Meeting Report Code of Conduct Group 20 March 2013

EUROPEAN COMMISSION DIRECTORATE-GENERAL TAXATION AND CUSTOMS UNION Direct taxation, Tax Coordination, Economic Analysis and Evaluation Company Taxation Initiatives Meeting Report Code of Conduct Group 20 March 2013 I. EXECUTIVE SUMMARY The proposals made by CH were discussed first. However some delegates also noted that CH was susceptible to international pressure and that it would be unwise to end the dialogue prematurely, particularly in view of wider international developments (e.g. BEPS project). COM would make an oral report to CH on views expressed at the meeting. The UK's patent box measure was discussed. Following a presentation by the UK it was agreed that a description of the measure would be prepared for circulation to the Group. The UK wanted to try and have the description ready by the meeting in May. CY's rules for income from intangible property were not discussed. CY's document had been circulated prematurely as no expert was available to attend the meeting. However it was agreed to move to an agreed description of the CY regime as well. The UK:Isle of Man retail tax measure was notified to the Group. ES asked for more information concerning the purpose and impact of the regime. UK updated the Group on the progress of the rollback proposals for Gibraltar's Income Tax Act 2010 which it hoped would be circulated in time for the May meeting. The discussion of the paper on inbound profit transfers was deferred at the request of NL. The draft Model Instruction on cross-border rulings was presented to the Group and the deadline for comments noted. The revised draft guidance was discussed. The guidance relating to intermediary regimes (section 4) and special economic zones (section 5) was agreed. Paragraphs 1 to 4 of the introduction (section 1) were also agreed. However no agreement could be reached on paragraph 5 and after a lengthy discussion the item was adjourned. CHAIR updated the Group on the anti-abuse subgroup which met in January. It had made significant progress in reaching agreement on key issues and was due to meet again the following day to discuss a revised version of COM's original guidance. Commission européenne/europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIË - Tel. +32 22991111

II. REPORT 1. Work Package 2011 Links to Third Countries - Switzerland CHAIR explained that unless there were any objections agenda item 6 would be dealt with first as the Director General of TAXUD needed to be in Parliament during the afternoon. CHAIR said that CH's paper was only received recently so MS might need some time to consider it but he wanted to hear initial reactions. IT said that they were surprised by the room document and not in a good way. The question was what did IT want to do regarding the IT measures that had been identified by CH? The answer was nothing; they fell within the scope of IT's national competence and protected its tax base. Noting the recent developments such as the BEPS project and COM's recently announced action plan, IT said it would be inappropriate to have special treatment for CH. There can be no question of a "soft" acquis for CH. That would set a very bad precedent. EL said it was too early to answer and entered a political reservation. However in general EL agreed with IT's comments about national competence and protection of the tax base. FR agreed with IT and EL. The CH request was not acceptable. FR's anti-abuse rules were not targeted at CH but at abuse. DK agreed with the other delegations. CH was asking for too much from MS with regard to MS anti-abuse laws. However the Group had embarked on a dialogue and there were indications that something was changing in CH and CH would also be under pressure in the context of the BEPS project. Therefore, the Group should avoid a premature end to the dialogue. ES agreed with the other delegations SE also agreed with previous speakers. The CH demands were unacceptable. Antiabuse rules only applied where there was abuse; they could not be disapplied on the basis of promises. 2

DE said that CH companies could not be treated as EU companies. However, how should the Group proceed to keep the pressure on CH? As DK said, this needed to be examined. CZ agreed with the other MS. The CH position was not acceptable but it would make sense to continue to talk and look for alternatives. CZ wondered what COM thought. How does the CH proposal fit in with the Communication of December 2012? CHAIR said some reaction needed to be communicated to CH. COM said that If agreement was not reached by the summer, talks would end and MS would have to decide what they did. COM explained that the paper had only very recently been supplied by CH. CH had wanted COM's help with drafting it but COM had refused as CH had to be responsible for setting out its position. CHAIR said that the Group needed to act quickly as the current mandate expired in the summer. CH had to understand that the Code of Conduct was a political instrument and could not lead to a legally binding outcome. DE noted that the OECD's Forum on Harmful Tax Practices still had the CH regimes under detailed examination. CHAIR said that it was good that they were on the Forum's agenda but noted that the Forum moved very slowly. COM (PK) explained that as a result of the technical discussions CH knew the Group's views on the different regimes. There were clear links with the BEPS project and the work of the Forum on Harmful Tax Practices where the previous reluctance to look at sub-federal regimes appeared to have given way. FR said that the Group needed to be strict and clear, so that CH understood the message and noted that CH was sensitive to international pressure. The Group needed to stand firm and apply strong political pressure. The links with wider international developments meant that it was plainly not a good idea to weaken the Group's position at this point. CHAIR suggested that COM should answer in the name of the group. COM said it would report back to CH on the reaction of the group. COM will describe what has been discussed in the group. MS reserved the right to react to abuse. 3

CHAIR summarised saying that there would be no letter to CH only an oral report, today if possible. 2. Notification of Rollback and Standstill returns including administrative practices for year ending 31 January 2013 a) Standstill UK: patent box regime UK presented its patent box measure. DK asked how the rules would be used. Were they linked to research in UK or could the research be carried out abroad? UK said that the IP company needs to have developed the patent. In a group of companies the development had to have been done in the group. Where the development was undertaken by a related company the IP company needed to satisfy the "active management condition". DK said it was "fishing" for the extent to which research had to be carried out in the UK. Was it possible that research is carried out in a foreign company with the patent ending up in the UK with the related profits being taxed at a low rate? UK said that the measure was applicable if the development took place outside the UK in another group company. In which case the IP company would have to satisfy the active management condition. ES asked if the box included income from selling the patent as well as patented products? UK said yes. All such income would be taxed at a rate of 10% on net profits. DE asked what the requirements for "active management" were and how net profit would be calculated? UK explained that its published guidance referred to there being a significant amount of management carried out in the company with respect to the patent such as making plans for its development, granting licences, maintaining protection. The net profit figure was based on the UK's existing tax rules with the additional deduction of the amount of profit representing the routine return and the marketing return. COM noted its support for promoting innovation and said that with this type of regime the main risk related to economic substance. It COM's view the Group needed to be cautious due to the crossover with the BEPS project. COM was not suggesting that the patent box measure must be harmful but to say that it was not the procedure would need to be followed. DK said its interest stemmed from its view that the UK measure had the same effect on Danish companies as Switzerland's. It only need involve the movement of a few senior officers or accountants to shift half the profits. That was the effect of the regime. The Group needed to have a co-ordinated approach in this area. It was wrong for the first movers to secure all the advantages. DE agreed with DK. The Group should look at IP measures. An internal discussion was needed; either nobody should have such regimes or everyone should be free to have them. 4

UK noted the reasonableness of COM's comments. If MS needed more time to consider the regime the UK was happy to receive questions over the next few weeks. In response to DK UK said that they did not want this regime to become a way of diverting profit, therefore it had ensured that passive income was excluded through the exclusion of the routine return and marketing profits as well as the active management condition. The UK accepted DK and DE's point about fairness and said that the issue was worth considering at a European level. COM asked if the UK was proposing a more detailed discussion at a later meeting or was COM being asked to prepare an agreed description of the measure? UK clarified that it would respond to questions by consolidating its replies and circulating them before the next meeting via the Secretariat. DK said that it preferred a more general discussion as they believed they understood the UK measure only too well. COM said that DK had raised two issues, being a general concern about the UK and CY regimes and the wider matter of tax policy on patent boxes in the EU. There was also obviously the question of regimes that the Group had decided not to assess in the past and the planned discussion on guidance notes which included IP. COM believed that the first stage of any analysis that the Group wished to pursue should be the preparation of an agreed description rather than some new procedure which omitted it. The Group also needed to keep an eye to the future as a discussion about this issue would soon arise out of the BEPS project and the Group would need to have a sound position. CHAIR said it was up to the Group to decide whether an agreed description was to be made. DE said it was a difficult issue and not a pleasant one for some MS. However there were two regimes on the table and the Group should get stuck in and have a look at them. CHAIR asked the UK if it agreed to the preparation of an agreed description. UK said that it did. CHAIR said that room document 7 (Cyprus IP regime) had been circulated in error; no-one was available from CY to discuss the issue until the next meeting. COM said that if the UK regime were to be described the CY measure should be too. This would differ from room document 7 as it would only contain a factual description of the regime. CY said that it did not believe the regime was harmful but has happy to have bilateral talks to answer questions. CHAIR said, to be clear, the process would start with the UK and then move to CY irrespective of bilateral discussions. COM said the Group should not discuss the current CY document but establish the facts and then, on the basis of an agreed description, consider whether an assessment was necessary. Both regimes had to be treated in the same way. UK said it was content to move to an agreed description and intended to get the process under way as soon as possible, hopefully in time for the meeting in May. CHAIR agreed that it would be possible to have the UK's agreed description on the agenda for May, perhaps CY too but perhaps not. 5

b) Rollback UK:Gibraltar c) Standstill UK:Isle of Man retail tax UK explained that it had notified the IOM's retail tax measure. This would apply the 10% tax rate to retail profits of more than 500,000 in any accounting period. The new measure would affect less than twenty corporate taxpayers and raise around 3.5m of revenue. It would have no material impact on the number of corporate taxpayers so that 0% remained the rate generally prevailing in the IOM. ES said it wanted more information on the measure as it might materially extend the 10% rate. UK said it would prepare a note with IOM's assistance. 3. Work Package 2011 Monitoring the implementation of agreed guidance on inbound profit transfers 6

4. Work Package 2011 Administrative Practices Model Instruction CHAIR noted that there were three questions in room document 4. The deadline set for comments was 26 April. However the Chair wondered if it would be possible to address the third question at the meeting? IT noted that the scrutiny reservation it had expressed at CACT was included in the room document. IT wanted to be clear that it supported the exercise strongly. The point of the reservation was that the process had to be as transparent as possible. IT was keen to ensure that there was verifiable co-operation. COM said that it understood IT's position but noted that other Groups (such as CACT) operate under different legal frameworks. The collection of statistics would be very useful but MS would need to agree the process in the appropriate body and there also needed to be a legal basis for collecting them. COM said that it would argue for the rapid incorporation of unilateral APAs into the Model Instruction as this would send a clear signal to CACT. 7

CHAIR noted the merits of an early mandate and asked for other views. UK supported the ongoing work and would strongly support a mandate for CACT to integrate the two. DE, SE and AT agreed with the UK. NL asked for time to come back in writing. CHAIR agreed and asked for comments by the deadline set in the room document. COM's proposed organisation of the work was agreed. 5. Work Package 2011 Preparation of guidance or application notes CHAIR introduced the room document and asked whether the Group thought it would be possible to agree sections four and five of the revised draft guidance by silence? There were no comments so these sections were agreed. Turning then to the introduction the Group also agreed paragraphs 1 to 4 by silence. CHAIR then moved on to paragraph 5 and asked one of the countries that had proposed the changes to explain them. NL said that it was seeking to add clarity where the Group had decided not to assess particular regimes. DK said it accepted the text without the proposals from BE, LU and NL. FR, ES and DE supported DK. BE stressed that regimes that had been assessed and those that had not been had to be treated in the same way. COM said that there were evidently two divergent views. The question was how the Group should deal with past work. If there was no agreement on this it might be necessary to agree the guidance first and then, separately, deal with the new issue. Paragraph 5 of the draft guidance was discussed extensively. It was common ground that no measure could be immune from re-examination but there was no consensus on how measures that had not been formally assessed should be dealt with. After a short break in proceedings CHAIR adjourned the discussion. 6. Work Package 2011 Anti-Abuse: subgroup report CHAIR briefly summarised the positive progress made at the meeting of the subgroup that had been held in January. A further meeting was scheduled for the following day at which a revised version of the original guidance was due to be discussed. 7. Any other business None. --------------------------- 8