On May 19, the Members of European Parliament (MEPs) approved a EU Commission proposal to adopt a 15% corporate minimum tax, to be effective as of 1/1/2023.
The next step for effective passage is the unanimous approval by the EU Council.
The timing is interesting, as the US is in a political quagmire re: Pillar 2 and any GILTI changes. However, the EU and other countries are unilaterally proposing domestic minimum top-up taxes to retain revenue that otherwise may be allocated/shared by other jurisdictions.
The term for European Parliament’s special committee on tax rulings and other measures (TAXE) has ended, and the European Parliament has introduced a similar committee for an additional six-month term. The new committee shall also have 45 members.
As with TAXE, one of the powers of the new committee is “to analyse and assess aggressive tax planning carried out by companies established or incorporated in the Member States, also regarding the third-country dimension including the exchange of information with third countries in this respect.”
A link to the announcement is provided for reference:
Click to access 20151202RES05870.pdf
This new committee signifies EU’s continued focus on aggressive tax planning and transparency, with many countries following its lead.
The European Parliament’s Policy Dept. A has provided a tax policy paper upon the request of the TAXE Special Committee of European Parliament. An EY summary, and detailed report, are provided for reference:
Click to access 2015G_CM5880_European%20Parliament%20publishes%20paper%20on%20the%20EU%20Third-Country%20Tax-Governance%20Issues.pdf
Click to access IPOL_IDA(2015)563449_EN.pdf
- Developing country tax governance issues
- Tax system trends and challenges
- Impact of tax havens on EU countries
- Challenges faced by tax policy makers
- Exchange of information
- Tax transparency
- Illicit activities
- Harmful tax competition
As the EU has stepped in to take the lead on various post-BEPS initiatives, this policy paper is recommended reading to gauge the trend in these topics that will also take place worldwide.
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.
The European Parliament adopted a resolution to tackle tax avoidance and tax evasion via transparency measures to ameliorate limited resources of tax administrations. A summary and full content of the proposal are referenced herein:
- Publish country-by-country reporting (CBCR) template as part of annual reporting; The European Commission is to provide a legislative proposal to amend the Accounting Directive accordingly.
- Establish a consistent definition of “tax havens” by the end of 2015.
- Provide a blacklist of countries that do not combat tax evasion or that accept it.
- New treaties with developing countries should tax profits where value is created.
- EU Member States should agree on a Common Consolidated Corporate Tax Base (CCCTB).
- The EU should be taking a leading role to combat tax havens, tax fraud and evasion, leading by example.
- Beneficial information should be public; the Financial Action Task Force’s (FAFT) anti-money laundering recommendation is a minimum.
- Public scrutiny of tax governance and the monitoring of tax fraud cases; protect whistleblowers and journalistic sources.
- Transition period for developing countries to adopt the Automatic Exchange of Information mechanism.
These initiatives are accelerating the focus and intent for public tax disclosures in the very near future.
Most importantly, inclusion of the CBCR template as required documentation of annual reporting will automatically accelerate the due date for completion of such information. Thus, the year-end 2017 timeline proposed by the OECD will give way to this proposal and similar unilateral actions.
EY’s publication discussing tax reputation readiness and transparency provides suggestions for increasing readiness with good processes, robust documentation/audit trail and class-leading data management. The publication is very timely, noting the recent European Parliament’s unanimous vote for public reporting of country-by-country (CbC) and beneficial ownership information.
Click to access ey-managing-tax-transparency-and-reputation-risk.pdf
- More than 60% of companies believe that engaging with the media is a “no-win” situation.
- Excellent timeline/events of transparency initiatives commencing from 2003 until present, and future, state.
- 65% of respondents have developed a more structured approach to managing their public tax profile in the previous 2 years.
- 94% of respondents expect increased growth in global disclosure and transparency initiatives.
- “Business can do more and be more proactive to prepare for new reporting obligations and, as one proposed step, either proactively or defensively, Whatever choices a business makes, developing and sustaining the ability to source accurate data, in the right format and in a timely manner will be a critical factor for all large businesses in the years ahead.”
- Multiple transparency initiatives are succinctly depicted in a table on page 9.
- Transparency will be the new normal.
- Quality information requires quality data.
- Transparency readiness is a significant and underestimated need of companies.
- Transparency readiness assessment questions are posed for consideration.
- Detecting risk anomalies in the data is an important consideration; thoughtful questions are posed for review.
- Companies that can quickly and clearly explain their tax transactions and strategies are best positioned to manage reputation risks.
- Six proactive actions to consider:
- Actively monitor the changing landscape
- Assess readiness, and desire, to respond
- Enhance communication with internal and external stakeholders
- Develop steps to prepare the total tax picture
- Decide with whom the company wishes to communicate
- Embed reputation risk thinking into core business strategy
This survey provides an excellent approach and proactive roadmap in addressing the challenges, readiness and complex actions required to develop transparency readiness and engage reputation risk proactively. Accordingly, this should be required reading for all MNE’s as a primer and self test mechanism to address the new era of international tax transparency and potential angles of attack for reputation risk.
The European Parliament recently voted unanimously for public disclosure rules to fight tax evasion, tax avoidance and establishing fair, well-balanced, efficient and transparent tax systems. A copy of the press release is provided for reference:
- All countries to adopt country-by-country (CbC) reporting, with all information available to the public
- Beneficial ownership information to be made publicly available
- Call for coordination to combat tax evasion and avoidance by the European Investment Bank, European Bank for Reconstruction and Development and EU financial institutions.
- Request to the Commission for an ambitious action plan, without delay
The outcry for public reporting, currently underway by the OECD, European Parliament and European Commission is increasing exponentially within Europe. Other countries will obviously follow the EU approach, with perceptions of complicated international tax rules increasing disparity between application of the transfer pricing arm’s length principle.
The CbC reporting, and beneficial ownership detail, should be expected to be in the public domain if this trend continues. Currently, it is a sign of an incoming tsunami that cannot be completely avoided.
The European Parliament approved the maintenance of public registers listing ultimate ownership of EU companies, as part of the 4th Anti-Money Laundering Directive. The new rules must be introduced in all EU Member States within the next 2 years.
A KPMG Euro Tax Flash outlines details of this proposal:
Click to access etf-248.pdf
- Beneficial ownership is broadly defined, covering individuals who ultimately (directly or indirectly) control the entity. The control threshold is premised on a 25% ownership criterion although Member States may adopt lower percentages.
- Information accessible by: competent authorities, financial intelligence units, “obliged entities” and persons/organisations that can demonstrate a “legitimate interest” (not a defined term).
- Member States have 2 years from adoption to implement its provisions into their domestic legislation.
In an ever-increasing quest for transparency, this Directive will fulfill EU’s obligation to meet that objective.
The European Commission published a package of tax transparency measures on 18 March 2015. The press release and other documents, linked herein for reference, include a tax transparency communication, Council Directive re: automatic exchange of information and Q and A’s of the comprehensive package. Significant initiatives are included in this package addressing corporate tax avoidance and harmful tax competition in the EU, key components of which are highlighted. http://europa.eu/rapid/press-release_IP-15-4610_en.htm http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_136_en.pdf http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_135_en.pdf http://europa.eu/rapid/press-release_MEMO-15-4609_en.htm Press release:
- The concepts of tax evasion, corporate tax avoidance, “pay their fair share,” aggressive tax planning and abusive tax practices are summarily stated, although corollary concepts for avoidance of double taxation and effective dispute resolution are noticeably absent.
- Tax rulings will be automatically exchanged every 3 months.
- Feasibility of public disclosure of certain tax information of MNE’s will be examined.
- The EU Code of Conduct on Business Taxation will be reviewed to ensure fair and transparent tax competition within the EU.
- The Savings Tax Directive is proposed to be repealed to provide efficiencies and eliminate redundant legislation in the Administration Cooperation Directive.
- Next steps: The tax rulings proposal will be submitted to the European Parliament for consultation and to the Council for adoption, noting that Member States should agree on this proposal by the end of 2015, to enter into force 1/1/2016.
- Common Consolidated Corporate Tax Base (CCCTB) proposal will be re-launched later this year.
Tax Transparency proposal:
- Existing legislative framework for information exchange will be used to exchange cross-border tax rulings between EU tax authorities.
- The Commission will develop a cost/benefit analysis for additional public disclosure of certain tax information.
- The tax gap quantification will be explored to derive more accuracy.
- The global automatic exchange of information for tax rulings will be promoted by the EU.
Council Directive (amending Directive 2011/16/EU) re: automatic exchange of information:
- Mandatory automatic exchange of basic information about advance cross-border rulings and advance pricing agreements (APAs).
- Article I definition of “advance cross-border ruling:
- any agreement, communication, or any other instrument or action with similar effects, including one issued in the context of a tax audit, which:
- is given by, or on behalf of, the government or the tax authority of a Member State, or any territorial or administrative subdivisions thereof, to any person;
- concerns the interpretation or application of a legal or administrative provision concerning the administration or enforcement of national laws relating to taxes of the Member State, or its territorial or administrative subdivisions;
- relates to a cross-border transaction or to the question of whether or not activities carried on by a legal person int he other Member Sate create a permanent establishment, and;
- is made in advance of the transactions or of the activities in the other Member State potentially creating a permanent establishment or of the filing of a tax return covering the period in which the transaction or series of transactions or activities took place.
- Automatic exchange proposal is extended to valid rulings issued in the 10 years prior to the effective date of the proposed Directive (Article 8a(2)).
- In addition to basic information exchanged, Article 5 of the Directive should provide relevant authority for the full text of rulings, upon request.
- EU central repository to be established for submission of information by Member States.
- Confidentiality provisions should be amended to reflect the exchange of advance cross-border rulings and APAs.
Q and A’s:
- Corporate tax avoidance, as explained, undermines the principle that taxation should reflect where the economic activity occurs.
- Standard/template information for the quarterly exchange of information includes:
- Name of taxpayer and group
- Issues addressed
- Criteria used to determine an APA
- Identification of Member States most likely to be affected
- Identification of any other taxpayer likely to be affected
- Commission could open an infringement procedure for Member States not following the disclosure obligations.
- Domestic tax rulings are exempt.
- The EU could be a global standard setter of tax transparency.
- The EU Code of Conduct criteria are no longer adequate, and it lacks a strong enough mandate to act against harmful tax regimes.
The EU Tax Transparency Package is required reading for all MNE’s and other interested parties, as it is an ambitious effort to provide globally consistent procedures for the exchange of tax rulings/APAs. Additionally, it is interesting to note the EU’s aggressive actions and timing in its efforts to align, as well as expand, the OECD’s efforts to address BEPS Action Items. These actions are also intended to be a standard for global setting in the new era of international tax transparency. As a Best Practice, the 10-year look-back provision for rulings implies that MNE’s should have a similar central database for prior, and future, cross-border rulings. Additionally, this automatic exchange is another element of consideration prior to formally requesting a tax ruling.