Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘EU’

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.

EU transparency: New Ruling Directive re: tax ruling exchange moves forward

The new EU Directive for the automatic exchange of tax rulings now moves forward for approval, with an effective date of 1/1/2017.  A copy of the press release is provided:

Click to access 40802203260_en_635797403400000000.pdf

Key observations:

  • Cross-border tax rulings and advance pricing agreements (APAs) will be automatically exchanged between EU Member States.
  • The rulings will be stored in a EU central repository, with access available to the Member States.
  • Rulings issued from 2012 will generally be included in the exchange of information, subject to de minimis thresholds.

This development is now moving forward with a transparency focus, although what information will practically be exchanged may be different dependent on the respective Member State.

Multinationals should review prior rulings subject to this exchange to avoid potential surprises.

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.

OECD Task Force on Tax & Development: Meeting update

The OECD Task Force’s role is to advise the OECD Committees in delivering a Tax and Development Programme focused on developing countries.  Co-chaired by South Africa and the Netherlands, its members include OECD and developing countries, business, and regional/international organisations.

http://www.oecd.org/tax/tax-global/taxanddevelopment.htm

Click to access taskforce-tax-development-korea-outcome-statement.pdf

The annual meeting was held 30-31 October in Seoul, Korea, with the following points of emphasis.

  • State building, accountability and effective capacity development, including governance of tax incentives and a feasibility study on Tax Inspectors Without Borders initiative (9 June post)
  • More effective transfer pricing regimes in developing countries, with country initiatives in Columbia, Ghana, Honduras, Kenya, Rwanda, Tanzania and Vietnam developed in partnership with the EU and World Bank.
  • Increased transparency in the reporting of financial data by MNEs, identifying Best Practices while monitoring developments of the Dodd-Frank Act and proposals for revising the EU Transparency Directive.
  • Countering international tax evasion/avoidance and improving transparency and exchange of information, preparing countries for peer reviews by the Global Forum on Transparency and Exchange of Information and developing exchange of information projects in Kenya and Ghana.

The report provides added value with numerous links to referenced initiatives (i.e., Tax Inspectors Without Borders, EU Transparency Directive) for a comprehensive understanding of the multiple initiatives being developed.

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