prop · H80326 · 2020-10-13 00:00:00 — 66.During the term of the Finnish Presidency, discussions on further coordinated defensive measures resumed in 2019 at the COCG and its subgroup on external issues. Council conclusions of 12 2019, point 20, doc. 7441/19. Council conclusions of 14 2019, point 16, doc. 10340/19. AS/AR/sg 67.At its meeting of , the COCG reached agreement on a 'Guidance on defensive measures in the tax area towards non-cooperative jurisdictions', which is set out in 4 to this report. COCG also took note that some Member States that, due to the nature and content of defensive measure and the national rules on enactment of laws, might face genuine institutional or constitutional issues that prevent them from meeting the deadline referred to in point 25 of that Guidance should ensure that this commitment is fulfilled by 1 2021. AS/AR/sg Compliance of EU Member States with the COCG Guidance on intermediate (financing, licensing) companies AS/AR/sg Done: commitment to AS/AR/sg The aspect raising potential concern regarding the rules on intra-group financing activities relates to the application of the safe-harbour of net return on financial assets. However, this specificity was looked into by the Group when it was introduced in 2017 (LU016). decided that the measure did not need to be assessed as it did not seem to entail any risk in the light of the Code of Conduct criteria, but that a monitoring should take place. committed to spontaneously exchange information in certain specific instances38. This falls within the scope of the annual monitoring and the assessment of the actual effects of the safe-harbour rule is done within that exercise. b)Polish rules: Beginning 2019, the Polish authorities introduced two safe-harbours in the area of transfer pricing (for low value-adding services and for certain loans transactions). The safe harbour for certain related party small loan transactions (up to 20 000 000 PLN, i.e. around 000 000, of total indebtedness) enables the taxpayer to reduce its TP documentation requirements by applying the pre-determined interest rate. The loans should not be granted for more than five years. The interest rate is based on the base interest rate plus a announced by the Minister of Finance. The parameters are announced periodically by the Minister of Finance, not less frequently than once a year. For 2019 the Notice of the MF states that the base interest rate is represented by 3 months interest rate for loans in different currencies, while the for all above mentioned currencies is set at the level of per year (which is the maximum for the borrower and the minimum for the lender). These parameters are monitored and updated periodically. 38Luxembourg committed to spontaneously exchange information: “- in the instances provided by the circular (i.e. when the taxpayer makes use of the safe harbour rule), and - also in instances where a taxpayer would apply the net return on financial assets in his commercial accounts and would then apply, based on a transfer pricing analysis, a downward adjustment in the tax return in order to achieve an at arm's length remuneration.” AS/AR/sg The measure referred to under point a) is a straightforward precedent adopted by the Group. have thus asked the Polish authorities whether similar spontaneous exchange of information takes place. The Polish authorities replied on that the information concerning the taxpayers benefiting from Polish safe harbour rules is collected and will be automatically reported under the EU Directive 2018/822 (DAC 6).39 According to the Polish authorities, the reporting based on Mandatory Disclosure Rules (MDR) is sufficient and there is no justification for re-sending the information on a spontaneous basis. The first automatic exchange on MDR will take place in 2020. In light of the aforementioned explanations, we are of the view that three aspects are not fully compliant with the precedent set by the Group: - first, Directive 2018/822 requires an arrangement. It is unclear whether the use of a safeharbour rule in all cases constitutes an arrangement under Directive 2018/822; - second, the exchange of information in Directive 2018/822 is different: the use of the safeharbour rule is an information which is directly available to the tax administration, as it is mentioned in the tax return. Therefore, this information can be directly exchanged with the concerned. Under the Directive the exchange would be dependent on an intermediary transferring such information to the Polish tax administration and afterwards the Polish tax administration would upload the information in the central directory on administrative cooperation. The concerned would not receive the information directly; -third, the instances where a taxpayer would apply the safe-harbour in his commercial accounts and would then apply, based on a transfer pricing analysis, a downward adjustment in the tax return in order to achieve an at arm's length remuneration are not addressed at all. 39According to , the evaluation of the ’s system, indicated by the Commission as a comparable example, was carried out even before the implementation of MDR. Thus, at that time, the exchange of this information could take place on a spontaneous basis. AS/AR/sg During the COCG meeting of , the Polish authorities committed to spontaneously exchange information ensuring therefore that the (other) Member States concerned receives directly the relevant information. In light of the aforementioned commitment, the COCG considered the Polish safe-harbour rule to be compliant with the 2013 Guidance. However, as for the measure, the Group will further monitor the actual effects of the measure/ the use of the safe-harbour rule. c)Cypriot rules: In 2017 published a Circulaire which explains how to apply the arm’s length principle to intragroup financing transactions. It also provides for a simplified measure – safe-harbour rule – that applies in the case of a purely intermediary entity providing financing (i.e. where an entity provides loans to a related entity and these loans are funded by loans received from other related entities). In this instance, the Circulaire allows that the intermediary financing entity may receive a minimum return of net profit on assets. This percentage is regularly reviewed by the Tax Department based on relevant market analyses. In order to use the simplified measures, the concerned entity must notify the tax authority accordingly in its tax return. The taxpayer is not allowed to derogate from the minimum percentage, unless this is properly justified in transfer pricing analysis. The measure referred to under point a) is a straightforward precedent adopted by the Group. have thus asked the Cypriot authorities whether similar spontaneous exchange of information takes place. The Cypriot authorities confirmed that spontaneous exchange of information takes place when the taxpayer makes use of the safe harbour rule. AS/AR/sg Further clarification has been asked whether similar exchange of information is provided for also in instances where a taxpayer would apply the safe-harbour in his commercial accounts and would then apply, based on a transfer pricing analysis, a downward adjustment in the tax return in order to achieve an at arm's length remuneration. The Cypriot authorities explained that the decision of a company to make use of the simplification measures in a tax year is declared on the tax return 40 of the respective tax year and it is not communicated to the Tax Department at any point of time before41. Therefore, if a company, at the time of the submission of its tax return has made use of the simplification measures, it will tick the relevant box, and such information will be exchanged spontaneously; otherwise, in case it has applied a different return based on a transfer pricing study, the relevant box will not be ticked and no exchange of information will take place. As the relevant spontaneous exchange of information takes place when the taxpayers makes use of the safe-harbour, the COCG considers the measure to be compliant with the Guidance. However, as for the measure, the Group will further monitor the actual effects of the measure/ the use of the safe-harbour rule. It is noted that following the issuance of the circular “Tax treatment of intra-group back-to-back financing arrangements” the company’s tax return was amended so as to incorporate a tick box, in which the taxpayer specifies whether it has made use of the simplification measures. Except in the case that the Company has applied for a tax ruling. AS/AR/sg Guidance on notional interest deduction regimes Purpose of the Guidance The guidance set out below is based on past decisions of the Code of and is intended to improve the transparency of the Code of 's work. It is also intended to help Member States as well as third countries identify more easily potentially harmful tax measures. The guidance neither replaces the principles and criteria of the Code of Conduct nor prejudges the harmfulness of any particular regime. The guidance presents a non-exhaustive list of elements and characteristics which indicate that a Notional Interest Deduction Regime may be harmful when assessed against the criteria of the Code of Conduct. assessment will continue to be based on the five criteria of the Code of Conduct on a case-by-case approach. The purpose of the text is to provide guidance on the application of the criteria of the Code of Conduct but it does not go beyond those criteria nor does it limit them. The guidance can never provide a safe harbour for a particular regime. A Notional Interest Deduction Regime that requires particular attention under the guidance may be found not harmful by the Code of ; likewise a measure that does not require particular attention under the guidance may be found to be harmful when assessed by the Group. The purpose of the guidance is not to confine the Group to applying pre-determined general criteria; rather it should continue to subject each particular regime to a case-by-case examination against the Code of Conduct criteria in the light of the Group's guiding principles set out in document 16410/08 FISC 174. AS/AR/sg Relationship with past assessments Past assessments will not be affected by the guidance. Regimes that have not been considered by the Group can be reviewed on the basis of this guidance and the criteria of the Code of Conduct. The current procedure for reopening past assessments remains valid. Review of the guidance The countering of harmful tax measures is an ongoing process; therefore the guidance notes could be periodically reviewed by the Group to ensure that they reflect future developments. 4.1 General methodology of the assessments The NID regimes are not based on a special income generated or a special activity performed but on the policy goal to tackle the debt bias. Such a regime should have certain limitations in scope and be properly contained by appropriate anti-abuse measures in order to tackle tax-planning opportunities. Paragraph L of the Code of Conduct states that: "anti-abuse provisions or countermeasures contained in tax laws and in double taxation conventions play a fundamental role in counteracting tax avoidance and evasion". In past assessments, the Code of has taken into account under criterion 3, the existence of limitations in the scope and appropriate anti-abuse provisions or countermeasures. In order to avoid tax planning and address abusive situations in applying NID regimes, the below enumerated limitations of the scope and antiabuse measures have been identified. AS/AR/sg As the NID regimes may differ significantly with regard to the base (stock based / incremental) and NID rate (- in 2018), the importance of anti-abuse provisions will be different. A NID regime should provide for strict anti-abuse measures, in particular when the benefits provided by the regime are high. It is reasonable to say that there is a greater incentive to use the regime for tax planning purposes when its benefits are high. In addition, a NID regime should be contained by appropriate limitations of scope to reduce the likelihood of abuse. The list of limitations of scope and anti-abuse measures contained in this Guidance is not exhaustive. 4.3 Limitations of scope The following limitations of the scope are likely to make the regime less vulnerable for tax planning: −In order to incentivize the creation of additional equity, a NID regime should be limited, where applicable, to new equity created after the starting date of the regime. −Exclusion of own shares: this exclusion prevents the possibility for a company to increase its equity and simultaneously subscribe the new shares. −Exclusion of shares held in other resident and non-resident legal persons: this exclusion tackles the possibility to the NID through chains of equity injection. −The application of the NID should not create nor increase tax losses. Consequently, a negative result due to this deduction should not generate a loss carry forward. −Exclusion of assets not necessary for conducting business: this exclusion avoids benefits through NID on assets that do not generate taxable income (for instance, luxury goods, artwork, etc.). −No deduction for capital which is allocated to a permanent if the profits attributable to the permanent are tax exempt. If the PE were a legal person (a subsidiary), the parent company holding its capital would have to exclude those shares from the NID base. AS/AR/sg 4.4 Special anti-abuse provisions The below tax avoidance situations involving transactions between related parties have been identified relevant to a NID regime. Special anti-abuse rules addressing these situations are likely to make the regime less vulnerable for tax planning: (a)Cascading through intra-group loans and loans involving associated enterprises; An equity injection is granted to company A located in an NID country. Company A uses this injection to grant a loan to a related company B. Company B injects equity in company A or to another related company (company C). This would allow multiplying the NID deduction starting from only one genuine equity injection. (b)Cash contributions and contributions in kind; Cash contributions raise the issue of cascading the NID through triangular situations within multinational groups. A group could circulate a cash contribution through local and foreign companies to multiply the NID deduction at the level of the country granting the deduction. For contributions in kind the value of the asset should not exceed the market value. (c)Transfer of participations; Since participations should be deducted from the NID base, a group could maximise the NID deduction by placing participations in companies that cannot claim a NID deduction. The amount of NID deduction could therefore be maximised at the consolidated level of the group. (d)The re-categorisation of old capital as new capital through liquidations and the creation of start-ups; An existing company, with retained earnings, is liquidated (increase of the parent company A equity through the incorporation of the retained earnings of the subsidiary). Then, a new company B is created. If the participation in company B was not held by the parent, the NID base of the parent would not be reduced by the value of the participation in the subsidiary. AS/AR/sg (e)The creation of subsidiaries; See (d). In general, reorganizations carried out without generating taxable profits in the transferring company should also be NID neutral. (f)Acquisitions of businesses held by associated enterprises; A group would increase its NID base by transferring to company A a business that was already held by a subsidiary or a company B. The price paid by company A to company B would increase company B equity although the business remains within the same group of companies. (g)Double-dipping structures combining interest deductibility and deductions under the Company A in a non-NID country would take a loan from a third party and use the funds to inject equity in a subsidiary, company B located in an NID country. At a consolidated level, there would be at least two deductions based on the same funds: the interest on the loan and the NID deduction on equity. (h)Increases in the amount of loan financing receivables towards associated enterprises as compared to the amount of such receivables at the reference date; See (a). 4.5 General anti-abuse provision NID should be refused for actions or transactions i.carried out without any substantial economic or trading purpose but with the aim of receiving NID or ii.carried out with related parties and that have the main purpose of converting old equity into new equity. AS/AR/sg 4.6 Burden of proof It is important that in the case of the special anti-abuse provisions the burden of proof lies with the taxpayer and not with the tax administration. The tax payer should have the right to prove that any transaction is carried out for valid commercial reasons and does not lead to a duplication of the benefit within a group. 4.7 Cross border situation It should be ensured that the special anti-abuse provisions also work in a cross border situation. For this purpose each with a notional interest deduction regime shall inform any other concerned Member States which have a notional interest deduction, i.If it has grounds for supposing that there is a tax loss in the other Member States or ii.If a tax payer received a reduction in tax which should not give rise to a second deduction in the other Member States. Assuming that modalities in which audits are carried out are a national prerogative, Member States should take into consideration potential risks inherent in their notional deduction regime when verifying that the activities of the entities benefitting from the regime at issue meet the requirements of this Guidance. AS/AR/sg Regimes that have been subject to an assessment in the Code of will be monitored. This monitoring will consist of Member States and third countries providing data that shows how these regimes are implemented in practice. This data should be provided on a yearly basis to the Code of . Based on the data provided, or its absence, the Code of may decide whether it is appropriate to reopen a review of the regime concerned. The following data should be provided: −the number of taxpayers benefitting from the regime, −how many of the companies benefitting from the regime are domestic companies and −how many are foreign or foreign owned companies and −the aggregate amount of income benefitting from the regime. AS/AR/sg Treatment of Partnerships under criterion 2.2 The COCG agreed on the following set of questions to be sent to the relevant criterion 2.2 jurisdictions in order to clarify the nature of the different partnerships within each jurisdiction, and help determine if and how they should be covered by the substance requirements:. It should be noted that, as per the Scoping Paper, substance requirements in any case should apply to all companies and undertakings that carry out relevant activities and can earn income in 2.2 jurisdictions. 1/ Can a relevant activity be carried out through a partnership? 2.2 jurisdiction should clarify whether each type of partnership mentioned in its legislation can be used to carry out a relevant activity and earn income therefrom42. At this stage, this question should be considered irrespective of whether the activity is carried out in its own name or in the name of the partners. If partnerships are not allowed to carry out any relevant activities and earn income in a particular jurisdiction, then those partnerships could be excluded from the substance requirements in that particular jurisdiction. However, if they can in principle be used to carry out relevant activities, additional questions could narrow down the application of substance requirements. 42Relevant activity being defined under the Scoping Paper by reference with the FHTP Guidance on non-IP regimes as: headquarter business, distribution and services centres, financing and leasing, fund management, banking, insurance, , holding activity (including pure equity holding). AS/AR/sg 2/ Can partnerships that can carry out relevant activities have legal personality? If the jurisdiction confirms that partnerships can have legal personality (either automatically or by opting to have one), then the partnerships are akin to companies, and should be in the scope of the substance requirements. Therefore, partnerships with legal personality would be required to meet the substance requirements for carrying out a relevant activity, and to file information on their substance for control and exchange of information purposes. If the jurisdiction says that partnerships cannot have (or do not opt to have) legal personality, additional questions could narrow down the application of substance requirements. 3/ Can the partners or beneficial owners of a partnership carrying out a relevant activity without legal personality be non-residents? If the answer is negative, partnerships of the jurisdictions concerned could be left out of the substance requirements, because non-resident partners or beneficial owners could not use them to shift profits. If the answer is positive (i.e. they can be non-residents), the partnership should fall within the scope of substance requirements, because non-resident partners or beneficial owners could use them to shift profit. Where a partnership has no legal personality, substance would be checked at the level of the partnership. This would allow the authorities to easily assess the substance and apply sanctions where relevant. It would also ease the exchange of information with relevant Member States. AS/AR/sg Guidance on defensive measures in the tax area towards non-cooperative 1.The Council, in its Conclusions of 12 2019 on the revised EU list of non - cooperative jurisdictions for tax purposes welcomed the fact that the list "is being taken into account by Commission in the implementation of EU financing and investment operations, as well as the agreements reached in respect of coordinated defensive measures in the non-tax area vis-à-vis the non-cooperative jurisdictions since the Council conclusions of ". 2.In the conclusions, the Council also: i)reiterated its invitation to the Code of to finalise discussions on further coordinated defensive measures, without prejudice to Member States' obligations under EU and international law43, and ii)invited (along the lines of point 19 of the Council conclusions of ) "the EU institutions and Member States, as appropriate, to take the revised EU list of non-cooperative jurisdictions for tax purposes set out in into account in foreign policy, economic relations and development cooperation with the relevant third countries […] without prejudice to the respective spheres of competence of the Member States and of the Union as resulting from the Treaties"44 43This point was also reiterated by the Council in its 14 2019 conclusions (point 16 concerning progress achieved by the Code of (doc. 10340/19)./ 44Council conclusions of 12 2019, points 19 to 21 (doc. 7441/19). AS/AR/sg 3.The objective of this Guidance is to set out the principles of co-ordination of actions by Member States in this area, whilst providing further details as regards the proposed defensive measures of a legislative nature to be applied, in accordance with EU and national law, including international obligations, to non-cooperative jurisdictions as long as they are listed by the EU. 4.The list of non-cooperative jurisdictions and the defensive measures, when applicable, encourage a positive change, as they have the preventive effect of sending a strong signal to the jurisdictions concerned.