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Prof . Dr. Wolfgang Kessler Lehrstuhl für Betriebswirtschaftliche Steuerlehre

Prof . Dr. Wolfgang Kessler Lehrstuhl für Betriebswirtschaftliche Steuerlehre. BEPS: Base Erosion and Profit Shifting – the lack of harmonization and the double taxation as a result. International Tax Forum September 19 th 2013 St. Petersburg.

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Prof . Dr. Wolfgang Kessler Lehrstuhl für Betriebswirtschaftliche Steuerlehre

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  1. Prof. Dr. Wolfgang KesslerLehrstuhl für Betriebswirtschaftliche Steuerlehre BEPS: Base Erosion and Profit Shifting – the lack of harmonization and the double taxation as a result International Tax ForumSeptember 19th 2013St. Petersburg Albert-Ludwigs-Universität Freiburg – Lehrstuhl für Betriebswirtschaftliche Steuerlehre – StB Prof. Dr. W. Kessler Werthmannstr. 8 – 79085 Freiburg i.Br. – Telefon 0761/203-9200 – Telefax 0761/203-9202

  2. Agenda • Fundamentals • Tax planning structures • Google • Apple • OECD measures • Report Addressing BEPS (10/02/2013) • Action plan on BEPS (19/07/2013) • Implications of the OECD measures

  3. 1. Fundamentals (1/6) - taxcreditmethod vs. exemptionmethod - IE IE Inc. AG 65 profit ./. 35 CIT ./. 1,3 *CIT + 12,5 FTC 87,5 dividend 87,5 dividend 86,2 profit OpCo OpCo USA 87,5 profit ./. 12,5 CIT ./. 12,5 CIT 100 EBT 100 EBT activeincome activeincome 87,5 profit DE *) Exemption method (tax base = 0), but 5% of dividend deemed as non deductible expenses.

  4. 1. Fundamentals (2/6) - taxdeferral vs. CFC rules - IE IE Inc. Inc. -22,5 loss 0 profit ./. 35 CIT + 12,5 FTC ./. 0 CIT 0EBT nodividend 0EBT nodividend OpCo USA USA CFC 87,5 profit 87,5 profit ./. 12,5 CIT ./. 12,5 CIT 100 EBT 100 EBT activeincome passive income

  5. 1. Fundamentals (3/6) - calculation -

  6. 1. Fundamentals(4/6) - US Corporate Income Taxes - • Federal tax: Corporate Income Tax • residence: place of incorporation (notplace of management) • U.S. taxation of worldwide income – as a basic principle • stepped rates up to 35% + state/local taxes (approx. 2-6%) • avoidance of international double taxation: foreign tax credit-method (FTC) with option to “deemed paid tax credit” (gross up) • Subpart F: current inclusion of passive income (e.g. dividends, interest, royalties) from controlled foreign corporations (CFC) • “check the box”-regulation (Form 8832): option to treat a corporation as permanent establishment (disregarded entity) • US-GAAP • expectedeffectivetaxrate (ETR) of 35-41%! • exception: no deferred taxes, “if sufficient evidence shows that the subsidiary has invested or will invest the undistributed earnings indefinitely …” (APB 23)

  7. 1. Fundamentals (5/6) - transfer of intangible assets fromthe USA - ② cost sharing agreement (buy-in) US Inc. BM ① research & development Offshore-Co intangible assets intangible assets USA ③ IP transfer EU-OpCo EU ④ license

  8. 1. Fundamentals (6/6) - jurisdictiontotaxfor CIT purposes - *) There is an exception to this rule if a related company is controlled or is regularly traded on a recognized stock exchange.

  9. 2. Taxplanningstructures (1/4) - Google: structure - Google Inc. ⑧ dividends(deferred) USA ① IP transfer Google Ireland Holdings (*) ⑦ royalties BM IE Google NL Holding B.V. ② license NL ③ sublicense Google Ire-landLtd. ⑥ royalties ④ online promotion DE ⑤ fees clients *) The Google Ireland Holdings was founded in Ireland, but theplace of managementis in Bermuda.

  10. 2. Taxplanningstructures (2/4) - Google: CIT - • USA: • Google Inc.: US CIT on dividends (but deferral in Bermuda) and no CFC taxation (active income from Irish subsidiaries) • Google Ireland Holdings: intangible assets transferred via cost sharing arrangement (APA) from the USA to Bermuda (no super royalty rule) • Google Ireland Ltd. / Google NL Holding B.V.: • no tax resident (both companies are not incorporated in the USA) • no CFC taxation (check-the-box-election  active revenues from Irish subs) • Bermuda: Google Ireland Holdings: no CIT and no withholding tax (tax haven) • Netherlands: • Google Ireland Holdings: no withholding tax on royalties outgoing (local tax code) • Google NL Holding B.V.: ruling on royalty net income (handling fee) • Ireland: • Google Ireland Holdings: no tax resident (no place of management in Ireland) • Google NL Holding B.V.: no withholding tax (Council Directive 2003/49/EC) • Google Ireland Ltd.: CIT = 12,5%, but low net income (high TP on royalties) • Germany: Google Ireland Ltd.: no CIT (no permanent establishment)

  11. 2. Taxplanningstructures (3/4) - Apple: structure - Apple Inc. IE DE Apple „OpCo“ International USA Apple Distri-bution Int. Apple OpCoEurope Apple Retail Holding Europe ① IP transfer ③ sale Apple SalesInternational ② sale Apple Retail Germany TW Foxconn clients ④ sale

  12. 2. Taxplanningstructures (4/4) - Apple: CIT - • USA: • Apple Inc.: • no CFC taxation (active income from disregarded “Irish” sub-subsidiaries) • Apple OpCo International / Apple OpCo Europe / Apple Sales International: • incorporated in IE, but have no tax residency in Ireland (no employees, no PE) and in the USA (ghost company) – board meetings in CA! • intangible assets transferred via cost sharing arrangement from the USA • no CFC taxation (check-the-box-election  sales income of Irish subsidiaries is active income of AOI) • Ireland: • Apple OpCo International / Apple OpCo Europe / Apple Sales International: • subject to non-resident taxation, but special tax rate of 2% • Apple Distribution International / Apple Retail Holding Europe: • tax resident, but low net income (TP: low risk distributor) • Germany: • Apple Distribution International: no CIT (no permanent establishment) • Apple Retail Germany: tax resident, but low net income (TP: low risk distributor) • Taiwan: Foxconn: tax resident, but low net income (TP: low risk distributor)

  13. 3. OECD measures& EU Code of Conduct - timeline - 1997 EU: Code of Conduct for business taxation 1998 Report: Harmful Tax Competition – An Emerging Global Issue 2001 Discussion paper: The Impact of the Communications Revolution on the Application of “Place of Effective Management" as a Tie Breaker Rule 2004 TAG Final Report: Are the Current Treaty Rules for Taxing Business Profits Appropriate for E-Commerce? 12/02/2013 BEPS-Report (diagnosis) 15/02/2013 G20 Finance Ministers meeting in Moscow 19/07/2013 G20 Finance Ministers meeting in Moscow OECD Action Plan on BEPS (therapy) 05/09/2013 G20 Leader’s Summit in St. Petersburg

  14. 3. OECD reportaddressing BEPS (10/02/2013) - Global Foreign Direct Investments in 2010 - Source: OECD, 2013. value of retained offshore profits ≈ 1.7 trillion $ ==> deferred US CIT ≈ 600 billion $ (Source: Pinkernell, IStR 2013, p. 180-187)

  15. 3.OECD action plan on BEPS (19/07/2013) - 15 actions -

  16. 4.Implications of the OECD measures (1/5)- actions - • Action 1: address the tax challenges of the digital economy • expected output: • report identifying the main difficulties that the economy poses for the application of existing international tax rules • development of detailed options to address these difficulties • object of investigation: • companies with a significant digital presence in the economy of another country without being liable to taxation (no nexus) • attribution of value for digital products and services and characterization of income of these digital products and services • application of related source rules • ensure the effective collection of VAT/GST with respect to the cross-border supply of digital goods and services • implications forthe tax structures of Google & Apple: • possibly non-resident tax liability in EU via the fiction of a (virtual) PE • possibly tax residency of the „ghost“ companies in the USA or in Ireland • global formulary apportionment?

  17. 4.Implications of the OECD measures (2/5) - actions - • Action 3: strengthen CFC rules • expectedoutput: • recommendationsregardingthe design of domesticrules • object of investigation: • design of rulesforcontrolledforeigncompanies • implicationsforthetaxstructuresof Google & Apple: • currently: US CFC taxationisavoided via check-the-box-election • in theory the CFC taxation in the USA could be strengthened so that CFC legislation would work properly • companies which are resident in EU member states: no relevance due to the judgments of the ECJ (Cadbury Schweppes), if the subsidiary has substance (not fully artificial) • thus CFC legislation is in fact a phase-out model

  18. 4.Implications of the OECD measures (2/5) - actions - • Action 5: counter harmful tax practices more effectively, taking into account transparency and substance • expectedoutput: • finalized review of member countries’ regimes • revision of existing criteria • object of investigation: • revamping the work on harmful tax practices with a priority on improving transparency (including compulsory spontaneous exchange on rulings related to preferential regimes) • requirement of a substantial activity for any preferential regime • implicationsforthetaxstructures of Google & Apple: • no rulings for conduit companies in the Netherlands • no special tax rates for IP companies (IE) or IP-boxes (NL, Lux, UK) • no preferential tax regimes for artificial holding companies

  19. 4.Implications of the OECD measures (3/5)- actions - • Action 7: prevent the artificial avoidance of permanent establishment status • expected output: • changes to the OECD Model Commentary and Tax Convention • recommendations regarding the design of domestic rules • object of investigation: • prevention of the artificial avoidance of the PE status – e.g. commissionaire arrangements and specific activity exemptions • implications forthe tax structures of Google & Apple: • currently: non-taxable direct business activities in EU member states • in the future: non-resident tax liability in EU member states via a sales agent PE, no exemption for facilities solely for the purpose of storage, display … and activities of preparatory or auxiliary character (Art. 5 P 4)

  20. 4.Implications of the OECD measures (4/5) - actions - • Action 8: assurethat transfer pricing outcomes are in line with value creation (intangibles) • expectedoutput: • changestotheTransfer Pricing Guidelines (WP6 discussiondraft on intangibles) • changestothe Model TaxConvention • object of investigation: • broad and clearly delineated definition of intangibles • appropriate allocation of the profits associated with the transfer and use of intangibles (in accordance with the creation of economic value) • development of TP rules for transfers of hard-to-value intangibles • updating the guidance on cost contribution arrangements • implicationsforthetaxstructuresof Google& Apple: • preventinga tax-free transfer of intangible assets from the USA to a tax haven

  21. 4.Implications of the OECD measures (5/5)- actions - • missingmeasures • Coordination of tax residency of corporations • place of incorporation vs. • place of (effective) management ( daily business) vs. • place of management ( strategic decisions) • OECD Discussion paper: The Impact of the Communications Revolution on the Application of “Place of Effective Management” as a Tie Breaker Rule (2001) • withholdingtax on interestandroyalties(for non-EU countries!) • alternative taxationconcepts • global formularyapportionment • fullinclusionsystem

  22. Conclusions • Controversial and open-ended project due to the clash of interests / distortion of competition • biggest problems in USA, massive export subsidy and offshore dilemma • while Germany is a model student who does even more than enough – earningstrippingrule, taxationat „transferring“ andtransfer of functions, strength CFC taxation, treaty override, intentional double taxation, … • CH, NL, Lux, UK, … are juvenile delinquents due to their preferential regimes • E-Commerce discussion: New Wine into Old Wineskins • Possible improvements: • country-by-country-reporting • abolition of preferential regimes („level playing field“) • revised version of Art. 5 P 4 OECD Model Tax Convention • tie-breaker rule for anti-avoidance measures • fundamental US tax reform • Worst case scenario: • massive treaty override, massive double taxation, endless TP disputes, …

  23. ThankYouforYour Attention!

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