Taxation of financial instruments in a changing world

Transcription

1 Taxation of financial instruments in a changing world Edoardo Traversa, Professor, Université Catholique de Louvain/Of Counsel, Liedekerke, Brussels Alain Goebel, Partner, Arendt & Medernach Jan Neugebauer, Senior Associate, Arendt & Medernach

2 Agenda 1. Introduction 2. BEPS 3. FATCA 4. Initiatives pertaining to an enhanced exchange of information 5. Initiatives pertaining to the abuse of tax structuring 6. Conclusions 2

3 1. Introduction Opening remarks Many uncoordinated initiatives on tax transparency have been undertaken by the EU, the OECD, the States themselves They all have impacts on: Financial products (insurance, life insurance, investment funds, certificates, hybrids, contracts ) The way these products are structured (marketing rules, distribution countries ) Compliance cost (significant increase to comply with the various obligations) Data protection/privacy Competitiveness of the industry within the EU 3

4 1. Introduction The various initiatives Limitation On Benefits (LOB) clause Base Erosion Profit Shifting (BEPS) action plan OECD Common Reporting Standards (CRS) Parent- Subsidiary directive 2014 (PS 2) Various initiatives Foreign Account Tax Compliance Act (FATCA) Savings directive 2014 (Savings 2) Directive on Admin. Coop 2011 (DAC 1) Savings directive 2003 (Savings 1) Directive on Admin. Coop 2013 Prop. (DAC 2) 4

5 1. Introduction The various initiatives OECD BEPS OECD CRS FATCA DAC1 DAC2 Savings1 Savings2 PS2 LOB Clauses Subject Action plan includes Fight against profit shifting and, Exchange of information Automatic exchange of financial account information Reporting of financial information for US persons only, but including (US) beneficial owners of structures 1) Exchange of information on demand 2) Automatic exchange of information (as from 2015) for income from employment, director s fees and pensions 1) Automatic exchange of information for dividend, capital gains and other income on financial instruments paid to an account 2) Integration of OECD Competent Authority Agreement (CAA) + CRS Certain interest income (distribution and redemption) Extended interest definition to structure products, certain insurance products, all investment funds (except pure equity funds) and «look through» structures End of double non taxation for intragrou p dividend payment within the EU Benefits of DTT limited to «qualified residents» 5

6 1. Introduction Exchange of information vs. international tax abuse/avoidance Type of initiatives Exchange of information International tax abuse/avoidance OECD BEPS X X OECD CRS FATCA DAC 1 DAC 2 Savings 1 Savings 2 PS 2 LOB clauses X X X X X X X X 6

7 1. Introduction Scope of the initiatives per sector Type of initiatives Financial institutions Multinational companies OECD BEPS X X OECD CRS X FATCA X DAC 1 X X DAC 2 X X Savings 1 X Savings 2 X LOB clauses X X 7

8 1. Introduction Timeline of implementation OECD BEPS? OECD CRS? DAC 2? Savings 2 DAC1 FATCA Savings Entry into force (1.07) 1st reporting for half Y2005 Entry into force and 1st reporting for Y 2011 Entry into force (1.07) Entry into force of art.8 and 1st reporting for Y 2014 Entry into force - end of 35% WHT 1st reporting for half Y2014 Entry into force 1st reporting for Y2017 8

9 2. BEPS Action plan on Base Erosion and Profit Shifting Source: OECD Webcast 15 September

10 2. BEPS Action 2: Hybrids mismatch arrangements Neutralize the effects of hybrids mismatch arrangements Arrangement that exploits the different tax treatment in two jurisdictions to produce a mismatch in tax outcomes (essence of BEPS project) Typology Dual-non resident entities (double non taxation of the profits attributable to the country of residence) or dual-resident entities (double deduction of the same payment) Hybrid items of income : deductible in the State of the payer and not taxed in the State of the recipient 10

11 2. BEPS Action 2: Hybrids mismatch arrangements Report issued on 16 September 2014 Consensus on - Ensuring that hybrid instruments and entities are not used to obtain the benefits of treaties unduly Preventing exemption or non recognition for payments that are deductible by the payer - Denying a deduction for a payment that is not includible in income by the recipient or similar - Denying a deduction for a payment that is also deductible in another jurisdiction As OECD calls mostly for changes in domestic law, the outcome of this action seems unpredictable 11

12 2. BEPS Action 2: Hybrids mismatch arrangements 12

13 2. BEPS Action 2: Hybrids mismatch arrangements Impacts on Luxembourg structures: Fund - The loan is ignored under the current legislation of the Fund s jurisdiction as LuxCo 1 is a transparent entity for the Fund s jurisdiction purposes - Interest accruals give rise to a deduction in Luxembourg at LuxCo 1 s level Interest Loan - D/NI mismatch arrangement LuxCo Risks under BEPS - Payer jurisdiction (i.e. Luxembourg) denies deduction - Income inclusion by Investor jurisdiction (i.e. Fund s jurisdiction) LuxCo 2 Solutions? - Make LuxCo 1 opaque for the Fund s jurisdiction tax purposes? - Financing of LuxCo 1 via CPECs instead of a loan? 13

14 2. BEPS Action 4: Interest deduction Limit base erosion via interest deductions While action 2 (hybrid mismatches) was about double deductions, this action concerns the amount of interest that can be deducted Tax Planning schemes targeted by action: Lending from a related entity that benefits from a low-tax regime (or no tax at all) to create excessive interest income deductions for the issuer established in a so called high tax jurisdiction Limit base erosion via other financial payments What one should understand by other financial payments? Payments «that are economically equivalent to interest payments» (see infra expanded EU savings Directive announced) 14

15 2. BEPS Action 4: Interest deduction Future actions Evaluate the effectiveness of domestic specific anti-abuse provisions Thin capitalization rules Interest barrier rules Changes to the transfer pricing guidelines Focus on related party financial transactions, including financial and performance guarantees, derivatives and captive and other insurance agreements Reports to be issued on September 2015 (effectiveness of domestic rules) and on December 2015 (Transfer pricing issues) 15

16 2. BEPS Action 6: Treaty abuse Two types of abuse 1. Abuse of the tax treaty itself (treaty shopping) For example: Transfer of shares to PE set up solely for that purpose in countries that offer preferential treatment to the income from such assets 2. Circumvent domestic tax laws by using treaty benefits For example: Arbitrage transactions that take advantage of mismatches found in the domestic law of one state and that are related to characterization of income For example: Thin capitalisation and other financing transactions that use tax deductions to lower borrowing costs Until now, most treaty abuses have been challenged on the basis of domestic law Commentary on Article 1of the OECD Model Tax Convention generally accepts the application of domestic anti-abuse laws 16

17 2. BEPS Action 6: Treaty abuse Changes proposed to the Model Tax Convention (16 September 2014 Report) Clear statement in treaties title and preamble that contracting states intended to avoid abuses (legal value?) Include specific anti-abuse rules: Limitation-on-benefit clauses (comp. with US Tax treaty model) New tie-breaker rules for determining the treaty residence of dual-resident persons other than individuals Include a general anti-abuse rule : A benefit under this convention shall not be granted ( ) if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit ( ) would be in accordance with the object and purpose of the relevant provisions of this Convention Main issues (comp. with EU law): Burden of proof Artificiality 17

18 2. BEPS Action 6: Treaty abuse Recommendations regarding the design of domestic rules (16 September 2014 Report) Focus on the relation between treaties and specific domestic anti-abuse rules Saving-clause: This convention shall not affect the taxation, by a contracting State, of its residents except with respect to the benefits granted under paragraph 3 of Article 7, paragraph 2 of Article 9 and Articles 19, 20,23, 24 and 25 and 28 Exit taxes: Tax treaties do not prevent the application of domestic tax rules according to which a person is considered to have alienated property for capital gain tax purposes immediately before ceasing to be a resident. Identify the tax policy considerations that countries should consider before signing a tax treaty with another country In particular with no or low tax jurisdiction Evaluate the extent to which the risk of double taxation actually exists Consider whether the other country is willing and able to implement effectively the administrative assistance as described in the treaty Luxembourg has recently signed treaties with Jersey, Kazakhstan, Laos, Mauritius, Seychelles,. 18

19 2. BEPS Action 6: Treaty abuse Fund LuxCo Dividends Dividends Impacts on Luxembourg structures: - Optimization of the withholding tax route - Withholding tax exemption by virtue of the Treaty between ForeignCo and LuxCo - Actual withholding tax between ForeignCo and the Fund s jurisdiction (which is located in another jurisdiction) Risks under BEPS - Application of Foreign / Luxembourg treaty denied Fund Solutions? - Increasing economic substance at LuxCo s level to satisfy the «main purpose test» - Transfer of risks and functions to LuxCo - Presence of Luxembourg AIF / AIFMD gives a non-tax motive 19

20 2. BEPS Action 8-10: Transfer pricing Action 8: Transfer pricing of intangibles Assure that transfer pricing outcomes are in line with value creation Develop rules to prevent BEPS by moving intangibles among group members Recent developments: Report on Action 8 (16 September 2014) Amendments to Chapter VI of Transfer Pricing guidelines Legal rights and contractual arrangements form the starting point for any transfer pricing analysis of transactions involving intangibles (pt. 6.35) While determining legal ownership is an important first step in the analysis, that determination is separate and distinct from the question of remuneration under the arm s length principle (pt. 6.42) Action 9: TP Risk/Capital Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members Action 10: TP High risk transactions Prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties Major impact for financial sector? 20

21 3. FATCA The Goal Enable the U.S. tax authorities to combat U.S. tax evasion by certain U.S. Persons and Obtain from non-u.s. financial institutions ( Foreign Financial Institution or FFIs ) information related to such persons that have direct or indirect offshore accounts or investments The Stick 30% withholding tax is imposed upon certain U.S. source income and principal of an FFI that does not participate / comply with FATCA FATCA - Agreement between Luxembourg and the US The Luxembourg Intergovernmental Agreement ( IGA ) was signed on 28 March 2014 IGA Model 1A (reciprocal agreement), ie Luxembourg Financial Institutions ( Fis ) are to be compliant Annex I details the due diligence obligations for identifying and reporting on i) U.S. Reportable accounts and ii) Non-Participating Financial Institutions (NPFFIs) Annex II details the Luxembourg specific conditions for Deemed-compliant FFIs (e.g. RF, CIV, Sponsored entities) Exempted beneficial owners (e.g. Governmental entities, international organisation, retirement funds) Excluded accounts (e.g. certain pension accounts or life insurance contracts) The IGA is to be transposed into law To be ratified until 30 September 2015 May impact the date of the reporting, but not the periods to report New QI Guidance and Agreement On 27 June 2014, the Internal Revenue Service released Revenue Procedure which provides guidance on the reporting, withholding, account documentation and registration requirements for a non-us intermediary entering into or renewing a qualified intermediary (QI) agreement 21

22 4. Initiatives pertaining to an enhanced exchange of information EU Directives on Administrative Cooperation (DAC 1 and DAC 2) EU Directive on Administrative Cooperation (DAC 1) EU Directive 2011/16/EU of 15 February 2011 on Administrative Cooperation aims to strengthen the cooperation between the tax authorities within the EU and provides for: (i) Exchange of information upon request (ii) Automatic exchange of information (iii) Spontaneous exchange of information The EU Directive 2011/16/EU on Administrative Cooperation in tax matters was implemented into Luxembourg law on 29 March 2013 but the scope was limited to the exchange of information upon request Automatic exchange of information As amended by the law of 26 March 2014, the scope was extended to the automatic exchange of information in Luxembourg but limited to certain categories of revenue: Income from employment Director s fees Pensions The revenue out of scope are: Certain life insurance products Income from immovable property The automatic exchange of information will be applicable as from 1 January

23 4. Initiatives pertaining to an enhanced exchange of information EU Directives on Administrative Cooperation EU amended Directive on Administrative Cooperation ( DAC 2 ) On 12 June 2013, the EU commission proposed to amend DAC 1. The proposed amendments aim at extending the automatic exchange of information as from 1 January 2015 to the following type of income: Dividends Capital gains Royalties All other forms of financial income and account balances Further proposals to the draft of the amending Directive have been made. One of those is adding the OECD Competent Authority Agreement ( CAA ) and the Common Reporting Standards ( CRS ) to extended list of information requested 23

24 4. Initiatives pertaining to an enhanced exchange of information OECD Common Reporting Standard On 13 February 2014 the OECD released its Standards for Automatic Exchange of Financial Account Information The standard has two components: on the one hand, the Common Reporting Standards ( CRS ) and on the other, the Model Competent Authority Agreement ( CAA ) (together the Standards ) The CRS provides for a global standard for automatic exchange of financial account information The CAA is a base agreement. It sets out general definitions, the obligations of the jurisdictions to obtain and exchange information, and the procedures for collaborating on compliance and enforcement Under the Standards, the States should obtain financial information from their financial institutions (e.g. banks, custodians, insurance companies) and automatically exchange that information with the other States on an annual basis, including: All types of investment income (e.g. interest, dividend, income from insurance contracts) Account balances Sales proceeds from financial assets Reportable accounts include accounts held by individuals and entities 24

25 4. Initiatives pertaining to an enhanced exchange of information EU Savings Directives Directive 2003/48/EC ( Savings 1 ) The Savings 1 implies that all Member States should automatically exchange information on interest payments made by paying agents established in their territories to individuals resident in other Member States Luxembourg transposed the Savings 1 by adopting the law of 25 June However, Luxembourg was entitled during a transitional period to levy a withholding tax at a rate of 15% for the first three years (until 30 June 2008), 20% for the following three years (until 30 June 2011), and 35% thereafter in place of information exchange The declaration of the Luxembourg government at the beginning of 2014 announced the end of the transitional period as from 1 January The declaration has been followed by the draft law n 6668 of 18 March 2014 not yet adopted Once the law will be adopted, the Luxembourg will automatically exchange information with other EU Member States in accordance with the Savings 1 The income covered by Savings 1 include: Interest from debt-claims including (cash deposits, corporate and government bonds, other similar negotiable debt securities) Accrued and capitalised interest including for instance zero-coupon bond Income resulting from indirect investment through certain collective investment undertakings 25

26 4. Initiatives pertaining to an enhanced exchange of information EU Savings Directives The amended Savings Directive 2014/48/EU ( Savings 2 ) Provides for an extension of the definition of interest which should cover structured products, certain insurance products, all investment funds and look through through certain structures The EU Members States are required to implement the Savings 2 by 1 January 2017 Savings 1 Savings 2 Paying agent Beneficial ownership Definition of savings income Individuals had the possibility to use an interposed legal person (e.g. foundation) or arrangement (e.g. trust) situated in an EU Member State Possibility for individuals to use interposed legal person or arrangement situated in a non-eu country which does not tax the income Interest income from debt-claims Possibility for individuals to use financial products having similar characteristics to debt claims, but are not legally classified as such Clearer definition of the structures (including trusts, transparent entities ) which have to apply the Directive (i.e. act as «paying agent upon receipt» of the income) in cases where upstream economic operators can t identify beneficial owners, Indicative list of entities Obligation for paying agent upon receipt «Look through» approach Debt claims Securities equivalent to debt claims, because virtually all (95%) of the capital invested is protected, or because the conditions of return on capital, as defined at the issuing date, provide for a link of at least 95% to income otherwise covered by the directive Life insurance contracts including a guarantee of income return or whose performance is for more than 25% linked to income fro debt claims or equivalent income covered by the savings Directive (unless they are long-term pension-like products) Investment funds Only covers relevant income obtained through UCITS. Income from other EU investment funds (non-ucits) are out of scope Inclusion of relevant income distributed/capitalised by all collective investment vehicles, regardless of legal form and technical qualification Relevant income from all non-eu investment funds is also covered. Source: EU Commission 26

27 5. Initiatives pertaining to the abuse of tax structuring Limitations on benefits clauses in Luxembourg s DTT network Limitations On Benefits ( LOB ) clauses are incorporated in Double Tax Treaty ( DTT ) to prevent treaty shopping Reasonable objective tests may be inserted in LOB clauses in order for the requiring company to demonstrate additional connections to the country of residence and be recognized as qualified resident such as article 24 of the DTT concluded between Luxembourg and the USA ( e.g. Ownership/base erosion test, trade or business activity test, authorization by a competent authority) Other LOB clauses may be shorter: The article 29 of the DTT concluded between Luxembourg and Russia states that: It is understood that a resident of a Contracting State shall not be entitled to a reduction of or exemption from tax under this Convention in respect of income arising in the other Contracting State if, as a result of consultations between the competent authorities of the Contracting States, it is established the main purpose or one of the main purposes of the creation or existence of such resident was to obtain the benefits of this Convention which would otherwise not be granted The article 29 of the DTT concluded between Luxembourg and Poland states that the benefits of the DTT do not apply in case of artificial arrangement It is noteworthy that Action 6 of the OECD BEPS action plan dealing with anti treaty shopping measures considers limitation on benefits clause as one of the tools to circumvent treaty abuses and harmonize bilateral tax conventions on this matter 27

28 5. Initiatives pertaining to the abuse of tax structuring EU Parent-Subsidiary Directives Foreign Fund The EU Parent-Subsidiary Directive 2011/96/EU (the Directive ) as transposed in article 166 of the Luxembourg tax law exempts dividends and other profit distributions paid by subsidiary companies to their parent companies from withholding taxes and eliminates double taxation of such income at the level of the parent company Dividends Interest Eligible LuxCo 1 Eligible ForeignCo Hybrid Instrument The Directive was amended on 8 July 2014 by the new EU Parent-Subsidiary Directive 2014/86/EU (the PS2 ) in order to neutralize hybrid mismatches (i.e. hybrid financing instruments that have characteristics of both debt and equity) which could result in double non-taxation The PS2 provides that the Member State of residence of a parent company should not allow companies to benefit from the tax exemption applicable to received distributed profits, to the extent that such profits are deductible by the subsidiary of the parent company The PS2 should be implemented into domestic law by the EU members States before 1 January

29 6. Conclusions What does this whole mean to your business? Dividends / capital gains OffCo / Fund / LuxCo Dividends Dividends LuxCo PS? LOB? FATCA? CRS? Savings 1/2? DAC 2? 29

30 6. Conclusions What does this whole mean to your business? Interest Payments OffCo / Fund / LuxCo Interest Interest LuxCo LOB? FATCA? Savings 2? CRS? 30

31 6. Conclusions What does this whole mean to your business? Insurance OffCo / LuxCo Insurance Premium InsuranceCo Interest BEPS? LOB? FATCA? Savings 2? CRS? 31

32 6. Conclusions What does this whole mean to your business? Derivatives/hybrids OffCo / Fund / LuxCo Equity Return Equity Return / Miscellaneous Interest LuxCo Savings 2? DAC 2? FATCA? Savings 2? CRS? 32

33 Contact us Edoardo Traversa Professor, Université Catholique de Louvain/Of Counsel, Liedekerke, Brussels Tel: /98 e.traversa@liedekerke.com Alain Goebel Partner, Arendt & Medernach Tel: alain.goebel@arendt.com Jan Neugebauer Senior Associate, Arendt & Medernach Tel: jan.neugebauer@arendt.com 33 Arendt Arendt Financial Law Law Forum Forum October