The French bill has approved the Finance Bill for 2019, subject to constitutional review for enactment generally effective 1/1/19. Some important provisions include:
- Interest deductibility, 30% EBITDA/debt-to-equity, limitaitons
- Favorable rate of 10%, vs. 15%, for patent related activities, aligning with the DEMPE/nexus provisions of BEPS Action Item 5.
- Royalty deduction limitation for beneficiaries with less than a 25% effective tax rate and it is listed as a harmful tax regime by the OECD
- For FYs beginning on or after 1 January 2019, a new anti-abuse provision will be applicable as a result of the transposition of article 6 of the ATAD. The main purpose, or one of the main purposes, anti-abuse test re: the EU ATAD will be used to determine if the anti-abuse rule applies for corporate income tax
- A new anti-abuse provision for all other taxes than CIT will allow the FTA to disregard acts which, by seeking to benefit from a literal application of provisions or decisions, against the initial objective sought by their authors, were driven by the main purpose of avoiding or reducing the tax burden which would have normally been borne by the taxpayers, due to their situation or their real activities, if those acts had not been entered into. This provision is effective in 2020
- French GAAR rule is retained (allowing flexibility to combat perceived abuse)
- The Finance Bill for 2019 transposes into French domestic law the provisions of the Directive 2017/1852 dated 10 October 2017 as regards mechanisms to settle double taxation arising as a result of the application of double tax treaties concluded between EU Member States.
- French tax consolidation group rules are modified
France is known for its proactivity in enacting anti-abuse legislation, and especially interesting is the royalty deduction limitation which a two-prong test, whereas Germany is also considering a harsher test to combat the US FDII benefit.
EY’s Global Tax Alert provides detailed summaries of the above provisions, among others.
The IRS has indicated its willingness to share unilateral Advance Pricing Agreement (APA) information to align with BEPS Action 5 re: transparency and substance.
As other jurisdictions have provided taxpayers to submit summary information that will be shared in such exchange, the IRS has not yet indicated such procedures. Thus, it is advised that any multinational with such rulings attempt to obtain a copy of the information to be shared, prior to the automatic sharing process, to ensure its accuracy.
The EY Global Alert provides additional details of this new development.
Most importantly, any taxpayer with tax rulings should already be looking at the information that could be shared to address potential questions/issues by other tax authorities, especially if there are different transfer pricing arrangements in place.
TEI submitted comments on the Modified Nexus Approach for IP (BEPS Action 5) and International VAT/GST Guidelines. Links to the submissions are provided for reference:
Summary: IP, BEPS Action 5:
- Accelerated comment process will likely lead to suboptimal results.
- The singular entity approach to benefit from the IP regime is problematic from a potential restructuring necessity and poses deviations from the arm’s length principle.
- R&D and patents have been expressly stated as benefitting from the IP regime, whereas other activities are not yet mentioned.
- Limiting the preferential regime to strictly patents, vs. innovative software, etc., represents a myopic approach.
- The 2021 expiration date for existing regimes seems too short-sighted for patents that may last 20 years.
Summary: International VAT/GST Guidelines
- Unilateral implementation of such guidelines erodes the neutrality principle, leading to double taxation or double non-taxation.
- Recommendations should align with the OECD discussions for a reverse charge mechanism in B2B scenarios.
- Supplier based documentation requirements should be practical and simple.
- The statement that a VAT/GST registration does not create PE should be moved from a footnote to the body of the document for clarity.
- The lack of consistency in application of transfer pricing adjustments for VAT/GST will provide increased risk of double taxation.
- Final rules that are clear and uniformly interpreted should be implemented via simple, consistent, flexible and proportional guidelines.
TEI’s comments for these two critical topics convey practical and thoughtful considerations for change prior to final implementation. They should thereby be reviewed to better understand the global context and potential consequences for these actions.