CFE’s Tax Top 5 – March 2018

 

Brussels, 26 March 2018

European Commission Publishes Digital Economy Taxation Proposals

The European Commission has published the long-anticipated proposals on taxation of the digital economy in the Single Market and Recommendation on amending Member states’ Double Tax Treaties with Third Countries. The proposals largely correspond with previously seen early drafts. The Directive on Digital Services Tax (“DST”) proposes to implement a short term interim turnover tax on digital businesses, whilst the proposal for an EU Directive on significant digital presence, ie. Digital permanent establishment (“PE”) seeks to introduce EU-wide long-term measures that redefine the concepts of permanent establishment and profit allocation to account for users’ contribution as a proxy for value creation.

  • Interim Measures/ Directive on DST:  The draft interim measure proposes a turnover tax to be levied at 3% on the aggregated gross revenue of businesses with global revenue above €750 million and annual EU revenue above €50 million, with no deduction of costs, to apply to revenue made from targeted advertising based on user data collection and digital intermediation services of making available digital marketplaces.
  • Long-term Measures/ Digital PE: The long-term measures propose revision of corporate taxation concepts of permanent establishment and profit allocation to account for digital activities. The directive proposes that the definition of permanent establishment should include a “significant digital presence”. A digital PE will be established when a platform either exceeds an annual turnover of €7 million, or has more than 100,000 users in a Member State in a taxable year, or has over 3,000 contracts for the provision of digital services in a taxable year, that would amount to a Digital PE.
  • Recommendations relating to Double Tax Treaties: The third proposal in the EU digital taxation package sets out recommendations to Member states to renegotiate and adapt their double tax treaties with 3rd countries (non-EU) by way of extending the scope of the PE concept to include significant digital presence (digital PE) through which the business of an enterprise is wholly or partly carried out.

Tax policy proposals at EU level require unanimity per the EU treaties to become European Union law.

MLI To Enter Into Force in July

In a significant milestone for the BEPS project, the OECD announced that the BEPS multilateral tax treaty instrument (“MLI”) will enter into force on 1 July 2018. This follows from the deposit of the fifth instrument of ratification by Slovenia. The other ratifying countries are Austria, the Isle of Man, Jersey and Poland.

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. OECD Secretary-General Angel Gurria stated “the entry into force of this multilateral convention marks a turning point in the implementation of OECD/G20 efforts to adapt international tax rules to the 21st Century”.

EU Commission Publishes “Blacklist” Countermeasure Guidelines

On 21 March, the Commission published guidelines identifying countermeasures for the movement of EU funds through countries identified as non-cooperative tax jurisdictions. The guidelines detail the relevant legislation concerning transfers of EU monies in relation to non-cooperative jurisdictions, and provides a framework for assessing the risks of tax avoidance in projects involving entities in these jurisdictions. The legislation requires that EU funds do not support projects which contribute to tax avoidance, and that funding is routing according to good governance taxation standards.

“The Commission will not allow EU funds to contribute to global tax avoidance. These EU level countermeasures should act as a wake-up call for those jurisdictions as they show the EU is serious about tackling tax avoidance on a global scale.” Commissioner Pierre Moscovici said of the guidelines in the Commission press release.

Nine countries now remain on the “blacklist”: American Samoa, Bahamas, Guam, Namibia, Palau, Samoa, Saint Kitts and Nevis, Trinidad and Tobago and the US Virgin Islands.

OECD Releases Report on Profit Attribution to Permanent Establishments

Following on from BEPS Action 7 and the changes made to Article 5 of the OECD Model Tax Convention, the OECD has now published a report setting out guidance on how profit attribution rules should apply to permanent establishments.

The guidance establishes high-level general principles concerning structures for sale of goods, online advertising and procurement, as well as guidance concerning permanent establishment and attributions of profits arising from anti-fragmentation rules.

CFE Forum “Fair Taxation of the Digital Economy” in Brussels on 19 April

CFE Tax Advisers Europe’s Annual Forum will take place in Brussels on 19 April. The forum will focus on aspects of direct and indirect taxation of the digital economy, outlining and discussing EU Commission’s proposal and the OECD Interim Report on the Taxation of the Digital Economy. Technical details of the recent EU proposals will be discussed by Maria Elena Scoppio, Head of VAT Unit and Bert Zuijdendorp, Head of Company Taxation Initiatives Unit, DG Taxation and Customs Union, European Commission. Register here!

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The selection of the remitted material has been prepared by

Piergiorgio Valente/ Aleksandar Ivanovski/ Brodie McIntosh/ Filipa Correia

Brussels, 19 March 2018

Council of EU Adopts Tax Intermediaries Directive (Mandatory Disclosure Rules)

Political agreement was reached at the 13 March ECOFIN Council meeting on the proposed directive concerning mandatory automatic exchange of information in relation to reportable cross-border arrangements. The directive will now be translated into EU official languages and thereafter adopted by the Council without further debate.

Member States will have until 31 December 2019 to implement the directive into national legislation, and disclosure requirements will apply from 1 July 2020. Intermediaries who design and/or promote reportable tax planning schemes will be required to disclose them to their national tax administrations, who will then automatically exchange the information with other Member States through a centralised database. Penalties will be imposed on intermediaries who do not comply with the new reporting measures. The initial automatic exchange of information between member states should take place on 31 October 2020.

OECD Published the Interim Report on the Taxation of the Digital Economy 

The OECD has published its Interim Report on Tax Challenges Arising from Digitalisation, which concludes that no agreement can presently be reached among the Inclusive Framework countries on either the implementation of short-term interim measures to tax the digital economy, or long term measures of identifying characteristics of digital businesses, and the extent to which those features contribute to value creation and should therefore be subject to a digital tax.

The report also examines the implementation of the BEPS package, and concludes that the measures are having an impact on the business and taxation operations of multinational companies, which has delivered increased tax revenue for countries.

OECD Inclusive Framework members have agreed to undertake a review of the nexus and profit allocation rules concerning allocation of taxing rights between jurisdictions, and the impact of digitalisation on the economy. To this end, and in order to improve international taxation rules to be better fit for purpose concerning the taxation of the digital economy, the OECD aims to produce a final report in 2020.

CCCTB & CCTB Proposals Vote in the European Parliament

On 15 March, the European Parliament approved by 438 votes to 145, with 69 abstaining voted amendments to the Common Consolidated Corporate Tax Base proposal. The Parliament also voted on the Common Corporate Tax Base system by 451 votes to 141, with 59 abstentions from that vote.

The proposals call for the Commission to set benchmarks to assist in identifying the digital presence of a business within a EU member state, and develop a single set of tax rules for all member states, with taxes to be managed via a “one-stop-shop” system, such that businesses can calculate what is to be paid to each member state based on where profits have been generated.

The new resolutions will now be considered by the Council and Commission.

EU “Blacklist” Update

Three countries have been removed and a further three countries added to the EU’s list of non-cooperative jurisdictions in taxation matters aimed at promoting tax good governance and minimising tax avoidance.

Following an assessment of commitments made to remedy the EU concerns, the ECOFIN Council at the March meeting has now removed Bahrain, the Marshall Islands and Saint Lucia from the “blacklist”.  The Council noted that these commitments will be closely monitored. However, The Bahamas, Saint Kitts and Nevis and the US Virgin Islands have all been added to the list, as a result of failing to respond to letters sent by the Council in January 2018 requesting the countries make high political level commitments to remedy specific EU concerns.

Nine countries now remain on the list: American Samoa, Bahamas, Guam, Namibia, Palau, Samoa, Saint Kitts and Nevis, Trinidad and Tobago and the US Virgin Islands.

3rd Batch of BEPS Tax Dispute Resolution Peer Reviews published by OECD

The OECD has published Stage 1 Peer Review Reports assessing tax dispute resolution practices in Czech Republic, Denmark, Finland, Korean, Norway, Poland, Singapore and Spain. The reports examine compliance with best practice standards established in Action 14 of the BEPS plan concerning resolution of taxation disputes, and contain over 215 recommendations for implementation for these countries. Stage 2 of the process will assess compliance with these recommendations contained in the Stage 1 Peer Review Report.

The OECD has also now called for submissions concerning the 5th round of peer reviews relating to Estonia, Greece, Hungary, Iceland, Romania, Slovak Republic, Slovenia and Turkey, to be provided via completion of a taxpayer input questionnaire, with a deadline of 9 April 2018.

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The selection of the remitted material has been prepared by

Piergiorgio Valente/ Aleksandar Ivanovski/ Brodie McIntosh/ Filipa Correia

 

 

Brussels, 12 March 2018

Commission Identifies Members States Engaging in Harmful Tax Practice

The European Commission has identified in its European Semester reports and Aggressive Tax Planning Indicators Report, published last week, Member States where economic indicators suggest that the countries facilitate harmful tax practices, including 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, to reveal patterns that signify the existence of aggressive tax planning.

The reports indicate that Cyprus, Malta, and Luxembourg raise more corporate tax relative to their GDP than models predict, and foreign directive investment was several times higher than GDP in Cyprus, Ireland, Luxembourg, Malta and the Netherlands. Ireland was reported as having the highest net royalty payments as a percentage of GDP.

Commission Demands the UK Pay €2.7 Billion Into Budget due to VAT Carousel Fraud 

The European Commission has formally demanded the UK pay €2.7 billion for lost custom duties directly into the budget based on recommendations made by the Commission’s anti-fraud investigation unit, OLAF, following their investigations into a fraud ring involving the value of clothes and shoes imported from China.

Goods were distributed to criminal networks participating in carousel VAT fraud within Europe after they entered the UK using false invoices and incorrect customs value declarations. The investigation found that the UK failed to take appropriate action to prevent the fraud, and is therefore financially liable for the consequences of the infringements. The fraud is reported to be ongoing.

HMRC have stated they do not agree with the Commission’s estimate of the loss, and will respond to the formal demand after further examination of the notice.

Council of EU ECOFIN 13 March Agenda

Ministers attending the Economic and Financial Affairs Council meeting on 13 March are due to discuss the banking union and tax transparency. It is expected that the draft proposal concerning mandatory disclosure rules, aimed at reducing tax avoidance and aggressive tax planning, will be agreed at the meeting, according to the Council of the EU.

European Court of Justice Determines France Must Recover €642 Million in State Aid

The Court of Justice has dismissed an appeal brought by SNCF against the judgment of the General Court that it must repay state aid received in the amount of €642 million excluding interest, on the basis the conditions to the restructuring aid received had been wrongly implemented and the aid was incompatible with the internal market.

In 2001, the Commission gave conditional authorisation for restructuring aid of €503 million to Sernam, a delivery company wholly owned by SNCF. In 2004, the Commission found that the conditions attached to the 2001 restructuring aid had not been complied with, and demanded the recovery of a further €41 million of incompatible aid that had been granted. The conditions to the decision concerning that recovery were that within a set period Sernam would either withdraw from the road transport market, or, alternatively, that within a set period Sernam would sell its assets en bloc at market price through a transparent procedure to a company with no legal link with SNCF. France elected to sell the assets en bloc, to a company created by the management team of Sernam, Financière Sernam.

Following complaints by competitors, in 2012 the Commission issued a decision that the conditions concerning the sale of the assets had not been complied with, and that the restructuring aid was therefore incompatible with the internal market, and should be repaid. SNCF appealed the decision to the General Court, who dismissed the appeal and held that the conditions for the restructuring aid concerning the sale of assets en bloc had not been complied with.

The Court of Justice found that the purpose of the 2004 decision was to eliminate Serman’s presence in the market and prevent distortion of competition due to the restructuring aid, and that the General Court had correctly held that conditions had not been complied with. The Court of Justice upheld the decision of the General Court that the deadline set out for the transfer of assets in the 2004 decision was not observed, that the tendering process was not open and transparent, and that the inclusion of liabilities in the sale of assets en bloc was also not compliant with the 2004 decision. It further held that the private investor test was not applicable to the implementation of a compensatory measure. The Court of Justice accordingly dismissed the appeal.

OECD Tax Talk Webcast – 16 March

The OECD Centre for Tax Policy and Administration will be hosting a live webcast on 16 March concerning the tax challenges arising from the digitalisation of the economy. You can register to participate here.

 

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The selection of the remitted material has been prepared by

Piergiorgio Valente/ Aleksandar Ivanovski/ Brodie McIntosh/ Filipa Correia

 

 

Brussels, 5 March 2018

EU Commission early draft on taxation of the digital economy

A draft European Commission text analysing potential avenues for taxation of the digital economy in the Single Market was published last week by Politico.

  • Short-term solution: Tax on gross revenue

The draft discusses a temporary measure to tax the aggregated gross revenue of digital businesses at a single rate of 1 -5 percent. The levy would apply to digital firms with global revenue above €750 million, and annual EU revenue of €10 million or more. The measure is considered as an indirect tax to be levied annually on gross revenue with no deduction of costs, with revenue to be calculated based on the “exploitation of digital activities characterised by user value creation”.

Revenue contemplated to be within the scope of the proposed tax includes services of data collection for the sale of targeted advertising, such as Google AdWords, “free” Spotify, Facebook, Twitter and Instagram, and intermediation services of making available digital marketplaces such as Airbnb and Uber, with the aim of taxing business “in the jurisdiction where value is created”. The tax would therefore require self-reporting of the relevant data for calculating revenue and place of supply. The draft specifically contemplates that electronically supplied digital content would be outside the scope of the tax, which would therefore exclude Netflix or paid Spotify subscriptions. The rationale for this is set out in detail in the proposal. The tax is proposed to be collected making use of a “one-stop-shop” model.

  • Long-term measures: Digital PE

The proposal further sets out that the ideal comprehensive solution to the issues posed by the digitalisation of the economy would be an agreed international approach defining digital permanent establishment and profit allocation rules for digital activities. The proposal is unlikely to be agreed in its current format between member states, and the comprehensive solution is also likely to face opposition, particularly given that the US recently set out its position that it does not believe digital business is so inherently different such that it warrants separate treatment by way of the creation of a special tax regime.

A finalised version of the draft is expected in late March.

EU Commission published final Amazon ruling

The EU Commission published on 26 February 2018 the non-confidential version of its Amazon State aid decision of October 2017 that had concluded a three-year investigation into the group’s tax arrangements in Luxembourg. The Commission established that the Luxembourg tax administration endorsed a methodology of calculation of taxable profits of Amazon’s Luxembourg operating company (Amazon sprl) that had in effect reduced Amazon’s taxable basis by payment of non-arm’s royalty. The tax ruling which approved the transfer-pricing report related to the above methodological parameters and the utilisation of the group’s intangible assets was declared to be in breach of the State aid rules. The decision is under appeal at the Court of Justice, which pending the outcome, does not however prevent recovery of the assessed back-taxes.

  • The tax structure under scrutiny

The Commission established that Luxembourg had granted State aid to the Amazon group (primarily to Amazon sprl “the operating company”) by virtue of a tax ruling dated 6 November 2003 and extended in 2011. This tax ruling allegedly reduced Amazon’s operating company tax liability by transferring non-arm’s length royalty to its parent Amazon SCS for the use of the group’s intangible property. Commission claim that this ruling endorsed a method of calculation of annual payments from the operating company to the holding company for the IP rights to the Amazon, which exceeded, on average, 90% of the operating company’s operating profits. Due to the legal form of this entity, a Luxembourg limited partnership with US-based partners, and its look-through nature for tax purposes, alongside the methodological choices accepted in the transfer-pricing report, the royalty payment to the SCS from Amazon sprl was assessed as non-compliant with a market-based outcome and consequently contrary to the State aid rules.

Under Luxembourg’s tax law, the operating entity is subject to corporate tax whilst the SCS is not due to the chosen legal form and a mismatch with US tax law. The taxation rights of SCS partners’ profits thus belong to the United States, with the US tax liability subject to deferral.  The Commission further claim that the SCS was not actively involved in the development the IP and was not engaged in management of risks, assets and functions that would justify the level of royalty it received. In this way, three quarters of Amazon’s profits were unduly attributed to the partnership, where they remained untaxed. According to the Commission, the ruling that endorsed the methods for taxation of profits amounts to selective advantage for Amazon not available to other companies in a comparable factual and legal situation, an illegal practice under the State aid rules.

  • Further steps

Commission have set out the methodology to calculate the back taxes initially estimated at €250 million, plus interest. An action for annulment of a Commission State aid decision does not have a suspensory effect, obliging the Luxembourg government to recover the assessed tax.  Under EU law, assessed back taxes under State air rules are not a penalty, rather an assessment that levels the playing field, and does not penalise the operating company as a beneficiary of State aid.

The Netherlands Introduces New Royalties Tax

The Netherlands’ government has introduced a new tax on royalties, to come into effect from 2021, which aims to discourage companies establishing “letterbox” or “shell” companies in order to avoid paying tax on royalties, as part of measures to “overturn the Netherlands’ image as a country that makes it easy for multinationals to avoid taxation”, according to Dutch Secretary of State for Finance Menno Snel.

The law will apply to payments made to entities based in jurisdictions on the EU “blacklist” of non-cooperative jurisdictions, or jurisdictions with either no or a low statutory tax rate. Additionally, the legislation will introduce increased substance requirements for resident holding, financing and licensing companies.

CFE Tax Advisers Europe Annual Forum “Fair Taxation of the Digital Economy”- Brussels 19 April

CFE Tax Advisers Europe’s Annual Forum will focus on the fair taxation of the digital economy, outlining and discussing EU Commission’s proposal due to be published in late March 2018.

The Forum will analyse the direct and indirect tax aspects of the digitalising economy. Three impressive panel of speakers include Maria Elena Scoppio, Head of VAT Unit and Bert Zuijdendorp, Head of Company Taxation Initiatives Unit, DG Taxation and Customs Union, European Commission. A full list of speakers, Forum registration & programme details is available on the link below.

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The selection of the remitted material has been prepared by

Piergiorgio Valente/ Aleksandar Ivanovski/ Brodie McIntosh/ Filipa Correia