CFE’s Tax Top 5 – May 2018

Brussels, 28 May 2018

Council Formally Adopts the Mandatory Disclosure Rules Directive (DAC6)

At the ECOFIN meeting on 25 May 2018, the Council of the EU formally adopted the Council Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation the reportable cross-border arrangements. Political agreement was reached at the 13 March ECOFIN Council meeting on the directive, and since then a legal-linguistic revision took place before the document was ready for sign-off.

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.

The Directive shall enter into force 20 days following publication in the Official Journal of the European Union, which is expected in early June.

EU VAT Package Proposals

On 25 May, the European Commission published two proposals which it introduced as “the final technical measures to create a future fraud-proof EU VAT system” following on from its comprehensive proposal of 2017 and the initial introduction of the VAT Action Plan in 2016. The reform measures propose adopting a definitive VAT system for intra-EU cross border trade based on the “destination principle”, i.e. taxation in the Member State of the destination of the goods.

The two new proposed directives set out the technical revisions required to existing EU VAT legislation in order to give effect to the proposed comprehensive revisions, with the Commission stating that around 200 of the existing 408 articles of the VAT Directive will need to be amended.

The proposed directives concern the following matters:

  1. Detailed technical measures for the operation of the definitive VAT system for the taxation of trade between Member States; and
  2. the period of application of the optional reverse charge mechanism in relation to supplies of certain goods and services susceptible to fraud and of the Quick Reaction Mechanism against VAT fraud.

These amendments introduce provisions concerning the online VAT “One Stop Shop” portal for European business-to-business traders and companies outside the EU wanting to trade with EU businesses. The measures also introduce provisions such that unless a customer is a Certified Taxable Person, the seller will be responsible for charging VAT due on sales to customers in another EU Member State, at the rate due in that Member State.

These proposals follow on from prior proposals concerning the future of the EU VAT area and the Commission noted it hoped the new measures will further discussion on the “cornerstones” of a definitive EU VAT system.

UN Releases Updated Model Double Tax Treaty

The 2017 update of the United Nations Model Double Taxation Convention between Developed and Developing Countries was published online on the occasion of the 16th Session meeting of the Committee of Experts on International Cooperation in Tax Matters convened in New York from 14 to 17 May 2018. The updated Model Double Taxation Convention incorporates changes which were approved in April 2017 by the Committee.

In a progress note circulated ahead of the Committee Session concerning the updates to the Convention, the Secretariat noted that the 2017 update incorporates language contained in the Base Erosion and Profit Shifting Project of the OECD and G20, aimed at preventing improperly obtained treaty benefits. In particular, the Secretariat noted the update incorporates new anti-abuse rules and a revised preamble setting out that “tax conventions are not intended to create opportunities for tax avoidance or evasion”.

Additionally, it was noted the update introduces an article which permits the imposition of a withholding tax relating to fees for technical services, identified in the note as a practice which increases source-based taxation.

OECD Releases First Peer Reviews on Action 13 of BEPS

The OECD has released peer reviews from the Country-by-Country reporting initiative which assess the legal and administrative framework and implementation of the OECD/G20 Base Erosion and Profit Shifting (BEPS) minimum standards of 95 Inclusive Framework jurisdictions as of January 2018.

The OECD reports that the 60 of the 95 countries reviewed where MNEs have headquarters have implemented reporting obligations for those MNEs that are in line with the requirements of the BEPS minimum standards. Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration states “the peer review outcomes and the launch of the global exchange of CbC reports in June shows that the BEPS measures are being implemented rapidly, consistently and globally”.

Country-by-Country reporting exchanges under the BEPS minimum standards are to begin in June 2018. The OECD reports there are more than 1400 bilateral relationships to which the reporting exchanges will apply; a number that will continue to grow.

This first peer review will be followed by two further annual reviews. The second review process began in April 2018 and will focus on the exchange of information aspect of Country-by-Country reporting.

EU List of Non-Cooperative Jurisdictions in Taxation Matters

The Bahamas and Saint Kitts and Nevis have been removed from 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 EU concerns, the ECOFIN Council at its meeting on 25 May has now removed the two countries from the “blacklist”.  The Council noted that the commitments will be closely monitored.

Seven countries now remain on the list: American Samoa, Guam, Namibia, Palau, Samoa, Trinidad and Tobago and the US Virgin Islands.

Clarification Concerning CFE Tax Top 5 of 22 May 2018

In the previous edition of the Tax Top 5, CFE reported that Finland had introduced a bill in its Federal Parliament to implement aspects of the European Commission proposals concerning the concept of a digital permanent establishment. However, the text that CFE reported on was not in fact a legislative proposal, but rather a communication to the Parliament informing it of the details of the EU proposals. Thanks to our scrupulous readers this was acknowledged and clarified.

 

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The selection of the remitted material has been prepared by

Piergiorgio Valente/ Aleksandar Ivanovski/ Brodie McIntosh/ Filipa Correia

Brussels, 22 May 2018

EU Commission and Council Work on Corporate Tax Scrutinised by Parliament

European Parliament’s Committee on financial crimes, tax evasion and tax avoidance (TAX3) session of Tuesday 15 May 2018 discussed the transparency record of the Council of EU on matters of taxation and further steps to improve the EU ‘blacklist’ of non-cooperative jurisdictions for tax purposes.

The European Ombudsperson, Emily O’Reilly, listened to concerns of the Members of Parliament regarding the absence of transparency of the work of the Council, and in particular the Code of Conduct Group (Business Taxation). Ms O’Reilly highlighted the lack of cooperation with the Council on tax policy matters, which failed to respond to requests for documents, including those that had often been misclassified as confidential or for limited circulation. As a personal view, the Ombudsperson stated that politicians need to be vocal about the issues that are important regarding taxation, citing a figure of up to 1 trillion Euro as estimated size of the EU tax gap. In her capacity as European Ombudsperson, Ms O’Reilly will present a special report to Parliament looking for political support regarding malpractice in the Council of the European Union in the tax area, and in particular the non-transparency of Council in relation to the work of the Code of Conduct Group (Business Taxation).

A panel discussion followed on EU’s list of non-cooperative jurisdictions, attended by Valère Moutarlier, EU Commission’s Direct Tax Director. Parliament recognised the blacklisting process as a positive step to improve tax good governance among third-countries and by implication, among EU Member states, however Members of Parliament highlighted their concerns that the ‘blacklisting’ process is highly political rather than technical. In this regard, the delisting of initially blacklisted jurisdictions was cited as an example of political interference into what should have been a technical process aimed at improving tax good governance.

Council Formally Adopts 5th Anti-Money Laundering Directive

The Council of the EU formally adopted the 5th EU Anti-Money Laundering Directive on Monday 14 May, following the political agreement between Council and Parliament of 15 December 2017. The 5th AML Directive 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.

Conversely, public access requirements are not put in place in respect of trusts and other legal arrangements. The 5th AML Directive 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 AML Directive already grants competent authorities access to beneficial ownership of trusts and other legal arrangements, albeit in limited circumstances.

  • Virtual currencies and verification

The 5th AML Directive 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.

  • Third-countries

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.

  • Background

The 5th AML 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 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 AML revised framework that is in force at present was adopted on 20 May 2015, consisting of the 4th AML Directive and Regulation (EU) 2015/847 on information accompanying transfers of funds. The transposition deadline for the 4th AML Directive 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 back in June 2017.

OECD Preferential Tax Regime Compliance

The OECD has released updates concerning reviews conducted by the Forum on Harmful Tax Practices (FHTP) in relation to compliance of preferential tax regimes of inclusive framework countries with OECD/G20 BEPS standards to improve the international tax framework, in accordance with BEPS Action 5.

Regimes from Lithuania, Luxembourg, Singapore and the Slovak Republic designed to comply with the standards were determined not to be harmful and met the transparency and exchange of information criteria. A further four regimes from Chile, Malaysia, Turkey and Uruguay were either abolished or require amendment to remove harmful features. 3 additional regimes, 1 from Kenya and 2 from Vietnam, were found not to pose a BEPS Action 5 risk and were accordingly held to be out of scope.

The FHTP have considered 175 regimes from over 50 jurisdictions since the Inclusive Framework was formed. From these regimes reviewed, 4 were found to have harmful features, 31 have been changed, 81 require legislative changes that are currently in progress, 47 were found not to pose any BEPS risk, and 12 are presently under review.

Full details of the regime reviews can be found on the OECD website at this link.

Finland to Introduce Digital Tax

Finland has introduced a bill in its Federal Parliament which, if passed, will implement aspects of the European Commission proposals concerning the concept of a digital permanent establishment. The bill adopts the criteria established in the European Commission proposals, i.e  that if a digital business meets the following criteria it will be deemed as having a permanent establishment and taxable presence in Finland:

  • Exceeds a threshold of 7 million Euro in annual revenue in Finland;
  • Has more than 100,000 users in Finland in a taxable year; or
  • Over 3000 business contracts for digital services are concluded within a taxable year.

OECD Inclusive Framework

Bahrain and The United Arab Emirates have now become the 115th and 116th jurisdictions respectively to join the OECD’s Inclusive Framework of minimum standards devised by the OECD and G20 countries as part of the 2015 Base Erosion Profit Shifting Plan (BEPS). Both countries have thereby committed to implementing anti-BEPS minimum standards and peer review processes, as part of the OECD efforts to address tax avoidance.

Joining the OECD Inclusive Framework also indicates compliance with conditions set by the European Commission in order for Bahrain to be delisted from 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 removed Bahrain, the Marshall Islands and Saint Lucia from the “blacklist”.

 

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The selection of the remitted material has been prepared by

Piergiorgio Valente/ Aleksandar Ivanovski/ Brodie McIntosh/ Filipa Correia

Brussels, 14 May 2018

OECD Consultation on Revising Transfer Pricing Guidelines

The OECD has invited public comments on two projects being considered for implementation that would revise certain chapters of the OECD Transfer Pricing Guidelines. Comments have been invited concerning the following proposed revisions to the guidelines:

  1. Revisions to Chapter IV – “Administrative Approaches to Avoiding and Resolving Transfer Pricing Disputes”, in particular concerning practices and mechanisms to prevent and resolve transfer pricing disputes, increase tax certainty and prevent double taxation; and
  2. Revisions to Chapter VII – “Special Considerations for Intra-Group Services”, in particular its practical application and how the guidance could be revised or supplemented in the context of intra-group services to correct practical application issues being experienced.

Comments have been requested by 20 June 2018.

Tax Intermediaries Directive (Mandatory Disclosure Rules) DAC6

The Council of the European Union has confirmed that the legal-linguistic revision has been finalised before publication and final approval of the  Proposal for a Council Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation the reportable cross-border arrangements. Political agreement was reached at the 13 March ECOFIN Council meeting on the directive, and since then the directive has been translated into EU official languages ready for sign-off.

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.

Switzerland Exchanges Tax Rulings with Other Nations

On May 8, the Federal Tax Administration (FTA) of Switzerland announced it had transmitted information concerning the tax rulings of private taxpayers in compliance with exchange of information obligations arising from legislation introduced following Switzerland ratifying the OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters.

The FTA stated it transmitted 82 reports to 41 countries concerning tax rulings of individuals that were still effective as of 1 January 2018, including to the EU Members States of France, Germany, the United Kingdom and the Netherlands.

Additionally, on 9 May, Switzerland’s Federal Council requested that its Parliament authorise the ratification of agreements concerning the automatic exchange of financial account information with Singapore and Hong Kong. The Council also proposed implementing an automatic exchange of financial account information with Singapore, Hong Kong and other financial centres on the basis of the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Account Information (MCAA), to take effect from 2020.

Saint Lucia Joins OECD Inclusive Framework

Saint Lucia has now become the 114th country to join the OECD’s Inclusive Framework of minimum standards devised by the OECD and G20 countries as part of the 2015 Base Erosion Profit Shifting Plan (BEPS). Saint Lucia has now committed to implement a country-by-country reporting scheme concerning multinational corporations, as part of the OECD efforts to address tax avoidance.

Joining the OECD Inclusive Framework also indicates compliance with conditions set by the European Commission in order for Saint Lucia to be delisted from 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 removed Bahrain, the Marshall Islands and Saint Lucia from the “blacklist”.

Ireland Updates Mandatory Exchange of Information Rules

On 7 May, Ireland updated its guidance concerning information required to be exchanged with other EU Member States concerning private cross-border rulings and advanced pricing agreements with multinationals, in line with EU Council Directive 2011/16 requiring that member states set up an automatic exchange of information concerning cross-border tax rulings, which must also be shared with the Commission.

The guidance also sets out what information is required to be exchanged and the notifications that must be provided to taxpayers concerning the exchange.

 

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The selection of the remitted material has been prepared by

Piergiorgio Valente/ Aleksandar Ivanovski/ Brodie McIntosh/ Filipa Correia

 

Brussels, 7 May 2018

ECJ Clarifies ‘Selectivity’ of Tax Measures in ANGED v Asturias

The First Chamber of the Court of Justice of the European Union (“ECJ”) rendered a judgment on 26 April 2018 on the interpretation of Articles 49 and 54, and Article 107(1) Treaty on the Functioning of the European Union (“TFEU”), that clarifies the compliance of tax measures with the EU freedom of establishment, and the EU State aid rules.

Questions

Joined cases C-234/16 & C-235/16 ANGED v Asturias concern a preliminary ruling from the Spanish Supreme Court under Article 267 TFEU seeking to establish:

  • Whether a regional tax on large retail establishments levied by a Spanish autonomous region is in breach of the freedom of establishment, constituting covert of overt discrimination of foreign companies in a host state scenario, contrary to the national treatment principle, and,
  • Whether the exclusion of small companies from the scope of this tax constitutes selective advantage contrary to the State aid prohibition of Article 107(1) TFEU.

Judgment

The Court concluded the tax levied on large retail establishments by the Spanish Autonomous Region of Asturias does not constitute a restriction on the freedom of establishment, nor an overt of covert discrimination on cross-border operating businesses, in line with established case-law (cf. Denkavit and ACT IV Group Litigation).

Regarding the State aid assessment, the Court clarified the criterion of ‘selectivity’, establishing that the non-taxation of smaller retail establishments did not constitute a selective advantage for these undertakings, when compared with large retailers. In order to classify a tax measure as selective, it needs to differentiate between operators that are in a comparable factual and legal situation in light of the objective pursued by the reference system in question, in line with recent case-law (ie. World Duty Free C-20/15 & C-21/15, para 57 et seq.)

Furthermore, the Court has clarified that in establishing material selectivity of tax measures, it is not always necessary to prove a derogation from the system of reference (cf. Adria-Wien Pipeline C-143/99). Under the ECJ’s interpretation of the EU State aid rules, the “effects” of a tax measure take precedence over the “regulatory technique” used (cf. British Aggregates C-487/06 and Gibraltar C-106/09 & C-107/09).

The issue of geographical selectivity was not raised, and was considered acte clair, in line with the Azores judgment criteria.

The first Chamber thus confirmed the approach of Advocate General Kokkott in her Opinion of 9 November 2017 in response to the preliminary ruling request by the Spanish Supreme Court.

Spain to Introduce Digital Services Tax

The Minister of Finance of Spain announced last week that the government of Prime Minister Mariano Rajoy will propose a new digital services tax (DST) in Spain effective by the end of 2018. The announcement lacked further detail, however, it is understood that the bill will follow the principles of the EU proposal of March 2018 that plans on introducing EU-wide digital services tax for the largest technology companies operating in the Single Market. Under these principles, the companies will face a turnover tax on revenues subject to threshold and significant (digital) footprint.

UK Parliament Vote on Beneficial Ownership Requirements

The lower House of the UK Parliament voted on 1 May to require companies registered in UK overseas territories to publicly disclose their beneficial ownership, thus expanding the scope of the Sanctions and Anti-Money Laundering Bill. Under the UK law, which has been in place for two years, all British companies are required to identify ultimate beneficial ownership of shareholders.

The UK Government Minister Alan Duncan said that Theresa May’s government did not want to harm British overseas territories’ autonomy by legislating directly. However, faced with a Labour- Conservative cross-party majority on this bill in the House of

Commons, the minister stated: “We have listened to the strength of feeling in the House on this issue and accept that it is without a doubt the majority view of this House that the overseas territories should have public registers.”

Similar transparency trends are noted with the political agreement of December 2017 on EU’s 5th Anti-Money Laundering Directive and OECD’s Common Reporting Standard (CRS), through which more than 80 countries have agree to share information about financial accounts.

HMRC Guidance on ‘Enablers’ of Tax Avoidance

The UK tax administration set out further guidance as to who is considered an ‘enabler’ of tax avoidance. The list, published 30 April, seeks to clarify the definition of enablers, and how to address the related issue of legally privileged communications.

Under the UK law, schedule 16 to the Finance Act 2017 (No.2), an enabler of tax avoidance is a person who is responsible for the design and marketing of abusive tax arrangements which are later defeated, but also a person who is facilitating another person’s entering into abusive tax arrangements.

Further, the updated guidance relates to penalties for enablers of defeated tax avoidance legislation, which was introduced in 2017. The guidance also sets out how the enablers’ legislation interacts with the GAAR and the PCRT. The PCRT (Professional Conduct in Relation to Taxation) is a document that concerns the members of the UK professional bodies working in taxation, which sets out rules of conduct for tax professionals as well as the fundamental principles of professional standards.

EU Commission Approves Irish State Aid SMEs Scheme

The European Commission has approved an extension of an Irish €10 million State aid scheme on restructuring of small and medium-sized enterprises (SMEs) in financial difficulty. The extension of the State aid scheme of November 2017 will allow the granting of temporary restructuring support like loans to SMEs in financial difficulty in Ireland facing acute liquidity needs. The extension will apply until 2020 with all sectors of the Irish economy qualifying, save for the financial sectors as well as the coal and steel industry.

Under the EU State aid rules, companies may be allowed to receive State aid under certain strict conditions in accordance with the 2014 Guidance on rescue and restructuring aid.

 

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The selection of the remitted material has been prepared by

Piergiorgio Valente/ Aleksandar Ivanovski/ Brodie McIntosh/ Filipa Correia