Transfer Pricing Times: Volume XIII, Issue 5
Inside this edition: EU Approves Country by Country Reporting Across All Member States
EU Approves Country by Country Reporting Across All Member States
On May 25, 2016 the Council of the European Union adopted rules requiring multinational companies that operate in the EU to file Country by Country (“CbC”) reports. CbC reports require the parent company of multinational groups with group revenue in excess of €750 million to report to tax authorities information on the “revenues, profits, taxes paid, capital, earnings, tangible assets, and the number of employees” for each country in which they operate. The Directive applies to tax years commencing January 1, 2016 in all EU Member States.
In instances where EU operating companies have parent companies that are outside the EU, and where those parent companies are not required by their home jurisdictions to file a CbC report, the new rules allow those EU subsidiaries to file a CbC report in the EU in a process referred to as “secondary reporting”. The press release indicates such ‘secondary reporting’ will be optional for the Member State as to whether it introduces the requirement for CbC reports in fiscal year 2016, but mandatory from fiscal year 2017. At this junction, Member States will have to introduce domestic legislation accordingly, where they have not already done so.
A link to the press release is available here.
It is important to note that the European Commission (EC) proposed a separate initiative in April to make CbC reports available to the public. This separate initiative has yet to be finalized and many are expecting some Member States to voice opposition in the coming weeks and months. Last month, the Transfer Pricing Times published a summary of this separate but related initiative which is available here.
U.S. Senators Voice Concern over EC’s State Aid Investigations
On May 23, 2016, four U.S. senators from the Senate Finance Committee penned a letter to the U.S. Secretary of the Treasury to raise concerns over the EC's transfer pricing related state aid investigations of U.S. multinational companies. As we reported in the Transfer Pricing Times December 2015 edition, the EC has opened several state aid investigations alleging that Member States granted U.S. multinationals overly generous tax rulings on transfer pricing related queries. Through these investigations the EC is seeking to require multinationals to pay back taxes where the alleged tax rulings provided by EU Member States are deemed to constitute illegal state aid. In the bipartisan letter the senators forcefully argue that U.S. multinational companies are being unfairly targeted by the EC as evidenced by written statements from the Directorate-General for Internal Policies of the European Parliament stating that any state aid recoveries should ideally be characterized as recovered “back taxes as to be eligible for foreign tax credits”. The senators argue that in cases where U.S. multinational companies are targets, the characterization of any state aid recoveries as eligible for foreign tax credits implies that U.S. taxpayers will ultimately foot the bill for any payments which arise from these cases. The senators conclude by asking the Secretary several questions including:
- Whether or not he believes the EC is unfairly targeting U.S. multinationals;
- Whether or not the EC has the legal authority over taxation determinations made by individual Member States;
- Whether or not the EC’s cases have been based on tax and transfer pricing rules in place during the period in question or whether the EC has based its decision on the framework of the more recently developed OECD Base Erosion and Profit Shifting (BEPS) initiative;
- Whether or not the EC Directore-General for Competition is competent in applying in international tax standards; and
- Whether or not the EC’s status as final arbiter of international tax rules would impact multilateral consensus building under the OECD and bilateral tax treaties between Member States and the U.S.
A link to the senators’ letter is available here.
OECD to Release Discussion Draft on Interest Deduction Rules in July
The OECD’s Committee on Fiscal Affairs announced the forthcoming publication of a discussion draft on the “Elements of the design and operation of the group ratio rule”. This draft stems from Action 4 of the OECD’s BEPS initiative which is intended to address and recommend limitations on the deductibility of interest through an array of ratio mechanisms. The OECD is expected to publish the draft on July 6, 2016 with public comment due August 3, 2016.
Australia Cracking Down on Global Profit Shifting
On May 3, 2016, Australia’s Federal Treasurer Scott Morrison delivered an ‘election budget’. Key taxation aspects of the budget include the introduction of a Diverted Profits Tax (“DPT”); Goods and Services Tax (“GST”) imposition on the importation of low value products; increased funding for the Australian Taxation Office (“ATO”); and increased disclosure and transparency provisions.
Given Australia is in the midst of an election year, legislation to implement the proposed changes will be delayed, but many relevant pieces of the legislation have bipartisan support, so there is a broad expectation that implementation of the proposed legislation will occur in the second half of the 2016 calendar year, regardless of the election outcome. Key aspects of the budget are discussed below.
Diverted Profits Tax
Following the lead of the UK, the Australian Government will introduce a new tax aimed at multinational corporations deemed to be artificially diverting profits from Australia. The tax will apply to income years commencing on or after July 1, 2017.
The new tax will target significant global entities (entities with consolidated global turnover of AUD 1 billion or more) that shift profit offshore through arrangements involving related parties:
- Resulting in the tax amount paid overseas that is at least 20 percent less than would otherwise have been paid in Australia.
- Where it is reasonable to conclude that the arrangement is designed to secure a tax reduction and the transaction therefore has insufficient economic substance.
Where the ATO takes the view that a diverted profits arrangement exists, a 40% tax on the relevant diverted profits will be applied by the ATO. In calculating the DPT, an offset will be allowed for Australian taxes paid on the diverted profits (e.g., Australian withholding taxes and taxes paid under the Controlled Foreign Company regime). However, there are nil credits for foreign taxes imposed on such profits.
On review of an MNC's Australian tax return, the ATO (within 7 years) may issue a provisional DPT assessment. This is followed by a 60-day period which allows the multinational corporations to clarify any factual inaccuracies associated with the assessment, but not to present a challenge on transfer pricing grounds. There is a subsequent (up to) 30-day period of ATO review, after which the ATO will issue a final DPT assessment, payable within 21 days by law. A subsequent ATO review will take place over the following 12 months, during which the ATO can issue a further revised DPT assessment. It is only after this period of time that the taxpayer can appeal the DPT assessment on qualitative (or quantitative) transfer pricing grounds.
GST on Low Value Goods
Previously announced changes will impose GST on imported digital products and services effective July 1, 2017. In this regard, the Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016, which provides for such GST legislation amendments, was passed by both Houses of Parliament on May 4, 2015 and quickly received Royal Assent on May 2016.
The budget announcement will extend the GST to all imported low value goods, similarly from July 1, 2017. Hence, overseas suppliers that have Australian turnover of AUD 75,000 or more will be required to register for, collect and remit GST for low value goods supplied to Australian customers from the effective date.
Increased funding for Tax Avoidance Taskforce
The Federal Government will establish a new Tax Avoidance Taskforce to enable the ATO to undertake enhanced compliance activities targeting multinationals, large public and private groups, and high wealth individuals.
The Government will also ensure the ATO has access to the information it needs by enhancing information sharing between the ATO and the Australian Securities and Investments Commission. This will support the operations of the Taskforce through improved risk analysis and detection.
This measure forms part of the Government's Tax Integrity Package, which will strengthen the integrity of Australia's tax system.
Increase in Penalties
The Government will increase administrative penalties imposed on companies with global revenue of AUD 1 billion or more who fail to adhere to tax disclosure obligations. This measure will apply from July 1, 2017 and is estimated to have an unquantifiable gain to revenue over the forward estimates period.
Increasing penalties relating to the lodgment of tax documents will raise the maximum penalty from AUD 4,500 to AUD 450,000. Penalties relating to making statements to the ATO will be doubled also, in relation to reckless or careless positions.
While details remain uncertain, it is clear that the Federal Government in Australia has sought, rightly or wrongly, to target multinational companies as a key source of additional revenue ahead of the nation heading to the polls on July 2, 2016.
 Presumably this is because U.S. companies that pay any state aid recoveries to EU Member States would have a corresponding decrease in their U.S. taxable income as a result of the foreign tax credit that would apply. As a result, Internal Revenue Service collections would decrease in conjunction with a corresponding increase in the EU Member State.
 Companies with Australian revenue of less than AUD 25 million will be exempt from the DPT calculation, unless these companies are artificially booking their revenue offshore.