tax obstacles in cross border planning · 2018-04-04 · 3 international fiscal association │ new...

International Fiscal Association USA Branch

New York Region

Fall Meeting | Thursday, December 1, 2016

Tax Obstacles in Cross Border Planning

Colleen O’Neill

Ernst & Young LLP

Maarten P. Maaskant Dirk-Jan (DJ) Sloof

PricewaterhouseCoopers LLP Ernst & Young LLP

Matt Ryan Godfried Schutz

PricewaterhouseCoopers LLP Deloitte LLP

2International Fiscal Association │ New York Region Fall Meeting | December 1, 2016

Colleen O’Neill

Ernst & Young LLP

Matt Ryan

PricewaterhouseCoopers LLP

Dirk-Jan (DJ) Sloof

Ernst & Young LLP

Maarten P. Maaskant

PricewaterhouseCoopers LLPGodfried Schutz

Deloitte LLP


EU tax update

Today’s agenda

• The Landscape

• Introduction and overall EU time line

• The CCTB and the CCCTB proposals in a nutshell

• The EU Anti-Tax Avoidance Directive and a recent

update proposal on hybrid mismatches

• UK Anti-hybrid rules

• State Aid update

• MLI


The Landscape

• Financing structures

– Transparency -- CBCR / exchange of rulings / Lux leaks

– State aid

– Anti-hybrid rules (including UK)

– CFC rules

– Interest deductibility restrictions

– MLI – PPT / LOB WHT


The Landscape (cont’d)

• Licensing structures

– DEMPE

– Irish Non-resident phase out

– Anti-hybrid rules (including UK)

– State aid




The Landscape (cont’d)

• Holding:

– CFC rules



All these developments are emanating from Europe


Timeline


Timeline – what is expected?

Red = Reality

Green = Very high likelihood

Blue = Possibility

Yellow = Uncertain

2016 2017 2018 2019 2020 2021

► State aid actions, targeting:

► Transfer pricing, using new EU TP concept

► Mismatches (double non-taxation, deduction/no inclusion)

► Rulings and regimes

► Parent Subsidiary Directive changes

► Intra-EU anti hybrid rule

► GAAR

► “Old” EU IP regimes

► No new entrants

► Phase out (July 2021)

► Exchange of ruling summaries started

► Country-by-Country reporting introduced in all EU MS

► Exchange of tax ruling summaries

► UK Anti-Hybrid rules:

► Applies to interest royalties, service fees, cost of goods sold.

► No deduction for payments made to disregarded havens; CV/BV and similar reverse hybrid structures and certain variants of “Double Irish”.

► Publication of List of tax havens

► Action 15 MLI

► First exchange of CbC reports

► Anti-Tax Avoidance Directive (ATAD):

► Interest limitation rules (30% EBITDA)

► EU-wide CFC rules

► EU GAAR

► ATAD 2: addressing mismatches with third countries (hybrid entities, hybrid instruments / hybrid branches, )

► EU-wide Common Corporate Tax Base (CCTB)

► Mandatory for groups with turnover of EUR 750M

► Broadly defined tax base (participation exemption, switch-over rules, NOL c/f, R&D deduction, NID regime)

► TP (upward adjustments only)

► Includes ATAD and ATAD 2’s measures

► ATAD:

► New exit rules

► “Old” EU IP regimes no longer applicable

► Common Consolidated Corporate Tax Base (CCCTB)

► Single tax return for all EU operations

► Taxable profits shared between Member States based on apportionment formula (1/3 sales, 1/3 labor, 1/3 assets (excluding intangible assets))

► 2016 ► 2017 ► 2018 ► 2019 ► 2020 ► 2021


Introduction ATAD and Oct 25th package

• The ATAD lays down rules in order to strengthen

the average level of protection against aggressive

tax planning in the internal market. The objective of

the Directive is to ensure a coordinated

implementation of certain BEPS outputs at the EU

level.

– Agreement on a final Directive was reached on 20 June

2016.



(cont’d)

• Member States must adopt and publish the laws,

regulations and administrative provisions necessary

to comply with this Directive by 31 December 2018

at the latest. As such, the rules should be

implemented at 1 January 2019 at the latest.

– An additional year is provided for the implementation of

the exit tax provisions (31 December 2019).



(cont’d)

– Member States which have (equally effective) national

targeted rules for preventing base erosion and profit

shifting risks, may defer implementation of the ATAD

interest limitation rules, but not until later than

1 January 2024.



(cont’d)

• On 25 October 2016, the European Commission

released its proposals for a major corporate tax

reform across the EU.

– a two-stage proposal towards a Common Consolidated

Corporate Tax Base (CCCTB);

– a Directive on Double Taxation Dispute Resolution

Mechanisms in the EU; and

– amendments to the ATAD agreed in June 2016, as

regards hybrid mismatches with third countries.



(cont’d)

• These legislative proposals will be submitted to the

European Parliament for consultation and to the

Council of the European Union for adoption. See

next slide for the envisaged time line.

– The proposals are subject to negotiations and all 28

Member States will have to unanimously agree to this

proposal before it can be adopted, and would then need

to incorporate it into their national law.


CCTB and CCCTB


EU Tax Update

Envisaged timeline CCTB and CCCTB

• Intended time line of the EU Commission to adopt

the CCTB and CCCTB is very ambitious.

• Currently not expected EU Member States will

reach unanimous agreement to the proposals within

suggested time frame of the EU Commission.

Furthermore compromises may need to be required

to adopt the directive.


EU Tax Update (cont’d)

Envisaged timeline CCTB and CCCTB

25 October 2016

• Initial proposal by the EU

Commission for the

renewed CCTB and

CCCTB.

Negotiations between Member States

• Negotiations/discussions between member states with respect to

both proposals;

• Potential amendments CCTB/CCCTB; and

• Intended agreement of all member states to final version of the

CCTB (including compromises).

Phase 1

January 1, 2019

• If approved, the CCTB Directive shall be adopted by

31 December 2018 in the domestic laws of EU

Member states, and its provisions shall apply from

1 January 2019.

Phase 2

January 1, 2021

• If approved it is suggested that the CCCTB Directive

shall be adopted by 31 December 2020 in the

domestic laws of EU Member states, and its

provisions shall apply from 1 January 2021.


ATAD1 recap and ATAD2 Proposal


ATAD1 recap

The ATAD contains anti-avoidance measures.

• ATAD provides minimum level of protection, Member

States could implement more strictly/additional anti-

avoidance rules

• Drafts contained a switch-over clause, but this clause

has been removed in the final version

• Anti-hybrid rule currently limited to EU situations

• Draft proposal for expansion to third countries was

launched on 25 October 2016

Potential consequences for US multinationals with

operations in Europe could include:

• Higher effective tax rate (ETR), e.g., due to a cap on

interest deductions and direct taxation of profits realized

by foreign subsidiaries and branches potentially in

multiple EU jurisdictions

• More structures may be challenged as a result of the

introduction of anti-hybrid rules and General Anti-Abuse

Rules (GAAR), potentially leading to more controversy

Intangible

property and

supply

chain

Holding

► Interest deduction limitation rules

► Anti-hybrid rules

► Controlled foreign company rules

► Rules on cross-border transfers of

assets, businesses and tax residence

► Anti-hybrid rules

Financing

Gen

eral

ant

i-abu

se r

ule


ATAD2 proposal

Amended hybrid mismatch (art. 9) – proposed

Background proposal:

• The proposed amendment seeks to amend the ATAD

agreed in June:

– Response to the ECOFIN Council statement of 20 June

2016, to put forward by October 2016, a proposal on hybrid

mismatches involving third countries in order to provide for

rules consistent with and no less effective than the rules

recommended by the OECD BEPS report on Action 2, with a

view to reaching an agreement by the end of 2016


ATAD2 proposal (cont’d)


• In addition to expanding the territorial scope to

include third countries, the proposal addresses

hybrid permanent establishment mismatches,

hybrid transfers, imported mismatches and dual

resident mismatches which are not currently

addressed by the ATAD, see next slide.


ATAD2 proposal (cont’d)


• Proposal will be submitted to the European

Parliament for consultation and to the Council of the

European Union for adoption. If the proposal will be

unanimously accepted by the Member States in its

current form, Member States will have to implement

it by 31 December 2018, and the provisions will

have to apply as from 1 January 2019.



Scope

Key elements of the amendments proposed on 25

October 2016

• The proposed amendments would expand the

territorial scope to third countries and address the

following mismatches:

– Hybrid entity mismatches (leading to a double deduction

or deduction without inclusion);



Scope (cont’d)

– Financial instrument mismatches (leading to a deduction

without inclusion);

• Mismatch occurs if the tax treatment of a financial instrument

differs between two jurisdictions.

– Hybrid transfers (leading to a deduction without

inclusion or double tax credit);

• Arrangement to transfer a financial instrument where the laws

of two jurisdictions differ on whether the transferor or the

transferee of a financial instrument has got the ownership of

the payments on the underlying asset.



Scope (cont’d)

– Hybrid PE mismatches (leading to non-taxation without

inclusion, double deduction or deduction without

inclusion);

– Imported mismatches (leading to double deduction or

deduction without inclusion); and

• Arrangements involving group members, or structured

arrangements, which shift the effect of a hybrid mismatch

between parties in third countries into the jurisdiction of a

Member State through the use of a non-hybrid instrument.

– Dual resident mismatches (leading to double deduction).



Scope (cont’d)

• The Member State shall neutralize the

abovementioned mismatches by:

– Denying the deduction (in case of double deduction);

– Including the payments in the taxable base (in case of

deduction without inclusion);

– Including the income in the taxable base (in case of

non-taxation without inclusion); or

– Limiting the benefit of the credit (in case of double tax

credit).


UK Anti-hybrid update


UK Action Item 2 Examples

1. Disregarded Havens

• Payment by UK Ltd to No Tax Co should

be considered under Chapter 7 – ‘Hybrid

payee D/NI mismatches’

• Mismatch is deemed to arise through

hybridity where:

– The payee is a hybrid entity;

– There is no territory where the payee is

resident 'for the purposes of a tax charged

under the law of that territory’ and payee’s

income is not taxed in a PE; and

– Income of the payee is not subject to a

CFC charge (UK or foreign).

• Applies to no tax entities (e.g. havens and

US LLCs)

• May apply to other entities…

No Tax Co

Non-US

UK Ltd

(UK)

Payments (Interest, royalties, COGS etc.)

US Inc



2. Hong Kong

• HK taxes resident and non-resident

companies based on a territorial system

• Offshore activity enables a proportion of

HK Cos income not to be taxed so all of

the payment is not ‘ordinary income’

under the UK anti-hybrid rules

• Consider Chapter 7 - ‘Hybrid payee D/ NI

mismatches’:

– Is HK Co resident in HK 'for the purposes

of a tax charged under the law of that

territory’?

• Consider Chapter 8 – ‘Multinational payee

D/NI mismatches’

– Does offshore activity reach the level of a

permanent establishment for Hong Kong,

the ‘PE jurisdiction, or the UK?

HK CO

(Hong Kong)UK Ltd

(UK)

Payments for cost of

goods sold

Non US

Offshore activity via

rep office / PE / sub

Principal

US Inc

Payments for

cost of goods

sold / service fee



3. Regarded No Tax

• Tax treatment of Principal should be considered under

Chapter 11 – ‘Imported mismatches’ as a result of the

UK payment.

• Payment by Principal to IP Owner should be

considered under Chapter 5 – ‘Hybrid payer D/NI

mismatches’

• Hybridity of Principal potentially impacts US tax

analysis of Top Co and IP Owner.

• Need to consider the US tax treatment if there is a UK

LRD and the royalty were to be regarded, including:

– Impact on ECI analysis;

– Impact on Subpart F analysis;

• Restructuring

– Required if there would be ECI

– To be considered if there would be Subpart F income

IP Owner

(No Tax)

Royalty

Top Co

(US)

Principal

(RoW)

IP

Payments (Interest,

royalties, COGS etc.)

RoW LRDs

(Including UK)



4. Other Imported Mismatches

• Tax treatment of Principal should be

considered under Chapter 11 – ‘Imported

mismatches’ as a result of the UK payment.

• Need to identify ‘arrangements’ entered into

in pursuance of, or in relation to the

Principal company activity.

• Payments by the Principal should be

considered as it if were UK tax resident.

• Potential mismatches include:

– Swiss Circular 8 rulings

– Branch remunerated on cost plus with head

office exemption

– Royalty payments to havens / hybrids

– Financing payments to disregarded haven /

hybrids

Other Country Cos

(EU)

IP

(Low / No tax)

Royalty

UK LRDs

Top Co

(US)

Principal

(RoW)

IP

Finco

(Low / No

Tax)

Interest

Payments (Interest,

royalties, COGS

etc.)

Procurement Co

(Low / No Tax)

Fee



4. Other Imported Mismatches, cont’d

• Restructuring to avoid UK payments gives

risk to DPT risk

• DPT threshold – is it reasonable to

assume UK service Co arrangement is to

avoid a UK PE?

• DPT exposure calculation:

– From June 28, 2016, DPT calculation

includes royalty payments deemed to

have UK source due to the avoided PE

– No deduction for royalty payments within

UK PE P&L under anti-hybrid legislation

from January 1, 2017

• Impact of the two rules is potentially an

effective 50% UK tax rate on royalty

payments

Reverse

Hybrid

Customer contractsPrincipal

UK Service Co

(UK)

Customers

Senior EU sales people with

activities in the UK and

routine UK sales support activities

Top Co

(US)

IPRoyalty


State aid update


State Aid

Fair competition on the EU’s internal market

• European law prohibits (potential) market distortion

through state intervention as this tilts the level

playing field in the European single market.

• State aid is broadly any measure, granted by a

Member State or funded out of State resources,

which could distort competition and affect trade

between Member States by favouring certain

taxpayers.


State Aid (cont’d)

Fair competition on the EU’s internal market

• A key criterion for state aid is that the measure must

be selective, whether by law or in practice. In

practice, selectivity is generally (but not always)

assessed through a three-step analysis:

1. Identify the reference framework.

2. Determine whether the measure derogates from that

framework.

3. Establish whether the derogation is justified by the

nature or general scheme of the framework.


Selectivity – General court in Santander case

Case T-399/11 Santander“48. (…) where the measure (…) even though it constitutes a derogation from

the common or ‘normal’ tax regime, is potentially available to all undertakings,

it is not possible to compare, in the light of the objective pursued by the

common or ‘normal’ regime, the legal and factual situation of undertakings

which are able to benefit from the measure with that of undertakings which

cannot benefit from it.

49. It follows from the foregoing that for the condition of selectivity to be

satisfied, a category of undertakings which are exclusively favoured by the

measure at issue must be identified in all cases and that (…) the mere finding

that a derogation from the common or ‘normal’ tax regime has been provided

for cannot give rise to selectivity.”


Opinion advocate-general (28 July 2016)

“84. It certainly does not follow either from the wording of Article 107(1) TFEU or from the

Court’s case-law that terms ‘favoring certain undertakings or the production of certain

goods’ require the identification of a category of undertakings which exhibit specific

characteristics and are exclusively favored by the measure at issue.....

92. After all, where the undertakings benefiting from a tax measure enjoy a tax advantage to

which they would not be entitled under the normal tax regime and which cannot be claimed

by undertakings performing similar operations, such a measure is selective in nature

because, contrary to what the General Court claims, it does not actually apply to all

economic operators. It is obvious that the measure at issue favors only the entirety of

economic operators which satisfy the conditions laid down, that is to say undertakings

taxable in Spain which acquire shareholdings in a ‘foreign company’, and excludes

economic operators which carry out similar operations, that is to say which acquire

shareholdings but in a company established in Spain.”


How does the EC know about the granting of

State aid?

• Suspected tax legislation and provisions?

– Formal notifications by Member States

– Complaints (by competitors)

– Included in formal documents, e.g. legislation

– Scholarly work and newspapers

• Tax rulings and settlements?

– EC can ask for a copy of the relevant documents

– Companies inform press and stakeholders of major fiscal

benefits

– Dissatisfied (former) employee

– Granted to certain undertaking (-s) undertaking = any legal

entity, regardless of its form or the way with which it is

financed, engaged in an economic activity, i.e. an activity

consisting in offering goods or services on a given market.


The State aid procedural steps

Informal investigation

Formal investigation

Decision EC RecoveryAppeal

(GC/CJ)

Council Regulation (EU) 2015/1589


State Aid – Where are we now?

Negative

decision +

appeal

2014 2015 2020 and beyond2017 2018 20192016

Opening

investigation

Negative

decision +

appeal

Opening

investigation

Negative

decision +

appeal

Opening

investigation

Opening

investigation

Opening

investigation

Negative

decision +

appeal?

Decision General

Court?Decision CJEU?

Decision General


Decision General


Decision General


Decision General


Decision General

Court?Decision CJEU?Opening

investigation

Negative

decision +

appeal?

Negative

decision +

appeal

Expansion

investigation to

rulings

Negative

decision +

appeal?

Decision General

Court?

Opening

investigation

Negative

decision +

appeal?

Decision General

Court?


Multilateral Instrument


Action plan 15Multilateral instrument to modify bilateral treaties

• The OECD released its Multilateral Convention

(MLI), together with an Explanatory Statement, on

Thursday, November 24, 2016

• The MLI supplements tax treaties with provisions,

most of which can be opted in or out of, in whole or

in part (with the exception of certain mandatory

inclusions).


Action plan 15 (cont’d)Multilateral instrument to modify bilateral treaties

• Treaty parties can also choose which of their

bilateral agreements will be included

• The MLI includes:

– Hybrid mismatches (Action 2): provisions for transparent

entities, elimination of double taxation, dual resident

companies


Action plan 15 (cont’d)Multilateral instrument to modify bilateral treaties

– Treaty abuse (Action 6): PPT is the standard, simplified

LOB can be an add on or detailed LOB (not included in

MLI).

• impact on use of holding companies and back-to-back

financing companies?

• alignment with EU law?

– Permanent establishments (Action 7): counter

avoidance of PEs

– Dispute resolution (Action 14)

– Arbitration

tax obstacles in cross border planning · 2018-04-04 · 3 international fiscal association │ new...

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