Latest from the U.S. on Five of the OECD BEPS Action Items

Robert Stack, deputy assistant secretary for international tax affairs with the U.S. Treasury, gave an update on several items in the OECD’s project to combat base erosion and profit shifting at the American Bar Association Section of Taxation’s May meeting. As reported more fully by Transfer Pricing Report’s Kevin Bell, Stack, the U.S. delegate to the OECD’s Committee on Fiscal Affairs, had the following to say about the OECD’s  BEPS work on intangibles, hybrid mismatch arrangements, country-by-country reporting, treaty abuse and the digital economy:

1. The U.S. probably will succeed in having a portion of the revised discussion draft on intangibles pulled out for recirculation–the section on which member of a multinational enterprise should be entitled to the intangible-related returns. Stack said the issue, which contemplates a “cash box” scenario, where a company in a low-tax jurisdiction has capital and takes on risk but conducts no activities, is the biggest issue in the intangibles project. The U.S. takes the view that wherever the cash is, at whatever rate applies, the entity is entitled to an arm’s-length return, and the debate should be about whether an equity return or a debt return is proper. Other countries argue that because multinationals are linked together, there can be some application of the arm’s-length standard–an application Stack said he is unable to articulate–“that permits you to give a zero return to that cash box.”

 2. The U.S. probably will be able to raise the related-party threshold, currently at 10 percent ownership, under the hybrid discussion draft. Much of the debate on hybrid mismatch arrangements centers on whether to take a top-down approach to curbing some types of hybrid arrangements, which could apply to any debt instrument that is held cross border, or a “bottom-up” approach, which would apply only to instruments held between related parties, including parties acting in concert, and to hybrid financial instruments entered into as part of a “structured” arrangement. Stack said the U.S. did not favor the top-down approach “but other countries did, and it took us months to get them off it.”

 3. Working Party No. 6 has yet to debate how multinational companies will share their country-by-country reporting templates with tax authorities. Stack said the big question in country-by-country reporting–one that Working Party No. 6 has not yet thought through–is whether a U.S. multinational would give its template to the Internal Revenue Service so the government can share it under the relevant U.S. treaty, which is subject to confidentiality rules, or follow some other process for sharing the information. The U.S., he said, favors the treaty approach because it gives protection.

 4. The U.S. will make a reservation to the OECD Model Tax Treaty if a “main purpose” clause is added to the model. The U.S. prefers its limitation-on-benefits approach “because it has standards. And, good or bad, at least it is looking for trades and businesses, and the right kind of ownerships.”

 5. There is little support among members of the digital economy tax force for adopting a virtual permanent establishment. As an income tax matter, proposals to create virtual PEs and a “significant digital presence” test raise enormous difficulties–“not necessarily finding the revenue, but finding the deductions.”  The task force may spend more time writing and thinking about the PE nexus issues, and also the data issues, “including more analysis about network effects.” In the context of discussions about digital transactions, Stack cited more interest in work on value-added tax.

Molly Moses, Managing Editor, Transfer Pricing Report