Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘EU Anti Tax Avoidance Package’

EU Anti-Tax Avoidance Package: PPT

The EU Anti-Tax Avoidance Package included a Commission recommendation on the implementation of measures against tax treaty abuse.  Specifically, this statement was issued to address artificial avoidance of permanent establishment status as stated in BEPS Action 7 Action Plan.

Re: tax treaties of Member States that include a “principal purpose test” (PPT) based general anti-avoidance rule, the following modification is encouraged to be inserted:

“Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capita l if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that it reflects a genuine economic activity or that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.”

This subjective phrase, that applies notwithstanding other provisions of the Convention, has already been used in new treaties and will proliferate as new treaties are drafted by a Member State, not necessarily with another Member State.  Thereby, it is important to draft supporting documentation that will provide support for transactions against which it is aimed.  This phrase will elicit additional appeals and court cases as to its meaning and / or intent for which non-consistent answers will be provided.

Questions that may be asked re: this statement:

  • Who is concluding on the reasonableness?  What facts are used for such determination?
  • Which facts and circumstances are relevant?
  • What are all of the principal purposes of the arrangement or transaction?
  • How is a benefit measured, directly or indirectly?
  • What is a genuine, vs. non-genuine, economic activity?
  • How do you determine if such arrangement is in accordance with the object and purpose of the “relevant provisions” of the Convention?

The phrase is purposefully vague, and thereby subject to inconsistent interpretation.

It is hopeful that tax administrations will use this statement wisely to address egregious transactions rather than ordinary business transactions for which the clear intent was not an evasion of tax.  This subjectivity will be important to monitor going forward to further understand subjective enforcement interpretations around the world.  

 

 

Tax Strategies: The new norm

As a Tax Policy is recognized as a basic tool for the foundations of a Tax Risk Framework, documented tax strategies are becoming the new norm.

The UK had previously published requests for comments re: publishing a UK tax strategy by UK and non-UK multinationals (MNEs), followed by the EU Anti Tax Avoidance Package with a communique on the subject.

Highlights of EU Communication to the European Parliament:

  • A coordinated EU external strategy on tax good governance is essential for Member States’ to tackle tax avoidance, ensure effective taxation and create a stable business environment.
  • In 2012, the Commission issued a Recommendation encouraging Member States to use transparency, information exchange and fair tax competition to assess third countries’ tax regimes and to possibly apply common counter-measures.  However, this attempt is now recognized as a failed measure.
  • Annex 1 of the Communication sets forth new good governance criteria, which it invites the Council to endorse, as well as provide a basis for all EU external policies on tax matters and promotion of good governance.
  • Annex 2 provide elements forming the basis for negotiating future tax good governance clauses that are recommended for endorsement.
  • A tax good governance standard responds to the EU’s future development commitments and prevents international tax weaknesses that create opportunities for base erosion and profit shifting.
  • The EU seeks to lead by example re: tax good governance.
  • A pan-EU list to identify outliers of tax transparency and tax good governance will be an interim solution until a common EU system is developed. “Once a jurisdiction has been added to the EU list, all Member States should apply common counter-measures against it.”  The defensive measures should be a top-up to other EU Directives, including withholding taxes and non-deductibility of costs for company transactions.

The Communication and Annexes are required reading, as it sets the tone for ensuing battles between the EU Member States’ and other jurisdictions.  Unilateral actions by other countries will probably closely follow, as each country seeks to assert their rights while avoiding the possibility to lose a piece of the tax pie for which everyone is seeking.

It is becoming very clear that MNEs will face a documentation and tax risk framework action to document country/regional/global strategies that will form an element of the post-BEPS transparency world that many are seeking.  

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