KPMG Global Tax Webcast EU State Aid Developments. Wednesday 2 November 2016, 9-10am EDT

Transcription

1 KPMG Global Tax Webcast EU State Aid Developments Wednesday 2 November 2016, 9-10am EDT

2 Notices The following information is not intended to be written advice concerning one or more Federal tax matters subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 2

3 Speakers Manal S. Corwin, Principal and National Leader, International Tax, KPMG LLP (U.S.) Vinod Kalloe, Head of International Tax Policy, KPMG Meijburg Robert Van der Jagt, Chairman, KPMG s EU Tax Centre 3

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5 Agenda Introduction EU State aid legal base and preliminary results EU State aid cases in detail U.S. reactions to State aid investigations 5

6 EU State aid legal base and preliminary results Vinod Kalloe, Head of International Tax Policy, KPMG Meijburg

7 EU state aid Legal base TFEU European commission Procedural rules Recovery Courts Article 107 (1) Aid granted by a Member State which distorts or threatens to distort competition by favoring certain undertakings incompatible with the internal market. Article 108 The European Commission keeps constant review of State Aid BEPS five focus: 1. Tax rulings 2. Transfer pricing 3. Discretionary powers 4. Attracting foreign direct investment Council regulation 659/1999 Preliminary investigation Formal investigation procedure Third party comments The final decision Calculation Commission method Company can claim legitimate tax deductions: Losses carried forward Foreign tax credits Patent box? Others? Judicial review For companies with direct and individual concern General Court Court of Justice Impact on comparable cases? Primacy EU law over national tax laws European Commission mandate Overriding national confidentiality laws Overriding national statute of limitations Final decision 7

8 EU state aid investigations tax ruling practices: Results so far? HQ EU service company Dual non-resident Reverse hybrid U.S. branch EU branch EU Intermediates EU Subsidiaries 8

9 Tax rulings and OECD transfer pricing guidelines HQ EU service company Dual non-resident Reverse hybrid U.S. branch EU branch EU Intermediates 1. Tax rulings provide certainty in advance 2. OECD Transfer Pricing Guidelines application leading to a reliable approximation of a market based outcome EU Subsidiaries 9

10 Transfer prices that do not reflect economic reality HQ 3. Finance companies LUX (2015) LUX, NL, FRA (2003) EU service company Dual non-resident Reverse hybrid U.S. branch EU branch 6. Royalty payment LUX (2014), NL (2015) EU Intermediates 7. Holding companies: LUX 1929 and BCC ( ) 8. Holding, management and mixed companies SWI (2007) 4. Manufacturing: NL (2015) 5. Group synergies: BEL excess profit (2016) EU Subsidiaries 10

11 Profit allocation methods that do not reflect economic reality HQ EU service company Dual non-resident Reverse hybrid 9. Sales profit allocation IRE (2016) U.S. branch EU branch EU Intermediates EU Subsidiaries 11

12 Inconsistent application of national law, giving rise to a discretionary double non-taxation HQ EU service company Dual non-resident Reverse hybrid 10. Hybrid branch LUX/U.S. (2015) U.S. branch EU branch 11. Internal hybrid financing LUX (2016) EU Intermediates EU Subsidiaries 12

13 Hybrid cross-border mismatches and notional deductions? HQ EU service company Dual non-resident Reverse hybrid 12. Entities described in cases NL, LUX, IRE (U.K.-LP and NL-CV) (LUX-LP) (IRE-DNR) U.S. branch EU branch 13. Notional interest deductions for finance branch? 15. Interest Free Loan? EU Intermediates 14. Notional deductions on royalty free licenses? EU Subsidiaries 13

14 Recent State aid cases: Apple and GDF Suez Robert Van der Jagt, Chairman, KPMG s EU Tax Centre

15 Case against Ireland regarding Apple On August 30, 2016, the European Commission announced its decision that Ireland granted State aid by providing tax opinions in 1991 and 2007 concerning the tax allocation of profits of the Irish branches of two Apple subsidiaries The State aid decision orders Ireland to calculate and recover additional taxes from Apple for the period June 2003 through September 2014 The EU Commission estimates the State aid to be Euro 13 billion plus interest The actual amount subject to recovery is to be calculated by Ireland in accordance with the European Commission's guidance Both Apple and the Irish government disagree and have announced to appeal the decision 15

16 Case against Luxembourg regarding GDF Suez On September 19, 2016, the European Commission announced that it has opened an investigation into Luxembourg's tax treatment of the GDF Suez group (now Engie). The Commission has concerns that several tax rulings issued by Luxembourg may have given GDF Suez an unfair advantage over other companies. Subject of the investigation is whether the treatment of the same financial transaction between companies of GDF Suez in an inconsistent way, both as debt and as equity, constitutes illegal State aid. Source: EU Commission Press release (IP/16/3085), September 19,

17 U.S. reactions to State aid investigations Manal S. Corwin, Principal and National Leader, International Tax, KPMG LLP (U.S.)

18 U.S. Treasury and Congressional reactions February 11, 2016 Letter from U.S. Treasury Secretary Lew to EC President Juncker expressing concerns about EC state aid investigations March 2, 2016 Letter from U.S Treasury to Senate Finance Committee Chairman Hatch regarding application of section 891 to EC s state aid investigations August 24, 2016 U.S. Treasury White Paper on EC s state aid investigations outlining Treasury s concerns with the EC s approach September 15, 2016 Notice dealing with the treatment of foreign initiated adjustments and referencing State Aid 18

19 U.S. Treasury letter to Hatch on Section 891 Treasury is considering, at Mr. Hatch s urging, whether as a result of the EC s state investigations U.S. corporations are being subject to discriminatory taxation in violation of I.R.C. section 891. I.R.C. 891 section provides: Whenever the President finds that, under the laws of any foreign country, citizens or corporations of the United States are being subjected to discriminatory or extraterritorial taxes, the President shall so proclaim and the rates of tax imposed by sections 1, 3, 11, 801, 831, 852, 871, and 881 shall, for the taxable year during which such proclamation is made and for each taxable year thereafter, be doubled in the case of each citizen and corporation of such foreign country. Similar concerns expressed by other members of Congress, e.g., Charles W. Boustany Jr. and Ron Wyden 19

20 U.S. Treasury White Paper on state aid The EC s approach is new and was unforeseeable by the relevant companies and EU Member States. Imposing retroactive recoveries under this new approach sets a bad precedent for tax policymakers around the world. The EC s approach undermines tax treaties, globally accepted transfer pricing principles, and the BEPS project. 20

21 Notice Provides that certain transactions aimed at separating earnings from taxes paid in a later year as a result of a foreign initiated adjustment will be treated as foreign tax credit splitter arrangements under I.R.C. section 909 Cites the EU state aid cases as an example of a situation in which a foreign-initiated adjustment may arise: The Treasury Department and the IRS are aware that, in anticipation of a large foreign-initiated adjustment that relates to a prior taxable year, a taxpayer may take steps to separate the additional payment of foreign income tax from the income to which it relates. Such foreign-initiated adjustments may arise under European Union (EU) State aid law, to the extent EU State aid payments result in creditable foreign taxes. 21

22 Today s Presenters Manal S. Corwin mcorwin@kpmg.com Robert Van der Jagt VanderJagt.Robert@kpmg.com Vinod Kalloe Kalloe.Vinod@kpmg.com 22

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