The Organization for Economic Cooperation and Development's (the "OECD") Base Erosion Profit Shifting ("BEPS") Proposals have been moving forward at a rapid pace. Fifteen Action Items were issued in late 2015 with many follow-ups providing more guidance planned for 2016. A number of OECD country members have already enacted provisions of these Action Items into their local law and others have serious proposals to do so. Fueled by the sound bites of the G-20 as well as the European Union's State Aid attacks, the landscape for international tax as well as the various tax audits initiated globally by OECD member countries (as well as the BRICs countries) have utilized the OECD proposals to create tax reform and address tax audits. This article addresses these issues solely from a US perspective.
The US and BEPS
While the US Treasury's main goal was to build a consensus around a number of the tax standards in the OECD proposals, an ancillary goal was to prevent other countries through these Proposals from taxing what it views to be "its" tax base or "nowhere income". Although generally supportive of the conceptual framework of these Proposals, the United States has been more skeptical of the OECD's BEPS Action Plan than other countries. The United States has taken the position that few or no changes in its domestic law will be necessary because existing anti-avoidance rules are generally consistent with the BEPS Action Items.
The OECD has responded with an Action Plan covering 15 Action Items to provide governments the domestic and international arms they need to combat BEPS. These Action Items are not an attempt to restrict a country's sovereignty over their own tax system. Rather, they should be seen as an opportunity to provide a platform for those countries who have signed up to the BEPS initiative to "restore and strengthen" their sovereign taxing rights.1
Accordingly, the final report is largely in the form of recommendations for the design of countries' domestic laws, as well as proposed changes to tax treaties, notwithstanding that some countries have already adopted these proposals in their local law. Discussed below are certain key action items of concern to the US Treasury.
US views on Article 7 - Preventing the Artificial Avoidance of Permanent Establishment ("PE") Status
The US Treasury has approved that the OECD scaled back the PE definition. Robert Stack, U.S. deputy assistant Treasury Secretary for International Tax Affairs stated "We are pleased that dependent agent aspects of the PE are tighter than they had been in earlier drafts."2 Earlier draft reports could have led to significant confusions due to the potential to interpret them broadly, albeit some Treasury officials still feel this may be the case.
Despite that a tighter definition of PE was adopted, the PE rule still can fall under significant scrutiny. Quyen Huynh, US Treasury Associate International Tax Counsel explained that she is concerned with the lack of clarity around the application of the preparatory and auxiliary rules.
Treasury officials have expressed disappointment that Action 7 did not address the rules for attribution of profits to PEs, but this is expected in 2016. As the OECD develops the multilateral instrument to implement BEPS, there should be additional guidance on the attribution of profits to PE.
For the anti-fragmentation rule, there has been general support from Treasury officials.
US views on Articles 8, 9 and 10 - Aligning Transfer Pricing outcomes with value creation
The United States does not generally envision that significant changes will be required to its current transfer pricing regulations to comply with the BEPS Actions 8 to 10. Arguably, the final report restates and clarifies the arm's length standard already embodied in the existing US regulations. Robert Stack stated that "To the extent that we think these rules are kind of clarifying the arm's-length standard that are already embodied in our regulations, we are not anticipating having to make substantial changes" to current regulations on Section 482 of Internal Revenue Code.3
Before the release of this final report the United States believed that measures to analyze hard to value intangibles could be remedied by the Internal Revenue Code or through special legislation. However, the IRS signaled that some measure should be taken to address intangible property owned offshore that is subject to zero tax. It is unclear if and how the IRS have changed their view on the hard to value intangibles.
Much attention has been focused on marketing intangibles where legal title was not dispositive of the entitlement to returns, but rather the focus was on funding to match income to expenses. The OECD's view is similar to the current IRS view. What is different is that like PEs, multinational corporations must identify these intangibles in their CbC Templates as well as contractually document their terms and conditions.
The United States is also reluctant to push taxpayers toward profit split methods, as suggested by the OECD (and China), believing that the other existing transfer pricing and valuation methods should suffice.
US views on Action 13 - Transfer Pricing Documentation and CbC Reporting
The Guidelines in Action Plan 13 have been received with a degree of uncertainty, primarily around the new information requested and with the BEPS's mission to increase transparency. Sen. Orrin G. Hatch (R-UT), Chairman of the Senate Finance Committee, and Rep. Paul D. Ryan (R-WI), then Chairman of the House Ways and Means Committee and now Speaker of the House, stating "we are concerned about the CbC reporting standards that will contain sensitive information related to a U.S. multinational's group operations. We are also concerned that the Treasury has appeared to agree that foreign governments will be able to collect the so-called "Master file" information directly from U.S. multinationals without any assurance of confidentiality or that the information collected is needed."4
Three days following the introduction of the bill, the US Treasury and IRS released the proposed regulations that would require that a CbC Report is adopted as outlined in Action 13, noting that this adoption was because the template is of an "internationally accepted standard" and would avoid "inconsistent and overlapping reporting obligations".5 Taxable years beginning on or after the date the regulations are finalized would be subject to the CbC reporting requirements.
The CbC report is not a substitute for a full transfer pricing analysis nor will adjustments be made solely on the basis of the report. US Treasury emphasized that the CbC report will only be used for making risk analyses enquiries into transfer pricing practices or other tax matters.
The US Treasury is conscious that US business remains open and competitive. House Ways and Means Committee Chair, Kevin Brady (R-Texas), stated that "New [CbC] reporting requirements on U.S. companies must be limited and should not make it even harder for our companies to compete."6 Because some major European countries and also Australia have already implemented, CbC Reporting as of 2016, or are planning on doing so, Robert Stack realized the potential for fines levied on US based companies who have subsidiaries in these countries if they do not comply with the local filing requirements during the period before the US filing requirement takes effect. Accordingly, on January 21, 2016 Treasury announced that it had been approached by companies to allow an election as noted above, to file a CbC report in 2016.
US views on Action Item 157 - Developing a Multilateral Instrument to Modify Bilateral Tax Treaties
The United States originally elected not to be involved in drafting the multilateral instrument, but reversed course last autumn. Robert Stack confirmed on October 2, 2015, that the United States will participate in a dialogue with the ad-hoc group that has been formed, but emphasized this does not mean that the United States will sign the instrument. Danielle E. Rolfes, International Tax Counsel with the Treasury, noted that many of the items being negotiated for the multilateral treaty are already included in US treaties.
We live in interesting times. More to come! More debate! More paper! More costs, and most certainly, more controversy!
- The US Senate Committee on Finance, "Hatch, Ryan Call on Treasury to Engage Congress on OECD International Tax Project," news release, June 9, 2015, http://www.finance.senate.gov/newsroom/chairman/release/?id=ff0b1d06-c227-44be- 8d5a-5f998771188b. / http://waysandmeans.house.gov/hatch-ryan-call-on-treasury-to-engage-congress-on-oecd-international-tax-project/
- Ryan Finley, "US Issues Proposed CbC Regulations", Tax Analyst December 22, 2015
- Id. fn 17