2 June 2016 Global Tax Alert German Ministry of Finance publishes draft bill to implement countryby-country reporting and other measures against base erosion and profit shifting EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: www.ey.com/taxalerts Executive summary On 1 June 2016, the German Ministry of Finance (MoF) published a technical draft of the Act Concerning the Implementation of Changes to the EU Administrative Cooperation Directive and of Additional Measures against Base Erosion and Profit Shifting. The core part of the draft is the implementation of the non-public Country-by-Country (CbC) reporting standards, as proposed by the Organisation for Economic Co-operation and Development (OECD) in its report on Action 13 of the Base Erosion and Profit Shifting (BEPS) project. The draft foresees mandatory CbC reporting for fiscal years beginning after 31 December 2015. The draft also includes the implementation of the European Union (EU) Automatic Information Exchange Directive which was adopted in December 2015 and governs the exchange of information concerning advance cross-border rulings and advance pricing arrangements. These actions are flanked by additional transparency measures, namely: Modification of already existing statutory transfer pricing documentation obligations which introduce the requirement to prepare country specific (Local File) and global (Master File) documentation Additional information reporting obligations imposed on multinational enterprises (MNEs)
2 Global Tax Alert Further to this, the draft includes a number of other legislative items aiming to secure or increase German tax revenues, most of them in the cross-border context: Introduction of a statutory definition of the arm s length principle, which must be applied in treaty situations, specifically for the interpretation of treaty provisions which follow Article (Art.) 9 of the OECD Model Treaty Tightening of treaty overriding rules which prevent the occurrence of untaxed income in certain treaty situations Changes in the German Controlled Foreign Company (CFC) regime, which secure that CFC income of a German resident is also subject to German Trade Tax Changes in the Trade Tax Act, which mandate a 5% income inclusion on dividends paid to a subsidiary in a German tax consolidated group (Organschaft) Changes in the so-called short term trading rules concerning dividend income and capital gains derived from the disposition of stocks The MoF has asked interest groups to submit comments by 17 June 2016. It is expected that the draft will be introduced into Parliament on 13 July 2016, and that the Act will be finalized during the second half of 2016. Detailed discussion Implementation of the CbC reporting standard The primary purpose of the draft legislation is the implementation of the CbC reporting obligation into domestic law. The requirements of the proposed German CbC reporting rule are generally in line with the OECD guidance on CbC reporting 1 and the 2016 EU directive (EU Directive) on CbC reporting. 2 Accordingly, CbC reporting obligations shall apply to Germanheadquartered multinational groups with annual consolidated group revenue of at least 750m and would be required for financial years starting after 31 December 2015. Additionally, a secondary mechanism will be implemented for domestic entities that are part of an MNE group that includes both a secondary reporting local filing and surrogate parent filing. The secondary mechanism provides for the filing of the CbC report for financial years commencing after 31 December 2016 only. Non-compliance with the CbC reporting obligation may be subject to a penalty of up to 5k. CbC reports would have to be filed within 12 months, starting from the end of the fiscal year to which they relate. The report would be automatically delivered by the German tax authorities to tax authorities of foreign countries through exchange of information channels. The automatic exchange with foreign countries would only take place on the basis of an underlying agreement with the foreign country, i.e., usually a Double Tax Treaty. The content of the mandated CbC report includes: Aggregate information relating to the amount of revenue, profit (loss) before income tax, income tax paid and accrued, number of employees, stated capital, accumulated earnings and tangible assets other than cash or cash equivalents in each jurisdiction in which the group operates. Identification of each constituent entity within the group, including the entity s jurisdiction of tax residence (and the jurisdiction under which the entity is organized, if different from its jurisdiction of tax residence), and the nature of the entity s main business activity or activities. A German entity will be obliged to indicate in its German tax return whether it is: 1. A German group parent company 2. A designated surrogate parent company Or 3. A domestic group company of a foreign Group parent company In the last case, the German entity is also obliged to specify which group entity will file the CbC report and which tax authority will receive the CbC report. If this information is missing in the German tax return, the German entity is required to submit the CbC report by itself (local filing) to the German tax authorities. Implementation of the Master File and Local File documentation requirement The draft regulations provide for a modification of the existing German transfer pricing documentation requirements by introducing a Master File and Local File documentation requirement. All entities with gross receipts (third party and intercompany) of at least 100m in the previous financial year are required to prepare a Master File. The Master File requirement applies for the first time for financial years starting after
Global Tax Alert 3 31 December 2015. The draft legislation does not change the regular filing requirements; transfer pricing documentation is still to be submitted to the tax authorities upon their request which usually occurs in a tax audit context. Further, the current penalty regime is tightened and now follows a transactional approach: if no or insufficient transfer pricing documentation for a certain transaction is submitted, the burden of proof shifts to the taxpayer and German tax authorities can assess income adjustments up to the most unfavorable point within the arm s length range. Taxpayers, therefore, have to ensure that their transfer pricing documentation is complete and includes all intercompany transactions they are involved in, e.g., including intercompany financial transactions. The draft also contains an obligation to include in the transfer pricing documentation specific information concerning the time of the transfer pricing determination (i.e., at which exact point in time the transfer prices used were established). Finally, the draft mandates a revision of the German Decree on the Type, Content and Scope of Documentation (Gewinnabgrenzungsaufzeichnungsverordnung) to provide further guidance on the newly implemented documentation measures. Changes to EU Administrative Cooperation Act to implement new EU Directive on automatic information exchange In 2011, the European Council adopted the Directive 2011/16/EU which deals with mandatory automatic exchange of information in the field of taxation. The Directive established procedures for closer cooperation between tax administrations in the European Union such as automatic and spontaneous exchanges of information. On 8 December 2015, the European Council formally adopted a new Directive (Council Directive (EU) 2015/2376) 3 amending Directive 2011/16/EU. The amendments specifically relate to the information exchange with regard to advance cross-border rulings and advance pricing arrangements, as suggested under the OECD BEPS Action 5 report. In its current draft bill, the MoF now proposes changes of the EU Administrative Cooperation Act (EU-Amtshilfegesetz) to adopt the new EU Directive 2015/2376 and implement it into German tax law. Moreover, the proposed changes of the EU Administrative Cooperation Act concern the automatic exchange of information gathered through CbC reporting. The information to be shared concerning a particular taxpayer especially includes: A summary of the advance cross-border rulings and advance pricing arrangements The period for which those rulings or arrangements apply The amounts of the underlying transactions A description of the applied transfer pricing mechanism Information regarding the EU countries and taxpayers that are expected to be affected by the respective ruling or arrangement Bilateral or multilateral agreements with non-eu countries are generally not subject to the automatic information exchange, unless the respective treaty under which such agreement was concluded explicitly allows for an exchange of the information with third parties. The information exchange occurs within three months after the calendar half-year in which the advance cross-border rulings or advance pricing arrangements were granted. In line with the EU Directive, the information exchange obligation affects rulings and arrangements that are issued, amended or renewed as of 1 January 2017. However, under certain conditions, rulings and arrangements that have been issued or amended since 1 January 2012 are also exchanged. Changes to the Income Tax Act and the Corporate Income Tax Act Prevention of untaxed income The treaty-overriding switch-over rule of Sec. 50d Para. 9 of the Income Tax Act is tightened with the objective to eliminate any opportunity to obtain a treaty based exemption of foreign source income which is only partially taxed by a foreign treaty jurisdiction. The amended rule shall be applicable as of 1 January 2017. Short Term Stock Trading Rules Dividends and capital gains from the disposition of stock are fully taxable for financial institutions if derived in trading situations. Under current law, this consequence is also imposed on so-called financial enterprises, which are widely defined and include ordinary holding companies even outside the financial services sector. To remove unintended consequences of this rule, including unwanted tax planning opportunities, the short term trading rules are narrowed and shall apply to financial enterprises such as holding companies only if they are owned directly or indirectly to more than 50% by banks or other financial services companies. The amended rule shall apply for stock that is acquired as of 1 January 2017.
4 Global Tax Alert Changes to the Foreign Tax Act An amendment to the German Foreign Tax Act includes an enhanced statutory definition of the arm s length principle that must be applied in a uniform way to all relevant Art. 9 OECD type tax treaty situations. The introduction of this treaty overriding provision is a reaction to recent case law, where the German Federal Fiscal Court (BFH) barred German tax authorities from using the arm s length principle as currently defined by the Foreign Tax Act on the basis of a more treaty-oriented interpretation. As a consequence, the enhanced domestic arm s length interpretation, which has still to be formulated within the scope of a separate decree or ordinance, takes precedence over a treaty based interpretation in cross-border situations. The amendment shall be applicable as of the promulgation of the new law. Changes to the Trade Tax Act German CFC income subject to trade tax According to the German trade tax rules, only income earned in a German permanent establishment (PE) is subject to trade tax. In accordance with these rules, the BFH held in its decision dated 11 March 2015 (I R 10/14) that foreign passive and low-taxed income which is attributed to a German resident under the German CFC regime is not subject to German trade tax. The BFH based its decision on the argument that the foreign income would not qualify as income earned by a German PE. In reaction to this decision, the new draft secures that CFC income of a German resident is also subject to German Trade Tax by stipulating that CFC income qualifies as income earned by a German PE. 5% trade tax income inclusion of dividends paid to a subsidiary in a German tax group According to the German participation exemption, only 95% of German or foreign dividends received by a corporate taxpayer are effectively tax-exempt. That is, 5% of the dividends qualify as non-deductible business expenses and, therefore, generally remain subject to corporate tax and trade tax at the level of the corporate recipient. However, the BFH ruled in its decision dated 17 December 2014 (I R 39/14) that, due to the specific income determination rules for tax consolidated groups (Organschaft), this 5% inclusion does not apply for trade tax purposes if the dividend is earned by a subsidiary in a tax consolidated group. The new Sec. 7a of the draft Trade Tax Act now foresees to change the income determination rules for tax consolidated groups to introduce the 5% income inclusion of dividends received in such group scenarios for trade tax purposes as well. Both amendments of the Trade Tax Act shall apply as of 1 January 2017. Endnotes 1. http://www.oecd-ilibrary.org/taxation/transfer-pricing-documentation-and-country-by-country-reporting-action-13-2015- final-report_9789264241480-en. 2. See EY Global Tax Alert, ECOFIN formally adopts directive on country-by-country reporting in the EU, dated 25 May 2016. 3. http://eur-lex.europa.eu/legal-content/en/txt/?uri=uriserv:oj.l_.2015.332.01.0001.01.eng&toc=oj:l:2015:332:toc.
Global Tax Alert 5 For additional information with respect to this Alert, please contact the following: Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Düsseldorf Oliver Wehnert +49 211 9352 10627 oliver.wehnert@de.ey.com Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich Christian Ehlermann +49 89 14331 16653 christian.ehlermann@de.ey.com Ernst & Young LLP, German Tax Desk, New York Joerg Brodersen +1 212 773 5250 joerg.brodersen@ey.com Thomas Eckhardt +1 212 773 8265 thomas.eckhardt@ey.com Tobias Appl +1 212 773 5594 tobias.appl1@ey.com Frauke Reifarth +1 212 773 0691 frauke.reifarth1@ey.com Denis Ahluwalia +1 212 773 0228 denis.ahluwalia1@ey.com Sabrina Kadenbach +1 212 773 7520 sabrina.kadenbach1@ey.com Ernst & Young LLP, EMEIA Transfer Pricing Tax Desk, New York Maren Holtz +1 212 773 5820 maren.holtz@ey.com Amanda Layne +1 212 773 6094 amanda.layne2@ey.com Ronny Waldkirch +1 212 773 9192 ronny.waldkirch1@ey.com
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. 2016 EYGM Limited. All Rights Reserved. EYG no. 01363-161Gbl 1508-1600216 NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com