Transcript BEPS/EU State Aid in practice

Recent developments on
BEPS
7 April 2015
Robert Jan van Lie Peters – tax adviser
Base Erosion and Profit Shifting Project (BEPS) Updates
•
•
Updates from Europe
• EU-level
• UK
• Netherlands
• Luxemburg
Updates from Asia
• China
• India
• Hong Kong
• Singapore
Part of OECD and fully
endorsing BEPS initiatives
Non-OECD Members partially
endorsing BEPS initiatives,
and ‘cherry-picking’
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EU BEPS related
developments
Tax planning is allowed under EU Case Law
ECJ in the Halifax Case on a VAT matter:
[…] taxpayers are in principle free to structure their activitities in a way that limits their
exposure to taxes […]
ECJ in Cadbury Schweppes Case:
[…]the fact that a company has been established in a Member State for the purpose
of benefiting from more favourable legislation does not in itself suffice to constitute
abuse […].
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Introduction
General trend: “Fair Share” approach is gaining momentum in EU
Apple
Amazon
Starbucks
Fiat
“Lux Leaks”
EU State
Aid
Fair share
Media and
politicians
Revenue
raising from
MNE’s
BEPS
reports
Competition
for
investments
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Introduction
Blurred line between Tax Evasion and Tax Avoidance
Tax Avoidance
•
•
•
•
Legal
Freedom versus morality
International planning
opportunities
(harmful) tax competition
Tax Evasion
•
•
•
Abusive/Illegal: Tax Fraud
Criminal offence
Mounting international exchange
of information and coordination
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BEPS overview
BEPS - 3 main themes to fight “inappropriate” tax planning
Transparency
AntiAbuse
Transfer
pricing
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EU Key focus on these main themes
- Anti-abuse and Transparency are key focus points of the EU Commission in
recent actions
- Transfer Pricing principles are used to test tax rulings and APA’s from an EU law
perspective (e.g. recent State Aid cases).
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Important most recent EU Developments (1)
• July 2014: Amendment to Parent – Subsidiary Directive, inclusion of a GAAR.
• 2014: domestic ruling practices, IP regimes and specific tax payers under State Aid scrutiny
• March 2015: EU Commission proposal: mandatory exchange of information on tax rulings
and APAs
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Amendment to Parent – Subsidiary Directive, inclusion of a GAAR.
- Purpose EU PSD?  Introduced to avoid economic double taxation on dividend
distributions between EU member states.
- Target of the GAAR = “It is necessary to ensure that this Directive is not abused
by taxpayers who fall within the scope of its application”
- EU Member States should refrain from granting benefits under the EU PSD, if:
• arrangements are not ‘genuine’ and
• have been put in place to obtain a tax advantage that is not reflecting
economic reality.
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EU GAAR provision
• GAAR adopted for EU PSD:
• ‘Minimal’ rule
• Subjective and objective elements
• No clear guidance on terms used in the GAAR
• To be implemented by EU jurisdictions 31 December 2015, at the latest
• Similar amendments expected to be included in EU Interest & Royalty Directive
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Important most recent EU Developments (2)
• July 2014: Amendment to Parent – Subsidiary Directive, inclusion of a GAAR.
• During 2014: domestic ruling practices, IP regimes and specific tax payers under State Aid
scrutiny
• March 2015: EU Commission proposal: mandatory exchange of information on tax rulings
and APAs
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EU State aid
EU State aid: the concept
Advantage
State Aid,
to be
recovered
Selective
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EU State aid
State Aid: framework
•
Indication of EU State Aid:
•
•
tax treatment which results in a lower amount of tax than in a comparable legal + factual
situation
Selectivity most important: is there a favor of certain undertakings in the member state and is
there an exception to the application of the tax system
•
Arm’s length principle and TP documentation gained increased importance!
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EU State aid
Recent EU State Aid scrutiny:
Netherlands
Belgium
Luxembourg
Ireland
Gibraltar
• Starbucks, formal investigation
• Excess profit ruling practice under formal investigation
• Fiat Finance & Trade, formal investigation
• Amazon, formal investigation
• IP regime/ruling practice, information injunction
• Apple, formal investigation
• Ruling practice, formal investigation
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EU State aid
EU State Aid risk
Essential checks
Was there an APA / Advance Tax Ruling concluded?
yes / no
Does the APA have a duration of more than 5 years, or no specific expiry date?
yes / no
Is the applied transfer pricing substantiated by TP documentation?
yes / no
To what extent has the qualification of the tested party been substantiated (i.e. is there
a wrong characterization of the functionality)?
yes / no
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Important most recent EU Developments (3)
• July 2014: Amendment to Parent – Subsidiary Directive, inclusion of a GAAR.
• During 2014: domestic ruling practices, IP regimes and specific tax payers under State Aid
scrutiny
• March 2015: EU Commission proposal: mandatory exchange of information on tax rulings
and APAs
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Proposal: Exchange of information on tax rulings and APAs
- Proposal status  announced by EU Commission’s President Juncker, as reaction
to “Luxleaks”.
- In force: 1 January 2016, applicable to rulings issued as of 1 January 2006 and
still in force
- Purpose: Increase of transparency = Key element of the BEPS initiative.
- Very broad scope: “any advance cross-border ruling”
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Proposal: Exchange of information on tax rulings and APAs
- Exchange to a database, accessible for all EU Member States’ authorities and
the EU Commission;
- Content of information:
- name company;
- activities of the company;
- reasoning for the ruling;
- criteria used for the transfer price; and
- countries involved.
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BEPS
Country specific
developments
UK, NL, LUX
UK Country specific developments
2 major domestic BEPS related developments to be addressed for the UK:
- Introduction of a General Anti-Abuse Rule (GAAR) in domestic legislation.
- New diverted profits tax (DPT) at 25% from April 2015.
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Introduction of domestic GAAR in the UK
- UK tax authorities are enabled to counter perceived abusive arrangements by
invoking the GAAR, rather than seeking resolution through the courts. 
- additional weapon for HMRC to counter abusive tax avoidance.
- Broad scope: “The main purpose, or one of the main purposes” to obtain tax
advantage = “one which reduces or avoids a tax liability through any means”.
- Protection for tax payer:
- The burden of proof will be with HMRC;
- broad carve-out from the GAAR for existing practice (‘grandfathering rule’);
- Double reason test and Advisory Panel.
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Diverted Profits tax (DPT)
- DPT proposals represent a ‘new approach’ to a problem the OECD has been
dealing with (in BEPS Action 7 and 8-10).
- Targets:
- Companies having a business trade in the UK and avoid PE status
- Effective tax mismatch outcome, in the relation with a UK resident whereby
an ‘insufficient economic substance’ condition is met.
-
Self-assessment
Rate 25%
Treaty override?
Breach EU Freedom of Establishment, or Capital?
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The Netherlands Country specific developments
- Active approach of treaty partner from ‘developing countries’ to include LOB and
anti-abuse rules in the treaties with these countries.
- June 2014: New Decree on substance requirements for holding companies
- Automatic exchange of information to Double tax treaty partners for intercompany
financing and licensing companies that do not meet specific substance criteria
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Active approach of treaty partners from ‘developing countries’
- Active approach of 23 developing states in order to amend the tax treaty.
- ‘assistance’ in protecting their tax bases from being eroded.
- New policy in international taxation, to “help” countries that have less developed
and ‘equipped’ tax authorities in there.
- How? LOB provisions are included in Dividend, Interest and Royalty article 
Only designated investors in these countries can apply the reduced
withholding tax rates under the treaty.
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The Netherlands Country specific developments
- Active approach of treaty partner from ‘developing countries’ to include LOB and
anti-abuse rules in the treaties with these countries.
- June 2014: New Decree on substance requirements for holding companies
- Automatic exchange of information to Double tax treaty partners for
intercompany financing and licensing companies that do not meet specific
substance criteria
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New Decree on substance requirements for holding companies
- Scope  Minimum substance criteria for (intermediate) holding companies in the
Netherlands that want to obtain tax rulings.
- Almost similar criteria that already applied as of 2004 to Dutch intercompany
financing or licensing companies, in APA context.
- If no ruling is desired to be obtained, deviation is possible. Decree gives practical
guidance:
- However, not meeting the criteria could jeopardize the status of resident under
a tax treaty.
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Automatic exchange of information
•
Codification of existing Dutch minimum substance requirements for DVL
(dienstverleningslichaam), regulations are effective as per 1 January 2014
•
Updated decrees on APA’s, ATR’s and relating substance requirements – effective as per 13
June 2014
•
Exchange of information
• DVLs that do not meet substance requirements but apply tax treaties and/or EU I&R
Directive for financing and licensing income
• APAs for stand alone structures
• Assist source country to make own analysis for application tax treaty and EU I&R
Directive
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Dutch minimum substance requirements
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
At least 50% Dutch resident board members (individuals or companies)
Board members should be sufficiently skilled to perform relevant tasks
Avail of qualified employees for proper implementation of transactions
Board decisions must be taken in the Netherlands
Main bank accounts must be maintained in the Netherlands
Bookkeeping must take place in the Netherlands
The registered address must be in the Netherlands.
To its knowledge, not considered tax resident elsewhere
Real risk as meant in article 8c sub 2 CITA
Equity must be adequate in relation to the functions performed, taking into account the
assets used and the risks assumed
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Luxemburg Country specific developments – New ruling policy
- 1 January 2015: Luxembourg ruling practice has a formal legal framework.
- Ruling Committee installed;
- Ruling request will cost a non-refundable amount of EUR 3,000 - EUR10,000
- Motivated by the newly proposed EU transparency proposals, moreover:
- No more rulings on net wealth tax planning;
- No new rulings on goodwill or informal capital contributions, foreign low
substance branches, and rulings on the IP regime (without real substance);
- general reluctance at rulings on hybrid financing an hybrid structures.
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BEPS
Country specific
developments
China,
India, HK, Singapore.
People’s Republic of China - Country specific developments
- Active involvement
- China does not necessarily adopt the OECD / BEPS deliverables:
- No LOB is included in its recent tax treaties (‘main purpose test’ is )
- TP approach deviates from the OECD’s TP related reports
 strong focus on location savings and local market conditions as value
driver
- FATCA and reversed exchange of information with US.
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People’s Republic of China - Country specific developments
- China combats cross-border tax evasions mostly by domestic anti-abuse
measures.
- GAARs that have been issued and guidance that has been provided in 2014 to
which extent these GAARs apply;
- Strong focus on transfer pricing and anti-treaty shopping;
- Recently, Notice no. 7 was introduced to replace Circular 698, which enables
China to tax some indirect share transfers with Chinese underlying assets in
situations which are considered to be abusive.
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India- Country specific developments
- Inclusion of LOB Clauses (Action 6) in new treaties
- Endorsement of Country-by-country reporting with regard to TP (Action 13)
- Strong focus on Transfer Pricing and Value creation in India (Intangibles/R&D)
- Budget 2015 aims to attract investors; GAAR implementation postponed until 2017
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Singapore developments
- Singapore is neither an OECD nor G20 member, but interested in the
developments of the BEPS initiatives.
- Seen as a tax friendly jurisdiction, but supports the message that taxes should be
paid in the countries were there are substantive economic activities
- Active in the field of transfer pricing documentation, mostly to defend its own tax
base and build real business substance in Singapore.
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Hong Kong developments
- Hong Kong is monitoring the developments of the BEPS initiatives. No active
involvement
- Seen as a tax friendly jurisdiction, with a typical ‘territorial system’, which may be
risky in the sense of benefitting from tax treaties, caused by BEPS and the
domestic measures taken by China.
- Functionalities gain momentum (“TP Light”) vs. Offshore regime
- TIEAs and FATCA
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Future outlook on BEPS for MNEs
- Tax burden may increase.
- Insecure playing field, if no (global) consensus is reached between countries;
- More MAPs will be needed, if countries on global scale will cherry-pick the
deliverables of the BEPS initiative (cost inefficient and time consuming).
- Increase of compliance burden, caused by:
- TP documentation requirements,
- Transparency Measures, such as FATCA and TIEAs (also with tax havens!)
- Need for multilateral APAs may increase to avoid tax risks
Message: careful and robust tax planning with increased attention for substance and
focus on transfer pricing!
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