With the recent decision re: Ireland state aid by the European Commission, the litigious stage now commences by Ireland, as the order has been provided to collect the state aid, with interest, from the multinational.
As the relevant rulings were not brought forward for approval upon their commencement by Ireland from the European Commission, the Commission now has the right to consider if such rulings are state aid.
This determination will not probably be final for several years as it progresses through the courts, however it does indicate a further trend of uncertainty re: transfer pricing rulings granted by EU Member States. Coupled with the intent of BEPS, the legal aspects of transfer pricing may start to sway towards a perceived “intention” for fairness and non-discrimination, with a “fair tax” flag being waved ever more rigorously.
This uncertainty will provide further chaos with new international tax perspectives being displayed in the public domain.
The EY Global Tax Alert is provided for reference.
EY’s Global Tax Alert summarizes recent BEPS developments around the world:
- Australia’s client experience roadmap re: its multinational anti-avoidance law (MAAL)
- Belgium’s adverse State Aid ruling by the European Commission re: its excess profit tax rulings, which is expected to be appealed
- Chile’s new sworn statement / tax disclosures (highlighted in a recent post)
- Finland’s draft proposal for country-by-country (CbC) reporting and transfer pricing documentation in a Master / Local file context
- Greece’s circular identifying preferential tax regimes
- Korea’s draft decree for transfer pricing documentation
- Luxembourg’s IP amendments and adoption of the EU Parent-Subsidiary Directive’s proposals
- Netherland’s CbC and transfer pricing documentation requirements
- Norway’s new rules for interest limitations, participation exemption regime inapplicable for hybrid instruments, and CbC reporting requirements
- Panama to announce its decision, in March, for adoption of the OECD BEPS recommendations
The trend for recent BEPS updates reflects an expansion of definitive actions into unilateral measures, decisions whether / when to adopt OECD’s BEPS recommendations, new disclosures, subjective anti-avoidance rules with inherent complexity, and each country’s expression of intent re: BEPS Actions coupled with local add-on documentation requirements.
Monitoring of the global developments in the post-BEPS era has introduced new challenges, requiring additional resources and thought processes for documenting transfer pricing methodologies and the business aspect of significant transactions.
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.
EY’s Global Alert highlights several OECD / unilateral actions resulting from the BEPS Action Items announced earlier this month.
- Czech Republic’s 2016’s income tax proposal, including the EU Parent-Subsidiary Directive change limiting exemption of tax deductible distributions, although retaining its own general anti-abuse rule (vs. that in the Directive).
- EU’s State Aid decisions re: Luxembourg and Netherlands, for which legal appeals are expected.
- Honduras transfer pricing information return requirement.
- Indonesian thin capitalization limit of 4:1, remainder of interest non-deductible (thereby incurring one-sided taxation re: interest income of recipient).
- Ireland’s Knowledge Development Box, following the OECD’s recommendations, and country-by-country (CbC) reporting by Irish headquartered groups with a secondary filing mechanism.
- Norway’s 2016 budget proposal, with an interest limitation of 25% of taxable EBITDA.
- Slovakia’s 2016 income tax changes, including implementation of the EU Parent-Subsidiary Directive.
This new post-BEPS period is starting off with a multitude of activities by countries and the EU that is not expected to slow down in the near future. These developments will shape the transfer pricing regime, and resulting complexity and disparity, around the world. Accordingly, these trends should be monitored and addressed in a corporation’s tax risk framework accordingly.
The European Commission (EC) and European Parliament (EP), including the TAXE Committee on Rulings established by the EP, have recently endorsed many provisions that would normally require the unanimity of approval by the Member States. Knowing this has not resulted in success with prior initiatives, a renewed focus may be taking place re: Article 116 of the Treaty on the Functioning of the European Union (TFEU) which empowers the EC/EP to issue a Directive accordingly.
Article 116 TFEU:
Where the Commission finds that a difference between the provisions laid down by law, regulation or administrative action in Member Sates is distorting the conditions of competition in the internal market and that the resultant distortion needs to be eliminated, it shall consult the Member States concerned.
If such consultation does not result in an agreement eliminating the distortion in question, the EP and the EC, acting in accordance with the ordinary legislative procedure, shall issue the necessary directives. Any other appropriate measures provided for in the Treaties may be adopted.
The TFEU is the same legal mechanism used to address State Aid, and may also be the choice of implementation to establish Directives for one or more of the following initiatives:
- EU Common Corporate Tax Base (CCTB)
- Country-by-Country (CbC) reporting, public disclosure
- Tax rulings, (redacted) public disclosure
- Permanent Establishment (PE) definition
- Anti-BEPS Directive, transforming OECD “soft law” into an EU legislative framework
- Interest & Royalty Directive requiring confirmation of EU tax being paid elsewhere
- EU Dispute Resolution approach
Everyone should monitor the EC, EP and TAXE for continuing developments, as they may form the basis for new global standards to enact the intent of BEPS initiatives.
In the context of State Aid, aggressive tax planning, tax avoidance and competition for a country’s fair share of tax, the European Commission has broadened its earlier request for taxpayer rulings to include all tax rulings of all Member States from 2010 to 2013. This initiative introduces additional transparency into the ruling practice of Member States.
Most importantly, the tax cost for denial of tax benefits for previously issued rulings is incurred by the respective companies, not the Member States. MNE’s can participate, directly and/or indirectly, into the process if such rulings are formally investigated. A link to the press release is attached for reference:
This initiative should be monitored by all MNE’s, supplemented by coordinating a list of all such rulings that would be requested for additional review and reference.
PwC has provided an outline of EU State Aid requirements. This comprehensive and succinct summary provides context for the OECD BEPS provisions, tax arrangements that are considered illegal State Aid, and a valuable reference for potential EU State Aid cases in the foreseeable future. A link to the outline is provided for reference:
This information provides a valuable context against which the recent inquiries have been focused, as well as potential areas (including OECD BEPS Actions) that may constitute illegal State Aid in the future. All MNE’s with European operations should be familiar with these legal provisions and the continuing importance that they have in today’s rapidly changing international tax environment.