The Council of the EU published its latest report, summarized and referenced herein:
The US complies with all the EU Member States re: Automatic Exchange of Information (AEOI) due to its double tax treaty network, FATCA, etc.
Guidance on notional interest deductions who wish to adopt a similar method, as not harmful by the Group (no safe harbor; general criteria)
Delisting certain non-cooperative jurisdictions
Monitoring implementation of commitments by jurisdictions
Identification of new preferential regimes
Further defensive measures for non-cooperative jurisdictions
Treatment of partnerships re: substance
The way forward; future monitoring, etc.
This is important guidance, as it provides transparency into the tax measures adopted, or not adopted, by various jurisdictions. It also provides potential measures to incentivize non-cooperative jurisdictions.
The EU, now recognized as the accelerator of BEPS for its Member States, have issued a roadmap of priorities and objectives for the near future. A link to Deloitte’s World Tax Advisor is provided, and the attached article therein.
I have highlighted certain parts of the roadmap worth watching:
Country-by-Country reporting (will there be a consistent EU standard?)
Hybrid mismatch arrangements
Code of Conduct activities, including alignment of transfer pricing outcomes with value creation, an extension of BEPS Actions 8-10. (Note Sweden and UK are already using such Actions re: clarification of existing transfer pricing policy)
Payments from an EU to non-EU country
The EU Arbitration Convention is mentioned, although it’s practical effect on mitigating dispute resolution is limited
European Union: Dutch presidency issues EU-BEPS roadmap
The Netherlands, which currently holds the presidency of the council of the EU, issued an ambitious EU-BEPS “roadmap” on 19 February 2016 that sets out plans to move forward with previous EU proposals, as well as future efforts on areas relating to the OECD’s base erosion and profit shifting (BEPS) project. The roadmap includes the following:
Possibly including a minimum effective taxation clause in the EU interest and royalties directive, and also possibly including or referring to the OECD “modified nexus approach” (however, no mention is made of the previous proposals to reduce the shareholding requirement in the directive from 25% to 10%, add legal entities to the annex or remove the “direct” holding requirement);
Reaching agreement on the European Commission’s proposal to introduce the OECD BEPS minimum standard for country-by-country reporting in the EU;
Initiating discussions for reforming the EU Code of Conduct group (specifically, the group’s governance, transparency and working methods), followed by discussions on a revision to the mandate in relation to the concept that profits are subject, as appropriate, to an effective level of tax within the EU;
Reaching agreement on guidance and explanatory notes on hybrid permanent establishment mismatches in situations involving third countries;
Continuing to monitor the legislative process necessary to revise existing patent box regimes; and
Monitoring and exchanging views on the BEPS developments relating to tax treaties concluded by EU member states, the OECD multilateral instrument to modify tax treaties and the European Commission’s recent recommendations on the implementation of measures to combat tax treaty abuse.
The Code of Conduct group will start work on the following:
Preparing EU guidance on aligning transfer pricing outcomes with value creation, in accordance with BEPS actions 8-10;
Identifying potential issues that arise when payments are made from the EU to a non- EU country;
Assessing the opportunity for developing EU guidance for implementing the conclusions on BEPS action 12 (the disclosure of aggressive tax planning), notably, with a view to facilitating the exchange of information between tax authorities; and
Developing guidelines on the conditions and rules for the issuance of tax rulings by EU member states.Additionally, the High Level Working Party on Taxation may discuss the current situation regarding the EU arbitration convention that allows the settlement of transfer pricing disputes.
The EU Parliament’s resolutions were passed by a vote of 508 to 108, with 85 abstentions. The proposals call for mandatory country-by-country (CbC) reporting, a common consolidated corporate tax base (CCCTB), defined tax terms and transparency / exchange of tax rulings. A summary press release and the full report are provided for reference:
Welcomes the EU Parent-Subsidiary Directive amendments, effective at year-end 2015, for a general anti-abuse rule and hybrid mismatches.
EU Commission has breached its obligations under Article 108 of the Lisbon Treaty by not launching state aid investigations previously.
EU Member States should respect the principle of profits taxation where they are generated.
Promote good practices on transfer pricing and the pricing of loans and finance fees in intra-group transactions.
Commission to further investigate restrictions of deductions for intercompany royalty payments (i.e. counter profit shifting).
All rulings that have an impact on other Member States to be presented in the CbC report, and shared with the Commission and tax administrations. Rulings to be publicly disclosed in accordance with confidentiality requirements.
Mandatory CCCTB, with a deadline for the consolidation element and without any further impact assessments.
Develop measures to tackle cross-border VAT fraud.
Reform of the Code of Conduct on business taxation.
New State Aid guidelines by mid-2017.
EU to be a global leader in tax transparency.
More extensive CbC report, with intra-group transactions.
Accelerate European Tax Identification Number project.
Aggressive tax planning is incompatible with Corporate Social Responsibility (CSR).
Outgoing financial flows from EU are taxed at least once (i.e. withholding tax).
Transition period for developing countries to align with Global Standard on Automatic Information Exchange.
This report is compelling, far-reaching and a resource that will be used worldwide, as most non-EU countries will attempt to follow the ever-increasing EU intensity and propensity for changes in the international tax arena. Thereby, it is a must read and a learning tool for non-tax executives in multinational organisations, as well as tax advisors, tax administrations and other interested parties.
My prior post of 30 May 2015 revealed that the European Commission would be developing a new Action Plan, the contents of which are hereby revealed.
The objectives of the new Action Plan are:
Re-establish the link between taxation and where economic activity takes place
Ensuring that Member States can correctly value corporate activity in their jurisdiction
Creating a competitive and growth-friendly EU tax environment
Protecting the Single Market and securing a strong EU approach to external corporate tax issues, including BEPS measures, to deal with non-cooperative tax jurisdictions and to increase tax transparency
The new Action Plan is provided for reference:
5 Key Action Areas:
Mandatory Common Consolidated Corporate Tax Base (CCCTB), with the consolidation component included as a second step.
Taxation of profits where they are generated (“However, it is clear that the current transfer pricing system no longer works effectively in the modern economy.”)
Enhance the EU’s tax environment via cross-border loss offset and improving double taxation dispute resolution mechanisms.
Increased tax transparency via an EU-wide list of third country non-cooperative tax jurisdictions and assessing whether additional disclosure obligations of certain tax information should be introduced.
Providing EU Coordination Tools to improve Member States’ tax audit coordination and reforming the Code of Conduct for Business Taxation and the Platform on Tax Good Governance.
The European Commission’s Action Plan clearly reveals a large step away from the traditional arm’s-length transfer pricing principle and toward an economic activity based source of taxation. This clear divergence, with the OECD and established legislation in most countries, sets the stage for a new evolution in transfer pricing and a hybrid of different approaches by various jurisdictions in the next several years.
Accordingly, the Action Plan is required reading to appreciate short and long-term objectives of the European Commission to unify the Member States.
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
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.