tax update: eu substance and more - kpmghome.kpmg/content/dam/kpmg/im/pdf/eu...nov 16, 2018 · -...

1©2018 KPMG LLC and Isle of Man limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative “KPMG International”, a Swiss entity.

1

Tax update: EU substance and more

Claremont Hotel

16 November 2018

Agenda

BEPS and beyond Robert Rotherham

EU Substance: IOM David Parsons and John Riva

Q&A


BEPS and beyond . . .


BackgroundBEPS project

National economies and markets integrating at rapid speed

International tax rules struggling to keep up

Media focused attention on cross-border tax affairs of MNEs – moved higher

on political agenda

BEPS was OECD’s response. BEPS designed to:

- introduce greater coherence in domestic rules affecting cross-border

activities;

- reinforce substance requirements in existing international standards; and

- improve transparency

Now well into implementation stage


BEPS – Fifteen Point Action Plan

Action

1. Addressing the tax challenges of the

digital economy

2. Neutralise the effects of hybrid mismatch

arrangements

3. Strengthen CFC rules

4. Limit base erosion via interest

deductions/other financial payments

5. Counter harmful tax practices more

effectively taking into account

transparency and substance

6. Prevent treaty abuse

7. Prevent the artificial avoidance of PE

status

8. Assure that TP outcomes are in line with

value creation: Intangibles

Action

9. Assure that TP outcomes are in line

with value creation: Risks/capital

10. Assure that TP outcomes are in line

with value creation: Other high-risk

transactions

11. Establish methodologies to collect and

analyse data on BEPS/actions to address it

12. Require taxpayers to disclose their

aggressive tax planning arrangements

13. Country by Country Reporting and

TP documentation

14. Make dispute resolution

mechanisms more effective

15. Develop a multilateral instrument


Isle of Man response to BEPSAction 5: Countering harmful tax practices

Aimed at improving transparency, specifically ensuring compulsory

exchange of information on certain tax rulings

Information pertaining to rulings granted in the following areas must be

exchanged with relevant overseas tax authorities:

- preferential regimes;

- cross-border unilateral APAs;

- downwards adjustment to profits;

- permanent establishments;

- conduit arrangements;

- any future areas identified by EU’s Forum for Harmful Tax Practices

ITD have exchanged details of past rulings and committed to exchange

details of future (post-1 April 2017) rulings within 3 months

Procedure has now changed in respect of requesting any ruling (i.e. not

just those in scope)


Isle of Man response to BEPSAction 6: Preventing treaty abuse

Aimed at restricting rights to treaty benefits to those intended to obtain

them – treaty shopping firmly within sights

IOM committed to ensuring all future tax treaties it enters into are BEPS

compliant, for example by:

- containing a preamble clarifying that it is not to be used to enable double

non-taxation or to facilitate evasion/ avoidance etc;

- including a limitation of benefits (“LOB”) provision and/or a principal

purpose test (“PPT”) clause

IOM has signed the Multilateral Instrument (“MLI”) which will amend

certain existing treaties, namely those (full DTAs) with: Estonia,

Luxembourg, Malta, Seychelles and Singapore (amends to preamble,

PPT, MAP)

Commitment to agreeing appropriate changes to other treaties which

cannot be modified by the MLI


Isle of Man response to BEPSAction 13: Country-by-country reporting

Only area in which substantive domestic legislation required

Rules apply for APs commencing on or after 1 January 2017

Reporting requirement applies to parent entity of MNEs with turnover

>€750m

Essentially a tool enabling wider visibility of TP risk areas

Notification requirement for all IOM resident consolidated subsidiaries of

MNEs – via the IOM CTR

First deadline drawing near!


Isle of Man response to BEPSAction 14: Dispute resolution

Aimed at strengthening the effectiveness of the Mutual Agreement

Process (“MAP”) contained within treaties

MAP provides mechanism for the resolution of disputes concerning the

application of treaties


Other developmentsUnilateral measures

UK’s (and Australia’s) Diverted Profits Tax

UK’s Digital Services Tax

EU initiatives

Anti Tax Avoidance Directive

Mandatory disclosure rules

Substance requirement – targeted at certain

jurisdictions . . .


11

EU Substance: IOM

16 November 2018

Agenda: Substance legislationBackground: the threat of EU

black-listing

The Proposal?

Substance Test

What do Isle of Man companies

need to do next?

What about other jurisdictions?

Q&A

Background: the threat of EU black-listing


• Provides a mechanism to evaluate Third Counties and see whether they should be

‘black listed’

• Should replace the ‘Tax haven’ EU list

• Criterion for listing is whether third country abides by the concept of “Tax Good

Governance”

• Three stage approach to listing:

1. Pre-assessment of all Third Country Jurisdictions to determine their risk of facilitating

tax avoidance, on the basis of a score card of "indicators".

2. Member States should agree on a short list of priority for Third Country Jurisdictions,

and launch the screening process and dialogue with these jurisdictions. Third

Country Jurisdictions should be screened against clear and intentional recognised

good governance "criteria". Other factors (including the level of development of the

Third Country) will also be taken into account.

3. Following the screening/dialogue process, the Commission will recommend which

Third Country Jurisdiction should be backlisted, and explain why. Member States

should endorse the final list in ECOFIN.

European Commission:External Strategy for Effective Taxation


Listing process - Screening criteria

1. Tax Transparency criteria

Isle of Man

Assessment

1.1 Must have committed, and started the legislative process, to

implement effectively the CRS, with first exchange in 2018

Must have in place effective exchange of information arrangements

with all Member States by 2017

As from 2018, must have at least a “largely compliant” rating by the

Global Forum with respect to CRS

1.2 Must have at least a “largely compliant” rating by the GF with respect

to OECD exchange of information on request

1.3 Must have ratified the OECD Multilateral Convention on Mutual

Administrative Assistance in Tax Matters

1.4 Future criterion: in line with international initiative on future global

exchanges of beneficial ownership information

?



2. Fair taxation

Isle of Man

Assessment

2.

1

The jurisdiction should have no preferential tax measures that could

be regarded as harmful according to the criteria as per the Code of

Conduct on Business Taxation

2.

2

The jurisdiction should not facilitate offshore structures or

arrangements aimed at attracting profits which do not reflect

real economic activity in the jurisdiction

x



3. Implementation of anti-BEPS measures

Isle of Man

Assessment

3.1 Initial criterion: jurisdiction should commit by the end of 2017, to the

agreed OECD anti-BEPs minimum standards and their consistent

implementation

• Addressing harmful tax practices

• Tax treaty abuse

• Country-by-Country reporting

• Improvement in cross-border tax dispute resolution

3.2 Future criterion: the jurisdiction should receive a positive assessment

for the effective implementation of the agreed OECD anti-BEPs

minimum standards. All members of the Inclusive Framework commit

to implementing the minimum standards and participating in peer

reviews.

?


Exchange of letters in November 2017

The charge:

- As a result of “de facto lack of substance requirements for entities doing business in or

through the Isle of Man….”, EU experts “have provisionally considered the tax system of

the Isle of Man as harmful”

The commitments:

- Introduce some form of legal substance requirements, where appropriate

- Introduce additional accounting and tax reporting obligations such that an appropriate

notification regime for entities that give rise to the risks and concerns identifying

Criterion 2.2 can ensure the collection and subsequent exchange of relevant information

within Member States

- Introduce legislation for the above by 31 December 2018


We are not alone – the 2.2 jurisdictions

• Anguilla

• The Bahamas

• Bahrain

• Bermuda

• BVI

• Cayman Islands

• Guernsey

• Jersey

• Marshall Islands

• Turks and Caicos Islands

• UAE

• Vanuatu

The Proposal


The Proposal

- Based on the EU Scoping Paper of June 2018

- Three stage approach:

1. Identify Isle of Man resident companies that derive income from a “relevant sector”

2. Impose substance requirements on affected companies

3. Enforcement of the substance requirement

- Timing:

1. Draft regulations published 6 November 2018 Income Tax (Substance Requirements)

Order 2018

2. Legislation must be in force on 31 December 2018, applicable to affected companies

accounting periods beginning on or after 1 January 2019

3. “First Level” Guidance Notes issued 6 November 2018. “Comprehensive” guidance

to be published “in due course”

Substance Test: Relevant sectors


Relevant sectors

Banking InsuranceFund

management

Financing &

leasing

Operation of a

holding company

(“pure equity”)

Shipping

HeadquarteringIntellectual

property holding

Distribution and

service centre

business


Relevant sectors: definitionsBanking: FSA deposit taking licence

Insurance: Insurance business authorised or permitted under Insurance Act 2008

Fund management: regulated activity of acting as manager to collective investment

scheme (or providing services to a manager)

Finance and leasing: provision of credit facility for consideration….

Pure equity holding company: as main function holds shares in another company and

which holds majority of voting rights/ right to appoint majority of Board (and performs no

other commercial activity)

Shipping: operation of ships in international traffic for income for transport of passengers/

cargo….

Headquartering: provision of services for foreign group entities which are material for

decision making in the group

IP holding: company which holds, exploits or receives income from IP assets

Distribution and service centre business: purchase of raw material or finished product

from foreign group company and resale, or provision of services to foreign group entities


Trust Structure

Trust

IOMHold

Co

IOM Co Property

Holding Co

IOM

Company

ABC Trust

Ltd

Interest Free Interest Bearing

Holding Company (pure equity)

Financing and leasing

Substance Test: requirements


Substance requirements (sectors other than pure equity holding)

For a company to have substance it must:

1. Be directed and managed in the Island

2. Conduct core income-generating activity in the Island (“CIGA”)

3. Have an adequate number of qualified employees in the Island, adequate expenditure

in the Island proportionate to level of activity carried on in the Island and adequate

physical presence in the Island

Each part must be passed

Although each part is a standalone test, they are all interlinked

The test is not a Transfer Pricing test


Substance requirements Pure equity holding

For a pure equity holding company to have substance it must:

1. Comply with its statutory obligations under Companies Act 1931/ 2006 or Foreign

Companies Act 2014; and

2. Have adequate people and premises for holding and managing the equitable interests

or shares

Note: no explicit directed and managed test….and no explicit CIGA requirements


Directed and managed in the Island

IOM resident relevant sector companies will be required to demonstrate that the company

is “directed and managed” in the IOM, as follows:

a) the company’s board of directors meets in the Island at an adequate frequency given

the level of decision making required

b) at such board meetings there is a quorum of directors physically present in the Island;

c) strategic decisions of the company must be set at meetings of the board and the

minutes must reflect those decisions;

d) the board of directors, as a whole, must have the necessary knowledge and expertise

to discharge its duties as a board; and

e) the minutes of all board meetings and the company records are kept in the Island.


Core Income Generating Activities in the Island - Law requires that the company conducts CIGA in the Island

- IOM CIGA means activities being carried on from within the Island

- The law then provides a list of activities for each relevant sector that may be

regarded as CIGA

- The list is not exhaustive

- Where CIGA is outsourced to another company, the relevant sector company must be

able to demonstrate that it has adequate supervision of the outsourced activity


CIGA – by sector (1)Fund Management relevant sector

- Taking decisions on the holding and selling of investments

- Calculating risks and reserves

- Taking decisions on currency or interest fluctuations and/or hedging positions

- Preparing regulatory or other reports for investors and regulators

Finance and Leasing relevant sector

- Agreeing funding terms

- Identifying and acquiring assets to be leased (in the case of leasing)

- Setting the terms and duration or any financing

- Monitoring and revising any agreements

- Managing any risks


CIGA – by Sector (2)Headquartering relevant sector

- Taking relevant management decisions

- Incurring expenditures on behalf of group entities

- Co-ordinating group activities

Shipping relevant sector

- Managing crew (including hiring, paying and overseeing crew members)

- Hauling and maintaining ships

- Overseeing and tracking deliveries

- Determining what goods to order and when to deliver them

- Organising and overseeing voyages


CIGA – by Sector (3)Banking relevant sector

- Raising funds

- Managing risks including credit, currency and interest risk

- Taking hedging positions

- Providing loans, credit or other financial services to customers

- Managing regulatory capital

- Preparing regulatory reports and returns

Insurance relevant sector

- Predicting and calculating risk

- Insuring or reinsuring against risk

- Providing client services


Intellectual Property Holding

- Research and development (rather than acquiring and outsourcing)

- Marketing, branding and distribution

- Taking strategic decisions and managing (as well as bearing) the principle risks related

to development and subsequent exploitation of the intangible asset

- Taking the strategic decisions and managing (as well as bearing) the principle risks

relating to the third party acquisition and subsequent exploitation of the intangible asset

- Carrying on the underlying trading activities through which the intangible assets are

exploited leading to the generation of revenue from third parties

Distribution and Service Centre Business relevant sector

- Transporting and storing goods

- Managing stocks and processing orders

- Providing consulting or administrative services

CIGA – by Sector (4)


“For each sector the proposed legislation provides a list of the core activities a company

operating in such a sector could carry on but it is not necessary for the company to perform

all of the CIGA listed in order to demonstrate substance. For example, a company that

holds a patent does not have to carry on the CIGA of marketing, branding and distribution

as well as the research and development.

Some companies may undertake or outsource all or part of an activity outside of the Island.

If that activity is not part of the CIGA this will not affect the company’s ability to meet the

substance requirement (for example, back office functions, such as IT support).

In addition, the substance requirement does not preclude companies seeking expert advice

or engaging the service of specialists in other jurisdictions. However, the income subject to

tax in the Island must be commensurate to the CIGA undertaken in the Island.”

Guidance Notes on CIGA


“The proposed legislation does not prohibit a company from outsourcing some or all of its

activity. Outsourcing, in this context, includes outsourcing, contracting or delegating to third

parties or group companies.

If some or all of the CIGA is outsourced, the company must be able to demonstrate that it

has adequate supervision of the outsourced activities and, to meet the substance

requirements, that those activities are undertaken in the Island.

Where a CIGA is outsourced the resources of the service provider in the Island will be

taken into consideration when determining whether the people and premises test is met.

However, there must be no double counting if the services are provided to more than one

company.

The company remains responsible for ensuring accurate information is reported on its

return and this will include precise details of the resources employed by its service

providers, for example based on the use of timesheets."

Guidance notes on “Outsourcing”


No Double Counting

IOM Company A IOM Company C

IOM Company D IOM Company B

IOM Company

Service Provider Provision of directors Provision of directors


“Adequate….”

A relevant sector company must ensure:

- there is an adequate number of qualified employees in the Island (whether or not

employed by it or by another person and whether on temporary or long-term contracts)

- it has adequate expenditure proportionate to the level of activity carried on in the Island;

- it has an adequate physical presence in the Island

The Assessor may issue Guidance….


“The proposed legislation refers to the term “adequate”. However, this term is not defined

and therefore has its ordinary meaning. The dictionary definition of “adequate” is:

“Enough or satisfactory for a particular purpose”

What is adequate for each company will be dependant on the particular facts of the

company and its business activity. A company will have to ensure it maintains and retains

appropriate records to demonstrate the adequacy of the resources utilised and expenditure

incurred.

Given the stringent regulatory requirements in the Island, which result in a significant

overlap with the substance requirements, it is expected that companies carry on banking,

insurance or fund management will already be operating with adequate resources and

expenditure. However, these companies will be subject to the proposed legislation (i.e.

filing requirements and monitoring by the tax administration).”

Guidance notes on “adequate”


Example: Holding company activities

Company A, an IOM resident company, holds the entire share capital of Company B.

Company A undertakes no other activity and receives (occasionally) dividends from

Company B.

Company A engages the services of ABC Trust & Company Limited (“ABC”), to provide

directors, corporate secretarial and general company administration services. ABC

provides two corporate directors, which meet once a year to consider existing investment in

Company B and agree Company A’s accounts together with AOB.

Two representatives of the corporate directors meet in the offices of ABC to hold this

annual board meeting.

Adequate People, Premises and Expenditure


Example: Finance Company

Finco was established in the IOM to provide financing to an internal group company. Two

local directors are appointed to the board. The individuals are also shareholders and sit on

the boards of all their IOM companies. The directors acting for Finco sign a loan agreement

with a related company requiring the related company to pay annual interest.

The directors do not formally meet, but they constantly monitor the interest payments and

sign the tax return. The company has never produced formal accounts but maintain

detailed records.

The directors do not charge for their services nor do they charge for administering the

company – these services are conducted by the Family Office.

Has Finco passed the Economic Substance Test?

Substance test: FinCo example


CIGA include

– agreeing funding terms

– identifying and acquiring assets to be leased (in the case of leasing)

– setting the terms and duration of any financing

– monitoring and revising any agreements

– managing any risks

Financing and leasing sector CIGA: reminder


Example: Finance Company

Finco was established in the IOM to provide financing to an internal group company. Two

local directors are appointed to the board. The individuals are also shareholders and sit on

the boards of all their Jersey companies. The directors acting for Finco sign a loan

agreement with a related company requiring the related company to pay annual interest.

The directors do not formally meet, but they constantly monitor the interest payments and

sign the tax return. The company has never produced formal accounts but maintain

detailed records.

The directors do not charge for their services nor do they charge for administering the

company – these services are conducted by the Family Office.

Has Finco passed the Economic Substance Test?

Substance Test: FinCo example

Substance Test: Sanctions


Sanctions: general

Failure to meet substance requirements

- Exchange of information

- Financial penalties (£10k/ £50k/ £100k)

- Ultimately strike-off

Avoidance

- Exchange of information/ penalties

- Fraudulent avoidance: custody…

In all cases Assessor can mitigate penalties

Note: for High Risk IP, exchange happens regardless of meeting substance test and

penalties start at £50k


Sanctions: Exchange of information

- Where the Assessor determines that a company has not met the substance

requirements, the Assessor must provide information obtained from the Income Tax

return to the appropriate competent authority

- The appropriate competent authority(ies) is the authority in the EU in which resides:

- The immediate holding company of the relevant company

- The ultimate holding company of the relevant company

- The ultimate beneficial owner of the relevant company; and

- If the relevant company is not incorporated in the IOM, the competent authority of

where it is incorporated

- For High Risk IP company, the information contained in the income tax return must be

exchanged to the above authorities irrespective of whether or not it has failed the

Substance Test

©2018 KPMG LLC and Isle of Man limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative “KPMG International”, a Swiss entity.

This presentation is made by KPMG LLC, the Isle of Man member firm of KPMG International, and is in all respects subject to

negotiation, agreement, and signing of a specific engagement letter or contract that includes KPMG's Standard Terms and

Conditions. It is also subject to satisfactory client and engagement acceptance procedures, including independence and confli ct of

interest checks

© 2018 KPMG LLC, an Isle of Man limited liability company and a member firm of the KPMG network of independent member firms

affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

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tax update: eu substance and more - kpmghome.kpmg/content/dam/kpmg/im/pdf/eu...nov 16, 2018 · -...

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