Tax Obstacles in Cross Border Planning

Transcription

1 International Fiscal Association USA Branch New York Region Fall Meeting Thursday, December 1, 2016 Tax Obstacles in Cross Border Planning Colleen O Neill Ernst & Young LLP Maarten P. Maaskant PricewaterhouseCoopers LLP Matt Ryan PricewaterhouseCoopers LLP Dirk-Jan (DJ) Sloof Ernst & Young LLP Godfried Schutz Deloitte LLP

2 Colleen O Neill Ernst & Young LLP Maarten P. Maaskant PricewaterhouseCoopers LLP Dirk-Jan (DJ) Sloof Ernst & Young LLP Matt Ryan PricewaterhouseCoopers LLP Godfried Schutz Deloitte LLP 2

3 EU tax update Today s agenda The Landscape Introduction and overall EU time line The CCTB and the CCCTB proposals in a nutshell The EU Anti-Tax Avoidance Directive and a recent update proposal on hybrid mismatches UK Anti-hybrid rules State Aid update MLI 3

4 The Landscape Financing structures Transparency -- CBCR / exchange of rulings / Lux leaks State aid Anti-hybrid rules (including UK) CFC rules Interest deductibility restrictions MLI PPT / LOB WHT 4

5 The Landscape (cont d) Licensing structures DEMPE Irish Non-resident phase out Anti-hybrid rules (including UK) State aid Transparency -- CBCR / exchange of rulings / Lux leaks MLI PPT / LOB WHT 5

6 The Landscape (cont d) Holding: CFC rules Transparency -- CBCR / exchange of rulings / Lux leaks MLI PPT / LOB WHT All these developments are emanating from Europe 6

7 Timeline 7

8 Timeline what is expected? State aid actions, targeting: Transfer pricing, using new EU TP concept Mismatches (double non-taxation, deduction/no inclusion) Red = Reality Rulings and regimes Parent Subsidiary Directive changes Intra-EU anti hybrid rule GAAR Old EU IP regimes No new entrants Phase out (July 2021) Exchange of ruling summaries started Green = Very high likelihood Blue = Possibility Yellow = Uncertain Country-by-Country reporting introduced in all EU MS Exchange of tax ruling summaries UK Anti-Hybrid rules: Applies to interest royalties, service fees, cost of goods sold. No deduction for payments made to disregarded havens; CV/BV and similar reverse hybrid structures and certain variants of Double Irish. Publication of List of tax havens Action 15 MLI First exchange of CbC reports Anti-Tax Avoidance Directive (ATAD): Interest limitation rules (30% EBITDA) EU-wide CFC rules EU GAAR ATAD 2: addressing mismatches with third countries (hybrid entities, hybrid instruments / hybrid branches, ) EU-wide Common Corporate Tax Base (CCTB) Mandatory for groups with turnover of EUR 750M Broadly defined tax base (participation exemption, switch-over rules, NOL c/f, R&D deduction, NID regime) TP (upward adjustments only) Includes ATAD and ATAD 2 s measures ATAD: New exit rules Old EU IP regimes no longer applicable Common Consolidated Corporate Tax Base (CCCTB) Single tax return for all EU operations Taxable profits shared between Member States based on apportionment formula (1/3 sales, 1/3 labor, 1/3 assets (excluding intangible assets)) 8

9 Introduction ATAD and Oct 25 th package The ATAD lays down rules in order to strengthen the average level of protection against aggressive tax planning in the internal market. The objective of the Directive is to ensure a coordinated implementation of certain BEPS outputs at the EU level. Agreement on a final Directive was reached on 20 June

10 Introduction ATAD and Oct 25 th package (cont d) Member States must adopt and publish the laws, regulations and administrative provisions necessary to comply with this Directive by 31 December 2018 at the latest. As such, the rules should be implemented at 1 January 2019 at the latest. An additional year is provided for the implementation of the exit tax provisions (31 December 2019). 10

11 Introduction ATAD and Oct 25 th package (cont d) Member States which have (equally effective) national targeted rules for preventing base erosion and profit shifting risks, may defer implementation of the ATAD interest limitation rules, but not until later than 1 January

12 Introduction ATAD and Oct 25 th package (cont d) On 25 October 2016, the European Commission released its proposals for a major corporate tax reform across the EU. a two-stage proposal towards a Common Consolidated Corporate Tax Base (CCCTB); a Directive on Double Taxation Dispute Resolution Mechanisms in the EU; and amendments to the ATAD agreed in June 2016, as regards hybrid mismatches with third countries. 12

13 Introduction ATAD and Oct 25 th package (cont d) These legislative proposals will be submitted to the European Parliament for consultation and to the Council of the European Union for adoption. See next slide for the envisaged time line. The proposals are subject to negotiations and all 28 Member States will have to unanimously agree to this proposal before it can be adopted, and would then need to incorporate it into their national law. 13

14 CCTB and CCCTB 14

15 EU Tax Update Envisaged timeline CCTB and CCCTB Intended time line of the EU Commission to adopt the CCTB and CCCTB is very ambitious. Currently not expected EU Member States will reach unanimous agreement to the proposals within suggested time frame of the EU Commission. Furthermore compromises may need to be required to adopt the directive. 15

16 EU Tax Update (cont d) Envisaged timeline CCTB and CCCTB January 1, 2019 If approved, the CCTB Directive shall be adopted by 31 December 2018 in the domestic laws of EU Member states, and its provisions shall apply from 1 January January 1, 2021 If approved it is suggested that the CCCTB Directive shall be adopted by 31 December 2020 in the domestic laws of EU Member states, and its provisions shall apply from 1 January Phase 1 Phase 2 25 October 2016 Initial proposal by the EU Commission for the renewed CCTB and CCCTB. Negotiations between Member States Negotiations/discussions between member states with respect to both proposals; Potential amendments CCTB/CCCTB; and Intended agreement of all member states to final version of the CCTB (including compromises). 16

17 ATAD1 recap and ATAD2 Proposal 17

18 General anti-abuse rule ATAD1 recap The ATAD contains anti-avoidance measures. ATAD provides minimum level of protection, Member States could implement more strictly/additional antiavoidance rules Financing Interest deduction limitation rules Anti-hybrid rules Drafts contained a switch-over clause, but this clause has been removed in the final version Anti-hybrid rule currently limited to EU situations Draft proposal for expansion to third countries was launched on 25 October 2016 Holding Controlled foreign company rules Potential consequences for US multinationals with operations in Europe could include: Higher effective tax rate (ETR), e.g., due to a cap on interest deductions and direct taxation of profits realized by foreign subsidiaries and branches potentially in multiple EU jurisdictions More structures may be challenged as a result of the introduction of anti-hybrid rules and General Anti-Abuse Rules (GAAR), potentially leading to more controversy Intangible property and supply chain Rules on cross-border transfers of assets, businesses and tax residence Anti-hybrid rules 18

19 ATAD2 proposal Amended hybrid mismatch (art. 9) proposed Background proposal: The proposed amendment seeks to amend the ATAD agreed in June: Response to the ECOFIN Council statement of 20 June 2016, to put forward by October 2016, a proposal on hybrid mismatches involving third countries in order to provide for rules consistent with and no less effective than the rules recommended by the OECD BEPS report on Action 2, with a view to reaching an agreement by the end of

20 ATAD2 proposal (cont d) Amended hybrid mismatch (art. 9) proposed In addition to expanding the territorial scope to include third countries, the proposal addresses hybrid permanent establishment mismatches, hybrid transfers, imported mismatches and dual resident mismatches which are not currently addressed by the ATAD, see next slide. 20

21 ATAD2 proposal (cont d) Amended hybrid mismatch (art. 9) proposed Proposal will be submitted to the European Parliament for consultation and to the Council of the European Union for adoption. If the proposal will be unanimously accepted by the Member States in its current form, Member States will have to implement it by 31 December 2018, and the provisions will have to apply as from 1 January

22 Amended hybrid mismatch (art. 9) proposed Scope Key elements of the amendments proposed on 25 October 2016 The proposed amendments would expand the territorial scope to third countries and address the following mismatches: Hybrid entity mismatches (leading to a double deduction or deduction without inclusion); 22

23 Amended hybrid mismatch (art. 9) proposed Scope (cont d) Financial instrument mismatches (leading to a deduction without inclusion); Mismatch occurs if the tax treatment of a financial instrument differs between two jurisdictions. Hybrid transfers (leading to a deduction without inclusion or double tax credit); Arrangement to transfer a financial instrument where the laws of two jurisdictions differ on whether the transferor or the transferee of a financial instrument has got the ownership of the payments on the underlying asset. 23

24 Amended hybrid mismatch (art. 9) proposed Scope (cont d) Hybrid PE mismatches (leading to non-taxation without inclusion, double deduction or deduction without inclusion); Imported mismatches (leading to double deduction or deduction without inclusion); and Arrangements involving group members, or structured arrangements, which shift the effect of a hybrid mismatch between parties in third countries into the jurisdiction of a Member State through the use of a non-hybrid instrument. Dual resident mismatches (leading to double deduction). 24

25 Amended hybrid mismatch (art. 9) proposed Scope (cont d) The Member State shall neutralize the abovementioned mismatches by: Denying the deduction (in case of double deduction); Including the payments in the taxable base (in case of deduction without inclusion); Including the income in the taxable base (in case of non-taxation without inclusion); or Limiting the benefit of the credit (in case of double tax credit). 25

26 UK Anti-hybrid update 26

27 UK Action Item 2 Examples 1. Disregarded Havens No Tax Co US Inc Non-US UK Ltd (UK) Payments (Interest, royalties, COGS etc.) Payment by UK Ltd to No Tax Co should be considered under Chapter 7 Hybrid payee D/NI mismatches Mismatch is deemed to arise through hybridity where: The payee is a hybrid entity; There is no territory where the payee is resident 'for the purposes of a tax charged under the law of that territory and payee s income is not taxed in a PE; and Income of the payee is not subject to a CFC charge (UK or foreign). Applies to no tax entities (e.g. havens and US LLCs) May apply to other entities 27

28 UK Action Item 2 Examples 2. Hong Kong US Inc HK taxes resident and non-resident companies based on a territorial system Payments for cost of goods sold / service fee Non US Principal Payments for cost of goods sold Offshore activity enables a proportion of HK Cos income not to be taxed so all of the payment is not ordinary income under the UK anti-hybrid rules Consider Chapter 7 - Hybrid payee D/ NI mismatches : HK CO (Hong Kong) UK Ltd (UK) Is HK Co resident in HK 'for the purposes of a tax charged under the law of that territory? Consider Chapter 8 Multinational payee D/NI mismatches Offshore activity via rep office / PE / sub Does offshore activity reach the level of a permanent establishment for Hong Kong, the PE jurisdiction, or the UK? 28

29 UK Action Item 2 Examples 3. Regarded No Tax Royalty Payments (Interest, royalties, COGS etc.) IP Top Co (US) IP Owner (No Tax) Principal (RoW) RoW LRDs (Including UK) Tax treatment of Principal should be considered under Chapter 11 Imported mismatches as a result of the UK payment. Payment by Principal to IP Owner should be considered under Chapter 5 Hybrid payer D/NI mismatches Hybridity of Principal potentially impacts US tax analysis of Top Co and IP Owner. Need to consider the US tax treatment if there is a UK LRD and the royalty were to be regarded, including: Impact on ECI analysis; Impact on Subpart F analysis; Restructuring Required if there would be ECI To be considered if there would be Subpart F income 29

30 UK Action Item 2 Examples 4. Other Imported Mismatches Procurement Co (Low / No Tax) Royalty Fee Payments (Interest, royalties, COGS etc.) IP (Low / No tax) IP Top Co (US) Principal (RoW) Other UK Country LRDs Cos (EU) Interest Finco (Low / No Tax) Tax treatment of Principal should be considered under Chapter 11 Imported mismatches as a result of the UK payment. Need to identify arrangements entered into in pursuance of, or in relation to the Principal company activity. Payments by the Principal should be considered as it if were UK tax resident. Potential mismatches include: Swiss Circular 8 rulings Branch remunerated on cost plus with head office exemption Royalty payments to havens / hybrids Financing payments to disregarded haven / hybrids 30

31 UK Action Item 2 Examples 4. Other Imported Mismatches, cont d Royalty IP Top Co (US) Reverse Hybrid Principal UK Service Co (UK) Senior EU sales people with activities in the UK and routine UK sales support activities Customers Customer contracts Restructuring to avoid UK payments gives risk to DPT risk DPT threshold is it reasonable to assume UK service Co arrangement is to avoid a UK PE? DPT exposure calculation: From June 28, 2016, DPT calculation includes royalty payments deemed to have UK source due to the avoided PE No deduction for royalty payments within UK PE P&L under anti-hybrid legislation from January 1, 2017 Impact of the two rules is potentially an effective 50% UK tax rate on royalty payments 31

32 State aid update 32

33 State Aid Fair competition on the EU s internal market European law prohibits (potential) market distortion through state intervention as this tilts the level playing field in the European single market. State aid is broadly any measure, granted by a Member State or funded out of State resources, which could distort competition and affect trade between Member States by favouring certain taxpayers. 33

34 State Aid (cont d) Fair competition on the EU s internal market A key criterion for state aid is that the measure must be selective, whether by law or in practice. In practice, selectivity is generally (but not always) assessed through a three-step analysis: 1. Identify the reference framework. 2. Determine whether the measure derogates from that framework. 3. Establish whether the derogation is justified by the nature or general scheme of the framework. 34

35 Selectivity General court in Santander case Case T-399/11 Santander 48. ( ) where the measure ( ) even though it constitutes a derogation from the common or normal tax regime, is potentially available to all undertakings, it is not possible to compare, in the light of the objective pursued by the common or normal regime, the legal and factual situation of undertakings which are able to benefit from the measure with that of undertakings which cannot benefit from it. 49. It follows from the foregoing that for the condition of selectivity to be satisfied, a category of undertakings which are exclusively favoured by the measure at issue must be identified in all cases and that ( ) the mere finding that a derogation from the common or normal tax regime has been provided for cannot give rise to selectivity. 35

36 Opinion advocate-general (28 July 2016) 84. It certainly does not follow either from the wording of Article 107(1) TFEU or from the Court s case-law that terms favoring certain undertakings or the production of certain goods require the identification of a category of undertakings which exhibit specific characteristics and are exclusively favored by the measure at issue After all, where the undertakings benefiting from a tax measure enjoy a tax advantage to which they would not be entitled under the normal tax regime and which cannot be claimed by undertakings performing similar operations, such a measure is selective in nature because, contrary to what the General Court claims, it does not actually apply to all economic operators. It is obvious that the measure at issue favors only the entirety of economic operators which satisfy the conditions laid down, that is to say undertakings taxable in Spain which acquire shareholdings in a foreign company, and excludes economic operators which carry out similar operations, that is to say which acquire shareholdings but in a company established in Spain. 36

37 How does the EC know about the granting of State aid? Suspected tax legislation and provisions? Formal notifications by Member States Complaints (by competitors) Included in formal documents, e.g. legislation Scholarly work and newspapers Tax rulings and settlements? EC can ask for a copy of the relevant documents Companies inform press and stakeholders of major fiscal benefits Dissatisfied (former) employee Granted to certain undertaking (-s) undertaking = any legal entity, regardless of its form or the way with which it is financed, engaged in an economic activity, i.e. an activity consisting in offering goods or services on a given market. 37

38 The State aid procedural steps Informal investigation Formal investigation Decision EC Recovery Appeal (GC/CJ) Council Regulation (EU) 2015/

39 State Aid Where are we now? Opening investigation Negative decision + appeal Decision General Court? Decision CJEU? Opening investigation Negative decision + appeal Decision General Court? Decision CJEU? Opening investigation Negative decision + appeal Decision General Court? Decision CJEU? Opening investigation Negative decision + appeal Decision General Court? Decision CJEU? Opening investigation Negative decision + appeal? Decision General Court? Decision CJEU? Opening investigation Negative decision + appeal? Decision General Court? Decision CJEU? Expansion investigation to rulings Negative decision + appeal? Decision General Court? Opening investigation Negative decision + appeal? Decision General Court? and beyond 39

40 Multilateral Instrument 40

41 Action plan 15 Multilateral instrument to modify bilateral treaties The OECD released its Multilateral Convention (MLI), together with an Explanatory Statement, on Thursday, November 24, 2016 The MLI supplements tax treaties with provisions, most of which can be opted in or out of, in whole or in part (with the exception of certain mandatory inclusions). 41

42 Action plan 15 (cont d) Multilateral instrument to modify bilateral treaties Treaty parties can also choose which of their bilateral agreements will be included The MLI includes: Hybrid mismatches (Action 2): provisions for transparent entities, elimination of double taxation, dual resident companies 42

43 Action plan 15 (cont d) Multilateral instrument to modify bilateral treaties Treaty abuse (Action 6): PPT is the standard, simplified LOB can be an add on or detailed LOB (not included in MLI). impact on use of holding companies and back-to-back financing companies? alignment with EU law? Permanent establishments (Action 7): counter avoidance of PEs Dispute resolution (Action 14) Arbitration 43