Developments in Europe Impact on US MNEs

Transcription

1 Impact on US MNEs Tino Duttiné Partner - Frankfurt Norton Rose Fulbright LLP 8 May 2018 Todd Schroeder Partner - Dallas Norton Rose Fulbright (US) LLP

2 Topics Introduction Update on State Aid Anti-Tax Avoidance Directives 1 & 2 Hybrid Mismatches General Anti-Abuse Rule Taxation of the Digital Economy 2

3 Topics Introduction Update on State Aid Anti-Tax Avoidance Directives 1 & 2 Hybrid Mismatches General Anti-Abuse Rule Taxation of the Digital Economy 3

4 Introduction EU Action Plan Key Areas for Action 1. Re-launching the CCCTB 2. Ensuring fair taxation where profits are generated 3. Creating a better business enviroment 4. Increasing transparency 5. Improving EU coordination 4

5 Introduction What has happened 1. State Aid investigations 2. SAAR in existing tax directives (PSD, MD, IRD) 3. New Transparency Initiatives Exchange of tax rulings CbC Reporting 4. New Anti-Avoidance Directives 5. Tax disputes resolution mechanism 5

6 Introduction Unilateral Measures 1. Poland - far reaching GAAR 2. UK diverted profits tax 3. UK gross revenue tax 4. Germany limitation on deductibility of royalty payments 6

7 Introduction German Royalty Limitation (1) 1. PARENT owns IP PARENT (US) SUB (GE) 2. PARENT produces product and sells to SUB 3. SUB acts as buy/sell distributer and sells to customers No royalty is paid No impact of GRL 7

8 Introduction German Royalty Limitation (2) 1. PARENT owns IP PARENT (US) SUB (GE) If PARENT is taxed at %, GRL may disallow 47.5% of royalty payment 2. PARENT licenses IP to SUB 3. PARENT subject to FDII 4. SUB pays royalty 5. SUB produces and sells to customers 8

9 Introduction German Royalty Limitation (3) 1. PARENT owns IP PARENT (US) 2. PARENT licenses IP to IRL & IRL licenses to SUB SUB (GE) LTD (IRL) 3. PARENT subject to FDII If PARENT is taxed at %, GRL may disallow 47.5% of royalty payment 4. SUB & IRL pay royalties 5. SUB produces and sells to customers 9

10 Introduction German Royalty Limitation (4) PARENT (US) 1. PARENT transfers IP to LTD 2. IRL licenses to SUB SUB (GE) LTD (IRL) 3. PARENT subject to FDII GRL not applicable - LTD not subject to a preferential tax regime PARENT subject to GILTI and FDII impact very low 4. SUB pays royalty 5. SUB produces and sells to customers 10

11 Topics Introduction Update on State Aid Anti-Tax Avoidance Directives 1 & 2 Hybrid Mismatches General Anti-Abuse Rule Taxation of the Digital Economy 11

12 State Aid - Reminder selective tax advantage Can be: Individual ruling Particular tax regime Action to recover tax 10 year look-back A matter of EU competition law 12

13 Where are we now? Recovery proceedings: Amazon - $ 250m Apple - $13bn Ongoing investigations: McDonalds Engie / GDF Suez UK CFC Regime IKEA 13

14 Motivation unchanged All companies, big or small, multinational or not, should pay their fair share of tax. Member States cannot let selected companies pay less tax by allowing them to artificially shift their profits elsewhere. We will now carefully investigate the Netherland s tax treatment of Inter IKEA. Commissioner Margrethe Vestager 14

15 Topics Introduction Update on State Aid Anti-Tax Avoidance Directives 1 & 2 Hybrid Mismatches General Anti-Abuse Rule Taxation of the Digital Economy 15

16 EU Anti-Tax Avoidance Directive of 12 July 2016 Specific proposed measures: 1. Deductibility of interest 2. Exit taxation 3. Controlled foreign corporation (CFC) rules 4. General anti-abuse rules (GAAR) 5. Hybrid mismatch rules (amended by ATAD 2 (EU) 2016/0339 of 12 May 2017) Applicable to all corporate taxpayers in EU Minimum standard Limited grandfathering rules Implementation Entry into effect 1 January 2019 / 1 January

17 Article 9 ATAD 2 Hybrid Mismatches: the anti-beps action (BEPS Action 2)! Significant extension scope ATAD II compared to scope ATAD I Material (Reverse) Hybrid entity Hybrid financial instrument Hybrid transfers Hybrid permanent establishment Imported mismatches Dual residents Territorial (third countries) Only a minimum rule - Member-States have infinite' authority to combat hybrids 17

18 Licensing & Financing Interest and royalties subject to tax at 25% rate at CV level as of 2022 Interest/ Royalities PARENT (US) CV (NL) BV (NL) Loans / Licenses Interest/ Royalities GROUP (Various) Loans / Licenses 18

19 D/NI rule Interest and royalties subject to tax at 25% rate at BV level as per 2020 Interest/ Royalities PARENT (US) LP (Bermuda) BV (NL) Loans / Licenses Interest/ Royalities GROUP (Various) Loans / Licenses 19

20 D/NI rule 2020/2021 Interest and royalties subject to tax at 25% rate at BV level Interest/ Royalities PARENT (US) CV (X) BV (NL) Loans / Licenses Interest/ Royalities GROUP (Various) Loans / Licenses 20

21 Imported Mismatch PARENT (US) Interest/ Royalities CV (Bermuda) X (Non-EU) Loans / Licenses Interest/ Royalities No deduction at GROUP level GROUP (EU) Loans / Licenses 21

22 Principal Structures PARENT (US) LP (Non-EU) Payment/ Royalty License BV (NL) Product Product CUSTOMERS (EU) LRDs (EU) PrincipalCo (Switzerland) Payment / COGS Payment / COGS 22

23 Topics Introduction Update on State Aid Anti-Tax Avoidance Directives 1 & 2 Hybrid Mismatches General Anti-Abuse Rule Taxation of the Digital Economy 23

24 Article 6 ATAD: General Anti-Abuse Rule (GAAR) For the purposes of calculating the corporate tax liability, a Member State shall ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. For the purposes of paragraph 1, an arrangement or a series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. 24

25 ATAD s GAAR (preamble): A backstop approach to tackle abusive tax practices that have not yet been dealt with through specifically targeted provisions A balancing act GAARs should be applied to arrangements that are not genuine; otherwise, the taxpayer should have the right to choose the most tax efficient structure for its commercial affairs. 25

26 A closer look For the purposes of calculating the corporate tax liability, a Member State shall ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. For the purposes of paragraph 1, an arrangement or a series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. 26

27 Article 6 ATAD: General Anti-Abuse Rule (GAAR) Doesn t all legal structuring have a tax paragraph? Halifax C-255/02 taxpayers may choose to structure their business so as to limit their tax liability. So what ll be the outcome of the weighting game? 27

28 A closer look For the purposes of calculating the corporate tax liability, a Member State shall ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. For the purposes of paragraph 1, an arrangement or a series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. 28

29 A closer look For the purposes of calculating the corporate tax liability, a Member State shall ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. For the purposes of paragraph 1, an arrangement or a series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. What are valid commercial reasons? and what are invalid commercial reasons? 29

30 Identifying abuse under ATAD: A balancing act or a slippery slope? ECJ so far: abuse is absent if substance is present Although we don t know what substance actually means, at least we do know that substance presence cancels out abuse ATAD s GAAR: abuse is present despite of substance being present? Is substance tax planning synonymous with aggressive tax planning? C-6/16 Eqiom SAS: the existence of a purely artificial arrangement which does not reflect economic reality and whose purpose is unduly to obtain a tax advantage. 30

31 Dutch choices re implementation ATAD1 GAAR Implementation via soft law fraus legis developed by Dutch Supreme Court Only two requirements (no separate artificiality test!): The legal actions are set up with the decisive motive to circumvent tax (motive requirement). the tax avoidance is contrary to the purpose and scope of the applicable tax act or with a specific provision (norm requirement). Fraus legis applies to more taxes not just CIT Will the domestic anti-abuse doctrine transform into an EU anti-abuse doctrine and change the scope of the existing domestic abuse doctrine? 31

32 UK choices re implementation ATAD1 GAAR UK approach we already comply: The principles of the EU GAAR that has been agreed are very similar to excisting rules within the UK tax code, both through the legislation for the UK GAAR and well established case law 32

33 Topics Introduction Update on State Aid Anti-Tax Avoidance Directives 1 & 2 Hybrid Mismatches General Anti-Abuse Rule Taxation of the Digital Economy 33

34 The digital economy: a new direction Current position Digitisation has challenged our understanding of how and where businesses create value Taxation based on location of business and value generated by business Transfer-pricing not catching all of the value Pressure for change Media Fairness Business Reform where are we now? OECD BEPS Action 1 Plan Addressing the Tax Challenges of the Digital Economy (October 2015) OECD interim report (16 March 2018) EC papers (21 March 2018) Unilateral approaches of jurisdictions 34

35 EC proposals Proposals introduced 21 March 2018 Short term and longer term proposals Short term measure Digital services tax (DST) interim tax of 3% Levied on gross revenues of companies attributable to the supply of digital services Longer term proposal Directive on digital permanent establishments (PE) Standalone instrument as opposed to amendment of CCCTB (although potential for future CCCTB integration) 35

36 EC short-term measures: DST No fixed duration One-stop shop system companies only file paperwork in one EU member state Companies with: Worldwide revenues above 750m; and EU taxable revenues above 50m Taxable companies Taxable revenues Revenues generated from: Placing advertising on a digital interfaces targeted at users of that interface Making a multi-sided digital interface available, allowing users to interact or facilitating the provision of supplies between users Transmitting data collected about users / their activities on digital interfaces Companies offering services for a fee (i.e. based on a subscription model so e-retailers) Specific exclusions: Securities trading venues Crowd-funding services Digital platforms facilitating the grant of loans Who will not be caught? Basis for tax being levied Levied based on the location of: Advert being displayed User who generated the data User who concluded the transaction User of a multi-sided digital platform 36

37 EC longer term proposals: digital PE and profit allocation Digital PE Profit allocation Significant digital tax presence (i.e. PE) if: Revenues from providing digital services to users in that member state > 7m; or Number of users of 1+ digital service located in that member state > 100,000; or Number of contracts for supplying digital contracts concluded by business users in that member state > 3,000 Digital services: Delivered over the internet or an electronic network Their supply is automated / requires minimal human intervention / impossible to ensure without information technology Non-exhaustive list of examples also provided Application: Intra-EU With third countries where there is no DTT preventing the broadened use of PE concept Profits attributable to businesses significant digital presences will be determined by a functional analysis Economically significant activities performed via digital interfaces will be included (focus on DEMPE functions) List of examples given Includes activities relating to user data, user generated content, online advertising and digital market places EU/OECD guidance on profit allocation to complement the Digital PE Directive EC envisages recommendation to Member States to implement rules into DTTs EC keen to see unified action with OECD ( ideal solution to inserted into OECD Model Convention) 37

38 Unilateral action Country Digital economy tax measures Status Austria Equalisation levy (advertising tax) Proposed Australia Diverted profits tax GST Active Active China VAT Active Hungary Equalisation levy (advertising tax) Active Italy Withholding tax (web tax) Virtual PE / diverted profits tax India Equalisation levy Virtual PE Israel Virtual PE VAT Active Active Active Proposed Active Active Kuwait Virtual PE Active New Zealand GST Active Saudi Arabia Virtual PE Active Taiwan Virtual PE VAT Turkey Withholding tax Virtual PE VAT Active Active Active Active Active UK Diverted profits tax Withholding tax (on specific non-resident royalties) US No specific federal digital economy measures State sales tax collection Active Proposed n/a Active 38

39 UK Gross revenue tax Short-term measure (anticipates challenges of international consensus) Increase UK tax paid by businesses deriving value from UK user participation Applies irrespective of physical presence of business in UK Compliant with DTTs / international tax framework Key issues Businesses in scope Revenues in scope Identifying the correct businesses and revenues in scope Applying the tax to multiple business lines Tailoring to varying levels of profitability Define channels through which user value created: tax businesses for which these channels most relevant Define categories of business, e.g. social media platforms, search engines, online marketplaces Define revenue streams. e.g. online advertising. Cross-border transactions 39

40 UK Pushing extraterritorial boundaries: from April 2019 IP licence Licensee (US) Royalty payment Licensor (low-tax jurisdiction) UK sales Payments Between related parties To exploit IP and intangible assets in the UK Regardless of whether the payer has a taxable presence in the UK Made to jurisdictions with which UK does not have a DTT with a non-discrimination article Joint and several liability 40

41 Tino Duttiné Partner Norton Rose Fulbright LLP, Germany Tino Duttiné is a tax partner based in our Frankfurt office. He has extensive experience advising clients on the full range of corporate taxation both nationally and internationally. His main focus lies in project-oriented tax planning, advice on M&A transactions and group structuring for national and international clients as well as advising on financing structures and real estate transactions. Tino studied law at the University of Frankfurt. Additionally, he completed a degree course in business administration and ho lds a German MBA (Diplom-Kaufmann). He is admitted as a certified tax advisor (Steuerberater). Before joining us in 2015, he worked for twelve years at another international law firm in Frankfurt. He is the author of various publications on corporate and tax matters and lectures on International Taxation at the Frankfurt School for Finance and Management. He is a German native speaker and speaks English fluently. 41

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