G20 and OECD action plan on corporate tax avoidance practices CMKOS and FES “Electronic Sales Control Systems as a Part of Struggle against Tax Evasions” Thursday October 16, 2014 Impact Hub Praha, Drtinova 10, Prague 5

A few words about VAT Pros – Low incentives for tax evasion – Less distortive & broad based – Cheap to collect – Taxing imports, not exports – Powerful tool to tackle informal businesses & economy Cons – Regressive, the heavy-handed way! – Cannot apply to financial services – Controversies around ‘social VAT’

VAT, the digital challenge

Destination principle – revenue accruing to the country where final consumption occurs – no VAT levied on exports, imports taxed – No bias in favour of low- or no-VAT jurisdictions – Physical goods, B2B : a non-issue, registration and payment through customs – Services, B2B: “reverse charge” approach VAT, the digital challenge

VAT, the tax challenge Growth of digital services – VAT thresholds for low-value B2C imports inadequate – Difficulty to trace the consumer – Non-registration of the supplier Options at hand – Lower the threshold for VAT-exemption & simplification of registration – Greater tax administration cooperation

Tax evasionTax avoidance Compliance Illegal & criminal behaviour Corporate and financial arbitrage Drivers Corruption Shadow economy Speculation Shadow banking Problem Opacity Non-cooperation between authorities Mismatch between jurisdictions and treaties Lax regulation Solution Exchange of information between tax authorities Enforcement Regulatory and treaty reforms Enforcement At the G20 Since 2008 Since 2013 OECD Agenda Standard for automatic exchange of information BEPS action plan

Reminder: the changing structure of the MNE (1)

Reminder: the changing structure of the MNE (2)

OECD mid-terms reports Sep 2014 Implementation of the G20-endorsed OECD Action Plan on Base Erosion & Profit Shifting (BEPS) encouraging in as far as effective implementation is concerned – Compared to the G20 process on financial reform, which is stalling. 7/15 action points delivered in september – profit shifting transfer pricing, c-b-c reporting harmful tax competition, abusive use of treaty benefits – base erosion (“hybrid mismatches”) – digital economy – feasibility of a new “umbrella” Multilateral Convention

ActionSeptember 2014September Report on the digital economyInput to Actions 3, 4, 7, Hybrid mismatches (excessive deductions)Pending issues re. Basel III & shadow banking 3 Abuse of controlled foreign company (CFC) 4 Excessive debt interest deductions 5Harmful tax practices (incl. patent boxes) 6Treaty abuse & “treaty shopping”Pending issues re. pools of capital 7 Avoidance of permanent establishment (PE) 8TP Guidelines on intangibles 9&10 TP Guidelines on capital & “high risk transactions” 11 Economic impact & spill over effects 12 Disclosure of tax planning arrangements 13 TP Guidelines on documentation & c-bc- reporting Pending issues re. filing the c-b-c reporting 14 Dispute resolution mechanisms 15Feasibility of a new multilateral conventionNegotiation to be launched in February 2015

Transfer pricing

Group-wide reporting

TP Guidelines Intangibles (Action 8), Ch. VI – “Double Irish” scheme – does not suggest any significant departure from the market-based “arm’s length principle” – formal ownership (say, in Ireland) is not necessarily the one criteria if other entities contribute / maintain value of the intangible (say, in Palo Alto, California) C-b-C reporting (Action 13), Ch. V – three-tiered approach, master file, local file, country- by-country reporting – Filing with the parent administration or with every single local administration?

Tax Jurisdiction Country A Country B Country C etc. RevenuesUnrelated Party Related Party Total Profit (Loss) Before Income Tax Income Tax Paid (on cash basis) Income Tax Accrued – Current Year Stated capital Accumulated earnings Number of Employees Tangible Assets other than Cash & Cash Equivalents

Hard to value intangibles

International tax arbitrage Harmful tax competition (Action 5) – “patent boxes”, consensus not “fully realised” – common methodology to test economic substance of preferential regimes – exchange of information on “rulings” secretive deals between a tax authority and an individual MNE – ie. EC probe in Irish rulings benefiting Apple Inc.) Treaty abuse (Action 6) – “Dutch sandwich” – OECD “minimum standard” clear statement in the preamble of treaties specific anti-abuse rule based on the limitation-on-benefits (LOB) more general qualitative anti-abuse rule some combination of the above LOB and PPT rules. – Pending CIV

Other action points Hybrid mismatches (Action 2) – BBT, Barclays & KPMG’s $700m “Structured Trust Advantaged Repackaged Securities (STARS) scheme – Domestic rules & revised OECD Model Tax Convention incl. “defensive rule” – Pending: Basel III & shadow banking Report on the digital economy (Action 1) – cannot be “ring-fenced”, but “key features” to feed in: Revision of the transfer pricing guidelines (8-10); Artificial avoidance of permanent status (PE) status (7); and Strengthening controlled foreign company (3). – VAT treatment of digitalised sales – Broader implications of “multi-sided business models” Feasibility of a BEPS Multilateral Convention (Action 15)

too early to make an informed judgment, but no public disclosure is foreseen for the new country-by-country MNE reporting framework is a major disappointment A lot of uncertainty re. treatment of shadow banking & investment funds lack of participation (inclusion) of developing countries

Why BEPS matters for workers Tax avoidance does not happen in a vacuum, it is another form of corporate short termism – harms government finance and public services. – But it also harms other stakeholders, and MNE workers in particular Business restructuring for the purpose of tax planning: – Reduces profit levels and, hence, the company’s long term interest and capacity to re-invest in productive assets; – Reduces workers’ access to information (as a result of greater opacity) and thereby weakens bargaining power; – Create pressure on existing CB agreements

French subsidiary of US MNE (incl. industrial sites, logistics & warehouses, Distribution) Customers(France) License fee (USA) Why BEPS matters for workers Business restructuring of the French subsidiary of a US MNE in 2004 – Before the restructuring – And after…

Industrial sites (France) Suppliers(France) Delivery of commodities & raw materials Empty Shell Primary contractor (Switerland) Orders, buys & owns commodities & raw materials Logistics & warehouses (France) Limited risk distributors (France) Customers(France) Pays for manufacturing (processing cost + 6%) Sale of the product, pricing set by the swiss shell Re-sale, pricing set to meet 2,5% margin License fee (USA) 4,3% Delivery of finished products Why BEPS matters for workers Transfer pricing rules & reporting Treaty abuse & harmful tax practice