CFE’s Tax Top 5 – June 2018

BRUSSELS JUNE 2018

OECD Releases Guidance on Intangibles and Profit Split Method Under BEPS Actions 8 & 10

The OECD has released two reports setting out guidance on the following matters: Guidance for Tax Administration on the Application of Approach to Hard-to-Value Intangibles under BEPS Action 8, and Revised Guidance on the Application of the Transactional Profit Split Method under BEPS Action 10.

An earlier OECD guidance report released in 2015 entitled Aligning Transfer Pricing Outcomes with Value Creation listed the above issues for future follow-up work, leading to the publication of this further guidance.

The first report sets out how tax administrations should apply adjustments of hard-to-value intangibles in order to reduce the risk of double taxation. The guidance includes an analysis of hard-to-value intangibles. The second report concerns the profit split method, and the guidance set out in the report has been incorporated into the Transfer Pricing Guidelines.

Additionally, on 21 June, Vanuatu became the 123rd country to sign the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The multilateral tax treaty allows jurisdictions to update their existing double tax treaties and transpose measures agreed in the BEPS project without further need for bilateral negotiations, and aims to increase transparency and further efforts to reduce cross-border tax evasion.

US Supreme Court Overturns Physical Nexus Requirements for Taxing Online Retailers

In a landmark ruling in the case of South Dakota v Wayfair Inc., the US Supreme Court has overturned prior case-law concerning the physical nexus requirement for taxation of online sellers, including overseas companies selling to US-based customers.

The outcome of the ruling is that businesses making sales to US customers, including overseas retailers with no physical presence in the country, will now be required to comply with taxation filing requirements. Previously, under US law, where a seller lacked a physical presence in the US, the retailer was not required to comply with sales tax requirements.

The Court referred to revenue losses caused by the requirement for a physical presence in a jurisdiction in order to be taxed, and opined this was “removed from economy reality”, and did not take into account the manner in which digital business had “changed the dynamics” of business operation and the economy.

This ruling will likely significantly complicate taxation compliance for businesses, in particular for SMEs , who may not have the resources to easily adapt to increasingly complex reporting requirements, particularly for retailers selling remotely into US jurisdictions.

NZ Anti-BEPS Legislation to Enter Into Force

New Zealand’s Taxation (Neutralising Base Erosion and Profit Shifting) Bill will come into force from 1 July 2018. The legislation will restrict multinationals from benefiting from reduced taxation through preventing BEPS measures such as setting artificially high interest rates on loans, related-party transactions which shift profits to offshore group members, exploiting hybrid mismatches and artificial arrangements put in place to avoid establishing a taxable presence in New Zealand.

Finance Minister Stuart Nash stated that the legislation will “ensure that multinationals pay tax based on the actual economic activity they carry out in New Zealand”. It is estimated that the legislation will result in an increase of 200 million NZD per annum in tax revenue.

Mr Nash noted that New Zealand’s Inland Revenue will collaborate internationally with the OECD and G20 in considering whether other anti-BEPS measures ought to be implemented.

OECD Launches Tax Revenue Database

At the 5th plenary meeting of the Inclusive Framework on BEPS, the OECD announced the launch of a new database which will provide detailed comparable taxation revenue information concerning 80 jurisdictions, and will increase to cover 90 jurisdictions by the end of 2018.

The database will be known as the Global Revenue Statistics Database, and will include country-specific indicators concerning tax structures and tax rates with a view to enable necessary tax policy reforms to sufficiently fund public services. A working paper compiled using information from the database sets out that tax revenues have increased since 2000.

Pascal Saint-Amans, Director of the OECD stated that the Global Revenue Statistics Database “sets the global standard for robust and comparable tax revenue data” and is a “vital foundation for tax policy reform”.

US Imposes Duties on EU Imports

On 31 May, the US announced that it would impose duties on steel and aluminium imported from the EU, Canada and Mexico, at rates of 25% and 10% on each product respectively, as of 1 June 2018. These tariffs will affect exports from the EU which were worth over 6.4 billion Euros in 2017.

In a press release issued on the same day, the EU stated it would launch legal dispute settlement proceedings in the WTO on 1 June against the US concerning the tariff, as part of coordinated action with other affected parties. Speaking about the measures, EU President Jean-Claude Juncker stated that “the EU believes these unilateral US tariffs are unjustified and at odds with World Trade Organisation rules. This is protectionism, pure and simple”.

Following on from that announcement, the EU College of Commissioners on 6 June endorsed the decision to impose additional rebalancing duties on a selected list of US products which was notified to the WTO by the EU in May. The duties are expected to begin to apply from July 2018 onwards on products valued at 2.8 billion Euros.

EU Commissioner for Trade, Cecilia Malmström, stated “this is a measured and proportionate response to the unilateral and illegal decision taken by the United States to impose tariffs on European steel and aluminium exports. What’s more, the EU’s reaction is fully in line with international trade law. We regret that the United States left us with no other option than to safeguard EU interests.” An investigation is ongoing concerning whether safeguard measures will be necessary to protect EU steel and aluminium markets.

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

BRUSSELS 25 JUNE 2018

EU Council Agree VAT Proposals

On 22 June the Council of the EU, at its Economic and Financial Affairs meeting, agreed the following VAT proposals:

• Proposal for amending Council Regulation (EU) No 904/2010 as regards measures to strengthen administrative cooperation in the field of value added tax
This regulation forms part of the fair taxation package for the creation of a single EU value added tax area, as set out in the Commission roadmap. The regulation provides for Member States to increase the exchange of information and cooperation between their national tax authorities and law enforcement in order to tackle VAT fraud.

More specifically, the Regulation provides for joint processing and analysis of relevant data with Eurofisc, improving the operational framework for coordinated checks between Member States, developing the exchange of data between tax administrations and law enforcement at EU level, and tackling VAT fraud involving dual VAT regimes by improving access to data.

Once the European Parliament has delivered its opinion, the regulation will be adopted without further discussion.

• Proposal to amend Directive 2006/112/EC on the common system of value added tax as regards the obligation to respect a minimum standard rate
This Directive sets a 15% minimum standard rate as a permanent feature of the new VAT system. The Directive is aimed at eliminating distortive competition that would occur with divergence in VAT rates in Member States, and the impact that would have on trade and cross-border supplies.

The Directive was adopted without discussion, however discussions concerning replacing the transitional VAT system with a definitive new VAT regime as set out in Commission proposals published in January and May 2018 are ongoing.

OECD Releases Guidance on Intangibles and Profit Split Method Under BEPS Actions 8 & 10

The OECD has released two reports setting out guidance on the following matters: Guidance for Tax Administration on the Application of Approach to Hard-to-Value Intangibles under BEPS Action 8, and Revised Guidance on the Application of the Transactional Profit Split Method under BEPS Action 10.

An earlier OECD guidance report released in 2015 entitled Aligning Transfer Pricing Outcomes with Value Creation listed the above issues for future follow-up work, leading to the publication of this further guidance.

The first report sets out how tax administrations should apply adjustments of hard-to-value intangibles in order to reduce the risk of double taxation. The guidance includes an analysis of hard-to-value intangibles. The second report concerns the profit split method, and the guidance set out in the report has been incorporated into the Transfer Pricing Guidelines.

Additionally, on 21 June, Vanuatu became the 123rd country to sign the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The multilateral tax treaty allows jurisdictions to update their existing double tax treaties and transpose measures agreed in the BEPS project without further need for bilateral negotiations, and aims to increase transparency and further efforts to reduce cross-border tax evasion.

EU Economic and Financial Affairs Council Approves European Semester Recommendations

The EU Economic and Financial Affairs Council, at its meeting on 22 June, approved draft recommendations for Member States’ economic and fiscal policies arising from the 2018 European Semester reports policy monitoring process.

Key economic indicators that signify the existence of aggressive tax planning were examined as part of the Semester reports, and the Commission identified indicators as being present in Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and The Netherlands.

Country-specific recommendations and opinions pursuing structural reform and responsible fiscal policies were approved by the Council, and referred for endorsement by the European Council at its meeting on 28 and 29 June. The Council is expected to adopt the recommendations on 13 July 2018.

EU Commission Determines €120 Million in Illegal State Aid Granted by Luxembourg

The European Commission has determined that Luxembourg granted an undue advantage to two Engie group companies, Engie LNG Supply and Engie Treasury Management, by endorsing complex intra-company financing structures involving a triangular transaction between the companies and two other Engie group companies in Luxembourg. The Commission determined that tax rulings concerning the structures treated the same transaction in an inconsistent way, i.e. as both debt and equity, thereby reducing the company’s tax burden, which did not reflect economic reality.

The ruling of the Commission comes following an investigation launched in 2016, one of a number of state aid investigations conducted by the Commission in Member States from 2013 onwards. Commissioner Margrethe Bestager said of the arrangements “Engie paid an effective corporate tax rate of 0.3% on certain profits in Luxembourg for about a decade. This selective tax treatment is illegal.”

In accordance with EU state aid rules, the amount of illegal state aid must now be recovered by Luxembourg, with interest, to restore equality to competition in the industry.

EU Council Approves VAT Agreement with Norway

The Council of EU, at its Economic and Financial Affairs meeting on 22 June, approved an agreement with Norway to increase cooperation in the area of value added tax. The agreement was originally signed in February 2018 in Sofia, and establishes a legal framework for administrative cooperation between EU Members States and Norway in order to prevent VAT fraud and assist with the recovery process for VAT claims.

This is the first agreement to be concluded with a country outside of the EU in this field. The agreement will take the same structure as the agreement that is in place between Member States, including access to electronic platforms and forms.

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

BRUSSELS  18 JUNE 2018

EU Publishes 2018 Taxation Trends Report

The European Commission has published a report setting out an analysis of taxation trends observed within the European Union, Iceland and Norway, based on statistical and economic analysis of the tax systems within these countries. Key taxation indicators were examined for the purposes of the report over a period from 2004 to 2016.

The report concludes that tax revenues as a percentage of GDP rose in 19 of the Member States over the period, although taxation rates differed dramatically between jurisdictions. Other key findings were that labour tax revenues have fallen from 2009 to 2016, that property tax revenues have continually grown since 2009, that VAT rates are unchanged in 2018, and that corporate income tax has decreased slowly from 2009 onwards, but has increased when measured against GDP.

EU Council’s Economic and Financial Affairs Agenda

The Council of the EU, at its Economic and Financial Affairs (ECOFIN) meeting on 22 June, is expected to approve recommendations for member states’ economic and fiscal policies arising from the 2018 European Semester reports. Key economic indicators that signify the existence of aggressive tax planning were examined as part of the Semester reports, and the Commission identified indicators as being present in Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and The Netherlands. Indicators such as foreign direct investment, corporate revenue and net royalty payments as a percentage of GDP, bilateral import price anomalies and dividend repatriation routes were examined as part of the reports.

The meeting agenda also tables for discussion the EU Commission’s proposed VAT directives concerning the VAT standard rate, and increased administrative cooperation aimed at reducing VAT fraud. These directives form part of the Commission’s VAT Action Plan for a definitive EU VAT system.

OECD Updates

On 13 June, the OECD published a paper presenting a potential reform package for personal taxation in Slovenia, prepared in particular to address issues relating to its ageing population. The report sets out the OECD perspective that Slovenia has a “window of opportunity for a comprehensive tax reform” to rebalance levels of tax funding for pensions and the health system away from employee social security contributions towards personal income tax, in a tax neutral manner. It has been designed to incentivise workers to enter the labour force sooner, and remain in the workforce for longer. The report also identifies opportunities to rebalance capital income taxes and broaden the VAT base within the country.

Additionally, on 11 June, Liberia became the 122nd jurisdiction to sign the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The multilateral tax treaty allows jurisdictions to update their existing double tax treaties and transpose measures agreed in the BEPS project without further need for bilateral negotiations, and aims to increase transparency and further efforts to reduce cross-border tax evasion.

TAX3 Paradise Papers Hearing

European Parliament’s Committee on financial crimes, tax evasion and tax avoidance (TAX3) will hold a hearing on 21 June examining the outcomes of the Paradise Papers. The two panels at the hearing will examine whether the Paradise Papers revealed EU tax legislation loopholes, and how the European Union ought to address these loopholes, as well as other aggressive tax planning schemes within the EU. Representatives from the OECD and multinationals, including McDonald’s and Nike, will be participating in the hearing.

The TAX3 Committee seeks to further the work of its predecessor inquiries, TAXE 1 and TAXE 2, as well as work carried out by the PANA committee. The inquiry is focusing on tax avoidance and evasion related to the digital economy, circumvention of VAT, EU progress in removing harmful tax regimes, and the impact of bilateral tax treaties.

The TAX3 Committee’s draft final report which will cover the above issues will be available on 9 November 2018.

EU and Australia Enter into Trade Negotiations

Following the conclusion of negotiations with Japan and Mexico over the past 12 months, and the entry into force of the EU-Canada trade agreement in 2017, the EU has now published a press release stating that Australia and the EU have entered into trade agreement negotiations. The negotiations reflect the EU agenda for fair and open trade, and engagement in the Asia-Pacific region. The decision authorising the negotiations to be opened was approved by the EU Council on 22 May 2018.

Australia is the EU’s second largest trade partner. Of the negotiations, EU Commissioner for Trade Cecilia Malmström stated “The result of our negotiations will be an agreement that offers clear benefits for both the EU and Australia. It will boost economic opportunity for businesses, both big and small, and create jobs.”.

The first formal round of talks will take place in Brussels from 2 to 6 July 2018.

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

BRUSSELS  11 JUNE 2018

Tax Intermediaries Directive (Mandatory Disclosure Rules) DAC6

The Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (commonly referred to as DAC6), has been published in the Official Journal of the European Union, and is available in all the official languages.

According to the Directive, each Member State shall require intermediaries and relevant taxpayers to disclose information on reportable cross-border arrangements the first step of which was implemented between 25 June 2018 and 31 December 2019, ie. the date of application of this Directive. Intermediaries and relevant taxpayers, where appropriate, must file information on those reportable cross-border arrangements by 31 August 2020. Effectively, in spite of the fact that the disclosure requirements will apply from 1 July 2020, all arrangements that are in place from 25 June 2018 onwards become reportable in accordance with this Directive.

TAX3 Committee Workshop of 7 June 2018

European Parliament’s Committee on financial crimes, tax evasion and tax avoidance (TAX3) held a workshop on 7 June which examined taxation and tax evasion in relation to the topics of virtual currencies, taxation of the digital economy and national aggressive tax planning practices as highlighted in the Commission European Semester reports.

During the first panel, Professor Houben of Antwerp University recommended that Parliament consider widening definitions of money laundering and implementing targeted bans to address anonymous crypto currency transactions, which his research has concluded leads to increased tax evasion. However, Professor Houben also stressed solutions to tax evasion issues involving crypto currencies ought to be addressed and agreed at international level.

Professor Vella of Oxford University, discussing digital taxation in the second panel, opined that the international taxation system is at a critical stage, but that digitalisation was not the source of the problem. Professor Vella opined that mobile factors from the internationalisation of business have led to profit shifting and distortion of economic reality, issues which are best addressed by taxing companies where their value creating immobile factors are located.

Valère Moutarlier, EU Commission’s Direct Tax Director, attended the third panel on behalf of the Commission to discuss the European Semester Reports. Mr Moutarlier stressed that the reports were based on impartial economic evidence which indicated aggressive tax planning, so the Commission could target issues on the basis of this data which were not being addressed at national level. Mr Moutarlier stated that there had been stronger dialogue with the Member States identified in the reports, and that progress was being made. He noted it was hoped the dialogue created by the reports would generate further political momentum for tax policy reform.

The TAX3 Committee’s draft final report which will cover the above issues will be available on 9 November 2018.

EU Imposes €2.8 Billion Worth of Duties on US

Following on from the announcement on 31 May that the US would impose duties on steel and aluminium imported from the EU, which affect exports from the EU worth over 6.4 billion Euros in 2017, the EU College of Commissioners on 6 June endorsed the decision to impose additional rebalancing duties on a selected list of US products which was notified to the WTO by the EU in May. The duties are expected to begin to apply from July 2018 onwards on products valued at 2.8 billion Euros.

EU Commissioner for Trade, Cecilia Malmström, stated “this is a measured and proportionate response to the unilateral and illegal decision taken by the United States to impose tariffs on European steel and aluminium exports. What’s more, the EU’s reaction is fully in line with international trade law. We regret that the United States left us with no other option than to safeguard EU interests.” An investigation is ongoing concerning whether safeguard measures will be necessary to protect EU steel and aluminium markets.

OECD Multilateral Convention Update

On 5 June, Serbia deposited its instrument of accession for the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which will enter into force in the country on 1 October 2018. The multilateral tax treaty allows jurisdictions to update their existing double tax treaties and transpose measures agreed in the BEPS project without further need for bilateral negotiations, and aims to increase transparency and further efforts to reduce cross-border tax evasion.

The MLI implements the Standard for Automatic Exchange of Information developed by the OECD and G20 countries as part of the BEPS project, through which over 100 jurisdictions will automatically exchange information.

EU-Wide Definitions and Penalties for Money Laundering Agreed by Parliament and Council

The EU Parliament and Council have informally agreed the scope of EU-wide definitions for money laundering related offences, and the minimum penalties for these offences, which aim to improve enforcement and increasing deterrence in relation to these criminal activities. A minimum of four years imprisonment has reportedly been agreed for money laundering sentences, as well as additional sanctions barring those convicted from holding public office or being able to access public funding.

Relevantly, the draft definition within the proposed Directive defines “criminal activity” as including criminal tax offences, both direct and indirect taxes, as defined by national law, punishable by deprivation of liberty or a detention order for a maximum of more than one year, or for a minimum of more than six months in Member States that have a minimum threshold for offences.

The agreed text needs to be formally approved by the Civil Liberties Committee, Parliament and the Council before entering into force.

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


BRUSSELS 4 JUNE 2018

Nordic Countries Oppose EU Commission Interim Proposals on Digital Tax

Finland, Norway and Sweden have published a joint statement on the Government Offices of Sweden website setting out their position concerning taxation of the digital economy. The countries stated that although they are committed to addressing tax avoidance, their view is that the EU Commission proposals for taxation of the digital economy focus on changing current allocation rules for taxation rather than avoidance issues.

In the statement, the countries set out their position that a shift in taxation rights based on the location of the digital user in value creation is a deviation from taxation principles that needs to be agreed at an international level. The countries noted that a digital services tax applied unilaterally by the EU on turnover without regard to profit will be difficult to enforce and harm international cooperation, as well as increase the risk of corresponding destination-based taxation measures being introduced by other countries.

The Nordic countries recommend that a thorough analysis of value creation in digital business models be undertaken at OECD level before deviating from internationally established principles, and expressed support for work in the area at the OECD to be accelerated.

ECJ Rule that the US Cannot Intervene in Apple State Aid Case

The Court of Justice of the European Union has upheld the decision of European Union General Court, determining that the US could not establish the requisite interest needed in order to intervene in proceedings related to the decision of the European Commission taken in August 2016 that Apple’s Irish entities owed over 13 billion Euros in taxes for state aid incorrectly granted to Apple which artificially lowered the entities’ profits. The decision is currently being appealed by Apple entities in Ireland.

The US argued that tax revenues would be impacted by the recovery proceedings in Ireland, on the basis that foreign tax credits would likely offset US tax collected on future repatriation of profits. However, the CJEU upheld the decision of the General Court that the US could not prove the company would repatriate profits, and thereby could not establish the necessary direct interest to be able to intervene in proceedings.

In relation to the recovery of tax at stake in the dispute, Reuters has reported that the Irish Finance Minister has confirmed that Apple has now paid the first instalment of 1.5 billion Euros into the escrow account set up to hold the 13 billion Euros of total disputed taxes until the dispute is finalised.

US Imposes Import Tariffs on EU

On 31 May, the US announced that it would impose duties on steel and aluminium imported from the EU, Canada and Mexico, at rates of 25% and 10% on each product respectively, as of 1 June 2018. These tariffs will affect exports from the EU which were worth over 6.4 billion Euros in 2017.

In a press release issued on the same day, the EU stated it would launch legal dispute settlement proceedings in the WTO on 1 June against the US concerning the tariff, as part of coordinated action with other affected parties. Speaking about the measures, EU President Jean-Claude Juncker stated that “the EU believes these unilateral US tariffs are unjustified and at odds with World Trade Organisation rules. This is protectionism, pure and simple”.

EU Commissioner for Trade, Cecilia Malmström, stated the EU would “impose rebalancing measures and take any necessary steps to protect the EU market from trade diversion caused by these US restrictions.” A list of US products upon which rebalancing tariffs will be imposed was agreed and notified to the WTO by the EU in May. A formal decision to proceed with the measures will be agreed with Member States in the coming weeks, and an investigation is already ongoing concerning whether safeguard measures will be necessary to protect EU steel and aluminium markets.

OECD Multilateral Convention Update

Paraguay has become the 119th jurisdiction to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The multilateral tax treaty allows jurisdictions to update their existing double tax treaties and transpose measures agreed in the BEPS project without further need for bilateral negotiations, and aims to increase transparency and further efforts to reduce cross-border tax evasion.

Additionally, Peru has now deposited its instrument of accession for the MLI, which will enter into force in the country on 1 September 2018. The MLI implements the Standard for Automatic Exchange of Information developed by the OECD and G20 countries as part of the BEPS project, through which over 100 jurisdictions will automatically exchange information.

EU Proposal to Reform Alcohol Excise Duty

The EU Commission has proposed a new EU-wide certification for small and artisan alcohol producers, to allow access to lower duty rates across the EU. Commissioner for Economic and Financial Affairs, Pierre Moscovici stated that the EU’s rules on excise duties on alcohol are in “urgent need of an update so that they can keep pace with the challenges and opportunities offered by new technology and trade developments.”

The proposal would put in place a uniform certification system confirming independent small producers’ status throughout the European Union and reduce IT compliance standards, thereby reducing administrative and compliance costs for SMEs. The proposal would also overhaul the classification of cider across the EU, clarify manufacturing processes for alcohol in the EU and increase the threshold for lower strength beer that can benefit from reduce rates from 2.8% to 3.5%.

The proposals will now be submitted to the European Parliament for consultation and to the Council for adoption.