BEPS Action Plan being implemented in Slovak tax legislation
Base erosion is a very important issue on the political agenda of many countries both inside and outside of the EU and it has been addressed at G20 and G8 summits. The G20 and the OECD have prepared a BEPS Action Plan aimed at combating base erosion and profit shifting by multinationals to countries with low taxation. It is expected that the Member States will be adopting various measures to implement BEPS provisions in their national legislation. Below are some of the action plans the Slovak Republic has adopted in its tax legislation or committed itself to adopt in the near future.
Action 2: Neutralise the effects of hybrid mismatch arrangements (double non-taxation)
Multinationals often use hybrid debt instruments and various other forms of aggressive tax planning to shift profits, leading to situations of double non-taxation. The introduced anti-avoidance rules govern situations where a tax entity receiving dividends makes transactions which do not correspond fully to economic reality. In such a case, these dividends will become subject to tax. Dividends paid out by a tax entity which can deduct them will likewise be subject to tax. The Slovak Republic has introduced a 35% withholding tax on transfers to offshore destinations.
Action 3: Strengthen Controlled Foreign Company (CFC) Rules
According to CFCs, income earned by these non-resident companies should become taxable when certain thresholds are reached, such as ownership (50%), effective tax rate (40%) and passive income (50%). While CFCs outside the EU should be subject to the substantive testing, CFCs inside the EU/EEC should be captured by CFC rules only if they are involved in a purely artificially created arrangement/structure. The Slovak Republic has yet to implement this Action Plan into its national legislation.
Action 4: Limiting interest deductions
In relation to Action 4, addressing limit base erosion via interest deductions and other financial payments, the Slovak Republic amended Act 595/2003 Coll. on Income Tax to introduce “thin capitalisation” rules in an added Sec. 21a. The amendment became effective on 1 January 2015. For the defined “controlled companies”, thin capitalisation rules limit the deduction of interest paid on borrowings and related borrowing costs to a maximum 25% of EBITDA. This means that interest and related costs exceeding 25% of EBITDA (earnings before interest, tax, depreciation and amortisation) during the tax period cannot be deducted.
Thin capitalisation rules do not apply to debtors that are banks, insurance companies or reinsurance companies, entities covered by a special regulation and leasing companies.
In addition to this, the controlled companies do have to charge interests in accordance with the principle of a “separate and independent enterprise” (according to the arm’s length principle – transfer pricing rules).
In order to minimize the tax impacts of the introduced thin capitalisation rules in Slovakia, we advise you to contact us, hence there are possibilities how to neutralize this negative tax impact.
Action 5: Counter harmful tax practices more effectively
Deducting of research and development costs with a 25% “super deduction” from eligible costs has already been implemented in national legislation (see Sec. 30c of the Income Tax Act). It is not yet known whether changes will take place due to final recommendations from the OECD.
Action 8-10: Assure that transfer pricing outcomes are in line with value creation
The adopted amendments particularly cover two areas and apply to the arm’s length principle (Chapter I) and to intangibles. The revised text of Chapter VI, devoted to intangible property, changes the definition, aims to distinguish between actual and legal owners and, among other things, provides for additional factors that should be compared in a comparability analysis of intangibles.
Because the final report on Actions 8-10 directly updates the Directive, it is possible for the principles to be directly applied when interpreting the arm’s length principle and the measurement of intangibles.
You can find more detailed information in our newsletter.
Action 13: Country-by-country reporting
As part of Action 13 to re-examine transfer pricing documentation, the Slovak Republic signed along with thirty other countries a document on automatic exchanging of information – “Country-by-country (CbC) reporting” on 28 January 2016. CbC reporting rules apply to large multinationals with consolidated annual turnover above €750 million. These multinationals will annually report information to the relevant tax authority in their Member State. The tax authorities in the Member States will then automatically exchange this information on the global allocation of income, profits, capital, employees and property, and also information about taxes paid. These CbC reporting rules should enable tax authorities in these Member States to detect easier any discrepancies in the multinationals’ transfer pricing as well as any related tax evasion.
Action 14: Make dispute resolution mechanisms more effective
The main objective of this action is to develop solutions to address obstacles that prevent treaty-related disputes under the mutual agreement procedure (MAP), including the absence of arbitration provisions in most double-taxation treaties and the fact that access to MAP and arbitration may be denied in certain cases.
The Slovak Republic has concluded effective double taxation treaties with 65 partners. The Slovak Republic is striving to renegotiate its treaties to meet the latest requirements.
Action 15 – Develop a multilateral instrument
94 countries are involved in this activity. A multilateral instrument is a more effective tool for renegotiating existing bilateral double taxation treaties (there are currently around 3,000 treaties in force around the world) than to update these treaties separately and bilaterally.
The multilateral instrument is a legal multilateral treaty which can modify articles in bilateral treaties outlined in the following Actions:
- Action 2 (provisions on hybrid instruments and provisions arising from potential problems in applying the exemption method)
- Action 6 (minimum standard on preventing treaty abuse)
- Action 7 (Article 5, Paragraphs 4, 5 and 6 to prevent the artificial avoidance of permanent establishment status)
- Action 14 (Article 25 in order to implement minimum standards for efficient dispute resolution and new provisions on arbitration)
The Slovak Republic intends to accede to the multinational instrument at a time relative to the current legislative proces.
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