CFE’s Tax Top 5 – September 2017

      Brussels, 25 September 2017

 

  1. Fair taxation of the Digital Economy – European Commission publishes communication to the European parliament and Council

Days after taxing the digital economy took centre stage at the informal ECOFIN meeting in Estonia, the European Commission published its communication to the European Parliament and Council entitled, ‘A fair and Efficient tax System in the European Union for the Digital Single Market’.

The Communication provides detailed analysis of the digitalisation, its growing impact on the economy, and new business models emerging in the digital economy. It highlights the effective average tax rates paid by traditional business models versus the newer digital business model.

The Communication identifies two main policy challenges when seeking to tax the digital economy, nexus and value creation, i.e. where to tax and how best to tax.

The Commission Press Release focuses attention on the CCCTB framework as the optimal means by which to address the tax challenges that arise from the digital economy in the context of the   revised permanent establishment rules and the use of formulary apportionment for allocating the profit of large multinational groups. In addition, the Communication states that “There is scope within the current CCCTB proposal to examine further enhancements to ensure that it effectively captures digital activities”.

The Communication outlines 3 options which should be considered as short-term solutions.

  1. Equalisation tax on turnover of digitalised companies

This is envisaged to be a tax on all untaxed or insufficiently taxed income generated from all internet-based business activities, including business – to – business and business-to-consumer, creditable against the corporate income tax or as a separate tax.

  1. Withholding tax on digital transaction

The communication states that this would constitute a standalone gross-basis final withholding tax on certain payments made to non-resident providers of goods and services ordered alone.

  1. Levy on revenues generated from the provision of digital services or advertising activity

The possibility of applying a separate levy to all transactions concluded remotely with in-country customers where a non-resident entity has a significant economic presence.

The Estonian Presidency is pursuing an ambitious timeline for conclusion, with the Finance Minister stating that they are aiming for agreement to be reached by the December ECOFIN meeting.

 

  1. OECD announces public consultation on taxation of the digital economy

On 22 September the OECD announced a public consultation to obtain input on the tax challenges of digitalisation and the potential options to address these challenges.

The input will inform the work of the OECD for the interim report on the implications for taxation of digitalisation to be published in April 2018 with a final report due in 2020.

The request for input outlines the outcomes of the OECD BEPS Action 1 Final Report which concluded that the digital economy could not be ‘ring-fenced’ and that BEPS Action 3, 6, 7, and 8-10 would substantially address the BEPS issues exacerbated by digitalisation. The Request for input reiterated that the Final Report acknowledged that specific problems still arise in the context of digitalisation namely, nexus, debate, and characterisation for direct tax purposes and outlines the possible solutions (not recommendations) listed in the Final Report, namely, a new tax nexus concept of “significant economic presence”, the use of a withholding tax on certain types of digital transactions, and a “digital equalisation levy”.

The request for input comes at a time where an increasing number of countries are taking or considering taking unilateral action in this regard.

The request for input relates to

  • Digitalisation, business models and value creation
  • Challenges and opportunities of tax systems
  • Implementation of the BEPS package
  • Options to address the broader direct tax policy challenges; and
  • Other comments not raised in the request.

The closing date for submissions is 13 October 2017.

The consultation is available here:

OECD Request for input on work regarding the tax challenges of the digitalised economy

 

  1. VAT & Cost Sharing Exemption – European Court of Justice issues decision

The European Court of Justice issued its eagerly awaited judgment in the joint cases of DNB Banka (Case C-326/15), Aviva (Case C-605 /15) and Commission v Germany (Case C- 616/15).

The cases concerned the cost-sharing VAT exemption (“CSE”) contained in Article 132(1) (f) of the Council Directive 2006/112/EC (the VAT Directive”).  The cases concern various aspects of the exemption and its applicability to the financial and insurance sectors.

 

The Court ruled that it was implicit that the VAT exemption for cost sharing groups did not apply to bodies making supplies of insurance and financial services. The decision eliminates the use of the cost-sharing VAT Exemption in the financial services industry. This is counter to the prevailing practice in many Member States. It is important to note that the Court has clearly indicated that the decision should not be applied retrospectively by Member States.

A detailed case summary and analysis will be included in the next CFE EU & Tax Policy Report

Judgment of the Court (Fourth Chamber) 21 September 2017 Case C-605/15

 

  1. CJEU upholds its jurisdiction to rule in a dispute regarding terms of the double tax treaty between Austria & Germany

The decision of the European Court of Justice in Republic of Austria v Federal Republic of Germany (Case C-648/15) was issued on 12 September 2017. The case concerned the interpretation of a clause in the double tax convention between Germany and Austria regarding the taxation of financial instruments and more precisely the interpretation of the phrase contained Article 11(2) of the Convention ‘income from debt-claims with participation in profits’.

Having accepted jurisdiction to hear the dispute the CJEU held that the particular criterion in the certificate which makes the payment of interest in a given year dependent on the existence of profit does not render those certificates as granting a right to share in the profits.

 Detailed Summary

The facts of the case involve an Austrian company purchasing registered certificates from a German bank. These certificates confer an entitlement to an annual payment at a fixed percentage of their nominal value, however, if the payment is likely to result in an accounting loss the amount of the payment is reduced or suspended to the degree necessary to avoid this loss. This suspended payment becomes payable in subsequent years when the debtor realises sufficient profit.

Whilst both Member States agreed on the legal classification of the income under the Convention, and that the taxing rights should be allocated to the state of residence of the beneficial owner – in this case Austria, a dispute arose in relation to an exception. The exception allows for ‘income from rights or debt-claims with participation in profits’ to be taxed also in the state in which the income arises. Austria argued that the exemption must be interpreted narrowly.

On a procedural point the ECJ ruled that it had jurisdiction to rule on this case pursuant to Article 273 TFEU which grants jurisdiction to the CJEU in disputes between Member States which relate to the subject matter of the Treaties and are submitted by special agreement of the parties concerned. The Court held that the conditions were satisfied on the basis that:

  • there was clearly a dispute between the parties,
  • the dispute “related to” (interpreted by the Court as ‘linked to’) the subject matter of the Treaty,
  • the referral was not based on the arbitration clause relating to this dispute specifically but rather under the general terms of Article 25 (5) of the Convention. The Court therefore accepted jurisdiction.

On the substantive issue before the Court, it was held that the phrase must be interpreted in line with international law and the terms of the Vienna Convention which requires phrases be given their everyday meaning where possible. The Court observed that it is clear the instrument may be regarded as a particular class of debt but it need to be ascertained whether the form of remuneration of those certificates may be regarded as characteristic of ‘participation in profit’.

The Court held that the particular criterion in the certificate which makes the payment of interest in a given year dependent on the existence of profit does not render those certificates as granting a right to share in the profits.

Judgment of the Court (Grand Chamber) 12 September Case C-648/15

  1. OECD publishes Report on the three dimensions of business taxation

The Taxation Paper, entitled ‘Legal tax liability, legal remittance responsibility and tax incidence’ examines the role of business in the tax system, in particular the role of business in the capacity of a withholding tax agent and remitters of tax on behalf of others. The paper demonstrates that businesses play an important role in the tax system not only as a tax payer but also as a remitter of tax. The paper seeks to demonstrate that the economic incidence, or burden of a tax is not necessarily borne by the person on whom the tax is imposed but in many instances is passed onto be borne by other economic actors.

OECD Taxation Working papers No. 32

      Brussels, 18 September 2017

  1. Digital Economy – focus of informal ECOFIN over weekend.

Estonian Presidency position

The challenges posed by the digital economy to fair taxation in the EU took centre stage at the informal ECOFIN meeting in Estonia on 15 & 16 September.

The Estonian Presidency highlighted that the current tax rules are out of date and in need of reform to aptly deal with the digital economy. In this regard whilst stating that a global resolution is the best solution in the long term, a common solution encompassing all the Member States in Europe is very important in the short to medium term, suggesting that the EU model could mould the global solution in the future “If we can agree on the approach inside the European Union, then we can also affect the global rules in a way that is favourable to us”.

Changes to definition of permanent establishment

In terms of a solution, the Estonian Presidency proposes changes to the definition of permanent establishment so as to

Abandon the requirement that companies have to be physically present in a country or own assets there, and replace this with the concept of a virtual permanent establishment. A precondition for this is a more precise agreement on the virtual taxpayers who have to start paying taxes.

After the meeting the Estonian Finance Minister stated that more than half of the Member States are in favour of the changes to rules on permanent establishment.

Proposed Equalisation Tax

In addition to changes to permanent establishment rules, the proposed equalisation tax was also discussed at the meeting. The equalisation tax will seek to tax turnover of companies rather than profit as is traditionally the case. It is being proposed as a stop-gap measure which would be removed once a comprehensive international solution is finalised to ensure fair taxation of such multinational entities.

Finance Ministers from Austria, Bulgaria, Greece, Romania, Slovenia, and Portugal have added their names to the letter signed by the G4 countries last week calling for discussion on an equalisation tax. It is reported that whilst the Netherlands and Belgium are publicly supporting the initiative, Ireland, Malta, Cyprus are the strongest opponents with Denmark, and Luxembourg expressing strong reservations.

Use of Enhanced Cooperation

The Presidency accepted that there may be obstacles to finding unanimous agreement and in such circumstances the proposals would proceed by means of enhanced cooperation. Nine Member States are needed to agree to begin proceedures by way of enhanced cooperation.

The Letter of the G4 proposing the introduction of an Equalisation Tax

The Estonian Presidency Press Release for the Informal ECOFIN Meeting

  1. EU Commission due to publish paper on fair taxation of the digital economy this week

On foot of the discussions at Council on the digital economy, the European Commission is expected to publish a policy paper which will set out the low tax contribution of large technology companies and the manner in which their activities can elude traditional systems of taxation.

The proposals are due to be published this week, and will contain suggested solutions before the next formal ECOFIN meeting of Council on 29 September 2017.

It is hoped that agreement will be reached by Council regarding the Commission proposals at the December ECOFIN meeting of Council but as set out above, the Estonian Presidency has indicated that it is willing to proceed by enhanced coo-operation if a unanimous position is not reached.

  1. Pascal Saint-Amans addresses proposed ‘Equalisation Tax’ on OECD Webinar

The Director of the OECD Centre for Tax Policy, Pascal Saint-Amans, said he would not criticise the proposed Equalisation Tax initiative being spear headed by France, Germany, Italy and Spain and now supported by 10 EU Member States.

Speaking on an OECD Webinar, he stated that other countries such as India have already taken action to tackle problems with fair taxation of the digital economy, with Indonesia and Malaysia considering measures.

On the topic of an international solution, he stated that given the complexity of the topic, any broad international solution will require time. In addition, he highlighted the need for all countries to cooperate and be willing to negotiate.

He highlighted changes to the definition of permanent establishment and the transfer pricing rules relating the allocation of profits to PE as areas in need of examination and modernisation.

  1. EU Commission President, Jean-Claude Juncker issues State of the Union

On 18 September the EU Commission President issued his State of the Union Address. From a tax perspective the two salient points which arose were:

  • An EU Minister of Economy & Finance; and
  • Removing the unanimity requirement for decisions on taxation matters, in favour of a qualified majority.  Mr. Juncker blames the veto power in tax matters for blocking necessary overhauls of tax legislation in order to tackle abusive tax practices. At present Member States have the power to veto proposed tax legislation in keeping with the sovereign nature of taxation. The Irish Minister for Finance has responded by stating that Ireland will resist any such proposal to allow for a qualified majority in tax matters.
  1. CFE General Assembly, Committee Meetings and Events in Bratislava 21 – 23 September 2017

This week the CFE and the Slovak Chambers of Tax Advisers (SKDP) will host CFE’s autumn meetings and events in Bratislava from 21 – 23 September.

The Professional Affairs Committee and the Executive Board meet on 21 September, the Fiscal Committee meetings take place on 21 and 22 September and the General Assembly on 22 September. Further information for delegates is available on the following link.

Brussels, 11 September 2017

Estonian presidency to propose EU rules for a ‘virtual Permanent Establishment’

The Estonian presidency of the Council of the European Union will propose amendments of the definition and concept of Permanent Establishment (‘PE’). The document that had been leaked and was reported by Reuters should be discussed at the informal meeting of the European finance ministers on 15 – 16 September in Tallinn, Estonia.

Under the Estonian presidency proposal, the income of multinational companies shall be taxed in the countries where the value is created, rather than on basis of tax residency rules. The concept of ‘virtual’ PE would establish taxable presence for multinational companies in the countries in which they operate. Virtual PE would be considered a sufficient taxable presence in jurisdiction for the purposes of levying corporate income tax.

This EU proposal comes in time where the OECD too announced that the PE definition in the context of BEPS Action 1 and the taxation of tech groups is open for discussion. This proposal is coupled with the recent EU initiatives to revive the CCTB/ CCCTB proposals for corporate taxation based on formulary apportionment in Europe.

The Estonian presidency is mindful of the ambitious nature of this proposal and will therefore approach other EU member states informally next weekend. In case of common agreement, the proposal could be formalised at the ECOFIN Council meeting in December.

EU to consider taxing US tech groups on basis of turnover

The agenda of the informal EU finance ministers meeting in Estonia is likely to see another ambitious proposal for corporate taxation of US tech groups in the European Union, according to the Financial Times. The proposal initiated by the French side considers taxation of tech companies in Europe on basis of their turnover in a particular EU jurisdiction. The so-called ‘equalisation tax’ for tech companies would mean significant change to present rules, where companies are taxed based on profits, rather than revenue or turnover.

The outline drafted by the France and Germany further reads: ‘The amounts raised would aim to reflect some of what these companies should be paying in terms of corporate tax.” Financial Times reports French official claiming that such a turnover tax, even levied at low percentage, has the potential to raise revenues of magnitude much higher than any EU government has been able to levy so far on basis of corporation tax.

OECD issued updated Guidance on BEPS Action 13: Country-by-Country Reporting

OECD has updated its Guidance on the implementation of BEPS Action 13: Country-by-Country Reporting. The update from the BEPS inclusive framework includes the issues relating to the definition of items reported in the template for the Country-by-Country Report (‘CbC Report’), ie. the definition of revenues, issues related to the amount of income tax accrued and income tax paid, and, issues relating to the filing obligation for the CbC Report in respect of short accounting periods.

By way of background, OECD BEPS Action 13 Report introduced a three-tiered approach to transfer pricing documentation, consisting of a master file containing standardised information relevant for all members of a multinational group; a local file referring specifically to material transactions of the local taxpayer; and a CbC Report containing certain information relating to the global allocation of the group’s income and taxes, together with indicators of the location of economic activity within the group. Where CbC Reporting applies, the ultimate parent entity of a group with annual consolidated group revenue equal to or higher than EUR 750 million (or near equivalent in domestic currency as of January 2015) in the preceding fiscal year is required to file a CbC Report on behalf of the group with its local tax authority. The deadline for filing the CbC Report is by no later than 12 months after the last day of the group’s reporting fiscal year. The tax authority with which the CbC Report is filed will exchange the CbC Report with the tax authority in other jurisdictions where the group has operations, under bilateral or multilateral tax treaties or tax information exchange agreements (TIEAs) that permit the automatic exchange of information. Countries have now moved to implementation phase.

OECD to publish the 2017 Tax Policy Report on 13 September

Pascal Saint-Amans, the OECD Director of the Centre for Tax Policy and Administration, will present the key findings of the OECD 2017 Tax Policy Report on Wednesday 13 September. The presentation will be available live at 15,00 on the following link.

The new Tax Policy Reforms 2017 – OECD and Selected Partner Economies provides comparative analysis on the tax reforms that were implemented, legislated or announced in 2016 in the 35 OECD countries, as well as in Argentina and South Africa. It follows reforms concerning personal income tax, social security contributions, corporate income tax, value-added tax and general sales tax, excise duties, environmental taxes and property taxes across countries and also tracks tax policy trends in these areas over time.

EU loses Boeing tax subsidies WTO case

The United States has won a tax subsidies dispute with the European Union, as the dispute settlement panel reverses a previous decision that declared US tax subsidies to Boeing illegal under the WTO rules. The 13-year dispute concerns allegedly illegal State aid provided by the US state of Washington to Boeing for the manufacturing of Boeing’s newest airplane Boeing 777X. Under the ruling, the previous decision of the dispute settlement panel that prohibits certain subsidised was now reclassified from the previous designation of ‘prohibited subsidies’. The WTO judges ruled last year that the $ 1 billion State aid from the state of Washington for a factory that will build world’s largest carbon fibre wings for the 777X aircraft was illegal. This decision has now been reversed with the dispute settlement panel deciding that the State aid cannot be classified as prohibited aid as it did not explicitly affect targeted trade flows under the WTO trade rules.

If the obliged parties do not comply with the WTO panel decisions, the other party can impose counter-measures. The litigation is likely to continue until both parties decide to settle.

CFE General Assembly, Committee Meetings and Events in Bratislava 21 – 23 September 2017

With summer holidays now behind us, CFE and the Slovak Chambers of Tax Advisers (SKDP) are ready to host the delegates who registered to attend CFE’s autumn meetings and events in Bratislava from 21 – 23 September. The Professional Affairs Committee and the Executive Board meet on 21 September, the Fiscal Committee meetings take place on 21 and 22 September and the General Assembly on 22 September. Further information for delegates is available on the following link.

 

 

4 September 2017

EU wins WTO dispute with Brazil over tax subsidies

The World Trade Organisation dispute settlement panel issued a ruling in the case of Brazilian tax subsidies, in one of the most comprehensive disputes launched by the European Union. WTO panel found that Brazilian tax subsidy schemes are illegal under the World Trade Organisation rules. The ruling states that the tax subsidy programmes discriminate against EU automotive, ICT and electronic products and grant prohibited import and export subsidies to Brazilian companies. The dispute also covered fiscal incentives contingent on Brazilian firms meeting certain export performance requirements.

The European Union filed the complaint in 2013, in respect of certain measures concerning taxation and charges in the automotive sector, the electronics and technology industry, goods produced in Free Trade Zones, and tax advantages for exporters. The European Union claimed that the measures are inconsistent with the GATT 1994, SCM Agreement and Articles 2.1. and 2.2. of the TRIMs Agreement.

The parties have 30 days to appeal the decision. Otherwise, Brazil will be required to remove its illegal tax subsidy programmes without delay.

OECD considering expanding the Permanent Establishment definition

The OECD Tax Policy director Pascal Saint-Amans said that the OECD is considering expanding the PE definition as part of the efforts to tax the digital economy. Speaking at a tax panel at the International Fiscal Association Congress in Rio de Janeiro, Saint-Amans confirmed for Bloomberg that the OECD would also look at profit attribution rules and possible interim measures such as an alternative tax on e-sales. He suggested “ALES” as a potential acronym for the alternative tax.

“That’s what we’re working on, with the idea of further expanding the PE definition that includes something that would track the digital presence of a company,”, Pascal Saint-Amans said, as reported by Bloomberg.

PANA Committee of Inquiry publishes study on Panama Papers follow-up in EU member states

The European Parliament PANA Committee of Inquiry into tax avoidance, tax evasion and money laundering published a study that analyses the national capacity to fight tax crimes and the follow-through of the Panama Papers investigations. The study investigates national administrative capacity to combat tax avoidance and tax evasion, money laundering laws and the enforcement capacity. The aim of the analysis was to evaluate whether the legal framework and the institutional arrangements in place are adequate, what are the deficiencies and how they could be addressed.

The study concludes that all Member states have a functioning legal framework to fight tax avoidance, tax evasion and money laundering but different national tax-collection set-ups and approaches to fraud. Despite similarities in the key institutional actors involved in this process, significant differences exist in the way they operate and how they share information and cooperate with one another.

Almost all Member States mentioned the practical action they have taken in reaction to the Panama Papers. Some EU Member States identified more than 3 000 EU-based taxpayers and companies linked to the Panama Papers, and have collectively launched at least 1 300 inquiries, audits and investigations into Panama Papers revelations.

In most countries it is too early to report on fines and convictions relating to the Panama Papers data.

CFE General Assembly, Committee Meetings and Events in Bratislava 21 – 23 September 2017

With summer holidays now behind us, CFE and the Slovak Chambers of Tax Advisers (SKDP) are ready to host the delegates who registered to attend CFE’s autumn meetings and events in Bratislava from 21 – 23 September. The Professional Affairs Committee and the Executive Board meet on 21 September, the Fiscal Committee meetings take place on 21 and 22 September and the General Assembly on 22 September. Further information for delegates is available on the following link.