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Tax Competition and Tax Planning: What Solution for the EU?

Tax Competition and Tax Planning: What Solution for the EU? ec Editorial TAX REVIEW 2014­2 Michel Aujean* The economic and budgetary crisis and its impact on their tax bill for many taxpayers has created a new climate regarding the fight against tax fraud, tax evasion and what is often called aggressive tax planning. Among the different international institutions (G-20, OECD, EU), a number of initiatives are in discussion for rendering this fight more efficient, notably when it comes to fighting against abuse of law and abuse of benefits, mismatches and other forms of non-taxation. Be it through the OECD Action plan on Base Erosion and Profit Shifting (BEPS) or the EU Action Plan to strengthen the fight against tax fraud and tax evasion, a lot of new developments might be expected for the next two years. But one question comes to our mind: is this really all that new? And the next one is: if this is not so new, why are we still in that situation? Already in the mid nineties, the OECD was alerting us on what it called `Fiscal degradation', i.e., the fact that through the application of available provisions of national tax laws, companies (meaning most of the time multinational companies) were able to considerably lower their tax bill. The EU on its side did not say differently when Commissioner Monti decided to launch its fight against harmful tax competition. As a result, since 1999 a large number of tax regimes or measures have been examined, assessed harmful and rolled back both within the EU (more than 100 harmful tax measures) and in the OECD. The EU went one step further by explaining that on one side a greater harmonization of corporate taxation associated with a new method for sharing the revenue between Member States was a necessity for a true single market, the CCCTB proposal, and that for other areas of taxation a new approach to Coordination1 should be adopted in order, notably, to avoid double taxation and double non-taxation. So the question then becomes: what was it that did not work and which could explain that G-20 leaders' meeting in Los Cabos on 18­19 June 2012 explicitly * 1 referred to `the need to prevent base erosion and profit shifting' in their final declaration? In other words, could there be a `serious' tax planning problem if there was not a `serious' tax competition problem? In this respect, we could quote one of the conclusions of a recent and exhaustive review of the literature on tax competition2: `Despite significant variation in the approaches, there emerges a relatively clear pattern of evidence for tax competition. Tax competition seems to be strongest in the European Union and the accession of the small new Member States has provided a further impetus to the downward competition'. The message is clear, the degree of tax competition in the EU is still high, probably higher than in the rest of the world, and associated with the freedoms guaranteed by the Treaty and the Single Market this provides for a very attractive tax environment for multinational companies. Against this background, the lack of harmonization/coordination of tax policies within the EU is flagrant and might well be the main cause of tax erosion and profit shifting across the board. In such a situation, one can be satisfied that the EU Commission, when implementing its action plan, has finally decided to take a number of new initiatives like the recent proposal3 amending the Parent-Subsidiary Directive in order to prevent the use of the Directive for tax planning purpose with hybrids and to suggest a stronger and common anti-abuse clause. Another reason to be satisfied can be found in the recent conclusions of 10 December 2013 ECOFIN Council. Indeed, the Council has invited the Code of Conduct Group: ­ to continue its consideration of the draft guidance on Hybrid Entity and Hybrid Permanent Establishment Mismatches; ­ to analyse the third criterion of the Code of Conduct (advantage granted without any real economic activity Partner of Taj ­ Law firm. EU Commission, `Coordinating Member States' direct tax systems in the Internal Market', Communication COM 2006(823) final, 19.12.2006. Michael P Devereux and Simon Loretz, What do we know about corporate tax competition? Oxford University Centre for Business Taxation, WP 12/29. EU Commission, Proposal for a Directive amending Directive 2011/96/ EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, COM(2013) 814 final, 25.11.2013. EC TAX REVIEW 2014/2 ©2014 Kluwer Law International BV,The Netherlands TAX COMPETITION AND TAX PLANNING: WHAT SOLUTION FOR THE EU? and substantial economic presence) by the end of June 2014; ­ to assess or consider all patent boxes in the EU, including those already assessed or considered before, by the end of 2014, ensuring consistency with the principle of equal treatment, also against the background of international developments, including those in relation to the OECD BEPS initiative and report before the end of the Greek presidency. Such actions will certainly help to reduce the degree of tax competition and to make the code of conduct more efficient as proposed in the EU action plan. In this respect, revising the criteria of the code of conduct is no doubt an important step forward and more should certainly be done in this direction, some of which was explicitly envisaged in the resolution of December 1997 adopting the code like the special tax arrangements for employees (`impatriate' regimes). The Commission had already suggested in the past to review the code of conduct without success, let's hope that this time it will work at least for criteria 3. Among the other important elements of the tax planning discussions are transfer pricing. Here the actions conducted until now by the EU Commission in the Joint Transfer Pricing Forum were presented as `targeted measures' for the elimination of tax obstacles to cross border economic activity. They mainly tended to improve the workability of the arm's length principle within the framework of the OECD transfer pricing principles. But we should not ignore the heavy critics addressed to transfer pricing which were considered as inadequate and constituting the main tax obstacle within the single market. The actual discussions in the OECD framework are offering some interesting progress in dealing with the treatment of intangibles and introducing some elements of profit split which might well improve the present approach to transfer pricing. Nevertheless, such a solution will continue to be based on the separate accounting principle and will continue to ignore the true nature of multinational companies and group structures. On the whole, many of the actions envisaged by the EU and by the OECD are largely of an anti-abuse nature. This type of approach is most often seen as rather negative and can only capture some forms of tax planning and at a rather high cost because of the considerable legal uncertainty which it then introduces in the tax systems. This may be necessary at some stage but cannot and should not be the only solution. A positive and business oriented solution is necessary and available for the EU. Actually, the EU can play the most important role in providing a comprehensive solution which can eliminate a number of the tax planning opportunities and at the same time eliminate most of the tax obstacles which are affecting the economic efficiency of the single market. The CCCTB proposal, in all its three components, i.e., a common base with consolidation and apportionment is still today the first best solution to most of the present difficulties. Of course some elements of the proposal would need careful re-examination today, notably in order to better deal with the development of the digital economy. This is specially the case for the definition of the terms and factors of the formulary apportionment. This will also require a new definition of the nexus or permanent establishment notion to which the sales factor refers. A fully harmonized and consolidated corporate tax system would substantially improve the situation for the business community in Europe by reducing compliance costs, increasing legal certainty and providing for an allocation mechanism free of all the transfer pricing difficulties. But in the actual context, to be effective, such a solution would call for a single common system, at least across the Euro-area: it is time for the business community to turn the page of an optional system and accept common rules. On their side, Member States should now accept the idea of two parallel systems for taxing companies: corporate taxation does not have to (and cannot) be the same for local businesses (incorporated SMEs, pizzeria or hairdresser . . .) and for global multinational companies. The problems international tax systems face today are nothing new. What is new, because of the budgetary situation, is the political will to agree on solutions and that must be underlined. Yes we can do it in Europe now! EC TAX REVIEW 2014/2 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png EC Tax Review Kluwer Law International

Tax Competition and Tax Planning: What Solution for the EU?

EC Tax Review , Volume 23 (2) – Apr 1, 2014

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Abstract

ec Editorial TAX REVIEW 2014­2 Michel Aujean* The economic and budgetary crisis and its impact on their tax bill for many taxpayers has created a new climate regarding the fight against tax fraud, tax evasion and what is often called aggressive tax planning. Among the different international institutions (G-20, OECD, EU), a number of initiatives are in discussion for rendering this fight more efficient, notably when it comes to fighting against abuse of law and abuse of benefits, mismatches and other forms of non-taxation. Be it through the OECD Action plan on Base Erosion and Profit Shifting (BEPS) or the EU Action Plan to strengthen the fight against tax fraud and tax evasion, a lot of new developments might be expected for the next two years. But one question comes to our mind: is this really all that new? And the next one is: if this is not so new, why are we still in that situation? Already in the mid nineties, the OECD was alerting us on what it called `Fiscal degradation', i.e., the fact that through the application of available provisions of national tax laws, companies (meaning most of the time multinational companies) were able to considerably lower their tax bill. The EU on its side did not say differently when Commissioner Monti decided to launch its fight against harmful tax competition. As a result, since 1999 a large number of tax regimes or measures have been examined, assessed harmful and rolled back both within the EU (more than 100 harmful tax measures) and in the OECD. The EU went one step further by explaining that on one side a greater harmonization of corporate taxation associated with a new method for sharing the revenue between Member States was a necessity for a true single market, the CCCTB proposal, and that for other areas of taxation a new approach to Coordination1 should be adopted in order, notably, to avoid double taxation and double non-taxation. So the question then becomes: what was it that did not work and which could explain that G-20 leaders' meeting in Los Cabos on 18­19 June 2012 explicitly * 1 referred to `the need to prevent base erosion and profit shifting' in their final declaration? In other words, could there be a `serious' tax planning problem if there was not a `serious' tax competition problem? In this respect, we could quote one of the conclusions of a recent and exhaustive review of the literature on tax competition2: `Despite significant variation in the approaches, there emerges a relatively clear pattern of evidence for tax competition. Tax competition seems to be strongest in the European Union and the accession of the small new Member States has provided a further impetus to the downward competition'. The message is clear, the degree of tax competition in the EU is still high, probably higher than in the rest of the world, and associated with the freedoms guaranteed by the Treaty and the Single Market this provides for a very attractive tax environment for multinational companies. Against this background, the lack of harmonization/coordination of tax policies within the EU is flagrant and might well be the main cause of tax erosion and profit shifting across the board. In such a situation, one can be satisfied that the EU Commission, when implementing its action plan, has finally decided to take a number of new initiatives like the recent proposal3 amending the Parent-Subsidiary Directive in order to prevent the use of the Directive for tax planning purpose with hybrids and to suggest a stronger and common anti-abuse clause. Another reason to be satisfied can be found in the recent conclusions of 10 December 2013 ECOFIN Council. Indeed, the Council has invited the Code of Conduct Group: ­ to continue its consideration of the draft guidance on Hybrid Entity and Hybrid Permanent Establishment Mismatches; ­ to analyse the third criterion of the Code of Conduct (advantage granted without any real economic activity Partner of Taj ­ Law firm. EU Commission, `Coordinating Member States' direct tax systems in the Internal Market', Communication COM 2006(823) final, 19.12.2006. Michael P Devereux and Simon Loretz, What do we know about corporate tax competition? Oxford University Centre for Business Taxation, WP 12/29. EU Commission, Proposal for a Directive amending Directive 2011/96/ EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, COM(2013) 814 final, 25.11.2013. EC TAX REVIEW 2014/2 ©2014 Kluwer Law International BV,The Netherlands TAX COMPETITION AND TAX PLANNING: WHAT SOLUTION FOR THE EU? and substantial economic presence) by the end of June 2014; ­ to assess or consider all patent boxes in the EU, including those already assessed or considered before, by the end of 2014, ensuring consistency with the principle of equal treatment, also against the background of international developments, including those in relation to the OECD BEPS initiative and report before the end of the Greek presidency. Such actions will certainly help to reduce the degree of tax competition and to make the code of conduct more efficient as proposed in the EU action plan. In this respect, revising the criteria of the code of conduct is no doubt an important step forward and more should certainly be done in this direction, some of which was explicitly envisaged in the resolution of December 1997 adopting the code like the special tax arrangements for employees (`impatriate' regimes). The Commission had already suggested in the past to review the code of conduct without success, let's hope that this time it will work at least for criteria 3. Among the other important elements of the tax planning discussions are transfer pricing. Here the actions conducted until now by the EU Commission in the Joint Transfer Pricing Forum were presented as `targeted measures' for the elimination of tax obstacles to cross border economic activity. They mainly tended to improve the workability of the arm's length principle within the framework of the OECD transfer pricing principles. But we should not ignore the heavy critics addressed to transfer pricing which were considered as inadequate and constituting the main tax obstacle within the single market. The actual discussions in the OECD framework are offering some interesting progress in dealing with the treatment of intangibles and introducing some elements of profit split which might well improve the present approach to transfer pricing. Nevertheless, such a solution will continue to be based on the separate accounting principle and will continue to ignore the true nature of multinational companies and group structures. On the whole, many of the actions envisaged by the EU and by the OECD are largely of an anti-abuse nature. This type of approach is most often seen as rather negative and can only capture some forms of tax planning and at a rather high cost because of the considerable legal uncertainty which it then introduces in the tax systems. This may be necessary at some stage but cannot and should not be the only solution. A positive and business oriented solution is necessary and available for the EU. Actually, the EU can play the most important role in providing a comprehensive solution which can eliminate a number of the tax planning opportunities and at the same time eliminate most of the tax obstacles which are affecting the economic efficiency of the single market. The CCCTB proposal, in all its three components, i.e., a common base with consolidation and apportionment is still today the first best solution to most of the present difficulties. Of course some elements of the proposal would need careful re-examination today, notably in order to better deal with the development of the digital economy. This is specially the case for the definition of the terms and factors of the formulary apportionment. This will also require a new definition of the nexus or permanent establishment notion to which the sales factor refers. A fully harmonized and consolidated corporate tax system would substantially improve the situation for the business community in Europe by reducing compliance costs, increasing legal certainty and providing for an allocation mechanism free of all the transfer pricing difficulties. But in the actual context, to be effective, such a solution would call for a single common system, at least across the Euro-area: it is time for the business community to turn the page of an optional system and accept common rules. On their side, Member States should now accept the idea of two parallel systems for taxing companies: corporate taxation does not have to (and cannot) be the same for local businesses (incorporated SMEs, pizzeria or hairdresser . . .) and for global multinational companies. The problems international tax systems face today are nothing new. What is new, because of the budgetary situation, is the political will to agree on solutions and that must be underlined. Yes we can do it in Europe now! EC TAX REVIEW 2014/2

Journal

EC Tax ReviewKluwer Law International

Published: Apr 1, 2014

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