On 24 August 2016 the US Treasury published a detailed White Paper in which it warns the EU Commission of the implications its State aid investigation and decisions have for the US government and US companies.
The US Treasury claims that the Commission’s actions undermine the United States’ efforts in developing transfer pricing norms and implementing the OECD BEPS project. Also, that the Commission’s actions call into question the ability of Member States to comply with their bilateral tax treaties obligations with the US. The US Treasury argues that the Commission has departed from its long-standing methodology in a way which companies could not have anticipated and that it should not seek retroactive recoveries of tax under its new approach as it would be inconsistent with EU legal principles.
In the White Paper, the Treasury criticises the Commission’s new approach in State aid cases stating that the Commission now finds advantage and selectivity if it disagrees with the Member State’s application of the arm’s length principle. This shift in approach, according to the US Treasury, has expanded the role of the Commission’s Directorate General for Competition ‘beyond enforcement of competition and State aid law into that of a supra-national tax authority’.
The US Treasury has warned that if the Commission continues on this path, it will consider ‘potential responses’.
The full report can be found here.
This article appears in the JHA August 2016 Tax Newsletter, which also features:
On 30 August 2016, the Commission concluded that two consecutive tax rulings granted by Ireland to Apple in 1991 and 2007, respectively, amounted to illegal state aid and ordered Ireland to recover the unpaid taxes from Apple for the years 2003 to 2014 amounting to €13bn (ca.£11bn), plus interest.
The Commission held that Apple’s structure in Ireland did not correspond to economic reality as the greater part of the profits recorded by two Irish Apple subsidiaries were internally allocated outside Ireland to head offices that existed only on paper and that the profits so allocated were not subject to tax in any country. According to the Commission’s findings, as a result of the tax rulings granted by Ireland, Apple’s effective corporate tax rate was reduced from 1% in 2003 to 0.005% in 2014.
The Commission held that Ireland’s tax rulings endorsed an artificial allocation of profits, which had no factual or economic justification, enabling Apple to pay substantially less tax than other companies, which is not legal under EU state aid rules. Allocation of profits within a corporate group must, according to the Commission, be commercial and comply with the arm’s length principle.
It has been reported that both Ireland and Apple will appeal the Commission’s decision.
The Commission’s press release is available here. The full decision has yet to be published. From the press release it appears that the Commission has developed its new approach to the arm’s length test seen recently in the Starbucks ruling, namely, that provisions which on their face appear to introduce a recognised arm’s length test will nevertheless offend state aid rules where they permit artificial arrangements to benefit to the selective advantage of multinational groups over domestic ones. How the Court addresses this line of cases will be of considerable importance to any multinationals seeking transfer pricing rulings around the EU.
This article appears in the JHA August 2016 Tax Newsletter, which also features:
By Noor Kadhim
In July 2016, ExxonMobil declared force majeure on one of its key projects, in Qua Iboe (Nigeria), the country’s largest export stream. This allegedly followed a spate of destructive activity by a protest group, affecting Exxon’s project site. In these times of political instability, such declarations are becoming more frequent. Accordingly, to what extent has the force majeure clause evolved from being a bona fide justification for the impossibility of contractual performance to a back-door method of termination in times of economic difficulty or physical insecurity? In a post originally published on Kluwer Arbitration Blog, Noor Kadhim considers how force majeure is applied by the English courts and in ICC arbitral practice, focusing on the recent ICC award (1) Gujurat State Petroleum Corporation Ltd; (2) Alkor Petroo Limited; (3) Western Drilling Contractors Private Limited v (1) Republic of Yemen; (2) The Yemeni Ministry of Oil and Minerals(“Gujurat”) case. As the English case-law and Gujurat decision show, force majeure clauses are creatures of contract that must be interpreted and applied on their terms. Accordingly, each case will turn on three main elements: what is specifically included by the parties in their clause, the tribunal or judge’s perception of risk, and its evaluation of whether the evidence produced by the parties satisfies the requirements of the clause.
By Moritz Richter
The case concerns the lawfulness of a Portuguese withholding tax (‘WHT’) regime on certain interest payments. Non-resident financial institutions are subject to a 20% WHT on interest income. The WHT is applied to the gross amount, without allowing deductions for business expenses directly related to the financial activity carried out. In contrast, the interest income of resident financial institutions is taxed as part of the total taxable income at a rate of 25% after deduction of business expenses.
KBC (resident for tax purposes in Ireland) granted a loan to Brisal. 20% WHT was applied to the gross interest paid by Brisal to KBC. The claimants argued that the Portuguese WHT scheme infringed the freedom to provide services contrary to Article 49 EC (now Article 56 TFEU) and that it should be allowed, like resident financial institutions, to deduct from its taxable base its business expenses and financial costs relating to the loan. The Supreme Administrative Court of Portugal referred the dispute to the CJEU.
On 13 July 2016, the CJEU held that Article 49 does not preclude national legislation under which a WHT is applied to the interest income of non-resident financial institutions received within the member state, while resident financial institutions are not subject to that WHT. Such a WHT scheme is lawful as long as it is justified by an overriding reason in the general interest. The court held that Article 49 does however preclude national legislation which taxes non-resident financial institutions without giving them the opportunity to deduct business expenses directly related to the activity in question, when such an opportunity is given to resident institutions.
This article appears in the JHA July 2016 Tax Newsletter, which also features:
On 27 June 2016, after more than 10 years of work, the EU Council finally adopted a directive which harmonises national VAT rules in the area of transactions involving vouchers. The directive is narrower in scope than the one proposed by the Commission in 2012. It defines single-purpose vouchers and multi-purpose vouchers and sets out rules to determine the taxable value of transactions in both of these cases.
The directive is directed at increasing legal certainty for such transactions and stopping double taxation and non-taxation by reducing the risk of mismatches in national tax legislation. Such tax mismatches can arise in situations where a voucher is issued in one Member State and is ultimately used in another, particularly where vouchers are traded.
Vouchers are used most frequently in situations such as: pre-paid telecom cards, gift cards and price discount coupons for the purchase of goods or services.
Member States will have until 31 December 2018 to transpose the directive into national law. The provisions adopted will apply only to vouchers issued after that date.
The Council directive can be found here.
This morning it was announced that a majority of the British electorate voted to leave the European Union in yesterday’s referendum. The formal procedure for leaving the EU is likely to begin in around 3 months and once a new Prime Minister has been appointed after David Cameron’s resignation earlier today.
The only procedure available for exiting the EU is that provided in article 50 of the Treaty of the European Union. This requires the negotiation of a withdrawal agreement with the withdrawing state by the Council acting by a qualified majority and with the consent of the European Parliament. The withdrawal agreement is to regulate the future relationship of the withdrawing state with the EU. Estimates given for the period of negotiation have been from 4 to 9 years. Article 50(3) prescribes that the EU Treaty shall cease to apply to the UK from the date of entry into force of the withdrawal agreement or, failing that, two years from notification of withdrawal unless extended by agreement. Accordingly, treaty rights will likely continue to apply for a minimum period of 2 years from notification of withdrawal, which the Prime Minister has said today will not occur for 3 months.
Please contact us if you would like to discuss further the legal implications of “Brexit” on your tax affairs.
This article appears in the JHA June 2016 Tax Newsletter, which also features:
By Jivaan Bennett
In Degano Transporti, the District Court of Udine (Italy) was presented with an application by Degano Transporti (“the Taxpayer”) for approval of a debt compromise arrangement similar in nature to a Company Voluntary Arrangement. The proposed arrangement would result in the Italian tax authorities receiving only a partial payment of the Taxpayer’s VAT liability. The Court, of its own motion, requested a preliminary reference from the CJEU on the question of whether the acceptance by the Italian tax authority of a partial payment of the Taxpayer’s VAT liability would be in breach of the provisions of TFEU and the VAT Directive (Directive 2006/112/EC) concerning the principle of the fiscal neutrality and the obligation on Member States to take the necessary administrative and legislative measures to ensure the proper collection of VAT due.
The Court, largely following the Opinion of AG Sharpston, reasoned that the acceptance of the partial VAT liability would not constitute a breach of EU law. In particular, it noted three safeguards about the Italian insolvency legislation which militated in the Member State’s favour. First, the legislation in question permitted the arrangement to be valid only if an independent expert attests that the tax authority, as a creditor, would not enjoy better treatment in the event of the taxpayer being declared insolvent and subsequently liquidated. Secondly, the arrangement must be voted on by the creditors. This offers the tax authority the opportunity to oppose the partial payment of the tax liability. Thirdly, even if the arrangement is agreed between the majority of the creditors and the company, it requires court approval. During this final stage, the tax authority has a second opportunity to oppose the arrangement and demand full payment of the outstanding VAT liability.
For EU jurisdictions where there is an insolvency regime similar to the Italian system, this judgment will allay the concerns of insolvency practitioners as to compatibility with EU law.
This article appears in the JHA June 2016 Tax Newsletter, which also features:
By Jivaan Bennett
This appeal concerned financing arrangements compliant with Sharia law (Ijara arrangement). Under an Ijara arrangement, a financial institution buys an asset which its customer wishes to own and leases it back to him. The rent is calculated so that the financial institution will receive a return on its investment. The customer will also have an option to purchase the asset. On 31 January 2008, the Ministry of Defence sold the Chelsea Barracks to Project Blue Limited (“PBL”) for a sum of £959m (“Transaction 1”). However, pursuant to an Ijara arrangement, PBL completed a sale to Masraf al Rayan (“MAR”), a Qatari bank on the same day for a sum of £1.25b (“Transaction 2”). MAR simultaneously granted a 999 year lease to PBL along with various put and call options.
PBL sought to rely on ss. 45(3) and 71A of Finance Act 2003 which, it argued, granted a “double exemption” from SDLT on Transaction 1 and Transaction 2. Section 45 operates such that the disposal from MoD to PBL is disregarded because it occurred at the same time as, and in connection with the completion of the notional secondary contract. Parallel to this, PBL argued that it was entitled to s. 71A exemption from SDLT. Section 71A serves to relieve refinancing/alternative financing arrangements such that, where property belongs to the customer of a financial institution, neither a sale to the financial institution nor a subsequent lease-back of the property attracts SDLT. HMRC was willing to accept PBL’s argument but countered that, if accurate, it could rightly invoke the anti-avoidance provision, s. 75A so as to charge SDLT on the sum paid by MAR, £1.25b.
Unravelling the issues, the Court found that while Transaction 1 fell to be disregarded (s. 45), s. 71A was not intended to create an exemption for the acquisition by MAR. To enable this would create a huge gap through which arrangements (such as the Ijara arrangement) would attract no SDLT at all. Overall, the transaction was to be viewed as an acquisition from MoD by MAR (at a sum of £1.25b). Accordingly, the appeal was to be dismissed as the party responsible for the SDLT was MAR (and not PBL). On the basis that the chargeable consideration was £1.25b, reliance on s. 75A proved futile as the condition in s. 75A(1)(c) would not be satisfied.
This article appears in the JHA June 2016 Tax Newsletter, which also features:
Originally printed in Taxation on 15 June 2016
Part 10 of the Finance Bill 2016 contains a further raft of measures introduced as part of the government’s ‘war’ on tax avoidance. These days there is almost no point in questioning whether such measures are required or will make any real difference to the tax that is lost each year through avoidance. It will therefore be essential for advisers to be clear on the scope of these rules even if, as is likely, they are of limited practical importance to most taxpayers and advisers.
The new proposals cover changes to the general anti-abuse rule (GAAR), including a penalty, new controls intended to combat ‘serial tax avoiders’, sanctions on unco-operative large businesses and a range of additional measures directed at the offshore world.
On 8 June 2016, the EU Commission’s proposal for an EU wide Anti-Tax Avoidance Directive was approved by the EU Parliament, with 486 votes for, 88 against and 103 abstaining.
Although the directive was welcomed, MEPs have recommend stricter rules in a number of areas. They suggested, inter alia, more stringent limits on tax deductibility of interest and a stricter switch-over clause; adoption of a common definition of patent box, tax havens, and permanent establishment; drawing up an exhaustive black list of tax havens and countries (including those in the EU) and a list of sanctions for non-cooperative jurisdiction and financial institutions operating within those jurisdictions.
The CCCTB has also been put back on the table together with a pitch for creating a harmonised-common EU Taxpayer Identification Number (TIN) to be used as a basis for automatic exchange of information between EU tax authorities.
The text adopted can be found here.
It is now up to the Council either to accept or ignore the Parliament’s amendments, adopt the proposed Directive as it is or reject it.
