CFE’s Top Tax 5 January 2017

   23 January 2017

Temporary general reverse charge in VAT on the EU agenda

EU finance ministers are expected to discuss on Friday 27 January the December 2016 proposal from the European Commission to amend the VAT Directive with a temporary generalised reverse charge mechanism for all domestic supplies above an invoice threshold of 10.000 Euro.

The Proposal for a Directive amending Directive 2006/112/EC on the common system of value added tax as regards the temporary application of a generalised reverse charge mechanism in relation to supplies of goods and services above a certain threshold came from the European Commission on 22 December 2016. The proposal would allow EU Member states to derogate from the standard VAT system on a voluntary basis and apply a general reverse charge on all domestic supplies above the invoice threshold of 10.000 Euro, effectively shifting the VAT payment liability from the supplier to the customer.

The amendments come after requests by a number of Member states with significant revenue losses due to VAT fraud. The EU-wide VAT tax gap is estimated at alarming level of EUR 160 billion, according to the Case Study and Reports on the VAT Gap in the EU-28 Member States 2016 Final Report.

The Commission proposes the general reverse charge to be in force until 30 June 2022, until when the ongoing comprehensive reform of the EU VAT system is completed, the cornerstone of which is the ‘destination’ principle.

EU Financial Transaction Tax proposal ‘ready by mid-2017’

Marianne Thyssen, the EU Commissioner for Employment, Social Affairs, Skills and Labour Mobility confirmed during a debate at the European Parliament on 18 January 2017 that the draft-text for EU financial transaction tax could be ready by mid-2017.

Commissioner Thyssen speaking to the MEPs confirmed that the tax is ‘supporting the real economy’, and that it would strengthen the EU Single market by ‘reducing divisions between Member states’ approach to financial taxes’. According to the Commissioner, the financial sector would then need to make a fair and substantial contribution to the public purse.

MEPs supporting the proposal highlighted that the tax would serve redistributive purposes and would enhance social justice. Many MEPs rejected the idea as ‘thoroughly bad’ and destined to create more costs than revenue.

Speaking on behalf of the Council of the EU, Ian Borg, minister in the Government of Malta, echoed the remarks by Commissioner Thyssen, confirming a legislative proposal is forthcoming in the months ahead.

ECOFIN Council scheduled for 27 January 2017 in Brussels

The Council of the EU, sitting as Economic and Financial Affairs Council (ECOFIN), will discuss the priorities of the Maltese EU presidency and present its working programme in the area of taxation and finance.

The Council is expected to adopt recommendations for the economic and monetary policy of the Euro zone. Also, the Council is set to adopt the annual EU growth survey for 2017 as well as the alert mechanism report related to the macroeconomic imbalance procedure.

In respect of the banking sector and the Basel Committee reform agenda, the Council will be briefed by the European Commission on the progress made in the banking post-crisis reform and developments in relation to banking supervision.

European Parliament rejects European Commission anti-money laundering ‘blacklist’ proposal

The European Parliament has rejected the proposal from the European Commission on a list of jurisdictions that are considered to be at risk of money laundering and terrorism financing, on grounds that the list is too limited.

European Parliament’s resolution of 19 January 2017 was passed with 393 to 67 votes, with 210 abstentions. MEPs requested from the Commission to expand the proposal with jurisdictions that facilitate tax crimes. During the discussion, the MEP rapporteur insisted that the proposal from the Commission is ‘inadequate’ and that the revised proposal from the Commission needs to be ‘more ambitious’ and ‘fit-for-purpose’.

The purpose of the ‘blacklist’ is to allow for heightened scrutiny for people and business from these jurisdictions when doing business with the EU. Bosnia and Herzegovina, Iraq, Afghanistan and Syria were originally listed by the Commission, to name but a few.

Following this vote, the existing European Commission list of countries with deficiencies in the area of anti-money laundering and terrorism financing remains in force.

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The selection of the remitted material has been prepared by Piergiorgio Valente / Filipa Correia /

Aleksandar Ivanovski / Mary Dineen

 

16 January 2017

AG Wathelet issues opinion in C-682/15 Berlioz, supports questioning ‘foreseeable relevance’ of tax authorities’ information exchange requests

The case C-682/15 Berlioz Investment Fund S.A., lodged on 19 December 2015, concerns the application of EU law in relation to administrative penalties for holders of information questioning the foreseeable relevance of information to be transferred to third countries.

Advocate General Wathelet in the Opinion issued on 10 january 2017 confirmed that the taxpayer has the right to challenge a request for information issued by Luxembourg pursuant to Directive 2011/16, on request from the French competent authority.

Berlioz Investment SA had to deal with a request for information sent to Luxembourg by the French competent authority in relation to dividends received from Cofima, Luxembourg subsidiary of Berlioz. Berlioz had requested exemption from withholding taxes related to the inbound dividends received from Cofima, whilst the French tax authorities wanted to ascertain whether relevant conditions of French law have been fulfilled. The requested information from Luxembourg on behalf of the French authorities concerned in particular whether the company has place of effective management in Luxembourg, list of employees with link to company’s registered office in Luxembourg, contractual relations between Berlioz and Cofima with any supporting documentation, information on shareholdings, amount of capital held by participants with percentage of capital held by each member etc. Berlioz objected to providing the latter information based on it lacking ‘foreseeable relevance’.

As part of the domestic litigation in Luxembourg, Berlioz brought an appeal to the Administrative court in Luxembourg alleging breach of Article 6 ECHR. The Administrative court filed a preliminary ruling to CJEU bringing in by its own motion Article 47 of the EU Charter of Fundamental Rights, which as binding EU law guaranteeing the ‘right of effective remedy and to a fair trial’.

Advocate General Wathelet is of the opinion that the requested authority must be in a position to determine whether the requested information is foreseeably relevant, i.e. whether a nexus exists between the request for information and the factual situation of a particular taxpayer. There must be a possibility for judicial review of the legality of the information on which the fine was based, in order to comply with Article 47 of the Charter. This needs to be balanced with the legitimate objective of combating tax evasion and tax avoidance pursued by the Directive, so the deficiency must be manifest. This type of review according to the Advocate General complies with Article 47 of the Charter and the principle of proportionality.

The concept of foreseeable relevance, as a ‘yardstick’ to judge the legality of information requests, prevents tax authorities from ‘fishing expeditions’, i.e. making requests that have no apparent nexus to an open inquiry or tax investigation with a particular taxpayer. According to AG Wathelet, this approach is also supported by Article 26 OECD Model Tax Convention, by which this EU legislation was inspired.

It remains to be seen whether the legal reasoning by the Advocate General will eventually be upheld by the Court of Justice.

European Commission presented the Services Package

European Commission presented on 10 January 2017 a proposal aimed at reform of the provision of professional services in the European single market with four legislative and non-legislative proposals. The proposal includes four steps:

  • New EU Services card: Regulation introducing a European services e-card and related administrative facilities: simplified electronic procedure for providers of business services (IT companies, engineering firm) where they engage with simple contact in the host member state only;
  • New proportionality test directive for regulated professions: EU law will now require that Member states need to prove that new national regulatory requirements for access to a profession are proportionate, necessary and balanced. Before amending national rules related to regulated professions, Member states must satisfy conditions of Article 6 of the Proportionality Test Directive. The criteria will be non-retroactive and will concern new or amended national rules of professional regulation;
  • Communication (non-binding instrument) which identifies means for reforming regulated professions across EU member states, European Commission proposes appropriate measures to tackle remaining barriers to cross-border provision of services; Non-binding guidelines for national reforms in regulation of professions;
  • Improvement in the notification of draft national laws on service: EU law (Services Directive) already requires from member states to notify any changes to domestic rules concerning services to the European Commission. The envisaged changes would make this procedure ‘more efficient and transparent’.

The Services Package is part of European Commission’s Single Market strategy which aims to make the cross-border provision of services in the EU easier and to enable services providers to navigate through administrative formalities.

In relation to this subject matter, CFE has issued Opinion Statement PAC 4/2016 on the regulation of cross-border professional services.

OECD invites comments on BEPS Actions 6 and treaty-entitlements of funds which are not collective investment vehicles by 3 February 2017

OECD is inviting comments on three drafts before 3 February 2017 related to OECD’s work under Action 6 – preventing granting of treaty benefits in inappropriate circumstances and the treaty entitlements of finds which are not collective investment vehicles (CIV).

Comments on BEPS action 6 discussion draft on non-CIV funds should be sent by 3 February 2017 at the latest by email to taxtreaties@oecd.org in Word format.

Save the date- CFE’s Forum 2017, our International Tax Conference will take place on 30 March 2017 in Brussels

This year’s CFE Forum brings together prominent speakers revisiting the concept of permanent establishment post-BEPS, with specific focus on fixed establishment for VAT purposes. Watch this space for more details. In the meantime, take a look at the tentative agenda.

Overview of the activities of CFE’s Fiscal Committee for 2016

Please follow the link below for overview of the main activities and publications of CFE’s Fiscal Committee for 2016.

CFE Fiscal Committee overview of activities and publications: LINK

 

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The selection of the remitted material has been prepared by Piergiorgio Valente / Filipa Correia /

Aleksandar Ivanovski / Mary Dineen

10 January 2017

European Commission published the opening decision in the case of potential state aid by Luxembourg to GDF Suez (Engie)

Continuing its inquiries into tax rulings practices by EU member states the European Commission opened on 19 September 2016 an investigation into the Luxembourg tax treatment of the GDF Suez group (now Engie). The opening decision was published on 5 January 2017.  This particular case concerns discretionary double non-taxation of interest i.e. tax treatment of debt and equity in relation to zero-interest loans. The tax rulings that the Commission looks into allegedly treated two financial transactions as both debt and equity, which is inconsistent with the tax treatment of the said transactions. Such a treatment gave rise to double non-taxation, as the borrowers could significantly reduce their tax liability in Luxembourg by deducting deemed interest payments as expenses. Under the terms of convertible zero-interest coupon the borrower can record a provision for deemed interest payment without an interest payment actually taking place. Had the lender actually received interest payments it would have been subject to corporation tax, whilst the interest payments are tax deductible at the level of the borrower. This discretionary treatment of the deemed interest payments gave rise to double non-taxation, endorsed with tax rulings approved by the Luxembourg tax administration.

With this case, the European Commission addresses the cases of inconsistent application of national tax law that gives rise to discretionary double-non taxation.

In similar vein, the Commission is already looking into McDonald’s arrangements in Luxembourg, where the group’s income was exempt from taxation on basis of confirmatory ruling that accepts existence of permanent establishment in the US, where the profits would have been subject to tax, in spite of the fact that they were in fact not taxed in the US.

ECJ annulled General Court judgments in the cases Commission v World Duty Free and Commission v Banco Santander, and in Commission v Air Lingus, Ryanair

The week before Christmas saw European Commission winning two cases on appeal at the Court of Justice of the EU (CJEU). This line of case-law provides for important clarification concerning the criterion of selectivity in tax related State aid cases.

The case C-20/15 concerned a Spanish tax scheme where undertakings taxable in Spain that acquired a foreign shareholding could deduct the resulting goodwill through amortisation from its basis of assessment. European Commission investigation concluded that the scheme was selective, with General court later annulling two Commission decisions considering that the selectivity of the scheme had not been established.

Court of Justice annulled the General Court judgments establishing there was error in law in annulling Commission decisions on the ground that the Commission had not established a particular category of undertakings that was favoured by the Spanish tax scheme.

Consequently, the requirement of the General Court to identify ex ante an exclusive category of undertakings that benefit from the measure in order to establish its selectivity was dismissed by the CJEU. The judgment accepts an earlier Opinion of Advocate General Wathelet who recommended annulment of the General Court judgment.

In Commission v Ryanair, Air Lingus, the Court of Justice set aside part of the General Court judgment that had required from the Commission to examine whether and to what extent the State aid beneficiaries enjoyed an economic advantage arising from the application of lower rate of passenger air tax. Thus, CJEU dismissed actions brought by Ryanair and Air Lingus and confirmed Ireland’s obligation to recover 8 Euro per passenger from the airlines benefiting from state aid.

Judgment Joined Cases C-20/15P and C-21/15P Commission v World Duty Free Group and Banco Santander

European Commission published the decision regarding potential State aid by Ireland to Apple- Ireland its arguments

The long awaited decision related to the alleged State aid granted by Ireland to Apple was finally published by the European Commission in December. CFE published an extensive note summarising Commission’s main arguments of 130 pages long ruling, which we summarise in the points below:

The European Commission decision states that Ireland granted Apple illegal State aid by virtue of the terms of two Advanced Pricing Arrangements (APAs) with two Apple entities in 1991 and 2007.  The APAs were granted in relation to two subsidiaries of Apple Inc., Apple Sales International (“ASI”) and Apple Operations Europe(“AOE”) which were not tax resident in Ireland but operated through a branch in Ireland.  The Commission issued its preliminary decision on 30 August 2016 after a three-year long investigation into Apple’s tax arrangements in Ireland following comments made by Apple executives before a Senate Committee hearing in Washington in 2013.  Ireland has appealed the decision and Apple has indicated its intention to appeal the decision.  As a preemptive move Ireland published an outline of its appeal prior to the publication of the Commission decision. It is available here.

Profit allocation methods were challenged by the Commission. The Commission found that the Irish Revenue i.e. Ireland’s tax authorities granted Apple a “selective advantage” in contravention of EU State aid law because it did not employ appropriate profit allocation methods to calculate the Irish source income of the Irish branches.  The Commission essentially disagrees with the methodologies employed by Apple and accepted by the Irish tax authorities, and in particular disagrees with:  The use of a one sided functional analysis as opposed to a two-sided functional analysis assessing the resources of the head office in reality. Ireland should not have accepted the “unsubstantiated assumption” that the Apple IP licenses held by the relevant entities should be allocated outside of Ireland in circumstances where the reality of the situation is that there were no employees or personnel to conceivably carry out the functions assigned to the head offices based outside Ireland, and the Board minutes of the Head Office indicate the directors played an insufficient “active and critical role” in the control and management of the relevant Apple licenses.  The use of operating expenses as the profit level indicator instead of sales in the case of ASI and total costs for AOE; the acceptance of a low rate of returns, as well as the comparables used in the analysis, were too challenged by the Commission.

Finally, the Commission is of an opinion that in accepting the one-sided profit allocation method endorsed by the tax rulings endorsed State aid for Apple in breach of Article 107 of Treaty on the Function of the EU.

Save the date- CFE’s Forum 2017, our International Tax Conference will take place on 30 March 2017 in Brussels

This year’s CFE Forum brings together prominent speakers revisiting the concept of permanent establishment post-BEPS, with specific focus on fixed establishment for VAT purposes.

Watch this space for more details. In the meantime, take a look at the tentative agenda.

Overview of the activities of CFE’s Fiscal Committee for 2016

Please follow the link below for overview of the main activities and publications of CFE’s Fiscal Committee for 2016.

CFE Fiscal Committee overview of activities and publications: LINK

 

 

 

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The selection of the remitted material has been prepared by Piergiorgio Valente / Filipa Correia /

Aleksandar Ivanovski / Mary Dineen