Tax World: The Post BEPS World

Learning Centre • Tax World: The Post BEPS World

Tax World: The Post BEPS World

Recently, tax authorities have been paying more attention to commodity traders.

In light of the digital economy, some jurisdictions have introduced diverted profits tax or anti-avoidance measures to counter these types of structures. These measures could impact commodity traders as they are also a potentially good vehicle for arranging a tax-efficient structure, and for some tax jurisdictions, they will be viewed as a more sophisticated means of arranging the same type of arrangements.

As a result of these changes, tax authorities now have more information, enabling revised transfer pricing guidelines to be agreed upon in consultation with the taxation authorities of the countries concerned. The BEPS proposals should assist tax authorities in ascertaining the total profit relating to the supply chain (though a combination of CbC reporting and the exchange of information between tax authorities) and how it could be allocated to the different functions and thus jurisdictions that make up the value chain (via revised transfer pricing guidelines).

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The other key measure which is of particular relevance is the change to the tax treaty framework in relation to PEs. Specifically, Action Item 7 lowers the threshold at which entities will be taken to have a PE in a foreign jurisdiction. However, this type of tax planning was not uncommon before the BEPS actions. The three relevant key changes are as follows:

Someone that habitually plays a vital role or central role in leading, steering, or coordinating the day-to-day substantive activities of the foreign enterprise and that is part of an overriding or directing system of authority likely to trigger a PE.

In the revised Accounting Standard, emphasis has been placed on ascertaining the viability of running a supply chain through a particular jurisdiction. This change has led to a closer examination of the importance of the activities carried out at the fixed place of business for established supply chains, i.e. how closely the ability to source, store, blend, transport, market and deliver relates to the core business of the commodity trading enterprise and whether the fixed place of business where the aforementioned are carried out, is an essential part of the business operations of the commodity trading enterprise.

A new anti-fragmentation rule has been added to disallow related parties who have the same tax return to fragment their business activities by operating them in separate fixed places of business if they could qualify for PE under the previously mentioned subset of equipment criteria.

Their tax authorities in those countries have taken measures to scrutinize the tax affairs of multinational enterprises, including introducing a more systematic approach which has led to real-time disclosure of tax audits. In some countries, tax authorities have expanded the scope of their domestic legislation to include a local presence in other industries as a possible permanent establishment.

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