Strategizing International Tax Best Practices – by Keith Brockman

EY’s Global Tax Alert highlights recent developments re: the previously announced Tax Transparency Package initiatives of the EU.  Key observations, and a copy of the Alert, are provided for reference:

Key Observations:

  • Definition of “tax rulings” is too broad for effective implementation by the Member States
  • The 10-year time period for rulings seems excessive and burdensome
  • 1/1/2016 implementation deadline to be extended to 12 months from entry into force of the amending Directive
  • OECD Action items should be considered for relevant integration / coordination
  • European Commission would also receive a copy of the rulings, with a central directory to be developed

EU Council Presidency issues report detailing open questions on proposal for automatic exchange of advance cross-border tax rulings and Advance Pricing Arrangements
Executive summary
On 8 June 2015, the Presidency of the EU Council (Latvia) sent a report (The Report) to the Permanent Representatives Committee and the European Council. The Report sets out the current state, as well as a number of open issues and questions, in regard to the 18 March 2015 proposal for a Council Directive amending Directive 2011/16/EU regarding the mandatory automatic exchange of tax information.

That proposal, focusing on the exchange of advance cross-border tax rulings (ATRs) and Advance Pricing Arrangements (APAs), constitutes a key element of the Tax Transparency Package1 issued on the same date. The Tax Transparency Package further contained a proposal to repeal the Savings Directive as well as a Commission communication outlining a number of other initiatives to advance tax transparency.

Detailed discussion
Under the Tax Transparency Package proposal, Member States will be required to automatically exchange information on their ATRs and APAs, with the Commission proposing a strict timeline whereby every three months all Member States would be obliged to report to all other Member States and the Commission on the rulings they have issued during that period.

This report, sent via a secure email system, would contain a pre-defined, standard set of information. The recipient Member States would also have the right to request more detailed information on any of the documented rulings, where the information is relevant to the administration of the tax laws of the Member State. Each year, Member States would have to provide statistics to the Commission on the volume of information exchange on tax rulings.

In addition to this quarterly exchange of information, the proposal also refers to a retroactive application of ten years, whereby the above obligation is extended to rulings issued during the ten years prior to the date on which the proposed Directive takes effect, where such rulings are still valid on the date of entry into force of the Directive.

The instrument under which all such exchange would occur is Directive 2011/16/EU on Administrative Cooperation in the Field of Taxation (DAC).

Open questions and issues detailed in the Report
The Report details that four meetings of the Working Party on Tax Questions have taken place (31 March, 30 April, 21 May and 9 June 2015) since the Tax Transparency Package was published, with the proposals being discussed in detail at each meeting. The Report further sets out a number of open issues and questions raised at those meetings. In the Report, the Presidency asks the Council to discuss these questions, in order to move the proposals forward, and to help the incoming Presidency to draft a compromise text for the DAC that could eventually be tabled for the political agreement of the Council in the autumn of 2015.

Scope and timing of exchange of information
In regard to the scope of definitions of ATRs and APAs, the Report noted that the definitions proposed by the Commission are too broad for a number of Member States. While the objective of the Tax Transparency Package is to cover as wide a scope of ATRs and APAs as possible, some Member States raised concerns that too much room for interpretation (by introducing a distinction between binding and non-binding rulings, for example) would create uncertainty. The Presidency therefore deemed it appropriate, to narrow the scope to ATRs and APAs which are issued to specific taxpayers or groups of taxpayers, with the effect of exempting from automatic exchange the commentaries of tax laws of a general nature.

In terms of the proposal to require the exchange of ten years of ATRs and APAs, the report notes that many Member States believe that this requirement goes beyond what is reasonably required for reasonable tax transparency purposes, as well as creating an overly voluminous administrative burden. The report makes no reference to what time period may be more acceptable to those Member States.

On the starting date of the exchange of new rulings, many Member States argue that at least 12 months would be required to transpose any new rules into national legislation. Therefore, the Presidency deemed it appropriate to bind the starting date of mandatory exchange of information (which was originally set to be 1 January 2016) with the transposition deadline, which would be 12 months from entry into force of the new amending Directive.

Taking OECD work into account

The Report states that a number of Member States have expressed that further work on a Presidency compromise should take into account work conducted at the Organisation for Economic Co-operation and Development (OECD) level, specifically within Action 5 of the Base Erosion and Profit Shifting (BEPS) project and at the Forum on Harmful Tax Practices (FHTP). Action 5 of the BEPS Action Plan calls for a framework for compulsory spontaneous information exchange on rulings to member and associate countries’ preferential regimes, with a view to starting to apply the framework following the FHTP’s Autumn 2015 meeting. The Report further notes that the OECD work currently seems to cover a narrower scope of ATRs and APAs than proposed by the Commission’s proposals. This, in turn, leads the Presidency to aim at an agreement within the EU of a higher standard, in order not to undermine the objectives of the Commission proposal. In that regard, the Report notes that the standard form developed by the FHTP for rulings exchanged could also potentially be used for the automatic exchange of information within the EU, as well as providing inspiration around the potential ”retroactivity” date used.

Exemption of bilateral and multilateral APAs with third countries
The Report notes that while all Member States support that APAs should fall under the scope of mandatory automatic exchange of information, a number of delegations believe it is important in certain cases to exclude from the proposed Directive the information exchanged with third countries, where such an APA was agreed to before the entry into force of the revised DAC.

Specifically, the Report notes that:

However, a number of delegations believe it is important, for reasons of legal certainty and under a set of very strict conditions, to exclude from the proposed Directive the information exchanged with third countries when agreeing to bilateral or multilateral APAs with third countries, which have been agreed to before the entry into force of this Directive, under existing international treaties, where those treaties foresee stricter confidentiality standards than would be provided for in Directive 2011/16/EC, once this legislative proposal on automatic exchange of ATRs and APAs has been adopted.

Role of the Commission in the new mechanism
The Report closes with a series of main features with regard to the Commission’s central role in the new rulings exchange mechanism. These include:

The initial information on the ATRs and APAs being communicated not only to other Member States, but also to the Commission
That the Commission would have to develop a central directory, where the information exchanged would be stored and the Commission would have access to all data
That the Commission would, by way of the “comitology”2 procedure, develop a standard form and all other measures and practical arrangements that are required for the first stage of the automatic exchange of information.
Implications
The series of open issues and questions raised at the four successive meetings of the European Commission’s Working Party on Tax Questions reflects the sensitive nature of the issue of tax rulings in Europe. With much debate and discussion due in the coming months in advance of a compromise text for the DAC, the business community should make all efforts to closely monitor developments.

Endnotes
1. See EY Global Tax Alert, European Commission presents a package of tax transparency measures, dated 19 March 2015.

2. Comitology is the process by which EU law is modified or adjusted and takes place within Comitology Committees chaired by the European Commission.

EYG no. CM5538

This is an important development, as the European Commissions’s aggressive timetable and efforts to tackle tax abuse are ameliorated by practical and relevant concerns of practicality and usefulness.  

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