List of contents
List of contents
List of tables
List of abbreviations
4. Discussion and analysis
4.1 The Recommendation explained
4.2 The legal basis for the Recommendation 9
4.3 The Recommendation in light of the ECJ jurisprudence
4.4 The Recommendation and the OECD publicity 15
4.5 The acceptance in academic and professional literature
Tables 1 - 15
7. List of references
7.1 Academic and professional literature
7.2 Statutory and political announcements
7.3 Table of cases
I thankfully dedicate this book to my grandparents. Some things need longer to grow and build and I feel so sorry that not every one of them can hold this book in their hands.
Purpose – This work focuses on the Commission Recommendation of 06.12.2012 on aggressive tax planning C(2012) 8806 final. It aims to analyse the concepts and definitions underlying the Recommendation, its legal basis and its impact on the EU, international, academic and professional debate about aggressive tax planning.
Methodology – The discussion works through a thorough literature review covering primary and secondary EU law, ECJ jurisprudence, political announcements of the OECD and other international organisations. Detailed tables summarise the key issues discovered.
Findings – The Recommendation has been neither unanimously adopted, nor rejected by the public. It provides broad definitions already addressed in a more precise manner in other official publications. Its approach against double non-taxation is similar to that of the ECJ and its GAAR proposal has gained ground with regard to the recent OECD announcements. The main criticism arises from the academia: the Recommendation is considered to be too general and to deviate widely from the established methodologies.
Limitations – The scope of the Recommendation lies on direct taxation of business activity which precludes analysis of indirect taxes as well as statutory wrongs like harmful tax competition or state aid.
Originality – The study enriches the academic publicity on the Recommendation that has experienced only modest coverage by the taxation scholarship following its release.
List of tables page
Table 1: EU publicity on ATP and related matters in direct taxation
Table 2: International (except for OECD) publicity on ATP and related matters in direct taxation
Table 3: Aggressive tax planning acc. to the Recommendation
Table 4: Technicalities sensitive to aggressive tax planning acc. to the Recommendation
Table 5: Mismatches between two or more tax systems sensitive to aggressive tax planning acc. to the Recommendation
Table 6: EU GAAR acc. to the Recommendation
Table 7: Artificial CSFT acc. to OECD (2009) Tax Compliance by Banks study / Artificial arrangements acc. to the Recommendation
Table 8: Transactions acc. to OECD (2010) Joint Audit Report susceptible to criteria of the Recommendation
Table 9: Potential risk areas acc. to OECD (2010) Bank Losses study susceptible to criteria of the Recommendation
Table 10: ATP schemes acc. to OECD (2011) Corporate Loss Utilisation study compared to criteria of the Recommendation
Table 11: HMA acc. to OECD (2012) Hybrid Mismatch Arrangements study
Table 12: ATP in compliance matters acc. to OECD (2013) Co-operative Compliance study
Table 13: ATP acc. to OECD (2103) After-Tax Hedging study
Table 14: ATP acc. to OECD (2013) BEPS Report
Table 15: Proposals against ATP acc. to OECD reports and studies
List of abbreviations
Abbildung in dieser Leseprobe nicht enthalten
This work analyses the Commission Recommendation of 06.12.2012 on aggressive tax planning C(2012) 8806 final (hereinafter “Recommendation” and “ATP”). Tax planning issues, especially those perceived by the public to be some kind of foul, dominate the headlines in times of tight budget constraints after the financial crisis. The debate is inflamed by multinational corporations preserving high level profits through complex structures from what is supposed to be a sincere contribution to public finances (Saint-Amans, 2013). From the academic’s and practitioner’s view, however, tax planning is not limited to the big players. It is a genuine part of managing the taxpayer’s affairs in a legal environment.
This environment has been disposed to the influence of the European Union to an increasingly high degree. The Recommendation is a result of extensive series of communications, recommendations, memoranda, press releases, published working papers and consultation documents of European institutions, especially of the European Commission and its departments and services. Moreover, the interstate debate is exposed to considerable influence of international institutions like the United Nations (UN), G8, G20 and the OECD. Their works have to be considered, too, when locating the Recommendation in the context of the publicity, showing its genesis among other acts and measures. Although the Recommendation refers itself to a public consultation carried out by the Commission in 2012, a broader approach is adopted here and starts with an overview of the Code of Conduct 1997, which is commonly regarded as the beginning of the Union’s efforts to address ATP (Lampreave, 2011). Table 1 and Table 2 show a chronological development of related EU and international publications. The multitude of the concepts and wordings shown in these tables is thought-provoking, especially because the Recommendation itself offers its own definitions and ideas. The legal context can therefore be regarded as highly complex, heterogeneous and in need of interpretation. Inter alia, further impact is to be expected through the work of the Platform for Tax Good Governance, established following the Recommendation via the European Commission Decision of 23 April 2013 on setting up a Commission Expert Group. The understanding of this impact on the legal terminology and the application of law is crucial. With that in mind, the concepts, merits and limits of the Recommendation are to be evaluated by this research.
After examining the definitions and concepts provided by the Recommendation, an overview on the European and international institutional publicity on ATP will be given. The review of the Recommendation`s nature will give an understanding of why precisely this legal instrument was chosen by the Commission. The Recommendation will then be tested against the jurisprudence of the European Court of Justice (ECJ), the concepts developed by the academia and the announcements of the Organization for Economic Cooperation and Development (OECD). Finally, the academic and professional literature published during the year after the issuance of the Recommendation will be analysed.
Citations presented in italics are derived from the Recommendation – unless otherwise indicated. In order to simplify reading, all tables are presented in an appendix following the written part. The reference list differentiates between academic and professional literature on the one hand and statutory and political announcements on the other hand. It follows an alphabetical order and is closed by the table of cases.
First of all, the scope given in the Recommendation itself serves as a limitation: it does not deal with indirect taxation and excludes secondary EU law explicitly named as not targeted by the Recommendation. Furthermore, several fields associated with ATP are not addressed: EU fraud in the sense of misconduct committed against European financial resources (Quirke,2010; Rizea, Croitoru, Ungureanu, 2010) / abuse of rights between EU member states(Byers, 2002) / harmful tax competition (van der Hoek, 2003) / state aid (Sutter, 2004; Luja,2004). The reason for this exclusion lies within the Commission’s aim to regulate business, not political entities. Also, the revenue losses and shadow profits through ATP will not be quantified or statistically evaluated, as they are already subject of extensive publicity (Bendlinger, 2012; Schneider, 2012).
4 Discussion and analysis
4.1 The Recommendation explained
To begin with, one may ask for the nature of the Recommendation, the legal status of the document and its background, why the Commission might have chosen this route to turn to the Member States. Whereas the legal issue is quite formal, the question of why is not so obvious and is not raised by the statutory procedures, but rather by the contents of the Recommendation.
The focus of the Recommendation is the ATP in direct taxes. The Commission considers national measures against ATP and measures to secure the tax revenue to be ineffective, not at least because planning and transactions take place cross-border, leaving the national sovereignty behind them. Therefore, the Commission encourages the Member States to take “the same general approach”.
Two malpractices in the field of direct taxation are considered responsible for the distortions, namely double non-taxation and abuse of rights.
In case of double non-taxation, the Commission criticises the inconsistencies of double taxation conventions (DTCs) and of the taxing behaviour of the Member States. The Commission gives two examples of such inconsistencies: some States waive their right to tax without taking into account, whether the income concerned is subject to tax in the partner jurisdiction. Besides DTCs, double non-taxation may occur, if States “unilaterally exempt items of foreign income”, again without taking into consideration the treatment in the source State. The taxpayer’s efforts to benefit from these bilateral or unilateral taxation practices are seen by the Commission as “e ngineering its tax affairs”, which must be addressed. The ultimate goal of the course of action recommended is to avoid “artificial” movements of capital and individuals, damaging the functioning of the internal market, as well as the tax base erosion of the States concerned.
In case of the abuse of rights, the Commission takes the view that the legislature of the Member States may not always be able to respond timely and appropriately to new, emerging tax schemes, which distort the internal market and diminish the proceeds of national taxation. Above this, the situation is worsened by deteriorating anti-abuse rules on national level. To overcome these weaknesses of the status quo, a general anti-abuse clause is to be implemented throughout the Member States.
Finally, the Recommendation prescribes a follow-up procedure: Member States have to notify the Commission about their compliance with the proposals and any amendments thereto. The Commission itself is going to publish a report on its results within three years after its adoption.
The Recommendation is declared non-applicable, if other acts of the European Union have impact on the subject matter. Especially, it shall not affect the legal issues covered by the Merger Directive, by the Parent Subsidiary Directive (recast) and by the Parent Subsidiary Directive. Finally, the scope of the Recommendation is limited by its addressees, which are the Member States of the European Union. However, the Commission is considering to review the Merger Directive, the Parent Subsidiary Directive (recast) and the Parent Subsidiary Directive in order to include the ideas of the Recommendation. The first steps have already been done in this direction through the European Commission Proposal of 25 November 2013 for a Council 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.
The Recommendation provides common place definitions of tax and income, limiting its scope to direct taxation:
“tax means income tax, corporation tax and, where applicable, capital gains tax, as well as withholding tax of a nature equivalent to any of these taxes”
“income means all items which are defined as such under the domestic law of the Member State which applies the term and, where applicable, the items defined as capital gains”.
It is worth noting that the Commission refers back to the Member States’ definition of income, instead of offering a “general” EU-wide definition in combination with its “general approach” towards double non-taxation and abuse. This might not be effective if the same rule has to be applied to income consisting of items, which might or might not be included in the tax base according to the national tax law. If the Member States are going on defining income on their own, then tax “engineering” possibilities will continue to be available to the taxpayers. Instead, the Commission should have tried to define a general income / tax base. Lessons can be drawn from the Union’s efforts to establish a Common Consolidated Corporate Tax Base (CCCTB). Thus, Schratzenstaller (2013) refers to the missing efforts to strengthen the CCCTB-approach as per the Commission to the European Parliament and the Council on 6 December 2012, An Action Plan to strengthen the fight against tax fraud and tax evasion, COM(2012) 722 final. The European legislator should try to combine its projects and to coordinate its action. It may be considered as a step in the direction of standardisation and simplification, that at least the Recommendation’s definition of GAAR, which will be explained further below, is used in Art. 13 of the European Commission Proposal of 14 February 2013 for a Council Directive implementing enhanced cooperation in the area of financial transaction tax, COM(2013) 71 final and in Art. 1 of COM(2013) 814 final. In this respect, it may be argued that the opportunity has been missed to strengthen the CCCTB- approach through the incorporation of a common definition of income into the Recommendation. The route chosen by the Commission reminds of the concept of co- existence, as formulated with reference to tax bases by Chown (2007):
“Tax harmonization should not be a euphemism for standardization but should simply mean making it easier for different fiscal systems to coexist”.
One of the most important definitions is that of ATP, the key term of the whole document. It consists of several components, requiring detailed scrutiny. At the beginning of the legal text, the Commission states that tax planning has been “traditionally treated (…) as a legitimate practice”, to go on saying that with the time it has become “ever-more sophisticated”. It then gives an example of such sophistication: shifting taxable profits “towards States with beneficial tax regimes (…) through strictly legal arrangements which however contradict the intent of the law”. The Recommendation then becomes more precise and describes ATP as “taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing tax liability”, accompanied by two further examples: double deductions (the taxpayer benefits from deductible items twice) and double non- taxation (the taxpayer benefits from non-taxability in the source State and from exemption in the State of residence). Table 3 sums up the Commission’s view of ATP, Table 4 summarises the technicalities sensitive to ATP acc. to the Recommendation.
This definition raises several issues. First of all, tax planning seems to be considered “legitimate”, as long as it is not “sophisticated”. Is it the sophistication, which makes tax planning aggressive? So sophistication becomes the decisive point. Sophistication is circumscribed by Lipatov (2005) as:
“understatement of tax liability that requires such special knowledge ( accounting or financial) will be called sophisticated tax evasion”
„the specialists inhibit evasion on unambiguous items (simple evasion), but stimulate it on ambiguous items (sophisticated evasion)”.
The Commission assumes that tax planning is sophisticated, if it benefits from technicalities of the tax law. However, tax law has become highly technical during the last decades. The European Union legislator itself is no exception – consider the VAT directive with all of its exemptions, special arrangements and special schemes. It remains unclear, which “technicalities” must be regarded as subtly and scheming, whereas others as simplistic and therefore acceptable. Does it make sense not to call the reduction of tax liability “aggressive” only for the lack of complexity? Presumably, the term Sophisticated Tax Planning (STP) would not trigger public attention as “aggressive” does. However, not the means (knowledgeable planning) should be blamed, but the end (reduction of tax liability). Indeed, the Commission limits its understanding of ATP as follows: only planning, which is aimed to reduce tax liability, shall be considered aggressive.
The Commission assumes tax planning to be sophisticated, if it benefits from mismatches between tax systems. Generally, tax systems have to be regarded as an expression of national sovereignty and are legal per definition. The question arises, whether the use of two systems may be treated as illegal in the interstate context, just because the systems are not congruent (Djanani, Brähler, 2008; Hey, 2013). National rules may be perfectly legal in the inner state context, being domestic “rules of the game” as a result of “balancing of policy considerations “ (OECD, 2008, Tax Effects on Foreign Direct Investment).
Furthermore, the Recommendation suspects sophistication, if legal instruments are used for purposes not intended by the legislator when creating these legal instruments. The Recommendation takes double taxation conventions (DTC) as an example. The residence Member States are encouraged to tax the questionable items which are exempt due to national rules in absence of a DTC, if the source State does not utilise its right to tax. The Commission recommends the source Member States to amend the DTC by supplementing them with a special clause. It also suggests the wording:
“Where this Convention provides that an item of income shall be taxable only in one of the contracting States or that it may be taxed in one of the contracting States, the other contracting State shall be precluded from taxing such item only if this item is subject to tax in the first contracting State”.
Finally, the Recommendation explains the subject to tax rule:
“an item of income should be considered to be subject to tax where it is treated as taxable by the jurisdiction concerned and is not exempt from tax, nor benefits from a full tax credit or zero-rate taxation”.
Hence, the waiver of the source State to tax and the exemption granted by the residence State can be regarded as “mismatches between two or more tax systems”. These mismatches are displayed in Table 5.
The definitions provided in connection with anti-abuse are much more detailed, evidently because the issue itself is difficult to grasp. An interpretative approach is required to qualify a legal transaction as an abuse of rights, whereas in double non-taxation matters the fact whether an item is subject to tax or exempt can be clarified through pure mutual assistance.
The Commission recommends to the Member States to apply the EU GAAR to matters not already covered by domestic anti-abuse provisions, concerning activities not only between the Member States, but also domestic activities and activities involving third countries. The Commission suggests the following wording for the EU GAAR:
“An artificial arrangement or an artificial series of arrangements which has been put into place for the essential purpose of avoiding taxation and leads to a tax benefit shall be ignored. National authorities shall treat these arrangements for tax purposes by reference to their economic substance”,
“an arrangement or a series of arrangements is artificial where it lacks commercial substance”.
An arrangement is said to be
“any transaction, scheme, action, operation, agreement, grant, understanding, promise, undertaking or event”
”comprise more than one step or part”..
The purpose is considered essential
“where any other purpose that is or could be attributed to the arrangement or series of arrangements appears at most negligible, in view of all the circumstances of the case”
with the avoidance arising
“where, regardless of any subjective intentions of the taxpayer, it defeats the object, spirit and purpose of the tax provisions that would otherwise apply”.
Table 6 presents the key characteristics of the EU GAAR. Do these additional numerous definitions in the context of the EU GAAR provide clarity to the language used by the Commission in defining ATP?
The focus is on the two spheres of activity – its economic elements (“reasonable business conduct”, “circular transactions”, “business risks “, “cash flows “, “offsetting or cancelling” elements) and its legal form (“legal characterisation”). The legal form does not only build bridges to the legislator’s intent and the initial legislative purposes of the instruments used, but directly triggers certain tax technicalities (different taxation of leasing or buying arrangements, of corporations and unincorporated entrepreneurs, of accrual and tax based they are usually tested in transfer pricing issues. Thus, Lyons (2013) calls attention to the fact that there might be genuine commercial purposes, which cause the taxpayer’s intention to be considered. Finally, the measurement of a “tax benefit” resulting from a transaction through comparison of the tax payable with and without the arrangement is clearly a matter of tax technicalities (tax base calculations, deductibility calculations) and legislative purposes (should an item be made tax deductible?).
4.2 The legal basis for the Recommendation
After all, EU law cannot be utilized for implementation of harmonised anti-ATP measures on domestic arrangements. Art. 17 TEU, regulating the role of the Commission, does not prescribe any engagement in single State cases. Instead, the Commission “s hall promote the general interest of the Union and take appropriate initiatives to that end (…), ensure the application of the Treaties (…), oversee the application of Union law”. One could advocate the view, that the promotion of “the general interest of the Union” might allow interference with domestic issues of the Member States. However, such an approach could only work, if “the general interest of the Union” would be characterised by purely domestic transactions, which may be not the case. This can be exemplified of the Fundamental Freedoms and the secondary EU law relevant for direct taxation. The free movement of goods refers to situation “between Member States” (Art. 28 sub-para. 1 TFEU), the freedom of movement for workers apply “within the Union” (Art. 45 sub-para. 1 TFEU), i.e. between the Member States, the right to establishment is secured for “nationals of a Member State in the territory of another Member State” (Art. 49 sub-para. 1 TFEU), the freedom to provide services must not be restricted “in respect of nationals of Member States who are established in a Member State other than that of the person for whom the services are intended” (Art. 56 sub-para. 1 TFEU), finally, free movement of capital is protected “between Member States and Member States and third countries” (Art. 63 sub-para. 1 TFEU). The cross-border element and the involvement of more than one nationality are crucial for the understanding of the Union’s concept of protection against discrimination through the Fundamental Freedoms.
As with the secondary EU law, the situation does not differ. The Parent-Subsidiary Directive (recast) limits its applicability to “the grouping together of companies of different Member States”. The Savings Directive addresses “c apital movements between Member States”, especially “interest payments (…) in the Member States to (…) individuals resident in another Member State”. The Interest and Royalties Directive refers to “transactions between companies of different Member States”. The Merger Directive addresses “companies of different Member States”. What triggers secondary EU law are interstate transactions. The Directives do not serve as a legal basis in case of domestic disputes. Not surprisingly, the competence catalogue of Art. 3, 4 and 6 TFEU does not entail any provisions enabling proposals on domestic matters, either. Lyons (2013) refers to the principle of subsidiarity of Art. 5 sub-para. 3 TEU. But whereas the application of this article might be suitable for interstate issues, it should not be used as a door-opener to regulate purely domestic situations.
The Union’s competence in direct taxation is derived from Art. 4 sub-papa. 2 lit. a TFEU. This provision declares that the Union and the Member States share the competence over the internal market. Direct taxation is seen as a matter influencing the internal market and can therefore be subsumed under Art. 4 sub-papa. 2 lit. a TFEU. So the Union is granted shared competence over direct taxation. This level of competence means that the Member States lose their competence as soon as the Union exercises its right to regulate (Terra, Wattel, 2012).
Art. 115 TFEU acts as a general harmonisation provision for direct taxation, as it should enable “the establishment or functioning of the internal market”. Issuing the Recommendation, the Commission might have had this article in mind, as its efforts are clearly directed towards the harmonisation of anti-double non-taxation and anti-abuse provisions with respect to direct taxes. Even more, the Commission adopts a highly harmonising approach, suggesting to the Member States the exact wording of the desired amendments. This is viewed differently by Niekel and Nouwen (2013), who reserve the word “harmonization” for the application of Art. 115 TFEU and therefore speak of “coordinated EU action” and “convergence” in the context of the Recommendation. The European Commission MEMO/06/499 (2006) defines harmonisation as a replacement “by a uniform Community system”, whereas co-ordination is explained as ensuring that “non-harmonized tax systems can better work together”. In view of this paper, the implementation of an exact wording means uniformity par excellence! However, Art. 115 TFEU requires unanimity. This is difficult to attain due to the high and still growing number of Member States. As per 2014, the European Union consisted of 28 Member States, with another five candidate counties (Iceland, Montenegro, the former Yugoslav Republic of Macedonia, Serbia, Turkey) and three potential candidates (Albania, Bosnia and Herzegovina, and Kosovo). There is a further problem with Art. 115 TFEU: it only grants the right to the Council (subject to specific legislative and consulting procedures) to issue directives (Terra, Wattel, 2012), not the right to the Commission to issue recommendations.
The Commission might have relied on Art. 107, 108 TFEU, which declare state aid “incompatible with the internal market”. Presumably, tax policy can distort competition in breach of these provisions (Terra, Wattel, 2012). Art. 108 sub-para. 1 sent. 1 TFEU imposes on the Commission the obligation to “propose to the Member States any appropriate measures required”. Proposal by way of a recommendation may appear suitable. Though, for the Art. 107 and 108 TFEU to be the legal basis for the Recommendation’s content, one could expect a more direct and specific approach. State aid rules apply if “certain undertakings” or the “production of certain goods” is favoured. This must have been addressed by the Commission, which attacks ATP in general, without any specific reference to certain regions, branches, entities, goods or services. For this reason, the reliance on Art. 107, 108 TFEU appears too far-fetched.
Art. 116 TFEU might be worth considering. It states that the Commission shall “consult the Member States concerned”, if competition is distorted in the internal market due to “provisions laid down by law, regulation or administrative action in Member States”, which opens it to tax law and tax administration issues (Terra, Wattel, 2012). But whereas the Commission is concerned with consultation, the real action is reserved to the European Parliament and the Council which “shall issue the necessary directives”. Art. 116 TFEU does not include any provision to allow the Commission the issuance of tax related recommendations. Consequently, the Commission cannot have relied on this article, too.
Instead, the Commission might have relied on Art. 179 sub-para. 2 TFEU, aiming at the removal of legal and fiscal obstacles to research and technological development and space (Terra, Wattel, 2012). The classification of Research and Development (RD) expenditure as capital or revenue expenditure for tax purposes, as well as valuation and amortisation issues, can significantly differ between the Member States. So, RD can be considered as susceptible to tax abuse. However, the reference to Art. 179 sub-para. 2 TFEU might be limited through Art. 173 sub-para. 3 TFEU, prohibiting the Union the introduction of “any measure (…) containing tax provisions” in the field of industry (Terra, Wattel, 2012). RD usually takes place in an industrial environment and to this end the Commission’s reliance on Art. 179 TFEU would have been not that practical.
Another legal basis for the Recommendation may be seen in Art. 325 TFEU, requiring the Union and the Member States to “counter fraud and any other illegal activities affecting the financial interests of the Union”. The Union should fulfil these requirements by the way of “measures” and “close and regular cooperation”, thus ensuring a broad applicability. Nevertheless, it must be kept in mind that not every aggressive tax planning automatically qualifies as tax fraud, especially as fraud might be characterized differently in the criminal laws of the Member States. Hence, reliance on Art. 325 TFEU has limitations, too.
Finally, Art. 352 TFEU could be regarded as a basis for the Recommendation. Art. 352 TFEU is seen as general direct taxation harmonisation provision (Terra, Wattel, 2012) and might be regarded as a basis for the harmonising approach undertaken by the Commission. It allows “action (…) necessary (…) to attain one of the objectives set out in the Treaties”. It could be argued, that the term “action” refers only to the “appropriate measures” adopted by the Council according to Art. 352 sub-para. 1 TFEU. But even in this case a playing field would remain for the Commission: it could refer to sub-para. 2, which makes the Commission “draw national Parliaments' attention to proposals based on” Art. 352 TFEU. The attention of Parliaments could easily be drawn by the way of a recommendation. Unfortunately, Art. 352 TFEU has served only once as a legal basis for a tax provision – namely at the establishment of the European Economic Interest Grouping (Terra, Wattel, 2012). Therefore, it would be surprising, rather than expected, for the Commission to base the Recommendation on this article.
Under the EU law recommendations are governed by Art. 288 and 292 TFEU, with the last- mentioned article designating the Commission as one of the European institutions which are allowed to “adopt recommendations”. Art. 288 TFEU rules that a recommendation is not legally binding. Thus, its contents must be regarded as suggestions to the Member States, which remain free to transfer them into their national law. Due to its non-binding nature, a recommendation in the field of tax law can be regarded as an instrument of “soft tax coordination”, as opposed to “hard tax coordination” through regulations or directives (Pistone, 2009), which are directly binding or must be implemented, respectively (Weber- Grellet, 2005; Rehm, Nagler, 2013). Despite of its suggestive character, recommendations can have quite profound effects, as the Recommendation C(2012) 8806 final shows: the Group of the Party of German Socialists in the German Bundestag placed a request to implement the Recommendation into German law just few months after its issue (SPD, 2013).
Although the request was dismissed (Deutscher Bundestag, 2013), the possibility cannot be ruled out that it will be raised again after the change of majority ratios in the German Parliament.
Arguably, there seem to be no primary EU law besides Art. 292 TFEU enabling the Commission to make suggestions and provoke amendments to Member States in direct tax matters. Indeed, the Commission has developed a constant practice of issuing recommendations on direct taxation (Terra, Wattel, 2012) and the Recommendation C(2012) 8806 final must be seen as a further result of this policy.
Possibly, the Commission is provoking changes via the “back door” (Lampreave, 2011), using its political weight and leaving aside the remedies already available to the EU legislator, as well as the opportunity to make these remedies more exploitable. At least, the European Commission Proposal for a Council Directive on a Common Consolidated Corporate Tax Base (2011) as well as the European Commission Proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax (2013) may be seen as such a step to codify anti-ATP provisions.
One might argue that as long as a proposal is not binding, the Commission could address any matter on its political agenda. Yet, taxation is a highly sensitive topic and political resistance is to be expected, where direct action is not allowed or hardly feasible. Of course, one might ask, whether it would be advisable for the Member States to implement for example the EU GAAR for cross-border activities and to uphold a national GAAR for domestic transactions. The answer probably would be that for the sake of legal certainty and simplicity of the application of law, a “one GAAR solution” should be preferred. If the Member States would have in fact desired one common GAAR, they could have tried to achieve this by the way of “coordination” (Serverin, 2007) relying on Art. 5 TFEU para. 1, as taxation can be regarded as a genuine dimension of economic coordination. This provision addresses the Member States, but it is the Council, who takes the appropriate measures. One could argue that indeed “coordination” were behind the Recommendation, because the Commission started its action after a corresponding Council Conclusion of 28 March 2012, EUCO 4/1/12 REV 1 to “improve the fight against tax fraud and tax evasion”. The strong support of the Recommendation by the European Parliament resolution of 21 May 2013 on Fight against Tax Fraud, Tax Evasion and Tax Havens, (2013/2060(INI) also points in this direction.
However, in that case the Recommendation should have been implemented by the Member States promptly. But this is not the case at least for Germany, Austria and the United Kingdom. Thus, the UK GAAR, that came into force on 17 July 2013, has made its way through the legislative procedure starting in 2010 and differs significantly from the EU GAAR, for example regarding the „ double reasonableness test” (HMRC, 2013). However, the “coordination” approach has its merits. In fact, the Commission recognises this matter itself – the Commission Staff Working Document Impact Assessment of 06 December 2012 Accompanying the Communication from the Commission to the European Parliament and the Council - An Action Plan to strengthen the fight against tax fraud and tax evasion, the Commission Recommendation regarding measures intended to encourage third countries to apply minimum standards of good governance in tax matters and the Commission Recommendation on aggressive tax planning, SWD(2012) 403 final, mentions that at the Fiscalis Seminar in July 2012 Member States were, “in general, supportive of an EU coordinated approach”, despite questions concerning “subsidiarity and proportionality” remaining unanswered.
4.3 The Recommendation in light of ECJ jurisprudence
Is the Recommendation consistent with the ECJ jurisprudence? Does it create added value for taxpayers, practitioners, scholars, national courts and tax authorities?
The ECJ has ruled on various taxation issues affecting double non-taxation. In the Marks Spencer case the Court said that double loss deduction has to be addressed by the Member States as such a tax benefit is neither in line with the Treaty, nor with public interest (Kofler,2006; Helminen 2013). In cases concerning the most favoured nation treatment (the taxpayer is granted the best tax treatment out of the options available to nationals of other States in a cross-border situation, not compared to the treatment of the national of the granting State) the ECJ ruled on several occasions against double non-taxation, arising out of the most favoured nation treatment (Monsenego, 2011), see the Schempp case, the Oy AA case, the Lidl Belgium case and the X Holding case. This jurisprudence does not remain uncontroversial. With the view to the Eckelkamp case and B lock case, Lang (2009) regards double deductibility of losses a natural consequence of the hardly harmonised field of direct tax law throughout the Union. In respect of the Recommendation, it might be concluded that it is moving in the same direction as the ECJ in its efforts to prevent double non-taxation.
As far as abuse is concerned, the ECJ differentiates between situations involving the application of the EU law and those not. Thus, on the M Italia Spa case, the court states that there exists “no general principle” that makes the Member States responsible for the prevention of abusive transactions. But the situations differs, as soon as benefits from the EU law are to be obtained without any proper legitimacy (Emsland-Stärke case, Halifax case, Kofoed case, Foggia case). Then, abuse of rights might take place, depending on the circumstances of the case at hand (Böing, 2007). First of all, minimising the tax liability is not prohibited per se, but instead is a right of a taxpayer (Eurowings case, Cadbury Schweppes case). The same is true for the choice of the jurisdiction with preferable tax provisions (Piantavigna, 2011; Segers case, Daily Mail case, Centros case, Inspire Art case, de Lasteyrie du Saillant case). However, these rights will be denied if the questionable arrangement is “wholly artificial” acc. to the Cadbury Schweppes case, Leur-Bloem case, ICI case, and Lankhorst-Hohorst case (Böing, 2007). The arrangements fails (Trian, 2008), if the
“the degree of physical presence of the subsidiary in the host state, the genuine nature of the activity provided by the subsidiary and the economic value of that activity with regard to the parent company and the entire group”
are not commercially substantiated, but the tax advantage obtainable via the arrangement seems to be the core essence.
The Recommendation`s definition of an “artificial arrangement” is not completely congruent with the ECJ jurisprudence. It would have been more favourable to use matching definitions.
4.4 The Recommendation and the OECD publicity
OECD publicity is of an extremely pervasive value in tax matters. Almost 3,500 tax treaties are based on the OECD Model Tax Convention on Income and on Capital from 1963 (OECD,2012). Over 600 mutual TIEAs are based on the OECD Model Tax Information Exchange Agreement (TIEA), issued in 2002 (Avery Jones, De Broe, Ellis, van Raad, Le Gall, Goldberg, Killius, Maisto, Miyatake, Torrione, Vann, Ward, Wiman, 2006). The OECD approach towards ATP seems to develop in the same direction: its Base Erosion and Profit Shifting (BEPS) Action Plan has been promoted by the G20 on the occasion of the Saint Petersburg Summit in September 2013 (G20 Leaders’ Declaration, 2013). It is already recognized as a joint project of OECD/G20 by the OECD (Secretary-General Report, 2013).
Even before the summit in Russia, the G20 encouraged the OECD work on ATP by the G20 Leaders’ Declaration at the Los Cabos Summit on 19 June 2012, by the Final Communiqué of the Meeting of Finance Ministers and Central Bank Governors in Mexico City on 5 November 2012 and by the Final Communiqué of the Meeting of Finance Ministers and Central Bank Governors in Moscow on 16 February 2013. Therefore, one might expect that the OECD announcements concerning ATP will be followed by the EU Member States, which are also the addressees of the Recommendation. So it is crucial to comprehend whether both of the sources are in line with each other, as both of them try to prompt legal action.
The observation of the OECD announcements starts with the Harmful Tax Competition Report of 1998, which is considered to be the beginning of the OECD publicity against “offshore tax evasions” (OECD, 2009). It suggests not to apply participation exemption to income that benefits from harmful tax competition regimes, e. g. “no or low effective tax rates “. The similarity to the Recommendation’s subject to tax clause is evident, although the latter is not limited to harmful tax competition cases.
Further steps have been initiated in recent years, so by the Final Seoul Declaration of the Third Meeting of the OECD Forum on Tax Administration on 15 September 2006. It identifies “cross-border non-compliance “ and “sophisticated cross-border schemes and/or investment structures (…) which go beyond legitimate tax minimization arrangements” and proclaims the need to fight such ATP “s chemes”. This need is addressed by the OECD study of Tax Intermediaries (2008), defining ATP very broadly as “tenable” planning that leads to “unintended and unexpected tax revenue consequences” or simply does not disclose any “uncertainty” with the position taken on the tax return. Unfortunately, the study does not explain why “tenable” positions might contradict the intent of the law. Further, it refers to advance rulings / advance disclosure through discussing potential ATP with tax authorities before a return is filed, but it does not clarify how “uncertainty” should be disclosed in the return itself (as this is a part of its ATP definition), which might be strange in practice. The tax return is meant to be a “Wissenserklärung” and “Willenserklärung” (Melchior, 2010) not a discussion paper. The Recommendation does not adopt such a wide scope, clearly limiting the ATP to cases that minimise tax liability. The definition of ATP in that study is thus considered unsatisfactory.
However, the definition of ATP from the OECD study on Tax Intermediaries has found its way into the OECD study undertaken in 2009 on tax compliance of High Net Worth Individuals (HNWI). Inter alia, the study reports experience from the UK where specific rules (“fixes”) were circumvented by planning “around the fix”, so that the GAAR has become a “last resort”. This is the route taken by the Recommendation. Both of the studies show that intermediaries could not only be tax advisers, but also banks, which might engage in designing and selling financial products helpful in ATP. On this impetus, the role of the banking industry was analysed by the OECD in 2009 in the study of tax compliance by banks. This study was followed in 2010 by the OECD Framework for a Voluntary Code of Conduct for Banks and Revenue Bodies, containing a commentary on the indications of artificial arrangements in an advanced ruling / advanced disclosure environment. Detailed descriptions of tax aggressive complex structured finance transactions (CSFT) are provided, which correspond to that used by the Recommendation when identifying artificial arrangements, Table 7. The OECD applies narrow indications, e. g. a transaction is considered artificial as long as no pre-tax profit arises. One wonders whether a pre-tax profit quite above zero would characterise the activity as commercially rational under the OECD approach. To account for that OECD shortcoming, the Recommendation is speaking about insignificant pre-tax profits. More detailed indications can be found in the OECD Joint Audit Report of 2010, which identifies risky arrangements susceptible to ATP and therefore suitable for simultaneous field examinations. Table 8 compares these OECD criteria to that of the Recommendation, making evident that the OECD document is more precise.
Financial institutions have remained in the focus of the OECD, so with the Addressing Tax Risks Involving Bank Losses study from 2010. Table 9 compares the identified “potential risk areas” with the Recommendation. The significance of loss utilisation for ATP purposes makes the OECD strengthen its research in this area. The Corporate Loss Utilisation through Aggressive Tax Planning study was released in 2011, scrutinising the exploitation of losses across industries. This study was preceded in 2011 by OECD report on Tackling Aggressive Tax Planning through Improved Transparency and Disclosure, which, however, did not address the schemes, but the existing compliance rules in ATP cases among a number of countries, see Table 10 for contrast with the Recommendation. As a consequence of the “loss” studies, in 2012 the OECD issued a study on Hybrid Mismatch Arrangements (HMA). Table 11 considers the crucial characteristics of this study, which are very similar to that of the Recommendation. However, the HMA study clearly prefers SAAR instead of GAAR. The rules “specifically” fighting HMA are considered more effective, which comes not at a surprise, given the same proposition in paragraph 9.6 of the OECD Commentary on Article 1 of the OECD MTC on Income and on Capital. To a certain degree a GAAR is regarded even as superfluous by the OECD – it goes without saying that laws have to be adhered to within the “spirit of the tax laws (…) discerning and following the intention of the legislature”, as posited by the OECD Guidelines for Multinational Enterprises in 2011. The “spirit of the law” has also been addressed in 2010 by the OECD paper on Co-operative Compliance: A Framework. From Enhanced Relationship to co-operative Compliance, suggesting that the nature of the aggressiveness of tax planning could be clarified by the way of advanced disclosure, see Table 12 for its ATP approach. Consequently, treaty benefits should be suspended for taxpayers entering into abusive transactions. The Recommendation does not take this view, as it endorses the EU GAAR. However, the debate on this question within the OECD itself is far from being closed – the GAAR approach is recommended by the 2013 OECD report on ATP based on After-Tax Hedging, with Table 13 presenting its ATP definitions. The report disqualifies SAAR as susceptible to circumvention and supports a general, broadly formulated rule.
The temporary peak has been reached by the OECD publicity in February / July 2013 when its report on BEPS and the Action Plan based on this report were issued, for the key concepts see Table 14 and Table 15, respectively. Although mentioning the Recommendation once in the BEPS Report, OECD goes far beyond in its analyses. This fact might be an implicit valuation of the Commission’s paper – it is mentioned en passant, but there is taken no inspiration from it. However, one point deserves particular attention: before the BEPS papers, the OECD had displayed a critical attitude towards new subject to tax rules aiming to prevent double non-taxation, assuming that the issue has been already addressed in the paragraph 32.6 of the OECD Commentary on Article 23 of the OECD MTC and in the paragraph 4 of Article 23A of the OECD MTC. This view has changed now by Action No. 2 of the BEPS Action Plan, which inter alia proposes the development of provisions against double non-taxation and double deductions as well as the alteration of the appropriate OECD MTC articles and domestic law – the similarity to the Recommendation is striking.
The OECD papers are highly detailed and focus on specific issues, identified as being of prime importance. To the contrary, the Recommendation uses broad terms that allow for a generous interpretation. Moreover, the Recommendation does not leave any room for non- aggressive tax planning, as long as “sophisticated” “technicalities” are used. Concern about such a broad approach has already been raised during the consultation procedure, but obviously the criticism has not been adopted (Commission Staff Working Document Impact Assessment SWD, 2012). This contradicts the OECD understanding of ATP:
“Double-dip transactions are not necessarily aggressive”
“Complexity does not necessarily indicate tax abuse” (OECD, 2008, Study into the Role of Tax Intermediaries)
as well as
“Transactions which involve different tax treatments in two jurisdictions are not necessarily aggressive” (OECD, 2009, Building Transparent Tax Compliance by Banks).
Furthermore, while recommending the implementation of the EU GAAR and a subject to tax rule, the Commission picks up only two devices out of a huge arsenal developed by the OECD, see Table 15. However, not all OECD proposals are to be followed uncritically, e. g. the suggestion in 2009 OECD study on tax compliance of High Net Worth Individuals that tax advisers should disclose beyond statutory requirements may raise important questions on the advisers` professional ethics. For the sake of fairness it may be claimed that the Commission has produced a short document of view pages and therefore has been probably unable to address all the issues raised by the OECD in its numerous lengthy studies. Above this, the two issues dealt with by the Recommendation have experienced a change within the OECD since 2013 – the GAAR approach has acquired acceptance and a new, far-reaching subject to tax rule is considered necessary. From this point of view – and despite all the criticism – the Recommendation represents a valid choice made by the Commission among the available options currently discussed by the OECD. Finally, the Commission regards the Recommendation to be closely related to the OECD BEPS Action Plan which has to be implemented now throughout the Union acc. to the European Commission Memorandum Fighting Tax Evasion and Avoidance: A year of progress, European Commission MEMO/13/1096 from 5 December 2013.
- Quote paper
- Paul Eisenberg (Author), 2014, The EU Commission Recommendation on Aggressive Tax Planning. Concepts, Merits, Limits, Munich, GRIN Verlag, https://www.grin.com/document/457449