Global Trends in Tax Anti‐Abuse Rules and Impact on Planning
November 19, 2014
Panelists: Kristen Hazel, McDermott, Will & Emery LLP, Partner
Sandra McGill, McDermott, Will & Emery LLP, Partner
Douglas McHoney, PwC, Partner
Gary Wilcox, PwC, Partner
Agenda
Common Planning Structures
U.S. Tax Policy Developments
U.S. Anti-Abuse Rules
Non-U.S. Tax Policy Developments
– OECD: BEPS
– Harmful Competition or “State Aid” Challenges
• Non U.S. Anti-Abuse Rules Impacting Tax Planning
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•
•
•
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November 19, 2014
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Common Planning Structures
U.S.
Bravo U.S.
3
Product X
U.S.
Customer
$$
Product X
2
Foreign
100%
Bravo
Bermuda
$$
100%
License
Bravo
Switzerland
Royalty
1
2
Product X
100%
Commission
Bravo
Netherlands
4
Sales
Support
Cost + 5%
$$
Foreign
Customer
100%
100%
1
Product X
Contract
Manufacturer
Commission
on Agents
Limited Risk
Distributor CFC
Product X 2
3
$$
$$
Product
X
Foreign
Customer
Source: WAYS AND MEANS HEARING ON POSSIBLE INCOME SHIFTING AND TRANSFER PRICING - Joint Committee on Taxation - July 22, 2010
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Common Planning Structures
Parent (U.S.)
CFC1
(Luxembourg)
Voting Common &
PECs
Voting Common &
PECs
CFC2
(Luxembourg)
Non‐U.S. DEs
Source: JCT Report on the Tax Treatment of Business Debt (July 2011)
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November 19, 2014
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May 9, 2014 WSJ
“While they may not be breaking U.S. laws, many of these companies are navigating a loophole in America's broken and dysfunctional tax code. And while their shareholders may secure a temporary win, workers, taxpayers and this country all lose. America's tax base erodes at a cost of hundreds of millions of dollars in revenue, increasing the burden on other companies and individuals. America also loses good jobs, talent, investment, and the ability to compete on a global stage.
Legal or not, this loophole must be plugged. Current law requires that U.S. companies reincorporating overseas must ensure that at least 20% of their stock is owned by their new, foreign partner. As chairman of the Senate Finance Committee, I am committed to raising this floor to at least 50% for all inversions taking place from May 8, 2014, on. I don't approach retroactivity in legislation lightly, but corporations must understand that they won't profit from abandoning the U.S.
It would be easy to point a finger at these runaway corporations alone and simply question their morality or patriotism, but that would be ignoring our own failure to bring the tax code into the 21st century. An uncompetitive tax code strains our economy, and we should not be surprised when corporations fight to get out from under antiquated tax rules.”
‐ Senator Wyden
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November 19, 2014
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Executive office of the President
July 28, 2014: “The Administration strongly supports Senate passage of S. 2569, a bill that would encourage companies to invest in the United States and bring jobs back while preventing companies from receiving tax breaks for shipping jobs overseas.
The Nation’s tax code does too little to encourage job creation and investment in the United States while allowing firms to benefit from incentives to locate production and jobs overseas. This bill can help attract and keep jobs in the United States by providing a 20 percent general business credit for eligible expenditures associated with bringing jobs back, which is paid for by preventing firms from receiving tax breaks for deducting expenses associated with outsourcing.
. . . .
The Administration looks forward to working with the Congress to encourage companies to invest in America and bring jobs home.”
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November 19, 2014
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Comments on the Senate Floor
“The company that Charles Walgreen started is reportedly considering a renunciation of its American citizenship and a move to Switzerland, just to avoid paying its fair share of taxes. Re‐established as a foreign corporation, Walgreen’s would be required to pay a smaller share of taxes. This practice, what some call “inversion,” is a tax trick – a loophole.”
“When these companies reincorporate overseas, it is, simply put, unfair. It’s unfair to the American taxpayer, to the American government, and to the many companies who refuse to engage in this deceptive practice.”
July 23, 2014 Comments on the Senate Floor: Reid Remarks on Ending Corporate Citizenship Scams
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In the Press
“Burger King’s decision to abandon the United States means consumers
should turn to Wendy’s Old Fashioned Hamburgers or White Castle
sliders . . .”
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U.S. Response: Code, Regulations and
Common Law
• Transaction
–
–
–
–
Section 7701(o)
Substance over Form
Step Transaction
Sham Transaction
• Preparer
– Tax Return Preparer Penalties
• Taxpayer
– Penalties • Civil
• Criminal
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U.S. Response: Statement by the President
America’s businesses have created 10 million jobs over the last
54 months – the longest stretch of uninterrupted private sector
job growth in our nation’s history – and we should do everything
we can as a country to build on that progress. That’s why I’ve
called on Congress to lower our corporate tax rate, close
wasteful loopholes, and simplify the tax code for everyone.
While there’s no substitute for Congressional action, my
Administration will act wherever we can to protect the progress
the American people have worked so hard to bring about. As
part of this effort, Secretary Lew briefed me today on the first
steps the Treasury Department is taking to discourage
companies from taking advantage of corporate inversions –
moving their tax residence overseas on paper to avoid paying
their fair share in taxes here at home.
We’ve recently seen a few large corporations announce plans
to exploit this loophole, undercutting businesses that act
responsibly and leaving the middle class to pay the bill, and I’m
glad that Secretary Lew is exploring additional actions to help
reverse this trend.
I believe America does better when hard work pays off,
responsibility is rewarded, and everyone plays by the same set
of rules. In the weeks and months ahead we should do even
more to bring fairness to our tax code, help our businesses
create more American jobs, and expand opportunity for all.
Tax Executive Institute
November 19, 2014
Shareholders
Non-U.S.
TopCo
3
1
License
U.S.
Parent
3
Royalty
2
Loan Cash $$
CFCs
4
Acquired
Non-U.S.
OpCOs
Dilute ownership/transfer
business
*Maximum amount of U.S. Parent debt determined based on debt/equity
considerations, arm’s length interest rates, and section 163(j). Section 163(j)
generally limits interest deductions to 50% of adjusted taxable income (taxable
income, grossed up for depreciation deduction, interest expense and other items)
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U.S. Response: Treasury Action
Shareholders
• Notice 2014‐52
– Tightening of merger
inversion rules
– Post‐inversion CFC cash access / decontrol transactions restricted
Non-U.S.
TopCo
3
1
License
U.S.
Parent
3
Royalty
2
Loan Cash $$
CFCs
4
Acquired
Non-U.S.
OpCOs
Dilute ownership/transfer
business
*Maximum amount of U.S. Parent debt determined based on debt/equity
considerations, arm’s length interest rates, and section 163(j). Section 163(j)
generally limits interest deductions to 50% of adjusted taxable income (taxable
income, grossed up for depreciation deduction, interest expense and other
items).
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November 19, 2014
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U.S. Response: Treasury Action
• Notice 2014‐58
– Provides guidance with respect to the contours of a “transaction”
• Aggregation approach
– Clarifies “similar rule of law”
• Rule or doctrine that applies the same factors and analysis as Section 7701(o)
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November 19, 2014
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U.S. Response: PSI
• Senate Permanent Subcommittee on Investigations (“PSI”), led by Sen. Levin
– FIN 48, uncertain tax positions
– Tax haven subsidiaries
– Repatriation
– IP migration / income shifting
– September 2012 hearing
– Supply chain planning
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U.S. Anti-Abuse Rules
• Economic Substance
• Section 269
• Other Regulatory Anti-Abuse Rules
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Codification of economic substance
(“COES”)
Overview
• The economic substance doctrine (“ESD”) is a judicially‐created doctrine that can deny the tax benefits associated with a transaction challenged by the IRS if a court determines that the claimed tax benefits were unintended by Congress and the transaction serves no economic purpose other than tax savings
• IRC §7701 (o) codified the economic substance doctrine
• Effective for transactions entered into after March 30, 2010
• IRC §6662(b)(6) imposes a 40% strict liability penalty for transactions that fail to meet the codified economic substance doctrine (20% if “adequately disclosed”)
• No exceptions (including the reasonable cause and good faith exception ‐ §6664(c)(1)) to the penalty are available
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Codification of economic substance
(“COES”)
Overview (continued)
• Although described as a “codification”, section 7701(o) is more aptly described as a clarification of how ESD is to be applied when a court determines that the doctrine is relevant
• Relevance is the key question, but the statute only says that relevance is determined as if the statute had never been enacted
• If a court determines that the ESD is relevant, then the transaction qualifies only if:
1) the transaction changes in a meaningful way the taxpayer’s economic position and 2) the taxpayer had a substantial non‐tax avoidance purpose for entering into the transaction
• If taxpayer relies on profit potential for satisfying either (1) or (2), present value of pre‐tax profit must be substantial in relation to present value of reasonably expected tax benefits Tax Executive Institute
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Advisors must determine if transaction has
risk of section 7701(o) strict liability penalty
•
•
•
“Relevancy” is based on case law both before and after March 30, 2010. You have to continuously consider the evolving case law. Notice 2010‐62
You must determine if transaction is similar to cases or revenue rulings where 1) Taxpayer won and ESD either rejected, found not to exist, or not raised (e.g., UPS, Dover, Granite Trust, Countryside, Shell, NAGP, PepsiCo), or is based on one of JCT’s long‐
standing exceptions , or
2) Taxpayer lost on basis of ESD (e.g., Coltec, Heinz, Chemtech, Bank of New York)
It is not clear when ESD is relevant or not relevant where ESD was asserted by gov’t, but was not basis for holding, or was alternative holding (e.g., Schering Plough/Merck, Pritired, Hewlett‐Packard)
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Joint Committee Report (JCT Report) (JCX18-10, March 21, 2010)
•
The provision is not intended to alter the tax treatment of certain basic business transactions that, under long‐standing judicial and administrative practice are respected, merely because the choice between meaningful economic alternatives is largely or entirely based on comparative tax advantages, including: 1)
2)
3)
4)
Capitalizing a business enterprise with debt or equity; Using a foreign corporation or a domestic corporation to make a foreign investment;
Entering into a corporate reorganization under subchapter C; and Using a related‐party entity in a transaction, provided that the arm's length standard of section 482 is satisfied.
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IRS will continue trying to bifurcate
transactions for ESD purposes
•
•
•
Tax Court in Bank of New York (TC 2013) bifurcated the transaction into two components – a structure designed to monetize FTCs and a loan – for ESD purposes, even though the structure was integral to achieving a business purpose to obtain low‐cost financing
Notice 2014‐58: IRS confirmed its litigating position that the economic substance doctrine may apply “to individual steps in the transaction where those steps are tax‐motivated and unnecessary to accomplish the non‐tax objective”
IRS’s argued for a “disaggregation” approach in several cases involving more traditional tax planning in the corporate and partnership context, but the courts looked at the transaction as a whole and held for the taxpayer (e.g., Countryside Limited Partnership v. Comm’r (TCM 2008); Shell Petroleum Inc. v. United States (S.D. Tex. 2008)). Tax Executive Institute
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IRS Field Directive/Chief Counsel Notice
•
•
On July 15, 2011, the LB&I Commissioner issued a directive on codification of ESD, setting forth four steps for examiners to follow in considering whether ESD should be applied (LB&I‐
4‐0711‐015).
– Step 1: analyze 18 nonexclusive factors that tend to show that application of ESD is likely not appropriate, as well as 4 circumstances (matching those from the JCT Report)
– Step 2: analyze 17 nonexclusive factors that tend to show that application of ESD may be appropriate
– Step 3: examiner should make 7 inquiries if, after considering steps 1 and 2, the examiner believes that application of ESD may be appropriate
– Step 4: process for seeking DFO approval, including taxpayer’s opportunity to explain its position. Further approval from manager and local counsel needed if examiner wants to bifurcate a transaction by applying ESD separately to one or more steps
Chief Counsel Notice 2012‐008 (April 3, 2012): CC attorneys are to follow similar procedures to those in LB&I directive, under either section 7701(o) or common law
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Cases decided on other judicial doctrines are
not subject to strict liability penalty
•
•
•
•
Section 7701(o) applies the 20% strict liability penalty to transactions that violate either ESD or “any similar rule of law”
In Notice 2014‐58, the IRS confirmed that the term “similar rule of law” may include the “sham transaction doctrine” does not include other judicial doctrines such as the substance over form or step transaction doctrines
Courts often look for ways to decide case on grounds other than ESD, e.g., Historic Boardwalk, Hewlett‐Packard, but not always, e.g., Bank of New York
IRS occasionally challenges traditional corporate tax planning on ESD grounds, seemingly in violation of its LB&I directive and Chief Counsel Notice
 For example, IRS and PSI have claimed that a 1999 restructuring – going from Caterpillar buying repair/replacement parts and selling them to Swiss sub for resale abroad, to Swiss sub buying the parts directly from unrelated suppliers in US and selling them abroad – violated the economic substance doctrine. They allege that the restructuring was done solely for tax purposes, and that “nothing changed.” Taxpayer asserts the issue is, at best, a §482 or §367(d) issue
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November 19, 2014
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Cases decided on other judicial doctrines are
not subject to strict liability penalty (cont’d)
Substance over form/step transaction cases – IRS argued lack of economic substance, but TP loses on other basis
• Barnes (TCM 2013) (repatriation strategy recharacterized as a direct dividend from CFC to US group)
• John Hancock (TC 2013)(LILOs characterized as financings; SILOs characterized as purchase of future interest in property)
• Historic Boardwalk (3d Cir. 2012) (partner recharacterized as creditor, causing loss of historic tax credits)
• Hewlett‐Packard (TCM 2012) ((arrangement with foreign bank structured to generate foreign tax credit, recharacterized as loan)
• Schering Plough/Merck (3d Cir. 2009) (sale of one leg of swap to CFC recharacterized as loan from CFC to US group)
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November 19, 2014
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Cases decided on other judicial doctrines are
not subject to strict liability penalty (cont’d)
Substance over form/step transaction cases ‐ IRS did not argue lack of economic substance ‐ TP wins
• NAGP (TCM 2012) (IRS litigated as debt‐equity case)
• PepsiCo (TCM 2012) (IRS litigated as debt‐equity case)
Compare pre‐section 7701(o) cases in which IRS argued lack of economic substance ‐ TP wins
• Shell Petroleum (S.D. Tex. 2008) (transfer of high basis, low value properties to Newco, followed by sale of stock at loss, giving rise to double deductions)
• Countryside Limited Partnership (TCM 2008)(partnership’s purchase of nonmarketable notes to distribute to redeemed partners, in order to cause outside basis step‐down and inside basis step‐up)
• UPS (11th Cir. 2001) (shifting business to offshore insurance company followed by spinoff)
• Northern Indiana (7th Cir. 1997) (back‐to‐back loans designed to avoid US withholding tax)
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November 19, 2014
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Cases decided on other judicial doctrines are
not subject to strict liability penalty (cont’d)
Compare pre‐section 7701(o) cases in which IRS argued lack of economic substance ‐ TP loses on basis of ESD
• Chemtech (5th Cir. 2014) (marketed partnership transaction involving shift of income to foreign bank investors)
• Bank of New York (TC 2013, on appeal to 2d Cir)(foreign tax credit generator involving foreign bank)
• Salem Financial (BB&T) (Fed. Cl. 2013, on appeal to Fed. Cir.) (foreign tax credit generator involving foreign bank)
• AIG (SDNY 2013) (FTC generator involving foreign bank)
• Pritired (S.D. Iowa 2011) (arrangement with foreign bank structured to generate foreign tax credit)
• Heinz (Fed. Cl. 2007) (sub purchases parent stock, parent redeems most of sub’s stock, basis shift followed by sale of sub’s stock for loss)
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November 19, 2014
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Section 269 - Generally
•
•
•
IRC Section 269(a)(1) provides that if (1) a taxpayer acquires control of a corporation and (2) the principal purpose of the acquisition is the evasion or avoidance of federal income tax by securing the benefit of a deduction, credit or other allowance which the taxpayer or the acquired corporation would not otherwise enjoy, then the IRS may disallow such deduction, credit or other allowance The “control” requirement is met if a taxpayer acquires stock possessing at least 50% of the total combined voting power of all classes of stock entitled to vote or at least 50% of the total value of all classes of stock of the acquired corporation The second requirement of Section 269 consists of three interrelated elements, to wit: (1) principal purpose is evasion or avoidance of tax; (2) by securing benefit of deduction, credit or other allowance; and (3) which taxpayer would not otherwise enjoy
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Section 269 – Rare Application
•
•
•
•
•
•
•
•
Section 269 does not apply to the use of an existing subsidiary. Challenger (TCM 1964)
Creation of a new corporation for the primary purposes of obtaining benefits intended by Congress may not generally be challenged under Section 269(a)(1). Achiro (TC 1981); FSA 003215
If new corporation is respected under Moline Properties test, section 269 will not apply. Sam Siegel (TC 1966)
The proscribed “deductions, credits or other allowances” must exist at time of acquisition. Zanesville (6th
Cir. 1964)
Tax benefits must stem from acquisition of control. Commodores Point (TC 1948); Wells Fargo (D. Minn. 2014)
Section 269 does not permit IRS to reallocate income to another corporation. Peter Pan Seafoods (9th Cir. 1969)
Requirement that tax avoidance purpose be “the” principal purpose means it must be the most important purpose to the taxpayer. US Shelter Corp (Fed. Cl. 1987); VGS (TC 1977)
Section 269 applies only if an acquisition produces a tax benefit that the parties “would not otherwise enjoy.” Cromwell TC 1964)
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Key regulatory anti-abuse rules
•
•
•
Treas. Reg. § 1.304‐4: Addresses use of newly formed corporation as either acquiring corporation or issuing corporation to either access low‐taxed earnings and profits, or avoid a distribution of earnings and profits altogether
Treas. Reg. § 1.367(b)‐10(d): Appropriate adjustments will be made if, in connection with a triangular reorganization, a transaction is engaged in to avoid the purpose of § 1.367(b). IRS has proposed to revise this rule. Notice 2014‐32
Treas. Reg. § 1.701‐2: IRS gave itself the authority to recast part, or all, of a transaction where a partnership is used or availed with a principal purpose of reducing the partners’ federal tax liability in a manner that is inconsistent with the intent of subchapter K. See Countryside Limited Partnership, supra (Tax Court rejected application of § 1.701‐2 anti‐abuse rule)
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Key regulatory anti-abuse rules (cont’d)
• Treas. Reg. § 1.752‐2(j): IRS may disregard an obligation of a partner or treat it as an obligation of another partner if a principal purpose of the arrangement is to eliminate the partner’s economic risk of loss with respect to that obligation. See Canal Corp. (TC 2010)
• Treas. Reg. §1.956‐1T(b)(4): A CFC will be considered to hold indirectly investments in US property acquired by any other foreign corporation that is controlled by the CFC, if one of the principal purposes is to avoid application of section 956 with respect to the CFC
 CCA 201420017 (rule applied to intercompany loan)
•
Treas. Reg. § 1.1502‐13(h): If a transaction is engaged in or structured with a principal purpose to avoid the purposes of the intercompany transaction rules, adjustments must be made to carry out the purposes of this section
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OECD Base Erosion and Profit Shifting
(“BEPS”)
• November 20, 2012 Background Paper:
– “There is a growing perception that governments lose substantial corporate tax revenue because of planning aimed at eroding the taxable base and/or shifting profits to locations where they are subject to a more favourable tax treatment.”
– “Broadly speaking corporate tax planning strategies aim at moving profits to where they are taxed at lower rates and expenses to where they are relieved at higher rates.”
– “While these corporate tax planning strategies may be technically legal and rely on carefully planned interactions of a variety of tax rules and principles, the overall effect of this type of tax planning is to erode the corporate tax base of many countries in a manner that is not intended by domestic policy.”
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February 12, 2013 BEPS Report
– “Base erosion constitutes a serious risk to tax revenues ,tax sovereignty and tax fairness for OECD member countries and non‐members alike.”
– “Further, as businesses increasingly integrate across borders and tax rules often remain uncoordinated, there are a number of structures, technically legal, which take advantage of asymmetries in domestic and international tax rules.
– “Business leaders often argue that they have a responsibility towards their shareholders to legally reduce the taxes their companies pay. Some of them might consider most of the accusations unjustified, in some cases deeming governments responsible for incoherent tax policies and for designing tax systems that provide incentives for Base Erosion and Profit Shifting (BEPS).”
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BEPS Action Plan (07/19/13)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Tax Challenges of the Digital Economy
Reduce hybrid mismatch arrangements ‐ entities and instruments
Strengthen CFC regimes
Limit base erosion via interest deductions and other intra‐group financing, transfer pricing, and specifically shifting of risk and intangibles
Counter harmful preferential tax regimes – require more substance/transparency
Prevent treaty abuse – facilitation of double non‐taxation
Prevent artificial avoidance of PEs – commissionaires
Develop new rules on intangibles – movement amongst group members
Develop new rules on risk and capital – contractual assumptions
Preventing BEPS arising from related party transactions which would rarely occur between third parties
Methodologies to collect and analyze data on BEPS
Require taxpayers to disclose aggressive tax planning
Transfer pricing documentation and country‐by‐country reporting
Making dispute resolution mechanisms more effective
Developing a Multilateral Instrument on BEPS
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November 19, 2014
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EU Harmful Competition
•
•
•
•
•
EU Member States cannot grant selective advantages, considered “state aid” to companies without the prior approval of the EU. The EU announced that it would use the EU State aid rules to challenge aggressive tax planning by multinational companies and 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. In 2014, the EU 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. EU is also challenging patent box regime in certain jurisdictionsl ike the UK and Luxembourg. The New EU Commissioner for Competition (responsible for the state aid cases) who will take office in November is expected to focus her work on “tax evasion” state aid cases. If the EU is successful in asserting state aid, the Taxpayer is required to pay taxes on income that is considered to have been underreported or undertaxed (retroactive up to 10 years).
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EU Harmful Competition
• Statement by Joaquim Almunia (outgoing vice president of the Commission): “It is well known that some multinationals are using tax planning strategies to reduce their global tax burden. These aggressive tax planning practices erode the tax basis in our Member States… when public budgets are tight and citizens are asked to make efforts to deal with the consequences of the crisis, it cannot be accepted that large multinationals do not pay their fair share of taxes.”
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November 19, 2014
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EU Harmful Competition - 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.. Apple could be asked to pay up to $200MN in back taxes if the EU is successful in its assertion of illegal state aid. Tax Executive Institute
November 19, 2014
U.S.
Company
IP Cost Sharing or
License fees
IP Cost Sharing
or IP License
CFC 1
Ireland/
Bermuda
IP License and
License fees
CFC 3
Netherlands
CFC 2*
Ireland
IP License and
License fees
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EU Harmful Competition -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.
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 not taxable in Luxembourg (but treated as a corporation for US tax purposes). 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. Tax Executive Institute
November 19, 2014
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EU Harmful Competition – U.K. Patent Box
•
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”
Tax Executive Institute
November 19, 2014
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EU Harmful Competition – Netherlands
• Netherlands filed “state aid” claim against Starbucks on the basis of transfer pricing. • An interim decision was issued in October but not yet published. • 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.
• 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 connedted to “state aid” challenge in same way that PSI hearings against Apple are likely connected to “state aid” challenge against Apple in Ireland. Tax Executive Institute
November 19, 2014
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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.”
EU commission needs to look like it is trying to curtain 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. Tax Executive Institute
November 19, 2014
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Switzerland
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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. 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 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. Tax Executive Institute
November 19, 2014
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Responses to BEPS and State Aid Defensive
Proactive
Reactive
UK – Continues strong defense of current patent box regime
UK – Commits to implementing country‐by‐
country reporting; consults on implementation of rules to prevent hybrid mismatch
Canada – Announces BEPS compliant
proposed actions in budget; settles on a “wait and see” approach
India –Expansion of PE rules (Vodaphone);
introduction of GAAR
France – New legislation on inbound hybrids; expanded transfer pricing rules (documentation, disclosure, valuation)
Brazil – Generally adheres to OECD instruments, including tax policy instruments
Luxembourg – Continues strong defense of rulings as being in compliance with transfer pricing rules
Mexico – Implements rules to prevent hybrid mismatch; enhanced documentation rules
Ireland – Eliminates stateless income structure by requiring that Irish incorporated companies be treated as Irish tax residents. Italy, Ireland – Recently proposed patent box regimes
Switzerland – Proposes new corporate tax rules that would abolish tax rulings practice. EU Directives –Parent/ Sub directive amended – tax deductible payments are taxable on receipt. Tax Executive Institute
November 19, 2014
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Anti-Abuse Measures – Non-U.S.
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•
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U.K.
Spain
Australia
China
Canada
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November 19, 2014
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U.K. Anti-Abuse Measures - Overview
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Application
– Applies to abusive tax arrangements that are entered into on or after July 17, 2013
Objective
– Primary objective is to deter the most abusive arrangements and promoters
– Arrangements are abusive if entering into or carrying out “cannot reasonably be regarded as a reasonable course of action” (the “double reasonableness test”)
• Considered by guidance to be a high threshold for HMRC to overcome
– Must have regard to “all of the circumstances” under the double reasonableness test, including:
• Consistency with policy and principles;
• Contrived or abnormal steps;
• Intention to exploit shortcomings in legislation.
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November 19, 2014
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U.K. Anti-Abuse Measures – Application to
UK Capital Restructuring
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Key Considerations
– Application to anti‐arbitrage exemptions, and withholding tax Target of Rules
US
UK1
UK2
Tax Executive Institute
November 19, 2014
Application of GAAR to exemptions
US
UK1
F
UK2
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Spain Anti-Abuse Measures - Overview
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General Tax Law – “Substance over form”
Conflict in the Application of the Tax Law
– Applies where taxpayers totally or partially avoid a taxable event (or reduce their taxable base or tax due) through acts or transactions where the following circumstances are jointly met:
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The acts or transactions, either individually or considered as a whole, are notoriously artificial or inappropriate to achieve the results obtained, and
No relevant legal or economic effects exist other than tax savings and the effects that would have resulted from annual or appropriate acts or transactions.
Sham Transaction Doctrine
– May re‐characterize a transaction as a sham transaction by disregarding the simulated transaction and consider instead the real transaction intended by the parties. Anti‐debt push down provision – Disallows interest expense from related entities when the debt has been used to acquire an equity ownership interest in any legal entity from other group companies, or to make capital contributions to other group companies, shall not be tax deductible unless the taxpayer is able to prove that the transaction is supported by valid economic reasons. Tax Executive Institute
November 19, 2014
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Australia Anti-Abuse Measures – Overview
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Part IVA Reform ‐ placed the burden of proof upon the taxpayer, so the taxpayer must prove that the assessment is excessive with evidence that:
– There is no scheme – There is no tax benefit obtained in connection with the scheme
– The scheme was not entered into for the dominant purpose of obtaining a tax benefit
Hart’s case
– Requires consideration of whether the substance of the transaction (tax implications apart) would reasonably have been achieved by a different transaction or form of transaction
– Taxpayers need to provide compelling reasons as to why any of the counterfactuals identified by the Commissioner would not be objectively reasonable on the evidence
– Dominant purpose test requires the consideration of the eight objective factors
Tax Executive Institute
November 19, 2014
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China GAAR (Discussion Draft) – Overview
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Objective of new GAAR measures
– To apply GAAR principles more consistently and transparently
– To extend GAAR implementation of all types of tax avoidance schemes in the future
Broadened Scope
– “Sole or main purposes, or one of the main purpose”
Applicable arrangements
– Arrangements executed on or after January 1, 2008
– State Administration of Taxation to release more detailed guidance
Excluded arrangements
– Arrangements between Chinese Tax Resident Enterprises not involved in cross‐border transactions or payments
– Failure to make payments, cheating of tax refunds, forged tax invoices, and other tax‐
related violations
Tax Executive Institute
November 19, 2014
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China GAAR (Discussion Draft) – Impacts on
Taxpayers
Good
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Increased standardization and transparency of procedures
Clarification of principles
Tax Executive Institute
November 19, 2014
Challenge
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Broadened scope for the application, “sole or main purposes, or one of the main purposes”
Good Practices Not Adopted
Uncertainty
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Timeline for tax authorities to respond to taxpayers
Confirmation that a case has not been selected for GAAR
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Alternative transaction
Minimum threshold to invoke GAAR
Review panel
Advance ruling
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Canada Anti-Abuse Measures – Overview
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Application of GAAR – Three Requirements:
1) A tax benefit results from the transaction
2) It cannot be said that the transaction was reasonably undertaken or arranged primarily for a bona fide purpose other than obtaining a tax benefit
3) There was abusive tax avoidance Burden of proof •
On taxpayer to refute (1) and (2)
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On the Minister to establish (3)
Benefit of the Doubt – to the taxpayer when accused of abusive tax avoidance. Canada Trustco Case
– An overall commercial purpose for a series of transactions does not imbue each transaction in that series with that overall purpose – each transaction has to be evaluated. Subsection 248(10)
– A reference to a series is deemed to include any related transactions or events completed in contemplation of the series. Tax Executive Institute
November 19, 2014
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The information provided herein is solely for informational purposes: 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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