CFE’s Top Tax 5 – February 2017

27 February 2017

  1. Council of the EU reaches deal on ATAD2, European Commission welcomes agreement that fights BEPS (hybrid mismatches) involving non-EU countries

On 21 February 2017, the Council of the EU reached agreement on the finalised text of the Directive extending the scope of the original Anti-Tax Avoidance Directive (“ATAD”). The “ATAD 2” Directive will extend the scope of the ATAD to include hybrid mismatches involving third countries (non-EU Member States) and will tackle specific hybrid scenarios, for example those relating to permanent establishments (“PE”), dual resident entities and hybrid financial instruments. The ATAD has an implementation deadline of 31 December 2018 whereas ATAD 2 will for the most part have a deadline of 31 December 2019, and up until 21 December 2021 for certain aspects (i.e. reverse hybrids). The European Parliament must now issue an Opinion after which the Council of the EU will adopt the Directive.

Pursuant to the finalised text, a hybrid mismatch will not arise where the payer jurisdiction under an “on-market hybrid transfer” requires a financial trader to include all amounts received under the transferred financial instrument as income. Therefore, a hybrid mismatch will only arise to the extent that the payer jurisdiction allows the deduction to be set-off against an amount that is not dual-inclusion income. Finally, payments made by a financial trader will not be considered to be hybrid payments under the Directive unless they arise in the context of associated enterprises, between a taxpayer and an associated enterprise, between the head office and PE, between two or more PEs of the same entity, or under a structured agreement.

In the context of reverse hybrid mismatches which arise when the hybrid entity is located in a Member State, the reverse hybrid entity will be regarded as tax resident in that Member State and taxed on the income that is not otherwise subject to tax. The reverse hybrid provisions will not apply to recognised collective investment vehicles.

In order to avoid any unintended consequences between the hybrid financial instrument and the loss-absorbing requirements imposed on banks, Member States will be allowed to provide an exemption for intra-group instruments that have been issued with the sole purpose of meeting the issuer’s loss-absorbing capacity requirements. The carve-out will not apply if it arises under a structured arrangement or is done for the purpose of avoiding tax. This carve-out will be limited in time until 31 December 2022 and the Commission will present a report assessing the consequences.

  1. Council of the EU to finalise by end of year the ‘blacklist’ of non-cooperative jurisdictions for tax purposes

The Council of EU sitting as ECOFIN also discussed on 21 February 2017 the EU list of non-cooperative jurisdictions for tax purposes. The Council agreed to establish a final list of non-cooperative jurisdictions by the end of 2017. An agreement has also been reached on the scope of the application of the Criterion 2.2., as established by the Council in its criteria and process leading to the establishment of the EU list of 8 November 2016. Criterion 2.2. establishes that “a jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect economic activity in the jurisdiction.” The 8 November 2016 Council conclusions lay down the tax good governance criteria that should be used to screen jurisdictions, and, establish guidelines for the screening. The established criteria are related to tax transparency, fair taxation and implementation of anti-BEPS measures.

The establishment of EU ‘blacklist’ of non-cooperative jurisdictions is a follow-up of the Panama Papers revelations. European Union’s actions are taken in line with the OECD work in the Global Forum on tax transparency and exchange of information for tax purposes.

The Council also discussed the work of the Code of Conduct group responsible for implementation of the EU Code of conduct on business taxation, and a body that shall oversee the screening process leading to establishment of the EU ‘blacklist’ of non-cooperative jurisdictions for tax purposes.

  1. European Parliament proposes extended scope of EU’s public country-by-country reporting

Under the draft Report of the European Parliament on the Directive 2013/34/EU on public by country reporting, the threshold for the multinational companies caught under these proposed EU rules would be set at EUR 40 million as opposed to the originally envisaged threshold of EUR 750 million consolidated net turnover.

The European Parliament’s draft Report of its Committees on Economic and Monetary Affairs (‘ECON’) and Committee of Legal Affairs aims to require from multinational corporations to disclose relevant information for all countries worldwide in which they operate, so that taxes would be paid where the profits are generated. According to the draft Report, the proposal of non-aggregated data to be disclosed is in line with the EU’s policy at helping developing countries to consolidate their tax revenues.

Under the proposed amendments, the EU Member States shall require subsidiaries incorporated in EU Member states and controlled by an ultimate parent undertaking which has a consolidated net turnover exceeding EUR 40 000 000 (which is not governed by the law of an EU Member State), to publish the report on income tax information of that ultimate parent undertaking on an annual basis.

The Parliament’s Report proposes that the corporate tax information is published in a common template available in an open data format and made accessible to the public on the website of the subsidiary undertaking or on the website of an affiliated undertaking in at least one of the official languages of the Union. On the same date, the company should also file the report in a public registry managed by the European Commission.

These amendments come in a form of draft European Parliament legislative resolution (first reading- ordinary legislative procedure), on the proposal for a directive of the European Parliament and of the Council amending Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches.

  1. Court of Justice of the EU published ‘Apple’ appeal in the Ireland State aid case

The Court of Justice of the European Union (“CJEU”) published the main arguments and pleas in law of Apple’s action for annulment of European Commission Decision of 30 August 2016 on State aid to Apple [Apple Sales International (“ASI”) and Apple Operations Europe (“AOE”), herein forth “Apple” or the applicant] implemented by Ireland.

Apple’s main arguments are based on maintaining error in law by the European Commission in the interpretation of Irish tax law and EU State aid rules.

At the outset, Apple claims that there is no legal requirement under Section 25 Taxes Consolidated Act (“TCA 1997”) that profit allocation to branches is compliant with the arm’s length principle (‘ALP’). Such a requirement does not exist under European law either, the applicant claims, adding that the ALP is not applicable standard of assessment under Article 107(1) TFEU, the relevant provision of EU law that prohibits unauthorised State aid.

In relation to the development and commercial utilisation of Apple’s intellectual property rights (“IP”), Apple claims that the European Commission disregard the fact the Apple’s IP is developed, controlled and managed in California, United States, and not in Ireland. IP related profits should therefore be subject to tax in the United States.

Apples further argues that the Commission failed to accept the  branches in Ireland performed routine operations only and therefore were limited in its activates and commercial utilisation of IP. The applicant points to Commission’s alleged misunderstanding of the fact that the Irish branches did not play significant part in the critical profit making activities of the group.

The applicant claims that the European Commission failed to establish ‘selectivity’, which is a decisive State aid criterion. Apple was treated by the Irish Revenue in the same way as the other non-resident entities for tax purposes, and the Commission wrongly assumed that Apple is an Irish resident entity for tax purposes.

In respect of the transfer-pricing methodology involved, Apple claims that the Commission erred in law and fact by the choice and application of the Transactional Net Margin Method (“TNMM”). TNMM is a transfer pricing method that compares the net profit margin arising from a non-arm’s length transaction with the net profit margins reached in similar arm’s length transactions, and, then examines the net profit margin relative to an appropriate base such as costs, sales or assets. According to Apple, the subsidiary line of the Commission fails to articulate a correct profit attribution analysis.

Finally, Apple claims that the European Commission breached the principles of legal certainty and non-retroactivity by demanding recovery of the State aid, and that the European Commission decision exceeds Commission’s competence under Article 107(1) TFEU.

  1. CFE Forum 2017: “Do you have a taxable presence in a country? The New Reality Permanent and Fixed (VAT) Establishments in the Post-BEPS World”

CFE Forum 2017, our annual international tax conference, will take place on 30 March 2017, 9:00 to 16:30, in Brussels (Rue Montoyer 47, B- 1000 Brussels). For programme and registration details, please follow the links below:

Programme: Link 

Further information: CFE website.

 

 

13 February 2017

  1. GDF Suez – Luxembourg: Fiscal State Aid

Until 3 March, the European Commission will be receiving comments on the fiscal state aid alleged to have been provided by Luxembourg to GDF Suez (Case No. SA 44888/2016).

In this case, the Commission is challenging 2 tax rulings issued by the Luxembourgish tax authorities to GDF Suez Group (currently Engie) in 2008 and 2010.

Both rulings concern tax treatment of intra-group interest-free mandatorily convertible loans, i.e. loans allowing the lender to become shareholder of the borrower upon conversion.

According to the rulings in question, the borrowing companies were taxed on fixed margin while the difference between their profits and the fixed margin were considered deductible expense. The Commission is challenging such deductibility, highlighting that the aforementioned loans are equity rather than debt instruments. Furthermore it is challenging the agreed non-taxation of the deductible amounts at ultimate owner level.

The relevant announcement of the European Commission may be found in this Link.

  1. C-283/15: X vs Netherlands – Tax Allowance for Personal and Family Circumstances

The case concerned the applicability of Schumacker case (C-279/93) in a new situation.

The facts involved a taxpayer receiving income from two states, at a proportion 60% – 40%, while being tax resident in third state. Such taxpayer’s income in the state of tax residence was so low that did not permit such state to take into account his personal and family circumstances.

The ECJ ruled that the fact that the taxpayer received the major part of his income within several states (instead of one) other than that of tax residence does not affect application of the Schumacker principles. The decisive criterion is whether it is impossible for the state of residence to take into account for tax purposes the personal and family circumstances of the relevant taxpayer, due to absence of sufficient taxable income therein.

The ECJ also clarified that the injunction applies to any state of activity of the taxpayer, in proportion to the income earned within its jurisdiction, irrespective of whether the remaining part of the income is earned in a member state or in a non-EU country.

The ECJ ruling may be found in this Link.

  1. C-21/16: Euro Tyre BV — Sucursal em Portugal vs Portugal – VAT Exemption of Intra-community Supplies of Goods

The case concerned the refusal of Portuguese tax authorities to exempt from VAT sales effected by branch of Dutch company and classified thereby as intra-community supplies.

The argument forwarded was that at the time of the transaction the purchaser was neither registered for intra-community in its state of residence nor registered in the VIES system.

The ECJ stressed that the above registration requirements are formalities which may not undermine the seller’s right to VAT exemption where the substantive conditions for intra-community supply are fulfilled. Substantially, it is required that goods are dispatched or transported to an EU destination outside the Member State of origin, by/on behalf of the seller or the purchaser, for another taxable person (or non-taxable legal person) acting as such in a Member State different from the Member State of origin of the goods (art. 138(1) of VAT Directive).

The ECJ ruling may be found in this Link. 

  1. AMCHAM in Support of Ireland’s Appeal on Apple State Aid Case 

The American Chamber of Commerce (AMCHAM) of Ireland declared its full support to Ireland’s decision to submit an appeal to the General Court of the EU against the European Commission’s decision condemning Apple to pay € 13 billion as illegal state aid.

The relevant (opening) statement (to the Oireachtas Finance Committee on EU State Aid Investigation) may be found in this Link.

  1. OECD DD Guidance for Meaningful Stakeholder Engagement in the Extractive Sector

The OECD published guidance to address challenges in relation to engagement with stakeholders in the mining, oil and gas sector, in recognition of the important social and environmental implications connected with extractive operations. Such guidance is relevant to responsible business conduct, as per the OECD Guidelines for MNEs.

OECD’s initiative aims at assisting relevant companies with the identification and management of risks related to stakeholder engagement and subsequently with avoiding relevant adverse impact, e.g. human rights infringements or economic setbacks.

The relevant announcement of the OECD may be found in this Link.

In addition, of cross-border interest are:

  • In Australia, the consultation regarding the potential impact of the country becoming a party to the Multilateral Instrument closed on 6 February 2017.

The relevant announcement by the Australian government may be found in this Link.

 

 

06 February 2017

 

  1. Maltese Presidency – tax policy priorities

The Maltese Presidency presented its work programme, including its tax priorities for the coming 6 months at the recent ECOFIN meeting that took place in Brussels on 27 January 2017. Malta will hold the Presidency until June 2017. The priorities are as follows:

  • Reaching final agreement on the text of the amendment to the Anti-Tax Avoidance Directive relating to hybrid mismatches with third countries.
  • This is presently at an advanced stage as broad agreement was reached at the December ECOFIN Meeting. However, agreement failed to be reached on some outstanding issues such as the implementation date and measures relating to certain types of financial instruments.
  • The re-launch of the Common Consolidated Corporate Tax Base;
  • At a recent public hearing of the European Economic and Social Committee (EESC) on the CCCTB, Mr. Anthony Vella Laurenti from the Maltese Ministry of Finance outlined that the Presidency would focus on the tax technical elements of the proposals, particularly in relation to the “Super Deduction” for R&D, the allowance for growth and investment and the temporary cross-border loss relief.
  • Reaching agreement on the proposed Directive on Double Taxation Dispute Resolution Mechanisms in the EU. Mr. Vella emphasised at the EESC meeting that this is a top priority of the Presidency.
  • Proposals on e-commerce and the reduced rates on e-publications, in the area of indirect taxation.
  1. Application made to ECJ in response to EU Commission Decision in Belgian Excess Profits Scheme – (Case T-832/16 Celio International v Commission)

The applicant in the case Celio International v Commission lodged an Action before the ECJ. The case concerns a finding by the Commission that selective tax advantages granted by Belgium under its “excess profit” tax scheme constituted illegal state aid under EU state aid rules. The scheme has benefitted at least 35 multinationals mainly from the EU.

The Action brought by Celio International SA requests the following of the Court:

  • To annul the Commission’s decision of 11 January 2016
  • Alternatively, to annul certain elements of the Commission Decision (namely Articles 2-4 of the Commission Decision); or
  • Alternatively to annual those paragraphs in so far as they:
    • require the recovery from entities other than the entities that have been issued an ‘excess profit ruling’ as defined in the Decision; and
    • require the recovery of an amount equal to the beneficiary’s tax savings, without allowing Belgium to take into account an actual upwards adjustment by another tax administration.
  • The Commission pay the costs of the proceedings.

The applicant’s main legal arguments to ground the above pleas include, manifest error of assessment, and failure to provide adequate reasons in relation to the existence of an aid scheme, that the scheme gives rise to an advantage or that the scheme grants a selective advantage.

  1. Apple lodges official appeal with ECJ

Two Irish Apple companies, Apple Sales International and Apple Operations Europe have lodged an appeal to the European Court of Justice against the decision by the European Commission that Ireland granted illegal state aid to the companies.

It comes as, Margrethe Vestager, EU Commissioner for Competition, appeared before an Irish Parliamentary Committee on Tuesday 31 January. The Commissioner reiterated the basis for the Commission’s Decision that two tax rulings granted by the Irish tax authorities to Apple constituted illegal state aid. Ms Vestager had stated previously that other European countries could seek to claim a portion of the 13 Billion. However, last week she stated that tax authorities in other Member States must be able to prove Apple generated taxable profit in their countries to be in a position to put in a claim.

  1. New EU Transparency rules on Tax Rulings has entered into force

The EU’s new transparency rules, requiring Member States to automatically exchange data on tax rulings and advance pricing agreements (APAs) entered into force on 1 January 2017. The first exchanges of information are dues to take place in September this year. Member States are required to provide information on all cross-border rulings issued since 2012 by 1 January 2018.

The new rules require Member States to send an electronic report listing all cross-border tax rulings and APAs issued by that Member State. The reports will be filed through a central depository system from which Member States can view the rulings and if necessary request more information on a particular ruling. The reports must be filed every six months.

  1. OECD releases Peer Review Documents for assessments for two BEPS Minimum Standards

On 1 February the OECD published key documents which will form the basis of the peer review of two of the BEPS Minimum Standards; Action 13 on Country-by-Country reporting and Action 5 dealing with the Transparency Framework. Each of the four BEPS minimum standards is subject to peer review in order to ensure timely and accurate implementation.

The documents include the Terms of Reference for assessing the implementation of the minimum standard, and the procedures by which jurisdictions will complete the peer review, including the process for collecting the relevant data, the preparation and approval of reports, the outputs of the review and the follow-up process.

The documents are available at the following links:

BEPS Action 5

BEPS Action 13

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The selection of the remitted material has been prepared by

Aleksandar Ivanovski / Mary Dineen/ Piergiorgio Valente / Filipa Correia /