Strategizing Multinational Tax Risks

The European Commission published a package of tax transparency measures on 18 March 2015.  The press release and other documents, linked herein for reference, include a tax transparency communication, Council Directive re: automatic exchange of information and Q and A’s of the comprehensive package. Significant initiatives are included in this package addressing corporate tax avoidance and harmful tax competition in the EU, key components of which are highlighted. http://europa.eu/rapid/press-release_IP-15-4610_en.htm http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_136_en.pdf http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_135_en.pdf http://europa.eu/rapid/press-release_MEMO-15-4609_en.htm Press release:

• The concepts of tax evasion, corporate tax avoidance, “pay their fair share,” aggressive tax planning and abusive tax practices are summarily stated, although corollary concepts for avoidance of double taxation and effective dispute resolution are noticeably absent.
• Tax rulings will be automatically exchanged every 3 months.
• Feasibility of public disclosure of certain tax information of MNE’s will be examined.
• The EU Code of Conduct on Business Taxation will be reviewed to ensure fair and transparent tax competition within the EU.
• The Savings Tax Directive is proposed to be repealed to provide efficiencies and eliminate redundant legislation in the Administration Cooperation Directive.
• Next steps: The tax rulings proposal  will be submitted to the European Parliament for consultation and to the Council for adoption, noting that Member States should agree on this proposal by the end of 2015, to enter into force 1/1/2016.
• Common Consolidated Corporate Tax Base (CCCTB) proposal will be re-launched later this year.

Tax Transparency proposal:

• Existing legislative framework for information exchange will be used to exchange cross-border tax rulings between EU tax authorities.
• The Commission will develop a cost/benefit analysis for additional public disclosure of certain tax information.
• The tax gap quantification will be explored to derive more accuracy.
• The global automatic exchange of information for tax rulings will be promoted by the EU.

Council Directive (amending Directive 2011/16/EU) re: automatic exchange of information:

• Mandatory automatic exchange of basic information about advance cross-border rulings and advance pricing agreements (APAs).
• Article I definition of “advance cross-border ruling:
  • any agreement, communication, or any other instrument or action with similar effects, including one issued in the context of a tax audit, which:
    • is given by, or on behalf of, the government or the tax authority of a Member State, or any territorial or administrative subdivisions thereof, to any person;
    • concerns the interpretation or application of a legal or administrative provision concerning the administration or enforcement of national laws relating to taxes of the Member State, or its territorial or administrative subdivisions;
    • relates to a cross-border transaction or to the question of whether or not activities carried on by a legal person int he other Member Sate create a permanent establishment, and;
    • is made in advance of the transactions or of the activities in the other Member State potentially creating a permanent establishment or of the filing of a tax return covering the period in which the transaction or series of transactions or activities took place.
• Automatic exchange proposal is extended to valid rulings issued in the 10 years prior to the effective date of the proposed Directive (Article 8a(2)).
• In addition to basic information exchanged, Article 5 of the Directive should provide relevant authority for the full text of rulings, upon request.
• EU central repository to be established for submission of information by Member States.
• Confidentiality provisions should be amended to reflect the exchange of advance cross-border rulings and APAs.

Q and A’s:

• Corporate tax avoidance, as explained, undermines the principle that taxation should reflect where the economic activity occurs.
• Standard/template information for the quarterly exchange of information includes:
  • Name of taxpayer and group
  • Issues addressed 
  • Criteria used to determine an APA
  • Identification of Member States most likely to be affected
  • Identification of any other taxpayer likely to be affected
• Commission could open an infringement procedure for Member States not following the disclosure obligations.
• Domestic tax rulings are exempt.
• The EU could be a global standard setter of tax transparency.
• The EU Code of Conduct criteria are no longer adequate, and it lacks a strong enough mandate to act against harmful tax regimes.

The EU Tax Transparency Package is required reading for all MNE’s and other interested parties, as it is an ambitious effort to provide globally consistent procedures for the exchange of tax rulings/APAs. Additionally, it is interesting to note the EU’s aggressive actions and timing in its efforts to align, as well as expand, the OECD’s efforts to address BEPS Action Items.  These actions are also intended to be a standard for global setting in the new era of international tax transparency.     As a Best Practice, the 10-year look-back provision for rulings implies that MNE’s should have a similar central database for prior, and future, cross-border rulings.  Additionally, this automatic exchange is another element of consideration prior to formally requesting a tax ruling.