The rapid adoption in 2016 of two major tax directives and the publication of an ambitious Action Plan on VAT reflect the tenacious new approach of the European Union (EU) to improving corporate tax transparency and tackling value-added tax (VAT) fraud. In the same way that the BEPS initiative of the G20/Organisation for Economic Co-operation and Development (OECD) has flourished following countries’ increased willingness to work collaboratively to modernize the international framework for taxing the profits of multinational enterprises, the public focus on tackling tax avoidance has drawn EU Member States to act together.
Cooperation is now considered by the EU Member States as far more necessary, and action at the EU level far less a challenge to fiscal sovereignty.
The EU’s collaborative, coordinated approach to tax generally comprises the following three key focus areas:
- Finding cross-border solutions to cross-border challenges
- Addressing excessive social market imbalances
- Developing and applying tax policies in a way that helps growth and addresses fairness
As we close out 2016 and look ahead to 2017, we should expect to see multinational taxation, and corporate transparency in particular, remain high-priority items on the EU’s direct tax agenda. On the indirect tax side, the focus will likely be on proposals related to the Commission’s Action Plan on VAT, which was adopted on 7 April 2016.
Direct tax developments
The ATA Directive is adopted
On 12 July 2016, ECOFIN formally adopted the ATA Directive. Unanimous political agreement on the directive had been reached on 21 June 2016 following several months of discussions and compromises.
The ATA Directive establishes a minimum standard with respect to five areas: interest deductibility limitation, a general anti-abuse rule (GAAR), controlled foreign company rules, hybrid mismatches and exit taxation.
The directive’s provisions should be transposed into Member States’ national laws no later than 31 December 2018, and should take effect as of 1 January 2019. Derogations apply to the interest deductibility limitation rule and the exit taxation rule.
Member States that have national targeted rules preventing BEPS risks that are equally effective to the interest deduction limitation rule can continue applying these rules until the OECD has reached an agreement on a minimum standard with regard to OECD BEPS Action 4, but no later than 1 January 2024. The exit taxation rule needs to be transposed in Member States’ national laws no later than 31 December 2019, and should take effect by 1 January 2020.
ECOFIN has further requested that the Commission put forward by October 2016 a proposal on hybrid mismatches involving third countries that provides for rules consistent with, and no less effective than, the OECD BEPS recommendations under Action 2. ECOFIN expects that an agreement on such a directive will be reached by the end of 2016.
CbCR Directive is adopted
On 25 May 2016, ECOFIN unanimously voted in favor of the amendments to the existing EU directive on exchange of information (Directive 2011/16/EU), which will implement Action 13 of the OECD’s BEPS recommendations on country-by-country reporting (CbCR) within an EU context (the CbCR Directive).
The CbCR Directive requires multinationals to report information on revenues, profits, taxes paid, capital, earnings, tangible assets and the number of employees on a country-by-country basis. This information must be reported for fiscal years starting on or after 1 January 2016 to the tax authorities of the Member State where the group’s ultimate parent entity is tax resident. If the ultimate parent entity is not resident in the EU, the report would have to be filed through a surrogate parent (EU or non-EU based) or the EU-based subsidiaries. The CbCR Directive gives Member States the option to either require secondary filing for fiscal years starting on or after 1 January 2016 or to defer that obligation to financial years starting on or after 1 January 2017.
The CbCR Directive will require EU Member States to implement a CbCR obligation in their national legislation in line with the requirements of the directive within 12 months from the date of its entry into force. The first reports will have to be filed within 12 months from the end of the fiscal year to which they relate. Member States will have to exchange them within 3 months thereafter, except for the reports relating to fiscal years starting on or after 1 January 2016, where the term would be 18 months after the end of the fiscal year. The Commission will adopt the necessary practical arrangements for upgrading the existing common platform for automatic exchange in the EU to fit the needs of the new requirements.
Proposal for public reporting of tax-related information
On 12 April 2016, the Commission published a draft directive (the Draft Directive) that, if adopted, would amend Directive 2013/34/EU, the EU Directive regarding the disclosure of income tax information (the Accounting Directive).
The proposed amendments to the Accounting Directive would require large multinational companies operating in the EU to draw up and publicly disclose reports on income tax information, including a breakdown of profits, revenues, taxes and employees. The information would be reported separately for each Member State and each jurisdiction that is listed on a “Common Union list of certain tax jurisdictions” and on an aggregated basis for the rest of the world. The “Common Union list of certain tax jurisdictions,” i.e., the specific tax jurisdictions to be included, is still to be determined. These reporting obligations would apply to both EU and non-EU multinational companies doing business in the EU.
The Draft Directive is separate from the new CbCR Directive (described above), which will implement the OECD’s BEPS Action 13 recommendations regarding non-public CbCR. It is also different from a new EU directive, adopted by ECOFIN in December 2015, that will require Member States to automatically exchange information related to cross-border tax rulings and advance pricing arrangements (that information will not be made public).
Because the Draft Directive is considered to relate to financial reporting obligations in respect to income taxation and not to the harmonization of taxes, it does not need ECOFIN’s unanimous consent in order to be adopted. The Draft Directive will instead be considered for adoption under the “ordinary legislative procedure,” which is intended to give the same decision-making weight to the Council and the European Parliament. Furthermore, ECOFIN can make its decision through a qualified majority, which would be met if 55% of Member States vote in favor (in practice this means 16 out of 28) that represent at least 65% of the total EU population.
State Aid developments
The Commission explains State Aid and tax rulings investigations in working paper and notice
On 3 June 2016, the Commission’s Directorate-General for Competition (DG Comp), which is vested with special legal competence in relation to State Aid law matters, published a working paper that summarizes and explains its investigations into tax rulings by highlighting the history and procedures followed during these still ongoing examinations. It also presents some guiding principles on when a tax ruling may give rise to State Aid.
DG Comp indicated that it continues to focus in particular on transfer pricing rulings when the Commission believes there could be a manifest breach of the arm´s-length principle.
The working paper followed a more general Notice on the notion of State Aid (Notice) that the Commission published on 19 May 2016 as part of the State Aid Modernization package. The Notice is intended to assist public authorities in identifying when, in particular, public investments do not entail State Aid under article 107(1) of the Treaty on the Functioning of the European Union.
The Notice also contains general guidance on the scope and definition of the EU State Aid rules as they are applied by the Commission.
Ireland decision released
On 30 August 2016, the Commission released its decision in its investigation into the (alleged) State Aid issues associated with a multinational company’s (MNC’s) tax arrangements agreed with the Irish Government. The Commission concluded that two tax rulings issued by Ireland have substantially and artificially lowered the tax paid by the MNC in Ireland since 1991.
The Commission has ordered that Ireland must now recover the unpaid taxes in Ireland from the MNC for the years 2003 to 2014 of up to €13 billion, plus interest. The Irish Government has confirmed that it will seek Cabinet approval to appeal the decision, as it disagrees profoundly with the Commission’s decision.
More details provided in Luxembourg cases
On 9 June 2016, the Commission published its final decision in the State Aid case relating to Luxembourg, rendered on 21 October 2015, in which the Commission determined that Luxembourg had granted illegal State Aid to a Luxembourg-resident company that forms part of an MNC group. The Commission found under the EU State aid rules that Luxembourg granted a selective tax advantage in agreeing to transfer prices that allegedly deviate from market practices.
The Commission ordered Luxembourg to recover the alleged advantage from the taxpayer (consisting of the tax benefit that the taxpayer has received since 2012). Luxembourg and the MNC have filed appeals.
In a separate case relating to Luxembourg, the Commission on 6 June 2016 published a non confidential version of the opening decision in which it formally informed Luxembourg of its preliminary conclusion that two rulings granted to an MNC involving a Luxembourg company with US and Swiss branches constitute State Aid. The investigation, first announced in December 2015, focuses on the exemption granted in respect of profits attributable to the US branch and, in particular, the fact that these profits are not currently subject to tax in the United States, which was disclosed and analyzed in detail in one of the rulings.
Panama Papers inquiry and other transparency initiatives
On 8 June 2016, the European Parliament agreed to set up an inquiry committee into the Panama Papers revelations. The committee, also known as PANA, is set to investigate whether EU laws on money laundering, tax evasion and tax fraud were breached in the structures revealed by the leak.
On 21 June 2016, TAXE 2 adopted its report containing recommendations for making corporate taxation fairer and clearer. The report, which was also approved in the Parliament Plenary session on 7 July 2016, calls for an EU register of beneficial owners of companies, a tax havens blacklist, sanctions against noncooperative tax jurisdictions, action against abuse of “patent box” regimes, a code of conduct for banks and tax advisors, tax good governance rules in EU trade agreements, an EU Common Consolidated Corporate Tax Base (CCCTB) and a withholding tax on profits leaving the EU.
On 5 July 2016, the Commission published a communication on further measures to enhance transparency against tax evasion and avoidance.
Indirect tax developments
Commission Action Plan on VAT
On 7 April 2016, the Commission adopted a wide-ranging Action Plan on VAT that sets out the Commission’s vision for modernizing the EU VAT system so that it can better support the Single Market, facilitate cross-border trade, and keep pace with the digital and mobile economy. The Action Plan addresses four main areas of concern.
The first is the removal of VAT obstacles to e-commerce in the Single Market, which is an essential part of the Commission’s Digital Single Market strategy. The Commission plans to put forward a proposal for a directive by the end of 2016 that will include, among other provisions, an extension of the one-stop shop used for e-services to cover business-to-consumer (B2C) distance sales of goods, together with the removal of the VAT exemption at import for small consignments imported from third countries. Given that ECOFIN was prepared to adopt a previous proposal by the Commission to modernize the EU VAT rules in respect of e-services, it is not unreasonable to expect that this proposal might make progress in ECOFIN.
The Action Plan’s second focus area is the need for further measures to reduce the VAT gap (the difference between VAT collected and the theoretical expected revenue). The Commission has put forward 20, mainly non-legislative, measures designed to enhance cooperation between tax administrations (both within the EU and with third countries), improve the efficiency of national VAT administrations and improve VAT compliance by businesses. In this context (although not part of the Action Plan), it is worth noting that two Member States, Austria and the Czech Republic, have requested that the Commission make a proposal to ECOFIN that would enable them to introduce a generalized reverse charge mechanism. The Commission has previously resisted such requests, but there are signs that it may now be prepared to make such a proposal (it would need to be unanimously adopted by ECOFIN).
The third and most ambitious area addressed in the Action Plan is the Commission’s intention to present in 2017, proposals for a “definitive” VAT regime for intra-community business-to-business trade based on taxation in the country of destination and the principle that the supplier should charge VAT both on domestic and intra-community supplies. This would, as with the proposed reform of B2C sales, entail the use of a one-stop-shop mechanism for the reporting and collection of VAT charged. This would re-establish the self-policing nature of VAT whereby the tax is charged at every stage, and would thus help to eliminate the considerable fraud that takes place under the current “transitional” regime in which tax is not charged on intra-community supplies.
The final area covered by the Action Plan is the question of reduced rates. The Commission points out that under a definitive system based on taxation in the country of destination, there would be scope for Member States to have far greater autonomy in deciding their policy on VAT rates and, in particular, on reduced VAT rates. The Commission has acknowledged, however, that this is a highly political issue and that it would wish to obtain a political mandate from ECOFIN before making an appropriate proposal in 2017. In the meantime, the Commission has launched a public consultation on the issue of reduced rates for electronically supplied publications, with a view to making a proposal on this specific matter in 2016.
Other indirect tax measures
- Financial Transaction Tax (FTT): In 2016, one Council working party meeting took place on the proposal to introduce an FTT by enhanced cooperation in 10 Member States (Estonia formally withdrew from the group of participating countries in March 2016). However, the 10 Member States appear unable to agree on a number of issues, so there is no immediate sign of any adoption of this proposal.
- Tobacco taxation: In 2015, the Commission presented a report to ECOFIN on the directives governing the structure and rates of excise duty applied to manufactured tobacco. Following ECOFIN’s discussion of this report, the Commission has been invited to consider what, if any, legislative changes are necessary.
- Alcohol taxation: In a similar vein, the Commission intends to present a report to ECOFIN on the structure of excise duties applied to alcohol and alcoholic beverages to enable Member States to make any necessary changes.
This article is included in issue 18 of EY´s Global tax policy and controversy briefing.