The CJEU has held in C-302/17 PPC Power that the Slovak tax on sold or unused greenhouse gas emission allowances is not compatible with EU law as it is contrary to the principle of the free allocation of allowances.
During 2011-2012 Slovakia levied a tax of 80% on allowances that were sold or were not used by entities participating in the EU Emission Trading System (‘EU ETS’). The allowances had been allocated to those entities free of charge in accordance with Directive 2003/87/EC (the ‘EU ETS Directive’).
The CJEU held that the free allocation of allowances was intended to prevent EU ETS regulated entities from losing competitiveness as a result of the introduction of the EU ETS. The economic value of allowances underpins the EU ETS, as selling unused allowances encourages undertakings to invest in emission reducing measures. However, depriving these undertakings of 80% of the value of such allowances removes most of the economic incentive to invest in measures to reduce emissions. In conclusion, the tax has the effect of neutralising the free allocation of allowances and is therefore incompatible with the EU ETS Directive.
This article appears in the JHA April 2018 Tax Newsletter, which also features:
The German Ministry of Finance has published its official guidance on the German anti-treaty shopping rule, in direct response to the decision of the Court of Justice of the European Union (‘CJEU’) in Joined Cases C-504/16 and C-613/16 Deister Holding and Juhler Holding (reported in the January 2018 newsletter). The CJEU had held that the German anti-treaty shopping provisions breached the Parent-Subsidiary Directive (‘PSD’).
Issued on 4 April 2018, the guidance provides that the previous German laws on anti-treaty shopping (dated 2007) are no longer to be applied in open cases where the foreign recipient of a distribution of profits claims a tax refund under the PSD, so that all such open cases must now be approved by the Federal Central Tax Office. Significantly, the guidance also comments on the applicability of the subsequent (2012) anti-treaty shopping provision. The guidance stipulates that the 2012 provision allows holding entities that only carry out asset management to claim tax relief under the PSD, provided that the said entity actually exercises its shareholder rights and does not merely exist for the purpose of avoiding tax.
It is worth noting that the guidance only concerns dividend withholding tax under the PSD. Specifically, the guidance does not affect withholding tax relief on interest or royalties (under the Interest and Royalties Directive) or relief on other dividends not falling within the scope of the PSD.
This article appears in the JHA April 2018 Tax Newsletter, which also features:
David Green QC is stepping down as Director of the Serious Fraud Office (SFO) this month, after six years in the job. The name of his successor remains undisclosed to date. Whoever that may be, he or she stands to inherit a complex legacy, which includes the increasing popularity of US-style Deferred Prosecution Agreements (DPAs).
The SFO has had a bumpy ride in its 30-year history. Mr Green’s appointment followed the controversial decision to terminate the investigation into bribery and corruption allegations at BAE Systems in relation to a multi-billion dollar arms deal with Saudi Arabia. Mr Green also inherited a botched investigation into the collapse of Icelandic bank Kaupthing: the badly mishandled dawn raids led to the SFO being sued by the Tchenguiz brothers and scathing judicial criticism.
It remains to be seen in which direction the SFO will be steered by its incoming director. During Green’s tenure, the only four DPAs that have ever been entered into in the UK were judicially approved in relation to Standard Bank, Rolls-Royce, Tesco and XYZ, a company whose anonymity is currently preserved on legal grounds. The financial penalty flowing from the Rolls-Royce DPA was the most significant at just under £500m.
The rationale behind DPAs is for corporates to avoid the uncertainties and reputational damage of a criminal prosecution and conviction (which may give rise to debarment from public tenders in certain circumstances) while encouraging self-reporting and cooperation by the potential targets of regulatory investigations. DPAs are resolved more quickly and cheaply than lengthy criminal trials and provide a corporate with the opportunity for PR control by virtue of the agreed statement of facts. Moreover, there is a financial incentive on both sides: the penalty is reduced for the corporate in line with guilty plea credit guidelines, and the Treasury is able to recoup the profit from the wrongdoing.
This system has been compared to having a “probation officer” for corporate entities – if the hefty financial penalty is not enough to deter, the threat of prosecution further down the line certainly will be. In addition, DPAs require signatories to remediate their alleged failings by the expiry of the agreement’s term and can impose other obligations, such as cooperation with overseas prosecution agencies and with any prosecution of individual employees in the UK.
Ultimately, however, the public interest against prosecution must outweigh those factors in favour of it. Whilst the SFO has described the stance the company takes once it becomes aware of the issue as a key factor in determining whether it will be offered a DPA or be subject to criminal prosecution, it should be noted that Rolls-Royce did not self-report, and only obtained a DPA (and a 50% reduction in financial penalty) on account of its “extraordinary” co-operation with the SFO. The large reduction afforded to Rolls-Royce in circumstances where the unlawful activity only came to light as a result of public statements made by a whistle-blower has been criticised as undermining the motivation for companies to self-report, particularly as there is no guarantee that a DPA will be offered and the company might be bringing to the attention of the SFO wrongdoing that would otherwise never have been discovered.
For his part, Mr Green has expressed his hope that the DPA system will continue for those firms that self-report and cooperate with the SFO.
‘Artificial intelligence’ (AI) no longer conjures up images from the early Noughties film Minority Report, but instead is vying to become the most powerful weapon in the fight against financial crime. What does AI mean in the legal and regulatory context? Data analysis technology is not new, but it is being newly applied to areas previously entrusted to human judgement, notably compliance.
According to the Financial Conduct Authority (FCA), UK banks spend around £5bn every year combating financial crime – £1bn more than the country spends on prisons. It was only a matter of time before banks would try to make their fraud and money laundering detection processes speedier, cheaper and more effective, and this is where AI can help. Speaking at the FinTech Innovation in Anti-Money Laundering (AML) and Digital ID regional event in London last year, Rob Gruppetta, Head of the Financial Crime Department at the FCA, was confident that AI can be particularly useful in monitoring a bank’s transactions to detect suspicious activity in real time, an area where there is significant potential for human error. The Financial Stability Board (FSB) also published a report last year on the impact of AI on financial services which identified potential benefits and risks to be monitored in the near future.
The financial services industry is increasingly turning to machine-based data analysis for their compliance processes. HSBC has recently partnered with UK start-up Quantexa and Silicon Valley-based Ayasdi to use their AI technology as part of a drive to automate compliance and process transactional data to identify potential money laundering activity. Other banks, from Singapore-based OCBC to Denmark’s Danske Bank, are rapidly following suit and innovating in fraud-detecting AI. Defence experts BAE Systems now provide financial crime technology solutions which allow banks and the National Crime Agency to share information, thus facilitating both compliance and law enforcement.
Beyond the perceived benefits that AI can bring, regulators such as the FCA and the FSB are rightly wondering if there are any drawbacks. Notably, can – and will – AI replace human-based compliance systems? Gruppetta’s speech suggests the FCA does not believe this to be the case. Rather, the FCA thinks AI will complement, but not replace human judgement in order to refine the decision-making model over time. The FSB’s report highlights the importance of appropriate risk management and oversight of AI, including adherence to data privacy and issues around cybersecurity. However, while AI may not fully replace human intervention, it may require tailor-made supervision by a new specialist regulatory body, as suggested by evidence given to the parliamentary Science and Technology Committee’s ‘Algorithms in decision-making’ inquiry.
Simon Whitehead, partner in the Joseph Hage Aaronson Contentious Tax team, is author of The Legal 500 and The In-House Lawyer Comparative Legal Guide to Tax in the United Kingdom.
The Guide is formatted as an easy-reference Q&A, and provides an overview of tax laws and regulations. The UK chapter provides an overview of areas including withholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
Advocate General (AG) Kokott has issued her Opinions on the interpretation of the beneficial owner concept in two sets of circumstances: under the Interest and Royalties Directive (IRD) (Joined Cases C-115/16, C-118/16 and C-119/16 N Luxembourg 1, X Denmark and C Danmark I, and C-299/16 Z Denmark) and under the Parent-Subsidiary Directive (PSD) (Joined Cases C-116/16 and C-117/16 T Danmark and Y Denmark).
The IRD cases involved Danish companies being given loans from and paying interest to companies based in other EU member states and ultimately owned by entities resident in third countries. Under the IRD, withholding tax is not chargeable on interest payments arising in an EU member state, so long as the beneficial owner of the payment is based in another member state. The PSD cases involved the payment of dividends from a Danish company to a company in another member state which was ultimately owned by a third country-based entity. Under the PSD, dividends from subsidiaries to parent companies are not subject to withholding tax, and there is no beneficial ownership requirement as with the IRD. In all cases the Danish tax authorities refused to grant an exemption from Danish withholding tax on the interest and dividend payments to the non-Danish, EU parent company. The Danish tax authorities interpreted the IRD and the PSD as meaning that the non-Danish, EU company in receipt of the income was a conduit and not the beneficial owner of the payment.
In the IRD cases, the AG took the view that the non-Danish, EU company receiving the interest was, in principle, the beneficial owner, as it was the entity entitled in law to demand payment of the interest. However, that company would not the beneficial owner where it was not acting in its own name and on its own account, but instead as a trustee for a third party. The AG listed some relevant aspects for the national court to consider when determining the existence or otherwise of a trust relationship. A refinancing agreement with another party on similar terms as the present case was not of itself conclusive of a trust. By contrast, arrangements such as identical refinancing interest rates and received interest rates, or the absence of costs for the parent company could indicate the existence of a trust.
With regard to the PSD cases, AG Kokott confirmed that the exemption to withholding tax under this Directive was not subject to a condition of beneficial ownership. Consequently, the next question was whether there was an abuse under EU law, namely a wholly artificial arrangement to escape national tax normally due on profits. The AG’s view was that a determination of abuse was a matter for the national court on the facts. In itself, the existence of a parent company in another member state so as to profit from that state’s tax legislation was not abusive, but abuse may exist if that company did not have the structure to achieve its purposes and generate an income.
This article appears in the JHA March 2018 Tax Newsletter, which also features:
This judgment relates to the proceedings between Volkswagen AG and the Finance Directorate of the Slovak Republic. The dispute arose after a partial refusal by the Finance Directorate of the Slovak Republic of an application for a refundof value added tax (‘VAT’), charged several years after the initial delivery of the supplied goods to Volkswagen AG.
The Slovak government argued that the 5 year limitation period (Law No 511/1992 on Tax Administration, ‘The Tax Code’), starting from the date of delivery of the goods, had already expired when the application for deduction was made on 1 July 2011.
The legal context asks whether the fixing of the starting date of the five year limitation period is compatible with EU law on the common system of value added tax. While current EU law on the common system of value added tax holds that the ‘right to deduct’ (Article 167 of Directive 2006/112) is an integral part of the VAT scheme, the ‘right to deduct’ is also subject to substantive requirements or conditions (judgment of 19 October 2017, Paper Consult, C-101/16, paragraph 38).
The CJEU found that EU law must be interpreted to preclude national legislation of a Member State in circumstances, such as the main proceedings, when the exercise of the right to claim a refund expired before the VAT tax was charged and an application for a refund was submitted.
This article appears in the JHA March 2018 Tax Newsletter, which also features:
The new Directive aims to amend Directive 2011/16/EU, which concerns administrative cooperation in the field of taxation. The proposed legislation places an obligation on intermediaries to report on potentially aggressive tax planning arrangements.
While the existing tax instruments at EU level do not contain explicit provisions requiring Member States to exchange information in the case of tax avoidance and/or evasion schemes, DAC contains a general obligation for the national tax authorities to spontaneously communicate information to the other tax authorities within the EU.
The new reporting requirements have an effective date of 1 July 2020, with EU Member States obliged to exchange information every three months after that. The first exchange will take place by 31 October 2020.
This article appears in the JHA March 2018 Tax Newsletter, which also features:
The US District Court for the Eastern District of New York has recently ordered a real-estate developer to pay an extraordinary sum of damages (totalling $6.75 million) to a group of artists to compensate them for destroying a large number of graffiti art on the 5Pointz building in Queens, New York City (see decision of 12 February 2018 here).
5Pointz, originally a largely dilapidated former factory in a crime infested neighbourhood of NYC, has been owned by Jerry Walkoff since the 1970s. After being approached by street artists for permission to paint on the outer walls of the building, granting such permission and putting Jonathan Cohen, a famous street artist, in charge, 5Pointz soon became a major attraction drawing thousands of visitors and being used in movies, on television and music videos.
All this came to an abrupt end when the graffiti art was whitewashed by Mr Walkoff following the denial of a preliminary injunction for the prevention of a planned demolition of 5Pointz, but before the court had made a final decision.
The artists went on to request damages for the demolition of their graffiti art on the basis that Mr Walkoff had acted contrary to the Visual Artists Rights Act (VARA) which grants some moral rights to artists (such as rights of attribution and integrity).
The court considered the artists’ right of integrity, whereby the artist can prevent the destruction of a work of visual art when it is of recognised stature or is prejudicial to the artist’s honor or reputation. The court had no problem in finding that 45 of the 49 works had recognised stature and commented that “even under the most restrictive of evidentiary standards almost all of the plaintiffs’ works easily qualify as works of recognized stature.” The key evidence accepted by the court included the testimony of an expert art appraiser, Renee Vara; as well as of Jonathan Cohen himself, described by the court as “one of the world’s most accomplished aerosol artists.”
The main contention of Mr Walkoff was that street art works are ephemeral and that VARA should not afford protection to temporary works. This was however rejected by the court who found that, although VARA does not directly address the issue, it resolves the tension between building owners’ rights and the artist’s rights, thus protecting temporary works. Section 113 of VARA provides protection in two circumstances when a protected work of art has been integrated into a building: (i) when the artwork cannot be removed from the building (in this case the artist may sue to prevent the destruction of the work unless he waived this right) and (ii) when the artwork can be removed, so contemplating that the work can be temporary.
In the latter case, VARA gives the opportunity to the artist to save the work upon receipt of a 90 days’ written notice from the building owner. If the artist fails to remove within the 90 days or if the owner could not notify the artist after making good effort, the artist’s VARA rights are deemed waived and the owner may destroy them without consequences. No such notice was given by Mr Walkoff in this case.
The Court therefore went on to find that the artists’ works were legally protected under VARA and that Mr Wilkoff willfully broke the law in destroying 5Pointz before having the Court’s permit and failing to give the 90 days’ notice to the artists to remove their works provided by VARA. The size of the award represented a total of statutory damages for the individual works concerned awarded at the maximum level. One of the strongest factors behind the award of damages at the maximum level was Mr Walkoff’s attitude and the audacity of the destruction. In contrast the artists were seen to have “conducted themselves with dignity, maturity, respect, and at all times within the law”.
The decision, although on its face a triumph for street artists, could leave real estate owners reluctant to allow artists to use their buildings for the creation of such art.
Advocate General (“AG”) Wathelet of the CJEU has issued his Opinion in C-685/16 EV v Finanzamt Lippstadt. The AG found that the German participation exemption regime applicable to company dividends originating in non-EU countries was incompatible with the free movement of capital. Non-EU dividends had to comply with stricter requirements than German dividends in order to qualify for the exemption, even though the two types of dividends were objectively comparable. This difference in treatment amounted to a restriction on the free movement of capital which could not be justified on grounds of overriding public interest, such as combating tax avoidance or ensuring the effectiveness of fiscal controls.
This article appears in the JHA February 2018 Tax Newsletter, which also features:
