Exchange of information on Tax Rulings 24 November 2016 Jean-Michel Hamelle Partner Tax and Accounting
Agenda 2 Exchange of Information on Tax Rulings OECD BEPS Action 5 EU Directive 2015/2376/EU Luxembourg on Exchange of Information on Tax Rulings Country-by-Country Reporting in Luxembourg
3 Background Increasing need for Exchange of Information Increasing concerns about preferential regimes that risk being used for artificial profit shifting and a lack of transparency in certain rulings. Increasing sophistication of tax planners in identifying and exploiting the legal arbitrage opportunities and the boundaries of acceptable tax planning. Increasing focus on ensuring that taxation takes place where economic value is generated and carried out. Reaction of States after Lux Leaks, Swiss Leaks and Panama Papers.
Recent International Developments 4 On 5 October 2015, final report on Action 5 of OECD/G20 BEPS project established a priority of improving transparency through a compulsory spontaneous exchange of information on certain tax rulings. On 6 October 2015, ECOFIN Council of EU reached a political consensus on the creation of an EU framework for the mandatory automatic exchange of tax ruling information. On 21 October 2015, EU Commission presented its decisions, holding that transfer pricing rulings granted by Luxembourg to Fiat was illegal under EU State aid rules. On 8 December 2015, the EU Directive 2015/2376 (DAC3) amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation was adopted to address the challenges posed by cross-border tax avoidance, aggressive tax planning and harmful tax competition.
OECD BEPS Action 5 Countering Harmful Tax Practices - Introduction Lack of transparency in the operation of a preferential regime or administrative process makes it difficult for other countries to take defensive measures and can give rise to mismatches in tax treatment and instances of doubletaxation. Substantial activity requirement used to assess preferential regimes should be strengthened to realign taxation of profits. Nexus Approach was developed, for IP regimes, to allow a taxpayer to benefit from an IP regime only to the extent that the taxpayer itself engages in R&D activities and actual qualifying R&D costs. 5
OECD BEPS Action 5 Countering Harmful Tax Practices Harmful IP Regimes IP regimes listed below were considered inconsistent, in part or in whole, with the nexus approach: 6
OECD BEPS Action 5 Countering Harmful Tax Practices - Framework Thus, a framework covering rulings that could give rise to BEPS concerns in the absence of compulsory spontaneous exchange was agreed 7 Categories of Rulings To be exchanged with 1) Rulings related to preferential regimes 1) Countries of residence of related parties with a transaction covered by the ruling, or in case of PE ruling country of head office/pe as case may be 2) Unilateral advance pricing agreements ( APA ) or other unilateral transfer pricing rulings 2) Country of Immediate Parent Company 3) Rulings giving a downward adjustment to profits 3) Country of Ultimate Parent Company 4) Permanent establishment rulings 5) Related party conduit rulings 6) Other rulings subsequently agreed to give rise to BEPS
OECD BEPS Action 5 Countering Harmful Tax Practices - Framework 8
OECD BEPS Action 5 Countering Harmful Tax Practices Exchange Process Tax rulings exchange process Country A Competent Authority Agreement to exchange information MACC, DTC XML Schema developed Country B Competent Authority 9 Tax administration rulings division 1. Issues ruling to taxpayer 3. Provides information to CA 2. Prepares summary in agreed template including taxpayer details, related party details in Country B & summary of issues covered in ruling 4. Receives information & follows confidentiality safeguards per EOI agreement; disseminates to authorized personnel Tax administration risk assessment division 5. Receives information for risk assessment & possible compliance action
OECD BEPS Action 5 Countering Harmful Tax Practices Application Timeline Information exchange is to apply not only to future rulings, but also to rulings that were issued on or after 1 January 2010 and were still in effect as from 1 January 2014. An ongoing monitoring and review mechanism, including annual review, will be put in place to ensure countries compliance 10 No exchange Past ruling Future ruling Valid on 1/1/2014? Date of issuance 1/1/10 1/1/14 1/4/16
OECD BEPS Action 5 Countering Harmful Tax Practices - Format for Exchange In July 2016, OECD released standardised IT-format for the exchange of tax rulings in the form of XML Schema. Ensures swift and efficient implementation of Action 5. Provides the countries with necessary legal basis, exchange of information, under Action 5, as from 1 April 2016 for future rulings and exchange of certain past rulings will need to be completed by 31 December 2016. The related XML Schema User Guide further explains the information required to be included in each data element to be reported. It also contains guidance on how to make corrections of data element within a file. 11
EU Directive 2015/2376 Exchange of Information - Introduction Initial Directive EU 2011/16 (DAC 1) on mutual assistance between member states in tax matters and assistance administrative cooperation in the field of taxation, covering: a) exchange of information upon demand; b) spontaneous exchange of information; and, c) automatic exchange of information on specific categories of data (salaries, pensions, director s fees, certain insurance and real estate). Amended to include automatic exchange of information based on the Common Reporting Standard Directive 2014/107/EU of 9 December 2014 (DAC 2) on mandatory automatic exchange of information in the field of taxation. Amended to include automatic exchange of tax rulings EU Directive 2015/2376 of 8 December 2015 (DAC 3). 12
EU Directive 2015/2376 Exchange of Information - Introduction Role of the Commission a) Monitoring and evaluation of exchange at any time and no other use of the information being provided. b) Communication to the Commission will not be construed as a notification of State Aid. c) As from 1 January 2017, Commission will establish a standard form. d) Along with a central directory accessible by all member states and the Commission. 13
EU Directive 2015/2376 Exchange of Information Exchange Process SCOPE TYPES OF RULING COVERED 14 Only corporate taxpayers; SME Advance Tax Agreement/ APA issued before 1 April 2016 to companies with annual turnover of less than EUR 40 Mil. Not applicable to SME involved in investment or financial activities. Advance cross-border tax rulings (ATA) and Advance pricing agreements (APA) between EU Member States INFORMATION TO BE EXCHANGED Identification of the group, amount of transaction(s); any info related to identification of individuals are removed Summary of ATA / APA (but no disclosure of commercial, industrial, professional secrets); Dates of issuance, amendment or renewal of ATA / APA; Start/end date of the period of validity of the ATA / APA; Identification of the method and criteria used for TP purposes in the APA. PROCESS Central Directory to be developed by the EU Commission where information exchanged will be stored. Communication with all other Member States. Communication of limited information with the EU Commission. Member States will be able to request further information including the full text of the ATA / APA.
EU Directive 2015/2376 Exchange of Information - Timeline Information exchange is to apply to rulings issued, amended or renewed after 31 December 2016 and for a transitional period from 1 January 2012 and 31 December 2016. 15 Date of issuance 1/1/12 1/1/14 1/4/16 31/12/16 Valid on 1/1/2014? No exchange Exception rule Past ruling Future ruling
Exchange of Information Luxembourg (Law 23 July 2016) To impose DAC3 into Luxembourg legislation the Luxembourg parliament transposed it into a law on 23 July 2016, without any deviations, which amends the law of 29 March 2013 on administrative cooperation in taxation matters. As of 1 January 2017, the Luxembourg tax authorities will be required to automatically exchange a pre-defined set of information with other EU member states tax authorities and the EU Commission (to a limited extent) for all cross-border rulings APAs or issued, amended or renewed after 31 December 2016. Only Rulings and APAs on cross-border transactions will be subject to the exchange of information. 16
Exchange of Information Luxembourg APA s in 2014 17 450 400 350 300 250 200 150 100 50 0 Belgium Germany France Italy Luxembourg Netherlands Number of APA requests received 91 19 9 43 398 272 Number of APA requests granted 100 4 9 9 228 203 Source EU Joint Transfer Pricing Forum, Statistics at the end of 2014
Exchange of Information Luxembourg Arrangements or transactions exclusive to Luxembourg tax or transfer pricing matters are not subject to exchange. Information on existing Rulings and APAs must also be communicated before 1 January 2018 to other Member States tax authorities and to the EU Commission (to a limited extent) if they were issued, amended or renewed in the period commencing five years prior to 1 January 2017 as follows : a) Where a Ruling or APA was issued, amended or renewed between 1 January 2012 and 31 December 2013, the information must only be communicated if the Ruling or APA was still applicable on 1 January 2014. b) Where a Ruling or APA was issued, amended or renewed between 1 January 2014 and 31 December 2016, the information must be communicated regardless of whether the Ruling or APA is still applicable. 18
Exchange of Information Luxembourg Information on Rulings or APAs issued, amended or renewed before 1 April 2016 with enterprises having an annual net turnover of less than EUR 40 million (or the equivalent in another currency) in the fiscal year before the Ruling or APA was issued is excluded from the exchange. Does not apply to companies conducting mainly financial or investment activities. Tax administrations of EU Member States can also request the full text of the Ruling or APA if they deem it necessary for further investigation. To facilitate this exchange of information on cross-border rulings and APAs the Luxembourg tax authorities have released a standardised form 777E which they request the taxpayers to complete with respect to any Rulings or APA. 19
Exchange of Information Luxembourg Form 777E The information that will be exchanged with the tax administrations of other EU Member States are set out in form 777E and relates to: a) The content of the ruling (ACBR or APA) : Dates of issuance, amendment or renewal; Period of validity covered by the Ruling; Type of Ruling (ACBR or APA, conduit, PE, Hybrid, etc., cf. slide 21); Summary of the content/issues covered by the Ruling; The amount of the transaction concerned; A description of the criteria used for determining transfer prices, including the transfer pricing method (APA). b) The entities affected by the Ruling : Identity of taxpayer (TIN), its annual turnover and its annual profit or loss (other than individuals); Identity of other non-resident entities affected by the Ruling (>25% threshold for NON-EU jurisdictions only), or Head office of permanent establishment/pe country; Identity of the immediate non-resident parent entities (>25% threshold); Identity of the ultimate non-resident parent (>25% threshold); Identity of the ultimate non-resident beneficial owner; Group to which the taxpayer belongs. 20
Exchange of Information Luxembourg Form 777E 21 Form 777E is largely based on the template for information exchange released by the OECD in the framework of its final report on Action 5 Accordingly Form 777E will also be used by the Luxembourg Tax Authorities to exchange information on Luxembourg tax Rulings (ACBR/ATA) with non-eu countries Already since 1 January 2016, Form 777E has to be submitted together with each request for a Ruling Information on the following types of Rulings will be exchanged if these Rulings were issued on or after 1/01/10 (see modalities depicted above in slide 10): - Preferential regimes - Conduits - Unilateral APAs or other TP issues - PE - Bilateral or multilateral APA - Hybrid entity - Exchange of summary information on request for - Downward adjustments bilateral or multilateral APA - Other types of Rulings
Luxembourg Tax Return Model 500 must be filled by all the resident non-transparent entity(s). It includes information required about the beneficial owner (individual or legal person) with a minimum holding of 10% at the end of the financial year. 22
Country-by-Country Reporting OECD BEPS Action 5 CbCR - Introduction Revised standards for transfer pricing documentation and a template for CbCR of income, taxes paid and certain measures of economic activity. Establishes rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules to be developed will include a requirement that multinational enterprises provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template. 23
Country-by-Country Reporting OECD BEPS Action 5 CbCR - Documentation Requirement 24 A three-tiered standardized approach to transfer pricing documentation: a) Master File requires tax multinational enterprises to provide tax administrations with high-level information regarding their global business operations and transfer pricing policies; b) Local File - detailed transactional transfer pricing documentation specific to each country, identifying material related party transactions, the amounts; c) CbCR - annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax and income tax paid and accrued.
Country-by-Country Reporting OECD BEPS Action 5 CbCR - Additional Guidance 25 On 22 March 2016, OECD released a standardized electronic format for the exchange of CbCR between jurisdictions. CbCR will be electronically transmitted between Competent Authorities in accordance with the CbC XML Schema, to assist tax administrations in obtaining a complete understanding of the way in which multinational enterprises structure their operations. The XML Schema will annually provide the tax administrations with key information on the global allocation of income and taxes paid, together with other indicators of the location of economic activity within the multinational enterprises group.
Country-by-Country Reporting OECD BEPS Action 5 CbCR - Luxembourg On 2 August 2016, the Luxembourg government lodged, before the Luxembourg Parliament, draft bill no. 7031 (the Bill ). Bill requires the ultimate parent company of the multinational enterprise group, which is resident for tax purposes in the Grand Duchy of Luxembourg, or any other entity reporting as covered under Section II of the Annex to file the CbCR annually with the tax administration. A multinational enterprise group with a consolidated group turnover of EUR 750 million or more (or an equivalent amount in another currency) during the previous fiscal year is obliged to file the CbCR. If, however, this threshold is not exceeded in the preceding fiscal year, the multinational enterprise group is not required to prepare the CbCR. 26
Country-by-Country Reporting OECD BEPS Action 5 CbCR - Luxembourg 27 The Bill contains a secondary filing mechanism whereby a surrogate parent entity or any constituent entity which is not the ultimate parent company could be designated as the reporting entity. The CbCR must be filed for fiscal years starting on or after 1 January 2016. The deadline for the submission of the Report is 12 months from the last day of the relevant fiscal year. For the first year, the deadline has been extended to 18 months. The competent Luxembourg tax authority may impose a fine of up to EUR 250,000 when: a)the reporting entity makes a late filing or incomplete or incorrect filing; b) The conditions which the designated reporting entity must adhere to have not been observed; or c)the relevant notifications to the competent tax authority have not been submitted. d)the amount of potential penalties is in line with penalties for similar non-compliance with FATCA reporting obligations.
Country-by-Country Reporting OECD BEPS Action 5 CbCR - Luxembourg The CbCR should contain: a) Aggregate information on sales, profit (loss) before taxes, taxes paid on profits, income taxes payable, social capital, retained earnings, number of employees and tangible assets (other than cash and cash equivalents) in each tax jurisdiction in which the multinational enterprise operates; b) The identity of each constituent entity of the multinational enterprise group, the tax residence jurisdiction of this constituent entity, as well as the nature of the main business activities; c) Any additional information or explanations that are necessary to understand the information provided under the above two mentioned points. 28
Country-by-Country Reporting OECD BEPS Action 5 CbCR - Luxembourg The Bill introduces a mechanism for the automatic exchange of CbC Reports between the competent tax authorities in Luxembourg and the jurisdictions in which the reporting obligation arises. As a result, the automatic exchange of CbCR will be initiated with EU member states as well as with other jurisdictions, signatories to the Multilateral Competent Authority Agreement on the Exchange of CbCR previewed by Action 13. A list of jurisdictions with which automatic exchange is to be initiated is expected to be included in a separate decree. 29
Country-by-Country Reporting OECD BEPS Action 5 CbCR - Luxembourg 30 With respect to deadlines, the Luxembourg competent tax authorities are obliged to exchange CbCR within three months of their submission. The period for exchanging the Reports covering the first fiscal year starting on or after January 1, 2016, is extended to six months. The Bill, subject to review and approval, will be applicable from the fiscal year 2016 onwards.
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32 Jean-Michel Hamelle T: +352 45 38 78-724 F: +352 45 38 29 E: jeanmichel.hamelle@lu.gt.com Grant Thornton Luxembourg (www.grantthornton.lu) is a leading provider of professional services in Luxembourg. This material has been prepared for information purposes only and shall not be regarded as a legal advice. Certain information contained herein are based upon our research and are subject to change. Neither this document, nor any copy of this document can be produced without prior consent of Grant Thornton. As a one-stop service provider, we offer a broad range of support solutions through the unique association of professional and specialized skills. Our clients have access to local and international expertise in Audit & Assurance, Tax & Accounting and Advisory & Financial Services. 2016 Grant Thornton Luxembourg, all rights reserved. Grant Thornton Luxembourg is a member of Grant Thornton International Ltd. Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently. Any and all references to Grant Thornton International refer to Grant Thornton International Ltd.