Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘EU’

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

EU: Broader CbC public disclosures envisioned

Members of the European Parliament (MEPs) have put forth additional recommended disclosures and requirements for the Accounting Directive of public Country-by-Country (CbC) reporting, prior to enactment of the original proposal.

The Accounting Directive allows a simple majority for passage, and involves additional complexities and cost as the OECD model is now just a starting point for new information.

The Parliament would also like to extend the proposal to include the following information in company reports:

  • The geographical location of the activities
  • The number of employees employed on a full-time equivalent basis
  • The value of assets and annual cost of maintaining those assets
  • Sales and purchases
  • The value of investments broken down by tax jurisdiction
  • The amount of the net turnover, including a distinction between the turnover made with related parties and the turnover made with unrelated parties
  • Stated capital
  • Tangible assets other than cash or cash equivalents
  • Public subsidies received
  • The list of subsidiaries operating in each tax jurisdiction both inside and outside the EU and data for those subsidiaries corresponding to the data requirements on the parent undertaking
  • All payments made to governments on an annual basis as defined in the Directive, including production entitlements, income taxes, royalties and dividends
  • The report shall not only be published on the website of the company in at least one of the official languages of the EU, but the undertaking shall also file the report in a public registry managed by the Commission

EY’s Global Tax Alert, referenced herein, provides the relevant details, although it appears the CbC report is not being construed as one tool for total transfer pricing assessment, but a public tool to determine one’s fair share of tax irrespective of the legal laws and limitations in each country.  

An alternative approach would be to design a standard (transfer pricing) audit template for the tax authorities that would include some, or all, of the above factors to the extent deemed important to assess a company’s tax liability in that relevant jurisdiction.  However, this non-public and Best Practice audit tool is not the focus in this post-BEPS world, to date.  

http://www.ey.com/Publication/vwLUAssets/EU_Parliament_members_submit_amendments_to_public_County-by-Country_Reporting_proposal/$FILE/2017G_00761-171Gbl_EU%20Parliament%20members%20submit%20amendments%20to%20public%20CbCR%20proposal.pdf

BEPS update: transparency

The latest BEPS updates are detailed in EY’s Global Tax Report, with the underlying premise of transparency.

Summary:

OECD: On 5 December 2016, the OECD released an updated version of the Guidance on the Implementation of Country-by-Country Reporting, providing flexibility for notification filing dates for countries not requiring a country-by-country (CbC) report for 2016.

Belgium: New innovation deduction covering patent and other IP rights.

EU: Proposal for hybrid mismatch rules with non-EU countries

Norway: Adoption and regulations for CbC reporting

UK: Interest limitation rules, among other provisions

US: CbC Form 8975 released

From a MNE perspective, it is increasingly apparent that deductions to, and benefits from, tax haven countries are under attack and substance is the key to business and tax decisions.  

(CbCR).http://www.ey.com/Publication/vwLUAssets/The_Latest_on_BEPS_-_19_December_2016/$FILE/2016G_04446-161Gbl_The%20Latest%20on%20BEPS%20-%2019%20December%202016.pdf

EU to Non-EU Hybrid rules

EY’s Global Tax Alert provides the latest developments into the EU’s hybrid arrangements with non-EU Member States to achieve consistency in application of the hybrid mismatch rules.  This development is not unanticipated, although will take some time to be fully developed and legislated into action.  In the interim, advance planning should take place, recognizing the fact that the current arrangements will not likely be allowed to exist much longer.

http://www.ey.com/Publication/vwLUAssets/European_Council_achieves_broad_consensus_on_draft_directive_aimed_at_closing_down_hybrid_mismatches_with_third_country_tax_systems/$FILE/2016G_04247-161Gbl_EC%20draft%20directive%20aimed%20at%20closing%20down%20hybrid%20mismatches%20with%20third%20country%20tax%20systems.pdf

EU’s Dispute Resolution: Follow the leader

The European Commission issued a significantly important proposal for a Double Taxation Dispute Resolution; it hopes to remain a leader in this ever-changing international tax arena with a mandate for binding arbitration, as applicable, as one of the leading initiatives.  This proposal would require a unanimous adoption by all EU Member States (although UK’s vote may be considered to be of less significance as time moves on, it still counts).

Other proposals of the three-prong package include a renewed focus on the Common Consolidated Corporate Tax Base (CCCTB) and hybrid mismatches with third countries.  The last initiative is interesting, as the EU now seeks to expand its reach with those countries outside the EU.

Although each proposal is significant as a stand-alone initiative, the Dispute Resolution would provide the most benefit at a critical time for a win-win relationship going forward.

EY’s Global Tax Alert provides further details on this initiative for reference.

http://www.ey.com/Publication/vwLUAssets/European_Commission_announces_proposal_on_double_taxation_dispute_resolution_mechanisms_in_the_European_Union/$FILE/2016G_03538-161Gbl_EC%20announces%20proposal%20on%20double%20taxation%20dispute%20resolution%20mechanisms%20in%20the%20EU.pdf

UK: Be careful what you wish for

As everyone knows, there is alot of uncertainty and doubt about what lies ahead for the UK as they will be leaving the EU, final timeline yet to be determined.

From a tax perspective, the linked EY Global Tax Alert summarily describes foreign exchange issues, alignment with EU court cases and Directives (including country-by-country reporting), ongoing BEPS alignment and conformity, treaty / immigration issues, EU State Aid, VAT and the need for transitional review.

Apart from BEPS, this change will compound the tax (un)certainty of the UK for the near future.

This is an excellent time for legal and operational review of UK operations, ensuring old structures and loans are dissolved, if possible, to mitigate future risks.  All multinationals should align with all stakeholders to face this radical change.  

http://www.ey.com/Publication/vwLUAssets/The_United_Kingdom_votes_to_leave_the_European_Union/$FILE/2016G_01773-161Gbl_UK%20United%20Kingdom%20votes%20to%20leave%20the%20EU.pdfUK

EU: CbC marches on

EY’s Global Tax Alert, attached for reference, provides details on the continuing momentum of the country-by-country (CbC) reporting rules in the EU. These rules will certainly be applied by some EU countries in 2016, thus US and other non-EU based multinationals should start to seriously consider options for separate and/or surrogate entity filings in EU and other jurisdictions for the 2016 tax year.

Note, it is likely the continuing transparency momentum will continue and likely to obligate multinationals to more disclosures going forward. Thus, it is imperative the key stakeholders are aligned currently and ongoing.

Global Tax Alert | 25 May 2016
ECOFIN formally adopts directive on country-by-country reporting in the EU
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On 25 May 2016, the Economic and Financial Affairs Council of the European Union (ECOFIN) which is made up of the Finance Ministers of all European Union (EU) Member States unanimously voted in favor of the amendments to the EU directive on exchange of information (the Directive). The revision, that will implement the recommendations of Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 13 on country-by-country reporting, is one of the elements of the European Commission’s Anti-Tax Avoidance package from January 2016.2 According to the ECOFIN, “the principal aim of the directive is to prevent multinationals from exploiting the technicalities of the tax system, or mismatches between different tax systems, in order to reduce of avoid their tax liabilities.”

The Directive requires multinationals to report information on revenues, profits, taxes paid, capital, earnings, tangible assets and the number of employees on a country-by-country basis. This information must be reported for fiscal years starting on or after 1 January 2016, to the tax authorities of the Member State where the group’s ultimate parent entity (UPE) is tax resident. If the UPE is not resident in the EU, the report would have to be filed through a surrogate parent (EU or non-EU based) or the EU based subsidiaries. The Directive would give Member States the option to either require secondary filing for fiscal years starting on or after 1 January 2016 or to defer that obligation to financial years starting on or after 1 January 2017.

The Member States adopted the amendments without discussion, following the agreement reached at the previous ECOFIN meeting held on 8 March 2016. Thus, the details of the Directive remained virtually unchanged to what had previously been reported.3

Next steps
The Directive will require EU Member States to implement a country-by-country reporting obligation in their national legislation in line with the requirements of the Directive within 12 months from the date of its entry into force.

The first reports will have to be filed within 12 months from the end of the fiscal year to which they relate. Member States will have to exchange them within 3 months thereafter, except for the reports relating to fiscal years starting on or after 1 January 2016 where the term would be 18 months after the end of the fiscal year. The European Commission will adopt the necessary practical arrangements for upgrading the existing common platform for automatic exchange in the EU to fit the needs of the new requirements.

Endnotes

1. Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation.

2. See EY Global Tax Alert, European Commission releases anti-tax avoidance package designed to provide uniform implementation of BEPS measures and minimum standards across Member States, dated 28 January 2016.

3. See EY Global Tax Alert, EU Council publishes updated Draft Directive on implementation of country-by-country reporting, dated 23 March 2016.

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