International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Friday, November 16, 2018

OECD releases latest results on preferential regimes and moves to strengthen the level playing field with zero tax jurisdictions

International efforts to curb harmful tax practices and prevent the misuse of preferential tax regimes are having a tangible impact worldwide, according to new data released today by the OECD.

The latest progress report from the Inclusive Framework on BEPS covers the assessment of 53 preferential tax regimes, demonstrating jurisdictions' continuing resolve to ensure that tax breaks are only offered to substantive activities and only if they do not pose risks of harmful competition to others.

The assessment process is part of ongoing implementation of Action 5 under the OECD/G20 Base Erosion and Profit Shifting Project. The assessments are undertaken by the Forum on Harmful Tax Practices (FHTP), comprising of the more than 120 member jurisdictions of the Inclusive Framework. Action 5 revamps the work on harmful tax practices with a focus on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for preferential regimes, such as IP regimes. The latest batch of assessments includes:

  • 18 regimes where jurisdictions have delivered on their commitment to make legislative changes to abolish or amend the regime (Andorra, Curaçao, Hong Kong (China), Mauritius, San Marino and Spain).
  • Four new or replacement regimes that have been specifically designed to meet Action 5 standard (Lithuania, Mauritius and San Marino).
  • New commitments to make legislative changes to amend or abolish a further 10 regimes, by Aruba, Australia, Maldives, Mongolia, Montserrat, the Philippines and Saint Lucia.
  • An additional 17 regimes that have been brought into the FHTP review process (Aruba, Brunei Darussalam, Curaçao, Gabon, Greece, Jordan, Kazakhstan, Malaysia, Panama, Paraguay, Saint Kitts and Nevis and the United States).
  • Four other regimes that have been found to be out of scope, not yet operational or were already abolished or without harmful features (Aruba, Kenya, Paraguay).

Having completed this latest set of reviews, the cumulative picture of the Action 5 regime review process is as follows, bringing the total number of regimes reviewed to 246:

Cumulative picture of the Action 5 regime review process

These results indicate the extent of continuing work to end harmful tax practices, and ensures that in the future all preferential regimes require real substance.

Given that all preferential regimes for geographically mobile income must now meet the Substantial Activities Requirements, it is essential to ensure that business activity does not simply relocate to a zero tax jurisdiction in order to avoid the substance requirements. This would tilt the playing field for those that have now changed their preferential regimes to comply with the standard and jeopardise the progress made in Action 5 to date. Against this backdrop, the Inclusive framework has decided to apply the Substantial Activities Requirement for "no or only nominal tax" jurisdictions.

"This new global standard means that mobile business income can no longer be parked in a zero tax jurisdiction without the core business functions having been undertaken by the same business entity, or in the same location," said Pascal Saint Amans, director of the OECD Centre for Tax Policy and Administration. "The Inclusive Framework's actions will ensure that substantial activities must be performed in respect of the same types of mobile business activities, regardless of whether they take place in a preferential regime or in a no or only nominal tax jurisdiction."

The FHTP will next meet in January 2019, to assess continuing reviews on the remaining regimes for which commitments to amend or abolish were made in 2017. Further discussion on all other regimes will take place through the FHTP review process in 2019. The FHTP will also work on the next steps for assessing compliance with the global standard for no or only nominal tax jurisdictions, and continue to report results to the Inclusive Framework.

November 16, 2018 in BEPS, OECD | Permalink | Comments (0)

Sunday, November 11, 2018

OECD and tax officials from Eastern Europe and Central Asia discuss BEPS implementation

Over 60 delegates from 16 countries, international and regional organisations, business, civil society and academia gathered in Yerevan, Armenia on 7-9 November 2018 for a regional meeting of the Inclusive Framework on BEPS in Eastern Europe and Central Asia. This was the latest in a series of regional meetings offering participants from different regions in the world the opportunity to provide their views and input into the Inclusive Framework on BEPS from a regional perspective and in a regional setting.

The event was hosted by the State Revenue Committee of the Republic of Armenia in co-operation with the OECD and the Intra-European Organisation of Tax Administrations (IOTA). Opened by the Chairman of the State Revenue Committee of Armenia, Mr. Davit Ananyan, the meeting was co-chaired by Ms. Nairuhi Avetisyan, Head of the Transfer Pricing and International Projects Division, State Revenue Committee of Armenia, and Mr. Wolfgang Büttner, Technical Taxation Expert at IOTA.

Participants shared and discussed the steps and actions taken in their respective jurisdictions to implement the BEPS measures which were released in October 2015. The meeting dealt with recent developments, in particular as regards to peer review mechanisms and timelines for the implementation of the four BEPS minimum standards and the signing of the Multilateral Instrument (MLI) to implement tax-treaty related BEPS measures. The meeting provided participants with the opportunity to work together on practical case studies on country-by-country reporting for the activities of multinational enterprises (BEPS Action 13), on preferential tax regimes and exchange of information on tax rulings (BEPS Action 5), as well as on treaty shopping and treaty abuse (BEPS Action 6).

Furthermore, the meeting gave an update on the transfer pricing follow-up work and the development of toolkits to support low-income countries. Participants discussed the range of capacity-building initiatives to strengthen countries' tax systems and administration including the joint OECD/UNDP initative Tax Inspectors Without Borders.

November 11, 2018 in BEPS | Permalink | Comments (0)

Monday, November 5, 2018

US Rejects Digital Economy Taxation Efforts by EU

Washington – U.S. Treasury Secretary Steven T. Mnuchin issued the following statement regarding digital tax proposals:

“Treasury is working very closely with the OECD and our counterparts there to address issues of base erosion and fair taxation.  We believe the issues are not unique to technology companies but also relate to other companies, particularly those with valuable intangibles.  I have instructed our team to continue their efforts in the OECD so that we can make progress on these issues quickly.  I highlight again our strong concern with countries’ consideration of a unilateral and unfair gross sales tax that targets our technology and internet companies.  A tax should be based on income, not sales, and should not single out a specific industry for taxation under a different standard.  We urge our partners to finish the OECD process with us rather than taking unilateral action in this area.”

November 5, 2018 in BEPS | Permalink | Comments (0)

Friday, November 2, 2018

Antigua and Barbuda, Dominica and Saint Vincent and the Grenadines join the Inclusive Framework on BEPS

Antigua and Barbuda, Dominica, Grenada, and St Vincent and the Grenadines have joined the OECD's inclusive framework on base erosion and profit shifting, bringing the total number of BEPS jurisdictions to 123.

November 2, 2018 in BEPS | Permalink | Comments (0)

Friday, October 26, 2018

Global Forum publishes compliance ratings on tax transparency for further seven jurisdictions

The Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) published today seven peer review reports assessing compliance with the international standard on transparency and exchange of information on request (EOIR).

These reports assess jurisdictions against the updated standard which incorporates beneficial ownership information of all relevant legal entities and arrangements, in line with the definition used by the Financial Action Task Force Recommendations.

Two jurisdictions – Bahrain and Singapore – received an overall rating of “Compliant”. Five others – AustriaArubaBrazilSaint Kitts and Nevis and the United Kingdom were rated “Largely Compliant”. The jurisdictions have demonstrated their progress on many deficiencies identified in the first round of reviews including improving access to information, developing broader EOI agreement networks; and monitoring the handling of increasing incoming EOI requests as well as taking measures to implement the strengthened standard on the availability of beneficial ownership.

The Global Forum is the leading multilateral body mandated to ensure that jurisdictions around the world adhere to and effectively implement both the standard of transparency and exchange of information on request and the standard of automatic exchange of information. This objective is achieved through a robust monitoring and peer review process. The Global Forum also runs an extensive technical assistance programme to provide support to its members in implementing the standards and helping tax authorities to make the best use of cross-border information sharing channels.

The Global Forum also welcomed Oman as a new member. This takes its membership to 154 members who have come together to cooperate in the international fight against cross border tax evasion. 

For additional information on the Global Forum, its peer review process, and to read all reports to date, go to: http://www.oecd-ilibrary.org/taxation/global-forum-on-transparency-and-exchange-of-information-for-tax-purposes-peer-reviews_2219469x.

For further information, journalists should contact Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, (+33 6 2630 4923) or Monica Bhatia, Head of the Global Forum Secretariat (+ 33 1 4524 9746).


Watch this short cartoon video to know 

October 26, 2018 in BEPS | Permalink | Comments (0)

Tuesday, October 23, 2018

Global Forum publishes compliance ratings on tax transparency for further seven jurisdictions

The Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) published today seven peer review reports assessing compliance with the international standard on transparency and exchange of information on request (EOIR).

These reports assess jurisdictions against the updated standard which incorporates beneficial ownership information of all relevant legal entities and arrangements, in line with the definition used by the Financial Action Task Force Recommendations.

Two jurisdictions – Bahrain and Singapore – received an overall rating of “Compliant”. Five others – AustriaArubaBrazilSaint Kitts and Nevis and the United Kingdom were rated “Largely Compliant”. The jurisdictions have demonstrated their progress on many deficiencies identified in the first round of reviews including improving access to information, developing broader EOI agreement networks; and monitoring the handling of increasing incoming EOI requests as well as taking measures to implement the strengthened standard on the availability of beneficial ownership.

The Global Forum is the leading multilateral body mandated to ensure that jurisdictions around the world adhere to and effectively implement both the standard of transparency and exchange of information on request and the standard of automatic exchange of information. This objective is achieved through a robust monitoring and peer review process. The Global Forum also runs an extensive technical assistance programme to provide support to its members in implementing the standards and helping tax authorities to make the best use of cross-border information sharing channels.

The Global Forum also welcomed Oman as a new member. This takes its membership to 154 members who have come together to cooperate in the international fight against cross border tax evasion. 

For additional information on the Global Forum, its peer review process, and to read all reports to date, go to: http://www.oecd-ilibrary.org/taxation/global-forum-on-transparency-and-exchange-of-information-for-tax-purposes-peer-reviews_2219469x.

For further information, journalists should contact Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, (+33 6 2630 4923) or Monica Bhatia, Head of the Global Forum Secretariat (+ 33 1 4524 9746).


Watch this short cartoon video to know more about the work of the Global Forum

October 23, 2018 in BEPS | Permalink | Comments (0)

Friday, October 19, 2018

OECD and IGF release first set of practice notes for developing countries on BEPS risks in mining

For many resource-rich developing countries, mineral resources present a significant economic opportunity to increase government revenue. Tax base erosion and profit shifting (BEPS), combined with gaps in the capabilities of tax authorities in developing countries, threaten this prospect. The OECD’s Centre for Tax Policy and Administration and the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) are collaborating to address some of the challenges developing countries face in raising revenue from their mining sectors. Under this partnership, a series of practice notes and tools are being developed for governments.

Three practice notes have now been finalised. In addition, interested parties were invited to provide comments on prelimary versions of these reports and are now publishing the public comments submitted. The OECD and IGF appreciate all feedback received.

Limiting the Impact of Excessive Interest Deductions on Mining Revenue

Building on BEPS Action 4, this practice note guides government policy-makers on how to strengthen their defences against excessive interest deductions in the mining sector.

Tax Incentives in Mining: Minimising Risks to Revenue

Supplementing wider work undertaken by the Platform for Collaboration on Tax on tax incentives, this practice note focuses on the use of tax incentives in mining specifically, examining the tax base erosion risks they can pose.

Monitoring the Value of Mineral Exports: Policy Options for Governments

Ensuring appropriate pricing of minerals relies on high-quality, accurate testing facilities and controls. This practice note helps governments choose the appropriate policy option for monitoring the value of mineral exports, considering the type of mineral, the risk of undervaluation, existing government capacities, and available budget.


About the OECD/IGF co-operation

The IGF and OECD Centre for Tax Policy and Administration have formed a partnership, combining the IGF’s mining expertise with the OECD’s knowledge of taxation, to design sector specific guidance on some of the most pressing base erosion challenges facing resource-rich developing countries.

This guidance reflects a broad consensus between the OECD Centre for Tax Policy and Administration Secretariat and the IGF, but should not be regarded as the officially endorsed view of either organisation or of their member countries.

Further information on the work of both organisations is available at:

October 19, 2018 in BEPS, OECD | Permalink | Comments (0)

Tuesday, October 9, 2018

2019 Dutch Budget: abolishment of the dividend withholding tax and introduction of earnings stripping and CFC rules

Loyens & Loeff announces that the 2019 Dutch Budget (the Budget) includes a proposal to abolish the existing dividend withholding tax, replacing it with a withholding tax on dividend payments to related entities in low-tax jurisdictions and in cases of abuse as of 1 January 2020.

In a separate proposal, implementing the EU Anti-Tax Avoidance Directive (ATAD1) new rules are introduced on the deductibility of interest (earnings stripping rules) and on taxation of Controlled Foreign Companies (CFC rules). The proposal also includes minor adjustments to the exit taxation rules for companies and broadly follows a preliminary proposal that was published for consultation purposes in 2017 (see our Tax Flash of 11 July 2017) and further clarifications provided by the Ministry of Finance early this year (see our Tax Flash of 23 February 2018). These provisions should enter into force per 1 January 2019.

read the full analysis in Loyens' newsflash here

October 9, 2018 in BEPS | Permalink | Comments (0)

Wednesday, September 26, 2018

IRS Issues Several Country-by-Country Reporting Reminders

1.  IRS Issues Reminder to U.S. MNEs Filing Form 8975 with no U.S. Schedule A (Form 8975)


When submitting Form 8975 and Schedules A (Form 8975), filers must attach at least two Schedules A (Form 8975) to the Form 8975. At least one Schedule A should be for the United States.

A U.S. MNE group with only fiscally transparent United States business entities would not provide a Schedule A for the United States, but would provide a Schedule A for “stateless” entities.

Filers who do not submit either a U.S. or stateless Schedule A (Form 8975) will receive a letter notifying them that an amended return must be filed to ensure their complete and accurate information is exchanged.

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2.  IRS Issues Reminder to U.S. MNEs of Instructions for Schedule A (Form 8975)


U.S. MNEs must submit a Schedule A (Form 8975) for each tax jurisdiction in which one or more constituent entities is tax resident. The tax jurisdiction field in Part I of Schedule A is a mandatory field, and U.S. MNEs are required to enter a two-letter code for the tax jurisdiction to which the Schedule A pertains. The country code for the United States is “US” and the country code for “stateless” is “X5.” All other country codes can be found at www.IRS.gov/CountryCodes.

Form 8975 and Schedule A information is exchanged using the OECD Country Code List that is based on the ISO 3166-1 Standard. Although the country codes found in the IRS link above contain the jurisdictions listed in the table below, those jurisdictions do not correspond to a valid OECD country code for purposes of exchanging the information. Therefore, do not enter any of these country codes on the tax jurisdiction line of Part I of Schedule A.

Tax Jurisdiction Country Code
Akrotiri AX
Ashmore and Cartier Islands AT
Clipperton Island IP
Coral Sea Islands CR
Dhekelia DX
Paracel Islands PF
Spratly Islands PG
Other Country OC

If the tax jurisdiction specified in the above list is associated with a larger sovereignty, use the country code for the larger sovereignty with which the tax jurisdiction is associated (e.g., Akrotiri and Dhekelia are considered a British Overseas Territory, so the country code for the United Kingdom would be used (“UK”)). Otherwise, use a separate Schedule A for “stateless” using the tax jurisdiction code “X5”.  In either case, you should include in Part III of Schedule A the name of the specific constituent entity and the jurisdiction where the constituent entity is located.

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3.  IRS Issues Reminder to U.S. MNEs of Procedures for Mailing Page 1 of Paper-Filed Form 8975 to the Ogden Mailbox


If a U.S. MNE files Form 8975 and Schedule A (Form 8975) on paper, the MNE should mail a copy of only page 1 of Form 8975 to Ogden to notify the IRS that Form 8975 and Schedules A (Form 8975) have been filed with a paper return.

If a U.S. MNE files Form 8975 and Schedules A (Form 8975) electronically, the filer should not mail a copy of page 1 of Form 8975 to the Ogden mailbox.

See the Instructions for Form 8975 and Schedule A (Form 8975) for further guidance.

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4.  IRS Issues Reminder to U.S. MNEs of Procedures for Amending Form 8975


If a U.S. MNE files Form 8975 and Schedules A (Form 8975) that the MNE later determines should be amended, the MNE must file an amended Form 8975 and all Schedules A (Form 8975), including any that have not been amended, with its amended tax return. The U.S. MNE should use the amended return instructions for the return with which Form 8975 and Schedules A were originally filed and check the amended report checkbox at the top of Form 8975.  Note that the amended return (with the amended Form 8975 and all Schedules A) must be filed using the same method (electronically or by paper) as the original submission.  In other words, if the U.S. MNE is required to e-file an original return and need to file an amended or superseding return, the amended return must also be e-filed.  Note that for the paper filer, it must also submit page 1 of Form 8975 to Ogden.

September 26, 2018 in BEPS, Tax Compliance | Permalink | Comments (0)

Tuesday, September 25, 2018

Public comments received on BEPS discussion draft on the transfer pricing aspects of financial transactions

On 3 July 2018, interested parties were invited to provide comments on a discussion draft on financial transactions, which deals with follow-up work in relation to Actions 8-10 (“Assure that transfer pricing outcomes are in line with value creation”) of the BEPS Action Plan. The OECD is grateful to the commentators for their input and now publishes the public comments received.  Download all the received comments on the BEPS discussion draft on the transfer pricing aspects of financial transactions:

September 25, 2018 in BEPS | Permalink | Comments (0)

Monday, September 24, 2018

OECD releases further guidance for tax administrations and MNE Groups on Country-by-Country reporting (BEPS Action 13)

The Inclusive Framework on BEPS has released additional interpretative guidance to give certainty to tax administrations and MNE Groups alike on the implementation of Country-by-Country (CbC) Reporting (BEPS Action 13).

The new guidance includes questions and answers on the treatment of dividends received and the number of employees to be reported in cases where an MNE uses proportional consolidation in preparing its consolidated financial statements, which apply prospectively. The updated guidance also clarifies that shortened amounts should not be used in completing Table 1 of a country-by-country report and contains a table that summarises existing interpretative guidance on the approach to be applied in cases of mergers, demergers and acquisitions.

The complete set of guidance concerning the interpretation of BEPS Action 13 issued so far is presented in the document released today. This will continue to be updated with any further guidance that may be agreed.

Also today, a set of newly established bilateral exchange relationships under the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (CbC MCAA) were published with respect to Bermuda, Curaçao, Hong Kong (China) and Liechtenstein. An overview of all CbC MCAA exchange relationships is available.

September 24, 2018 in BEPS | Permalink | Comments (0)

Saudi Arabia signs landmark agreement to strengthen its tax treaties

Saudi Arabia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Convention). Saudi Arabia becomes the 84th jurisdiction to join the Convention, which now covers over 1,400 bilateral tax treaties.

The Convention is the first multilateral treaty of its kind, allowing jurisdictions to integrate results from the OECD/G20 BEPS Project into their existing networks of bilateral tax treaties. The OECD/G20 BEPS Project delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to "disappear" or be artificially shifted to low or no tax environments, where companies have little or no economic activity. Treaty shopping, in particular, is estimated to reduce the effective withholding tax rate by more than 5 percentage points from nearly 8% to 3%, generating large revenue losses for developed and developing countries.

The Convention, negotiated by more than 100 countries and jurisdictions under a mandate from the G20 Finance Ministers and Central Bank Governors, is one of the most prominent results of the OECD/G20 BEPS project. It is the world's leading instrument for updating bilateral tax treaties and reducing opportunities for tax avoidance by multinational enterprises. Measures included in the Convention address hybrid mismatch arrangements, treaty abuse, and strategies to avoid the creation of a "permanent establishment". The Convention also enhances the dispute resolution mechanism, especially through the addition of an optional provision on mandatory binding arbitration, which has been taken up by 28 jurisdictions.

 

The text of the Convention, the explanatory statement, background information, database, and positions of each signatory are available at http://oe.cd/mli.

September 24, 2018 in BEPS | Permalink | Comments (0)

Thursday, September 20, 2018

State aid: Commission investigation did not find that Luxembourg gave selective tax treatment to McDonald's

The Commission has found that the non-taxation of certain McDonald's profits in Luxembourg did not lead to illegal State aid, as it is in line with national tax laws and the Luxembourg-United States Double Taxation Treaty.

At the same time, the Commission welcomes steps taken by Luxembourg to prevent future double non-taxation.

Commissioner Margrethe Vestager, in charge of competition policy, said: "The Commission investigated under EU State aid rules whether the double non-taxation of certain McDonald's profits was the result of Luxembourg misapplying its national laws and the Luxembourg-US Double Taxation Treaty, in favour of McDonald's. EU State aid rules prevent Member States from giving unfair advantages only to selected companies, including through illegal tax benefits. However, our in-depth investigation has shown that the reason for double non-taxationin this case is a mismatch between Luxembourg and US tax laws, and not a special treatment by Luxembourg. Therefore, Luxembourg did not break EU State aid rules.

Of course, the fact remains that McDonald's did not pay any taxes on these profits – and this is not how it should be from a tax fairness point of view. That's why I very much welcome that the Luxembourg Government is taking legislative steps to address the issue that arose in this case and avoid such situations in the future."

Following an in-depth investigation launched in December 2015, based on doubts that Luxembourg might have misapplied its Double Taxation Treaty with the United States, the Commission has concluded that Luxembourg's tax treatment of McDonald's Europe Franchising does not violate the Double Taxation Treaty with the United States. On that basis the tax rulings granted to McDonald's do not infringe EU State aid rules.

McDonald's Europe Franchising corporate structure

McDonald's Europe Franchising is a subsidiary of McDonald's Corporation, based in the United States. The company is tax resident in Luxembourg and has two branches, one in the United States and the other in Switzerland. In 2009, McDonald's Europe Franchising acquired a number of McDonald's franchise rights from McDonald's Corporation in the United States, which it subsequently allocated internally to the US branch of the company.

As a result, McDonald's Europe Franchising receives royalties from franchisees operating McDonald's fast food outlets in Europe, Ukraine and Russia for the right to use the McDonald's brand.

McDonald's Europe Franchising also set up a Swiss branch responsible for the licensing of the franchise rights to franchisors and through which royalty payments flowed from Luxembourg to the US branch of the company.

McDonald's tax rulings in Luxembourg

In March 2009, the Luxembourg authorities granted McDonald's Europe Franchising a first tax ruling confirming that the company did not need to pay corporate tax in Luxembourg since the profits would be subject to taxation in the United States. This was justified by reference to the Luxembourg – US Double Taxation Treaty, which exempts income from corporate taxation in Luxembourg, if it may be taxed in the United States. Under this first ruling, McDonald's Europe Franchising was required to submit proof every year to the Luxembourg tax authorities that the royalties transferred to the United States via Switzerland were declared and subject to taxation in the United States and in Switzerland.

Following this first tax ruling, the Luxembourg authorities and McDonald's engaged in discussions concerning the taxable presence of McDonald's Europe Franchising in the United States (a so-called "permanent establishment"). McDonald's claimed that although the US branch was not a "permanent establishment" according to US tax law, it was a "permanent establishment" according to Luxembourg tax law. As a result, the royalty income should be exempt from taxation under Luxembourg corporate tax law.

The Luxembourg authorities ultimately agreed with this interpretation and, in September 2009, issued a second tax ruling according to which McDonald's Europe Franchising was no longer required to prove that the royalty income was subject to taxation in the United States.

Commission assessment

The role of EU State aid control is to ensure that Member States do not give selected companies a better treatment than others, through tax rulings or otherwise. In this context, the Commission's in-depth investigation assessed whether the Luxembourg authorities selectively derogated from the provisions of their national tax law and the Luxembourg – US Double Taxation Treaty and gave McDonald's an advantage not available to other companies subject to the same tax rules.

The Commission concluded that this was not the case.

In particular, it could not be established that the interpretation given by the second tax ruling to the Luxembourg – US Double Taxation Treaty was incorrect, although it resulted in the double non-taxation of the royalties attributed to the US branch. Therefore, the Commission found that the Luxembourg authorities did not misapply the Luxembourg –US Double Taxation Treaty and that the tax advantage conferred to McDonald's Europe Franchising cannot be considered State aid.

McDonald's Europe Franchising's US branch did not fulfil the relevant provisions under the US tax code to be considered a permanent establishment.

At the same time, the Commission found that the Luxembourg authorities could exempt the US branch of McDonald's Europe Franchising from corporate taxation without violating the Double Taxation Treaty because the US branch could be considered a permanent establishment according to Luxembourg tax law. Under the relevant provision in the Luxembourg tax code, the business carried on by the US branch of McDonald's Europe Franchising fulfilled all the conditions of a permanent establishment under Luxembourg tax law.

Therefore, the Commission concluded that the Luxembourg authorities did not misapply the Luxembourg – US Double Taxation Treaty by exempting the income of the US branch from Luxembourg corporate taxation.

Preventing future double non-taxation in Luxembourg

This interpretation of the Luxembourg – US Double Taxation Treaty led to double non-taxation of the franchise income of McDonald's Europe Franchising.

The Luxembourg government presented on 19 June 2018 draft legislation to amend the tax code to bring the relevant provision into line with the OECD's Base Erosion and Profit Shifting project and to avoid similar cases of double non-taxation in the future. This is currently being discussed by the Luxembourg Parliament.

Under the proposed new provision, the conditions to determine the existence of a permanent establishment under Luxembourg law would be strengthened. In addition, Luxembourg would be able to, under certain conditions, require companies that claim to have a taxable presence abroad to submit confirmation that they are indeed subject to taxation in the other country.

Background

Tax rulings as such are not a problem under EU State aid rules, if they simply confirm that tax arrangements between companies within the same group comply with the relevant tax legislation. However, tax rulings that confer a selective tax advantage to specific companies can distort competition within the EU's Single Market, in breach of EU State aid rules.

Since June 2013, the Commission has been investigating individual tax rulings of Member States under EU State aid rules. It extended this information inquiry to all Member States in December 2014.

Regarding investigations concerning tax rulings that have already been concluded by the Commission:

  • In October 2015, the Commission concluded that Luxembourg and the Netherlands had granted selective tax advantages to Fiat and Starbucks, respectively. As a result of these decisions, Luxembourg recovered €23.1 million from Fiat and the Netherlands recovered €25.7 million from Starbucks.
  • 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 are illegal under EU State aid rules. The total amount of aid to be recovered from 35 companies is estimated at approximately €900 million, including interest. Belgium has already recovered over 90% of the aid.
  • In August 2016, the Commission concluded that Ireland granted undue tax benefits to Apple, which led to a recovery by Ireland of €14.3 billion.
  • In October 2017, the Commission concluded that Luxembourg granted undue tax benefits to Amazon, which led to a recovery by Luxembourg of €282.7 million.
  • In June 2018, the Commission concluded that Luxembourg granted undue tax benefits to Engie of around €120 million. The recovery procedure is still ongoing.

The Commission also has one ongoing in-depth investigation concerning tax rulings issued by the Netherlands in favour of Inter IKEA, and one investigation concerning a tax scheme for multinationals in the United Kingdom.

Statement by Commissioner Vestager on Commission decision that the non-taxation of certain McDonald's profits in Luxembourg is not illegal State aid

The Commission has today decided that the non-taxation of certain McDonald's profits in Luxembourg is not illegal State aid.

Our case concerned two tax rulings granted by Luxembourg to McDonald's in 2009. These exempt from taxation in Luxembourg all franchise profits that McDonald's receives from third parties operating McDonald's outlets in Europe, the Ukraine and Russia. In the first ruling, Luxembourg falsely assumed that these profits were taxable in the US. They were not. In the second ruling, Luxembourg then removed any obligation on McDonald's to prove that the revenues were taxable in the US. This means that these profits were neither taxed in Luxembourg nor the US.

The Commission investigated under EU State aid rules whether this double non-taxation was the result of Luxembourg misapplying its national laws and the Luxembourg-US Double Taxation Treaty, in favour of McDonald's. EU State aid rules prevent Member States from giving unfair advantages only to selected companies, including through illegal tax benefits.

However, our in-depth investigation has shown that the reason for double non-taxation in this case is a mismatch between Luxembourg and US tax laws, and not a special treatment by Luxembourg. Therefore, we concluded that Luxembourg did not break EU State aid rules.

Details of the McDonald's structure

First, let me tell you a bit more about the facts of the case.

Our case concerns McDonald's Europe Franchising, a Luxembourg-based subsidiary of the McDonald's Corporation. This company also has a branch in the US.

McDonald's Europe Franchising owns the rights to the McDonald's brand and other related rights. It licenses these rights to third parties, who operate the McDonald's fast food outlets and pay franchise fees to McDonald's Europe Franchising.

In February 2009, McDonald's Europe Franchising contacted the Luxembourg tax authorities to ask for a tax ruling confirming that profits from its franchise rights would not be taxable in Luxembourg. McDonald's claimed that this was because these rights are attributed to its US branch. It further argued that the Luxembourg – US Double Taxation Treaty exempts from taxation in Luxembourg any income that may be taxed in the US, if the company has a taxable presence there, for example through a branch.

In March 2009, the Luxembourg authorities issued a first tax ruling agreeing to McDonald's interpretation of the Double Taxation Treaty. At the same time, they requested that the company provide proof that the income of the US branch had been declared and could indeed be taxed in the US.

However, six months later, the Luxembourg tax authorities issued a second tax ruling that removed this requirement to submit proof. In other words, Luxembourg confirmed that the income is exempt from taxation in Luxembourg as well, even though it is not taxable at the US branch.

The State aid investigation

You may wonder how Luxembourg can rely on a Treaty meant to avoid double taxation to endorse double non-taxation. We asked ourselves the same question, which is why we opened a State aid investigation in December 2015.

The purpose of such investigations is to give the Member State and company concerned, as well as other third parties, the opportunity to submit their views on the Commission's preliminary concerns. We then carefully assess them.

The short summary of our conclusion in this case is that the Double Taxation Treaty between Luxembourg and the US explains Luxembourg's tax treatment of McDonald's. Luxembourg did not misapply the Treaty in a selective manner and, on that basis, did not break EU State aid rules.

The more complicated answer starts with a taxation concept called "permanent establishment". If a company has a "permanent establishment" in a specific country, this means that it carries out business and has a taxable presence there.

The Luxembourg – US Double Taxation Treaty says that Luxembourg cannot tax the profits of companies, if they may be taxed in the US because they have a permanent establishment there. Luxembourg can assume that the income of this permanent establishment is taxed in the US.

However, whether a permanent establishment exists in the US is assessed differently by the US and by the Luxembourg tax authorities, under their respective tax codes.

The US did not consider the US branch of McDonald's Europe Franchising to be a permanent establishment under its tax law, and so did not tax the profits of this US branch. However, the Luxembourg authorities considered that the same US branch fulfilled all the conditions necessary to be a permanent establishment under Luxembourg tax law. It therefore exempted this income from Luxembourg taxation in line with the Double Taxation Treaty.

The result was double non-taxation of the income by Luxembourg and the US. However, this was not due to any special treatment awarded by Luxembourg to McDonald's, which was the issue that our investigation under EU State aid rules focused on. In other words, Luxembourg's tax treatment of McDonald's is not illegal under EU State aid rules.

As usual, we will publish the non-confidential version of our decision as soon as we have agreed with Luxembourg on any business secrets that need to be removed from it.

New Luxembourg tax rules

Of course, the fact remains that McDonald's did not pay any taxes in Luxembourg on these profits – and this is not how it should be from a tax fairness point of view.

That's why I very much welcome that the Luxembourg Government is taking legislative steps to address the issue that arose in this case and avoid such situations in the future.

Among other things, Luxembourg will strengthen the criteria under its tax code to define a permanent establishment. This proposal is currently with the Luxembourg parliament. Once adopted, the new provision will require the taxpayer, in certain circumstances, to provide a certificate of residence in the other country, if it wants to benefit from a tax exemption in Luxembourg. This would be proof that the other country recognises the existence of a taxable permanent establishment of that company. This new provision is presented to the Luxembourg parliament together with other measures to transpose the EU's Anti-Tax-Avoidance Directive.

Over the past few years, we have seen an international determination to deal with the issue of tax avoidance. Through closing loopholes in tax laws and working on the OECD's Base Erosion and Profit Shifting Project.

Also within the EU, under the responsibility of my colleagues Valdis Dombrovskis and Pierre Moscovici, the Commission has pursued a coherent strategy towards fair taxation and greater transparency. And Member States have been using the momentum to reform their corporate taxation framework, to make it both fairer and more efficient.

Progress on recovery cases

Finally, I would like to update you on significant progress made on the implementation of Commission decisions requiring Member States to recover unpaid taxes. This is important because otherwise companies continue to benefit from an illegal advantage.

In May, Luxembourg completed the recovery of more than 280 million euros from Amazon, of which 21 million euros is interest.

I am also happy to confirm that Ireland has now recovered the full illegal aid from Apple. The final amount recovered is 14.3 billion euros, of which about 1.2 billion euros is interest. This money will be held in an escrow account, pending the outcome of the ongoing appeal of the Commission's decision before the EU courts. This means that we can proceed to closing the infringement procedure against Ireland for failure to implement the decision.

These are important steps forward to tackling multinationals' tax avoidance and to meeting our ultimate goal of ensuring that all companies, big or small, pay their fair share of tax in the future.

September 20, 2018 in BEPS | Permalink | Comments (0)

Ireland confirms US$15B recovery of the alleged State Aid from Apple

The Minister for Finance and Public Expenditure and Reform, Paschal Donohoe TD, on behalf of the Government, confirms that the full recovery of the alleged State Aid from Apple has been completed. Over the course of Q2 and Q3 2018, Apple deposited c. €14.3 billion into the Escrow Fund which represents the full recovery of the alleged State Aid of c. €13.1 billion plus EU interest of c. €1.2 billion.

The full recovery of the alleged State Aid is a significant milestone and is in line with the commitment given earlier in the year that the alleged State Aid would be recovered by end Q3 2018.

Notwithstanding the fact that the Government does not accept the Commission’s analysis in the Apple State Aid decision and have lodged an appeal with the European Courts, the collection of the alleged State Aid from Apple demonstrates that it was always the Government’s intention to comply with its legal obligations.

Speaking today Minister Donohoe said: ‘While the Government fundamentally disagrees with the Commission’s analysis in the Apple State Aid decision and is seeking an annulment of that decision in the European Courts, as committed members of the European Union, we have always confirmed that we would recover the alleged State aid.  We have demonstrated this with the recovery of the alleged State Aid which will be held in the Escrow Fund pending the outcome of the appeal process before the European Courts’. 

“This is the largest State Aid recovery at c. €14.3 billion and one of the largest funds of its kind to be established. It has taken time to establish the infrastructure and legal framework around the Escrow Fund but this was essential to protect the interests of all parties to the agreement.”

ENDS

Notes to editors

Recovery of alleged State Aid

  1. The State has recovered the alleged State Aid from Apple. The total amount is €14.285 billion (which is the principal amount and relevant EU interest). The final payment was made in early September.
  2. There has been continuous and extensive engagement with the Commission Services throughout the recovery process, including in relation to agreeing the amount of the alleged State Aid and the relevant EU interest.
  3. The alleged State Aid has been placed into an Escrow Fund with the proceeds being released only when there has been a final determination in the European Courts over the validity of the Commission’s Decision.
  4. Notwithstanding the appeal in the Apple State Aid case and the difference in view between Ireland and the Commission on the issue, the Government has always been committed to complying with the binding legal obligations the Commission’s Final Decision places on Ireland. 
  5. Significant developments during 2018:
  • On 7 March 2018, the Department of Finance confirmed that the Bank of New York Mellon, London Branch, was selected as preferred tenderer for the provision of escrow agency and custodian services following a competitive tender process.
  • On 23 March 2018, the Department of Finance confirmed that Amundi, BlackRock Investment Management (UK) Limited and Goldman Sachs Asset Management International were selected as preferred tenderers for the provision of investment management services.
  • On 24 April 2018, the Minister for Finance confirmed that the Escrow Framework Deed, which sets out the detailed legal agreement regarding the recovery of the alleged State Aid was signed by the Minister and Apple.  
  • On 18 May 2018, the Minister for Finance confirmed that the collection of the alleged State Aid had commenced.

Infringement proceedings

6. In October 2017, the European Commission announced the intention to launch infringement proceedings against Ireland over the recovery of the alleged Apple State Aid.  As recovery of the alleged State Aid has now been effected, it is now hoped that these proceedings will be withdrawn by the Commission. The Irish Government is in discussion with the Commission in respect of this. 

Appeal on State Aid case

7. The Government profoundly disagrees with the Commission’s analysis in the Apple State Aid case. An appeal is therefore being brought before the European Courts in the form of an application to the General Court of the European Union (GCEU), asking it to annul the Decision of the Commission.

8. The case has been granted priority status and is progressing through the various stages of private written proceedings before the GCEU. It is at the discretion of the Court to determine if there will be oral proceedings, either in public or in private.

9. It will likely be several years before the matter is ultimately settled by the European Courts.

September 20, 2018 in BEPS | Permalink | Comments (0)

Tuesday, September 4, 2018

OECD releases fourth round of BEPS Action 14 peer review reports on improving tax dispute resolution mechanisms

The work on BEPS Action 14 continues with today’s publication of the fourth round of stage 1 peer review reports. Each report assesses a country’s efforts to implement the Action 14 minimum standard as agreed to under the OECD/G20 BEPS Project.

The reports of AustraliaIrelandIsraelJapanMaltaMexicoNew Zealand and Portugal published today contain over 130 targeted recommendations that will be followed up in stage 2 of the peer review process. A document addressing the implementation of best practices is also available for each jurisdiction that opted to have such best practices assessed. The peer review reports incorporate MAP statistics from 2016 and 2017, as reported under the recently developed MAP Statistics Reporting Framework.

 These stage 1 peer review reports continue to represent an important step forward to turn the political commitments made by members of the Inclusive Framework on BEPS into measureable, tangible progress. Many countries 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. In total, 29 peer reviews have been finalised, with 8 more pending approval. The sixth batch of Action 14 peer reviews were launched this month with 8 more countries beginning their peer review process.

 

 

September 4, 2018 in BEPS | Permalink | Comments (0)

Wednesday, August 1, 2018

IRS Provides Clarifications to the Instructions for Schedule A (Form 8975)

The IRS published a Recent Development Article to provide clarifications to the instructions for Schedule A (Form 8975). A link to the article can also be found on the Reporting Guidance page.

August 1, 2018 in BEPS, Tax Compliance | Permalink | Comments (0)

IRS Publishes New Content on Country-by-Country (CbC) Reporting

New content is available on the CbC Reporting pages:

August 1, 2018 in BEPS, Tax Compliance | Permalink | Comments (0)

Monday, July 9, 2018

Estonia joins the Multilateral Instrument and the United Kingdom deposits ratification instrument

At the OECD Headquarters in Paris, H.E. Ambassador Alar Streimann, Ambassador Extraordinary and Plenipotentiary of Estonia to the OECD, signed Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Multilateral Instrument) in the presence of Masamichi Kono, Deputy Secretary-General of the OECD. Estonia becomes the 82nd jurisdiction to join the MLI. Estonia’s signature follows the signatures by Kazakhstan, Peru and the United Arab Emirates earlier this week.

Also today, the United Kingdom deposited its instrument of ratification for the Multilateral Instrument with the OECD. Joining eight jurisdictions that previously ratified, the United Kingdom demonstrates its strong commitment to prevent the abuse of tax treaties and base erosion and profit shifting (BEPS) by multinational enterprises.

The text of the Convention, the explanatory statement, background information, database, and positions of each signatory are available at http://oe.cd/mli.

July 9, 2018 in BEPS | Permalink | Comments (0)

Wednesday, July 4, 2018

OECD releases BEPS discussion draft on the transfer pricing aspects of financial transactions

Public comments are invited on a discussion draft on financial transactions, which deals with follow-up work in relation to Actions 8-10 ("Assure that transfer pricing outcomes are in line with value creation") of the BEPS Action Plan.

The 2015 report on BEPS Actions 8-10 mandated follow-up work on the transfer pricing aspects of financial transactions. Under that mandate, the discussion draft, which does not yet represent a consensus position of the Committee on Fiscal Affairs or its subsidiary bodies, aims to clarify the application of the principles included in the 2017 edition of the OECD Transfer Pricing Guidelines, in particular, the accurate delineation analysis under Chapter I, to financial transactions. The work also addresses specific issues related to the pricing of financial transactions such as treasury function, intra-group loans, cash pooling, hedging, guarantees and captive insurance.

While comments are invited on any aspect of the discussion draft, the document also identifies a number of issues on which feedback is particularly sought.

Interested parties are invited to send their comments on this discussion draft, and to respond to the specific questions included in the boxes, by 7 September 2018 by e-mail to TransferPricing@oecd.org in Word format (in order to facilitate their distribution to government officials). Comments in excess of ten pages should attach an executive summary limited to two pages. Comments should be addressed to the Tax Treaties, Transfer Pricing and Financial Transactions Division, OECD/CTPA.

Please note that all comments received on this discussion draft 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.

For more information, please Tomas Balco, Head of the Transfer Pricing Unit or the Communications Office at the OECD Centre for Tax Policy and Administration.

July 4, 2018 in BEPS, OECD | Permalink | Comments (0)

Monday, June 25, 2018

OECD releases new guidance on the application of the approach to hard-to-value intangibles and the transactional profit split method under BEPS Actions 8-10

the OECD released two reports containing Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles, under BEPS Action 8; and Revised Guidance on the Application of the Transactional Profit Split Method, under BEPS Action 10.

In October 2015, as part of the final BEPS package, the OECD/G20 published the report on Aligning Transfer Pricing Outcomes with Value Creation (OECD, 2015), under BEPS Actions 8-10. The Report contained revised guidance on key areas, such as transfer pricing issues relating to transactions involving intangibles; contractual arrangements, including the contractual allocation of risks and corresponding profits, which are not supported by the activities actually carried out; the level of return to funding provided by a capital-rich MNE group member, where that return does not correspond to the level of activity undertaken by the funding company; and other high-risk areas. The Report also mandated follow-up work to develop:

The new guidance for tax administration on the application of the approach to hard-to-value intangibles (HTVI) is aimed at reaching a common understanding and practice among tax administrations on how to apply adjustments resulting from the application of this approach. This guidance should improve consistency and reduce the risk of economic double taxation by providing the principles that should underlie the application of the HTVI approach. The guidance also includes a number of examples have been included to clarify the application of the HTVI approach in different scenarios and addresses the interaction between the HTVI approach and the access to the mutual agreement procedure under the applicable tax treaty. This guidance has been formally incorporated into the Transfer Pricing Guidelines as an annex to Chapter VI.

This report contains revised guidance on the profit split method, developed as part of Action 10 of the BEPS Action Plan. This guidance has been formally incorporated into the Transfer Pricing Guidelines, replacing the previous text on the transactional profit split method in Chapter II. The revised guidance retains the basic premise that the profit split method should be applied where it is found to be the most appropriate method to the case at hand, but it significantly expands the guidance available to help determine when that may be the case. It also contains more guidance on how to apply the method, as well as numerous examples.


Addressing base erosion and profit shifting continues to be a key priority of governments around the globe. In 2013, OECD and G20 countries, working together on an equal footing, adopted a 15-point Action Plan to address BEPS. In 2015, the BEPS package of measures was endorsed by G20 Leaders and the OECD. In order to ensure the effective and consistent implementation of the BEPS measures, the Inclusive Framework on BEPS was established in 2016 and now has 116 members. It brings together all interested countries and jurisdictions on an equal footing at the OECD Committee on Fiscal Affairs.

June 25, 2018 in BEPS, OECD | Permalink | Comments (0)