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