CHAPTER 5 SHIFTING INTERNATIONAL TAX LAWS - NEW EXPOSURES AND RISKS FOR INTERNATIONAL TRANSACTIONS
| Jurisdiction | Derecho Internacional |
SHIFTING INTERNATIONAL TAX LAWS - NEW EXPOSURES AND RISKS FOR INTERNATIONAL TRANSACTIONS
Cuatrecasas
Madrid
Barton Bassett
Morgan Lewis
San Francisco
Ana Luiza Martins
Tauil & Chequer in association with Mayer Brown
São Paulo
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ANTONIO BARBA DE ALBA is a partner with the law firm of Cuatrecasas, in Madrid. He provides tax advice with special inclination to the international area. Periodically, he provides legal and tax advice to Spanish companies in their investments abroad and also to foreign companies in their investments in Spain. He also has extensive experience in tax advice inherent to complex international financing projects, such as construction and management of BOT modality projects (desalination, electrical installations, highways, transmission lines, etc.) and the acquisition of assets (mainly, ships, airplanes, renewable energy assets).
BARTON W. S. BASSETT is a partner with Morgan Lewis in San Francisco. He counsels Silicon Valley-based and global multinational technology companies on international tax planning for the outbound operations of US companies doing business abroad, and for the inbound operations of foreign companies seeking to do business within the United States. Barton advises clients on structuring mergers and acquisitions (M&A), internal restructurings and operations, joint ventures, external and internal financings, and transfer pricing matters, including the transfers and licenses of intellectual property (IP).
ANA LUIZA MARTINS is a partner in the Tax practice of Tauil & Chequer Advogados in the São Paulo office. Ana Luiza has a large experience in tax consulting and litigation before the Brazilian High Courts of Justice. Among her clients are national and international companies pertaining to various industry sectors, such as consumer goods, hospitality and leisure, goods and services, infrastructure, pharmaceutics and technology (telecom). Ana Luiza started her career in 1997 as member of the Tax practice of Gouvêa Vieira Advogados. In 2000, she joined Veirano Advogados to work with Guido Vinci, a founding partner of the Tax department of such firm. In 2007, she joined Campos Mello Advogados as a senior associate focused in tax litigation and strategic consulting, becoming a partner in January 2011. In October, 2015, Ana Luiza joined Tauil & Chequer as a partner based in São Paulo. During her career, Ana Luiza represented multinational companies, mainly North American, Italian and French, and prominent Brazilian companies, including those listed in the stock market, having sponsored causes and argued before the highest courts and tax administrative bodies of Brazil, including STF (Federal Supreme Court), STJ (Justice Supreme Court) and CARF (Administrative Counsel of Fiscal Resources).
Introduction
The exploration, extraction, processing, and delivery of mineral and energy resources is inherently international in scale. Natural resource projects frequently implicate a wide range of cross-border transactions that, as a result, attract a complex range of tax implications. From initial investment to exit, the lifecycle of a natural resource project is typically fraught with a myriad of complex tax issues. During the past six years the tax profile for international natural resource projects has increased in complexity as the world has embraced a new set of international tax principles.
In 2013 the G20 nations and the Organization for Economic Co-operation and Development ("OECD")1 embarked on an project to rewrite the international tax principles with the stated goal of neutralizing "Base Erosion and Profit Shifting" ("BEPS"). Following the release of the report Addressing Base Erosion and Profit Shifting2 in February 2013, the OECD and G20 countries adopted a 15-point "Action Plan" to address BEPS. Under the Action Plan the OECD worked towards finalizing 15 Action reports. The final package of BEPS Action reports was released by the OECD in May of 2015.
Two of the stated goals of the Action Plan were to ensure that international and domestic tax rules do not allow or encourage multinational enterprises from reducing overall taxes by artificially shifting profits to low tax jurisdictions, and to ensure that profits are taxed where the economic activities generating such profits are performed and value created.
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The BEPS package introduced a broad range of fundamental changes to the international tax rules in the form of guidelines for changes in local country laws and international tax treaties. The BEPS package is designed to be implemented pursuant to changes in domestic law and administrative practices, and through the amendment of existing tax treaties. While it may take a number of years for the majority of recommendations to be fully implemented (through local country legislation), many provisions have been fast-tracked by various jurisdictions and have already been adopted. The BEPS proposed changes to international tax treaties have seen more rapid adoption with the passage of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the "MLI"), which entered into force on July 1, 2018.
The changes to the international tax principles and international tax treaties ushered in under the BEPS package warrant careful consideration by the natural resources industry. Changes, both implemented and pending, may require immediate action by businesses to come into compliance to avoid adverse tax consequences. This paper provides a general overview3 of the BEPS project and summarizes select BEPS proposals that are likely to impact the natural resources industry. The article then turns to highlight a number of recent tax law changes in Brazil, Spain, and the U.S., as well as a number of select issues in Latin America and Europe; discussing how recent law and policy changes in these jurisdictions relate to the OECDs efforts to combat BEPS.
OECD Introduces a New Framework for International Tax Standards
In June of 2013 the OECD's Committee on Fiscal Affairs approved the Action Plan on Base Erosion and Profit Shifting4 (the "Action Plan"), which was subsequently endorsed by the G20 Finance Ministers during their July 2013 meeting, and then formally endorsed by the G20 leaders at their September 2013 meeting in Saint Petersburg. By adopting the Action Plan the G20 and OECD member states signaled a coordinated effort and intent to address BEPS, which was viewed as a key priority due the threat inappropriate tax practices were posing to the global economy. According to the OECD, BEPS is responsible for a "conservatively estimated" annual tax revenue loss of USD $100-$240 billion per year.5
The OECD's Action Plan called for the development and adoption of 15 "Actions"6 to counteract the harmful effects and proliferation of BEPS throughout the global economy.
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In 2015 the OECD released the final package of BEPS reports, two years following its launch in 2013. As described by the OECD, the final BEPS package represented "the most fundamental changes to international tax rules in a century."7
Action 2 - Neutralizing the Effects of Hybrid Mismatch Arrangements8
According to the Action 2 report, "hybrid mismatch arrangements" are problematic from a BEPS standpoint to the extent they exploit differences in the tax characterization of an entity or financial instrument under the laws of two or more tax jurisdictions. Hybrid mismatch arrangements are used by taxpayers to achieve double non-taxation, including long-term tax deferral. The Action 2 report states that hybrid mismatch arrangements are widespread and have resulted in a substantial erosion of the taxable bases of countries throughout the world.
The Action 2 report defines hybrid mismatch arrangements to include transactions that give rise to deductible expense in one jurisdiction (e.g., a deduction for interest) with no income recognition in the jurisdiction of the recipient, structures that provide for deductions in two or more jurisdictions for the same expense, as well as the import of mismatch arrangements into a third jurisdiction. The Action 2 report recommendations seek to neutralize hybrid mismatches by putting an end to multiple deductions for a single expense, eliminating deductions without corresponding taxation, and preventing the generation of multiple foreign tax credits associated with the single foreign tax payment.
A simple example of a fact pattern targeted by Action 2 is the mismatch that can arise with respect to the tax characterization of a cross border advance of funds by a parent entity to its wholly-owned subsidiary. Assume that under the tax laws of the parent's jurisdiction the advance of funds is characterized as an equity investment. In contrast, the jurisdiction in which the subsidiary is formed characterizes the advance from the sole shareholder as a debt instrument, which gives rise to deductible interest deductions for the subsidiary regardless of when/if the interest payments are actually paid. Such an arrangement is a hybrid mismatch; it results in interest deductions in the jurisdiction of the subsidiary, reducing that entity's taxable income, while simultaneously not giving rise to any income inclusion in the jurisdiction of the parent entity. This is a fairly common tax planning technique that would be neutralized under the hybrid mismatch rules of Action 2, which deny the subsidiary's deduction for the deemed interest expense.
The Action 2 report is separated into two parts: Part I outlines recommendations for changes to domestic law; and Part II outlines recommended changes to the OECD Model Tax Convention. The recommendations set forth in Part I of the report seek to introduce "linking rules" that align the treatment of an instrument or entity in one jurisdiction with the tax treatment in the counterparty...
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