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Recent Developments to Combat Tax Avoidance in Germany

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Recent Developments to Combat Tax Avoidance in Germany

“Paper is patient.” This is a common German saying, typically used to highlight the sluggishness of processes and plans of all kinds. However, paper can also catch up with you or even take you by surprise in a way that may be embarrassing or worse when your name pops up in leaked information relating to offshore accounts. Jurisdictions with preferential tax regimes are under the scrutiny of tax and investigative authorities in Germany. This affects multinational corporations, family offices, entrepreneurial families, and wealthy private individuals who invest their assets internationally in a diversified and international manner. Dr. Marco Ottenwälder, a partner in the Frankfurt Office of Andersen Tax, and his colleague, Andreas Gesel, a senior associate of the firm, explain recent measures taken in Germany to combat tax avoidance and follow up with recent practical experience. The tax authorities are aggressive, exit tax has a wider scope than might be commonly expected, and unhappy events occur for individuals and associated companies stemming from arrival in Germany and also departure. Not a pretty sight.

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Adventures In Transfer Pricing – Practical Experience In Germany

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Adventures In Transfer Pricing – Practical Experience In Germany

 For many years, German tax authorities suspected that M.N.C.’s transfer pricing policies were not in line with the arm’s length principle. Consequently, it comes as no surprise that Germany spearheaded international regulatory developments related to the arm’s length standard. International M.N.C.’s face ever increasing tax controversies in matters related to transfer pricing. In some cases, T.N.M.M. benchmarking is challenged under the view that a German sales entity makes intangible-related D.E.M.P.E. contributions in the field of marketing. In other cases ,C.U.T. benchmarking for intercompany license fees is challenged on grounds that the intangible property licensed to a German affiliate is unique by definition, thereby leading to a profit split. Restructures are attacked using inflated values for routine activities that remain in Germany. However, all is not bleak. In three case studies, Dr. Yves Herve, a Senior Managing Director in the Frankfurt Office of NERA and Philip de Homont, MSc, a Managing Director in the Frankfurt Office of NERA, illustrate in “plain language” the ways by which in-depth economic analysis has been used to overcome aggressive assertions by tax examiners.

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British Virgin Islands Economic Substance Requirements

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British Virgin Islands Economic Substance Requirements

Just as water flows downhill, action to prevent aggressive tax planning flows from (i) the O.E.C.D. in its B.E.P.S. Action Plan, especially Action 5 applicable to no or nominal tax jurisdictions (“N.T.J.’s”) to (ii) the E.U. Code of Conduct Group (“C.O.C.G.”), in its scoping paper identifying nine relevant activities and economic substance criteria for N.T.J.’s to avoid the E.U. blacklist, to (iii) the N.T.J.’s, themselves, in steps taken to police economic substance requirements of local law. The B.V.I. heard the message and has implemented a robust information reporting system for relevant entities. In their article, Joshua Mangeot, a partner in the B.V.I. office of Harneys and Kiril Pehlivanov, a member of the investment funds and regulatory team in the B.V.I office of Harneys, explain the effect of the B.V.I. economic substance regime on companies and limited partnerships registered in the B.V.I. and provide practical guidance for compliance and reporting.

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The Multilateral Instrument and Its Applicability in India

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The Multilateral Instrument and Its Applicability in India

One of the most significant outcomes of the B.E.P.S. Project is the signing of the multilateral instrument (“M.L.I.”) in 2017.  The O.E.C.D. initiated the B.E.P.S. Project in 2013 with a view to curtail tax avoidance.  The M.L.I. addresses B.E.P.S. concerns in thousands of bilateral tax treaties through one common treaty.  India has been at the forefront of implementing B.E.P.S. measures, and India’s covered tax treaties will need to be read with the M.L.I. from April 1, 2020.  Sakate Khaitan of Khaitan Legal Associates, Mumbai, India, and Abbas Jaorawala, a chartered accountant and consultant to that firm, explain India’s positions on various provisions of the M.L.I. for those engaged in trade or investment opportunities relating to India.

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O.E.C.D. to Use Hybrid Model to Develop Digital Economy Nexus and Profit Attribution Rules

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O.E.C.D. to Use Hybrid Model to Develop Digital Economy Nexus and Profit Attribution Rules

The O.E.C.D. announced on January 31, 2020, that its policy development efforts under Pillar One, related to the taxation of the digital economy, will move forward using the non-consensus “Unified Approach” as a working model.  The O.E.C.D.’s deadline for obtaining a consensus outcome is highly ambitious.  Michael Peggs provides his views.  Despite what people may think about when this effort should have begun, it is crucially important that it has begun at last and in an organized way.

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More Permanent Establishments: The Dwindling Preparatory and Auxiliary Activities Exception

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More Permanent Establishments: The Dwindling Preparatory and Auxiliary Activities Exception

Nothing is certain in this world, except death and taxes – and even taxes are subject to change.  The ever-expanding definition of a permanent establishment (“P.E.”) and ever diminishing exceptions to a P.E. under the O.E.C.D.’s B.E.P.S. Project has made one thing clear – the restrictions local jurisdictions put on activities by foreign taxpayers to trigger taxation are tightening.  The dwindling preparatory and auxiliary activities exception is a prime example.  Neha Rastogi and Beate Erwin explain.

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A New Definition of Permanent Establishment in Italian Domestic Income Tax Law

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A New Definition of Permanent Establishment in Italian Domestic Income Tax Law

Italian domestic tax law has adopted the permanent establishment (“P.E.”) concept when determining whether business profits of a nonresident are taxable in the absence of an applicable income tax treaty.  Earlier this year, changes to the definition of the term broadened the scope of activity constituting a P.E.  Effective January 1, 2018, (i) a digital P.E. is treated as a fixed place P.E., (ii) the scope of the specific activity exemption has been scaled back, (iii) an anti-fragmentation rule has been adopted applicable to groups of companies, and (iv) the scope of an agency P.E. has been broadened. Stefano Loconte and Linda Favi of Loconte & Partners, Milan, explain the new rules.

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New U.S. Tax Law Adopts Provisions to Prevent Base Erosion

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New U.S. Tax Law Adopts Provisions to Prevent Base Erosion

Following the lead of the O.E.C.D. and the European Commission (“E.C.”), the T.C.J.A. adopts several provisions designed to end tax planning opportunities.  In some instances, the new provisions closely follow their foreign counterparts.  In others, the provisions that are specific to U.S. tax law.  Among these changes are (i) the introduction of the G.I.L.T.I. minimum tax on the use of foreign intangible property by C.F.C.’s, (ii) the total revamp of Code §163(j) so that it reflects an interest ceiling rather than an earnings stripping provision, (iii) the restriction of tax benefits derived from the use of hybrid entities and transactions, (iv) the broadened scope of Subpart F through definitional changes, (v) legislative reversals of judicial decisions in which I.R.S. positions in transfer pricing matters were successfully challenged, and (vi) legislative reversals of a judicial decision invalidating Rev. Rul. 91-32 regarding the sale of partnership interests by foreign partner.  Sheryl Shah and Stanley C. Ruchelman discuss these provisions and place them in context. 

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O.E.C.D. Releases Mutual Agreement Procedure Peer Review Report for the U.S.

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O.E.C.D. Releases Mutual Agreement Procedure Peer Review Report for the U.S.

The B.E.P.S. Action 14 Report, Making Dispute Resolution Mechanisms More Effective, acknowledged that the actions to counter B.E.P.S. must be complemented with effective dispute resolution mechanisms.  Participating countries agreed to have their compliance with the minimum standard reviewed by their peers.  The U.S. is among the first few countries that have been reviewed.  Neha Rastogi and Michael Peggs summarize the M.A.P. report card issued for the U.S. 

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Brazil 2017: Tax Developments for Business Transactions

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Brazil 2017: Tax Developments for Business Transactions

In Brazil, the year 2017 saw many important developments regarding cross-border and intrastate business transactions.  These developments focus on the implemention of various B.E.P.S. actions, the categorization of software transactions, and subjecting certain intrastate transactions to competing levels of state and municipal tax, all done the Brazilian way by emphasizing gross basis taxation on consumption payments.  Erika Tukiama, Rogério Gaspari Coelho, and Nathália Fraga of Machado Associados, São Paulo, provide guidance on these developments.

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O.E.C.D. Issues Proposed Changes to Permanent Establishment Provisions Under Model Tax Convention

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O.E.C.D. Issues Proposed Changes to Permanent Establishment Provisions Under Model Tax Convention

Earlier this year, the O.E.C.D. proposed amendments to Article 5 (Permanent Establishment) of the Model Tax Convention and Commentary.  The revisions eliminate loopholes that exist for commissionaire arrangements, artificial characterization of core activities as “preparatory,” avoidance of permanent establishment status through artificial fragmentation of contracts, and the use of not-so-independent agents.  Neha Rastogi, Beate Erwin, and Stanley C. Ruchelman explain the replacement provisions.

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India: Legal and Practical Strategies for Managing Tax Disputes

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India: Legal and Practical Strategies for Managing Tax Disputes

Most readers of this journal are front-end tax planners, proposing plans to be implemented by clients.  Regrettably, not all plans escape examination by the tax inspector, and in India, that number is on the rise.  Sanjay Sanghvi of Attorneys Khaitan & Co., Mumbai explains how to prepare for a tax examination in India and provides practical insights into the examination, appeals, and judicial review processes.

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Insights Vol. 4 No. 8: Updates & Other Tidbits

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Insights Vol. 4 No. 8: Updates & Other Tidbits

This month, Neha Rastogi and Nina Krauthamer look briefly at certain timely issues: (i) a European parliament proposal to extend the scope of country-by-country (“CbC”) reporting by group members when the group parent is not obligated to report and (ii) regulations identified by the I.R.S. as imposing undue burden on taxpayers.

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I.R.S. Pushes to Ease Implementation of Country-by-Country Reporting for U.S. M.N.E.’s

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I.R.S. Pushes to Ease Implementation of Country-by-Country Reporting for U.S. M.N.E.’s

It is widely known that the U.S. is following its own path towards international tax compliance.  It has not signed onto the O.E.C.D.’s Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports; it does not participate in the Common Reporting Standard; and it did not sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent B.E.P.S.  Nonetheless, at the request of U.S. multinationals, the I.R.S. has adopted domestic income tax regulations on country-by-country (“CbC”) reporting.  In May, the I.R.S. confirmed the first bilateral competent authority agreement regarding CbC reporting was signed with the Netherlands.  That agreement has now been followed by agreements with Canada, Denmark, Guernsey, Iceland, Ireland, Korea, Latvia, New Zealand, Norway, Slovakia, and South Africa.  Galia Antebi and Kenneth Lobo delve into the U.S. rules and forms for CbC reports.

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The 2016 U.S. Model Income Tax Treaty

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The 2016 U.S. Model Income Tax Treaty

On February 17, 2016, the U.S. Treasury Department released its 2016 Model Treaty. This month, as we reminisce on the best of 2016, we review significant revisions to the baseline text from which the U.S. initiates treaty negotiations.

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A Year of Guest Features

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A Year of Guest Features

This month, we reminisce on the best of 2016, with articles contributed by guest authors from around the world.

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O.E.C.D Targets Hybrid Mismatch Arrangements Using Branch Structures

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Advisers who took comfort in the belief that the B.E.P.S. Project’s attack on hybrid mismatches did not apply to transactions between two branches of the same entity were disappointed when the O.E.C.D. released draft recommendations for domestic law that would neutralize income inclusion mismatches using branches located in different countries.  Kenneth Lobo and Beate Erwin explain that D/NI, DD, and indirect D/NI outcomes are not legitimized when branches, rather than affiliates, are used.

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B.E.P.S. Action 7 – O.E.C.D. Calls for Improved International Coordination on the Allocation of Branch Profit

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One of three releases on July 4, the O.E.C.D.’s Additional Guidance on the Attribution of Profits to Permanent Establishments addresses the imponderable question – how much profit should be attributed to a P.E.?  The answer will make tax advisers quite happy: It depends on the facts, and the O.E.C.D. suggests that a coordinated global approach is required to avoid double taxation.  Stakeholders are invited to comment.  Michael Peggs examines five examples in the additional guidance.

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A New Way to Do the Splits: B.E.P.S. Guidance Falls Short of Enabling Global Formulary Apportionment

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From the moment the B.E.P.S. Project began in 2013, multinational enterprises have been concerned that tax authorities would be emboldened to apportion income resulting from the joint commercialization of intangible assets.  Surprise.  A July 4 publication of the O.E.C.D. Revised Guidance on Profit Splits discussion draft does not place an over-broad profit apportionment tool in the hands of tax authorities.  Michael Peggs explains why the transactional profit split method may not be appropriate in many instances. 

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Insights Vol. 3 No. 6: B.E.P.S. Around the World

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Insights Vol. 3 No. 6: B.E.P.S. Around the World

This month, we review steps toward implementation of anti-B.E.P.S. provisions in various countries and the E.U.  Kenneth Lobo and Nina Krauthamer look at the latest items, including French tax raids on local offices of U.S. companies, disagreement with the E.U. over the adoption of blacklists and the tax treatment of C.F.C.’s, and pushback against proposed Code §385 regulations that deal with debt and equity.

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