Apple ruling drives IFA Congress day two as EU, US officials trade sharp blows

Transcription

1 All eyes yesterday were glued on the afternoon session at the IFA Congress, the Bloomberg BNA reception that witnessed a face-to-face duel between top EU and US Treasury officials on the former's highly controversial Apple tax ruling. Mr Karl Soukup (Director, Directorate General Competition, European Commission) strongly defended the Commission's ruling holding Apple in violation of EU State aid laws and imposing a USD 14 billion penalty. Mr Soukup explained, in brief, how the Commission attributed profits to Apple's Ireland branch. In its press release accompanying its ruling against Apple, the Commission had explained Apple's arrangement/structure as follows: Under the agreed method, most profits were internally allocated away from Ireland to a "head office" within Apple Sales International. This "head office" was not based in any country and did not have any employees or own premises. Its activities consisted solely of occasional board meetings. Only a fraction of the profits of Apple Sales International were allocated to its Irish branch and subject to tax in Ireland. The remaining vast majority of profits were allocated to the "head office", where they remained untaxed. Mr Soukup emphasized a few points that played a decisive role in the Commission s arriving at the conclusion that it did: 1. Only board meetings were held at the head office, and that, too, once every few months. 2. No substantial activity took place in the head office. 3. The head office was certainly not exploiting the European market. In essence, Mr Soukup argued that "nothing happened in the head office". Mr Robert Stack, Deputy Assistant Secretary (International Tax Affairs) US Treasury, fired back strongly and minced no words in his scathing criticism of the Commission s ruling. He started by posing a fundamental question: should Ireland have been allowed to tax more than what is attributable from an FAR (functions, assets and risk) analysis? He warned the European Union that, "when the halo fades, it will be perceived as a colossal blunder by the European Commission". He also expressed concern that three out of the first four cases/investigations conducted by the European Union with regards to State aid law violations

2 concerned US companies. He accused the European Union of "retroactively" applying a new law to individual companies. Mr Stack, alluding to the post-beps scenario, stated that a lot of structures that are currently being talked about and targeted will no longer exist. He termed the EU decision an extraordinary rejection of the arm's length standard", especially since the European Union has endorsed BEPS. He then asked, rhetorically, "what is Europe telling the rest of the world about investing in Europe? Is it telling us that we will make up laws as we go along?" While acknowledging the fact that some of the US companies being investigated by the European Union might be paying low taxes, Mr Stack nonetheless asserted that rules should apply equally to those we "vilify" and those we do not. He then added that "it would have been cowardice on our part if we did not show up and ask tough questions... although the actors might be unpopular". Other panellists too seemed to support the American view point. Mr Pascal opined that, personally, he doubted the legality of the EU decision on the basic premise that it interfered with the taxing powers of States. He added that, in said ruling, "advantage" and "selectivity" have been used in the same breath, which, according to him, is against European Commission jurisprudence. He also termed as incorrect the Commission's interpretation that States cannot give a treatment more favourable to MNCs than they do to domestic companies. The panel noted that, after Ireland, Luxembourg is now in the cross hairs, with big cases Amazon, McDonald's, Fiat etc. lined up. In response to a question from an audience member on how Ireland could recover USD 14 billion from Apple in the absence of any domestic law provision, Mr Soukup had a terse reply: the EU decision is binding on Ireland and is a legal act! In his concluding remarks, Mr Soukup stated that the Commission was not challenging the Irish tax laws and they are not judging how Apple structured its business. He invited the audience to read the decision carefully (the ruling is yet to be released publicly). His final quip: "The judgment is based on economic reality we are not living in a time warp". Seminar D IFA/EU: Recent EU Developments Chair: Pasquale Pistone (Italy) Panel Members: Robert Danon (Switzerland), Carol Dunahoo (United States), Richard Lyal (European Union) and Emmanuel Raingeard (France) Secretary: João Nogueira (IBFD)

3 The panel on recent EU developments focused on the two most critical developments taking place in the region, namely, the recent developments relating to EU State aid investigations, including specifically the Apple case and the anti-tax avoidance (ATA) package released in January of this year. Explaining the concept of State aid, Mr Richard Lyal, of the European Commission, stated that a State aid assessment would essentially involve four elements: i) whether there is an advantage from the State; ii) whether the advantage is selective ; iii) whether it was granted from State resources; and iv) what is its impact on competition and on trade between Member States within the European Union. He also traced some of the precedents from the European Commission on State aid issues, such as [C-173/73] Italy v. Commission, [C-182/03 and C-217/03] Forum 187 and [C-66/02] Italy v. Commission. Mr Lyal further highlighted another example of an EU State aid case, involving a Gibraltar bespoke company tax system. He cited it as an odd case and added that, Gibraltar being a small country, one is able to play with the tax system. He also added, however, that if an advantage given by a country is open to everyone, then it would not be regarded as State aid. In this regard, he cited export tax reliefs granted to all exporters as an example. The panel thereafter discussed various legal issues relating to the interpretation of EU State aid. The panel also discussed the McDonald s case, involving a disregarded PE. The panel invited a special intervention from renowned tax expert Mr Philip Baker (QC) to explain the case of Apple involving EU State aid. Mr Baker shared with the audience that it would take some more time before the decision is released. He explained Apple US s structure, involving two Irish incorporated entities (which were tax residents of the United States) and two branches in Ireland. These branches carried on the activities of the manufacture of specialized computers and procurement, sales and distribution activities, respectively. He stated that Apple obtained advisory opinions on profit computation from Irish revenue authorities back in 1991 and 2007, which is now being held as State aid by the European Commission. Mr Baker raised three questions for audience to ponder: a) Does the decision pass a reality check? (b) How does the decision deal with the contribution from the thousands of staff in California? (c) Is the Commission in a time warp? The panellists also explained various blocks of the ATA package, which includes the anti-tax avoidance directive (ATAD), recommendations on tax treaties, a revised administrative cooperation directive and communication on the external strategy. The panel Chair, Mr Pasquale Pistone, gave an overview of the status of each of the 15 BEPS Action items vis-à-vis areas covered under the ATA package. He highlighted the fact that BEPS Action 1, relating to the digital economy, and Actions 8-10, relating to transfer pricing, have not been implemented in the ATAD.

4 Mr Pistone also highlighted measures that are included in the ATAD but are not being considered under BEPS, such as exit taxes and domestic measures to secure corporate tax bases (article 3 of the ATAD). Ms Carol Dunahoo (Baker & McKenzie) raised US concerns in the wake of the Apple case. At the outset, she stated that there is a rare degree of consensus between both ruling parties in the United States, both houses of Congress, the White House, the Treasury Department, companies and advisors. She explained that the Apple case is seen as disproportionately targeting US-based companies, an unfair retrospective change in the interpretation of both ALP and EU State aid rules and an unprincipled action by a region of territorial regimes. Ms Dunahoo also added that it is seen as an incursion on the US tax base. Narrating the reactions from the United States, Ms Dunahoo expressed a view that the real drivers might not be EU State aid law or complaints regarding the US tax system but other factors, such as the perception that many US companies enjoy lower effective tax rates or the desire by high-tax Member States to stamp out tax competition within Europe. She also suggested that other drivers could include the desire of large market economies to move the international corporate income tax system towards market- or consumption-based tax, or even populist political initiatives responding to popular pressure for companies to pay their fair share of tax. Mr Lyal explained the ATA package and ECJ case law on abuse and commented that the BEPS-project has given an opportunity to codify case laws. The panel discussed the impact of the ATA package on third countries. The panel also noted the lack of harmonization arising due to the ATA package and opined that inconsistent interpretations could give rise to State aid issues as well. More specifically, in the US context, Ms Dunahoo stated that the US implemented many anti-beps provisions long before the OECD/G20 project began. Subject 2 The notion of tax and the elimination of international double taxation or double non-taxation General Reporter: Marjaana Helminen (Finland) Chair: Adolfo Martin Jiménez (Spain) Panel Members: Patricia Brown (United States), Wei Cui (People s Republic of China), Johanna Hey (Germany) and Luis Eduardo Schoueri (Brazil) Secretary: Ricardo Garcia Antón (Spain) Planned intervention: Krister Andersson (Sweden) The key take-away from this panel discussion is that there is no universal notion of tax or tax on income/capital prevalent in the world today. The panel noted different practices being followed in different countries relating to the scope of article 2 of the OECD Model and new levies/charges introduced by governments, which may or may not amount to income tax under tax treaties. Such levies, the panel opined, would lead to serious risks of economic double

5 taxation. The panel also noted that there is diversity in policies and interpretations, and that hybrid taxes cause further problems. The panel noted that domestic tax reforms on the levy of new taxes are often guided by domestic interest, regardless of tax treaties. More specifically, the panellists expressed the opinion that BEPS has created additional tensions between national tax systems and tax treaties. They suggested that the message under BEPS seems to be that the fight against double non-taxation could legitimize all kinds of new levies disregarding tax treaties. One of the panellists also expressed concern that, post-beps, there is a risk that income could be taxed in the wrong place. Thereafter, the panel raised a pertinent question, namely, whether there is a need to refine concepts of double taxation, double non-taxation by working on concept of tax, tax on income/capital. Elaborating on the general concept of tax, the panel observed that, in many countries, there are trends to meet budgetary needs not with traditional taxes but with earmarked levies and user fees. With non-tax revenues likely to grow (as a percentage of budgets) for domestic political and policy reasons, the growing significance of such levies will have bearings on cross-border transactions as well, the panellists explained. They noted that special levies are very similar to taxes, but the main difference is that they are not levied for general public purposes; instead, the revenue flows into special funds. Further, explaining the same, it was mentioned that special levies are levied only from certain groups/industries and are a way to circumvent classification as tax, often as a result of domestic constitutional restrictions on the power of taxation. They listed some examples of special levies, including the European Bank Levies, Financial Crisis Responsibility Fees and Brazilian contributions. A number of specific examples from Brazil and India s equalization levy were also discussed in this regard. On the other hand, the panel also noted the example of the Indian education cess, which was introduced with the specific purpose of meeting the cost of education in the country but is regarded as an income tax for treaty purposes. The panel further discussed another interesting aspect regarding the treatment of imposition on behalf of a contracting state/ political subdivisions/local authorities. Levies on behalf of religious bodies and supranational/international organizations are not covered, except when explicitly included, observed the panel. For example, the Canada-Kuwait and Kuwait-Spain tax treaties provide for the Islamic contribution, zakat, while most treaties concluded by Denmark, Finland and Sweden, among others, provide for church taxes. However, the panellists opined that the

6 phrase on behalf of a contracting state cannot be interpreted as on behalf of any public purpose/public good. The next aspect discussed by the panel was the treatment of social security contributions. The panellists opined that, in principle, social security taxes should be encompassed within the article 2(2) definition as taxes imposed on elements of income or on the total amount of wages or salaries. However, it was pointed out that some countries, like the United States, explicitly exclude social security taxes from article 2(2), whereas some tax treaties specifically include social security taxes as covered taxes to avoid double taxation. In general, the methods for eliminating double taxation under article 23 refer to the scope of taxes covered under article 2. Exemption/credit is given in the residence country against taxes covered under article 2 if the right to impose covered taxes is allocated to the other contracting state. In this regard, the panel noted exceptions to these credit rules. For example, Finland s experience of involving treaty methods for the elimination of taxation may be exclusive and may narrow the scope of credit under domestic law. The other example given was of the church tax, kirkollisvero, listed in the Japan-Finland tax treaty, which does not fall within the scope of foreign corporation tax and is thus not creditable against the Japanese corporation tax. Further, it was elaborated that the Argentina-Germany tax treaty provides credit only for German income tax, despite the inclusion of other taxes (e.g. the local trade tax) in article 2. The panel also pointed out examples of tax treaties wherein certain levies were included in article 2 only for tax credit purposes (e.g. the 2008 Netherland-United Kingdom tax treaty). Another example given was the Japan-Switzerland tax treaty, wherein municipal taxes are normally included in article 2 and foreign taxes paid can be credited against them. The panel also discussed the specific example of the Italy United States approach, wherein a practical solution was found by the two states to avoid the double taxation. Italy introduced IRAP, a local tax on trading income that disallowed most business deductions. However, under US domestic law, IRAP would not have been a creditable net income tax. As a practical solution, the tax treaty effectively created a net income tax by giving credit for the amount of tax that would have been imposed if interest and labour expense deductions had been allowed. The panel deliberated on the concept of tax in the context of BEPS, noting that most actions under BEPS narrow the definition of double non-taxation but do not take into account the other effect of taxes on income. This, it was opined, results in BEPS applicability even if there was no double non- taxation.

7 In addition, the panel discussed India's equalization levy and the government s position that it is not an income tax (i.e. is outside the scope of tax treaties and is not entitled to treaty benefits).the panel also discussed the United Kingdom s diverted profits tax (DPT) and noted HMRC s position that the DPT is not a corporation tax. The panel raised an important question as to whether the DPT could be considered a substantially similar tax under article 2 and hence be covered under the treaty. One of the panellists also raised the question of whether the DPT is contrary to treaty obligations. The panel also noted developments in the United States in the wake of its revision of its Model Convention, wherein changes have been made in respect of withholding tax rates on specified income streams where the beneficial owner is entitled to the benefits of a special tax regime. The panellists noted that the detailed special tax regime provision seems to set out the US concept of what constitutes a net income tax system and questioned whether it affect[s] the scope of covered taxes. On the topic of taxes on capital, the panel noted that there is little elucidation in the OECD Model or Commentary regarding what is a tax on capital for treaty purposes. Taxes on elements of capital are taxes on capital, they agreed. They explained that many actual bilateral tax treaties do not cover taxes on capital for example, Australia, Japan and Korea have made explicit reservations, while Singapore and the United Kingdom, among others, have not included capital taxes in tax treaties as a matter of policy. Further, countries like China and Russia have chosen not to include capital taxes in most treaty coverage, even when they have no declared position and have taxes on capital. In conclusion, the panel recommended the insertion of article 2, in full, in tax treaties. It also suggested that there is a need to work on the interconnection between article 2, article 4 and article 23.