2016 saw an active European Commission make significant progress on EU tax reform. Inter alia the Commission introduced proposals to tackle avoidance improve transparency and reform corporate tax. In order to tackle avoidance the Commission introduced a seven-part anti-tax avoidance package including the Anti-Tax Avoidance Directive which member states must transpose into national law largely by the end of 2018. Also the Commission unveiled proposals to improve tax transparency and completed its first step towards creating an EU list of ‘non-cooperative’ tax jurisdictions. Following the 2015 action plan towards the end of 2016 the Commission proposed another comprehensive corporate tax reform package which consisted of four new draft EU Directives; namely two directives on the relaunch of the common consolidated corporate tax base (one directive on the common corporate tax base and one on the common consolidated corporate tax base); a directive...
During the year coming to its end, the Commission has been exceptionally active and the member states in Council relatively cooperative. This is to be expected, following the momentum that was built up during the OECD’s project to tackle base erosion and profit shifting (BEPS), finalised in October 2015, and due to the follow up from the Commission’s work between 2012 and 2015.
Especially noteworthy is the Commission’s action plan A fair and efficient corporate tax system in the EU, released in June 2015, with key actions including a strategy to relaunch the common consolidated corporate tax base (CCCTB) and improved dispute resolution mechanisms (see www.bit.ly/2gbmjji). The Commission also published a first pan-EU list of third country uncooperative tax jurisdictions and initiated a public consultation to assess whether companies must publicly disclose certain tax information. In October 2015, it announced that the member states had reached an agreement on the automatic exchange of tax rulings (see www.bit.ly/1Oi8PP7). The Savings Directive was also abolished.
However, save for the state aid cases, few could have predicted the intensity of the developments in 2016. This article briefly reviews these developments, focusing on direct taxation.
The anti-tax avoidance package
In January 2016, the Commission presented its anti-tax avoidance package, which was part of the Commission’s ambitious agenda for fairer, simpler and more effective corporate taxation in the EU. The anti-tax avoidance package consisted of seven parts:
a proposed Anti-Tax Avoidance Directive;
a recommendation on the implementation of measures in the OECD/G20 BEPS initiative regarding treaty abuse and on permanent establishments (PEs);
a proposed amendment to the Mutual Assistance Directive (2011/16) regarding the mandatory automatic exchange of information to enable the coordinated implementation of the country by country (CBC) reporting requirements under the OECD/G20 BEPS initiative;
a general policy communication on the anti-tax avoidance package and a proposed way forward;
a general policy communication on an EU external strategy for effective taxation;
a Commission staff working document; and
a study on aggressive tax planning.
In the draft Anti-Tax Avoidance Directive, the Commission addressed six elements relating to international and base erosion and profit shifting issues (see www.bit.ly/2fSa61Q). It also proposed action in the three areas covered by the proposals regarding the OECD/G20 BEPS initiative: hybrid mismatches; interest restrictions and CFCs. However, the proposed Directive also proposed actions in three areas not reflected in the BEPS action plan; namely, a general anti-abuse rule (GAAR); a switch over clause; and exit taxation.
In the recommendation on the implementation of measures to deal with treaty abuse, member states were urged to implement the proposals of the OECD/G20 BEPS initiative to address treaty abuse. Where member states include in tax treaties a GAAR based on a principal purpose test (PPT), as suggested in the final report on Action 6 of the OECD/G20 BEPS initiative, i.e. the prevention of treaty abuse, the Commission has recommended that the GAAR should be modified to comply with the case law of the CJEU, such that genuine economic activities are not affected.
The Commission again proposed to amend the Mutual Assistance Directive (2011/16) to ensure adoption of Action 13 of the OECD/G20 BEPS initiative regarding CBC reporting requirements by extending the scope of the Directive (see www.bit.ly/2gNwi1G). When the communication was published, the proposed amendment was expected to be approved soon and to become effective on 1 January 2017. It was indeed approved at the ECOFIN meeting in May 2016 (see below).
In the general policy communication, the Commission explained the rationale behind the anti-tax avoidance package (see www.bit.ly/2fZwOsn). The OECD/G20 BEPS initiative was endorsed. At the same time, however, it was stated that the EU could and should go further to ensure that the member states develop a common standard and level playing field by implementing the anti-tax avoidance package in a coordinated manner.
In the communication on an EU external strategy for effective taxation (see www.bit.ly/2gTEDNT), the Commission discussed ideas to promote tax good governance with non-EU countries, for example, by way of a special clause in trade agreements with third countries. The Commission also announced its intention to develop a screening process to assess and list third countries on the basis of their adherence to, or lack of, basic indicators of tax good governance. An update of the controversial June 2015 list of non-EU country uncooperative tax jurisdictions was published online in an interactive map (see www.bit.ly/1N1ZfxN).
In the context of the anti-tax avoidance package, the Commission published a new study on aggressive tax planning, which it had commissioned to identify indicators that facilitate such tax planning (see www.bit.ly/2gTIKcO). In the study, the corporate income tax systems of member states were reviewed with regard to certain indicators to identify tax rules and practices that could result in member states becoming vulnerable to aggressive tax planning.
Finally, a staff working document accompanied the anti-tax avoidance package (see www.bit.ly/2gg1t22). The annex of this document included an overview of the action plan of the OECD/G20 BEPS initiative and the corresponding EU actions.
The most substantial part of the package – and arguably the most controversial one – was the Anti-Tax Avoidance Directive. In May 2016, the European Parliament’s Economic and Monetary Affairs (ECON) Committee approved the Commission’s proposal for the Anti-Tax Avoidance Directive, thereby clearing the way for a vote by the ECOFIN.
The ECOFIN meeting of 25 May 2016 was presented with both a presidency compromise text on the draft Directive and a proposal for a general approach (see www.bit.ly/2gNIyz2). The objective of the meeting was, at least, to agree on a general approach. While there was strong agreement on the need to counter aggressive tax planning at an EU level, several member states were concerned with the presidency’s compromise proposal. Therefore, notwithstanding the determination of the Dutch presidency, in the first half of 2016, the Commission and some member states, notably France and Germany, to adopt the proposed Anti-Tax Avoidance Directive, at the ECOFIN meeting of 25 May 2016, a final agreement could not be reached. As has been reported, there were disagreements, relating to the scope of the hybrid mismatch rules, as to whether the switch-over rules should form part of the Directive and whether the effective taxation requirements in the proposal infringed the tax autonomy of the member states, especially the right to set the level of taxation. Concern was also expressed with regard to the CFC rules and whether they should apply both inside and outside the EU, the substance requirement, and where the burden of proof for substance should be placed.
The January 2016 proposal to amend the Mutual Assistance Directive (2011/16) with regard to the mandatory automatic exchange of information in the field of taxation (i.e. the equivalent of Action 13 of BEPS) was adopted without discussion. The information to be reported within this document is similar to that described in Action 13 of the BEPS action plan. MNE groups should provide annually and for each tax jurisdiction in which they do business: the amount of revenue; profit before income tax; and income tax paid and accrued. MNE groups should also report the number of their employees, stated capital, accumulated earnings and tangible assets in each tax jurisdiction. Finally, they also should identify each entity within the group doing business in a particular tax jurisdiction and provide an indication of the business activities in which each entity is engaged. The information above should be reported on an aggregated basis for all entities resident in a specific jurisdiction and not entity by entity.
Under the amended directive, the obligation to prepare a CBC report will apply to very large MNE groups for which the total consolidated group revenue exceeds €750m (or an amount in local currency approximately equivalent to €750m). The obligation of preparing a CBC report will apply for the fiscal year commencing on or after 1 January 2016 (subject to exceptions).
The CBC reporting concerns both MNE groups headquartered in an EU member state and those headquartered outside the EU. If the parent entity is headquartered outside the EU, one of the subsidiaries or branches established within the EU and appointed by the parent entity will be in charge of the CBC report on behalf of the parent.
Political agreement on the Anti-Tax Avoidance Directive was finally reached in June 2016, following the silence procedure (i.e. approved ‘by default’ in the absence of objections). The silence procedure ended at midnight on 20 June 2016. As no objections were raised by the deadline, political agreement was reached and the presidency submitted the file to the Council for formal adoption. In the final compromise text of the draft Anti-Tax Avoidance Directive, the proposal for a switch-over clause was deleted.
On 12 July 2016, the Council of the European Union formally adopted the new version of the Anti-Tax Avoidance Directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market (see www.bit.ly/2h1WhDa).
Member states now have until 31 December 2018 to transpose the Directive into their national laws and regulations, except for the exit taxation rules, for which they have until 31 December 2019. Member states that have targeted rules that are equally effective to the interest limitation rules may apply them until the OECD reaches agreement on a minimum standard, or until 1 January 2024 at the latest.
Improving tax transparency
In a press release released on 5 July 2016 (see www.bit.ly/29iRv1I), the European Commission unveiled its latest proposals to tackle terrorism financing and money laundering, as well as the next steps to increase tax transparency and tackle tax abuse. The new proposals included two legislative proposals to amend the Anti-Money Laundering Directive (2015/849/EU) and the Mutual Assistance Directive on Administrative Cooperation in the field of direct taxation (2011/16/EU).
The Commission also published a communication on further measures to enhance transparency and the fight against tax evasion and avoidance (see www.bit.ly/2fZaLTW). The proposed measures were aimed at addressing tax abuse, protecting tax good governance globally and fostering a better business environment in the internal market.
The key actions included proposals to improve tax transparency and harness the link between anti-money laundering and tax transparency rules. In the context of this, the Commission proposed that tax authorities have access to national anti-money laundering information, in particular as regards beneficial ownership and due diligence information. This was to be attained through an amendment to the Mutual Assistance Directive (2011/16). The Commission also proposed that both existing and new accounts be subject to due diligence controls; and that passive companies and trusts be subject to higher scrutiny and tighter rules. This was to be attained through amendments to the Anti-Money Laundering Directive (2015/849), which would be adopted by the European Parliament and the Council of the European Union as co-legislators.
In order to improve information exchange on beneficial ownership, the Commission would examine the most appropriate framework through which member states could automatically exchange national information on beneficial owners of companies and trusts with a potential tax impact.
As a further action, the Commission would also examine ways to increase the oversight of enablers and promoters of aggressive tax planning and ensure that effective disincentives apply to them. With this aim, the Commission was going to launch a public consultation to gather feedback in autumn 2016.
As a final action, the Commission was to endeavour to improve the protection of whistle-blowers. As noted, the protection of whistle-blowers in the private sector contributes to address mismanagement and irregularities, including cross-border corruption relating to national or EU financial interests. Also, from the perspective of the functioning of the single market and corporate social responsibility, it can help to discipline companies and protect societal interests (see pages 9–10 of the Commission communication).
In a similar manner, on 6 July 2016, the European Parliament voted in plenary session on the report prepared by the Special Committee on Tax Rulings and Other Measures Similar in Nature or Effect (TAXE2) (see www.bit.ly/2gslqCY). The report, which was adopted by 514 votes to 68, with 125 abstentions, contained recommendations to make corporate taxation fairer and clearer and to tackle tax evasion and aggressive tax planning. The Special Committee urged the Commission to present a proposal on the CCCTB before the end of 2016, and to present concrete legislation on transfer pricing issues and clarifying guidelines as regards their interaction with state aid.
Other concrete recommendations were made for making corporate taxation fairer and clearer, such as:
an EU register of beneficial owners of companies;
a tax havens blacklist;
sanctions against non-cooperative tax jurisdictions;
action against abuse of ‘patent box’ regimes;
a code of conduct for banks and tax advisors;
tax good governance rules in EU trade agreements;
a CCCTB; and
a withholding tax on profits leaving the EU.
Earlier on, on 8 June 2016, the European Parliament had voted for the creation of the Panama papers committee of inquiry. The TAXE report and the European Parliament’s resolution are indicative of the increasing pressure that the European Parliament is putting on other EU institutions with respect to countering aggressive tax planning and promoting tax transparency.
Good tax governance and the listing process
On 14 September 2016, the Commission completed the first step of the new EU listing process: a scoreboard of all third countries and jurisdictions for tax purposes according to key indicators, including economic data, financial activity, institutional and legal structures, and basic tax good governance standards (see www.bit.ly/2fZjMMS). The Commission emphasised that the scoreboard did not represent any judgement of third countries, nor was it a preliminary EU list. It was merely ‘an objective and robust data source, produced by the Commission, to help member states in the next steps of the common EU listing’.
In the scoreboard, the results of a thorough pre-assessment were presented, under which third country jurisdictions were analysed to determine their risk of facilitating tax avoidance. This pre-assessment was firstly based on a wide range of neutral and objective indicators; namely:
strength of economic ties to the EU: to see how strong the economic ties are between the third country and the EU, indicators such as trade data, affiliates controlled by EU residents and bilateral FDI flows were examined;
financial activity: to determine if a jurisdiction had a disproportionately high level of financial services exports, or a disconnection between their financial activity and the real economy, indicators such as total FDI, specific financial income flows and statistics on foreign affiliates were used; and
stability factors: to see if the jurisdiction would be considered by tax avoiders as a safe place to put their money; general governance indicators such as corruption and regulatory quality were examined.
For each indicator, the jurisdiction with the highest value received ‘1’, the second highest received ‘2’, and so forth.
The jurisdictions that featured strongly in these three categories (table I) and the five jurisdictions with transparency agreements with EU (table II) were then set against risk indicators, such as:
their level of transparency and exchange of information: the jurisdictions’ status with regard to the international transparency standards, i.e. exchange of information on request and automatic exchange of information;
the potential use of preferential tax regimes: the existence of potential preferential regimes, identified by the Commission on the basis of publicly available information (IBDF, national websites, etc.); and
the existence of a tax system with no corporate income tax or a zero corporate tax rate.
These three risk indicators reflected the situation in July 2016. The risk indicators did not pre-empt the in-depth analysis of jurisdictions’ tax systems, which would take place in the screening stage (step 2). It was only intended to provide member states with as much information as possible to decide on the jurisdictions that they would want to screen.
As a second step, member states in the Code of Conduct Group would choose which third countries should be screened more fully so as to determine the non-cooperative jurisdictions. In the final step, member states would decide whether to add the jurisdiction in question to a common EU list of problematic tax jurisdictions. This decision will be based mainly on the screening process.
The corporate tax reform package
Following on its commitments from the 2015 action plan, on 25 October 2016, the Commission proposed another comprehensive tax package which consisted of four new draft EU Directives on:
the common corporate tax base (CCTB Directive);
the common consolidated corporate tax base (CCCTB Directive);
hybrid mismatches with third countries; and
double taxation dispute resolution mechanisms in the EU.
These proposals are analysed below.
The relaunch of the CCCTB/CCTB
As already mentioned, in its 2015 summer action plan, the Commission had announced that it would relaunch the CCCTB project in 2016. This would be done through a two step approach: member states would first agree on rules for a CCTB, after which agreement would be reached on the consolidation element. Neither the original proposal published in 2011 (see www.bit.ly/2gXtQDC), nor the current proposals involved changes to member states’ corporate tax rates.
Indeed, the proposals relaunched in October 2016 consisted of two separate draft directives: one for a CCTB (see www.bit.ly/2gXwEAC ); and the other for a CCCTB (www.bit.ly/2gssShp). If approved, the CCTB proposal would apply from 2019 and the CCCTB proposal from 2021. The difference between the CCTB and the CCCTB is the cross-border consolidation of profits and losses, as well as the elimination of intra-group transactions.
What is noteworthy – and to an extent expected – was that under the new proposals the focus of attention has shifted from the objective of facilitating corporate groupings and simplifying compliance, to countering tax avoidance. The draft directives contain provisions which are similar to those adopted under the Anti-Tax Avoidance Directive (ATAD). However, in order to ensure a more harmonised implementation, the new proposals give member states less flexibility to apply stricter rules than required by ATAD.
An important difference between this proposal and the 2011 proposal is that the new rules (both CCTB and CCCTB) are mandatory for large corporate groups, i.e. for groups with a consolidated revenue exceeding €750m. Companies falling outside the scope of the Directive may opt to apply its rules under certain conditions (voluntary opt-in). The proposed rules are limited to EU-resident companies and EU PEs. Contrary to the 2011 CCCTB proposal, the revised PE definition refers only to PEs situated in the EU and belonging to a taxpayer resident for tax purposes in the EU. EU PEs of third country companies are not covered – their position is to be dealt with in bilateral tax treaties and national law.
Under the new proposal, there is a super-deduction for R&D costs: on top of the amounts already deductible for R&D costs, a deduction of an extra 50% of R&D costs each tax year will be granted for costs up to €20m and 25% for expenditure above this level. An enhanced 100% extra deduction would be available for start-ups for R&D expenditure up to €20m (see proposed article 9(3)). The CCTB does not provide for a patent or innovation box, but this is thought to be a good alternative to entice member states to agree to the proposal and abandon their own patent boxes. It will also help attract high value R&D activities to the EU.
Another addition to the CCTB proposal is the allowance for growth and investment (AGI) which was inserted to neutralise the current asymmetry between debt and equity financing (see proposed article 11). The AGI is defined as the difference between the equity of a taxpayer and the tax value of its participation in the capital of associated enterprises. Pursuant to this rule, taxpayers will be given a deduction in respect of a notional yield on defined increases in their equity (the AGI equity base). This will be deductible from their taxable base subject to certain conditions dealing with anti-tax avoidance. In the case of an AGI equity base decrease, an amount equal to the notional yield of the AGI equity decrease shall become taxable. ‘The outcome is a definitive advantage in favour of financing through debt as opposed to equity’ (see explanatory memorandum preceding the proposal).
The CCCTB proposal sets out the conditions for the formation of a consolidated tax group and the mechanism for formulary apportionment and allocation of the consolidated tax base to the relevant member states. In addition, there are rules for entering and leaving a group, the treatment of losses, business reorganisations and the intra-group transfer of assets. Under the CCCTB proposal, consolidation would be mandatory to all groups that fall within the scope of the CCTB proposal. Effectively, therefore, consolidation would be mandatory for large groups (with a consolidated group revenue exceeding €750m) and would be limited to EU companies and EU PEs.
Groups that do not meet the size threshold are allowed to opt in so as to benefit from consolidation (see proposed article 2(3). A qualifying subsidiary means every immediate and lower-tier subsidiary in which the parent company has a right to exercise more than 50% of the voting rights and it has an ownership right amounting to more than 75% of the subsidiary’s capital or profit (see proposed article 5(1)).
The formula is the same as that proposed in 2011 and is based on three equally weighted factors: labour, assets and sales. As in the 2011 proposal, intangible assets are excluded from the base of the asset factor.
Furthermore, as in the original proposal, there are detailed administrative provisions for consolidated groups. The CCCTB is meant to offer qualifying groups a one-stop shop approach – the group would deal with one EU tax administration in the EU, which is usually the member state where the group’s parent company is resident.
Proposed Directive on hybrid mismatch arrangements
Along with the CCTB and CCCTB proposals, as expected from earlier announcements, the Commission proposed a directive to broaden the scope of the Anti-Tax Avoidance Directive as regards hybrid mismatch arrangements (see www.bit.ly/2h9Hfvg), so as to align it with the corresponding provisions in the CCTB proposal. Under the proposed directive, the hybrid provisions would not only apply to mismatch arrangements within the EU, but also to mismatches arising in relation to third countries. The hybrid provisions would also deal with mismatches involving PEs, imported mismatches, hybrid transfers and dual resident mismatches. The underlying principle of the proposals is for the member state to align its tax treatment with that of the third country, unless the mismatch has already been eliminated by the third country.
At the 6 December 2016 ECOFIN meeting, agreement was not reached on this proposal. As several last minute changes were made to the draft text of the proposal, a number of member states indicated that they were not in a position to approve the revised text and needed more time to consider.
Proposals to improve dispute resolution
The Commission delivered on an earlier promise to improve the existing dispute resolution mechanism for the elimination of double taxation. While for companies within the CCCTB system it was expected that double taxation would be significantly reduced, issues would still arise with non-EU companies or companies outside the CCCTB system. Although an EU Arbitration Convention existed, this had substantial shortcomings. Therefore, the Commission presented a draft directive to improve double tax dispute mechanisms within the EU, which would have a wider scope, be more effective, work quicker and be less costly (see www.bit.ly/2gaXUN5).
State aid cases
Undoubtedly, the most prominent decisions have been the Commission’s decisions in several high profile state aid cases.
In January 2016, the Commission published its final decision in the Belgian excess profits case (see www.bit.ly/1mPZbcz). The Commission largely confirmed the preliminary conclusions of the opening decision in finding that the excess profit provision constitutes unlawful fiscal state aid which must be recovered. The Belgian excess profits regime was only available to a limited number of multinational companies and, in particular, it was not available to stand-alone companies only active in Belgium. The regime could result in the exemption of a significant part of the income of Belgian companies, resulting in double non-taxation.
The Commission found that the regime derogated from normal practice under Belgian company tax rules and the ‘arm’s length principle under EU state aid rules’. The press release referred to at least 35 beneficiaries and estimated the amount of the recovery at €700m. The non-confidential version of the decision, published in May 2016, included an annex listing the names of the companies that entered into tax rulings with the Belgian authorities and the total amount of excess profit deduction allowed under these rulings. The Belgian government has filed an official action for annulment with the General Court of the European Union against this decision.
The non-confidential version of the final decisions in Starbucks and Fiat also referred to the concept of EU state aid rules. (These decisions came out in 2015 but only a summary of them was published. The non-confidential full versions of these decisions were released in the summer of 2016.) According to the Commission, the arm’s length principle is neither the one derived from OECD article 9 nor the one under national transfer pricing provisions, but is a general principle under TFEU article 107(1). If accepted by the CJEU (both cases are being appealed), the concept of state aid under article 107(1) is likely to gain a whole new dimension, quite challenging for transfer pricing purposes.
Furthermore, on 6 June 2016, the Commission published its opening decision in the formal investigation into two tax rulings obtained by McDonald’s entities in Luxembourg (see C(2015) 8343 final). In the opening decision, the Commission argued that Luxembourg’s tax rulings (an initial tax ruling and then a revised one which confirmed the initial ruling) constituted state aid. This was because the rulings provided that McDonald’s Europe was exempt from tax because its royalty income was attributable to the United States, despite Luxembourg knowing that the company was not being taxed there.
The Commission argued that: ‘The Luxembourg tax administration, by confirming in the revised tax ruling an erroneous interpretation of the Luxembourg/US DTT and the Luxembourg domestic law that transposes it, in full knowledge of the fact that the US Franchise Branch is not subject to taxation in the United States, confers a selective advantage to McD Europe for the purposes of TFEU article 107(1), as compared to Luxembourg tax resident companies in a similar legal and factual situation that are taxed on all their accounting profits, since that erroneous interpretation results in the non-taxation of a sizeable portion of McDonald’s Europe’s accounting profits.’ (para 92)
The Commission argued that Luxembourg had not provided any possible justification for the selective treatment of McDonald’s Europe resulting from the revised tax ruling (para 93). In any event, the Commission was unable to identify ‘any possible ground for justifying the preferential treatment that could be said to derive directly from the intrinsic, basic or guiding principles of the reference system or that is the result of inherent mechanisms necessary for the functioning and effectiveness of that system’ (para 94).
Moreover, on 3 June 2016, the Commission’s Competition Directorate published its working paper on state aid and tax rulings. The working paper provided an overview of the Commission’s preliminary orientations after review of member states’ tax ruling practices. In this working paper, it was noted that if an arrangement complied with the OECD transfer pricing guidelines, including the guidance on the choice of the most appropriate transfer pricing method, and led to a reliable approximation of a market based outcome, it was unlikely to give rise to state aid. It was stated that the DG Competition’s focus was on cases where there was a manifest breach of the arm’s length principle.
On 24 August 2016, the United States Department of the Treasury released a white paper on the European Commission’s recent state aid investigations of transfer pricing rulings (see www.bit.ly/2bQdFVn). The white paper acknowledged the shared view of the US Treasury and the Commission on tax avoidance by multinational companies, but also outlined the US Treasury’s concerns with the Commission’s approach.
These concerns are likely to be exacerbated following the Commission’s final decision in the Apple case, the summary of which was released on 30 August 2016 (see press release at www.bit.ly/2bOwMln). The Commission concluded that the two tax rulings issued by Ireland to Apple had substantially and artificially lowered the tax paid by Apple in Ireland since 1991. This was because the rulings endorsed a way to establish the taxable profits for two Irish incorporated companies of the Apple group (Apple Sales International and Apple Operations Europe), which did not correspond to economic reality: almost all sales profits recorded by the two companies were internally attributed to a ‘head office’. This head office existed only on paper and could not have generated such profits. As such, the profits allocated to the head office were not subject to tax in any country under specific provisions of the Irish tax law, which are no longer in force. According to the Commission, as a result of the allocation method endorsed in the tax rulings, Apple only paid an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014 on the profits of Apple Sales International.
The Commission concluded that the selective tax treatment of Apple in Ireland was illegal under the state aid rules, as it gave Apple a significant advantage over other businesses that were subject to the same national taxation rules. Ordering a recovery of illegal state aid for the ten-year period preceding the Commission’s first request for information in 2013, Ireland was effectively asked to recover unpaid taxes of up to €13bn, plus interest.
The Commission did allude to the fact that the tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire single market. This was due to Apple’s decision to record all sales in Ireland, rather than in the countries where the products were sold. It was conceded that this structure was outside the remit of EU state aid control. However, if other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland. This potentially opens the battlefield to more member states to claim a taxable base from Apple.
Ireland has applied to annul the decision; Apple is expected to do so. Therefore, state aid litigation in this area is likely to continue, with all eyes now on the CJEU that is to deliberate on these cases.
Conclusion
These are the major developments from 2016. It is undeniable that the EU is meeting its pledge to deal with tax evasion and aggressive tax planning. Whether the measures regarding enhanced transparency will improve the capacity of the member states to address harmful tax practices and profit shifting beyond EU borders, without having a detrimental effect on the international competitiveness of EU companies, remains to be seen.
There is obviously motivation within the EU to strengthen the EU corporate tax rules against aggressive tax planning. There is certainly an impetus to benefit from the political momentum, with the Commission fast-tracking many legislative proposals or amendments at Council level, which the author has argued elsewhere are questionable from the perspective of EU compatibility. It should, however, be questioned whether, in the absence of harmonisation in the EU, the Commission is currently going too far in restricting options for tax competition. One could argue that an EU strategy focusing so much on countering tax avoidance and aggressive tax planning risks restricts the single market, and thereby reduces its efficiency and potential. In the absence of a single fiscal market, such an ad hoc strategy can only do more damage than good in the long term.
2016 saw an active European Commission make significant progress on EU tax reform. Inter alia the Commission introduced proposals to tackle avoidance improve transparency and reform corporate tax. In order to tackle avoidance the Commission introduced a seven-part anti-tax avoidance package including the Anti-Tax Avoidance Directive which member states must transpose into national law largely by the end of 2018. Also the Commission unveiled proposals to improve tax transparency and completed its first step towards creating an EU list of ‘non-cooperative’ tax jurisdictions. Following the 2015 action plan towards the end of 2016 the Commission proposed another comprehensive corporate tax reform package which consisted of four new draft EU Directives; namely two directives on the relaunch of the common consolidated corporate tax base (one directive on the common corporate tax base and one on the common consolidated corporate tax base); a directive...
During the year coming to its end, the Commission has been exceptionally active and the member states in Council relatively cooperative. This is to be expected, following the momentum that was built up during the OECD’s project to tackle base erosion and profit shifting (BEPS), finalised in October 2015, and due to the follow up from the Commission’s work between 2012 and 2015.
Especially noteworthy is the Commission’s action plan A fair and efficient corporate tax system in the EU, released in June 2015, with key actions including a strategy to relaunch the common consolidated corporate tax base (CCCTB) and improved dispute resolution mechanisms (see www.bit.ly/2gbmjji). The Commission also published a first pan-EU list of third country uncooperative tax jurisdictions and initiated a public consultation to assess whether companies must publicly disclose certain tax information. In October 2015, it announced that the member states had reached an agreement on the automatic exchange of tax rulings (see www.bit.ly/1Oi8PP7). The Savings Directive was also abolished.
However, save for the state aid cases, few could have predicted the intensity of the developments in 2016. This article briefly reviews these developments, focusing on direct taxation.
The anti-tax avoidance package
In January 2016, the Commission presented its anti-tax avoidance package, which was part of the Commission’s ambitious agenda for fairer, simpler and more effective corporate taxation in the EU. The anti-tax avoidance package consisted of seven parts:
a proposed Anti-Tax Avoidance Directive;
a recommendation on the implementation of measures in the OECD/G20 BEPS initiative regarding treaty abuse and on permanent establishments (PEs);
a proposed amendment to the Mutual Assistance Directive (2011/16) regarding the mandatory automatic exchange of information to enable the coordinated implementation of the country by country (CBC) reporting requirements under the OECD/G20 BEPS initiative;
a general policy communication on the anti-tax avoidance package and a proposed way forward;
a general policy communication on an EU external strategy for effective taxation;
a Commission staff working document; and
a study on aggressive tax planning.
In the draft Anti-Tax Avoidance Directive, the Commission addressed six elements relating to international and base erosion and profit shifting issues (see www.bit.ly/2fSa61Q). It also proposed action in the three areas covered by the proposals regarding the OECD/G20 BEPS initiative: hybrid mismatches; interest restrictions and CFCs. However, the proposed Directive also proposed actions in three areas not reflected in the BEPS action plan; namely, a general anti-abuse rule (GAAR); a switch over clause; and exit taxation.
In the recommendation on the implementation of measures to deal with treaty abuse, member states were urged to implement the proposals of the OECD/G20 BEPS initiative to address treaty abuse. Where member states include in tax treaties a GAAR based on a principal purpose test (PPT), as suggested in the final report on Action 6 of the OECD/G20 BEPS initiative, i.e. the prevention of treaty abuse, the Commission has recommended that the GAAR should be modified to comply with the case law of the CJEU, such that genuine economic activities are not affected.
The Commission again proposed to amend the Mutual Assistance Directive (2011/16) to ensure adoption of Action 13 of the OECD/G20 BEPS initiative regarding CBC reporting requirements by extending the scope of the Directive (see www.bit.ly/2gNwi1G). When the communication was published, the proposed amendment was expected to be approved soon and to become effective on 1 January 2017. It was indeed approved at the ECOFIN meeting in May 2016 (see below).
In the general policy communication, the Commission explained the rationale behind the anti-tax avoidance package (see www.bit.ly/2fZwOsn). The OECD/G20 BEPS initiative was endorsed. At the same time, however, it was stated that the EU could and should go further to ensure that the member states develop a common standard and level playing field by implementing the anti-tax avoidance package in a coordinated manner.
In the communication on an EU external strategy for effective taxation (see www.bit.ly/2gTEDNT), the Commission discussed ideas to promote tax good governance with non-EU countries, for example, by way of a special clause in trade agreements with third countries. The Commission also announced its intention to develop a screening process to assess and list third countries on the basis of their adherence to, or lack of, basic indicators of tax good governance. An update of the controversial June 2015 list of non-EU country uncooperative tax jurisdictions was published online in an interactive map (see www.bit.ly/1N1ZfxN).
In the context of the anti-tax avoidance package, the Commission published a new study on aggressive tax planning, which it had commissioned to identify indicators that facilitate such tax planning (see www.bit.ly/2gTIKcO). In the study, the corporate income tax systems of member states were reviewed with regard to certain indicators to identify tax rules and practices that could result in member states becoming vulnerable to aggressive tax planning.
Finally, a staff working document accompanied the anti-tax avoidance package (see www.bit.ly/2gg1t22). The annex of this document included an overview of the action plan of the OECD/G20 BEPS initiative and the corresponding EU actions.
The most substantial part of the package – and arguably the most controversial one – was the Anti-Tax Avoidance Directive. In May 2016, the European Parliament’s Economic and Monetary Affairs (ECON) Committee approved the Commission’s proposal for the Anti-Tax Avoidance Directive, thereby clearing the way for a vote by the ECOFIN.
The ECOFIN meeting of 25 May 2016 was presented with both a presidency compromise text on the draft Directive and a proposal for a general approach (see www.bit.ly/2gNIyz2). The objective of the meeting was, at least, to agree on a general approach. While there was strong agreement on the need to counter aggressive tax planning at an EU level, several member states were concerned with the presidency’s compromise proposal. Therefore, notwithstanding the determination of the Dutch presidency, in the first half of 2016, the Commission and some member states, notably France and Germany, to adopt the proposed Anti-Tax Avoidance Directive, at the ECOFIN meeting of 25 May 2016, a final agreement could not be reached. As has been reported, there were disagreements, relating to the scope of the hybrid mismatch rules, as to whether the switch-over rules should form part of the Directive and whether the effective taxation requirements in the proposal infringed the tax autonomy of the member states, especially the right to set the level of taxation. Concern was also expressed with regard to the CFC rules and whether they should apply both inside and outside the EU, the substance requirement, and where the burden of proof for substance should be placed.
The January 2016 proposal to amend the Mutual Assistance Directive (2011/16) with regard to the mandatory automatic exchange of information in the field of taxation (i.e. the equivalent of Action 13 of BEPS) was adopted without discussion. The information to be reported within this document is similar to that described in Action 13 of the BEPS action plan. MNE groups should provide annually and for each tax jurisdiction in which they do business: the amount of revenue; profit before income tax; and income tax paid and accrued. MNE groups should also report the number of their employees, stated capital, accumulated earnings and tangible assets in each tax jurisdiction. Finally, they also should identify each entity within the group doing business in a particular tax jurisdiction and provide an indication of the business activities in which each entity is engaged. The information above should be reported on an aggregated basis for all entities resident in a specific jurisdiction and not entity by entity.
Under the amended directive, the obligation to prepare a CBC report will apply to very large MNE groups for which the total consolidated group revenue exceeds €750m (or an amount in local currency approximately equivalent to €750m). The obligation of preparing a CBC report will apply for the fiscal year commencing on or after 1 January 2016 (subject to exceptions).
The CBC reporting concerns both MNE groups headquartered in an EU member state and those headquartered outside the EU. If the parent entity is headquartered outside the EU, one of the subsidiaries or branches established within the EU and appointed by the parent entity will be in charge of the CBC report on behalf of the parent.
Political agreement on the Anti-Tax Avoidance Directive was finally reached in June 2016, following the silence procedure (i.e. approved ‘by default’ in the absence of objections). The silence procedure ended at midnight on 20 June 2016. As no objections were raised by the deadline, political agreement was reached and the presidency submitted the file to the Council for formal adoption. In the final compromise text of the draft Anti-Tax Avoidance Directive, the proposal for a switch-over clause was deleted.
On 12 July 2016, the Council of the European Union formally adopted the new version of the Anti-Tax Avoidance Directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market (see www.bit.ly/2h1WhDa).
Member states now have until 31 December 2018 to transpose the Directive into their national laws and regulations, except for the exit taxation rules, for which they have until 31 December 2019. Member states that have targeted rules that are equally effective to the interest limitation rules may apply them until the OECD reaches agreement on a minimum standard, or until 1 January 2024 at the latest.
Improving tax transparency
In a press release released on 5 July 2016 (see www.bit.ly/29iRv1I), the European Commission unveiled its latest proposals to tackle terrorism financing and money laundering, as well as the next steps to increase tax transparency and tackle tax abuse. The new proposals included two legislative proposals to amend the Anti-Money Laundering Directive (2015/849/EU) and the Mutual Assistance Directive on Administrative Cooperation in the field of direct taxation (2011/16/EU).
The Commission also published a communication on further measures to enhance transparency and the fight against tax evasion and avoidance (see www.bit.ly/2fZaLTW). The proposed measures were aimed at addressing tax abuse, protecting tax good governance globally and fostering a better business environment in the internal market.
The key actions included proposals to improve tax transparency and harness the link between anti-money laundering and tax transparency rules. In the context of this, the Commission proposed that tax authorities have access to national anti-money laundering information, in particular as regards beneficial ownership and due diligence information. This was to be attained through an amendment to the Mutual Assistance Directive (2011/16). The Commission also proposed that both existing and new accounts be subject to due diligence controls; and that passive companies and trusts be subject to higher scrutiny and tighter rules. This was to be attained through amendments to the Anti-Money Laundering Directive (2015/849), which would be adopted by the European Parliament and the Council of the European Union as co-legislators.
In order to improve information exchange on beneficial ownership, the Commission would examine the most appropriate framework through which member states could automatically exchange national information on beneficial owners of companies and trusts with a potential tax impact.
As a further action, the Commission would also examine ways to increase the oversight of enablers and promoters of aggressive tax planning and ensure that effective disincentives apply to them. With this aim, the Commission was going to launch a public consultation to gather feedback in autumn 2016.
As a final action, the Commission was to endeavour to improve the protection of whistle-blowers. As noted, the protection of whistle-blowers in the private sector contributes to address mismanagement and irregularities, including cross-border corruption relating to national or EU financial interests. Also, from the perspective of the functioning of the single market and corporate social responsibility, it can help to discipline companies and protect societal interests (see pages 9–10 of the Commission communication).
In a similar manner, on 6 July 2016, the European Parliament voted in plenary session on the report prepared by the Special Committee on Tax Rulings and Other Measures Similar in Nature or Effect (TAXE2) (see www.bit.ly/2gslqCY). The report, which was adopted by 514 votes to 68, with 125 abstentions, contained recommendations to make corporate taxation fairer and clearer and to tackle tax evasion and aggressive tax planning. The Special Committee urged the Commission to present a proposal on the CCCTB before the end of 2016, and to present concrete legislation on transfer pricing issues and clarifying guidelines as regards their interaction with state aid.
Other concrete recommendations were made for making corporate taxation fairer and clearer, such as:
an EU register of beneficial owners of companies;
a tax havens blacklist;
sanctions against non-cooperative tax jurisdictions;
action against abuse of ‘patent box’ regimes;
a code of conduct for banks and tax advisors;
tax good governance rules in EU trade agreements;
a CCCTB; and
a withholding tax on profits leaving the EU.
Earlier on, on 8 June 2016, the European Parliament had voted for the creation of the Panama papers committee of inquiry. The TAXE report and the European Parliament’s resolution are indicative of the increasing pressure that the European Parliament is putting on other EU institutions with respect to countering aggressive tax planning and promoting tax transparency.
Good tax governance and the listing process
On 14 September 2016, the Commission completed the first step of the new EU listing process: a scoreboard of all third countries and jurisdictions for tax purposes according to key indicators, including economic data, financial activity, institutional and legal structures, and basic tax good governance standards (see www.bit.ly/2fZjMMS). The Commission emphasised that the scoreboard did not represent any judgement of third countries, nor was it a preliminary EU list. It was merely ‘an objective and robust data source, produced by the Commission, to help member states in the next steps of the common EU listing’.
In the scoreboard, the results of a thorough pre-assessment were presented, under which third country jurisdictions were analysed to determine their risk of facilitating tax avoidance. This pre-assessment was firstly based on a wide range of neutral and objective indicators; namely:
strength of economic ties to the EU: to see how strong the economic ties are between the third country and the EU, indicators such as trade data, affiliates controlled by EU residents and bilateral FDI flows were examined;
financial activity: to determine if a jurisdiction had a disproportionately high level of financial services exports, or a disconnection between their financial activity and the real economy, indicators such as total FDI, specific financial income flows and statistics on foreign affiliates were used; and
stability factors: to see if the jurisdiction would be considered by tax avoiders as a safe place to put their money; general governance indicators such as corruption and regulatory quality were examined.
For each indicator, the jurisdiction with the highest value received ‘1’, the second highest received ‘2’, and so forth.
The jurisdictions that featured strongly in these three categories (table I) and the five jurisdictions with transparency agreements with EU (table II) were then set against risk indicators, such as:
their level of transparency and exchange of information: the jurisdictions’ status with regard to the international transparency standards, i.e. exchange of information on request and automatic exchange of information;
the potential use of preferential tax regimes: the existence of potential preferential regimes, identified by the Commission on the basis of publicly available information (IBDF, national websites, etc.); and
the existence of a tax system with no corporate income tax or a zero corporate tax rate.
These three risk indicators reflected the situation in July 2016. The risk indicators did not pre-empt the in-depth analysis of jurisdictions’ tax systems, which would take place in the screening stage (step 2). It was only intended to provide member states with as much information as possible to decide on the jurisdictions that they would want to screen.
As a second step, member states in the Code of Conduct Group would choose which third countries should be screened more fully so as to determine the non-cooperative jurisdictions. In the final step, member states would decide whether to add the jurisdiction in question to a common EU list of problematic tax jurisdictions. This decision will be based mainly on the screening process.
The corporate tax reform package
Following on its commitments from the 2015 action plan, on 25 October 2016, the Commission proposed another comprehensive tax package which consisted of four new draft EU Directives on:
the common corporate tax base (CCTB Directive);
the common consolidated corporate tax base (CCCTB Directive);
hybrid mismatches with third countries; and
double taxation dispute resolution mechanisms in the EU.
These proposals are analysed below.
The relaunch of the CCCTB/CCTB
As already mentioned, in its 2015 summer action plan, the Commission had announced that it would relaunch the CCCTB project in 2016. This would be done through a two step approach: member states would first agree on rules for a CCTB, after which agreement would be reached on the consolidation element. Neither the original proposal published in 2011 (see www.bit.ly/2gXtQDC), nor the current proposals involved changes to member states’ corporate tax rates.
Indeed, the proposals relaunched in October 2016 consisted of two separate draft directives: one for a CCTB (see www.bit.ly/2gXwEAC ); and the other for a CCCTB (www.bit.ly/2gssShp). If approved, the CCTB proposal would apply from 2019 and the CCCTB proposal from 2021. The difference between the CCTB and the CCCTB is the cross-border consolidation of profits and losses, as well as the elimination of intra-group transactions.
What is noteworthy – and to an extent expected – was that under the new proposals the focus of attention has shifted from the objective of facilitating corporate groupings and simplifying compliance, to countering tax avoidance. The draft directives contain provisions which are similar to those adopted under the Anti-Tax Avoidance Directive (ATAD). However, in order to ensure a more harmonised implementation, the new proposals give member states less flexibility to apply stricter rules than required by ATAD.
An important difference between this proposal and the 2011 proposal is that the new rules (both CCTB and CCCTB) are mandatory for large corporate groups, i.e. for groups with a consolidated revenue exceeding €750m. Companies falling outside the scope of the Directive may opt to apply its rules under certain conditions (voluntary opt-in). The proposed rules are limited to EU-resident companies and EU PEs. Contrary to the 2011 CCCTB proposal, the revised PE definition refers only to PEs situated in the EU and belonging to a taxpayer resident for tax purposes in the EU. EU PEs of third country companies are not covered – their position is to be dealt with in bilateral tax treaties and national law.
Under the new proposal, there is a super-deduction for R&D costs: on top of the amounts already deductible for R&D costs, a deduction of an extra 50% of R&D costs each tax year will be granted for costs up to €20m and 25% for expenditure above this level. An enhanced 100% extra deduction would be available for start-ups for R&D expenditure up to €20m (see proposed article 9(3)). The CCTB does not provide for a patent or innovation box, but this is thought to be a good alternative to entice member states to agree to the proposal and abandon their own patent boxes. It will also help attract high value R&D activities to the EU.
Another addition to the CCTB proposal is the allowance for growth and investment (AGI) which was inserted to neutralise the current asymmetry between debt and equity financing (see proposed article 11). The AGI is defined as the difference between the equity of a taxpayer and the tax value of its participation in the capital of associated enterprises. Pursuant to this rule, taxpayers will be given a deduction in respect of a notional yield on defined increases in their equity (the AGI equity base). This will be deductible from their taxable base subject to certain conditions dealing with anti-tax avoidance. In the case of an AGI equity base decrease, an amount equal to the notional yield of the AGI equity decrease shall become taxable. ‘The outcome is a definitive advantage in favour of financing through debt as opposed to equity’ (see explanatory memorandum preceding the proposal).
The CCCTB proposal sets out the conditions for the formation of a consolidated tax group and the mechanism for formulary apportionment and allocation of the consolidated tax base to the relevant member states. In addition, there are rules for entering and leaving a group, the treatment of losses, business reorganisations and the intra-group transfer of assets. Under the CCCTB proposal, consolidation would be mandatory to all groups that fall within the scope of the CCTB proposal. Effectively, therefore, consolidation would be mandatory for large groups (with a consolidated group revenue exceeding €750m) and would be limited to EU companies and EU PEs.
Groups that do not meet the size threshold are allowed to opt in so as to benefit from consolidation (see proposed article 2(3). A qualifying subsidiary means every immediate and lower-tier subsidiary in which the parent company has a right to exercise more than 50% of the voting rights and it has an ownership right amounting to more than 75% of the subsidiary’s capital or profit (see proposed article 5(1)).
The formula is the same as that proposed in 2011 and is based on three equally weighted factors: labour, assets and sales. As in the 2011 proposal, intangible assets are excluded from the base of the asset factor.
Furthermore, as in the original proposal, there are detailed administrative provisions for consolidated groups. The CCCTB is meant to offer qualifying groups a one-stop shop approach – the group would deal with one EU tax administration in the EU, which is usually the member state where the group’s parent company is resident.
Proposed Directive on hybrid mismatch arrangements
Along with the CCTB and CCCTB proposals, as expected from earlier announcements, the Commission proposed a directive to broaden the scope of the Anti-Tax Avoidance Directive as regards hybrid mismatch arrangements (see www.bit.ly/2h9Hfvg), so as to align it with the corresponding provisions in the CCTB proposal. Under the proposed directive, the hybrid provisions would not only apply to mismatch arrangements within the EU, but also to mismatches arising in relation to third countries. The hybrid provisions would also deal with mismatches involving PEs, imported mismatches, hybrid transfers and dual resident mismatches. The underlying principle of the proposals is for the member state to align its tax treatment with that of the third country, unless the mismatch has already been eliminated by the third country.
At the 6 December 2016 ECOFIN meeting, agreement was not reached on this proposal. As several last minute changes were made to the draft text of the proposal, a number of member states indicated that they were not in a position to approve the revised text and needed more time to consider.
Proposals to improve dispute resolution
The Commission delivered on an earlier promise to improve the existing dispute resolution mechanism for the elimination of double taxation. While for companies within the CCCTB system it was expected that double taxation would be significantly reduced, issues would still arise with non-EU companies or companies outside the CCCTB system. Although an EU Arbitration Convention existed, this had substantial shortcomings. Therefore, the Commission presented a draft directive to improve double tax dispute mechanisms within the EU, which would have a wider scope, be more effective, work quicker and be less costly (see www.bit.ly/2gaXUN5).
State aid cases
Undoubtedly, the most prominent decisions have been the Commission’s decisions in several high profile state aid cases.
In January 2016, the Commission published its final decision in the Belgian excess profits case (see www.bit.ly/1mPZbcz). The Commission largely confirmed the preliminary conclusions of the opening decision in finding that the excess profit provision constitutes unlawful fiscal state aid which must be recovered. The Belgian excess profits regime was only available to a limited number of multinational companies and, in particular, it was not available to stand-alone companies only active in Belgium. The regime could result in the exemption of a significant part of the income of Belgian companies, resulting in double non-taxation.
The Commission found that the regime derogated from normal practice under Belgian company tax rules and the ‘arm’s length principle under EU state aid rules’. The press release referred to at least 35 beneficiaries and estimated the amount of the recovery at €700m. The non-confidential version of the decision, published in May 2016, included an annex listing the names of the companies that entered into tax rulings with the Belgian authorities and the total amount of excess profit deduction allowed under these rulings. The Belgian government has filed an official action for annulment with the General Court of the European Union against this decision.
The non-confidential version of the final decisions in Starbucks and Fiat also referred to the concept of EU state aid rules. (These decisions came out in 2015 but only a summary of them was published. The non-confidential full versions of these decisions were released in the summer of 2016.) According to the Commission, the arm’s length principle is neither the one derived from OECD article 9 nor the one under national transfer pricing provisions, but is a general principle under TFEU article 107(1). If accepted by the CJEU (both cases are being appealed), the concept of state aid under article 107(1) is likely to gain a whole new dimension, quite challenging for transfer pricing purposes.
Furthermore, on 6 June 2016, the Commission published its opening decision in the formal investigation into two tax rulings obtained by McDonald’s entities in Luxembourg (see C(2015) 8343 final). In the opening decision, the Commission argued that Luxembourg’s tax rulings (an initial tax ruling and then a revised one which confirmed the initial ruling) constituted state aid. This was because the rulings provided that McDonald’s Europe was exempt from tax because its royalty income was attributable to the United States, despite Luxembourg knowing that the company was not being taxed there.
The Commission argued that: ‘The Luxembourg tax administration, by confirming in the revised tax ruling an erroneous interpretation of the Luxembourg/US DTT and the Luxembourg domestic law that transposes it, in full knowledge of the fact that the US Franchise Branch is not subject to taxation in the United States, confers a selective advantage to McD Europe for the purposes of TFEU article 107(1), as compared to Luxembourg tax resident companies in a similar legal and factual situation that are taxed on all their accounting profits, since that erroneous interpretation results in the non-taxation of a sizeable portion of McDonald’s Europe’s accounting profits.’ (para 92)
The Commission argued that Luxembourg had not provided any possible justification for the selective treatment of McDonald’s Europe resulting from the revised tax ruling (para 93). In any event, the Commission was unable to identify ‘any possible ground for justifying the preferential treatment that could be said to derive directly from the intrinsic, basic or guiding principles of the reference system or that is the result of inherent mechanisms necessary for the functioning and effectiveness of that system’ (para 94).
Moreover, on 3 June 2016, the Commission’s Competition Directorate published its working paper on state aid and tax rulings. The working paper provided an overview of the Commission’s preliminary orientations after review of member states’ tax ruling practices. In this working paper, it was noted that if an arrangement complied with the OECD transfer pricing guidelines, including the guidance on the choice of the most appropriate transfer pricing method, and led to a reliable approximation of a market based outcome, it was unlikely to give rise to state aid. It was stated that the DG Competition’s focus was on cases where there was a manifest breach of the arm’s length principle.
On 24 August 2016, the United States Department of the Treasury released a white paper on the European Commission’s recent state aid investigations of transfer pricing rulings (see www.bit.ly/2bQdFVn). The white paper acknowledged the shared view of the US Treasury and the Commission on tax avoidance by multinational companies, but also outlined the US Treasury’s concerns with the Commission’s approach.
These concerns are likely to be exacerbated following the Commission’s final decision in the Apple case, the summary of which was released on 30 August 2016 (see press release at www.bit.ly/2bOwMln). The Commission concluded that the two tax rulings issued by Ireland to Apple had substantially and artificially lowered the tax paid by Apple in Ireland since 1991. This was because the rulings endorsed a way to establish the taxable profits for two Irish incorporated companies of the Apple group (Apple Sales International and Apple Operations Europe), which did not correspond to economic reality: almost all sales profits recorded by the two companies were internally attributed to a ‘head office’. This head office existed only on paper and could not have generated such profits. As such, the profits allocated to the head office were not subject to tax in any country under specific provisions of the Irish tax law, which are no longer in force. According to the Commission, as a result of the allocation method endorsed in the tax rulings, Apple only paid an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014 on the profits of Apple Sales International.
The Commission concluded that the selective tax treatment of Apple in Ireland was illegal under the state aid rules, as it gave Apple a significant advantage over other businesses that were subject to the same national taxation rules. Ordering a recovery of illegal state aid for the ten-year period preceding the Commission’s first request for information in 2013, Ireland was effectively asked to recover unpaid taxes of up to €13bn, plus interest.
The Commission did allude to the fact that the tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire single market. This was due to Apple’s decision to record all sales in Ireland, rather than in the countries where the products were sold. It was conceded that this structure was outside the remit of EU state aid control. However, if other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland. This potentially opens the battlefield to more member states to claim a taxable base from Apple.
Ireland has applied to annul the decision; Apple is expected to do so. Therefore, state aid litigation in this area is likely to continue, with all eyes now on the CJEU that is to deliberate on these cases.
Conclusion
These are the major developments from 2016. It is undeniable that the EU is meeting its pledge to deal with tax evasion and aggressive tax planning. Whether the measures regarding enhanced transparency will improve the capacity of the member states to address harmful tax practices and profit shifting beyond EU borders, without having a detrimental effect on the international competitiveness of EU companies, remains to be seen.
There is obviously motivation within the EU to strengthen the EU corporate tax rules against aggressive tax planning. There is certainly an impetus to benefit from the political momentum, with the Commission fast-tracking many legislative proposals or amendments at Council level, which the author has argued elsewhere are questionable from the perspective of EU compatibility. It should, however, be questioned whether, in the absence of harmonisation in the EU, the Commission is currently going too far in restricting options for tax competition. One could argue that an EU strategy focusing so much on countering tax avoidance and aggressive tax planning risks restricts the single market, and thereby reduces its efficiency and potential. In the absence of a single fiscal market, such an ad hoc strategy can only do more damage than good in the long term.
2016 saw an active European Commission make significant progress on EU tax reform. Inter alia, the Commission introduced proposals to tackle avoidance, improve transparency and reform corporate tax. In order to tackle avoidance, the Commission introduced a seven-part anti-tax avoidance package, including the Anti-Tax Avoidance Directive which member states must transpose into national law largely by the end of 2018. Also, the Commission unveiled proposals to improve tax transparency and completed its first step towards creating an EU list of ‘non-cooperative’ tax jurisdictions. Following the 2015 action plan, towards the end of 2016, the Commission proposed another comprehensive corporate tax reform package which consisted of four new draft EU Directives; namely, two directives on the relaunch of the common consolidated corporate tax base (one directive on the common corporate tax base and one on the common consolidated corporate tax base); a directive to address hybrid mismatches with third countries; and a directive to improve double taxation dispute resolution mechanisms in the EU. Undoubtedly, though, the most prominent of all were the Commission’s decisions in fiscal state aid cases.
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