Wednesday, December 6, 2017
Questions and Answers on the EU list of non-cooperative tax jurisdictions
Why has the EU produced a list of non-cooperative tax jurisdictions?
The new list is part of the EU's work to clamp down on tax evasion and avoidance. It will help the EU to deal more robustly with external threats to Member States' tax bases and to tackle third countries that consistently refuse to play fair on tax matters.
Up to now, Member States have had a patchwork approach to dealing with tax havens, which has had limited impact. In its External Strategy for Effective Taxation, the Commission suggested that a common EU list could be a more effective way of tackling countries that encourage abusive tax practices. Member States agreed that a single EU list would hold much more weight than a medley of national lists and would have an important dissuasive effect on problematic third countries.
The EU listing process also prompts change. It creates a positive incentive for international partners to improve their tax systems where there are weaknesses in their transparency and fair tax standards. Throughout the EU listing process, many countries engaged with Member States to address the deficiencies found in their tax systems.
Finally, the common EU list will also create a clearer and fairer environment for businesses and third countries. Divergent national approaches, with different 'triggers' and criteria for listing, send mixed messages to international partners regarding the EU's good governance expectations. A single EU listing process, based on clear criteria and an open dialogue process is much easier for international partners to understand and engage with.
Why weren't EU Member States assessed for this list?
The EU list is a tool to deal with external threats to Member States' tax bases. It is also a means to promote more dialogue and cooperation with international partners on tax issues.
Within the EU, different tools are used to ensure fair and transparent taxation. For example, Member States are bound by far-reaching new transparency rules and anti-avoidance measures, thanks to the ambitious EU agenda against tax abuse. The EU also leads by example when it comes to implementing the OECD BEPS measures and international transparency standards, which are now enshrined in EU hard law.
Member States' laws have been put in conformity with these global standards over the past three years, through several pieces of legislation agreed at EU level. Thanks to these changes, the EU is now is the lead when it comes to tax standards
Besides, Member States tax regimes are also subject to a high degree of scrutiny within the EU, and are challenged if they are considered to be unfair. The Code of Conduct for Business Taxation sets out principles for fair tax competition, which all Member States abide by. The Commission has also launched state aid investigations when it suspected that Member States gave unfair tax advantages to certain companies. The European Semester process is another tool to address national tax schemes which may not be up to scratch when it comes to fair and transparent taxation. It should be noted that, when assessed against the EU list criteria, all Member States are fully compliant.
How was the list compiled?
In May 2016, EU Finance Ministers endorsed the new listing process set out in the External Strategy, and subsequently agreed on common criteria to assess selected countries. They asked the Code of Conduct Group, the body comprising of Member State taxation experts in the Council, to manage the process and to present a first EU list by the end of 2017.
The list was compiled through a three-step process:
1: Pre-Selection: In September 2016, the Commission pre-assessed 213 countries using over 1600 different indicators. These indicators help to classify countries according to their economic ties with the EU, financial activity, legal and institutional stability, and tax good governance levels. This data was compiled in a Scoreboard, and helped Member States to decide which countries should be examined in greater detail. On the basis of the Scoreboard, Member States decided which countries to screen in more depth.
2: Screening: All jurisdictions chosen for screening were formally contacted, to explain the process and invite them to engage with the EU. Member State experts then assessed the selected jurisdictions' tax systems in-depth, using the agreed criteria. There were many contacts with the jurisdictions during the screening stage, to seek clarification, information and explanations from both sides.
3: Listing: Once the experts had finished the screening stage, they delivered their findings to the Code of Conduct Group. On that basis, a letter was sent to each jurisdiction, either confirming that they complied with the criteria, or highlighting deficiencies in their tax systems. Jurisdictions were asked to make high level commitments to address identified deficiencies within a set time period. Those that did not do so were put forward for listing.
The Code of Conduct Group drafted the first EU list, and submitted it to EU Finance Ministers to endorse at their monthly meeting. Member States also took note of the commitments made by various jurisdictions, and agreed on a general approach to sanctions for the listed countries.
Commission reviews third countries' risk levels
Member States agree criteria for screening
Member States assess third countries' tax systems and start dialogue
January – December 2017
Member States list countries that did not commit to addressing identified problems
5 December 2017
Continuous review of all jurisdictions. EU listupdated at least once a year.
OVERVIEW OF THE SCREENING PROCESS
213 pre-assessed for the Scoreboard
92 chosen for screening
20 given all-clear
72 asked to address deficiencies
47 committed to:
Stop harmful tax practices
Introduce substance requirements
Implement OECD BEPS
8 Hurricane Countries have more time
17 on EU List
What criteria were used in the EU listing process to assess countries?
The EU listing criteria are in line with international standards and reflect the good governance standards that Member States comply with themselves. These are:
Transparency:The country should comply with international standards on automatic exchange of information and information exchange on request. It should also have ratified the OECD's multilateral convention or signed bilateral agreements with all Member States, to facilitate this information exchange. Until June 2019, the EU only requires two out of three of the transparency criteria. After that, countries will have to meet all three transparency requirements to avoid being listed.
Fair Tax Competition: The country should not have harmful tax regimes, which go against the principles of the EU's Code of Conduct or OECD's Forum on Harmful Tax Practices. Those that choose to have no or zero-rate corporate taxation should ensure that this does not encourage artificial offshore structures without real economic activity.
BEPS implementation:The country must have committed to implement the OECD's Base Erosion and Profit Shifting (BEPS) minimum standards.
Who was responsible for screening the selected jurisdictions?
The process was led by Member States. They nominated national tax experts to screen the tax systems of the selected third countries. These experts were grouped into panels, which examined the jurisdictions against the agreed criteria. The expert panels were given guidance from the Code of Conduct Group and technical support from the Commission.
Did the screened countries have a chance to present their case?
Yes. Since the very beginning of the exercise, the Commission stressed that the EU listing process must be as fair, transparent and open as possible. At each subsequent stage, high priority was given to ensuring that the relevant countries understood the process and could respond. Many bilateral and multilateral meetings were held to this end, and there was extensive correspondence between Member States and the jurisdictions concerned.
The jurisdictions were sent a formal letter when they were selected for screening in January 2017. At the end of the screening process, they received another letter, either confirming that they were compliant or asking them to make specific improvements to their tax systems. At every stage, the jurisdictions were encouraged to engage with the EU, provide any relevant information and seek any clarifications they needed. Each country had a chance to present their position, address concerns and discuss how to deepen their cooperation with the EU on tax matters.
Why didn't Member States list every country that failed to meet the criteria?
The EU list was always intended as a last resort option – when all other efforts to engage with a third country had failed. Jurisdictions that were prepared to cooperate were not listed, so long as they gave a clear and concrete commitment to address the identified tax deficiencies.
For certain jurisdictions, specific factors needed to be taken into account. For example, 8 jurisdictions (Antigua and Barbuda, Anguilla, Bahamas, British Virgin Islands, Dominica, St Kitts and Nevis, Turks and Caicos, US Virgin Islands) that were badly hit by the hurricanes in summer 2017 have been given until early 2018 to respond to the EU's concerns. Special consideration was also given to the situation of developing countries. Least Developed Countries without financial centres were automatically excluded from the screening process, while other developing countries without financial centres were given more time to address their shortcomings.
What positive changes can already be seen as a result of the EU listing process?
A key benefit of the EU listing process is that it re-launched discussions on tax good governance and prompted countries to improve their tax systems, in line with international standards. Many jurisdictions cooperated closely with the EU during the listing process and made firm commitments to fix problems identified in their tax systems. Many others actually improved their standards immediately, in response to the EU listing exercise.
What is the breakdown of the commitments made by jurisdictions to improve their taxation standards?
In total 47 countries committed to improving their transparency standards. Once fulfilled, these commitments should enhance the tax good governance environment, globally. Work must now continue to review the situation throughout 2018.
What type of commitments did countries make in response to the EU listing process?
Member States agreed not to list jurisdictions if they committed to address the deficiencies that were found during the screening process. These commitments had to be made at high political level (e.g. Minister of Finance), and give a clear domestic timeline for implementing the changes. The commitments related to the good governance criteria used in the listing process.
Improve Transparency Standards
Armenia; Bosnia & Herzegovina; Botswana
Improve Fair Taxation
Andorra; Armenia; Aruba; Belize; Botswana; Cape Verde; Cook Islands; Curaçao; Fiji; Hong Kong SAR; Jordan; Labuan Island; Liechtenstein; Malaysia; Maldives; Mauritius; Morocco; Niue; St Vincent & Grenadines; San Marino; Seychelles; Switzerland; Taiwan, Thailand, Turkey; Uruguay; Viet Nam.
Introduce substance requirements
Bermuda; Cayman Islands; Guernsey; Isle of Man; Jersey; Vanuatu.
Commit to apply OECD BEPS measures
Albania; Armenia; Aruba; Bosnia & Herzegovina; Cape Verde; Cook Islands; Faroe Islands; Fiji; Former Yugoslav Republic of Macedonia; Greenland; Jordan; Maldives; Montenegro; Morocco; Nauru; New Caledonia; Niue; Saint Vincent & Grenadines; Serbia; Swaziland; Taiwan; Vanuatu.
Why did the EU not exclude developing countries from the EU listing process?
The specific situation of developing countries was taken fully into account throughout the EU listing process. The Commission excluded 48 Least Developed Countries from the pre-assessment, in recognition of the particular constraints they face. In addition, developing countries without financial centres have been given an extra year to meet the expected standards, when deficiencies were found in their tax systems with respect to transparency and BEPS implementation.
The Commission is very sensitive to the challenges that developing countries face in the area of taxation. The External Strategy has a whole section on supporting developing countries in fighting tax abuse and collecting domestic revenues, which builds on the Commission's “Collect More, Spend Better” strategy. This delivers on the EU's commitments under the Addis Tax Initiative, such as increased support to low income countries in improving their revenue raising capacities. The Commission and Member States have also started to examine possible effects of EU and national tax policies on developing countries, to prevent negative spill-overs and ensure greater policy coherence.
What sanctions will apply to listed countries?
The EU list should have a real impact on the countries concerned, thanks to new EU legislative measures.
First, following Commission proposals the EU list is now linked to EU funding in the context of the European Fund for Sustainable Development (EFSD), the European Fund for Strategic Investment (EFSI) and the External Lending Mandate (ELM). Funds from these instruments cannot be channelled through entities in listed countries. Only direct investment in these countries (i.e. funding for projects on the ground) will be allowed, to preserve development and sustainability objectives.
Second, the Commission has made reference to the list in other relevant legislative proposals. For example, the public Country-by-Country reporting proposal includes stricter reporting requirements for multinationals with activities in listed jurisdictions. In the proposed transparency requirements for intermediaries, a tax scheme routed through an EU listed country will be automatically reportable to tax authorities. The Commission is also examining legislation in other policy areas, to see where further consequences for listed countries can be introduced.
In addition to the EU provisions, the Commission encouraged Member States to agree on coordinated sanctions to apply at national level against the listed jurisdictions. First steps have been taken in this direction. Member States have agreed on a set of countermeasures which they can choose to apply against the listed countries. These include measures such as increased monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions. The Commission will support Member States' work to develop a more binding and definitive approach to sanctions for the EU list in 2018.
Will the list be updated?
Yes. The list will be updated at least once a year. This update will be based on the continuous monitoring of listed jurisdictions, as well as those that have made commitments to improve their tax systems. Depending on developments, Member States may also decide to screen even more countries in 2018. An interim report will be prepared by mid-2018 to assess progress made.
From June 2019, more stringent transparency criteria come into effect, which will require a re-assessment of all jurisdictions to ensure that they are in line. The EU listing criteria will also be updated in the future, to reflect new elements that Member States agreed upon, such as transparency on beneficial ownership, as well as possible evolutions at international level.
How can a country be de-listed by the EU?
A country will be removed from the list once it has addressed the issues of concern for the EU and has brought its tax system fully into line with the required good governance criteria. The Code of Conduct will be responsible for updating the EU list, and recommending countries for de-listing to the Council.
Is the EU list in line with the international agenda for tax good governance?
Yes, the EU list firmly supports the international tax good governance agenda. The EU listing criteria reflect internationally agreed standards and countries were encouraged to meet these standards to avoid being listed. The EU also took on board OECD assessments of countries' transparency standards and tax regimes, as part of the screening process. The Commission and Member States were in close and regular contact with the OECD throughout the listing process, to ensure that EU and international work in this area remained complementary and mutually reinforcing.
How is the EU list different from the list published by the OECD in July?
The OECD list focussed on countries that failed to meet international transparency standards, as requested by the G20. The EU list is based on a wider set of good governance criteria. In addition to transparency, it also covers fair taxation, adherence to BEPS standards, and the level of taxation, where this might encourage artificial structures and arrangements. As such, there was a wider scope to the EU listing process. This is in line with the broad spectrum of tax good governance standards that EU Member States themselves adhere to.
How does the new EU list compare to the "pan-EU list" published in 2015?
The new EU list is a fully coordinated EU project. It was conceived, developed and managed at EU level. The criteria and process were agreed by EU Finance Ministers at the ECOFIN Council, and Member States worked together to screen selected countries and to decide which ones to list. The final EU list was unanimously endorsed by Member States in Council.
The "pan-EU" list was simply a compilation of Member States' individual lists. The Commission published this consolidated version of national lists in June 2015, as a first step towards a more coordinated EU approach. The "pan-EU" list highlighted how diverse Member States' lists were, and the confusion this created for businesses and international partners. Many countries welcomed the idea of a single EU listing process, which would be clearer and easier to work with than a patchwork of different lists.
What is the difference between this list of non-cooperative tax jurisdictions and the EU anti-money laundering list?
The anti-money laundering (AML) list is focussed on countries with poor anti-money laundering and counter-terrorist financing regimes. It reflects the Financial Action Task Force (FATF) approach to dealing with countries that have not implemented internationally agreed anti-money laundering standards. Banks must apply higher due diligence controls to financial flows towards these listed countries.
The EU tax list targets external risks posed by countries that refuse to respect tax good governance standards. It has different objectives, different criteria, a different compilation process and different consequences to the AML list. Nonetheless, the two lists will complement each other in ensuring double protection for the Single Market against external good governance risks.
Tuesday, December 5, 2017
The first ever EU list of non-cooperative tax jurisdictions has been agreed today by the Finance Ministers of EU Member States during their meeting in Brussels.
In total, ministers have listed 17 countries for failing to meet agreed tax good governance standards. In addition, 47 countries have committed to addressing deficiencies in their tax systems and to meet the required criteria, following contacts with the EU. Download 17 countries
This unprecedented exercise should raise the level of tax good governance globally and help prevent the large-scale tax abuse exposed in recent scandals such as the "Paradise Papers".
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: "The adoption of the first ever EU blacklist of tax havens marks a key victory for transparency and fairness. But the process does not stop here. We must intensify the pressure on listed countries to change their ways. Blacklisted jurisdictions must face consequences in the form of dissuasive sanctions, while those that have made commitments must follow up on them quickly and credibly. There must be no naivety: promises must be turned into actions. No one must get a free pass."
The idea of an EU list was originally conceived by the Commission and subsequently taken forward by Member States. Compilation of the list has prompted active engagement from many of the EU's international partners. However, work must now continue as 47 more countries should meet EU criteria by the end of 2018, or 2019 for developing countries without financial centres, to avoid being listed. The Commission also expects Member States to continue towards strong and dissuasive countermeasures for listed jurisdictions which can complement the existing EU-level defensive measures related to funding.
The EU listing process is a dynamic one, which will continue into 2018:
- As a first step, a letter will be sent to all jurisdictions on the EU list, explaining the decision and what they can do to be de-listed.
- The Commission and Member States (in the Code of Conduct Group) will continue to monitor all jurisdictions closely, to ensure that commitments are fulfilled and to determine whether any other countries should be listed in the future. A first interim progress report should be published by mid-2018. The EU list will be updated at least once a year.
Thursday, November 23, 2017
The Senate Finance Committee has posted its 515 pages of new Internal Revenue Code language for a vote within 10 days. Relevant text passages for base erosion and profit shifting are excerpted below. Download Senate Version Tax Cuts and Jobs Act
SEC. 951A. GLOBAL INTANGIBLE LOW-TAXED INCOME INCLUDED IN GROSS INCOME OF UNITED STATES SHAREHOLDERS.
Description of Text by Senate Finance Committee
Under the proposal, a U.S. shareholder of any CFC must include in gross income for a taxable year its global intangible low-taxed income (“GILTI”) in a manner generally similar to inclusions of subpart F income. GILTI means, with respect to any U.S. shareholder for the shareholder’s taxable year, the excess (if any) of the shareholder’s net CFC tested income over the shareholder’s net deemed tangible income return. The shareholder’s net deemed tangible income return is an amount equal to 10 percent of the aggregate of the shareholder’s pro rata share of the qualified business asset investment (“QBAI”) of each CFC with respect to which it is a U.S. shareholder.
(a) IN GENERAL.—Each person who is a United States shareholder of any controlled foreign corporation for any taxable year of such United States shareholder shall include in gross income such shareholder’s global intangible low-taxed income for such taxable year.
(b) GLOBAL INTANGIBLE LOW-TAXED INCOME.
(1) IN GENERAL. The term ‘global intangible low-taxed income’ means, with respect to any United States shareholder for any taxable year of such United States shareholder, the excess (if any) of -
(A) such shareholder’s net CFC tested income for such taxable year, over
(B) such shareholder’s net deemed tangible income return for such taxable year.
(2) NET DEEMED TANGIBLE INCOME RETURN.
The term ‘net deemed tangible income return’ means, with respect to any United States shareholder for any taxable year, an amount equal to 10 percent of the aggregate of such shareholder’s pro rata share of the qualified business asset investment of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year (determined for each taxable year of each such controlled foreign corporation which ends in or with such taxable year of such United States shareholder).
(c) NET CFC TESTED INCOME.
(1) IN GENERAL.—The term ‘net CFC tested income’ means, with respect to any United States shareholder for any taxable year of such United States shareholder, the excess (if any) of—
(A) the aggregate of such shareholder’s pro rata share of the tested income of each controlled foreign corporation with respect to which such shareholder is a United States shareholder or such taxable year of such United States shareholder (determined for each taxable year of such controlled foreign corporation which ends in or with such taxable year of such United States shareholder), over
(B) the aggregate of such shareholder’s pro rata share of the tested loss of each controlled foreign corporation with respect to which such shareholder is a United States shareholder for such taxable year of such United States shareholder (determined for each taxable year of such controlled foreign corporation which ends in or with such taxable year of such United States shareholder).
(d) QUALIFIED BUSINESS ASSET INVESTMENT.—
(1) IN GENERAL.—The term ‘qualified business asset investment’ means, with respect to any corporation for any taxable year of such controlled foreign corporation, the average of the aggregate of
the corporation’s adjusted bases as of the close of each quarter of such taxable year in specified tangible property —
(A) used in a trade or business of the corporation, and‘
(B) of a type with respect to which a deduction is allowable under section 167.
(2) SPECIFIED TANGIBLE PROPERTY.—
(A) IN GENERAL.—The term ‘specified tangible property’ means, except as provided in subparagraph (B), any tangible property used in the production of tested income.
(B) DUAL USE PROPERTY. In the case of property used both in the production of tested income and income which is not tested income, such property shall be treated as specified tangible property in the same proportion that the gross income described in subsection (c)(1)(A) produced with respect to such property bears to the total gross income produced with respect to such property.
SEC. 250. FOREIGN-DERIVED INTANGIBLE INCOME AND GLOBAL INTANGIBLE LOW-TAXED INCOME.
Senate Finance Committee Explanation of Text
In the case of a domestic corporation for its taxable year, the proposal allows a deduction equal to 37.5 percent of the lesser of (1) the sum of its foreign-derived intangible income plus the amount of GILTI that is included in its gross income, or (2) its taxable income, determined without regard to this proposal. The foreign-derived intangible income of any domestic corporation is the amount which bears the same ratio to the corporation’s deemed intangible income as its foreign-derived deduction eligible income bears to its deduction eligible income.
(a) ALLOWANCE OF DEDUCTION.
(1) IN GENERAL.—In the case of a domestic corporation for any taxable year, there shall be allowed as a deduction an amount equal to the sum of—
(A) 37.5 percent of the foreign-derived intangible income of such domestic corporation for such taxable year, plus
(B) 50 percent of the global intangible low-taxed income amount (if any) which is included in the gross income of such domestic corporation under section 951A for such taxable year.
(b) FOREIGN-DERIVED INTANGIBLE INCOME.
(1) IN GENERAL.—The foreign-derived intangible income of any domestic corporation is the amount which bears the same ratio to the deemed intangible income of such corporation as—
(A) the foreign-derived deduction eligible income of such corporation, bears to
(B) the deduction eligible income of such corporation.
(2) DEEMED INTANGIBLE INCOME.
(A) IN GENERAL.The term ‘deemed intangible income’ means the excess (if any) of—
(i) the deduction eligible income of the domestic corporation, over
(ii) the deemed tangible income return of the corporation.
(B) DEEMED TANGIBLE INCOME RETURN. The term ‘deemed tangible income return’ means, with respect to any corporation, an amount equal to 10 percent of the corporation’s qualified business asset investment (as defined in section 951A(d), determined by substituting ‘deduction eligible income’ for ‘tested income’ in paragraph (2) thereof).
(C) SPECIAL RULES WITH RESPECT TO RELATED PARTY TRANSACTIONS.
(i) SALES TO RELATED PARTIES.—If property is sold to a related party who is not a United States person, such sale shall not be treated as for a foreign use unless such property is sold by the related party to another person who is an unrelated party who is not a United States person and the taxpayer establishes the satisfaction of the Secretary that such property is for a foreign use.
SEC. 14222. LIMITATIONS ON INCOME SHIFTING THROUGH INTANGIBLE PROPERTY TRANSFERS.
(a) DEFINITION OF INTANGIBLE ASSET. Section 936(h)(3)(B) is amended—
(vi) any goodwill, going concern value, or workforce in place (including its composition and terms and conditions (contractual or otherwise) of its employment); or
(vii) any other item the value or potential value of which is not attributable to tangible property or the services of any individual.
(b) CLARIFICATION OF ALLOWABLE VALUATION METHODS.
(i) the valuation of transfers of intangible property, including intangible property transferred with other property or services, on an aggregate basis, or
(ii) the valuation of such a transfer on the basis of the realistic alternatives to such a transfer, if the Secretary determines that such basis is the most reliable means of valuation of such transfers.
SEC. 59A. TAX ON BASE EROSION PAYMENTS OF TAXPAYERS WITH SUBSTANTIAL GROSS RECEIPTS.
Senate Finance Committee Explanation of Text for Tax on Base Erosion Payments
Under the proposal, an applicable taxpayer is required to pay a tax equal to the base erosion minimum tax amount for the taxable year. The base erosion minimum tax amount means, with respect to an applicable taxpayer for any taxable year, the excess of 10-percent of the modified taxable income of the taxpayer for the taxable year over an amount equal to the regular tax liability (defined in section 26(b)) of the taxpayer for the taxable year reduced (but not below zero) by the excess (if any) of credits allowed under Chapter 1 over the credit allowed under section 38 (general business credits) for the taxable year allocable to the research credit under section 41(a).
Modified taxable income means the taxable income of the taxpayer computed under Chapter 1 for the taxable year, determined without regard to any base erosion tax benefit with respect to any base erosion payment, or the base erosion percentage of any net operating loss deduction allowed under section 172 for the taxable year.
A base erosion payment generally means any amount paid or accrued by a taxpayer to a foreign person that is a related party of the taxpayer and with respect to which a deduction is allowable, including any amount paid or accrued by the taxpayer to the related party in connection with the acquisition by the taxpayer from the related party of property of a character subject to the allowance of depreciation (or amortization in lieu of depreciation). A base erosion payment also includes any amount that constitutes reductions in gross receipts of the taxpayer that is paid to or accrued by the taxpayer with respect to: (1) a surrogate foreign corporation which is a related party of the taxpayer, and (2) a foreign person that is a member of the same expanded affiliated group as the surrogate foreign corporation. A surrogate foreign corporation has the meaning given in section 7874(a)(2), but does not include a foreign corporation treated as a domestic corporation under section 7874(b).
A base erosion tax benefit means any deduction allowed with respect to a base erosion payment for the taxable year. Any base erosion tax benefit attributable to any base erosion payment on which tax is imposed by sections 871 or 881 and with respect to which tax has been deducted and withheld under sections 1441 or 1442, is not taken into account in computing modified taxable income as defined above. If the rate of tax required to be deducted and withheld under sections 1441 or 1442 with respect to any base erosion payment is reduced, the above exclusion only applies in proportion to such reduction.
(a) IMPOSITION OF TAX.—There is hereby imposed on each applicable taxpayer for any taxable year a tax equal to the base erosion minimum tax amount for the taxable year. Such tax shall be in addition to any other tax imposed by this subtitle.
(b) BASE EROSION MINIMUM TAX AMOUNT.
(1) IN GENERAL.—Except as provided in paragraph (2), the term ‘base erosion minimum tax amount’ means, with respect to any applicable taxpayer for any taxable year, the excess (if any) of—
(A) an amount equal to 10 percent of the modified taxable income of such taxpayer for the taxable year, over
(B) an amount equal to the regular tax liability (as defined in section 26(b)) of the taxpayer for the taxable year, reduced (but not below zero) by the excess (if any) of—
(i) the credits allowed under this chapter against such regular tax liability, over
(ii) the credit allowed under section 38 for the taxable year which is properly allocable to the research credit determined under section 41(a).
(2) MODIFICATIONS FOR TAXABLE YEARS BEGINNING AFTER 2025.
In the case of any taxable year beginning after December 31, 2025, paragraph (1) shall be applied—
(A) by substituting ‘12.5 percent’ for ’10 percent’ in subparagraph (A) thereof.
(d) BASE EROSION PAYMENT.
(1) IN GENERAL.—The term ‘base erosion payment’ means any amount paid or accrued by the taxpayer to a foreign person which is a related party of the taxpayer and with respect to which a deduction is allowable under this chapter.
(2) PURCHASE OF DEPRECIABLE PROPERTY. Such term shall also include any amount paid or accrued by the taxpayer to a foreign person which is a related party of the taxpayer in connection with
the acquisition by the taxpayer from such person of property of a character subject to the allowance of depreciation (or amortization in lieu of depreciation).
(3) CERTAIN PAYMENTS TO EXPATRIATED ENTITIES.
(A) IN GENERAL Such term shall also include any amount paid or accrued by the taxpayer with respect to a person described in subparagraph (B) which results in a reduction of the gross receipts of the taxpayer.
(1) IN GENERAL.—The term ‘applicable taxpayer’ means, with respect to any taxable year, a taxpayer—
(A) which is a corporation other than a regulated investment company, a real estate investment trust, or an S corporation,
(B) the average annual gross receipts of which for the 3-taxable-year period ending with the preceding taxable year are at least $500,000,000, and
(C) the base erosion percentage (as determined under subsection (c)(4)) of which for the taxable year is 4 percent or higher.
Tuesday, November 21, 2017
The Inclusive Framework (IF) welcomes Qatar and Saint Kitts and Nevis, bringing to 106 the total number of countries and jurisdictions participating on an equal footing in the BEPS Project. Members of the IF have the opportunity to work together with other OECD and G20 countries on implementing the BEPS package consistently and on developing further standards to address BEPS issues.
Thursday, November 16, 2017
The Dutch newspaper Trouw reports that the Netherlands Revenue Authority has been ordered by the Ministry of Finance to review all 4,000 advance pricing rulings / agreements ('APAs') between multinationals and the Revenue.
And what is the cause? Trouw reports that Proctor & Gamble obtained an advance ruling from the revenue with only one reviewing revenue officer signing off which is against the internal procedures of the revenue department. See YouTube video (in Dutch) describing the issue.
Read in English a synopsis of the Dutch articles.
Wednesday, November 15, 2017
ICIJ reports that its investigation uncovers that music song rights are licensed via a Jersey company and pay no tax:
- A Jersey company owned the publishing rights to 26,000 songs, including classics such as "Louie, Louie," and "Country Roads”.
- Between 2007 and 2014 the company paid no tax on income generated by the catalog which made, on average. $4.6 million a year in royalties.
- The fund behind the company, First State Media Works Fund I, attracted investments from pension plans in North America, Europe and Australia.
Read the ICIJ story that describes how the process works.
Thursday, November 9, 2017
ICIJ reports again on the Paradise Papers - this time Apple is in the crosshairs:
Despite almost all design and development of its products taking place in the U.S., the iPhone-maker has for years been able to report that about two-thirds of its worldwide profits were made in other countries, where it has used loopholes to access ultra-low foreign tax rates.
Now leaked documents help show how Apple quietly carried out a restructuring of its Irish companies at the end of 2014, allowing it to carry on paying taxes at low rates on the majority of global profits.
Those rates allowed it to accumulate a $252 billion mountain of cash offshore.
Wednesday, November 8, 2017
ICIJ reports: "In the three years after that conference call, its after-tax profits would jump by an astounding 55 percent, to $1.88 billion, thanks in substantial part to a drop in its worldwide effective tax rate from 34.9 percent to 24.8 percent – on its way to 13.2 percent last year. .... Since switching property rights to the Swoosh and other trademarks from the Bermuda subsidiary to the Dutch partnership in 2014, Nike’s pile of offshore profits has continued to grow. At the end of May 2017, it had reached $12.2 billion. These accumulated earnings have been taxed at less than 2 percent by foreign tax authorities – and not at all in the United States.
In late 2016, the ministry had urged other EU member states to delay reforms because of the heavy toll they were likely to take on the Netherlands, where the government estimates that 77,660 jobs are linked to U.S. multinationals that have been drawn there by the possibility of developing tax structures using CVs.
Read the entire investigatory story and analysis by the ICIJ here!
Tuesday, October 31, 2017
On 7 June 2017, over 70 Ministers and other high-level representatives participated in the signing ceremony of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("Multilateral Instrument" or "MLI"). Signatories include jurisdictions from all continents and all levels of development. A number of jurisdictions have also expressed their intention to sign the MLI as soon as possible and other jurisdictions are also actively working towards signature.
The MLI offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide. The MLI modifies the application of thousands of bilateral tax treaties concluded to eliminate double taxation. It also implements agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies.
The text of the Multilateral Instrument (MLI) and its Explanatory Statement were developed through a negotiation involving more than 100 countries and jurisdictions and adopted on 24 November 2016, under a mandate delivered by G20 Finance Ministers and Central Bank Governors at their February 2015 meeting. The MLI and its Explanatory Statement were adopted in two equally authentic languages, English and French.
Download the text of the MLI (PDF)
Download the Explanatory Statement (PDF)
Monday, October 23, 2017
BEPS Action 13: OECD releases CbC reporting implementation status and exchange relationships between tax administrations
a further step was taken to implement Country-by-Country Reporting in accordance with the BEPS Action 13 minimum standard, through activations of automatic exchange relationships under the Multilateral Competent Authority Agreement on the Exchange of CbC Reports ("the CbC MCAA"). Over 1000 automatic exchange relationships have now been established among jurisdictions committed to exchanging CbC Reports as of mid-2018, including those between EU Member States under EU Council Directive 2016/881/EU.
It is expected that more jurisdictions will nominate partners with which they will undertake the automatic exchange of CbC Reports under the CbC MCAA in the coming weeks. In addition, the United States has now signed 27 bilateral competent authority agreements for the exchange of CbC Reports under Double Tax Conventions or Tax Information Exchange Agreements, with more under negotiation. Regular updates will be published on the OECD website on exchange relationships to provide clarity for MNE Groups and tax administrations.
This additional wave of activations of CbC Reporting exchange relationships is another important step towards the timely implementation of Country-by-Country Reporting and reflects the commitment of jurisdictions around the world to the fight against base erosion and profit shifting.
- Find out more about the OECD's work on Country-by-Country reporting: www.oecd.org/tax/beps/country-by-country-reporting.htm
- Find out more about the Inclusive Framework on BEPS: www.oecd.org/tax/beps/
Friday, October 13, 2017
The Platform for Collaboration on Tax invites comments on a draft toolkit on the taxation of offshore indirect transfers of assets
The draft version of The Taxation of Offshore Indirect Transfers – A Toolkit is now available for download Download Discussion-draft-toolkit-taxation-of-offshore-indirect-transfers
The Platform for Collaboration on Tax – a joint initiative of the IMF, OECD, UN and World Bank Group – is seeking public feedback on a draft toolkit designed to help developing countries tackle the complexities of taxing offshore indirect transfers of assets, a practice by which some multinational corporations try to minimise their tax liability.
The tax treatment of 'offshore indirect transfers' (OITs) — the sale of an entity located in one country that owns an "immovable" asset located in another country, by a non-resident of the country where the asset is located — has emerged as a significant concern in many developing countries. It has become a relatively common practice for some multinational corporations trying to minimise their tax burden, and is an increasingly critical tax issue in a globalised world. But there is no unifying principle on how to treat these transactions, and the issue was not addressed in the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. This draft toolkit, "The Taxation of Offshore Indirect Transfers – A Toolkit," examines the principles that should guide the taxation of these transactions in the countries where the underlying assets are located. It emphasises extractive (and other) industries in developing countries, and considers the current standards in the OECD and the U.N. model tax conventions, and the new Multilateral Convention. The toolkit discusses economic considerations that may guide policy in this area, the types of assets that could appropriately attract tax when transferred indirectly offshore, implementation challenges that countries face, and options which could be used to enforce such a tax.
The toolkit responds to a request by the Development Working Group of the G20, and is part of a series the Platform is preparing to help developing countries design their tax policies, keeping in mind that those countries may have limitations in their capacity to administer their tax systems. Previous reports have included discussions of tax incentives, and external support for building tax capacity in developing countries. This series complements the work that the Platform and the organisations it brings together are undertaking to increase the capacity of developing countries to apply the OECD/G20 BEPS Project.
The Platform partners now seek comments by 20 October 2017 from all interested stakeholders on this draft. Comments should be sent by e-mail to email@example.com, a common comment box for all the Platform organisations. Spanish and French language versions of the toolkit are forthcoming and will also be posted for comment. The Platform aims to release the final toolkit by the end of 2017.
Questions to consider
- Does this draft toolkit effectively address the rationale(s) for taxing offshore indirect transfers of assets?
- Does it lay out a clear principle for taxing offshore indirect transfers of assets?
- Is the definition of an offshore indirect transfer of assets satisfactory?
- Is the discussion regarding source and residence taxation in this context balanced and robustly argued?
- Is the suggested possible expansion of the definition of immovable property for the purposes of the taxation of offshore indirect transfers reasonable?
- Is the concept of location-specific rents helpful in addressing these issues? If so, how is it best formulated in practical terms?
- Are there other implementation approaches that should be considered?
- Is the draft toolkit's preference for the 'deemed disposal' method appropriate?
- Are the complexities in the taxation of these international transactions adequately represented?
Please do not restrict yourself to these questions; any other views you have on addressing the taxation of offshore indirect transfers of assets would be welcome. Comments and inputs on the draft will be published, and will be taken into consideration in finalising the toolkit.
Please note that all comments received will be made publicly available. Comments submitted in the name of a collective "grouping" or "coalition", or by any person submitting comments on behalf of another person or group of persons, should identify all enterprises or individuals who are members of that collective group, or the person(s) on whose behalf the commentator(s) are acting.
Media queries should be directed to:
Thursday, October 12, 2017
Country-by-Country (CbC) Reporting is one of the four minimum standards under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project to which over 100 countries have
committed, covering the tax residence jurisdictions of nearly all large MNE groups. Where CbC Reporting is implemented effectively, and in line with the conditions set out in the BEPS Action 13 Report, it will give tax authorities unprecedented access to information on the global allocation of an MNE group's revenue, profit, tax and other attributes for high level transfer pricing risk assessment and the assessment of other BEPS-related risks.
This handbook supports countries in the effective use of CbC Reports by incorporating them into a tax authority's risk assessment process, including:
- a description of the role of tax risk assessment in tax administration, the core characteristics of an effective risk assessment system, and examples of the approaches used in different countries;
- an outline of the information contained in CbC Reports, and the potential advantages CbC Reports have over data from other sources;
- consideration of the ways in which CbC Reports can be incorporated into a tax authority's risk assessment framework and a description of some of the main potential tax risk indicators that may be identified using CbC Reports;
- a description of some of the challenges that may be faced by a tax authority in using CbC Reports for tax risk assessment and how some of these may be dealt with;
- an outline of some of the other sources of data that may be used by a tax authority alongside CbC Reports; and
- an overview of how the results of a tax risk assessment using CbC Reports may be used and the next steps that should be taken.
Tuesday, October 10, 2017
We, the heads of 48 tax administrations, met in Oslo for the 11th Plenary meeting of the OECD Forum on Tax Administration (FTA). The meeting brought together over 180 delegates, including the Treasury Minister of Argentina - the incoming G20 Presidency - the Finance Minister of Norway, Tax Commissioners and senior officials, representatives of business as well as international partner organisations. We would like to thank our hosts, the Norwegian Tax Administration, for the excellent arrangements for this meeting and for the warm welcome to Oslo.
The Forum on Tax Administration brings together Tax Commissioners of the most advanced tax administrations worldwide, including OECD and G20 countries, to work collaboratively on global tax administration challenges and take collective action to achieve common goals. Together FTA members collect EUR 8.5 trillion in revenues to fund public services and deliver government objectives. At this year’s Plenary we focused on the following interlocking themes:
At this year’s Plenary we focused on the following interlocking themes: Supporting the OECD/G20 international tax agenda, in particular through implementing automatic
Supporting the OECD/G20 international tax agenda, in particular through implementing automatic exchange of information, the BEPS outcomes and actions to enhance tax certainty;
Improving compliance through work on the shadow economy and a future focus on the effective use of data, including from online intermediaries in the sharing economy;
Building the tax administration of the future with a focus on digital services and delivery, and supporting wider capacity building in developing countries, core to achieving the Sustainable Development Goals, including through assistance on the implementation of BEPS and automatic exchange of information.
Supporting the international tax agenda
We continue to prioritise implementation of the OECD/G20 international tax agenda. On automatic exchange of bank information, pursuant to the Common Reporting Standard (CRS), we have put everything in place domestically and internationally to exchange within the timelines to which our jurisdictions have committed. The automatic exchange of information is making accounts held offshore visible to tax authorities for the first time, allowing unpaid tax to be recovered and appropriate penalties applied to those who do not come forward voluntarily. As reported by the OECD to the G20, disclosure initiatives previously taken in advance of this change have already identified close to EUR 85 billion in
September 2017, the time of our Plenary, is a key milestone for the first exchanges of CRS information and we are pleased to announce that such exchanges are now beginning between many of our members. We agreed to continue to work collaboratively to ensure that data exchanged under the CRS is of high quality and is used effectively and appropriately in the common fight against tax evasion. CRS information is being exchanged using the Common Transmission System (CTS), the first global, secure bilateral exchange system connecting tax administrations from around the world. The FTA designed, funded and built the CTS and did so on time and on budget. The CTS has substantially reduced costs, enhanced security levels, and eliminated the need for over 5000 bilateral transmission channels. We thank all ofthose involved in this huge collective effort, which we see as a template for future FTA co-operation, and we welcome the Global Forum on Transparency and Exchange of Information’s role in managing the ongoing operation of the CTS.
On BEPS, we welcomed the release of the first six MAP peer review reports under BEPS Action 14 earlier this week. FTA members have further driven forward work under Action 13 and jointly prepared for the first exchanges of CbC reports in June of next year. It is in this context that we have released two handbooks containing practical guidance on how to implement Country-by-County (CbC) reporting and how to make effective use of the information for high level risk assessment purposes, including detailed
examples of dos and don’ts.
On the tax certainty agenda we are moving forward with an ambitious and comprehensive agenda focused on dispute prevention and dispute resolution, supplementing the ongoing work on MAP and CbC, and including:
A new international compliance assurance programme - ICAP. We launched ICAP, a pilot program that uses CbC Reports and other information to facilitate multilateral engagements between MNE groups and participating tax administrations, bringing benefits to taxpayers and tax administrations including improved risk assessment based on fully informed and targeted use of CbCR information, an efficient use of resources, a faster and clearer route to multilateral tax certainty and fewer disputes entering into MAP.
Improved and better co-ordinated risk assessment. The ICAP pilot will be complemented by a new FTA project mapping out jurisdictions’ differing approaches to risk assessment with a view to increasing mutual understanding, closer cooperation and convergence.
More closely integrated international audit activity. A new project will look at how to facilitate greater use of joint audits across jurisdictions, reducing costs for firms and allowing tax administrations to work jointly on the assessment of tax liabilities in cross-border operations, further reducing situations requiring resolution through MAP.
Reducing audit adjustment not sustainable in MAP. Further work will be undertaken in improving and promoting the “Global Awareness Training for International Tax Examiners”.
The Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) has continued to provide a highly effective mechanism for bringing together tax administrations to respond to new global compliance risks and to collaborate on individual cases. The JITSIC work on the Panama Papers has resulted in a better understanding of evasion and avoidance arrangements, especially the role of intermediaries in these arrangements, improved exchange of information practices and an agreed collaborative approach to any future data leaks.
We have released a report on the Shadow Economy, which identifies the latest trends in shadow economy activity, including the rise of labour market crime, and highlights how tax administrations are responding, including through taking whole of government approaches and the use of new technologies such as online cash registers and data matching. As a result of this report, a new project is being launched to obtain and share information from online intermediaries in the sharing and gig economy on payments which might otherwise go untaxed. This project will include discussions with intermediaries including on data aspects such as the format and periodicity of data collection. Finally, tax debt management remains a priority issue for the FTA, with nearly EUR 800 billion of
Finally, tax debt management remains a priority issue for the FTA, with nearly EUR 800 billion of potentially collectible tax debt, and we have launched a new project to identify innovative practices, including the use of behavioural insights, and to learn from best in class. Future of tax administration
Future of tax administration
All FTA members are looking at the opportunities that new technologies, analytical tools and data provide for increasing compliance, improving taxpayer service and reducing burdens. This is a fundamental rather than incremental change and the wider economic benefits can be substantial. We have released a new report on the Changing Tax Compliance Environment and Role of Audit which sets out the scale and scope of the changes taking place in the tax environment and the opportunities and challenges that arise. The digital transformation will continue to be a major focus of FTA work going forward.
Significant change is taking place in FTA member tax administrations, driven by the use of new technologies but also other factors, such as cost reductions and the taking on of new responsibilities. It is against this background, that today we are also pleased to release the Tax Administration Series 2017 which identifies how these shifts are occurring in different tax administrations, including through a large number of country examples, and provides invaluable comparative information to inform tax administrations’ strategies. We also commend the exemplary cooperation with the IMF, CIAT and IOTA in the collection of this data which has now, for the first time, created a set of comparative data on tax administrations covering more than 130 jurisdictions from around the world.
In the critical area of capacity building we took important steps in joining-up the work of individual tax administrations, supporting the Tax Inspectors Without Borders (TIWB) Initiative and in working with other regional tax organisations as well as the Platform for Collaboration on Tax (OECD, IMF, WBG, UN). A new platform has been developed by the Canada Revenue Agency, the Knowledge Sharing Platform (KSP), which allows learning tools and material to be disseminated more easily, and provides a one-stop shop to connect tax officials from around the world.
Finally, the Plenary thanked Edward Troup, Commissioner of the United Kingdom’s HM Revenue & Customs, for the leadership and direction he has shown over the last three years which have seen significant changes in the international tax environment. FTA collaboration is stronger and more effective than ever. The Plenary also welcomed the appointment of the new Chair, Hans Christian Holte, Commissioner of the Norwegian Tax Administration and looked forward to continued co-operation on the
collective opportunities and challenges for tax administrations.
Monday, October 9, 2017
Country-by-Country (CbC) Reporting is one of the four minimum standards under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project to which over 100 countries have committed, covering the tax residence jurisdictions of nearly all large MNE groups. Where CbC Reporting is implemented effectively, and in line with the conditions set out in the BEPS Action 13 Report, it will give tax authorities unprecedented access to information on the global allocation of an MNE group's revenue, profit, tax and other attributes for high level transfer pricing risk assessment and the assessment of other BEPS-related risks.
This handbook is a practical guide to assist countries in implementing CbC Reporting into their domestic law, taking into account:
- key factors that countries should consider in introducing a domestic legal framework for the filing and use of CbC Reports;
- issues concerning the implementation and operation of an international framework for the exchange of CbC Reports;
- operational aspects of CbC Reporting, including mechanisms to identify entities required to file CbC Reports in a country, the handling of CbC Reports and the importance of effective sanctions for non-compliance; and
- practical issues including the importance of guidance to taxpayers and tax authority staff, engaging with stakeholders and providing training for staff who will deal with CbC Reports.
Wednesday, October 4, 2017
State aid: Commission finds Luxembourg gave illegal tax benefits to Amazon worth around €250 million
The European Commission has concluded that Luxembourg granted undue tax benefits to Amazon of around €250 million. This is illegal under EU State aid rules because it allowed Amazon to pay substantially less tax than other businesses. Luxembourg must now recover the illegal aid. Download Amazon State Aid Decision
Commissioner Margrethe Vestager, in charge of competition policy, said "Luxembourg gave illegal tax benefits to Amazon. As a result, almost three-quarters of Amazon's profits were not taxed. In other words, Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules. This is illegal under EU State aid rules. Member States cannot give selective tax benefits to multinational groups that are not available to others."
Following an in-depth investigation launched in October 2014, the Commission has concluded that a tax ruling issued by Luxembourg in 2003, and prolonged in 2011, lowered the tax paid by Amazon in Luxembourg without any valid justification.
The tax ruling enabled Amazon to shift the vast majority of its profits from an Amazon group company that is subject to tax in Luxembourg (Amazon EU) to a company which is not subject to tax (Amazon Europe Holding Technologies). In particular, the tax ruling endorsed the payment of a royalty from Amazon EU to Amazon Europe Holding Technologies, which significantly reduced Amazon EU's taxable profits.
The Commission's investigation showed that the level of the royalty payments, endorsed by the tax ruling, was inflated and did not reflect economic reality. On this basis, the Commission concluded that the tax ruling granted a selective economic advantage to Amazon by allowing the group to pay less tax than other companies subject to the same national tax rules. In fact, the ruling enabled Amazon to avoid taxation on three-quarters of the profits it made from all Amazon sales in the EU.
Amazon's structure in Europe
The Commission decision concerns Luxembourg's tax treatment of two companies in the Amazon group – Amazon EU and Amazon Europe Holding Technologies. Both are Luxembourg-incorporated companies that are fully-owned by the Amazon group and ultimately controlled by the US parent, Amazon.com, Inc.
- Amazon EU (the "operating company") operates Amazon's retail business throughout Europe. In 2014, it had over 500 employees, who selected the goods for sale on Amazon's websites in Europe, bought them from manufacturers, and managed the online sale and the delivery of products to the customer.Amazon set up their sales operations in Europe in such a way that customers buying products on any of Amazon's websites in Europe were contractually buying products from the operating company in Luxembourg. This way, Amazon recorded all European sales, and the profits stemming from these sales, in Luxembourg.
- Amazon Europe Holding Technologies (the "holding company") is a limited partnership with no employees, no offices and no business activities. The holding company acts as an intermediary between the operating company and Amazon in the US. It holds certain intellectual property rights for Europe under a so-called "cost-sharing agreement" with Amazon in the US. The holding company itself makes no active use of this intellectual property. It merely grants an exclusive license to this intellectual property to the operating company, which uses it to run Amazon's European retail business.
Under the cost-sharing agreement the holding company makes annual payments to Amazon in the US to contribute to the costs of developing the intellectual property. The appropriate level of these payments has recently been determined by a US tax court.
Under Luxembourg's general tax laws, the operating company is subject to corporate taxation in Luxembourg, whilst the holding company is not because of its legal form, a limited partnership.Profits recorded by the holding company are only taxed at the level of the partners and not at the level of the holding company itself. The holding company's partners were located in the US and have so far deferred their tax liability.
Amazon implemented this structure, endorsed by the tax ruling under investigation, between May 2006 and June 2014. In June 2014, Amazon changed the way it operates in Europe. This new structure is outside the scope of the Commission State aid investigation.
The scope of the Commission investigation
The role of EU State aid control is to ensure Member States do not give selected companies a better tax treatment than others, via tax rulings or otherwise. More specifically, transactions between companies in a corporate group must be priced in a way that reflects economic reality. This means that the payments between two companies in the same group should be in line with arrangements that take place under commercial conditions between independent businesses (so-called "arm's length principle").
The Commission's State aid investigation concerned a tax ruling issued by Luxembourg to Amazon in 2003 and prolonged in 2011. This ruling endorsed a method to calculate the taxable base of the operating company. Indirectly, it also endorsed a method to calculate annual payments from the operating company to the holding company for the rights to the Amazon intellectual property, which were used only by the operating company.
These payments exceeded, on average, 90% of the operating company's operating profits. They were significantly (1.5 times) higher than what the holding company needed to pay to Amazon in the US under the cost-sharing agreement.
To be clear, the Commission investigation did not question that the holding company owned the intellectual property rights that it licensed to the operating company, nor the regular payments the holding company made to Amazon in the US to develop this intellectual property. It also did not question Luxembourg's general tax system as such.
The Commission's State aid investigation concluded that the Luxembourg tax ruling endorsed an unjustified method to calculate Amazon's taxable profits in Luxembourg. In particular, the level of the royalty payment from the operating company to the holding company was inflated and did not reflect economic reality.
- The operating company was the only entity actively taking decisions and carrying out activities related to Amazon's European retail business. As mentioned, its staff selected the goods for sale, bought them from manufacturers, and managed the online sale and the delivery of products to the customer. The operating company also adapted the technology and software behind the Amazon e-commerce platform in Europe, and invested in marketing and gathered customer data. This means that it managed and added value to the intellectual property rights licensed to it.
- The holding company was an empty shell that simply passed on the intellectual property rights to the operating company for its exclusive use. The holding company was not itself in any way actively involved in the management, development or use of this intellectual property. It did not, and could not, perform any activities, to justify the level of royalty it received.
Under the method endorsed by the tax ruling, the operating company's taxable profits were reduced to a quarter of what they were in reality. Almost three quarters of Amazon's profits were unduly attributed to the holding company, where they remained untaxed. In fact, the ruling enabled Amazon to avoid taxation on three quarters of the profits it made from all Amazon sales in the EU.
On this basis, the Commission concluded that the tax ruling issued by Luxembourg endorsed payments between two companies in the same group, which are not in line with economic reality. As a result, the tax ruling enabled Amazon to pay substantially less tax than other companies. Therefore, the Commission decision found that Luxembourg's tax treatment of Amazon under the tax ruling is illegal under EU State aid rules.
The infographic is available in high resolution here.
As a matter of principle, EU State aid rules require that incompatible State aid is recovered in order to remove the distortion of competition created by the aid. There are no fines under EU State aid rules and recovery does not penalise the company in question. It simply restores equal treatment with other companies.
In today's decision, the Commission has set out the methodology to calculate the value of the competitive advantage granted to Amazon, i.e. the difference between what the company paid in taxes and what it would have been liable to pay without the tax ruling. On the basis of available information, this is estimated to be around €250 million, plus interest. The tax authorities of Luxembourg must now determine the precise amount of unpaid tax in Luxembourg, on the basis of the methodology established in the decision.
Since June 2013, the Commission has been investigating the tax ruling practices of Member States. 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 least 35 multinationals, mainly from the EU, under its "excess profit" tax scheme are illegal under EU State aid rules. In August 2016, the Commission concluded that Ireland granted undue tax benefits of up to €13 billion to Apple. The Commission also has two ongoing in-depth investigations into concerns that tax rulings may give rise to state aid issues in Luxembourg, as regards McDonald's and GDF Suez (now Engie).
This Commission has pursued a far-reaching strategy towards fair taxation and greater transparency and we have recently seen major progress. Following Commission proposals on tax transparency of March 2015, new rules on automatic exchange of information on tax rulings entered into force in January 2017. Member States have also agreed to extend their automatic exchange of information to country-by-country reporting of tax-related financial information of multinationals. A proposal is now on the table to make some of this information public. New EU rules to prevent tax avoidance via non-EU countries were adopted in May 2017 completing the Anti-Tax Avoidance Directive (ATAD) which ensures that binding and robust anti-abuse measures are applied throughout the Single Market.
In terms of ongoing legislative work, the Commission's proposals for a relaunched Common Consolidated Corporate Tax Base in October 2016 would act as a powerful tool against tax avoidance in the EU. In June 2017, the Commission proposed new transparency rules for intermediaries - including tax advisors - who design and promote tax planning schemes for their clients. This legislation will help to bring about a much greater degree of transparency and deter the use of tax rulings as an instrument for tax abuse. Finally, just this September the Commission launched a new EU agenda to ensure that the digital economy is taxed in a fair and growth-friendly way. Our Communication set out the challenges Member States currently face when it comes to acting on this pressing issue and outlines possible solutions to be explored ahead of a Commission proposal in 2018. All of the Commission's work rests on the simple principle that all companies, big and small, must pay tax where they make their profits.
The non-confidential version of the decisions will be made available under the case number SA.38944 in the state aid register on the Commission's Competition website once any confidentiality issues have been resolved. The State Aid Weekly e-News lists new publications of State aid decisions on the internet and in the EU Official Journal.
For detailed State Aid analysis, see Practical Guide to Transfer Pricing. Fifty co-authors contribute subject matter expertise on technical issues faced by tax and risk management counsel. Free download of chapter 2 here
Previous Amazon case analysis is Byrnes’ Analysis of the 200+ page Amazon Decision. Is it the Death Knell of the Income Method and Inclusion of Employee Stock Compensation for Cost Sharing Agreement Valuation?
Starbucks State Aid analysis Application of TNMM to Starbucks Roasting Operation: Seeking Comparables Through Understanding the Market
transfer pricing update is 2017 U.S. Transfer Pricing and Intra Group Pricing Update
Tuesday, October 3, 2017
In April 2016, the Internal Revenue Service and the United States Department of the Treasury (the "Treasury Department") (together, the "Agencies") issued a rule identifying stock of foreign acquiring corporations that is to be disregarded in determining an ownership fraction relevant to categorization for federal-tax purposes because the stock is attributable to prior domestic-entity acquisitions. 26 C.F.R. § 1 .7874-8T (the "Rule"). The U.S. Chamber of Commerce and the Texas Association of Business filed a legal challenge to the IRS’s immediately effective Multiple Acquisition Rule, which attempts to prevent certain corporate mergers that are otherwise permitted under the inversion rules under Section 7874 of the Internal Revenue Code.
The administration asked Congress to give it the authority to eliminate corporate inversions. When Congress would not do so, Treasury and the IRS ignored the clear limits of the tax code to target entirely lawful transactions. The Chamber argued that Treasury violated the Administrative Procedural Act (APA). The Chamber argued Treasury violated the APA in issuing the Rule because the Rule exceeds Treasury's statutory jurisdiction, Treasury engaged in an arbitrary and capricious rulemaking, and Treasury failed to provide affected parties with notice and an opportunity to
comment on the Rule.
“Treasury and the IRS ignored the clear limits of a statute, and simply rewrote the law unilaterally. This is not the way government is supposed to work in America,” said U.S. Chamber President and CEO Thomas J. Donohue.
The District Court stated that based on the broad authority granted by Congress, the court concludes the Rule does not exceed the statutory jurisdiction of Treasury.
As explained in the complaint, inversions are the natural consequence of America’s misguided policy of imposing high taxes on corporations, and then trying to export those taxes to income earned globally. “Instead of breaking the rules to punish companies engaged in lawful transactions, Washington should just do its job and comprehensively reform the tax code,” Donohue stated. “The real solution is tax reform that lowers rates for all businesses, allowing American companies to compete globally and the United States to attract foreign investment.”
Section 7874 sets a specific numerical threshold governing combination transactions between U.S. and foreign companies: so long as the shareholders of a foreign company own more than 40 percent of the combined entity’s stock, the transaction will not be treated as an inversion subject to this statutory provision. In order to circumvent this numerical threshold, the rule, which was made immediately effective, artificially ignores any stock owned by the foreign shareholders that came from prior acquisitions of a U.S. company within the three years before a merger. As a result, the rule disallows some mergers that clearly satisfy the 40 percent threshold.
“Treasury and the IRS rewrote the Internal Revenue Code and steamrolled over the Administrative Procedure Act, which requires that an agency provide interested parties with notice and an opportunity to comment before a rule becomes effective,” explained Lily Fu Claffee, chief legal officer of the U.S. Chamber. “Treasury and the IRS admitted to skipping over any prior notice or opportunity to comment on their Multiple Acquisition Rule, but offered no justification for dodging their legal obligations in this way. Treasury and the IRS should not act as if they are above the basic rules that govern all federal agencies.”
The District Court stated that the standard of review is highly deferential to the action of Treasury, and a reviewing court "may not use review of an agency's environmental analysis as a guise for second-guessing substantive decisions committed to the discretion of the agency." The court undertook a review of the full analysis by which Treasury determined the Rule is necessary to achieve the goals of the Internal Revenue Code. The court concludes Treasury did not rely on factors that Congress did not intend for them to consider or fail to consider an important aspect of the issue before them. Thus, the court concluded Treasury did not engage in an arbitrary and capricious rulemaking.
Treasury asserted that it complied with the APA's notice-and-comment requirements because a temporary regulation may be issued without notice and comment. The court disagreed stating that the statute specifically refers to permissible effective dates of regulations and publication of notice in the Federal Register as required by the APA but does not mention an exception for temporary rules.
Treasury countered that the temporary regulation was merely interpretative. The Court quoted Phillips Petroleum (5th Cir 1994): "Generally speaking.. .'substantive rules,' or 'legislative rules' are those which create law, usually implementary to an existing law; whereas interpretative rules are statements as to what the administrative officer thinks the statute or regulation means." The Court disagreed with Treasury stating that adjustments to application and treating stock as if it were not stock are not mere interpretations of the statute, but substantive modifications to the application of the statute. The court concluded the Rule is a substantive or legislative regulation, not an interpretive regulation, and Treasury is not therefore excused from the notice-and-comment procedure required by the APA.
Consequently, the inversion temporary regulations is unlawful and may not be enforced.
Saturday, September 30, 2017
The OECD has released updated and new IT-tools and guidance to support the technical implementation of the exchange of tax information under the Common Reporting Standard (CRS), on Country-by-Country (CbC) Reporting and in relation to tax rulings (ETR).
In relation to CbC Reporting pursuant to BEPS Action 13, the updated CbC XML Schema and User Guide now allows MNE Groups to indicate cases of stateless entities and stateless income, as well as to specify the commercial name of the MNE Group. Furthermore, both with respect to the CbC and ETR XML Schemas and User Guides, certain clarifications have been made, in particular with respect to the correction mechanisms.
The OECD is further pleased to announce that a dedicated XML Schema and User Guide have been developed to provide structured feedback on received CbC and ETR information. The CbC and ETR Status Message XML Schemas will allow tax administrations to provide structured feedback to the sender on frequent errors encountered, with a view to improving overall data quality and receiving corrected information, where necessary. In the same context, the User Guide for providing CRS-related Status Messages has also been slightly updated to clarify the technical aspects of the structured feedback process.
The different new and updated IT-tools and user guides may be accessed here:
- Country-by-Country Reporting XML Schema and User Guide
- Exchange on Tax Rulings XML Schema and User Guide
- Country-by-Country Reporting Status Message XML Schema and User Guide
- Exchange on Tax Rulings Status Message XML Schema and User Guide
- Common Reporting Standard Status Message XML Schema and User Guide
Thursday, September 28, 2017
The finance and economic affairs ministers of the EU member states discussed updating international tax rules for companies at their informal meeting in Tallinn today, so that these rules could also be applied to taxing enterprises that use digital technology. The ministers agreed to move forward swiftly and to reach a common understanding at the Ecofin Council in December.
“For us, it is important to agree on new international tax rules that also take into account the business models of the digital economy. This would guarantee the equal taxation of all companies regardless of their location or place of activity. I hope that today’s discussion helped us get a step closer to a suitable solution,” said Toomas Tõniste, the Minister for Finance of Estonia, after the meeting.
“Tax problems connected with the digital economy and the need for new solutions have been a subject of discussion for a long time. At the same time, companies have to operate in unequal conditions. Countries are deprived of tax income and to compensate for that, they impose unilateral measures. This, however, harms our common market and the entire European Union,” the minister added. “Thus, the sooner we reach a solution the better. This guarantees the fairer taxation of companies and creates a better business environment.”
According to Minister Tõniste, a common solution that covers the entire European Union is also important because different tax rules in member states can create multiple taxation and lead to a belief that doing business outside of the EU is more lucrative than inside the European Union. “If we can agree on the approach inside the European Union, then we can also affect the global rules in a way that is favourable to us. We all agree that a global solution would be the best solution,” said the minister.
Business models of the digital economy differ substantially from the business models of the traditional economy, and companies often operate virtually in several countries. The international rules for taxing the profit of companies, however, still assume that in order to create a taxable profit, the company has to be physically present. This allows many companies not to pay their taxes because the tax rules are out of date. This is also one of the reasons why this situation cannot simply be solved with measures that stop companies from evading their taxes.
Estonia is of the opinion that when bringing the tax rules up to date, it is important to abandon the requirement that companies have to be physically present in a country or own assets there, and replace this with the concept of a virtual permanent establishment. A precondition for this is a more precise agreement on the virtual taxpayers who have to start paying taxes.
Tuesday, September 26, 2017
OECD releases first peer reviews on implementation of BEPS minimum standards on improving tax dispute resolution mechanisms
As part of continuing efforts to improve the international tax framework, the OECD has released the first analysis of individual country efforts to improve dispute resolution mechanisms. The six peer review reports represent the first evaluation of how countries are implementing new minimum standards agreed in the OECD/G20 BEPS Project. The BEPS Project sets out 15 key actions to reform the international tax framework, by ensuring that profits are reported where economic activities are carried out and value is created.
A key pillar of the project focused on improving the mutual agreement procedure (MAP), which resulted in a new minimum standard to ensure that tax treaty related disputes are resolved in a timely, effective and efficient manner (Action 14). This minimum standard is complemented by a set of best practices. In addition to implementing the Action 14 minimum standard, countries committed to have their compliance with this standard reviewed and monitored by their peers. (For further information about the OECD's work on Action 14, see: www.oecd.org/tax/beps/beps-action-14-peer-review-and-monitoring.htm.)
The first six peer review reports relate to implementation by Belgium, Canada, the Netherlands, Switzerland, the United Kingdom and the United States. A document addressing the implementation of best practices is also available on each jurisdiction. The six reports include over 110 recommendations relating to the minimum standard. In stage 2 of the peer review process, each jurisdiction’s efforts to address any shortcomings identified in its stage 1 peer review report will be monitored. The six assessed jurisdictions performed well in various MAP areas:
- All provide for roll-back of bilateral APAs with a view to preventing disputes from arising;
- MAP is available and access to MAP is granted in the situations required by the minimum standard;
- The competent authority function is adequately resourced, and takes a pragmatic and principled approach for the resolution of MAP cases; and
- MAP agreements reached so far have been implemented on time.
The main areas where improvements are necessary concern:
- Resolution of MAP cases within the pursued average of 24 months is a challenge for some jurisdictions, especially concerning transfer pricing cases;
- MAP guidance is generally clear and accessible, however, improvements for some jurisdictions are necessary and already under way; and
- Each of the six jurisdictions was given recommendations to align their tax treaty MAP provisions with the Action 14 minimum standard. For a number of those treaties, such alignment will already be realised via the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.
These first peer review reports represent an important step forward to turn the political commitments made by members of the Inclusive Framework into measureable, tangible progress. The six jurisdictions concerned are already working to address deficiencies identified in their respective reports. The OECD will continue to publish stage 1 peer review reports in accordance with the Action 14 peer review assessment schedule.
Lexis’ Practical Guide to U.S. Transfer Pricing is updated annually to help multinationals cope with the U.S. transfer pricing rules and procedures, taking into account the international norms established by the Organisation for Economic Co-operation and Development (OECD). It is also designed for use by tax administrators, both those belonging to the U.S. Internal Revenue Service and those belonging to the tax administrations of other countries, and tax professionals in and out of government, corporate executives, and their non-tax advisors, both American and foreign. Free download here
Monday, September 25, 2017
Taxation: Commission sets out path towards fair taxation of the Digital Economy
The European Commission is today launching a new EU agenda to ensure that the digital economy is taxed in a fair and growth-friendly way. The Communication adopted by the Commission sets out the challenges Member States currently face when it comes to acting on this pressing issue and outlines possible solutions to be explored.
The aim is to ensure a coherent EU approach to taxing the digital economy that supports the Commission's key priorities of completing the Digital Single Market and ensuring the fair and effective taxation of all companies. Today's Communication paves the way for a legislative proposal on EU rules for the taxation of profits in the digital economy, as confirmed by President Juncker in the 2017 State of the Union. Those rules could be set out as early as spring 2018. Today's paper should also feed into international work in this area, notably in the G20 and the OECD.
Andrus Ansip, Vice-President for the Digital Single Market said: “Modern taxation rules are essential to leverage the full potential of the EU's Digital Single Market and to encourage innovation and growth. This means having a modern and sustainable tax framework which provides legal certainty, growth-friendly incentives and a level playing field for all businesses. The EU continues to push for a comprehensive revision of global tax rules to meet the new realities."
Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue said: "There is broad agreement that the growing digitalisation of the economy creates huge economic opportunities. At the same time, our tax systems should evolve to capture new business models while being fair, efficient and future-proof. It's also a question of sustainability of our tax revenues as traditional tax sources come under strain. Not least, it's about maintaining the integrity of the Single Market and avoiding fragmentation by finding common solutions to global challenges."
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs added: "The goal of this Commission has always been to ensure that companies pay their fair share of tax where they generate profits. Digital firms make vast profits from their millions of users, even if they do not have a physical presence in the EU. We now want to create a level playing field so that all companies active in the EU can compete fairly, irrespective of whether they are operating via the cloud or from brick and mortar premises."
The current tax framework does not fit with modern realities. The tax rules in place today were designed for the traditional economy and cannot capture activities which are increasingly based on intangible assets and data. As a result, the effective tax rate of digital companies in the EU is estimated to be half that of traditional companies – and often much less. At the same time, patchwork unilateral measures by Member States to address the problem threaten to create new obstacles and loopholes in the Single Market.
The first focus should be on pushing for a fundamental reform of international tax rules, which would ensure a better link between how value is created and where it is taxed. Member States should converge on a strong and ambitious EU position, so we can push for meaningful outcomes in the OECD report to the G20 on this issue next spring. The Digital Summit in Tallinn will be a good occasion for Member States to define this position at the highest political level.
In the absence of adequate global progress, the EU should implement its own solutions to taxing the profits of digital economy companies. Today's Communication outlines the Commission's long term strategy, as well as some of the short term solutions that have been discussed at EU and international level so far. The Common Consolidated Corporate Tax Base (CCCTB) in particular offers a good basis to address the key challenges and provide a sustainable, robust and fair framework for taxing all large businesses in the future. As this proposal is currently being discussed by Member States, digital taxation could easily be included in the scope of the final agreed rules. However, short term 'quick fixes' such as a targeted turnover tax and an EU-wide advertising tax will also be assessed (see MEMO).
As announced at the informal ECOFIN of September, the Estonian Presidency will continue working on these issues with a view to having clear and ambitious Council conclusions by the end of the year. These conclusions should act as the EU contribution to international discussions on digital taxation, and lay the basis for future work in the Single Market.
In the meantime, the Commission will continue to analyse the policy options and consult with relevant stakeholders and industry representatives on this important and pressing issue.
The Commission looks forward to the OECD's report to the G20 in spring 2018, which should set out appropriate and meaningful solutions to taxing the digital economy at the international level and which can be integrated into the upcoming Commission proposal for binding rules in the EU's Single Market. If this is not the case, the Commission will in any case be ready to present an original legislative proposal to ensure a fair, effective and competitive tax framework for the Digital Single Market.
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