Multinational tax practices
face growing scrutiny
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Contents
2
Multinational tax practices face growing scrutiny
Introduction
03
General trends 04
– Tax exposure and tax reputation 05
–O
ECD’s Action plan on
base erosion and profit shifting
08
France
14
– A politic will to fight against tax avoidance
15
Germany 18
– BEPS measures in Germany
19
Italy
22
– BEPS measures in Italy
23
– Hot Topics in Italy
26
Netherlands 28
– BEPS measures in Netherlands
29
Spain
32
– BEPS measures in Spain
33
© Allen & Overy LLP 2014
3
Introduction
Over the last few decades, the globalisation of labour, capital and know-how
combined with the growing relevance of intangibles and the digital economy has
created new business models and opportunities. However, it has also brought about
new challenges for domestic and conventional tax laws.
Governments are now paying more attention to the
cross-border tax affairs of companies and to M&A
transactions. In doing so they are basically trying to protect
their tax revenues, which in many cases have been badly hit
by the financial crisis.
The focus on corporate taxation has also been amplified by
growing public and media scrutiny. News of multinationals
coming under major tax investigations often make the
headlines these days.
As such governments are now clamping down on aggressive
tax avoidance schemes with more vigour. At the same time,
countries are increasingly exchanging information among each
other and coordinating their actions to challenge companies
looking to pay minimal taxes. As shown in the first contribution
to this brochure, taxation not only impacts net profits, but also
has a greater impact on the overall business.
Having a reputation as a ‘good’ tax payer is steadily
becoming a more valuable asset for multinational enterprises.
Indeed, the issue has worked its way into boardrooms and is
no longer just the province of tax accountants. This brochure,
prepared by members of our Global Tax practice, provides an
overview of these trends and looks at the potential impact on
business across several countries. It is designed to provide
food for thought for tax professionals. But it’s also for
directors, who increasingly have to factor in wider tax
issues, such as the reputational aspects when making
strategic decisions.
“Governments now routinely
challenge tax avoidance and
aggressive tax planning.”
In particular, this brochure highlights the OECD’s report of
12 February 2013 addressing what is known as Base Erosion
and Profit Shifting (BEPS) – an international initiative to reduce
tax avoidance. Contributors from France, Germany, Italy,
the Netherlands and Spain show that governments now
routinely challenge tax avoidance and aggressive tax planning.
They also demonstrate that surviving in this environment of
greater tax scrutiny requires concerted action in areas
such as risk management and when conducting
cross-border business.
Your usual Allen & Overy contact and our local tax experts
would be more than happy to assist you with any queries
you may have and elaborate on the topic in view of your
particular needs.
Contact details may be found in this brochure.
CONTACTS
Francesco Guelfi
Gottfried Breuninger
Head of Tax
Milan
Tel +39 02 2904 9659
Partner – Global Head of Tax
Munich
Tel +49 89 71043 3302
francesco.guelfi@allenovery.com
gottfried.breuninger@allenovery.com
www.allenovery.com
4
Multinational tax practices face growing scrutiny
General
trends
“A major tax investigation can result in criminal
proceedings being brought against top management
and/or business owners.”
“Transparency and the content of agreements
need to be addressed with a view that the potential
tax consequences may vary in the future due to
changes in the law, or its interpretation.”
© Allen & Overy LLP 2014
5
Tax exposure
and tax reputation
Taxation has ceased to be a purely academic or technical interest
having decisively moved into the public consciousness.
Soaring budget deficits combined with falling tax revenues
have spurred governments to fight tax avoidance more
aggressively and to counter practices, which shift taxable
revenues to low-tax jurisdictions.
A number of multinationals were severely criticised in the
UK for diverting taxable profits to low-tax jurisdictions,
such as the Netherlands and Luxembourg. They found
themselves hauled before the UK Parliament’s Public
Accounts Committee to account for their tax practices
under the full glare of the media spot light.
The issue of tax avoidance is hardly isolated to the UK.
Multinationals have found themselves subject to high-profile
tax investigations in other European countries. Back in 2012,
a number of multinationals were examined by the Italian and
French tax authorities. Then in 2013 tax investigations were
launched against them. In Italy, some fashion groups faced
harsh scrutiny and treatment from the tax authorities.
At an international level, efforts to counter cross-border
corporate tax avoidance by multinationals have been pursued
by the European Commission and the Organisation for
Economic Co-Operation and Development (OECD). Last year
the OECD released the BEPS Action Plan. Earlier this year the
first discussion papers emerged looking at some of the
measures covered in the Action Plan. National measures are
also expected to follow. These trends represent an urgent
call for corporates to be more transparent in their tax affairs.
Politicians are not just responding to the need to reduce
budget deficits. They’re acutely aware, as is the media,
that the general public has been forced to stomach significant
sacrifices due to the effects of the financial crisis and the
subsequent bailouts of struggling financial institutions.
There is a common perception that the financial difficulties
suffered by governments have been made worse by these
bailouts, where costs have been picked up by taxpayers.
This has made the whole issue of fighting tax avoidance and
reforming the tax system far more emotive and has in a sense
turned it into a moral crusade.
There’s a growing realisation in boardrooms that the
repercussions of a tax investigation can significantly damage a
corporate’s reputation, its revenues and the value of its brand.
How hard a major tax investigation hits a company very much
depends on which countries it operates in as well as its
market. If it’s a retail business with a high public profile any
resulting consumer backlash can be very painful.
However, public reactions to a tax investigation can vary.
One multinational coffee chain managed to escape a
widespread customer revolt, while on the other hand a
famous fashion brand in Italy saw its flagship store temporarily
closed while it was subject to intense media and political
scrutiny and public disapproval. As such, taxation is no longer
just an accounting matter, but one that carries major
reputational risks.
Reputational and strategic considerations are now an
increasingly important part of tax planning. The main areas
of consideration are M&A transactions involving cross-border
acquisitions, financing, transferring or exploiting intangibles,
R&D programmes, reshaping business models, and transfer
pricing policy.
Making sure the tax angle is properly managed requires
a new approach to organising the businesses’ functions and
handling the tax authorities. Tax risk management is already a
reality in the financial sector. Financial supervisors in a number
of countries require regulated financial institutions to include
tax risk within the scope of their risk management procedures.
This will very likely become more common for non-financial
firms as well.
It is hardly surprising that the issue of taxation has made
its way into the boardroom. It’s not just the business that
is at stake. A major tax investigation can result in criminal
proceedings being brought against top management and/or
business owners. And being ‘based’ in cyberspace is
hardly a protection these days. The Spanish authorities,
for example, have taken as much interest in the tax
affairs of Internet-focused multinationals as they have
in those with a more ‘physical’ presence.
www.allenovery.com
6
Multinational tax practices face growing scrutiny
Boards will increasingly be expected to effectively manage tax
and the related reputational risks by insuring an appropriate
level of interaction between the finance department and other
business functions. Those who handle taxes within the
finance department should no longer be considered as just
a back office function.
Part of the risk management process requires implementing
internal procedures, which could be difficult depending on the
organisation’s complexity, its tax situation and the countries it
operates in. These procedures should facilitate information
flows within the organisation and with outside stakeholders,
such as tax authorities and the media. This is to keep the
board informed of all tax sensitive information that may
influence their decisions. It also protects directors from
potential tax liabilities.
Risk management should account for a possible media
reaction to a potential tax claim, which could centre around
specific transactions, portrayed as ‘immoral.’ Being best
prepared for such an event requires a full understanding of the
business, together with an exhaustive outline of the tax issues
surrounding these transactions. This requires close
cooperation with the finance department.
But that’s not all. The OECD proposals on BEPS and public
discussions on the topic highlight the growing need for
transparency and disclosure when it comes to dealing with
taxation and tax authorities.
For multinationals this is especially important. The overall
resilience of their tax planning may be tested more readily
thanks to more efficient and frequent information exchanges
between national tax authorities, which are made easier
by new technology.
© Allen & Overy LLP 2014
Attention must also be paid to the way past transactions
were structured along with the tax guidelines that were used.
These could spring to the fore if, for example, a multinational
decided to amend its transfer pricing policies or disclose
financing structures aimed at replacing more aggressive
schemes they used in the past. Transparency and the content
of agreements need to be addressed with a view that the
potential tax consequences may vary in the future due to
changes in the law, or its interpretation.
To sum up, the economic changes since the financial crisis
and the growing attention paid by governments, the public
and the media to the tax practices of multinationals is a
huge reversal of previous trends.
This has seen taxation escalate in importance for various
governments, while the ability and growing willingness of
national tax authorities to collaborate with each other places
a strong onus on multinationals adopting a policy of
transparency and disclosure. This widens the scope for risk
management, which must encompass not only potential
claims by tax authorities, but also the reputational aspects
their actions may entail.
This calls for multinationals to organise their tax affairs
carefully. This can be done by setting up systems to support
efficient information flows and decision-making processes
relating to tax. It also requires an appropriate level of
interaction between the board and the company’s tax
function so they can properly evaluate potential risks
when making decisions.
CONTACTS
7
For more information please contact:
Lydia Challen
Francesco Guelfi
Partner – Tax
London
Tel +44 20 3088 2753
Head of Tax
Milan
Tel +39 02 2904 9659
lydia.challen@allenovery.com
francesco.guelfi@allenovery.com
www.allenovery.com
8
Multinational tax practices face growing scrutiny
OECD’s action plan on base
erosion and profit shifting
Background
Overview of the BEPS Action Plan
The BEPS Action Plan – which follows the OECD’s report
Addressing Base Erosion and Profit Shifting of 12 February
2013 – was commissioned by the G20. Globalisation of
labour, capital and know-how, with the increasing relevance of
intangibles and the digital economy – and the resulting
reallocation of business functions – have raised new
challenges for domestic and conventional tax laws. In these
areas, indeed, domestic measures no longer seem to be
effective if they are not reinforced by shared tax rules and
proper international coordination. The BEPS Action Plan
caters for a roadmap for these measures.
The BEPS Action Plan recognises that it is necessary to
develop new measures to prevent double non-taxation
and cases of no or low taxation associated with practices
that artificially segregate taxable income from the activities
that generate such income. To this end, international cohesion
of corporate income tax systems must be achieved, especially
where double non-taxation (or no taxation) results from
interaction between more than two countries. In this respect,
transfer pricing represents a critical area.
Summary
Needless to say, beyond the public plans of governments to
protect their revenues in a world where the link between
taxable profit and country of source seems to be more and
more volatile, this roadmap responds to growing political
pressure on equity of taxation and transparency. This
envisages coordination between governments and a new
pactum between governments and taxpayers, which opens
new scenarios in several countries in terms of the relationships
between taxpayers and the tax authorities.
Further, the OECD emphasises that transparency as well
as certainty and predictability for business are key points
in successfully countering BEPS. Both are sought by the
BEPS Action Plan. On the one hand, transparency allows
tax administrations to gather information on aggressive tax
planning at an early stage, while certainty and predictability
are necessary for businesses to make investment decisions.
The proposed actions, time-frames and a few thoughts on
each action are briefly summarised below.
At the meeting held in Moscow on 20 July 2013, the G20 finance ministers unanimously approved the
Action Plan on Base Erosion and Profit Shifting (the BEPS Action Plan) released the day before by the
Organisation for Economic Co-operation and Development (the OECD).
The BEPS Action Plan contains 15 actions to be taken by governments to develop measures to counter
corporate income tax avoidance in cross-border activities by multinational enterprises, each of which is
linked to certain outputs that are expected to be completed in 2014 and 2015. Discussion papers on
some of these actions were issued earlier in 2014.
© Allen & Overy LLP 2014
9
Address the challenges of
the digital economy
Neutralise the effects of hybrid
mismatch arrangements
The first action is to “Identify the main difficulties that the digital
economy poses for the application of existing international tax
rules and develop detailed options to address these difficulties…
considering both direct and indirect taxation”.
Action 2 suggests the development of model treaty
provisions and recommendations regarding the design
of domestic rules to neutralise the effect (e.g. double
non-taxation, double deduction, long-term deferral)
of hybrid instruments and entities.
In particular, the BEPS Action Plan calls for an examination of:
(i) the potential for a digital presence in a country without the
creation of a taxable nexus; (ii) the attribution of value created
from the generation of marketable location-relevant data through
the use of digital products; (iii) the characterisation and sourcing
of income deriving from new business models; and (iv) effective
collection of VAT/GST in the case of the cross-border delivery
of products.
It has been observed that there is far from international
consensus in this area. The proposal for “virtual PE” in the digital
economy in February 2013 has been hotly debated. Now, the
report identifying issues – ranging from identifying a nexus that
allows a country to levy taxes on digital activities up to the
allocation of value to different phases of the digital process
– is a way to restart discussions in this area.
A discussion draft on this matter was released in March 2014,
while the comments received were published on 16 April 2014.
The most critical area is the development of a new, alternative
type of permanent establishment based on a “significant digital
presence” as this would represent a significant departure from
traditional principles of taxation. Foreshadowed withholding
obligations for financial institutions in relation to payments made
to foreign e-commerce providers represent a further critical area,
considering that this would cause significant administrative
burdens for the financial institutions involved. Introduction of a
consumption tax is also an important area of attention: crossborder “business to customer transactions” (particularly if they
qualify as a supply of services) may distort competition in the
local market if there is no mechanism to ensure tax charges in
the market of consumption.
A discussion draft on this matter was released in
March 2014, while the comments received were
published on 11 April 2014.
The discussion draft describes what a hybrid mismatch
arrangement is, for the purposes of this action, focusing on:
(a) hybrid financial instruments: where the deductible payment
made under a financial instrument is not treated as taxable
income under the laws of the payee’s jurisdiction;
(b) hybrid entity payments: where there is a difference in the
characterisation of the hybrid payer which entails that a
deductible payment is disregarded (or triggers a second
deduction) in the other jurisdiction; and
(c) reverse hybrid and imported mismatches, where payments
are made to an intermediary payee and are not taxable
on receipt.
From a domestic viewpoint possible measures might
include, inter alia, provisions aiming to prevent exemption or
non-recognition for payments that are deductible by the payer,
on the one hand, and/or deny deduction for a payment that is
not includible in income by the recipient or is also deductible
in another jurisdiction, on the other.
It is worth noting that this action will require a certain degree
of cooperation between countries given that the tax treatment
of an item in a country would hinge on the tax treatment of the
same (or mirroring) items in another country of which the tax
rules will therefore be important to determine the taxable base
in the former country. Exchange of information between
countries will also be important here.
From a conventional viewpoint, changes to the OECD
Model Tax Convention are envisaged to avoid undue
benefits for hybrid instruments. Finally, attention is paid to
the interaction between possible changes to domestic rules
and the provisions of the OECD Model Tax Convention.
Interaction of domestic controlled foreign company rules
(CFC) is also a key point.
This proposal seems to be in line with the recent
recommendations of the European Commission of
6 December 2012 (EC Action Plan) (recommendation
on aggressive tax planning as part of its own action plan to
fight tax fraud, evasion and aggressive tax planning) which,
among other things, encouraged the EU member states to
include a provision in their double taxation conventions that
prevents taxpayers from using the conventions to avoid
taxation of items in one contracting state that are not
subject to tax in the other contracting state.
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10
Multinational tax practices face growing scrutiny
Strengthen CFC rules
This action entails the development of recommendations
regarding the design of domestic CFC rules.
Counter harmful tax
practices more effectively,
taking into account
transparency and substance
These recommendations are expected by September 2015.
The OECD recognises that CFC rules, which substantially lead
to the attraction of taxable income in the resident country of
the ultimate shareholder, also have a positive effect in source
countries, as taxpayers no longer have any incentive to shift
profits into a third low-tax jurisdiction.
In the last few years CFC rules have often been addressed by
domestic legislation in Europe. There is, however, still scope
to improve measures to counter BEPS in a more
comprehensive manner.
Limit base erosion via
interest deductions and
other financial payments
Action 4 envisages that recommendations are developed
regarding “best practices in the design of rules to prevent
base erosion through the use of interest expense”.
In this respect, the OECD recalls the use of related-party
and third-party debt to achieve excessive interest deductions
or to finance the production of exempt or deferred income,
and other financial payments that are economically equivalent
to interest payments. Transfer pricing guidelines for financial
transactions will also be paramount here and should include,
among others, financial and performance guarantees,
derivatives (including internal derivatives used in intra-bank
dealings) and captive and other insurance arrangements.
Recommendations regarding the design of domestic rules
are expected by September 2015, while changes to the
OECD Transfer Pricing Guidelines for Multinational Enterprises
and Tax Administrations (the Transfer Pricing Guidelines)
are expected by December 2015.
This action aims to revamp “the work on harmful tax
practices with a priority on improving transparency,
including compulsory spontaneous exchange on rulings
related to preferential regimes, and on requiring substantial
activity for any preferential regime”. It will also engage with
non-OECD members on the basis of the existing framework
and consider revisions or additions to the existing framework.
The finalisation of the review of OECD member country
regimes is expected by September 2014; the strategy to
expand participation to non-OECD members will be
developed by September 2015; and the revision of existing
criteria by December 2015.
This action recalls the OECD’s 1998 report Harmful Tax
Competition: An Emerging Global Issue. This action
seems to contemplate a broader focus on a wider range
of preferential tax regimes. However, this action seems
rather to focus on greater transparency and exchange
of information between countries.
Prevent treaty abuse
Action 6 proposes the development of model treaty provisions
and recommendations in relation to the design of domestic
rules to prevent the granting of treaty benefits in inappropriate
circumstances. It should be clarified that tax treaties are not
intended to be used to generate double non-taxation, and
identify tax policy considerations that a government should
bear in mind when deciding whether to enter into a tax treaty.
A discussion draft on this matter was released in March 2014,
while the comments received were published on 11 April 2014.
The discussion draft addresses, among others: (i) proposed
wording for limitation - on benefit provisions; (ii) amendments
to the tiebreaker rule on tax residence (by introducing a
mutual agreement procedure for dual-resident persons other
than individuals); (iii) anti-abuse provisions for permanent
establishments situated in third states and amendments to
title; and (iv) amendments to the preamble to the conventions
to make clear that the treaty aims not only to avoid double
taxation but also to prevent tax evasion and avoidance
(thus avoiding double non-taxation).
The comments on the discussion draft welcome anti-abuse
provisions but highlight that they could raise issues of
compatibility with EU law (if an EU member state is involved
in the application of the relevant treaty). With reference to
the tiebreaker rule, it is generally recognised that the mutual
agreement procedure should be set up in such a way to
make it effective; further, an advance ruling should be made
available to avoid situations of uncertainty before the
dual-residence issue is tackled by tax authorities.
Changes to the Model Tax Convention and recommendations
regarding the design of domestic rules are expected by
September 2014.
© Allen & Overy LLP 2014
11
Prevent the artificial avoidance of
permanent establishment (PE) status
This action aims to “develop changes to the definition
of PE to prevent the artificial avoidance of PE status in
relation to BEPS, including through the use of commissionaire
arrangements and the specific activity exemptions”.
This will also deal with issues concerning profit attribution
to a permanent establishment.
Changes to the Model Tax Convention are expected by
September 2015.
This action addresses an area foreshadowed by a
number of OECD initiatives and has been much debated
at international level. Indeed, the proposed action seems
to focus on quite restricted aspects of the definition of PE
(i.e. commissionaire arrangements and exceptions to PE
status), which sometimes give scope for abusive practices
(e.g. where multinational group entities fragment their
operations among a number of entities to qualify for
PE status). The issues are quite delicate: it is therefore
anticipated that it might be difficult to achieve consensus.
Risks and capital
This action deals with rules to prevent BEPS by transferring
risks between, or allocating excessive capital to, group
members. This will involve adopting transfer pricing rules
or special measures to ensure that inappropriate returns will
not accrue to an entity solely because it has contractually
assumed risks or has provided capital. The rules to be
developed will also require the alignment of returns with
value creation.
Changes to the Transfer Pricing Guidelines and possibly to
the Model Tax Convention are expected by September 2015.
For the sake of homogenisation and coordination between
countries, the OECD seems to avoid suggesting new and/or
innovative formulae for profit allocation; rather, it seems
preferable to improve the current system in particular
with regard to the return from intangible assets, risk and
over-capitalisation. The role of capital and of economic risk
borne by the taxpayer will be paramount. Effects are also
expected in the financial sector.
Other high risk transactions
Intangibles
This and the following two actions specifically address
transfer pricing issues. The OECD recognises that the current
transfer pricing rules based on arm’s length principles are an
effective and efficient means of allocating income in different
jurisdictions; nevertheless there are cases where transfer
pricing rules are mis-used to artificially separate income
from activities.
In this respect, the eighth action proposes the development of
rules to prevent BEPS by moving intangibles between group
members. According to the BEPS Action Plan, this will
include: “(i) adopting a broad and clearly delineated definition
of intangibles; (ii) ensuring that profits associated with the
transfer and use of intangibles are appropriately allocated in
accordance with (rather than divorced from) value creation;
(iii) developing transfer pricing rules or special measures for
the transfer of hard to-value intangibles; and (iv) updating the
guidance on cost contribution arrangements”.
Action 10 deals with transactions which would not
(or would only very rarely) occur between third parties and
proposes to develop special measures aiming to: “(i) clarify the
circumstances in which transactions can be recharacterised;
(ii) clarify the application of transfer pricing methods,
in particular profit splits, in the context of global value chains;
and (iii) provide protection against common types of base
eroding payments, such as management fees and head
office expenses”.
Changes to the Transfer Pricing Guidelines and possibly to
the Model Tax Convention are expected by September 2015.
Changes to the Transfer Pricing Guidelines and possibly
also the Model Income Tax Convention regarding Intangibles
are expected by September 2014 and Cost Contribution
Arrangements by September 2015.
This action was partially anticipated by the Discussion Draft
on the Revision of the Special Considerations for Intangibles
in Chapter VI of the OECD Transfer Pricing Guidelines and
Related Provisions (the Intangibles Discussion Draft) in
June 2012 and will be coordinated with the outcome of
the Discussion Draft on the Transfer Pricing Aspects of
Intangibles. The review is now expanded to include cost
contribution arrangements (Chapter VIII of the OECD
Guidelines). This action shall be duly coordinated with other
actions, namely action 3 relating to strengthened CFC
regimes and action 10 relating to other high-risk transactions.
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12
Multinational tax practices face growing scrutiny
Establish methodologies to
collect and analyse data on BEPS
and the actions to address it
Action 11 aims to develop recommendations regarding
“indicators of the scale and economic impact of BEPS and
ensure that tools are available to monitor and evaluate the
effectiveness and economic impact of the actions taken to
address BEPS on an ongoing basis”. The work will also
involve assessing a range of existing data sources, identifying
new types of data that should be collected, and developing
methodologies based on both aggregate (e.g. FDI and
balance of payments data) and micro-level data (e.g. from
financial statements and tax returns). In this respect,
taxpayer confidentiality and the administrative costs for tax
administrations and businesses should also be considered.
Recommendations regarding data to be collected
and methodologies to analyse them are expected by
September 2015.
The focus of this action item is diagnostic in nature
and reveals a new approach to cross-border tax issues.
Require taxpayers to
disclose their aggressive
tax planning arrangements
Re-examine transfer
pricing documentation
Again in the transfer pricing area, action 13 deals with
documentary requirements to enhance transparency for tax
administrations. Compliance costs for business must be
taken into consideration, however. The OECD focuses here,
among other things, on the requirement that multinational
entities provide all relevant governments with information
about the global allocation of their income, economic activity
and taxes paid to countries according to a common template.
International coordination is therefore a key aspect here.
A discussion draft on this matter was released in April 2014.
Changes to Transfer Pricing Guidelines and recommendations
regarding the design of domestic rules are expected by
September 2014.
This action entails an essential development in the transfer
pricing approach, which more and more addresses the global
value chain of a multinational enterprise rather than dealing
with specific transactions. This seems to be in line with the
guideline for transfer pricing documentation of the EU Council
and adopted by several EU member states. These guidelines
require both: (i) a “Masterfile” which caters for a general
overview by describing the group and the intra-group
transactions in general; and (ii) a “Countryfile” for each country
where the group is operating which describes the specific
features of each local subsidiary.
This action envisages developing recommendations with
regard to the design of mandatory disclosure rules for
aggressive or abusive transactions, arrangements or
structures. According to the OECD approach, the work will
use a modular design allowing for maximum consistency but
adaptable for country-specific needs and risks. An identified
area is international tax schemes and the work will examine
the concept of “tax benefit” in this framework. The work will
be coordinated with the work on cooperative compliance.
It will also involve designing and putting in place enhanced
models of information sharing for tax administrations to use.
Make dispute resolution
mechanisms more effective
Recommendations regarding the design of domestic rules
are expected by September 2015.
Changes to the Model Tax Convention are expected by
September 2015.
This action is in line with general political pressure for
transparency and disclosure. Also welcome is the intention to
develop criteria for determining what constitutes “aggressive
or abusive transactions, arrangements, or structures”.
This action responds to requirements for equity in taxation
and may be seen as functional to the proposed actions.
Indeed, access to MAP, with arbitration as a possible
avenue will be paramount in mitigating drawbacks deriving
from the possible double taxation that might arise from the
enforcement of any new rules relating to transfer pricing,
jurisdiction to tax, or the characterisation of payments.
© Allen & Overy LLP 2014
This action aims to improve the effectiveness of the
mutual agreement procedure (MAP). In particular, this action
proposes the development of solutions “to address obstacles
that prevent countries from solving treaty-related disputes
under MAP, including the absence of arbitration provisions
in most treaties and the fact that access to MAP and
arbitration may be denied in certain cases”.
13
Develop a multilateral instrument
CONTACTS
Finally, action 15 addresses “the analysis of tax and public
international law issues relating to the development of a
multilateral instrument to enable jurisdictions that wish to do
so to implement measures developed in the course of the
work on BEPS and amend to bilateral tax treaties. On the
basis of this analysis, interested parties will develop a
multilateral instrument designed to provide an innovative
approach to international tax matters, reflecting the rapidly
evolving nature of the global economy and the need to adapt
quickly to this evolution”.
For more information please contact:
A report identifying relevant public international law and
tax issues is expected by September 2014, with the
development of a multilateral instrument by December 2015.
Francesco Guelfi
Francesco Bonichi
Head of Tax
Milan
Tel +39 02 2904 9659
Partner
Italy - Rome
Tel +39 06 6842 7566
This action is an ambitious goal, which would complete
the above roadmap. Multilateral negotiations could indeed
facilitate the implementation of many actions that require
initiatives at treaty level and which would be slowed up
by bilateral negotiations.
francesco.guelfi@allenovery.com
francesco.bonichi@allenovery.com
Conclusions
The BEPS Action plan clearly represents an ambitious
project in terms of both content and timing.
However, considering that the main result of this work will
be recommendations for changes to domestic law and the
amendment of bilateral tax treaties, you may appreciate that
the effectiveness of these measures and the timing of their
implementation will largely hinge on the actions of each
country and of local policymakers. Amendments to the
Transfer Pricing Guidelines could be effected more quickly,
given that these might result in self-executing policy
changes in many countries.
Giuseppe Franch
Senior Associate
Italy - Milan
Tel +39 02 2904 9556
giuseppe.franch@allenovery.com
In Europe, the interaction between the OECD’s proposals
and the work of the European Commission will significantly
influence the output of this pattern. The European
Commission is willing to implement concrete actions to
address perceived aggressive tax planning and tax havens.
This could speed up the process of identifying shared and
concrete measures and, at least for EU member states,
speed up the implementation process.
The measures that will result from the OECD’s work,
when effectively implemented by countries, will affect
multinational enterprises in specific and concrete ways
and might require a significant effort by these enterprises in
terms of the administrative burden and of risk management,
especially in the areas of transfer pricing and mandatory
disclosures. To the extent this is balanced by predictability
and certainty of tax rules, however, the new approach might
be welcomed by such enterprises as well.
www.allenovery.com
14
Multinational tax practices face growing scrutiny
France
“It is worth noting that although the
objective of the law was mainly to
fight against abusive tax planning
and structures, it actually resulted
in wider limitations.”
© Allen & Overy LLP 2014
15
Summary
Political action to fight
against tax avoidance
French legislation includes various anti-abuse provisions. Recent history shows that this set of rules has been
strengthened. The increasing limitations on the tax deductibility of financial expenses and the additional
transfer pricing requirements included in the Finance Bill of 2014 illustrate what could be interpreted as the
French answer to the BEPS action plan. In the meantime, the law regarding the fight against tax fraud and
financial crime, which was enacted in November 2013, provides the French administration with new means
of investigation and new penalties.
Increasing limitations on
the tax deductibility of
financial expenses
A few years ago, it was still rather easy to implement
French tax structures allowing for the tax deductibility of
interest on financings from related or unrelated parties,
subject to the general abnormal act of management theory.
New thin-capitalisation rules implemented in 2007 initially
introduced a limitation on the tax deductibility of interest
on related party debt. Since 2010, thin-capitalisation rules
have been extended to financings from non-related parties
(notably banks), where such financings are guaranteed by
a related party or by a third party which is itself guaranteed
by a related party.
Since then, additional rules preventing the tax deductibility
of financial expenses have been regularly implemented. It is
worth noting that although the objective of the law was mainly
to fight against abusive tax planning and structures, it actually
resulted in wider limitations.
In 2011, an anti-avoidance rule was introduced (the so-called
“Carrez Amendment”), aimed at preventing abusive debt
structuring in France, in particular where debt is incurred at
the level of French entities acquiring the shares of companies
located outside France. This mechanism results in a limitation
on the deductibility of interest relating to an acquisition of
qualifying participations if it cannot be shown that the
decisions and/or control or influence relating to those
participations are made or exercised by a company
established in France.
Further, the Finance Bill of 2012 introduced a new
mechanism, rather similar to those existing in other
European countries (e.g. Italy and Spain), that caps the
tax deductibility of net financial expenses at 75% of their
amount. This “haircut” mechanism applies to both related
party debt and third party debt if the total net financial
expenses exceed EUR3million, and affects financial
expenses that remain deductible under the other limitation
rules (i.e. thin-capitalisation and Carrez rules).
With the view to fighting against “artificial leverage schemes”
and hybrid financing instruments, the Finance Bill of 2014
introduced a new condition for the deductibility of interest on
debts subscribed by French borrowers from related parties.
Under this new rule, deduction would be possible only to the
extent the French borrower demonstrates, upon request from
the French tax authorities, that the lender is, for the current
fiscal year, subject to income tax on the interest equal to at
least 25% of the income tax determined under standard
French tax rules. Where the lender is resident or established
outside of France, reference to “income tax determined
under standard French tax rules” would mean that the lender
would incur an income tax liability on the interest income
in France if it were resident in, or established in, France.
This new test applies to the fiscal years ending on or
after 25 September 2013.
www.allenovery.com
16
Multinational tax practices face growing scrutiny
New transfer
pricing requirements
Transfer pricing documentation requirements have been
implemented for the fiscal years starting 1January 2010,
for French entities whose revenues or gross assets exceed
EUR400m and for French entities affiliated with an entity
(whether French or foreign) whose revenues or gross assets
exceed that same threshold (article L 13 AA of the French
Procedural Tax Code). The required documentation includes
(i) general information about the group the French entity
belongs to (description of its structure, activities, functions,
assets and risks, as well as a general description of the
transfer pricing policy of the group) and (ii) specific information
about the French company (description of its activities,
presentation of the transfer pricing methodology, including a
functional analysis). Failure to comply with such a
documentation requirement triggers a penalty amounting
to EUR10,000 for each fiscal year subject to tax audit or,
if higher, a 5% penalty assessed on the gross reassessed
amount (i.e. transferred benefits within the meaning of
article 57 of the French Tax Code).
Article 98 of the Finance Bill of 2014 extends the scope of
transfer pricing documentation requirements provided by
article L 13 AA of the French Procedural Tax Code to rulings
from foreign tax administrations granted to related parties.
Compliance with such a new requirement may trigger
practical difficulties (the related party may refuse to disclose
the ruling, or the ruling may include non-disclosure
commitments). In addition, based on the wording of the
new provision, it may apply to any ruling, whether relating
to transfer pricing policy or not.
Article 106 of the Finance Bill of 2014 originally included
new transfer pricing requirements in respect of cross-border
business restructurings, resulting in shifting the burden of
proof to the taxpayer. These rules applied to transfers of
risks and functions between related parties (or to any party,
whether related or unrelated, if the transferee benefited from a
privileged tax regime or was established in a non-cooperative
State or territory) if the operating results of the transferring
company during one of the two financial years following
the transfer were at least 20% below the average operating
result of the three preceding years. In such a situation,
the transferring company had to demonstrate that it received
arm’s length compensation in consideration for the transfer.
For these purposes, it had to provide the French tax
administration, upon request, with any relevant information
regarding both the transferring and the transferee company.
Otherwise, the profits that should have been realised by the
transferring company would be added-back to its taxable
result. The Constitutional Council has however censored
article 106 of the Finance Bill of 2014 on the grounds that
neither the concept of the transfer of risks and functions nor
the period corresponding to the “profits which should have
been realised” have been defined.
© Allen & Overy LLP 2014
Article 97 of the Finance Bill of 2014, which provided for a
maximum penalty for failure to comply with transfer pricing
documentation requirements up to 0.5% of the turnover of the
company (rather than the current maximum penalty of 5% of
the profits transferred abroad) has also been censored by the
Constitutional Council on the ground that the level of such a
penalty was disproportionate.
Enhancing information
and transparency,
strengthening penalties
On 5 November 2013, a law regarding the fight against
tax fraud and financial crime was adopted. As far as tax
matters are concerned, this law gives new powers of
investigation to the French tax administration (e.g. ability to
make copies of computer files and to use information of illicit
origin), enhances information requirements and strengthens
penalties in the event of tax fraud.
Eventually, in addition to the above-mentioned provisions,
two measures discussed within the framework of the Finance
Bill of 2014 but censored by the Constitutional Council clearly
reveal the current political climate and the will to fight against
tax avoidance and aggressive tax planning.
The first measure consisted in an enlargement of the
abuse of law definition in order to cover transactions whose
“main purpose” is to avoid or reduce the tax burden (whereas
under the current definition, the abuse of law concept relates to
transactions which are “exclusively” motivated by tax reasons).
The other measure consisted in the introduction of a mandatory
disclosure requirement regarding tax planning structures.
One cannot exclude the possibility that these proposals could
be adapted and discussed again in the future.
Conclusion
There is a clear intent on the part of the French
government and Parliament to go further in the fight
against tax evasion. The legislative changes described above
are meant to implement new rules in order to reach this goal.
However, from a practical standpoint, the contemplated rules
may go beyond the anti-avoidance objectives and catch
operations which are just business oriented or plain vanilla
tax planning schemes and subject them to unjustified hurdles.
It is still too early to assess the effects of such developments
but it is clear that taxpayers and tax practitioners will have to
adapt to the new climate.
CONTACTS
17
For more information please contact:
Jean-Yves Charriau
Sophie Maurel
Partner – Tax
Paris
Tel +33 1 40 06 53 60
Counsel – Tax
Paris
Tel +33 1 40 06 53 72
jean-yves.charriau@allenovery.com
sophie.maurel@allenovery.com
www.allenovery.com
18
Multinational tax practices face growing scrutiny
Germany
“Demands from important emerging countries to
change the landscape of taxation at source already
seem to be dawning. Given the expectation by the
established industrialised countries not to change
the architecture, conflicts that may not be easily
resolved appear already on the horizon.”
© Allen & Overy LLP 2014
19
BEPS measures
in Germany
Status quo
About one year after the release of the BEPS Action Plan
the public and political pressure to combat international tax
planning that may cause base erosion and profit shifting has
not lost its momentum. The Council of States (Bundesrat)
urged the German government by a resolution of 23 May
2014 to intensify its influence at a European level to repeal
in particular techniques that allow the creation of untaxed
income and the “double dipping” of expenses. The German
Finance Minister, Wolfgang Schäuble, underpinned the
German commitment to curb the international unfair tax
competition recently when Germany took over the Presidency
of the G7 Finance Ministers and Central Bank Governors on
1 July 2014. Whilst heralding political initiatives is one thing
and reality another, it is legitimate to ask where the BEPS
Action Plan stands today.
Leaders of the German tax administration share the view of
German business associations that Germany has already
implemented core aspects of the Action Plan on BEPS such
as the interest limitation and business migration rules as well
as the correspondence principle to neutralise the mismatch of
hybrid instruments. In the meanwhile hybrid mismatches are
also targeted by the amendment of the EU parent-subsidiary
directive as agreed by the Council of the EU on 20 June 2014.
The EU member states will have to transpose the amendment
into national law by 31 December 2015. Germany also has
tight CFC rules that permit German multinational companies
only on a very limited basis to defer taxation of passive
income in low-tax foreign jurisdictions.
Top priorities
A top priority of the German tax administration has apparently
been to address the tax challenges of the digital economy.
The OECD task force in charge of this topic is faced with the
ambitious deadline of September 2014 to deliver their report.
It is expected that the task force will strive to meet this
deadline, even though it is already obvious that significant
work on the digital economy will be delayed into 2015. It is
not very likely that the report will propose a fundamental new
tax regime for the digital economy because the interests of the
OECD members are just too different. Whilst some countries
seem to favour taxation based on a digital presence, other
countries still defend the established physical presence
approach. In anticipation of the amendment of article 58 of
the EU VAT Directive with effect from 1 January 2015 pursuant
to which e-commerce “B2C” services will in general be
subject to VAT at the place of the retail customer, Germany
has already incorporated the amendment into domestic law,
applicable from 1 January 2015 onwards. It remains to be
seen what else is to come to broaden the tax base for income
taxes as well.
On 22 August 2013 the Federal Ministry of Finance published
a model tax treaty with the goal of increasing consistency in
the wording of future tax treaties and to brief the legislators of
the Federal Parliament better about German tax treaty policy.
Whilst, following a long German tradition, the model
agreement still follows the concept of import neutrality by
providing for tax exemption, for certain foreign source income
categories (in particular income from foreign immovable
property, business profits and dividends from substantial
foreign shareholdings), it also underpins the determination to
avoid untaxed income by such exemptions. To avoid untaxed
income the exemption method is replaced by a tax credit for
foreign income taxes paid (thereby ensuring that the tax
burden is uplifted to the German level) in cases where there is
no sufficient substance or income taxation in the foreign
jurisdiction. The weaponry to reach this goal may result in
overkill. (i) Dividends received by a German corporation from a
substantial holding in another foreign corporation shall only be
tax exempt if the foreign corporation conducts a trade or
business and maintains an adequate physical business
presence (activity clause). (ii) Income put into different
provisions of the tax treaty by the other contracting state and
thereby causing double or non-taxation shall be switched
from the exemption to the credit method (switch-over-clause).
(iii) Income that is not effectively subject to income tax in the
foreign jurisdiction is also excluded from the exemption and
placed into the foreign tax credit basket (subject-to-taxclause). (iv) If, after consultation, Germany has notified the
treaty partner that it intends to apply the tax credit rather than
the exemption method to certain categories or elements of
foreign source income it may do so.
Another approach vigorously pursued by the German tax
administration is the enhanced spontaneous exchange of
information with foreign tax authorities. To go beyond the
exchange of information as stipulated in the EU Savings
Directive of 3 June 2003, Germany, France, Italy, Spain,
the UK and the USA passed a common declaration on
26 July 2012 to introduce a system for the exchange of
information that follows the template of the U.S. Foreign
Account Tax Compliance Act (FATCA) and the
Intergovernmental Agreements in this context that
Germany and the USA signed on 31 May 2013 and
which had already been endorsed by the German Federal
legislature and entered into force on 16 October 2013.
www.allenovery.com
20
Multinational tax practices face growing scrutiny
Areas with lower priority
Outlook
The OECD Action Plan on BEPS also offers the view that
enhanced transparency on tax planning measures is also
needed. Along these lines the Social Democratic Party and
the Green Party submitted a motion to the Federal Parliament
on 4 June 2013 to resolve that large companies must disclose
in their annual financial statements, amongst other items,
their tax payments broken down country by country
(country-by-country reporting). Ever since the Social
Democratic Party has joined the Grand Government
Coalition with the Conservative Party after last year’s election
with the Social Democratic Party Chairman, Sigmar Gabriel,
opting to take the Ministry of Economic Affairs, little has been
said about country-by country reporting. On the other hand,
the EU Directive 2013/34/EU of 26 June 2013 on the financial
statements of certain types of undertakings stipulates that
large undertakings and public-interest entities active in the
extractive industry or in the logging of primary forests should
disclose to the public payments of EUR100,000 or more
to governments. Likewise the EU Directive 2013/36/EU
of 26 June 2013, transformed into German law on
28 August 2013, on access to the activity of credit
institutions and investment firms requires country-by-country
reporting and public disclosure of taxes on profits and public
subsidies received with effect from 1 July 2015. There are
some indications that a general country-by-country reporting
system is not top of the list of the German tax administration.
However, given the development at the EU level it remains to
be seen if the country-by-country reporting requirement for all
large companies can ultimately really be warded off. It is very
desirable that it is because country-by country reporting
would impose an immense bureaucratic burden on
multinational companies and there is little hope that the
information revealed would be correctly interpreted by the
media and hence the public. Misleading interpretations would
most likely give rise to increased international public disputes
about the putative fair share of the allocation of tax revenues.
Not only Cassandra would be concerned that this discussion
would not be a catalyst for mutual international understanding.
If one puts the bits and pieces together that have leaked
out of the OECD working groups on BEPS it seems to be
that, as expected, all measures that may cause different
allocation of international tax revenues such as transfer
pricing will generate resistance from one or the other side.
Demands from important emerging countries to change the
landscape of taxation at source already seem to be dawning.
Given the expectation by the established industrialised
countries not to change the architecture, conflicts that
may not be easily resolved appear already on the horizon.
The realistic expectation therefore may be that in substance
the changes in the BEPS initiative will be less dramatic than
hoped or feared, depending on the observer’s perspective.
However, those measures that have no impact on the
allocation of tax revenues but put significant burdens on
businesses, such as enhanced disclosure requirements,
are more likely to be implemented.
© Allen & Overy LLP 2014
As regards the timeline the OECD Action Plan on BEPS is
very ambitious, perhaps too ambitious. Its architects obviously
committed themselves to such a tight deadline to capitalise
on the current public mood and the momentum the actions
should gain from it. As a next step the intent seems to be
to promulgate recommendations by the OECD that are
endorsed by all the OECD and G20 countries that support
the Action Plan. To avoid extremely cumbersome bilateral
treaty negotiations on a case-by-case basis the approach
appears to be to enter into a multilateral convention with all
willing states and transform this convention into domestic
law by ratification by the legislature of each jurisdiction.
CONTACT
21
For more information please contact:
Eugen Bogenschütz
Partner – Tax
Frankfurt
Tel +49 69 2648 5804
eugen.bogenschuetz@allenovery.com
www.allenovery.com
22
Multinational tax practices face growing scrutiny
Italy
“The proposal to involve taxpayers in
designing the compliance procedure
for an ex-ante tax control mechanism,
in particular, is welcome and should
hopefully lead to effective and efficient
solutions for both parties.”
© Allen & Overy LLP 2014
23
Summary
BEPS measures
in Italy
Mandatory disclosure in certain tax areas and increasing collaboration between taxpayers and tax
administrations are keywords of the Action Plan on Base Erosion and Profit Shifting (the BEPS Action Plan)
released last July by the OECD.
This article addresses two measures implemented in Italy, namely the Cooperative Compliance Programme
(the CC Programme) and the International Standard Ruling (the IS Ruling) which, in different areas
and with different effects, aims to increase transparency and proactive collaboration between taxpayers
and tax authorities.
Further measures are on the agenda, namely in relation to the exchange of information among countries.
On 14 January 2014, Italy and the U.S. signed an agreement to improve international tax compliance and
implement FATCA (the Foreign Account Tax Compliance Act), which will allow automatic exchange of
financial information between the tax authorities of those countries.
Background
The CC Programme is a pilot project which was launched
by the Italian Tax Administration (Agenzia delle Entrate) on
25 June 20131 and which aims, in line with OECD
recommendations, to implement a cooperative compliance
programme for large businesses. The first initiatives
foreshadowed by this programme commenced in autumn
2013 and are still continuing.
The IS Ruling has been in force for the last ten years2 so it
is not a brand new measure. It should, however, be noted
that it has gradually been adopted by several multinational
enterprises since its introduction. Further, from 2010, the Italian
Tax Administration, in line with the provisions of the OECD
Model Commentary, has agreed to discuss and conclude
bilateral and multilateral Advance Pricing Agreements (APAs)
under the IS Ruling procedure. A recent report by the Italian
Tax Administration on the outcome of the IS Ruling applying
to the 2003-2012 tax period3 shows how collaboration
between taxpayers and tax administrations has developed
in recent years.
The Cooperative
Compliance Programme
Goals and contents
Under the CC Programme, selected taxpayers have
been joining technical roundtables, together with the
Italian Tax Administration, to design and test an ex-ante
control mechanism based on voluntary disclosure and
periodic compliance.
The selected taxpayers and the Italian Tax Administration
are examining the main features of the internal tax control
framework, the possible obligations and fulfilments of
taxpayers and the role and responsibilities of the Italian
Tax Administration in enhancing efficiency for both parties.
The CC Programme should lead to the drafting of appropriate
legislative measures according to which all large business
taxpayers could opt to join a compliance and transparency
regime which would provide legal certainty in specific
transactions and avoid burdensome ex-post verifications
by tax administrations, which often result in time-consuming
tax litigation.
A balance should obviously be struck between the benefits
that may arise from such cooperation and transparency and
the costs of tax compliance for taxpayers. In any event,
the opportunity to influence new compliance rules is welcome.
01_According to Articles 27(9) to (12) of Legislative Decree No. 185 of 29 November 2008, as converted by Article 1 of Law No. 2 of 28 January 2009.
02_Article 8 of Legislative Decree No. 269 of 30 September 2003, as amended by Law No. 326 of 24 November 2003 and implemented by the Note (Provvedimento)
of the Italian Inland Revenue dated 23 July 2004.
03_Italian Tax Administration, International Standard Ruling, Report, II Edition, dated 19 March 2013.
www.allenovery.com
24
Multinational tax practices face growing scrutiny
The requirements necessary
to join the CC Programme
Large business taxpayers (for this purpose being those
with a 2011 turnover not lower than EUR100m) who had
implemented an organisational model to manage tax risks4
were eligible to apply for the CC Programme. Other factors
that might assist in being selected for the CC Programme are,
among others, adopting similar compliance programmes in
other jurisdictions or subscribing to a code of conduct with
other tax administrations.
The Italian Tax Administration has selected the taxpayers
to be admitted to the CC Programme.
The CC Programme so far
It has been reported5 that 84 applications have been filed:
the applicants are companies belonging to 55 groups.
Of these groups, 53% are based in Italy, 32% in Europe
and the remaining 15% outside Europe. The Italian Tax
Administration has started roundtables with the selected
taxpayers and a first report on the status of consultations
is expected in the next couple of months.
International Standard Ruling
Goals and contents
An IS Ruling allows entrepreneurs engaged in certain
cross-border transactions to reach agreement with the Italian
Tax Administration on the following matters: (i) determination
of the arm’s length value6 of transactions with associated
entities; (ii) the tax treatment of cross-border dividends,
interest and royalty payments (including identification of the
beneficial owners of the relevant payments); and (iii) attribution
of profits and/or losses to permanent establishments.
The features of an IS Ruling, as set out by law, are similar
to those of a unilateral Advance Pricing Agreements (APA).
Starting from 2010, however, the Italian Tax Administration
has expressly agreed to discuss and conclude bilateral and/or
multilateral APAs, in accordance with Article 25(3) of the
OECD Convention Model.
An IS Ruling may be applied to resident enterprises carrying
out international activities and to foreign enterprises with
permanent establishments in Italy. To this end, a resident
enterprise is deemed to carry out international activities if:
(i) it falls within the scope of Italian transfer pricing rules7;
(ii) its capital is (even partially) held by foreign entities or it
holds interests in entities resident abroad; and (iii) it pays
to or receives from foreign entities any dividends,
interest or royalties.
The IS Ruling procedure includes a pre-examination
process (lasting no longer than 30 days) in which the
Italian Tax Administration ascertains whether or not the
application can be entertained. If it can, the procedure must
be completed within 180 days. The 180-day term may,
however, be extended if further information is needed by
the Italian Tax Administration. From a practical standpoint,
the time required to obtain an IS Ruling may vary significantly
from case to case: the average period for reaching an
agreement is generally about 16 months. Indeed, the length
of time required represents the most critical aspect of
this procedure.
The Italian Tax Administration is also prepared to discuss
specific transactions on an informal basis (the so-called
pre-filing procedure), which may or may not result in
an IS Ruling.
An IS Ruling is binding on both taxpayers and the Italian
Tax Administration to the extent that the taxpayer’s business
operations reflect the facts contained in the agreement.
An IS Ruling is valid for three fiscal years, i.e. for the year
of its approval and the following two years. Upon request,
the agreement may be extended for a further fiscal period.
Once the agreement is in force, the taxpayer must periodically
prepare documentation and may be subject to inspection by
the Italian Tax Administration in order to verify whether the
agreement has been complied with. If the factual
circumstances and provisions of law on which the IS Ruling
has been based change, even in part, the agreement must
be amended accordingly.
Outcome of the
procedures so far
The report on IS Rulings for the 2004-2012 period,
published earlier last year by the Italian Tax Administration,
shows encouraging results: 135 applications for an IS Ruling
were filed with the Italian Tax Administration in this period,
with a notable increase in applications during the 2010-2012
period. Furthermore, a significant number of applications for
bilateral or multilateral APAs were filed from 2010 onwards
(21 applications of the 83 applications filed in total in the
same period).
To date, 56 IS Rulings have been issued (i.e. APAs concluded
accordingly), while 25 applications had a negative outcome
for taxpayers (i.e. they turned out not to be permissible or
no agreement was otherwise reached). The remaining
applications (about 40%) are still under consideration.
Notably, about 40% of the applications filed during the last
three years resulted in an IS Ruling, as against 14% of those
filed in the 2004-2006 period, thus showing an increasing
degree of awareness by both parties of the effectiveness
of the system.
04_ According to Law No. 231 of 2001 or having adopted a Tax Control Framework to manage tax risks.
05_ See: http://www.agenziaentrate.gov.it.
06_ More precisely, the so-called normal value (valore normale) according to Article 9 of Presidential Decree No. 917 of 22 December 1986 (the Italian Tax Code).
07_ Article 110(7) of the Italian Tax Code.
© Allen & Overy LLP 2014
25
The matters dealt with in those IS Rulings mainly related
to transfer pricing (19 cases involved bilateral APAs);
the attribution of profits and losses to permanent
establishments was also addressed in the IS Rulings
examined so far, while issues concerning withholding
taxes on dividends, interest and royalties seemed to be
marginal (one case only).
Finally, increasing numbers of pre-filings have been
registered in the last few years (about 110 cases from 2009),
which address wider issues than those found in IS Rulings
(e.g. in relation to business restructurings); this seems to
reflect a growing trust on the part of taxpayers in cooperative
procedures and voluntary disclosures.
Conclusions
CONTACTS
For more information please contact:
Francesco Guelfi
Francesco Bonichi
Head of Tax
Milan
Tel +39 02 2904 9659
Partner
Italy - Rome
Tel +39 06 6842 7566
francesco.guelfi@allenovery.com
francesco.bonichi@allenovery.com
The BEPS measures described in this article show how the
Italian Tax Administration has followed the path indicated by
the OECD in terms of proactive collaboration with taxpayers.
The proposal to involve taxpayers in designing the compliance
procedure for an ex-ante tax control mechanism, in particular,
is welcome and should hopefully lead to effective and efficient
solutions for both parties.
Indeed, the positive feedback from taxpayers on the
CC Programme and the increasing recourse to IS Rulings
to manage tax risks effectively suggests that the traditional
distrust of the Italian Tax Administration can be overcome and
replaced by a new spirit of cooperation. Notably, voluntary
disclosure no longer seems to be a taboo subject in Italy.
Giuseppe Franch
Senior Associate
Italy - Milan
Tel +39 02 2904 9556
giuseppe.franch@allenovery.com
Also welcome is the increasing number of bilateral APAs
reached so far, which is encouraging in terms of possible
cooperation between Italy and other countries, on the one
hand, and global risk management by multinational
enterprises on the other hand.
There is still some work to do. The CC Programme
represents a first step: the effectiveness of the measures that
are expected to arise from this programme and the timing
of their implementation are unpredictable. Needless to say,
the success of the CC Programme will also hinge on the
actions of local policymakers.
The time required to obtain an IS Ruling is still a significant
problem and should be further speeded up. The updating
of the economic and legal framework could also be further
examined so as to reduce administrative burdens and
uncertainties in implementing IS Rulings.
www.allenovery.com
26
Multinational tax practices face growing scrutiny
Hot Topics in Italy
The report of the Italian military tax police (guardia di finanza) in relation to the tax
inspections performed during the 2012 tax period is clear: more than EUR17 billion were
challenged in relation to cross-border transactions, which equates to about three times
the amount challenged in 2008. These figures foreshadow the increasing focus of the
Italian Tax Administration on multinational enterprises and the potential base erosion
deriving from cross-border transactions.
The main objective of these inspections relates to
the permanent establishment of foreign entities in Italy
(about EUR13.5bn was challenged in 2012).
available to the taxpayers and the provision of appropriate
and exhaustive feedback to the tax inspectors is often
decisive in this kind of claim.
Global integration of multinational enterprises, division of
the distribution process between a number of entities located
in different countries and diffusion of the digital economy have
made permanent establishment exposure an increasingly
critical issue, as highlighted by the OECD in its recent Action
plan on Base Erosion and Profit Shifting. Recent inspections
made by the Italian military tax police resulted in claims of
huge amounts based on the permanent establishment issue,
while important claims derived from the inspection of
enterprises that adopt “traditional” distribution schemes
(e.g. agency schemes) on a global basis. Further, it is worth
noting that foreign investment funds that operate in private
equity in Italy have claimed to have permanent establishments
in Italy based on the fact that the management of their target
companies was effectively carried on in Italy (about EUR900m
was challenged in 2012).
A further critical area is the question of the tax residence in
Italy of foreign companies, namely foreign holding companies
and SPVs. The economic substance of these foreign entities
and the place of their effective management are keywords
in these claims.
Transfer pricing and deductibility of expenses from
transactions with entities located in blacklisted companies
represents another area under the aegis of the Italian Tax
Administration (about EUR1.7bn was challenged in 2012).
As for the second issue, it is worth noting that according
to the Italian tax rules, the Tax Administration can disregard
deductibility of costs deriving from transactions with
blacklisted companies, if they are not supported by
sound economic reasons, regardless of whether the
pricing of the transaction is at arm’s length and the
companies are independent or not. The means of proof
© Allen & Overy LLP 2014
The concept of the abuse of law, which has been developed
in recent years by the Italian tax courts, has often played a
central role in these claims and is increasingly being used
by the tax authorities to challenge aggressive tax planning,
beyond the traditional measures (e.g. presumptions of law
and the exchange of information). According to this approach,
the military tax police challenged the restructuring of a
fashion group, which entailed the drop-down of brand
and trademarks from Italy into a Luxembourg entity.
The development of tax claims arising from such tax
inspections is often unpredictable and may take several
years to conclude. This is the reason why taxpayers often
prefer to try to reach a settlement on their claim with the
Tax Administration through one of the several instruments
set out in tax laws.
In any event, the consequences for taxpayers may be
very severe in terms of the financial burden, relationships
with financial institutions and reputational drawbacks.
Further, criminal consequences for individuals are highly
likely where tax claims involve significant amounts.
27
Risk management is therefore an increasingly critical issue
for multinational groups and relate to restructuring and
mergers and acquisitions, as well as the business model
actually adopted and ongoing transactions. Monitoring
relevant tax issues and implementing proper risk evaluation
– which should be updated periodically in the light of possible
modifications to the factual background and the amendment
of tax provisions and the development of their interpretations
– is becoming essential to conducting business on a
multinational basis.
Tax ruling procedures, in particular International Standard
Ruling and Advanced Pricing Agreements, represent routes
that an increasing number of multinational groups are going
to follow in order to get certainty regarding the legal and
tax treatment of their activities in Italy and to avoid double
taxation globally. These procedures however trigger a
significant administrative burden for taxpayers and entail full
advanced disclosure of business, financial and tax matters,
elements which could change once an application has been
filed, thus jeopardising the outcome of the ruling procedure:
a pros and cons analysis is therefore necessary on a
case-by-case basis.
www.allenovery.com
28
Multinational tax practices face growing scrutiny
Netherlands
“The government has also made clear that it is
inclined to safeguard the current attractive Dutch tax
climate for international business and that further
steps cannot be taken unilaterally by the Netherlands,
but must be taken internationally.”
© Allen & Overy LLP 2014
29
BEPS measures
in the Netherlands
The debate on base erosion and profit shifting has been quite intense in the Netherlands in
the past two years. NGOs initiated a strong lobby which was followed involvement by the
media and several left-wing politicians. The Second Chamber of Parliament organised an
official hearing on the topic of BEPS and several politicians urged the government for action.
In reaction to this impetus, the Dutch Government sent
a letter to Parliament on 30 August 2013 in which it
stressed that international tax avoidance issues can only
be resolved on an international scale and not by the
Netherlands on its own.
The Netherlands will maintain its attractive tax climate for
international investment. It will not change the main features
of its tax system such as the participation exemption,
the extensive tax treaty network and the potential to obtain
rulings in advance. However, the Dutch Government has
Information requirements
– finance companies
tightened the rules on the exchange of information in relation
to Dutch finance companies and has made changes to the
rules for Advance Tax Rulings (ATRs) and Advance Pricing
Agreements (APAs), changes which should not harm the
attractiveness of the Netherlands for real investments.
These changes are specifically aimed at situations in which
the risk of abuse exists and fit expected international
resolutions. In addition, the Netherlands will propose that tax
treaties with several developing countries are renegotiated,
for example by adding a general anti-abuse rule.
Substance requirements
In short, these substance requirements entail that:
As of 1 January 2014, companies which receive or pay
out interest, royalties, rental and lease instalments to or
from entities not resident in the Netherlands which are part
of the same business group must make an annual statement
as to whether they comply with the substance requirements
which previously only applied to companies with an ATR/APA.
This statement must be made in the Dutch corporate
income tax return.
a) at least half of the board members are resident
in the Netherlands;
b) the Dutch-resident board members have sufficient
knowledge and capability to perform their tasks,
which include at least making decisions on transactions
and managing the completion of transactions;
c) the company has staff qualified to manage and
register the transactions;
d) board decisions are made in the Netherlands;
e) the principal bank accounts are held in the Netherlands;
f) the company’s books and records are kept
in the Netherlands;
g) the place of residence of the company is
in the Netherlands;
h) as far as the company is aware, it is not deemed
to be resident in another country;
i) the company runs a real risk regarding the loans or legal
relations underlying the paid out and received interest,
royalties, rental and lease instalments, meaning that the
equity must be at least the lower of 1% of the outstanding
loans or EUR2m; and
j) the company has a sufficient amount of equity to
match its functions.
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30
Multinational tax practices face growing scrutiny
Additional information
requirements
If a finance company does not meet the substance
requirements, it must state which requirements it does not
meet and give an overview of the interest, royalties, rental and
lease instalments received for which it has requested the
application of a tax treaty, and any relevant European interest
and royalty directive or a national implementation of this
directive, including the names of the countries in which this
request has been filed. Furthermore, it must provide the name
and address of each of the entities from which it has received
interest, royalties, rental and lease instalments.
Automatic exchange of
information and fine
The Netherlands will automatically send information on
finance companies not meeting the substance requirements
to the relevant other country, which can then decide whether
the company is eligible for tax treaty benefits. If the company
does not fully meet the information requirements, the tax
authorities can impose a maximum fine on the company
of EUR19,500.
© Allen & Overy LLP 2014
Amended APA/ATR policy
Revised ATR/APA policy decrees were issued in early
June 2014. Although the overall policy has not changed,
there are some amendments which can be attributed to
the on-going debate on base erosion and profit shifting.
For instance, the Netherlands will automatically exchange
information on Advance Pricing Agreements with tax
authorities of other states if the multinational group does
not have more activities in the Netherlands than a Dutch
company receiving and paying interest and/or royalties.
Furthermore, ruling requests regarding holding activities,
receiving and paying out dividends will only be considered
if the multinational enterprise has sufficient nexus with the
Netherlands, for example because of real presence in the
Netherlands or the serious intention to create such presence.
This is all rather vague. An example of a case in which the
nexus criterion is met is when the ATR/APA substance
requirements are met, which requirements are practically
in line with the requirements for finance companies as
outlined above.
Conclusion
These measures make clear that the Dutch Government
is meeting on-going demands to prevent abuse of the tax
legislation of other countries by interposing the Netherlands.
However, it has also made clear that it is inclined to safeguard
the current attractive Dutch tax climate for international
business and that further steps cannot be taken unilaterally by
the Netherlands, but must be taken internationally.
31
CONTACTS
For more information please contact:
Godfried Kinnegim
Jochem Kin
Partner – Tax
Amsterdam
Tel +31 20 674 1120
Counsel – Tax
Amsterdam
Tel +31 20 674 1173
Rens Bondrager
Sigrid Hemels
Senior Associate – Tax
Amsterdam
Tel +31 20 674 1314
Senior PSL – Tax
Amsterdam
Tel +31 20 674 1572
godfried.kinnegim@allenovery.com
rens.bondrager@allenovery.com
jochem.kin@allenovery.com
sigrid.hemels@allenovery.com
www.allenovery.com
32
Multinational tax practices face growing scrutiny
Spain
“The Spanish Tax Administration shares the principles and
goals of international organisations aimed at combating base
erosion and profit shifting. At the same time, it is aware of
the real need to cooperate with taxing authorities of other
jurisdictions in order to successfully tackle harmful tax
practices and aggressive tax planning mechanisms.”
© Allen & Overy LLP 2014
33
Summary
BEPS measures
in Spain
The Spanish Tax Administration is in the process of enhancing the existing mechanisms to
challenge aggressive tax planning practices and harmful tax competition in its long-standing battle
against tax fraud and tax evasion. All these initiatives are in line with those taken or recommended by
international organisations, focusing on the effective exchange of tax information at international level and
cooperation amongst the relevant jurisdictions. The current on-going tax reform and the current Plan for
Tax Affairs clearly show these goals.
Spanish tax system
under reform
The Spanish Government is currently working on substantial
reform of the whole tax system, mainly affecting Personal
Income Tax, Corporate Income Tax and Non-Resident Income
tax. While some of the changes aim at boosting the economy
and internationalisation of Spanish companies (following the
trend of such continuing changes during the last five years)
and softening the increase of taxes introduced two years ago
to compensate the financial budget deficit, other potential
changes focus on aggressive tax planning techniques,
tax avoidance and international tax cooperation.
According to the recently published bill for a law (which is still
subject to corresponding parliamentary discussion before
enactment), the main changes relate, amongst others, to the
following areas: CFC rules; hybrid instrument mismatches;
limitation of tax deductibility of financial expenses; and
transactions with counterparties established or resident in
a tax haven jurisdiction.
Spanish tax regulations already challenge certain abusive
structures by denying the tax deductibility of certain financing
costs. In particular, it regards as non-tax deductible financial
costs accrued on a group financing obtained for either the
purpose of acquiring equities from a group company or
contributing equity to another company, unless a valid
business reason exists. This tax provision clearly attacks
abusive internal restructurings implemented in the past by
foreign multinationals interposing a Spanish holding company
(Entidad de Tenencia de Valores Extranjeros – ETVE),
combined with the tax grouping regime: under these
structures, ETVE acquired, through an interest-bearing
vendor loan (e.g. deferred consideration sale and purchase
agreement), non-Spanish subsidiaries from group companies
and opted for the tax grouping regime at domestic level.
Through this scheme they achieved tax deductibility within
the tax group for their financial costs accrued on intra-group
financings used for internal reorganisations.
Similarly, Spanish tax legislation already denies tax
deduction for costs corresponding to transactions,
directly or indirectly, entered into with persons resident in
tax haven jurisdictions, unless the effectiveness of the
transaction is properly evidenced.
Lastly, new reporting obligations in respect of offshore
assets and investments were recently introduced in Spain
with severe penalties for non-compliance. As a heavily
criticised measure, this means in practical terms the extension
of the statute of limitations period in respect of unreported
income, which also needs to be subsequently reported as
offshore assets/investments.
We summarise below some of the amendments included in
the bills for the law referred to above which are in line with the
initiatives taken at international level:
– CFC rules. These rules would not apply in respect of an
investment in subsidiaries located in an EU jurisdiction
unless such subsidiaries performed a genuine economic
activity abroad;
www.allenovery.com
34
Multinational tax practices face growing scrutiny
– Limitation of the tax deductibility for financing costs
(following the recommendations made by international
organisations). Interest-capping rules were introduced in
Spain back in 2012, which permit the computation of the
relevant parameters (financing costs and EBITDA)
at group level for companies under the tax grouping regime.
The introduction of a second tier of limitation is now
proposed which is especially designed to attack the financial
structure typically used on leveraged buy-out transactions
when the debt exceeds 70% of the acquisition price:
in essence, financing for a share deal would generate limited
tax-deductible costs as the purchaser/borrower would only
compute its own EBITDA (and not the group’s) to apply the
interest-capping rules;
The Spanish Annual Plan
on Control of Tax Affairs
– Non-tax deductibility for any interest payable under a profit
participating loan granted by a group company, irrespective
of the lender’s tax residence, as this interest is characterised
as equity remuneration;
The BEPS Action Plan is expressly highlighted by this
Annual Plan, as well as the recently introduced change in
Parent-Subsidiary EU Directive 2011/96/EU regarding the
potential lack of double taxation through hybrid structures
or instruments.
– Non-tax deductibility for expenses arising from transactions
entered into with related persons which, as a result of a
different tax characterisation do not generate taxable
income or generate a tax exempt income or income
taxable at a rate lower than 10%;
– Interest obtained by lenders on profit participating loans
granted to group companies (irrespective of their tax
residence) shall be initially regarded as tax-exempt dividends
in Spain, unless it constitutes a tax-deductible expense for
the borrower; and
– The concept of low-tax jurisdiction or tax haven territory is
amended in line with international principles.
The Spanish Plan on Control of Tax Affairs for 2014
contains a number of initiatives that relate to, on the one
hand, international tax affairs and, on the other hand,
aggressive tax planning, showing that it is totally aligned
with the actions and initiatives taken at international level.
The areas under analysis within this Plan are intricately
connected with the initiatives taken by international
organisations at EU level, OECD, G20 countries etc,
which will be fully supported by the Spanish Tax
Administration in its long-standing battle against tax fraud.
The Plan also focuses interest on the implementation of
international standards for the effective exchange of
international tax information as proposed by the Global
Forum on Transparency and Exchange of Tax Information.
Spain, as one of the G5 countries, actively participated in
the meeting on tax fraud and tax evasion held in Paris on
28 April 2014 to promote transparency and cooperation
in the tax area, to tackle tax fraud and tax evasion,
to counter harmful tax practices and to challenge
aggressive tax planning practices.
The Annual Plan makes particular reference not only to
the recently implemented intergovernmental agreement
for the automatic exchange of financial information with
the United States (FATCA) and implementing regulations
introduced in Spain, but also to the additional number of
Treaties for the avoidance of Double Taxation ratified with
other jurisdictions contemplating the exchange of tax
information (in particular tax havens or low-tax jurisdictions).
To this extent, the Plan supports the full development
of the National Agency for International Tax Matters
(Oficina Nacional de Fiscalidad Internacional), established in
2013, which primarily focuses on international related-party
transactions, transfer pricing issues between companies
belonging to multinational groups and the correct taxation
for Spanish sourced-income obtained by non-Spanish
residents. One of its main goals is to secure a harmonised
criteria for relevant and complex transactions.
© Allen & Overy LLP 2014
35
In particular, the main areas covered by
the Annual Plan are as follows:
CONTACTS
– Abusive application of domestic and international
regulations. In particular, topics like hybrid entities and
hybrid financial instruments which are currently benefiting
from their different characterisation in relevant jurisdictions
and the application of Double Tax Treaties; and potential
application of abuse of law doctrine to payments abroad
of a special relevance and to complex transactions;
For more information please contact:
– Transactions with tax haven territories or entities, for the
purposes of verifying the effective application of the
limitations and special rules set out in our domestic
regulations and of controlling artificial domiciliation of
entities in these territories to avoid Spanish taxes;
– Transfer pricing, in particular, in respect of complex group
restructurings, intra-group transactions, cost-sharing
arrangements and intangible transactions. Incentivising
advanced pricing agreements with the tax authorities to
prevent tax fraud is a goal identified in the Plan;
Carlos Albinana
Partner – Tax
Madrid
Tel +34 91 782 99 16
carlos.albinana@allenovery.com
– Identification of permanent establishments situated within
Spanish territory through which taxpayers who are treated
as non-Spanish tax residents develop their business activity,
in particular within multinational groups with a presence in
Spain; and
– Aggressive tax planning techniques, with a particular focus
on double dip structures, generation of tax losses as a result
of intragroup equity transfers, group restructurings benefiting
from a special tax-neutral regime and tax deductibility of
financing expenses.
Conclusion
Undoubtedly the Spanish Tax Administration shares the
principles and goals of international organisations aimed at
combating base erosion and profit shifting. At the same time,
it is aware of the real need to cooperate with taxing authorities
of other jurisdictions in order to successfully tackle harmful tax
practices and aggressive tax planning mechanisms.
Otherwise, any measure is doomed to failure. It remains to
be seen how potentially conflicting interests between different
jurisdictions evolve, as cooperation would involve not only
low-tax jurisdictions, emerging countries with the need to
attract foreign capital and investment (and tax incentives are
the natural tool for this), but also well-established jurisdictions
with a traditional tax status in this globalised world.
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