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Actions 5 and 6 are two of the Actions which will have an influence on companies using Cyprus. Below you will find some more details of the measures discussed in the interim reports.
Action 5 – Countering harmful tax practices
Action 5 of the OECD BEPS project committed the OECD’s Forum on Harmful Tax Practices (FHTP) to revamp the work previously done by the OECD on harmful tax practices of countries. In this regard, the FHTP is to deliver three outputs:
(i) a review of member country preferential regimes
(ii) a strategy to expand participation to non-OECD member countries
(iii) consideration of revisions or additions to the existing framework for analysing whether regimes are harmful
The interim report on Action 5 (the Harmful Tax Practices Report) discusses the progress on the first output. The work of the FHTP focused on:
(i) designing a substantial activity test for any preferential regime and
(ii) on improving transparency between tax administrations related to the existence and mechanics of preferential regimes, such as by mandating compulsory spontaneous exchange of information on rulings related to preferential regimes.
The second and third outputs are expected by September 2015 and December 2015, respectively.
In the review of preferential regimes, the FHTP concentrated first on intellectual property (IP) regimes. It suggested that a “nexus approach” would be most appropriate when determining whether the substantial activity test is met. Under this approach the application of an IP regime would be dependent on the level of R&D activities carried out by the taxpayer.
Only patents and other IP assets that are functionally equivalent to patents would qualify, if those IP assets are both legally protected and subject to similar approval and registration process, where such processes are relevant. Marketing related IP assets, such as trademarks, would not qualify for tax benefits under an IP regime.
Discussions of the approach are continuing. In the next stage the FHTP will evaluate all existing IP regimes of OECD and associated countries to determine whether or not they require “substantial activity.” In addition, the approach that will ultimately be agreed on will need to be extended to tax regimes not related to IP.
With respect to the goal of improving transparency, the FHTP developed a framework for compulsory spontaneous exchange of information by tax administrations on taxpayer-specific tax rulings and Advance Pricing Agreements (APAs). The framework would require rulings (or summaries of such rulings) on preferential regimes that meet certain criteria to be exchanged spontaneously with the competent authorities of the tax jurisdictions involved.
The framework also deals with questions such as time-limits, legal basis, confidentiality and the type of information to be exchanged. An ongoing monitoring and review mechanism, including annual review by the FHTP, will be put in place to ensure countries’ compliance.
Note: For more detailed information please read the OECD publication “Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance” by clicking here.
Action 6 – Preventing the granting of treaty benefits in inappropriate circumstances (treat abuse)
The draft recommendations under Action 6 (the Treaty Abuse Report) reflect the recommendations made as part of the discussion draft published on 14 March 2014 (the Treaty Abuse Discussion Draft). The Treaty Abuse Report includes proposals to:
(i) Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances.
(ii) Clarify that treaties are not intended to be used to generate double non-taxation.
(iii)Provide tax policy considerations for contracting states to consider before entering into a tax treaty with another country.
To prevent the granting of treaty benefits in inappropriate circumstances, particularly through treaty shopping arrangements, the report recommends the inclusion of anti-abuse rules in the OECD Model Tax Convention.
The report includes:
(i) a “limitation on benefits” (LOB) provision, and
(ii) a general anti-abuse rule, based on the principal purposes of transactions or arrangements (a principal purpose test or “PPT” rule)
The Treaty Abuse Report acknowledges that the adoption of both the LOB and PPT rules, together, might not be appropriate for all countries. Therefore, the report suggests that as a minimum, countries should:
(i) affirm through an express statement in their tax treaties that they intend to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance; and
(ii) adopt either (i) the LOB and the PPT rules, (ii) the PPT rule, or (iii) the LOB rule supplemented by a mechanism (such as a restricted PPT rule applicable to conduit financing arrangements or domestic anti-abuse rules or judicial doctrines that would achieve a similar result) that would address conduit financing arrangements not already addressed in tax treaties.
The Treaty Abuse Report also adds a proposed change to the OECD Model Tax Convention addressing the availability of treaty benefits to collective investment vehicles (CIVs) and other funds. It further states that there is more work to be done in this area.
Note: For more detailed information please read the OECD publication “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances” by clicking here by clicking here.
