14 Mar 2018, advanced pricing agreements (APAs) between EU governments and multinational companies increased by 64% from 1,252 at the end of 2015 to 2,053 at the end of 2016, despite a series of exposés by whistle-blowers and state aid cases brought by the European Commission.
Based on analysis by Eurodad, the pan-European network of non-governmental organisations, of figures released by the European Commission, Belgium overtook Luxembourg as the EU country with the highest number of unilateral APAs in force, going from 397 in 2015 to 1,081 in 2016. Luxembourg’s APAs rose from 519 to 599, Italy from 61 to 73, the Czech Republic from 46 to 54 and Finland from 23 to 45.
According to Eurodad, the majority of unilateral APAs in force in the EU concern only other EU member states. However, roughly 25% also concern non-EU countries.
The Netherlands does not report on the total number of APAs in force and does not distinguish between unilateral, bilateral or multilateral APAs. However Eurodad estimated that its APAs had risen from 667 in 2015 to 858 in 2016, placing it second.
In respect of EU moves towards automatic exchange of APAs and other advance tax rulings, member states decided that they should be exchanged confidentially between EU tax administrators but not disclosed to the public. The European Commission will not have access to information about which multinational corporations have obtained such agreements, or any summary of the content. Member states further underlined that the Commission may not use this information for any other purpose other than to monitor and evaluate the effective application of the automatic exchange.
Tove Maria Ryding, Tax Justice Co-ordinator at Eurodad, said: “It’s positive that the European Commission has launched state aid cases to try and stop a few specific deals, some of which have cost us many millions of Euros in lost tax income. But with the number of deals increasing so fast, there is obviously no way the Commission can keep up. Furthermore, just like the public, the Commission has very limited knowledge about the actual content of these highly confidential deals”.
1 March 2018, the Belgium Grondwettelijk Hof (Constitutional Court) declared the tax known as the ‘fairness tax’ to be unconstitutional and therefore it has been annulled. However it limited the retroactive effect of the annulment except in respect of the redistribution of a dividend.
The fairness tax was introduced in 2013 as a separate tax of 5.15% on distributed profits that have not been effectively taxed as a result of the notional interest deduction (NID) and/or tax losses carried forward. It applied to both Belgian resident companies and Belgian establishments of non-resident companies.
In January 2014, a request for annulment was introduced before the Belgian Constitutional Court in X v Ministerraad (C-68/15). X argued that the ‘fairness tax’ constituted a restriction of freedom of establishment posing an obstacle to non-resident companies in freely choosing the legal form under which they intend to conduct their economic activities in Belgium.
It further argued that the ‘fairness tax’ constituted discrimination on grounds of nationality between a non-resident company conducting an economic activity in Belgium through a permanent establishment and a resident company. A non-resident company might be subject to that tax even if all of the profits of its Belgian permanent establishment were retained or reinvested in Belgium, whereas that would not be the case if the resident company reserved or reinvested all of its profits in Belgium.
Before deciding on the merits of the case, the Constitutional Court referred a preliminary question to the European Court of Justice (ECJ). In a judgment (Case C-68/15) issued on 17 May 2017, the ECJ held that the fairness tax was in breach of Article 4 of the Parent-Subsidiary Directive to the extent that it applied to redistributed dividends that qualify under the Parent-Subsidiary Directive with the effect that the 5% ceiling, as provided for by article 4(3) of that directive, was crossed.
The Constitutional Court held that the way in which the fairness tax was determined violated Articles 10, 11 and 172 of the Belgian Constitution, which guarantee equality and non-discrimination. Since the calculation of the fairness tax became unworkable in view of this violation, the Court annulled the fairness tax entirely.
The annulment is binding from the moment the decision of the Court is published in the Belgian Official Journal. However, for financial reasons, the ruling maintains the fairness tax until tax year 2018 (financial year 2017), except to the extent the tax applies to redistributed dividends and violates the Parent-Subsidiary Directive.
The Belgian legislature has now adopted other measures to limit the benefits of carried-forward of tax losses and the NID as from tax year 2019 (financial year 2018). The use of certain tax assets – including carried-forward tax losses and the NID – is now limited for any taxable year to €1 million, plus 70% of the taxable income above €1 million, leading to ‘minimum taxation’ of the remaining 30%. The tax assets that cannot be used are carried forward to the next tax year.
8 March 2018, the European Commission sent letters of formal notice to Cyprus, Greece and Malta for failing to levy the correct amount of VAT on the provision of yachts. It said last year's 'Paradise Papers' leaks had revealed widespread VAT evasion in the yacht sector, facilitated by national rules that do not comply with EU law.
Firstly, the infringement procedures concern the reduced VAT base for the lease of yachts – a general VAT scheme provided by Cyprus, Greece and Malta. Current EU VAT rules allow member states not to tax the supply of a service where the effective use and enjoyment of the product is outside the EU, but do not allow for a general flat-rate reduction without proof of the place of actual use. Malta, Cyprus and Greece have established guidelines under which the larger the boat is, the less the lease is estimated to take place in EU waters, a rule which greatly reduces the applicable VAT rate.
Secondly, the Commission also cited the incorrect taxation in Cyprus and Malta of purchases of yachts by means of what is known as 'lease-purchase'. Cypriot and Maltese laws currently classify the leasing of a yacht as a supply of a service rather than a good. As a result, they only levy VAT at the standard rate on a minor proportion of the real cost price of the craft once the yacht has finally been purchased. The bulk of the purchase price is taxed as the supply of a service and at a greatly reduced rate.
Commissioner for Economic and Financial Affairs, Taxation and Customs Union Pierre Moscovici said: “In order to achieve fair taxation we need to take action wherever necessary to combat VAT evasion. We cannot allow this type of favourable tax treatment granted to private boats, which also distorts competition in the maritime sector. Such practices violate EU law and must come to an end."
The three member states now have two months to respond to the arguments put forward by the Commission. If they do not act within those two months, the Commission may send a reasoned opinion to their authorities.
7 March 2018, EU Tax Commissioner Pierre Moscovici announced that, for the first time, the Commission had specifically identified the issue of aggressive tax planning in seven EU countries. The Commission also released a paper providing economic evidence suggesting that particular tax avoidance structures were being used in many EU States.
In introducing the 2018 European Semester Winter Package, an annual analysis of the economic and social situation in each of the 27 Member States, Moscovici said: “I want to highlight the fact that for the first time, the Commission is today stressing the issue of aggressive tax planning in seven EU countries: Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and The Netherlands.
“These practices that we know have the potential to undermine fairness and the level playing field in our internal market, and they increase the burden on EU taxpayers. The related country reports presented today are based on a thorough review of their tax rules and relevant factual economic indicators.”
The reports outlined the following practices:
-Ireland: absence of anti-abuse rules for the exemption from withholding taxes on dividend payments made by companies based in Ireland;
-Luxembourg: absence of withholding taxes on royalty and interest payments and the lack of some anti-abuse rules;
-The Netherlands: absence of withholding taxes on dividend payments by co-operatives, the possibility for hybrid mismatches using the limited partnership, absence of withholding taxes on royalties and interest payments, and the lack of anti-abuse rules;
-Belgium: patent box and delay in transposing ATAD into national law;
-Cyprus: tax rules on corporate tax residency, absence of withholding taxes on dividend, interest and royalty payments by Cyprus companies, risks associated with the design of Cyprus’s notional interest regime, and the lack of anti-abuse rules;
-Hungary: relatively high capital inflows and outflows through special purpose entities having little or no effect on the real economy, absence of withholding taxes on dividend, interest, and royalty payments made by companies based in Hungary, and patent box;
-Malta: planned notional interest deduction regime, absence of withholding taxes, and the lack of anti-abuse rules.
In addition to the country reports, the Commission released a 189-page taxation paper titled “Aggressive tax planning indicators”, which provides economic evidence of the “possible existence” of aggressive tax planning structures in EU countries and of the harm caused to by these structures to other EU countries.
These structures, the paper said, allow the tax base of a multinational group member located in a higher tax EU jurisdiction to be passed to another group member located lower-tax EU country. Sometimes there is an interim step, where the tax base is first passed to an entity in a third EU country (conduit entity), the paper said.
The paper analysed aggressive tax planning through the use of deductible interest and royalty payments and use of strategic transfer pricing. It noted, for example, that Cyprus, Malta, and Luxembourg raised more corporate revenues relative to GDP than other countries, which suggested the use of these countries for tax avoidance. Ireland was notable because it was the Member State with the highest net royalty payments as a percentage of GDP, which was consistent with facilitating aggressive tax avoidance using royalty payments.
22 March 2018, the UK and Cyprus signed a new double tax treaty and accompanying protocol in Nicosia. The new treaty, which will replace the existing treaty dating from 1974, closely follows the 2014 OECD model treaty and introduces new standards on the exchange of information and base erosion and profit shifting (BEPS).
The new treaty provides for a 0% withholding rate on payments of dividends, interest and royalties, with the exception of dividends paid by certain investment vehicles out of income derived, directly or indirectly, from tax exempt immovable property income. In such cases a 15% withholding rate applies.
These provisions are relevant only to dividends paid from the UK, since Cyprus does not impose withholding tax on dividends. The dividend exemption does not apply if the dividends derive from a permanent establishment in the country from which the dividends are paid, through which the beneficial owner of the income carries out business.
For capital gains, gains derived by a resident of one country from the alienation of immovable property (or of moveable property associated with a permanent establishment) situated in the other, or from the alienation of unlisted shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other country, may be taxed in the country in which the property is situated. Gains derived from the alienation of all other property are taxable only in the country in which the alienator is resident.
Cyprus also retains the exclusive taxing rights on pension income of Cyprus tax resident individuals, with the exception of certain cases of UK government service pensions.
The new treaty incorporates the Principal Purpose Test (PPT) under Action 6 of the BEPS project, which provides that a treaty benefit will not be granted, under conditions, if obtaining that benefit was one of the principal purposes of an arrangement or transaction.
When ratified the new treaty will enter into force in Cyprus from 1 January of the next calendar year. In the UK it will apply: for withholding taxes for amounts paid or credited on or after 1 January of the next calendar year; for income tax and capital gains tax from the next 6 April; and for corporation tax for any financial year beginning on or after the next 1 April.
15 March 2018, the European Court of Justice held that a natural person who transfers his or her place of residence to Switzerland and manages shareholdings in companies located in EU member states from there may not, for capital gains tax purposes, rely on the provisions concerning the freedom of establishment set out in the 1999 EU-Switzerland agreement on the free movement of persons (AFMP).
In Christian Picart v Ministre des Finances et des Comptes publics (C-355/16), Picart transferred his residence from France to Switzerland in 2002. On the date of transfer, he held significant shareholdings in a number of French companies. Under Article 167 bis of the code général des impôts (French General Tax Code (GTC)), he declared an unrealised capital gain on the shares and, in order to benefit from suspension of payment of the tax payable on that capital gain, appointed a tax representative in France and provided a bank guarantee to ensure recovery of the debt to the French Treasury.
In 2005, Picart transferred the shares in question, thus bringing the suspension of the payment of that taxation to an end. Following examination of his personal tax position, the French tax authorities re-assessed the amount of the capital gain declared and made Picart liable for additional assessments to income tax and social security contributions, with penalties.
Picart sought a discharge from those assessments and penalties. He argued unsuccessfully before the Administrative Court, Montreuil, that Article 167 bis of the GTC was incompatible with the AFMP in that the freedom of establishment guaranteed by that agreement allowed him to be established in Switzerland and to there pursue an economic activity as a self-employed person consisting in the management of his various direct or indirect shareholdings in a number of companies which he controlled in France. The Administrative Court of Appeal, Versailles, also rejected this argument on appeal.
Picart therefore brought an appeal on a point of law before the Council of State – whether the right of establishment as a self-employed person, within the meaning of the AFMP, had the same scope as the freedom of establishment which Article 49 of the Treaty on the Functioning of the European Union (TFEU) guarantees to nationals of EU member states. If it did, whether account must be taken for the purposes of its application, of the case law deriving from the subsequent judgment of 7 September 2006 in N v Inspecteur van de Belastingdienst Oost/kantoor Almelo (C‑470/04, EU:C:2006:525). The Council of State decided to stay the proceedings and to refer the following questions to the ECJ for a preliminary ruling.
The ECJ found that Picart’s situation did not come within the scope ratione personae of the notion of ‘self-employed persons’ within the meaning of the AFMP and therefore he could not rely on that agreement.
As regards the interpretation of Article 49 TFEU deriving from the N judgment, the interpretation given to the provisions of EU law could not automatically be applied by analogy to the interpretation of the AFMP, unless there were express provisions to that effect laid down by that agreement itself. The AFMP did not contain any such express provisions.
“When a natural person transfers his residence from that state to another state party to that agreement, while maintaining his economic activity in the first of those two states, without undertaking every day, or at least once a week, a journey from the place of his economic activity to that of his residence, provides for the immediate taxation of the unrealised capital gains on significant shareholdings held by that person in companies governed by the laws of the first state at the time of the transfer of residence and which allows deferred recovery of the tax due only if suitable guarantees to ensure recovery of the tax are provided, whereas a person who also holds such shareholdings, but who continues to reside in the territory of the first of those states, need pay tax only at the time of transfer of those shareholdings,’ the ECJ said.
1 March 2018, Advocate General of the European Court of Justice Juliane Kokott issued her opinions on the interpretation of the beneficial owner concept in four joined cases (C-115/16, C-118/16, C-119/19, and C-299/16) where the Interest Royalty Directive (IRD) applies and in two joined cases (C-116/16 and C-117/16) where the Parent-Subsidiary Directive (PSD) applies.
The IRD cases involved Danish companies being given loans from and paying interest to companies based in other EU member states and ultimately owned by entities resident in third countries. Under the IRD, withholding tax is not chargeable on interest payments arising in an EU member state provided that the beneficial owner of the payment is based in another member state.
The PSD cases involved the payment of dividends from a Danish company to a company in another member state that was ultimately owned by a third country-based entity. Under the PSD, dividends from subsidiaries to parent companies are not subject to withholding tax and there is no beneficial ownership requirement.
In all cases the Danish tax authorities refused to grant an exemption from Danish withholding tax on the interest and dividend payments to the non-Danish, EU parent company. The Danish tax authorities interpreted the IRD and the PSD as meaning that the non-Danish, EU company in receipt of the income was a conduit and not the beneficial owner of the payment.
In the IRD cases, the Advocate General took the view that the non-Danish, EU company receiving the interest was, in principle, the beneficial owner because it was the entity entitled in law to demand payment of the interest. However, that company would not be the beneficial owner where it was not acting in its own name and on its own account, but instead as a trustee for a third party.
The Advocate General listed some relevant aspects for the national court to consider when determining the existence or otherwise of a trust relationship. A refinancing agreement with another party on similar terms as the present case was not of itself conclusive of a trust. By contrast, arrangements such as identical refinancing interest rates and received interest rates, or the absence of costs for the parent company could indicate the existence of a trust.
With regard to the PSD cases, the Advocate General confirmed that the exemption to withholding tax under this Directive was not subject to a condition of beneficial ownership. Consequently, the next question was whether there was an abuse under EU law, namely a wholly artificial arrangement to escape national tax normally due on profits.
The Advocate General’s view was that a determination of abuse was a matter for the national court on the facts. In itself, the existence of a parent company in another member state so as to profit from that state’s tax legislation was not abusive, but abuse might exist if that company did not have the structure to achieve its purposes and generate an income.
27 February 2018, the English Court of Appeal held that a solicitor could not object on grounds of privilege to giving evidence where the questions related to factual information received from third parties in the course of acting for his client.
In Kerman v Akhmedova  EWCA Civ 307, the appellant solicitor Anthony Kerman had been called to attend court to give evidence relating to certain affairs of his clients, Russian businessman Farkhad Akhmedova and a nominee company.
The application was brought by Tatiana Akhmedova as part of a 2016 High Court ruling that awarded her a 41.5% share of former husband’s assets (£453.5m), which included an art collection valued at more than £90 million. As well as requiring Kerman to attend court to give evidence, the witness summons contained an order preventing Kerman tipping off his clients.
Kerman attended court but objected on grounds of privilege to certain questions about his role in arranging insurance for the modern art collection and about his clients’ assets. Haddon-Cave J rejected the claim to privilege on the basis that the husband’s conduct in seeking to hinder or prevent the enforcement of the wife’s claim had been seriously iniquitous, so that the fraud or iniquity exception to privilege applied. Kerman appealed.
The English Court of Appeal dismissed the appeal, finding that the matters in question were not privileged, though for different reasons. President of the Family Division Sir James Munby said that it was clear from the transcript that the questioning of Kerman was confined to two factual topics – his involvement in the insurance arrangements for the art collection and his knowledge of the nominee company’s banking arrangements and the transfer of its funds from Switzerland to Liechtenstein. Kerman had not been asked about his dealings with his clients, his instructions from them, or his communications with them, let alone about any advice he may have given them. Sir James also noted that if these questions had been put to the husband, he would not have been able to rely on privilege as a reason for refusing to answer.
It was the wife’s submission that the documentation and information sought from Kerman related to communications with third parties, which were not protected by legal advice privilege. Kerman had no effective answer to this and had to concede that communications between a solicitor and third party are not privileged. Accordingly, the appeal was dismissed.
21 March 2018, the European Commission adopted guidelines to put in place the first EU counter-measures against countries on its ‘black list’ of non-cooperative tax jurisdictions. The measures are designed to ensure that EU external development and investment funds cannot be channelled or transited through entities in countries on the black list.
The new requirements seek to align the EU's objective of tackling tax avoidance at the global level with the rules governing the use of EU funds by international financial institutions, such as the European Investment Bank (EIB), development financial institutions, such as the European Fund for Sustainable Development (EFSD) and other eligible counterparties involved in the indirect management of the EU budget.
The guidelines set out how its partners should assess projects that involve entities in jurisdictions listed by the EU as non-cooperative for tax purposes. This assessment includes a series of checks to identify a risk of tax avoidance with a business entity. For example, before channelling funding through an entity, it should be established that there are sound business reasons for how a project is structured that do not take advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing a tax bill.
The Commission also calls on international financial institutions and other bodies involved in the management of the EU budget to review their internal policies on non-cooperative jurisdictions in the course of 2018.
EU Tax Commissioner Pierre Moscovici said: "The EU's blacklist of tax havens is a living document and more countries will be added if they don't live up to the commitments they have made to improve their tax systems. The Commission will not allow EU funds to contribute to global tax avoidance. These EU level countermeasures should act as a wake-up call for those jurisdictions as they show the EU is serious about tackling tax avoidance on a global scale."
In addition to the EU provisions, member states have already agreed on a set of countermeasures hat they can choose to apply against the listed countries, including increased monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions.
The EU Economic and Financial Affairs Council (Ecofin) revised the black list on 13 March to take into account recent commitments made by listed jurisdictions and an assessment of jurisdictions for which no listing decision had yet been taken.
As a result, Bahrain, the Marshall Islands and Saint Lucia were removed from the list because Ecofin said they had made commitments at a high political level to remedy the EU's concerns. Implementation of these commitments will be carefully monitored.
However the Bahamas, Saint Kitts & Nevis and the US Virgin Islands failed to make such commitments and have been added to the non-cooperative jurisdiction list, while Anguilla, Antigua & Barbuda, the British Virgin Islands and Dominica have been added to the EU’s ‘grey list’.
When it first published a list of 17 non-cooperative jurisdictions on 5 December 2017, the Council agreed to delay screening of the tax systems of certain Caribbean jurisdictions that had been disrupted by hurricanes last September. This process was restarted in January 2018, when the EU sent letters requesting commitments from the countries involved that they would take steps to allay EU concerns.
It was the second time Ecofin has revised the list. On 23 January, it removed Barbados, Grenada, South Korea, Macao, Mongolia, Panama, Tunisia and the United Arab Emirates.
As a result the current list of non-cooperative jurisdictions comprises: American Samoa, the Bahamas, Guam, Namibia, Palau, Samoa, Saint Kitts & Nevis, Trinidad & Tobago and the US Virgin Islands.
Last month members of the European Parliament deplored the lack of transparency surrounding the compilation of the list. They said the lack of information about the criteria for adding a country to the list, and more importantly for its removal, had undermined its credibility.
27 March 2018, the European Commission published the non-confidential version of its decision, adopted on 18 December 2017, to open an in-depth investigation into the Netherlands' tax treatment of Inter IKEA, one of the two groups operating the IKEA business.
The Commission said it had concerns that two Dutch tax rulings, issued in 2006 and 2011, may have allowed Inter IKEA to pay less tax and given it an unfair advantage over other companies, in breach of EU State aid rules. The Commission held back the release of its opening decision to ensure that any confidentiality concerns could be addressed.
The opening of an in-depth investigation gives the Netherlands and interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation. The decision is available under the case number SA.46470 on the EU’s competition website at http://ec.europa.eu/competition/state_aid/cases/272426/272426_1973466_49_4.pdf
The Commission has been investigating individual tax rulings of member states under EU State aid rules since June 2013. It extended this information inquiry to all member states in December 2014.
In October 2015, the Commission concluded that Luxembourg and the Netherlands had granted selective tax advantages to Fiat and Starbucks respectively. In January 2016, the Commission concluded that selective tax advantages granted by Belgium to at least 35 multinationals, mainly from the EU, under its ‘excess profit’ tax scheme were illegal under EU State aid rules. In August 2016, the Commission concluded that Ireland had granted undue tax benefits of up to €13 billion to Apple. In October 2017, the Commission concluded that Luxembourg had granted undue tax benefits of up to €250 million to Amazon. The Commission also has two ongoing in-depth investigations concerning tax rulings issued by Luxembourg in favour of McDonald's and Engie (formerly GDF Suez), as well as one concerning a tax scheme for multinationals in the UK.
28 February 2018, the European Union requested that the OECD’s Forum on Harmful Tax Practices to undertake a ‘fast-track’ review of recent US tax changes, following discussions among EU finance ministers on whether to mount retaliatory measures via the World Trade Organisation.
The US Tax Cuts and Jobs Act, which cut the corporate tax rate from 35% to 21%, was signed into law by President Trump on 22 December 2017. The EU has warned that several provisions – notably the new base erosion and anti-abuse tax (BEAT) and the deduction for foreign derived intangible income (FDII) rules – may be in breach of international trade rules.
The EU claims the BEAT may be incompatible with the OECD Model Tax Convention’s non-discrimination Article 24 because it would only apply to payments to foreign-related parties and not to comparable payments to US related parties.
The FDII deduction works alongside the law’s requirement that US shareholders of controlled foreign corporations pay tax on their global intangible low-taxed income (GILTI) and may therefore be in breach of international standards such as Action 5 of the OECD’s Base Erosion and Profit Shifting (BEPS) rules.
The call for an OECD review followed a European Commission survey to determine the impact of the US tax reform on EU businesses, which is the first step in filing a WTO complaint.
The OECD Forum on Harmful Tax Practices is mandated to monitor and review tax practices around the world, focusing on the features of preferential tax regimes. This has included compliance with the BEPS reforms since 2015.
13 March 2018, the EU Economic and Financial Affairs Council (Ecofin) reached political agreement on a draft directive, proposed by the European Commission in June 2017, aimed at preventing aggressive tax planning by requiring mandatory reporting of potentially aggressive tax planning arrangements by tax intermediaries.
The draft directive, directive, which takes the form of an amendment to the Directive for Administrative Cooperation (DAC), requires intermediaries such as tax advisors, accountants and lawyers that design or promote tax planning schemes to report schemes that are considered potentially aggressive. The proposal broadly reflects Action 12 of the OECD’s BEPS project.
The draft directive establishes 'hallmarks' to identify the types of schemes to be reported to the tax authorities. The requirement to report a scheme will not imply that it is harmful, only that it may be of interest to tax authorities for further scrutiny. Whilst many schemes have entirely legitimate purposes, the aim is to identify those that do not.
If the taxpayer develops the arrangement in-house, or is advised by a non-EU adviser, or if legal professional privilege applies, the taxpayer must notify the tax authorities directly.
EU member states will be required to exchange the information they receive automatically through a centralised database in order to block harmful arrangements. Member states will also be obliged to impose penalties on intermediaries that do not comply with the transparency measures.
"Enhancing transparency is key to our strategy to combat tax avoidance and tax evasion", said Vladislav Goranov, minister for finance of Bulgaria, which currently holds the Council presidency. “If the authorities receive information about aggressive tax planning schemes before they are implemented, they will be able to close down loopholes before revenue is lost."
The directive requires unanimity within the European Council, after consulting the European Parliament. The Parliament backed the proposal on 1 March by 541 votes to 33 votes, with 61 abstentions. The directive will therefore be formally adopted during the next Council meeting on 25 May.
Member States will have until 31 December 2019 to transpose the directive into national laws and regulations. The new reporting requirements will apply from 1 July 2020. Member states will be obliged to exchange information every three months, within one month from the end of the quarter in which the information was filed. The first automatic exchange of information will therefore be completed by 31 October 2020.
21 March 2018, the European Commission published two distinct legislative proposals to ensure a fair share of tax revenues from online activities, as urgently requested by EU leaders in October 2017. It said the package set out a coherent EU approach to a digital taxation system that supported the Digital Single Market and would also feed into international discussions aiming to fix the issue at the global level.
The first initiative aims to reform corporate tax rules so that profits are registered and taxed where businesses have significant interaction with users through digital channels, even if a company does not have a physical presence there. This forms the Commission's preferred long-term solution.
A digital platform will be deemed to have a taxable 'digital presence' or a virtual permanent establishment in a Member State if it fulfils one of the following criteria:
-It exceeds a threshold of €7 million in annual revenues in a Member State
-It has more than 100,000 users in a Member State in a taxable year
-Over 3000 business contracts for digital services are created between the company and business users in a taxable year.
The new rules will also change how profits are allocated to Member States in a way which better reflects how companies can create value online: for example, depending on where the user is based at the time of consumption.
This, it said, would secure a real link between where digital profits are made and where they are taxed. The measure could eventually be integrated into the scope of the Common Consolidated Corporate Tax Base (CCCTB) – the Commission's existing proposal for allocating profits of large multinational groups in a way which better reflects where the value is created.
The second proposal responds to calls from several member states for an interim tax which covers the main digital activities that currently escape tax altogether in the EU. It would also help to avoid unilateral measures to tax digital activities in certain member states that could lead to a patchwork of national responses and damage the Single Market.
The tax would apply to revenues created from activities where users play a major role in value creation and which are the hardest to capture with current tax rules, such as those revenues created from:
-Selling online advertising space
-Digital intermediary activities that allow users to interact with other users and which can facilitate the sale of goods and services between them
-The sale of data generated from user-provided information.
Tax revenues would be collected by the member states where the users are located, and would only apply to companies with total annual worldwide revenues of €750 million and EU revenues of €50 million. This will help to ensure that smaller start-ups and scale-up businesses remain unburdened. An estimated €5 billion in revenues a year could be generated for Member States if the tax is applied at a rate of 3%.
Commissioner for Economic and Financial Affairs, Taxation and Customs Pierre Moscovici said: “The digital economy is a major opportunity for Europe and Europe is a huge source of revenues for digital firms. But this win-win situation raises legal and fiscal concerns. Our pre-Internet rules do not allow our member states to tax digital companies operating in Europe when they have little or no physical presence here. This represents an ever-bigger black hole for member states, because the tax base is being eroded. That's why we're bringing forward a new legal standard as well an interim tax for digital activities.”
The Commission said the recent boom in digital businesses –such as social media companies, collaborative platforms and online content providers – had made a great contribution to economic growth in the EU. But the current tax rules were not designed to cater for companies that were global, virtual or had little or no physical presence. Digital companies currently had an average effective tax rate half that of the traditional economy in the EU.
Vice-President for the Euro and Social Dialogue Valdis Dombrovskis said: "Digitalisation brings countless benefits and opportunities. But it also requires adjustments to our traditional rules and systems. We would prefer rules agreed at the global level, including at the OECD. But the amount of profits currently going untaxed is unacceptable. We need to urgently bring our tax rules into the 21st century by putting in place a new comprehensive and future-proof solution."
The legislative proposals will be submitted to the Council for adoption and to the European Parliament for consultation. The EU said it would also continue to contribute to the global discussions on digital taxation within the G20/OECD and push for ambitious international solutions.
15 March 2018, the European Parliament voted to approve the ‘Common Consolidated Corporate Tax Base’ (CCCTB) – part of a wide-ranging proposal to create a single EU corporate tax regime – by 438 votes to 145 votes, with 69 abstentions. The resolution will now be passed on to the European Council and European Commission for their consideration.
A separate, complementary measure that creates the basis for the harmonised corporate tax system – the Common Corporate Tax Base – was also approved by 451 votes to 141, with 59 abstentions.
Together, the two measures are aimed at plugging the gaps that have allowed some digital and global companies to reduce their tax bills or avoid paying taxes where they create their profits. This would partly be achieved through proposed benchmarks that would identify whether a firm has a ‘digital presence’ within an EU member state, and is therefore liable for tax.
Parliament also wants the EU Commission to set those benchmarks – such as the number of users or the volume of digital content collected – to produce a clearer picture of where a company generates its profits. Personal data is currently not considered when calculating tax liabilities.
Companies would calculate their tax bills by adding up the profits and losses of their constituent companies in all EU member states. The resulting tax would then be shared between member states depending on where the profits were generated. The aim is to curtail the current practice of firms moving their tax base to low-tax jurisdictions.
Once the proposals take effect, a single set of tax rules would apply in all member states. Firms would no longer have to deal with 28 different sets of national rules, and would only be accountable to a single tax administration.
19 March 2018, European countries have, on average, a tax burden of 43.3% of Gross Domestic Product (GDP), over 50% higher than the global average (28.2%) and nearly twice the average rate for the major emerging BRIC economies (21.8%), according to a report published by UHY, the international accounting and consultancy network.
UHY studied 34 countries around the world, calculating what percentage of that country’s GDP is taken by the government in tax. Denmark came top of the study with 53.5% of total GDP, an increase on the 48.6% recorded in a previous UHY study in 2015.
Western European countries dominated the higher positions in the ranking, with France (51.9%), Italy (46.1%), Portugal (43.9%), and Germany (43.8%) completing the top five. Ireland (26.2%) was the only Eurozone country studied where government tax take is below the global average.
The G7 average of 31.1% is closer to the global average, with the US (22%) and Japan (34.4%) seeing lower tax takes than their European competitors. The US percentage could fall further as a result President Donald Trump’s recent tax changes, which could see US government tax revenues fall by as much as US$2 trillion.
Emerging economies in general have much lower levels of government tax ‘take’, including many in the ASEAN (Association of Southeast Asian Nations) trading bloc such as Malaysia (16.5%) and the Philippines (13.9%).
20 March 2018, the governments of France and Luxembourg signed a new double tax treaty that will replace the current tax treaty dating from 1958. The most significant relate to the implementation of the latest OECD standards, the definition of tax residency and the withholding tax treatment of dividend distributions.
The definition of a ‘resident’ person eligible to treaty benefits is changed to exclude persons and entities that are not liable to tax and introduce the criterion of the place of effective management as the tie-breaker to resolve tax residency disputes.
The treaty updates the definition of ‘permanent establishment’ to defeat strategies used to prevent the recognition of a permanent establishment through agency or commissionaire arrangements, or the exception applicable to activities of a preparatory and auxiliary character.
The concept of ‘beneficial ownership’ is introduced to prevent the avoidance of withholding taxes with respect to dividend, interest and royalty income.
A dividend withholding tax exemption is introduced in respect of distributions paid from a corporation liable to tax, when the beneficial owner is a corporation that has owned directly at least 5% of the share capital of the distributing corporation for a period of 365 days, including the dividend payment date. In other cases it is 15%.
The dividend withholding tax rate applicable to distributions paid out of income or gains derived from real estate properties by real estate investment vehicles is increased from the current rate of 5% to the standard domestic rate – 30% or 15% for dividends paid to eligible Luxembourg investment funds. Where the relevant non-resident investor holds less than 10% of the real estate investment vehicle, this rate is reduced to 15%.
Specific anti-abuse rules and a general anti-abuse rule based on the ‘principal purpose’ test have been inserted in the treaty.
The revised tax treaty could enter into force as early as 1 January 2019, if ratification is completed before the end of 2018.
29 March 2018, the Inland Revenue (Amendment) (No. 3) Ordinance 2018 was gazetted to bring the new two-tier profits tax rates regime into force. The regime is designed to lower the tax burden for small and medium enterprises (SMEs) and will apply to both corporations and unincorporated business.
As from year of assessment 2018/19, the new profits tax will be levied at a rate of 8.25% (7.5% for unincorporated businesses) on the first HK$2 million of assessable profits and at a rate of 16.5% (15% for unincorporated businesses) on the remainder of assessable profits.
The law contains restrictive provisions specifying that a group of ‘connected entities’ can only elect one of them to be eligible for the two-tier regime for a year of assessment. It also excludes corporations that have elected to be subject to the special half-rate tax regimes for profits derived from their businesses of professional reinsurers, captive insurers, corporate treasury centres, aircraft lessors or aircraft leasing managers.
Profits derived from qualifying debt instruments, which are already taxed at 8.25%, will not be included in the first HK$2 million threshold under the two-tier regime.
Business restructurings, including the amalgamation of companies, involving a transfer of business from one company to another are generally considered as normal commercial activities. As such, tax benefits derived under the two-tier regime as a result of such restructurings will not generally be considered as a tax avoidance arrangement.
5 March 2018, the Hong Kong Inland Revenue Department launched a new Country-by-Country (CbC) Reporting Portal. Multinational enterprises (MNEs) can now register to file CbC reports for accounting periods beginning between 1 January 2016 and 31 December 2017 using the online portal.
Action 13 of the OECD base erosion and profit shifting (BEPS) initiative requires MNEs to provide aggregate information annually, in each jurisdiction where they do business, relating to the global allocation of income and taxes paid, together with other indicators of the location of economic activity within the group. It also covers information about which entities do business in a particular jurisdiction and the business activities each entity engages in.
The requirement for filing a CbC report in Hong Kong applies to the parent entity of MNEs where annual consolidated group revenues exceed HK$6.8 billion (US$868 million) and, in exceptional circumstances, surrogate parent entities of the group.
19 March 2018, India and Hong Kong signed a treaty for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. It is the 39th tax treaty signed by Hong Kong and will come into force following ratification by both sides.
Under the treaty, double taxation will be avoided because Indian tax paid by Hong Kong companies will be allowed as a credit against the tax payable in Hong Kong on the same profits, subject to the provisions of the tax laws of Hong Kong. For Indian companies, tax paid in Hong Kong will be allowed as a deduction from the tax payable on the same income in India.
The agreement provides that India’s withholding tax rate for Hong Kong residents on interest will be capped at 10%. Withholding tax on dividends is capped at 5%, withholding tax on royalties is capped at 10%, and withholding tax on fees for technical services is capped at 10% of the gross amount of the fees.
The treaty does not confer any specific exemption for most capital gains on Hong Kong residents investing in India. Such gains will continue to be taxed in accordance with Indian domestic tax law. The agreement also includes provisions for the exchange of tax information.
5 March 2018, President Joko Widodo issued Presidential Regulation No.13 of 2018 regarding the Implementation of the Principle on Recognising Beneficial Ownership of Corporations in the Framework of the Prevention and Eradication of Money Laundering and Criminal Acts of Terrorism Financing.
The regulation is intended to strengthen the fight against money laundering and financing of terrorism, and is necessary to allow Indonesia to comply with international standards for exchange of information.
Under the regulation, all companies, foundations, partnerships, associations, co-operatives and other types of entity are required to disclose to the ‘authorised agency’ at least one person as their beneficial owner upon registering for business. Existing entities are also required to disclose beneficial ownership information within a year by 5 March 2019.
Going forward, entities will then be required to submit details of changes in beneficial ownership no later than three business days after any changes, and re-submit beneficial ownership information on an annual basis.
Beneficial ownership data that is held by the authorised agency may be shared with other requesting law enforcement and governmental agencies, both domestic and international, having regard to the provisions of prevailing laws and international treaties. The regulation also expressly provides that third parties may seek information about a company’s beneficial owners by submitting a request to the authorised agency under the freedom of information legislation.
The regulation does not specify penalties for non-compliance but does provide that the failure to comply with certain sections of the regulation can be subject to sanctions provided in other laws and regulations.
The move is a part of efforts by Indonesia to bring rules up to international standards and join the Financial Action Task Force (FATF), an inter-governmental body fighting money laundering. Indonesia was placed on an FATF list of jurisdictions with weak measures to combat money laundering and terrorism financing in 2012. It was removed from the list in 2015 due to progress in improving regulations, but is yet to become an FATF member.
23 March 2018, the US Internal Revenue Service issued an advisory notice to taxpayers that income from virtual currency transactions – also known as digital currency – is reportable on their income tax returns and is treated as property for US federal tax purposes.
IRS Notice 2014-21 said some taxpayers might be tempted to hide taxable income from the IRS because transactions in virtual currencies could be difficult to trace and had an inherently pseudo-anonymous aspect. However taxpayers who did not properly report the income tax consequences of virtual currency transactions could be audited for those transactions and, when appropriate, could be liable for penalties and interest.
In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return. Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.
General tax principles that apply to property transactions also apply to transactions using virtual currency. Among other things, this means that:
-A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
-Payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply. Normally, payers must issue Form 1099-MISC.
-Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2 and are subject to federal income tax withholding and payroll taxes.
-Certain third parties who settle payments made in virtual currency on behalf of merchants that accept virtual currency from their customers are required to report payments to those merchants on Form 1099-K, Payment Card and Third Party Network Transactions.
-The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
13 March 2018, the Internal Revenue Service announced that it would begin to wind down the Offshore Voluntary Disclosure Programme (OVDP) before closing it fully on 28 September 2018. The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward, but only 600 disclosures were made in 2017.
“Taxpayers have had several years to come into compliance with US tax laws under this programme,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the programme at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”
The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed voluntary programmes offered in 2011 and 2009. The programmes were designed to enable US taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns.
The IRS said more than 56,000 taxpayers had used one of the programmes since 2009, paying a total of $11.1 billion in back taxes, interest and penalties. Over the same period, criminal Investigation had indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.
The planned end of the current OVDP reflected advances in third-party reporting – implementation of the Foreign Account Tax Compliance Act (FATCA) – and increased awareness of US taxpayers of their offshore tax and reporting obligations with respect to undisclosed foreign financial assets.
A separate programme – the Streamlined Filing Compliance Procedures – for taxpayers who might not have been aware of their filing obligations, is to remain in place and available to eligible taxpayers for the time being. But the IRS said that, as with OVDP, these might be brought to an end at some point.
9 March 2018, the OECD issued new model disclosure rules that require lawyers, accountants, financial advisors, banks and other service providers to inform tax authorities of any schemes they put in place for their clients that purport to circumvent the Common Reporting Standard (CRS Avoidance Arrangements) and on structures that disguise the beneficial owners of assets held offshore (Opaque Offshore Structures).
The OECD said that as the reporting and automatic exchange on offshore financial accounts under the CRS comes into force in over 100 jurisdictions this year, there are still many taxpayers that continue, often with the help of advisors and financial intermediaries, to try hiding their offshore assets.
CRS Avoidance Arrangements are arrangements that are designed to circumvent, or are marketed as, or have the effect of, circumventing the CRS, as implemented in relevant domestic laws. An arrangement circumvents the CRS where it avoids the reporting of CRS information to all jurisdictions of tax residence of the taxpayers in a way that undermines the policy intent of the CRS.
Opaque Offshore Structures are structures that involve the use of a passive entity in a jurisdiction other than the jurisdiction of tax residence of one or more of the beneficial owners and that are designed to, marketed as or have the effect of disguising the identity of the beneficial owner(s). Amongst others, this may include the use of nominee shareholders, the exercise of indirect control over entities or the use of jurisdictions with weak rules for the identification of beneficial owners. In order to minimise reporting in low-risk situations there is a carve-out from the definition of Offshore Structure for Institutional Investors.
Promoters are those persons that are responsible for the design or marketing of the scheme or arrangement. This in particular includes instances where the promoter has introduced features into the arrangement in light of its CRS treatment or for preventing the identification of the beneficial owners, or where the promoter has marketed the scheme or arrangement as having such outcomes. This definition would include a wealth planner or financial advisor that encouraged their client to enter into an arrangement on the basis that it was not subject to CRS reporting.
The information to be disclosed by the intermediary with respect to a CRS Avoidance Arrangement or Opaque Offshore Structure includes all the steps and transactions that form part of the arrangement or structure including key details of the underlying investment, organisation and persons involved and the relevant tax details of the clients and users as well as any other Intermediaries, but only to the extent that such information is within the Intermediary’s knowledge, possession or control.
Service providers are persons that provide assistance or advice with respect to the design, marketing, implementation or organisation of the scheme or arrangement. This may for instance include the advice provided by a lawyer, accountant or financial advisor, as well as account management or compliance services.
A promoter must disclose the CRS Avoidance Arrangement or the Opaque Offshore Structure within 30 days from the moment it makes the arrangement or structure available for implementation to either other Intermediaries or taxpayers – when the material design elements of the arrangement or structure have been completed and communicated to its client.
A service provider must disclose the arrangement or structure within 30 days once it provides ‘relevant services’ with respect to the arrangement or structure, but only where it knows or can reasonably be expected to know that the arrangement or structure is a CRS Avoidance Arrangement or an Opaque Offshore Structure.
Promoters are further required to disclose CRS Avoidance Arrangements entered into prior to the effective date of the rules, but after 29 October 2014, but only when the value or balance of the relevant financial account equals or exceeds US$1 million. Disclosure is required within six months of the effective date of the rules.
Director of the OECD Centre for Tax Policy and Administration Pascal Saint-Amans said: "With the automatic exchange of CRS information becoming a global reality this year, it is the right moment to get hold of those taxpayers and advisors that attempt to undermine the reporting on offshore assets and that try to play the new global tax transparency framework.
To avoid duplicate disclosures, the rules provide that an intermediary is not required to disclose any information on an arrangement or structure that has previously been disclosed to that tax authority. The rules do not require attorneys, solicitors or other admitted legal representatives to disclose any information that is protected by legal professional privilege or equivalent professional secrecy obligations, but only to the extent that an information request for the same information could be denied under Article 26 of the OECD Model Tax Convention and Article 21 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
The rules further impose a direct disclosure obligation on reportable taxpayers where the intermediary is not required to comply with equivalent disclosure obligations due to the fact that the intermediary is outside the scope of the rules or bound by the requirements of professional secrecy. In such cases, the reportable taxpayer must provide all relevant information on the arrangement or structure that is within its knowledge, possession or control.
In order for the new rules to meet their objective of providing additional information to tax authorities, the OECD is currently working on an exchange of information framework for the new rules, to be developed under the multilateral Convention on Mutual Administrative Assistance, which, it says, offers the most global international legal basis for the exchange of the information disclosed under the new rules with over 115 participating jurisdictions.
Director of the OECD Centre for Tax Policy and Administration Pascal Saint-Amans said: "With the automatic exchange of CRS information becoming a global reality this year, it is the right moment to get hold of those taxpayers and advisors that attempt to undermine the reporting on offshore assets and that try to play the new global tax transparency framework.
“The mandatory disclosure rules will be a powerful tool to detect taxpayers that continue to refuse to be compliant with their obligations to declare their assets and income to their tax authorities. They will also have a deterrent effect against the design, marketing and use of schemes to avoid CRS reporting or hide beneficial owners behind opaque offshore structures. This is key both for the integrity of the CRS and for making sure that taxpayers that can afford to pay advisors and to put in place complex offshore structures do not get a free ride."
The model mandatory disclosure rules will be submitted to the G7 presidency. The EU is in advanced discussions to implement the rules as part of a wider directive that would also implement BEPS Action 12 on Mandatory Disclosure more broadly. Finally, chapter IX of the CRS, to which over 100 countries have committed, requires these jurisdictions to have rules in place to prevent CRS avoidance arrangements.
15 March 2018, a report concluding that the rapid growth in free trade zones (FTZs) had unintentionally fostered growth in the trafficking of counterfeit goods was published jointly by the OECD and the EU’s Intellectual Property Office (EUIPO). It said more effective actions and co-ordination at the national and international levels were urgently needed to ensure that FTZs are not undermined by illicit activities.
According to the report entitled ‘Trade in Counterfeit Goods and Free Trade Zones’, there are now more than 3,500 FTZs, often located at key ports, in 130 countries or economies in North and South America, the Asia-Pacific region, Europe and Africa – up from just 79 spread across 25 countries or economies in 1975.
FTZs facilitate trade by offering businesses advantageous tariffs and lighter regulation on financing, ownership, labour and immigration, and taxes. They have helped emerging economies to attract foreign investment and generate jobs and growth, although they have also benefitted wealthier economies such as the US, Singapore and Hong Kong.
However, the report also found that exports of counterfeit and pirated goods from a country or economy rise in parallel to the number and size of FTZs that it hosts. Comparing growth in FTZs, measured by the number of firms and employees in the zone, and customs seizure data from around the world showed that establishing a new FTZ was associated with a 5.9% rise in the value of counterfeit exports from the host economy.
“This is clear evidence that free trade zones are being used by criminals to traffic fake goods,” said OECD Public Governance Director Marcos Bonturi at a meeting of the OECD Task Force on Countering Illicit Trade. “We want this to be a call for action, and we will be working in the months ahead to help free trade zones step up their efforts to stop illicit trade, while at the same time maintaining their role as facilitators of legal trade.”
16 March 2018, the G20/OECD Inclusive Framework on base erosion and profit shifting (BEPS) released ‘Tax Challenges Arising from Digitalisation – Interim Report 2018’, which builds on the 2015 BEPS Action 1 Report and includes an in-depth analysis of the changes to business models and value creation arising from digitalisation.
The report focuses on new digital business models and considers how to respond to the challenge of determining how taxing rights on income generated from cross-border digital activities should be allocated among jurisdictions.
The Task Force for the Digital Economy undertook work to understand the main features of digital markets and how these characteristics shape value creation. The following characteristics have been observed in highly digitalised business models:
-Scale without mass. Highly digitalised businesses often are highly involved in the economy of a jurisdiction without any significant physical presence;
-Reliance on intangible assets; and
-Data and user participation, including network effects. The existing tax framework currently does not capture this concept of value creation.
There was no consensus agreement among countries over the tax implications of scale without mass and a greater reliance on intangibles. There was general agreement that data and user participation were common characteristics of highly digitalised businesses, but there are differences of opinion on whether, and the extent to which, they represented a contribution to value creation by the business. Some jurisdictions considered that the role of user participation allowed highly digitalised businesses to collect and monetise information, while others considered that the data was similar to any other input sourced from an independent third party.
Countries had different views on whether, and to what extent, changes were needed to the international tax rules. These fell into three broad categories:
-Targeted changes are needed – reliance on data and user participation may lead to misalignment between the location in which profits are taxed and the location in which value is created, but this issue is confined to certain digital business models;
-Changes should apply more broadly – the ongoing digital transformation and globalisation of the economy present challenges to the existing international tax framework for business profits, so a broader review is needed; and
-No significant reform is needed – the BEPS package has largely addressed the concerns of double non-taxation, although it is still too early to fully assess the impact. The existing tax system generally is satisfactory.
Acknowledging this divergence, there was agreement that it was in the common interest to maintain a single set of relevant and coherent international tax rules to promote economic efficiency and global welfare. A review will therefore be undertaken of how taxing rights are allocated between jurisdictions and how profits are allocated to the different activities carried out by multinational enterprises. This will test the feasibility of different options for nexus and profit attribution rules. Input will be gathered from stakeholders.
There was no consensus on the need for, or merit of, interim measures and the interim report did not recommend their introduction. Jurisdictions that opposed interim measures were concerned about the potential adverse consequences of a gross-basis tax in respect of: investment, innovation and welfare; increases in consumer prices; over-taxation; and compliance and administrative costs. There was also concern that interim measures could remain in place long term.
Other jurisdictions considered that the policy challenge of not acting outweighed the disadvantages. These jurisdictions considered that the current position undermined the sustainability and public acceptability of the system and asserted that, pending a global solution, jurisdictions should be compensated for what they consider to be untaxed value created in their jurisdiction. A number of jurisdictions, including the EU and the UK, are considering an interim measure in the form of an excise or revenue tax on the supply of certain e-services within their jurisdiction.
Countries have agreed that, where interim measures are introduced, design guidelines are to be followed to mitigate possible adverse consequences and limit divergence. In particular, the measures must:
-Comply with a country’s international obligations, including tax treaties and World Trade Organisation, EU and EEA membership. Consideration will be needed as to whether the new tax would be covered by existing bilateral tax treaties;
-Be temporary in duration. Countries must remain committed to working towards consensus on adapting the international tax system;
-Target the highest risk areas where value is created by user participation and network effects. The online sale of goods and digital content should be excluded. A number of countries maintain that the focus could be on Internet advertising and online intermediation services on the basis that these businesses typically operate remotely and rely heavily on intangible property, data, user participation and network effects;
-Minimise over-taxation through a low tax rate and possible exemptions;
-Minimise impact on start-ups, business creation and small business more generally by establishing thresholds for both global group revenue and local sales; and
-Minimise cost and complexity by relying on the existing tax collection mechanisms and place of supply rules. For online intermediation services, it is suggested that supply would be based at the location of the customer purchasing the intermediation services.
"The international community has taken an important step today towards resolving the tax challenges posed by the digitalisation of the economy," said OECD Secretary General Angel Gurria. "We have underlined the complexity of the issues, and highlighted the importance of reaching international agreement, both for our economies and the future of the rules-based system.”
An update on the work in respect of the profit allocation and nexus rules will be provided in 2019, with members working towards a consensus-based solution by 2020. The Task Force for the Digital Economy will also continue to monitor the impact of BEPS measures, US tax reform, unilateral measures and evolving business models in connection with the digitalisation of the economy.
12 March 2018, Serbia became the 149th member of the Global Forum on Transparency and Exchange of Information for Tax Purposes. It will participate in the forum and has committed to implementing both exchange of information on request and automatic exchange of information for tax purposes.
5 March 2018, the Inland Revenue Authority of Singapore (IRAS) announced that Return Filing for the Reporting Year 2017 under the US Foreign Account Tax Compliance Act (FATCA) would commence on 16 April 2018.
All reporting Singapore financial institutions (SGFIs) are required to submit a FATCA Return to IRAS, setting out the required information in relation to every US Reportable Account that was maintained in calendar year 2017 by 31 May 2018.
“We strongly encourage Reporting SGFIs to submit their FATCA Return by 15 May 2018 to allow sufficient time to resolve any unexpected issues. Enforcement actions will be taken against Reporting SGFIs that did not submit their FATCA returns on time or did not submit their FATCA returns,” said the IRAS.
Reporting SGFIs that did not maintain any US Reportable Accounts may continue to submit a Paper Nil Return for Reporting Year 2017. The Paper Nil Return for Reporting Year 2017 will be made available for download from 13 April 2018.
22 March 2018, the government of Slovenia deposited the fifth instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) to ensure that it will enter into force on 1 July 2018.
The Convention, negotiated by more than 100 countries and jurisdictions under a mandate from G20 Finance Ministers and central bank governors, will allow signatories to transpose results from the OECD/G20 BEPS Project into their existing bilateral tax treaties without the need for bilateral renegotiations.
Treaty measures that are included in the Convention include those on hybrid mismatch arrangements, treaty abuse and permanent establishment. The Convention also strengthens provisions to resolve treaty disputes, including through mandatory binding arbitration.
The Convention had previously been ratified by Austria (22 September 2017), the Isle of Man (19 October 2017), Jersey (15 December 2017) and Poland (23 January 2018). The entry into force of the Convention on 1 July 2018 will bring it into legal existence in these five jurisdictions and its contents will start to have effect for existing tax treaties as from 2019.
OECD Secretary-General Angel Gurría said: “The entry into force of this Multilateral Convention marks a turning point in the implementation of OECD/G20 efforts to adapt international tax rules to the 21st Century. We are translating commitments into concrete legal provisions in more than 1,200 tax treaties worldwide. Thanks to this drive by the international community, we are ensuring that multinational companies pay their fair share when it comes to fulfilling tax obligations, like citizens do.”
19 February 2018, the Spanish Supreme Court ruled that the practice of charging non-residents a higher rate under Spanish inheritance and gift tax than residents in Spain or the EU and EEA member states to be discriminatory and therefore unlawful. The decision will potentially enable non-resident taxpayers to claim reimbursement of the excess amount paid.
Originally, the Spanish Inheritance and Gift Tax Law excluded persons who were non-tax residents in Spain from the application of certain rules and tax benefits available from the Autonomous Regions to inheritance procedures and gifts with sufficient connection to their individual territories. Non-residents in Spanish territory were therefore obliged to apply the national tax provisions when receiving by inheritance or donation assets located in Spain. This generally resulted in a higher tax charge.
The European Court of Justice (ECJ) ruled in September 2014 (Case C-127/12) that both Article 63 of the Treaty on the Functioning of the European Union and Article 40 of the Agreement on the European Economic Area, when referring to the free movement of capital, were to be interpreted as precluding such discrimination between resident and non-resident persons in Spain, and also gifts concerning immovable property located in Spain and outside its territory.
The Spanish government was obliged to modify the law and extend the application of regional inheritance and gift tax benefits to tax residents in the EU/EEA member states. However, it did not extend the application to third countries and several claims were lodged before the domestic Spanish courts.
The Supreme Court found that there were no legal grounds for applying a different tax treatment for persons resident in the EU/EEA/Spain and persons resident in third countries because the free movement of capital also applied to these situations. It also recognised that this infringement was sufficiently serious to merit ordering the Spanish tax administration to compensate non-resident taxpayers. As a result, non-EEA citizens who have paid Spanish inheritance tax in the last four years are expected to now be able to apply for a refund in situations where regional law would be more favourable than the national law.
21 March 2018, the Swiss Federal Council adopted a draft bill for reforming the Swiss corporate tax regime, known as ‘Tax Proposal 17’ (TP 17), which is designed to comply with international standards after pressure from the EU and the OECD. Last year, voters rejected the government’s initial Corporate Tax Reform III proposal by referendum.
TP 17 proposes the abolition of cantonal preferential tax regimes – holding, domiciliary and mixed company status – together with the Swiss finance branch and principal company federal regimes. To maintain competitiveness, some cantons have already announced plans to reduce their corporate tax rates.
Transitional measures provide for preferential taxation of hidden reserves of such companies, provided those reserves will be realised within five years. The new bill also contains the potential for companies that relocate to Switzerland to enjoy and tax neutral step-up for hidden reserves and self-generated goodwill income
TP 17 will introduce a mandatory patent box regime on a cantonal level in accordance with the modified nexus approach, developed by the OECD. As a result, tax relief of up to 90% will be available for profits arising from patents or comparable rights.
The bill authorises the cantons to implement an R&D super-deduction of up to an additional 50% of business-related costs for R&D activities performed in Switzerland. The tax relief resulting from the patent box and the R&D super-deduction is capped at 70% of the taxable profit before offsetting any net operating losses of the Swiss company.
TP 17 also provides that at least 30% of company profits should be fully taxed by cantons before so-called patent box and other R&D reliefs can be applied.
The draft legislation will be discussed in parliament and may still be amended. Essentially, if the project is not delayed, it is likely that TP 17 will enter into force in 2020 whereas cantons will have the possibility to apply the step-up rules already at an earlier stage.
27 March 2018, the Treasury Sub-Committee announced that is will examine the amount of tax lost to avoidance and offshore evasion, and whether HMRC has the resources, skills and powers needed to bring about a real change in the behaviour of taxpayers and tax advisers. It will also be examining the role of the UK’s Crown Dependencies and Overseas Territories. Chair of the Treasury Sub-Committee John Mann said: "Tax avoidance and evasion remain matters of serious public concern. HMRC has been given additional funds in recent years to address the issue, yet the tax gap for avoidance and evasion is still billions of pounds.
“The Sub-Committee will look into how well HMRC has used these additional funds to close the tax gap, whether its strategy to reduce avoidance and offshore evasion has worked, and whether HMRC’s resources are sufficient … And we’ll be looking in depth at avoidance and evasion in the UK’s Crown Dependencies and Overseas Territories, and asking questions of those responsible. Over the next few months, we’ll be holding all those involved to account to make sure that no one – however wealthy – can dodge paying the tax they owe."
The Treasury Sub-Committee has invited the submission of evidence in response to a number of questions. The deadline for written submissions is 31 May 2018.
28 February 2018, the UK National Crime Agency (NCA) secured two unexplained wealth orders (UWOs) to investigate assets totalling £22 million that were understood to be owned by a politically exposed person (PEP).
These are the first such orders granted and represent the first time the legislation, which only come into force on 31 January 2018, will be tested through the court. The orders relate to two properties, one in London and one in the South East of England. In addition to the UWOs, interim freezing orders (IFOs) were granted meaning that the assets cannot be sold, transferred or dissipated while subject to the order (IFO).
NCA Director for Economic Crime Donald Toon said: “Unexplained wealth orders have the potential to significantly reduce the appeal of the UK as a destination for illicit income. They enable the UK to more effectively target the problem of money laundering through prime real estate in London and elsewhere. We are determined to use all of the powers available to us to combat the flow of illicit monies into, or through, the UK.”
22 March 2018, the UK government announced that it is to publish legislation to introduce the world’s first public Register of Beneficial Owners of Overseas Companies and Legal Entities bodies that own UK property or participate in UK government procurement.
The government said the introduction of the overseas register would make it easier for enforcement agencies to track criminal funds and would serve to inhibit corruption. Recent figures suggested that over £180 million worth of UK property has been placed under criminal investigation since 2004, of which 75% was linked to overseas companies.
The register is to be administered by Companies House and will adopt the same definition of ownership control that governs inclusion in the register of persons with significant control (PSCs) over UK companies, that is individuals who: hold more than 25% of the shares or voting rights of the company; have the right to appoint a majority of directors of the company; or have the right to exercise or actually exercise significant influence or control over the company, trust or other legal entity. To ensure compliance, the government intends to introduce a system of statutory restrictions backed up with criminal offences. The government proposes that overseas entities will be unable to buy or sell property in the UK unless they have provided information in respect of their beneficial owners for the new register. Legal title will be withheld to overseas legal entities that do not have a valid registration number at completion. Preferred suppliers will be required to produce beneficial ownership information as a condition of being awarded a contract.
Overseas entities that currently own UK property will have a transitional period to register their beneficial owners. A period of 12 months was initially proposed, but the government now intends that this time period should be longer.
The introduction of the register follows a consultation and call for evidence on the issue last April, which received 56 responses. Respondents to the consultation largely agreed that all legal entities that can own property should fall within the scope of the requirement to be on the register. The government said it would follow this view, although it would ensure there would be flexibility to allow exemptions where appropriate, for instance where there is already transparency of beneficial ownership information.
The government also said trusts would not be included in the register because publishing the details of who owns and benefits from trusts would “not be proportionate and effective especially as disclosure would undermine family confidentiality”. HMRC set up a register of trust ownership last year, but this register is only accessible by tax and law enforcement authorities.
The government said it intended to publish draft legislation by the summer, which will be introduced into Parliament by summer 2019. The register is to be operational in 2021.
8 March 2018, the US government announced that it had signed a competent authority agreement (CAA) with the Cayman Islands to exchange country-by-country (CbC) tax reports on multinational firms as part of OECD base erosion and profit shifting (BEPS) plan.
Both the US and Cayman Islands are members of the Inclusive Framework on BEPS, a coalition of 113 countries that have pledged to implement country-by-country reporting. The US has concluded CAAs to exchange country-by-country reports with 34 countries and is in negotiation with 10 others.
5 March 2018, the US Tax Court upheld an IRS determination that payments made from a foreign sales corporation (FSC) to ‘Roth’ individual retirement accounts (Roth IRAs) were, in substance, contributions made by the taxpayers. It therefore found the taxpayers liable to excise taxes for excess contributions made to their Roth IRAs.
In Mazzei v Commissioner 150 T.C. No. 7, the taxpayer petitioners had entered into a pre-packaged plan to route funds from their family business through a Bermuda-based foreign sales corporation and then into Roth IRAs created for this purpose.
In 1998, each of the taxpayers directly contributed US$2,000 – the applicable contribution limit – to his or her newly created Roth IRA, which then paid a nominal amount for stock in the FSC. From 1998 to 2002, the taxpayers indirectly transferred over US$533,000 from their business to their Roth IRAs by routing these funds through the FSC.
The IRS found that the payments from the FSC to the Roth IRAs were, in substance, contributions by the taxpayers to their Roth IRAs and, as such, the taxpayers owed excise taxes for the amount of excess contributions to their Roth IRAs (under section 4973).
The taxpayers argued that the IRS was mistaken in re-characterising the transfers as something other than dividends from the FSC directly to the Roth IRAs and, as a result, they were not liable for the excess contribution excise taxes.
The Court held that the Roth IRA beneficiaries, and not the Roth IRAs, were the true owners of the FSC. It said: …because petitioners (through various pass-through entities) controlled every aspect of the transactions in question, we conclude that they, and not their Roth IRAs, were the owners of the FSC stock for Federal tax purposes at all relevant times. The dividends from the FSC are therefore properly re-characterised as dividends from the FSC to petitioners, followed by petitioners' contributions of these amounts to their respective Roth IRAs. All of these payments exceeded the applicable contribution limits and were therefore excess contributions. We therefore uphold respondent's determination of excise taxes under section 4973.”
The Tax Court did not, however, sustain the imposition of timely filing or timely paying penalties under section 6651(a)(1) and (2).