BEPS - Current Status of Implementation in EU Countries Prof. Guglielmo Maisto 1 March 2019 1
Pillar I COHERENCE Action 2 Neutralizing Hybrid Mismatch Arrangements Action 3 CFC Rules Action 4 Interest barrier rule Action 5 Harmful Tax Practices Pillar II SUBSTANCE Action 6 Preventing Tax Treaty Abuse Action 7 Avoidance of PE Status Action 8-10 TP and value creation Pillar III TRANSPARENCY AND CERTAINITY Action 11 Measuring BEPS Action 12 Disclosure Rules Action 13 TP Documentation Action 14 Dispute Resolution Action 1 Digital Economy Action 15 Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS ( MLI ) Minimum Standards 2
MLI and Tax Treaty related BEPS Actions 3
Four BEPS actions propose changes to tax treaties: i. Hybrid mismatches (Action 2) ii. Treaty abuse (Action 6) iii. The artificial avoidance of PE status (Action 7) iv. Improvements to dispute resolution (Action 14) With over 3,000 bilateral tax treaties, the MLI constitutes a vehicle for the quick implementation of treaty-related BEPS measures The MLI generally implements the final BEPS recommendations with limited modification Arbitration provision in Part VI of the MLI developed as part of the MLI negotiation 4
24 November 2016: Adoption of the text of the MLI and its Explanatory Statement 7 June 2017: MLI signing ceremony in Paris during which 68 jurisdictions signed the MLI Status as of 25 February 2019: 87 jurisdictions signed the MLI 21 jurisdictions deposited the instrument of ratification, acceptance or approval 6 other jurisdictions (Algeria, Kenya, Lebanon, Oman, Swaziland, and Thailand) expressed their intent to sign the MLI 5
Part I. Scope and Interpretation of terms (Art. 1-2) Part II. Hybrid Mismatches (Art. 3-5) Part III. Treaty Abuse (Art. 6-11) Part IV. Avoidance of PE status (Art. 12-15) Part V. Improving Dispute Resolution (Art. 16-17) Part VI. Arbitration (Art. 18-26) Part VII. Final Provisions (Art. 27-39) 6
MLI supplements Covered Tax Agreements * Adding new provisions and/or Amending/replacing existing provisions, but MLI does not directly amend Covered Tax Agreements * It will be applied alongside DTAs modifying their application *Article 2 Interpretation of Terms For the purpose of this Convention, the following definitions apply: a) The term Covered Tax Agreement (CTA) means an agreement for the avoidance of double taxation (DTA) with respect to taxes on income ( ): i. that is in force between two or more [Parties]; and ii. with respect to which each such Party has made a notification to the Depositary listing the agreement as well as any amending or accompanying instruments thereto ( ) as an agreement which it wishes to be covered by this Convention 7
The flexibility provided by the MLI is intended to accomodate a variety of tax policies while ensuring that the tax treaty-related BEPS measures are actually implemented The MLI provides for different types of flexibility: Reservations Jurisdictions may choose to reserve the right not to apply MLI provisions with respect to: a. all CTAs, or b. a subset of CTAs that contain existing provisions with specific and objective characteristics Options Certain provisions allow Parties to choose to apply one or none of two or more options [e.g., Articles 5 and 13] If Contracting Jurisdictions opt for different rules, generally only the standard rule applies Notification clauses 1. Covered Tax Agreements that include/do not include certain provisions 2. CTAs provisions modified by specific provisions of the MLI 8
MLI is subject to the ordinary procedures of ratification, acceptance or approval Instruments of ratification, acceptance or approval to be deposited with the Depositary Entry into force (Art. 34 MLI): For the first five signatories: from the first day of the month following a period of 3 months from the deposit of the fifth instrument of ratification, acceptance or approval (the MLI is currently in force) For each other signatory: from the first day of the month following a period of 3 months from the deposit of the instrument of ratification, acceptance or approval 9
Withholding taxes: Taxable events occurring on or after the first day of the calendar year that begins on or after the latest of the two dates on which the MLI enters into force for each of the two Contracting Jurisdictions (Art. 35(1)(a) MLI) Other taxes (including CIT): Taxes levied with respect to taxable periods beginning on or after expiration of a period of 6 calendar months (or shorter if Contracting States agree) from the latest of the two dates on which the MLI enters into force for each of the two Contracting States (Art. 35(1)(b) MLI) Mandatory arbitration provisions in Part VI Cases presented to the Competent Authorities ( CAs ) on or after the latest of the dates on which the MLI enters into force for each Contracting Jurisdiction (Art. 36(1)(a) MLI) Cases presented to the CAs prior to the latest of the dates on which the MLI enters into force for each of the Contracting Jurisdictions (Art. 36(1)(b) MLI): subject to mutual agreement 10
The MLI will enable all parties to meet the treaty-related minimum standards regarding the prevention of treaty abuse (BEPS Actions 6) and the improvement of dispute resolution (BEPS Action 14) The implementation of these minimum standards will be enabled on the basis of the following provisions of the MLI: Article 6 Purpose of a Covered Tax Agreement Article 7 Prevention of Treaty Abuse Article 16 Mutual Agreement Procedures Article 17 Corresponding Adjustments Explicit references to the minimum standard for preventing treaty abuse under the OECD/G20 BEPS package are included in Articles 7 and 16 of the MLI 11
Article 6 Purpose of a Covered Tax Agreement The provision includes new preamble language which is part of the minimum standard on treaty abuse: Intending to eliminate double taxation with respect to the taxes covered by this agreement without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this agreement for the indirect benefit of residents of third jurisdictions) Additional language could be included according to paragraph 3: Desiring to further develop their economic relationship and to enhance their co-operation in tax matters 12
Article 7 Prevention of Treaty Abuse Paragraph 1 provides for a general anti-abuse rule based on the Principal Purpose Test (PPT) «Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital 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 in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement» Paragraphs 8 to 13 provide for a simplified LOB that recognizes the benefits of the Convention to certain qualified persons which, due to their characteristics, are objectively connected with the State in which they reside or are deemed unfamiliar with abusive 13
Article 16 Mutual Agreement Procedure The provision aims at ensuring the timely, effective and efficient resolution of treaty-related disputes by implementing new model MAP article including: Presentation of the case to either competent authority At least 3 years for the presentation of the case Implementation of agreement irrespective of domestic law time limits Consultation for elimination of double taxation in cases not provided for in Double Tax Agreements 14
Article 17 Corresponding Adjustments According to the provision, jurisdictions should include paragraph 2 of Article 9 of the OECD Model Tax Convention in their tax treaties (Consistently with Best Practice no. 1 of BEPS Action no. 14) The TP claims carried out by the CAs of a Contracting Jurisdiction, shall lead to an appropriate decreasing adjustment to the amount of the tax charged on the profits of the related parties in the other Contracting Jurisdiction, to the extent that such claims reflects the arm s-length principle It is not, itself, part of a minimum standard, but jurisdictions not adopting Article 9(2) through the MLI must: commit to making adjustments under domestic law; or, at least, endeavor to resolve TP cases through MAP 15
Treaty residence to be decided by competent authorities under MAP «Where by reason of the provisions of a Covered Tax Agreement a person other than an individual is a resident of more than one Contracting Jurisdiction, the competent authorities of the Contracting Jurisdictions shall endeavour to determine by mutual agreement the Contracting Jurisdiction of which such person shall be deemed to be a resident for the purposes of the Covered Tax Agreement, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by the Covered Tax Agreement except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting Jurisdictions» (art. 4(1) MLI) If disagreement, no treaty relief or exemption unless if and as agreed by competent authorities The parties can opt not to apply the provision, consistently with OECD Commentary after BEPS (Action 6 Final Report, par. 48) 16
Action 7 of BEPS led to changes to the definition of permanent establishment to prevent the artificial avoidance of permanent establishment status in relation to BEPS 1. Amendment of the dependent agent and independent agent provisions corresponding to Article 5(5) of the OECD Model Tax Convention (Art. 12) habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise 2. Each of the exceptions included in Article 5(4) of the OECD Model Tax Convention is restricted to activities that are otherwise of a preparatory or auxiliary character 3. Preventing the fragmentation of activities among related companies 4. The manipulation of PE time limit relating to building sites by connected parties (Art. 14) 17
These articles govern the entire arbitration procedure, which is aimed at settling the disputes brought to the Competent Authorities of the States involved The dispute resolution is entrusted to an independent arbitration panel if the States involved do not reach an agreement within the MAP It is not a minimum standard. All the provisions concerning the arbitration procedure are optional and apply only between jurisdictions that opted for Part VI of the MLI 18
Timing Any unresolved issues may be submitted to arbitration after two years from the opening of a MAP Contracting jurisdictions may reserve the right to extend such period to three years Arbitration Panel The arbitration panel consist of three individual members with expertise or experience in international tax matters Each competent authority appoints one panel member within 60 days of the date of the request for arbitration. The two panel members so appointed, within 60 days of the latter of their appointments, appoint a third member who serve as Chair of the panel Decision Best practice: within 150 days from the appointment of the Chair of the Panel or within 180 days in the case of reply submission with respect to the resolution proposed by the other competent authority (Sample Mutual Agreement On Arbitration included in the Commentary of the OECD Model, 2017) Adopted by a simple majority of the panel members 19
Non-Tax Treaty related BEPS Actions 20
Hybrid mismatches, due to different characterization by two jurisdictions of an entity, payment or business activities, trigger double non-taxation BEPS Action 2 recommends specific improvements to domestic law, designed to achieve a better alignment between different jurisdictions and their intended tax policy outcomes by introducing linking rules that neutralize mismatches in tax outcomes under a hybrid mismatch arrangement ATA Directive as amended by ATAD 2 has implemented the OECD recommendation in the EU and deals with various kind of hybrid mismatches (e.g., hybrid permanent establishment (PE) mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches) 21
Definition of CFC Legal and economic control > 50% Exemptions, thresholds Effective tax rate, white lists Definition of CFC income Different approaches; e.g. legal classification of income, relatedness of parties, source of income Computing & attributing CFC income by applying the Parent jurisdiction rules Preventing double taxation 22
CFC rules apply to subsidiaries and exempt permanent establishments (Art. 7, par. 1) Two cumulative conditions i. Direct/indirect (stand-alone or together with associated enterprises) of more than 50% of voting rights; or capital; or profit entitlement; and ii. Effective Tax Rate < 50% of the taxpayer s Member State rate Two alternative models: A. Categorical Approach (Art. 7, par. 2, let. a)) B. Transactional Approach (Art. 7, par. 2, let. b)) 23
Net interest expenses limited to fixed percentage of taxable EBITDA (between 10% - 30%) De minimis threshold Group ratio rule (optional) Allow deduction of interest expenses up to the group s net third party interest/taxable EBITDA ratio if higher than the fixed ratio Possible use of other ratios (e.g. equity and asset ratios) Volatility in EBITDA Carry forward and back of disallowed interest expense Carry forward of unused interest capacity 24
Limitation of exceeding borrowing costs ( EBC ) to 30% of taxpayer s EBITDA (Art. 4(1)) Safe harbour clauses (Art. 4(3)) EBC up to EUR 3 million EBC if standalone entity Interest deduction rules for taxpayers that are members of a consolidated group for financial accounting purposes (Art. 4(5)) Additional rules (Art. 4(6)) a) carry forward b) carry back for a maximum of three years c) to carry forward, for a maximum of five years, unused interest capacity 25
The digital economy is characterized by: An unparalleled reliance on intangibles The massive use of data (notably personal data) The widespread adoption of multi-sided business models capturing value from externalities generated by free products The difficulty of determining the jurisdiction in which value creation occurs Impact on direct taxes Characterization Characterization of payments for the new digital products Data Relevance of data for value creation in a market Nexus Identification of new territorial connection elements 26
New Nexus in the form of a "significant economic presence" Withholding tax on certain types of digital transactions Equalisation levy The proposals are not alternatives, they may be implemented jointly The OECD has not recommended any of the above proposals, leaving States with the decision of implementing domestic measures for taxing digital businesses in order to gather information about their practical application for future discussions The European Commission issued two legislative proposals that provide rules relating to: the corporate taxation of a significant digital presence in EU Member States (COM(2018) 147 final); and a digital services tax on revenues resulting from the provision of certain digital services within the EU (COM(2018) 148 final) 27
A GAAR gives EU countries the power to counteract aggressive tax planning and tackle artificial tax arrangements in the cases where other specific rules don t apply Article 6, paragraph 1, of ATA Directive reads as follows: 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 When evaluating whether an arrangement should be regarded as nongenuine, Member States could consider all valid economic reasons, including financial activities 28
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