International Financial Law Prof Blog

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

Wednesday, July 29, 2020

OECD/G20 Inclusive Framework on BEPS: Progress Report July 2019-July 2020

This is the fourth annual progress report of the OECD/G20 Inclusive Framework on BEPS. The report describes the progress made to deliver on the mandate of the OECD/G20 Inclusive Framework, covering the period from July 2019 to July 2020, while also taking stock of the progress made since BEPS implementation began.

The report contains an overview and four sections of substantive content. Part I focuses on inclusivity and support for developing countries. Part II describes the progress made on strengthening coherence. Part III describes the progress made on substance. Part IV describes the progress made with respect to evaluation, transparency and tax certainty. These are followed by two annexes providing information on the membership of the OECD/G20 Inclusive Framework on BEPS (Annex A) and the text of the Statement by the OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy as agreed in January 2020 (Annex B).

Download Oecd-g20-inclusive-framework-on-beps-progress-report-july-2019-july-2020

July 29, 2020 in BEPS | Permalink | Comments (0)

Friday, July 17, 2020

Oman deposits its instrument of ratification for the Multilateral BEPS Convention

Oman deposited its instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Convention or MLI) with the OECD’s Secretary-General, Angel Gurría, thus underlining its strong commitment to prevent the abuse of tax treaties and base erosion and profit shifting (BEPS) by multinational enterprises. For Oman, the MLI will enter into force on 1 November 2020.

With 94 jurisdictions currently covered by the MLI, today’s ratification by Oman now brings to 49 the number of jurisdictions which have ratified, accepted or approved it.

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

Texas A&M International Tax Risk Management programTexas A&M University School of Law has launched its online international tax risk management graduate curricula for industry professionals.

Apply now for courses that begin August 23: International Tax Risk Management, Data, and Analytics; International Tax & Tax Treaties (complete list here

 

July 17, 2020 in BEPS, OECD | Permalink | Comments (0)

Wednesday, July 15, 2020

Ireland and Apple Win State Aid Case!

Scroll down to paragraph 241-245 for the application of arm's length to the Irish branches, paras 255-309, and then paragraph 322 for the analysis of the application of the TNMM transfer pricing method - The most relevant parts excerpted from the EU General Court's decision are on my WordPress blog here

(ii) Whether the Commission correctly applied the Authorised OECD Approach in its primary line of reasoning

241    Ireland and ASI and AOE submit, in essence, that the Commission’s primary line of reasoning is inconsistent with the Authorised OECD Approach, inasmuch as the Commission considered that the profits relating to the Apple Group’s IP licences should necessarily have been allocated to the Irish branches of ASI and AOE, in so far as the executives of ASI and AOE did not perform active or critical functions with regard to the management of those licences.

242    In that regard, it should be borne in mind that, in accordance with the Authorised OECD Approach..., the aim of the analysis in the first step is to identify the assets, functions and risks that must be allocated to the permanent establishment of a company on the basis of the activities actually performed by that company. It is true that the analysis in that first step cannot be carried out in an abstract manner that ignores the activities and functions performed within the company as a whole. However, the fact that the Authorised OECD Approach requires an analysis of the functions actually performed within the permanent establishment is at odds with the approach adopted by the Commission consisting, first, in identifying the functions performed by the company as a whole without conducting a more detailed analysis of the functions actually performed by the branches and, second, in presuming that the functions had been performed by the permanent establishment when those functions could not be allocated to the head office of the company itself.

243    In its primary line of reasoning the Commission considered, in essence, that the profits of ASI and AOE relating to the Apple Group’s IP (which, according to the Commission’s line of argument, represented a very significant part of the total profit of those two companies) had to be allocated to the Irish branches in so far as ASI and AOE had no employees capable of managing that IP outside those branches, without, however, establishing that the Irish branches had performed those management functions.

244    Accordingly, as Ireland and ASI and AOE rightly argue, the approach followed by the Commission in its primary line of reasoning is inconsistent with the Authorised OECD Approach.

245    In those circumstances, as is rightly argued by Ireland and ASI and AOE ..., it must be found that the Commission erred in its application, in its primary line of reasoning, of the functional and factual analysis of the activities performed by the branches of ASI and AOE, on which the application of section 25 of the TCA 97 by the Irish tax authorities is based and which corresponds, in essence, to the analysis provided for by the Authorised OECD Approach.

(1)    Strategic decision-making within the Apple Group

298    Ireland and ASI and AOE claim that the ‘centre of gravity’ of the Apple Group’s activities was in Cupertino and not in Ireland. All strategic decisions, in particular those concerning the design and development of the Apple Group’s products, were taken, in accordance with an overall business strategy covering the group as a whole, in Cupertino. That centrally decided strategy was implemented by the companies of the group, which include ASI and AOE, which acted through their management bodies, much like any other company, according to the rules of company law applicable to them.

299    In that regard, it should be noted, in particular, that ASI and AOE submitted evidence, in the administrative procedure and in support of their pleadings in the present instance, on the centralised nature of the strategic decisions within the Apple Group taken by directors in Cupertino and then implemented subsequently by the various entities of the group, such as ASI and AOE. Those centralised procedures concern, inter alia, pricing, accounting decisions, financing and treasury and cover all of the international activities of the Apple Group that would have been decided centrally under the direction of the parent company, Apple Inc.

300    More specifically, with regard to decisions in the field of R&D — which is, in particular, the functional area behind the Apple Group’s IP — ASI and AOE provided evidence showing that decisions relating to the development of the products which were then to be marketed by, inter alia, ASI and AOE, and concerning the R&D strategy which was to be followed by, inter alia, ASI and AOE had been taken and implemented by executives of the group based in Cupertino. It is also apparent from that evidence that the strategies relating to new product launches and, in particular, the organisation of distribution on the European markets in the months leading up to the proposed launch date had been managed at the Apple-Group level by, inter alia, the Executive Team under the direction of the Chief Executive Officer in Cupertino.

301    In addition, it is apparent from the file that contracts with third-party original equipment manufacturers (‘OEMs’), which were responsible for the manufacture of a large proportion of the products sold by ASI, were negotiated and signed by the parent company, Apple Inc., and ASI through their respective directors, either directly or by power of attorney. ASI and AOE also submitted evidence regarding the negotiations and the signing of contracts with customers, such as telecommunications operators, which were responsible for a significant proportion of the retail sales of Apple-branded products, in particular mobile phones. It is apparent from that evidence that the negotiations in question were led by directors of the Apple Group and that the contracts were signed on behalf of the Apple Group by Apple Inc. and ASI through their respective directors, either directly or by power of attorney.

302    Consequently, in so far as it has been established that the strategic decisions — in particular those concerning the development of the Apple Group’s products underlying the Apple Group’s IP — were taken in Cupertino on behalf of the Apple Group as a whole, the Commission erred when it concluded that the Apple Group’s IP was necessarily managed by the Irish branches of ASI and AOE, which held the licences for that IP.

(2)    Decision-making by ASI and AOE

303    With regard to ASI and AOE’s ability to take decisions concerning their essential functions through their management bodies, the Commission itself accepted that those companies had boards of directors which held regular meetings during the relevant period, and reproduced extracts from the minutes of those meetings confirming that fact in Tables 4 and 5 of the contested decision.

304    The fact that the minutes of the board meetings do not give details of the decisions concerning the management of the Apple Group’s IP licences, of the cost-sharing agreement and of important business decisions does not mean that those decisions were not taken.

305    The summary nature of the extracts from the minutes reproduced by the Commission in Tables 4 and 5 of the contested decision is sufficient to allow the reader to understand how the company’s key decisions in each tax year, such as approval of the annual accounts, were taken and recorded in the relevant board minutes.

306    The resolutions of the boards of directors which were recorded in those minutes covered regularly (that is to say, several times a year), inter alia, the payment of dividends, the approval of directors’ reports and the appointment and resignation of directors. In addition, less frequently, those resolutions concerned the establishment of subsidiaries and powers of attorney authorising certain directors to carry out various activities such as managing bank accounts, overseeing relations with governments and public bodies, carrying out audits, taking out insurance, hiring, purchasing and selling assets, taking delivery of goods and dealing with commercial contracts. Moreover, it is apparent from those minutes that individual directors were granted very wide managerial powers.

307    In addition, with regard to the cost-sharing agreement, it is apparent from the information submitted by ASI and AOE that the various versions of that agreement in existence during the relevant period were signed by members of the respective boards of directors of those companies in Cupertino.

308    Moreover, according to the detailed information provided by ASI and AOE, it is the case for both ASI and AOE that, among ASI’s 14 directors and AOE’s 8 directors on their respective boards for each tax year during the period when the contested tax rulings were in force, there was only one director who was based in Ireland.

309    Consequently, the Commission erred when it considered that ASI and AOE, through their management bodies, in particular their boards of directors, did not have the ability to perform the essential functions of the companies in question by, where appropriate, delegating their powers to individual executives who were not members of the Irish branches’ staff.

(d)    Conclusions concerning the activities within the Apple Group

310    It is apparent from the foregoing considerations that, in the present instance, the Commission has not succeeded in showing that, in the light, first, of the activities and functions actually performed by the Irish branches of ASI and AOE and, second, of the strategic decisions taken and implemented outside of those branches, the Apple Group’s IP licences should have been allocated to those Irish branches when determining the annual chargeable profits of ASI and AOE in Ireland.

The EU General Court of Justice press release described its decision as follows: In 2016 the Commission adopted a decision concerning two tax rulings issued by the Irish tax authorities (Irish Revenue) on 29 January 1991 and 23 May 2007 in favor of Apple Sales International (ASI) and Apple Operations Europe (AOE), which were companies incorporated in Ireland but not tax resident in Ireland. The contested tax rulings endorsed the methods used by ASI and AOE to determine their chargeable profits in Ireland, relating to the trading activity of their respective Irish branches. The 1991 tax ruling remained in force until 2007, when it was replaced by the 2007 tax ruling. The 2007 tax ruling then remained in force until Apple’s new business structure was implemented in Ireland in 2014.

By its decision, the Commission considered that the tax rulings in question constituted State aid unlawfully put into effect by Ireland. The aid was declared incompatible with the internal market. The Commission demanded the recovery of the aid in question. According to the Commission’s calculations, Ireland had granted Apple 13 billion euro in unlawful tax advantages.

By today’s judgment, the General Court annuls the contested decision because the Commission did not succeed in showing to the requisite legal standard that there was an advantage for the purposes of Article 107(1) TFEU. According to the General Court, the Commission was wrong to declare that ASI and AOE had been granted a selective economic advantage and, by extension, State aid.

The General Court endorses the Commission’s assessments relating to normal taxation under the Irish tax law applicable in the present instance, in particular having regard to the tools developed within the OECD, such as the arm’s length principle, in order to check whether the level of chargeable profits endorsed by the Irish tax authorities corresponds to that which would have been obtained under market conditions.

However, the General Court considers that the Commission incorrectly concluded, in its primary line of reasoning, that the Irish tax authorities had granted ASI and AOE an advantage as a result of not having allocated the Apple Group intellectual property licences held by ASI and AOE, and, consequently, all of ASI and AOE’s trading income, obtained from the Apple Group’s sales outside North and South America, to their Irish branches. According to the General Court, the Commission should have shown that that income represented the value of the activities actually carried out by the Irish branches themselves, in view of, inter alia, the activities and functions actually performed by the Irish branches of ASI and AOE, on the one hand, and the strategic decisions taken and implemented outside of those branches, on the other.

In addition, the General Court considers that the Commission did not succeed in demonstrating, in its subsidiary line of reasoning, methodological errors in the contested tax rulings which would have led to a reduction in ASI and AOE’s chargeable profits in Ireland. Although the General Court regrets the incomplete and occasionally inconsistent nature of the contested tax rulings, the defects identified by the Commission are not, in themselves, sufficient to prove the existence of an advantage for the purposes of Article 107(1) TFEU.

Furthermore, the General Court considers that the Commission did not prove, in its alternative line of reasoning, that the contested tax rulings were the result of discretion exercised by the Irish tax authorities and that, accordingly, ASI and AOE had been granted a selective advantage.

Transfer Pricing 4th Ed WIlliam ByrnesThis case will be analyzed and included in William Byrnes' annually update of his 4th Edition of Practical Guide to U.S. Transfer Pricing. The next supplement will contain 50 chapters of 2,000 pages of technical, jurisprudence, and regulatory analysis to advise clients from a tax risk management perspective and to mitigate controversy. Order a copy here: https://store.lexisnexis.com/products/practical-guide-to-us-transfer-pricing-skuusSku60720 

 

[download entire Apple State Aid CJEU decision 15 July 2020

 

July 15, 2020 in BEPS | Permalink | Comments (0)

Friday, July 10, 2020

New OECD CbCR corporate tax statistics data crunch with analysis of activities of multinational enterprises

New data, released today, provides aggregated information on the global tax and economic activities of nearly 4,000 multinational enterprise (MNE) groups headquartered in 26 jurisdictions and operating across more than 100 jurisdictions worldwide.

The data, released in the OECD’s annual Corporate Tax Statistics publication, is a major output based on the Country-by-Country Reporting requirements for MNEs under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project.  

The BEPS Project has seen more than 135 jurisdictions collaborating to tackle tax avoidance strategies by MNEs that exploit gaps and mismatches in international tax rules to avoid paying tax. Under Country-by-Country Reporting, large MNEs are required to disclose important information about their profits, tangible assets, employees as well as where they pay their taxes, in every country in which they operate. Country-by-Country reports (CbCRs) provide tax authorities with the information needed to analyse MNE behaviour for risk assessment purposes, and with the release of today’s anonymised and aggregated statistics will support the improved measurement and monitoring of BEPS.

The anonymised and aggregated CbCR statistics for 2016 have been provided to the OECD by member jurisdictions of the Inclusive Framework on BEPS. This new dataset contains a vast array of aggregated data on the global tax and economic activities of MNEs, including profit before income tax, income tax paid (on a cash basis), current year income tax accrued, unrelated and related party revenues, number of employees, tangible assets and the main business activity (or activities) of MNEs.

While the data contain some limitations[1] and it is not possible to detect trends in BEPS behaviour from a single year of data, the new statistics suggest a number of preliminary insights:

  • There is a misalignment between the location where profits are reported and the location where economic activities occur, with MNEs in investment hubs reporting a relatively high share of profits compared to their share of employees and tangible assets.
  • Revenues per employee tend to be higher where statutory CIT rates are zero and in investment hubs.
  • On average, the share of related party revenues in total revenues is higher for MNEs in investment hubs.
  • The composition of business activity differs across jurisdiction groups, with the predominant business activity in investment hubs being “holding shares and other equity instruments”.

Noting the limitations of the data and that these observations could also reflect some commercial considerations, they are indicative of the existence of BEPS behaviour and reinforce the need to continue to address remaining BEPS issues as part of the Inclusive Framework’s work on Pillar 2 of the ongoing international efforts to address the tax challenges arising from digitalisation.

The new OECD analysis also shows that corporate income tax remains a significant source of tax revenues for governments across the globe, accounting for 14.6% of total tax revenues on average across the 93 jurisdictions in 2017, compared to 12.1% in 2000. Corporate taxation is even more important in developing countries, comprising on average 18.6% of all tax revenues in Africa and 15.5% in Latin America and the Caribbean, compared to 9.3% in the OECD.

This second edition of Corporate Tax Statistics also collects for the first time, information on controlled foreign company (CFC) rules, which are designed to ensure the taxation of certain categories of MNE income in the jurisdiction of the parent company in order to counter certain offshore structures that result in no or indefinite deferral of taxation (BEPS Action 3); as well as new data on interest limitation rules, which can assist in understanding progress related to the implementation of BEPS Action 4.

The publication and data are accessible at: https//oe.cd/corporate-tax-stats

A list of Frequently Asked Questions on CbCR is available at https://oe.cd/corporate-tax-stats-CbCR-FAQ

Texas A&M International Tax Risk Management programTexas A&M University School of Law has launched its online international tax risk management graduate curricula for industry professionals.

Apply now for courses that begin August 23: International Tax Risk Management, Data, and Analytics; International Tax & Tax Treaties (complete list here

Texas A&M University is a public university, ranked in the top 20 universities by the Wall Street Journal / Times Higher Education university rankings, and is ranked 1st among public universities for its superior education at an affordable cost (Fiske, 2018) and ranked 1st of Texas public universities for best value (Money, 2018).

July 10, 2020 in BEPS | Permalink | Comments (0)

Friday, June 5, 2020

Platform for Collaboration on Tax releases toolkit to help developing countries tackle the complex issues around taxing offshore indirect transfers of assets

The Platform for Collaboration on Tax (PCT) released a Toolkit on the Taxation of Offshore Indirect Transfers (OIT) providing guidance on the design and implementation issues when one country seeks to tax gains on the sale of interests in an entity owning assets located in that country by an entity which is a tax resident in another country. This is the third Toolkit1 published by the PCT to provide guidance on areas of international taxation of particular concern to developing countries.

This toolkit addresses a concern of particular significance to developing countries, mostly but not exclusively natural resource rich countries—primarily from the perspective of the country where the underlying assets are located. Taxation of the indirect transfer of assets such as mineral rights, and other assets generating location specific such as licensing rights for telecommunications, has been the subject of protracted public interest. This topic is a concern in many developing countries, magnified by the revenue challenges that governments around the world face as a consequence of the COVID-19 crisis.

The significance of this issue was recognised in the development of the OECD led Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the "MLI"). The MLI includes a provision based upon the OECD and UN model tax conventions, for purposes of extending the reach of existing tax treaties to allocate rights to tax such indirect transfers to location countries, should treaty partners so choose.

The toolkit assesses the economic rationale for such an allocation of taxing rights on such transfers to the country where the underlying assets are located. The toolkit proposes that location countries may wish to tax offshore indirect transfers of at least those assets which are immovable—within the meaning of current UN and OECD model treaties—and perhaps additional assets that also generate location specific rents. If location countries do wish to extend taxing rights to such transfers the toolkit suggests two models for domestic legislation which such countries may adopt.

The first model seeks to tax the resident asset owner under the deemed disposal model- treating it as having realised the gain on the assets in question immediately before the transfer and reacquired the asset immediately after the transfer. The second model seeks to tax instead the non-resident seller of the asset. The toolkit also suggests a model definition of immovable property for the purposes of such domestic legislation and provides further guidance to support enforcement and collection.

This toolkit takes into account extensive comments received during two rounds of public consultation in 2017 and 2018 from numerous groups representing country authorities, civil society organisation and the private sector.

The launch of this toolkit will be complemented with a launch webinar in the coming weeks. French and Spanish versions of the toolkit will follow, as well as virtual learning opportunities based on the toolkit.

The PCT is a joint initiative of the International Monetary Fund (IMF), the Organisation for Economic Cooperation and Development (OECD), the United Nations (UN) and the World Bank Group (WBG). More information can be found on the PCT's official website.

1 The PCT released a toolkit on Options for Low Income Countries' Effective and Efficient Use of Tax Incentives for Investment in 2015, and another for Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analyses in 2017. Others are in varying stages of development and public comment.

June 5, 2020 in BEPS, OECD | Permalink | Comments (0)

Thursday, May 14, 2020

to prohibit the use of tax flow-through entities and the provision of trust services to high-risk third countries and EU Blacklisted jurisdictions

Loyens & Loeff writes that the Netherlands government proposal entails the following prohibitions:

  1. The prohibition to facilitate the use of a flow-through entity, which currently is one of the trust services under the Wtt 2018.
  2. It will be prohibited to enter into a business relationship or provide a trust service in case a client, object company or the UBO of a client or object company resides in or has its seat in (a) a high-risk third country or (b) a non-cooperative jurisdictions for tax purposes. The original list of high-risk third countries adopted by the European Commission may be found here, more countries were added to the list in October 2017December 2017 and July 2018. A list of non-cooperative jurisdictions for tax purposes is kept by the EU Council and can be found here.

Proposals in Dutch from Dutch Ministry here

May 14, 2020 in BEPS, Tax Compliance | Permalink | Comments (0)

Tuesday, February 11, 2020

Final OECD Transfer Pricing Guidance on Financial Transactions: Inclusive Framework on BEPS: Actions 4, 8-10

The report is significant because it is the first time the OECD Transfer Pricing Guidelines include guidance on the transfer pricing aspects of financial transactions, which will contribute to consistency in the interpretation of the arm’s length principle and help avoid transfer pricing disputes and double taxation.

The guidance in this report describes the transfer pricing aspects of financial transactions. It also includes a number of examples to illustrate the principles discussed in the report. Section B provides guidance on the application of the principles contained in Section D.1 of Chapter I of the OECD Transfer Pricing Guidelines to financial transactions. In particular, Section B.1 of this report elaborates on how the accurate delineation analysis under Chapter I applies to the capital structure of an MNE within an MNE group. It also clarifies that the guidance included in that section does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation. Section B.2 outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions. Sections C, D and E address specific issues related to the pricing of financial transactions (e.g. treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance). This analysis elaborates on both the accurate delineation and the pricing of the controlled financial transactions. Finally, Section F provides guidance on how to determine a risk-free rate of return and a risk-adjusted rate of return.

Sections A to E of this report are included in the Guidelines as Chapter X. Section F is added to Section D.1.2.1 in Chapter I of the Guidelines, immediately following paragraph 1.106. The guidance describes the transfer pricing aspects of financial transactions and includes a number of examples to illustrate the principles discussed in this report. 

Download Transfer-pricing-guidance-on-financial-transactions-inclusive-framework-on-beps-actions-4-8-10

February 11, 2020 in BEPS, OECD | Permalink | Comments (0)

Saturday, February 1, 2020

International community renews commitment to multilateral efforts to address tax challenges from digitalisation of the economy

The international community reaffirmed its commitment to reach a consensus-based long-term solution to the tax challenges arising from the digitalisation of the economy, and will continue working toward an agreement by the end of 2020, according to the Statement by the Inclusive Framework on BEPS released by the OECD Friday.  Download Statement-by-the-oecd-g20-inclusive-framework-on-beps-january-2020

The Inclusive Framework on BEPS, which groups 137 countries and jurisdictions on an equal footing for multilateral negotiation of international tax rules, decided during its Jan. 29-30 meeting to move ahead with a two-pillar negotiation to address the tax challenges of digitalisation. 

Participants agreed to pursue the negotiation of new rules on where tax should be paid ("nexus" rules) and on what portion of profits they should be taxed ("profit allocation" rules), on the basis of a "Unified Approach" on Pillar One, to ensure that MNEs conducting sustained and significant business in places where they may not have a physical presence can be taxed in such jurisdictions. The Unified Approach agreed by the Inclusive Framework draws heavily on the Unified Approach released by the OECD Secretariat in October 2019.

Endorsement of the Unified Approach is a significant step, as until now Inclusive Framework members have been considering three competing proposals to address the tax challenges of digitalisation. A Programme of Work agreed in May 2019 has been replaced with a revised Programme of Work under Pillar One, which outlines the remaining technical work and political challenges to deliver a consensus-based solution by the end of 2020, as mandated by the G20. Inclusive Framework members will next meet in July in Berlin, at which time political agreement will be sought on the detailed architecture of this proposal.

The Statement by the Inclusive Framework on BEPS takes note of a proposal to implement Pillar One on a "safe harbour" basis, as proposed in a December 3, 2019 letter from US Treasury Secretary Steven Mnuchin to OECD Secretary-General Angel Gurría. It recognises that many Inclusive Framework members have expressed concerns about the proposed "safe harbour" approach. The Statement also highlights other critical policy issues that must be agreed under Pillar One before a decision can be taken. The "safe harbour" issue is included in the list of remaining work, but a final decision on this issue will be deferred until the architecture of Pillar One has been agreed upon.

The Inclusive Framework also welcomed the significant progress made on the technical design of Pillar Two, which aims to address remaining BEPS issues and ensure that international businesses pay a minimum level of tax. They noted the further work that needs to be done on Pillar Two.

"It is more urgent than ever that countries address the tax challenges arising from digitalisation of the economy, and the only effective way to do that is to continue advancing toward a consensus-based multilateral solution to overhaul the international tax system," said OECD Secretary-General Angel Gurría. "We welcome the Inclusive Framework’s decision to move forward in this arduous undertaking, but we also recognise that there are technical challenges to developing a workable solution as well as critical policy differences that need to be resolved in the coming months."

"The OECD will do everything it can to facilitate consensus, because we are convinced that failure to reach agreement would greatly increase the risk that countries will act unilaterally, with negative consequences on an already fragile global economy," Mr Gurría said.

The Inclusive Framework’s tax work on the digitalisation of the economy is part of wider efforts to restore stability and increase certainty in the international tax system, address possible overlaps with existing rules and mitigate the risks of double taxation.  

The ongoing work will be presented in a new OECD Secretary-General Tax Report during the next meeting of G20 finance ministers and central bank governors in Riyadh, Saudi Arabia, on 22-23 February.

February 1, 2020 in BEPS, OECD | Permalink | Comments (0)

Friday, December 20, 2019

U.S. Country-by-Country Report, Tax Year 2017

Six new tables presenting data from Form 8975, Country-by-Country Report, and Form 8975 Schedule A, Tax Jurisdiction and Constituent Entity Information, are now available on SOI's Tax Stats Web page. The tables present data from the estimated population of corporate and partnership returns filed for Tax Year 2017. Five tables display the number of filers, revenues, profit, income taxes, earnings, number of employees, and tangible assets. The first three tables are classified by major geographic region and selected tax jurisdiction. The fourth table is classified by major industry group, geographic region, and select tax jurisdiction. The fifth table is classified by effective tax rate of multinational enterprise subgroups. A sixth table displays number of constituent entities classified by major geographic region, selected tax jurisdiction, and main business activities.

Statistical Tables

The following tables are available as Microsoft Excel® files. 

Country-by-Country Report: Tax Jurisdiction Information

Data Presented: Number of Filers, Revenues, Profit, Income Taxes, Earnings, Number of Employees, Tangible Assets

Classified by: Major Geographic Region and Selected Tax Jurisdiction
Tax Years: 2017 | 2016
Classified by: Major Geographic Region and Selected Tax Jurisdiction with Positive Profit Before Income Tax
Tax Years:  2017 | 2016
Classified by: Major Geographic Region and Selected Tax Jurisdiction with Negative or Zero Profit Before Income Tax
Tax Years: 2017 | 2016
Classified by: Major Industry Group, Geographic Region, and Selected Tax Jurisdiction
Tax Years: 2017 | 2016
Classified by: Effective Tax Rate of Multinational Enterprise Sub-groups
Tax Years: 2017 | 2016

Country-by-Country Report: Constituent Entities

Data Presented: Number of Constituent Entities

Classified by: Major Geographic Region, Selected Tax Jurisdiction, and Main Business Activities
Tax Years: 2017 | 2016

William Byrnes’ 4th Edition of his industry-leading Practical Guide to U.S. Transfer Pricing treatise was published on December 19, 2019 by Matthew Bender LexisNexis.  William Byrnes is the author or co-author of nine Lexis titles and an advisory board member of Law360’s International Tax journal.

William Byrnes’ completely revised 4th Edition Practical Guide to U.S. Transfer Pricing (2020) has been expanded to 2,000 pages of analyses and practice notes, 47 chapters divided over six parts: Part I: U.S. regulatory analysis, application of transfer pricing methods, and jurisprudence; Part II: OECD; Part III: United Nations; Part IV: European Union; Part V: Industry topics; and Part VI: Country practice and tax risk management. Professor Byrnes brings together 50 of the industry’s eminent transfer pricing counsel, economists, and financial accountants to provide a comprehensive two-volume “go-to” resource for tax risk management.

William Byrnes explained, “I am fortunate to be able to call upon and work with the industry’s leading transfer pricing professionals from firms such as Alston, Covington, Pillsbury, Jones Day, McDermott, Duff & Phelps, Miller Chevalier, PwC, KPMG, and multinational companies like Vertex and Veritas.” Sixty contributors add subject matter expertise on technical issues faced by tax and risk management counsel.

Last chance to join one of the case study teams for TRANSFER PRICING taught live online, using Zoom, by Dr. Lorraine Eden, Prof. William Byrnes, and many industry experts… The courses are for tax attorneys, accountants, or economists and count toward the Texas A&M’s INTERNATIONAL TAX Master degree (taught online).

The class of a maximum of 18 students will be grouped into teams of 3 students each. The 6 teams meet using Zoom to prepare a weekly presentation to respond to a real-world post-BEPS client study. Then all teams meet together online via Zoom twice each week at 8:00am Dallas time Wednesdays and Sundays to discuss and present the case study solutions. Students are provided without charge textbook materials, videos with PPT, and podcasts, and granted access to a large online law & business database library including Lexis, Bloomberg, IBFD, Kluwer/CCH, Thomson, among many other tax resources.

To apply for the transfer pricing courses and international tax courses, contact Jeff Green, Graduate Programs Coordinator, T: +1 (817) 212-3866, E: jeffgreen@law.tamu.edu or contact David Dye, Assistant Dean of Graduate Programs, T (817) 212-3954, E: ddye@law.tamu.edu. Texas A&M Admissions website: https://law.tamu.edu/distance-education/international-tax  (applications and previous university transcripts must be received by Admissions before Wednesday, January 8th at 5pm Texas time). Note that the university is closed for the holidays from Dec. 20 until Jan. 2, 2020.

December 20, 2019 in BEPS | Permalink | Comments (0)

Wednesday, December 18, 2019

Brazil agrees to change its transfer pricing rules to OECD Guidelines

Brazil has identified a clear pathway for bringing its existing transfer pricing framework into alignment with the international consensus, and is Brazil
weighing two options – immediate or gradual implementation, according to a new joint report by the OECD and Receita Federal, Brazil's federal revenue authority (RFB) .Convergence with the OECD transfer pricing standard requires full alignment with the OECD Guidelines, with a focus on the key areas outlined in Part I, but bearing in mind the need to retain and ensure simplicity, limit tax compliance costs and to ensure effective tax administration. The key consideration is how alignment should occur – immediately or gradually – and the related implications with respect to each option.

The main difference between the two options relates to the timing of the implementation. A similar amount of preparatory work will be necessary to achieve full alignment, but if alignment is achieved under the first option, the new rules will become applicable for all taxpayers immediately, meaning that the leadup to the entry into force of the new system will need to occur within a short timeframe with all different aspects of the system being rolled out simultaneously.

It is envisaged under the first scenario that the adoption of the new system in conformity with the OECD standard will occur in one time and replace in whole the existing framework with a directly effective and operational framework, as opposed to a staged approach in the second scenario.

Transfer Pricing in Brazil: Towards Convergence with the OECD Standard assesses the similarities and differences between Brazil's transfer pricing rules and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which is the international consensus on transfer pricing.

 

December 18, 2019 in BEPS | Permalink | Comments (0)

Wednesday, September 25, 2019

Starbucks and Netherlands APA Upheld by European Court of Justice

The General Court annuls the Commission’s decision on the aid measure implemented by the Netherlands in favor of Starbucks (released by the Court)

For William Byrnes analysis of this State Aid controversy, see    

The Commission was unable to demonstrate the existence of an advantage in favor of Starbucks

In 2008, the Netherlands tax authorities concluded an advance pricing arrangement (APA) with Starbucks Manufacturing EMEA BV (SMBV), part of the Starbucks group, which, inter alia, roasts coffees. The objective of that arrangement was to determine SMBV’s remuneration for its production and distribution activities within the group. Thereafter, SMBV’s remuneration served to determine annually its taxable profit on the basis of Netherlands corporate income tax. In addition, the APA endorsed the amount of the royalty paid by SMBV to Alki, another entity of the same group, for the use of Starbucks’ roasting IP. More specifically, the APA provided that the amount of the royalty to be paid to Alki corresponded to SMBV’s residual profit. The amount was determined by deducting SMBV’s remuneration, calculated in accordance with the APA, from SMBV’s operating profit.

In 2015, the Commission found that the APA constituted aid incompatible with the internal market and ordered the recovery of that aid.

The Netherlands and Starbucks brought an action before the General Court for annulment of the Commission’s decision. They principally dispute the finding that the APA conferred a selective advantage on SMBV.

More specifically, they criticize the Commission for (1) having used an erroneous reference system for the examination of the selectivity of the APA; (2) having erroneously examined whether there was an advantage in relation to an arm’s length principle particular to EU law and thereby violated the Member States’ fiscal autonomy; (3) having erroneously considered the choice of the transactional net margin method (TNMM) for determining SMBV’s remuneration to constitute an advantage; and (4) having erroneously considered the detailed rules for the application of that method as validated in the APA to confer an advantage on SMBV.

In today’s judgment, the General Court annuls the Commission’s decision.

First, the Court examined whether, for a finding of an advantage, the Commission was entitled to analyze the tax ruling at issue in the light of the arm’s length principle as described by the Commission in the contested decision.

In that regard, the Court notes in particular that, in the case of tax measures, the very existence of an advantage may be established only when compared with ‘normal’ taxation and that, in order to determine whether there is a tax advantage, the position of the recipient as a result of the application of the measure at issue must be compared with his position in the absence of the measure at issue and under the normal rules of taxation.

The Court goes on to note that the pricing of intra-group transactions is not determined under market conditions. It states that where national tax law does not make a distinction between integrated undertakings and stand-alone undertakings for the purposes of their liability to corporate income tax, that law is intended to tax the profit arising from the economic activity of such an integrated undertaking as though it had arisen from transactions carried out at market prices. The Court holds that, in those circumstances, when examining, pursuant to the power conferred on it by Article 107(1) TFEU, a fiscal measure granted to such an integrated company, the Commission may compare the fiscal burden of such an integrated undertaking  resulting from the application of that fiscal measure with the fiscal burden resulting from the application of the normal rules of taxation under the national law of an undertaking placed in a comparable factual situation, carrying on its activities under market conditions.

The Court makes clear that the arm’s length principle as described by the Commission in the contested decision is a tool that allows it to check that intra-group transactions are remunerated as if they had been negotiated between independent companies. Thus, in the light of Netherlands tax law, that tool falls within the exercise of the Commission’s powers under Article 107 TFEU. The Commission was therefore, in the present case, in a position to verify whether the pricing for intragroup transactions accepted by the APA corresponds to prices that would have been negotiated under market conditions.

The Court therefore rejects the claim that the Commission erred in identifying an arm’s length principle as a criterion for assessing the existence of State aid.

Second, the Court reviewed the merits of the various lines of reasoning set out in the contested decision to demonstrate that, by endorsing a method for determining transfer pricing that did not result in an arm’s length outcome, the APA conferred an advantage on SMBV.

The Court began by examining the dispute as to the Commission’s principal reasoning. It notes that, in the context of its principal reasoning, the Commission found that the APA had erroneously endorsed the use of the TNMM. The Commission first stated that the transfer pricing report on the basis of which the APA had been concluded did not contain an analysis of the royalty which SMBV paid to Alki or of the price of coffee beans purchased by SMBV from SCTC, another entity of the group. Next, in examining the arm’s length nature of the royalty, the Commission applied the comparable uncontrolled price method (CUP method). As a result of that analysis, the Commission considered that the amount of the royalty should have been zero. Last, the Commission considered, on the basis of SCTC’s financial data, that SMBV had overpaid for the coffee beans in the period between 2011 and 2014.

The Court holds that mere non-compliance with methodological requirements does not necessarily lead to a reduction of the tax burden and that the Commission would have had to demonstrate that the methodological errors identified in the APA did not allow a reliable approximation of an arm’s length outcome to be reached and that they led to a reduction of the tax burden.

As regards the error identified by the Commission in respect of the choice of the TNMM and not of the CUP method, the Court finds that the Commission did not invoke any element to support as such the conclusion that that choice had necessarily led to a result that was too low, without a comparison being carried out with the result that would have been obtained using the CUP method. The Commission therefore wrongly found that the mere choice of the TNMM, in the present case, conferred an advantage on SMBV.

Likewise, the Court states that the mere finding by the Commission that the APA did not analyze the royalty does not suffice to demonstrate that that royalty was not actually in conformity with the arm’s length principle.

As regards the amount of the royalty paid by SMBV to Alki, according to an analysis of SMBV’s functions in relation to the royalty and an analysis of comparable roasting agreements considered by the Commission in the contested decision, the Court finds that the Commission failed to demonstrate that the level of the royalty should have been zero or that it resulted in an advantage within the meaning of the Treaty.

As regards the price of green coffee beans, the Court notes that the price of those beans was an element of SMBV’s costs that was outside the scope of the APA and that, in any event, the Commission’s findings did not suffice to demonstrate the existence of an advantage within the meaning of Article 107 TFEU. The Court notes, in particular, that the Commission was not entitled to rely on matters subsequent to the conclusion of the APA.

The Court then examined the dispute as to the Commission’s subsidiary reasoning whereby the APA allegedly conferred an advantage on SMBV because the detailed rules for the application of the TNMM, as endorsed by the APA, were erroneous.

It finds that the Commission did not demonstrate that the various errors it identified in the detailed rules for the application of the TNMM conferred an advantage on SMBV, whether as regards the validation by the APA of the identification of SMBV as the tested entity for the purposes of the application of the TNMM, the choice of profit level indicator or the working capital adjustment and the exclusion of the costs of the unaffiliated manufacturing company.

Consequently, according to the Court, the Commission has not managed to demonstrate the existence of an economic advantage within the meaning of Article 107 TFEU.

For William Byrnes analysis of this State Aid controversy, see    

September 25, 2019 in BEPS | Permalink | Comments (0)

Wednesday, July 24, 2019

Nike State Aid case analysis: Would you pay $100 for a canvas sneaker designed the 20's?

Where does the residual value for "Just Do it" and the 'cool kids' retro branding of All Stars belong? I have received several requests in the U.S. about my initial thoughts on the EU Commission’s 56-page published (public version) State Aid preliminary decision with the reasoning that The Netherlands government provided Nike an anti-competitive subsidy via the tax system.  My paraphrasing of the following EU Commission statement [para. 87] sums up the situation:

The Netherlands operational companies are remunerated with a low, but stable level of profit based on a limited margin on their total revenues reflecting those companies’ allegedly “routine” distribution functions. The residual profit generated by those companies in excess of that level of profit is then entirely allocated to Nike Bermuda as an alleged arm’s length royalty in return for the license of the Nike brands and other related IP”

The question that comes to my mind is: "Would I pay $100 for a canvas sneaker designed the 20's that I know is $12 to manufacture, distribute, and have enough markup for the discount shoe store to provide it shelf space?" My answer is: "Yes, I own two pair of Converse's Chuck Taylor All Stars." So why did I spend much more than I know them to be worth (albeit, I wait until heavily discounted and then only on clearance).  From a global value chain perspective: "To which Nike function and unit does the residual value for the 'cool kids' retro branding of All Stars belong?"

infograph

U.S. international tax professionals operating in the nineties know that The Netherlands is a royalty conduit intermediary country because of its good tax treaty system and favorable domestic tax system, with the intangible profits deposited to take advantage of the U.S. tax deferral regime that existed until the TCJA of 2017 (via the Bermuda IP company).  Nike U.S., but for the deferral regime, could have done all this directly from its U.S. operations to each country that Nike operates in.  No other country could object, pre-BEPs, because profit split and marketing intangibles were not pushed by governments during transfer pricing audits.

The substantial value of Nike (that from which its profits derive) is neither the routine services provided by The Netherlands nor local wholesalers/distributors.  The value is the intangible brand created via R&D and marketing/promotion.  That brand allows a $10 – $20 retail price sneaker to sell retail for $90 – $200, depending on the country.  Converse All-Stars case in point.  Same  $10 shoe as when I was growing up now sold for $50 – $60 because Converse branded All-Stars as cool kid retro fashion.

Nike has centralized, for purposes of U.S. tax deferral leveraging a good tax treaty network, the revenue flows through NL.  The royalty agreement looks non-traditional because instead of a fixed price (e.g. 8%), it sweeps the NL profit account of everything but for the routine rate of return for the grouping of operational services mentioned in the State Aid opinion. If Nike was an actual Dutch public company, or German (like Addidas), or French – then Nike would have a similar result from its home country base because of the way its tax system allows exemption from tax for the operational foreign-sourced income of branches.  [Having worked back in the mid-nineties on similar type companies that were European, this is what I recall but I will need to research to determine if this has been the case since the nineties.]

I suspect that when I research this issue above that the NL operations will have been compensated within an allowable range based on all other similar situated 3rd parties.  I could examine this service by service but that would require much more information and data analysis about the services, and lead to a lesser required margin by Nike. The NL functions include [para 33]: “…regional headquarter functions, such as marketing, management, sales management (ordering and warehousing), establishing product pricing and discount policies, adapting designs to local market needs, and distribution activities, as well as bearing the inventory risk, marketing risk and other business risks.”

By example, the EU Commission states in its initial Nike news announcement:

Nike European Operations Netherlands BV and Converse Netherlands BV have more than 1,000 employees and are involved in the development, management and exploitation of the intellectual property. For example, Nike European Operations Netherlands BV actively advertises and promotes Nike products in the EMEA region, and bears its own costs for the associated marketing and sales activities.

Nike’s internal Advertising, Marketing, and Promotion (AMP) services can be benchmarked to its 3rd party AMP providers.  But by no means do the local NL AMP services rise to the level of Nike’s chief AMP partner (and arguably a central key to its brand build) Wieden + Kennedy (renown for creating many industry branding campaigns but perhaps most famously for Nike’s “Just Do it” – inspired by the last words of death row inmate Gary Gilmore before his execution by firing squad).

There is some value that should be allocated for the headquarters management of the combination of services on top of the service by service approach.  Plenty of competing retail industry distributors to examine though.  If by example the profit margin range was a low of 2% to a high of 8% for the margin return for the combination of services, then Nike based on the EU Commission’s public information falls within that range, being around 5%.

The Commission contends that Nike designed its transfer pricing study to achieve a result to justify the residual sweep to its Bermuda deferral subsidiary.  The EU Commission states an interesting piece of evidence that may support its decision [at para 89]: “To the contrary, those documents indicate that comparable uncontrolled transactions may have existed as a result of which the arm’s length level of the royalty payment would have been lower…”.  If it is correct that 3rd party royalty agreements for major brand overly compensate local distributors, by example provide 15% or 20% profit margin for local operations, then Nike must also.  [I just made these numbers up to illustrate the issue]

All the services seem, on the face of the EU Commission’s public document, routine to me but for “adapting designs to local market needs”.  That, I think, goes directly to product design which falls under the R&D and Branding.  There are 3rd parties that do exactly this service so it can be benchmarked, but its value I suspect is higher than by example ‘inventory risk management’.  We do not know from the EU document whether this ‘adapting product designs to local market’ service was consistent with a team of product engineers and market specialists, or was it merely occasional and outsourced.  The EU Commission wants, like with Starbucks, Nike to use a profit split method.  “…a transfer pricing arrangement based on the Profit Split Method would have been more appropriate to price…”.  Finally, the EU Commission asserts [para. 90]: “…even if the TNMM was the most appropriate transfer pricing method…. Had a profit level indicator been chosen that properly reflected the functional analysis of NEON and CN BV, that would have led to a lower royalty payment…”.

But for the potential product design issue, recognizing I have not yet researched this issue yet, based on what I know about the fashion industry, seems rather implausible to me that a major brand would give up part of its brand residual to a 3rd party local distributor.  In essence, that would be like the parent company of a well-established fashion brand stating “Let me split the brand’s value with you for local distribution, even though you have not borne any inputs of creating the value”.  Perhaps at the onset of a startup trying to create and build a brand?  But not Nike in the 1990s.  I think that the words of the dissenting Judge in Altera (9th Cir June 2019) are appropriate:

An ‘arm’s length result is not simply any result that maximizes one’s tax obligations’.

The EU Commission obviously does not like the Bermuda IP holding subsidiary arrangement that the U.S. tax deferral regime allows (the same issue of its Starbucks state aid attack), but that does not take away from the reality that legally and economically, Bermuda for purposes of the NL companies owns the Nike brand and its associated IP.  The new U.S. GILTI regime combined with the FDII export incentive regime addresses the Bermuda structure, making it much somewhat less comparably attractive to operating directly from the U.S. (albeit still produces some tax arbitrage benefit).  Perhaps the U.S. tax regime if it survives, in combination with the need for the protection of the IRS Competent Authority for foreign transfer pricing adjustments will lead to fewer Bermuda IP holding subsidiaries and more Delaware ones.

My inevitable problem with the Starbucks and Nike (U.S. IP deferral structures) state aid cases is that looking backward, even if the EU Commission is correct, it is a de minimis amount (the EU Commission already alleged a de minimis amount for Starbucks but the actual amount will be even less if any amount at all).  Post-BEPS, the concept and understanding of marketing intangibles including brands is changing, as well as allowable corporate fiscal operational structures based on look-through (GILTI type) regimes. More effective in the long term for these type of U.S. IP deferral structures is for the EU Commission is to spend its compliance resources on a go-forward basis from 2015 BEPS to assist the restructuring of corporations and renegotiation of APAs, BAPAs, Multilateral PAs to fit in the new BEPS reality.  These two cases seem more about an EU – U.S. tax policy dispute than the actual underlying facts of the cases.  And if as I suspect that EU companies pre-BEPS had the same outcome based on domestic tax policy foreign source income exemptions, then the EU Commission’s tax policy dispute would appear two-faced.

I’ll need to undertake a research project or hear back from readers and then I will follow up with Nike Part 2 as a did with Starbucks on this Kluwer blog previously.  See Application of TNMM to Starbucks Roasting Operation: Seeking Comparables Through Understanding the Market and then My Starbucks’ State Aid Transfer Pricing Analysis: Part II.  See also my comments about Altera:  An ‘arm’s length result is not simply any result that maximizes one’s tax obligations’.

Want to help me in this research or have great analytical content for my transfer pricing treatise published by LexisNexis? Reach out on profbyrnes@gmail.com

Prof. William Byrnes (Texas A&M) is the author of a 3,000 page treatise on transfer pricing that is a leading analytical resource for advisors.

July 24, 2019 in BEPS, Tax Compliance | Permalink | Comments (0)

Monday, June 3, 2019

OECD Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy

Download Programme-of-work-to-develop-a-consensus-solution-to-the-tax-challenges-arising-from-the-digitalisation-of-the-economy

The international community has agreed on a road map for resolving the tax challenges arising from the digitalisation of the economy, and committed to continue working toward a consensus-based long-term solution by the end of 2020, the OECD announced today.

The 129 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) adopted a Programme of Work laying out a process for reaching a new global agreement for taxing multinational enterprises.

The document, which calls for intensifying international discussions around two main pillars, was approved during the May 28-29 plenary meeting of the Inclusive Framework, which brought together 289 delegates from 99 member countries and jurisdictions and 10 observer Organisations. It will be presented by OECD Secretary-General Angel Gurría to G20 Finance Ministers for endorsement during their 8-9 June ministerial meeting in Fukuoka, Japan.

Drawing on analysis from a Policy Note published in January 2019 and informed by a public consultation held in March 2019, the Programme of Work will explore the technical issues to be resolved through the two main pillars. The first pillar will explore potential solutions for determining where tax should be paid and on what basis ("nexus"), as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located ("profit allocation").

The second pillar will explore the design of a system to ensure that multinational enterprises – in the digital economy and beyond – pay a minimum level of tax. This pillar would provide countries with a new tool to protect their tax base from profit shifting to low/no-tax jurisdictions, and is intended to address remaining issues identified by the OECD/G20 BEPS initiative.

In 2015 the OECD estimated revenue losses from BEPS of up to USD 240 billion, equivalent to 10% of global corporate tax revenues, and created the Inclusive Forum to co-ordinate international measures to fight BEPS and improve the international tax rules.

"Important progress has been made through the adoption of this new Programme of Work, but there is still a tremendous amount of work to do as we seek to reach, by the end of 2020, a unified long-term solution to the tax challenges posed by digitalisation of the economy," Mr Gurría said. "Today’s broad agreement on the technical roadmap must be followed by a strong political support toward a solution that maintains, reinforces and improves the international tax system. The health of all our economies depends on it."

The Inclusive Framework agreed that the technical work must be complemented by an impact assessment of how the proposals will affect government revenue, growth and investment. While countries have organised a series of working groups to address the technical issues, they also recognise that political agreement on a comprehensive and unified solution should be reached as soon as possible, ideally before year-end, to ensure adequate time for completion of the work during 2020.

June 3, 2019 in BEPS | Permalink | Comments (0)

Monday, April 29, 2019

Proposed India profit attribution rules reject OECD approach, add “sales” and “users” as apportionment factors

India’s Central Board of Direct Taxes (CBDT) on April 18 asked for public feedback on proposed new rules for attributing profits to Indian permanent establishments (PEs) that differ from the authorized OECD approach (AOA).

read the full analysis here at MNE Tax News

April 29, 2019 in BEPS, Tax Compliance | Permalink | Comments (0)

Thursday, April 11, 2019

Georgia, the Kingdom of the Netherlands and Luxembourg deposit instruments of acceptance or ratification for the Multilateral BEPS Convention

The Kingdom of the Netherlands has deposited its instrument of acceptance and Georgia and Luxembourg have deposited their instruments of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (multilateral convention or MLI) with the OECD’s Secretary-General, Angel Gurría, underlining their strong commitments to prevent the abuse of tax treaties and base erosion and profit shifting (BEPS) by multinational enterprises. With its instrument of acceptance, the Kingdom of the Netherlands covers Curaçao and the (European and Caribbean parts of the) Netherlands.

In November 2016, over 100 jurisdictions concluded negotiations on the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ("Multilateral Instrument" or "MLI")  that will swiftly implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. The MLI already covers 87 jurisdictions and entered into force on 1st July 2018. Signatories include jurisdictions from all continents and all levels of development 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. 

April 11, 2019 in BEPS, OECD | Permalink | Comments (0)

Sunday, February 24, 2019

OECD Releases Peer Review Reports for Stopping Treaty Abuse and MAPs

Latest releases
Progress continues with the implementation of the BEPS package, as the OECD releases additional peer review reports assessing countries’ efforts to implement the Action 6 and Action 14 minimum standards as agreed under the OECD/G20 BEPS Project. 

February 24, 2019 in BEPS, OECD | Permalink | Comments (0)

Thursday, February 21, 2019

Does your financial center company have economic substance?

Applyby information

Ernst Young information 

BDO information

PwC information

Cayman Laws

The International Tax Co-operation (Economic Substance) Bill, 2018

PASSED : By the House for the Third Meeting of the 2018/2019 Session of the Legislative Assembly on December 17th 2018.

[A Bill For A Law To Provide For An Economic Substance Test To Be Satisfied By Certain Entities; And For Incidental And Connected Purposes.]
The Companies (Amendment) (No. 2) Bill, 2018

PASSED : By the House for the Third Meeting of the 2018/2019 Session of the Legislative Assembly on December 17th 2018.

[A Bill For A Law To Amend The Companies Law (2018 Revision) To Make Miscellaneous Changes To The Provisions Relating To Accounting Records And Exempted Companies; And To Provide For Incidental And Connected Purposes.]
The Local Companies (Control) (Amendment) Bill, 2018

PASSED: By the House for the Third Meeting of the 2018/2019 Session of the Legislative Assembly on December 17th 2018.

[A Bill For A Law To Amend The Local Companies (Control) Law (2015 Revision) To Provide For Exempted Companies Carrying On Business In The Islands; And For Incidental And Connected Purposes.]

British Virgin Islands Law - VIRGIN ISLANDS ECONOMIC SUBSTANCE (COMPANIES AND LIMITED PARTNERSHIPS) ACT, 2018

ARRANGEMENT OF SECTIONS
Section
1. Short title and commencement.
2. Interpretation.
3. Meaning of finance and leasing business.
4. Meaning of financial period.
5. General obligations.
6. Meaning of relevant activities.
7. Meaning of Core income-generating activities.
8. Economic substance requirements.
9. Presumptions of non-compliance for intellectual property business.
10. Assessment of compliance.
11. Requirement to provide information.
12. Penalties for non-compliance with economic substance requirements.
13. Right of appeal.
14. Procedure on appeal.
15. Time for compliance with section 12 notice.
16. Amendments to the 2017 Act.
17. Regulations and Rules.
SCHEDULE

February 21, 2019 in BEPS, Tax Compliance | Permalink | Comments (0)

Monday, February 18, 2019

OECD invites public input on the possible solutions to the tax challenges of digitalisation

As part of the ongoing work of the Inclusive Framework on BEPS, the OECD is seeking public comments on key issues identified in a public consultation document on possible solutions to the tax challenges arising from the digitalisation of the economy. The publication of the consultation document was foreshadowed with the release of a Policy Note by the Inclusive Framework on 29 January 2019 and follows the agreement of members of the Inclusive Framework to examine proposals involving two pillars; one pillar that focusses on the allocation of taxing rights and a second pillar that addresses remaining BEPS issues. The work will be carried out as the Inclusive Framework continues to work towards a consensus-based long-term solution in 2020. 

Following a mandate by G20 Finance Ministers in March 2017, the Inclusive Framework on BEPS, working through its Task Force on the Digital Economy (TFDE), delivered an Interim Report in March 2018, Tax Challenges Arising from Digitalisation – Interim Report 2018. One of the important conclusions of this report is that members agreed to review the impact of digitalisation on nexus and profit allocation rules and committed to continue working together towards a final report in 2020 aimed at providing a consensus-based long-term solution, with an update in 2019.

Since the delivery of the Interim Report, the Inclusive Framework further intensified its work and several proposals emerged that could form part of a long-term solution to the broader challenges arising from the digitalisation of the economy and the remaining BEPS issues. The work on these proposals is being conducted on a “without prejudice” basis; their examination does not represent a commitment of any member of the Inclusive Framework beyond exploring these proposals. In this context, the Inclusive Framework agreed to hold a public consultation on possible solutions to the tax challenges arising from the digitalisation of the economy on 13 and 14 March 2019 at the OECD Conference Centre in Paris, France. The objective of the public consultation is to provide external stakeholders an opportunity to provide input early in the process and to benefit from that input.

As part of this public consultation, this consultation document describes the proposals discussed by the Inclusive Framework at a high level and seeks comments from the public on a number of policy issues and technical aspects. The comments provided will assist members of the Inclusive Framework in the development of a solution for its final report to the G20 in 2020.

Interested parties are invited to send their comments on this consultation document. Comments should be sent by no later than Friday, 1 March 2019 to TFDE@oecd.org in Word format (in order to facilitate their distribution to government officials). All comments submitted should be addressed to the Tax Policy and Statistics Division, Centre for Tax Policy and Administration.

Please note that all comments on this consultation document 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. Speakers and other participants at the upcoming public consultation in Paris will be selected from among those providing timely written comments on this consultation document.

The proposals included in this consultation document do not represent the consensus views of the Inclusive Framework, the Committee on Fiscal Affairs (CFA) or their subsidiary bodies. Instead, they intend to provide stakeholders with substantive proposals for analysis and comment.

Public Consultation

A public consultation meeting will be held at the OECD Conference Centre in Paris on Wednesday, 13 March and Thursday morning, 14 March 2019. Further information about attending the public consultation is available online. Those wishing to attend are invited to register by no later than Friday, 1 March 2019.

Media queries should be directed to Pascal Saint-Amans (+33 1 45 24 91 08), Director of the OECD Centre for Tax Policy and Administration (CTPA) or Grace Perez-Navarro (+33 1 45 24 18 80), Deputy-Director of the CTPA.

February 18, 2019 in BEPS | Permalink | Comments (0)

Thursday, February 14, 2019

EU Court of Justice Overrules EU Commission on State Aid (Decision Below)

Loyens and Loeff summary -

The General Court then turned to assessing whether the Belgian rules and the related rulings effectively constituted a scheme and found that the criteria were not met:

  • Implementing measures were needed and the tax authorities had a genuine margin of discretion in deciding whether it was appropriate to grant the downward adjustment to the Belgian company’s taxable profits.
  • The beneficiaries could not be identified on the sole basis of the tax provision in the law without further implementing measures.
  • The Commission’s analysis of a limited sample of rulings did not meet the requisite standard of proof to establish a systematic approach. Deficiencies in the contested decision could not be remedied by additional information provided during the proceedings.

Case Below ...

APPLICATION pursuant to Article 263 TFEU for annulment of Commission Decision (EU) 2016/1699 of 11 January 2016 on the excess profit exemption State aid scheme SA.37667 (2015/C) (ex 2015/NN) implemented by Belgium (OJ 2016 L 260, p. 61), THE GENERAL COURT (Seventh Chamber, Extended Composition), composed of M. van der Woude, President, V. Tomljenović (Rapporteur), E. Bieliūnas, A. Marcoulli and A. Kornezov, Judges, Registrar: S. Spyropoulos, Administrator, having regard to the written part of the procedure and further to the hearing on 28 June 2018.

The contested decision may be found here

15      By Decision (EU) 2016/1699 of 11 January 2016 on the excess profit exemption State aid scheme SA.37667 (2015/C) (ex 2015/NN) implemented by Belgium (OJ 2016 L 260, p. 61, ‘the contested decision’), the European Commission found that the exemptions granted by the Kingdom of Belgium, by means of advance rulings under Article 185(2)(b) of the CIR 92, constituted an aid scheme within the meaning of Article 107(1) TFEU that was incompatible with the internal market and had been put into effect in breach of Article 108(3) TFEU.

16      Furthermore, the Commission ordered that the aid granted be recovered from the beneficiaries, a definitive list of which was to be drawn up by the Kingdom of Belgium following the decision. The annex to the contested decision contained an indicative list of 55 beneficiaries – including Magnetrol International, the applicant in Case T‑263/16 – identified on the basis of information provided by the Kingdom of Belgium in the course of the administrative procedure.

28      The operative part of the contested decision is worded as follows:

‘Article 1

The Excess Profit exemption scheme, based on Article 185(2)(b) of the [CIR 92], pursuant to which [the Kingdom of] Belgium granted tax rulings to Belgian entities of multinational corporate groups authorising those entities to exempt part of their profit from corporate income taxation constitutes aid within the meaning of Article 107(1) [TFEU] that is incompatible with the internal market and that was unlawfully put into effect by Belgium in breach of Article 108(3) [TFEU].

Article 2

(1) [The Kingdom of] Belgium shall recover all incompatible and unlawful aid referred to in Article 1 from the recipients of that aid.

(2) Any sums that remain unrecoverable from the recipients of the aid, following the recovery described in the paragraph 1, shall be recovered from the corporate group to which the recipient belongs.

(3) The sums to be recovered shall bear interest from the date on which they were put at the disposal of the beneficiaries until their actual recovery.

(4) The interest on the sums to be recovered shall be calculated on a compound basis in accordance with Chapter V of Regulation (EC) No 794/2004.

(5) [The Kingdom of] Belgium shall stop granting the aid referred to in Article 1 and shall cancel all outstanding payments of such aid with effect from the date of adoption of this decision.

(6) [The Kingdom of] Belgium shall also reject all requests for an advance ruling concerning the aid referred to in Article 1 submitted to the Ruling Commission and pending on the date of the adoption of this decision.

Article 3

(1) Recovery of the aid granted referred to in Article 1 shall be immediate and effective.

(2) [The Kingdom of] Belgium shall ensure that this Decision is fully implemented within four months following the date of notification of this Decision.

Article 4

(1) Within two months following notification of this Decision, [the Kingdom of] Belgium shall submit the following information:

(a)      the list of beneficiaries that have received the aid referred to in Article 1 and the total amount of aid received by each of them;

(b)      the total amount (principal and recovery interests) to be recovered from each beneficiary;

(c)      a detailed description of the measures already taken and planned to comply with this Decision;

(d)      documents demonstrating that the beneficiaries have been ordered to repay the aid.

(2) [The Kingdom of] Belgium shall keep the Commission informed of the progress of the national measures taken to implement this Decision until recovery of the aid referred to in Article 1 has been completed. It shall immediately submit, on simple request by the Commission, information on the measures already taken and planned to comply with this Decision. It shall also provide detailed information concerning the amounts of aid and recovery interest already recovered from the beneficiaries.

Article 5

This Decision is addressed to the Kingdom of Belgium.’

 Procedure and forms of order sought

 Procedure and forms of order sought by the parties in Case T131/16

29      By application lodged at the Court Registry on 22 March 2016, the Kingdom of Belgium brought an action seeking the annulment of the contested decision.

30      By a separate document, lodged at the Court Registry on 26 April 2016, the Kingdom of Belgium brought an application for interim measures, in which it claimed that the President of the General Court should suspend the operation of Articles 2 to 4 of the contested decision until the General Court has delivered its judgment on the main action. By order of 19 July 2016, the President of the General Court dismissed the application for interim measures and reserved the costs.

31      On 11 July 2016, the Court requested the Kingdom of Belgium to reply to a question. The Kingdom of Belgium complied with that request by letter of 19 July 2016.

32      By document lodged at the Court Registry on 11 July 2016, Ireland applied for leave to intervene in support of the form of order sought by the Kingdom of Belgium. By decision of 25 August 2016, the President of the Fifth Chamber of the General Court granted Ireland’s application to intervene. Ireland lodged its written submissions and the main parties lodged their observations on those submissions within the prescribed periods.

33      Following a change in the composition of the Chambers of the General Court on 21 September 2016, pursuant to Article 27(5) of the Rules of Procedure of the General Court, the Judge Rapporteur was assigned to the Seventh Chamber, to which the present case was accordingly allocated.

34      By document lodged at the Court Registry on 26 January 2017, the Kingdom of Belgium requested that the case be decided by a Chamber sitting in extended composition. On 15 February 2017, the Court took formal note, in accordance with Article 28(5) of the Rules of Procedure, of the fact that the case had been allocated to the Seventh Chamber, Extended Composition.

35      As a Member of the Seventh Chamber, Extended Composition, was unable to sit in the present case, by decision of 28 March 2017, the President of the General Court designated the Vice-President of the General Court to complete the Chamber.

36      Acting on a proposal from the Judge-Rapporteur, the President of the Seventh Chamber, Extended Composition, decided, on 12 December 2017, pursuant to Article 67(2) of the Rules of Procedure, to give the present case priority over others.

37      Acting on a proposal from the Judge-Rapporteur, the General Court (Seventh Chamber, Extended Composition) decided to open the oral part of the procedure and, by way of measures of organisation of procedure pursuant to Article 64 of the Rules of Procedure, requested the Kingdom of Belgium and the Commission to reply to a number of questions in writing. The parties complied with those requests within the prescribed periods.

38      By order of 17 May 2018, after hearing the parties, the President of the Seventh Chamber, Extended Composition, of the General Court decided to join Cases T‑131/16, Belgium v Commission, and T‑263/16, Magnetrol International v Commission, for the purposes of the oral part of the procedure, pursuant to Article 68(2) of the Rules of Procedure, and granted Magnetrol International’s request for confidential treatment vis-à-vis Ireland.

39      The parties presented oral argument and answered questions put to them by the Court at the hearing on 28 June 2018.

40      The Kingdom of Belgium claims that the Court should:

–        annul the contested decision;

–        in the alternative, annul Articles 1 and 2 of the operative part of the contested decision;

–        order the Commission to pay the costs.

41      Ireland requests the General Court to annul the contested decision, as specified in the form of order sought by the Kingdom of Belgium.

42      The Commission contends that the General Court should:

–        dismiss the action;

–        order the Kingdom of Belgium to pay the costs.

 Procedure and forms of order sought by the parties in Case T263/16

43      By application lodged at the Court Registry on 25 May 2016, Magnetrol International brought an action seeking the annulment of the contested decision.

44      On 20 June 2016, the Commission applied for proceedings to be stayed pending judgment in Case T‑131/16, Belgium v Commission, to which the applicant objected on 26 July 2016. By decision notified to the main parties on 9 August 2016, the President of the Fifth Chamber of the General Court rejected the Commission’s request for the proceedings to be stayed.

45      Following a change in the composition of the Chambers of the General Court on 21 September 2016, pursuant to Article 27(5) of the Rules of Procedure of the General Court, the Judge Rapporteur was assigned to the Seventh Chamber, to which the present case was accordingly allocated.

46      Acting on a proposal from the Seventh Chamber, the General Court decided, on 12 March 2018, pursuant to Article 28(3) of the Rules of Procedure, to assign the case to a Chamber sitting in extended composition.

47      As a Member of the Seventh Chamber, Extended Composition, was unable to sit in the present case, by decision of 15 March 2018, the President of the General Court designated the Vice-President of the General Court to complete the Chamber.

48      Acting on a proposal from the Judge-Rapporteur, the President of the Seventh Chamber, Extended Composition, decided, on 16 April 2018, pursuant to Article 67(2) of the Rules of Procedure, to give the present case priority over others.

49      Acting on a proposal from the Judge-Rapporteur, the General Court (Seventh Chamber, Extended Composition) decided to open the oral part of the procedure and, by way of measures of organisation of procedure pursuant to Article 64 of the Rules of Procedure, requested Magnetrol International and the Commission to reply to a number of questions in writing. The parties complied with those requests within the prescribed periods.

50      By order of 17 May 2018, after hearing the parties, the President of the Seventh Chamber, Extended Composition, of the General Court decided to join Cases T‑131/16, Belgium v Commission, and T‑263/16, Magnetrol International v Commission, for the purposes of the oral part of the procedure, pursuant to Article 68(2) of the Rules of Procedure, and granted Magnetrol International’s request for confidential treatment vis-à-vis Ireland.

51      As noted in paragraph 39 above, the parties presented oral argument and answered questions put to them by the Court at the hearing on 28 June 2018.

52      Magnetrol International contends that the General Court should:

–        annul the contested decision;

–        in the alternative, annul Articles 2 to 4 of the contested decision;

–        in any event, annul Articles 2 to 4 of the contested decision in so far as those articles, first, require any recovery from entities other than the entities that have been issued an advance ruling and, secondly, require the recovery of an amount equal to the beneficiary’s tax savings, without allowing the Kingdom of Belgium to take into account an actual upwards adjustment by another tax administration;

–        order the Commission to pay the costs.

53      The Commission claims that the General Court should:

–        dismiss the action;

–        order Magnetrol International to pay the costs.

 Law

54      After hearing the views of the parties in that regard at the hearing, the Court has decided to join the present cases for the purposes of the judgment also, in accordance with Article 68 of the Rules of Procedure.

 Preliminary observations

55      In support of its action, the Kingdom of Belgium raises five pleas in law. The first plea alleges a breach of Article 2(6) TFEU and of Article 5(1) and (2) TEU, in that the Commission encroached upon the tax jurisdiction of the Kingdom of Belgium. The second plea alleges an error of law and a manifest error of assessment, in that the Commission classified the measures as an aid scheme. It is divided into two parts disputing, first, the identification of the acts on which the alleged aid scheme at issue is based and, secondly, the finding relating to the lack of further implementing measures. The third plea alleges a breach of Article 107 TFEU, in that the Commission considered that the excess profit ruling system constituted a State aid measure. The fourth plea alleges that the Commission made a manifest error of assessment regarding the identification of the beneficiaries of the alleged aid. The fifth plea, raised ‘in the alternative’, alleges infringement of the general principle of legality and of Article 16(1) of Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 [TFEU] (OJ 2015, L 248, p. 9), in that the contested decision orders recovery from the multinational groups to which the Belgian entities that were issued an advance ruling belong.

56      In support of its action, Magnetrol International raises four pleas in law. The first plea alleges a manifest error of assessment, excess of power and failure to provide adequate reasoning in so far as the contested decision alleges the existence of an aid scheme. The second plea alleges a breach of Article 107 TFEU and of the duty to state reasons and a manifest error of assessment in so far as the contested decision classifies the purported scheme as a selective measure. The third plea alleges a breach of Article 107 TFEU and of the duty to state reasons and a manifest error of assessment in so far as the contested decision asserts that the purported scheme gives rise to an advantage. The fourth plea, raised ‘in the alternative’, alleges a breach of Article 107 TFEU, infringement of the principle of the protection of legitimate expectations, a manifest error of assessment, excess of power, and failure to provide adequate reasoning, as regards the recovery of the aid ordered in the contested decision, the identification of the beneficiaries and the amount to be recovered.

57      It follows from the presentation of all of the above pleas that the Kingdom of Belgium and Magnetrol International raise, albeit in a different order, pleas in law alleging, in essence:

–        first, that the Commission exceeded its powers in relation to State aid by encroaching upon the exclusive tax jurisdiction of the Kingdom of Belgium in the field of direct taxation (first plea in Case T‑131/16 and first part of the third plea in Case T‑263/16);

–        secondly, that the Commission erred in finding a State aid scheme in the present case, within the meaning of Article 1(d) of Regulation 2015/1589, inter alia because of the incorrect identification of the acts on which the alleged scheme was said to be based and the erroneous finding that the aid scheme did not require further implementing measures (second plea in Case T‑131/16 and the first plea in Case T‑263/16);

–        thirdly, that the Commission erred in regarding advance rulings in relation to excess profit as State aid, given inter alia the lack of an advantage and the lack of selectivity (third plea in law in Case T‑131/16 and third plea in law in Case T‑263/16);

–        fourthly, that the Commission infringed, inter alia, the principles of legality and of the protection of legitimate expectations in that it erroneously ordered the recovery of the alleged aid, including from the groups to which the beneficiaries of that aid belong (fourth and fifth pleas in law in Case T‑131/16 and the fourth plea in law in Case T‑263/16).

58      The General Court will examine the pleas in law in the order set out in paragraph 57 above.

 The Commission’s alleged encroachment upon the Kingdom of Belgium’s exclusive jurisdiction in the field of direct taxation

59      The Kingdom of Belgium and Magnetrol International submit, in essence, that the Commission exceeded its powers by using the State aid rules of EU law in order to determine unilaterally matters falling within the exclusive tax jurisdiction of a Member State. The determination of taxable income remains an exclusive competence of the Member States, as does the manner of taxing profits generated by cross-border transactions within groups of undertakings, even if it leads to double non-taxation. The Commission’s position of regarding advance rulings on excess profit as State aid because they are not in line with what the Commission considers to be the correct application of the arm’s length principle is tantamount to forced harmonisation of rules relating to the determination of taxable income, which does not fall within the competences of the European Union.

60      Ireland submits, in essence, that the contested decision seriously disturbs the balance of competences between the European Union and the Member States established, inter alia, by Article 3(6) TEU and Article 5(1) and (2) TEU, and confirmed by settled case-law.

61      The Commission contends, in essence, that although the Member States enjoy fiscal autonomy in the field of direct taxation, any fiscal measure a Member State adopts must comply with the State aid rules of EU law.

62      In that respect, it must be noted that, according to settled case-law, while direct taxation, as EU law currently stands, falls within the competence of the Member States, they must nonetheless exercise that competence consistently with EU law (see judgment of 12 July 2012, Commission v Spain, C‑269/09, EU:C:2012:439, paragraph 47 and the case-law cited). On the other hand, it is undisputed that the Commission is competent to ensure compliance with Article 107 TFEU.

63      Thus, interventions by Member States in areas which have not been harmonised in the European Union, such as direct taxation, are not excluded from the scope of the State aid rules. Accordingly, the Commission may find that a tax measure constitutes State aid provided that the conditions for making such a finding are met (see, to that effect, judgments of 2 July 1974, Italy v Commission, 173/73, EU:C:1974:71, paragraph 13; of 22 June 2006, Belgium and Forum 187 v Commission, C‑182/03 and C‑217/03, EU:C:2006:416, paragraph 81; and of 25 March 2015, Belgium v Commission, T‑538/11, EU:T:2015:188, paragraphs 65 and 66). The Member States must therefore exercise their competence in the field of taxation consistently with EU law (judgment of 3 June 2010, Commission v Spain, C‑487/08, EU:C:2010:310, paragraph 37). Accordingly, they must refrain from adopting any measure, in that context, liable to constitute State aid incompatible with the internal market.

64      It is true that, in the absence of EU rules governing the matter, it falls within the competence of the Member States to designate tax bases and to spread the tax burden across the different factors of production and economic sectors (see, to that effect, judgment of 15 November 2011, Commission and Spain v Government of Gibraltar and United Kingdom, C‑106/09 P and C‑107/09 P, EU:C:2011:732, paragraph 97).

65      However, that does not mean that every tax measure which affects inter alia the tax base taken into account by the tax authorities falls outside the scope of Article 107 TFEU. If such a measure in practice discriminates between companies that are in a comparable situation with regard to the objective of the measure in question and thereby grants the beneficiaries of the measure selective advantages which favour ‘certain’ undertakings or the production of ‘certain’ goods, it may be regarded as State aid for the purpose of Article 107(1) TFEU (see, to that effect, judgment of 15 November 2011, Commission and Spain v Government of Gibraltar and United Kingdom, C‑106/09 P and C‑107/09 P, EU:C:2011:732, paragraph 104).

66      In addition, a measure by which the public authorities grant certain undertakings advantageous tax treatment which – although it does not involve the transfer of State resources – places the beneficiaries in a more favourable position than other taxpayers is capable of constituting State aid for the purpose of Article 107(1) TFEU. On the other hand, advantages resulting from a general measure applicable without distinction to all economic operators do not constitute State aid for the purpose of Article 107(1) TFEU (see judgment of 21 December 2016, Commission v World Duty Free Group and Others, C‑20/15 P and C‑21/15 P, EU:C:2016:981, paragraph 56 and the case-law cited).

67      It follows from the foregoing that, since the Commission is competent to ensure compliance with Article 107 TFEU, it cannot be accused of having exceeded its powers by examining the measures comprising the alleged scheme at issue in order to determine whether they constituted State aid and, if they did, whether they were compatible with the internal market, within the meaning of Article 107(1) TFEU.

68      That conclusion is not called into question by the Kingdom of Belgium’s arguments concerning, first, its lack of tax jurisdiction in respect of the taxation of the excess profits and, secondly, its own competence to adopt measures to avoid double taxation.

69      The Kingdom of Belgium submits that, since the excess profits cannot be attributed to Belgian entities subject to tax in Belgium, those profits do not fall within the Belgian tax jurisdiction. Accordingly, the Commission cannot question the non-taxation of those profits in Belgium.

70      In so far as those arguments are to be understood as challenging the Commission’s competence to examine the measures in question, it should be noted that those measures concern advance rulings, issued by the Belgian tax authorities in the context of their competence in the field of direct taxation. In that respect, the case-law cited in paragraph 65 above should be borne in mind, according to which any tax measure that meets the conditions for the application of Article 107(1) TFEU constitutes State aid. It follows that the Commission, in the exercise of its competence relating to the application of Article 107(1) TFEU, must be able to examine the measures in question in order to determine whether they meet those conditions.

71      As regards the arguments concerning the Kingdom of Belgium’s competence to adopt measures in order to avoid double taxation, it indeed follows from the case-law that it is for the Member States to take the measures necessary to prevent situations of double taxation, by applying, in particular, the apportionment criteria followed in international tax practice (see, to that effect, judgment of 14 November 2006, Kerckhaert and Morres, C‑513/04, EU:C:2006:713, paragraph 23). However, as noted in paragraph 63 above, the Member States must exercise their tax competences in accordance with EU law and refrain from adopting any measure liable to constitute State aid incompatible with the internal market. Accordingly, the Kingdom of Belgium cannot invoke the need to avoid double taxation as an objective pursued by the Belgian tax authorities’ practice as regards excess profit, in order to justify an exclusive competence in that respect, the exercise of which would fall outside the scope of the Commission’s power to verify compliance with Article 107 TFEU.

72      Moreover, and in any event, it must be noted that, in the present case, it does not appear that the non-taxation of excess profit, as applied by the Belgian tax authorities, pursued the objective of avoiding double taxation. The application of the measures at issue was not subject to the condition that it be demonstrated that the excess profit in question had been included in the profit of another company. Nor was it necessary to demonstrate that that excess profit had actually been taxed in another country.

73      Article 185(2)(b) of the CIR 92 provides for a downward adjustment of a company’s profit only if that profit has been included in the profit of another company. However, the Kingdom of Belgium has not denied the findings made by the Commission in recitals 173 to 181 of the contested decision concerning the practice of the Belgian tax authorities – as explained, inter alia, by the Minister for Finance’s replies, mentioned in paragraphs 12 to 14 above – according to which the downward adjustment of the tax base of a company requesting an advance ruling was carried out without it being verified whether the profit deducted from that company’s tax base, as excess profit, was actually included in the profit of another company.

74      In the light of the foregoing considerations, the plea alleging that the Commission encroached upon the tax jurisdiction of the Kingdom of Belgium must be rejected as unfounded.

 The existence of an aid scheme, within the meaning of Article 1(d) of Regulation 2015/1589

75      The Kingdom of Belgium and Magnetrol International submit, in essence, that the Commission incorrectly identified the acts on the basis of which the excess profit system allegedly constituted an aid scheme and wrongly found that those acts did not require further implementing measures, within the meaning of Article 1(d) of Regulation 2015/1589. They also submit that the conclusion concerning the existence of an aid scheme is based on contradictory reasoning.

76      The Commission contends, in essence, that it followed a consistent line of reasoning throughout the contested decision, in that it considered that the excess profit scheme was based on Article 185(2)(b) of the CIR 92, as applied by the Ruling Commission, in the light of the interpretation given by the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of that provision. Those acts show a systematic and consistent approach by which the Belgian tax authorities exempted so-called excess profit from tax, without further implementing measures being required.

77      Under Article 1(d) of Regulation 2015/1589, ‘aid scheme’ means any act on the basis of which, without further implementing measures being required, individual aid awards may be made to undertakings defined within the act in a general and abstract manner and any act on the basis of which aid which is not linked to a specific project may be awarded to one or several undertakings for an indefinite period of time or for an indefinite amount.

78      It follows from the case-law that, in the case of an aid scheme, the Commission may confine itself to examining the characteristics of the scheme at issue in order to assess, in the grounds for its decision, whether, by reason of the arrangements provided for under the scheme, the latter gives an appreciable advantage to beneficiaries in relation to their competitors and is likely to benefit in particular undertakings engaged in trade between Member States. Thus, in a decision which concerns such a scheme, the Commission is not required to carry out an analysis of the aid granted in individual cases under the scheme. It is only at the stage of recovery of the aid that it is necessary to look at the individual situation of each undertaking concerned (see judgment of 9 June 2011, Comitato ‘Venezia vuole vivere’ and Others v Commission, C‑71/09 P, C‑73/09 P and C‑76/09 P, EU:C:2011:368, paragraph 63 and the case-law cited).

79      In addition, it has been held that, in examining an aid scheme, where no legal act establishing that scheme is identified, the Commission may rely on a set of circumstances which taken as a whole indicate the de facto existence of an aid scheme (see, to that effect, judgment of 13 April 1994, Germany and Pleuger Worthington v Commission, C‑324/90 and C‑342/90, EU:C:1994:129, paragraphs 14 and 15).

80      It must be borne in mind that, in the contested decision, first of all, in recital 97 thereof, it is indicated that the excess profit exemption was granted on the basis of Article 185(2)(b) of the CIR 92. Next, in recital 98 of that decision, it is indicated that the application of Article 185(2)(b) of the CIR 92 by the Belgian tax administration is explained in the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of that provision. Lastly, in recital 99 of the contested decision, the Commission concluded that Article 185(2)(b) of the CIR 92, the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of Article 185(2)(b) of the CIR 92 constitute the acts on the basis of which the excess profit exemption is granted.

81      However, in recital 125 of the contested decision, it is indicated that no provision of the CIR 92 provides for an abstract unilateral exemption of a fixed part or percentage of the profit actually recorded by a Belgian entity forming part of a group. It is also indicated that Article 185(2)(b) of the CIR 92 allows downward transfer pricing adjustments subject to the condition that the profit to be exempted, generated by the international transaction or arrangement in question, has been included in the profit of the foreign counterparty to that transaction or arrangement.

82      It is true that the Commission’s reasoning appears somewhat ambivalent, since, on the one hand, it refers to all of the acts listed in recital 99 of the contested decision as the acts on which the scheme at issue is based, whereas, on the other hand, in its analysis of the reference system, in the course of examining whether there is a selective advantage, it states that no provision of the CIR 92 prescribes an exemption such as that applied by the Belgian tax authorities.

83      However, it follows from a reading of the contested decision in its entirety that Article 185(2)(b) of the CIR 92, as applied by the Belgian tax authorities, constitutes the basis for the alleged aid scheme at issue and that the application of that provision may be deduced from the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of that provision.

84      Accordingly, it must be examined whether the alleged aid scheme, based on the acts identified by the Commission, requires further implementing measures within the meaning of Article 1(d) of Regulation 2015/1589.

85      The following observations may be made on the basis of the definition of an aid scheme in Article 1(d) of Regulation 2015/1589, set out in paragraph 77 above, as interpreted by the case-law.

86      First, if individual aid awards are made without further implementing measures being adopted, the essential elements of the aid scheme in question must necessarily emerge from the provisions identified as the basis for the scheme.

87      Secondly, where the national authorities apply that scheme, those authorities cannot have any margin of discretion as regards the determination of the essential elements of the aid in question and whether it should be awarded. For the existence of such implementing measures to be precluded, the national authorities’ power should be limited to the technical application of the provisions that allegedly constitute the scheme in question, if necessary after verifying that the applicants meet the pre-conditions for benefiting from that scheme.

88      Thirdly, it follows from Article 1(d) of Regulation 2015/1589 that the acts on which the aid scheme is based must define the beneficiaries in a general and abstract manner, even if the aid granted to them remains indefinite.

89      It is therefore necessary to assess the extent to which the elements highlighted above emerge from the acts identified by the Commission as the basis for the aid scheme at issue, so that the alleged aid measures, namely the excess profit exemptions, could be granted on the basis of those acts without it being necessary to adopt further implementing measures.

 The essential elements of the aid scheme at issue

90      In recitals 13 to 22 of the contested decision, the Commission describes the aid scheme at issue as consisting of an exemption of excess profit and sets out the elements which, in essence, constitute the essential elements for the grant of that exemption, which are summarised in recital 102 of the contested decision. Thus, first, the fact that the Belgian entities concerned are entities of a multinational group is taken into account. Secondly, account is taken of the fact that the entities concerned have obtained an advance ruling by the Ruling Commission, which is linked to a new situation, such as a reorganisation leading to the relocation of a central entrepreneur to Belgium, the creation of jobs, or investments. Thirdly, the existence of profit in excess of the profit that would have been made by comparable standalone entities operating in similar circumstances is taken into consideration. Fourthly, on the other hand, no account is taken of whether a primary upward adjustment was carried out in another Member State.

91      In that respect, it must be examined whether the essential elements of the alleged aid scheme, indicated above, emerge from the acts that the Commission referred to as the basis of the excess profit exemption system.

92      At the outset, it must be underlined that the Commission stated, in recitals 101 and 139 of the contested decision, that the essential elements of the alleged aid had been identified on the basis of an analysis of a sample of advance rulings. Thus, the Commission itself acknowledged that those essential elements did not emerge from the acts on which it considered the scheme was based, but from the advance rulings themselves or, rather, from a sample of those rulings.

93      In any event, although some of the essential elements of the scheme identified by the Commission may emerge from the acts identified in recitals 97 to 99 of the contested decision, that is not the case however for all of those essential elements.

94      As the Kingdom of Belgium and Magnetrol International have rightly submitted, neither the two-step methodology for calculating the excess profit nor the requirement of investments, the creation of jobs or the centralisation or increase of activities in Belgium follow, even implicitly, from the acts referred to by the Commission in recitals 97 to 99 of the contested decision as the basis of the scheme at issue. If those elements which, according to the Commission itself, constitute essential elements of the alleged aid scheme do not feature in the acts that supposedly constitute the basis of the scheme, the implementation of those acts and thus the grant of the alleged aid necessarily depends on the adoption of further implementing measures, with the result that there is no aid scheme within the meaning of Article 1(d) of Regulation 2015/1589.

95      First, the acts identified in recitals 97 to 99 of the contested decision, set out in paragraph 80 above, do not mention the two-step methodology, including the TNMM, for the calculation of excess profit. It follows from the contested decision, in particular from Section 6.3.2 thereof (recitals 133, 144 and 152 to 168 of that decision), that that methodology was applied systematically and constitutes an essential element of the scheme, since it is precisely the application of that methodology that makes the scheme selective.

96      Accordingly, without prejudging the question as to whether the determination of the excess profit using the two-step methodology, described in the contested decision, could lead to a selective advantage, it must be held that that constituent element of the scheme at issue nevertheless does not stem from the acts on which that scheme is based and could not therefore be applied without further implementing measures.

97      Secondly, as regards investments, the creation of jobs or the centralisation or increase of activities in Belgium by applicants for advance rulings, it should be noted that, in Section 6.3.2.1 of the contested decision, the Commission stated that, even though those elements were not listed as conditions for the grant of the excess profit exemption under Article 185(2)(b) of the CIR 92, they were essential in order to be eligible for an advance ruling, which was compulsory for the application of the exemption in question.

98      As the Commission itself recognised, inter alia in recital 139 of the contested decision, those elements do not emerge from the acts on which the scheme at issue is based, but from the advance rulings themselves, according to the sample that the Commission examined. Accordingly, as the Kingdom of Belgium and Magnetrol International rightly submit, if those elements do not emerge from the acts which, according to the Commission, constitute the basis of the aid scheme, those acts must necessarily be the object of further implementing measures. If, as the Commission submits, such investments are taken into account by the Belgian tax authorities for the purpose of granting the excess profit exemption, that will necessarily entail an analysis and a specific evaluation of the investments proposed by the Belgian entities concerned, as regards inter alia the nature and amount of those investments, or other details concerning the manner in which they would be made. Such an analysis could be carried out only on a case-by-case basis and would therefore require further implementing measures.

 The margin of discretion of the Belgian tax authorities

99      As the Commission rightly noted, in recital 100 of the contested decision, the existence of further implementing measures, within the meaning of Article 1(d) of Regulation 2015/1589, entails a degree of discretion on the part of the tax authority adopting the measures in question, allowing it to influence the amount or the characteristics of the aid or the conditions under which it is granted. The Commission considers, by contrast, that the mere technical application of the act providing for the grant of the aid in question does not constitute a further implementing measure within the meaning of Article 1(d) of Regulation 2015/1589.

100    It should be noted that the fact that a prior request for approval must be submitted to the competent tax authorities in order to benefit from an aid does not imply that those authorities have a margin of discretion, when they merely verify whether the applicant meets the requisite criteria in order to benefit from the aid in question (see, to that effect and by analogy, judgment of 17 September 2009, Commission v Koninklijke FrieslandCampina, C‑519/07 P, EU:C:2009:556, paragraph 57).

101    In the present case, it is undisputed that the non-taxation of excess profit is subject to the grant of an advance ruling. In that respect, it must be noted that Article 20 of the Law of 24 December 2002 defines an ‘advance ruling’ as the legal act by which the Federal Public Service for Finance determines, in accordance with the applicable provisions, how the law will apply to a particular situation or transaction that has not yet had tax consequences.

102    It must therefore be examined whether, in issuing such advance rulings, that service had a margin of discretion allowing it to influence the amount and the essential elements of the excess profit exemption and the conditions under which it was granted.

103    First, it is apparent from the explanatory memorandum to the Law of 21 June 2004 amending the CIR 92 (as summarised in paragraph 7 above) and from the Circular of 4 July 2006 (as described in paragraphs 9 to 11 above) that the downward adjustment provided for in Article 185(2)(b) of the CIR 92 must be carried out on a case-by-case basis in the light of the available information provided, in particular, by the taxpayer. In addition, it is indicated that no criteria may be established in respect of that adjustment, since the latter must be carried out on a case-by-case basis. However, it is stated that a correlative adjustment should be made only if the tax administration or the Ruling Commission considers both the principle and the amount of the primary adjustment to be justified. Furthermore, the Minister for Finance’s replies to parliamentary questions on the application of Article 185(2)(b) of the CIR 92 (as summarised in paragraphs 12 to 14 above) merely refer in general terms to the position of the Belgian tax administration as regards excess profit and the arm’s length principle.

104    It may be inferred from a combined reading of the acts mentioned in paragraph 103 above that, when the Belgian tax authorities issued advance rulings on excess profit, they did not carry out a technical application of the applicable regulatory framework, but, rather, carried out a qualitative and quantitative assessment of each request on a ‘case-by-case’ basis, in the light of the reports and evidence provided by the entity concerned, in order to decide whether it was justified to grant the downward adjustment provided for in Article 185(2)(b) of the CIR 92. Accordingly, contrary to the Commission’s assertions, inter alia in recital 106 of the contested decision, and in the absence of any other instructions that would limit the decision-making power of the Belgian tax administration, that administration necessarily enjoyed a genuine margin of discretion in deciding whether it was appropriate to grant such downward adjustments.

105    Secondly, as indicated in paragraph 73 above, Article 185(2)(b) of the CIR 92 provides for a downward adjustment of a company’s profit only if that profit has been included in the profit of another company. In practice however, as explained, inter alia, by the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of Article 185(2)(b) of the CIR 92, the downward adjustment was carried out by the Ruling Commission without it having been determined to which foreign companies the excess profit should be attributed.

106    In addition, it follows from recitals 67 and 68 of the contested decision that the scheme at issue does not cover all the advance rulings issued on the basis of Article 185(2)(b) of the CIR 92. It concerns only advance rulings which granted downward adjustments without the administration having verified whether the profit concerned had been included in the profit of another company of the group established in another jurisdiction. By contrast, advance rulings which, in accordance with the wording of Article 185(2)(b) of the CIR 92, grant a downward adjustment corresponding to an upward adjustment of the taxable profit of another company of the group established in another jurisdiction do not form part of the aid scheme at issue.

107    Accordingly, as the Kingdom of Belgium and Magnetrol International rightly submit, if, on the basis of that provision, the Belgian tax administration may adopt both decisions which, according to the Commission, grant State aid and decisions which do not grant such aid, it cannot reasonably be maintained that the role of that administration is limited to the technical application of the scheme at issue.

108    Thirdly, on the basis of the information provided by the Kingdom of Belgium to the Commission concerning the operation of the Ruling Commission, it is necessary to examine how the Ruling Commission determined, in its individual examination of requests for advance rulings, whether there was a situation giving rise to excess profit, whether a downward adjustment should be carried out under Article 185(2)(b) of the CIR 92 and what the characteristics, the amount and the conditions of that adjustment should be.

109    As regards the characteristics of the excess profit exemption and the conditions in which it is granted, it suffices to recall the considerations set out in paragraphs 90 to 98 above, according to which certain essential elements of the alleged scheme do not emerge from the acts on which, according to the Commission, that scheme is based.

110    As regards the amount to be exempted, it should be noted that the percentage of profit considered to be excess profit is not defined in the acts on which the alleged aid scheme is based. Indeed, it is not possible to deduce from those acts a specific percentage, a range or even a ceiling, and no specific element is provided concerning the method of calculation to be applied. On the contrary, it can be seen from the contested decision (recital 103 thereof) that the individual facts, the amounts involved and the transactions to be taken into account differ from one advance ruling to another. Likewise, the description of excess profit, in recital 15 of the contested decision, shows that determining that profit requires an assessment, on a case-by-case basis, of studies submitted by the tax payer as regards, first, the company’s residual profit, generated from transactions with companies in the same group, and, secondly, the excess profit generated because of that company’s membership of a group, which is deducted from the residual profit, as calculated in the first step.

111    More specifically, as the Kingdom of Belgium and Magnetrol International rightly submit, the parameters for calculating the excess profit and the instructions necessary for the purpose of taking account, when issuing advance rulings, of synergies, investments, the centralisation of activities and the creation of jobs in Belgium are not set out in the acts on which, according to the Commission, the scheme at issue is based. It is therefore the Ruling Commission which (i) determined the essential elements that were required in order to obtain a downward adjustment and (ii) verified whether that requirement was met where it agreed to grant that adjustment. It cannot therefore be maintained that the margin of discretion of the Belgian tax authorities was limited to the mere technical application of the provisions identified in recital 99 of the contested decision.

112    Fourthly, it must be noted that the procedure before the Ruling Commission includes a preliminary phase during which the requests for an advance ruling are analysed and at the end of which some of the requests are officially taken into account. It is apparent from the annual reports of the Ruling Commission identified by the Kingdom of Belgium, in particular the 2014 report, that only around half of open files at the pre-notification stage result in an advance ruling. That is an indication that, contrary to the Commission’s submissions, the Ruling Commission has a margin of discretion which it actually exercises when granting or rejecting requests relating to excess profit, including at the pre-notification stage.

113    Lastly, it should be noted that, in recital 106 of the contested decision, the Commission indicates that the Ruling Commission has a limited margin of discretion to agree the exact percentage of the downward adjustment. However, it follows from the considerations set out in paragraphs 101 to 112 above that, in the present case, the Belgian tax authorities had a margin of discretion over all of the essential elements of the alleged aid scheme.

 Definition of the beneficiaries

114    As regards the definition of the beneficiaries, it should be noted that, in recital 109 of the contested decision, the Commission refers to Article 185(2)(b) of the CIR 92. That article, the wording of which is set out in paragraph 8 above, provides that it applies to companies which are part of a multinational group, as regards their reciprocal cross-border relationships.

115    It could indeed be considered that Article 185(2)(b) of the CIR 92 covers a general and abstract category of entities, namely companies forming part of a multinational group in the context of their reciprocal cross-border relationships. However, the beneficiaries of the scheme, as referred to in the contested decision, cannot be identified on the sole basis of that provision, without further implementing measures.

116    In the present case, the beneficiaries of the scheme, as the latter is found to exist by the Commission, correspond to a much more specific category than that of companies forming part of a multinational group in the context of their reciprocal cross-border relationships. According to the Commission’s assessments, inter alia in recital 102 of the contested decision, relating to the essential elements of the aid scheme at issue, that scheme applies to companies forming part of a multinational group which, on the basis of transfer pricing reports and the existence of excess profit calculated using those reports, seek the exemption of that profit by a request for an advance ruling and which, moreover, make investments, create jobs or centralise activities in Belgium.

117    In addition, it should be noted that the other acts on which the Commission found the scheme was based do not provide any additional details as regards the definition of the beneficiaries of the scheme at issue.

118    As regards, specifically, the Law of 24 December 2002, although Article 20 thereof sets out the requirement for a particular situation or transaction that has not yet had tax consequences, that law does not contain provisions intended to define the beneficiaries of the alleged scheme. Nor do the Circular of 4 July 2006 or the Minister for Finance’s replies of 13 April 2005, 11 April 2007 and 6 January 2015 provide details concerning the beneficiaries of the alleged scheme. Moreover, it must be noted that the latter acts were adopted after 2004, the year from which, according to the Commission, the scheme in question was applied.

119    Accordingly, it cannot be concluded that the beneficiaries of the alleged aid scheme are defined in a general and abstract manner by the acts on which the Commission found the scheme was based. Further implementing measures therefore necessarily have to be taken in order to define such beneficiaries.

120    It follows from the foregoing considerations that the Commission wrongly concluded that the excess profit exemption scheme, as defined by the Commission in the contested decision, did not require further implementing measures and therefore constituted an aid scheme, within the meaning of Article 1(d) of Regulation 2015/1589.

 The existence of a systematic approach

121    The conclusion in paragraph 120 above cannot be called into question by the Commission’s arguments alleging the existence of a systematic approach, which it identified by examining a sample of 22 of the 66 existing advance rulings.

122    It is necessary to bear in mind the case-law, cited in paragraph 79 above, according to which, in examining an aid scheme, where no legal act establishing that scheme is identified, the Commission may rely on a set of circumstances which taken as a whole indicate the de facto existence of an aid scheme (see, to that effect, judgment of 13 April 1994, Germany and Pleuger Worthington v Commission, C‑324/90 and C‑342/90, EU:C:1994:129, paragraphs 14 and 15).

123    Accordingly, it cannot be ruled out that the Commission may conclude that there is an aid scheme where it is able to demonstrate, to the requisite legal standard, a systematic approach, the characteristics of which meet the requirements set out in Article 1(d) of Regulation 2015/1589.

124    However, the Commission has not succeeded in demonstrating that the approach that it had identified met the requirements set out in Article 1(d) of Regulation 2015/1589.

125    In the first place, as regards the arguments put forward by the Commission inter alia at the hearing, according to which a systematic approach may constitute the very basis of the aid scheme, it suffices to note that it is not the basis of the scheme relied on in the contested decision. As noted in paragraph 80 above, in recitals 97 to 99 of the contested decision, the Commission stated that Article 185(2)(b) of the CIR 92, as applied by the Belgian tax administration, formed the basis of the alleged aid scheme at issue and that that application could be deduced from the explanatory Memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions concerning the application of that provision.

126    In the second place, even if the Commission’s arguments are to be understood as meaning that the essential elements of the aid scheme emerge from a systematic approach which, in turn, is said to emerge from the sample of advance rulings that it examined, it must be pointed out that, in the contested decision, the Commission was not able to demonstrate to the requisite legal standard the existence of such a systematic approach.

127    First of all, it must be noted that, in recitals 65 and 103 of the contested decision, the Commission acknowledged that it examined a sample of 22 of the 66 advance rulings concerned. As the Kingdom of Belgium and Magnetrol International rightly submit, the Commission did not explain, in the contested decision, either the choice of that sample or why it had been considered to be representative of all of the advance rulings. In response inter alia to a written question from the Court, which response was also clarified at the hearing, the Commission indicated that it had requested the advance rulings issued in 2005 (no ruling having been issued in 2004), 2007, 2010 and 2013 so that its examination would cover rulings issued at the beginning, middle and end of the period during which the Ruling Commission had issued such rulings.

128    In addition, the contested decision contains, in recitals 62 to 64 and footnote 80, references to 6 of the 66 advance rulings concerned, which are described briefly and referred to as examples capable of illustrating all of the advance rulings. However, no explanation is given in the contested decision as to why those 6 examples were chosen, why those examined advance rulings are sufficiently representative of all 66 advance rulings or why those 6 examples are sufficient to justify the Commission’s conclusion regarding the existence of a systematic approach by the Belgian tax authorities.

129    Next, it is necessary to recall the considerations set out in paragraphs 103 to 112 above, according to which the Belgian tax authorities examined each request on a case-by-case basis and had a margin of discretion that went well beyond a mere technical application of the provisions identified in recital 99 of the contested decision, when they issued each advance ruling following that examination, which, in itself, undermines the systematic nature of the approach allegedly followed by the Belgian tax authorities. In addition, the existence of a systematic approach is called into question by the finding made in paragraph 98 above, concerning the further implementing measures necessary in order to implement the excess profit exemption system at issue in the present case.

130    Lastly, the Kingdom of Belgium and Magnetrol International submit that several advance rulings did not incorporate the essential elements of the alleged aid scheme identified by the Commission in the contested decision, in particular because the advance rulings did not all concern the role of central entrepreneur as taken into consideration by the Commission, a centralisation or recentralisation of activities did not take place in every case and the calculation of the excess profit was carried out on a case-by-case basis and not always according to the two-step calculation methodology criticised by the Commission.

131    In that respect, it must be noted that the deficiencies identified in paragraphs 127 and 128 above cannot be remedied by the additional information provided by the Commission in response to the Court’s questions, mentioned in paragraph 49 above, concerning the sample of advance rulings that it had analysed. The Court cannot, without exceeding the limits of its power to review the legality of the contested decision, rely, in order to reject a plea for annulment submitted to it, on grounds which did not form part of that decision (see, to that effect, judgment of 22 April 2016, Ireland and Aughinish Alumina v Commission, T‑50/06 RENV II and T‑69/06 RENV II, EU:T:2016:227, paragraph 145).

132    In any event, and as the Kingdom of Belgium and Magnetrol International rightly submit, it follows from the additional information submitted by the Commission in response to the Court’s questions that the advance rulings in the sample examined by the Commission show individual responses given by the Belgian tax authorities to various situations before them. The information provided concerning the 22 rulings show that those rulings were issued in different situations, such as the merger or restructuring of production activities, the construction of new facilities, the increase of the production capacity of existing facilities or the internalisation of supply activities. Thus, contrary to recital 15 of the contested decision and to the reasoning followed by the Commission in order to prove that the alleged scheme granted the beneficiaries a selective advantage (Section 6.3.2.2 of the contested decision), the advance rulings in the sample examined do not all concern situations in which the Belgian entity concerned operated as a ‘central entrepreneur’.

133    In addition, it follows from the information provided by the Commission in its reply to the Court’s questions, referred to in paragraph 49 above, that the two-step approach to calculating the excess profit –– identified by the Commission as one of the essential elements of the alleged aid scheme and described by the Commission in recital 15 of the contested decision –– involving inter alia the use of transfer pricing reports and the TNMM, was not followed systematically.

134    Accordingly, apart from the deficiencies identified in paragraphs 127 and 128 above, which would undermine the arguments concerning the existence of a systematic approach on the part of the Belgian tax authorities, the sample to which the Commission refers in the contested decision cannot necessarily prove that such a systematic approach actually existed and that it was followed in all of the advance rulings concerned.

 Conclusion on the classification of the measures in question as an aid scheme

135    It follows from the foregoing considerations that the Commission erroneously considered that the Belgian excess profit system at issue, as presented in the contested decision, constituted an aid scheme.

136    Accordingly, it is necessary to uphold the pleas raised by the Kingdom of Belgium and Magnetrol International, alleging the infringement of Article 1(d) of Regulation 2015/1589, as regards the conclusion set out in the contested decision regarding the existence of an aid scheme. Consequently, without it being necessary to examine the other pleas raised against the contested decision, that decision must be annulled in its entirety, inasmuch as it is based on the erroneous conclusion concerning the existence of such a scheme.

 Costs

137    Under Article 134(1) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. Since the Commission has been unsuccessful, it must be ordered to pay, in addition to its own costs, those incurred by the Kingdom of Belgium, including those relating to the proceedings for interim measures, and by Magnetrol International, in accordance with the forms of order sought by them.

138    Under Article 138(1) of the Rules of Procedure, the Member States which have intervened in the proceedings are to bear their own costs. Ireland must therefore bear its own costs.

On those grounds,

THE GENERAL COURT (Seventh Chamber, Extended Composition)

hereby:

1.      Joins Cases T‑131/16 and T‑263/16 for the purposes of the present judgment;

2.      Annuls Commission Decision (EU) 2016/1699 of 11 January 2016 on the excess profit exemption State aid scheme SA.37667 (2015/C) (ex 2015/NN) implemented by Belgium;

3.      Orders the European Commission to pay, in addition to its own costs, those incurred by the Kingdom of Belgium, including those relating to the proceedings for interim measures, and by Magnetrol International;

4.      Orders Ireland to bear its own costs.

17      In the first place, as regards the assessment of the aid measure (recitals 94 to 110 of the contested decision), the Commission considered that the measure in question constituted an aid scheme, based on Article 185(2)(b) of the CIR 92, as applied by the Belgian tax administration. That application is explained in the explanatory memorandum to the Law of 21 June 2004, the Circular of 4 July 2006 and the Minister for Finance’s replies to parliamentary questions on the application of Article 185(2)(b) of the CIR 92. According to the Commission, those acts constitute the basis on which the exemptions in question were granted. In addition, the Commission considered that those exemptions were granted without further implementing measures being required, since the advance rulings were merely technical applications of the scheme at issue. Furthermore, the Commission stated that the beneficiaries of the exemptions were defined in a general and abstract manner by the acts on which the scheme was based. Those acts referred to entities that form part of a multinational group of companies.

18      In the second place, as regards the conditions for applying Article 107(1) TFEU (recitals 111 to 117 of the contested decision), first, the Commission indicated that the excess profit exemption constituted an intervention by the State, imputable to it, and gave rise to a loss of State resources, since it resulted in a reduction of the tax liability in Belgium of undertakings benefiting from the scheme. Secondly, it considered that the scheme at issue was liable to affect intra-Union trade, since the undertakings that benefited from the scheme were multinational companies operating in several Member States. Thirdly, the Commission underlined that the scheme at issue relieved the undertakings benefiting from it from a burden they would otherwise be obliged to bear and that, consequently, that scheme distorted or threatened to distort competition by strengthening the financial position of those undertakings. Fourthly, the Commission considered that the scheme at issue conferred a selective advantage on Belgian entities and thus benefited only the multinational groups to which those entities belonged.

19      As regards, specifically, the existence of a selective advantage, the Commission considered that the excess profit exemption was a derogation from the reference system, identified as the Belgian corporate income tax system, since the tax was not applied to the total profit actually recorded by the company concerned but to an adjusted arm’s length profit (recitals 118 to 134 of the contested decision).

20      In that regard and primarily (recitals 135 to 143 of the contested decision), the Commission considered that the scheme at issue was selective, first of all, because it was available only to entities that were part of a multinational group, not to standalone entities or entities forming part of domestic corporate groups. Next, the scheme at issue resulted in selectivity between, on the one hand, multinational groups that amended their business model by establishing new operations in Belgium and, on the other hand, any other economic operators that continued to operate under existing business models in Belgium. Lastly, the scheme at issue was de facto selective since only Belgian entities forming part of a large or medium-sized multinational group could effectively benefit from the excess profit exemption, not entities that were part of a small multinational group.

21      As a secondary point (recitals 144 to 170 of the contested decision), the Commission stated that, even if it were accepted that the Belgian corporate income tax system contained a rule according to which the profit recorded by multinational group entities that exceeded an arm’s length profit should not be taxed, which the Commission disputed, the excess profit exemption constituted a derogation from the reference system, since both the rationale for that exemption and the methodology used to establish the excess profit contravened the arm’s length principle. That methodology comprised two steps.

22      In the first step, the arm’s length prices charged in transactions between the Belgian entity of a group and the companies with which it is associated were fixed based on a transfer pricing report provided by the taxpayer. Those transfer prices were determined by applying the transactional net margin method (TNMM). A residual or arm’s length profit was thus established, which, according to the Commission, corresponded to the profit actually recorded by the Belgian entity.

23      In the second step, on the basis of a second report submitted by the taxpayer, the Belgian entity’s adjusted arm’s length profit was established by determining the profit that a comparable standalone company would have made in comparable circumstances. The difference between the profit arrived at following the first and second steps (namely the residual profit minus the adjusted arm’s length profit) constituted the amount of excess profit which the Belgian tax authorities regarded as being the result of synergies or economies of scale arising from membership of a corporate group and which, accordingly, could not be attributed to the Belgian entity.

24      Under the scheme at issue, that excess profit was not taxed. According to the Commission, that non-taxation granted the beneficiaries of the scheme a selective advantage, particularly since the methodology for determining the excess profit departed from a methodology that leads to a reliable approximation of a market-based outcome and thus from the arm’s length principle.

25      In addition, the Commission considered that the scheme at issue could not be justified by the nature and the general scheme of the Belgian tax system (recitals 173 to 181 of the contested decision). Contrary to the assertions of the Kingdom of Belgium, the scheme at issue did not pursue the objective of avoiding double taxation, since it was not necessary, in order to benefit from the excess profit exemption, to demonstrate that that profit was included in the tax base of another company.

26      In the third place, the Commission considered that the measures in question constituted operating aid and were therefore incompatible with the internal market. Furthermore, since those measures were not notified to the Commission pursuant to Article 108(3) TFEU, they constituted unlawful aid (recitals 189 to 194 of the contested decision).

27      As regards the recovery of the aid (recitals 195 to 211 of the contested decision), the Commission stated that the Kingdom of Belgium could not rely on the principle of the protection of the beneficiaries’ legitimate expectations or on the principle of legal certainty in order to justify a failure to fulfil its obligation to recover the incompatible aid unlawfully granted and that the amounts to be recovered from each beneficiary could be calculated on the basis of the difference between the tax that would have been due, based on the profit actually recorded, and the tax actually paid as a result of the advance ruling.

Loyens and Loeff Commentary can be read here.

February 14, 2019 in BEPS, Tax Compliance | Permalink | Comments (0)

Sunday, January 13, 2019

Belize signs landmark agreement to strengthen its tax treaties and Monaco deposits its instrument of ratification for the Multilateral BEPS Convention

Today, Belize signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Convention), becoming the 86th jurisdiction to join the Convention, which now covers almost 1,500 bilateral tax treaties.

In addition, Monaco yesterday deposited its instrument of ratification for the Convention with the OECD’s Secretary-General, Angel Gurría, therewith underlining its strong commitment to prevent the abuse of tax treaties and base erosion and profit shifting (BEPS) by multinational enterprises.


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 alike. The Convention will become effective on 1 January 2019 for the first 47 tax treaties concluded among the 18 jurisdictions that have already deposited their acceptance or ratification instrument.

(Left to right: H.E. Mr. Joseph D. Waight, Financial Secretary of Belize, Mr. Ludger Schuknecht, OECD Deputy Secretary-General)

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 treaty abuse, strategies to avoid the creation of a “permanent establishment”, and hybrid mismatch arrangements. 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.

January 13, 2019 in BEPS | Permalink | Comments (0)