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Cross-Border Business Restructuring

Cross-Border Business Restructuring. Recent international tax developments Richard Newby Partner, International Tax 23 September 2010. Agenda. OECD Controlled Foreign Companies Exit taxes. Business restructuring – OECD example. Key to flows:. Legal title. Physical flow. Services.

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Cross-Border Business Restructuring

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  1. Cross-Border Business Restructuring Recent international tax developments Richard Newby Partner, International Tax 23 September 2010

  2. Agenda • OECD • Controlled Foreign Companies • Exit taxes

  3. Business restructuring – OECD example Key to flows: Legal title Physical flow Services Head Office Sales and Marketing (limited risk distribution] Management services Sale 1 Sale 2 Principal Suppliers Customers Purchase of materials Delivery of goods Delivery of materials Manufacturing services Distribution andlogistics services Distribution Centres Manufacturing (consignment) Delivery of goods

  4. OECD developments • Business restructuring: • New Chapter IX, TPG • Model Tax Convention • July 2008: Report on the Attribution of Profits to Permanent Establishments - guidance on applying the arm’s length principle in determining the profits attributable under Article 7 to a PE • 2010: • new version of Article 7 in the update of the Model Tax Convention • modified Report: deletes obsolete cross-references and aligns the Report’s wording with the text of the new Article 7 and the revised TPG. • Intangibles: • New TP project contemplated • Possible revision of Chapters VI and VIII, TPG • Comments on possible scope invited by 15 September

  5. OECD – Chapter IX – highlights? • Non-recognition [9.168]: • “…non-recognition of a transaction is not the norm but an exception to the general principle that a tax administration’s examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them. The word “exceptional” in this context is similar in meaning to “rare” or “unusual”. It reflects that in most cases it is expected that the arm’s length principle under Article 9 can be satisfied by determining arm’s length pricing for the arrangement as actually undertaken and structured.” • Tax purpose [9.182]: • “Provided functions, assets and/or risks are actually transferred, it can be commercially rational from an Article 9 perspective for an MNE group to restructure in order to obtain tax savings. However, this is not relevant to whether the arm’s length principle is satisfied at the entity level for a taxpayer affected by the restructuring.”

  6. OECD – Chapter IX – regrets? • Arm’s length principle: • good discussion at June 2009 Conference e.g. bargaining power • little since • Out of scope: • domestic anti-abuse rules and CFC legislation • domestic tax treatment of an arm’s length payment e.g. deductibility • Why not the MTC system of with Reservations?

  7. Controlled Foreign Companies • UK • Discussion document January 2010 • Interim improvements 2011 • Full reform 2012 • Japan • US

  8. Exit taxes • OECD position: • [9.65-68]: “The arm’s length principle does not require compensation for a mere decrease in the expectation of an entity’s future profits. When applying the arm’s length principle to business restructurings, the question is whether there is a transfer of something of value (rights or other assets) or a termination or substantial renegotiation of existing arrangements and that transfer, termination or substantial renegotiation would be compensated between independent parties in comparable circumstances.” • Germany: • 2008: ‘Transfer Package’ introduced • 2010: retrospective to 2008 - individual transfer prices can be applied for all transferred items provided 1) less than a full business is transferred, together with 2) at least one intangible asset • Potential for no exit charge where no identifiable assets are charged • “a great deal of confusion”

  9. Presenter’s contact details Richard Newby +44 (0)20 7694 4955 richard.newby@kpmg.co.uk Please include below disclaimer on all external material in which the member firm provides information that may otherwise be relied on by the reader without further consultation: The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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