Strategizing International Tax Best Practices – by Keith Brockman

The Court of Justice of the European Union (CJEU) has clarified a Romanian court request that a company cannot be required to verify that a VAT supplier has met its reporting obligations re: fraudulent conduct.  The judgment was provided on June 4th, SC CF SRL v. AJFPM, DGRFPC, C-430/19 (CJEU 2020).  The court stated that tax authorities cannot require that a company have supporting VAT compliance documentation, nor ensuring that the supplier has the goods and is able to provide them.

The CJEU has established a valuable EU precedent, stating that a taxpayers’ right to deduct VAT is a fundamental principle of the VAT system without limitations, absent evidence of fraud.  Additionally, Article 178(a) of Council Directive 2006/112/EC (the VAT Directive) does not require such additional documentation.  This would violate the principle of neutrality.

 

 

IRS office update

Several IRS offices are still at work-from-home status, impacting mail received, sent and phone communications.

The latest status is attached for reference.

https://www.forbes.com/sites/kellyphillipserb/2020/06/11/whats-open-and-whats-not-as-the-irs-begins-to-reopen/#717828a41b0a

Recent developments include a political agreement reached by the ambassadors of the Member States to submit an amended proposal, with each Member State having to make a formal decision thereto, for deferral of the reporting dates.

  • The prior period, from June 25, 2018 to June 30, 2020 will be deferred to February 28, 2021 (from August 31, 2020)
  • For arrangements commencing July 1, 2020 subject to the 30-day reporting deadline, the 30-day period begins on January 1, 2021 and would include arrangements from July 1 through December 31, 2020.

Next steps will be a written procedure in the EU Council, followed by formal adoption.  If a Member State fails to respond to the proposal, the original reporting timelines will apply.

Dutch guidance has also been issued, providing further clarification.

https://globaltaxnews.ey.com/news/2020-5837-eu-council-ambassadors-reach-agreement-on-amended-proposal-for-deferral-of-mdr-filing-deadlines

 

NL: Mandatory Disclosure Rules/DAC6

The European Mandatory Disclosure Rules (MDR)/DAC6 Directive will come into effect on 01 July 2020. Following its implementation in the Netherlands, intermediaries and/or taxpayers have to report potentially aggressive international tax arrangements to the Tax and Customs Administration. This concerns arrangements that involve residents from various countries and that may be used to avoid tax.

On this page, you can read more about the following subjects:

Intermediaries virtually always have to report a potential tax avoidance arrangement

If you are an intermediary and you are involved in a potentially aggressive international taxarrangement, you have to report it. There are two exceptions to this rule. You do not have to report a potentially aggressive international tax arrangement in the following cases:

  • Another intermediary has already reported the tax arrangement and he has given you a reference number to prove it.
  • You have a legal professional privilege.

Note!

The DAC6 Directive applies to all intermediaries . For instance, tax consultants, lawyers, accountants, civil-law notaries, financial advisers, banks and trust offices.

Taxpayers sometimes have to report a potential tax avoidance arrangement themselves

The taxpayer for whom a potentially aggressive international fiscal arrangement is intended, has to report it himself in the following cases:

  • An intermediary from outside the European Union is involved in the artificial tax arrangement.
  • An intermediary who is involved in the artificial tax arrangement has a legal professional privilege, therefore, he does not have to report the arrangement.
  • No intermediary is involved in the tax arrangement.

When you are not sure if someone else has reported a potential tax avoidance arrangement

When in doubt, report it yourself.

When to report a potential tax avoidance arrangement

The DAC6 Directive has retrospective effect. Potentially aggressive international tax arrangements youare involved in between 25  June 2018 and 01 July 2020 must be reported between 01  July 2020 and31 August 2020.

Every arrangement you are involved in after 01 July 2020 must be reported within 30 days.

Which fiscal arrangements must be reported?

The DAC6 Directive provides a list of hallmarks. If a tax arrangement has one or more of these hallmarks, you have to report it. A guide line with more details and examples will be available soon.

Note!

The hallmarks have been set at a European level and may, therefore, be interpreted differently at times. If you are not sure if a tax arrangement is potentially aggressive, be on the safe side and report it anyway.

Which taxes does the DAC6 Directive apply to?

It applies to:

  • corporation tax
  • income tax
  • Payroll tax
  • dividend tax
  • inheritance tax and gift tax
  • most other taxes

It does not apply to:

  • VAT (turnover tax)
  • customs duties
  • excise duties
  • social insurance contributions
  • charges
  • fees

How to report potential tax avoidance arrangements

You can report them by means of the Cross-Border Arrangements Reporting form, in English. You can complete this form via the data portal of the Tax and Customs Administration from 01 July 2020.

Your report must include:

  • details about yourself
  • details about the taxpayer and his affiliated persons
  • a summary of the content of the artificial tax arrangement
  • the relevant hallmarks
  • the relevant national statutory provisions
  • the value of the artificial tax arrangement
  • the implementation date
  • the relevant EU Member States

After you have submitted your report, we will send you a reference number.

What happens if you don’t report?

You will risk a (high) fine.

More information

For questions about the mandatory disclosure legislation such as questions about the hallmarks, pleasecontact the MDR team of the Tax and Customs Administration by e-mail at MDR-team@belastingdienst.nl

If you have a question about submitting the Cross-Border Arrangements Reporting form, please send an e-mail to the Tax and Customs Administration Contact Centre at gegevensuitwisseling@belastingdienst.nl

If you are a software developer or if you are going to develop software for your own organisation to report potential tax avoidance arrangements, you can register at the Digital Messaging Support [Ondersteuning Digitaal Berichtenverkeer (ODB)] website of the Tax and Customs Administration for the necessary specifications, IT-related questions (for instance, about the required technical specifications of the various fields) and support. You can also contact the service desk at servicedesk.odb@belastingdienst.nl

Answers to frequently asked questions about the mandatory disclosure legislation are collected in the Mandatory Disclosure Rules/DAC6 Knowledge Database (only available in Dutch).

 

On May 27th, a €750 billion entitled “Next Generation EU” has been proposed.  The plan would be made up of grants and loans for every EU Member State, to be repaid via a digital tax, carbon tax and/or a tax on recycled plastics.  However, the European Central Bank is not expected to be a player in this plan, due to Germany’s top court ruling earlier this month that it violated the German constitution.  The referenced link provides additional details.

On May 28th, as follow up,  the EU Commission said it is ready to act on a digital tax if the OECD fails to achieve a global consensus on taxation of the digital economy.  This statement, along with unilateral tax proposals, provides the impetus for OECD to act on this proposal by year-end, for which it has dedicated to fulfill this timeline.

The EU is committed to a global strategy for digital taxation and minimum corporate taxation, and will present their own plans  if the OECD fails by act by the end of 2020. 

https://www.bbc.com/news/world-europe-52819126

I have authored a DAC6 best practices article, published today by Bloomberg Tax in the Daily Tax Report.

Hope you find the content informative.

https://news.bloombergtax.com/daily-tax-report/insight-dac6-past-present-and-future

Additionally, NL is scheduled to publish DAC6 guidelines tomorrow on its website.

Bloomberg Tax hosted a webinar on May 21st, featuring Dr. Achim Pross, Head of OECD Centre for Tax Policy and Administration.

The interview PDF features a discussion of the OECD Work on the Digitalised Economy, Pillar 1 and 2, COVID-19 tax issues, and the International Compliance Assurance Program (ICAP).  Dr. Pross acknowledged Pillar 1’s timeline is still this year, whereas Pillar 2 still has some issues to address, including the global minimum tax and U.S. GILTI provisions.

The second attachment featured tax executives and outside advisors, discussing the challenges of the OECD approach in addition to challenges thereto.

Each attachment is a valuable read, illustrating the goals and challenges for everyone.

Bloomberg Tax_The Brave New World of Global Tax_Dissecting Pillar 1 and 2 – FINALBloomberg Tax_The Brave New World of Global Tax_Keynote Interview – FINAL

Effective July 1, 2020 Indonesia will impose a 10% VAT on digital products sold by non-resident internet companies with a significant presence in the Indonesian market, including streaming services, applications and digital games.  The increase attempts to recoup some revenues resulting from COVID-19.

The government expects a 10% drop in state revenue this year due to the impact of the coronavirus pandemic and weak commodity prices, forecasting that economic growth will more than halve to 2.3%, from 5% in 2019. It foresees a fiscal deficit of 5.07% of GDP for 2020, the biggest in more than a decade.

https://www.reuters.com/article/us-indonesia-tax-digital/indonesia-to-impose-vat-on-streaming-other-digital-services-from-july-idUSKBN22R23V

Tax Executives Institute (TEI) recently provided comments in response to OECD’s Consultation Document for potential changes to the Country-by-Country (CbC) reporting process.

Highlights of comments:

  • Current reports should remain unchanged, as tax administrations have not yet had the experience to transform the data into an effective risk assessment tool.  Additionally, report changes are not easy to implement by multinationals (MNEs)
  • Multiple local filings are still required, which was not the intent of the legislation
  • There should not be additional jurisdictional requirements for a Master File, such data should reside in a Local File.  Additional requirements are not efficient for MNEs to provide
  • The definition of “control” should be over 50% to have availability for data collection
  • The reporting threshold should not be lowered
  • Examples of “revenue” would be helpful
  • TEI does not support providing legal entity information in Table 1
  • Consolidated, vs. aggregate, reporting presents many challenges for MNEs
  • Requests for additional details of reported amounts should be delayed
  • The OECD is currently developing a CbC reporting “Tax Risk Evaluation & Assessment Tool” (TREAT) to support tax authorities in reading and interpreting CbC reports. TEI recommends the OECD publish the TREAT to help MNEs in identifying indicators triggering questions from tax authorities (if the OECD is not otherwise planning on doing so)

    What is not mentioned is the trend toward transparency of tax data, which introduces additional issues as data becomes more granular and subject to interpretation by non-tax readers of such information. 

 

Click to access TEI%20Comments%20-%20OECD%20County-by-Country%20Reporting%20Review%20-%20FINAL%20to%20OECD%205%20March%202020.pdf

The Italian parliament has proposed relief from IRAP for 2020 relating to companies with less than EUR 250 million of sales.  Other incentives, business and personal, are also being proposed to restore some fiscal growth due to COVID.

Saudi Arabia has tripled its 2-year old VAT law, from 5% to 15%, as of July 1, 2020.

Does this represent a new trend for countries hungry for revenues due to shortfalls from COVID-19?

https://www.bbc.com/news/business-52612785

The Democratic House passed an extensive new CARES-19 bill, which is subject to Senate review and further amendments.  Most importantly, the effective dates are retroactive, thereby reversing / revising some provisions of the prior enacted CARES Act bill.

For multinationals, the NOL carry back period is restricted to years beginning 1/1/2018, thereby negating the positive rate arbitrage from 21% to 35% for 2016 and 2017.  Additionally, the Employee Retention Tax Credit provisions have been liberalized, from a change in the quarterly decline in gross receipts for year-over-year and increasing the amount of “qualified wages” eligible for the credit.

https://www.npr.org/2020/05/12/854707010/read-the-house-bill-calling-for-3-trillion-in-coronavirus-relief

In response to prior comments, including additional clarification, HMRC has issued draft guidance for which comments are to be received by May 15, 2020.

With regard to penalties, which are a significant concern re: implementation and reporting of DAC6 reportable arrangements, there will be a “reasonable excuse” guideline.  This guideline will be supporting by the governance and documentation principles established in the reporting process.

EY’s Alert provides additional details on this recent development.

https://www.ey.com/en_gl/tax-alerts/uk-hmrc-issues-draft-guidance-on-mandatory-disclosure-regime-regulations

In response to comments from countries, companies and tax advisors, the EU Commission has prepared a draft Council Directive to extend the DAC6 reporting deadlines by 3-months due to COVID-19 considerations.

The initial report, covering the period from June 25, 2018 to June 30, 2020 will be due by November 30, 2020 (currently August 31, 2020).  The 30-day reporting, currently commencing July 1, 2020, will be delayed until October 1, 2020, thereby the first 30-day report would include the period from July 1 to October 1, due 30 days thereafter.

The legal basis for this change is sourced from Articles 113 (indirect tax) and 115 (direct tax) of the Treaty on the Functioning of the European Union (TFEU).  Reportable cross-border arrangements may relate to both indirect and direct tax, thus both legal bases are relevant for the proposed rules.  As a result, a Directive is required to change the prior legislation.

Member States shall adopt and publish, by May 31, 2020, the laws and administrative provisions necessary to comply with the Directive, and communicate to the Commission accordingly.

The Directive will enter into force on the day following that of its publication in the Official Journal of the European Union. 

The extension will allow reporting parties additional time to collect supporting documentation for the initial reporting date, and develop sustainable processes for 30-day reporting thereafter.  

Click to access 08-05-2020-proposal_for_a_council_directive_amending_directive_201116eu.pdf

ERTC: IRS reversal

IRS has agreed to reverse its FAQ decision in which it denied the benefits of the Employee Retention Tax Credit for health care expenses of furloughed employees that were not receiving a salary for not working.

This is a welcome change, as it conforms to the intent of the Cares Act, Joint Committee on Taxation and Senate Finance Committee.

It is hopeful they will also revise their distinction of benefits for “essential” and “non-essential” businesses.

As a reminder, the FAQ’s do not have legislative authority and are at the lowest level of guidance, which begins with the Internal Revenue Code and Regulations.

https://www.finance.senate.gov/chairmans-news/following-bipartisan-request-treasury-modifies-employee-retention-tax-credit-eligibility-for-employers-providing-health-benefits-for-furloughed-employees

 

Effective July 1, 2020, regular payments subject to withholding, and fulfilling tax treaty requirements, will be subject to paying the withholding taxes and filing for a refund, which is estimated to be a 6-month lag.

Exceptions would be approval by the tax administration, also a 6-month process, or assertion by the board of directors that all requirements have been met which is subject to personal liability and therefore a personal deterrent.

As other countries generally follow such trends, will COVID-19 prompt such actions to preserve final cash flow?

EY’s Alert provides additional details on this development.

https://taxnews.ey.com/news/2020-1072-poland-to-impose-withholding-tax-on-cross-border-payments-as-of-1-july-2020

 

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