- Global tax transparency developments: ‘Paradise Papers’
Back in November 2017 the International Consortium of Investigative Journalists (“ICIJ”) revealed documents related to off-shore activities of individuals and companies named “Paradise Leaks”. The disclosures contained information related to tax avoidance schemes employed by multinational companies such as Apple, Nike and Facebook. Irrespective of the legality of the revealed tax optimisation strategies, the general public was yet again informed about fund flows into off-shore structures, use of off-shore trusts for tax planning purposes, companies incorporated in secrecy jurisdictions, entities that hold assets and investments in shares and stocks as well as private individuals shielding their identity. 14.4 million files were obtained by the German newspaper Süddeutsche Zeitung, and subsequently shared with ICIJ, BBC and the Guardian. The ‘Paradise Papers’ leaks came as world’s second biggest data leak with 1.4 TB of data, preceded only by the “Panama Papers” in 2016 amounting to 2.6 TB. The “LuxLeaks” files of 2014 amounted to 4.4 GB of tax rulings from Luxembourg.
Simultaneously with these public disclosures, new transparency initiatives at global and EU level have emerged, including an EU Parliament’s Committee of Inquiry of contraventions to EU law, new beneficial ownership transparency requirements, as well as policy initiatives for mandatory disclosure of aggressive tax avoidance schemes at both EU and OECD level. The Bulgarian EU presidency is expected to prioritise the EU directive on mandatory disclosure of cross-border aggressive tax planning schemes in the second quarter of 2018.
- OECD & EU move-forward on mandatory disclosure rules
The OECD on the other hand is seeking input on a consultation document concerning model mandatory disclosure rules. This consultation follows on the OECD BEPS Action 12, which indeed envisaged introduction of mandatory disclosure rules, albeit not as a minimum standard. The model rules are supposedly intended to target promoters and intermediaries involved in the design, marketing or implementation of the common reporting standards (CRS) avoidance arrangements or offshore structures. The proposed rules contemplate that information on those schemes (including the identity of any user or beneficial owner) would then be made available to the domestic and other tax authorities in accordance with the requirements of the applicable information exchange agreements.
- EU: From State Aid Investigations to global tax good governance standards
Global tax certainty challenges for international businesses include the EU’s competition regulator & enforcement body (DG Competition) State aid investigations into multinational companies’ tax arrangements with EU governments. The inquiry into tax rulings was at least partly initiated on basis of ‘market information’ contained in the “LuxLeaks” revelations. Ireland recouped the assessed back taxes worth €13 billion in an escrow account, under threat of litigation at the EU courts for non-compliance with EU ruling. Other open investigations at the moment include IKEA, Amazon and McDonald’s. It will up to the EU Courts to confirm the viability of EU’s interpretation of international tax concepts, such as the ‘arm’s length principle’.
With an aim to promote fair tax competition and global tax transparency standards, the EU approved a list of non-cooperative jurisdiction for tax purposes this December. The list includes 17 countries that are failing to meet European tax good governance standards: American Samoa, Bahrain, Barbados, Grenada, Guam, Korea (Republic of), Macao, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates. The first European list is part of the EU’s efforts to promote tax good governance, to dissuade external threats to EU Member states’ tax bases and to address standards of third countries that refuse to cooperate in tax matters.
The EU listing criteria included transparency, BEPS implementation and commitment to fair tax competition. In addition, 47 countries have been ‘grey’ listed, and have committed to addressing the deficiencies in their tax systems and to meet the required criteria, following a dialogue with the EU. In order to ensure compliance with the EU measures, the EU has designed defensive measures in tax area could be taken by the Member States. Such actions include:
- Non-deductibility of costs;
- CFC rules;
- Withholding tax;
- Limitation of participation exemption;
- Switch-over rule;
- Reversal of the burden of proof;
- Special documentation requirements;
- Mandatory disclosure of specific tax schemes with respect to cross-border arrangements.
In reaction to the EU ‘blacklist’, the governments of South Korea, Macau, Mongolia, Tunisia, Namibia and Panama condemned this EU action. Panama recalled its ambassador to the EU, whilst other countries denounced the EU measures as “unfair, arbitrary and discriminatory”. In this global display of divergent understanding of tax transparency, Korea’s finance ministry added that the European Union is not in a position to impose its tax standards on countries like South Korea.
- US Tax Reform Bill (Tax Cuts & Jobs Act)
The highly controversial US Tax Reform Bill has been passed by both the Congress and the Senate in the United States. Two separate versions of the Bill were passed previously so work has been carried out on merging and consolidating the text of the Bill.
The Bill will cut the headline corporation tax rate in the U.S. from 35 to 21% and see the U.S. move to a territorial tax system. This transition to a territorial system will be facilitated by a full dividend exemption for dividends of non-US companies (with a 10% holding requirement). As part of the transition to the territorial system a once off deemed repatriation tax will be imposed on existing earnings held outside the U.S. The once-off levy will be imposed at a rate of 15.5% on cash and 8% for non-cash assets.
Other fundamental changes include the introduction of the following concepts:
- “Global Intangible Low Taxed Income” (GILTI)– This effectively constitutes a minimum tax being imposed on the certain foreign earnings of US multinationals in excess of a specified amount based on the standard rate of return of the foreign company’s assets.
- Foreign – derived intangible income (FDII) – This is akin to a patent box.
- Base Erosion Anti-Abuse Tax (BEAT) – This will impose an alternative effective minimum tax targeting excessive intra-group payments to off-shore group companies, such as excessive royalty payments.
- New rules on the treatment of hybrids.
It is anticipated that the new corporation tax rate will be applicable from 1 January 2018.
- OECD Publishes Updated Edition of the Model Tax Convention
On 18 December, the OECD published the latest edition of the OECD Model Tax Convention. The updated version incorporates the changes from the various BEPS Reports by consolidating the work done on the following actions:
- Action 2 – Neutralising the effects of hybrid mismatch arrangements
- Action 6 – Preventing the granting of Treaty Benefits in inappropriate circumstances
- Action 7 – Preventing the artificial avoidance of PE status
- Action 14 – Making Dispute Resolution more effective.
The publication is used by countries concluding bilateral tax conventions as the basis for negotiation.
Brussels, 18 December 2017
- EU agreement reached on the 5th Anti-Money Laundering Directive
The Council of EU and the European Parliament reached a political agreement on 15 December on the EU Commission’s proposal to amend the Fourth Anti-Money Laundering Directive. The amended directive (‘5th AMLD’) seeks to prevent large scale concealment of funds and to introduce increased corporate transparency rules, whereby corporate and other legal entities will be required by law to publicly disclose information on the beneficial ownership.
- Transparency requirements for corporate entities and trusts
Under the new rules, member states shall be required to ensure compulsory public disclosure of certain information on beneficial owners in respect of companies and legal entities engaging in profit-making activities as per Article 54 TFEU. Conversely, public access requirements are not put in place in respect of trusts and other legal arrangements. The 5th AMLD recognises that trusts may also be set up for non-commercial purposes, such as charitable aims, use of family assets, and other purposes beneficial to the community/ general public. Considering that such arrangements do not qualify as business benefits, the essential data on trusts’ beneficial owners shall only be granted to persons holding a legitimate interest. Similarly, the 4th AMLD already grants competent authorities access to beneficial ownership of trusts and other legal arrangements, albeit in limited circumstances.
- Virtual currencies and verification
The 5th AMLD introduces a requirement for member states to verify beneficial ownership information submitted to their beneficial ownership registers as well as an extension of anti-money laundering legislation applicability to virtual currencies.
With respect to transactions involving third countries, the obliged entities shall apply enhanced customer due diligence measures set out in the directive. Member States will introduce such rules as a requirement for all transactions with natural persons or legal entities established in third countries identified as high-risk countries pursuant to Article 9 (2) of the Directive.
- Timeline and background
This directive stems from Commission’s Action Plan of July 2016 for strengthening the fight against money-laundering and terrorist financing, aiming to prevent illicit movement of funds or other assets and disrupting the sources of revenue. On 12 February 2016, the ECOFIN Council (EU finance ministers) called on the Commission to initiate amendments to the 4th AMLD in the second quarter of 2016 the latest. The informal ECOFIN Council also called for action in April 2016 to enhance the transparency of beneficial ownership registers, to clarify the registration requirements for trusts, to speed up the interconnection of national beneficial ownership registers, to promote automatic exchange of information on beneficial ownership, and to strengthen customer due diligence rules.
The EU’s current AML revised framework was adopted on 20 May 2015, consisting of the 4th AMLD and Regulation (EU) 2015/847 on information accompanying transfers of funds. The transposition deadline for the 4AMLD and the entry into force of Regulation (EU) 2015/847 was set for 26 June 2017. The EU’s supranational risk assessment was also published in June 2017. Following the political agreement between the co-legislators, EU member states will have until mid-2019 to implement the 5th AMLD into national legislation.
- EU Commission opens State Aid investigation into IKEA’s tax arrangements in the Netherlands
EU Commission’s Directorate General for Competition has announced a fresh State aid investigation into IKEA’s tax arrangements in the Netherlands. The Commission is looking into IKEA’s franchising model, which allows all the revenue from IKEA franchise fees worldwide to be recorded in Inter IKEA Systems in the Netherlands. Commission’s preliminary inquiry indicates that two tax rulings, granted by the Netherlands tax administration in 2006 and 2011 respectively have unduly reduced Inter IKEA Systems’ taxable profits in the Netherlands.
The Commission asserts that the Dutch entity’s profits were reduced by endorsing a method for calculation of the annual fees that further transfers vast amount of IKEA’s worldwide franchising fees to a Luxembourgish entity, I.I. Holding. I.I. Holding was part of a special tax scheme in Luxembourg (exempt holdings’ exemption for dividends), effectively relieving all profits from corporate taxation in Luxembourg. This regime was declared harmful tax measure within the meaning of the EU Code of Conduct on business taxation on the grounds that the exemption was not conditional upon the payment of a sufficient tax by the distributing company, and was subsequently phased out at the end of 2010 at Commission’s request. IKEA would not have payed tax in Luxembourg on this basis in any event.
In 2011, a second tax ruling was issued by the Netherlands, which endorsed a methodology for intellectual property acquisition pricing at the level of Inter IKEA Systems. The ruling further confirmed the interest tax treatment of an intercompany loan to the parent company in Liechtenstein, i.e. the interest deduction from IKEA’s taxable profits in the Netherlands. The Commission asserts that these interest payments were a profit shifting strategy where the vast majority of IKEA’s franchising income after 2011 was shifted to the Liechtenstein parent company.
On this basis, the Commission will now assess if the level of the annual licence fee payments reflect Inter IKEA Systems’ contribution to the franchise business in an arm’s length scenario, and, whether the viability of the interest deductions from IKEA’s Dutch taxable base as endorsed by the Dutch tax rulings is compliant with the EU State aid rules. The Netherlands confirmed that they cooperate with the European Commission in respect of IKEA’s investigation.
- European Parliament adopts ‘PANA’ inquiry final report
The European Parliament adopted the Committee of Inquiry into Money Laundering, Tax Avoidance and Evasion (‘PANA’) final report and recommendations to the Council and the Commission. The 211 recommendations were approved at Parliament’s plenary on 13 December in Strasbourg, by 492 votes to 50 with 136 abstentions. PANA recommendations include the formation of a Permanent Committee of Inquiry on taxation, modelled on basis of the US Congress committees during the next Parliament (2019 -2024). In the meantime, a Special Committee to follow up on the recommendations would continue the investigative work through the mandate of this Parliament, until May 2019. The PANA Committee of Inquiry held the last session on the Paradise Papers before its mandate expired on 8 December 2017, followed by an address from Commissioner Moscovici who provided a round-up on the EU anti-tax avoidance initiatives.
The final recommendations include unrestricted public access to beneficial ownership registers and stricter regulation, sanctions for tax intermediaries aiding aggressive tax planning, then better regulation for protection of whistleblowers and a common international definition of what constitutes tax haven, offshore financial centre, non-cooperative tax jurisdiction and a high-risk country. MEPs called for more transparency in the Code of Conduct Group on business taxation and radical overhaul of its governance and modus operandi. The European Parliament also supported shift from unanimity to qualified majority voting in Council regarding taxation.
- OECD releases further BEPS peer-reviews on dispute resolution
The OECD has released the OECD second round of analyses of individual country efforts to improve dispute resolution mechanisms. These seven peer review reports come as a second round of initial evaluations of how countries are implementing the minimum standards agreed under BEPS Action 14.
These seven reports include over 170 recommendations relating to the minimum standard. In stage two of the peer review process, each jurisdiction’s efforts to address any shortcomings identified in its initial peer review report will be monitored. The reports relate to implementation by Austria, France (also available in French), Germany, Italy, Liechtenstein, Luxembourg (also available in French) and Sweden.
- VAT Forum in Prague on 26 January
CFE’s member organisation the Chamber of Tax Advisers of the Czech Republic is organising a VAT Forum on the 26 January 2018 in Prague. The VAT Forum is an excellent opportunity for practitioners and policy-makers alike to discuss the impact of new EU VAT regime with keynote speakers Luděk Niedermayer, Member of the European Parliament and Maria-Elena Scoppio of the European Commission.
Brussels, 11 December 2017
- EU list of non-cooperative jurisdictions adopted by EU finance ministers
The Council of the EU sitting as ECOFIN (Economic and Financial Affairs Council) has approved Commission’s list of non-cooperative jurisdiction for tax purposes. The list includes 17 countries that are failing to meet European tax good governance standards: American Samoa, Bahrain, Barbados, Grenada, Guam, Korea (Republic of), Macao, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates. The first European list is part of the EU’s efforts to promote tax good governance, to dissuade external threats to EU Member states’ tax bases and to address standards of third countries that refuse to cooperate in tax matters.
The EU listing criteria included transparency, BEPS implementation and commitment to fair tax competition. In addition, 47 countries have been ‘grey’ listed, and have committed to addressing the deficiencies in their tax systems and to meet the required criteria, following a dialogue with the EU. Work on the list started in July 2016 within the Council’s working group responsible for implementing the EU Code of Conduct on business taxation. In November 2016 the Council reached conclusions on the process to be followed, setting the end of 2017 as a deadline for finalising the list. Since then, the working group has overseen a screening that included a technical dialogue with a number of third country jurisdictions.
In order to ensure compliance with the EU measures, the EU has designed defensive measures in tax area could be taken by the Member States. Non-tax measures taken by the EU are also envisaged to effectively discourage non-cooperative practices in the jurisdictions placed on the list. Without prejudice to the competence of Member States to apply additional measures, the actions include:
- Non-deductibility of costs;
- CFC rules;
- Withholding tax;
- Limitation of participation exemption;
- Switch-over rule;
- Reversal of the burden of proof;
- Special documentation requirements;
- Mandatory disclosure of specific tax schemes with respect to cross-border arrangements.
The EU listing process will continue in 2018. As a first step, letters will be sent to all the blacklisted jurisdictions explaining the decision and the action required to be removed from the list. The Commission and the Code of Conduct Group for business taxation will continue to monitor the implementation of the criteria, with the first interim report expected mid-2018.
- Council conclusions reached on taxation of the digital economy
The ECOFIN Council reached conclusions which highlight the urgency in agreeing globally accepted and tax policy response to the taxation of the digital economy. The adopted Council conclusions suggest revision of international tax rules, including appropriate nexus in the form of a virtual permanent establishment.
Revisiting the transfer-pricing and profit allocation rules in line with the arm’s length principle forms part of the Council conclusions. The Council takes the view that the appropriate nexus in the form of a virtual permanent establishment, alongside any changes to the transfer pricing and profit-allocation rules should take into account how value is created within various business models. Furthermore, the Council urged the OECD to come up with appropriate solutions for the network of double tax treaties that are fit for purpose for the global challenges related to taxation of the digital economy. The Council conclusions also reiterate that unilateral solutions in the absence of international consensus can lead to double taxation disputes between Member states that could undermine the Single Market.
The Estonian presidency initiated a high-level discussion at EU level in July 2017. In September, ministers discussed the issue at an informal meeting in Tallinn. The Commission subsequently issued a communication in September 2017 outlining the challenges and possible solutions.
The EU finance ministers agreed that the EU should closely follow international response in particular at OECD level and consider appropriate responses. The OECD is expected to publish its report on the taxation of the digital economy in April 2018. The Bulgarian EU presidency intends to follow-up with an EU legislative proposal in spring 2018.
- OECD seeks input on disclosure of CRS avoidance arrangements and offshore structures
Today the OECD published a consultation document inviting input on model mandatory disclosure rules. The model rules are intended to target promoters and intermediaries involved in the design, marketing or implementation of the common reporting standards (CRS) avoidance arrangements or offshore structures. The proposed rules would require the intermediaries to disclose information on the scheme to their national tax authority. The rules contemplate that information on those schemes (including the identity of any user or beneficial owner) would then be made available to other tax authorities in accordance with the requirements of the applicable information exchange agreement.
This consultation follows on the BEPS Action 12, which envisaged establishment of mandatory disclosure rules, albeit not as a minimum standard. Public input is sought on all aspects of these model rules. Interested parties are invited to send their comments by 15 January 2018 at the latest by email to [email protected] in Word format. They should be addressed to the International Co-operation and Tax Administration Division, OECD/CTPA.
- EU Commission announced Code of Conduct on withholding taxes
The EU Commission has today announced new guidelines on withholding taxes (WHT) to help Member States reduce costs and simplify procedures for cross-border investors in the EU. Today’s recommendations, developed alongside national experts, form part of the EU’ Capital Markets Union plan and should improve the system for investors and Member States alike. In particular, the Code of Conduct aims to reduce the challenges faced by smaller investors when doing business cross-border. It should result in quick, simplified and standardised procedures for refunding withholding taxes where appropriate.
The Code is a non-binding document which calls for voluntary commitments by Member States and should be considered as a compilation of approaches to improve the efficiency of current withholding WHT procedures, in particular for refunds of WHT to which Member States can add or adapt elements to meet national needs or contexts.
- Apple has paid the State aid recovery assessment to Ireland
Media reports indicated that Apple had paid the amount of 13 billion EUR to Ireland in an escrow account, pending resolution of the appeal filed at the EU courts. The Irish government said in a statement that an agreement had been reached for the Apple recovery in the framework of the principles that govern the escrow arrangements.
The European Commission decided in October to refer Ireland to the ECJ in accordance with Article 108(2) of the Treaty on the Functioning of the European Union (TFEU) for failing to recover the assessed back taxes worth up to €13 billion. The recovery was required by a Commission decision of 30 August 2016, which concluded that Ireland’s tax rulings issued to Apple were illegal under the EU State aid rules. The deadline for Ireland to implement the Commission’s decision on Apple’s tax treatment was 3 January 2017.
Ireland has appealed the Commission’s decision to the Court of Justice, which does not suspend the recovery but allows for the recovered amount to be placed in an escrow account, pending the outcome of the EU court proceedings.
Brussels, 4 December 2017
- European Commission publishes new rules to improve the VAT System by making it more resilient to fraud and closing loopholes which create VAT fraud.
On 30 November, the European Commission published a draft Regulation to strengthen administrative cooperation between the tax authorities of Member States. It seeks to amend Regulation (904/2010) regarding measures to strengthen administrative co-operation in the field of VAT.
The legislative initiative seeks to swiftly improve how tax authorities cooperate not only with each other but also with other law enforcement bodies across the EU. It comes in preparation for the full implementation of the definitive VAT regime and follows on from the proposal of fundamental cornerstones of the new system as published in October.
The primary elements of the proposal seek to :
Strengthen cooperation between Member States by putting in place an online system for information sharing within ‘Eurofisc’, the EU’s existing network of anti-fraud experts. The system would enable Member States to process, analyse and audit data on cross-border activity to make sure that risk can be assessed as quickly and accurately as possible. To boost the capacity of Member States to check cross-border supplies, joint audits would allow officials from two or more national tax authorities to form a single audit team to combat fraud – especially important for cases of fraud in the e-commerce sector. New powers would also be given to Eurofisc to coordinate cross-border investigations.
Increase interaction with other law enforcement bodies by opening new lines of communication and data exchange between tax authorities and European law enforcement bodies on cross-border activities suspected of leading to VAT fraud: OLAF, Europol and the newly created European Public Prosecutor Office (EPPO). Cooperation with European bodies would allow for the national information to be cross-checked with criminal records, databases and other information held by Europol and OLAF, in order to identify the real perpetrators of fraud and their networks.
Share key information on imports from outside the EU by further improving information sharing between tax and customs authorities for certain customs procedures which are currently open to VAT fraud. Under a special procedure, goods that arrive from outside the EU with a final destination of one Member State can arrive into the EU via another Member State and transit onwards VAT-free. VAT is then only charged when the goods reach their final destination. This feature of the EU’s VAT system aims to facilitate trade for honest companies, but can be abused to divert goods to the black market and circumvent the payment of VAT altogether. Under the new rules information on incoming goods would be shared and cooperation strengthened between tax and customs authorities in all Member States.
Share information on motor vehicles In order to tackle fraud, in relation to trading in cars new measures will seek to allow Eurofisc officials access to car registration data from other Member States.
The Proposed Regulation is available here.
- European list of non-cooperative jurisdictions to be approved by European Finance Ministers this week.
Approval is expected to be reached at tomorrow’s ECOFIN meeting on the list being prepared of non-cooperative tax jurisdictions. The list is being compiled in parallel with the OECD global forum on transparency and exchange of information for tax purposes. The list has been prepared by the Working Group responsible for implementing the EU code of conduct on business taxation.
ECOFIN previously agreed on the process for making the list in November 2016, setting end of 2017 as the deadline for the conclusion of the list. The list will be formulated based on criteria:
- that a jurisdiction should fulfil to be considered compliant on tax transparency;
- that a jurisdiction should fulfil to be considered compliant on fair taxation; and
- related to the implementation of anti-BEPS measures agreed by the OECD.
- ECOFIN Meeting to take place Tuesday 5 December – EU Blacklist, Digital tax and VAT on the Agenda
A very important ECOFIN will take place tomorrow, Tuesday 5 December. As outlined above it is expected that the EU blacklist of non-cooperative tax jurisdictions will be agreed upon.
In addition, from a digital tax perspective, it is hoped to agree Council Conclusions on an approach to the taxation of the digital economy with a view to discussions at an international level. An OECD interim report on the taxation of the Digital Economy is due to be published in Spring, but the European Commission is also currently conducting its own public consultation on the fair taxation of digital economy, in addition to the publication of a paper outline possible legislative solutions and proposing possible legislative intervention in Spring 2018.
Finally, in the field of VAT, it is expected that proposals in the area of e-commerce will be passed enabling SMEs to more easily comply with their VAT obligations. The proposals were agreed by all Member States apart from one at the previous ECOFIN meeting. This issue with one Member State has now been resolved and therefore agreement is expected without any discussion at tomorrow’s meeting.
The new rules extend an existing EU-wide portal (mini ‘one-stop shop’) for the VAT registration of distance sales and for distance sales from third countries with a value under €150. VAT will be paid in the Member State of the consumer, ensuring a fairer distribution of tax revenues. In addition, the European Commission will present the proposals outlined above for tackling VAT fraud by increasing administrative cooperation between Member States.
- The OECD publishes further guidance on country-by-country reporting
The OECD has published more detailed guidance on the implementation of country-by-country reporting in order to increase certainty for both tax administrations and MNE groups. The additional guidance addresses a number of specific issues:
- how to report amounts taken from financial statements prepared using fair value accounting;
- how to treat a negative figure for accumulated earnings in Table 1;
- how to treat mergers/acquisitions/de-mergers;
- how to treat short accounting periods; and
- how to treat the definition of total consolidated group revenue.
The additional guidance is available here.
- The OECD publishes first peer reviews on BEPS Action 5 on spontaneous exchange of tax rulings
The OECD has released the first peer reviews of progress made by individual countries in spontaneously exchanging information on tax rulings in accordance with BEPS Action 5. The first reports evaluates 44 countries, including all OECD members and the G20 countries.
The Report is available here.
DATE FOR THE DIARY
26 January – VAT FORUM – University of Economics Prague.