We believe that lower corporate tax rates and the transition from global taxation to a territorial tax system would make the United States a more attractive business location.
3. The tax policy the United States will pursue in the future
The political environment in Washington, D.C. is chaotic at the moment. Although the White House and both houses of Congress are controlled by the Republicans, there is a tremendous amount of disagreement between the moderate groups in the party and the more conservative members of the Freedom Caucus, as evidenced by the recent failure to abolish and replace Obamacare. Both houses of Congress and President Trump have presented tax proposals with the aims of reducing corporate taxation, introducing a reduced tax rate for the repatriation of foreign income, repealing the alternative minimum tax (AMT) for companies and individuals, and lowering personal income tax rates. These measures would probably give the U.S. economy a much-needed boost. Yet it is very unlikely that tax laws will be passed in 2017 owing to the contentious mood inside the Beltway. In addition, there has been discussion of a border tax on certain imported goods manufactured outside the United States. Several proposals for this have been submitted that could counteract an economic boost stemming from lower tax rates, however.