Increased transparency and interest deduction limitations are key challenges for you as a Commodity Trader. How do OECD Base Erosion and Profit Shifting (BEPS) and the EU Anti-Tax Avoidance Directive (ATAD) for instance affect your business? We list the 7 most important challenges of international tax developments – and their solutions.
1. Increased transparency on organisational structure of Commodity Traders
Multinational groups are subject to Country-by-Country Reporting obligations in many jurisdictions. Also, many countries now require multinationals to have in their administration or file with local authorities a transfer pricing Master File and Local File. These transparency measures will have a significant impact on you as a Commodity Trader, due to limited organisational size and business models applied. We recommend to perform a transparency impact analysis in advance of deadlines.
2. Visibility of obtained tax rulings of Commodity Traders
EU Member States have started the automatic exchange of information on advance cross-border tax rulings and advance pricing arrangements (exceptions for older rulings may apply). As of 1 January 2018, Switzerland will also join with spontaneous exchange for rulings with a significant BEPS risk that are still valid as of that date. The exchange of tax rulings will give tax authorities an even more comprehensive overview of Commodity Trader’s group structures. It could result in increased scrutiny and potential attempts to tax a larger part of your overall global profit.
You should carefully review current tax rulings to assess potential impact of the exchange of information. For Switzerland, tax rulings revoked before 1 January 2018 should be out of scope of such spontaneous exchange.
3. Commodity Traders could be faced with non-deductible interest expenses
High volume (external) debt financing and low margins are common denominators among Commodity Traders. The impact of non-deductible interest on effective tax rates will be significant. Although it may take until 2024 for this rule to become mandatory within the EU, it will limit tax deduction of net borrowing costs to 30% of EBITDA (for net borrowing costs exceeding EUR 3 million). BEPS Action 4 proposes the implementation of a similar interest deduction limitation rule, but no such legislation has yet been adopted by OECD Member States. Switzerland has indicated not to implement such rule, but to keep its current rules.
We advise to already assess which EU group companies might be affected. Possibly an adjustment to the financing model and international allocation within the group may mitigate the potential impact.
4. Tax treaty benefits may no longer apply
Globally operating Commodity Traders are utilizing various tax treaties to limit their exposure to withholding taxes on dividend, interest and/or royalties. The Multilateral Instrument (MLI) intends to modify the application of existing bilateral tax treaties of more than 100 jurisdictions. It introduces the inclusion of a Principal Purpose Test (PPT) as anti-abuse provision (optionally supplemented with a simplified limitation-on-benefits provision).
You should review whether certain group companies would no longer be able to obtain tax treaty benefits following implementation of the MLI. Issues to be checked include use of hybrid mismatch entities/instruments and the risk of new permanent establishments being present. Current substance in holding, finance or IP companies needs to be checked. Amendments to the current group structure might be required prior to the MLI entering into effect for certain tax treaties.
5. Swiss privileged regimes to be abolished
On 12 February 2017 the Swiss corporate tax reform III bill was not approved and the Swiss government will have to draft a revised bill. It is still expected that the privileged regimes that are applied by most Swiss based Commodity Traders will be abolished as of 1 January 2019 (earliest).
It should be reviewed how to minimize the adverse consequences of such abolishment (e.g., by applying a tax neutral step-up in basis). Also, most Swiss cantons still intend to substantially lower cantonal corporate income and to some extent annual capital tax rates to enter into effect as of 1 January 2019 (earliest) see below chart (federal and cantonal level combined):6. Income of low taxed group entities may be taxed in the EU
The proposed controlled foreign company (CFC) provision under the ATAD applies to participations of more than 50%, if such entity or permanent establishment is subject to an effective tax rate of less than 50% of that in the EU Member State of the taxpayer.
The non-distributed or non-genuine income of such participation (CFC) will in principle need to be included in the taxable income of the taxpayer holding the participation. Entities in low taxed jurisdictions such as Switzerland, Singapore, or the UAE may trigger these CFC rules if (in)directly held by EU resident entities. The CFC provision will be implemented in different ways in different EU Member States. Non-EU countries such as Switzerland are not required to introduce CFC rules and might therefore become more attractive as holding locations.
7. Potential harmonized EU wide corporate tax base
On 25 October 2016 proposals were published for a Common Corporate Tax Base (CCTB) and a Common Consolidated Corporate Tax Base (CCCTB) to establish a mandatory harmonized EU wide corporate tax base for groups with a total annual turnover of at least EUR 750 million that conduct business activities with a taxable presence in the EU.
The proposals first need to be approved unanimously by all EU Member States, but the impact of the proposals – if adopted – will be substantial and Commodity Traders would likely be affected due to the turnover threshold.