CFE’s Tax Top 5 – December 2018

BRUSSELS DECEMBER 2018

IRS Releases Proposed BEAT Regulations

On 13 December, the United States Internal Revenue Service (IRS) released proposed regulations on the section 59A Base Erosion and Anti-abuse Tax. As part of the revision of the US international tax system, major amendments to the US tax law for 2018 and future years were enacted with the Tax Cuts and Jobs Act (TCJA). Among other changes made by the TCJA, new section 59A imposes a tax equal to the base erosion minimum tax, in addition to the regular tax liability, beginning in tax year 2018. This new provision will primarily affect corporate taxpayers with gross receipts of more than $500 million over a three-year period who make deductible payments to foreign related parties.

The IRS stated that the proposed regulations provide detailed guidance regarding which taxpayers will be subject to section 59A, the determination of what is a base erosion payment, the method for calculating the base erosion minimum tax amount, and the required base erosion and anti-abuse tax resulting from that calculation.

EU – Japan Trade Agreement to Enter Into Force

The European Parliament plenary session of 12 December saw the approval of the EU’s trade agreement with Japan, the largest bilateral trade deal ever negotiated by the EU. The Economic Partnership Agreement is expected to enter into force in 2019, subject to approval by the EU Member states. Signed on 17 July 2018, the deal creates a trade zone of 600 million people, and covers a third of world’s GDP and about 40 per cent of global trade.

Commenting, Jean-Claude Juncker, President of the European Commission said: “Almost five centuries after Europeans established the first trade ties with Japan, the entry into force of the EU-Japan Economic Partnership Agreement will bring our trade, political and strategic relationship to a whole new level. I praise the European Parliament for today’s vote that reinforces Europe’s unequivocal message: together with close partners and friends like Japan we will continue to defend open, win-win and rules-based trade. And more than words or intentions, this agreement will deliver significant and tangible benefits for companies and citizens in Europe and Japan.”

G20 Leaders Adopt Declaration at Summit in Argentina

On 1 December, world leaders adopted a declaration setting out the priorities of the G20 at a summit that took place in Buenos Aires, Argentina. The OECD report to G20 leaders was also published at the commencement of the Summit. The Declaration confirms that the G20 will continue to cooperate concerning the challenges in taxation of the digitalisation of the economy, and will attempt to find an international consensus on the best solution to address the challenges. The prior commitments made to produce an update in 2019 and a final report in 2020 were reconfirmed. Leaders also committed to reforming the World Trade Organisation, stating that the system is “currently falling short of its objectives”.

The Director of the OECD Centre for Tax Policy and Administration Pascal Saint-Amans noted that leaders welcomed BEPS implementation and the commencement of Automatic Exchange of Information, and said that French President Emmanuel Macron stated there was a need for a BEPS 2.0 to address the tax challenges of the digital economy.

ATO Issues Corporate Tax Transparency Report

The Australian Taxation Office (ATO) has now published its annual Corporate Tax Transparency report. The report indicates that the tax effects of the multinational anti-avoidance law (MAAL) which was implemented on 1 January 2016 are become apparent in tax returns (and transparency information) from the 2016–17 income year for companies that have restructured in response to the MAAL. Already in the 2016–17 income year, a transitional year, $2.5 billion of sales income has been reported, ATO states. In subsequent years, the figures go up to approximately $7 billion or more of additional sales each year.

Similarly, the ATO anticipates that the diverted profits tax that came into effect on 1 July 2017 will result in restructuring and increased allocation of profits to Australia by affected taxpayers.

OECD: Increased Transparency on Tax Rulings

As part of efforts to improve tax transparency, the OECD BEPS Inclusive Framework has assessed 92 individual jurisdictions’ progress in spontaneously exchanging information on tax rulings, in accordance with Action 5 of the OECD BEPS project. The OECD’s 2017 Peer Review Reports on the Exchange of Information on Tax Rulings show that more than 16,000 tax rulings have been identified and almost 21,000 exchanges of information having taken place to date.

The selection of the remitted material has been prepared by
Piergiorgio Valente/ Aleksandar Ivanovski/ Brodie McIntosh/ Filipa Correia

BRUSSELS 17 DECEMBER 2018

EU Commission Publish McDonald’s Decision

The European Commission published today a non-confidential version of the decision establishing that Luxembourg did not provide for a selective tax treatment to McDonald’s in breach of the EU State aid rules.

In September, the Commission formally closed a three-year long investigation that aimed to establish that a Luxembourg tax ruling interpreting the US- Luxembourg Double Tax Treaty amounted to State aid. The case was of paramount importance for the EU Commission, aiming to establish that double-non taxation could amount to State aid by virtue of favourable interpretation of a Double Taxation Treaty provision. It transpires that by not pursuing the McDonald’s line of inquiry further, the Commission have set a limit to the fiscal State aid investigations: disparities among tax systems and arbitrage resulting from divergent interpretation of (conflicting) taxation laws could not be addressed by enforcing the EU State aid rules.

EU Parliament Seeks to Extend DST Scope

A plenary session of the European Parliament in Strasbourg reached conclusions seeking to extend the scope of the Digital Services Tax (“DST”) proposals by adding further digital content to the taxable services. The European Parliament also sought to reduce the taxation threshold to any entity generating revenues within the EU of more than EUR 40 000 000 during the relevant financial year. Under the EU Parliament resolution, the list of services that qualify as taxable revenue for DST purposes would include the supply of “content on a digital interface such as video, audio, games, or text using a digital interface”, regardless of whether the content is owned by that entity or if it has acquired the rights to distribute it. It is understood that online platforms such as Netflix would fall within scope. It should be noted that the European Parliament has only consultative role on matters of EU taxation.

Considering that the EU finance ministers were again unable to reach agreement concerning the DST proposals at the 5 December ECOFIN, a modified proposal was put forward by Germany and France. The proposal sought to amend the DST by applying the 3% turnover tax to digital advertisement services from 1 January 2021, if no international solution has been agreed upon by that date, and expire by 2025.

The Austrian Presidency of the EU has recommended that Member states continue work on the matter on the basis of the latest compromise text, incorporating appropriate aspects of the Franco-German proposal.

EU Parliament Calls for Expedited Settlement of Cross-Border Commercial Disputes

The last plenary session of the European Parliament saw the approval of the Legal Affairs Committee report that invites the European Commission to consider a European Expedited Civil Procedure (EECP) for cross-border commercial disputes. The main goal of the proposal is to introduce a voluntary procedure in order to provide European companies with a possibility to reach a settlement of cross-border commercial (business-to-business) disputes within a reasonable time frame. It is intended that the EECP would be voluntary and would include short, pre-determined deadlines and limited appeal possibilities.

Commenting, for the European Parliament, Tadeusz Zwiefka MEP said: “Cross-border commercial litigations can last years. During this period, companies lose time, money and very often, the amount under dispute is frozen. The base for predictable and safe business is legal certainty and I call on European Commission to come forward with a legislative act on expedited procedures. I encourage as well member states to establish specialized chambers or courts that could deal with the cross border commercial disputes. It would be also interesting to look into the possibility of establishing a European commercial court, to serve as a specialised, international forum for cross-border disputes.”

EU Wins WTO Tax Subsidies Dispute With Brazil

The World Trade Organisation (“WTO”) Appellate Body confirmed the initial ruling of 2017 that Brazilian tax incentives are not in line with WTO rules as they favour domestic products. As a consequence of the ruling, Brazil will now have to bring its tax measures in compliance with WTO rules and remove the prohibited measures without delay.
Back in August 2017, the WTO dispute settlement panel issued a ruling under which the Brazilian were declared discriminatory tax subsidies against the EU automotive, ICT and electronic products by way of granting 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 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 EU is Brazil’s second biggest trading partner accounting for more than 18% of its total trade. For many sectors of the Brazilian economy, the EU is the largest foreign investor. The EU initiated the WTO dispute in December 2013. In July 2015, Japan launched a parallel dispute against the same Brazilian programmes and the two cases were joined. The WTO reports issued in both cases are substantially similar.
The Understanding on Dispute Settlement at the WTO provides WTO Members with a set legal framework for resolving disputes that arise in implementing WTO agreements. Ideally disputes are resolved through negotiations. If this is not possible, WTO Members can request a Panel to settle the dispute. The Panel’s report can also be appealed before the WTO Appellate Body on questions of law. If a Member does not comply with the recommendations from dispute settlement, then trade compensation or sanctions, for example in the form of increases in customs duties, may follow.

OECD: Increased Transparency on Tax Rulings

As part of efforts to improve tax transparency, the OECD BEPS Inclusive Framework has assessed 92 individual jurisdictions’ progress in spontaneously exchanging information on tax rulings, in accordance with Action 5 of the OECD BEPS project. The OECD’s 2017 Peer Review Reports on the Exchange of Information on Tax Rulings show that more than 16,000 tax rulings have been identified and almost 21,000 exchanges of information having taken place to date.

The selection of the remitted material has been prepared by
Piergiorgio Valente/ Aleksandar Ivanovski/ Brodie McIntosh/ Filipa Correia

BRUSSELS 10 DECEMBER 2018

EU Council Adopts VAT Quick Fixes Legislation

The Council of the European Union has adopted legislation aimed at rectifying a number of issues in relation to the day-to-day running of the EU VAT system, known as VAT “quick-fixes”.

The fixes were designed to address specific issues with EU VAT rules, pending the introduction of a definitive EU VAT Regime, as follows:

– Call-off stock arrangements – simplification and harmonisation of rules regarding call-off stock arrangements, where a vendor transfers stock to a warehouse at the disposal of a known acquirer in another member state;
– VAT identification number – introduction of an identification number for a customer as an additional condition for VAT exemption for intra-EU supplies of goods;
– Chain transactions – simplification and harmonisation of rules regarding chain transactions; and
– Proof of intra-EU supply – introduction of a common framework of criteria of documentary evidence required to claim a VAT exemption for intra-EU supplies.

The fixes will apply from 1 January 2020. Council discussions concerning the legislative proposals that introduce the definitive VAT system are ongoing.

Anti-Money Laundering Action Plan Adopted by EU Council

A detailed action plan setting out the means by which money laundering is to be monitored and addressed was adopted by the EU Council on 4 December.

The plan identifies key objectives of: identifying contributing factors to money laundering within EU banks, mapping money laundering and terrorist financing risks and best practices to address them, enhancing and improving supervision and information exchange between authorities, sharing best practices among authorities and improving existing EU supervisory authorities powers and tools.

The fifth AML directive is due to be transposed into national legislation by January 2020. The most recent legislative proposal of the EU Commission to strengthen AML supervision is currently under discussion by the Council.

ECJ Rules that the UK Can Unilaterally Withdraw Article 50 Notification

The Court of Justice of the European Union has today made public its decision that the United Kingdom can unilaterally revoke its notification to withdraw from the European Union under Article 50 of the TEU.

The Court held that “notification by a Member State of its intention to withdraw does not lead inevitably to the withdrawal of that Member State from the European Union. On the contrary, a Member State that has reversed its decision to withdraw from the European Union is entitled to revoke that notification for as long as a withdrawal agreement concluded between that Member State and the European Union has not entered into force or, if no such agreement has been concluded, for as long as the two-year period laid down in Article 50(3) TEU, possibly extended in accordance with that provision, has not expired.”

The Court also held that any “revocation must be decided following a democratic process in accordance with national constitutional requirements. This unequivocal and unconditional decision must be communicated in writing to the European Council.” Arguments of those advocating for a second referendum will be strengthened by the decision.

The decision was released one day ahead of the date for the House of Commons vote on the currently proposed Brexit deal, which was today postponed by UK Prime Minister Theresa May as it was widely expected the deal would not be approved by parliament.

Last week the UK published updated information concerning the customs and VAT scenarios that would apply in the event the UK crashes out of the EU with no deal.

No Digital Tax Agreement at December ECOFIN

At its meeting on 5 December, the Council of the European Union sitting as ECOFIN (Economic and Financial Affairs Council) were again unable to reach agreement concerning the European Commission proposals for a Digital Services Tax in the EU.

The Presidency note concerning the proposed EU digital tax sets out that certain delegations were as a matter of principle unable to agree the text, irrespective of the technical revisions made by the Presidency, and that a number of other delegations had raised concerns as to specific provisions in the draft.

A Franco-German proposal was put forward and discussed at the ECOFIN, wherein it was suggested that the Commission and Council should amend the proposed tax such that it would be a 3% turnover tax to apply to digital advertisement services that would enter into force on 1st January 2021, if no international solution has been agreed upon by that date, and expire by 2025. In the instance an international solution has been agreed and translated into EU law before the proposed implementation date, France and Germany propose that the directive could then be withdrawn by majority vote.

The current Austrian Presidency has recommended the Council continue its work on the issue on the basis of the latest proposed compromise text, incorporating appropriate aspects of the Franco-German proposal.

EU Parliament’s Legal Affairs Committee Approves Amendments to Company Law Package
The EU Parliament’s Legal Affairs Committee has approved, by a vote of 21 to 2, a draft report of amendments to the European Commission proposal on cross-border conversions, mergers and divisions, part of the so-called Company Law Package.

In April, the Commission published proposals on reforming and digitalising EU company law in order to make it easier for companies to reorganise – merge, divide or move within the EU Single Market. Further, the proposals seek to prevent tax avoidance practices that rely on artificial arrangements.

The proposal on cross-border conversions, mergers and divisions envisages common EU rules for cross-border conversions and divisions aiming to update existing ones to facilitate reorganisation, provided that the operations are genuine. The proposal includes provisions for safeguards against abuse of the conversion and division procedures to create artificial arrangements aimed at obtaining undue tax advantages. Further, the proposal sets out safeguards for employee rights including the establishment of artificial arrangements for tax avoidance purposes.

The Committee in the report introduces a requirement for genuine economic activity in the Member State where a company is being established, in line with the decision of Cadburry Schweppes. Rapporteur, Evelyn Regner (S&D, AT), noted that “with these new rules for conversions and divisions, national authorities receive the option for a veto when identifying an artificial arrangement that constitutes a letter-box company used for social or tax fraud or any other abusive purposes.”

The Committee voted to begin inter-institutional negotiations with European ministers when Parliament as a whole has adopted a position on the proposed directive.

The selection of the remitted material has been prepared by
Piergiorgio Valente/ Aleksandar Ivanovski/ Brodie McIntosh/ Filipa Correia

BRUSSELS 3 DECEMBER 2018
G20 Leaders Adopt Declaration at Summit in Argentina

At the summit meeting which took place from 30 November to 1 December in Buenos Aires, Argentina, the G20 leaders adopted a declaration setting out the priorities of the G20. The OECD report to G20 leaders was also published at the commencement of the Summit.

The Declaration confirms that the G20 will continue to cooperate concerning the challenges in taxation of the digitalisation of the economy, and will attempt to find an international consensus on the best solution to address the challenges. The prior commitments made to produce an update in 2019 and a final report in 2020 were reconfirmed. Leaders also committed to reforming the World Trade Organisation, stating that the system is “currently falling short of its objectives”.

Pascal Saint-Amans noted that leaders welcomed BEPS implementation and the commencement of Automatic Exchange of Information, and said that French President Macron stated there was a need for a BEPS 2.0 to address the tax challenges of the digital economy.

Germany & France Expected to Reveal New Transactional Tax Proposal

France and Germany are expected to release details of a new transactional tax they propose should be adopted by the European Union. The proposed tax will allegedly be modelled on an already existing system in France, which taxes transactions involving shares issued domestically by companies which have a market capitalisation of over 1 billion Euros.

It is anticipated that France and Germany will suggest that revenue collected from the tax can be used to fund the Euro zone budget, with countries able to offset the tax against contributions. It is also expected the proposal will provide for apportionment of revenue to countries which would not collect significant amounts of tax from the proposed measure.

ECOFIN Report on Tax Issues Published

The Economic and Financial Affairs Council have published their draft Report to the European Council on Tax Issues, which sets out progress achieved by the European Council on tax dossiers under the Austrian Presidency.

The report lists the numerous proposals adopted related to the implementation of the definitive VAT regime, as well as the proposal adopted for revision of excise duties. The report detailed that discussions on the CCTB dossier under the Austrian Presidency explored the impact of the proposed Directive on national revenues. It was concluded that the impact would be more positive if applied to all corporate taxpayers, but delegations are divided on extending the compulsory scope to all corporate income taxpayers. Delegations are reportedly also divided over tax incentives to be included in the Directive, and the concept of permanent establishment in a Member state.

In relation to the digital taxation package, the report notes that the dossier was discussed on multiple occasions since the commencement of Austrian Presidency, and that the Presidency acted with a view to agree the DST by December. The dossier is listed for discussion at the ECOFIN meeting scheduled for 4 December 2018, however it is not anticipated that agreement will be able to be reached.

Cape Verde Joins Inclusive Framework on BEPS

Cape Verde has joined the OECD BEPS Inclusive Framework, becoming the 124th jurisdiction to do so. Members of the Inclusive Framework have the opportunity to work together on an equal footing with other OECD and G20 countries on implementing the BEPS package consistently, and on developing further standards to address remaining BEPS issues.

The Inclusive Framework was established in January 2016, following the G20 call for timely implementation of the BEPS package released in October 2015. The OECD welcomed the commitments by Cape Verde to implement internationally agreed standards to tackle tax evasion and avoidance.

Netherlands Announce Stricter Requirements for Tax Rulings

The Netherlands’ Ministry of Finance has announced stricter requirements concerning the issuing of international tax rulings, to come into effect from 1 July 2019.

Under the proposed measures, companies established in the Netherlands which do not have any economic value or physical presence will be ineligible to receive a tax ruling from the Dutch revenue authority. The requirements will also apply to low-tax countries (countries where the tax rate is lower than 9%), and those countries which are included on the European Union’s List of Non-Compliant Jurisdictions for Tax Purposes.

International rulings will also be issued by one centralised team, and the Dutch Ministry of Finance has committed to providing a summary and annual report concerning the issued rulings. All rulings will also be subject to independent investigation concerning whether they have been lawfully issued.

The selection of the remitted material has been prepared by
Piergiorgio Valente/ Aleksandar Ivanovski/ Brodie McIntosh/ Filipa Correia