The European Commission has clearly announced it’s intent to be the global leader in advancing OECD’s BEPS initiatives, with some proposals exceeding the scope / intent of the OECD.
Copies of the following documents are provided for reference, with subsequent posts addressing highlights of significant initiatives. It is important to distinguish the documents between Proposals for a Council Directive, Communications, Studies and Recommendations.
- Anti Tax Avoidance Package
- Proposal for a Council Directive re: tax avoidance practices
- Proposal for a Council Directive re: automatic exchange of information
- Annex to automatic exchange of information proposal
- Communication on an External Strategy for Effective Taxation
- Annexes to the external strategy communication
- Communication re: Tax Avoidance Package
- Study on Structures of Aggressive Tax Planning & Indicators
- Recommendation on implementation of measures against tax treaty abuse
The documents are required reading for all international tax practitioners, as they highlight the complex post-BEPS world and the trend indicators for the near future. We can assume that some of these developments will proceed for action very quickly, thereby imputing a doctrine that “time is of the essence.”
UK’s Autumn Statement 2015 has been announced, with several measures aimed at changing corporate tax behavior and promoting transparency with the objective to achieve a modern and fairer tax system. A link to the Statement is provided for reference:
- A 60% penalty of tax due for successful general anti-abuse rule (GAAR) cases, to be implemented in 2016. The revenue impact of this measure is highly uncertain, as it is also meant to be an incentive to change corporate tax behavior.
- A desire to be to the most digitally advanced tax administration in the world.
- New criminal offense for corporates failing to prevent tax evasion; failure to prevent their agents from criminally facilitating tax evasion by an individual or entity.
- Hybrid mismatch rules to be effective 1/1/2017, following the OECD’s BEPS Guidelines.
- Corporates to publish tax strategies as they relate to, or affect, UK taxation.
- Cooperative compliance framework.
- “Special measures” regime to tackle businesses that persistently engage in aggressive tax planning.
A carrot, stick and transparency approach is contained within the Statement, and thus important to follow as other countries will surely review UK’s leading initiatives to gauge impact on their respective economy. The GAAR related penalty, which is inherently subjective, will be dictated in some fashion by HMRC’s aggressiveness to assess GAAR and a willingness to pursue it through the respective appeal avenues or court. The tax strategy initiative will also be interesting to monitor as to its breadth and potential impact upon a company’s risk rating.
The Senate Economics References Committee has published its interim report entitled “Corporate tax avoidance.” Part I, “You cannot tax what you cannot see” provides an excellent frame of reference for the discussions therein.
It is worthwhile noting that there is a section “Government Senators’ Dissenting Report” expressing concerns about some recommendations therein; this should be a additional warning sign of the recommendations put forth. Conversely, there are “Additional Comments from the Australian Greens” fully supporting the report in its entirety.
The final report is due in November 2015, although this interim release provides an indication of the thought trends currently in process by the Australian Tax Office (AT0). A link to the report is provided for reference:
- 17 recommendations provided addressing (1) evidence of, and multilateral efforts to combat, tax avoidance and aggressive minimization, (2) multilateral actions to protect Australia’s revenue base, and (3) capacity of Australian government agencies to collect corporate taxes.
- Australian government to work with other countries having significant marketing hubs to improve the transparency of information
- Australian government continues to take the load re: OECD BEPS initiatives; international collaboration should not prevent the Australian Government from taking unilateral action
- Mandatory tax reporting (transparency) code
- Existing transparency laws to be identical for private and public companies
- Public register of tax avoidance settlements reached with the ATO
- Public excerpts from the Country-by-Country OECD reports, based on the EU’s standards
- Annual public report on aggressive tax minimization and avoidance activities
- Section 3.95 discusses a novel concept: “Effective tax borne” effective tax rate formula, a metric that seeks to reflect all of the channel profit derived from business activities involving Australia and the Australian and global tax paid on that channel profit. Appendix 3 provides additional rules for application of this formula, noting that there has not yet been a consultation with taxpayers or other stakeholders. The metric envisions that the entire supply chain profit is a profit of the economic group arising from Australian business activities (i.e. intercompany purchases of goods and services from offshore related parties). Numerator is either the Australian tax paid on business activities by the economic group, or the global tax paid by such group. Denominator is the total economic profit from business activities which are linked to Australia. Withholding taxes of economic group profit are includable, whereas royalties and excises are not. Numerous rules apply for intercompany adjustments.
Australia is still recognized as a leader in the pursuit of the BEPS objectives, using transparency as a weapon to fight ensuing battles.
This report not only extends the strong cry for public disclosure of tax information, it suggests a new concept to examine the effective tax rate of jurisdictions having activities with an Australian related party. However, it is hopeful the envisaged complexity, cost/benefit and technical nuances of the “effective tax borne” concept are presented to stakeholders with enough time to review, plan and adjust/eliminate the final recommendation accordingly.
As Australia leads, many others follow. This report is required reading for all interested parties, as the ideas presented have a high probability of appearing in other jurisdictions in a similar form and formulating the same intent for transparency.
The Australian Tax Office (ATO) has issued a very interesting Practice Statement Law Administration. It is an informal policy document for which interested parties should submit comments by 25 September. The Statement is a lengthy document, citing case law, that is very worthwhile reading, as Australia continues its proactive efforts driving change in the international tax arena.
Although informal, taxpayers can rely on such guidance for protection from interest and penalties. A copy of the Statement is provided for reference:
- A general anti-avoidance rule (GAAR) cannot be applied before a determination by the Tax Counsel Network (TCN).
- A GAAR decision is generally referred to a GAAR Panel (an independent advisory body) before a final decision is made.
- The taxpayer may be invited to attend a Panel meeting to assist the deliberative process.
- Concepts of a tax scheme and a tax benefit are discussed. A tax benefit inclusive in Part IVA, the GAAR provision relates to: an amount not included in income, an allowable deduction, a capital loss, a tax loss carry back, a foreign income tax offset or withholding tax.
- An alternative hypothesis” or “alternative postulate” identification is discussed; what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out.
- It is for the court to determine objectively what alternative would have occurred if the scheme had not been carried out.
- Arguably, there is no longer a test of reasonable exception, based on Parliament’s intention in enacting the Amendments.
- Warning signs that GAAR may apply (which ATO must consider) are established:
- Arrangement is out of step ordinarily used to achieve the commercial objective,
- Arrangement seems more complex than necessary,
- Tax result does not conform to the commercial or economic result,
- Arrangement is low risk where significant risks would normally apply,
- Parties are operating in a non-arm’s length manner, or
- Gap between substance and legal form.
- Penalties are applicable.
- Division 165 (a GST GAAR rule) is discussed, including permanent and timing differences.
- A “dominant purpose” test is applicable for the GAAR and the GST provisions, with different factors includable in each.
The above provisions attempt to conceptualize objective factors for an inherently subjective GAAR determination. As additional GAAR’s are introduced around the world, each applying a different level of subjectivity, the Statement is helpful in understanding the rationale and intent of the ATO.
Tax planning post-BEPS will require additional GAAR documentation for significant transactions, thereby requiring tax to be involved early in the discussions to understand the business intent and alternatives considered.
HMRC has issued consultation documents proposing requirements to publish a “tax strategy,”, voluntary Code of Practice corporate tax processes and creation of a “special measures” regime. Comments are due by 14 October 2015 for each Consultation document.
These proposals follow closely upon the heels of the ATO issuance of Best Practice methodologies addressing a taxpayer’s tax risk.
Three documents are provided for reference: (1) A Clifford Chance Briefing note, (ii) HMRC’s Consultation document for Improving Large Business Tax Compliance and (iii) HMRC’s Consultation document on Strengthening Sanctions for Tax Avoidance.
- Public availability of a company’s tax strategy (financial penalty for non-disclosure) including:
- Tax internal governance arrangements
- Risk management approach
- Tax planning attitude and tax risk appetite, including affirmation that it aims to satisfy the spirit, as well as the letter of the law
- Attitude to relationship with HMRC
- Target UK effective tax rate (if applicable), and what measures are being taken to achieve it
- Voluntary Code of Practice, including affirmations that:
- Tax planning is consistent with the economic consequences
- Transactions provide a tax result that is in accordance with the intentions of Parliament: “HMRC will consider a purposive construction of the legislation, and will also consider whether Parliament can realistically have intended to give the proposed result in circumstances that are very different from those that prevailed at the time”
- Transparent relationship is maintained with HMRC
- Tax obligations are met
- Early dialogues for engagement with HMRC to discuss tax planning, strategy, risk, significant transactions and full disclosure of areas providing significant uncertainty
- Objective evidence is provided to HMRC that decisions with tax implications have been approved by a senior decision maker
- Special Measures for companies entering into aggressive tax planning / failing to transparently engage withHMRC, including:
- Providing all documentation (including third party tax advice) related to tax
- Refusal to provide non-statutory clearances
- Public naming
- Automatic 100% tax penalties
Observations in the Documents:
- Attitudes to tax avoidance and aggressive tax planning have altered significantly, including political interest
- Intention is to create Best Practices
- The Government is awaiting the EU Tax Transparency Package consultation, and will consider its findings carefully
- Proposal is separate from the current SAO regime, as well as the OECD’s country-by-country reporting guidelines
- A company could be required to state in their tax strategy whether they are a signatory to the Voluntary Code of Practice
- Non-publication of a tax strategy will be a consideration of HMRC’s tax risk reviews
- Evidence of “governance in action” to be provided
- Voluntary Code of Practice is aimed at tax planning that crosses over into tax avoidance
- The company should reasonably believe that transactions give a tax result which is not contrary to Parliament’s intentions
- Special measures will remain for a minimum of 2 years
A higher standard of tax excellence is being demanded by public pressures and tax administrations in the form of an objective tax risk framework overseen at the Board level and subject to internal control testing. HMRC’s proposals are being followed by other countries worldwide, and similar measures would not be unexpected in other jurisdictions. Accordingly, all interested parties should review the documents, and provide comments thereto.
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 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.