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International briefing for August 2015

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The decrease in the UK corporation tax which was announced in the recent UK Budget may be causing concern for companies which are incorporated in Jersey but are tax resident in the UK. The European Parliament has released a draft report on tax rulings and other measures and the European Commission has ordered €1.37bn state aid be repaid. The Brazilian government has published a provisional measure which mandates the disclosure of certain transactions, which is intended to be in accordance with BEPS Action 12.

With the summer holiday season in full swing, this month’s article is shorter than usual, reflecting the fact that there tend to be fewer announcements at this time of year.

In last month’s update, I mentioned that the announcement in the Summer Budget that the UK corporation tax rate will fall to 19% from 1 April 2017 and this may have implications for the controlled foreign company (CFC) analysis of inbound groups. The falling corporation tax rate may also be causing some concern for groups containing companies that are incorporated in Jersey but are UK tax resident by reason of central management and control. This is due to the residence rules in Jersey which provide that a company is tax resident in Jersey, even when central management and control is elsewhere, if the highest rate of tax in the jurisdiction of central management and control is lower than 20%. However, it is highly likely that the Jersey residence rules will change prior to 1 April 2017 to prevent a detrimental impact on the financial services industry there. The Jersey government has already indicated its intention to maintain the existing tax treatment for the companies affected and there is likely to be an announcement in the 2016 Budget.

EU update

European Parliament special committee on tax rulings draft report

On 20 July, the special committee on tax rulings of the European Parliament issued a draft report including a number of suggestions, many of which go further than the European Commission’s current position.

One rather controversial suggestion was that, in cases where it is established that a member state has provided illegal state aid through a tax ruling, rather than that member state recovering the aid from the recipient taxpayer as is currently the case, the funds should instead be returned to either those member states which ‘suffered from an erosion of their tax bases’ or should be contributed to the EU budget. Given the likely political opposition to such a suggestion and the difficulty of accurately identifying and quantifying overseas tax base erosion, it seems very unlikely that this recommendation will go anywhere.

The draft report also outlines the European Parliament’s support for the introduction of a full common consolidated corporate tax base (CCCTB). This includes support for a definition of a minimum (and maximum) effective taxation rate in the CCCTB, which is something that David Gauke commented on in a speech in June when he stated that the UK would block any proposal for a minimum effective taxation rate if it was forthcoming.

In addition to commenting on country by country reporting and the OECD’s list of tax havens, amongst other areas, the draft report also calls upon the Commission to propose Europe-wide legislation for the protection of whistleblowers. Given the controversial nature of some of the other recommendations, this may be one suggestion which could gain some traction.

EC orders €1.37bn state aid repayment from taxpayer

Although different from the tax rulings state aid investigations discussed by the European Parliament (above), a recent decision of the European Commission that corporate tax reliefs granted by the French tax authorities in 1997 were incompatible with the EU State aid rules and therefore must now be recovered, is nevertheless very significant. The reason this case is different is that, at the time, the French state was also the majority shareholder of the taxpayer receiving the aid.

When the commission first looked at the case in 2003 it only considered the position of France as a tax authority forsaking tax revenues and concluded that no state aid had been granted. However, the European courts annulled this decision, saying that the Commission should have applied the private market investor (PMI) test, namely: did France act in the same way as any other private investor in similar circumstances?

On further consideration, the Commission concluded that the tax relief/investment by France was not economically justified under the PMI test as the expected profitability was too low to be acceptable to a private investor and therefore could not be considered as an investment made on economic grounds. As it was not deemed an investment, the tax relief granted conferred an undue economic advantage in comparison to other operators in the market causing distortion of competition and was therefore unlawful state aid. Consequently, the aid would have to be repaid.

One point that is dramatically illustrated by this case is the impact of compound interest on the amount a taxpayer potentially has to repay. In this instance the actual aid received is estimated at €889m with an additional €488m of interest repayable.

Margrethe Vestager, the Commissioner responsible for competition policy, commented in relation to this decision: ‘Whether private or public, large or small, any undertaking operating in the single market must pay for its fair share of corporation tax’. This suggests that the Commission will continue to use the state aid rules to enforce its objectives in this area.

Global update

Brazil: mandatory reporting of transactions giving rise to tax benefits

The Brazilian government recently published a provisional measure (PM 685), which introduced a new requirement for taxpayers to formally report to the Brazilian tax authorities transactions that result in a tax benefit. This measure is intended to be in line with Action 12 of the OECD’s BEPS initiative (mandatory disclosure), which will require taxpayers to disclose potentially abusive tax planning arrangements.

Broadly, this measure requires taxpayers to disclose to the Brazilian tax authorities by 30 September each year, any information involving transactions concluded in the previous year that result in the reduction, elimination or deferral of tax. This includes reporting transactions which are only entered into for tax purposes, transactions that are structured in an ‘unusual’ manner, and other transactions to be specified in regulations issued by the Brazilian tax authorities.

Whilst PM 685 has attempted to limit the reporting obligation to transactions that result in some type of tax benefit, the wording of the regulation is vague and this lack of clarity raises doubts as to which transactions will need to be disclosed including such fundamental points as the date from which it applies.

As mentioned above, this new reporting regime is currently a provisional measure which still needs to be converted into law (which should take place within 120 days from its publication on 21 July) and then regulated by the Brazilian tax authorities. Hopefully there will be guidance forthcoming to reduce the uncertainties around the regime that currently exist.