Tax Governance and BEPS - The Impact of OECD and EU Action on BEPS on Business. Prof. Dr. Ana Paula Dourado University of Lisbon

Transcription

1 Tax Governance and BEPS - The Impact of OECD and EU Action on BEPS on Business Prof. Dr. Ana Paula Dourado University of Lisbon

2 ABUSE IN EU LAW: LEGAL UNCERTAINTY IN DIRECT TAXES? (1) a main purpose or one of the main purposes to circumvent the application of the legislation of the Member State concerned in order to obtain a more favourable tax regime; (2) artificial arrangements or artificial exercise of the fundamental freedoms; (3) these artificial arrangements are aimed at circumventing the aforementioned national legislation; (4) national anti-abuse provisions have to be proportionate.

3 ABUSE IN EU HARMONIZED TAXES Article 15 Merger Directive: Valid commercial reasons (Foggia) VAT (Halifax et sub.): (1) the accrual of a tax advantage the grant of which is contrary to purpose of the legal provision; and (2) the obtaining of a tax advantage as the essential aim of the transactions concerned. (3) Halifax, normal commercial operations is an additional criterion to the previously mentioned tests. In Ocean Finance the Court abandoned the first of the aforementioned tests and focused on the artificiality of the transaction (C-653/11, (2013) ECR I-00000).

4 ONE SINGLE PRINCIPLE OF ABUSE IN EU LAW? In its broadest meaning there is abuse of law when there is an accrual of advantages in a manner that conflicts with the purposes and aims of the EC law provisions (Op. AG Poiares Maduro in Halifax) Acte clair: taking advantage of an EU right in order to benefit from a more favourable domestic legal system is not abuse (ICI, Emsland- Stärke, Op. AG Geelhoed in Akrich, Chen, Centros, Gemente Leusden and Holin Group, Cadbury Schweppes) The principle of abuse is an interpretative principle (of EU law) Abuse of law and Allocation of taxing powers (cases on cross border losses): esp. X Holding BV and SGI

5 ABUSE AS AN EXCEPTION? See also, EFTA, 9 July 2014, joined cases E-3/13 and E-20/13, Fred. Olsen and Others and Petter Olsen and Others, vs. the Norwegian State, paras Any formal exercise of an EUfundamental freedom is within the meaning and scope of the freedom

6 AGGRESSIVE TAX PLANNING, ABUSE and GAARs EC Recommendation C-(2012) 8806 of 12 December 28 GAARs recommended by the European Commission GAARS: An artificial arrangement or an artificial series of arrangements which has been put into place for the essential purpose of avoiding taxation and leads to a tax benefit shall be ignored. National authorities shall treat these arrangements for tax purposes by reference to their economic substance

7 GAARs PPT Rule recommended in BEPS Action 6: «Notwithstanding the other provisions of this Convention, a benefit under this Convention 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 this Convention»

8 ACTION 6 PPT RULE AND EU TAX LAW The PPT rule includes the two Halifax elements of the abuse principle in EU Law: (1) Whether the tax benefit granted is in accordance with the object and purpose of the relevant provisions in the tax treaty (2) Whether obtaining the tax benefit was one of the principal purposes of any arrangement or transaction BUT: In the PPT rule, if obtaining the tax benefit was one of the principal purposes of the arrangement or transaction, there is a presumption that the tax benefit is not in accordance with the object and purpose of the tax treaty provision No reference to artificiality

9 Action 6 No Reference to Aggressive Tax Planning but to evasion and avoidance (clearer than the EC Recommendations in this respect) Recommends that DTCs include in title and preamble a clear statement that the CS intend to avoid creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance including through treaty shopping: no compatibility issues with EU Law Recommends inclusion of LOBs in DTCs: ECJ considered them to be compatible with EU Law without applying an artificiality test Recommends a GAAR in DTCs

10 ACTION 6 The OECD recommended GAAR is to be introduced in DTCs and not in domestic law Note: Whereas the EC proposes a GAAR in domestic law and mismatch rules in DTCs, the OECD takes the opposite approach in both cases DTCs between MS still bound to EU law under the primacy principle Either GAARs in DTCs concluded between EU/EEA MS are to be adapted in line with the artificiality requirement Or the case-law will be adapted to the current standards What will take longer? Renegotiation of DTCs in order to include OECD recommendations or amendments in domestic law following EC recommendations?

11 AGGRESSIVE TAX PLANNING AND SUBJECT-TO- TAX CLAUSE Subject-to-tax clause recommended by the EC Recommendation (8806) 3.2..MS are encouraged to include an appropriate clause in their DTC.could read as follows: Where this Convention provides that an item of income shall be taxable only in one of the contracting States or that it may be taxed in one of the contracting States, the other contracting State shall be precluded from taxing such item only if this item is subject to tax in the first contracting State. Intended vs unintended gaps

12 Aggressive Tax Planning AGGRESSIVE TAX PLANNING in the EC RECOMMENDATION 3.3. Where, with a view to avoid double taxation through unilateral national rules, MS provide for a tax exemption in regard to a given item of income sourced in another jurisdiction, in which the item is not subject to tax, MS are encouraged to ensure that the item is taxed. 3.4.an item of income should be considered to be subject to tax where it is treated as taxable by the jurisdiction concerned and is not exempt from tax, nor benefits from a full tax credit or zero-rate taxation

13 AGGRESSIVE TAX PLANNING IN THE EC RECOMMENDATION The subjet-to-tax rule in the EC Recommendation (8806) is a general clause The Single Tax Principle? No reference to intended exemptions (or «with a view to avoid double taxation» covers only unintended exemptions?) And (very) low taxation in the source State? Are participation exemption regimes sentenced to death?

14 Aggressive Tax Planning in Action 2 OECD Action 2: more structured and more reasonable? Does it also cover intended double non-taxation? Definition, point 10: linking rules seeking to align the tax treatment of an instrument or entity with the tax outcomes in the counterpart jurisdiction but otherwise do not disturb the tax or commercial outcomes.

15 Aggressive Tax Planning in Action 2 Several linking rules: hybrid mismatch rules For domestic law to address (differently from the EC Recommendation) To avoid double taxation and ensure elimination of mismatch: Primary Response, Defensive rule, scope The PSD is at the forefront in adopting a linking rule similar to the one proposed by Action 2:

16 Aggressive Tax Planning in Action 2 Mismatch D/NI: Hybrid Financial Instrument: No dividend exemption for deductible payments Proportionate limitation of withholding tax credits However, in Action 2 the Primary Response: denial of deduction Whereas the PSD solution corresponds to the OECD Defensive Rule: Include as ordinary income Larger Scope in Action 2 than in the PSD: Related parties and structured arrangements

17 Interaction OECD influence in the final outcome of the PSD If a MS adopts the Action2 response domestically (deny payer deduction) The new rule in the PSD will not be activated It will in practice only operate as a defensive rule (include as ordinary income) Regarding the other Action 2 recommended hybrid mismatch rules for cases of disregarded payment made by a hybrid (deduction/ni outcome); payment made to reverse hybrids

18 Interaction Double deductions: deductible payment made by a hybrid, by dual resident Imported mismatch arrangements In all these cases, denial of payer deduction is the proposed response The main cases of mismatches due to hybrids are identified and there is no need for specific EU rules OECD recommendations in Action 2 and Compatibility with the fundamental freedoms OECD Action 2, point 30, in fine: Recommendations relate primarily to the rules concerning the elimination of double taxation If it is understood that linking rules are rules on allocation of taxing rights, they are not incompatible with the fundamental freedoms

19 Interaction INTERACTION Possible changes to OECD MC Art. 4 (3): dual treaty residence to be solved on a case-bycase basis and not on the basis of the current rule based on the place of effective management of entities In the case of PSD, e.g., dual residence will still be solved by the directive criteria (primacy), and the new GAAR may allow a case-by-case analysis OECD recalls that the exemption method should not be applied to dividends No problem in respect of the PSD, since the credit is one of the methods Action 2 may bring back the discussion on the equivalence of credit vs. Exemption method in EU law