(August 1, 2015)

On July 31, 2015 we informed our readers that a Draft Report on tax rulings and other measures similar in nature or effect, which was drafted by the co-rapporteurs of the European Parliament’s Special Committee on Tax Rulings and Other Measures Similar in Nature or Effect, had become available on the website of the European Parliament (see our article from July 31, 2015). At the time of writing that article we unfortunately did not have the time to thoroughly study the Draft Report.

 

However, now we are able to provide you with a selection of interesting remarks made in the Draft Report.

 

The Draft Report contains a.o. a Draft motion for a European Parliament Resolution on tax rulings and other measures similar in nature or effect, which on its turn contains a.o. the remarks quoted below:

 

LuxLeaks: facts and figures

 

Under point B on page 6 of the Report it is stated that the European Commission’s (hereafter; EC) investigations and the work carried out by the European Parliament (hereafter: EP) through its special committee have shown that LuxLeaks is not the only case but a practice that is widespread within Europe and beyond, and one which consists in taking tax measures to reduce some corporations’ overall tax liabilities so as to artificially increase the national tax base at the expense of other countries;

 

Tax rulings and harmful tax practices

 

Under points J, K and L on page 7 & 8  the following remarks are made: 

J             whereas tax rulings cover a wide range of practices in Member States, in terms of possible scope and topics covered, binding nature, frequency of use, publicity, length and payment of fees; whereas there is no commonly agreed definition of tax rulings at international level except for the Commission’s reference to them as ‘any communication or any other instrument or action with similar effects, by or on behalf of the Member State regarding the interpretation or application of tax laws’;

K            whereas tax rulings are not intrinsically problematic since they can, as is their original purpose, provide legal certainty for the taxpayer in cases where the tax laws or their particular application in certain circumstances are unclear or subject to diverging interpretations, in particular with regard to complex transactions, and thereby avoid future disputes between the taxpayer and the tax authority;

L             whereas the practice of rulings developed, in the framework of a closer and more cooperative relationship between tax administrations and taxpayers, as a tool to tackle the increasing complexity of the tax treatment of certain transactions in an increasingly complex, global and digitalised economy; whereas, as undisclosed and potentially discretionary/negotiated arrangements, rulings could at the same time be used as a means of obtaining derogations and more favourable tax treatments;

 

Aggressive tax planning instruments and their impact

 

With respect to its fact finding missions on pages 11 & 12 under point 15 the following remarks are being made:

Stresses that, during its fact-finding missions in five Member States and Switzerland, its special committee observed that a number of national tax measures had the potential to be harmful tax practices, in particular the following, which should only be considered as a non-exhaustive list:

       diverging definitions of permanent establishment and tax residence, and relationship with economic substance (sometimes allowing taxation in the absence of economic substance or, conversely, no taxation of revenue stemming from real economic activity),

       deduction of notional interests (enabling companies to deduct from their taxable income a fictitious interest calculated on the basis of their shareholders’ equity),

       excess profit ruling practices (through which a company may obtain written confirmation from the tax administration that its taxable income does not include those profits that would not have been realised in a ‘stand-alone’ situation),

       unclear or uncoordinated transfer pricing provisions,

       a number of preferential regimes, in particular in relation to intangibles (patent, knowledge or IP boxes),

       exemption of withholding tax on interest, dividends and royalties through bilateral tax treaties,

       differences in legal designations between Member States (hybrid entities or hybrid loans),

       and, in the case of Switzerland, special tax regimes at cantonal level for foreigncontrolled companies which are not granted to nationally controlled companies;"

 

Under the points 16 through 22 on the pages 12 & 13 subsequently the following remarks are being made:

16.       Takes note that, according to the Commission, 72 % of profit shifting takes place in the EU through the channels of transfer pricing and location of intellectual property;

17.       Stresses that a number of Member States have in recent years developed specific corporate tax reduction schemes to attract companies’ mobile intangible assets, such as income resulting from intellectual property; notes the variety in the tax rate reductions and allowances and in the scope of the schemes proposed (innovation boxes, intellectual property boxes, knowledge boxes, patent boxes, etc.); stresses that, in some Member States, , taxpayers do not need to produce intellectual property within the country in order to access tax benefits, but merely to acquire it through a company which has its residence within the jurisdiction;

18.       Considers such schemes to be typical examples of harmful tax competition between states, because while their connection with and impact on the real economy is not evident, they have the effect of reducing the tax revenue of other countries, including Member States;

19.       Stresses that, in an economic environment characterised by more intangible assets, transfer pricing is often affected by the lack of comparable transactions and benchmarks, which casts doubts on the sound application and relevance of the arm’s length principle, according to which the pricing of transactions between entities belonging to the same corporate group should be valued in the same way as between independent entities;

20.       Notes that the existing guidelines for transfer pricing leave MNCs a significant margin of discretion in the choice and implementation of evaluation methods; stresses that the lack of any effective common standard for transfer pricing and the various derogations, exceptions and alternatives provided for are being exploited by MNCs, in contradiction with the spirit of those guidelines, to calibrate their taxable profits by jurisdiction and reduce their overall tax liability through, for instance, abusive cost-plus, arbitrary setting of profit margins or the questionable exclusion of certain expenditure from their calculation;

21.       Underlines the fact that transfer pricing files submitted by MNCs or their representatives cannot be properly monitored by tax administrations, which are often not sufficiently equipped and staffed to critically and thoroughly examine those analyses and their outcome or impact;

22.       Deplores the fact that, in an economic context where 60 % of world trade is intragroup, guidelines for the application of this purely economic concept are fragmented at national level and therefore subject to inconsistencies between Member States and legal disputes;

 

On page 13 under point 24 an interesting remark is made regarding the position of the so-called Big 4, where the following is stated:

Stresses the crucial role of the four biggest accounting firms (the ‘Big Four’) in the design and marketing of rulings and tax avoidance schemes exploiting mismatches between national legislations; stresses that those firms, which seem to derive a considerable amount of their revenue from tax services, to dominate most Member States’ auditing markets and to prevail in the global tax advising services, constitute a narrow oligopoly; draws attention to the conflict of interest resulting from the juxtaposition, within the same firms, of tax advice and consulting activities intended, on the one hand, for tax administrations and, on the other, for MNCs’ tax planning services, which exploit the weaknesses of national tax laws; questions the effectiveness of any corporate code of conduct in tackling this issue; underlines the fact that tax rulings have become, in the EU and worldwide, a common business practice, not only to obtain legal certainty or advantageous tax deals, but also in cases where legislative provisions do not allow any room for interpretation;

 

State of play and assessment of EU, international and national actions

 

On page 15 under point 33 remarks are made regarding the involvement of the so-called Big 4 in the Platform for Tax Good Governance and the Joint Transfer Pricing Forum. In these respect the following remarks are made:

Notes also the efforts made through the creation of the Platform for Tax Good Governance, which brings around the same table various stakeholders with the aim of creating consensus around the issue of tax avoidance, in particular in an international context, and the Joint Transfer Pricing Forum, which issues a number of guidelines on the technical issues surrounding transfer pricing; stresses that, to date, these bodies have contributed to making limited corrections to the corporate tax framework; strongly deplores the fact that the Joint Transfer Pricing Forum is composed, in particular, of representatives from the Big Four accountancy firms, which contribute to the work on guidelines of transfer pricing while, at the same time, advising corporations on how to avoid taxes through the use of transfer pricing;

 

DG COMP state aid investigations: overview and results

 

An other interesting remark can be found under point 58 at page 19 where the following remark is made:

Recalls that tax rulings should be aimed at providing legal certainty and create legitimate expectations for their beneficiaries; stresses, against a background where national rulings can be challenged by state aid rules at EU level, that a risk exists of mass notifications of individual rulings requests from Member States for advance clearance by the Commission with a view to avoiding legal uncertainties for tax administrations and undertakings;

 

Conclusions and recommendations

 

Under point 68 on page 21 of the report the following is mentioned:

Concludes, looking back to the mandate which it conferred on its special committee and despite the various limitations and obstacles encountered in carrying out its fact-finding missions, that:

       without prejudice to the outcome of the Commission’s ongoing state aid investigations, the information gathered indicates that, in several cases, Member States did not comply with Article 107(1) of the TFEU, since they introduced tax rulings and other measures similar in nature or effect which, by favouring certain undertakings, have distorted competition within the internal market and affected trade between Member States,

       Member States did not fully enforce Article 108 of the TFEU since they failed to formally notify the Commission of all their plans to grant tax-related aid, thereby also infringing the corresponding provisions of Council Regulation (EC) No 659/1999;…,

       Member States did not comply with the obligations set out in Council Directives 77/799/EEC and 2011/16/EU since they did not spontaneously exchange tax information, even in cases where there were clear grounds, despite the margin of discretion left by those directives, for supposing that there may be tax losses in other Member States, or that tax savings may result from artificial transfers of profits within groups,

 

Under point 73 on page 22 the following is stated:

Takes the view that a comprehensive, transparent and effective exchange of tax information and a common consolidated corporate tax base are essential preconditions for achieving a tax system at EU level that complies with and preserves the basic principles of the internal market;

 

Under point 75 the on page 22 following is stated:

Regrets the fact that, despite repeated invitations, several MNCs did not take the opportunity to discuss international tax planning matters with the committee; recommends, therefore, that serious consideration be given to banning these firms from the Transparency Register;

 

Common Consolidated Corporate Tax Base

 

Under point 81 on page 23 the report notes the following:

Expresses its full support for the action plan proposed by the Commission on 17 June 2015 to address tax avoidance and promote fair and efficient corporate taxation in the EU; calls on the Commission to speed up the presentation of legislative modifications for the prompt establishment of a compulsory EU-wide Common Consolidated Corporate Tax Base (CCCTB), which would solve not only the issue of preferential regimes and mismatches between national tax systems, but also most of the issues leading to tax base erosion at European level (in particular transfer pricing issues);

 

Under point 87 on page 23 the following is stated:

Calls also on the Commission, in the absence of any generally accepted definition, to conduct further analyses and studies in order to define harmful tax practices, taking into account the various negative impacts they can have on society, ensure their monitoring and identify more precisely the impact of tax avoidance in the EU and in developing countries;…

 

Code of Conduct on business taxation

 

Under point 88 on page 24 the following is stated:

Calls for an urgent reform of the Code of Conduct on business taxation and of the Group charged with its enforcement, with a view to addressing the obstacles currently in the way of effectively tackling harmful tax practices;

 

Transparency

 

Under the points 96, 97 & 98 on page 26 the following is noted:

96.  Underlines the crucial importance of transparency with a view to increasing the public accountability of MNCs; stresses that it can have a strong deterrent effect and change behaviours, through both the reputational risk for non-compliant firms and the provision of information to the competent authorities, which can then adopt appropriate corrective measures and sanctions;

97.  Reiterates its position that MNCs should disclose in their financial statements, by Member State and by third country in which they have an establishment, a range of aggregated information, including their profit or loss before tax, taxes on profit or loss, number of employees, assets held, etc. (country-by-country reporting); underlines the importance of making this information available to the public, possibly in the form of a central EU register;

98.  Calls, moreover, for more extensive country-by-country reporting to be made available to tax authorities, building on the OECD standard and including more detailed information, such as tax returns and intra-group transactions; calls also for harmonised accounting standards to be developed;

 

Third-country dimension

 

Under point 104 on pages 27 & 28 the following is stated:

Stresses, in particular, the need to ensure that outgoing financial flows are at least taxed once, for instance by imposing a withholding tax, in order to avoid profits leaving the EU untaxed; insists that a system should be put in place to ensure that a confirmation document has to be presented to the tax authorities in order to certify this operation, thereby protecting the single market and maintaining the connection between where profits and economic value are generated and where these are taxed; calls on the Commission, while supporting the promotion by the OECD of a multilateral approach to tax issues aimed at streamlining international tax arrangements and ensuring that profits are taxed in the place where the value is created, to enhance the EU’s role on the international stage by speaking with one voice and to work on the development of a common EU framework for bilateral treaties in tax matters and a progressive substitution of the huge number of bilateral individual tax treaties by EU/third jurisdiction treaties; stresses that this would be the most immediate way to tackle treaty shopping practices;

 

Tax advisers

 

With respect to the juxtaposition of tax advisers the following is stated under points 110 through 112 on page 29:

110.    Points to the problematic juxtaposition, within the same firms, of tax advice, auditing and consulting activities intended to service tax administrations on the one hand, and provide tax planning services for MNCs on the other, exploiting the weaknesses of national tax laws;

111.    Calls on the Commission to come forward with proposals for guidelines for the tax advising service industry and for the setting-up of an EU incompatibility regime for advisors in tax matters and, as appropriate, for banks, in order to ensure that conflicts of interest between services to the public and private sectors are avoided; calls on the Commission to launch an inquiry in order to assess the state of concentration in the sector;

112.    Requests that the Commission assess the possibility of introducing sanctions for firms implementing or promoting tax dodging and aggressive tax planning, in particular with regard to access to funding from the EU budget and any advisory role in EU institutions;

 

Further action at national level

 

Finally we would like to point 116 on page 29, where the following is stated:

Stresses, finally, that the unanimity rule within the Council, by giving each Member State a veto right, reduces the incentive to move from the status quo towards a more cooperative solution; calls on the Commission not to refrain from making use, where appropriate, of Article 116 of the TFUE which stipulates the following: ‘Where the Commission finds that a difference between the provisions laid down by law, regulation or administrative action in Member States is distorting the conditions of competition in the internal market and that the resultant distortion needs to be eliminated, it shall consult the Member States concerned. If such consultation does not result in an agreement eliminating the distortion in question, the European Parliament and the Council, acting in accordance with the ordinary legislative procedure, shall issue the necessary directives (...)’;

 

We would like to emphasize that it should be noted that the above is merely a selection of remarks made in the Draft motion for a European Parliament Resolution that is included in the Draft Report, and should in no way be considered to constitute a summary of the Draft Report. Obviously the 28 page Draft motion for a European Parliament Resolution contains much more remarks than the ones selected above.

 

Perhaps the most important takeaway from the report is that the motion for a European Parliament Resolution on tax rulings and other measures similar in nature or effect does not seem to contain any proposals for regulations that have an immediate and direct impact on the position of multinationals.

 

Click here to be forwarded to the full Draft Report as available on the website of the European Parliament, which will open in a new window.

 

 

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