CFE’s Top Tax 5 – August

   

  28 August 2017

European Commission advances with EU blacklist work 

The European Commission is advancing with its work on establishing a list of non-cooperative jurisdictions for tax purposes. According to a document analysed by Bloomberg, EU member states are considering options for various sanctions for blacklisted countries, including a flexible approach that would allow Member states to impose additional sanctions. The document operates with three approaches: flexible, rigid and toolbox approach that would be addressed at specific issues.

Four types of sanctions are considered by the EU: imposition of withholding taxes, new CFC rules, limitations of the participation exemption regime, and, eliminating deductible costs such as royalties.

The European Commission is screening 92 jurisdictions, including the United States and Switzerland, for compatibility with tax transparency and corporate tax criteria. The document, on basis of which the EU Code of Conduct group will analyse the countries’ compliance, forms a basis for further negotiations.

By way of background, on 8 November 2016, the Council agreed on the criteria and the process for the establishment of an EU list of non-cooperative jurisdictions for tax purposes. Council adopted conclusions on: criteria for the screening of third country jurisdictions, and, guidelines on the process for selecting and screening jurisdictions. Screening is due to be completed by next month, so that Council can endorse the list of non-cooperative jurisdictions by the end of 2017.

OECD Global Forum releases tax transparency ratings for 10 jurisdictions

The OECD Global Forum published the new round of peer review reports on tax transparency compliance of 10 jurisdictions. The process was launched in mid-2016 following a six-year process during which the Global Forum assessed the legal and regulatory framework for information exchange (Phase 1) as well as the actual practices and procedures (Phase 2) in 119 jurisdictions worldwide.

Ireland, Norway and Mauritius received an overall rating of ‘Compliant’ and six other jurisdictions, including Australia, Germany and Canada have room to improve with rating of ‘largely compliant’.

The review forms part of the implementation of the CRS, the common reporting standard, with CRS exchanges planned to commence in September 2017. The monitoring and review process is intended to ensure the effective and timely delivery of commitments made, the confidentiality of information exchanged and to identify areas where support is needed.  The United States is not participating in the system.

EESC public hearing on taxation of the sharing economy

The European Economic and Social Council was commissioned by the Estonian EU Presidency to come up with a study on the Taxation of the sharing economy. The exploratory opinion on the topic of “Taxation of the sharing economy – analysing of possible tax policies faced with the growth of the sharing economy” is analysing how the new models of business, work, and consumption in the sharing economy can be taxed accordingly.

The Section for Economic and Monetary Union and Economic and Social Cohesion (ECO) of the European Economic and Social Forum is organising a public hearing on Taxation of the sharing economy on 13 September 2017, 09:00 -13:00 in Tallinn, Estonia. One could also participate in the debate via Twitter: @EESC_ECO using the hashtags #Tax #SharingEconomy.

New CCTB study published in Commission taxation papers

European Commission Taxation Papers are intended to increase awareness and seek comments and suggestions for further analyses in a particular policy area. A recently published paper from DG TAXUD provides an assessment of R&D provisions under a Common Corporate Tax Base (CCTB). The EC proposal for an EU wide Common Consolidated Corporate Tax Base (CCCTB) includes an R&D incentive. The paper presents the rationale for the inclusion of R&D provisions, quantifies the subsidy implied by alternative options using the user’s cost approach and approximates aggregate impacts by means of simple extrapolations from elasticities found in literature. The study find that the CCCTB without an R&D incentive would significantly deteriorate incentives to invest in R&D. As an alternative, the paper argues that the level of support should be ambitious to address the pressing need in the EU to invest more, stay globally competitive and reach the EU’s target of investing 3% of its GDP in R&D. To take full advantage of such opportunities, EU member states need to mobilise a range of policies and engage in complementary non-tax interventions in their national innovation systems.

 

     21 August 2017

Publication of comments received on the OECD Model Tax Convention 2017 Update

The OECD published the comments received on the 2017 update on the Model Tax Convention (“MTC”). Draft contents was released on 11 July 2017 with respect to the changes in relation to paragraph 13 of the Commentary on Article 4 MTC (tie-breaker rule for Article 4(2)c MTC; changes to paragraphs 17 and 19 (regarding the meaning of ‘habitual abode’); the addition of new paragraph 1.1 to the Commentary on Article 5 MTC (relevant for interpretation of the ‘permanent establishment’ definition); and, the deletion of parenthetical reference from subparagraph 2a) of Article 10.

The public comments received by the OECD on the above changes to the Model Tax Convention are available to download at the following link.

OECD plans to approve and publish the full contents of the OECD Model 2017 Update at the end of year.

Estonian EU presidency to focus on digital economy tax issues

The Estonian government, currently presiding with the Council of the European Union, will focus its efforts on finding a European solution for taxation of the digital economy and the US-tech companies with taxable presence in Europe. Solutions are likely to be discussed at an informal meeting of European finance ministers to be held 15 – 16 September in Tallinn.

A spokesperson for the Estonian EU presidency speaking for Bloomberg said that the EU looks into possibilities to come up with new tax rules that will prevent the non-taxation of profits for technology companies.

Dmitri Jegorov, the Estonian Finance Ministry Undersecretary for Tax and Customs Policy confirmed for Bloomberg that attention of the Estonian Presidency will be directed towards a separate agreement on the terms of what constitutes a permanent establishment. The presidency conclusions will feed into the OECD’s next proposals expected in 2018.

France and Germany to propose CCTB solution

The upcoming September meeting in Tallinn will likely see the EU finance ministers discussing a new CCTB proposal of the French and German government. The French Finance Minister Bruno Le Maire said that President Macron is in favour of simpler rules for corporate taxation which will serve European economic interests much firmly.

During the summer months, France has been working with the German government to come up with a simplified bilateral CCTB proposal no later than 2018 that should serve as basis for tax (rates) harmonisation within the Eurozone. A multilateral agreement is possible within the EU, with a possibility for other EU member countries to join at a later stage. Under the so-called ‘enhanced cooperation’ procedure at least nine EU member states can do so, with voluntary participation of other EU countries.

Earlier this year, the European Commission proposed introducing a type of formulary apportionment in the EU in a form of CCCTB proposal, accompanied by a CCTB proposed directive.

The next formal ECOFIN meeting is scheduled for 10 October in Luxembourg.

White House focuses on tax reform

President Trump’s administration will concentrate its efforts on securing a tax reform working with Congress Republicans, focusing on the international tax side of the reform. According to FT and Bloomberg, a shift to territorial tax system and deemed repatriation are key elements with wider support. Measures are also considered in BEPS context, with minimum tax on income from intangible property and exemption of 95 percent from US tax on foreign earnings that have been subject to tax in another jurisdiction and would allow repatriation at a reduced rate.

Senate majority leader Mitch McConnell confirmed the projected timeline for tax reform last week. In the meantime,  a letter from Democratic Senators to President Trump followed outlining the conditions for bipartisan support of tax reform.

16 August 2017

EU Court of Justice ruling in C-386/16 Toridas on VAT zero-rated intra-EU supply of goods

The Court of Justice of the EU (“CJEU”) on 26 July 2017 rendered a judgment in the VAT case C-386/16 Toridas where it established that the zero rating for intra-EU supplies of goods in a chain which involves intra-EU movement applies only to the supply to which the transport of the goods can be attributed to.

This preliminary ruling from the Lithuanian Court concerned interpretation of Articles 138(1), 140(a) and 141 of the VAT Directive.  In particular, the referring Court inquired whether the supply of goods by a taxable person who is established in one Member State must be exempt under those provisions in the case where, before that supply transaction is entered into, the purchaser (a person identified as being a taxable person in a second Member State) expresses an intention to resell the goods immediately, before transporting them from the first Member State, to a taxable person established in a third Member State, for whom those goods are transported (dispatched) to that third Member State. The referring Court sought to establish, in particular, whether this type of supplies of goods may be zero-rated pursuant to the provisions of the VAT Directive applicable to intra-EU transactions.

Interpreting Article 138 (1) of the VAT Directive, CJEU ascertained that a supply of goods by a taxable person established in a first Member State is not exempt from VAT under that provision where, prior to entering into that supply transaction, the person acquiring the goods, who is identified for VAT purposes in a second Member State, informs the supplier that the goods will be resold immediately to a taxable person established in a third Member State, before he takes them out of the first Member State and transports them to that third taxable person, provided that that second supply has in fact been carried out and the goods have then been transported from the first Member State to the Member State of the third taxable person. The fact that the first person acquiring the goods is identified for VAT purposes in a Member State other than that of the place of the first supply or that of the place of the final acquisition is not a criterion for classification of an intra-Community transaction or, in itself, evidence sufficient to show that a transaction is an intra-Community one.

CJEU also noted that Article 138(1) of the VAT Directive obliges the Member States to exempt supplies of goods meeting the substantive conditions which are listed there exhaustively in C‑21/16 Euro Tyre, para 29. The processing of the supplied goods does not form part of the substantive conditions laid down by that article. As regards a chain of two supplies such as those at issue in the main proceedings, the first supplies cannot be classified as intra-EU supplies since no intra-EU transport could be ascribed to them. Therefore, processing of the goods, in the course of a chain of two successive supplies, such as that at issue in the main proceedings, carried out on the instructions of the middleman acquiring the goods and before the goods are transported to the Member State of the person finally acquiring them, has no effect on the conditions for any exemption of the first supply where that processing takes place after the first supply.

New Luxembourg IP taxation legislation published

The amended Luxembourgish Act on Taxation of Intellectual Property (“IP”) published on 7 August reflects the efforts of the Luxembourg government to promote R&D activities in the country within the compliance framework set by OECD BEPS Action 5, which requires substantial activity for preferential IP regimes. Under the proposal, capital gains and income from IP assets shall be exempt from corporate taxation and municipal tax up to 80%, and fully exempt from net wealth tax. Eligible IP includes patents, software protected by copyrights, utility models etc., whilst eligible costs include any costs related to R&D directly to development of an eligible asset. The new legislation is set to become effective on 1 January 2018.

Belgium: Corporate Tax Rate to be reduced to 25% by 2020

Under the proposed Belgian tax reform, which is subject to parliamentary discussion and approval, the corporate income tax rate is set to gradually decrease from 34% to 25% in 2020. SMEs will benefit from a reduced rate of 20.4% under certain circumstances. The Belgian tax legislation reform proposal envisages implementation of the EU Anti-Tax Avoidance Directives, introduction of CFC legislation, reform of the notional interest deduction, tax consolidation allowing Belgian group entity’s losses to be offset against profits of another Belgian group in a fiscal year, and, reform of the holding regime by extending the minimal participation value for eligible participation exemption, amongst other issues. The measures are likely to enter into force on 1 January 2018, subject to parliamentary approval.

Conference ‘Current Issues in European Tax Law’ in Tallinn on 7 September

The Estonian Ministry of Finance, supported by IBFD, is organising a tax conference on 7 September 2017. The conference aims to address the recent EU initiatives in tax, such as the dispute resolution directive and the proposal on tax intermediaries and mandatory disclosure rules.

For more details on the conference and registration please see the following link at the website of the Estonian EU presidency.

 

  7 August 2017

Platform for Tax Collaboration invites comments on draft toolkit on the taxation of offshore assets

The Platform for Tax Collaboration, a joint initiative of the United Nations, the World Bank Group, the IMF and the OECD invites comments on a draft toolkit designed to help developing countries in the taxation of offshore indirect transfer of assets. With an aim of releasing the final toolkit by the end of 2017, the Platform expects comments and public feedback from interested stakeholder by 25 September 2017, by email to taxcollaborationplatform@worldbank.org.

The draft toolkit ‘Taxation of Offshore Indirect Assets Transfers’ identifies the principles that guide the taxation of sales of entities located in one country that owns immovable property located in another. The taxation of these transactions is of particular importance for developing countries but it was not addressed with the OECD Base Erosion and Profit Shifting Project.  The toolkit addresses in particular the taxation of the underlying assets in relation to the extracting industries in developing countries, and the current standards under the OECD and the UN Model Tax Conventions, as well as the new Multilateral instrument. The work complements projects that have already been undertaken in increasing the capacity of developing countries to design their tax policies and to apply the OECD/ G20 BEPS principles.

EU Commissioner Vestager welcomes legislative changes on tax treatment of financing companies

EU Commissioner responsible for Competition Margrethe Vestager welcomed changes introduced by the Cypriot government for more stringent tax treatment of financing companies. The Commission has expressed concerns that Member states’ tax ruling practices for financing companies endorse very low margins and artificially lowered taxable bases, which is in breach of the EU State aid rules. The changes made by the Cypriot government follow similar changes introduced by Luxembourg in January 2017, also welcomed by the European Commission earlier this year.

The changes to the Luxembourg legislation (Circulaire 164/2 bis) and article 56bis of the Luxembourg Income Tax Act reshape the transfer-pricing framework for companies carrying out financing activities in Luxembourg. The Circulaire provides for additional guidance in terms of substance and incorporation of the arm’s length principle for intra-group financing activities in line with the OECD Transfer-Pricing Guidelines.

On the same subject matter, the Commission has already closed the case of Fiat Finance and Trade, where it established that Fiat Finance paid tax on a portion of its actual accounting capital at a low remuneration. The Commission’s assessment showed that in the case of Fiat Finance and Trade, if the applied estimations of capital and remuneration had corresponded to market conditions, the taxable profits declared in Luxembourg would have been 20 times higher. The case is under appeal at the Court of Justice of the EU.

Commission requires Belgium and France to abolish corporate tax exemption for ports

The European Commission decided that corporate tax exemptions granted to Belgian and French ports provide them with a selective advantage, in breach of the EU state aid rules. In particular, the tax exemptions do not pursue a clear objective of public interest, such as the promotion of mobility. The tax savings generated this way by the port operators may be used to fund any type of activity or to subsidise the prices charged by the ports to customers, to the detriment of competitors and fair competition.

The two European Commission decisions make clear that if port operators generate profits from economic activities these should be taxed under the corporate tax law provisions to avoid distortions of competition.

Since the corporate tax exemption for ports already existed before the accession of France and Belgium to the EU, these measures are considered as “existing State aid” and the European Commission cannot ask Belgium and France to recover the aid already granted. Belgium and France now have until the end of 2017 to take the necessary steps to remove the tax exemption in order to ensure that, from 1 January 2018, all ports are subject to the same corporate taxation rules as other companies.

The non-confidential versions of these decisions will be made available under the case numbers SA.38393 (Belgian ports) and SA.38398 (French ports) once any confidentiality issues have been resolved.

UK will not be a tax haven after Brexit, says Chancellor of the Exchequer

In an interview with Le Monde published last weekend, Philip Hammond, the UK Chancellor of the Exchequer, denied claims that the UK Government plans a ‘race a to the bottom’ with corporation tax rates with the rest of the EU. The UK does not plan to change the economic model as part of government’s Brexit policy, rather a very close trade relationship with the EU, avoiding any unnecessary disturbances. Mr Hammond also suggested a transitional period after 2019, which will be ‘off-the-shelf’ model creating predictable regulatory environment in the transitional period after the UK has formally left the EU.

‘I often hear it said that the UK is considering participating in unfair competition in regulation and tax. That is neither our plan nor our vision for the future. I would expect us to remain a country with social, economic and cultural model that is recognisably European’, Mr Hammond said for Le Monde.

Philip Hammond added that the amount of taxes that the government raises as a percentage of the GDP puts the UK in the middle of the pack and the UK does not plan to change that even after the country has left the European Union.

UK’s tax take as a share of GDP is the 15th highest of the 28 EU Member states, according to Eurostat.