CFE’s Tax Top 5 – December 2017

Brussels,  11 December 2017

  1. 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.

Compliance

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.

  1. 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.

  1. 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 MandatoryDisclosure@oecd.org in Word format. They should be addressed to the International Co-operation and Tax Administration Division, OECD/CTPA.

  1. 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.

  1. 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

  1. 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.

  1. 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.
  1. 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.

  1. 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.

  1. 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.