Transcript U.S. & International Legislative Update

U.S. & International Legislative Update
Detroit TEI – December 9, 2014
Philip D. Morrison
[email protected]
(202) 756-8389
Kristen E. Hazel
[email protected]
(312) 984-3696
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Discussion Agenda
I. U.S. Legislative Outlook.
II. European Developments.
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I. U.S. Legislative Outlook
Extenders
 Congressional discussions as of November 25—a bipartisan
combination:
– Permanent:
• the research credit, simplified according to the provisions in a Housepassed bill (H.R. 4438) to make the credit permanent but also including
the provision from the Senate Finance Committee package providing startup businesses the ability to claim the credit against payroll taxes;
• section 179 expensing;
• the state and local sales tax deduction;
• the American opportunity tax credit, indexed to inflation after its renewal in
2018;
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I. U.S. Legislative Outlook
Extenders
– Permanent, cont’d:
• the employer-provided mass transit and parking benefits exclusion;
• the reduced recognition period for built-in gains of S corporations;
• the rules regarding basis adjustments to the stock of S corporations
making charitable contributions of property;
• the rule allowing some tax-free distributions from IRAs for charitable
purposes;
• the deduction for charitable contributions by individuals and corporations
of real property interests for conservation purposes; and
• the deduction for charitable contributions of food inventory.
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I. U.S. Legislative Outlook
Extenders
– 2-year extension (to YE 2015) for most of remaining
extenders per S.2260.
– Wind production tax credit phased out.
– Bonus depreciation changes per W&M:
• Owner-occupied retail stores as qualified property.
• Unused corporate AMT credits can be claimed in lieu of
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I. U.S. Legislative Outlook
Extenders
 Prospects for enactment of November 25 potential deal.
– >$440 billion revenue cost over 10 years not offset.
– Administration comments re no revenue offset.
• Leverage to get Dems’ favorites included, so no impediment?
• Or real concern re increased deficit?
– Administration veto threat, November 25.
• Wants permanence to 2017 expiring expansion of child care credit and earned
income credit; offhand mention of deficit.
– Lameduck adjournment likely December 11.
– Wind credit phase out chief concern of conservatives.
 Alternatives.
– Senate’s S.2260 2-year extension.
– House Repub’s 1-year extension.
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I. U.S. Legislative Outlook
Extenders
 Impact on Reform.
– Permanent, unoffset changes make revenue baseline lower.
– May make broad, revenue-neutral reform easier.
• No need to provide revenues to enact extenders, either short-term or permanent.
• “Clears the decks” of debate over several provisions.
• Some provisions, now “permanent” could be repealed to use revenue for lower rate.
– Could have little/no effect.
• Lobbying moves from obtain to preserve—little difference.
• Shifts some lobbying (e.g., R&E) to less popular provisions.
– Veto threat, despite agreement of Congressional Dems, not a good
omen.
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I. U.S. Legislative Outlook
Tax Reform Fundamentals
 Some key, as yet unanswered questions.
– What purpose is tax reform meant to serve?
– What is the appetite for giving up tax expenditures in order to achieve
rate reductions? (Each point of the corporate rate = roughly $100B over
10 years. Compare cost of R&E permanence—approx $150B over
10years).
– How will the various interactions be managed (e.g., between international
and domestic corporate, or between domestic corporate and
individuals/pass-throughs)?
– Any chance one area might be pursued independently of the others?
– How will key revenue estimating issues be addressed?
• Revenue neutral?
• Budget window or beyond?
• “Dynamic” scoring?
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I. U.S. Legislative Outlook
Tax Reform Fundamentals
 Some recent drivers for international reform.
– Congressional tax investigations.
• PSI (Sen. Levin, chmn) series: tax haven subs; repatriation; IP migration; taxpayerspecific hearings.
• SFC and W&M hearings (with JCT assistance) re taxpayer (MNEs)-specific tax
planning.
– Inversions.
– BEPS.
– EU actions.
• Lux leaks.
• Legislative proposals.
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I. U.S. Legislative Outlook
Tax Reform Fundamentals
 Legislative process questions.
– Will Obama Administration flesh out its 2012 “framework”?
• Both Dems and Repubs want some Treasury leadership.
– Use of Reconciliation process?
• Filibuster proof—51 rather than 60 Senate votes—Ryan and Hatch OK.
• Still likely needs some Dems to sign on to avoid Obama veto.
– Where to start?
• Camp proposal “a good start” per both Dems and Repubs.
– 2015/16 or 2017/18?
• Depends on perceived impediments, Repub candidate, any Obama
leadership.
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I. U.S. Legislative Outlook
International Tax Reform
 Obama “Framework for Business Tax Reform.”
– Released Feb. 22, 2012, shortly after FY 2013 budget proposal.
– High-level conceptual outline, as opposed to specific proposals.
– Selected international features:
• 28% top corporate rate, lower rate for manufacturing (25%, or even lower if
“advanced”),
• New limits on interest deductibility.
• Crackdown on cross-border “income shifting,” through budget proposal items as
well as a new minimum tax on CFC earnings—low-tax earnings would be subject to
U.S. tax on current basis up to some minimum rate, with FTC.
• No territorial proposal (but administration reportedly not averse to a “tough” version
of territorial).
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I. U.S. Legislative Outlook
International Tax Reform
 Camp international tax reform proposal—big picture.
– Territorial dividend exemption system, with 25% top corporate income
tax rate.
– International business tax reform intended to be revenue-neutral or
even raise some revenue for other priorities.
– Camp discussion draft illustrates the difficult trade-offs involved on the
international side.
– Camp draft a fair approximation of the kind of “tough” territorial
proposal that the Obama administration might consider.
– No expense allocation rule, but quite a lot of revenue-raising features
to make up the difference (Obama administration presumably would
push for inclusion of expense allocation rule).
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I. U.S. Legislative Outlook
International Tax Reform
 Camp proposal: treatment of expenses.
– No general foreign/domestic allocation and disallowance rule.
– Instead a 5% “haircut” (95% exemption rather than 100% exemption),
imposed upon repatriation, with no ratable FTCs.
– Also a new thin capitalization rule, disallowing lesser of:
• Net interest expense attributable to “excess” leverage, determined by applying
worldwide group’s debt-equity ratio to US members of group.
• Excess of net interest expense over [X%] of adjusted taxable income.
– Intended to prevent overleveraging of US operations, while not
overburdening typical business and financing structures.
– Should be less burdensome than allocation/disallowance approach.
– Any reason other than revenue to have both a haircut and the new thincap rule?
– Any real conceptual basis for the haircut? What if the haircut percentage
increases?
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I. U.S. Legislative Outlook
International Tax Reform
 Camp proposal: foreign tax credit streamlining.
– FTC takes on a more limited role.
– FTC accordingly streamlined:
• 902 repealed (even for 5% taxable dividend amounts).
– Also no more 901 credit for WHTs on these dividends.
• Indirect expense allocation eliminated.
• 960 applied on year-by-year (and apparently item-by-item) basis.
– Lots of simplification, lots of rough justice, some new conceptual
challenges.
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I. U.S. Legislative Outlook
International Tax Reform
 Camp proposal: tightening of subpart F.
– Why?
• Heightened income-shifting concerns presented by shift to territorial itself?
• Existing concerns present under deferral or territorial system?
• Revenue?
– How?
• Based on connection to IP?
• Based on foreign effective rate?
• Based on location of customers?
• Based on level of business substance in relevant jurisdictions?
• Branch rules?
• Other structural alternatives (e.g., current-basis haircut)?
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I. U.S. Legislative Outlook
International Tax Reform
 Camp proposal: tightening of subpart F.
– Option C (“carrot & stick” IP taxation) – included in Camp 2011 proposal, and the
sole “option” in the 2014 draft—very complex.
– All CFC income attributable to IP is subpart F income – 2014 draft provides a
formula for this determination.
– But a US S/H is entitled to deduct 40% of IP-related income attributable to selling
into foreign markets, as opposed to the US market (deduction applies to subpart F
income and other types of income, such as royalties).
– So all IP-related income is tentatively taxed at 25%, but the portion of such
income relating to serving foreign markets is taxed at an ETR of 15% [.6 * .25].
– Plus an additional 1.25% [.05 * .25] at time of repatriation (no PTI rules) under
2011 version; 2014 version keeps PTI concept.
– Strange interactions with modified “legacy” subpart F rules.
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I. U.S. Legislative Outlook
International Tax Reform
 Camp proposal: transition.
– 2011 draft:
• Deemed repatriation prior to general effective date, 85% deductible, for a 5.25%
ETR, subject to ratable FTCs.
• Payable in up to 8 equal annual installments, with interest payable at underpayment
rate.
• Additional 1.25% tax if actually repatriated after regime’s general effective date.
– 2014 draft:
• Deemed repatriation prior to general effective date, bifurcated 75%/90%.
cash/non-cash DRD, for a bifurcated 8.75%/3.5% ETR, subject to ratable FTCs.
• Payable in 8 back-loaded installments, with no interest charge.
• No additional tax on later movement of cash – comes home as PTI.
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I. U.S. Legislative Outlook
International Tax Reform
 Obama FY 2015 budget proposals: Carryover items.
–
–
–
–
–
–
Interest expense deferral to reflect deferral of foreign income.
Foreign tax credit pooling.
Excess returns.
Definition of intangibles and other IP migration changes.
Leveraged distributions.
Other.
• 338(h)(16) treatment for all 901(m) covered asset acquisitions.
• Removal of taxes from pool when E&P is eliminated.
• Rev. Rul. 91-32 codification.
• Dual capacity taxpayers.
• Reinsurance.
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I. U.S. Legislative Outlook
International Tax Reform
 Obama FY 2015 budget proposal: New starters.
– New “foreign base company digital income” subpart F category.
– Special toll manufacturing rule under foreign base company sales
income rules.
– Denial of same-country and CFC look-through exceptions for
payments to reverse hybrids resulting in stateless income.
– Inbound/inversions.
• Interest deduction cap.
• Anti-hybrid rule for interest and royalty deductions.
• Additional inversion restrictions.
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I. U.S. Legislative Outlook
International Tax Reform
 Obama FY 2015 budget—Subpart F digital income.
– Concern is optionality of characterization of economically similar
transactions in “digital economy.”
– Proposal would create new “foreign base company digital income”
category:
• CFC income from lease or sale of a digital copyrighted article or from provision
of
a digital service.
• Where CFC uses IP developed by a related party (including under a CSA) to
produce the income.
• And CFC does not, through its own employees, make a substantial
contribution to the development of the property or services that give rise to the
income.
• Subject to same-country-use/consumption exception.
• Branch rule?
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I. U.S. Legislative Outlook
International Tax Reform
 Obama FY 2015 budget—new FBCSI rule regarding tolling.
– Concern about avoidance of FBCSI rules with respect to property
manufactured by related parties in tolling arrangements.
– Proposal would expand FBCSI to include income from sale of
property manufactured on behalf of CFC by a related person, even if
no purchase of property from a related person (or sale to).
– Subject to existing exceptions.
– Other “no related-party purchase” and tolling scenarios untouched.
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I. U.S. Legislative Outlook
International Tax Reform
 Obama FY 2015 budget—payments to reverse hybrids.
– Concern: CFC makes deductible payment to reverse hybrid owned
directly by U.S. shareholder—subpart F avoided under 954(c)(3) or
(c)(6), even though neither U.S. nor country of organization imposes
tax on receipt of item.
– Proposal would deny 954(c)(3) and (c)(6) exceptions for deductible
related-party payments made to U.S.-owned reverse hybrids.
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I. U.S. Legislative Outlook
International Tax Reform
 Obama FY 2015 budget—interest deduction cap.
– Concern: 163(j) too narrow, U.S. subgroups overleveraged to erode
tax base.
– Proposal would cap U.S. interest deductions at U.S. interest income +
proportionate share of worldwide group’s net interest expense.
– Proportionate share based on proportionate share of EBITDA.
– Or skip it and apply 10% ATI threshold.
– Indefinite carryforward of disallowed interest and 3-year carryforward
of excess limitation.
– Financial services and de minimis exceptions.
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I. U.S. Legislative Outlook
International Tax Reform
 Obama FY 2015 budget—anti-hybrids re interest and
royalties.
– Concern: Use of hybrid entities, instruments, and transactions to
obtain U.S. interest or royalty deduction with no corresponding
inclusion for payee (or with multiple deductions in different
jurisdictions).
– Proposal would deny interest and royalty deductions for related-party
payments in certain hybrid arrangements.
– Hybrid arrangements = no inclusion for recipient, or additional
deduction in another jurisdiction.
– Reg authority to deal with conduit arrangements, structured
transactions involving unrelated parties, and preferential regimes
(reducing generally applicable rate by 25%).
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I. U.S. Legislative Outlook
International Tax Reform
 Obama FY 2015 budget—new inversion restrictions
– Concern: 7874 not preventing current wave of acquisition inversions involving
<80% shareholder continuity.
– Proposal would:
• Reduce the >80% shareholder continuity threshold for deemed-U.S.-resident
treatment to a >50% test;
• Abandon any shareholder continuity requirement at all where the resulting group
has substantial business activities (25% across-the-board test?) in the U.S. and is
primarily managed and controlled in the U.S.; and
• Modify the existing 7874 partnership rules to cover acquisitions of substantially all
domestic partnership assets even if assets do not comprise a trade or business.
– >50% line would be a fairly remarkable assertion of U.S. jurisdiction given
traditional U.S. commitment to free cross-border trade and investment flows.
– Stitching together of 7874 and “managed and controlled” test would be awkward
and could produce strange results.
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I. U.S. Legislative Outlook
International Tax Reform
 Prospects for action independent of broad reform.
– Dems and Repubs not that far apart.
• Repubs (Camp proposal) moderate broadening of Subpart F.
– Two rates system depending on market served.
• Dems (rumors/Wyden /Baucus proposals) either.
– greater broadening of Subpart F or
– “minimum tax” (i.e., lower rate) on all non-Sub F CFC income.
– Inversions, BEPS, PSI hearings focus on international.
– Still, corporate rate reduction critical aspect for Repubs.
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I. U.S. Legislative Outlook
General Tax Reform
 Obama “Framework for Business Tax Reform.”
– Released Feb. 22, 2012, shortly after FY 2013 budget proposal.
– High-level conceptual outline, as opposed to specific proposals.
– Selected domestic features:
• 28% top corporate rate, lower rate for manufacturing (25%, or even lower
if “advanced”), permanent R&D credit.
• Elimination of various “business tax loopholes and tax expenditures” (e.g.,
LIFO accounting, oil & gas preferences, carried interest preference).
• “Parity” for large pass-through entities and large C corps.
• New limits on interest deductibility.
• Increased public disclosure of corporate income tax payments.
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I. U.S. Legislative Outlook
General Tax Reform
 Wyden tax reform bill—S.727.
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–
–
–
Reduces tax rates.
Three brackets for individuals: 15%, 25% and 35%.
Corporate tax rate reduced to 24%.
Bill is not revenue neutral.
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I. U.S. Legislative Outlook
General Tax Reform
 Wyden, cont’d
– Repeal of several credits, deductions and exclusions, including:
• Deferral.
• Section 199.
• Accelerated depreciation.
– Other offsets
• Index the interest deduction for corporate debt to disallow the part of the
deduction that reflects inflation.
• Reinstate per country foreign tax credit.
• Dual capacity taxpayer foreign tax credit proposal targeting large
integrated oil companies.
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I. U.S. Legislative Outlook
General Tax Reform
 Camp proposal—Individuals (select provisions).
– Rates: 10%/25%/35% (but 35% rate not applied to domestic mfg income).
– Cap gains/dividends taxed at regular rates with 40% deduction.
– Standard deduction doubled and personal exemptions repealed.
– Mortgage interest—limit (phased in) to max $500K debt for debt incurred after
DoE (other than refinancings of pre-DoE debt).
– Charitable contributions deductible only over 2% AGI floor.
– State/local tax deduction and myriad other deductions/credits repealed.
– AMT repealed.
– Only Roth IRAs.
– Distributional effect.
• Modest cut in lower and most middle brackets.
• Modest increase in $500K-1million bracket.
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I. U.S. Legislative Outlook
General Tax Reform
 Camp proposal—Business (select provisions).
– 25% corporate rate.
– Less generous depreciation (though small business expensing expanded).
– NOLs—no carryback; carryforward limited to 90% of taxable income.
– R&E amortization—5 years (15 years if performed abroad).
– Advertising expense—50% capitalized and amortized over 10 years.
– §197 (goodwill, etc)—20 year amortization (currently 15).
– §199 (domestic mfg/production)—phased out.
– Entertainment expenses—various reductions to or elimination of deduction.
– Like-kind exchange provision repealed.
– R&E credit—permanent.
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I. U.S. Legislative Outlook
General Tax Reform
 Camp proposal—Business (select provisions), cont’d
– LIFO repealed.
– §1256 mark-to-market expanded to broader definition of derivatives and
straddles.
– Exemption for interest on private activity bonds repealed.
– Reinsurance with related entities tightened.
– Non-qualified deferred comp further tightening.
– Deduction limit for excessive (>$1m) comp.
• Expanded to performance-based comp.
• Covered employees expanded.
– ACA’s medical device excise tax repealed.
– Too-big-to-fail financial institutions—new excise tax on assets >$500B
imposed (.035% per quarter).
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I. U.S. Legislative Outlook
General Tax Reform
 Camp proposal—Revenue.
– Revenue neutral overall.
• Individual provisions and AMT repeal lose approx. $700B over 10 years
(but that includes any benefit of no 35% rate application to domestic mfg.
income).
• Business, international, and excise tax provisions pick up approx. $700B
over 10 years.
– But $170B of revenue pickup is from taxation of deferred income of
CFCs.
(APB 23 amounts)
• Obama and Dems criticize as not revenue neutral for “out years.”
• Would use that revenue gain for infrastructure improvements.
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II. European Developments
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II. Developments in Europe
EU Harmful Competition – Generally
 Article 107 of the Treaty on the Functioning of the European
Union ensures that aid granted by a Member State does not
distort competition and trade within the EU by favoring
certain companies or the production of certain goods.
 General prohibition on “state aid” while recognizing
government intervention sometimes is necessary and can be
considered compatible with EU policy.
 EU Member States required to give prior notification to
European Commission of all new aid measures so that
Commission can investigate whether the aid is compatible
with EU rules.
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II. Developments in Europe
EU Harmful Competition – Generally
 If the EU Commission takes a negative decision where aid
has already been paid out/realized, the Commission
generally requires the Member State to recover the aid (with
interest) from the taxpayer (retroactive up to 10 years).
 The EU has announced that it will use the EU State aid rules
to challenge aggressive tax planning by multinational
companies and that it considers that “state aid” can be
granted to taxpayers through tax rulings as well as through
the beneficial IP tax regimes that exist in certain countries.
 The New EU Commissioner for Competition (responsible for
the state aid cases) who took office in November is expected
to focus her work on “tax evasion” state aid cases.
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II. Developments in Europe
EU State Aid/Harmful Tax Practices
 Transfer pricing is a key focus of the Commission in these
investigations.
 Joaquin Almunia (outgoing VP and Commissioner
Responsible for Competition) has said that state aid comes
into play where multinational enterprises use transfer pricing
tactics to reduce their global tax burden.
 “National authorities must not allow selected companies to
understate their taxable profits by using favorable calculation
methods. It is only fair that subsidies of multinational
companies pay their share of taxes and do not receive
preferential treatment which could amount to hidden
subsidies.”
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II. Developments in Europe
EU State Aid Investigations
 In 2014, the EU has launched formal investigations
into state aid allegedly given to taxpayers in Ireland
(Apple), Luxembourg (Fiat Finance and Amazon)
and the Netherlands (Starbucks) and has also
indicated that it is going to investigate Gibraltar tax
rulings.
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II. Developments in Europe
EU State Aid Investigations
“Maybe in the beginning of the second quarter
of next year, we will have results on at least
some of those open cases [and will] know
much, much more about what actually goes
on”
European Competition Commissioner Margrethe
Vestager, commenting on probes of Apple,
Amazon, Starbucks and Fiat
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II. Developments in Europe
EU State Aid Investigations – Ireland
 In June 2014, the EU started state aid investigations into tax rulings
(i.e., APAs) granted to Apple and on September 30, 2014, the EU
published its redacted June 2014 opening decision explaining why it
believes tax rulings granted to Apple in Ireland constitute illegal state
aid.
 Apple had two non-resident Irish entities (i.e., companies
incorporated in Ireland but managed and controlled outside of Ireland)
with branches in Ireland –one was involved in contract manufacturing
and the other was involved in sales. Both Irish entities obtained tax
rulings from the Irish tax authorities regarding the amount of income
attributable to (and taxable to) the Irish branches.
 The EU challenged the rulings based on transfer pricing. – “appear to
have been reverse engineered” to arrive at a negotiated amount of
income “that does not have an economic basis.”
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II. Developments in Europe
EU State Aid Investigations – Ireland
 Apple could be asked to pay hundreds of millions of dollars
in back taxes plus interest if the EU is successful in its
assertion of illegal state aid.
 EU can take as many as five years to decide the case and
Ireland could challenge any ruling in the European Court of
Justice.
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II. Developments in Europe
EU State Aid Investigations - Luxembourg
 The EU has requested that Luxembourg provide it with all the rulings
granted over the period 2011-2013. Luxembourg has refused to fully
cooperate and only handed over a sample of rulings. The EU filed an
injunction against Luxembourg which is currently being appealed at the
European Court of Justice.
 In June 2014, the EU announced its decision to start formal state aid
investigations into a tax ruling granted by Luxembourg to FF&T and
the redacted opening decision was published (in French) on
September 30, 2014.
– FF&T, a finance company, obtained a 5 year ruling in Luxembourg in 2011.
The ruling appears to grant FF&T an imposition of the normal 28% tax on an
agreed upon spread between its income earned and its expenses of
approximately 2,542M Euros. The EU Commission determined that this was
a negotiated rate that was not based on arm’s length transfer pricing
principles, as required by the OECD.
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II. Developments in Europe
EU State Aid Investigations - Luxembourg
 On October 7, 2014 (following Luxembourg’s release of
several additional rulings in August), the EU announced its
decision to start a formal state aid investigation into
Amazon’s Luxembourg tax ruling.
– Under that ruling Amazon EU Sarl received most of the group’s offshore
profit and then paid out a deductible royalty payment to a Luxembourg
partnership that is not taxable in Luxembourg. The inquiry relates to the
arm’s length nature of the royalty payment.
 The Luxembourg IP regime which currently grants a rate of
5.63% on income from certain IP including patents AND
trademarks is also under scrutiny by the EU. It is likely that
the IP regime will be revised prospectively to apply only to
patents, not to trademarks.
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II. Developments in Europe
EU State Aid Investigations “Luxembourg Leaks” Scandal
 November 5 leak of almost 28,000 documents exposing the details of
preferential advance tax agreements between Luxembourg and more
than 300 taxpayers
 “There probably was a certain amount of tax avoidance in Luxembourg,
as in other EU countries.”
Comments of European Commission President Jean-Claude Juncker,
formerly Prime Minister of Luxembourg
 Pierre Moscovici, Commissioner for Economic and Financial Affairs,
Taxation and Customs, to draft a directive for the automatic exchange
of information on national tax rulings to increase tax transparency in
the wake of the scandal.
 Investigations are province of Competition Commissioner Margrethe
Vestager and Juncker has made clear he will steer clear of them.
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II. Developments in Europe
EU State Aid Investigations –
Luxembourg Position on Rulings
 In mid November the Luxembourg Tax Administration published its
“position on the practice of issuing tax rulings.”
– Key points:
• The European Commission has confirmed that the practice of issuing rulings is not
in conflict with European law, provided that all taxpayers in a similar situation are
treated equally.
• Rulings are not made public, but rather are subject to confidential treatment.
However, rulings issued by the Luxembourg tax authority are not secret and, upon
request, Luxembourg exchanges information on rulings with its partners.
• “The interaction of the tax regimes of multiple countries, within the current
international framework, together with the application of non-double taxation
treaties, can lead to a significant reduction of a company’s tax burden, or even no
taxation at all. This is not acceptable from an ethical point of view.”
• What is currently an administrative practice of issuing rulings “will be anchored in
law.”
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II. Developments in Europe
EU State Aid Investigations –
Luxembourg Position on Rulings
– Key points (continued):
• A commission on rulings will be put in place within the tax administration.
• The tax law will be amended to included an explicit incorporation of the arm’s length
principle and new transfer pricing documentation requirements.
• Luxembourg supports:
– The introduction of provisions in the Parent-Subsidiary Directive which aim to prevent
the double non-taxation of groups of companies arising from hybrid loans.
– Proposal to introduce a general anti-abuse clause into the Parent-Subsidiary
Directive.
• The government has announced that Luxembourg will be among the first countries to
transpose the amended Directive into national law.
• Luxembourg is an active participant in the OECD’s BEPS discussions and has made the
commitment “to fully apply the new regulations that will result from these discussions.”
• Luxembourg is breaking with the tradition of banking secrecy and supports the automatic
exchange of information for tax purposes as a global standard.
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II. Developments in Europe
EU State Aid Investigations –
The Netherlands
 In 2012 and 2013 there were hearings before the UK House of Public
Accounts Committee regarding Starbucks observing that there was a 6%
royalty to Netherlands resulting in years of losses in the UK despite large
UK sales during these years. These hearings may be connected to
“state aid” challenge in same way that PSI hearings against Apple are
likely connected to “state aid” challenge against Apple in Ireland.
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II. Developments in Europe
EU State Aid Investigations –
The Netherlands
 In June, 2014 the EU stated its decision to start a formal state aid
investigation into a tax ruling granted to Starbucks.
 The ruling by the Dutch tax authorities under investigation is a transfer
pricing ruling that addresses the calculation of the taxable basis in The
Netherlands for manufacturing activities of Starbucks Manufacturing
EMEA BV.
 The EU has indicated that in general Dutch rulings are considered to be
in compliance with transfer pricing rules so Starbucks may be an isolated
challenge.
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II. Developments in Europe
EU State Aid Investigations –
The Netherlands
 11/14/2014 Opening Decision: Starbucks.
– APA concluded with Starbucks constitutes state aid.
– Dutch State Secretary of Finance response.
• Confident that investigation will show that the APA does not constitute state aid
 11/16/2014 Netherlands Court of Audit Tax Evasion Report:
– Dutch tax rules for multinational enterprises (MNEs) are comparable with rules in
other European countries – still favorable for MNEs, but not exceptional.
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II. Developments in Europe
Harmful Preferential Regimes
“Patent Box”
 Luxembourg – 80% exemption for net income from qualifying IP –
5.75% ETR rate.
 Belgium – 80% exemption for certain patent royalties – 6.8% ETR.
 Netherlands – self-developed patents/software – 5% tax rate.
 Spain – 50% exemption for gross income from licensing of internally
created patents, designs, knowhow and similar assets.
 Ireland – 12.5% rate on trading profits.
 UK – 10% rate on royalties, patent income from product sales,
infringement damages, gains on sale of patents.
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II. Developments in Europe
EU State Aid Investigations – U.K.
 UK Patent Box Violates EU Code of Conduct – October 16, 2013.
– “The European Commission confirms that the Patent Box offers a significantly
lower level of tax as compared to the general United Kingdom corporate tax
level and finds that it is harmful,” said European Commission spokeswoman
Emer Traynor. “Essentially the Patent Box enables companies to protect an
important part of their tax base from the standard corporate 23 percent tax rate
and instead benefit from a reduced corporate tax rate of 10 percent.”
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II. Developments in Europe
EU State Aid Investigations – U.K.
 October 16, 2013 - UK Patent Box Violates EU Code of Conduct.
– Economic substance: While the patent box regime says that patents bought from
abroad must be further improved or actively managed in the U.K. in order to be
eligible, the criteria are very vague and open the way for multiple interpretations
and manipulation by companies.
– International principles for establishing the tax base: The patent box short-cuts
the OECD principles for calculating the tax base with complex and not very
transparent formulas that can have different results depending on the company or
sector.
 March 2014 - The European Commission has asked the UK government
to provide it with information about the Patent Box as part of its
assessment of intellectual property (IP) tax regimes in the EU.
 October 2014 – UK Treasury states that the policy “categorically . . .
does not create an opportunity for businesses to reduce their taxes
without increasing their value to the UK economy.”
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II. Developments in Europe
EU State Aid Investigations – Spain
 Note 11/7/14 EU General Court ruling in favor of Banco
Santander SA.
– Spanish tax breaks for companies investing in overseas firms not
shown to constitute illegal state aid.
– Spain was ordered in 2009 and 2011 by the EU to abolish the tax
break and recoup parts of the aid. The court annulled those
decisions.
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II. Developments in Europe
EU Harmful Competition – Take-aways
 Application of State Aid to individual advanced tax rulings is
radical expansion of “state aid” doctrine.
 EU using “state aid” to go after structures that are
considered aggressive and that result in income not being
taxed anywhere.
– Apple: Dutch sandwich structure results in substantial amount of IP
related income being sheltered from tax in Bermuda.
– Amazon: Payment of royalty by Luxembourg Sarl to Luxembourg
reverse hybrid (partnership treated as corporation for US tax
purposes) results in large amount of income being taxed nowhere.
Almuna said “we observe that through this mechanism most
European profits of Amazon are recorded in Luxembourg but are not
taxed there.”
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II. Developments in Europe
EU Harmful Competition – Take-aways
 EU commission needs to look like it is trying to curtail these
aggressive structures (like Obama’s statements against
inversions).
 Taxpayers should make sure their transfer pricing rulings are
brought up to date to comply with transfer pricing
documentation requirements.
 Also need to be aware of possible changes to patent box
regimes in certain countries, in particular Luxembourg.
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II. Developments in Europe
EU Directives
 03/2014 -- Amended EU Savings Directive broadens the
scope of the directive to include income that is equivalent to
interest and to prevent circumvention of the directive by the
use of intermediaries.
 07/2014 -- Amended Parent/Subsidiary Directive aimed at
hybrids: payments that are tax-deductible for the distributing
subsidiary will be taxable in the parent jurisdiction on receipt.
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II. Developments in Europe
Switzerland – Potential Corporate
Tax Reform
 While Switzerland is not a member of the EU it does have a tax
treaty with the EU and through that Treaty, the EU has put
pressure on Switzerland to changes its laws to be compliant with
EU principles.
 On September 22, 2014, the Swiss Federal Counsel released a
draft proposal of the new Swiss corporate tax system.
 The new rules would effectively do away with Swiss tax rulings
such as the auxiliary ruling (which reduces and often eliminates
cantonal tax) and the special federal tax treatment of Swiss
principal companies and Swiss finance branches.
 The rulings currently in effect would cease to be effective 2 years
after the new rules go into force.
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II. Developments in Europe
Switzerland – Potential Corporate
Tax Reform
 In order to continue to be a tax advantaged country,
Switzerland would reduce its federal and cantonal corporate
tax rate as well as provide other advantages (patent box,
notional interest deduction) through its tax laws and not
through negotiated rulings.
 Swiss tax advisors have indicated that the objective is to
grant taxpayers the benefits that they currently get through
their rulings for at least 7 years after the new rules go into
effect.
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II. Developments in Europe
Ireland – Tax Reforms
 10/2013: Ireland amends corporate tax residence rules. The changes
ensure that a company incorporated in Ireland will be tax-resident in
Ireland if its central management and control is located in a jurisdiction
that assesses tax residence by reference only to the jurisdiction of
incorporation.
 10/2014: Further proposed amendments to corporate tax residence
rules intended to prevent the Double Irish structure (Apple). The change
ensures that a company incorporated in Ireland will be tax-resident in
Ireland, unless it is non-resident by virtue of a treaty tiebreaker provision.
– Change is effective 01/01/2015; existing structures grandfathered until
01/01/2021, unless there is an earlier change in ownership coupled with a major
change in the business of the company.
• Shelf companies incorporated prior to 2015 cannot be used to circumvent the new
rules.
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II. Developments in Europe
Ireland
 Ireland is similar to Switzerland, in that they have announced rules to
curb rulings and to eliminate the double-Irish-Dutch-sandwich structure.
 Of course, the announced rules have long transition/grandfathering
periods.
 Ireland’s BEPS Consultation Report states that “…the BEPS project as a
whole, or via any of its individual actions, is not focused on Ireland’s, or
indeed any other jurisdiction’s, tax rate. The Irish 12.5% rate will not
change and is not under discussion as part of the BEPS project.”
 The Report also states that: “In the area of transfer pricing, the actions
which focus on value creation (actions 8, 9 & 10) are likely to result in
changes internationally. As is mentioned above, it is clear that certain
structures, with little substance, are in their winter and as such there are
opportunities for Ireland to become a location of choice for groups who
wish to bring their intangible assets onshore together with the relevant
substance.”
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II. Developments in Europe
United Kingdom
 11/2012 and 02/2013: Hearings before the UK House of
Commons Public Accounts Committee.
– Google CEO - $4B UK sales, UK taxable loss, Irish sales unit.
– Starbucks Global CFO - $3B UK sales since 1988, total CT of £9M,
“13 years of losses”; 6% royalty to Netherlands + Swiss sales of
coffee.
– Amazon Director of Public Policy - $5B UK sales, no UK tax; Lux
SalesCo.
 “We are not accusing you of being illegal, we are
accusing you of being immoral.”
 Similar to U.S. PSI investigations.
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II. Developments in Europe
United Kingdom
 03/2014: UK government publishes position paper on the BEPS project.
 04/2014: UK confirms its intention to introduce a public register of
beneficial ownership of companies.
 07/2014: UK government launches consultation on the implementation
of the OECD Common Reporting Standard on financial account
information.
 08/2014: UK government launches consultation on the introduction of
new strict liability criminal offense for failing to declare offshore income
and gains.
 09/2014: UK commits to implementing the new OECD BEPS country-bycountry reporting template.
 10/2014: UK government announces forthcoming consultation on the
implementation of rules to prevent hybrid mismatches.
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Philip D. Morrison
Philip D. Morrison (U.S. & International Tax, Washington) Philip is a counsel in the law firm of McDermott Will &
Emery LLP and is based in the Firm's Washington, D.C., office. He focuses his practice on international tax, including
inbound and outbound planning, treaty issues, transfer pricing and controversy work.
Phil has over 30 years of experience as a tax lawyer. He recently retired as a principal at Deloitte Tax LLP where he led
Deloitte’s U.S. international tax quality control effort. In that position he provided tax planning and compliance advice to
international tax practitioners, directed training on international tax issues and acted as a liaison with the federal
government.
From 1989 to 1992, Phil served as the U.S. Department of the Treasury’s international tax counsel, the U.S. government’s
chief legal advisor on international tax matters (including international tax legislation and regulations), chief negotiator of
tax treaties and director of the Office of International Tax Counsel. He also represented the U.S. at the Organisation for
Economic Co-operation and Development and at other multilateral tax fora. Earlier in his career, he served as counsel to
the U.S. Senate Finance Committee.
Phil is a member of the Committee on U.S. Activities of Foreigners and Tax Treaties of the American Bar Association’s
Tax Section, The Tax Council, the tax committee of the National Foreign Trade Council, the International Fiscal
Association and a Washington-based international tax study group. He has regularly been selected as a leading tax
advisor and a leading transfer pricing advisor for the International Tax Review and in Legal Media Group’s Expert Guides.
He has spoken and published widely on various international tax subjects and is a regular contributor to the Tax
Management International Journal’s “Leading Practitioner Commentary.”
Phil received his J.D. from Harvard Law School (with honors) and his A.B. (with high honors) from Princeton University.
[email protected]
www.mwe.com
Tel: +1 202 756 8389
63
Kristen E. Hazel
Kristen Hazel (U.S. & International Tax, Chicago) Kristen is a partner and focuses her practice on U.S. and
international aspects of federal tax matters, including global restructuring and effective tax rate planning
strategies, international acquisitions and joint ventures, captive insurance companies, and structuring and
implementing domestic and international partnership transactions. Kristen also represents clients before the
IRS in a broad range of tax controversy matters.
Kristen has extensive experience in the field of legal ethics and professional responsibility. She is a member of
the Firm’s Professional Responsibility Committee and the New Business Committee.
Kristen is a member of the bar of the State of Illinois. She is a member of the American Bar Association and the
Chicago Bar Association. She has served on the Illinois State Bar Association’s Committee on Legal
Education, Admission and Competence. In addition, Kristen chaired the Chicago Bar Association Federal Tax
Committee’s International Tax Subcommittee.
Kristen has authored articles on various topics including captive insurance companies, international partnership
transactions, working with limited liability companies, working with the intangibles amortization rules and
partnership exit strategies. Kristen is a frequent speaker on international tax topics for various professional
organizations such as the Tax Executive Institute, the Chicago Tax Club and Bloomberg BNA. She is an
adjunct professor at the University of Illinois College of Law, where she teaches International Taxation of
Business Transactions, Chicago-Kent College of Law, where she teaches Taxation of International
Transactions, and The John Marshall Law School, where she teaches Taxation of International Transactions.
She served a two-year clerkship with Justice Daniel J. McNamara of the Illinois Appellate Court.
Kristen received her J.D. from Loyola University of Chicago School of Law in 1988 and her B.A. with distinction
from Wayne State University in 1985.
[email protected]
www.mwe.com
Tel: +1 312 984 3696
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The information provided herein is solely for
informational purposes: it is not intended as and
does not constitute legal advice. It should not be
relied upon or used as a substitute for consultation
with legal, accounting, tax, and/or other
professional advisors.
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