In 2015, the BEPS package was approved. It is considered to be the most significant international tax reform of this decade. Which provisions have already been implemented in the Lithuanian legislation and what should business be aware of?
In 2015, the Action Plan on Base Erosion and Profit Shifting (BEPS), initiated by the Organization for Economic Co-operation and Development (OECD) and supported by G20, was approved. The BEPS Action Plan is considered as the most significant achievement in modernization of international taxation in this decade (you can read more about BEPS here).
The main goals of the BEPS package are to establish general anti-abuse provisions designed to:
— neutralize effects from mismatches in domestic tax rules;
— eliminate double non-taxation;
— ensure that income is taxed based on the substance of activities;
— identify and address the challenges of the digital economy;
— improve mutual agreement procedures and dispute resolution mechanisms.
By a multilateral agreement most countries will adopt a number of BEPS measures right away. On 7 June 2017, Lithuania, together with other 70 counties, signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting based on BEPS Action 15. The aim of the convention is to modify existing bilateral tax treaties.
Most of the countries, including Lithuania, have already started implementing certain BEPS measures into domestic law. Some changes are relevant to business.
Tax exemption on inbound/ outbound dividend payment was recently amended. As of 2016, amendments to EU Parent-Subsidiary directive (2011/96/ES) were implemented in the Lithuanian Law on Corporate Income Tax (Law on CIT). According to these changes, tax exemptions may not apply to inbound/ outbound dividends where the main purpose/ one of the main purposes of the arrangement is to obtain a tax benefit.
Furthermore, the EU has prepared a separate anti-tax avoidance directive 2016/1164 (and its amending directive 2017/952). The directive sets forth the following measures:
— limitations to deductibility of interest;
— exit taxation;
— general anti-abuse rule;
— controlled foreign company rules;
— hybrid mismatches.
Most of the abovementioned measures already exist in the Lithuanian legislation and are applied in practice (e.g. the substance over form principle set forth in Art. 69 of the Law on Tax Administration, controlled foreign company rules, thin capitalization rules). Nevertheless, exit taxation and hybrid mismatches provisions will be new in the Lithuanian tax legislation. Furthermore, interest deductibility rules may be implemented differently in member states as the directive provides several options. Countries must transpose these provisions into the national legislation by 31 December 2018 and apply as of 1 January 2019 (exceptions apply to certain measures).
Worth also noting that the extent of information exchange between EU countries is increasing (e.g. information about advance cross-border rulings, advance pricing arrangements). Additionally, the EU has renewed directive 2011/16/ES on administrative cooperation in the field of taxation (amending directives 2014/107/ES and 2015/2376).
Country by Country reporting (CbC reports) was implemented in Lithuania in 2017 according to BEPS Action 13. In line with the CbC rules, Lithuanian entities from multinational enterprises (MNEs) are obliged to file the CbyC report or must notify the tax authorities which entity of the MNE will provide the CbyC reports (by the last day of the MNE’s financial year). The CbyC reporting obligation applies if consolidated revenue of an international group exceeds EUR 750 million for the period the CbyC report is filed for. These rules apply to subsidiaries as well. First reports will have to be filed by 31 December 2017 for year 2016 (you can read more here).
According to the Code of Administrative Offences, as of 1 January 2017, non-compliance with the transfer pricing documentation requirements may impose a penalty from EUR 1,400 to EUR 4,300 (in case of repeated offence – from EUR 2,900 to EUR 5,800). Transfer pricing rules in Lithuania have not been reviewed yet. However, it is likely that certain changes will be implemented in the near future considering the OECD proposals.
Another relevant proposal in this context (issued by the European Commission) is to oblige tax advisors, accountants and others advising on tax issues to notify the tax authorities about their international tax planning schemes created. In this case, companies would have to provide information about the author of the scheme and the scheme itself.
Considering the rapidly changing tax environment businesses and MNEs especially should carefully assess if dividends paid to foreign shareholders (holdings) can be tax exempt in Lithuania. Furthermore, it is worth considering whether all structures and transactions have economic substance and whether activities performed abroad do not create a permanent establishment.
Companies should make sure that all relevant transfer pricing documentation is prepared timely and properly. New transfer pricing rules may require to review transactions with intangible assets, high risk transactions, profit shifting principles etc. in the future. Worth noting that due to the automatic data exchange between the tax authorities in different countries more detailed tax audits may be performed.
To sum up, business should follow the developments of the Lithuanian and international tax environment and be prepared for increasing administrative burden.
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