Tag Archives: taxation

Submission to OECD on the Multilateral Instrument

The BMG submitted on 30 June 2016 these Comments on Action 15 on the proposed Multilateral Instrument which will amend existing tax treaties to implement changes agreed in the BEPS project.


The reports resulting from the project on Base Erosion and Profit Shifting (BEPS) include a number of proposals for changes in tax treaties, formulated as amendments to the OECD Model Convention and its Commentaries. The Multilateral Instrument (MLI) is intended to provide a method for quickly amending existing bilateral treaties. Hence, it must take the form of an actual self-standing treaty, and not a model. However, there are differences in the texts of the actual treaties to be amended, especially those involving developing countries, and based on the UN model. Hence, we suggest that the MLI should be accompanied by Country Schedules, bilaterally agreed, to ensure clarity as regards which treaties are amended and how. This would ensure that tax authorities, taxpayers and courts know which treaties have in fact been amended and their new language.

The core provisions of the MLI should be the basic provisions for preventing abuse of tax treaties and eliminating double non-taxation. Several variants have been proposed in BEPS Action 6, and it is essential that the MLI includes options which are suitable for developing countries. The revisions of the Permanent Establishment definition have been drafted in relation to the OECD Model, and a variant should be included which is compatible with the UN model, in consultation with the UN Committee.

The proposals for strengthening the Mutual Agreement Procedure (MAP) for resolving tax treaty disputes are unsuitable for developing countries, and should remain purely voluntary. This applies in particular to Mandatory Binding Arbitration, which we regard as illegitimate for all countries. Tax treaty provisions are binding in domestic law, and can be enforced through national tribunals. Accordingly, MNEs should not be given further privileges over other taxpayers. The MAP is an ‘amicable procedure’, and it is not appropriate to try to convert it into a supranational dispute settlement procedure. It is contrary to the due process of law, and indeed in many countries regarded as unconstitutional, for contentious interpretations of legal provisions to be made by secret and unaccountable administrative procedures, rather than by courts or tribunals in an open legal process. To make it mandatory for all conflicting interpretations to be resolved would provide a guarantee that aggressive tax planning would be riskless, and create an incentive to continue BEPS behavior. The main cause of the increase in tax disputes is the subjective basis of the transfer pricing rules, and it is inappropriate to expect the MAP to resolve issues which negotiators have failed to deal with in a principled manner.


Submission on US Draft Regulations on Country by Country Reporting

The BMG has now made a submission to the US Treasury on its draft Regulations for Country by Country Reporting.

Overall, we applaud this implementation of Country-by-Country Reporting (CbCR) in accordance with the recommendations of the 5 October 2015 Final Report on Action 13 of the G20/OECD project on Base Erosion and Profit Shifting (BEPS). The proposed regulation as drafted will be an important contribution to the ability of the IRS to enforce U.S. tax laws. Recent estimates by Kimberly Clausing suggest that profit shifting likely cost the U.S. government between $77 and $111 billion in corporate tax revenue in 2012, and that these revenue losses have increased substantially in recent years.

A strong and effective CbCR program will provide the IRS with an important tool to identify situations not only involving potential transfer pricing issues, but also potential application of judicial concepts and other laws, such as determining whether income is effectively connected with a trade or business being conducted in the U.S. Often, the real business of some low- or zero-taxed foreign group members is being conducted by group members located within the U.S. Where this is found, the IRS can potentially choose to impose tax through re-characterization under judicial concepts, through transfer pricing adjustments, or through application of the effectively connected income rules. Often, where the facts support it, applying the effectively connected income rules will provide a more statutory basis to assess tax, which will be assessed at higher effective tax rates due to the §884 branch profits tax and the potential loss of deductions and credits under §882(c)(2) where a foreign group member has previously filed no U.S. tax return.

We wish to add as well that effective CbCR will better allow the IRS to target their examinations on both domestic MNEs and foreign-based MNEs. Importantly, foreign-based MNEs include inverted MNEs and foreign MNEs that have acquired U.S.-run multinational businesses. Especially for these purposes, it is of extreme importance that the IRS fully and actively participates in the automatic exchange of CbCRs among treaty partners as contemplated by BEPS Action 13.

The U.S. is the most important single country whose actions will help define the BEPS process and its degree of future success. The resolute actions of the Treasury and the IRS, both in timely publishing effective regulations and in implementing sharing through information exchange mechanisms, will provide a meaningful leadership position that sets an example for the rest of the world.



Comments on BEPS Action 8: Hard-to-Value Intangibles

The BMG has now published its comments on the Discussion Draft under Action 8, which proposes revised text for the OECD Transfer Pricing Guidelines on Hard to Value Intangibles.


The transfer of intangible property rights to related entities is one of the main techniques used by multinational enterprises (MNEs) to avoid taxes through base erosion and profit shifting (BEPS). Such assets are especially hard to value if they are transferred at an early stage, since their income-generating potential will be speculative, although best known to the firm itself. This discussion draft (DD) proposes that, in specific circumstances, the price of the asset transfer can be adjusted subsequently by tax authorities, taking into account the income actually generated. However, the DD specifies a number of conditions which must apply for this approach to be adopted.

Although desirable, in our view the proposals do not go far enough in two respects. First, the mechanism adopted should itself discourage transfers taking advantage of ex ante pricing, which is where most BEPS concerns and risk arise. Second, the DD must aim to reduce the endemic and serious problem of information asymmetry between a tax authority and a company. This is rooted in the requirement under the arm’s length principle to evaluate internal transfers within a firm, since the tax authority can never know a firm’s business better than the firm does.

Hence, we suggest instead a reversal of the burden of proof, with a presumption that any intra-firm transfer of HTVIs should be subject to pricing based on subsequent consideration of the actual income produced, unless the taxpayer can show that specified criteria were satisfied. We also propose two additional criteria for such a showing: proof that the transfer did not result in a significantly lower effective tax rate, and a ‘purpose test’ requiring satisfactory evidence of the legal and commercial reasons for the transfer. This reversal of the burden of proof will create a much stronger incentive for firms to cease tax-motivated transfers of intangibles. In addition, to provide more certainty, we suggest an APA-like ruling process.

Joint Statement to the G20

The BMG, together with the Global Alliance for Tax Justice, has prepared a statement of Key Points on Tax Issues, summarising our views on the BEPS Action Plan proposals to date. This is being presented by the C20 Steering Group to the G20 Sherpas on 16-17 June 2015. It has also been sent to Pascal de St Amans, Head of the OECD Centre for Tax Policy and Administration, who has forwarded it to the Chair of the Committee on Fiscal Affairs, which is responsible for the BEPS Project.

Comments on BEPS Action 6: Prevent Treaty Abuse

The BMG has now published its comments on the Revised Discussion Draft under Action 6, Prevent Treaty Abuse.


A key test of whether the BEPS project can be a success is whether it will result in the inclusion of effective anti-abuse provisions in all tax treaties, not only prospectively, by formulating suitable provisions in the model treaty, but also more directly and quickly, by inclusion of such provisions in the proposed Multilateral Convention (MC), which aims to amend existing treaties.

The RDD proposes a ‘simplified’ limitation of benefits (LoB) provision, and as a minimum standard either (i) a combination of a principal purpose test (PPT) and an LoB provision, or (ii) a PPT provision alone, or (iii) an LoB rule plus some mechanism for dealing with conduit arrangements which are not already covered by other treaty provisions. However, the LoB provision is stated as only a bare outline with a direction to include whatever wording each pair of negotiating states can agree, while the full detailed wording of an LoB article is only in the Commentary, for use by states which prefer not to include a PPT provision.

This approach has exacerbated the concerns we expressed on the previous draft, that it would make it harder for small developing countries to conclude suitable treaties, and result in a kaleidoscope of different provisions, very likely leaving a continued scope for treaty shopping and increasing complexity for tax authorities as well as tax payers.

Furthermore, the RDD does not discuss how such provisions might be included in the MC, and the proposed ‘flexible’ format would make such inclusion difficult if not impossible.

Our comments also include a number of specific technical suggestions.

Comments on BEPS Action 7: Revised Discussion Draft on
Preventing Artificial Avoidance of Permanent Establishment Status

Under international tax rules, whether a foreign company can be taxed on profits earned from activities in a country depends on whether it has a Permanent Establishment (PE). Devised a century ago, this concept has become easy to avoid, and is clearly inappropriate for the post-industrial age. The BEPS Action Plan proposed only a relatively modest reconsideration of some aspects of the rules, although it should also be considered under Action 1 relating to the Digital Economy.

The BMG has now published its comments on the OECD Revised Discussion Draft, the latest and final proposals under this action point.

Summary of BMG Comments

We are concerned that this revised discussion draft (RDD) seems to have given too much weight to the quantity of comments received on the initial draft, failing to take into account that since the vast majority came from the same community of MNEs and their paid tax advisers, it is hardly surprising that they tend to agree. In particular the RDD picks out the comments which defended ‘the fundamental concept of the independence of legal entities’, without mentioning our submission pointing out that it flies in the face of business reality to claim that associated entities within a multinational corporate group operate as independent parties, a view which is supported by economic theory and practice, and by most independent commentators.

We welcome that nevertheless a majority of the Working Party agreed to the proposed anti-fragmentation rule, although it has been given very limited scope. Indeed, the Working Party has interpreted its mandate very narrowly, focusing essentially on commissionaire arrangements and sales-related activity, so that its proposals will only deal with a few types of corporate fragmentation, those related to delivery of goods to customers. The proposals on commissionaire arrangements leave unclear whether they will apply even to activities such as marketing, while failing to deal with many other types of functional fragmentation which facilitate BEPS.

The RDD does not deal at all with the reality of the modern world in which real value is created through scientific research and the development and testing of products and services, in continuous processes of innovation and improvement. This is not just a ‘digital economy’ issue. Spending on innovation is key to the success of many businesses today. This must be reflected in Article 5 with sufficient nuance that MNEs will not continue to undervalue for source countries the value that is truly created within their borders.

The report also does not deal with the key issue of attribution of profits, which has been deferred to be dealt with after the G20 deadline for the BEPS project, perhaps in conjunction with the continued work on the Digital Economy. The weakness of these proposals is confirmed by the introduction by some OECD countries (e.g. Australia, UK) of unilateral measures to tax ‘diverted profits’. Developing countries should also take measures to protect their tax base, e.g. through withholding taxes on fees for services, but these are blunt instruments (applying to gross payments rather than profits). An internationally coordinated approach would clearly be far better both for business and revenue authorities.

The BEPS project is in our view seriously weakened by this failure to reconsider the permanent establishment concept to provide a definition of taxable presence more suited to the 21st century.

Limitation of Interest Deductions

We have now published our submission in response to the consultation on BEPS Action Point 4 Interest Deductions.


We warmly welcome the proposals in this report, which could greatly reduce the opportunities for tax avoidance by multinationals using internal financial structures to reduce their taxes artificially by inflated deductions of interest from taxable profits. We support its main proposal, that countries should introduce a limit on such interest deductions based on the consolidated net interest expense of the whole multinational corporate group to third parties, apportioned to each group member according to its earnings before tax, interest, depreciation and amortisation (EBITDA). However, we also make some comments and suggestions.

Firstly, more attention should be paid to the problem of divergence between the standards for financial accounting and those for taxation. Since consolidated financial statements will at least initially be used, we suggest that companies should be required to identify and adjust for any material differences caused by inconsistent financial accounting rules and differing accounting and tax treatments of significant items, at both the group and entity levels. Any allocation of net interest expense based on group accounting must be based on data drawn from the consolidation process where (i) all intra-group transactions have already been eliminated from consideration and (ii) the accounts of subsidiary entities have, if necessary, been restated from the local accounting standards to those of the group financial statements. In the longer term, we strongly urge the OECD to work on the development of an international standard for tax accounting for such purposes, which could build on the work already done in the EU’s Common Consolidated Corporate Tax Base.

Secondly, it should be recognised that the adoption of any allocation rule entails a move away from the separate entity principle, but in this case only in relation to charging for costs. As we noted in our response to the report under AP10 on Low Value Added Services, which also proposed an apportionment method, many tax authorities, especially in developing countries, may be reluctant to accept an apportionment method for joint costs, as they can be used to reduce taxable profits in source countries. We nevertheless support an apportionment approach in general, since it is in line with business reality, and results in rules which are much easier to administer. In the case of interest, we support a cost apportionment since (i) allocation based on earnings reflects economic activity and hence to some extent benefit; and (ii) evidence shows that this method would restrict interest deductions to a level which will normally be well below that resulting from the interest cap or thin capitalisation rules that countries currently apply.

However, as we have argued in several submissions, we would generally favour a move to more comprehensive profit apportionment solutions. Hence, we strongly encourage the systematisation and expanded use of the profit split method, which fairly and easily apportions both costs and revenues. This would be the most effective way to achieve the aims of the BEPS project as laid down by the G20 leaders, to ensure that multinationals are taxed ‘where economic activities take place and value is created’.

Transfer Pricing Aspects of Cross-Border Commodity Transactions

We have now published our submission to the consultation on BEPS  Action Point 10 Transfer Pricing Aspects of Cross-Border Commodity Transactions.


Consideration of the so-called Sixth Method of transfer pricing adjustment for commodities, as used in a number of countries especially in Latin America, is important. However, in our view this report misunderstands the method and the reasons for using it, and its proposals are inappropriate.

The Sixth Method has been adopted by a number of developing countries because it has a number of advantages, but they have also in practice experienced difficulties applying it. Its advantages are that since many commodities are traded on public exchanges, a quoted price can provide a clear and relatively objective point of reference. Hence, it can provide a basis for rules which are easy to administer and do not involve either subjective judgment or detailed examination of facts and circumstances.

However, this does not mean, as the report suggests, that such a quoted price can be used as a ‘comparable uncontrolled price’ (CUP) to adjust the terms of transactions within a multinational corporate group. Independent parties trading commodities settle their agreements in open markets and generally based on future prices, which is quite different from transactions between related parties within large corporate groups. These are generally vertically-integrated, so that the commodity is transferred to the related party for processing and perhaps eventual use in manufacturing; or they are large diversified commodity traders and brokerages. Transfers within such large integrated corporate groups cannot be regarded as in any way equivalent to transactions between unrelated parties, and should not be regarded as the starting point.

The report points to some of the many factors to be taken into account in comparing a quoted price with the actual relationships between a commodity producer and the rest of the MNE group. In our view, these many differences mean that the aim should not be to conduct an exhaustive and detailed comparability analysis of all the contracts involved to arrive at the ‘correct’ price. This would undermine the main advantage of the Sixth Method, which is to provide a clear and objective standard, which is easy to administer.

We suggest that quoted prices should be used as a guide, taking into account the comparability factors mentioned in the report (and others), on the basis of which the tax authority should establish a benchmark price. Such a price should be one that results in an appropriate level of profit for the affiliate based on its activities in the country, and taking into account the value it creates for the MNE as a whole. This includes the benefits of providing a source of supply combined with the management of stocks and of ultimate delivery, and access to raw materials which is a type of location-specific advantage.

Report on Transfer Pricing and the Use of Comparables

We are today publishing our BMG Submission to OECD on Transfer Pricing Comparability Data and Developing Countries . This is our response to the OECD Report on this subject of 11th March 2014, prepared at the request of the G20.


In our view, the Report is disappointing. It is inadequate and unhelpful for developing countries. The Report:

  • assumes that developing countries should use transfer pricing methodologies which have been found deficient even by OECD countries, and are currently being revised, especially through the project on Base Erosion and Profit Shifting (BEPS);
  • prioritizes the use of comparables, although these methods have been shown to be deficient in both theory and practice, especially for developing countries;
  • obscures the real problem, which is not the absence of data but lack of appropriate comparables, due to the integrated nature of multinational firms;
  • fails to provide any information about what databases are available, or an evaluation of whether or how the data that they provide is supposed to be helpful for the purposes of auditing transfer pricing;
  • encourages developing countries to use methods which are likely to require case-by-case negotiation to ameliorate the fundamental deficiency of data without acknowledging the asymmetries of knowledge and power between developing country tax administrations and both tax advisers and developed country tax administrations; and
  • provides only a superficial consideration of alternatives to the use of comparables.

In our view methods based on either comparable prices or comparable profits are unsuitable for developing countries, and likely to lead to either over- or under-taxation, because:

  • the lack of appropriate comparables means that appropriate assessments require detailed examinations, specialist knowledge, and subjective judgment;
  • such assessments are time-consuming, and require skilled specialists, who developing countries find it hard to recruit and retain;
  • the subjective judgments involved leave officials open to undue pressures and temptations to corruption;
  • relying on data-bases can result in the use of inappropriate comparables, which may become generalized as firms also rely on them to avoid disputes;
  • conversely, the adoption of aggressive adjustments by officials, which may also result from performance incentives, resulting in counter-claims by firms, can lead to an adversarial culture, and sometimes excessive litigation;
  • the subjective and often arbitrary nature of adjustments based on comparables makes it hard to resolve conflicts if they arise between states other than by equally discretionary bargaining.

Our recommendations are that developing countries should:

  • learn from the mistakes of the OECD countries, and build on their own experience, for example the `sixth method’, or the Brazilian approach;
  • anticipate rather than await reforms likely to result from initiatives to combat BEPS, such as country-by-country reporting;
  • establish methods which are clear, transparent and easy to administer without the need for significant ad hoc investigation or subjective judgment;
  • coordinate transfer price scrutiny with other anti-avoidance measures such as denial of deductions for inappropriate payments to related entities.