Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘EU’

EU Proposed Directive: debt-equity bias

Click to access COM_2022_216_1_EN_ACT_part1_v6.pdf

The European Commission (EC) issued today a proposal for a Council Directive to address the debt-equity bias, as part of the EU strategy on business taxation. The rules would introduce tax deductibility of notional interest on increases in equity, while providing for a limitation on net interest expense.

The effective date would be as of 1/1/2024, with Member States’ conforming their laws by 31 December 2023. The equity deduction is based upon a 30% limitation of EBITDA, with carryover provisions.

The proposal is a very interesting read, evidencing the intent to arrive at a practical and efficient methodology to place equity on a more level playing field as interest, from a tax deductibility aspect. Additionally, this intent would also minimize the placement of intercompany loans in entities which do not have a foreseeable ability to repay interest.

Although this is an EU proposal, other countries will be following these developments closely.

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Tax Risk Management

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Grey List: Add “Hong Kong”

The EU, as of October 5, 2021, will add Hong Kong to its “grey list” of non-cooperative jurisdictions for tax purposes.

The grey list imputes a sense of tax avoidance or harmful tax practices for Hong Kong. However, Hong Kong has until December 31, 2022 to change its legislation, thereby avoiding such characterization ongoing.

To the extent no relevant legislation is enacted, potential punitive measures by the EU include changing its characterization to a “blacklisted” jurisdiction, which would provide denial of deductions for payments made thereto, increased withholding tax, taxation of dividends and administrative rules.

This will be important for many reasons, as other aspects of tax (i.e., DAC 6 reporting) use these designations for potential further reporting obligations.

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Tax Risk Management

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EU Parliament adopts DAC7 report

The European Parliament has adopted proposed changes to the draft seventh directive, amending 2011/16/EU, for information exchanges of online platforms.

Recent recommendations for adoption ensures this information can be used for other data sharing purposes (e.g., money laundering). Additionally, the expansion of beneficial ownership transparency and inclusion of real estate, trusts, crypto assets and some capital gains is included.

https://data.consilium.europa.eu/doc/document/ST-13130-2020-REV-1/en/pdf

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Tax Risk Management

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OECD Pillar I & II comments

Attached is EY’s summary of the recent meetings, in which comments were provided for various applications of Pillar I and II.

The EU has also expressed its desire to move forward with a digital service tax if the OECD falls behind in its targeted 2021 dates to prescribe rules. The OECD’s approach will also encounter issues re: dispute resolution in multiple countries, for which countries may not yet be ready for.

As the U.S. presidency is now decided, its direction will also influence the ongoing discussions for global implementation.

https://www.ey.com/en_gl/tax-alerts/oecd-inclusive-framework-political-leaders-promote-global-consen

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Tax Risk Management

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EU:Action Plan, DAC7 & Good Governance

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.

https://taxnews.ey.com/news/2020-1815-european-commission-adopts-package-for-fair-and-simple-taxation?uAlertID=Sd%2FG8rua1oj6%2Fl58EZ2AiA%3D%3D

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EU

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EU blacklist: Additions

The EU blacklist of noncooperative tax jurisdictions, which is used in one of the DAC6 hallmarks for reportable transactions, is revised as of February 18th to include the Cayman Islands, Panama, Seychelles and Palau, in addition to the official list, as included in the referenced link.  It is noted that Turkey was not added to the list.

https://www.consilium.europa.eu/en/policies/eu-list-of-non-cooperative-jurisdictions/

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Tax Risk Management

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EU Code of Conduct

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.

Click to access 2019G_005707-19Gbl_EU%20Code%20of%20Conduct%20Group%20issues%20update%20report%20-%20new%20guidance.pdf

https://data.consilium.europa.eu/doc/document/ST-14114-2019-INIT/en/pdf

http://data.consilium.europa.eu/doc/document/ST-12284-2019-REV-1/en/pdf

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Tax Risk Management

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US int’l update: EC contests FDII

As expected, the European Commission has sent a letter this week to US Treasury commenting that: the Foreign Derived Intangible Income (FDII) deduction violates international trade law.  “The design of the FDII deduction is incentivizing tax avoidance and aggressive tax planning by offering a possibility to undercut local tax rates in foreign economies.”  The Commission further described the FDII is an “incentive for foreign economies to lower corporate tax rates in a ‘race to the bottom.’” The letter included a statement that the European Commission was “ready to protect the economic interest of the European Union in light of discriminatory rules and practices.”

EY’s Global Tax Alert is provided for added reference.

Click to access 2019G_002276-19Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2010%20May%202019.pdf

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Tax Risk Management

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EU: Profit Split method

The EU Joint Transfer Pricing Forum recently published a paper illustrating when to use the profit split method (PSM) and how to accomplish the split of profits per the OECD Guidelines.  The report is linked as a reference.

The report is a complement to, and supports, the OECD Revised Guidelines on the application of the Transactional Profit Split Method issued in June 2018.

As this method is not simple, and is also a focus on transfer pricing issues in the US, this paper is valuable into the application and concepts of PSM.

 

Click to access report_on_the_application_of_the_profit_split_method_within_the_eu_en.pdf

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Tax Risk Management, Transfer Pricing

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EU exporter: New definition

The European Commission has recently amended the definition of “exporter” for EU purposes.  The new definition allows greater flexibility, although still postulates that non-EU established companies may not act as an EU exporter.

Article 1(19) of the UCC DA now requires a company that wants to act as an “exporter,” to be a person established in the EU customs territory and:

  • Has the power to determine that the goods are to be brought outside the customs territory of the Union

     

    or

  • Is a party to the contract under which goods are to be taken out of that customs territory

In summary, the EU supply chains should be reviewed re: whom is acting as an exporter, as well as how the new rule may simplify such actions.

EY’s Global Tax Alert provides additional details for this important change:

 

Click to access 2018G_010770-18Gbl_Indirect_EC%20amends%20definition%20of%20exporter%20in%20the%20EU.pdf

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Tax Risk Management

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EU: CCTB / CCCTB (It’s back!)

The concepts of Common Corporate Tax Base (CCTB) and Common Consolidated Corporate Tax Base (CCCTB) once again emerge as a perceived solution to tax the Member States via a “digital presence” and commonality in computing tax liabilities of the EU Member States.

These proposals have emerged in prior years, now with a digital presence emphasis, although such measures have required a unanimous vote which is difficult to achieve.  However, this trend is always worth watching as the public perception may help to sway those countries that strive to protect their sovereignty over taxation.

http://www.europarl.europa.eu/news/en/press-room/20180219IPR98113/new-eu-corporate-tax-plan-embracing-digital-presence-approved-in-committee

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Tax Risk Management

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EU’s List is published: Uncooperative Jurisdictions

The Council of the European Union (ECOFIN) has published its list of uncooperative tax jurisdictions, numbering 17:

American Samoa, Bahrain, Barbados, Grenada, Guam, Korea (Republic of), Macao SAR, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates

The listing criteria are focused on three main categories: tax transparency, fair taxation and implementation of anti-BEPS measures.

 

There are potential counter-measures that could be employed by other jurisdictions, and there is the possibility of other countries aligning such countries on a comparable list.  This list will be reviewed annually, thereby expanding or diminishing accordingly.

EY’s Global Tax Alert provides historical context for development of this list.

Click to access 2017G_06895-171Gbl_Council%20of%20the%20EU%20publishes%20list%20of%20uncooperative%20jurisdictions%20for%20tax%20purposes.pdf

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OECD, Tax Risk Management

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UK: EU (Withdrawal) Bill

The UK EU exit bill has been introduced in Parliament, paving the way for suggested interpretations of:

  • Existing EU law
  • Loss of EU Directives
  • New customs regime
  • Transitional EU VAT case law
  • Social security contributions/benefits
  • Corporation tax impact of UK vs. EU law/Directives
  • Employee mobility
  • Employment law

This document portrays a glimpse into the thoughts behind the complex and myriad evolutions that will take place with the Brexit negotiations.  Tax, supply chains, individual changes, VAT, etc. and related unknown implications are still to be discovered; the EY Global Tax Alert provides a primer into the brave new world of a country exiting the EU.  Note, this is also a valuable reference for other countries considering this option.

Click to access 2017G_04283-171Gbl_UK%20Government%20introduces%20European%20Union%20Withdrawal%20Bill.pdf

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Tax Risk Management

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Hybrid mismatches: EU / Rest of World

On May 29. 2017 the EU Council adopted the Anti-Tax Avoidance Directive (ATAD), to be effective by 1/1/2020 between EU and the rest of world for hybrid mismatch arrangements.  This Directive is known as ATAD-2 and follows the intent of BEPS Action 2, hybrid mismatch arrangements.

ATAD 2 expands the scope to address hybrid permanent establishment (PE) mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches.

EY’s Global Tax Alert provides additional details; all hybrid mismatch arrangements will be of limited use going forward to the extent they are included in these new rules.

Click to access 2017G_03493-171Gbl_EU%20Council%20adopts%20Directive%20to%20address%20hybrid%20mismatches%20with%20third%20countries.pdf

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Transfer Pricing

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Double Tax disputes: Draft EU Directive

The Council of the European Union has proposed a draft EU Directive, to be in effect by June 30 2019, that would resolve double taxation disputes between Member States.  A summary of the Draft Directive is provided, as well as referenced herein.

This proposal is based upon the foundation of the Union Arbitration Convention (90/436/EEC) re: cross-border tax disputes.

Key points:

  • 3 years, from first notification, to file a complaint by the taxpayer
  • Each competent authority (CA) acknowledges receipt within 2 months
  • Additional 3 months by CA’s to request additional information, by which the taxpayer has 3 months to provide
  • Approx. 6 months later, CA’s decide to accept or reject the complaint; or a CA can decide to resolve unilaterally by which the Directive is terminated
  • Taxpayer may appeal per national rules a rejection of the complaint
  • CA’s try to resolve issue within 2 years, which may be extended by 1 year
  • Upon taxpayer’s request, an Advisory Commission shall be established where the complaint is rejected by not all of the relevant CA’s, or a failure by CA’s to reach agreement.  This request can be denied by a Member State on a case by case basis where a question of dispute does not involve double taxation.
  • Advisory Commission = Chair, 1-2 representatives of each CA, and 1-2 independent persons by each CA
  • Advisory Commission to adopt a decisions within 6 months
  • CA’s may, alternatively, set up an Alternative Dispute Resolution Commission instead of the Advisory Commission; this commission has freedom of techniques to settle
  • Professional secrecy standards are prescribed
  • Advisory or Alternative Commission opines in 3-6 months
  • CA’s shall agree within 6 months of the opinion on how to resolve the complaint; they can decide on a decision that deviates from the opinion or be bound by the opinion
  • Final decision does not constitute a precedent
  •  (Redacted) decision is published and maintained in an online central repository
  • Evaluation of process by June 30, 2024 and issue a report

As the key point summary infers, there are many provisions in the Draft Directive, requiring a proactive effort by the taxpayer and relevant CA’s.  The Directive can be reviewed via the attached link:

http://data.consilium.europa.eu/doc/document/ST-9420-2017-INIT/en/pdf

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Audits, Tax Risk Management, Transfer Pricing

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