On 5 October 2015, the OECD published a second package of measures (included in 9 reports) related to the Project on base erosion and profit shifting (“BEPS“).
This project started in 2013, when members of the OECD and the G20 adopted an Action Plan of 15 points that was and is aimed at ensuring that multinational companies tribute in the countries where the value of their transactions is generated.
The OECD published a first package of measures (a total of 7 reports) in September 2014. These reports carried a number of recommendations on how to address these problems, either by modifying International Double Taxation Treaties or by modifying each country’s legislation.
Despite the soft law nature of these recommendations, the member countries of the OECD (among them Spain) have carried out tax reforms that anticipate the essential principles of the BEPS project.
In this respect, the 2016 State Budget Draft Bill introduces modifications in the Patent Box regime. In line with action 5 of the BEPS Plan, the new Patent Box regime aims to limit the application of the incentive to those companies that have developed any intangible asset object of transfer.
Simultaneously, the new Spanish Corporate Income Tax (“CIT”), Law 27/2014 of 27 November, applicable to exercises begun in 2015, introduces a number of precepts that are in line with BEPS recommendations:
- In relation to financial expenses, action 4 of the BEPS action plan proposed restricting their deductibility. Although the Spanish rule anticipated restrictions to said deductibility in 2012 (through Royal Decree 12/2012), the new CIT regulations, in line with BEPS Plan recommendations has increase the deductibility restrictions concerning financial expenses.
- In relation to the new CIT regulations, in accordance with action 2 of the BEPS Plan, has introduced measures related to the taxation of hybrid transactions, which are understood as any transaction that has a different tax rating in the participants parties. In particular, the Spanish regulation includes a non-abuse provision (art. 15j CIT Law), aimed at those transactions in which one of the participating entities creates a deductible expense both on the tax base and on the other participating entity. The income is not recorded for tax purposes (because it is no considered an income or because it is exempt).
- In relation to the obligations on transfer pricing matters, action 13 of the BEPS Plan introduces, as a novelty, the “country by country reporting”, a document in which companies exceeding a turnover of 750 million should detail their activity in each of the States it makes business. This obligation is included in the new CIT regulations and shall come into effect in 2016.
- In relation to international tax transparency, action 3 of the Plan introduces a number of recommendations concerning the design of international tax transparency rule.
Within this framework, the new CIT regulations introduce in the Spanish CIT (art. 100 CIT Law) a new assumption related to the obligation to tribute any rents obtained by non-resident subsidiaries. Under this new assumption, the objective of the Spanish rule is to ensure that any profits made by the subsidiaries of Spanish entities, which reside in countries with a significantly inferior taxation than the Spanish one and do not have any human and/or material means, tribute in Spain.
In connection with the role of the Spanish courts in the application of the BEPS Plan, the rulings that the Supreme Court issued on 9 February and 12 February 2015 are of special significance. The rulings, concerning leverage buyout transactions, are specifically mentioned in the BEPS Plan with the following wording: “In view of the existence of a pressing public interest reason, the practice that detects and corrects how taxation is applied is currently one of the main concerns of the OECD, and this is reflected in the BEPS”.
Cornening the new measures adopted on 5 October 2014, these include a number of recommendation on the following issues:
- Action 3: International tax transparency.
The report introduces recommendations aimed at improving the application of international tax transparency rules, which on occasion has proved to be inefficient.
The report aims to define those entities that should apply these rules. It also insists in the necessity to establish a minimum threshold and in the concept of control (this is relevant as it indicates if said rules need to be applied or not), the control should be both legal and financial.
The recommendations included will allow those States that have no international tax transparency rules to implement them in their legal system or, if a State has already implemented them, to improve them.
- Action 4: Base erosion through interest deductions and financial payments.
The report introduces a number of recommendations related to the design of rules that prevent base erosion by resorting, for instance, to interest charges.
- Action 7: Preventing the artificial avoidance of permanent establishment Status.
The report underlines the necessity of updating the conventional definition of permanent establishment. The objective is to prevent that, either by applying commissionaire’ mechanisms or by applying specific activity exemptions, the permanent establishment status may be artificially circumvented.
- Actions 9 and 10: Transfer pricing. Risks, capital and other high risk transactions.
The reports emphasize the importance of satisfactorily identifying the transactions carried out, the importance of the risk and its geographical situation.
Additionally, it introduces a number of measures aimed at putting transfer prices in line with the creation of value; this is specially related to intangibles.
- Action 11: Establish methods aimed at collecting and analysing data related to BEPS and the actions used to deal with it.
The report seeks to set the procedures to obtain and analyze data related to base erosion and to the measures applied to deal with it.
- Action 12: Communicating aggressive tax planning mechanisms.
The report concerning action 12 develops recommendations to prepare rules which make taxpayers disclose any aggressive or abusive transactions, agreements or structures.
- Action 14: Dispute resolution mechanisms.
The purpose of action 14 is to find solutions that allow countries to resolve any disputes related to international conventions by using friendly procedures (for instance, arbitration procedures).
Taking into account how quickly the Spanish legislator introduced the first measures included in the BEPS Project in the Spanish legal system, it appears that these last recommendations on tax legislation may be a reality in the short to medium term. However, one should bear in mind that the first measures coincided with the tax reform, which aided their inclusion in the Spanish legislation.