On November 13, 2015 the Dutch State Secretary for Finance (Hereafter: the Secretary) sent the Dutch Parliament a letter with answers to the questions raised by a Member of the Dutch Parliament regarding Starbucks. Since in our view the letter a.o. provides an interesting insight in how the Secretary thinks about certain parts of the BEPS-project and the consequences thereof, but unfortunately was only available in Dutch, below we did our best to draft an UNOFFICIAL ENGLISH TRANSLATION of the letter.
UNOFFICIAL ENGLISH TRANSLATION
Q1
Are you known with the decision of the European Commission that the ruling that the Netherlands has concluded with Starbucks constitutes State Aid and with the many media reports on the matter?
A1
Yes I have taken notice of the decision of the European Commission (Hereafter: the Commission)
Q2
When will the full decision of the Commission be published? When will the cabinet send its full reaction and view regarding the decision to the Dutch Parliament?
A2
The Netherlands received the confidential version of the decision on October 22, 2015. In line with the announcement of the Commission C(2003)4582 of December 1, 2003 on confidentiality regarding decisions on State Aid (Hereafter: the Announcement), in its decision the Commission has requested the Netherlands to inform it with respect to confidential information included in the decision that cannot be published. Together with Starbucks the Netherlands is currently listing the confidential data included in the decision and will then respond towards the Commission. It is expected that then a procedure with respect to confidential information as meant in the Announcement of the Commission will be started. The Announcement provides a more detailed description of the nature of confidential data that can be protected through confidentiality. This can be both business secrets as well as other confidential information. Business secrets are that information that is related to the conducting of a business that has real or potential economic value and of which the publication can provide economic advantage to other businesses. In this respect it should be noted that in general a request for confidential treatment is only taken into consideration if this is absolutely necessary to protect a business secret or confidential information. Finalizing the discussions with the Commission can take a while. After the announcement, it took for example half a year before the decision of the Commission to start an investigation was published.
I expect that I will be able to inform the Parliament within a few weeks with respect to the reaction and the view of the cabinet on the decision of the Commission.
Q3
To which extent are the media reports correct when they state that Starbucks and the Dutch cabinet are closely working together in their actions against the Commission’s decision?
A3
The Netherlands is having its own procedure and in that its interests are not always the same as Starbucks’. For being able to conduct this procedure the Netherlands however needs to be provided with information that Starbucks has at its disposal. The Netherlands cannot on its own determine which data in the decision are business secrets as meant in the Announcement of the Commission. The decision on that has to be primarily made by Starbucks. Next to that the assistance of Starbucks is required for the supply of information as requested by the Commission that sometimes is solely available at the Member State and sometimes solely available at the business. In the case of Starbucks the Commission has decided to, in accordance with Article 7 of Regulation 2015/1589/EU, also request market information directly from Starbucks and other enterprises (the so-called Market Information Tool – MIT). In technically complex cases like Starbucks contact with the taxpayer are necessary to provide the Commission with the correct and necessary information that the Commission thinks is necessary for a correct judgement of the case.
Q4
Independently from whether or not the decision from the Commission will hold out in court, do you share the view that the Starbucks-case shows that in this case one can speak of undesired base erosion because of which Starbucks pays significantly less taxes than local enterprises active the hotel and catering industry do, leading to unfair competition? Do you therefore also share the view that the tax construction of Starbucks is undesirable, whether or not this is legal? Do you agree that the goal of the Action Plan on Base Erosion and Profit Shifting (BEPS) is to make sure that these structures will be no longer possible and do you support this goal?
Q8(Part 1)
Is it correct that non-European companies are often not taxed in Europe because of the clever use of intangible assets and hybrid instruments? Can these be both hybrid finance instruments as well as hybrid entities? Do these non-European companies, like Google and Apple, with 0% corporate income tax compete against European companies that do normally pay corporate income tax, in the Netherlands against a rate of 25%? To which extent do you think this is fair competition?
A4 & 8(Part 1)
Indeed the use of hybrid entities can lead that income is taxed in no country whatsoever, or that the taxation is deferred for a very long time. That it is possible that by anticipating on the differences between different local tax systems, like hybrid instruments, international active companies can have an unwanted competition advantage on local businesses is of a concern to the cabinet. That is why the cabinet embraces the BEPS proposals in this respect. In my letter from October 5, 2015 I have extensively elaborated on the final outcomes of the BEPS-project and the appreciation the cabinet has for them.
The concern with respect to hybrid mismatches should be seen separately from the question whether the profits allocated to the Netherlands was done correctly and whether in this case a selective advantage was granted to Starbucks. That is the only question that is important and can be answered in the underlying Starbucks case and by the judgement of the State Aid aspects.
Under the questions 5 and 6 I will elaborate on the use of intangible assets.
Q5
Does the cabinet state in its initial reaction: “The tax authorities levy taxes over the profits that Starbucks Manufacturing generates in the Netherlands with the roasting of coffee beans. Since the intangible assets of Starbucks are not located in the Netherlands, the royalties for the use of these intangible assets are not taxed in the Netherlands”? Is it furthermore correct that Actions 8-10 of the BEPS-project of the G20 and the OESO, which is supported by the Netherlands and to which the Netherlands contributes, provide for a complete different method of profit allocation to intangible assets? Would the Netherlands also have granted the ruling to Starbucks if the new Transfer Pricing Guidelines regarding intangible assets as provided by the BEPS-project would already be in force (taking into account that the new Transfer Pricing Guidelines demand that the complete worldwide business activities have to be taken into account and that it is not sufficient to make an analysis of the activities performed in the Netherlands)? What is the purpose of the exchange of information if the Netherlands only pays attention to the activities performed in the Netherlands and does not check whether the missing activities are actually performed in the non-taxed letterbox entity?
Q6
Is it correct that in the reaction from the cabinet to the BEPS-reports you state the following: “The BEPS-project has also led to an adjustment of the OECD Transfer Pricing Guidelines? In practice these new regulations will barely bring change to the way by which the Dutch tax authorities will apply the OECD Transfer Pricing Guidelines. After all, the Dutch policy is almost in line with the new regulations. Apparently the Netherlands has convincingly explained and propagated its policy. I am happy that other countries are now going to apply these regulations in the same manner.”? Is it correct that in the BEPS-report itself it is stated that a lot has been changed and is it correct that the entire text of the Transfer Pricing Guidelines has been replaced? Is it correct that in this respect that in the report it is stated: “Tax administrations are given new tools to tackle the problem of information asymmetry to assist in determining the appropriate pricing agreements for intangibles …”.? How do you judge the discrepancy between both statements? To what extent does the Dutch cabinet take BEPS seriously enough with respect to intangible assets? Isn’t this statement a clear sign that the Netherlands should really start combating tax avoidance by the use of intangible assets?
A5 & 6
The Transfer Pricing Guidelines dictate that for the determination of the commercial and financial relations between related parties and the conditions and the economic relevant circumstances connected therewith an analysis of the group as a whole is needed. Consequently a better understanding is obtained regarding the role of the functions, the therewith connected risks and a use of assets from a certain part of the group within the activities of the group as a whole. The profit of that specific part of the group will be determined based on the functions performed by that part of the group, the therewith connected risks and the assets used. The question whether too much or too little of the other profits is allocated to other parts of the group is not relevant for this profit allocation. The possibility that as a consequence of disparities between different tax systems, like for example hybrid mismatches, profit that is not allocable to the Netherlands will not be taxed is not relevant in this respect.
The BEPS Action Plan notes that applying the Transfer Pricing Guidelines could lead to an allocation of profits to entities in which no value adding activities were performed. Especially the emphasis on the contractual allocation of functions, risks and assets made the Transfer Pricing Guidelines vulnerable to manipulation. That is why in the BEPS-project the guidelines regarding the application of the at arm’s length principle have been clarified and strengthened. For quite some time now the Netherlands is using an economic approach, which is based on an extensive analysis of functions actually performed, risks actually incurred and assets actually used. The policy regarding the storage of intangible assets as formulated in the ‘verrekenprijsbesluit’ is a good example of that. Already for years the Dutch tax authorities have been combating the artificial allocation of profits stemming from intangible assets to locations outside the Netherlands. Therefore the adjustments made to the Transfer Pricing Guidelines can be considered to constitute a confirmation of the Dutch policy.
Also when applying the outcomes of Actions 8-10 of the BEPS-project, the Dutch tax authorities would have concluded an identical ruling (APA) with Starbucks.
Q7
Is it correct that the new OECD transfer price regulations state that profits have to be allocated to intangible assets based on the functions, assets and risks regarding “the development, enhancement, maintenance, protection and exploitation of intangibles”? Is it correct that the ‘verrekenprijzenbesluit’ only mentions the functionality to constrain risks and that the other wording is not included in the ‘verrekenprijzenbesluit’? Are you willing to amend the ‘verrekenprijzenbesluit’ as a consequence of the BEPS-project in such a way that the same principles are used as those that form the base of the Transfer Pricing Guidelines? Are you willing to explicitly confirm in the ‘verrekenprijzenbesluit’ that for the allocation of profits to intangible assets the Transfer Pricing Guidelines will be leading, also in the cases where there might be a potential mismatch between the ‘verrekenprijzenbesluit’ and the Guidelines?
A7
In the BEPS proposals to amend Chapter VI of the OECD Transfer Pricing Guidelines it is stated that all parts of a group need to receive a fitting remuneration for the functions they perform, the risks incurred therewith, and the assets they use for the development, enhancement, maintenance, protection and exploitation of intangibles. The ‘verrekenprijzenbesluit’ also states that the functions performed, the risks incurred therewith and the assets used determine the remuneration. Therefore is incorrect to state that the ‘verrekenprijzenbesluit’ only refers to the functionality to constrain risks.
In the current ‘verrekenprijzenbesluit’ it is already stated that the OECD Transfer Pricing Guidelines provide an internationally accepted interpretation of the at arm’s length principle and that the Netherlands considers them as appropriate interpretation and explanation of the principle as included/provided by Article 8b of the Dutch corporate income tax Act. After in the time to come a few more subjects from the BEPS-project will have been further developed, the ‘verrekenprijzenbesluit’ will be amended there where necessary in order to ensure that also after the complete BEPS project has been finalized it will be in line with the amended Transfer Pricing Guidelines.
Q8(Part 2)
Is it correct that in the BEPS-project it is stated that if because of the use of a tax haven or hybrid instruments a profit is not taxed, the source state can impose a levy in order to avoid double non-taxation or a one-sided deduction and that this is in line with the motion-Groot (ITP: Groot is the MP that raised these questions) that proposed a European withholding tax on money-flows to tax havens? To which extent are these conclusions of BEPS a reason for you to still embrace this motion?
A8(Part 2)
The outcome of the BEPS-project do not contain a proposal to levy a withholding tax in situations in which profits are not being taxed, because of the use of a tax haven or a hybrid instrument.
It however contains proposals to react to the use of hybrid instruments or hybrid entities and by doing so to arrange that a balance exists between deductibility and taxation or non-deductibility and exemption. The outcomes also contain a description of possible measures that could be used to levy additional taxes at level of the parent company over profits of subsidiaries residing in low taxed countries (via so-called Controlled Foreign Company provisions).
How the different measures that are described in the BEPS-reports will be implemented will be shown over the next few years. The Dutch Government is a strong advocate to do this multilateral with binding agreements between states. Because taxpayers take advantage of the differences between systems unilateral actions by individual countries are no answer to the problem and are therefore not effective. One country cannot simultaneously anticipate on the deviating systems of different countries and unilateral measures cannot prevent that the possibility to take advantage of different systems elsewhere keeps existing.
Q9
Do you share the opinion that the main goal of tax treaties is to avoid double taxation and not to create double non-taxation? Shouldn’t the Netherlands, in line with the BEPS-project, combat aggressive structures that arrange that profits are not taxed anywhere in the world?
A9
Tax treaties were originally designed to avoid double taxation. Therefore tax treaties divide the rights to levy taxes between the contracting parties. One of the outcomes of the BEPS-project is that in the preamble of future treaties a statement will be included that stated that it is not the intention that the treaty is used to create double non-taxation. In that respect the nuance should be made that there are cases where it is no objection that a payment is nowhere charged, in particular to avoid economic double taxation. It is for example an integral part of the Dutch treaty policy to strive that the dividend payments made within a group are never taxed. Not in the source state and, through the use of the participation exemption, neither in the Netherlands. The purpose of the participation exemption not to tax profits of a group twice would otherwise be undermined.
In principal I also do not have a problem with cases in which an exemption in the treaty leads to the deduction in one country against a higher rate than the rate at which it is taxed in the other country. Without such a principle, the sovereignty of a country to create its own fiscal stimulus would be affected.
The aforementioned shows that the use of double taxation and double non-taxation does not always lead to a useful distinction between acceptable and undesirable situations. What really matters is that those cases should be tackled in which taxes are avoided in artificially way and contrary to the purposes of certain regulations. As stated before more than only treaty abuse should be taken into account in that respect.
Click here to be forwarded to “Antwoorden op Kamervragen over Starbucks” as available on the website of the Dutch Ministry of Finance, which will open in a new window.
Copyright – internationaltaxplaza.info
Are you looking for a new tax colleague? Then place your job ad on International Tax Plaza!
and
Stay informed: Subscribe to International Tax Plaza’s Newsletter! It’s completely FREE OF CHARGE!
