As the Mandatory Disclosure Rules of DAC6 are still being interpreted by Member States, practitioners and advisors, the European Commission has adopted a new package of initiatives, including
- 25-step Action Plan to be implemented between now and 2024, addressing a fair and simple tax system with a focus on technology,
- DAC7, exchange of information by sellers on digital platforms, and
- Tax Good Governance in the EU and beyond, including a review of the EU list of non-cooperative jurisdictions
The tax package is well worth reading, especially the introduction of DAC7, which provides context for the manner in which tax rules and parliamentary procedures must be met prior to formal adoption.
EY’s Tax Alert provides a detailed summary, including links to the initiatives.
The European Commission has recently released a public consultation on improving double taxation dispute resolution mechanisms, with comments accepted through 10 May 2016. It is a process / Best Practices approach to enact future efficiencies. A summary story and consultation links are provided for reference:
Click to access survey_consult_doc_double_tax_en.pdf
- Double or multiple taxation by EU Member States is recognized as a barrier to operate freely across borders.
- A legislative proposal is expected by the end of 2016, following the comment period.
- The Mutual Agreement Process (MAP) currently is not bound to reach a solution.
- The EU Arbitration Convention (re: transfer pricing cases and permanent establishment profit attribution) is acknowledged as a current process, but limited in scope.
- The last such public consultation (2010) resulted in an arbitration provision, although it has not been mandated in double tax conventions.
- Stakeholders’ views are requested on the relevance of removing double taxation, EU objectives and proposed solutions.
This document is pivotal in establishing practical and efficient EU dispute resolution mechanisms ongoing, and all interested parties should submit thoughtful input.
The proposal, as noted, would only be effective between EU Member States, not between one Member State and another non-EU jurisdiction or between non-EU jurisdictions. The EU has been a strong proponent in leading global best practices in the post-BEPS environment. Therefore, global consistency of the EU approach is also encouraged, especially by countries having no such dispute mechanism.
Additionally, other countries’ need to rethink sovereignty arguments in trying to evade / negate the effect that such transparent measures would have on their ability to address local tax practices.
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.
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.
OECD’s press release highlights their endorsement of the recently announced Anti-Tax Avoidance Package proposal.
“OECD Secretary-General Angel Gurría welcomed the Commission’s proposal, which he said marks an important milestone towards the development of a comprehensive, coherent and co-ordinated approach against corporate tax avoidance in Europe.”
This acknowledgment puts additional pressure on the EU Member States for unilateral adoption, as a Member State will not want to be seen as an outlier to transparency and the tax avoidance political landscape. Thereby, the possibility of unilateral adoption is (highly) likely.
Placing additional context behind the BEPS statement, the press release provided the following statement: “The OECD conservatively estimates revenue losses from BEPS at USD 100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues.”
The European Commission has aimed its sights upon the Limitation on Benefits (LOB) provision between Netherlands and Japan. Netherlands has been asked to change this treaty provision on the grounds that it is incompatible with EU law.
As the LOB provision is widely used in the US treaty network, as well as many other countries, the impact of this recent development may expand exponentially with global ramifications. Accordingly, this pursuit should be closely followed.
Deloitte’s summary is provided for reference:
The new EU Directive for the automatic exchange of tax rulings now moves forward for approval, with an effective date of 1/1/2017. A copy of the press release is provided:
Click to access 40802203260_en_635797403400000000.pdf
- Cross-border tax rulings and advance pricing agreements (APAs) will be automatically exchanged between EU Member States.
- The rulings will be stored in a EU central repository, with access available to the Member States.
- Rulings issued from 2012 will generally be included in the exchange of information, subject to de minimis thresholds.
This development is now moving forward with a transparency focus, although what information will practically be exchanged may be different dependent on the respective Member State.
Multinationals should review prior rulings subject to this exchange to avoid potential surprises.