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US Inbound: BEPS roundup: Developments and US views

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Jim Fuller


David Forst

Robert Stack, the US Treasury Department's deputy assistant secretary for international tax affairs, provided a recent update on the status of various BEPS projects. He stated that as an overarching principle, it is important the product of the BEPS project be "clear and straightforward rules rather than something subject to, and susceptible to, lots of interpretations". The digital economy report (Action Plan, Action 1) to be released in September will feature a discussion of the various business models in the digital space, stated Stack, including a study of the value drivers in digital businesses. However, the report will not propose a fundamental new tax regime for the digital economy. Stack explained that the digital economy taskforce examined whether it was possible to set up separate rules for the digital economy that would set it apart from the traditional economy. The group concluded that the world is digital, the economy is digital, and you really cannot hive off the digital economy from the rest of the economy as a basis for setting up some kind of fundamentally new tax regime. This is encouraging since existing tax rules are easily adaptable to transactions conducted over the internet, and the internet should not be used as a pretext to rewrite these rules. Some of the digital economy work will be pushed into 2015.

Work is also moving along regarding hybrid mismatch arrangements and the recommendations will cover both instruments and entities. According to Stack, this is an area where the working group hopes to come to a consensus to get countries to agree on coordination rules.

Action 4's focus on base erosion using interest deductions represents a large concern for countries around the world, according to Stack. He said this is an area in which countries have a common interest in minimising base stripping. Current work involves identifying what is doable in this area and what parts should be left aside for the longer term.

Stack stated that the report on treaty abuse may not reach a consensus, but there has been a lot of discussion. The US will not agree to put a main purpose test in its treaties. The Senate rejected this approach some years ago. However, Stack stated that it is likely the test will start to show up in treaties between other jurisdictions.

Transfer pricing

The main points of interest for the US in transfer pricing under Actions 8, 9, and 10 are that there be respect for legal entities and contracts unless there are unusual circumstances, and that value be attributed to the place where the functions, assets and risks are located and performed. Stack stated that the US has worked really hard to make the arm's-length principle well-articulated and clear. The US, however, is willing to look at situations that are being called 'special measures' that could preclude unacceptable policy results. The OECD's work in this area bears close scrutiny by the tax community since the implementation of a 'special measure' would almost certainly be a deviation from the arm's-length principle (otherwise, it wouldn't be 'special'). Work on these BEPS actions is likely to be the most difficult work for 2015.

Stack stated that the US has been very successful regarding transfer pricing documentation under Action 13 in convincing others that for risk assessment, you can have less data. He said the US is trying to ensure that companies are able to do the documentation and that the information would be shared by the IRS under its treaty network or through treaty exchange agreements. Stack said the US wants to have some kind of mechanism to withhold information from countries if they are misusing the information. The US wants the panel to make sure this is a risk assessment tool and not a back-door way to formulary apportionment.

The Senate Finance Committee held a hearing on June 22 to consider the need for comprehensive tax reform, including BEPS. Senator Hatch (R-Utah) expressed a concern that BEPS could be used by other countries to increase taxes on US taxpayers, and sought assurances from a US Treasury official (Bob Stack) and an OECD representative (Pascal Saint-Amans) who were present at the hearing that the US would not be rushed into accepting a "bad deal" just for the sake of reaching an agreement.

Jim Fuller (jpfuller@fenwick.com) and David Forst (dforst@fenwick.com)

Fenwick & West

Tel: +1 650 335 7205; +1 650 335 7274

Website: www.fenwick.com

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