International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009 Exit Taxes and Business Restructuring - The OECD Perspective - Wolfgang Büttner Senior Advisor Tax Treaties, Transfer Pricing and Financial Transactions Division OECD

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009 What do we see in practice?  Since the mid 90s: typically, conversion of “full fledged distributors” into “commissionnaires”; of “full fledged manufacturers” into “toll-manufacturers”; etc.  Migration of intangible assets and of risks, together with associated profit potential, often to low tax jurisdictions. 2

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009 Significance of the issue:  Tax base erosion concern for certain countries  Uncoordinated reactions by governments, for instance: –Characterise a PE of foreign principal –Assess exit / capital gain tax upon conversion –Challenge post conversion transfer pricing –Attempt to disregard some transactions involved in the restructuring –Combine several of the above arguments  Huge stakes (potential double taxation!) and uncertainties for business  Lack of consensus 3

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009 Background to OECD Work  Work began in 2005 in recognition of insufficient OECD guidance on: –Application of treaty rules and transfer pricing rules (the arm’s length principle!) upon and/or after a business restructuring –Principles governing recognition or non-recognition of restructuring transaction

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009 The transfer pricing question: “Are there conditions made or imposed in the restructuring which differ from conditions that would be made between independent enterprises ?” Article 9 of the OECD and UN Model Tax Conventions; arm’s length principle 5

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009  Definition of business restructurings: “Cross-border redeployment (transfer) by a multinational enterprise of functions, assets and/or risks with associated profit/loss potential”  Profit/loss potential is not an asset  Focus: How does the arm’s length principle and TP Guidelines apply to business restructurings? Transfer Pricing Aspects of Business Restructuring The OECD Discussion Draft 6

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009  OECD Discussion Draft consists of 4 Issues Notes: 1.Special Consideration for Risks 2.Arm’s Length Compensation for the Restructuring Itself 3.Remuneration of Post-Restructuring Controlled Transactions 4.Recognition of the Actual Transactions Undertaken 7 Transfer Pricing Aspects of Business Restructuring The OECD Discussion Draft

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009 Other issues:  Permanent establishment threshold (at a later stage)  Domestic anti-abuse rules (not covered)  VAT, customs… (not covered)  Definition and evaluation of intangibles (later project on revision of chapter VI TPG))  Issues around exit taxes (not within the scope of work) Mandate is to provide guidance on how to apply the TPG to business restructurings 8

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009 Council Resolution of 2 December 2008 and the OECD’s work on BR  Aim of council resolution: elimination of double taxation on «transfer of economic activites» which are subject to two or more tax jurisdictions  OECD MTC  New Article 25 (5) Arbitration  MEMAP  When exit state reserves option to exercise its taxing rights un unrealised gains corresponding to assets held by taxpayer, host state takes market value (AL price?) on transfer date when calculating subsequent added value in the event of disposal (step-up) 9

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009 Remuneration for the restructuring itself 2 situations identified: 1.Transfer of “something of value” (rights or other assets) – Profit potential not an asset – does not require remuneration per se: are there underlying assets that carry profit potential and are transfered? What are the options that would be realistically available to the parties at AL? 10

International Tax Conference Confederation of Swedish Enterprises Stockholm, June Indemnification for the termination or substantial renegotiation of existing arrangements: –No presumption that there should be an indemnification: determine what independent parties at AL would do Role of contractual terms Actual behaviour of parties Commercial legislation 11 Remuneration for the restructuring itself

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009  The arm’s length principle and TP Guidelines apply in the same way to transactions that result from a restructuring and those which were structured as such from the beginning  (But there may be differences in the comparability analysis) 12 Remuneration for the post-restructuring transactions No relevance for exit taxation

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009 Some good progress ! 1.More consensus than non-consensus 2.Starting point is not abusive cases 3.MNEs free to organise their business; tax administrations draw tax consequences on the basis of existing rules 4.Same ALP of BR and post-BR as for others 5.Absence of comparables does not mean non-AL 6.Profit potential not an asset: decrease of PP not a taxable event per se

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009 Some good progress ! 6.Art. 9: starts from contracts (respected only if actual behaviour + AL); AOA for Art. 7 is a different analytical framework 7.Examine rights and other assets 8.Look at perspectives of both parties 9. Non-recognition of transactions exceptional: pricing solutions preferred 10.Etc.

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009 The consultation process  A discussion draft on the transfer pricing was released on 19 September 2008 for public comment  37 detailed contributions received from the public (see ww.oecd.org/ctp/tp/br)  Consultation with commentators held 9-10 June 2009  Many commentators acknowledge the OECD efforts for a balanced draft  More work to be done however

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009 Areas for further work: 1.Risks of double taxation, uncertainties – Understand scale of the issue in practice – Lack of consensus – Subjective guidance 2.Documentation 3.Differences between parts of MNEs and independent parties: options realistically available; decision-making process; etc

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009 Areas for further work: 4.Issues Note No. 1 (risks): – Role of comparables – Control – Financial capacity to bear risk 5.Issues Note No. 2 (BR itself): – Profit potential / goodwill / ongoing concern – Only legally protected intangibles? – Indemnification in the absence of contractual clause?

International Tax Conference Confederation of Swedish Enterprises Stockholm, June 2009 Areas for further work: 6.Issues Note No. 3 (post-BR): – See review of comparability and profit methods 7.Issues Note No. 4 (non-recognition) – Economic substance – “practically impedes the determination of an appropriate TP” – Commercially rational behaviour: non-tax business reasons? AL behaviour ? Group level or entity level ? – Lack of consensus

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