International Taxation Panel Presentation

International Centre for Tax and Development
www.ictd.ac
www.ictd.ac
Sol Picciotto
ICTD International Taxation Research
Emeritus Professor, Lancaster University
Senior Fellow, ICTD
ICTD Annual Meeting, Kigali, February 2019

www.ictd.ac
Questions for ICTD Research
 1. How should international tax rules be reformed to benefit
developing countries in the long-run?
 2. What are the most cost-effective short-term measures
for small developing countries to protect their corporate
tax base?

www.ictd.ac
Main Areas of ICTD International Tax Work
 Taxing Multinational Corporations
Key part of revenues, especially for developing countries (average 15%)
also for tax morale, fairness, competitive equality
G20/OECD project on Base Erosion & Profit-Shifting (BEPS) 2013-
comprehensive reform attempt
central issue: allocation of MNC income – problems of arm’s length
shift to unitary taxation of MNCs? (ICTD book)
Interim measures to protect tax base (ICTD WPs)
e.g. interest deduction limitations
implementation of BEPS project recommendations
extractive industries: e.g. price-based royalty
Inclusive Framework on BEPS now open to all
Tax consequences of digitalisation: radical reforms?
UN Tax Committee: what role can/should it play?
 Tax Treaty Policies
Data-set on provisions in developing country treaties 2016
New area of work 2017-

www.ictd.ac
Allocation of MNC Income

www.ictd.ac
www.ictd.ac
Sol Picciotto
Problems of Transfer Pricing &
Current Reform Attempts
Emeritus Professor, Lancaster University
ICTD Senior Fellow

www.ictd.ac
Allocation of Income of MNCs
 Tax Treaty Provisions: model treaties, originating 1928, 1935
Article 9: power to adjust accounts of Associated Enterprises
to ensure profits are in line with those of independent enterprises
Article 7: PE Profits = what would be expected if it were independent enterprise
 The Arm’s Length Standard
The treaty specifies comparable profit - “arm’s length”
1935-1975 = comparable profits method, or “fractional apportionment” (Carroll report 1935)
1968 US Transfer Pricing Regulations: new focus on transaction prices
Rejected by OECD 1967,but accepted in 1979 OECD Report
US experience shows no true comparables (Treasury 1973, GAO 1981, IRS 1984)
US introduces Comparable Profits Method 1988 > conflicts in OECD 1988-1993
 OECD Transfer Pricing Guidelines (TPGs) 1995
adopt 5 methods, all “transactional”: but only CUP focuses on price
Cost+, Resale-, TNMM focus on profit margin – but all “one-sided”
Only Profit Split Method (PSM) allocates combined profits
UN Practical Manual – follows OECD, with some variations
Developing Country Practices: Brazil, China, India, South Africa, Mexico

www.ictd.ac
Application of Transfer Pricing Guidelines
 Ambiguous Status of OECD TPGs
widely adopted 1996- , not only by OECD members, almost universal 2009-
Only “soft law” in most countries, but widely applied in practice
Deeply embedded in professional-technical practices, but easy to amend
Ad hoc methodology & complexity allows flexibility
Depoliticises issue of allocation of MNE profits
Yet continual rise of conflicts & disputes: MAP & Arbitration -- in secret
 Implementation in Africa
Statutory power to adjust to “arm’s length” profits – almost all countries
Specific Regulations based on OECD TPGs: 17 states -
Egypt (2005) , Kenya (2006), Namibia (2006) , Rwanda (2007) , Senegal
(2008), South Africa (2009), Malawi (2009) , Uganda (2011), Ghana (2012),
Nigeria (2012), Madagascar (2014), Tanzania (2014), Seychelles (2015),
Liberia (2016), Zimbabwe (2016), Mozambique (2017), Zambia (2018)

www.ictd.ac
Example: Rwanda
 General Power to Adjust Accounts
Income Tax Act s. 33 (enacted 2005)
“Transfer pricing between related persons
Related persons involved in controlled transactions must have
documents justifying that their prices are applied according to arm’s
length principle. Failure to do so, the Tax Administration adjusts
transactions prices in accordance with general rules on transfer
pricing, issued by an Order of the Minister.”
 Detailed Regulations
Ministerial Order 004/2007
Arm’s Length Principle – presumption
Specific Methods: CUP, Cost+, Resale-
Also:
“any other method that the fiscal administration deems appropriate”

www.ictd.ac
Problems with the TPGs
 Major practical problems
Individual “facts & circumstances” functional analysis & comparables search
Need for expert knowledge: asymmetry between Revenue & Taxpayer
Subjective: creates uncertainty & conflict
 Basic conceptual flaws
Separate entity concept illusory: whole is more than sum of parts, profits from synergy
Key functions centralised: Finance, R&D, Risk - major problems for ALP
 BEPS project and beyond
Aim to align profits & tax with real economic activity
but Actions 8-10 focus on “misuse” excluded study of alternative approaches
Revised TPGs 2017: start from contracts, but analyse “real deal”
e.g. for intangibles DEMPE functions
Result: TPGs 450 >> 600 pages, “far more complex” (Andrus & Collier 2017)
Achievement: country-by-country reporting (CbCR) + Master File + Local File
Continuing work 2016-18:
Attribution of profits to PEs: 2018 – only for post-2010 OECD model treaties
Profit Split Method – still “transactional”, some new examples
 Need for Simplified Methods

www.ictd.ac
The TPGs and Simplified Methods
 Compatibility of Simplification with the TPGs
TPGs say aim is “reasonable estimate”, “not an exact science”
but requires judgment, so individual audit, not automatic application
Safe Harbours? TPGs chapter 4
 Brazil: Fixed Margin System 1998
based on OECD Cost-Plus & Resale Minus methods
but fixed margins (3 bands for imports used in manufacture), +/- 5%
taxpayer can only choose among available methods, not e.g. TNMM
right to appeal to Minister – never used
Compatible with art. 9 but not TPGs
Brazil candidate to join OECD, joint review 2018-9
easy to administer, few disputes, predictability for investors
but one-size-fits all, fixed margin regardless of actual profitability
corporate tax revenues quite high, tax/GDP ratio = average of OECD

www.ictd.ac
Tax consequences of digitalisation of the economy
 BEPS Project Action 1: 2015 report
not separate sector, whole economy - needs comprehensive solutions
Task Force on Digital Economy work extended to 2020
possible interim measures (not recommended)
 Unilateral Actions
India: “equalisation levy” 2015 - advertising (Google/Facebook tax)
Withholding Tax on payments to nonresident for advertising
UK: Diverted Profits Tax 2014; proposed Digital Services Tax (users) 2020
EU: proposed Digital Activities Tax 2018
adverts + data sales + intermediation (e.g. Uber)
not digital services (Spotify, Netflix)
US: TCJA 2017: shift from (weak) worldwide to territorial-plus system
CIT rate 36% >> 21%
GILTI: minimum tax on foreign profits @ 10.5% on tangible assets
BEAT: minimum tax on US profits @ approx. 10%

www.ictd.ac
Moves towards a Long-Term Solution
 TFDE Reports to Inclusive Framework on BEPS
Interim report 2018, Policy Note January 2019
proposals by US, UK, France-Germany, G24 (esp. Ghana,India, Colombia)
Consultation March, Work Programme May 2019, Final Report 2020
 Wider Permanent Establishment (PE) definition (taxable presence)
Significant Economic Presence
 Global Minimum Tax
Franco-German proposal (income inclusion rule + tax on base-eroding payments)
 Rules for Allocation of Profits
New criteria for value creation (for “non-routine” returns):
UK: user contributions
US: marketing intangibles
Wider Approach – shift to formulary apportionment
G24: balance of production factors (workers, assets) & sales – simple rules
fractional apportionment still allowed in tax treaties under UN model article 7(4)
EU Commission 2018:
within EU – CCCTB formula (assets-employees-sales)
towards non-EU: mandatory use of profit split method (similar apportionment)

www.ictd.ac
www.ictd.ac
Alexander Ezenagu
Safe Harbours
PhD Candidate, McGill University
ICTD Researcher

www.ictd.ac
Definition, Purpose and Concerns
 Definition:
 Administrative simplification regime for a category of taxpayers or
transactions;
 Election between accuracy and simplicity.
 Purpose:
 Administrative simplicity and efficiency; reduction of compliance cost and
burden; reduction of risk of dispute and potential litigation risks; and
promotion of FDI.
 Securing corporate income tax revenues- guarantee of a minimum of tax
revenues.
 Tax certainty.
 Promotes equitable treatment of taxpayers in an industry or engaged in
similar transactions, unlike APAs.

www.ictd.ac
Contd.
 Concerns:
 1995 TPGs
 Pre-determined prices or TP methodology may not comply with the arm’s
length principle.
 unilateral safe harbor may create room for double non-taxation.
 Tax optimization opportunities for MNEs.
 OECD, Multi-Country Analysis of Existing Transfer Pricing
Simplification Measures, 2012. Influence on the OECD’s take on
Safe Harbours.
 OECD- SHs can help to relieve some of the burdens associated with
administering and complying with the TP rules, while providing
taxpayers with greater certainty.

www.ictd.ac
Types of Safe Harbours
 Types:
 Exemption from Transfer Pricing Rules: Mexico (small individual
taxpayers); UK (SMES, subject to some exceptions).
 Exemption from Transfer Pricing Documentation: in some jurisdictions,
applied as a de minimis rule.
 Prescription of pre-established transfer method and margin rates.
 Exemption for SMEs: determining threshold; SMEs in Africa largely do
not come under the TP rules as they do not engage in cross-border
activities with related entities.
 Exemption for Small Transactions: issue of threshold.

www.ictd.ac
Substantive Safe Harbours
 Sectoral APAs:
 What is an APA?
 Difference between a sectoral APA and sectoral Safe Harbour Regime?
 Sectoral Safe Harbours
 Determining the sectors: EU Report (applied to large sectors of the
economy).
 Determining the transfer pricing method to be applied.
 Examples of Sectoral Safe Harbours
 Mexico: Maquiladora industry.
 Dominican Republic: Hospitality industry.

www.ictd.ac
Design of Safe Harbours
 Safe Harbour Transfer Pricing Methodology
 A one-sided method is recommended.
 Safe Harbour Price Range and Interest Rate
 Approximates to the arm’s length price, else it becomes an incentive.
 Participation in the Safe Harbour Regime: Opt-in or Opt-out
 Safe harbour regime must be voluntary.
 Acceptable alternative(s) where a taxpayer refused to opt in or opts out.
 Unilateral, Bilateral or Multilateral Safe Harbours
 Fear of double taxation vis-à-vis exigency and expediency.
 Fear of capture by the bigger party.
 Surmounting the hurdles of a multilateral agreement.

www.ictd.ac
www.ictd.ac
Michael C. Durst
Alternative Corporate Minimum
Taxes
ICTD Senior Fellow

www.ictd.ac
Minimum Taxes on MNCs
 US Tax Reform 2017
GILTI – minimum tax on foreign (non-US) profits
BEAT – minimum tax on US profits (prevent base erosion)
 Proposals to Inclusive Framework for BEPS
Germany: minimum taxes on both domestic & foreign profits
 Protecting Tax Base of Developing Countries
Alternative Minimum Taxes – on inward investment
E.g. Pakistan, Ecuador

www.ictd.ac
Minimum Tax on Inward Investment
Based on Turnover
 Alternative minimum tax is computed as some small percentage (for
example, 1 percent) of taxpayer’s total revenue (turnover). If the
alternative tax is higher than the taxpayer’s regular tax liability,
minimum tax is paid.
 A means of limiting base erosion and profit shifting (BEPS).
 Currently, AMTs based in whole or in part on turnover are in effect in
about 18 countries, especially in francophone Africa. Rates and other
details of the tax, however, vary widely from country to country (with,
for example, the tax subject to low maximum amounts in some
countries).
 Question for today: Is the turnover based AMT a promising model for
further consideration?

www.ictd.ac
Example of Turnover-Based AMT at 1%
 Assume local subsidiary with $100 million turnover, reporting
net operating margin of 3%, yielding net operating income of $3
million. Assume also that subsidiary deducts interest at 30% of
net operating income, so taxable income = $2.1 million.
Assuming corporate income tax rate of 35%, “regular” tax is
$735,000.
 Alternative minimum tax at 1% of turnover = $1,000,000
 Additional research surely should be conducted, using data
from tax returns, but it seems plausible that even a 1%
alternative minimum tax on based on turnover could generate
better revenue results than the current BEPS-vulnerable
system.

www.ictd.ac
Economic Argument Against Turnover-Based Taxes
 Taxes on gross revenue subject investors to risk taxation even
in absence of economic profit; therefore, they can be seen as
economically inefficient.
 But does the arguable economic inefficiency of, say a 1% tax on
turnover outweigh the advantages of efficient and effective
revenue collection? See Best, Brockmeyer, Kleven &
Spinnewijn, “Production versus Revenue Efficiency with Limited
Tax Capacity: Theory and Evidence from Pakistan,” 123
Journal of Political Economy 1311 (2015).

www.ictd.ac
Potential Advantages of Turnover-Based AMT
 Since no deductions are allowed, a gross-based AMT is immune to
avoidance through the overstatement of deductions. This
includes immunity to avoidance through interest deductions, as well
as deductions for management fees and the cost of goods sold.
 (The turnover-based AMT would remain vulnerable to underpricing of
outbound sales of goods and services, including natural resource and
agricultural products -- but the quantitative effects of the underpricing
should be small compared to the effects under net-income taxation.)
 A turnover-based AMT should be relatively easy to administer.
 Might a turnover-based AMT result in revenue collections at levels
that are politically realistic given the pressures of tax competition for
inbound investment?

www.ictd.ac
Suggestion
 Additional research should be conducted to assess
performance of turnover-based AMT in countries that have
adopted it.
 Given its potential utility, the possibility of more extensive use of
turnover-based AMT should figure more prominently in global
discussions of BEPS.

www.ictd.ac
Tax Treaties

www.ictd.ac
www.ictd.ac
Catherine Ngina Mutava
Tax Treaty Practices &
Policy in Africa
Associate Director, Strathmore Tax Research Centre
ICTD Researcher

www.ictd.ac

www.ictd.ac
Current situation
 Imbalance between capital
exporting and capital importing
countries makes negotiations
lopsided.
 Increasing resident centric
treaties Increasing resident
centric treaties –
ICTD/Actionaid database
 Secret and rushed conclusion
of treaties – elite capture
 Lack of expertise
 Need for treaty policy

www.ictd.ac
Objectives of a tax treaty policy
 Transparency
 Protecting the tax base
 Provide a framework for
negotiation of tax treaties

www.ictd.ac
What should inform the treaty policy?
 Economic status - country’s level of investment and trade flows
 Country’s tax policy
 Main corporate players
 Implications on domestic tax
 Other existing policies
 Cost of implementation

www.ictd.ac
Content of a treaty policy
 Choice of treaty partner
 Choice of negotiators
 Expected outcomes
 Choice of Model

www.ictd.ac
Negotiations
- pre-negotiation stage – determine who will be
involved, carry out a study, prepare a model;
- Negotiation stage – determine strategy –
a. Interest vs position strategy
b. Disclosure or non-disclosure
c. Post negotiations

www.ictd.ac
Protecting the tax
base
- UN and OECD Model are the most common
- OECD assumes a balance
- UN though more favourable to source
countries is a compromised position
- Retain source taxation
- Seal off loopholes

www.ictd.ac
Protection recommendations
- Limit PE activity exemptions to where the activities
are genuinely preparatory or auxiliary in nature.
- if that enterprise or a closely related enterprise
carries on a business in that place, or in any other
place in that state that qualifies as a PE; or if the
combination of activities between that enterprise and
the related enterprise are not auxiliary or preparatory
where the combined activities are complementary
functions of a cohesive business operation.

www.ictd.ac
PE provisions – UN Model
 Construction PE – The UN Model extends the scope of building and construction PE to include
supervisory services relating to the building, construction or assembly project that continues to exist
for more than 6 months;
 Service PE – The UN Model widens the definition of a PE to include a PE created by performance of
services by an employee or any other personnel may create a PE if the services continue for more
than 183 days in any 12-month period;
 Agency PE - Under the UN Model, the maintenance of stock and habitual delivery of the stock by an
independent agent who does not habitually conclude contracts will create a PE; and
 Specifically providing creation of a PE by a foreign insurance business unless the premiums are
collected by an independent agent in ordinary course of business.
 Force of attraction rule
 Technical services PE

www.ictd.ac
Taxing capital gains
 Seek to preserve taxation of gains from alienation of shares.
 UN allows for taxation of alienation of shares from immovable properties as well as those not related
to immovable properties

www.ictd.ac
www.ictd.ac
Annet Wanyana Oguttu
Implications of the BEPS-MLI for
African countries’ tax treaties
Professor, Department of Taxation and African Tax Institute,
University of Pretoria

www.ictd.ac
Background
 2015 OECD BEPS Measures – to ensure profits are taxed where economic
activities generating those profits are performed and where value is created
 Measures impact on: international tax principles; domestic law & DTAs
 Focus - DTA BEPS measures:
 Action 2 - hybrid mismatches
 Action 6 - prevent treaty abuse
 Action 7 - prevent artificial avoidance of PE status
 Action 14 - resolving treaty disputes - MAP
 Challenges of adopting DTA measures
 renegotiation of thousands of DTAs
 burdensome, time consuming & expensive

www.ictd.ac
The BEPS-MLI
 Action 15: MLI to implement DTA BEPS measures
 Swift, coordinated & consistent implementation across existing DTA network
 Simultaneous renegotiation of DTAs
 Development of MLI
 Ad Hoc included 23 African countries & 2 observer African organisations
 24/11/2016 – MLI & Explanatory Statement text concluded
 31/12/2016 – MLI opened for signature for all countries
 As at 23/01/2019, 11 African countries have signed; 2 have expressed interest
 Status of MLI
 Self-standing convention - operates alongside existing DTAs - not a Protocol

www.ictd.ac
Impact of MLI for African countries’ tax treaties
 Impact if signed
 Impacts current DTA network - applies to only covered tax agreements (CTA)
 Applicable provision of MLI override provision of CTA
 Modifies DTAs depending on options and reservations made
 Main impact is on older CTAs
 Advantages of signing the MLI for African countries
 DTAs restrict source taxation – MLI will strengthen source taxation
 DTA BEPS concerns - priority for African countries
 Developing countries prefer UN MTC - MLI can modify any DTA
 Will reduce costs & time involved in re-negotiating DTAs
 Improvements in existing tax treaty rules
 MLI provisions – pertinent matters developing countries should consider to opt in or
out of – see published paper

www.ictd.ac
MLI Challenges for African countries’ tax treaties
 Administrative challenges
 Lack of experience in the use of multilateral
conventions
 Administrative capacity to engage with and
benefit from MLI
 Complex reservation and option mechanism
 Distinguishing between modified and
unmodified provisions
 Impact of MLI flexibility to its effectiveness
 Non-uniform adoption - jeopardizes BEPS
project
 Country can opt out of some BEPS
minimum standards
 Uncertainties
 Treaty negotiations consider interconnected
articles – some not covered by MLI
 Treaty negotiation, a give and take process
- concessions not considered
 Parliamentary approval before ratification
 Explanation of BEPS measures/ MLI
 Impact on bilateral trade & investment flows
 Language:
 MLI - so far in English and French
 Many treaties concluded various languages
 Global acceptance of MLI
 Evolves from BEPS project - interests of
developing countries?
 USA, part of Ad hoc group – didn’t sign up
 UK/Germany; UK/Switzerland – chose to
sign protocols
 Is the OECD becoming a world tax organization?
 Need for representative body under UN
auspices rejected
 Developing countries view MLI suspiciously

www.ictd.ac
Recommendations and concluding remarks
 Great care & caution before signing the MLI
 Inconsistent implementation - double taxation, impact on cross-border trade
 Administrative & political uncertainties: adopt wait & see approach
 Consider what other countries are opting in or out of
 Understand own treaty policy - make informed decisions
 For countries with fewer DTAs – consider protocol
 For details refer to:
 Annet Wanyana Oguttu “OECD Multilateral Instrument on Treaty-related
BEPS Measures: Benefits, Challenges and Recommended Options for South
Africa and Other Developing Countries” South African Yearbook of
International Law (2017) vol 22 pgs 220-265.

www.ictd.ac
www.ictd.ac
Thank You!

International Taxation Panel Presentation

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (20)

Semelhante a International Taxation Panel Presentation

Semelhante a International Taxation Panel Presentation (20)

Mais de International Centre for Tax and Development - ICTD

Mais de International Centre for Tax and Development - ICTD (20)

Último

Último (20)

International Taxation Panel Presentation