European Commission proposes public tax transparency rules for multinationals

On 12 April 2016, the European Commission (EC) introduced a legislative proposal on public reporting requirements for large multinational enterprises (MNEs), being multinational groups with a consolidated turnover exceeding 750 million EUR.  The so-called Country-by-Country Reporting (CbCR) will force large multinational enterprises to publish country specific profits and tax payments.

The current efforts for changes in the EU tax policy are directly linked to the OECD project on Base Erosion and Profit Shifting (BEPS). Among the 15 action points of BEPS, transparency plays a central role. Action point 13 - 'Transfer Pricing Documentation and Country-by-Country Reporting' - addresses the issue of more transparency explicitly. A first step by the EC refers to the so-called "Anti-Tax Avoidance Package".

In its Anti-Tax Avoidance Package, released in January 2016, the EC already indicated it was looking at the issue of public CbCR. The current legislative proposal to introduce public CbCR is published only a few weeks after the Council of the European Union reached political agreement on non-public CbCR to national tax authorities of the EU Member States. It is yet another EU initiative aimed at enhancing transparency and public scrutiny on corporate income tax affairs of MNEs.

CbCR is seen as a powerful tool to fight profit shifting by MNEs. They shall be obliged to provide financial figures such as the net turnover (including that with related parties), profit/loss before tax and number of employees as well as the nature of the enterprise's activity, the amount of accumulated earnings and the current year corporate income tax accrued and corporate income tax paid (differences between amounts of tax paid and tax accrued at group level must be explained). However, for legal reasons the CbCR will be limited to EU countries while for the rest of the world only aggregated figures will be provided.

The EC proposal goes further than OECD BEPS Action 13 requirements regarding the disclosure of information to tax authorities. This report must be published and made accessible on the corporate website in at least one of the official languages of the EU and filed with the appropriate business register.

Neutralising the Effects of Hybrid Mismatch Arrangements

The final report recommended that changes be made both to domestic law and the OECD Model Tax Convention in order to neutralize the effects of hybrid mismatch arrangements, which necessarily exploit differences in tax treatment of a single entity or instrument under the laws of two or more tax jurisdictions to achieve double non-taxation including long-term deferral.

Part 1 of the report for Action 2 basically recommends the linking of rules that align the tax treatment of an instrument or entity with the tax treatment in the counterparty jurisdiction but otherwise do not disturb commercial outcomes. Also, Part 2 aims to ensure that hybrid instruments and entities do not abuse the treaty benefits and will not prevent the application of the changes in domestic law as recommended in Part 1.

https://www.linkedin.com/pulse/beps-action-plan-2-hybrid-mismatch-arrangements-dirk-de-wolf?trk=hp-feed-article-title-publish

The Action Plan is clearly ambitious in scope and timing and some actions will be easier to implement than others, yet there is broad political support for at least some change to the international tax system.

ECOFIN reaches political agreement on CbCR

On 8 March 2016, the Council of the European Union (ECOFIN) reached a political agreement on the European Commission's proposal to implement country-by-country reporting (CbCR) to local tax administration, as well as the exchange of the reports between them.

The agreement is, however, still subject to the scrutiny of the UK parliament. This is a first step towards adoption of the European Commission's proposal, which was included in its Anti-Tax Avoidance Package published on 28 January 2016.

 

http://dirkdewolf.blogspot.be/2016/02/launch-of-anti-tax-avoidance-package.html

 

The agreement entails the mandatory exchange of tax-related financial information rules which will apply to multinational companies operating cross-border in the European Union. After the implementation, all Member States will have all the necessary financial information in order to protect their tax bases by addressing the companies that try to avoid paying their so-called 'fair share' of taxes in the country where their profits originate from.

 

http://europa.eu/rapid/press-release_IP-16-663_en.htm

 

The CbCR rules are seen as a necessary complement to the OECD guidelines on BEPS.

Treaty shopping and BEPS action 6

Action 6 (Treaty Abuse) is a key element of the OECD's BEPS Project. Action 6 handles treaty abuse, and in particular, Treaty Shopping, which allegedly is one of the most important BEPS Action plan concerns.

What is the OECD trying to achieve?

Double taxation treaties are agreements between two countries that aim to eliminate the double taxation of income which would otherwise be taxable in both countries under their domestic tax rules. The OECD is concerned that multinational groups may be structuring transactions to take advantage of more favourable treaties (treaty shopping) and/or engaging in tax planning arrangements using treaties in such a way they may result in double non-taxation.

Treaty shopping, i.e., where a person in country A, which is not, in principle, eligible to benefit from a given tax treaty with country B, invests through an entity in country C to benefit from the treaty. More generally, Action 6 intends to prevent the granting of treaty benefits in inappropriate circumstances.

 

Launch of the Anti-Tax Avoidance Package

On 28 January 2016, the European Commission (EC) presented its Anti-Tax Avoidance Package (ATAP) that contains proposed measures to planning, boost tax transparency and create a level playing field for all businesses in the European Union.

 

ATAP consists of seven parts:

• legislative proposals for an Anti-Tax Avoidance Directive (draft ATA Directive);
• legislative proposals for an amendment to Directive 2011/16/EU to coordinate implementation of G20/OECD BEPS country-by-country reporting (CBCR) requirements;
• a proposed 'EC Recommendation' to Member States on the implementation of G20/OECD BEPS recommendations on tax treaty abuse and on permanent establishments;
• a general policy 'Communication' on the ATAP and the proposed way forward;
• a general policy 'Communication' on an EU external strategy for effective taxation;
• an EC Staff Working Document; and
• a study on Aggressive Tax Planning.

Comments:

1. The EC's new proposals to crack down on multinational companies avoiding paying tax in countries they earn their profits won't be enough to fight tax havens, according to NGOs. http://www.euractiv.com/section/euro-finance/news/eu-s-anti-tax-avoidance-package-likely-to-fail-say-ngos/
2. Recommendations on amending tax treaties:
   ° ensure implementation of new PE definition
   ° advice on how to revise tax treaties against abuse
   ° focus on how to do it in EU law compliant way
3. The proposal for an ATA Directive could be seen as a first step toward harmonization in the context of the fight against base erosion and profit shifting. The EC continues to favour the adoption of the CCCTB, despite its rejection by many member states.

31 Countries Signed MCAA To Boost Transparency In International Tax Matters

On 27 January 2016, 31 countries signed the Multilateral Competent Authority Agreement (MCAA), which will bring greater sharing of information in international tax matters. The MCCA provides for the automatic exchange of Country-by-Country reports, enabling tax administrations to obtain a complete understanding of how multinational enterprise operations are structured across the value chain, while ensuring the confidentiality of such information.

‘Country-by-Country reporting will have an immediate impact in boosting international co-operation on tax issues, by enhancing the transparency of multinational enterprises’ operations,’ said OECD Secretary-General Angel Gurría. ‘Under this multilateral agreement, information will be exchanged between tax administrations, giving them a single, global picture on the key indicators of multinational businesses. This is a much-needed tool towards the goal of ensuring that companies pay their fair share of tax, and would not have been possible without the BEPS Project.’

This agreement, which covers BEPS Action 13 (Transfer Pricing Documentation & Country-by-Country Reporting), requires large companies operating in multiple jurisdictions to “report to their country of residence specified information regarding each jurisdiction in which the group operates,” including “revenues, profits, income tax paid, stated capital, accumulated earnings, number of employees, and tangible assets.”

First exchanges will start in 2017-2018 on 2016 information, depending on local implementation of CbC reporting requirements. In case information fails to be exchanged, the Action 13 report provides for alternative filing so that the playing field is levelled – although again this will depend on how the OECD recommendations are implemented in each territory.

Tax rulings and fiscal state aid in the EU

Since June 2013, the European Commission started a sweeping crusade against tax rulings, alleging that companies have received state aid in form of tax relief through tax rulings.

 

"The main reason behind our state aid action is the realization that governments can distort competition in the Single Market not only by granting subsidies but also by offering sweetheart tax deals. In particular, the deals we have identified benefit only a handful of large multinationals that can put enticing investments and job opportunities on the negotiating table. Smaller companies cannot wield the same bargaining power."

 

February 3, 2015: EU Commission starts proceeding against Belgium's excess profit ruling system

February 25, 2015: "Unhappy Meal" report - EU/US trade unions call for action from EU Commission

May 26, 2015: Amazon introduced a new tax structure in the UK, Germany, Italy and Spain. The Commission said it "will consider changes to the group tax structure, but these changes going forward don't affect any advantages the company may have received in the past."

 

The Commission in October 2015 decided that tax rulings for Fiat in Luxembourg and Starbucks in the Netherlands granted illegal selective tax advantages to the companies in breach of EU state aid rules. The Commission also has ongoing in-depth state aid investigations into tax rulings concerning Apple in Ireland, Amazon in Luxembourg and Belgium's "excess profit" ruling system.

 

More information: https://zwitsersbankgeheim.wordpress.com/2016/01/01/taxation-and-eu-state-aid-law/