Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘EU Parent Subsidiary Directive’

Belgian Fairness Tax lesson: Appeal early

The EY Global Alert link highlights the fact that the former Belgian Fairness Tax was determined to violate:

  • Principle of legality
  • Article 4, Parent-Subsidiary Directive
  • Constitutional principles of equality and non-discrimination

Despite these multiple violations of law, the principle of equality was limited to assessments commencing in 2019, with limited exception.

Most importantly, the lesson learned from this not-uncommon example is: Appeal early to preserve your legal rights; as courts may not preserve such rights in their final decision.  

 

Click to access 2018G_01226-181Gbl_Belgian%20Constitutional%20Court%20annuls%20Fairness%20tax.pdf

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Tax Risk Management

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France’s Finance Act 2016:new trends

The French Parliament has adopted the Finance Act for 2016, in addition to amendments of the 2015 Finance Act.  A comprehensive summary by Bird & Bird is provided for reference:

http://www.twobirds.com/en/news/articles/2016/france/finance-act-for-2016-and-amended-finance-act-for-2015-company-taxation

Highlights:

  • Country-by-country (CbC) reporting, effective for the 2016 tax year, for French based MNE’s and other companies not subject to a CbC requirement.  (Note for US MNE’s: under the proposed Regulations, this would require CbC reporting in France, and other countries, for 2016 whereas the 2017 tax year would be reported to the IRS in the US)
  • Penalty up to EUR 100k if a CbC report is not filed.
  • In addition to current French regulations for transfer pricing information, a new requirement has been added: Identification of jurisdictions where intra-group transactions are conducted or where group members own intangible assets.
  • The 10.7% exceptional contribution on corporate income tax has not been extended, thereby lowering the total effective tax rate.  Calendar year taxpayers will not be subject to this charge for 2016.
  • Dividend distributions commencing in 2016 within a French fiscal group, or from an EU member, is subject to a 1% (vs. 5%) income inclusion, to bring its legislation into compliance with European law.
  • The EU Parent-Subsidiary Directive’s provisions are adopted: Anti-abuse de minimis clause including a “main purpose” or “one of the main purposes” test.  Additionally, “an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.”
  • An advisory committee for the research tax cried and innovation tax credit has been created.

The new legislation highlights new trends that may be followed by other countries:

  1. Significant penalties for non-filing of required CbC reports.
  2. Additional subjectivity for anti-abuse provisions.
  3. Legislation that has been adopted to conform with the European Court of Justice determinations.
  4. Additional information reporting, including a focus on IP ownership.

All MNE’s should review these new provisions with a global perspective, not only with respect to companies operating in France.

 

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Transfer Pricing

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Slovakia proposes EU PSD conformity

Slovakia has proposed legislation conforming treatment of hybrid loan arrangements and general anti-avoidance rules (GAAR) of the EU Parent-Subsidiary Directive.  Note that Slovakia has not suggested expansion of such rules, as Sweden’s recent proposal suggests.

EY’s Global Tax Alert highlights these developments, as well as other changes including penalties and service PE determination.

Click to access 2015G_CM5410_Slovakia%20proposes%20changes%20to%20tax%20legislation.pdf

The new legislation is expected to take effect as of 1/1/2016, thus future planning should document transactions accordingly, especially noting the “main purpose” rule of the GAAR initiative which is inherently subjective.

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Transfer Pricing

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Sweden adopts new EU PSD with expansion

The Swedish tax authorities have adopted the anti-hybrid legislation of the EU Parent Subsidiary Directive (PSD), and have chosen to expand the participation exemption limitation to non-EU countries.

A link to EY’s Tax Alert discusses the details of this recent development.

Click to access 2015G_CM5392_Swedish%20Gov%20proposes%20limitation%20to%20participation%20exemption%20rules%20and%20amendments%20to%20Swedish%20Tax%20Avoidance%20Act.pdf

The opportunity to reach beyond the EU PSD, incentivized by OECD BEPS draft actions, may become more a norm than the exception, and is a trend worth watching.

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OECD / UN, Transfer Pricing

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Danish GAAR moves forward

Following up on its intent to introduce a “Super GAAR” (refer to 03 Jan 2015 post), a draft bill has been issued by the Danish tax authorities to achieve this objective.  The new anti abuse provisions would take effect 01 May 2015 with no grandfathering exception.

The draft bill would contain two GAAR provisions:

  • EU tax directive following the EU Parent-Subsidiary Directive (PSD) adopted by the European Council on 27 January.
  • Domestic provision, mirroring language in the PSD, that would apply to all EU Directives, including the Interest and Royalty Directive.

The provisions would apply to existing and new Danish tax treaties based on the premise that treaty benefits are not available in arrangements that include abuse of treaty provisons.

The inherently subjective nature of the GAAR proposals, including the override of EU Directives, will likely be challenged by taxpayers and possibly the courts.  In the interim, Danish transactions should be exercised with an element of care re: the potential application of GAAR that would reverse the tax advantage obtained.

The final OECD BEPS guidelines are yet to be issued, thus inconsistencies may arise between the unilateral legislation speeding into Danish tax law and OECD’s final guidance that aims at worldwide consistency.

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Transfer Pricing

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Inconsistent (tax) terminology adds to confusion

The inconsistent use of (tax) terminology in drafting / enacting legislation and communicating issues re: perceived tax abuse, developing specific/targeted/general anti-avoidance rules (SAAR, TAAR, GAAR), anti-abuse rules, etc. promotes subjectivity, uncertainty, and misguided perceptions in trying to understand complex legal and technical international tax laws and regulations.

The recently drafted anti-abuse rule in the EU Parent-Subsidiary Directive (attached link for reference) is designed as a minimum standard to be adopted by EU Member States.  Article 1, paragraph 4 of the Directive states “This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse.”  This language should be compared to other tax legislation that introduce additional subjectivity and confusion with undefined and misunderstood terminology.

http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2016633%202014%20INIT

Subjective terminology that accompanies undefined verbiage as a basis for tax laws and regulations, such as anti-avoidance / abuse rules, further complicates comprehension, application, interpretation, and assessment of complex international tax rules.

The phrases “tax evasion” and “tax fraud” clearly set forth bright legal lines for definition and enforcement, whereas inherently subjective phrases of “tax avoidance,” “aggressive tax planning,” “intent of Parliament”, “tax abuse,” and similar terminology result in additional uncertainty for deciphering the true intent of significant tax legislation.

It would be beneficial to recognize the inherent inconsistencies of terminology applied in tax laws and regulations, and commence inclusion of verbiage and definitions that provide clarity promoting consistent application, implementation and enforcement of international tax guidelines.

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OECD / UN, Transfer Pricing

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Denmark: (Super) GAAR?

The General Anti-Avoidance Rule (GAAR) has received a status of prominence during 2014, and continues its subjective and complex override provisions in domestic law that are interwoven with treaty provisions.

Denmark has proposed a (Super) GAAR, trumping the EU Parent-Subsidiary Directive, EU Interest-Royalty Directive, EU Merger Directive and Danish double tax treaties.  Notwithstanding its current status as a “proposal,” Denmark’s intent is clearly shown to provide an umbrella rule, evidently overriding the respective treaties, providing that a “main purpose” rule which achieves tax advantages would be used to disallow respective tax benefits of the transaction(s).  The proposed rule would be effective by 01 May, 2015.

PwC’s Insight has provided a brief summary of the proposal:

Click to access pwc-denmark-introduce-gaar-double-tax-treaties-directives.pdf

GAAR continues to be “the elephant in the room,” highly visible although the rules and appeal avenues are distinct and arbitrary for every country.  Some countries have GAAR rules, along with specific / targeted anti-avoidance rules (SAAR / TAAR).  Thereby, tax uncertainty and the risk of double taxation increases, dispute resolution (if available) avenues are further stressed, and arbitration measures may not be available.

With respect to arbitration, it should be adopted by every country to achieve mutuality with taxpayers, however some countries have expressly stated that they do not want to give up their control / sovereignty.  Unfortunately, OECD has not aggressively pursued this remedy for multilateral agreement.

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OECD / UN, Tax Risk Management, Transfer Pricing

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Spain: New laws, including BEPS alignment

Spain has introduced new tax reforms that will be effective 1/1/2015.  A Deloitte International Tax Alert provides details of the new rules, with a link provided for reference:

Click to access dttl-tax-alert-spain-021214.pdf

Key Observations:

  • OECD BEPS incentivized anti-hybrid rule; Disallowed deductions where no income is generated (Deduction/No-Inclusion), income will not be subject to tax, or income will be subject to a nominal tax rate of less than 10%.
  • Impairment losses will be limited.
  • The 30% corporate income tax rate will be reduced to 28% for 2015, and 25% in subsequent years.
  • NOL’s will be available for indefinite carryover, although subject to taxable income limitations.
  • The Statute of Limitations to review NOL’s is extended from 4 to 10 years.
  • Participation exemption rules are revised, including a anti-hybrid measure to prevent a benefit where a dividend represents a deductible expense for the payer (in alignment with the EU Parent-Subsidiary Directive).
  • New consolidated tax regimes are included, including horizontal tax consolidation.
  • Goodwill and asset step-ups of a merger after 2014 will not be recognized for tax purposes.
  • CFC rules are modified.  Spanish taxable income will include a CFC’s income from a transfer of assets or rights, or service income of the CFC where there are no material and personnel resources at the level of the CFC.  Additionally, certain passive income will be subject to the CFC rules.

The EU Parent-Subsidiary Directive (EU PSD) rules were anticipated to be effective by the end of 2015, whereas the anti-hybrid rules represent a proactive legislative response to the OECD BEPS initiatives for which this rule may not match the final guidelines that the OECD will provide in 2015.

Accordingly, the OECD BEPS Guidelines should be closely followed, knowing that proposed guidelines and actions are being legislatively enacted in various countries that provide a complex puzzle of different actions for identical transactions.

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OECD / UN

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EU Parent-Sub Directive: Anti-abuse proposal

A anti-abuse rule has been proposed by the EU Economic and Financial Affairs Council for inclusion in the EU Parent-Subsidiary Directive (PSD), following implementation of hybrid mismatch rules as summarized in my post of 24 June 2014.  The proposal would be required to legislated into law by 31 December 2015, in addition to the earlier hybrid loan rules.

A copy of the communique is attached for reference:

http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2016435%202014%20INIT

Key observations:
Annex I contains the following language (highlights added for emphasis) for the proposed anti-abuse rule:

Member States shall not grant the benefits of this Directive to an arrangement or a series of arrangements that, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage which defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. 3. For the purposes of paragraph 2, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. 4. This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse.”

Annex II provides further reference stating that EU Member States  will endeavor to inform each other, and additionally that an anti-abuse provision will be considered in future work addressing the EU Interest and Royalties Directive 2003/49/EC.

This proposal should be closely followed, as it will directly affect transactions between EU Member States.  Additionally, this initiative will be followed by other countries in drafting domestic and/or treaty anti-abuse/anti-avoidance rules, possibly resulting in a multi-pronged approach of anti-avoidance / anti-abuse rules in Directives, treaties and domestic legislation.

The subjectivity of this rule will increase complexity, reduce clarity and certainty while being subject to further appeals contesting implementation and/or interpretation of the guidelines, including the “main purpose” test.

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OECD / UN

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OECD BEPS: EY update

EY’s recent tax alert highlights the recent developments and trends of the OECD BEPS initiatives:

OECD
The OECD has announced another in its series of webcasts providing updates on developments with respect to the BEPS project. The webcast is scheduled for 15 December 2014 and will feature senior members of the OECD secretariat.

Asia-Pacific region
On 24-27 November 2014, the creation of a new task force was announced at a meeting of the Study Group on Asian Tax Administration and Research (SGATAR) in Sydney. The task force is to be made up of SGATAR members and be designed to, among other things, enable the Asia-Pacific region to discuss and to keep abreast of international developments and issues including base erosion, profit shifting, and tax transparency. According to the announcement, there is already unprecedented and powerful global collaboration on these issues and the creation of the task force will give all SGATAR members a platform to play a role, including relaying their views to international forums. The task force also is intended to enable cooperation and support for the development of robust, cohesive tax systems in each jurisdiction. According to the announcement, SGATAR members will be able to use the task force to coordinate sharing of best practices and experience and to seek assistance on implementing initiatives such as exchange of information. Current SGATAR members include Australia, People’s Republic of China, Hong Kong SAR, Indonesia, Japan, Republic of Korea, Macao SAR, Malaysia, Mongolia, New Zealand, Papua New Guinea, The Philippines, Singapore, Chinese Taipei, Thailand and Vietnam.

See EY Global Tax Alert, Asia Pacific tax administrations create task force as next step in greater regional cooperation, dated 2 December 2014.

European Union
On 1 December 2014, according to several media outlets, the Finance Ministers of Germany, France and Italy sent a joint letter to Pierre Moscovici, European Union (EU) Commissioner for Economic and Financial Affairs, Taxation and Customs. According to the reports, the letter calls upon the EU to rapidly develop a new EU Directive on anti-base erosion and profit-shifting measures, which should be presented for consideration before the end of 2014, with a view to EU Member States adopting the measures therein by the end of 2015. According to the reports, the ministers noted that the G20 and the OECD are already one year through a two year long comprehensive BEPS initiative, but further noted that it is important that the EU should also adopt a common set of binding rules that go beyond greater transparency and company registries, to a “general principle of effective taxation” to compensate for the EU’s lack of “tax harmonization.” According to the letter, these rules should include mandatory and automatic exchange of information on cross-border tax rulings (including Advance Pricing Agreements in the field of transfer pricing), a register identifying beneficiaries of trusts, shell companies and other non-transparent entities, and measures against tax havens.

See EY Global Tax Alert, Finance Ministers of France, Germany and Italy ask European Commission to rapidly develop a new Directive addressing tax avoidance and tax evasion issues, dated 2 December 2014.

France
On 5 December 2014, during the debates on the Draft Amended Finance Bill for 2014, the French Assemblée Nationale incorporated a provision addressing inbound hybrid payments. The rule would deny the participation exemption on income from shares (i) if the income was tax deductible for the distributing entity (in implementation of the EU Parent-Subsidiary Directive as amended on 8 July 2014) or (ii) if such income was paid out of profits from a non-taxable activity. The rule would apply to fiscal years that begin on or after 1 January 2015. The Bill is still in draft form, and final enactment is expected by the end of December.

See EY Global Tax Alert, French Parliament to implement recent EU rule on hybrid mismatches, dated 8 December 2014.

Netherlands
On 1 December 2014, the Dutch State Secretary of Finance provided input on previously raised parliamentary questions regarding the future of the innovation box regime. Generally, the Dutch State Secretary supports the discussions around substance requirements, but also wants to safeguard the position of innovative small and medium sized entities. The Dutch State Secretary has stated that the Netherlands plans to continue to promote innovation through tax and other incentives and expressed the view that, in light of the strong substance requirements that are in place for the Dutch innovation box, the regime should not be vulnerable for abuse. Based on this, it is not expected that the Dutch government will propose major changes to the Dutch innovation regime at this time.

See EY Global Tax Alert, Dutch State Secretary of Finance provides input on innovation box regime, dated 5 December 2014.

New Zealand
On 27 November 2014, New Zealand’s Minister of Revenue released two officials’ reports regarding BEPS. They outline officials’ current views on the BEPS project and the timetable for action. They show strong support for the OECD’s approach to BEPS and commit to no unilateral measures in advance of final OECD recommendations, which should reduce risks of incoherence and double taxation. They also show that tax authorities are using BEPS concerns to justify certain measures with respect to foreign trusts, non-resident withholding taxes, and tax compliance for large corporations. The reports provide a detailed timetable, which should give business some measure of short-term certainty.

South Africa
On 19 November 2014, National Treasury and the South African Revenue Service (SARS) made presentations on transfer pricing during a meeting of Parliament’s Mineral Resources and Finance Committees. SARS informed the committees that specific legislation is being considered for transfer pricing documentation and for country-by-country reporting and that a legislative framework for Advance Pricing Agreements is also being considered. While tighter legislation may be needed, SARS recognizes the importance of a balanced approach in line with domestic and international law, which does not pose a deterrent to foreign direct investment. The date when such legislation will be drafted (or implemented) is unclear. SARS also informed Parliament of the results of transfer pricing audits performed over the last three years. The SARS Transfer Pricing Unit has audited more than 30 cases and made transfer pricing adjustments of over R 20billion (at a conservative estimate) with an income tax impact of R 5billion. A similar number of cases are currently in progress and other cases are in the process of risk assessment. This underscores the importance for South African taxpayers of making sure that their transfer pricing policies are compliant with the arm’s length principle and South African transfer pricing regulations.

See EY Global Tax Alert, South African authorities address transfer pricing and OECD’s BEPS Action Plan, dated 8 December 2014.

Spain
On 28 November 2014, Laws enacting a Spanish tax reform were published in the Spanish Official Gazette. Most rules will enter into force as of 1 January 2015 (subject to specific transition rules). Among many other measures, the new Laws address matters that are focus areas in the OECD BEPS project. Anti-hybrid arrangement rules are introduced under which: (i) expenses corresponding to related party transactions will no longer be tax deductible if, as a result of a different tax characterization, no income is generated or, if generated, the income is tax exempt or subject to a nominal tax rate lower than 10%; and (ii) the participation exemption will no longer apply to dividend or profits distributions that are derived from a tax deductible expense in the source country. Intra-group profit sharing loans, currently characterized as debt instruments for Spanish tax purposes, are treated as equity instruments. An additional limitation is introduced that caps deductible interest on loans financing the purchase of purchase of shares at 30% of the operating profit of the acquiring entity (including where the acquired and acquiring entities are merged or join the same tax unity), subject to an escape clause. The Spanish controlled foreign company (CFC) rules are strengthened, including additional substance requirements for the CFC in order to avoid imputation of foreign low-taxed income. Anti-abuse rules regarding EU dividend and royalty payments are amended.

See EY Global Tax Alert, Spain enacts tax reform, dated 5 December 2014.

United Kingdom
On 2 December 2014, the UK Government issued an update on likely changes required to the UK patent box following the work being done on preferential, intellectual-property (IP) tax regimes as part of the OECD BEPS project. The UK announcement indicates that the joint UK and German proposal on a new modified nexus approach was welcomed by both the G20 and the OECD Forum on Harmful Tax Practices as well as the EU’s Code of Conduct Group in recent meetings. The proposal will now form the basis of continuing work by the Forum on Harmful Tax Practices to determine how the approach will work in practice. As part of this work, the OECD will carry out an informal consultation with countries and other stakeholders. Under the proposal, countries with existing preferential IP regimes would be required to agree to close these to new IP by 30 June 2016 and to eliminate them by 30 June 2021, after which all countries would be required to operate only regimes that are compliant with the modified nexus approach. The UK has confirmed its commitment to retaining a patent box. It will consult on changes to the existing patent box once the Forum on Harmful Tax Practices has completed work on the detail of the new rules.

See EY Global Tax Alert, Update on UK Patent Box and other preferential IP regimes, dated 3 December 2014.

On 3 December 2014, the UK Chancellor of the Exchequer delivered his Autumn Statement. Key announcements from a BEPS perspective include the introduction of a “diverted profits tax” on profits earned as a result of substantial UK activity (e.g., sales) where those profits are considered to be diverted abroad. The tax charge will be 25% of the diverted profits and will come into effect from 1 April 2015. At present there is no further information on the rules but draft legislation and a technical note are expected to be available on 10 December. Also, a consultation document was released on the implementation of the OECD’s recommendations to prevent hybrid mismatches under BEPS Action 2. The new rules are proposed to apply to payments made after 1 January 2017. The rules proposed in the consultation document are directionally similar to the existing UK anti-arbitrage rules, but the motive test would be removed. This would mean that, from 2017, any structure involving hybrid mismatches would potentially be subject to higher UK taxation, regardless of whether the mismatch was for the purposes of avoiding UK tax. The consultation document largely mirrors the latest Action 2 report issued by the OECD in September.

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OECD / UN

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Substance vs. Form: “Directive Shopping”

Today’s tax climate, OECD Base Erosion & Profit Shifting (BEPS) Action Plans, 2014 changes to the OECD Model Tax Convention re: “Beneficial Ownership” (refer to 22 July 2014 post), and General Anti-Abuse Rules (GAAR) all focus on increased substance of activities in an entity, versus pure legal form, to derive relevant treaty benefits.

A recent Austrian Administrative High Court decision (VwGH 26/6/2014, 2011/15/0080-13) focused on the EU Parent-Subsidiary Directive (PSD) re: “directive shopping.”  There were dividend distributions from an Austrian company to a pure holding company in Cyprus with no people or physical assets. Withholding tax was paid by the Austrian company, with a refund claimed by the Cypriot company in accordance with the EU PSD.  (Note the Cypriot company had a Russian shareholder, for which direct distributions from Austria to Russia would not have the benefit of the EU PSD.)

The High Court, confirming the tax authority’s view, stated the Cypriot company structure was abusive.  Accordingly, the withholding tax refund application of the Cypriot company was denied.

The substance vs. form application of the case highlights the potential withholding tax issues for a pure holding company located in a tax favorable jurisdiction.  Thus, all holding company structures should be reviewed under current law, and most importantly with respect to future international tax changes focusing on the proper substance to receive treaty benefits.

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Tax Risk Management, Transfer Pricing

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OECD BEPS & EU Case Law: Uncertainty ahead

PwC has published a very informative article addressing the impact of EU case law, exemplified by cases from the Court of Justice of the European Union, on the OECD BEPS international tax proposals.  There may be additional uncertainty by EU Member States after the OECD BEPS measures are announced due to the “fundamental freedoms” in the Treaty on the Functioning of the European Union (CJEU), State Aid principles and the EU direct tax initiatives, including the Parent-Subsidiary Directive.  The link to the article is included for reference:

Click to access pwc-eu-beps-july-2014.pdf

The article provides excellent references to current EU Law concepts, including the basic premise that domestic legislation must be compliant with EU law.  Additionally, the OECD proposals for hybrid mismatch transactions, tax treaty abuse and harmful tax practices are discussed against the backdrop of EU legislation.

The article concludes with the takeaway: “The implementation of OECD BEPS proposals within the EU/EEA Member States will only be possible to the extent that those proposals are also compliant with EU Law.  So far, however, little attention seems to have been paid to potential EU Law issues in the OECD’s draft discussion papers, so that EU/EEA Member States might actually risk breaching EU Law.  As a result, companies doing business in the EU/EEA will be faced with legal uncertainty about the lawfulness of implemented OECD BEPS proposals in domestic law or tax treaties.”

As an additional observation, there is a likelihood that the domestic legislation enacting OECD BEPS proposals will not be consistent for each Member State, thereby the legal uncertainty should be reviewed for each Member State as domestic legislation and OECD proposals are implemented.

 

 

 

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OECD / UN

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EU Parent-Subsidiary Directive: One step forward

On 20 June 2014, the EU Economic and Financial Affairs Council reached agreement on modifying the EU Parent-Subsidiary Directive.  The agreement proceeds with the prevention of double non-taxation via the use of hybrid financing arrangements, while agreeing to work separately on an amended General Anti-Avoidance Rule (GAAR).  Links to the current EU Parent Subsidiary Directive (2011/96/EU), a PwC Tax Alert summarizing the proposal and the EU proposals are included for reference:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:345:0008:0016:EN:PDF

Click to access pwc-newsalert-20-june-2014-amendment-parent-subsidiary-directive.pdf

http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2010419%202014%20INIT

The amendment is limited to the 28 Member States of the EU, with a similar proposal envisioned in the OECD BEPS initiative.  It is interesting to note the OECD BEPS provisions are being focused within the EU Community, in addition to the international OECD Guidelines.  Timing for this EU proposal is for domestic legislative action by December 2015.

Re: Best Practices, it is prudent to review the EU legal structure for such hybrid arrangements to quantify the effect of this proposal, possibly requiring modification of hybrid debt and/or legal entities.  Additionally, such hybrid instruments in non-EU countries should be noted for the forthcoming OECD BEPS corollary provision.

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OECD / UN

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European Commission report: TP adjustments/audit plan

The European Commission published a report 4 June 2014 on the work of the EU Joint Transfer Pricing Forum in the period July 2012 to January 2014.  The report highlights the effect, including double taxation, of secondary and compensating adjustments, in addition to a flowchart for a recommended transfer pricing audit plan.  The link to this report is included for reference, with key excerpts from the report:

Click to access com(2014)315_en.pdf

Secondary adjustments

The report presents the general aspects of secondary adjustments and gives recommendations on how to deal with possible double taxation in this context. Member States in which secondary adjustments are not compulsory are advised to refrain from making them in order to avoid double taxation. Member States in which secondary adjustments are compulsory are advised to provide ways and means to avoid double taxation.

Drawing on the EU Parent Subsidiary Directive (PSD) the report recommends characterising secondary adjustments within the EU as constructive dividends or constructive capital contributions. Accordingly, the PSD ensures that no withholding tax is imposed on the distribution from a subsidiary to its parent within the EU. For cases not covered by the PSD, the report describes and recommends the procedure of repatriation in the context of a Mutual Agreement Procedure (MAP) available under the respective applicable Double Taxation Agreement (DTA) or even at an earlier stage. Further it is recommended that Member States should refrain from imposing a penalty with respect to the secondary adjustment.

Compensating adjustments

The report recommends that Member States should accept a compensating adjustment initiated by the taxpayer (upward as well as downward adjustment), if the taxpayer has fulfilled certain conditions: the profits of the concerned related enterprises are calculated symmetrically, i.e. enterprises participating in a transaction report the same price for the respective transaction in each of the Member States involved; the taxpayer has made reasonable efforts to achieve an arm’s length outcome; the approach applied by the taxpayer is consistent over time; the adjustment has been made before the tax return is filed; in case a taxpayer’s forecast differs from the result achieved, the taxpayer is able to explain why this occurred, should it be required by at least one of the Member States involved.

The application of secondary adjustments may lead to double taxation. Therefore, if secondary adjustments are not compulsory, it is recommended that MS refrain from making secondary adjustments when they lead to double taxation. Where secondary adjustments are compulsory under the legislation of a Member State, it is recommended that Member States provide for ways and means to avoid double taxation (e.g. by endeavouring to solve it through a MAP, or by allowing the repatriation of funds at an early stage, where possible). These recommendations assume that the taxpayer’s behavior does not suggest an intent to disguise a dividend for the purpose of avoiding withholding tax.

When repatriation is agreed in a MAP settlement, it is recommended that the MAP agreement states that no withholding tax will be applied by the Member State out of which the repatriation is made and no additional taxable burden will be imposed in the Member State to which the repatriation is made.

As taxpayers may not be aware of the fact that in certain situations a separate request needs to be made for avoiding double taxation resulting from secondary adjustments, Member States which do not consider that secondary adjustments can be treated under the AC are encouraged to highlight in their public guidance the fact that a separate request under Art 25 OECD MTC may be needed to remove double taxation. For reasons of efficiency, it is recommended that taxpayers submit both requests in the same letter.

TP Audit Work Plan

This TP audit work plan is an example of the various steps that are typically performed during a TP audit (not a comprehensive audit) on the side of the taxpayer and on the side of the tax administration, respectively. It should be understood as an informative guide rather than as prescriptive rules. It is recognised that the structure suggested may not fit into all MSs’ and taxpayers’ legal framework and administrative practice. An underlying assumption of the work plan is that properly prepared documentation – as requested by local tax authorities – is available and well-trained staff act on both sides.

 

Re: Best Practices, this is an excellent document to review.  It explains secondary and corresponding adjustments, which are often areas overlooked in audits until the final assessment is issued and the audit has been settled in the primary jurisdiction.  Additionally, the TP audit work plan is a valuable document to develop Best Practices with the tax authorities in planning an audit, developing mutual trust and cooperation.  These principles should also be applied globally, not only within the EU.

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Transfer Pricing

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EU Parent-Sub Directive: GAAR/Mismatch proposals

The proposals for the EU Parent-Subsidiary Directive have been published, with a summary and KPMG review in this post.

Proposed amendments on 25 Nov., 2013

•    Domestic law implementation

•    Financial mismatches (PPL, hybrids, etc.)

•    GAAR:

Artificial arrangements: to gain improper tax advantages, and defeats object, spirit & purpose of tax provisions

•     Compliance with Directive by 31 Dec. 2014

Determination of artificiality (one or more):

•     Legal characterization, vs. legal substance, of individual steps

•     Does not reflect economic reality

•     Arrangement is not ordinarily used in reasonable business conduct

•     Arrangement has offsetting or cancelling elements

•     Transactions are circular in nature

•     Arrangement results in a significant tax benefit which is not reflected in the business risks undertaken by the taxpayer

Click to access eu-nov25-2013.pdf

This proposal follows GAAR implementations by several countries in advance of the OECD BEPS Action Plan.  This subjective anti-avoidance action should be followed, as other countries will also be examining the relevant wording and guidance therein.

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Tax Risk Management

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