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BASE EROSION PROFIT SHIFTING (BEPS)

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BASE EROSION PROFIT SHIFTING (BEPS)

Paul Fay, Head of Property Tax, Crowe Clark Whitehill

Recent years has seen significant media coverage of the tax affairs of large multinationals and particularly concerns over whether they are able to artificially shift profits to low tax jurisdictions.

The tax rules in nearly all jurisdictions are very complex and largely evolved in a pre digital economy era.  Domestic tax laws are not necessarily coordinated across different territories, and have not kept up to date with commercial developments, potentially opening up opportunities for international groups to move profits to territories where they face lower tax rates. It has been estimated that cross border tax planning activities by multinationals costs governments between US $100-240 billion a year.

In response to these concerns, the Organisation for Economic Co-operation and Development (OECD) last October published their recommendations in relation to Base Erosion and Profit Shifting (BEPS). The OECD’s findings run to some 2000 pages and represent a major change to the international corporate tax landscape. The changes are likely to affect all corporate groups that work cross border.

The OECD’s findings are set out in the form of 15 Actions which aim to minimise profit shifting through a variety of methods. Detailed consideration of the full recommendations is outside the scope of this article but some of the key issues addressed include.

  • Hybrid mismatches: differences between tax systems in the various countries make it possible to design structures that give a tax deduction in one territory with no corresponding income in the other, or multiple tax deductions. These arrangements will be addressed.
  • Interest deductions: to prevent using interest flows to artificially depress taxable profits, the OECD is recommending that interest deductions should be restricted to a proportion of Earnings Before Interest Tax Depreciation and Amortisation (EBITDA). The suggested proportion is in the range 10-30%.
  • Treaty abuse: double tax treaties will include new tests to ensure they are not being used to aid avoidance. This is likely to include purpose tests and/or limitation of benefits rules, with a view to ensuring that treaty reliefs are focussed on genuine commercial situations.
  • Permanent Establishments: there are significant changes to the definition of what constitutes a taxable presence. Under current law, where a company has a branch in another territory it is generally only taxable in that other country where it has the power to conclude contracts. It is proposed that this is extended to include scenarios where the overseas branch habitually pays a principal role leading to the conclusion of contracts. The tests on whether storage facilities or preparatory activities give rise to a taxable presence are also tightened.
  • Intangibles and Transfer Pricing: intangibles is a difficult area. It is often difficult to value intangibles or to say where they belong, particularly where they have been developed across a number of territories. There is a proposed focus on which entities develop, enhance, manage, protect and exploit the assets rather than who legally owns them, with the conduct of parties more important than the contractual arrangements. This could significantly affect arrangements where intangibles have been put into low tax jurisdictions, but little real development or management is done there.

In relation to management charges, the OECD has made a distinction between low value services which are of a supportive nature, not part of the core business, do not recognise the use of unique and valuable intangibles or do not involving the assumption or control of substantial or significant risk. These services could fall within ‘safe harbour provisions’ and a 5% mark-up could be applied. For high value services which drive the business strategically and tactically a more objective decision will need to be made about how to value them.

In the UK, this will apply for accounting periods commencing on or after 1 January 2016 with the first information due on 31 December 2017. Groups with turnover of more than £750 million will be caught. UK subsidiaries of such groups will be required to provide their share of the information.

These are major changes which will affect many corporates. Those affected should be considering their impact at an early stage.

Finance

Sterling gets vaccine boost to hit 8-month high vs euro

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Sterling gets vaccine boost to hit 8-month high vs euro 1

By Joice Alves

(Reuters) – Sterling rose to a fresh eight-month high against the euro on Wednesday as Britain’s faster COVID-19 vaccine rollout than in the European Union offered support to the pound.

Although Britain’s deaths from the coronavirus pandemic passed 100,000 on Tuesday, its faster initial vaccine rollout has fuelled hopes for economic recovery.

Sterling was up 0.3% at 88.28 pence at 1049 GMT, after hitting a fresh eight-month high of against the single market currency.

Graphic: Sterling 27 Jan, https://fingfx.thomsonreuters.com/gfx/mkt/jbyvrnbbbve/Sterling%2027%20Jan.png

Geoffrey Yu, senior EMEA market strategist at BNY Mellon, said “the general theme of UK doing well with vaccinations is playing a role” in lifting the pound, which is “not expensive and not over-owned yet”.

On the other hand, “the euro is clearly being undermined by ongoing concerns over vaccine rollout speed and supply,” Yu added.

Versus the greenback, sterling was flat at $1.3736, not far off a May 2018 high of $1.3759 touched earlier.

Hopes for a large U.S. fiscal stimulus package has fuelled risk sentiment in markets in recent weeks, benefiting sterling. Market participants are expecting Federal Reserve Chair Jerome Powell to renew a commitment to ultra-easy policy.

“It’s FOMC today so the adjustment in dollar positions may be playing a role as well,” Yu said.

As Britain left the bloc in December, the City of London said the capital’s loss of some financial business due to Brexit has not been catastrophic and it will thrive even if the European Union “irrationally” blocks access.

“For now Sterling continues to trade more on hope, vaccines, than current reality,” said Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets.

(Reporting by Joice Alves in VARESE, Italy. Editing by Alexander Smith and Andrew Cawthorne)

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Dollar advances as investors shy away from risk

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Dollar advances as investors shy away from risk 2

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – The dollar edged higher against a basket of currencies on Monday, as a burst of volatility in stock markets around the globe sapped investors’ appetite for riskier currencies.

Concerns over the timing and size of additional U.S. fiscal stimulus sent major U.S. stock indexes briefly more than 1% lower before they recovered to trade little changed on the day.

The sharp move in stock markets soured FX traders’ appetite for risk, Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto, said.

“Your high beta currencies – currencies that are highly correlated with equity markets and global risk appetites – are tumbling in synchrony with equity indexes,” Schamotta said.

Market sentiment turned more cautious at the end of last week as European economic data showed that lockdown restrictions to limit the spread of the coronavirus hurt business activity.

The U.S. Dollar Currency Index was 0.19% higher at 90.396, after rising as high as 90.523, its strongest since Jan. 20.

The euro was down around 0.28% against the dollar. German business morale slumped to a six-month low in January as a second wave of COVID-19 halted a recovery in Europe’s largest economy, which will stagnate in the first quarter, the Ifo economic institute said on Monday.

The Australian dollar – seen as a liquid proxy for risk – was 0.16% lower against the dollar.

U.S. stocks have scaled new highs in recent sessions even as concerns about the pandemic-hit economy remain. Investors are trying to gauge whether officials in U.S. President Joe Biden’s administration could head off Republican concerns that his $1.9 trillion pandemic relief proposal was too expensive.

Despite the dollar’s recent rebound – the dollar index is up about 1.3% since early January – analysts expect a broad dollar decline during 2021. The net speculative short position on the dollar grew to its largest in 10 years in the week to Jan. 19, according to weekly futures data from CFTC released on Friday.

The U.S. Federal Reserve meets on Wednesday and Chair Jerome Powell is expected to signal that he has no plans to wind back the Fed’s massive stimulus any time soon – news which could push the dollar down further.

Sterling strengthened on Monday against the weaker euro as Britain’s COVID-19 vaccine rollout over the weekend offered support to the British currency.

(Reporting by Saqib Iqbal Ahmed; Editing by Andrea Ricci and Sonya Hepinstall)

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London and New York financial services treated the same, EU says

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London and New York financial services treated the same, EU says 3

By Huw Jones

LONDON (Reuters) – An EU forum for discussing financial services with Britain will be similar to what the United States has, and it must be in place before market access will be considered, the bloc’s financial services chief said on Monday.

Britain’s Brexit trade deal with the EU from Jan. 1 does not cover financial services, leaving its City of London financial center largely cut off from the EU.

Both sides are committed to creating a forum for financial regulatory cooperation by March, but talks have not started yet, the EU financial services commissioner told the European Parliament.

“What we envisage for this framework is similar to what we have with the United States, a voluntary structure to compare regulatory initiatives, exchange views on international developments and discuss equivalence related issues,” Mairead McGuinness told the European Parliament.

U.S. and EU regulators took about four years just to agree on rules on cross-border derivatives.

Trading in euro shares has already left London, along with a chunk in swaps trading. That questions the value of any future EU access given that many banks and trading platforms from the UK have opened units in the bloc.

McGuinness said regulatory cooperation will not be about restoring market access that Britain has lost, nor will it constrain the EU’s unilateral equivalence process.

Equivalence refers to EU access when Brussels deems a non-EU country’s rules are similar enough to the bloc’s.

“Once we agree on our working arrangements, we can turn to resuming our unilateral equivalence assessments… using the same criteria as with all third countries, including anti-money laundering and taxation cooperation,” she said.

Britain plans to amend some EU rules.

“The United Kingdom intention to diverge requires a case-by-case discussion in each area. Equivalence and divergence are polar opposites,” McGuinness said.

“I am optimistic that over time, through cooperation and trust, we will build a stable and balanced relationship with our UK friends.”

(Reporting by Huw Jones; Editing by Dan Grebler)

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