OECD-G20 work on taxation – BEPS and Automatic Exchange of Information 18th Cross Atlantic and European Tax Symposium 21 November 2014 Achim Pross, OECD

Automatic Exchange of Information Outline BEPS Background and context OECD BEPS Report Action Plan against BEPS The 2014 Deliverables Next steps Automatic Exchange of Information Background, context and timeline The Standard: basic approach and key features

Base Erosion and profit shifting

Background and context Tax rates on foreign income – often very low / issue of double non-taxation; Separation of place of economic activity and place where profits are reported for tax purposes; Increasing importance of intangible assets; Principles of international taxation often developed in the 1920s: Less cross-border activity; Changes to business models, e.g. globalisation of value chains, „digital economy“; Built on the assumption that profits are taxed in the other country.

Background and context (cont.) Doing nothing is not an option: Increased possibilities for mismatches; Increased competitive distortions; Additional disputes and increased uncertainties for business; Use of anti-avoidance measures may decide who will grab a part of the taxable income (“First in time, first in line.”); Tax rates → Race to the bottom; Danger of undermining voluntary compliance by other taxpayers. No blaming / no finger-pointing: Not about blaming business; if we want different results we need to look again at the system And not about blaming particular countries either.

OECD BEPS Project to date Step 1: Addressing BEPS (February 2013): Identifies main pressure areas leading to opportunities for BEPS Calls on governments to address these areas: if governments are not happy with the results under the laws, they must change the laws. Welcomed by G20 Finance Ministers (16 February 2013) Step 2: BEPS Action Plan (July 2013): 15 actions to be delivered in 2014 and 2015 based on coherence, substance and transparency Endorsed by G20 Leaders (6 September 2013) Step 3: First Seven Deliverables September 16,2014, release of first seven deliverables, agreed by consensus by all OECD and G20 countries Welcomed by G20 Finance Ministers (21 September 2014)

Key pressure areas Hybrid Mismatch Arrangements Transfer pricing Delivery of digital goods and services Availibility of preferential regimes Treaty abuse, Anti-avoidance measures, etc. Group financing Intangibles Financing

Overview all actions September 2014 September 2015 December 2015 Digital Economy Report Hybrids Review of HTP Regimes Preventing Treaty Abuse Addressing TP aspects of Intangibles (Phase 1) Addressing TP documentation Multilateral Instrument Report CFC Rules Interest Deductibility Strategy on expansion of FHTP Addressing avoidance of PE status Addressing TP aspects of Intangibles (Phase 2) Addressing TP aspects of risks and capital Addressing TP aspects of other high risk transactions Report on Data and Economic Analyses Mandatory Disclosure Rules Dispute Resolution Addressing TP Interest Deductions Revision of HTP Criteria Multilateral Instrument

46 countries involved Chile Canada USA Iceland Australia Austria Belgium Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Israel Italy Latvia Japan Korea Luxembourg Netherlands Norway Poland Portugal Slovak Republic Slovenia Spain Sweden Switzerland Turkey United Kingdom Russia China Chile Mexico Saudi Arabia India Malaysia Singapore Colombia Indonesia Brazil Chile South Africa Argentina New Zealand

The 2014 Deliverables

The 2014 Deliverables Explanatory Statement 3 Reports: two final reports on the Digital Economy (Action 1) and the Feasibility of a Multilateral Instrument (Action 15) one interim report on harmful tax practices (Action 5) Draft Rules in 4 areas Hybrid mismatch arrangements Treaty abuse TP Intangibles TP Documentation and CBC template

Action 1 – Digital economy - key outcomes Common understanding of digital economy, its business models and aspects relevant for taxation Digital economy can not be segregated from wider economy Does not raise unique BEPS issues, but some of its key features (especially mobility) may exacerbate BEPS risks. These features need to be taken into account in other work in BEPS, e.g. (i) artificial avoidance of PE, (ii) CFC rules, and (iii) Transfer pricing and value creation Digital economy also raises broader challenges for direct tax (related to nexus, characterisation, and data which may overlap), and indirect tax (related to VAT collection for cross-border business-to-consumer transactions) Task Force discussed potential options and agreed on framework for evaluation, but concluded that the fact that other work to address BEPS is ongoing makes the scope of challenges and impact of options difficult to evaluate

Action 1 – Digital economy - key outcomes Work continues in order to: Address collection of VAT in B2C transactions Ensure that work in other areas of BEPS addresses BEPS in the digital economy Address broader tax challenges, refine potential options, and evaluate impact of BEPS work Consider economic incidence of VAT and CIT and impact on broader options If further actions are necessary to address BEPS in digital economy, consider limiting application of options for broader tax challenges to situations in which BEPS concerns arise Work will be completed by December 2015

Action 2 – Hybrid mismatches What is a hybrid mismatch arrangement? An arrangement that exploits the different tax treatment in two jurisdictions to produce a mismatch in tax outcomes Mismatch is either two deductions for the same payment or a deductible payment that is not included in income by the recipient What are we trying to achieve? Recommendations for domestic law changes and changes to OECD Model Convention to deal with hybrids. Clear, automatic and comprehensive rules that neutralise the tax mismatch without disturbing the commercial or regulatory consequences.

Action 2 – Overview of key features Special rule on dividend exemption for instruments DN/I Instruments / entities General rule: deny deduction Linking rules Indirect DN/I Instruments / entities DD Entities only Rule order Primary rule & defensive rule. Scope Controlled groups and structured arrangements. Related parties for instruments. 15

Action 2 – Where have we got to? We have consensus on: Linking rules as a concept and their detailed application. Scope to ensure rules are comprehensive but still administrable by taxpayers and tax administrations. Rules that neutralise hybrid mismatches even if counterparty jurisdiction does not have them. Rules that ensure application does not lead to double taxation. Rules both reduce transaction costs and tax risks for cross-border investment when compared with uncoordinated action. Ongoing work to ensure co-ordination with other Actions Commitment to a second phase of work with a focus on implementation issues.

Action 5 – Harmful tax practices 2014 Progress report Update on work on substantial activity as it would apply to IP regimes Framework for exchanging information on taxpayer specific rulings List of member and associate regimes under review Next steps: Finalise agreement on an approach to substantial activity for IP regimes in particular in light of joint UK-German proposal Agree how to apply elaborated substantial activity criteria to other, non IP, regimes Apply framework on rulings and start to exchange information Engage with third countries (i.e. non-OECD/G20) on participation in FHTP Consider revisions or amendments to the existing criteria

Action 6 – Treaty abuse Agreement that treaties not to be used to generate double non-taxation Agreement on a common minimum standard to tackle treaty abuse Further work to be done on some technical details related to the drafting of the provisions Further work to consider impact of anti-abuse provisions on collective investment vehicles.

Action 8 – Intangibles A broad definition of intangibles is introduced Important value creating activities relating to intangibles will get appropriate remuneration If no comparables exist, techniques to value are available Benefits following from corporate synergies cannot be centralised in low tax locations, but must be shared among the group members which contribute to these synergies Guidance on locational advantages Many examples Artificial profit shifting to “cash boxes” no longer tolerated Some guidance interim since issues are closely related to 2015 work on treatment of risks, capital, and recharacterisation

Action 13 – Transfer pricing documentation Agreement on standard TP documentation that includes Master file, local file and country-by-country reporting template Overview of where profits, sales, employees, and assets are located and where taxes are paid and accrued on a country-by-country basis Useful tool for risk assessment Work ongoing on scope and filing mechanism to be completed early 2015 Post implementation review by 2020

Action 13 – Model Template of CbC report

Action 13 – Model Template of CbC report (cont.)

Action 15 – Multilateral Instrument Based on precedents from various areas other than tax, a multilateral instrument to implement BEPS measures is feasible It is also desirable to ensure the sustainability of the consensual framework to eliminate double taxation Goal is to expedite and streamline the implementation of the measures developed to address BEPS Report recommends a multilateral instrument to be developed soon and to cover at least tax treaty related BEPS measures

Next steps All recommendations are agreed but will remain in draft form so that the potential impact of the 2015 deliverables can be incorporated before finalising them. Implementation and practical guidance will be developed. The next outputs of the BEPS Project are due to be delivered in September and December 2015.

Standard for Automatic exchange of Financial account information

The OECD-Standard on Automatic Exchange of Information G20 Summit, St Petersburg Sep ‘13 Support to OECD/G20 work on: - Presenting standard by February 2014; and - Finalizing technical modalities by mid-2014. Asked the GFTEI to establish mechanism to monitor and review implementation of standard. Called on the OECD, the GFTEI and others to ensure developing countries can benefit from new standard (technical assistance). Next slide

The OECD-Standard on Automatic Exchange of Information February 2014: G20 endorsement of the Common Reporting Standard for automatic exchange of tax information September 2014: G20 endorsement of the full standard and commitment to begin exchanging information by 2017 or end-2018 November 2014: Presentation to G20 Leaders

35 years of automatic exchange in 3 slides The first 20 years ‘81 ‘92 ‘03 ‘05 ‘10 Design of the Paper Standard Format Standard Magnetic Format (SMF) adopted Approval of EU Savings Directive which builds upon SMF US enacts FATCA Standard Transmission Format (STF) adopted EU Savings Directive updates to STF

35 years of automatic exchange in 3 slides The transition Jun ‘12 Jul ‘12 Nov ‘12 Apr ‘13 FATCA Model 1 IGA includes commitment to develop a common model In Los Cabos, G20 welcomes OECD report on AEOI G20 Support AEOI G5 pilot (early adopters)

35 years of automatic exchange in 3 slides Design and implementation of the CRS Jun ‘13 Sep ‘13 Nov ‘13 Dec ‘13 Jan ‘14 Feb ‘14 Mar ‘14 May ‘14 Jun ‘14 Jul ‘14 Sep ‘14 Oct ‘14 Oct ‘14 Nov ‘14 2017 G20 endorse AEOI as new global standard and ask OECD to develop CRS European Council commits to adopt DAC2 in 2014 Early adopters statement (44 countries) OECD approves full version of standard GF Berlin: 93 jurisdictions commit to AEOI CAA signed by 51 jurisdictions Full version of standard endorsed by G20 Ministers First exchange under CRS G20 endorse CRS OECD Ministerial Declaration (OECD Members + 14 other countries, including Singapore) OECD Council Recommend. on AEOI Full version of Standard presented to G20 Leaders together with overview of committed countries OECD report to G8 on common model for AEOI GFTEI creates AEOI group OECD approves first part of standard Ecofin political agreement on revised DAC2 which incorporates CRS Ongoing business consultation

Jurisdictions committed to AEOI 2017 2018

Automatic exchange standard Basic approach: Leveraging on FATCA Model 1 IGA reporting Model 1 IGA exchanges Leveraging on Model 1 IGA implementation to develop standardised automatic exchange in a multilateral context Account Holder Bank   Country A  US  Bank Account Holder   Country B   Account Holder Bank

AEOI standard: Building on FATCA, EU Savings Directive and FATF to have Single Standard and Reduce Cost Similar scope of information reported Personal data: name, address, tax residence, TIN Financial data: account balance, investment income, sales proceeds from financial assets Similar scope of financial institutions required to report Banks, custodia ns, insuranc e compani es and investm ent entities (e.g. certain collectiv e investm ent vehicles) Similar scope of account holders subject to reporting Individuals Entities (including trusts and foundations) Controlling persons (i.e., beneficial owners) of entities Similar Due diligence procedures Distincti on pre- existing /new, individu al/entity, lower value/hi gh value accounts

Next Steps Country implementation Translating the reporting and due diligence rules into domestic law Selecting a legal basis for the exchange of information Entering into Competent Authority Agreements Protecting confidentiality and safeguarding data Making effective use of the information Putting in place the related administrative resources and required IT infrastructure Developing secure, effective and common transmission systems Measuring impact Voluntary disclosure initiatives

Next steps for OECD Ongoing maintenance to resolve issues and ensure consistency (in consultation with FIs) Produce training material (CRS Implementation Handbook) and co-host training events for implementing countries (together with Global Forum) CRS portal for both general and country-specific information on implementing the Standard (including information on TINs and residence rules) Continued support to “operationalise” Multilateral CAA Voluntary disclosure Toolbox for making effective use of information Alignment of TRACE to CRS and assist in country implementation

OECD-G20 work on taxation – BEPS and Automatic Exchange of Information Questions and comments: Achim.PROSS@oecd.org