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The Platform for Collaboration on Tax

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The Platform for Collaboration on Tax The Platform for Collaboration on Tax COMMENTS RECEIVED ON PUBLIC DISCUSSION DRAFT: The Taxation of Offshore Indirect Transfers— A Toolkit December 2017 International Monetary Fund (IMF) Organisation for Economic Co-operation and Development (OECD) United Nations (UN) World Bank Group (WBG) Table of Contents Aneri Dani & Associates ................................................................................................................................ 1 BIAC ............................................................................................................................................................... 4 BEPS Monitoring Group .............................................................................................................................. 11 CBI ............................................................................................................................................................... 21 China State Administration of Taxation ...................................................................................................... 30 Deloitte ....................................................................................................................................................... 33 International Chamber of Commerce (ICC) ................................................................................................ 41 Government of India ................................................................................................................................... 45 International Tax and Investment Center (ITIC) ......................................................................................... 51 Jubilee USA Network ................................................................................................................................... 69 KPMG .......................................................................................................................................................... 70 PwC ............................................................................................................................................................. 78 Repsol .......................................................................................................................................................... 84 Sergio Guida ................................................................................................................................................ 92 Silicon Valley Tax Directors Group (SVTDG) ................................................................................................ 94 Tax Executives Institute (TEI) .................................................................................................................... 112 Transfer Pricing Economists for Development (TPED) .............................................................................. 120 United States Council for International Business (USCIB) ........................................................................ 133 ii 1 Aneri Dani Associates Comments on discussion draft titled “The Taxation of Offshore Indirect Transfers – A Toolkit” I. Is the suggested possible expansion of the definition of immovable property for the purposes of the taxation of offshore indirect transfers (‘OIT’) reasonable? • Despite the broad title of Toolkit, it only emphasizes on taxation of OIT of shares1 principally deriving value from immovable properties. While no explicit reason has been pointed out for distinction between immovable and movable properties, the economic consideration for taxing OIT has been primarily linked with Location Specific Rents - a concept more closely associated to immovable property than movable property. However, other economic considerations could be evaluated to justify taxation of OIT of shares deriving value from assets other than immovable properties. • On a conceptual level, taxation of OIT closely resembles the concept of exit taxes. Many developed countries including US, Canada, etc. levy exit taxes on individuals permanently exiting their home country. Thus, where multinational groups extinguish their ties with source country by initiating an OIT, isn’t it fair to assume that they should also pay their share of taxes based on the same economic considerations that back levy of exit taxes in case of individuals? • By limiting the right of source country to tax only those cases where immovable properties (though with extended meaning) are involved, the Toolkit does not comprehensively address this burning issue which is the need of the hour, given the tax and political importance it has gained in various countries around the world. II. Is the concept of location-specific rents helpful in addressing these issues? If so, how is it best formulated in practical terms? • As acknowledged in the Toolkit, Location Specific Rents could also arise, for instance, from access to domestic markets. The fact that there may be difficulties to gauge and distinguish from rents associated with brand names or intellectual property, is not an apt reason for not developing rules to tax them. Enabling provisions to tax OIT involving all kinds of assets (and not restricted to immovable property alone) would help tax values linked to these attributes as well. III. Is the draft toolkit's preference for the 'deemed disposal' method appropriate? Model 1, i.e. deemed disposal, is favoured over Model 2 in Toolkit for reasons of simplicity, tax cost adjustment logic and ease in enforcement. However, the following points need consideration: • As acknowledged in the Toolkit, Model 1 may result into economic double taxation where the seller’s country of residence also imposes tax on such transfer. Since taxpayer in residence country (seller) and source country (local entity) would be different, taxes paid 1 In this document, transfer of “shares” is intended to include transfer of “shares or comparable interests” 2 in source country may not be available as a credit. Effectively, while the rationale behind Model 1 is to plug the loophole of double non-taxation arising in typical OIT structures, this being a uniform rule and not GAAR provision, may result into economic double taxation for genuine OITs, defeating the primary objective of avoiding double taxation. • Also, since Model 1 anyways runs the risk of double taxation, source countries may possibly be more inclined towards formulating alternative solutions complementing their own tax framework better rather than adopting Model 1. • Under Model 1 a tax cost step-up is granted in the hands of local entity which becomes relevant for any future direct or indirect transfer of control. Thus, this model is likely to mitigate risk of double taxation of unrealised gain upon subsequent change of control at same intermediate holding entity level or otherwise. However, as acknowledged in the Toolkit this is a typical feature that arises when multi-tiered holding structures are involved – whether domestic or offshore. For instance, assume a case of domestic indirect transfer of shares of a company, instead of direct sale of the underlying immovable property. The source country may levy tax on the seller for transfer of shares. Similarly, the source country may also levy tax on the company on subsequent transfer of such immovable property. No tax cost step-up is granted on account of taxes paid on previous sale of shares. Accordingly, step-up in tax cost as envisaged under this model may ultimately result into lower tax share for source country. • Also, it could very well be a case that tax cost of “local assets in hands of the local entity” may be substantially different to tax cost of “shares of local entity in the hands of non- resident seller”– resulting into higher/lower (typically lower) tax share for source country, depending on facts of each case. For instance, the tax cost of shares of local entity in the hands of non-resident seller may be lower where the acquisition of local assets has been financed from funds other than those infused by the non-resident seller by way of share capital (like borrowings, retained earnings, etc.) • Finally, it may be worth highlighting that, since the underlying principle of Model 1, propagates shifting of source based tax to residence based tax, countries may cite this as a precedent to carry out unilateral amendments in their domestic legislation for establishing taxing rights over varied transactions which currently fall outside their ambit due to tax treaty restrictions. In view of this fundamental drawback, Model 1 entirely loses its relevance. It is rather inexplicable to see Model 1 being favoured by collaborative efforts of International Organisations whose principle objective is to develop solutions for avoiding double taxation. • Despite the complexities involved, Model 2 appears to be more logical and appropriate for taxation of OIT. III. Are the complexities in the taxation of these international transactions adequately represented? 3 • Guidance on the methodology to determine Market Value of assets may be provided in the Toolkit to lay down a common principle that countries may use. This will reduce the risk of double taxation and disputes on account of difference in valuation norms used by countries involved. 4 William Morris Chair, BIAC Tax Committee 13/15, Chaussée de la Muette, 75016 Paris France The Platform for Collaboration on Tax Submitted by email: [email protected] October 20, 2017 Ref: DISCUSSION DRAFT: THE TAXATION OF OFFSHORE
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