Tackling International Tax
Avoidance in the European Union Recent Developments
Dr Christiana HJI Panayi
Senior Lecturer in Tax Law
Queen Mary University of London
1
Stateless Income and Base Erosion
• Public perception that big MNEs should pay more tax
• Media attention
• NGOs: Christian Aid, Oxfam, Action Aid, Tax Justice Network, Global
Financial Integrity etc.
• Politicians becoming involved
• G8/G20
• UK Parliament (Public Accounts Committee) hearings: Starbucks, Amazon,
Google, PWC, HSBC
• US Senate (Permanent Subcommittee on Investigations) hearings:
Microsoft, Hewlett-Packard, Apple and Caterpillar
• Tax evasion v. tax avoidance v. aggressive tax planning
• Tax morality, tax justice, corporate social responsibility…
• OECD/G20 launched the BEPS project in 2013
2
BEPS Action Plan
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Address the tax challenges of the digital economy
Neutralise the effects of hybrid mismatch arrangements
Strengthen CFC rules
Limit base erosion via interest deductions and other financial payments
Counter harmful tax practices more effectively taking into account
transparency and substance
Prevent treaty abuse
Prevent the artificial avoidance of PE Status
Assure that transfer pricing outcomes are in line with value creation
intangibles
Same - risks and capital
Same - other high risk transactions
Establish methodologies to collect and analyse data on BEPS and
actions to address it
Require taxpayers to disclose their aggressive tax planning
arrangements
Re-examine transfer pricing documentation
Make dispute resolutions mechanisms more effective
Develop a multilateral instrument
3
EU Timeline
• 1998-2015: Continuous work on harmful tax competition by the
Code of Conduct Group
• 2006: Communication about the need to develop a co-ordinated
strategy to improve the fight against fiscal fraud, COM (2006) 254
final of 31 May 2006.
• Also see Communication on the application of anti-abuse measures in
the area of direct taxation - within the EU and in relation to third
countries, COM(2007) 785 final
• ECOFIN 2008: Resolution to promote the principles of good
governance in the tax area, described as “the principles of
transparency, exchange of information and fair tax competition, as
subscribed to by Member States at Community level”.
• 2009: Communication for the promotion of good governance in tax
matters
• 2011: Public consultation on tackling double non-taxation,
resulting in report in February 2012 - poor response to Consultation
4
EU Timeline
• 2012: In March 2012, European Council called on Commission &
Council “to rapidly develop concrete ways to improve the fights against
tax fraud and tax evasion, including in relation to third countries …”.
• European Parliament resolution in April 2012.
• 2012: Communication on concrete ways to reinforce the fight against
tax fraud and tax evasion including in relation to third countries,
COM(2012) 351
• “Aggressive tax planning includes the use of artificial operations or
structures and the exploitation of mismatches between tax systems with
the effect of undermining Member States’ tax rules and exacerbating the
loss of tax revenues”. P.3
• Emphasis on application of good governance principles within the EU and
with third countries.
• Suggestions to amend and strengthen existing instruments such as the
Savings Directive, the Mutual Assistance Directive on exchange of information,
the use of Tax Identification Number, Quick Reaction Mechanism on VAT.
• Praise for work of OECD Global Forum on Transparency and Exchange of
Information for Tax Purposes.
5
EU Timeline – The EU’s Action Plan
• Communication on concrete ways to reinforce the fight
against tax fraud and tax evasion including in relation
to third countries: COM(2012) 351 final (27.6.12)
• Package on fight against tax fraud and evasion,
aggressive tax planning and good governance in
relation to third countries (6.12.2012)
• Communication on action plan to strengthen the fight against tax
fraud and tax evasion: COM(2012) 722 final
• Recommendations on measures intended to encourage third
countries to apply minimum standards of good governance in tax
matters (C(2012) 8805 final) and aggressive tax planning (C(2012)
8806 final)
6
EU Timeline – The EU’s Action Plan
• Recommendation on Good Governance
• Measures suggested to encourage third countries to apply
minimum standards of good governance in tax matters
• Transparency and exchange of information
• No harmful tax measures in business taxation
• Potentially harmful measure if significantly lower effective
level of taxation, including zero taxation
• Member States to place non-compliant third countries on
national blacklists, to be published.
• Member States encouraged to renegotiate, suspend or
terminate DTCs with non-compliant third countries and
to initiate negotiations for DTCs with compliant ones.
• Also consider offering closer cooperation and assistance to
compliant third countries especially developing countries.
7
EU Timeline – The EU’s Action Plan
• Recommendation on Aggressive Tax Planning
• Member States are urged to introduce a subject-to-tax
requirement both in their unilateral double tax relief rules and in
their bilateral tax treaties
• Suggestion for revision of Parent-Subsidiary Directive to allow
effective measures by Member States against double non-taxation
in the area of hybrid loan structures
• Commission to develop new formats for income covered by
Directive 2011/16 to implement automatic exchange of
information within EU
• Commission to consider giving Member State tax administrations
direct access to relevant areas of each other’s national databases
• Member States are encouraged to incorporate GAARs in their
national legislation.
8
EU Timeline – The EU’s Action Plan
• Recommendation on Aggressive Tax Planning
• Suggested GAAR wording:
• “An artificial arrangement or an artificial series of
arrangements which has been put into place for the
essential purpose of avoiding taxation and leads to a tax
benefit shall be ignored. National authorities shall treat
these arrangements for tax purposes by reference to their
economic substance.”
• Explanatory section in the Recommendation
• Proposal to review the anti-abuse provisions in the
Interest and Royalty Directive, Parent-Subsidiary
Directive, Merger Directive
9
EU Timeline
• 2012: Code of Conduct Group (Subgroups) begin to look
into hybrid mismatch arrangements involving hybrid
entities and later on Patent Box regimes.
• 2013: Platform for Tax Good Governance set up to monitor
Member States’ progress in tackling aggressive tax planning
and clamping down on tax havens. Members appointed.
• 2014: Digital Economy Group publishes report,
recommending destination-based taxation
• Taxation at the place of consumption of all digital goods and services
• 2015: Commission to unveil a directive on the automatic
exchange of information on tax rulings in the first quarter of
2015 and will examine additional anti-avoidance proposals.
10
Corporate Transparency Measures
• New Accounting Directive 2013/34/EU introduces an obligation
for large extractive and logging companies to report country-bycountry the payments they make to governments, and also on a
project-basis
• Increased transparency in the Extractive Industries Transparency
Initiative (http://eiti.org/)
• Revised Capital Requirements Directive 2013/36/EU improves
transparency in the activities of banks and investment funds in
different countries, particularly regarding profits, taxes and
subsidies in different jurisdictions
• Proposal to revise 4th anti-money laundering directive to include a
specific reference to tax crimes accepted in January 2015.
• Member States to store beneficial ownership information in central
registers.
• Accessible to public but must show a ‘legitimate interest’ in suspected
money laundering, terrorist financing and in ‘predicate’ offences that
may help to finance them, such as corruption, tax crimes and fraud.
11
Group on Taxation of Digital Economy
• Mandate to provide a broad overview of taxation issues
linked to digital economy, looking at both indirect taxes such
as VAT and direct corporate taxation.
• Report on 28 May 2014 endorses BEPS work on Action 1 but
makes some concrete suggestions.
• Consensus on the destination principle – taxation at the
place of consumption of all digital goods and services.
• Suggestions for the destination-based VAT system for some
digital services* to be expanded to all goods and services (in
business-to-consumer transactions) in the future.
• *More specifically, suggestion for the EU Mini One Stop Shop (MOSS)
which covers business-to-consumer sales of telecommunications,
broadcasting and electronic services to be expanded into a broad One
Stop Shop (OSS) to cover all business-to-consumer transactions.
12
Amendment to Parent Subsidiary Directive
• Proposal made on 25/11/13 (See COM(2013)
814 final) and approved 20/6/14
• To tackle hybrid loans and mismatches
• Art 4(1)(a) to provide that where a parent company, by
virtue of its association with its subsidiary, receives
distributed profits, the Member State of the parent
company shall refrain from taxing such profits to the
extent that such profits are not deductible by the
subsidiary of the parent company.
• Updates anti-abuse rule by requiring Member
States to create a common anti-abuse rule to
prevent them from granting benefits of the
directive to arrangements that do not reflect
economic reality.
13
Amendment to Parent Subsidiary Directive
• Common GAAR approved - 9 December 2014
• Art 1(2) to be replaced by the following text:
• “2. Member States shall not grant the benefits of this Directive to an
arrangement or a series of arrangements that, having been put into
place for the main purpose or one of the main purposes of obtaining a
tax advantage which defeats the object or purpose of this Directive,
are not genuine having regard to all relevant facts and
circumstances. An arrangement may comprise more than one step or
part.
• 3. For the purposes of paragraph 2, an arrangement or a series of
arrangements shall be regarded as not genuine to the extent that they
are not put into place for valid commercial reasons which reflect
economic reality.
• 4. This Directive shall not preclude the application of domestic or
14
agreement-based provisions required for the prevention of tax
evasion, tax fraud or abuse.”
Amendment to Savings Directive
• ECOFIN on 11 March 2014
• Amendments to Savings Directive suggested to enable Member
States to better counter tax fraud and tax evasion
• European Council on 20 March 2014
• Proposed amendments to Savings Directive adopted
• Since then
• Every Member State – including Luxembourg and Austria – is now
committed to automatic exchange of information on savings
income.
• Commission to update existing savings agreements with five
European third countries - Andorra, Liechtenstein, Monaco, San
Marino and Switzerland.
• Both the revised Savings Directive, through further discussions at
Council level, and the revised Savings agreements will be aligned
with the OECD Global Standard on automatic exchange of
information
15
Amendment to Mutual Assistance Directive
• Breakthrough of ECOFIN October 2014
• Amendment of Mutual Assistance Directive 2011/16/EU
(Exchange of Information directive).
• Member States agreed on a Commission proposal to apply the
widest possible scope of automatic exchange within Europe, to
mirror the global standard of automatic information exchange
agreed by the G20.
• From 2017, Member State tax authorities will automatically
exchange information with each other on most categories of
income and capital held by private individuals and certain
entities.
• Austria to be given an additional year to apply the new rules, to
allow it sufficient time to make the necessary technical adaptations.
• Savings Directive to be finally repealed to ensure there is one
standard of automatic exchange.
16
Code of Conduct Group
• On December 9, 2014 the Code of Conduct Group reported to
the ECOFIN on its work on hybrid entity mismatches.
• (KPMG report) The guidance focuses on two mismatch situations
involving hybrid entities: (1) a double deduction or other relief is
given in two Member States for the same payment, (2) a deduction
or relief is given in one Member State without a corresponding
receipt in another country.
• The solution put forward is for both Member States to treat the
entity as non-transparent in the first situation, and as transparent
in the second situation.
• Also, CCG report on review of patent box regimes
• The Group endorsed the modified nexus approach, with a
reservation from the Netherlands.
• Netherlands did not want IP regimes to be limited to patents, but
also to cover other innovations derived from R&D.
• Benefits not to be available for imported IP.
• Cf. UK Patent Box; fundamental freedoms???
17
Tax Transparency Package
• Commission’s Work Programme in December 2014 –commitment to
clamp down on tax evasion and tax avoidance, to ensure that taxes are
paid in the country where profits are generated.
• Among 23 initiatives see A Fairer Approach to Taxation: “An Action
Plan on efforts to combat tax evasion and tax fraud, including measures
at EU level in order to move to a system on the basis of which the country
where profits are generated is also the country of taxation; including
automatic exchange of information on tax rulings and stabilising
corporate tax bases.”
• 18 February 2015: Commission announced that it will present a Tax
Transparency Package, including a legislative proposal for the
automatic exchange of information on tax rulings, in March.
• This is considered as a foundation for a fairer and more transparent
approach to taxation in EU
• CCCTB to be re-launched in March 2015
18
The State Aid prohibition
• Art 107 TFEU (ex Art 87(1) EC):
Save as otherwise provided in this Treaty, any aid granted by a
Member State or through State resources in any form whatsoever
which distorts or threatens to distort competition by favouring
certain undertakings or the production of certain goods shall,
insofar as it affects trade between Member States, be incompatible
with the common market.
19
The test
1.
2.
3.
4.
5.
There has to be an aid in the sense of a benefit or
advantage;
granted by a Member State and through State
resources;
favouring certain undertakings or the production of
certain goods (the ‘selectivity’ principle);
distorting or threatening to distort competition; and
is capable of affecting trade between Member
States.
20
Aggressive Tax Planning and State Aid
• Four high profile Commission decisions
•
•
•
•
• Apple, Fiat, Starbucks, Amazon
Important question is whether the tax rulings under
investigation allowed the MNE beneficiaries to depart from
market conditions in setting the commercial conditions of intragroup transactions.
Member States renounce taxable revenues = State resources.
The Commission compares the transfer prices used with those
of a third party prudent independent market operator.
• Linkage of the prudent independent market operator test
with the arm’s length principle
• Commission’s own transfer pricing standards?
• Stricter than OECD TP Guidelines?
Commission’s main argument: Existence of advantage and
selectivity are satisfied when arm’s length principle not
complied with.
21
Aggressive Tax Planning and State Aid
• Issues of concern to the Commission:
• Tax rulings negotiated rather than substantiated by reference to
comparable transactions
• Tax rulings agreed a long time ago without any revisions
• Doubts as to the appropriateness of the transfer pricing method
and/or inconsistencies in the application of the method chosen
• Acceptance of a fixed tax base or a tax base which can vary only
marginally or cap and floor mechanisms
• Inconsistencies with the OECD TP Guidelines
• Limitations of the transfer pricing report (or no report)
• Ruling agreed in very short period of time
• Royalty rates not in line with market conditions
• Overall the Commission appears to reject the
economic rationale underlying the APAs.
22
More State Aid actions?
• The Commission has already asked all Member States to provide
information about their tax ruling practices.
• 3 February, 2015 Commission launched an investigation into Belgian
excess profits rulings (IP/15/4080)
• The rulings allow MNEs in Belgium to reduce their corporate tax liability by
"excess profits" that allegedly result from the advantage of being part of a
multinational group.
• Benefits only available to limited number of MNEs and not stand-alone
companies
• Commission has doubts that the Belgian legislation is following the OECD’s
arm’s length principle.
• “The Commission has concerns that the "excess profit" alleged under the tax
rulings, i.e. the deductions that a company can claim for e.g. intra-group
synergies or economies of scale, significantly overestimate the actual benefits
of being in a multinational group. The deductions granted through the excess
profit ruling system usually amount to more than 50% of the profits covered by
the tax ruling and can sometimes reach 90%.”
• Also, the rulings cannot be justified on the grounds that they prevent double
taxation, because the deductions in Belgium do not correspond to a claim from
another country to tax the same profits.
23
Potential conflicts with EU law
• Double non-taxation
• Also see treatment of juridical double taxation…
• Compliance of suggested anti-abuse rules with
principles of case law? (Cadbury Schweppes, Thin Cap
GLO etc)
• Does the rule target wholly artificial arrangements?
• Taxpayer given opportunity to prove the commerciality
of the arrangement?
• Recharacterisation at arm’s length amount
• Amendments to P-S Directive
• Subject to interpretation by MS? Jurisdiction shopping?
• What if different national GAARs?
• Modified nexus approach
24
The End
Thank you!
25
Progress in Fighting Tax Evasion/Avoidance in EU
• Expanding the automatic exchange of information widely
within the EU
• Tightening EU corporate tax rules against aggressive tax
planning (P-S Directive)
• Launching the debate on Digital Taxation
• Agreeing new instruments to better fight VAT fraud (Quick
Reaction Mechanism and Reverse Charges)
• New standard VAT form for businesses
• Preventing harmful tax competition – State aid and Code of
Conduct on Business Taxation
• Commission to unveil a directive on the automatic exchange
of information on tax rulings in the first quarter of 2015 and
will examine additional anti-avoidance proposals.
26