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CFE Tax Advisers Europe 2018 Technical & Policy Publications


CFE Publications 2018 Opinion Statements FISCAL COMMITTEE OPINION STATEMENTS •

• • • • • • •

Opinion Statement FC 1/2018 on the European Commission proposal of 21 March 2018 for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services. Published on 04/06/2018. Opinion Statement FC 3/2018 on Problems Caused by VAT Numbers. Published on 05/06/2018. Opinion Statement FC 4/2018 on a Proposal for a Council Directive amending Directive 2006/112/EC, as regards rates of Value Added Tax (COM(2016)758 final, of 1 December 2017 and COM/2018/20 of 28 January 2018). Published on 08/06/2018. Opinion Statement FC 5/2018 on practical difficulties arising from the practices and procedures of the Court of Justice of the European Union. Published on 20/11/2018. Opinion Statement FC 6/2018 on a Proposal for a Council Directive amending Directive 2006/112/EC, on the common system of value added tax as regards the special scheme for small enterprises. Published on 03/07/2018. Opinion Statement FC 7/2018 as regards the Commission proposal to introduce detailed technical measures for the operation of the definitive VAT system. Published on 27/08/2018. Opinion Statement FC 9/2018 on the notion of “minimal human intervention” in the definition of “electronically supplied services” for the purposes of Article 58 of the VAT Directive. Published on 05/12/2018. Opinion Statement FC 10/2018 on the European Commission Platform Tax Good Governance discussion questionnaire on tax competition and competitiveness. Published on 05/12/2018.

PROFESSIONAL AFFAIRS COMMITTEE OPINION STATEMENTS • •

• • •

Opinion Statement PAC 1/2018 on the OECD Consultation regarding Mandatory Disclosure Rules for Addressing CRS Avoidance Arrangements and Offshore Structures (Prepared by CFE on behalf of the Global Tax Advisers’ Cooperation Forum). Published on 16/01/2018. Opinion Statement PAC 2/2018 on the European Parliament Recommendations to the Council and Commission following the inquiry into money laundering, tax avoidance and tax evasion of 13 December 2017. Published on 22/01/2018. Opinion Statement PAC 4/2018 on the EU Whistleblowers Protection. Published on 24/07/2018 Opinion Statement PAC 5/2018 on the legal professional privilege reporting waiver set out in the EU Mandatory Disclosure Rules Directive (DAC6). Published on 12/07/2018. CFE Survey on the Implementation of the 4th EU Anti-Money Laundering Directive

ECJ TASK FORCE OPINION STATEMENTS • •

Opinion Statement ECJ-TF 1/2018 on the Compatibility of Limitation-on-Benefits (LoB) Clauses with the EU Fundamental Freedoms. Published on 02/05/2018. Opinion Statement ECJ-TF 2/2018 on the CJEU decision of 7 September 2017 in Case C-6/16, Eqiom, concerning the compatibility of the French anti-abuse rule regarding outbound dividends with the Parent-Subsidiary Directive and fundamental freedoms. Published on 30/05/2018.

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Opinion Statement ECJ-TF 3/2018 on the CJEU decision of 12 June 2018, in Case C-650/16, Bevola, concerning the utilisation of “definitive losses” attributable to a foreign permanent establishment. Published on 15/11/2018.

JOINT OPINION STATEMENTS •

Opinion Statement CFE 1/2018 on the Importance of Taxpayer Rights, Codes and Charters on Tax Good Governance. Published on 06/06/2018.

Declarations •

“The Ulaanbaatar Declaration” - 10 Key Priorities in International Taxation by Global Tax Advisers Platform (GTAP)

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Opinion Statement FC 1/2018 on the European Commission proposal of 21 March 2018 for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services

Prepared by the CFE Fiscal Committee Submitted to the European Institutions in May 2018

CFE Tax Advisers Europe is a Brussels-based association representing European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE is part of the European Union Transparency Register no. 3543183647�05. We would be pleased to answer any questions you may have concerning our Opinion Statement. For further information, please contact Ms. Stella Raventós, Chair of the CFE Fiscal Committee or Aleksandar Ivanovski, Tax Policy Manager, at info@taxadviserseurope.org. For further information regarding CFE Tax Advisers Europe please visit our web page http://www.taxadviserseurope.org/

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Executive Summary •

CFE appreciates the pivotal role that the European Union and its Member states are playing in addressing the challenges of taxation of the digital economy, seeking to reach and contribute to a global solution to these challenges and working together with the OECD. Furthermore, CFE acknowledges the efforts of the European Commission to bring about progress in this complex area of tax law and policy. • CFE’s strong view is that the European Union and its Member states should focus on a long-term and sustainable taxation solution, in line with the Ottawa Taxation Framework Principles of 1998 when legislating for emerging sectors of the economy. • CFE acknowledges the OECD BEPS Action 1 proposition that the digital economy should not be ringfenced from the rest of the economy for tax purposes due to the increasingly prevalent nature of digitalisation and the evolving nature of the business models under scrutiny. • Equally, CFE recognises the political imperative to take meaningful action to tax profits of multinational groups with digital business models, which are currently subject to only a very low effective rate of tax. The public perception is that these companies are not paying ‘enough’ tax. However, comprehensive reform takes time and is best achieved through consensus, taking into account the principles of neutrality and simplicity in designing legislation, which will maintain the growth and competitiveness of the European economies. • At a general level, digitalisation continues to be an evolving process and an opportunity for society at large. As such, the digitalisation of the economy, the new business models and the consumer value it brings should be welcomed. • CFE believes that in absence of international tax policy consensus on the features of the various business models in the digital economy, the digitalising traditional business models as well as a concurrent review of the ‘nexus’ and ‘profit allocation’ concepts, unilateral actions could compound existing shortcomings and aggravate competiveness and growth risks in the Single Market. Accordingly, contemplated interim measures on taxation of the digital economy need to be considered carefully, weighing the expected revenue from this tax against the potentially adverse impact. Once implemented, interim taxes tend to become permanent, hence such taxes need to be introduced with caution. • CFE believes that establishing tax certainty in the international taxation framework and protection of taxpayers’ rights is of utmost importance and must be a priority for policy makers. Whilst we appreciate the need to take action, solutions for taxation of the digital economy need to avoid double or multiple taxation and avoid discrimination of non-resident businesses. Equally, any new taxes need to be within the ambit of existing double tax treaties yet provide access to effective dispute resolution mechanisms.

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1. Introduction This Opinion Statement sets out the CFE Tax Advisers Europe views on the European Commission proposals for digital services tax on revenues resulting from certain digital activities in the EU Single Market (“DST” or “the proposal”)1.

The CFE has also commented on this matter in the context of the OECD and EU Commission consultation process: in October 2017 in response to the OECD request for input on work regarding the tax challenges of the digital economy, and, in December 2017 in response to the 2016 EU Commission public consultation on the fair taxation of the digital economy. This Opinion Statement complements these previous opinion statements.

CFE will consider responding separately to the European Commission proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence and the Commission Recommendation relating to the corporate taxation of a significant digital presence.2

2. Key Policy Considerations It is now widely recognised that the digital economy poses unique tax policy challenges for policymakers. The immediate concerns are twofold: 

The existing international tax rules are unable to fully address the concerns related to the increasing reliance on data and B2C sales in host jurisdictions;

Some multinational group companies with digital business models are currently subject to only a very low effective rate of tax, with a public perception that these companies are not paying ‘enough’ tax.3

More generally, the EU has been at the forefront of efforts to implement anti-BEPS measures including those that address base-eroding practices associated with the digital economy. As a result, many of the enacted

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Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services of 21.3.2018 COM(2018)148 2 In respect of the long-term proposals addressing the tax challenges of the digital economy, CFE will consider issuing a separate Opinion statement on basis of developments as set out in the Presidency digital taxation roadmap: http://data.consilium.europa.eu/doc/document/ST-9052-2018-INIT/en/pdf 3 Digital businesses models in the EU face a lower effective average tax rate than traditional business models, as evidenced by the European Commission Impact Assessment. ZEW (2017) finds that a cross-border digital business model is subject to an effective average tax rate of only 10% compared to a rate of 23% of a cross-border traditional business, with more than one factor accounting for such a difference; European Commission Impact Assessment accompanying the Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services, SWD(2018) 81 final/2, page [136]

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measures at EU level, which implement BEPS policy outcomes, may mitigate issues prevalent in the digital economy taking into account their implementation timescale. These include in particular the issues associated with transfer-pricing and base-eroding IP profit shifting and income mobility associated with the digital economy: 

BEPS Actions 2, 3 and 4, the recommendations on CFCs and the enactment of ATAD/ ATAD 2;4

BEPS Actions 8-10 on transfer-pricing and the revised DEMPE approach;5

EU’s Dispute Resolution Directive as a follow-up of BEPS Action 14;6

Directive on CbCR as follow-up of BEPS Action 13.7

ATAD in particular is key legislation to protect the tax base among EU Member states against tax avoidance practices and to ensure tax is paid where the profits are generated, which, once implemented, shall end some of the existing mismatches that cause market fragmentations and distortions. Equally, the mandatory introduction of CFC rules per ATAD addresses some of the issues associated with transfer-pricing and the baseeroding IP profit shifting and income mobility prevalent in the digital economy.

Similarly, the revised OECD Transfer-Pricing Guidelines alongside the revisited PE concept per BEPS Action 7 address other relevant BEPS concerns associated with the digital economy: 

The reduced dependent agent threshold, where implemented with applicable MLI provisions (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting), reduces “under-taxation” opportunities for digital businesses in jurisdictions where the customers are located;

Anti-fragmentation rules regarding specific activity exemption address further issues: what formerly constituted mere preparatory or auxiliary activity would now be within the PE threshold, ie. shall constitute taxable presence in the source jurisdiction.

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Council Directive (EU) 2016/1164 of 20 June 2016 laying down rules against tax avoidance practices that directly effect the functioning of the internal market, and, Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries 5 Revised OECD approach related to development, enhancement, maintenance, protection and exploitation of intangibles, BEPS Actions 8–10 on transfer-pricing aspects of intangibles (‘Aligning Transfer Pricing Outcomes with Value Creation’), 5 October 2015 6 Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union, which CFE welcomed in its Opinion Statement of 23 May 2017 as a means of improved mechanisms available to Member states to resolve double taxation disputes: http://taxadviserseurope.org/blog/portfolio-items/opinion-statement-fc-42017-on-the-proposed-directive-on-double-taxation-dispute-resolution-mechanisms-in-the-european-union/ 7 Council Directive (EU) 2016/881 of 25 May 2016, which amends Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation (“DAC 4”)

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CFE acknowledges, however, that the BEPS project has not resolved all the issues related to the tax challenges of the digital economy. This presents an exceptional challenge for the policymakers in seeking to address further BEPS issues that arise therefrom, as well as the pertinent issue of addressing the increased reliance of data in “value creation” and B2C sales in host countries from a tax perspective.

Further, CFE believes that in absence of international tax policy consensus on the features of the various business models in the digital economy, the digitalising traditional business models as well as a concurrent review of the ‘nexus’ and ‘profit allocation’ concepts, unilateral actions on taxation of the digital economy could compound existing shortcomings and aggravate competiveness and growth risks in the Single Market. Accordingly, interim measures on taxation of the digital economy need to be introduced with caution, weighing the expected revenue from this tax against the potentially adverse impact.

3. Comprehensive identification of the features of digital business models The academic and policy discussions related to the concept of “value creation” and “profit attribution” in the digital economy indicate an absence of international consensus on such a definition for tax policy purposes. Similarly, the OECD work on identifying the scope of the business models in the digital economy is ongoing and the Interim Report of March 2018 indicates that it will take more time to pinpoint the features of both the digital business models and the digitalising traditional ones.8

The proposed EU directive recognises that a fundamental principle for profit allocation should remain that taxation takes place in the jurisdiction where value is created. Thus, a globally accepted definition on what constitutes value, where is the value created, and how it is apportioned for tax purposes is lacking. The evolving nature of the digital business models and the digitalising traditional business models merit a proper evaluation, which is currently being undertaken by the OECD. This process is also carried out by the EU with the revised rules on profit attribution or a revised concept of PE in the context of the proposed Directive on Significant Digital Presence and the related Tax Treaty Recommendations.

In this vein, CFE supports the work that seeks to explore the extent to which the new forms of business activity generate value and how will such value be attributed among jurisdictions for taxation purposes.

Tax Challenges Arising from Digitalisation – Interim Report 2018: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing (2018), Paris, http://dx.doi.org/10.1787/9789264293083-en. 8

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4. Arrangements within scope of the proposed Directive At present, the following arrangements are within scope of the Commission proposal: 

Advertising: the making available on a ‘digital interface’ of advertising space for advertising that is aimed at users of that interface;

Multilateral interfaces: the making available to users of a ‘digital interface’ which allows users to find other users and to interact with them, and which may also facilitate the provision of underlying supplies of goods or services directly between users; and,

Selling of user data: the transmission of data collected about users and generated from users' activities on digital interfaces.

CFE considers that it is vital to arrive at a common understanding of the features of the emerging business models in the digital economy and subsequently to determine what constitutes “value” for tax purposes. Digital business models continue to evolve with the utilisation of emerging technologies, such as artificial intelligence and block-chain, or leverage on the use of data and user relationships with platforms. Identifying relevant business model features is clearly a prerequisite for an adequate policy solution. Only once key contributing factors have been identified will it be possible to develop consistent policy proposals in line with the Ottawa principles.

In CFE’s view, EU’s focus on long-term solutions as opposed to the interim taxation will avoid a perception that such taxation creates arbitrary distinctions between different business models and consequently the arrangements within scope.

5. Methodological choices on the arrangements within scope In our view, the argument that certain models are within scope of the Directive on digital service tax due to ‘more significant user contribution’9, whilst others are not, could be perceived as amounting to a distinction within digital business models. Encompassing or leaving out of the scope of the EU proposal certain digital business models or particular elements of certain digital business models could potentially raise WTO-related issues too.10 The dependence on user involvement and the monetisation of user participation is indeed a distinct

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Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services of 21.3.2018 COM(2018)148, at page [4] 10 idem, Article 3

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feature of the digital economy that merits a comprehensive understanding and evaluation, as a matter of international tax policy.

6. Discrimination, Double Taxation and Tax Relief 6.1. Tax Relief and Double Taxation The proposal contemplates deductibility of the new tax from the Corporate Income Tax base, irrespective of whether tax is paid in the same or another Member state. A key policy consideration in a situation where a tax is not a covered tax for double tax treaty purposes is the inability of a taxpayer to claim double taxation relief.

Considering that turnover taxes are substantially similar to VAT, these do not qualify as income taxes, which consequently excludes the possibility for treaty relief in the resident jurisdiction of the taxpayer. It is widely accepted in academic literature that turnover taxes such as the one proposed by the Commission do not fall within the scope of the OECD Model Tax Convention and double tax treaties.11

If a tax is not a ‘covered tax’ under Article 2 of the OECD Model, it would consequently not be covered by either the ‘distributive’ articles of the OECD Model, nor would it qualify for dispute resolution under MAP (Article 25 of the OECD Model). Accordingly, such indirect taxes would not qualify for relief from double taxation under Article 23 of the OECD Model in the residence jurisdiction of the taxpayer, and will involve double or multiple taxation.

6.2. Discrimination of non-resident entities The design of any interim measures should not result in discrimination of non-resident businesses. The proposals need to ensure that the tax does not covertly differentiate between resident and non-resident entities that are in a comparable factual and legal situation, taking into account existing obligations under WTO and State Aid rules. CFE understands that this is not the intended policy outcome, hence the detail should meet Commission’s policy intention.

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In such a scenario, relief for taxpayers will be limited to unilateral measures, if available, in absence of treaty relief. Philip Baker QC, International Tax Law and Double Taxation Conventions, Sweet & Maxwell (2017), at 2B.10.

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7. Sunset clause Interim measures should clearly reflect their temporary nature. Consequently, such measures should cease to apply either once a global solution has been agreed under the G20/ OECD auspices, or, alternatively, once the Directive on significant digital presence enters into effect.

In this vein, consideration should be given to the policy intention that companies may cease to be subject to interim taxation only when they become subject to tax under the Directive on significant digital presence. This follows on from the fact that the Directive on significant digital presence is tied-in with a Recommendation to amend tax treaties with third countries, which may or may not occur in due course. It transpires from the design of the proposals that the interim Digital Services Tax will become permanent taxation for the companies that are not subject to the Directive on Significant Digital Presence.

This policy intention seems to be at variance with the recommendations of the OECD Interim Report on temporary limitation of any interim measures on taxation of the digital economy, taken by particular countries individually or collectively at regional level, such as in the EU context.12

8. Economical distortion and tax cascading The CFE appreciates the narrow scope of the proposal by the inclusion of two revenue-related thresholds. Our view is that other safe harbours, such as a profitability threshold, may need to be considered in order to minimise the impact on companies with low profitability. Principally, gross revenue taxes significantly affect companies with small profit margins. Contrary to the common objectives, a wrong message may be conveyed as a matter of policy to the nascent European digital sector, which may also discourage outsourcing and, as a consequence, the efficient utilisation of resources.

Further, it is widely recognised that turnover tax levied on gross revenues with no deduction of costs is economically distortive, with the incidence falling on the final consumers. Turnover taxes were replaced with VAT due to the impossibility to credit against a Corporate Income Tax base and the related issue of tax cascading. In absence of the right of deduction, distortive consequences of the cascading effect of such taxation has led to the abandoning of this system and introduction of VAT in the Single Market decades ago.

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Tax Challenges Arising from Digitalisation – Interim Report 2018: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing (2018), Paris, para 432 at page [184]

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9. Viability of the One-Stop-Shop & Capacity issues CFE welcomes the simplicity that the “One-Stop-Shop” will provide for the taxpayers and administrations affected by this proposals. We are worried however that the existing capacity issues with the VAT Mini-OneStop-Shop (MOSS) may be compounded by the administrative obligations set out in the proposal for a Directive on DST. The MOSS, as conceived for use in the VAT area, is set to become available to all taxable persons in the form of One-Stop-Shop (OSS), and serve as a ‘clearing house’, whereby Member states would transfer a portion of the DST to other member states where the tax is legally due.13

Similarly, there may be confusion arising from the mismatching definition of tax residency for corporate tax and DST purposes.14 The CFE accepts that this distinction stems from the different basis of these taxes (income tax versus turnover tax), however, further detail may be necessary for reasons of clarity.

We strongly agree that taxpayers should not be liable to fulfil administrative obligations in different Member states where they are ‘resident’ for DST purposes, but equally, the practical difficulties and capacity issues of the OSS need to be taken into account.

10. Dispute Resolution CFE envisages an increase of tax disputes related to the implementation of the Digital Services Tax. Tax tribunals operate at limit of capacity in many European countries, whereas the EU Dispute Resolution Directive/ the Mutual Agreement Procedure (“MAP”) is applicable to direct taxes only. Consequently, the issue of which forum shall deal with such disputes in the EU context is raised alongside potentially increased costs of doing business.

The experience of CFE members concurs with the findings set out in the impact assessment of the Dispute Resolution Directive.15 The limited scope of the EU Arbitration Convention and Article 25 of the OECD Model Tax Convention results in the inability of taxpayers to invoke and rely on such procedures, and is compounded by the lengthy and often ineffective conclusion of dispute resolution procedures. This is equally applicable at present to the arrangements within scope of the proposed directive on Digital Services Tax.

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Articles 9 – 19 of the Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services of 21.3.2018 COM(2018)148 14 idem, Article 10 15 Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union

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CFE therefore encourages and welcomes any measures that expand the scope of dispute resolution mechanisms to cover new forms of taxation that empower taxpayers’ involvement within the process, and are focused on mandatory resolution of the disputes within a fixed time-frame. Consequently, an amendment of the EU Dispute-Resolution Directive to include newly introduced taxes such as the Digital Services Tax may need to be considered.

11. Concluding remarks CFE supports the ongoing process of reaching a globally acceptable solution for the tax challenges of the digital economy. We also acknowledge that the preferred solution of the EU Commission is arriving at a common position on taxation of the digital economy, in absence of which a plethora of uncoordinated national measures throughout Europe could follow, potentially creating further opportunities for tax arbitrage.

CFE strongly believes that the EU should focus on long-term solutions that seek to complement the OECD work on the tax challenges of the digital economy. Accordingly, any interim measures on taxation of the digital economy need to be considered with caution, weighing the expected revenue from this tax against the potentially adverse impact as highlighted in this position paper.

CFE believes that establishing tax certainty in the international taxation framework as well as the protection of taxpayers’ rights is of utmost importance and must be a priority for policymakers. Whilst we appreciate the initiatives of the Commission, prospective solutions for taxation of the digital economy need to avoid double or multiple taxation and avoid discrimination of non-resident businesses. Equally, any new taxes need to be within the ambit of existing double tax treaties yet provide access to effective dispute resolution mechanisms.

About CFE Tax Advisers Europe CFE Tax Advisers Europe is a Brussels-based umbrella association representing the European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE’s role and mission is to: • Safeguard the professional interests of tax advisers and assure the quality of tax services provided by tax advisers; • Exchange information about national tax laws and contribute to the co-ordination and development of tax policy in Europe; • Maintain relations with the European institutions, the OECD and other international and national bodies, and share with the European Union institutions the tax technical experience and insight of our members from all areas of taxation; • Seek to provide the best possible conditions for tax advisers to carry out their profession; • Inform the general public about the role, mission and the services that tax advisers provide.

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Opinion Statement FC 3/2018 on Problems Caused by VAT Numbers Prepared by the CFE Fiscal Committee Submitted to the European Institutions in June 2018 This Opinion Statement seeks to highlight two problems that arise from the way in which the place of supply rules and VAT invoicing requirements interrelate. The first problem relates to supplies of services to a trader established in a different Member State who does not have a VAT number. The second problem relates to what VAT number a trader should use on an invoice when it sells goods situated in another Member State where the business is not registered to a third Member State.

CFE Tax Advisers Europe is a Brussels-based association representing European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE is part of the European Union Transparency Register no. 3543183647�05. We would be pleased to answer any questions you may have concerning our Opinion Statement. For further information, please contact Ms. Stella Raventós, Chair of the CFE Fiscal Committee or Aleksandar Ivanovski, Tax Policy Manager, at info@taxadviserseurope.org. For further information regarding CFE Tax Advisers Europe please visit our web page http://www.taxadviserseurope.org/

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I. Background and Issues This Opinion Statement seeks to highlight two problems that arise from the way in which the place of supply rules and VAT invoicing requirements interrelate. The first problem relates to supplies of services to a trader established in a different Member State who does not have a VAT number, which will generally benefit from the exemption for small enterprises or possibly because its supplies are more generally exempt. The second problem relates to what VAT number a trader should use on an invoice when it sells goods situated in another Member State where the business is not registered to a third Member State.

II. Supplies of Services to Taxable Persons in Another Member State Who Do Not Have a VAT Registration Number Introduction The general rule 1 for determining the place of supply of services is contained in Article 44 of Directive 2006/112 2, which provides that the recipient of the services must have the status of a taxable person acting as such. For this purpose a “taxable person” is any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity3. Accordingly, the rules depend on the status of the recipient. For this purpose, Article 18(1) of the Council Implementing Regulation (EU) No 282/2011 (hereinafter referred as Regulation 282/2011), states that unless a person has information to the contrary he may treat his customer as a taxable person if he has a valid VAT number. Article 18 (2) of Regulation 282/2011 determines that unless he has information to the contrary, the supplier may regard a customer established within the Community as a non-taxable person when he can demonstrate that the customer has not communicated his individual VAT identification number to him. Meaning of Article 18 (2) of Regulation 282/2011 The European Commission has stated that as a result of Article 18(2): “Irrespective of information to the contrary, the supplier ‘may’ regard a customer as a nontaxable person as long as that customer has not communicated his individual VAT identification number. The second subparagraph of Article 18(2) does not, however, compel him to do so.

1 There are some exceptions, in which the status of the recipient of the services is not important, for example in relation to services related to land. 2 The place of supply of services to a taxable person acting as such shall be the place where that person has established his business. However, if those services are provided to a fixed establishment of the taxable person located in a place other than the place where he has established his business, the place of supply of those services shall be the place where that fixed establishment is located. In the absence of such place of establishment or fixed establishment, the place of supply of services shall be the place where the taxable person who receives such services has his permanent address or usually resides. 3 Article 9 of Directive 2006/112.

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If he has other information to substantiate the status of the customer as a taxable person, the supplier can treat him as such but he then assumes the risk in case things go wrong with his customer”. The use of ‘may’ in the second subparagraph of Article 18(2) makes it optional for the supplier to use this provision. A reference to ‘shall’ would have forced a supplier who did not receive a VAT identification number from his customer to treat this customer as a non-taxable person. However it is not excluded that, even in the absence of a VAT identification number, the supplier knows that his customer is in fact a taxable person and the reference to ‘may’ then allows him to refrain from treating that customer as a non-taxable person. If the supplier has sufficient information to substantiate that the customer is in fact a taxable person, he is therefore not compelled to treat that customer as a non-taxable person and can issue an invoice without VAT if, in accordance with Article 196 of the VAT Directive, the latter is required to account for VAT. In the absence of a VAT identification number, when the supplier does not use the option in the second subparagraph of Article 18(2), he needs to be able to substantiate that the customer is in fact a taxable person. If this is not possible, the supplier could be held liable for payment of the VAT on account of the customer being a non-taxable person 4”. Although Article 18(2) of Regulation 282/2011 states that the status can be determined by other evidence, in practice traders can have considerable difficulties in persuading tax authorities that their customer is a taxable person if they do not have a VAT number. For these reasons businesses can be reluctant to accept alternative evidence that the business is a taxable person. This can in turn impose onerous obligations upon them to register as taxable persons in other Member States. This is illustrated by the following examples: Example 1 Dentist A from MS1 provides dental services to Hospital B from MS2. Hospital B is not registered for VAT purposes and has no intention of registering or to seek a VAT number in according with Article 214 (1)(d) of Directive 2006/112 5 since such services are exempt from VAT in MS2 according to Article 132 (1)(b) of Directive 2006/112. Dental services are not exempt from VAT in MS1. Since Hospital B is not registered for VAT purposes, Dentist A does not treat it as a taxable person. Therefore, the general rule under Article 45 of Directive 2006/112 6 shall be taken into account. Dentist A charges local VAT for its dental services in MS1, even though as a matter of substance the hospital is clearly a taxable person so Article 44 should apply, so the supply ought to be treated as one made in MS2. Explanatory notes on the EU VAT changes to the place of supply of telecommunications, broadcasting and electronic services that entered into force in 2015, published on 3 April 2014 (see points 5.5.1, 5.5.3 and 5.5.4): https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/vat/how_vat_works/telecom/explanatory_notes_2 015_en.pdf 5 Member States shall take the measures necessary to ensure that the following persons are identified by means of an individual number and also every taxable person who within their respective territory receives services for which he is liable to pay VAT pursuant to Article 196. 6 The place of supply of services to a non-taxable person shall be the place where the supplier has established his business. However, if those services are provided from a fixed establishment of the supplier located in a place other than the place where he has established his business, the place of supply of those services shall be the place where that fixed establishment is located. In the absence of such place of establishment or fixed establishment, the place of supply of services shall be the place where the supplier has his permanent address or usually resides. 4

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If the dental services are taxable in both MS1 and MS2 but the hospital’s supplies are exempt a form of double taxation would arise as A would be accounting for VAT in MS1 while the hospital would have obligations to account for VAT in MS2 under Article 196.

Example 2 Company A from MS1 provides electronic services to Company B from MS2. Company B is a small company and therefore not registered for VAT purposes in MS2. Company B should, but does not, obtain a VAT number in MS2 according to Article 214 (1) (d) of Directive 2006/112. Since Company B is not registered for VAT purposes, Company A does not treat it as a taxable person and the specific provision in Article 58 of Directive 2006/1127 directed at electronic supplies apply. Company A uses MOSS in order to fulfil its VAT obligations in MS2.

Example 3 Company A from MS1 provides construction services in MS2. Company A is not registered for VAT purposes in MS1 as a small company; however, it is registered for VAT purposes in MS2 as a foreign taxable person. Accountant B from MS2 provides accountancy services to Company A. Since Company A is registered for VAT purposes in MS2, the Accountant treats it as a taxable person. According to Article 44 of Directive 2006/112 the place of taxation of the accountancy services is MS1, since Company A has no fixed establishment in MS2. However, since Company A has no VAT number the Accountant cannot report such services in its Recapitulative Statement and it might happen that VAT will not be paid in MS1 under the reverse charge mechanism. Possible Solutions As a way of mitigating these problems, the CFE considers it would be desirable if Member States could keep a number of different registers of taxable persons. It is already the position in some Member States (for example in Slovenia and Malta) that taxable persons can register just for the purposes of the reverse charge, so that the registration has no impact on the supplies made by the taxable persons. In the United Kingdom a person can rely on the exemption for small enterprises to avoid having to account for VAT on supplies from other Member States provided those supplies and any supplies the trader makes are below the registration threshold. We consider that it would be helpful if such traders could be given a special registration which recognises their status as a business that is exempt from VAT. Alternatively, it might be helpful if national tax authorities kept a database of bodies that it accepts are taxable persons who do not have a VAT number. So as to make it more accessible to people in other The place of supply of the electronic services to a non-taxable person shall be the place where that person is established, has his permanent address or usually resides.

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Member States, this information should also appear on an EU portal. In this way, suppliers can be more confident that they can treat the customer as a taxable person and thereby avoid the risks of double taxation highlighted in Example 1 and also ensure that VAT is not accounted for in a state under Article 45 when it is clear that the customer is a taxable person so the VAT ought to be accounted for in that state. Article 18(2) of the Regulation should also be amended so that it only applies if the person has evidence that suggests that the other person is not a taxable person. We also consider that Recapitulative Statement should be changed so that supplies can be shown even if there is no VAT number, and it should be made clear that this is a legitimate action for a supplier to take in circumstances such as those in Example 3.

III. VAT NUMBER AND ISSUING INVOICES Introduction As a general rule, Article 219a of Directive 2006/112 requires invoices to be produced in accordance with the “rules applying in the Member State in which the supply of goods or services is deemed to be made”. However, there are two exemptions: • cross-border supplies, which are subject to the reverse charge mechanism; and • supplies which are taxable outside the EU. In these two cases, the invoicing rules of the Member State where the supplier is established or has a fixed establishment from which the supply is made or has his permanent address or usually resides shall apply. According to Article 226 of Directive 2006/112 invoices should also include the VAT identification number under which the taxable person supplies the goods or services. Presented Problem The following example illustrates how the interrelation of these provisions can cause problems. Example Company A from MS1 buys goods in MS2 and exports these goods from MS2 to its buyer in a third country. Company A is registered for VAT purposes in MS1, but not in MS2, since there is no obligation to register when its only supplies are exportations of goods from MS2 to third countries. In this example, the place of supply of goods is MS2 (the place where the goods are located at the time when dispatch or transport of the goods to the customer begins 8 ). According to the basic rule, Company A must issue an invoice to the buyer of the goods under local VAT rules in MS2. The issue is which VAT number should be mentioned on such invoices.

8

Article 32 of Directive 2006/112.

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Proposed Solution Article 219a of Directive 2006/112 should be amended so that, in cases where there is no obligation to register in the Member State where the supply takes place, a trader can use the invoicing rules of the Member State where the supplier is established or has a fixed establishment from which the supply is made or has his permanent address or usually resides.

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Opinion Statement FC 4/2018 on a Proposal for a Council Directive amending Directive 2006/112/EC, as regards rates of Value Added Tax (COM(2016)758 final, of 1 December 2017 and COM/2018/20 of 28 January 2018) Prepared by the CFE Fiscal Committee Submitted to the European Institutions in June 2018 This Opinion Statement concerns the proposal to amend Article 99 of Directive 2006/112/EC (COM(2016)758 final of 1 December 2017) to allow Member States to apply reduced rates or to grant exemptions with the right to deduct input tax on the supply of books, newspapers and periodicals other than publications wholly or predominantly devoted to advertising and other than publications wholly or predominantly consisting of music or video content. The Opinion Statement also concerns the proposal (COM/2018/20 of 28 January 2018) to amend Articles 98 and 100 and to insert a new Article 99a into Directive 2006/112/CE. The CFE supports the idea of giving Member States greater freedom to be able to fix rates. However, it is concerned that this should be done in a manner that does not significantly increase the burdens on businesses making cross-border supplies.

CFE Tax Advisers Europe is a Brussels-based association representing European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE is part of the European Union Transparency Register no. 3543183647�05. We would be pleased to answer any questions you may have concerning our Opinion Statement. For further information, please contact Ms. Stella Raventós, Chair of the CFE Fiscal Committee or Aleksandar Ivanovski, Tax Policy Manager, at info@taxadviserseurope.org. For further information regarding CFE Tax Advisers Europe please visit our web page http://www.taxadviserseurope.org/

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I. Background and Issues This Opinion Statement concerns the proposal to amend Article 99 of Directive 2006/112/EC (COM(2016)758 final of 1 December 2017) to allow Member States to apply reduced rates or to grant exemptions with the right to deduct input tax on the supply of books, newspapers and periodicals other than publications wholly or predominantly devoted to advertising and other than publications wholly or predominantly consisting of music or video content. The Opinion Statement also concerns the proposal (COM/2018/20 of 28 January 2018) to amend Articles 98 and 100 and to insert a new Article 99a into Directive 2006/112/CE. These changes withdraw the current, complex list of goods and services to which reduced rates can be applied and replaces them with new lists of products (such as weapons, alcoholic beverages, gambling and tobacco) to which the standard rate of 15% or above would always have to be applied. The CFE supports the idea of giving Member States greater freedom to be able to fix rates. However, it is concerned that this should be done in a manner that does not significantly increase the burdens on businesses making cross-border supplies.

II. The evolution of the EU VAT system since 1993 In accordance with the Principle of Subsidiarity (Article 4 and 5 of the Treaty on the Functioning of the European Union), reduced VAT rates should only be within the competence of the European Union when this is necessary to prevent abuse or to ensure that undue burdens and complexities are not imposed on those making cross-border supplies in the internal market. In this regard the CFE observes that: •

the Council’s decision to apply the destination principle means that there is no longer the same need to restrict the use of reduced rates to protect the proper functioning of the internal market;

the Council has also approved a proposal designed to avoid distortions of competition arising from distance sales and the provision of e-services to non-taxable persons.

III. For the consumer reduced VAT rates have the same impact as VAT exemptions, but the position is different for producers The CFE observes that reduced rates and VAT exemptions have a similar economic impact on sale prices to the final consumer. However, they do not have the same impact on the organisation of the production chain: •

reduced rates allow a price reduction to the final consumer. However, they also allow a deduction of input VAT by the supplier and this renders outsourcing and intra-group transactions easier;

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VAT exemptions without the right of deduction of input VAT allow a reduction of the price charged to the final consumer. However, they also impact on the commercial attractions of outsourcing and intra-group transactions because they may increase the amount of input tax that the business cannot recover. A possible alternative consisting of granting every business performing VAT exempt operations an option to tax those operations at a reduced rate is unlikely to be generally acceptable. Such an alternative would cause distortions in intracommunity and international trade: this is because the acquirer would be able to claim a VAT exemption to avoid having to account for VAT in the country where he acquires the service while the supplier in a different country would elect for taxation, so as to secure a right of deduction. Giving traders such options would therefore result in non-taxation or double taxation.

It was an appreciation of the points outlined above that resulted in the European Parliament in 1963 recommending that Member States should have the right to determine what supplies should be exempt or eligible for reduced rates or other specific taxes, provided this had no impact on the internal market 1. When assessing the position account needs to be taken of the technological changes that have occurred since the 1960s.

IV. Zero rating with a right to deduct input VAT An alternative to VAT exemptions would be to allow taxation at a reduced rate or to zero-rate 2 . Preparatory documents relating to the Sixth VAT Directive indicate that the Council objected to zerorating on the basis that: •

it would violate Article 1(2) of the VAT Directive that intends to apply a tax on any consumption. Indeed, zero rating is relieving specific consumption from a tax;

that the taxable persons performing VAT zero rate operations would only receive money from the tax authorities and it is not the role of the tax authorities to grant subsidies to some categories of business.

Despite these objections, the CFE can see no reason why supplies should not be zero-rated provided this does not cause undue distortions to the single market. In any event, these objections do not apply to super reduced rates because it is a tax and it complies with Article 113 of the Treaty on the Functioning of the European Union. In addition, some operations that are currently VAT exempt are subject to other indirect taxes that may sometimes be much higher than non-deductible VAT (for example in the insurance sector). It would probably be preferable if these national indirect taxes were progressively replaced by the common VAT system.

Report of the Committee for the internal market on the Proposal of the Commission to the Council (Doc 121, 1962-1963) concerning a Directive on the harmonization of the legislations of the Member States on turnover taxes (“Deringer Report”), European Parliament, Documents of Session 1963-1964, 20 August 1963, Document 56, p. 45

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2

Exemptions with deductibility of the VAT paid at the preceding stage to the supply

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V. Common structure and uniform definitions Although the CFE is in favour of a revision of the lists of operations benefitting from reduced VAT rates or zero rating, it also has concerns about the implications of the proposals on particularly small businesses that are making supplies to customers in other Member States. Under the Commission’s current proposals for the definitive system, such businesses may be required to account for VAT using the relevant rates applied in the country of their customer. Particularly with services that are performed as part of a package of supplies whose elements are taxed at different rates, considerable difficulties may then frequently arise in determining what rates to apply. In this regard, the CFE observes that if such an approach is to be adopted: •

at a minimum, it is of fundamental importance that accurate, and preferably binding, guidance is available to traders who are not established in that state. This should ideally be available in a number of languages, otherwise a business established in another state may find the information difficult to locate. Ideally it should be available from a single portal, so that traders throughout the EU know that there is one source to which they can turn for guidance. This could in part be done by reference to links to relevant guidance on national tax authority web sites, if this is available;

consideration should be given to a binding ruling systems;

while it may slightly limit the Member States’ freedom, there could also be merit in having a classification at an EU level for supplies that might be made by non-established businesses. This might be done in regulations or explanatory notes. Although Member States would be given the freedom to determine what rate to apply to a category of supply, the categories would be defined at an EU level, so that harmonised definitions would apply. This would help avoid or reduce the problems that arise from the multiplicity of different definitions in different Member States. In order to avoid the need to classify supplies for which no Member State wants to apply a reduced rate, the system could possibly work on the basis that Member States that want to introduce a reduced rate should consult with the Commission who will then together seek to devise a relevant classification for the supplies to be taxed at a reduced rate. If another Member State wants to reduce the rate for similar supplies, consideration would then be given by that State and the Commission to whether the same classification should apply to all those supplies or whether additional classifications are required;

the development of computerised systems that can determine the basis upon which supplies are made would be helpful. Provided that the business has acted reasonably in using the system the responses should be binding. Having a classification system may assist in developing such a computerised system;

given the heavy burdens being imposed on them, it is important that businesses that have acted in good faith should not be penalised by the imposition of heavy penalties.

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Except in cases where there are difficulties in calculating how much VAT should be charged on operations, when exemptions may still perform a useful role 3 , the CFE considers that it would be preferable for supplies to be taxed at reduced rates, rather than being exempt. In this way, the barriers to outsourcing caused by the current exemption are reduced.

3 Some members of the Fiscal Committee do not share this view and consider that there are no technical reasons that would make difficult or impossible to determine the VAT taxable base.

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Opinion Statement FC 5/2018 on practical difficulties arising from the practices and procedures of the Court of Justice of the European Union Prepared by the CFE Fiscal Committee Submitted to the Court of Justice of the European Union in November 2018 This Opinion Statement details practical difficulties encountered by members of the CFE in cases heard by the Court of Justice of the European Union. The CFE is appreciative of the significant contribution that the Court of Justice has made to develop European jurisprudence and, in particular, in protecting citizens’ rights and ensuring that measures are taken in a proportionate manner with proper procedural safeguards. This Opinion Statement seeks to provide some constructive comments on the practices and procedures of the Court of Justice.

CFE Tax Advisers Europe is a Brussels-based association representing European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE is part of the European Union Transparency Register no. 3543183647‐05. We would be pleased to answer any questions you may have concerning our Opinion Statement. For further information, please contact Ms. Stella Raventós, Chair of the CFE Fiscal Committee or Brodie McIntosh, Tax Technical Officer, at info@taxadviserseurope.org. For further information regarding CFE Tax Advisers Europe please visit our web page http://www.taxadviserseurope.org/

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I.

General Remarks

The CFE is appreciative of the significant contribution that the Court of Justice has made to develop European jurisprudence and, in particular, in protecting citizens’ rights and ensuring that measures are taken in a proportionate manner with proper procedural safeguards. This Opinion Statement seeks to provide some constructive comments on the practices and procedures of the Court of Justice with a view to further improvement 1. The main procedural steps in references to the Court are the making of a reference, then the submission of written observations. In most cases, this is then followed by an oral hearing. The Advocate-General will then frequently deliver an Opinion, followed by a judgment of the Court.

II.

The Making of a Reference

According to the Recommendations to national courts and tribunals, in relation to the initiation of preliminary ruling (in OJEU C-439 of 25th November 2016), Point 13, the national judge should be: “(…) able to define, in sufficient detail, the legal and factual context of the case in the main proceedings, and the legal issues which it raises. In the interests of the proper administration of justice, it may also be desirable for the reference to be made only after both sides have been heard.

We consider that this imposes a joint responsibility on the national Courts and the lawyers 2 before the national Court to provide the Court of Justice with all information necessary for it to be able to provide a useful reply to the questions referred by the national Court or tribunal, in accordance with Article 94 of the Rules of Procedure of The Court of Justice.

III.

The Written Part of the Procedure

Article 23, second sub-paragraph, of the Statute of the Court of Justice states that: Within two months of this notification, the parties, the Member States, the Commission and, where appropriate, the institution, body, office or agency which adopted the act the validity or interpretation of which is in dispute, shall be entitled to submit statements of case or written observations to the Court.

According to Paragraph 10 of the Practice directions to parties concerning cases brought before the Court (in OJEU L-31 of 31th January 2014): On account of the non-adversarial nature of preliminary ruling proceedings, the lodging of written observations by the interested persons referred to in Article 23 of the Statute does not involve any specific formalities. Where a request for a preliminary ruling is served on them by the Court, those persons may thus submit, if they wish, written observations in which they set out their point of view on the request made by the referring Court or tribunal. The purpose of those observations — which must be lodged within a time-limit of two months from service of the request for a preliminary ruling (extended on account of distance by a single period of 10 days) that cannot otherwise be extended — is to help clarify for the Court the scope of that request, and above all the answers to be provided to the questions referred by the referring Court or tribunal.

A consolidated version of the rules of the Court can be found at: https://curia.europa.eu/jcms/upload/docs/ application/pdf/201210/rp_en.pdf 2 However, it is observed that national Courts can make a preliminary ruling to the Court of Justice even when the parties have not requested such a ruling. 1

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In our opinion, the parties and their legal representatives have a responsibility to try and ensure that the Court has a correct appreciation of the facts. Sometimes the parties fail to adequately discharge this obligation, and the Court will request further clarification of the factual position. The Court has in some instances written to the parties in advance of the hearing requesting such clarification. The CFE considers that such an approach is to be encouraged, because it reduces the risks of misunderstandings that may arise if the issue is raised for the first time during the oral hearing. When there are joined references, a party’s ability to make representations may also be inhibited by the fact that it does not have any right to obtain information relating to the other reference. For example, in Joined Cases C-439/04 Axel Kittel (Civil case) and C-440/04 Recolta Recycling (Criminal case) 3, the lawyers of Axel Kittel had no access to information contained in the files of Recolta Recycling that had been submitted to the Court. The CFE considers that it would be desirable if the Court could order appropriate disclosure in such cases. Sometimes, it may also become clear from the written observations of the other parties or other developments that the case will raise important points that were not referred by the national Court. Examples where this has happened have included: (i)

C-607/14 Bookit v HMRC and C-130/15 NEC v HMRC 4 , where the Commission, in its written observations, contended that a supply by a taxable person acting as agent and a related supply made by it as principal could in certain circumstances be considered a single supply for VAT purposes. This issue had not been referred by the national court because the UK courts have ruled that aggregation of supplies by different taxable persons is not possible in the absence of abuse. If joint supplies by different taxable persons are a possibility, difficult questions will arise as to who is liable for how much VAT and as to how the place of supply rules should operate if the suppliers are in different countries. The judgments suggest that such an aggregation may be possible. Apart from the Commission, the only observations made on this issue were during the brief oral hearing.

(ii)

C-326/15 DNB Banka v Valsis ienemumu dienests and C-605/15 Minister FinansĂłw v Aviva cases 5 , where the issue of whether the exemption in Article 132(1)(f) of the directive could apply to groupings of companies in the insurance and financial sector was considered by the Court even though it had not been raised in the references by the national Courts6.

Neither the rules or practice directions explicitly make it clear that there is any right to make further written representations when there has been a reference in such cases7. The CFE considers that in such cases it is unsatisfactory for the parties to be limited to confining their response to the brief opportunity afforded during the oral hearing and considers that the Court’s rules and procedures should make it clearer that the parties can seek to rely on further written observations on the new issues.

3 4 5 6 7

6 July 2006. 26 May 2016. 21 September 2017. The issue also arose in C-616/15 EC v Germany. Article 126 RP refers to a right of reply and rejoinder in direct actions and article 175 contains a similar right in relation to appeals.

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IV.

The Importance of the Public Hearing

Article 76, paragraph 1, of the Rules of Procedure of the Court of Justice (RP) (consolidated version) states: 1. Any reasoned requests for a hearing shall be submitted within three weeks after service on the parties or the interested persons referred to in Article 23 of the Statute of notification of the close of the written part of the procedure. (‌).

The parties (or their representatives) have the right to request an oral hearing. It is clearly important to make a request in cases where a party wants an opportunity to comment on the written observations of the other parties. Concerning the procedure of the oral hearing itself, the CFE would particularly like to encourage the continuation of the practice of having an introductory meeting between the advocates and the judges prior to the hearing commencing, where the judges indicate what points they propose to raise. However, in addition, the CFE would also like to encourage the Court to send any additional or revised questions to the parties in writing in the period following the notification of the hearing and the hearing itself, where possible, in order for parties to be able to prepare an appropriate response to provide in oral submissions to these further questions, and avoid any misunderstandings of fact. One other concern that the CFE has with the oral part of the procedure is the increasingly short time, now generally 15 minutes, that parties have to make representations. The CFE appreciates the pressures on the Court’s time and that it is possible to make a reasoned application for a longer hearing. However, there have been a number of occasions when clients have told members of the Fiscal Committee that they feel that the shortness of the time to make representations means that they have not had a proper opportunity to present their case. Perceptions are important, and the CFE therefore considers that it would be desirable to give the parties a longer period to present their case. This is particularly true if new points arise prior to the oral hearing which the parties have not had an opportunity to address in their written observations.

V.

The Importance of the Clarity and Completeness of the Ruling

Article 104 of RP reads: 1. 2.

Article 158 of these Rules relating to the interpretation of judgments and orders shall not apply to decisions given in reply to a request for a preliminary ruling. It shall be for the national courts or tribunals to assess whether they consider that sufficient guidance is given by a preliminary ruling, or whether it appears to them that a further reference to the Court is required.

In order to prevent the need for a national Court to make a further reference in the same case or in other cases raising similar facts, the CFE believes that the Court's rulings must be sufficiently clear and comprehensive. The CFE in particular observes that: (i)

the Opinions of the Advocate General can frequently be very helpful in determining the legal consequences of a judgment of the Court. Article 20 of the Statutes of the Court states that the Court can dispense with the need for an Opinion when it considers that the case raises no new points of law. Although the very welcome increase in the number

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of Advocate Generals may reduce problems going forward, this power seems to have been increasingly used in recent years. However, the consequences of dispensing with the Opinions may well be an increase in disputes in national Courts and the increased need for further references. This is because the Opinions can frequently assist in understanding judgments from the Court. For example, there was no AdvocateGeneral’s Opinion in C-175/09 HMRC v Axa UK 8, C-607/14 Bookit v HMRC and C-130/15 NEC v HMRC 9 . In the Bookit and NEC cases, this was despite the fact that the Commission’s observations potentially raised a new and important question on the aggregation of supplies by different taxable persons. The United Kingdom’s Upper Tribunal considered that these decisions were difficult to reconcile, and therefore made a further reference in C/5/17 HMRC v DPAS10. There were also significant disputes about the consequences of the Court’s judgment in Joined Cases C-53/09 and C-55/09 HMRC v Loyalty Management UK Ltd and Baxi Group v HMRC 11: see [2013] UKSC 42 12. Again there was no Advocate-General’s Opinion in those cases; (ii)

when an Advocate General produces an Opinion, it would also be helpful if the Court could indicate to what extent it agrees or disagrees with the statements made by the Advocate-General. A recent example of the difficulties that can arise from the failure to do this is provided by the United Kingdom First-tier Tribunal decision in Blackrock Investment Management (UK) Ltd v HMRC [2017] UKFTT 633 (TC) 13 . The Tribunal at paragraphs 197-199 observed that AG Cruz Villalon at paragraphs 27, 36-37 of his Opinion in C-275/11 GFBk Gesellscaft v Finanzamt 14 considered that supplies might not qualify as supplies of “management” falling within Article 135(1)(g) of the Principal VAT Directive unless they have “a significant degree of autonomy as regards its contents”. The Tribunal doubted whether there was any such requirement and also observed that there was nothing in the judgment of the Court that suggested that it was endorsing these comments. However, it still considered that it should make a finding that the supplies were, in any event, sufficiently autonomous. If the Court had commented on the issue, the position would, obviously, have been even clearer.

As we indicated at the outset, the contribution made by the Court to European jurisprudence is greatly welcomed and appreciated by the CFE. Addressing the issues raised in this Opinion Statement is likely to further increase the respect with which the Court is quite correctly held. In some instances, it may also assist the effective management of the Court resources, by reducing the need for further references to be made to clarify the impact of earlier judgments.

28 October 2010. 26 May 2016. 10 21 March 2018. 11 7 October 2010 12 20 June 2013. 13 15 August 2017. 14 7 March 2013. 8 9

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Opinion Statement FC 6/2018 on a Proposal for a Council Directive amending Directive 2006/112/EC, on the common system of value added tax as regards the special scheme for small enterprises Prepared by the CFE Fiscal Committee Submitted to the European Institutions in July 2018 This Opinion Statement concerns the proposal to amend Directive 2006/112/EC on the common system of value added tax as regards the special scheme for small enterprises. CFE Tax Advisers Europe welcomes the proposal, however, particularly given the current proposals to reform the taxations of supplies between Member States, the CFE does not consider that these proposals go far enough to address the problems caused for such businesses by the VAT system.

CFE Tax Advisers Europe is a Brussels-based association representing European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE is part of the European Union Transparency Register no. 3543183647�05. We would be pleased to answer any questions you may have concerning our Opinion Statement. For further information, please contact Ms. Stella Raventós, Chair of the CFE Fiscal Committee or Aleksandar Ivanovski, Tax Policy Manager, at info@taxadviserseurope.org. For further information regarding CFE Tax Advisers Europe please visit our web page http://www.taxadviserseurope.org/

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I. Background CFE Tax Advisers Europe welcomes the proposals by the Commission amending Directive/112/EC on the common system of value added tax as regards the special scheme for small enterprises and VAT 1. The CFE also welcomes the majority of the proposals in the draft report by the Committee on Economic and Monetary Affairs of 3 May 2018 2. However, particularly given the current proposals to reform the taxations of supplies between Member States, the CFE does not consider that these proposals go far enough to address the problems caused for such businesses by the VAT system 3.

II. Identified Issues Facing SMEs & Proposed Amendments to Draft Directive The CFE, in particular, welcomes the proposal that taxable persons who are established in a different Member State should be able to benefit from national exemptions provided their Union annual turnover does not exceed 100,000 Euros. The CFE also welcomes the proposed simplification for nonexempt small enterprises. These are currently limited to businesses with a turnover of 2 million Euros. We consider that there would be merit in extending them to small enterprises with a turnover of less than 10 million Euros. The Report by the Committee on Economic and Monetary Affairs correctly observes that the VAT system imposes proportionally higher burdens on small enterprises than larger businesses. In the future, this will be particularly true when cross-border supplies are made from businesses established in one state to customers established in other states. When the supplies are made to consumers, this is because the abolition of the distance sales rules in Article 34 of the Directive 2006/112/EC, by Directive 2017/2455, will mean that VAT will increasingly have to be accounted for in the country where the customer is established. The proposed adoption of the definitive regime will also mean that businesses going forward will be increasingly required to account for VAT at the rates in force in the country where their customer is established. We fear that small businesses are likely to have considerable difficulties in qualifying as certified taxable persons. Even in a national context, it can be frequently very difficult to determine what is the appropriate rate to tax supplies. This can be particularly true with supplies of services, when difficulties can arise in determining whether there is one composite or multiple supplies for VAT purposes or whether supplies are closely linked to supplies that are exempt under Article 132(1). b, g, h, i, l, m, n, of Directive 2006/112/EC. These problems are likely to be increased in a cross-border context, especially if Member States are given a greater freedom to alter their VAT rates, as is currently proposed 4. While larger businesses are likely to have the funds and profits to seek advice to determine what VAT to charge in different Member States, seeking such advice will clearly impose much greater burdens on small businesses. Particularly for small businesses, these changes therefore create an additional barrier on the proper functioning of the internal market and are likely to inhibit its proper functioning unless further relief is provided. Com(2018) 21 Final. 2018/0006(CNS) 3 The European Economic and Social Committee in its opinion of 23 May 2018 also highlighted the need to ensure that the VAT system within the internal market did not place “unjustified obstacles in the way of small businesses' development�. 4 Com (2018) 20 Final 1 2

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Under Directive 2017/2455 the only relieving provision is proposed Article 59c of Directive 2006/112/EC. This just applies to distance sales of goods to consumers, within proposed Article 33 to Directive 2006/112/EC, and electronic services to consumers, within Article 58 of the Directive. In relation to such supplies, this article permits suppliers to use the rules of the Member State where they are established provided the value of supplies do not, on a Union wide basis, exceed 10,000 Euros. This is much less generous than the current distance sales rules, where the threshold before national rules apply is a minimum of 35,000 Euro and a maximum of 100,000 Euros in each Member State. The proposed Article 59c is not just directed at small enterprises. Given the problems that they in particular will face as a result of the proposed changes, the CFE considers that there is a powerful case for considering that special relief should be provided to such traders. For example, Article 59c could be altered so that in the case of such enterprises the threshold is increased from 10,000 Euros to 25,000 Euros. At present, the threshold also only applies to distance sales of goods and some electronic services. However, we can see no reason why it should not be extended to other services, for example the services of architects. Indeed, when the definitive regime is adopted, particularly if improvements are made to the procedures for recovering input tax incurred in other Member States, we can see a powerful case for also extending the provisions to cross-border business to business supplies. The CFE also welcomes the Committee on Economic and Monetary Affairs’ suggestion that there should be an on-line portal that can be used to establish the status of exempt businesses, although the CFE can see that another alternative would be to have a special national registration scheme for such enterprises which in turn can be verified on the VIES system. The current absence of any method of verifying an exempt businesses’ status in some Member States causes problems on cross-border supplies, since suppliers are frequently concerned their national tax authority will seek to impose a national VAT charge on any supplies they make unless they can establish that their customer has a VAT registration in another Member State. This in turn results in suppliers wanting to charge VAT on such supplies. These and related problems are addressed in greater detail in a separate Opinion Statement on the problems caused by VAT numbers on cross-border transactions5. The CFE also considers that the European Commission’s maximum threshold for exemption of 85,000 Euros is to be proffered to the threshold of 50,000 Euros being suggested by the Committee on Economic and Monetary Affairs. It also considers that it is important that the exemption for small enterprises should remain optional. Otherwise, there are dangers that the rules will operate to preclude input tax recovery by start-up businesses.

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Issues connected with VAT registration were also considered in a report from the Commission (2017) 780 of 18 December 2017.

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Opinion Statement FC 7/2018 on a Proposal for a Council Directive amending Directive 2006/112/EC, as regards the introduction of the detailed technical measures for the operation of the definitive VAT system for the taxation of trade between Member States (2018/0164(CNS)) Prepared by the CFE Fiscal Committee Submitted to the European Institutions on 23 August 2018 This Opinion Statement concerns the proposal to amend Directive 2006/112/EC as regards the introduction of the detailed technical measures for the operation of the definitive VAT system for the taxation of trade between Member States. CFE Tax Advisers Europe welcomes certain aspects of the proposal, however is concerned with the potential consequences of many aspects of the proposals, in particular the practical implications of introducing “Certified Taxable Persons” and the potential impact of the proposed Directive on SMEs. CFE also has practical concerns in relation to call-off stock and chain transactions, reverse charge supplies, and the special schemes extending the one-stop account for VAT.

CFE Tax Advisers Europe is a Brussels-based association representing European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE is part of the European Union Transparency Register no. 3543183647‐05. We would be pleased to answer any questions you may have concerning our Opinion Statement. For further information, please contact Ms. Stella Raventós, Chair of the CFE Fiscal Committee or Brodie McIntosh, Tax Technical Officer, at info@taxadviserseurope.org. For further information regarding CFE Tax Advisers Europe please visit our web page http://www.taxadviserseurope.org/

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I.

General Remarks

This Opinion Statement comments on the European Commission’s proposals, published on the 25th May 2018, relating to the amending of Directive 2006/112/EC as regards the introduction of the detailed technical measures for the operation of the definitive VAT system for the taxation of trade between Member States (2018/0164(CNS)). CFE Tax Advisers Europe considers that there are aspects to the proposals that are to be welcomed. However, it remains concerned with the consequences of many aspects of the proposals. CFE understands the wish of the European Commission to tackle fraud and to improve and simplify the VAT system for cross-border transactions within the EU, however it is concerned about the burdens that the proposed system will place on traders. In particular, it is concerned that small and medium sized businesses may face considerable difficulties and expense in determining what rates to charge in other Member States. CFE fears that rather than facilitating cross-border trade, the proposals will have the reverse effect. It can already be difficult and expensive for businesses to accurately determine their obligations in a purely domestic context. The difficulties are clearly going to be much greater when directed at trying to determine how much VAT should be paid under the laws of a different Member State, where any legislation and guidance is likely to be in a different language. CFE Tax Advisers Europe is concerned that these difficulties will increase as Member States are given greater freedom to fix their VAT rates. The issue will clearly be particularly serious if traders become subject to penalties, particularly significant penalties on account of errors. If the proposals are adopted, the CFE considers that it would be desirable that steps are taken to ideally ensure that innocent errors are not penalised and certainly not unduly penalised.

II.

Certified Taxable Persons (CTPs)

One of the main facets of the proposals is a special regime for Certified Taxable Persons (CTPs), a term defined in proposed Article 13a. CFE Tax Advisers Europe has a number of concerns with the proposed definition. In particular: (i)

the vague nature of terms in the proposed Article 13a(2), such as “serious infringement” or “financial solvency”, will give Member States significant discretion. Greater harmonisation of the criteria might be helpful and avoid different standards being applied in practice across Member States. In so far as financial solvency is established by the provision of guarantees “provided by insurance or other financial institutions or by other economically reliable third parties”, it is also important to observe that such guarantees can be expensive to maintain and can also impact on the availability of funding for other needs of a business. Reliance on expensive guarantees should not be a key ingredient of being a CTP and Member States should not be allowed to default to such guarantees or require them for anything other than the minimum period necessary for that company to establish/meet the financial solvency test;

(ii)

when there is a VAT group it is not entirely clear whether it is the entire group or the individual member of the group that the status of CTP applies to, although we consider that the better view is that the status is probably intended to apply to the entire grouping in a Member State.

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However, the issue is not without its difficulties given the fact that different Member States take different views about what establishments should be considered to form part of the grouping. Nor is it clear what is to happen when a new business joins the group. If CTP status attaches to the group then presumably by joining the group the new business will automatically obtain CTP status. If CTP status is automatically obtained, joining an existing CTP VAT group will therefore give such new businesses an advantage over ones that are not joining an existing VAT group, although we can see that this can be said to be an automatic consequence of the grouping. However, it does also beg the question of whether CTP status for the entire group should be reassessed each time a new member joins. Obviously, it will be a matter of concern to a group if its status as a CTP is automatically lost each time a new member joins and a fresh application with possible delays has to be made. Member States, however, may not be happy about the prospect of CTP status being automatically maintained even though the companies in a group change, since they may have concerns that this will result in abuse. Additionally, if a business leaves a VAT group and becomes independently registered for VAT, if the relevant entity obtaining CTP status is the group it will presumably need to make a fresh application. It will clearly be disruptive if the application cannot be granted until after it has left the group. If consideration has not already been given to these issues, they are clearly issues that require consideration; (iii)

in the case of a company with fixed establishments in a number of countries, it is not completely clear what entity is expected to apply for CTP status and in what country. The uncertainty is increased by the fact that Article 13a makes it clear that making an application is not dependent on having a fixed establishment in a state, and that an address may be sufficient. We assume it is probably envisaged the establishments in different Member States should apply for separate CTP status in each Member State, a view that is supported by the reference to “tax authorities” in Article 13a(1). However, it would be helpful if the article could be amended to make the position clearer. This could possibly be done by inserting in Article 13a 7 “(but the status shall only apply to the place of business or fixed establishments of permanent or usual addresses in the Member State granting the status as certified taxable person)”;

(iv)

the CTP is analogous to the Authorised Economic Operator (“AEO”) in the customs context (although the AEO contains 5 eligibility criteria). It is a point of great practical concern that it currently takes approximately 1 year to get an application for AEO approved. We are therefore very concerned about the practicalities and capacity of the tax authorities to handle a large number of CTP applications in a short time frame. If such delays are likely the application process will need to be open some time before the new system comes into effect;

(v)

the VIES system will be pivotal to the operation of the CTP. Therefore, the VIES system will need to be reviewed and updated in order to effectively facilitate the new system. The current VIES system already causes difficulties when checking VAT numbers particularly with groups or when large numbers of searches are required. Problems are also caused by the fact that in some countries, for example Spain and Germany, the VIES will only confirm that there is a valid VAT number, but not who is the correct owner of that number. Particularly given the decision to make the correct identification of customer VAT number a substantive requirement, changes to the system are already required for that reason. If the CTP must apply to individual businesses in VAT groups, VIES would need to be adapted to accommodate this search, as it

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currently only shows the representative member of the VAT group when a search is carried out on the VAT number. These new proposals will complicate the system further and could lead to further administrative difficulties when using the system; (vi)

we are concerned that, particularly as currently drafted, Member States will implement the proposals in a manner that results in many reputable smaller and even medium sized businesses being unlikely in practice to be able to satisfy the requirements set out in Article 13a(2) that require “a high level of control of his operations” and evidence of “financial solvency”, requiring proof of good financial standing or the provision of guarantees. Without further clarification of these requirements or an express declaration that when formulating these requirements as a matter of national law they must be framed so that the requirements are tailored by reference to the size and nature of the business, we are concerned that in practice it will only be very large businesses that will ever qualify. This in turn will mean that other businesses will be placed at a cash flow disadvantage, because they will not be able to obtain the cash flow benefits of being a CTP (i.e. having the ability to account for VAT and to recover it as input tax at the same time). If the requirement of CTP status is maintained, it will also prevent them from benefiting from the proposals in Article 17a, relating to call-off stock, or Article 36a, relating to chain transactions. It could also have reputational implications: see (vii) below;

(vii)

businesses that cannot secure CTP status may suffer reputational damage and it is possible that both customers and suppliers may be more reluctant to have dealings with them for that reason;

(viii)

we also consider that it would be better if exempt traders could benefit from the CTP regime. We appreciate that Article 13a(3) envisages that a person can be a partial CTP when it carries on “other economic activities”. However, we are concerned that the current proposed wording may conceivably give rise to disputes about whether an “activity” can be considered sufficiently distinct to be considered an “other” activity that is eligible for partial CTP status. This is particularly true when the taxable and exempt activities are closely integrated, for example when a supplier, possibly a financial institution, sells a package of supplies some of which are taxable and some exempt and the supply being acquired is used in both activities. In such circumstances, we are concerned that the current proposed wording may conceivably give rise to disputes about whether an “activity” can be considered sufficiently distinct to be considered an “other” activity that is eligible for partial CTP status. It may also give rise to disputes about to what extent a recipient of a supply should be considered a CTP when the supply is being used for both taxable and exempt purposes. It is not clear what rules apply for the purposes of determining to what extent a customer is a CTP, and this is something that any supplier is going to need to know at the time he makes the supply. National rules for claiming deductions vary, and the rights to claim deduction can alter over time. If these rules are to be applied in determining to what extent a customer is a CTP, that will clearly cause potential problems for suppliers. We consider that it is unsatisfactory and undermines commercial confidentiality if a supplier has to ask detailed questions about the precise use that his customer will be going to make of the supplies made by the supplier. Under proposed Article 194a, a CTP is liable to account for VAT on supplies made to it. Rather than restricting its eligibility to be a CTP, for a combination of these reasons we consider that such businesses should be able to apply for full

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CTP status, so that they account for VAT on the entirety of the supplies made to them but with a corresponding restriction on their rights of deduction, to reflect their partly exempt status. Not only will this avoid any possibility about disputes about whether the activity is sufficiently distinct to be an “other” activity, but administratively it is also likely to be far simpler for any adjustment to be done by the CTP restricting its entitlement to recover input tax, rather than having two different persons accounting for part of the tax on a supply and, particularly in the case of the supplier, having to make an assessment of the extent to which the customer should be considered to be acting as a CTP; (ix)

if the CTP status is time limited (we understand it may just apply until 2027) and the process for complying with it is expensive and arduous, that in itself may discourage applicants. Clarification of how long the system is intended to apply may therefore be significant;

(x)

presumably rules will also need to be put in place for reassessing whether a person should continue to benefit from CTP status.

III.

Impact on SMEs

CFE Tax Advisers Europe is concerned that the proposals will place particularly onerous burdens on smaller businesses who may have difficulties in determining what rates should be applied to supplies in different Member States. Difficulties can arise in determining whether there is one composite supply or multiple supplies for VAT purposes or whether supplies are closely linked to supplies that are exempt under Article 132(1) b, g, h, i, l, m, n, of Directive 2006/112/EC. While such difficulties may arise with supplies of goods, they are particularly likely to arise with supplies of services. CFE Tax Advisers Europe therefore welcomes the decision to focus the current changes on supplies of goods. However, it remains concerned about the burdens that the changes will impose on such businesses. Because of these difficulties CFE suggested in its Opinion Statement FC 6/2018 that small enterprises should be given a 25,000 Euro threshold where small enterprises can use national rules. Proposed Article 59c of Directive 2006/112/EC in Directive 2017/2455 contains a 10,000 Euro threshold but it is not only directed at small enterprises. Given the particular difficulties that the proposals are likely to entail for them, CFE Tax Advisers Europe continues to believe that a more generous provision targeted at small enterprises would also be appropriate.

IV.

Call-off Stock and Chain Transactions

CFE Tax Advisers Europe considers that it is unfortunate that proposed Articles 17a and 36a are only directed at transactions with CTPs. Particularly in the case of Article 36a, we cannot see any clear reason why the provisions should be so limited. We therefore welcome the fact that the draft directive approved at the ECOFIN meeting on 20 June 2018 has deleted such a requirement in the equivalent provisions providing “quick fixes” pending the definitive regime 1. We consider that similar changes should be made to the proposed articles for the definitive regime. As we understand it, the only change being made by Article 36a is a clarification of which supply should be ascribed to a supply of transport.

1

See Doc 10335/18 Fisc 266 ECOFIN 638 at p 14 and p 16

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We have particular difficulties in seeing why this should be limited to CTPs. In both cases, the limitation has the inevitable consequence that there will be two sets of rules governing the same transactions. It would also appear to be particularly unfair and unfortunate that any simplification measures are not available to reputable small businesses because, as we have indicated, we fear that the proposed definition of a CTP and, equally importantly, how it is to be implemented by the Member States, is such that many reputable small traders will find that they cannot realistically qualify. In relation to the proposed Article 36a we also observe that: (i)

we assume that there is intended to be only one supply in the chain that the transport is ascribed to and the article is intended only to help identify that supply. This in turn means that any chain will have only one “provider”. This could be made even clearer if the definition of provider in Article 36a(3)(c) were altered so that it referred to the “first supplier” referred to in Paragraph 36(3)(b). Otherwise the definition of “provider”, on first reading, possibly suggests that any intermediate operator can be a “provider” in relation to the supplies that it is making. We note in this regard that the draft directive approved at the ECOFIN meeting on 20 June 2018 2, directed at “quick fixes”, in our view more helpfully focuses on the “first supplier” rather than the “provider”;

(ii)

if we are correct that Article 36a is only intended to ascribe which chain supply should be attributed to a transport or dispatch, we are also surprised that the article has no application when the intermediary operator is identified for VAT purposes in a Member State in which the dispatch or transport of goods begins. We consider that it would also be helpful to have a clearer rule ascribing the transport or dispatch when there are intermediaries in the Member State in which the dispatch or transport of goods begins. This would of course only apply when the supply between them is an intra-Union supply of goods for the purposes of Article 14 and not to supplies that clearly take place in the Member State where they are both established. Alternatively, the directive should be altered to make it clearer that those supplies should be considered to be made in the country where both traders are established (it is not clear which article in the directive clearly ensures this);

(iii)

another possible drafting ambiguity relates to Article 36a 1(b), which states that Article 36a only applies if “the intermediary operator is identified for VAT purposes in a Member State other than that in which the dispatch or transport of the goods begins”. This wording may arguably suggest that the article does not apply if a company has an establishment and is registered in the country of dispatch even though it also has an establishment in a different Member State and it is the establishment in the different Member State that places the order. We assume that it is probably intended that Article 36a should apply in such circumstances and it should be amended to make the position clearer, possibly by amending Article 36a 1(b) so that it also includes the following additional words in italics and reads “the intermediary operator is identified in relation to the supply for VAT purposes in a Member State other than that in which the dispatch or transport of the goods begins”.

2

See Doc 10335/18 Fisc 266 ECOFIN 638 at p 16.

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On a more general note, we also observe that the need to identify which supplies in chain transactions is attributable to transport or dispatch has frequently been a cause of difficulty. We are therefore disappointed that the proposed reforms are so limited.

V.

Article 194 and Reverse Charge Supplies

Under the proposals, Article 194 is altered so that a reserve charge only applies to supplies of services carried out by a taxable person who is not established in the Members State. The fact that the article no longer applies to supplies of goods means that traders who are not currently registered or established in any Member State will in future have to account for VAT on supplies made to taxable persons established in the European Union unless they are certified taxable persons. In such cases, we can see that there may be merit in retaining a reverse charge. We would have thought that tax authorities would prefer to have the ability to recover tax in such cases from the customer who is a business established in the Union, rather than from a business that has no such establishment. Such a limited reverse charge will also simplify the position for businesses that are not established in the Union.

VI.

Special Schemes Extending the One-Stop Account for VAT

The proposed special schemes are to be welcomed. They at least reduce the administrative difficulties that the reforms are likely to cause, although, as we have observed above, they have no impact on the difficulties that the proposals will cause suppliers in determining what rate to apply to cross border supplies. We particularly welcome the proposals in Article 369a-369za to enable input tax to be recovered using the one-stop procedure. However, there are two eligibility requirements for this scheme that appear to us to be unduly restrictive: (i)

we have some difficulty in understanding why non-established traders who are only making supplies within Section 2 of Chapter 6 should be excluded from participating, as provided by Article 369b 2;

(ii)

we would also question whether there is any need to impose an obligation on non-established traders to appoint an intermediary, as currently proposed by Article 169b 1(b), if the nonestablished person is established in a country and has agreed to provide similar levels of administrative cooperation and mutual enforcement to those provided by other Member States. We note in this regard the recent VAT Agreement reached between Norway and the European Union. This requirement to appoint an intermediary may prove to be onerous, and we can see no reason why an exception should not be made for businesses established in states that have entered into such agreements, so the mutual enforcement rights are similar to those between Member States. It may also have the benefit to the Union of encouraging countries to enter into such agreements.

(iii)

with traders who are established in a different Member State and who have a right to recover input tax under Council Directive 2008/9/EC, we also have difficulties in seeing why they should only have a right to carry forward input tax claims when their deductions exceed the VAT due

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from them in the Member State. In such cases, it should surely be possible to integrate the two systems.

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Opinion Statement FC 9/2018 on the notion of “minimal human intervention”1 in the definition of “electronically supplied services” for the purposes of Article 58 of the VAT Directive2: European Commission VAT Committee Guidelines Resulting from its 108th Meeting held on 27 – 28 March 2017 Prepared by the CFE Fiscal Committee Submitted to the European Institutions in December 2018 This Opinion Statement discusses the implications of the European Commission VAT Committee Guidelines resulting from its 108th Meeting held on 27-28 March 2017 concerning the notion of “minimal human intervention” in “electronically supplied services” and CFE’s view as to whether they conform with the intended effect of Article 58 of the VAT Directive. CFE Tax Advisers Europe is a Brussels-based association representing European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE is part of the European Union Transparency Register no. 3543183647‐05. We would be pleased to answer any questions you may have concerning our Opinion Statement. For further information, please contact Ms. Stella Raventós, Chair of the CFE Fiscal Committee or Brodie McIntosh, Tax Technical Officer, at info@taxadviserseurope.org. For further information regarding CFE Tax Advisers Europe please visit our web page http://www.taxadviserseurope.org/

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Article 7(1) of the VAT Implementing Regulation (Regulation 282/11) Directive 2006/112/EC

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I.

Introduction

During its 106th meeting, the European Commission VAT Committee discussed Working Paper 896 on the notion of ‘minimal human intervention’, one of the elements of the definition of ‘electronically supplied services’ in Article 7(1) of the VAT Implementing Regulation. 3 The matter was discussed by the VAT Committee once again at its 108th meeting, in relation to Working Paper 919, resulting in the VAT Committee Guidelines published on 1 May 2018. 4 Working Paper 919 sets out indicators which aim to identify in a more precise manner what should be covered by the notion of ‘minimal human intervention’. Some of these indicators were already agreed to by the VAT Committee in earlier Guidelines, 5 whilst others reflect the Commission’s view as set out in previous Working Papers on the subject matter. 6 Working Paper 919 added some additional indicators and also examined further examples of services which involve the internet, assessing whether or not the level of “minimal human intervention” is exceeded in those scenarios. It is acknowledged that in a fast-evolving digital sector which has seen and continues to see the digitalisation of services, in particular of traditional brick-and-mortar-type services, it is essential to establish where a line is to be drawn between services which can be classified as ‘electronically supplied services’ for the purposes of Article 58 and those which cannot. It is further acknowledged that the involvement of the internet in the context of a supply of services does not lead to the automatic determination that the service is an electronically supplied service. As the VAT Committee has unanimously agreed: “the definition of electronically supplied services from Article 7(1) of the VAT Implementing Regulation consists of the four following elements: (1) a service is delivered over the Internet or an electronic network, (2) the nature of the service is that it is essentially automated, (3) the nature of the service is that it involves minimal human intervention, and (4) the nature of the service is such that it is impossible to ensure in the absence of information technology. The VAT Committee unanimously agrees that in the assessment of whether a service qualifies as an electronically supplied service all these four elements are equally important”. 7 Guidance on the third element of this definition would assist businesses in assessing their activities and determining whether their services fall within the scope of Article 58 of the VAT Directive, and sectorspecific examples may also be helpful. However, any such guidance should be future-proof, and broad generalisations should be avoided. To this end, sectoral examples should make reference to the elements of the specific service which make it an ‘electronically supplied service’ or otherwise, so as to avoid pigeon-holing supplies according to their sector rather than their specific characteristics. The recent EU proposal applying the definition of ‘electronically supplied services’ outside the sphere of VAT 8 further increases the need for clarity, consistency and harmonisation of interpretation, and in this regard it is acknowledged that the Commission may be undertaking further work on the proposed 3 VAT

Implementing Regulation (Regulation 282/11) Guidelines resulting from the 108th meeting of 27-28 March 2017; Document C – taxud.c.1(2018)2397450 – 930 (p. 220) 5 Guidelines resulting from the 102nd meeting of 30 March 2015; Document D – taxud.c.1(2015)4128689 – 862 (p. 192) 6 for example, Working Paper 896 and Working Paper 882 (28 September 2015) 7 Guidelines resulting from the 102nd meeting of 30 March 2015; Document D – taxud.c.1(2015)4128689 – 862 (p. 192) 8 Proposal for a Council Directive laying down rules relating to the taxation of a Significant Digital Presence, art 3(5) 4

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definition of ‘digital services’ which reflects the definition and scope of electronically supplied services in the VAT Directive and the Implementing Regulation.

2.

Indicators and the assessment of examples of certain services

The VAT Committee Guidelines set out additional ‘indicators’ based on those contained in Working Papers 896 and 919, which were not already contained in earlier guidelines. It also sets out the Committee’s conclusions on the assessment of the level of human intervention in particular scenarios. CFE has considered the content of the Working Papers and the conclusions reached by the VAT Committee, and set out our views below. 2.1

Guideline 1(a) – Activity of a Third Person/Party Independent from the Supply to Which the Service Being Analysed Relates

We are, in principle, in agreement that the activity of a third person/party, independent from the supply to which the service being analysed relates, may not be relevant for the assessment of ‘minimal human intervention’. This would be the case, for example, in the scenario mentioned in Working Paper 896. 9 However, it is recognised that it is not unknown for business to outsource a component of its functions to a third party. To the extent that the outsourced component is labour-intensive and central to the supply of the service, then the fact that those activities are carried out by a ‘third party’ should not be relevant to the assessment of whether the service delivered to the customer is an electronically supplied service or otherwise. 2.2

Guideline 1(b) – Individual Approach to Individual Customers

When analysing the limits of human intervention, the various Working Papers on ‘human intervention’ have placed emphasis on the existence of an “individual approach to an individual customer”, and on the supplier responding to “individual requests from customers”. The VAT Committee is of the (almost unanimous) view that “the activity of staff of the supplier of services, performed independently from any individual request to provide a particular service made by a customer, shall be seen as falling within the limits of “minimal human intervention”. It is acknowledged that this ‘test’ (i.e. the supplier – customer interaction, or the supplier response to individual customer requests) is one which can be logically applied to many scenarios involving the supply of services over the internet, as a determining test of the level of human intervention. However, it cannot be ignored that this test may not necessarily be of universal application, and that it would not be reasonable to apply a one-size-fits-all approach. 2.3

Guideline 2: Human Involvement in Generic Activities

This guideline once again makes reference to ‘individual requests by customers’, essentially suggesting that any ‘human intervention’ which is not prompted by a request by an individual According to Working Paper 896, the activities of third parties organising a sporting event should not be relevant to the assessment of whether an online sportsbetting service classifies as an electronically supplied service.

9

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customer is merely minimal. We are in agreement with the view that human involvement in generic activities, such as adjustments to the system environment, updates and improvements (i.e. support and preparatory functions), are not relevant to the assessment of the level of human intervention in a service. 10 However, we believe that what constitutes a support or a preparatory function may vary from service to service, and thus can only be properly assessed in the context of a specific service. In our view, preparatory/support functions refer to those functions which enable the technical infrastructure and the creation of the environment in which the electronic service is supplied 11, and do not include functions which are intrinsic to and the essence of the service itself. However, it is acknowledged that this may not necessarily correspond with the view of the Commission, as illustrated in the examples provided in Working Paper 896 (Section 3.2). 12 2.4

Guideline 8: Education Services

With specific reference to education services, the proposed approach suggests that, where an online course is not merely automated (i.e. text-based) but involves lectures or seminars delivered by tutors and streamed in real-time, such that the internet is merely a means of transmission, these features are not sufficient to constitute more than minimal human intervention. The level of human intervention is regarded as more than minimal only if the students have the option to ask questions to the tutor, even if the option is not exercised. It is our view that where the internet is merely the medium by which a service is purchased, and the service itself by its nature requires the involvement of individuals in its delivery, then their involvement should be regarded as constituting more than minimal human intervention. This would reconcile with the position adopted in the Guidelines following the 67th Meeting of the VAT Committee concerning conventional auctioneer services. However, Guideline 8(a) concerning online access to seminars would appear to be taking a different, and contradictory, approach. Furthermore, it would seem that the interpretation of the notion of ‘human intervention’ is shifting from the requirement of intervention from the side of the supplier 13 to that of ‘interaction’ between the supplier and the customer. 2.5

Guidelines 8 and 10: Possibility of Interaction between the Customer and Service Provider

It is noted that for certain sectors, Working Paper 919 proposed that where there is the possibility of interaction between the customer and the service provider (or an individual on behalf of the service provider), then that of itself is sufficient to constitute more than ‘minimal human intervention’, bringing a service outside the definition of ‘electronically supplied services’.

section 2.2 paras. 7 and 8 of Working Paper 919 For example: technical/IT staff who set up, maintain and update the online presence of the service provider and the functionality of the system; and customer care / help desk personnel. 12 Referred to in Working Paper 919, page 3 13 See Guideline resulting from the 103nd meeting of 30 March 2015 Document D – taxud.c.1(2015)4128689 – 862, page 193, para 3.1(2) 10 11

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Whilst we recognise the practical complexities of determining the place of supply of services in situations where there may be more than minimal human intervention (for example, where customers are granted access to a course and there is a possibility to ask questions but this option is not always exercised), we question whether the mere possibility to interact with the supplier should be sufficient to change the place of supply of that service, whether or not the interaction actually takes place. In our view, to the extent that this is the preferred interpretive approach, then it should be applied consistently in other scenarios, where relevant.

3.

General comments on the interpretation of the definition of ‘Electronically Supplied Services’ and of the European Commission VAT Committee Guidelines on the subject matter

In the assessment of the notion of ‘minimal human intervention’, the drawing of parallels between one service and another, disregarding the specific characteristics of the activities, and in particular the role of individuals in the supply, may not necessarily lead to an outcome intended by the Directive. For example, in Working Paper 882, a ‘human intervention’ comparative analysis is run between music download services and online sports betting services. In the former scenario, the Working Paper explains, the supplier of music downloads “…classifies the songs in different styles, creates playlists, highlights new songs…”, activities which require human involvement. However, the client purchases the song (download) without the requirement of human intervention, therefore the service is classified as an electronically supplied service. Working Paper 919 applies the same reasoning to online sportsbetting services, equating the role of individuals in setting odds with that of the individuals who catalogue songs and create playlists, and considers the human intervention in the supply to be minimal. This analysis raises two key issues: (a)

Working Paper 919 presents a generalised classification of music download services as electronically supplied services, on the basis that the human intervention is merely minimal and the supply is essentially automated. Such a classification by service-type does not consider the possibility that a given music download service may not necessarily have the characteristics described in Working Paper 882. Therefore, the conclusion may be different if, for example, the supplier creates tailor-made playlists, whether upon a direct request by a client or on the basis of a study of market trends, and the human involvement of staff is intrinsic to the service being requested by and delivered to the client. It follows therefore that it would not be appropriate to classify services as ‘electronically supplied services’ or otherwise merely by reference to the category of activity/sector to which it belongs, without taking into consideration the specific features of the service.

(b)

A comparison is being made between two activities which differ intrinsically, and whose only similar feature is the fact that they are delivered over the internet. The analysis does not consider that online sportsbetting services is, in effect, a conventional book-

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making service, 14 and that the setting of the odds and other related functions carried out by individuals cannot reasonably be equated to the preparatory function of categorising songs, but is in effect ‘the service’ itself. We understand that an online sportsbetting service enables players to place a bet on the outcome of an event at the odds offered by the supplier. The role of individuals in monitoring events, setting odds, and effecting risk management strategies reflects the consolidated function of a traditional bookmaker, rendering the service significantly dependent on human intervention, and therefore not meeting the criteria of the definition of an electronically supplied service. In this case, the internet is merely a medium via which a bet is placed, equally interchangeable with other media. Of course, the analysis would be different if the bookmaking function were to be wholly automated, akin to an RNG game. In practice, businesses rely on an individual Member State’s determination on the notion of ‘electronically supplied services’, as well as on any guidance provided by the VAT Committee. Harmonisation of interpretation is key to ensuring that situations of double taxation or non-taxation do not arise. Insofar as the VAT Directive provides a special rule for the place of supply of ‘electronically supplied services’, which is defined by reference to particular characteristics, it would not be accurate to assume that all services delivered over the internet meet the definition. Any guidance on the definition should be consistent and should draw on features of the services and/or the relevant aspects of ‘human intervention’, with due attention given to the particular characteristics of given services which may impact the classification.

14

Working Paper 919, page 10

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Opinion Statement FC 10/2018 on the European Commission Platform for Tax Good Governance Discussion Questionnaire on Tax Competition and Competitiveness Prepared by the CFE Fiscal Committee Submitted to the European Commission in December 2018 This CFE Opinion Statement sets out CFE’s views on tax competition and competitiveness. It was submitted to the EU Platform for Tax Good Governance in December 2018. CFE representatives at the Platform for Tax Governance are Piergiorgio Valente, President of CFE and Stella Raventós, Chair of the CFE Fiscal Committee.

CFE Tax Advisers Europe is a Brussels-based umbrella association uniting 30 European national tax institutes and associations of tax advisers from 24 European countries. Founded in 1959, CFE represents more than 200,000 tax advisers. CFE Tax Advisers Europe is part of the European Union Transparency Register no. 3543183647‐05. For further information regarding this opinion statement please contact Stella Raventós, Chair of the CFE Fiscal Committee or Aleksandar Ivanovski, Tax Policy Manager at info@taxadviserseurope.org

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This Opinion Statement responds to the European Commission Platform for Tax Good Governance discussion questions, setting out CFE’s views on matters related to tax competition and competitiveness in general.

What and who defines a competitive tax system? At a time of immense change in the international tax framework, CFE believes that tax policy tools and instruments should be utilised to promote competitive tax systems that help generate economic growth and prosperity for society. We accept, however, that competitiveness of tax systems is a relative concept in an international context. Fiscal policies to a large extent remain a prerogative of each country, involving difficult choices which allow jurisdictions to exercise their tax sovereignty in a way that produces the best outcomes for their societies. Hence, CFE acknowledges the fiscal sovereignty of Member States and their liberty to design competitive tax policies fit for their social and economic systems, to the extent these are compliant with EU law and OECD BEPS commitments, i.e.: •

primary EU law (fundamental freedoms and state aid rules);

secondary EU law that concerns harmonized areas of taxation (VAT, the DAC administrative framework 1 and the corporate tax directives that affect the functioning of the Single Market)

the OECD BEPS Action Plan and the related recommendations and guidance.

The CFE concurs that tax policy and administration directly affect the pillars that define a competitive tax system. 2 As such, stable institutions and a predictable environment for doing business, tax good governance standards, absence of corruption or undue influence of judicial and administrative decisions, macroeconomic considerations such as the economic impact of tax reforms, as well as a dynamic market all play a role in defining a competitive tax system. The competition factors that play a significant role in this framework include tax rates, the availability of double taxation relief in practice and the taxable base, all of which have had significant impact on cross-border investment decisions to the extent that countries The EU legislative framework for administrative cooperation: • Directive 2011/16 - removal of banking secrecy, exchanges on request and spontaneous exchanges; AEOI on five non-financial categories (employment income, director’s fees, pensions, life insurance products and property – income and ownership) • DAC 2 (Dir 2014/107) – AEOI on financial account information: interests, dividends, account balances info etc. • DAC3 (Dir 2015/2376) – automatic exchange of as of January 2018 of advance cross-border rulings (confirmatory rulings) and transfer-pricing rulings (advance pricing agreements): using a central directory of rulings • DAC 4 (Dir 2016/881) – Country by Country Reporting on certain financial information: revenues, profits, taxes (paid and accrued), accumulate earnings, number of employees and certain assets • DAC5 (Directive 2011/16) – Access to UBO registers by tax administrations • DAC6 – mandatory disclosure rules on reportable cross-border arrangements 2 World Economic Forum, Global Competitiveness Report (2011) 1

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have had to compete for both investment and the related taxable revenue. Similarly, technological developments and the ability of economies to adapt to innovative business models, as well as sufficient focus on research and development related expenditure bear significance in the discussion on the competitiveness of a tax system. The CFE believes that tax systems should contribute to an environment which is business friendly and attracts investment. Private sector investment creates growth and jobs, whilst the current state of the economy calls for tax policies that give priority to an investmentfriendly environment. Ideally, tax policy decisions would as little as possible distort the investment forms and choices, in the longer-term interests of the EU internal market. In CFE’s view, in absence of harmonizing legislation, the investment decisions could be driven by fiscal factors and Member States should retain their powers to influence such decisions to the extent these decisions take into account EU’s criteria for tax good governance and the commitments made in the OECD BEPS process. Simpler and more coherent tax rules throughout the EU would also contribute to a more competitive tax system, making the EU Single Market a more dynamic and business-friendly environment. This approach is in line with the finding of the European Commission Taxation Paper that “At the domestic level, the key aspects to consider are the simplification of tax rules and tax compliance and the features of process generating the tax law”. As such, coordinated measures among EU Member States’ rules would prevent mismatches among national legislations, which is an element to consider for a competitive tax environment, taking the interest of the Single Market as whole. 3

Does a competitive tax system rely on a level playing field? From CFE’s perspective, tax policy, the implementation of tax laws and tax administration need to ensure there is a level playing field in the Single Market. Competition arising from jurisdictions putting in place harmful or aggressive tax measures affect markets and consumers across the board. It is not only a matter of EU Member States following primary and secondary EU law, but all Inclusive Framework jurisdictions (in the case of BEPS initiatives) implementing and adhering to agreed initiatives. If this is not the case, issues of competitiveness arise. In the absence of a requirement for ‘substantial economic presence’, certain tax regimes could be perceived as harmful, as indicated by the EU’s Code of Conduct for Business Taxation, which was established in 1997 as a commitment of the EU Member States towards a tax environment that ensures a level-playing field in the EU Single Market. 4 European Commission Taxation Working Paper 67 of 2017, ‘Tax Uncertainty: Economic Evidence & Policy Responses’, page 24 4 Resolution of the Council of the EU of 1 December 1997 on a Code of Conduct for business taxation, acknowledging the positive effects of fair competition and the need to consolidate the competitiveness of the European Union and the Member States at international level, whilst noting that tax competition may also lead to tax measures with harmful effects, the need for a Code of Conduct for business taxation designed to curb 3

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The results of the work of the Code of Conduct group are significant, helping not only to improve competitiveness in the EU Single Market, but also in ensuring that national tax systems remain competitive on fair terms. Similarly, the role played by the Code of Conduct process in establishing fair tax competition involving third countries (non-EU states) is significant too. 5 Apart from the Code of Conduct process, to ensure a level-playing field in the Single Market, the Commission is also relying on its powers to scrutinise national tax practices against the EU State Aid rules 6. In doing so, CFE believes that DG Competition should refrain as much as possible from introducing retroactive standards that could affect both tax certainty and the competitiveness of the EU Single Market. Efficient tax systems demand a delicate balance between ensuring certainty of the laws and their application but also promoting tax policies that are fit for purpose in a particular context. However, if that balance is not reached, it will lead to tax uncertainty and undermine the tax system as a whole. For instance, the retroactive introduction of certain fiscal State aid compliance criteria, in our view would have such unintended consequences. Accordingly, the achievement of a desired balance should be based on two main pillars: Clarity of tax legislation and tax administration practice, and absence of retrospective legislation. On balance, CFE believes that a level-playing field is indeed a very important consideration in the tax competitiveness debate, affecting markets and consumers across the board. Additionally, CFE believes that the EU should follow initiatives agreed to at international level, provided that the other OECD Inclusive Framework partners do the same. Issues of competitiveness and competition clearly arise where this is not the case. In CFE’s view, Member States should otherwise be free to make their sovereign choices in designing and implementing tax policy choices. Such practices however should not be based on harmful tax measures that are a clear manifestation of ‘ring-fencing’ and hence unduly distort the level playing field in the Single Market.

harmful tax measures, and emphasizing that the Code of Conduct is a political commitment and does not affect the Member States' rights and obligations or the respective spheres of competence of the Member States and the Community resulting from the Treaty, Preamble of the Council Resolution of 1 December 1997 5 Dr Tom O’Shea, Ensuring Fair Taxation: 20 Years of the EU’s Code of Conduct Group, Tax Notes International, November 2018, page 717 6 Article 107(1) of the Treaty on the Functioning of the European Union: “Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.”

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How to improve tax competitiveness? Reducing complexity and distortions Reducing complexities and distortions in the tax system is crucial to improving tax competitiveness. It requires simplicity and clarity of legislation, by introducing simple and easy to understand tax laws which ultimately work well in practice. In this respect, legislation should set clear general principles, which seek to prevent misinterpretation of the rules by both taxpayers and tax administrations. At EU and international level, coordination should be pursued in order to avoid mismatches and loopholes that create opportunities for double interpretations. The established standards should also provide for best practices within the legislative process. In particular, all stakeholders should be given the opportunity to meaningfully engage with legislators prior to the implementation of legislation. Stakeholder consultations prior to the enactment of legislation is a very positive feature of the legislative process in some Member States, all of which contributes to reducing the ‘redtape’ perception and hence the complexity of a tax system. Stakeholder consultation should be of adequate duration, and allow for input on all aspects of the proposed measure rather than on narrow standalone issues. Feedback documentation summarising consideration given to responses to the consultation would facilitate a transparent and meaningful process. Improving taxpayers’ rights Given the importance of this topic for stability and predictability in a competitive tax environment, CFE has long advocated for binding EU rules for protection of taxpayers. A fundamental right of tax certainty is therefore suggested, which is promulgated in the Model Taxpayer Charter, an initiative of three international tax professional organisations, CFE, AOTCA and STEP. 7 It was compiled in 2013 and updated in 2016, to take into account interim developments. The compilation of the Model followed an extensive survey on the status of taxpayers’ protection in 41 jurisdictions. It reflects the views of its authors’ organisations on how to ensure taxpayers’ position in the system, stimulate their trust, boost compliance and form competitive tax systems. CFE has fully endorsed the EU’s approach and views expressed by the European Commission 8 that a Code or Charter on Taxpayers’ Rights can enhance the efficiency and effectiveness of tax systems and can also increase the tax morale of the European citizens. 9 CFE, AOTCA, STEP, A Model Taxpayer Charter, 2016 (second edition) European Commission, Guidelines for a European Taxpayers’ Code (2016), available at https://ec.europa.eu/taxation_customs/sites/taxation/files/guidelines_for_a_model_for_a_european_taxpayer s_code_en.pdf 9 For CFE’s detailed view on the matter, please refer to the Opinion Statement CFE 1/2018 on the Importance of Taxpayers Rights, Codes and Charters on Tax Good Governance, available at 7 8

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R&D & SME incentives In respect of boosting productivity through well-designed Research & Development tax policies, CFE is supportive of such policies to the extent those are compliant with the Code of Conduct Group recommendations of 2014 and the OECD BEPS Action 5 recommendations on patent boxes and the (modified) nexus approach. Similarly, any incentives, regardless of the form or character, need to be compliant with primary EU law provisions that prohibit State aid in order to avoid distortions of the levelplaying field in the Single Market. Additionally, although tax policy decisions should as little as possible distort the operation of the Single Market and level-playing field, CFE also believes there is merit in policy initiatives aimed at assisting start-ups and SMEs. This is particularly so in the context of a rapidly changing tax environment where the complexity and costs of tax compliance can hinder competition. Tax administration CFE supports modernisation of tax administrations to reduce compliance burden and costs for businesses. Tax systems are intrinsically complex and tax advisers make complex tax systems work. Tax administrations should be efficient, accessible and transparent. Efficient tax administration is an important pillar of the competitiveness index and is becoming more challenging for taxpayers and tax administrations alike, particularly in the context of the increased compliance required by initiatives such as Country-by-Country reporting, the antimoney laundering directives, and the EU DAC6 mandatory disclosure rules for intermediaries. As acknowledged by the European Commission Working Paper on Tax Certainty, companies are now paying much closer attention to tax risk (i.e., the risk of being considered noncompliant when audited) than they did in the past. 10 Still, tax inspections and audits may also give rise to uncertainty with a stricter enforcement of tax rules. To that end, CFE strongly supports the tax administration modernisation and digitalisation projects to the extent these contribute to simplified tax compliance. CFE has long advocated for the establishment of binding instruments that set out clear and equally applicable rights and obligations for taxpayers vis-a-vis tax administrations, throughout the EU. Increasingly, taxpayers in different EU Member States are facing equal tax obligations but are not treated equally by tax administrations in terms of their rights in different Member States. 11 https://taxadviserseurope.org/blog/portfolio-items/opinion-statement-the-importance-of-taxpayers-rightscodes-and-charters-on-tax-good-governance/ 10 European Commission Taxation Working Paper 67 of 2017, ‘Tax Uncertainty: Economic Evidence & Policy Responses’, page 8 11 Model Taxpayers’ Charter (supra, at footnote 5)

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As a means of providing advance certainty for taxpayers by tax administration, CFE is supportive of any programmes that establish such protection for taxpayers. We support both cooperative compliance programmes and tax ruling practices that comply with the OECD and the EU tax good governance standards and primary EU law rules. 12 Equally, cooperative compliance was recently endorsed by the IMF/OECD, on the basis that “cooperative compliance programs could reduce uncertainty for low risk companies, assist tax administrations to better focus their resources and promote a culture of greater trust”. 13 In the same vein, where tax administrations provide tax rulings and Advance Pricing Agreements (APAs) these have proved to be an effective tool for the prevention of tax-related disputes, especially with respect to transfer pricing issues. They provide the taxpayer with advance knowledge of the tax treatment of particular transactions and therefore allow certainty for taxpayers in planning for the future, and also prevent the risk of subsequent disputes. The CFE calls upon the European Commission to consider harmonising measures that would outline an EU framework of tax rulings. All Member States should be required to establish simple and effective procedures for the conclusion of bilateral/multilateral APAs and/or confirmative tax rulings. 14 Such a coordination of national procedures would benefit investment and competitiveness by providing clarity and a more predictable tax environment, as well as simplifying the rules applicable in the EU Single Market. Tax Competition and Social Welfare When considering the ‘pros and cons’ of tax competition and how it affects particular countries, it needs to be specified whether the matter under scrutiny concerns tax competition between EU Member States or tax competition between the EU Single Market and the rest of the world. As discussed supra, CFE acknowledges the fiscal sovereignty of Member States and their liberty to design tax policies fit for their social and economic systems, to the extent these are compliant with primary EU law (fundamental freedoms and State aid rules) and the secondary EU law that concerns harmonised areas of taxation (VAT, the DAC framework and the corporate tax directives that affect the functioning of the Single Market). For example, in spite of the challenges, the cooperative compliance programme of the Dutch tax administration has changed the relationship between the tax services and the companies from “adversarial ‘them and us’ relationship, to a stronger one characterised by cooperation”, see Dennis De Widt, Dutch Horizontal Monitoring: The Handicap of a Head Start. Umeå Universitet, 2017. See also Lotta Björklund Larsen et al. "Nordic Experiences of Co-Operative Compliance Programmes: Comparisons and Recommendations." (2018) and OECD, Co-operative Compliance: A Framework: From Enhanced Relationship to Co-operative Compliance, 2013, available at: http://www.oecd.org/tax/administration/co-operative-compliance.htm. 13 IMF/OECD Report for the G20 Finance Ministers March (2017) 14 The first multilateral European Advance Pricing Agreement (APA) was concluded on 8 April 2004 by Airbus Industrie and the tax administrations of France, Germany, the United Kingdom and Spain. More on the benefits of the tax rulings: Carlo Romano, Advance tax rulings and principles of law: towards a European tax rulings system?. Vol. 4. IBFD, 2002. 12

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In CFE’s view, the absence of certain tax competition could lead to excessive taxation. Similarly, the longer-term tax competition within the framework elaborated supra would not necessarily lead to lower public revenues. Such policies of course need to be carefully balanced in order to protect the social welfare in each of the EU Member States whilst maintaining taxable revenues. Under no circumstances should tax competition be harmful to the extent it adversely affects the supply of public goods. Conversely, tax policy choices between Member States (and within Member States) should be able to support quality healthcare, security, public safety, education and infrastructure, as basic pillars of the social model underpinning the European Union.

Is it good tax policy to keep reducing rates/ reducing cross-border barriers? Admittedly, tax competition over mobile and easily shifted profit has resulted in downward trends in statutory tax rates, offset by broadening of the tax base, which enables countries to maintain their marginal tax rates on capital. 15 These trends have been modified to a certain extent. While the declining trend in the average OECD corporate tax rate has gained renewed momentum in recent years, corporate tax rate reductions are less pronounced than before the financial crisis, with most countries engaging in a “race to the average”, rather than a ‘race to the bottom”. 16 However, the interaction between expanding tax bases and tax rates must also be taken into account. This is particularly so if one considers that if a tax base is widened this can increase compliance issues and lead to instances of double taxation. In those cases, if the issue is not covered under double taxation treaties it poses a significant problem. From our perspective, the competitiveness of tax systems cannot be assessed only by reference to tax rates or tax incentives but rather as an equilibrium of investment and growthfriendly tax policies that support the social goals of each Member State and the EU Single Market as a whole. CFE welcomes coordinated measures that reduce cross-border tax barriers on doing business and compliance burdens, through the introduction of instruments such as the Mini One-Stop-Shop (MOSS) (soon to become OSS). We also welcome any measures that ensure clear guidance and that are fit for purpose to allow taxpayers to do business in a simple, efficient and coherent manner throughout the EU.

Conclusion Tax competition and competitiveness is a question of balance in tax policy in general. It is not only a matter of EU Member States following primary and secondary EU law, but all Inclusive Framework jurisdictions (in the case of BEPS initiatives) implementing and adhering Michael Devereux, Rachel Griffith, and Alexander Klemm "Corporate income tax reforms and international tax competition." Economic policy 17.35 (2002) pages 449-495. 16 According to the OECD, the average corporate income tax rate across the OECD has dropped from 32.5% in 2000 to 23.9% in 2018. OECD (2018), Tax Policy Reforms 2018: OECD and Selected Partner Economies, OECD Publishing, Paris, https://doi.org/10.1787/9789264304468-en 15

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to agreed initiatives. If this is not the case, issues of competitiveness arise. The EU is at the forefront of providing equilibrium in this respect. Notwithstanding the above observations, CFE would also like to emphasise that it is not only the process of achieving harmony in tax competition and competitiveness which may, ultimately, boost economic growth and benefit EU citizens. It is also a question of balancing other policy areas from safety through to judicial systems, transport policy and a properly functioning financial market, to name but a few. Achieving economic growth which will benefit EU citizens can only be achieved if the system is balanced across these complex and interrelated areas.

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Opinion Statement PAC 1/2018 on the OECD Consultation regarding Mandatory Disclosure Rules for Addressing CRS Avoidance Arrangements and Offshore Structures (Prepared by CFE on behalf of the Global Tax Advisers’ Cooperation Forum)

Submitted to the OECD on 15 January 2018

We will be pleased to answer any questions that you may have concerning the GTACF comments. For further information, please contact the Chair of CFE Professional Affairs Committee Wim Gohres at wim.gohres@nl.pwc.com or the CFE Brussels Office at brusselsoffice@cfe-eutax.org +32 2 761 00 91, Avenue de Tervuren 188A, B - 1150 Brussels.

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In der Beschränkung zeigt sich erst der Meister, und das Gesetz nur kann uns Freiheit geben. (The master shows himself by restriction, and only the law will set us free.) Johann Wolfgang von Goethe (1749-1832)

1. Introduction On 11 December 2017, the OECD released a “consultation document”1 under cover of a media release2 which invited submissions by 15 January 2018. The public discussion draft is 44 pages in length and contains mandatory disclosure rules for two loosely connected subjects, the avoidance of reporting under the Common Reporting Standard (“CRS”) and the use of ‘opaque’ offshore structures. 2. Consultation period and stakeholders’ involvement The first exchanges on the CRS rules date from 2017 and a lot of countries have not begun the exchange3. The CRS rules are primarily aimed at financial institutions and are quite complicated themselves. The disclosure rules regarding opaque offshore structures are complicated as we will see hereafter. The GTACF therefore wants to emphasize that the consultation period is too short for the complicated subjects at hand and that as a result it is difficult to see the true value of this consultation. In view of the call for penalties on non-complying intermediaries and reportable taxpayers, the short consultation period running over public holidays in most countries runs the risk of underestimating the impact that the proposal may have for those involved and the uncertainty which may stem therefrom. In light of these considerations, GTACF recommends an additional consultation period. Such an extension would allow professional associations such as GTACF to gather comprehensive internal feedback from our member organisations, therefore more meaningful consultation input and technical refinement of the proposed course of action. We will endeavour to partake in any subsequent consultations on this very important subject. Having said this, GTACF will comment on some of the most salient aspects of the proposal, but cannot claim to be exhaustive or even thorough in its comments. Nonetheless, GTACF hopes that its comments may contribute to the discussion of the proposal. 3. Position of the GTACF GTACF’s main concern is that the scope for an obligation to report is too broad and the test to decide whether a report is necessary is quite challenging. We fear that this creates uncertainty for intermediaries and taxpayers involved and could result authorities receiving large quantities of information about quite innocent arrangements sent to reduce the risk of failing to comply. This would ultimately present those authorities with large quantities of meaningless data from which it is difficult to identify activities that are the target of the proposals. Although the OECD definition of intermediaries includes tax advisers as ‘service providers’, this definition remains somewhat vague. It involves persons who are involved in the implementation of the structures, but it remains unclear how

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http://www.oecd.org/tax/beps/Discussion-draft-mandatory-disclosure-rules-for-CRS-avoidancearrangements-offshore-structures.pdf (accessed 29 December 2017) 2 http://www.oecd.org/tax/oecd-seeks-input-on-new-tax-rules-requiring-disclosure-of-crs-avoidancearrangements-and-offshore-structures.htm (accessed 29 December 2017) 3 http://www.oecd.org/tax/transparency/AEOI-commitments.pdf

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much diligence is appropriate to expect before giving tax advice. Tax advisers assist their clients in complying with the complicated tax laws and rules on national and international level and advise their clients on these rules and how to organize their affairs in order to be compliant with such laws and rules. As such, tax advisers stand beside their clients and do not and should not have a commercial interest other than serving their clients while remaining professionally independent from all parties, including their clients. The present proposal is aimed at a wide group of consultants and true intermediaries, regulated or not, amongst which there may be tax advisers. It is therefore good to remember that only a small part of the tax advisers are actually involved in the area the proposal seeks to regulate and that these tax advisers will provide their services within the boundaries of the relevant laws and jurisprudence. In this respect it is important to notice once again that the proposal asks for reporting on what are, in itself, legitimate arrangements and structures. If the purpose of any activity directed to avoiding reporting is to evade taxes (or any other illegal purpose) the conduct is for that reason illegal, and usually subject to the heavy penalties associated with tax evasion or other financial crime4. GTACF and its member organisations fully support the combat against tax evasion and expect their members not to be part of any form of tax evasion. GTACF notes that in the end the taxpayer is the one primarily responsible for his affairs and feels that the proposal puts a disproportionate responsibility on the ‘intermediaries’ especially in view of the call for sanctions. Making such intermediaries the addressees of the proposed rules, sends out the message that taxpayers themselves bear no or little responsibility for their affairs and that they are more or less subject to what intermediaries propose to them. GTACF also notes that the description “CRS avoidance arrangement” in itself suggests that there is an obligation to use only financial instruments that would be subject to CRS exchange. Similarly, the word ‘avoidance’ can be seen as suggestive of complicity. CRS obliges financial institutions to exchange information of their clients for tax purposes, but in no way obliges taxpayers to use only financial instruments provided by financial institutions, nor is there an obligation to have their dealings signed off by a tax adviser. GTACF feels it would be more appropriate to extend the scope of the CRS to other entities. This would better serve the purpose of establishing clarity in the reporting obligation, as opposed to putting the reporting onus on the intermediaries. In doing so, the reporting would become much more factual and aimed at situations that, at this stage, are not subject to CRS reporting. GTACF is concerned that tax advisers would have an obligation to disclose steps taken by their clients, when they, acting as advisers may not know whether or when the steps have been taken, and the steps themselves (choosing one type of investment rather than another) might intrinsically be very commonplace and not motivated by tax evasion or any other illicit purpose. It seems to us that the approach adopted internationally in respect of Anti Money Laundering legislation should be adopted and the disclosure obligation focussed on where there are doubts of illegality. Indeed, where AML legislation already applies there should not be a requirement to disclose the same transaction to multiple authorities. Also, any requirements imposed on advisers (who are ‘intermediaries’ within the OECD definitions but, in acting as advisers, are not in reality parties to any of the transactions undertaken ), should reflect their position as owing duties of confidentiality to their clients and not necessarily knowing what their clients have implemented. In many countries, there is no precedent for imposing obligations in such circumstances (other than AML legislation). Where, as for example in the UK’s DOTAS legislation, 4

Cotorceanu, Peter: Hiding in plain sight,(2015) 21 Trusts & Trustees 1050 (Oxford)

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advice that is given can become reportable, this is in the first instance the generic nature of the advice that is believed to produce a tax advantage. The scope of the obligation is tightly defined to try to ensure that appropriate confidentiality obligations are respected, that the regime is not disproportionately onerous to operate, and the disclosures made are focussed on matters likely to be of interest to the authorities, who if confronted with routine disclosure of even legitimate transactions, would encounter difficulty in ‘seeing the wood for the trees’. Any requirements going further than AML rules should follow the same approach. 4. Definition of CRS Avoidance Arrangements GTACF believes that a technical refinement of the definitions used by the OECD would result in better clarity and compliance with any relevant obligations subsequently. Similarly, GTACF believes that clarity of legislation and rules in general is essential element in preserving taxpayers’ rights and enforcing existing legal obligations. Conversely, asking intermediaries to report on insufficiently precise or vaguely drafted rules would result in uncertainty. Focusing on clarity of the CRS or other legislation will better ensure that such weaknesses are subsequently eliminated. A CRS ‘Avoidance’ Arrangement is any Arrangement for which it is reasonable to conclude that it is designed to, marketed as or has the effect of circumventing CRS legislation or exploiting the absence thereof. If an arrangement has the effect of ‘circumventing’ CRS legislation, it is of little interest that it may or may not be designed or marketed as such. In fact, once it is established that CRS legislation is not ‘applicable’ (instead of ‘circumvented’), that should suffice. It is therefore not easy to see the added value of the elements ‘designed’ and ‘marketed’. The question is therefore what the proposal is really aiming at, all arrangements which have the effect of ‘circumventing CRS’ or the reporting on arrangements which are actually intended to do this. There would be some logic in aiming at those arrangements which were actually intending to avoid CRS, however in GTACF’s opinion only if the intention was actually aimed at tax evasion. GTACF is of the opinion that the exploitation of the absence of CRS legislation cannot and should not be part of the definition. As indicated above there is no ethical or legal requirement to be subject to CRS legislation. If there is no CRS legislation this cannot be a reason for reporting. If this is felt as a shortcoming, the CRS legislation should be expanded. On a more technical level GTACF feels that this makes the definition so broad that it will become unclear when it is actually applicable and thus creates uncertainty for taxpayers and intermediaries alike. In view of the fact that it is proposed that involved persons should be sanctioned, this shall result in legal uncertainty. Definition 1.1.(c) is aimed at reporting in cases where the due diligence procedures used by Financial Institutions show weaknesses. GTACF feels that logically the CRS or other legislation should be amended to ensure that such weaknesses are eliminated instead of asking intermediaries to report on them. The proposal indicates that these hallmarks are developed in the light of experience of a number of tax administrations. GTACF therefore advocates to focus on the more principled issues, such as clarity of the rules. In the OECD Consultation commentary under 16) it is explained that ‘reasonable to conclude’ is to be determined from an objective standpoint without reference to the subjective intention of the persons responsible for the design, marketing or using the scheme. This approach seems somewhat confusing. The test will be satisfied where a reasonable person in the position of a professional adviser with a full 4


understanding of the terms and consequences of the arrangement and the circumstances in which it is designed, marketed and used would come to this conclusion. GTACF points out that in view of the broad hallmarks such a professional adviser will have problems concluding this. The question is therefore how intermediaries and other people involved should be able to make such a distinction, when no professional adviser is involved. 5. Definition of Offshore Structures GTACF believes that these definitions are quite complicated to understand and therefore implement in practice, under threat of sanctions. GTACF points out that the definitions set out in Chapter 2 are complex as they refer to each other which results in circular referrals e.g. 1.1 Offshore structure and 1.4 Opaque Ownership structure. This actually reads as: ”An Offshore Structure is a Passive Offshore Vehicle held through an Opaque Ownership Structure which is a Ownership Structure allowing a natural person to be Beneficial Owner of a Passive Offshore Vehicle.” Definition 1.3 regarding Passive Offshore Vehicle excludes Institutional Investors, but that seems counterintuitive. In fact, such legal person/arrangement is still passive, the ownership in itself does not change that. It would make more sense to exclude this situation from Opaque Ownership Structures. The definition of Beneficial Owner refers to the FATF recommendations but then expands this which leads to a partial repetition. It would be better to adhere to the FATF glossary by repeating that definition without embellishments. GTACF therefore feels that this part of the proposal will be very difficult to implement and/or understand by those persons actually responsible under the threat of sanctions, to report on this. Once again it is pointed out that the mere fact that there is an offshore structure does not say anything about the legitimacy of the structure. There can be many good reasons for this. The definitions do not seem to make an exception for Offshore Structures in situations where relevant authorities are informed about ownership details. 6. Disclosure requirements The definition of an Intermediary incorporates Promoters and Service Providers. A Promoter means any person who is responsible for the design or marketing of a CRS ‘Avoidance’ Arrangement or Offshore Structure. A Service Provider means any person who provides Relevant Services in circumstances where the person could reasonably be expected to know that the Arrangement is a CRS ‘Avoidance’ Arrangement or Offshore Structure. The group of people that become subject to the reporting obligation can and will be therefore very broad. For a disclosure on what is in effect a legitimate arrangement GTACF feels this is not balanced. GTACF points out that if the arrangement is not legitimate those involved will be subject to criminal law and can be punished but will in all probability not be active in making disclosures. This proposal for practical purposes is thus not aimed at the latter group and therefore the reporting obligations should be reasonable and clear. This also means that GTACF feels that the reporting obligations if any should be limited to situations where the arrangement is actually implemented. GTACF points out that ‘making available’ is one of the few key elements which are not defined. For example, the United Kingdom’s Disclosure of Tax Avoidance Schemes (DOTAS) has a clear guidance on this subject.

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The proposed disclosure of CRS arrangements entered into after 15 July 2014 is in fact retrospective if not retroactive. For reporting on arrangements which are not illegal GTACF feels this will be disproportionate specifically in view of the uncertainty in respect of ‘what’ to report and ‘who’ should report. 7. Information reporting The reporting should enclose names, address, contact details, jurisdictions of tax residence and tax identification number (TIN) of the person making the disclosure, any Reportable Taxpayer (in which case also the birth date should be reported) and any Client or Intermediary and furthermore the details of the arrangement. GTACF is concerned that part of this proposal actually entails reporting on other people such as the taxpayer, the actual client, potential users and other intermediaries involved. Non-compliance to this would be sanctioned. GTACF feels that the proposal in this respect goes beyond what one may expect of the citizens of democratic states and points out this reporting on other people is actually required where per se no illegitimate arrangements are in order. For CRS one should also report those features for which it is reasonable to conclude that they are designed to, marketed as, or have the effect of, ‘circumventing’ CRS. For the Offshore Structures similar language applies. GTACF feels that this borders on self-incrimination and at least will breach the equality of arms. Especially for tax advisers this will be very awkward. For taxpayers this reporting as soon as such an arrangement is made available, may actually endanger their free access to tax advice. 8. Penalties The commentary states that the regime needs penalties for both intermediaries and taxpayers to ensure compliance. However, GTACF reiterates that it would be disproportionate to impose penalties for not reporting legitimate arrangements in a situation where it is unclear whether these are covered by the proposal or not. GTACF clearly stands against tax evasion, however imposing a penalty for noncooperation with self-incrimination is in fact at odds with the principles of the rule of law. 9. In conclusion GTACF therefore concludes that the proposal as such puts an unfair obligation on intermediaries and especially on tax advisers and their clients that could ultimately prove ineffective because compliant intermediaries (as defined) could seek to protect their position by reporting matters that are in reality of no interest to the authorities. The broad definitions of the proposal combined with the penalties make for a situation where those involved could be penalized for what may be a legitimate arrangement. GTACF feels that better clarity of CRS legislation will supersede the need for mandatory disclosure rules. Finally, GTACF is of the opinion that the part of the OECD proposal related to Offshore Structures will be very difficult to implement in practice.

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About the Global Tax Advisers’ Cooperation Forum The Global Tax Advisers’ Cooperation Forum (GTACF) was established in 2014 by CFE Tax Advisers Europe, the Asia-Oceania Tax Consultants Association (AOTCA) and the West African Union of Tax Institutes (WAUTI). The GTACF is a platform for tax advisers to provide a global response to international tax initiatives and to strengthen tax technical and policy cooperation. CFE Tax Advisers Europe is the umbrella organisation of the European tax advisers. Our members are 30 professional organisations from 24 European countries with more than 200,000 individual members. GTACF aims to safeguard the professional interests of tax advisers, to exchange information about international and national tax laws and policy, professional law, and to contribute to the coordination of tax law and policy in Europe. CFE is registered in the EU Transparency Register (no. 3543183647‐05). AOTCA is the umbrella organisation of the Asia and Oceania tax advisers. Our members are 20 professional organisations from 17 Asian and Oceania countries with more than 400,000 individual members. Like CFE, AOTCA aims to safeguard the professional interests of tax advisers, to exchange information about international and national tax laws and policy, professional law, and to contribute to the coordination of tax law and policy in its region. WAUTI aims to harmonize taxation practice in West Africa, and to promote the highest professional standards of competence and integrity among practitioners in member states. In order to have a forum for technical and educational development, information sharing and enhancement of Tax Practice and Administration, The Chartered Institute of Taxation of Nigeria (CITN) and The Chartered Institute of Taxation of Ghana (CITG) in collaboration with Revenue agencies in the West African Region have formed The West African Union of Tax Institutes (WAUTI).

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CFE Tax Advisers Europe Opinion Statement PAC 2/2018 on the European Parliament Recommendations to the Council and Commission following the inquiry into money laundering, tax avoidance and tax evasion

Submitted to the European institutions on 22 January 2018

CFE is the umbrella organisation of the European tax advisers. Our members are 30 professional organisations from 24 European countries with more than 200,000 individual members. CFE aims to safeguard the professional interests of tax advisers, to exchange information about international and national tax laws and policy, professional law, and to contribute to the coordination of tax law and policy in Europe. CFE is registered in the EU Transparency Register (no. 3543183647�05). We will be pleased to answer any questions that you may have regarding the CFE comments. For further information, please contact the Chair of CFE Professional Affairs Committee Wim Gohres wim.gohres@nl.pwc.com or the CFE Brussels Office brusselsoffice@cfe-eutax.org +32 2 761 00 91, Avenue de Tervuren 188-A, B - 1150 Brussels. 1


1. Introduction 1.1. This CFE submission is in response to the European Parliament Recommendations to the Council and the Commission following the inquiry into Money Laundering, Tax Avoidance and Tax Evasion of 13 December 2017.1 The CFE comments concern the recommendations related to tax advisers. 1.2. CFE welcomes the open debate and the dedication of the European Parliament in pursuing tax transparency and efforts to restore public trust in the tax systems. The parliamentary open discussion about the future of the European Union member states’ tax systems as well as EU’s tax framework is laudable. 1.3. CFE supports the parliamentary scrutiny of potential contraventions to European Union law stemming from various revelations in the public domain, in particular related to tax evasion, aggressive tax avoidance, money laundering and terrorism financing. 1.4. CFE highlights that the vast majority of tax advisers help individuals as well as small, medium and large sized companies to get their complex tax affairs right. By making complex tax systems work, tax advisers contribute to the fight against tax evasion and aggressive tax avoidance. Bearing in mind the inherent complexity of tax systems, taxpayers should have unconstrained access to tax advice. 1.5. CFE supports simplification of tax laws and better drafting of tax legislation. All stakeholders should be given the opportunity to meaningfully engage with legislators prior to the implementation of legislation. 2. Regulation of the profession 2.1. CFE notes the calls for regulation of all tax intermediaries. However, apart from the fact that tax advisers are organised in different ways within the EU (tax advisers stricto sensu, tax advisers as lawyers, tax advisers as accountants etc.), there are many tax intermediaries who are involved at providing services with regards to taxation. These tax intermediaries are very different in training, background, employment, location and so on. Some tax intermediaries are involved regularly in tax services, others incidentally. A regulation of all tax intermediaries in the whole of the EU does not seem a practical approach. Regulation if any should therefore be aimed at the services provided instead of the persons providing them. 2.2. The CFE points out that according to the 4th EU Anti-Money Laundering Directive, all tax advisers, that is all those who give tax advise including all kind of intermediaries, fall within the scope of the application of the EU’s anti-money laundering legislation, regardless whether they are regulated or not. CFE recommends that this principle be more stringently adhered to in the legislation of the member states than is presently the case. 2.3. CFE also points out that taxes are ultimately paid by taxpayers, who therefore bear the ultimate responsibility for their tax matters. Tax advisers are there to advise taxpayers. If they fail to do so appropriately, the tax advisers will be subject to civil claims, professional sanctions or criminal proceedings. 2.4. The regulatory environment in which the tax advisers under the CFE umbrella work is truly diverse in respect of the form and scope of professional regulation and competences.2 One-size-fits all 1

European Parliament Recommendations of 13 December 2017 to the Council and the Commission following the inquiry into money laundering, tax avoidance and tax evasion (2016/3044(RSP)) 2 “CFE European Professional Affairs Handbook” (CFE, IBFD. 2013) contains information on the organisation of the tax profession across Europe, requirements for providing professional tax services in 23 European

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approach would undermine the liberal nature of the tax profession in context of access to the tax advisory activities with significant implications to the European economies and therefore the competitiveness of the Internal Market. 2.5. In the context of the call for regulating the tax advisers, by providing, or withdrawing licences throughout the EU member states, CFE wishes to point out that this tendency runs against the European Commission proposed Directive that aims to establish a ‘proportionality test’ before introducing new legislative, regulatory or administrative requirements restricting access to or pursuit of regulated professions.3 2.6. We therefore disagree with proposals for hard-law regulation of the tax advisory profession in Europe and the “one-size-fits-all” approach. 2.7. CFE would like to add that regulation and/or certification of tax professionals only would not be a solution for preventing tax avoidance. The main solution for tax avoidance is in improving the quality of the relevant legislation. As there are many tax intermediaries, regulation of only tax advisers would provide for an uneven playing field without solving any problem while at the same time harming competition. Also, regulation in a democratic society should not be about what tax advisers may or may not advise their clients, as regulation should primarily be aimed at protecting clients whilst not acting against the wider public interest. With regards to tax evasion we note that this is a criminal offence and therefore regulation would not serve any purpose in this respect. 3. Tax Certainty and Tax Transparency 3.1. CFE believes that tax certainty must be the priority of policy makers in times of ever-changing international tax landscape. Good practices to address the issue of tax uncertainty ought to be prioritised as a contribution to the tax transparency endeavours. 3.2. CFE supports consolidation of taxpayers’ rights and obligations through establishment of binding legal instruments at EU and national level (e.g. A Taxpayers’ Charter). A promotion of drafting of high quality tax legislation will result in clarity and simplicity of tax laws and effective mechanisms for resolution of tax disputes. 3.3. Whilst CFE appreciates the importance of measures to tackle aggressive tax avoidance schemes and base erosion and profit shifting (BEPS), it believes that a balance must be achieved in order to promote certainty for taxpayers and business and consequently the economic growth. Furthermore the CFE wants to point out that the EU has already made enormous efforts in tackling aggressive tax avoidance by adopting the Anti-Tax Avoidance Directive4 which should now be implemented by the different member states. 3.4. Efficient tax systems demand a delicate balance between ensuring certainty on the laws and their application on one hand and updating legislation in line with societal and economic developments on the other hand. The achievement of a desired balance is based on two main pillars: clarity of rules/uniformity of laws; no retrospective legislation and limited retroactive tax legislation.

countries, impact of EU legislation and case-law on professional regulation, and other developments in the EU and national law with relevance for tax professionals. 3 Article 6(1) of the Proposal for a Directive on a proportionality test before adoption of new regulation of professions COM(2016) 822 final 2016/0404(COD) 4 Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market

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3.5. CFE encourages wider cooperation among EU member states/worldwide as means to achieving common understanding of the fundamental principles of taxation that stem particularly from the challenges in the taxation of the digital economy. Coordination of national rules to prevent loopholes would cut on one of the most important sources of tax uncertainty and will contribute to increased tax transparency. 4. Comments on mandatory disclosure rules 4.1. In respect of the European Parliament recommendation to Member states to consider extending the scope of the EU proposed cross-border mandatory disclosure rules5 to purely domestic cases, whilst coordination and exchange of information could be helpful, the principle of subsidiarity needs to be respected.6 CFE advocates adherence to the OECD BEPS Action 12 principles, which is not a minimum standard, whereby the member states are at liberty to define country specific hallmarks alongside a list of excluded tax regimes and outcomes that are not required to be disclosed. 4.2. Whilst mandatory disclosure rules could be a helpful instrument for the tax authorities to gather information on aggressive tax avoidance schemes, the primary focus should be on the clarity and simplicity of tax legislation. CFE believes that the most sensible approach to avoiding mismatches and loopholes that create opportunities for double non-taxation of income is clearly drafted tax laws. 5. Oversight of self-regulated tax advisers 5.1. In the context of the calls to prohibit the self-regulation of obliged entities and strengthen the oversight obligations pursuant to the 4th EU Anti-Money Laundering Directive7, CFE highlights the diverse scope of the anti-money laundering supervisory regime in respect of tax advisers throughout the continent. 5.2. A mix of professional bodies, national regulators, tax authorities and ministerial bodies perform the supervisory and oversight function throughout Europe, in line with the European Union anti-money laundering obligations. 5.3. Respecting this diversity, CFE welcomes a dialogue on the scope of the oversight obligations for supervisory bodies in the course of implementation of the 5th Anti-Money Laundering Directive following the political agreement of 15 December 2017. 5.4. CFE also welcomes a debate on the role of oversight bodies in the context of the anti-money laundering supervisory regime specifically in ensuring consistency of the approach by the professional body anti-money laundering supervisors. 6. Separation of accounting firms 6.1. CFE member organisations have many members who are associated with accountants. At the level of public entities, there are rules that limit the provision of audit services and advisory services such as tax advice at the same time. In practice, the combination of accountants and tax advisers in the middle market sector (non-public interest entities) has not given rise to structural issues. At the same time the clients in this market appreciate the synergies offered from a joint work environment, such as the one-

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Proposal for a Council Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements of 21 June 2017 6 Article 5 of the Treaty on the European Union 7 Directive (EU) 2015/849 of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing

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stop-shop, lower fees and coordinated services. A separation of these service providers therefore does not seem advisable and CFE would welcome a discussion on the arguments for such a separation. 6.2. CFE has no objections to an incompatibility regime for tax advisers to prevent them from conflict of interest in advising both public authorities and taxpayers. CFE opines however that an appropriate management of conflicts of interest could be preferable. CFE points out that such services are in practice requested by relevant authorities especially for the knowledge and experience such tax advisers have. Authorities are well aware of the background of such advisers and are well able to appreciate the advice given. CFE therefore believes that such an incompatibility would not be appreciated by authorities and would ultimately not be the best option for the general public. 7. Cooperation on tax good governance 7.1. Tax advisers working under the CFE umbrella stand ready to participate in open debate and further cooperation among relevant stakeholders that aims to promote tax transparency, good governance in tax matters, enhanced tax certainty and binding instruments for protection of taxpayers’ rights. 7.2. CFE will continue contributing to the tax transparency debate by providing relevant technical and policy submissions as the most representative association of the European tax advisers. 7.3. CFE remains open to cooperation with the European Parliament and other international stakeholders in all future endeavours for increased tax transparency and tax certainty.

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Opinion Statement PAC 4/2018 on the European Commission proposal for a Directive of the European Parliament and of the Council on the protection of persons reporting on breaches of Union law (‘Whistleblowing’) Issued by the CFE Professional Affairs Committee Submitted to the European Institutions in July 2018

CFE Tax Advisers Europe is a Brussels-based association representing European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE is part of the European Union Transparency Register no. 3543183647‐05. We would be pleased to answer any questions you may have concerning our Opinion Statement. For further information, please contact Wim Gohres, Chair of the CFE Professional Affairs Committee or Aleksandar Ivanovski, Tax Policy Manager, at info@taxadviserseurope.org. For further information regarding CFE Tax Advisers Europe please visit our web page http://www.taxadviserseurope.org/

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1. Introduction This Opinion Statement sets out CFE’s position on the European Commission proposal of 23 April 2018 for a Directive of the European Parliament and of the Council on the protection of persons reporting on breaches of Union law (‘Whistleblowers proposal’ or ‘The proposed directive’)1. CFE has commented on this matter in the course of the consultation on the protection of whistleblowers in the field of tax for the Platform on Tax Good Governance in June 2017, and prior to that, by issuing an Opinion Statement on the European Commission public consultation on protection of whistleblowers in May 20172. This Opinion Statement supplements the previous position papers issued by the CFE on the matter.

2. Policy Intention CFE welcomes the Commission proposal that seeks to establish horizontal rules for protection of persons disclosing breaches of European Union law, specifically in relation to tax. We appreciate the important societal role that whistleblowers play in advancing public policy interests, specifically in reporting tax fraud, corruption, abusive and illegal practices. CFE acknowledges that achieving change in this area must be accompanied by a public debate that highlights the benefits for society by the actions of those individuals that believe that they genuinely disclose wrongful conduct or malpractice. CFE has consistently advocated for measures that promote transparency, that restore public trust and strengthen the integrity of tax systems, as well as the sense of fairness and equity at a more general level. By advancing these aims, the proposals that seek to establish legal channels for individuals to voluntary disclose wrongful conduct are likely to achieve beneficial outcomes that reduce malpractice in organisations and ensure individuals can report without fear of reprisal. Further, from an organisation perspective, a properly channelled and tiered reporting on wrongdoings can serve as a supplementary internal audit tool. CFE thus welcomes this proposed directive but also wishes to further comment on certain aspects of the proposal in relation to taxation that in our view merit further technical refinement.

3. Personal Scope CFE believes that the tiered-level reporting procedure as set out in the Commission proposal will ensure that remedies are in place whilst protecting the process from any disingenuous reporting and will not undermine these genuinely beneficial developments. Such an approach is sensible from both organisational perspective and also from a perspective of an individual who genuinely believes that their information will be helpful for their employer, regulators or the society at large.

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Proposal for a Directive of the European Parliament and the Council of the EU on the protection of persons reporting on breaches of Union law {SWD(2018) 116 final} - {SWD(2018) 117 final} 2 Available on the following link: http://taxadviserseurope.org/publications/

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CFE hopes that the EU’s whistlieblowers’ framework will strike the right balance between protecting individuals who disclose information in the public interest, and those individuals who seek to cause harm by disclosing confidential and commercially sensitive information. CFE recognises that there may be legitimate reasons to override client confidentiality, such as when an adviser or an accountant may be legally required to disclose what would otherwise be confidential information, eg. when they make disclosures related to the domestic or EU anti-money laundering rules, including reporting on tax evasion.3 In this vein, CFE welcomes the establishment of ‘reasonable belief’ as a scrutiny standard, whilst still protecting those who believe that they genuinely report in good faith. Achieving change relies on responding positively to those who disclose malpractice and acknowledging the benefits it brings. CFE also recognises that the whistleblowers protection may need to be extended to persons who do not make an internal disclosure as first step, which may be justifiable in limited circumstances.4

4. Material Scope The proposed directive aims to further enhance transparency in taxation by way of complementing Commission’s recent initiatives on fair taxation of businesses operating in the Single Market. In particular, the proposal highlights the legislative actions aimed at protecting base eroding practices and the reinforced antimoney laundering rules (ATAD and the 5th Anti-Money Laundering Directive, respectively).5 In relation to the tax, Article 1.1.d.) sets out the material scope as a minimum common standard for protection of persons reporting unlawful activities or abuse of law falling within the scope of the breaches, inter alia, in relation to corporate tax arrangements. Furthermore, if the intention of the Directive is to limit the protection in relation to tax to the equivalent to corporation tax, or taxes payable by companies, CFE believes that the policy reasons need to be set out clearly. CFE expects all equivalent enterprises to be within scope, such as companies, charities, partnerships of all forms, trusts with commercial purpose, investment funds etc. The CFE appreciates that breaches of the corporate tax rules whose purpose is to obtain a tax advantage and to evade legal obligations defeat the objectives of legislation, and could have serious negative consequences on the Single Market such as affecting competition and aiding tax evasion. This level playing field argument is doubly important in the context of uncompetitive behaviour by certain companies that may undermine tax revenues that legitimately belong to EU Member states.

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CFE refers to the International Ethics Standards Board for Accountants (IESBA) International Code of Ethics for Professional Accountants, which applies to some CFE member organisations. The amended IESBA Code related to the overrides to client confidentiality, enters into force on 1 January 2020, and some CFE member organisations will become subject to these revisions. The revisions continue to differentiate circumstances where accountants are legally required to disclose what would otherwise be confidential information, and circumstances when accountants voluntarily choose to disclose information in the public interest. 4 Failing to extend whistleblowers protection to individuals who have not followed internal procedures conflicts with existing obligations of members of certain CFE member organisations from the United Kingdom, as well as the UK’s Public Interest Disclosure Act (1998). 5 Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market; and, Directive amending Directive (EU) 2015/849 on the prevention of use financial system for purposes of money laundering or terrorism financing.

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As such, more detail may be required to define the material scope of the widely drawn wording of Article 1.1.d.). Consistent language would bring clarity for both persons who report on breaches of EU law related to corporate tax and organisations alike. At present, the broad wording of Article 1.1.d.) read in conjunction with Article 3(1), which defines breaches as ‘actual’ or ‘potential’ could leave scope for uncertainty. We appreciate that the extension of the scope to cover ‘potential breaches’ has legitimate policy reasons, such as preventing offence from taking place, however, we believe that in a complex area of law such as tax, broad wording may not be helpful.6 Further, due to the fact that the directive sets out ‘minimum standards’ of protection, Member states may introduce more favourable provision for protection of whistle-blowers. In an EU context, this fact, in conjunction with the broad wording of Article 1.1.d) may compound the uncertainty in relation to the material scope of the directive in the area of taxation from a perspective of a reporting person and an organisation. This may be compounded by the fact that inconsistent language could also dissuade whistleblowers from pursuing legitimate concerns, whilst leaving taxpayers and organisations potentially exposed to ‘leaks’ which is not the policy intention of the directive, as understood by the CFE.

5. Tiered Reporting Channels & Standard of Scrutiny CFE welcomes the tiered- level reporting as set out in the proposed directive. The obligation to establish internal reporting channels and procedures will benefit organisations and protect individuals that believe that their information will be helpful for their employer, regulators or the society at large. The proposal establishes a protection only for those persons reporting externally who first made an internal disclosure, where applicable. The proposal therefore rightly seeks to establish tiered-level reporting, ensuring that established procedural guarantees are in place.7 CFE recognises that there may be limited circumstances when whistleblower protection may need to be extended to persons who do not make an internal disclosure as a first step. 8 CFE welcomes the proposal’s requirement for Member States to develop routes for external reporting with dedicated staff and recordkeeping. 6

For instance, under Article 33 (1) (a) of the 4 th EU Anti-Money Laundering Directive Member States shall require obliged entities, and, where applicable, their directors and employees, to cooperate fully by promptly by informing the FIU, including by filing a report, on their own initiative, where the obliged entity knows, suspects or has reasonable grounds to suspect that funds, regardless of the amount involved, are the proceeds of criminal activity or are related to terrorist financing, and by promptly responding to requests by the FIU for additional information in such case; Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC 7 According to Article 13 which sets out the conditions for protection, a person can report externally only after an internal report, where applicable, on reasonable belief that the information was true and within scope of the Directive. As such, the proposal follows the case-law of the European Court of Human Rights in Guja v Moldova which establishes that a disclosure of confidential information cannot be protected where the individual had a recourse to more discrete means to remedy the wrongdoing, Guja v Moldova, App no 14277/04, IHRL 3209 (ECHR 2008), 12th February 2008, European Court of Human Rights; Similarly, the Opinion of the European Parliament’s Committee of Employment and Social Affairs of 24 March 2017 recalls that in the event of false reporting those responsible could be held into account. 8 Failing to extend whistleblowers protection to individuals who have not followed internal procedures conflicts with existing obligations of members of certain CFE member organisations from the United Kingdom, as well as the UK’s Public Interest Disclosure Act (1998).

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On a related point, those individuals who are involved in ‘leaks’ and other undesirable disclosure of confidential information belonging to organisations are likely to cause harm and such inappropriate release should be discouraged. To this end, CFE has expressed a concern that due to the specificity of the tax adviser- taxpayer relationship, as well as the confidentiality of client information, the proposals need to find the right balance among these equally important issues. In general, the client confidentiality principle, where applicable, requires tax advisers to treat as confidential any information received from clients in the course of their work. 9 Considering this right is primarily attached to the client, and is in place to protect the client/ the taxpayer, consideration needs to be given to this principle and the right balance should be struck.10 From this perspective, CFE welcomes the proposed establishment of ‘reasonable belief’ as a scrutiny standard for persons disclosing information on wrongdoings in the public interest. As regards the conditions for protection of reporting persons, Article 13 of the proposed Directive sets out ‘reasonable grounds to believe’ that the information that is disclosed was true at the time of reporting and that the information falls within scope of the Directive. Whist we appreciate that there is mandatory internal reporting for a person to qualify for protection under this Directive, we believe that the proposals strikes the right balance by establishing measures for prohibition of retaliation against the reporting persons. Equally, the detail of the proposal must ensure that the national implementing acts transpose the elements of the directive that effectively protect organisations from retaliatory disclosures.

About CFE Tax Advisers Europe CFE Tax Advisers Europe is a Brussels-based umbrella association representing European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE’s role and mission is to: • Safeguard the professional interests of tax advisers and assure the quality of tax services provided by tax advisers; • Exchange information about national tax laws and contribute to the co-ordination and development of tax policy in Europe; • Maintain relations with the European institutions, the OECD and other international and national bodies, and share with the European Union institutions the tax technical experience and insight of our members from all areas of taxation; • Seek to provide the best possible conditions for tax advisers to carry out their profession; • Inform the general public about the role, mission and the services that tax advisers provide.

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For further information on the client confidentiality principle and the potential issues arising with relation to whistleblowing, please refer to the CFE Opinion statement PAC 2/2017, pages [4-5] available on the following link: http://taxadviserseurope.org/blog/portfolio-items/opinion-statement-pac-2-2017-on-the-european-commission-publicconsultation-on-protection-of-whistleblowers/ 10 As noted supra, CFE refers to the IESBA ethics regime, which applies to some CFE member organisations. The amended IESBA code related to the overrides to client confidentiality, enters into force on 1 January 2020, and some CFE member organisations will become subject to these revisions. The revisions continue to differentiate circumstances where accountants are legally required to disclose what would otherwise be confidential information, and circumstances when accountants voluntarily choose to disclose information in the public interest.

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Opinion Statement PAC 5/2018 on the legal professional privilege reporting waiver set out in Article 8ab(5) of the Council Directive (EU) 2018/822 of 25 May 2018 (DAC6)

Issued by the CFE Professional Affairs Committee Submitted to the European Institutions in July 2018

CFE Tax Advisers Europe is a Brussels-based association representing European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE is part of the European Union Transparency Register no. 3543183647�05. We would be pleased to answer any questions you may have concerning our Opinion Statement. For further information, please contact Wim Gohres, Chair of the CFE Professional Affairs Committee or Aleksandar Ivanovski, Tax Policy Manager, at info@taxadviserseurope.org. For further information regarding CFE Tax Advisers Europe please visit our web page http://www.taxadviserseurope.org/

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Statement Council Directive (EU) 2018/822 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (“DAC6” or “the Directive”) was adopted on 25 May 2018, and published in the Official Journal of the EU on 5 June 2018.1 The Directive is effective as of 25 June 2018 and Member States are now obliged to transpose the Directive into national legislation before 1 January 2020. Taxpayers and tax intermediaries, including tax advisers, are obliged to disclose information on potentially aggressive cross-border arrangements under certain circumstances, in accordance with the Directive and its hallmarks. The Directive also sets out rules on administrative exchange of this information. The reporting should commence on 1 July 2020, however, cross-border arrangements of which the first step of implementation was made between 25 June 2018 and 1 July 2020 are equally reportable before 30 August 2020. In spite of the fact that this new obligation is imposed on intermediaries, such as tax advisers, the Directive itself respects legal professional privilege in accordance with Article 8ab(5)2 and recital 8 thereof. The waiver set out in Article 8ab(5) allows Member States to exempt tax advisers from the reporting obligation where such a disclosure would be in breach of the legal professional privilege under national laws. Tax advisers’ confidentiality is one of their fundamentals obligations, the objective of which is to primarily protect the rights and legitimate interests of the taxpayer. It is equally an essential part of the trust between a tax adviser and a client, the taxpayer. CFE appreciates the diversity of legal professional regulations for tax advisers in individual Member States of the European Union including non-uniform rules that allow tax advisers to be considered within scope of legal professional privilege. Accordingly, the CFE expects that Member States will implement this Directive, and in particular the reporting waiver as set out in Article 8ab(5) in a manner which fully respects legal professional privilege in those Member States where such rights exist. For instance, where the profession of tax advisers, including their rights and duties, including professional confidentiality, is regulated by law, CFE expects that the exception of Article 8ab(5) is fully respected by Member States in the transposition of the Directive into national legislation. CFE therefore considers of utmost importance that those states apply this exception in the course of the implementation, as set out in the Directive. Such an implementation will not endanger disclosing of reportable cross-border arrangements, due to the shift of this reporting obligation to other intermediaries or ultimately to the taxpayer, in cases where the tax adviser is prevented from reporting due to legal professional privilege. This exception is in accordance with the objectives of the Directive, which sets out that the waiver (the reporting exception) is applicable to the extent that the intermediaries operate within the limits of the relevant national laws that define their profession.

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Official Journal of the European Union, L 139, 5.6.2018, pp. 1–13 Article 8ab(5) of Council Directive (EU) 2018/822: “Each Member State may take the necessary measures to give intermediaries the right to a waiver from filing information on a reportable cross-border arrangement where the reporting obligation would breach the legal professional privilege under the national law of that Member State. In such circumstances, each Member State shall take the necessary measures to require intermediaries to notify, without delay, any other intermediary or, if there is no such intermediary, the relevant taxpayer of their reporting obligations under paragraph 6. Intermediaries may only be entitled to a waiver under the first subparagraph to the extent that they operate within the limits of the relevant national laws that define their professions.” 2

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CFE expects that tax advisers will provide assistance to their clients with fulfilment of their disclosure obligations, where applicable. Similarly, where applicable, a taxpayer can also entrust a tax adviser to disclose the information on their behalf. Tax adviser members of the national associations under the umbrella of the CFE stand ready to continue making complex tax systems work and assist their clients to deal with the tax implications of cross-border arrangements, advising on the potential risks too.

About CFE Tax Advisers Europe CFE Tax Advisers Europe is a Brussels-based umbrella association representing European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE’s role and mission is to: • Safeguard the professional interests of tax advisers and assure the quality of tax services provided by tax advisers; • Exchange information about national tax laws and contribute to the co-ordination and development of tax policy in Europe; • Maintain relations with the European institutions, the OECD and other international and national bodies, and share with the European Union institutions the tax technical experience and insight of our members from all areas of taxation; • Seek to provide the best possible conditions for tax advisers to carry out their profession; • Inform the general public about the role, mission and the services that tax advisers provide.

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Results for the CFE Professional Affairs Committee Survey on the implementation status of the 4th Anti-money laundering directive EU/2015/849

April 2018

BACKGROUND EU Member states had until 26 June 2017 to implement the 4th EU Anti-Money Directive (“AMLD”) into domestic legislation. The 4th AMLD reinforces the existing rules by introducing the following changes: reinforcing risk assessment obligation for certain obliged entities; setting transparency requirements about beneficial ownership for companies, facilitating cooperation and exchange of information between Financial intelligence units, establishing a coherent policy towards non-EU countries that have deficient anti-money laundering (“AML”) and terrorism-financing rules, and, reinforcing the sanctioning powers of competent authorities.

AIMS Tax advisers are considered obliged entities for AML purposes pursuant to Article 2 of the 4th AMLD. The AML supervisory regime is complex and the 4th AMLD poses many practical questions for tax advisers and supervisors of the AML compliance. The questionnaire aims to gather data of the countries on the implementation status of the 4th AML Directive, in particular regarding national risk assessments, beneficial ownership registers, your supervisory obligations, if any, the national oversight regime, as well as issues that you encounter related to identification of risks and compliance in general. The countries which responded to the questionnaire are: Austria, Belgium, Croatia, Czech Republic, Italy, Lithuania, Luxembourg, Russia, Spain, the Netherlands and the United Kingdom.

SURVEY RESULTS

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Question 1 - What is the implementation status of the 4th AML Directive in your country? Please specify the national implementing legislation, when was it implemented and the date of entering into force.

Austria

WTBG 2017 (BGBl I Nr. 137/2017, 15.9.2017) WiEReG (BGBl I Nr. 136/2017, 15.9.2017) KSW-GWPRL (ABl-KWT Sondernummer II/ 2017, 22.12.2017)

Belgium

The directive has been implemented by the law of 18 SEPTEMBER 2017 on the prevention of money laundering and terrorist financing and on the restriction of the use of cash.

Croatia

Implemented with Zakon o sprečavanju pranja novca I financiranje terorizma (NN 108/2017) effective as from 1.1.2018.

Czech Republic

In the Czech Republic, the 4th AML Directive was implemented by the Act no. 368/2016 Coll. which came into force partly in 1st January 2017 and the beneficial ownership register part is going to come into force in 1st January 2018. This act amended Act no. 253/2008 Coll. – The Anti-money Laundering Act. Ireland has since November 2016 required companies to set up and maintain a register of their beneficial owners in accordance with the 4th AML Directive (S.I. No. 560 of 2016). Ireland has not yet set up a central register of beneficial ownership of companies. It is understood that a central register will be set up in the first quarter of 2018 and will be maintained by the Companies Registration Office (CRO).

Ireland

Ireland has not yet taken steps to set up a central register of beneficial owners of trusts. It is understood that Ireland has been waiting for the finalisation of the 5th AML Directive before doing so as the scope of requirements on trusts was under debate at EU level. It is thought likely that the Irish Revenue will maintain the central register for trusts when set up. In terms of the implementation of other elements of the 4th AML Directive, it is understood that a Bill is currently being drafted which will be entitled the “Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill”.

Italy

The 4th AML Directive was implemented in Italy by the Legislative Decree 90/2017 that reformed the existent Legislative Decree 231/2007. The reformed text of the Legislative Decree 231/2007 came into force on July 4th, 2017.

Lithuania

4th AML Directive is already implemented in the legislation of the Republic of Lithuania. On 29th June 2017 amended Law on the Prevention of Money Laundering and Terrorist Financing was adopted. It came in to force on 13th July 2017 (from here on – AML Law).

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Luxembourg

The implementation status of the 4th AML Directive in Luxembourg is still in progress: a draft bill has been introduced.

Russia

Federal Law No. 115-FZ dated 07.08.2001 on Anti-Money Laundering, Combating the Financing of Terrorism – national legislation.

Spain

The status of the 4th AML Directive implementation in Spain is still in process. There’s no legislation changed yet about this 4th Directive. There has been a public consultation trying to get all the proposals and opinions from all the subjects that could have an obligation change due to the Directive or due to the changes in the main representative associations from collectives. This consultation ended up on June 10th of 2017. Since this consultation, there hasn’t been any notice about the 4th AML Directive implementation yet, being still applicate the 10/2010 of April 28th of 2017 law on AML and all the regulation that develop all its content (RD 304/2014 from June 5th).

The Netherlands

There is a bill sent to parliament containing part of the changes to be implemented. Notably the UBO register is left out. This bill is expected early 2018. It is expected parliament will discuss both bills at the same time therefore at present it is expected that the new legislation will enter into force at the earliest on 1 July 2018.

United Kingdom

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 came in to force on 26 June 2017 http://www.legislation.gov.uk/uksi/2017/692/made

Question 2 - To what extent the national implementing act follows the provisions of the 4th AML?

Austria

Belgium

Scope of obligations is risk based as required by the 4th AML. RISK IDENTIFICATION AND AWARENESS AS STARTING POINT. In order to be able to build their own RBA, firms need to have a clear, consistent, documented and data driven view on their ML/FT risks. En matière d’“évaluation des risques”, une nouveauté importante est introduite par l’instauration d’une procédure dite en “cascade” pour l’identification et l’évaluation des risques de blanchiment et de financement du terrorisme et, en matière d’“obligations de vigilance”, l’approche basée sur les risques est d’application. RISK BASED APPROACH (“RBA”) BASED ON AN ENTERPRISE WIDE RISK ASSESSMENT (“EWRA”) : A RBA as requested by the new Law implies that, in a more clear way than before, all measures (organisation, business and transaction wise) should aim at avoiding /mitigating the risk of being misused for ML/FT purposes. The RBA should therefore enable financial institutions to take less profound measures in situations where risks are limited. The resources that are redeemed should be used for more profound measures in situations

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where risks are higher. The set-up of the institution’s RBA should be based on an actual and profound knowledge and understanding of its ML/FT risks. Therefore, institutions are required to set-up and perform a general AML/CFT risk assessment (“Enterprise Wide Risk Assessment” – “EWRA”) at the level of their entity. This EWRA should be documented, be based on actual data and take into account the entities’ customers products and services offered, transactions, countries/geographical zones and distribution channels. More detailed guidance on appropriate business linked risk factors can be found in the European Supervisory Authorities (ESA’s) Risk Factors Guidelines (see our regulatory newsflash of 6 July 2017). All policies, procedures, processes controls,… should be risk based taking into account the necessary granularity at the level of the firm. CUSTOMER DUE DILIGENCE (“CDD”). Introduction of (non-exhaustive) lists of risk variables and risk factors that need to be taken into account when determining the ML/FT risk profile of the customer (and consequently the extent of the customer due diligence measures to be applied). Existing exemptions for simplified identification (financial institutions, listed entities, public authorities,…) are no longer included: Simplified CDD can only be applied after an individual assessment of the concerned risks. Strengthened definitions and CDD requirements will impact risk categories and the review of existing customers (adapted definition of UBOs, inclusion of domestic PEPs,…). More detailed CDD information and documentation requirements will lead to longer and more thorough onboarding process, more review and analysis, etc. ULTIMATE BENEFICIAL OWNERS (“UBOS”) Strengthened definition for UBOs of companies (>25% control/ownership only considered as an indication of UBO, management only considered as UBO if no other UBO can be found,…) Detailed definition for UBOs of trusts, foundations, associations,… UBO identification will require a clear view on the ownership/control structure of the legal entity Introduction of a requirement to set up a central public register for UBO’s by the Treasury department of the FPS Finance. DEFINITION OF POLITICALLY EXPOSED PERSONS (“PEPS”) Extended definition including, amongst other, domestic PEPs. APPROPRIATE LEVEL OF CDD. The appropriate level of CDD measures (simplified, normal or enhanced) will need to be determined taking into account the institution’s RBA. More detailed guidance on appropriate simplified and enhanced CDD measures can be found in the ESA’s recently published final Guidelines on simplified and enhanced CDD Next to measures identified by the institutions in setting up their RBA, specific enhanced CDD measures are set by the new Law for the following possible risks:

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PEPs

Correspondent relationships

Customers where the identity is verified during the business relationship (and not before)

Customers settled or residing in third countries considered as high risk by EU and FAT

Specific cases related to Serious fiscal fraud whether organised or not (link to specific countries)

ORGANISATION Driven by the RBA, the new Law extends and strengthens the requirements for the institution’s AML/CFT organisational framework. Documentation is the key. The policy, process and control framework (including analysis, risk assessment process,…) should be documented in detail, including evaluation, updates, validation and decision-making. Also the practical application of this framework (client acceptance, internal investigations, alert handling,…) will need to be fully and consistently documented. RESPONSIBILITY FOR THE PREVENTION OF ML/FT Next to the existing AML Reporting Officer (AMLRO or “AML Compliance Officer” as it is now called in the Explanatory Memorandum to the new Law), a responsible person has also to be designated at the level of the Executive Committee. This person will be appointed as final responsible person for AML/CFT and will make sure that the effective management takes the necessary AML/CFT responsibilities. POLICY FRAMEWORK. The new law lists a minimal set of required internal measures and control procedures including such as risk management models, client acceptance policy, policies and procedures, internal controls,… WHISTLE BLOWING MECHANISMS. Internal (to the AML responsible persons – see above) and external (to the concerned authorities) whistle blowing mechanisms should be installed related to violations of the applicable requirements. RECORD KEEPING. The period for keeping the required data will be gradually extended from the existing 5 year period to 10 years as from 2020 (7/8/9 years in respectively 2017/2018/2019). Furthermore, after this time period, the concerned data need to be erased.

Croatia

No

Czech Republic

The Czech legislators decided to restrict the range of obliged entities in case of gambling services providers, e.g. raffles, bingos or scratch cards due to a low risk. Other provisions of the Directive are followed.

Ireland

Ireland’s implementation to date has been in accordance with the 4 th AML Directive.

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Italy

The Italian implementing act (as above) fully follows the provisions of the 4th AML Directive; with these remarkable exceptions, that can be viewed as “gold plating” previsions: (i) the anonymity of the person/entity who reports a SAR is not fully guaranteed, since the judicial authority can ask for its revelation; (ii) the retention period of the data and documents regarding the CDD is extended from 5 to 10 years (iii) new retention obligations are wider as they are set in an undetermined way regarding either the contents or its application; (iv) customer due diligence measures require, during the risk assessment, to obtain information about the client financial and economic position.

Lithuania

The purpose of AML Law is to establish measures for the prevention of money laundering and / or terrorist financing and the authorities responsible for the implementation of measures to prevent money laundering and / or terrorist financing. AML Law is intended to ensure the application of the European Union legislation. There has not been any extension of the scope of obligations.

Luxembourg

National implementing act is not finalised yet.

Russia

Federal Law No. 340-FZ dated 27.11.2017 on additional measures to bring the national legislation in accordance with the 4th AML Directive.

Spain

There’s no chance to analyse this answer because Spain doesn’t have any 4th AML Directive implementation yet.

The Netherlands

On the whole the proposed legislation stays very close to the 4 th directive, however regarding the UBO register there was a consultation which proposed that the register is open to the public although at a fee. The set of data would be slightly less broad. Also extra data would be requested for the benefit of the authorities only e.g. social number. Article 47(3) of the Directive required tax advisers and accountants to ‘take the necessary measures to prevent criminals convicted in relevant areas or their associates from holding a management function in or being the beneficial owners of those obliged entities’

United Kingdom The UK has interpreted this as requiring supervisors to undertake criminal checks on beneficial owners, officers and managers of supervised firms (see Regulation 26(1)) Independent checks must be carried out; self-certification is not sufficient.

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Question 3 - What is the implementation status of the beneficial ownership register?

Austria

Belgium

WiEReG (BGBl I Nr. 136/2017, 15.9.2017) Register of benificial ownership is online since 01/2018. Deadline for registrations 1.6.2018

Introduction of a requirement to set up a central public register for UBO’s by the Treasury department of the FPS Finance. Practical details for the set-up of this register will be elaborated by royal decree. It is expected that the UBO Register will be operational by the summer of 2018. . However the new Law states that entities cannot rely only on the information in the register for the identification and verification. Additional measures remain necessary.

Croatia

The most notable change in relation to the current AML Act in force is the establishment of the Beneficial Owner Register as the central electronic database on the beneficial owners of legal entities. The AML Act prescribes that legal entities established in Croatia, ie companies, subsidiaries of foreign companies, associations, foundations and institutions ("Entities") are obliged to have and keep corresponding, accurate and updated information about their: i. beneficial owner(s), comprising of: first name and surname, country of residence, date of birth, ID card information, citizenship and nature and scope of beneficial ownership; and ii. ownership structure – which for companies also includes information on shares, stakes and other participation in ownership.

Czech Republic

The beneficial ownership register is up to be launched in 1st January 2018.

Ireland

See response to Q1 – only the requirement for companies to collect and maintain up to date beneficial ownership information has been legislated for to date. No central register of beneficial owners has been established or legislated for. No legislation placing obligations on trusts or providing for a central register of trusts has been introduced. Provisions relating to the collection and sharing of that information has not yet been enacted – it is envisaged that the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill will make provision for this.

Italy

Since now there was not any implementation of the BO register.

Lithuania

Obligation to register in the beneficial ownership register will come in to force on 1 January 2019.

Luxembourg

A draft bill has been introduced few days ago.

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Russia

Legal entities are responsible for operating registers.

Spain

The Beneficial ownership register (BWR) is not created in Spain yet, as any of the 4th AML Directive obligations because of its non-implementation. Nevertheless, in Spain we’ve a notary BWR since 2004 and it allows much collaboration between the Spanish public administrations that requires it. It’s called INDICE ÚNICO INFORMATIZADO in charge of the general counsel of the notary. In addition, the Spanish notary set up the Beneficial Ownership Data Base. It allowed an even more intense collaboration between the notary association and the Spanish public administration, especially on the fight against the AntiMoney Laundering.

The Netherlands

See above. The register will be maintained by the Chamber of Commerce. The register is being developed.

A register of Persons with Significant Control (PSC) was set up in June 2016. This is held by Companies House and is publicly accessible.

United Kingdom

A PSC is someone that holds more than 25% of shares or voting rights in a company, has the right to appoint or remove the majority of the board of directors or otherwise exercises significant influence or control. HMRC have also been tasked with setting up a trust register where the AML Supervisors will be required to supply details of supervised firms which provide Trust and Company Services. This is in addition to a trust register to record details of settlors and beneficiaries.

Question 4 – Is the beneficial ownership register implemented with separate legislation?

Austria

Yes

Belgium

The UBO register is aimed at providing adequate, accurate and current information on the beneficial owners, referred to in Article 4, 27°, a), of companies created in Belgium, the beneficial owners referred to in Article 4, 27°, b), of trusts, the beneficial owners referred to in 4, 27°, c), of foundations and (international) non-profit organisations and on the beneficial owners referred to in Article 4, 27°, d), of legal arrangements similar to fiducial or trusts. Practical details for the set-up of this register will be elaborated by royal decree

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Croatia

The special regulation which will be rendered by the Minister of Finance within six months from the effective date of the AML Act.

Czech Republic

The UBO register is implemented in The Public Registers Act which is separated from The AML Act. As noted above, Ireland’s central register of beneficial ownership has not yet been legislated for. Since November 2016, Irish incorporated companies have been required to set up and maintain a register of their beneficial owners – this has been legislated for through secondary legislation (statutory instrument). The primary legislation that enables this is the European Communities Act 1972.

Ireland

It is understood that the legislative footing to the central register of beneficial ownership of companies will also be legislated for through a separate statutory instrument. It is also understood that the legislation relating to a central register of beneficial ownership of trusts will be in the form of a separate statutory instrument. As noted above, it is foreseen that the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill will legislate for the other requirements of the 4th AML Directive.

Italy

When implemented the BO register will be set by a delegated secondary legislation

Lithuania

Beneficial ownership register at the moment is regulated in the29th June 2017 amended Law on the Prevention of Money Laundering and Terrorist Financing. No separate legislation for beneficial ownership register.

Luxembourg

It is going to be implemented with separate legislation

Russia

No

Spain

There’s no news about this so we can’t know how it’s going to be in the near future.

The Netherlands

It is

United Kingdom

The requirements to keep a PSC register are set out in Part 21A of and Schedules 1A and 1B to the Companies Act 2006 (as inserted by the Small Business Enterprise and Employment Act 2015) and in The Register of People with Significant Control Regulations 2016

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Question 5 – Could you please specify which entities are responsible for setting up and operating the register(s)? Which entities are responsible for entering the UBO information (eg legal entities, advisers, accountants etc)?

Austria

Legal entities are responsible for registrating and providing required information. Tax advisers, accountants, lawyers etc. may be authorized to enter data on behalf of legal entities.

Belgium

Practical details for the set-up of this register will be elaborated by royal decree

Croatia

The Register will be operationally led by the Financial Agency (FINA). Entities (except companies whose financial instruments are traded on a stock exchange or regulated market) shall be obliged to provide this information. Legal entities are credit institutions, payment service providers, investment funds, pension funds, factoring companies, electronic money institutions, legal and physical persons providing forfeiting services, audit companies, tax advisors etc)

Czech Republic

The UBO register is administrated by regional courts. The legal entities themselves and trustees are responsible for entering the UBO information.

All Irish incorporated companies are required to set up and maintain a register of beneficial ownership. The primary responsibility for collecting the beneficial ownership information for each company lies with its directors / the chief executive officer of the company. Where this information is not readily available to the company, it may require the shareholders to provide the required information where they are a beneficial owner.

Ireland

The precise collection and reporting mechanism to the central register is not yet known but it is anticipated that the statutory instrument that gives legislative footing to the central register of beneficial ownership will place an obligation on companies to provide the information about their beneficial owners to the central register. It is unknown at this stage what the details of the requirements on trusts will be.

Italy

The entities responsible for setting up, operating and entering the BO register are: (i) all the entities with legal personality obliged to register at the Business Register of the Italian Chamber of Commerce (including trusts with relevant legal effect for tax purposes); (ii) the other private legal entities with legal personality not obliged to register at the Business Register of the Italian Chamber of Commerce (associations, foundations, partnerships)

Lithuania

State Enterprise Centre of Register is responsible for setting up and operating beneficial ownership register. According to the Article 25 part 1 of AML Law all legal entities which are registered in the Republic of Lithuania shall receive, renew and save adequate, accurate and current information on beneficial ownership. Exception for legal entities which are controlled by the State or Municipality is applicable.

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Luxembourg

GIE RCSL will be responsible for setting up and operating the BO register. Each Luxembourg entity (expect listed companies) will be responsible for entering its own UBO information.

Russia

Legal entities

Spain

Because we have no law about it, we can’t answer this question. Nevertheless, we suppose that the entire obligated subjects are going to be obligated to register all its Beneficial Ownerships, organism that will be probably charged from the “Registro Mercantil”.

The Netherlands

Chamber of Commerce. The entities seated in the Netherlands will be obliged to enter the UBO information.

United Kingdom

Companies are required to submit the information to Companies House which holds the register.

Question 6 – Who has access to the beneficial ownership registers?

Austria

Access to the register is possible for authorities, legal representatives (e.g. tax advisers, lawyers, notaries) ans persons with legitimate legal interest.

Belgium

The Administration of the Treasury referred to in Article 73 is in charge of collecting, retaining, managing and checking the quality of the data and providing the information referred to in the first paragraph, in accordance with the provisions of this Law and the legal and statutory provisions allowing the initial collecting of these data. Practical details for the set-up of this register will be elaborated by royal decree Information from the Register will be accessible to (i) authorised officials in the Anti-Money Laundering Office (the "AML Office"), (ii) (ii) authorised persons in state bodies (eg Ministry of Finance, Croatian National Bank, Croatian Financial Services Supervisory Agency, Ministry of the Interior, State Attorney's Office, courts, etc), and

Croatia

(iii) authorised persons in the entities which are obliged to undertake measures relating to the prevention and detection of money laundering and terrorism financing when conducting customer due diligence. Limited information from the Register may also be provided to interested parties which submit a reasoned application to the AML Office and prove justified legal interest.

Czech Republic

The UBO register itself is not public, only limited number of subjects with specific lawful reasons has access to the information contained in it.

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As noted above there is no central register of beneficial ownership of companies or trusts yet.

Ireland

Italy

It is expected that the central registers will not be publicly available but access to the central register will be given to a defined cohort of persons, e.g. financial institutions conducting customer due diligence, police forces, tax and legal advisors, etc. as well as other persons with a “legitimate interest”. As the central registers are not yet set up the details of who might be considered to have a “legitimate interest” and hence access to the central registers is not yet known.

The entities who can access the BO registers are: a) the Ministry of Economics and Finance; b) the sectorial supervisory authorities; c) the Italian financial intelligence unit; d) the anti-mafia investigative Directorate; e) the Guardia di Finanza (the Italian Financial Police) operating in cases as provided by the law by means of the Nucleo Speciale di Polizia Valutaria (a Guardia di Finanza special branch), without any restriction; f) the national anti-mafia Directorate; g) the national counterterrorism Directorate; h) the judicial authority, in accordance with its institutional responsibilities; i) the competent authorities who combat tax evasion, according to the access mode to guarantee the pursuit of this objective, set out in a special Decree of the Minister of economy and finance, in consultation with the Minister of Development; j) the 4th AML Directive obliged entities responsible for supporting the obligations prescribed during the customer due diligence, following accreditation and upon payment of fees; k) upon payment of fees, entities who hold a relevant legal and differentiated interest, in those cases where the knowledge of beneficial ownership is necessary to cure or defend, during a court proceeding, a legally protected interest corresponding to a situation, when they have concrete reasons and documented, to doubt that the ownership actual is different from the legal; the interest must be direct, concrete and actual and, in the case of representative bodies of widespread interests, should not coincide with the individual interests of category represented. Access to beneficial ownership information may be excluded where the information relates to people unable or minor of age or where access exposes the beneficial owner at risk to their own safety. JADIS data is provided to: 1) Participants of legal entities – if their data are entered in the JADIS database;

Lithuania

2) legal entities that have submitted their participants' data - have the right to receive all the data of their participants and their lists; 3) state institutions and bodies entitled to receive all data of legal entities' participants and their lists for the fulfillment of the functions prescribed by laws and other legal acts; 4) natural and legal persons who are entitled to receive data in cases established by law.

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Luxembourg

Access will be granted to 3 groups: - AML competent national authorities, - Self-regulated bodies (OEC included), - People demonstrating a legitimate interest.

Russia

Federal Tax Service of Russia and Federal Financial Monitoring Service (Rosfinmonitoring)

Spain

As the 5th answer there’s no new about it, nevertheless, after reading the 4th AML Directive, we can deduce that every organism interested in the Anti-Money Laundering as “SEPBLAC” or “MINECO”, all the obligated subjects and everyone that has an legitimate interest (this last one is very controverted because there’s no correct definition of the concept yet).

The Netherlands

See above. Also tax administration will probably have access.

United Kingdom

It is publicly available

Question7 – Are there any compliance regulations that need to be implemented further to the 4 th AMLD implementing acts?

Austria

4th AMLD is fully implemented

Belgium

The 5th AMLD

Croatia

The special regulation which will be rendered by the Minister of Finance

Czech Republic

No, currently the 4th AML Directive has been fully implemented.

Ireland

As most of the implementing legislation has not been published, it is not possible to comment on whether additional compliance regulations will be required to be implemented.

Italy

Yes. In Italy, regulatory procedures need to be set for auditors, accountants, professional consultants and tax advisors (“the practitioners”). Regulatory procedures must be agreed between CNDCEC (Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili _ National Professional Body of Certified public accountants, auditors and advisors) and CSF Comitato di Sicurezza Finanziaria (Financial Security Committee).

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Lithuania

No additional regulation is needed for the 4th AML implementation in the Republic of Lithuania.

Luxembourg

We are not aware of such compliance regulations

Russia

-

Spain

We are not noticed about all the outstanding Directives to implement in Spain. Nevertheless, we know that as many Countries in the EU, quite a lot of Directives to implement yet. For example, there’ve been a notice about the hypothecary Directive that Spain haven’t implement yet being accomplished the maximum to do it.

The Netherlands

Definitions of UBO will be laid down in a royal decree (legislation of lower rank than a law). This does not have to pass parliament.

United Kingdom

None

Question 8 – Who is responsible for oversight of the 4th AML compliance at the national level?

Austria

Several authorities, professional bodies (e.g. KSW is oversight body for tax advisers).

Belgium

The Minister of Finance, the Administration of Treasury, the National Bank of Belgium, the Financial Services and Markets Authority, the Federal Public Service Economy, SMEs, SelfEmployed and Energy, the Supervisory Board of Auditors, the Institute of Tax Accountants and Tax Consultants, the Institute of Accounting professionals and Tax Experts, the National Chamber of Notaries, the National Association of Bailiffs, the President of the Bar Association, the Federal Public Service Home Affairs, the Gaming Commission

Croatia

Supervision over the obliged entities is the responsibility of the Croatian National Bank, the Financial Inspectorate, the Croatian Financial Services Supervisory Agency and the Tax Administration.

Czech Republic

The general AML obligations supervisor is the Financial Analytical Office which was created by the 4th AML Directive implementation act on 1st January 2017 by transformation of a financial analytical department of the Ministry of Finance to a separate body.

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Ireland

Ultimately the Department of Justice and Equality is responsible for ensuring compliance with the requirements of the 4th AML Directive (Anti-Money Laundering Compliance Unit). However, compliance responsibilities are devolved to various other bodies e.g. the Irish central bank, the Irish police, regulatory bodies (e.g. legal or accountancy), etc.

Italy

The CNDCEC at central level and the local professional bodies are responsible for oversight of the 4th AML compliance. At local level, even the Disciplinary Councils had an important role, since they have the power to carry out disciplinary sanctions against colleagues who have disregarded the rules of professional ethics and law. Supervisory bodies for the measures of AML law are: 1) Financial Crime Investigation Service;

Lithuania

2) The Bank of Lithuania; 3) Department of Cultural Heritage, Gambling Supervisory Service, Lithuanian Bar Association, Lithuanian Chamber of Auditors, Lithuanian Notaries 'Chamber, Lithuanian Bailiffs' Court, Lithuanian Chamber of Commerce - according to their competence.

Luxembourg

Government is responsible for oversight of the 4th AML compliance at the national level.

Russia

The Federal Financial Monitoring Service (Rosfinmonitoring) is a federal executive body responsible for combating money laundering and terrorist financing

Spain

We’re not noticed about any responsible to check the amount of accomplishment of this 4th AML Directive in Spain.

The Netherlands

Several regulators are appointed, for accountants and tax advisers there is an independent regulator the BFT Bureau for Financial Oversight. Lawyers are self regulated

United Kingdom

HM Treasury and the Home Office. A new body – the Office for Professional Body AML Supervisors will take effect from January 2018. Its role is to oversee the work of and ensure consistency of supervision approach by the professional body AML supervisors. The tax authority (HMRC) and the Financial Conduct Authority which are government body Supervisors will not be overseen by OPBAS but they have undertaken to apply the same standards required by OPBAS.

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Question 9 – What is the status of the national risk assessment in your country?

Austria

Preparations have started for updating the national risk assessment. https://www.bmf.gv.at/finanzmarkt/geldwaescheterrorismusfinanzierung/Nationale_Risikoanalyse_Oesterreich_PUBLIC.pdf (2015) The coordinating bodies take the necessary measures to identify, assess and mitigate the ML/TF risks that Belgium faces, as well as any related data protection issue.

Belgium

>At the end of January 2016, the first part of the analysis (the analysis of money laundering threats) was finalised and forwarded to the Ministerial Coordination Committee for Combating Money Laundering of Illicit Origin. This analysis of money laundering threats has identified the most threatening profiles among 32 profiles (business sectors, individuals or groups of individuals) and has already made recommendations with regard to the most threatening profiles. The second part of the bleaching vulnerability analysis was completed in March 2017. The Anti-Money Laundering Coordination Board has also made a series of proposals to the Ministerial Committee of the same name for the establishment of a real AML policy. >The Terrorist Finance Platform completed the analysis of threats, vulnerabilities and risks to terrorist financing in Belgium, which consisted of verifying whether the threats and France Télécom vulnerabilities identified at international level also applied to Belgium. No document has been published until now. they have to prepare a risk assessment report, each insofar as it concerns them and six months after publication of this Law at the latest. They then update this report every two years or more frequently if circumstances warrant this.

Croatia

No information

Czech Republic

The first round of NRA, coordinated by the Financial Analytical Office, took place between 2015 and 2016. The report was approved by the Government on 9 th January 2017.

Ireland

Published in October 2016 – click here

Italy

In Italy, last NRA was made in July December 2014.

Lithuania

National risk assessment of the Republic of Lithuania was performed in 2015 and published in 2016. According to the AML Law National risk assessment for money laundering and terrorist financing is carried out at least every 4 years.

Luxembourg

As far as we know, it has been performed but not published yet.

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Russia

-

Spain

Knowing the fact that there’s an over national risk report from de European Commission, we have not been noticed about any Spanish risk report in Anti-Money Laundering and terrorism financials. Nevertheless, we have one of those risk reports in Spain created in 2014 jointly the GAFI (FATF) in Spain. So the new risk report is yet to be created and published.

The Netherlands

United Kingdom

Should be published this week.

The NRA was issued on 26 October 2017 https://www.gov.uk/government/publications/national-risk-assessment-of-moneylaundering-and-terrorist-financing-2017

Question 10 – What is the scope of the national risk assessment (NRA)? Is your NRA based on the EU Commission SNRA of June 2017?

Austria

The NRA is based on the „National Money Laundering and Terrorist Financing Risk Assessment (February 2013)“

Belgium

Not Yet. The sectoral risk analysis carried out in 2014 is based on public documents (annual CTIF reports, economic statistics or equivalent) and on private sources and information received from members, such as the biannual LAB questionnaire, or other information from the national risk analysis (see answer to question 9). No document has been published until now This analysis will benefit from regular updates based on new typologies and NARS results, including

Croatia

Yes

Czech Republic

The National Risk Assessment assesses risk of legal professions in general. Among others the main risks are purchase/sale of an immovable property, establishment and administration of legal entities and trusts and services connected to these. This NRA does not contain separate analysis for tax advisors, parts of the assessment are subject to confidentiality and is not intended for public publication and moreover is available only in Czech language.

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Ireland

The scope of the NRA may be viewed from page 5 onwards in the report linked above at Q9. As the NRA was published prior to the SNRA published by the EU Commission, it is not based on the SNRA. We understand that the Irish NRA will be “kept up to date.” Comments on risk areas identified concerning tax advisers may be viewed from page 62 onwards.

Italy

The NRA scope consists in identifying and analysing the risks of money-laundering and terrorist financing, aimed at the development of intervention guidelines for mitigation of the same and adoption of a risk-based approach to the activity of AML/CFT (antimoney laundering and countering the financing of terrorism). This approach requires that AML/CFT policies and measures be carried out in proportion to the risks they face. Italy NRA is not already based on EU Commission SNRA of June 2017. The National Risk Assessment of Money Laundering and Terrorist Financing is carried out in order to determine the existing risk of money laundering and terrorist financing in the Republic of Lithuania and its level and to ensure that these risk mitigation measures are selected.

Lithuania Lithuanian National Risk Assesment please find here: http://www.fntt.lt/data/public/uploads/2016/10/d3_lnra2015.pdf

Luxembourg

There is no sectorial NRA. The risk assessment criteria are: Structure (size, fragmentation / complexity), ownership / legal structure, products/activities, geography (international business/ flows with risky geographies), clients (volume, risk), channels, typical ML/FT methods.

Russia

-

Spain

We can’t answer about this aspect because of no having Spanish risk report yet.

The Netherlands

We are awaiting the NRA

United Kingdom

There does not appear to be any reference to the SNRA in the UK NRA. SNRA was probably issued too late to be taken in to account.

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Question 11 – Do you have AML supervisory obligations as professional body? If you do not, please specify which body is responsible for AML supervision of tax advisers.

Austria

KSW is the supervisory authority and responsible for AML supervision of tax advisers. Yves. Supervisory authorities or, where appropriate, authorities designated by other laws may issue regulations that apply to the obliged entities under their competence and that complete the provisions of Books II and III and their implementing decrees on a technical level, taking into account the national risk assessment § send circulars, recommendations or other forms of communication to the obliged entities in order to clarify the scope of the obligations arising from the aforementioned provisions for these entities;

Belgium

§ take measures to raise the obliged entities’ awareness of ML/FT risks; and § take measures to inform the obliged entities of the developments in the legal AML/CFTP framework The supervisory authorities shall exercise their supervision based on a risk assessment. To that end, we shall ensure that we have a clear understanding of the ML/FT risks present in Belgium, based on relevant information concerning national and international risks, including the report drawn up by the European Commission pursuant to Article 6(1) of Directive 2015/849 and on the national risk assessment referred to in Article 68;, based on the frequency and intensity of on-site and offsite supervision on the obliged entities’ risk profile.

Croatia

Supervision over the tax advisers is the responsibility of the Financial Inspectorate, the Croatian Financial Services Supervisory Agency and the Tax Administration.

Czech Republic

Yes, according to the AML Act, the Chamber has the capacity to carry out an inspection of AML obligations compliance on the initiative of the Financial Analytical Office. The Disciplinary Commission has the capacity to impose disciplinary measures to a tax advisor for breaching the AML obligations.

See comments on page 62 / 63 of the NRA linked above – list of prescribed accountancy bodies in Ireland. The Irish Tax Institute is not an AML supervisory body. However, many of our members are dual members i.e. also a member of an accountancy body or also a member of the legal profession.

Ireland Members of the Irish Tax Institute who are lawyers are regulated by the legal profession, while Irish Tax Institute members who are also accountants are regulated by that accountancy body. Where individuals are members of the Irish Tax Institute only, these are regulated by the Department of Justice (see page 63 of the NRA document).

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Italy

The professional body obligations are the following: (i) set the regulatory and practical procedures for practitioners (ii) control that members are compliant with the legislation (iii) set the professional training for practitioners (iv) set criteria and methodologies for the analysis and evaluation of professional

Lithuania

Association of Lithuanian Tax Advisers do not have supervisory obligations as professional body. However, there is no such body as supervisory professional body for the tax advisers in the Republic of Lithuania yet.

Luxembourg

The “Ordre des Experts-Comptable” has AML supervisory obligations as professional body.

Russia

Our Chamber as professional body does not have AML supervisory obligations.

Spain

We’re not a supervision organism of obligations. There’s no specific supervision organism to tax advisors. Nevertheless, the “SEPBLAC”, charged to oversight the AML accomplishment.

The Netherlands

NOB does not have AML supervisory obligations. See above.

United Kingdom

Yes. The CIOT is a Supervisory Body and we supervise approximately 850 firms. (Many of our members will be supervised by another professional body such as the ICAEW.)

Question 12 – What issues or problems have you encountered in the context of your AML supervisory obligations? If not a supervisory body, what issues have you identified in your cooperation with the national AML supervisor of tax advisers?

Austria

The supervisory system is set up at the moment, there are no specific experiences or problems right now.

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Belgium

In addition to the regulation, the circular and the procedures manual, we have proposed diagrams and identification forms and decision trees in addition to support the fact that the risk approach, which is the guiding principle of the Due Diligence (AML) requires proper organization and procedures within the firm, including the requirement to appoint a law enforcement official in the application of the "10 Professionals" rule. The risk dimension is also included in the quality review, of which AWW supervision is an important component.

Croatia

No information.

Czech Republic

The law do not provide unambiguous range of capacity to conduct these controls, however, the Financial Analytical Office requires us to conduct systematic controls. Thus we have proceeded to amend the Statute of the Chamber so it has the option to do so.

Ireland

The Irish Tax Institute is not a supervisory body. No issues identified when cooperating with the national AML supervisor, the Department of Justice.

Italy

The principal issue in Italy is there in no prevision for professionals of a transitional period for the enforcement of the new AML previsions, with the relevant consequence that they are substantially non-enforceable if the regulatory procedures are not set.

Lithuania

There is no such body as supervisory professional body for the tax advisers in the Republic of Lithuania yet.

Luxembourg

Peer review (organized and supervised by the OEC) in AML/CFT (framed by an internal regulation and dedicated guide).

Russia

-

Spain

We haven’t been noticed about any problem.

The Netherlands

In the beginning we had discussions about applications of the law. Nowadays we still differ in respect to the exemption in case of prosecution and other procedures.

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United Kingdom

We consider that we already carried out our duties as Supervisor in accordance with the requirements of 4MLD so very little if any change will be required. We have a good working relationship with the other professional body Supervisors and HMRC in the tax and accounting field. Very occasionally we find members who have failed to register for supervision because they were unaware of the obligation to do so.

Question 13 – What procedures have you implemented as supervisory body in order to remain compliant? If not a supervisory body, how do you as professional body cooperate with the national AML supervisor?

Austria

Too early to tell.

Belgium

78 supervisors (rapporteurs) for the quality review in 2017 (end of 2017 = 84) The 26 newly supervisors (rapporteurs) underwent special training for them, during which emphasis was placed on the principle of accompanying. The training was also aimed at explaining the quality review procedure from A to Z and thoroughly analyzing the questionnaires used. >An electronic exchange platform was also launched with the aim of facilitating contacts between supervisors (rapporteurs) and allowing discussions on specific topics and case studies. >Desirous of placing the quality review in a clear, transparent and transparent framework, the questionnaires, very concrete, were then thoroughly reviewed, taking into account the experience gained during the pilot phase, and approved by the Council in early 2016. The questions are covered in full transparency in the BeExcellent platform

22


Supervisory bodies (Art 83 AMLTF Law): conduct supervision over the reporting entities concerning the implementation of money laundering and terrorist financing prevention measures:  the Croatian National Bank,  the Croatian Financial Services Supervisory Agency,  the Financial Inspectorate of the Republic of Croatia,  the Tax Administration.

Croatia

The Croatian National Bank: conducts supervision of compliance with the Law with banks and other credit institutions. The Croatian Financial Services Supervisory Agency (CFSSA, HANFA): conducts supervision of compliance with the Law with capital markets participants, funds and insurance companies etc. The Financial Inspectorate: conducts supervision of compliance with the Law, as the primary supervisor, with the sector of so called non-bank financial institutions (exchange offices, money transfer services, etc.), and professional activities sector (lawyers, notaries public, accountants, auditors, tax advisers). The Tax Administration: conducts supervision of compliance with the Law with the organisers of games of chance. The Tax Administration also checks domestic legal and natural persons’ compliance with the prescribed limitation of cash payments in an amount exceeding HRK 105,000.00, i.e. amount exceeding EUR 15,000.00 in the arrangements with non-residents. The Customs Administration: conducts controll of cash transfer across the state border. Financial intelligence unit: AMLO: as the central national body in charge for receiving, analysing and disseminating to competent bodies cases with suspicion of ML/TF is a part of the preventive system, an intermediary body, between financial and non-financial sector (banks and others), which report suspicious transactions to the AMLO, on the one hand, and prosecution bodies (police and State Attorney’s Offices), as well as courts, on the other. LEAs Police: conducts police inquiries and financial investigations of money laundering criminal offences by acting on cases initiated from the AMLO, from other supervision bodies, or on its own initiative.

Czech Republic

At the last General meeting the art. 25 of the Statute of the Chamber was amended in order to provide a capacity to conduct the AML obligations compliance inspections for the Supervisory Commission. Unfortunately the number of the Supervisory Commission members remained the same and at the moment the Chamber has personnel insufficiency to conduct such inspections but the Commission will be supported by the Chamber staff.

Ireland

The Irish Tax Institute is not a supervisory body (see comments in Q11 above). The Irish Tax Institute regularly provides the Department of Justice with a list of members of the Institute who are not also regulated members of an accountancy body or the legal profession. The Irish Tax Institute also regularly provides training for members on AML.

Italy

As said above CNDCEC is writing down the practical procedures. CNDCEC also set an anonymous channel to receive SARS from its members and send them to the FIU.

23


Lithuania

Association of Lithuanian Tax Advisers is fully operating according to the provisions of AML Law.

Luxembourg

We plan to strengthen our efforts in AML/CFT by: - reinforcing our internal procedure which frames the peer review and developing an IT tool to support it (to increase and speed up the number of controls), - publishing an update of our practical guide, - hiring a dedicated employee to the supervision of the peer review.

Russia

/

Spain

We’re not a supervisory body and it doesn’t exist any of this kind of organism either in Spain. Nevertheless, we’re concerned from the AEDAF organism about the Anti-Money Laundering stuff and we’re organizing conferences and opening days to talk and get everyone informed about all this subject news introduced with the AML 4th Directive. We’re doing all these conferences helped by a Group of Experts in Anti-Money Laundering, who knows everything about this law. Also, we have sent all the necessary information to all over the associates, so they are informed about the news on AML. As there’s a 5th Directive project in AML, we also made what’s possible to get all them informed about what its coming soon.

The Netherlands

We have a very close cooperation with our regulator with mutual respect.

As noted in 2 above from June 2018 we will have to carry out criminal checks on beneficial owners

United Kingdom As noted in 3 above we will have to notify which supervised members carry out trust and company service work

Question 14 – What type of methodology you rely on to identify issues of relevance, do you rely on self-declaration of members, what type of background checks, if any, you perform?

Austria

Supervision will be possible in any possible way the AMLD is providing.

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Belgium

The questions are largely based on the annual bi AWW questionnaire, whose responses are verified as part of an on-site approach. Each question has a specific weight. Questions to check whether the regulations in force are respected (for example: do you have liability insurance?) Carry more weight than questions that are limited to checking whether the firm is trying to achieve organizational efficiency. Each member can quickly check in BeExcellent if he is ready and if his office is ready for quality review.

Croatia

Key Measures to be taken include customer due diligence via KYC standard and notification of suspicious transactions to the AML Office.

Czech Republic

So far we controlled tax advisers on the initiative of the Financial Analytical Office or on the initiative from the inside of the Chamber. Now we are going to perform our own controls of AML obligations compliance based on our own risk analysis (assessment) and plan of controls. Moreover the controls are automatically conducted in case of a filed complain about a tax adviser due to an assumption that such a tax advisor does not comply with the AML obligations.

Ireland

N/A – Irish Tax Institute is not a supervisory body.

Italy

This prevision is not already being set for professionals and they have no duties now, since our FIU announced the schemes for AML objective communications will be set first for the financial sector.

Lithuania

Association of Lithuanian Tax Advisers rely on self-declaration which is provided by the tax advisors before the joining the Association.

Luxembourg

Issues of relevance are relied on self-declaration of members firstly and then on-site control (with sampling).

Russia

-

Spain

We did not have had to apply any process to check the amount of true that all the information that we receive have.

The Netherlands

NA

United Kingdom

Currently we ask our supervised members on an annual return to confirm whether they have any criminal convictions, been disqualified from acting as a director, been subject to disciplinary action etc. As noted in 2 above from next year we will also have to carry out criminal checks.

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Question 15 - How do you identify and assess the international and domestic risks for members of your professional association? Austria

Too early to tell.

Belgium

LAB questionnaire which allows, among other things, to identify clients and HR activities in the profession Risk Analysis Debriefing, annual meetings with CTIF: review of trends, statistics and typologies…

Croatia

We rely on questionnaires

Czech Republic

Risks are identified in cooperation with the Financial Analytical Office and they have been included in the National Risk Assessment.

Ireland

N/A – Irish Tax Institute is not a supervisory body.

Italy

This prevision is not already being set. CNDCEC will proceed at collecting data for the annual communication to CSF – Comitato di Sicurezza Finanziaria. CNDCEC will also participate to the next NRA (a NRA is expected every 3 years) and will collect information from its members; that information will be sent to the Ministry of Finance.

Lithuania

Association of Lithuanian Tax Advisers rely on information provided by the tax advisors before the joining the Association. Tax advisers guarantees that information provided is fully correct.

Luxembourg

Such an analysis has not been made.

Russia

-

Spain

We are not an organism that checks the risk that our association members have, we only ease the contact between the tax advisors and the obligated subjects to make easier their contact and the accomplishment of all the obligations they have.

The Netherlands

NA

United Kingdom

We ask our supervised members each year on the annual return what they see as the main AML risk to their practice. We attend quarterly meetings with the other AML supervisors, HM Treasury, the Home Office and the National Crime Agency where risk is discussed. The tax and accountancy AML professional body supervisors are drafting an AML risk assessment tool and will be happy to forward a copy once finalised.

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CFE Tax Advisers Europe Office 188A, Avenue de Tervueren B – 1150 Brussels T. + 32 2 761 00 91 E. info@taxadviserseurope.org W. www.taxadviserseurope.org

Opinion Statement ECJ-TF 1/2018 on the Compatibility of Limitation-on-Benefits (LoB) Clauses with the EU Fundamental Freedoms

Prepared by the CFE ECJ Task Force Submitted to the European Institutions in 2018

CFE Tax Advisers Europe is a Brussels-based association representing the European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE is part of the EU Transparency Register no. 3543183647�05. For further information on CFE Tax Advisers Europe please visit our web page http://taxadviserseurope.org/about-us/ or contact the CFE Office at info@taxadviserseurope.org


This Opinion Statement (“OS”) has been prepared by the CFE ECJ Task Force1. It concerns the compatibility of limitation-on-benefits (LoB) clauses with the EU fundamental freedoms, based on the judgments of the European Court of Justice. The context of this OS is the Commission’s infringement procedure against the Netherlands with regard to the LOB clause inserted in the Dutch-Japan treaty, and the inclusion of simplified LOB clause in the BEPS Multilateral Instrument, optional for signatories to adopt. Unlike the usual format of Opinion Statements of the CFE ECJ Task Force, this one does not address the issue on basis of one single judgment, but rather by taking into account the various relevant statements made by the European Court of Justice. This OS addresses the potential authority of previous judgments on LOB clauses, the implications that different Court reasoning may have on the exercise of fundamental freedoms and the apparent conflict between ECJ decisions. I.

Background and Issues

1.

The object of this Opinion Statement is so-called limitation-on-benefits clauses (hereinafter also: LoB clauses), i.e. tax treaty clauses that restrict the benefits of a double tax treaty for certain residents of a Contracting State, such as ones controlled by a resident of a non-Contracting State, (notably foreign-controlled corporations).

2.

Such clauses aim to counter ”treaty shopping”. This typically involves the establishment of an intermediate holding company in a State with tax treaties with both the State of residence of the investor, and with that of a source of profit, which together provide a more favourable regime than if the investor had received the profit directly.

3.

The focus of this Opinion Statement is on the compatibility of such clauses with the EU fundamental freedoms, taking into account statements made by the European Court of Justice in its tax and non-tax case law.

4.

Although the compatibility of LoB clauses with EU fundamental freedoms has long been under scrutiny, especially as to their restrictive effect on the exercise of the right of establishment within the Internal Market,2 the issue has recently come under the spotlight in connection with the BEPS 1

Members of the Task Force are: Alfredo Garcia Prats, Werner Haslehner, Volker Heydt, Eric Kemmeren, Georg Kofler (Chair), Michael Lang, Jürgen Lüdicke, João Nogueira, Pasquale Pistone, Albert Rädler†, Stella Raventos-Calvo, Emmanuel Raingeard de la Blétière, Isabelle Richelle, Alexander Rust and Rupert Shiers. Although the Opinion Statement has been drafted by the ECJ Task Force, its content does not necessarily reflect the position of all members of the group. 2 See, e.g., para. 19 of the Commission‘s working document “EC Law and Tax Treaties”, TAXUD E1/FR DOC (05) 2306 (9 June 2005). See inter alia A. Martín Jiménez, EC Law and Clauses on Limitation of Benefits in Treaties with the U.S. after Maastricht and the U.S.-Netherlands Tax Treaty, 4 EC Tax Review 2 (1995), p. 81 ff., G. Kofler, European Taxation Under an ‘Open Sky’: LoB Clauses in Tax Treaties Between the U.S. and EU Member States, Tax Notes International, 5 July 2004, p. 46 ff., , P. Pistone, Test Claimants in Class IV of the Act Group Litigation: limitation-of-benefits clauses are clearly different from most-favoured-nation clauses, British Tax Review, No. 4 (2007), pp. 363-365; P. Pistone/F. Cannas/R. Julien, Can the Derivative Benefits Provision and the Competent Authority Discretionary Relief Provision Render the OECD-Proposed Limitation on Benefits Clause Compatible with EU Fundamental Freedoms?, in Lang/Pistone/Rust/Schuch/Staringer (eds.), Base Erosion and Profit Shifting (BEPS) – The Proposals to Revise the OECD Model Convention (Linde, Vienna, 2016), pp. 165 – 218 who hold them incompatible with fundamental freedoms; taking an opposite view see A. P. Dourado, Portugal, in: Lang/Pistone (eds), The EU and Third Countries: Direct Taxation (Kluwer Law International, 2007), pp. 499536, E. Kemmeren, Where is EU Law in the OECD BEPS Discussion?, 23 EC Tax Review 4 (2014), pp. 191-192; T. O’Shea, Limitation on Benefits (LoB) clauses and the EU Part I, International Tax Report (October 2008), pp. 1-8. Such issues were also discussed in the framework of a conference at the EU Commission on 5 July 2005, http://ec.europa.eu/taxation_customs/taxation/company_tax/double_taxation_conventions/workshop/index_ en.htm . F.Debelva, et al., LOB Clauses and EU-Law Compatibility: A Debate Revived by BEPS?, 24 EC Tax 1


Action 6 recommendation – endorsed by the G20 on 15-16 November 2015 – that states should include LoB clauses in their tax treaties.3 Also the BEPS Multilateral Instrument, signed in Paris on 7 June 2017 includes a simplified LoB provision as a tool to counter treaty shopping, and also the 2017 Update to the OECD Model Convention contains an LoB clause in the new Article 29. 5.

Further, from the perspective of EU law, the request of the EU Commission, dated 19 November 2015,4 for the Netherlands to amend the LoB clause contained in Article 21 of the NetherlandsJapan tax treaty, which includes stock-exchange and derivative-benefits tests, also brings new momentum to the issue. The Commission announced: “The European Commission asked the Netherlands today to amend the Limitation on Benefits (LOB) clause in the Dutch-Japanese Tax Treaty for the Avoidance of Double Taxation, which entered into force on 1 January 2012. The Commission believes that, on the basis of previous cases such as C-55/00 Gottardo and C-466/98 Open Skies, a Member State concluding a treaty with a third country cannot agree better treatment for companies held by shareholders resident in its own territory, than for comparable companies held by shareholders who are resident elsewhere in the EU/EEA. Similarly, it cannot agree better conditions for companies traded on its own stock exchange than for companies traded on stock exchanges elsewhere in the EU/EEA. However, under the current terms of the LOB clause, some entities are excluded from the benefits of the tax treaty. This means that they suffer higher withholding taxes on dividends, interest and royalties received from Japan than similar companies with Dutch shareholders or whose shares are listed and traded on ‘recognised stock exchanges’, which include certain EU and even third-country stock exchanges. The Commission's request takes the form of a reasoned opinion. In the absence of a satisfactory response within two months, the Commission may refer the Netherlands to the Court of Justice of EU.”

6.

The key point is that the Commission holds the view that, on the basis of previous (non-tax) case law of the European Court of Justice – such as Gottardo5 and the Open Skies decisions6 – “a Member State concluding a treaty with a third country cannot agree better treatment for companies held by shareholders resident in its own territory, than for comparable companies held by shareholders who are resident elsewhere in the EU/EEA” 7.

7.

Until the time of drafting this Opinion Statement the procedure is still listed as pending, but there have been no public developments concerning it. This is somehow surprising since two and a half years have passed from the initial request of the European Commission to the Netherlands.

Review, Issue 3 (2015), pp. 132-143, have taken an intermediate position, by concluding that LoB clauses, if targeted at wholly artificial arrangements, can be eventually regarded compatible with EU fundamental freedoms. 3 See OECD, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 – 2015 Final Report (October 2015). 4 See “Taxation: Commission asks the Netherlands to amend the Limitation on Benefits clause in the Dutch-Japanese Tax Treaty for the Avoidance of Double Taxation” in the Commission’s Fact Sheet “November infringements package: key decisions”, MEMO/15/6006 (19 November 2015). 5 IT: ECJ, 15 Jan. 2002, C-55/00, Elide Gottardo v Istituto nazionale della previdenza sociale (INPS), EU:C:2002:16, ECJ Case Law IBFD. 6 ECJ, 5 Nov. 2002, C-466/98, Commission v. United Kingdom, EU:C:2002:624, ECJ Case Law IBFD; ECJ, 5 Nov. 2002, C-467/98, Commission v. Denmark, EU:C:2002:625, ECJ Case Law IBFD; ECJ, 5 November 2002, C468/98, Commission v. Sweden, EU:C:2002:626, ECJ Case Law IBFD; ECJ, 5 Nov. 2002, C-471/98, Commission v. Belgium, EU:C:2002:628, ECJ Case Law IBFD; ECJ, 5 Nov. 2002, C-472/98, Commission v. Luxembourg, EU:C:2002:629, ECJ Case Law IBFD; ECJ, 5 Nov. 2002, C-475/98, Commission v. Austria, EU:C:2002:630, ECJ Case Law IBFD; ECJ, 5 Nov. 2002, C-476/98, Commission v. Germany, EU:C:2002:631, ECJ Case Law IBFD. 7 See “Taxation: Commission asks the Netherlands to amend the Limitation on Benefits clause in the Dutch-Japanese Tax Treaty for the Avoidance of Double Taxation” in the Commission’s Fact Sheet “November infringements package: key decisions”, MEMO/15/6006 (19 November 2015). 2


8.

Tax treaty practice is not uniform. LoB clauses contain a range of features. This Opinion Statement does not aim to provide a comprehensive overview of all such clauses. It analyses the character and operation of some common elements of LoB clauses (II.), with a view to determining in the light of relevant precedents whether and to what extent they create procedural and/or substantive restrictions and if so, whether such restrictions can be justified by the need to counter abusive practices. or other grounds of public importance, including the requirements of the principle of proportionality (III. and IV.). The Opinion Statement will then discuss the possible repercussions for EU Member States if LoB clauses are declared incompatible with EU fundamental freedoms (V.).

9.

As stated above, the focus of this statement is on the fundamental freedoms. It does not consider LoB clauses from any other perspective, including that of State aid, the Parent/Subsidiary Directive, or any wider policy considerations. As for LoB clauses this Statement focuses on "ownership test" clauses and also refers to "discretionary benefit" clauses. It does not address the anti-abuse clauses in some treaties which are described as limitation-on-benefits clauses, but in fact have different structural features, and more closely resemble treaty GAARs. This type of clause is sometimes included in bilateral treaties of OECD countries, in particular Mexico, and more often in treaties concluded by developing countries. The EU law issues of compatibility raised by such LoB clauses are substantially different and are better addressed separately, together with the problems presented by GAARs.

II.

The Structural Features, Types and Effects of Clauses

10. Limitation-on-benefits clauses were originally designed by the US in the 20th century. The purpose was to counter treaty shopping without the need for the lengthy procedures required by general anti-avoidance clauses. 11. LoB clauses therefore raise quite similar issues to all special anti-avoidance rules (SAARs), which determine effects on an automatic or quasi-automatic basis. 12. The worldwide spread of such clauses over the past two decades has been significant. In addition, clauses have been agreed which go beyond the boundaries of US tax treaty practice. These developments appear due to the effectiveness of LoB clauses to counter treaty shopping.8 13. An "ownership test" LoB clause as described in paragraph 1 is generally triggered where a resident of non-Contracting State (A) may indirectly obtain the entitlement of a more favourable tax treaty with the State of a source of income by controlling a resident of a State (B), that has concluded the more favourable tax treaty with the State of source (C).  To counter “treaty shopping” fully, a typical LoB clause contains a number of objective tests.  Under the “ownership test”, entities at least 50% of whose shares are held by other qualified persons generally qualify for treaty benefits; however, that “ownership test” is generally supplemented by a “base erosion test” which disqualifies entities which pay 50% of more of their gross income to persons who are not qualified persons. 8

P. Pistone/F. Cannas/R. Julien (supra n. 1) indicate that at least the following treaties between EU Member States include a type of LoB clause: Belgium-Estonia, effective 1 January 2004, Article 28; BelgiumLatvia, effective 1 January 2004, Article 29; Belgium-Lithuania, effective 1 January 2004, Article 29; BelgiumPoland, Protocol to the 2001 Treaty, signed in 2014, not yet effective, Article 28A; Estonia-Italy, effective 1 January 2001, Article 28; Estonia-Latvia, effective 1 January 2002, Article 29; Estonia-Lithuania, effective 1 January 2006, Article 30; Estonia-Portugal, effective 1 January 2005, Article 27; Germany-Malta, effective 1 January 2002, Article 27; Germany-Spain, Article 28, effective 1 January 2013; Italy-Latvia, effective 1 January 2009, Article 30; Italy-Lithuania, effective 1 January 2000, Article 30; Latvia-Lithuania, effective 1 January 1995, Article 30; Latvia-Portugal, effective 1 January 2004, Article 28; Lithuania-Portugal, effective 1 January 2004, Article 28; Malta-Portugal, Article 27, effective 1 January 2003; Malta-Slovenia, effective 1 January 2004, Article 27; Malta-Spain, effective 1 January 2007, Article 27; Poland-Slovakia, effective 1 January 1996 and protocol effective 1 January 2015, Article 28A; Poland-Sweden, effective 1 January 2006, Article 27. 3


 The LoB clause recommended by the OECD, in the framework of the BEPS project treats certain publicly-listed entities and their affiliates and other entities that meet certain ownership requirements as qualified entities.  In addition, LoB clauses usually contain (1) an escape clause that provides treaty benefits in respect of certain income of a person that is not a qualified person if the person is engaged in the active conduct of a business in its State of residence and the income is derived in connection with, or is incidental to, that business, and (2) a “derivative benefits” test, i.e., a provision that provides treaty benefits to a person that is not a qualified person if at least a specified proportion of that entity is owned by certain persons entitled to equivalent benefits, i.e., signalling that “treaty shopping” is not involved as the owners of the entity could derive the treaty benefits themselves without “interposing” the entity.  Finally, even if treaty benefits would be denied under the objective tests of an LoB clause, a “subjective clause” can allow the competent authority of a Contracting State to grant certain treaty benefits to a person where benefits would otherwise be denied. The operation of the “ownership test” of a typical LoB clause of this sort is exemplified by the facts of the relevant part of the ACT Group Litigation case, decided by the Court in 2006.9 There, under the UK/Netherlands treaty, certain benefits granted by source State C (i.e., the UK) were denied to the recipient of a dividend in State B (i.e., a Netherlands entity) under the treaty's LoB clause because its sole shareholder was resident in a third Member State A (i.e., Germany):

14. To summarise, an "ownership test" LoB clause can deprive taxpayers resident in State B, who are controlled by non-residents, of the entitlement to the benefits of tax treaties that they would otherwise enjoy along with other residents of State B. 15. Further, this deprivation is applied without case-by-case analysis. 16. For the purposes of this Opinion Statement, a restriction could arise from such a clause in two ways. First, as the taxpayer resident in State B is deprived of his entitlement to the tax treaty benefits available to other residents, a substantive obstacle to the exercise of fundamental freedoms may arise. Second, even where the taxpayer is ultimately able to obtain the treaty benefit the LoB clause can also be the source of procedural obstacles to the exercise of fundamental freedoms, taking into account the complexity of such clauses and the potential difficulties in proving the facts required to preserve the entitlement to tax treaty benefits. Either could amount to a restriction, given the settled case law of the Court of Justice of the European Court of Justice, which protects the timely and effective exercise of rights granted by EU law.

9

UK: ECJ, 12 Dec. 2006, C-374/04, Test Claimants in Class IV of the ACT Group Litigation v Commissioners of Inland Revenue, EU:C:2006:773, ECJ Case Law IBFD. 4


17. As noted above an alternative to the "ownership test" LoB clause is the so-called "discretionary relief" LoB clause. This has a different structure, and allows to some extent for case-by-case analysis. However, this type of LoB clause gives tax authorities a wide discretion to decide the cases where, and the conditions under which, a resident controlled by a non-resident can preserve its entitlement to tax treaty benefits. Accordingly this type of LoB clause may restrict EU fundamental freedoms by representing a procedural obstacle, as the exercise of the freedom is left to the discretionary powers of tax authorities of the EU Member State of residence.10 It is not analysed further here. 18. Issues of compatibility of the "ownership test" type clause, including the other tests frequently associated with such a clause are analysed in the following sections, in the light of existing case law of the Court of Justice on overt and covert restrictions on the exercise of fundamental freedoms within the Internal Market. Section III focuses on residence State (i.e. State B) cases (e.g. Gottardo, the Open Skies and the Factortame II cases11), in which the Court has rejected the compatibility of nationality clauses with the right of establishment. Section IV considers the sole occasion on which the Court considered an LoB clause from the perspective of the source State C: ACT Group Litigation. III. From the perspective of the residence State B 19. The EU Commission infringement procedure against the Netherlands considers this. It concerns the treatment, under the Netherlands-Japan double tax treaty, of an entity, resident in Netherlands, receiving income from Japan. 20. The EU Commission pointed out in its request on 19 November 2015 that the Court of Justice of the European Union has already rejected in the Gottardo and Open Skies judgments the compatibility of clauses in agreements with third countries that provide for different treatment depending on nationality. 21. Under EU law, the need for effective protection of the exercise of free movement of persons may oblige a Member State unilaterally to extend the benefits its nationals receive under tax treaties signed with a third country to nationals of other EU Member States in its territory.12 The fact that non-Member States are not obliged to reciprocate or to comply with EU law does not change this. 22. In particular, the Gottardo case13 addressed this situation in the case of an overt discrimination (under the Switzerland-Italy social security treaty) affecting an individual, who was a national of neither Contracting State (but of France) and having exercised her freedom to work in Italy, had claimed against the Italian State her right to enjoy the same treatment for social security purposes to which Italian nationals were entitled under the social security convention with Switzerland. 23. Furthermore, in the Open Skies the Court reached similar conclusions in the context of air-traffic routes between the US and EU Member States.14 The nationality clauses contained in the bilateral air traffic agreements of several EU Member States with the US share the common feature of 10

It is settled case law of the Court of Justice of the European Union that the exercise of freedoms may not be left to the discretionary powers of a Member State (see ECJ, 12 December 2006, C-446/04, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue, ECLI:EU:C:2006:774, para. 212, ECJ Case Law IBFD). 11 The Queen v Secretary of State for Transport, ex parte Factortame Ltd and others, ECLI:EU:C:1991:320 (C-221/89) 12 This type of issues was addressed already in ECJ, 21 Sept. 1999, C-307/97, Compagnie de Saint-Gobain, Zweigniederlassung Deutschland v Finanzamt Aachen-Innenstadt, EU:C:1999:438. ECJ Case Law IBFD 13 Gottardo (C-55/00) 14 Commission v. United Kingdom (C-466/98); Commission v. Denmark (C-467/98); Commission v. Sweden (C-468/98); Commission v. Belgium (C-471/98); Commission v. Luxembourg (C-472/98); Commission v. Austria (C-475/98); Commission v. Germany (C-476/98) 5


limiting traffic rights on flights between the Contracting States solely to national companies of such States. 24. The interpretation of nationality clauses in the Gottardo and Open Skies cases reflects settled case-law of the Court, prohibiting overt and covert restrictions that are liable to deter the exercise of fundamental freedoms. There is no reason to think that the tax context should lead to a different outcome, and in addition the Court explicitly quoted Saint-Gobain15 in Open Skies.16 25. From the perspective of the residence State (B) the Gottardo and Open Skies judgments demonstrate that the impact of LoB clauses on the exercise of the right of establishment is to be determined simply by looking at whether the application of such clauses has a restrictive effect. Insofar as the LoB clause provides for a different treatment depending on ownership, it is likely to dissuade EU nationals from exercising the right of establishment into State B. 26. The starting point for assessing the existence of such restriction is the comparison between (i) a resident entity of EU Member State B, which is controlled by a non-resident shareholder (who is a resident of EU Member State A), and (ii) another resident company of EU Member State B. Since in these circumstances all such companies are subject to the fiscal sovereignty of EU Member State B in the same way and thus liable to pay income taxes under the same conditions, applying the reasoning of the Saint-Gobain decision there is no doubt that the conditions for the resident company controlled by a non-resident shareholder to enjoy national treatment are met.17 27. Accordingly, any less favourable tax treatment connected with the mere fact that a resident of EU Member State B is controlled by a non-resident entity, which is a resident of EU Member State A, is likely to constitute a restriction on the right of establishment within the Internal Market. 28. As the case law of the Court of Justice essentially takes the same approach regardless of the applicable fundamental freedom, LoB clauses could give rise to a restriction also in respect of other freedoms, such as free movement of capital and services. 29. This means that insofar as the LoB clause may have an impact on the exercise of a freedom within the Internal Market (i.e. between EU Member State A and EU Member State B), it makes no difference if the source State (i.e. State C) is an EU Member State or a third country. 30. However, it may make a difference if State A is instead a third country. In such case there can only be an infringement if the LoB clause affects the exercise of free movement of capital. This is particularly the case where benefits are restricted because of non-controlling shareholders in State A. 31. Insofar as there is a restriction, we should now look at whether it may be justified in the light of the need to counter abusive practices, which is an accepted justification in settled case law of the Court of Justice.18 32. When assessing how this justification practically operates, one should bear in mind that EU Member States do not have carte blanche as to its implementation, but should comply with the framework determined by the overall principles of European Union law. More specifically, the broad international consensus in the framework of the BEPS project as to a sort of abuse which

15

Saint-Gobain (C-307/97). See Commission v. United Kingdom (C-466/98), paras. 45 and 46, where the Court also quoted para. 32 of the Gottardo (C-55/00) judgment when stating the obligation of EU Member States to unilaterally secure national treatment also in situations involving agreements with third countries. 17 In Saint-Gobain (C-307/97) at para. 47-49 the Court held that it was not relevantly permissible for Member State B to apply worse tax treatment, to a permanent establishment in Member State B of a company incorporated and established in Member State A, than to a company incorporated and resident in State B. This was on the basis that Member State B essentially taxed the two in the same way. 18 See A. Garcia Prats et al., EU Report at the 2018 IFA Congress, in Cahiers de droit fiscal international, vol. 103a, 2018, forthcoming. 16

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should be countered is not per se the source of a justification. Only where there is abuse as established by the case law of the Court is a restriction permitted. 33. The Court has regularly stated that the need to counter abusive practices requires a case-by-case analysis, which is indispensable in order for a measure to be suitable to achieve its goal, and proportionate to it. 34. These concerns are also not relieved by the so-called “derivative benefits” clauses, whereby treaty residents of another State (e.g., State A) who meet appropriate criteria can help satisfy the ownership test. Simplified, a derivative benefits test entitles a company that is a resident in a contracting state (i.e., B) but is not entitled to treaty benefits under the basic tests of an LoB provision if the beneficial owner of that company (e.g., individuals or qualified corporations in State A) would have been entitled to the same benefit (i.e., reduced source taxation in State C) if the income in question flowed directly to that owner.19 It is, however, obvious that such a “derivative benefits” test merely mitigates, but does not eliminate the concerns under the fundamental freedoms because they rely on the benefits in other tax treaties so that, e.g., an LoB clause in a tax treaty that provides for a zero rate will only lead to derivative benefits if the shareholders of the interposed entity would likewise enjoy a zero rate if they received the income directly. In the latter circumstances, derivative benefits clauses do not eliminate possible disproportionate (procedural or substantive) restrictions on the right of establishment. 35. Finally, issues also arise as to the application of discretionary relief LoB clauses. Such clauses allow for a case-by-case analysis, but their mechanism generates specific problems of compatibility with fundamental freedoms as interpreted by settled direct tax case law of the European Court of Justice. In particular, this is the case when this type of LoB clause is intrinsically linked with the attribution of discretionary powers to tax authorities and disconnected with a timely and effective protection of the entitlement to the benefits of the tax treaty of the State of the resident subsidiary controlled by a parent company established in a different Member State. This may make the exercise of the right of establishment more difficult in practice (being the source of a procedural restriction), or even give no certainty as to the entitlement to the treaty benefits.

IV. From the perspective of the Source State C (the ACT Group Litigation Case) 36. Tax-related limitation-on-benefits clauses were considered briefly by the European Court of Justice in the ACT Group Litigation case,20 concerning the Netherlands-United Kingdom double tax treaty. The issue was considered as part of a single reference dealing with several cases, each raising different issues. That meant that the court had to consider a fairly complex situation, and its judgment gave particular focus to other issues, notably the entitlement to most-favourednation treatment. 37. In ACT Group Litigation, the Court held that the LoB clause at issue did not infringe the freedom of establishment. But the rationale is not clear. To understand this it is necessary to understand the structure of the judgment. The Court addressed issues on most-favoured-nation treatment at paragraphs 78 to 86, and then again at paragraphs 92 to 94. Only paragraphs 89 and 90 unambiguously address the LoB case. Paragraphs 87, 88 and 91 might be directed to either case, or both. The Court argued:

19

The idea behind the derivative benefits concept is that treaty benefits pursuant to a tax treaty between two countries should also be available to a company owned by residents of a third country, provided the treaty benefits are no richer than those residents would enjoy if they earned the respective income directly rather than through the interposed company. This, in turn, demonstrates that the interposition of an entity in State B does not serve a treaty shopping purpose. 20 ACT Group Litigation (C-374/04). 7


“88 Thus, the grant of a tax credit to a non-resident company receiving dividends from a resident company, as provided for under a number of DTCs concluded by the United Kingdom, cannot be regarded as a benefit separable from the remainder of those DTCs, but is an integral part of them and contributes to their overall balance (see, to that effect, [ECJ, 5 July 2005, C-376/03, D, EU:C:2005:424], paragraph 62). 89 The same applies to the provisions of the DTCs which make the grant of such a tax credit subject to the condition that the non-resident company is not owned, directly or indirectly, by a company resident in a Member State or a non-member country with which the United Kingdom has concluded a DTC which does not provide for such a tax credit. 90 Even where such provisions extend to the situation of a company which is not resident in one of the contracting Member States, they apply only to persons resident in one of those Member States and, by contributing to the overall balance of the DTCs in question, are an integral part of them.” 38. Paragraph 90 appears to state that the impact of the treaty on a person "which is not resident in one of the contracting Member States" is to be disregarded. But where it restricts the exercise of a fundamental freedom by that person, this appears directly contrary to the analysis in Gottardo and Open Skies. At least Open Skies was cited to the Court, though neither cases was referred to in the Opinion or Judgment. If the Court had intended to overrule these cases, it is reasonable to think that it would have addressed them directly. 39. Accordingly, it is not clear that the relevant conclusions reached by the Court in ACT Group Litigation do constitute a precedent endorsing the compatibility of LoB clauses with the EU fundamental freedoms, even from the perspective of the Source State, C. 40. The question may be, in effect, whether EU Source State C is permitted to restrict the exercise of a fundamental freedom from EU State A to EU State B. Taking the example of freedom of establishment, the wording of the treaty provisions is not clear. It is therefore clearly welcome, that the Commission’s action with regard to the LoB clause in the Dutch-Japan DTC may give the Court the possibility to clarify its considerations in ACT Group Litigation.

V

The Possible Repercussions within the Internal Market and in Relations with Third Countries

41. Against this backdrop, it is possible to consider the impact of EU law on ownership tests in LoB clauses contained in a treaty between two EU Member States and those contained in treaties between one EU Member State and one non-EU Member State. The two are discussed separately below. 42. In the former case, subject to any remaining impact of ACT Group Litigation, where State A is an EU Member State, both residence State B and source State C would have to interpret an LoB clause in such a way as to restrict its application to cases of abusive practices. This would mean that, within the EU, LoB clauses are denied the ability to operate on the automatic or quasi-automatic basis which has until now made them so attractive to tax administrations. 43. For LoB clauses in treaties with third countries – including the one in the Netherlands-Japan treaty currently under review by the Commission – the consequences may be different, since the third country is not bound by EU law. 44. In such scenario, the taxpayer is a resident of Member State B with income from a third country C, who is subject to higher taxation in State C because of it being partly owned by residents of Member State A, with third country C thus denying treaty benefits based on an LoB clause. 45. We should now focus our attention on the legal obligations for an EU Member State in relation to LoB clauses if the Court follows the line of reasoning adopted in Gottardo and Open Skies.

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46. In such a case, since the EU Member State involved cannot invoke any justification for the LoB clause in its entirety (the clause would only be effective to the extent of the Member State B conducting a case-by-case analysis of the existence of the abusive practice), three key issues arise. 47. First, EU Member States could no longer include such LoB clauses in future treaties, at least to the extent explained here. 48. Second, they would also be obliged to renegotiate their treaties with a view to removing the violation of the freedoms.21 This could be achieved via a treaty change to limit the LoB’s effect to cases falling under the Court of Justice’s definition of abuse, the LoB’s abolition, or by the termination of the treaty. If the first two alternatives appear contradictory to the purpose underlying the initial inclusion of an LoB clause, the termination of the treaty would achieve equal treatment only by making the situation worse for most taxpayers and better for none and is thus not desirable from a policy perspective. 49. Third, an EU Member State B could be obliged to secure national treatment for its residents adversely affected in non-EU Contracting State C by the LoB clause, i.e. by neutralising those disadvantages unilaterally.22 50. Finally, we shall briefly analyse the practical impact of this third issue on a scenario reflecting the pattern of the procedure initiated by the EU Commission on 19 November 2015, to show that it is the least important of the three. The scenario concerns the Netherlands as residence State B of a subsidiary that is controlled by a company residing in a different EU Member State A and receives income from a third country C, here Japan. 51. In such case, Japan may automatically apply the treaty LoB clause and accordingly refuse to limit the exercise of its taxing rights in respect of income paid to Dutch subsidiaries not quoted on the Netherlands stock exchange when controlled by non-resident parents, or apply the derivative benefits approach, restricting benefits by reference to the treaty with the country of residence of the parent company. In these circumstances, the Dutch subsidiary should nonetheless be entitled to national treatment if it proves the genuine exercise of the [right of establishment] in the Netherlands. As a consequence, the Netherlands would be obliged to secure national treatment by means of its domestic law. Since the disadvantage results directly from taxation in Japan, this would have to take the form of relief for taxes levied by Japan. As this might well exceed any tax liability that the subsidiary faces in the Netherlands (by virtue of a participation exemption or otherwise), the question arises whether this would require the Netherlands to neutralise this disadvantage. There seem to be two potential options: first, based on the fundamental freedoms with a possible credit, or, second, with an attempt to recover the cost of such taxes by way of a claim for damages under state liability rules – on the basis that the EU Member State has breached EU law conferring equal treatment on resident taxpayers whether or not controlled by foreign (EU resident) shareholders. the latter option would likely fail, due to the restrictive conditions laid down in the Brasserie du Pêcheur and Factortame cases.23 In particular, due to the unclear status of legality of LoB clauses due to the case law above, Member State B’s decision to add or accept an LoB clause in its tax treaty with third country C will likely not constitute a “sufficiently serious” breach of EU law. Furthermore, there may be difficulties in proving the existence of a direct causal link between the infringement and the higher tax levied by the third country, as it is uncertain what alternative agreement Member State B could have obtained from the third country C: If the

21 This follows from Article 351(2) TFEU for all bilateral agreements with third States regardless whether they were concluded prior or after the Member State’s accession to the EU. 22 Despite Article 351(1) TFEU, this is also true regardless whether the bilateral agreement predates the Member State’s accession to the EU, since doing so does not affect the Member State’s obligations under the agreement. 23 Similarly FII Group Litigation (C-446/04), paras 209–218.

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default alternative had been no tax treaty at all, the third country would have levied the same (high) source tax.

VI. The Statement 52. The CFE finds that typical limitation-on-benefits clauses are likely to be incompatible with EU fundamental freedoms, since the different tax treaty regime connected with their application is likely to generate a procedural or substantive restrictive impact on the exercise of the right of establishment within the Internal Market, which may dissuade EU national individuals and corporations from controlling a subsidiary in a different EU Member State. 53. Nor can the different specific features of LoB clauses justify such restriction in the absence of the assessment of an actual abusive practice, which settled case-law of the Court of Justice requires to be done on the basis of a case-by-case analysis. In the absence of such analysis, the CFE submits that it would be hard to reconcile the application of LoB clauses with the requirements of the principle of proportionality within the Internal Market. 54. On the basis of such grounds the CFE believes that, at least until the Court of Justice will have stated on the compatibility of LoB clauses with the EU fundamental freedoms, EU Member States should take into account their obligations under the principles of the Internal Market when negotiating LoB clauses in their tax treaties (e.g. by defining all EU nationals and corporations as equivalent beneficiaries for the purpose of applying the derivative benefits test). Any possible issue of an effective reaction to treaty shopping could be addressed, on a case-by-case analysis, by means of a PPT clause, in the form recommended also by the EU Commission in its Recommendation C(2016) 271.24 For the same reasons, EU Member States must also secure that the application of the existing LoB clauses complies with the Internal Market.

24

Commission Recommendation of 28.1.2016 on the implementation of measures against tax treaty abuse C(2016) 271 10


Opinion Statement ECJ-TF 2/2018 on the CJEU decision of 7 September 2017 in Case C-6/16, Eqiom, concerning the compatibility of the French anti-abuse rule regarding outbound dividends with the Parent-Subsidiary Directive and fundamental freedoms Prepared by the CFE ECJ Task Force Submitted to the European Institutions in May 2018 CFE welcomes the Eqiom judgment. In an international context where the fight against tax avoidance and aggressive tax planning is intensifying, it is important to preserve the fundamental principles of a balanced tax system: Free choice of the least taxed route, legal certainty, respect of the principles concerning the burden of proof etc. In this respect, the Court appears to be the guardian of these rights. In line with its previous decisions and upholding the fundamental ideas of the Internal Market, the ECJ in Eqiom and Deister and Juhler clearly confirms that Member States may neither employ general presumptions of abuse nor define any tax planning or structuring as abusive in light of secondary EU law or the fundamental freedoms.

CFE Tax Advisers Europe is a Brussels-based association representing the European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE is part of the European Union Transparency Register no. 3543183647�05. For further information please contact CFE Tax Advisers Europe at info@taxadviserseurope.org or visit our web page http://taxadviserseurope.org/

1


This is an Opinion Statement prepared by the CFE ECJ Task Force1 on Case C-6/16, Eqiom, in which the Sixth Chamber of the Court of Justice of the EU (ECJ) delivered its judgment on 7 September 2017.2 In general terms, the ECJ followed the reasoning of Advocate General Kokott, who had delivered her opinion on 19 January 2017.3 The case concerns the compatibility of the French anti-abuse rule regarding outbound dividends which put the burden of proof on the taxpayer to demonstrate that a scheme is not abusive in cases where a French company distributes dividends to an EU parent which is itself owned (directly or indirectly) by a parent company located in a third country. The issue was whether such legislation is contrary to Article 1(2) of the Parent-Subsidiary Directive (PSD)4 (before its amendment in 20155) and/or the freedom of establishment (Article 49 of the TFEU). Employing a narrow interpretation of Article 1(2) PSD, rejecting a general presumption of fraud and abuse, and noting that the mere fact that a company residing in the EU is directly or indirectly controlled by residents of third States does not imply a purely artificial arrangement, the Court eventually found that the French rule at issue in Eqiom was not in line with Article 1(2) PSD. Moreover, the French rule also violated the freedom of establishment, with the Court explicitly noting that “the objective of combating fraud and tax evasion, whether it is relied on under Article 1(2) of the Parent-Subsidiary Directive or as justification for an exception to primary law, has the same scope.” Similar issues were subsequently addressed by the ECJ in its decisions in Deister and Juhler6 concerning the German anti-abuse rules for outbound dividends, in which the Court not only followed its reasoning in Eqiom but also gave substantive guidance as to the interpretation of the anti-abuse standard in EU law.

I.

Background and Issues

1. Eqiom is a French resident company, wholly owned by Enka, a company governed by Luxembourg law. Enka is almost fully owned by a company resident in Cyprus, which is itself controlled by a company established in Switzerland. In 2005 and 2006, Eqiom distributed dividends to Enka. 2. Article 119 ter of the French tax code (CGI) generally provides exemption of withholding tax for dividends paid to the parent company under conditions similar to those of the Parent-Subsidiary Directive (PSD). However, the third paragraph of Article 119 ter of the CGI, in its reading as applicable to the facts of the case, denies the withholding tax exemption, i.e., the tax advantage provided for by Article 5(1) PSD, where the distributed dividends are received by a legal person controlled directly or indirectly by one or more residents of States that are not members of the European Union, unless the parent company establishes that the principal purpose or one of the principal purposes of the chain of interests is not to take advantage of the withholding tax exemption. 3. The French Tax Authorities argued that the third paragraph of Article 119 ter CGI, i.e. the anti-abuse rule, was applicable to Eqiom. The company complained before French Courts but both the first tier tribunal and

1 Members of the Task Force are: Alfredo Garcia Prats, Werner Haslehner, Volker Heydt, Eric Kemmeren, Georg Kofler (Chair), Michael Lang, Jürgen Lüdicke, João Nogueira, Pasquale Pistone, Albert Rädler†, Stella Raventos-Calvo, Emmanuel Raingeard de la Blétière, Isabelle Richelle, Alexander Rust and Rupert Shiers. Although the Opinion Statement has been drafted by the ECJ Task Force, its content does not necessarily reflect the position of all members of the group. 2 ECLI:EU:C:2017:641 3 ECLI:EU:C:2017:34 4 Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, [1990] OJ L 225, p. 6, as amended by Council Directive 2003/123/EC of 22 December 2003, [2004] OJ L 7, p. 41. 5 Council Directive (EU) 2015/121 of 27 January 2015, [2015] OJ L 21, p. 1. 6 ECJ, 20 December 2017, C-504/16 and C-613/16, Deister Holding AG and Juhler Holding A/S v Bundeszentralamt für Steuern, EU:C:2017:1009.

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the Court of appeal dismissed its plea. Finally, Eqiom appealed to the French Conseil d’Etat raising questions on the compatibility of the French anti-abuse rule with both the PSD and the fundamental freedoms. The French Supreme Court referred several questions to the ECJ for a preliminary ruling. “(1) If the national legislation of a Member State uses in domestic law the option offered by Article 1(2) of Directive 90/435, is there scope for review of the measures or agreements adopted in order to give effect to that option under EU primary law? (2) Must the provisions of Article 1(2) of that Directive, which confer upon Member States broad discretion to determine which provisions are “required for the prevention of fraud or abuse”, be interpreted as precluding a Member State from adopting a mechanism aimed at excluding from the benefit of the exemption the dividends distributed to a legal person controlled directly or indirectly by one or more residents of States that are not members of the Union, unless that legal person provides proof that the principal purpose or one of the principal purposes of the chain of interests is not to benefit from the exemption? (3) (a) If the compatibility with EU law of the “anti-abuse” mechanism mentioned above should have to be assessed having regard to the provisions of the Treaty too, must it be examined, having regard to the purpose of the legislation at issue, in the light of the provisions of Article 49 TFEU, even though the company receiving the dividend distribution is controlled directly or indirectly, as a result of a chain of interests which has among its principal purposes the benefit of the exemption, by one or more residents of third States that may not avail themselves of freedom of establishment? (b) If the answer to the preceding question is not affirmative, must that compatibility be examined in the light of the provisions of Article 63 TFEU? (4) Must the provisions cited above be interpreted as precluding national legislation from excluding from the exemption from withholding tax the dividends paid by a company in one Member State to a company established in another Member State, if those dividends are received by a legal person controlled directly or indirectly by one or more residents of States that are not members of the European Union, unless that legal person establishes that the principal purpose or one of the principal purposes of that chain of interests is not to benefit from the exemption?”

II.

The Judgment of the Court of Justice

4. Following, in general terms, the reasoning of Advocate General Kokott the Court examines whether, first, Article 1(2) PSD, according to which the Directive “shall not preclude the application of domestic or agreement-based provisions required for the prevention of fraud or abuse”, and, secondly, Article 49 or Article 63 TFEU must be interpreted as precluding the French anti-abuse rule at issue. Before addressing these issues, the Court noted that “according to settled case-law, any national measure in an area which has been the subject of exhaustive harmonisation at the level of the European Union must be assessed in the light of the provisions of that harmonising measure, and not in the light of the provisions of primary law”.7 However, such “shielding effect” from scrutiny in light of the fundamental freedoms was quickly rejected by the Court, as Article 1(2) PSD only provides for a possibility for the Member States to apply domestic or agreement-based provisions required for the prevention of fraud and abuse, so that it cannot be considered as an exhaustive harmonization measure and therefore the domestic legislation should be tested both against the PSD and the fundamental freedoms.8 5. It was uncontested that the case at issue is covered by the PSD. For analyzing the compatibility of the French provision with Article 1(2) PSD, the Court first refers to some fundamentals of the Directive, especially to its purpose of eliminating any disadvantage to cooperation between companies of different Member States as compared with cooperation between companies of the same Member State, thus instituting a tax neutrality within the internal market by abolishing withholding taxation so as to avoid double taxation.9 The Court also

7 Eqiom (C-6/16), para. 15, referring to ECJ, 8 March 2017, C-14/16, Euro Park Service v Ministre des finances et des comptes publics, EU:C:2017:177, para. 19. 8 Eqiom (C-6/16), paras 16-18. 9 See Eqiom (C-6/16), paras 19-23.

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recalls that a Member State cannot unilaterally introduce restricting measures and conditions that would reduce the availability of the advantage.10 6. Regarding Article 1(2) PSD, the Court states that it is to be regarded as an exception to the rules of the Directive – reflecting the general principle which precludes a situation from benefiting of EU law when it entails abusive or fraudulent ends – so that it must be interpreted strictly. 11 The power granted to the Member States to introduce “anti-abuse” provisions cannot “be given an interpretation going beyond the actual terms” of Article 1(2) PSD.12 As this provision only permits the application of domestic or agreementbased provisions “required” for that purpose, 13 it is necessary to verify whether the French provision respects this requirement of necessity. 7. In doing so, the Court relies on the interpretation well known from its case law in the area of the fundamental freedoms,14 and recalls that the specific objective of the domestic provision must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, the purpose of which is unduly to obtain a tax advantage. As such, a general presumption of fraud and abuse cannot justify either a fiscal measure which compromises the objectives of a directive, or a fiscal measure which prejudices the enjoyment of a fundamental freedom guaranteed by the treaties.15 As a consequence, a domestic provision providing predetermined general criteria should be set aside. An anti-abuse rule should provide for a case-by-case analysis. As the Court already stated recently, a “general tax measure automatically excluding certain categories of taxpayers from the tax advantage, without the tax authorities being obliged to provide even prima facie evidence of fraud and abuse, would go further than is necessary for preventing fraud and abuse.”16 8. The provision under scrutiny applies automatically when the EU parent is held directly or indirectly by a parent located in a third country, i.e., the French rule “is not specifically designed to exclude from the benefit of a tax advantage purely artificial arrangements designed to unduly benefit from that advantage, but covers, in general, any situation where a company directly or indirectly controlled by residents of third States has its registered office, for any reason whatsoever, outside France”.17 However, such control by a third country resident does not, in itself, indicate the existence of a purely artificial arrangement which does not reflect economic reality and whose purpose is unduly to obtain a tax advantage.18 The general presumption of fraud and abuse which leads to the reversal of the burden of proof without the tax authorities having to provide “even prima facie evidence” of the fraud and abuse undermines the objective of elimination of double taxation set by the PSD. 19 This conclusion is also not “undermined by the fact that the parent company at issue is directly or indirectly controlled by one or more residents of third States”, because no provision of the PSD indicates that “the origin of the shareholders of companies resident in the European Union affects the right of those companies to rely on tax advantages provided for by that directive”.20 9. With regard to Article 1(2) PSD, the Court therefore concluded:

10

See Eqiom (C-6/16), para. 24, referring, inter alia, to ECJ, 4 June 2009, C-439/07 and C-499/07, Belgische Staat v KBC Bank NV and Beleggen, Risicokapitaal, Beheer NV v Belgische Staat, EU:C:2009:339, para. 38. 11 Eqiom (C-6/16), para. 26. 12 Eqiom (C-6/16), para. 27, referring to ECJ, 25 September 2003, C-58/01, Océ Van der Grinten NV v Commissioners of Inland Revenue, EU:C:2003:495, para.86 13 Eqiom (C-6/16), para. 28. 14 See ECJ, 12 September 2006, C-196/04, Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, EU:C:2006:544, para. 55, and ECJ, 5 July 2012, C-318/10, Société d’investissement pour l’agriculture tropicale SA (SIAT) v État belge, EU:C:2012:415, para. 40. 15 Eqiom (C-6/16), paras 31-32. 16 Eqiom (C-6/16), para. 32, referring to Euro Park Service (C-14/16), paras 55 and 56. 17 Eqiom (C-6/16), para. 33. 18 Eqiom (C-6/16), paras 34-35 19 Eqiom (C-6/16), para. 36. 20 Eqiom (C-6/16), para. 37.

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“In the light of the above considerations, it must be held that Article 1(2) of the Parent-Subsidiary Directive must be interpreted as precluding national tax legislation, such as that at issue in the main proceedings, which subjects the grant of the tax advantage provided for by Article 5(1) of that directive — namely, the exemption from withholding tax of profits distributed by a resident subsidiary to a non-resident parent company, where that parent company is directly or indirectly controlled by one or more residents of third States — to the condition that that parent company establish that the principal purpose or one of the principal purposes of the chain of interests is not to take advantage of that exemption.”21

10. In a second step, the Court scrutinized the issue in light of the fundamental freedoms and held that, specifically, the freedom of establishment (Article 49 TFEU) applies to the case at hand (and not the free movement of capital under Article 63 TFEU). While the French rules applied to shareholdings of at least 20% (at the time), no information on the purpose of the law was available to the Court, i.e., whether it is only to apply to situations where the shareholder exercises a definite influence over its subsidiary. However, being in an EU (and not a third-country) situation, one must determine the applicable freedom based on the specific facts of the case.22 As the case involves a 100% shareholder relationship, it falls within the freedom of establishment.23 The fact that the shareholder of the EU parent is located in a third country does not deprive the EU parent from relying on the freedom of establishment provision “as the origin of the shareholders is irrelevant since the status of being a European Union company is based, under Article 54 TFEU, on the location of the corporate seat and the legal order where the company is incorporated, not on the nationality of its shareholders”.24 As it is not called in question that the company is established in the EU, the freedom of establishment applies. 11. Applying the freedom of establishment, the relevant difference of treatment consists in the fact that the additional burden of proof only exists in cross-border situations: “[I]t is solely where a resident subsidiary distributes profits to a non-resident parent company, which is directly or indirectly controlled by one or more residents of third States, that the exemption from withholding tax is subject to the condition that that parent company establish that the principal purpose or one of the principal purposes of the chain of interests is not to take advantage of that exemption. By contrast, where such a subsidiary distributes profits to a resident parent company, also directly or indirectly controlled by one or more residents of third States, that resident parent company may benefit from that exemption without being subject to such a condition.” 25

12. Those situations are comparable when, as in the case at hand, the Member State exercises its jurisdiction over the dividends – sourced in that Member State – received by a non-resident taxpayer.26 With regard to a potential justification of that difference in treatment of comparable situations, the Court employed the same approach as for rejecting the application of the anti-abuse provision of Article 1(2) PSD.27 The French rules therefore also violated the freedom of establishment, with the Court explicitly noting that “the objective of combating fraud and tax evasion, whether it is relied on under Article 1(2) of the ParentSubsidiary Directive or as justification for an exception to primary law, has the same scope. Therefore, the findings [with regard to Article 1(2) PSD] also apply with regard to that freedom”.28 13. The Court concluded as follows: “In the light of the foregoing considerations, the answer to the questions referred is that Article 1(2) of the ParentSubsidiary Directive, first, and Article 49 TFEU, secondly, must be interpreted as precluding national tax legislation, such as that at issue in the main proceedings, which subjects the grant of the tax advantage provided for by Article 5(1) of that directive — namely, the exemption from withholding tax of profits distributed by a resident 21

Eqiom (C-6/16), para. 38. See for this determination also ECJ Task Force, ‘Opinion Statement ECJ-TF 1/2017 on the decision of 24 November 2016 of the Court of Justice of the EU in Case C-464/14, SECIL, concerning the free movement of capital and third countries,’ 57 European Taxation (2017), pp. 163-172. 23 Eqiom (C-6/16), paras 39-51. 24 Eqiom (C-6/16), paras 47-48. 25 Eqiom (C-6/16), para. 55. 26 Eqiom (C-6/16), paras 57-58. 27 Eqiom (C-6/16), paras 57-65. 28 Eqiom (C-6/16), para. 64. 22

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subsidiary to a non-resident parent company, where that parent company is directly or indirectly controlled by one or more residents of third States — to the condition that that parent company establish that the principal purpose or one of the principal purposes of the chain of interests is not to take advantage of that exemption.” 29

III. Comments A.

The “shielding effect” of secondary EU law from scrutiny under the fundamental freedoms

14. Repeating in Eqiom what the Court had already stated in Euro Park Service, any national measure in an area which has been the subject of exhaustive harmonisation at the level of the European Union must be assessed in the light of the provisions of that harmonising measure, and not in the light of the provisions of primary law, specifically the fundamental freedoms.30 In that respect, secondary EU law would “shield” domestic implementing legislation from scrutiny under the freedoms. That approach, however, leads to some uncertainties: First, one may wonder if the exhaustive harmonisation test applies with respect (1) to a sphere or area of law (e.g., tax law or corporate tax law), (2) a directive as a whole (e.g., the PSD or the ATAD)31 or (3) if it would be sufficient that a single provision of a directive obliges the Member States to act in a specific way without opening any choices. The latter approach seems to have been taken by the Court in Eqiom32 and also, e.g., subsequently in Deister and Juhler,33 where the Court focused on whether a specific provision of the directive, i.e., Article 1(2) PSD, leads to such harmonisation and not whether the domain as a whole (being tax law or, at least, the treatment of specific operations such as EU cross-border dividend distributions). Similarly, in the Euro Park Service case, the Court also refers to a specific provision of the Merger Directive possibly leading to such harmonization for testing a national provision.34 15. The key element to be taken into account to determine whether the harmonization brought about by one or more provisions of a directive is exhaustive in nature appears to be whether a directive, or one of its provisions, prescribes a particular behaviour from the Member States without leaving any option to them.35 The Court’s case law in non-tax cases confirms this interpretation.36 To do this, “the Court must interpret those provisions taking into account not only their wording but also the context in which they occur and the objectives of the rules of which they form part”.37 Where, therefore, a directive “does not set out minimum requirements […], but rather exhaustive rules”, “Member States are therefore not entitled to adopt more stringent requirements.“ 38 Conversely, a harmonization is not exhaustive if a directive provides that “Member States may introduce or maintain, in the area covered by the directive, more stringent provisions to ensure a higher level of consumer protection” (provided, of course, that power is exercised with due regard for the Treaty).39 29

Eqiom (C-6/16), para. 66. Euro Park Service (C-14/16), para. 19; see also, e.g., ECJ, 12 November 2015, C-198/14, Valev Visnapuu v Kihlakunnansyyttäjä (Helsinki) and Suomen valtio - Tullihallitus, EU:C:2015:751, para. 40; ECJ, 19 October 2017, C-573/16, Air Berlin plc v Commissioners for Her Majesty's Revenue & Customs, EU:C:2017:772, para. 27. 31 See, e.g., ECJ, 19 October 2017, C-573/16, Air Berlin plc v Commissioners for Her Majesty's Revenue & Customs, EU:C:2017:772, where the Court noted “that both Directive 69/335 and Directive 2008/7, which repealed and replaced it, provided for complete harmonisation of the cases in which the Member States may levy indirect taxes on the raising of capital” and that, “where a matter is harmonised at EU level, national measures relating thereto must be assessed in the light of the provisions of that harmonising measure and not of those of the FEU Treaty”. 32 Eqiom (C-6/16), para. 15, finding it “necessary to determine first of all whether Article 1(2) of the Parent-Subsidiary Directive carries out such harmonisation“. 33 Deister Holding and Juhler Holding (C-504/16 and C-613/16), paras 45-46. 34 Euro Park Service (C-14/16), paras 19 and 25. 35 Valev Visnapuu (C-198/14), para. 41. 36 See, for instance, ECJ, 22 June 2017, C- 549/15, E.On Biofor Sverige v Statens energimyndighet, EU:C:2017:490. 37 Valev Visnapuu (C-198/14), para. 42, referring to ECJ, 16 July 2015, C-95/14, Unione Nazionale Industria Conciaria (UNIC) and Unione Nazionale dei Consumatori di Prodotti in Pelle, Materie Concianti, Accessori e Componenti (Uni.co.pel) v FS Retail and Others, EU:C:2015:492, para. 35. 38 UNIC (C-95/14), para. 37. 39 ECJ, 16 December 2008, C-205/07, Lodewijk Gysbrechts and Santurel Inter BVBA, EU:C:2008:730, para. 34. 30

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16. Based on these considerations, the Court in Eqiom noted that Article 1 (2) PSD does not realize an exhaustive harmonization of anti-abuse rules. This is “clear from the wording of that provision”,40 says the Court, which “recognises solely the Member States’ power to apply domestic or agreement-based provisions required for the prevention of fraud and abuse”.41 In other words, as the Directive was referring to, inter alia, domestic anti-abuse provision, it was obvious that the provisions did not exhaustively harmonize the respective area. This position was clearly confirmed in Deister and Juhler.42 17. However, if a directive should have such “shielding effect”, it is that directive and its validity that has to be measured against primary EU law. Indeed, in HSBC Holding plc43 and Air Berlin,44 the Court, after having considered that the legislation was implementing a directive that had harmonized exhaustively the area of indirect taxes on the raising of capital, analyzed the compatibility of domestic tax law with the Directive and refused to analyze it with the Treaty. However, it is then not the domestic rule that should be tested against fundamental freedoms but the provision of the Directive itself. Indeed, the restriction is not attributable to a Member State but to the EU institutions that have adopted the Directive: primary law also binds EU institutions when they adopt secondary legislations, which have to comply, notably, with the fundamental freedoms. For instance, the Court has held that “the prohibition on restrictions on freedom to provide services applies not only to national measures but also to measures adopted by the European Union institutions”.45 It is, however, a question of debate if the Court applies the same standard of primary EU law scrutiny to domestic measures on the one hand and Union legislation on the other hand. While some decisions apply rather strict scrutiny also for secondary EU law measures,46 the Court’s general approach is to accept more easily the proportionality of a restriction that is applicable in the whole EU and that the institutions, requiring the (unanimous) acceptance of all Member States, found politically necessary in light of the goals of the Union. 47 For instance, in the recent Grand Chamber decision in Rzecznik Praw Obywatelskich concerning the compatibility of the VAT directive with the Charter of Fundamental Rights, the Court stated that:48 “52 Where a difference in treatment between two comparable situations is found, the principle of equal treatment is not infringed in so far as that difference is duly justified […]. 53 That is the case, according to settled case-law of the Court, where the difference in treatment relates to a legally permitted objective pursued by the measure having the effect of giving rise to such a difference and is proportionate to that objective […]. 54 In that respect, it is understood that, when the EU legislature adopts a tax measure, it is called upon to make political, economic and social choices, and to rank divergent interests or to undertake complex assessments. Consequently, it should, in that context, be accorded a broad discretion, so that judicial review of compliance with the conditions set out in the previous paragraph of this judgment must be limited to review as to manifest error […].”49 40

Eqiom (C-6/16), para. 16. Eqiom (C-6/16), para. 17. 42 Deister Holding and Juhler Holding (C-504/16 and C-613/16), paras 45-46. 43 ECJ, 1 October 2009, C-569/07, HSBC Holdings plc and Vidacos Nominees Ltd v The Commissioners of Her Majesty's Revenue & Customs, EU:C:2009:594. 44 Air Berlin (C-573/16), paras 26-27. 45 See, e.g., ECJ, 26 October 2010 C-97/09, Ingrid Schmelz v Finanzamt Waldviertel, EU:C:2010:632, para. 50. 46 See, e.g., ECJ, 5 May 1982, Case 15/81, Gaston Schul Douane Expediteur BV v Inspecteur der Invoerrechten en Accijnzen, Roosendaal, EU:C:1982:135, para. 42, stating in a VAT case that “the requirements of Article 95 of the Treaty are of a mandatory nature and do not allow derogation by any measure adopted by an institution of the Community”. Likewise, “[a]s a matter of principle, the scope of a provision of primary law cannot be interpreted in the light of provisions of secondary law that the institutions may have adopted for its implementation. On the contrary, when it is necessary to interpret a provision of secondary law, it is the secondary law which must be interpreted, as far as possible, in a manner which renders it consistent with the provisions of primary law” (Court of First Instance, 2 October 2009, T-324/05, Republic of Estonia v European Commission, EU:T:2009:381, para. 208). 47 See, e.g., ECJ, 10 December 2002, C-491/01, The Queen v Secretary of State for Health, ex parte British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd., EU:C:2002:741, para. 123; ECJ, 17 October 2013, C-203/12, Billerud Karlsborg AB and Billerud Skärblacka AB v Naturvårdsverket, EU:C:2013:664, para. 35. 48 Rzecznik Praw Obywatelskich (RPO) (C-390/15), paras. 52-54 (quotations omitted). 49 ECJ, 7 March 2017, C-390/15, Rzecznik Praw Obywatelskich (RPO), EU:C:2017:174. 41

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B.

Substantive aspects of Eqiom and further clarifications in Deister and Juhler

18. It must be stressed that in Eqiom the French domestic rule has been held incompatible with both the PSD and the freedom of establishment for the sole reason that the burden of proof was automatically reversed where the distributed dividends had been received by a legal person controlled directly or indirectly by one or more residents of States that are not members of the European Union, as under French law the tax authorities did not have to provide “even prima facie evidence” of the fraud and abuse.50 In other words, the Court objected to the mere reversal of the burden of proof based on a general criterion – a “general presumption of fraud and abuse” – set by domestic law that is considered to exceed what is necessary to attain the objective of combatting abuse and fraud. As the Court noted, the mere control by a third country resident does not, in itself, indicate the existence of a purely artificial arrangement which does not reflect economic reality and whose purpose is unduly to obtain a tax advantage.51 19. This is in line with previous case law. For example, Euro Park Service concerned domestic legislation that required an advance agreement for all cross-border mergers (but not for domestic ones), necessitating that the taxpayer show that the operation concerned was justified for commercial reasons and “that it does not have as its principal objective, or as one of its principal objectives, tax evasion or tax avoidance and that its terms make it possible for the capital gains deferred for tax purposes to be taxed in the future”.52 The Court found this requirement to violate both Article 49 TFEU and Article 11(1)(a) of the 1990 Merger Directive.53 Similarly, in SIAT, Belgian legislation on the deductibility of expenses paid to certain lowly or untaxed foreign (but not domestic) service providers put the burden of proof on the domestic taxpayer by requiring proof that such payments relate to genuine and proper transactions and do not exceed the normal limits. Advocate General Cruz Villalón concluded that such reversal of the burden of proof was too general but that some criteria such as the existence of a relationship of interdependence between the service providers and the buyer could have led to accept the measure as proportionate.54 The Court did not take position on this point since it considered that the rule, being insufficiently clear, precise and predictable, infringed the principle of legal certainty.55 20. Shortly after the decision in Eqiom, the Court in Deister and Juhler56 had to deal with the German anti-abuse rule of § 50d(3) of the German Income Tax Act,57 which was supposedly implementing Article 1(2) PSD. German legislation provided for an irrebuttable presumption of abuse (and consequently no relief from withholding taxation of cross-border outbound dividends) that was based on (foreign) ownership of the parent company and the failure to meet one of three objective tests, i.e., economic and substantial reasons for the involvement of that company, a 10% gross-income threshold relating to own economic activity and partaking in general economic commerce. More precisely, § 50d(3) of the German Income Tax Act contained the following conditions: “A foreign company has no entitlement to complete or partial relief [from withholding taxation] to the extent that persons have holdings in it who would not be entitled to the refund or exemption if they earned the income directly, and 50

Eqiom (C-6/16), para. 36. Eqiom (C-6/16), paras 34-35. 52 Euro Park Service (C-14/16), para. 70. 53 Council Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States, [1990] OJ L 225, p. 1. 54 Opinion of AG Cruz Villalón, 29 September 2011, C-318/10, SIAT SA v État belge, EU:C:2011:624. 55 SIAT (C-318/10). 56 Deister Holding and Juhler Holding (C-504/16 and C-613/16). 57 Deister Holding and Juhler Holding (C-504/16 and C-613/16) concerned German legislation that was implemented by the Annual Tax Act (“Jahressteuergesetz”) 2007. The question of compatibility of the more recent version of § 50d(3) of the German Income Tax Act (as amended by the Annual Tax Act 2012) with EU law is currently pending before the Court as C-440/17, GS (referred by the Tax Court of Cologne, 17 May 2017, 2 K 773/16). 51

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(1) there are no economic or other substantial reasons for the involvement of the foreign company or (2) the foreign company does not earn more than 10% of its entire gross income for the financial year in question from its own economic activity or (3) the foreign company does not take part in general economic commerce with a business establishment suitably equipped for its business purpose.”

Moreover, “organisational, economic or other substantial features of undertakings that are affiliated with the foreign company” were irrelevant in the assessment of the abusive nature of the scheme. Finally, a foreign company would not be considered as having an economic activity “if it earns its gross income from the management of assets or assigns its main business activities to third parties”. 21. In Deister and Juhler, the Court found that such a rule violated Articles 1(2) and 5(1) PSD and also gave indications as to the substantive criteria of the abuse standard in EU law.58 First, foreign ownership of the parent company does not indicate the existence of a wholly artificial arrangement, second, the objective tests amount to a general (and irrebuttable) presumption of fraud or abuse. Such irrebuttable presumptions are disproportionate. Third, the conditions of those tests (cumulatively and alternatively) do not by themselves imply the existence of fraud or abuse which also lead to the disproportionality of the rule.59 The Court also clarified that the PSD does neither establish any requirements with regard to the nature of economic activities of qualified companies nor the amount of turnover resulting from those companies’ own economic activity; moreover, “[t]he fact that the economic activity of a non-resident parent company consists in the management of its subsidiaries’ assets or that the income of that company results only from such management cannot per se indicate the existence of a wholly artificial arrangement which does not reflect economic reality”.60 Finally, German legislation also failed the Directive’s standard because it did not provide for an overall assessment, on a case-by-case basis, of the relevant situation be conducted, based on factors including the organisational, economic or other substantial features of the group of companies to which the parent company in question belongs and the structures and strategies of that group.61 As a result, just as the French law did in Eqiom, the German rules also violated the freedom of establishment.62 22. It might finally be noted that the Court in Eqiom spent some considerations on whether the freedom of establishment (Article 49 TFEU) or the free movement of capital (Article 63 TFEU) should apply.63 As the French provisions did not generally apply only to shareholdings which give a shareholder a definite influence, the Court could merely refer to the factual circumstance that Eqiom was a wholly-owned subsidiary so that it was “necessary to answer the questions referred in the light of freedom of establishment”.64 We shall not further comment on this “definite influence” requirement, as the ECJ Task Force has recently delivered its detailed comments on SECIL65 and the delimitation of the fundamental freedoms specifically with regard to third-country situations.66

It is in reaction to the substantive criteria that, in a circular dated 4 April 2018, Federal Tax Gazette (BStBl) I 2018, p. 589, the German Federal Ministry of Finance decreed that § 50d(3) of the German Income Tax Act (as implemented by the Jahressteuergesetz 2007)) is no longer to be applied in cases covered by the PSD. Notwithstanding the pending ECJ case (C-440/17, GS) regards § 50d(3) German Income Tax Act (as amended by the Jahressteuergesetz 2012), this version of the provision will be applied in due consideration of such substantive criteria. 59 Deister Holding and Juhler Holding (C-504/16 and C-613/16), paras 64-71. 60 Deister Holding and Juhler Holding (C-504/16 and C-613/16), paras 72-73. 61 Deister Holding and Juhler Holding (C-504/16 and C-613/16), para. 74. 62 Deister Holding and Juhler Holding (C-504/16 and C-613/16), para. 97. 63 Eqiom (C-6/16), paras 39-51. For a parallel discussion see Deister Holding and Juhler Holding (C-504/16 and C-613/16), paras 7685. 64 Eqiom (C-6/16), para. 51. 65 ECJ, 24 November 2016, C-464/14, SECIL – Companhia Geral de Cal e Cimento SA v Fazenda Pública, EU:C:2016:896. 66 See ECJ Task Force, ‘Opinion Statement ECJ-TF 1/2017 on the decision of 24 November 2016 of the Court of Justice of the EU in Case C-464/14, SECIL, concerning the free movement of capital and third countries,’ 57 European Taxation (2017), pp. 163-172. 58

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C.

Outlook: New Article 1 of the Parent-Subsidiary Directive

23. Eqiom and Deister and Juhler both concerned the anti-abuse reservation in the original text of the PSD: According to its original Article 1(2), “[t]his Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of fraud or abuse”.67 Addressing both the Member State of the subsidiary and of the parent company, that clause makes reference to domestic and tax treaty rules that are “required” for the “prevention of fraud or abuse”. It was also clear from that provision’s wording that whilst Member States may have taken such measures, they were not compelled to do so. 24. The PSD, however, was the first (and so far only68) company tax directive that has undergone an overhaul of its anti-abuse provision. Following the EU’s Action Plan to strengthen the fight against tax fraud and tax evasion and its call for a review of anti-abuse provisions in EU legislation,69 the Commission has proposed to amend the PSD to introduce a mandatory minimum standard to counter abusive transactions, and the Council has adopted such provision in 2014:70 Currently, therefore, Article 1 contains a mandatory minimum anti-abuse standard in paragraphs 2 and 3,71 while the previous optional anti-abuse reservation was slightly reworded and moved to paragraph 4:72 “2. Member States shall not grant the benefits of this Directive to an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. 3. For the purposes of paragraph 2, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. 4. This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse.”

25. Article 1(2) and (3) aim at guaranteeing that the application of anti-abuse rules is proportionate and serves the specific purpose of tackling an arrangement or a series of arrangements which are not genuine, i.e., 67

The notion of “fraud” (and similarly “tax evasion”) likely only has declarative meaning, as in any event the benefits of a Directive will not be available in cases of illegal activities. 68 The new anti-abuse provision in the PSD will, however, be taken into consideration by the Council “in its future work on a possible anti-abuse provision to be included in [the IRD].” See Annex II in the political agreement in Dok. 16435/14 FISC 221 ECOFIN 1157 (5 December 2014). 69 See Action 15 in the Communication from the Commission “An Action Plan to strengthen the fight against tax fraud and tax evasion”, COM(2012)722 final (6 December 2012). 70 See Council Directive (EU) 2015/121 of 27 January 2015, [2015] OJ L 21, p. 1. 71 The Member States had to implement the new requirement into domestic laws by 31 December 2015, and some Member States have done so through specific rules. Conversely, however, if Member States have not implemented that requirement into domestic law, the traditional perspective is that the obligation imposed by the Directive does not have direct effect but rather requires implementation into domestic law (Art. 288(3) TFEU). This is because “direct effect” does not operate against individuals or companies, i.e., a Member State may not invoke against an individual or a company a provision of a Directive, the necessary implementation of which in national law has not yet taken place (see generally, e.g., ECJ, 26 February 1986, Case 152/84, M. H. Marshall v Southampton and South-West Hampshire Area Health Authority (Teaching), EU:C:1986:84), a perspective that the Court has also embraced with regard to the antiabuse reservation in Article 15 MD (see ECJ, 5 July 2007, C-321/05, Hans Markus Kofoed v Skatteministeriet, EU:C:2007:408, para. 42). There is yet also no clear guidance from the Court that this necessity of implementation of anti-abuse rules in the company tax Directives is obsolete based on a general principle of EU law that abusive practices are prohibited (see, however, for the area of VAT ECJ, 22 November 2017, C-251/16, Edward Cussens and Others v T. G. Brosman, EU:C:2017:881, paras. 25-44), but AG Kokott has recently rejected the idea that non-implemented anti-avoidance provisions of the company tax directives could be applied directly by Member States (see the Opinions of AG Kokott of 1 March 2018 in Cases C-115/16, N Luxembourg 1, EU:C:2018:143, paras 98-113, C-116/16, T Danmark, EU:C:2018:144, paras 94-109, C-117/16, Y Denmark, EU:C:2018:145, paras 94-109, C-118/16, X Denmark, EU:C:2018:146, paras 108-123, C-119/16, C Danmark I, EU:C:2018:147, paras 96-111, and C-299/16, Z Denmark, EU:C:2018:148, paras 98-113). In any event, the obligation to interpret national law in accordance with EU law (e.g., an existing domestic GAAR) also exists where the result prescribed is not favorable to the individual or company, so that an interpretative inverse vertical direct effect may be created (see, e.g., Kofoed (C321/05), para. 45). 72 It is, however, disputed which domestic anti-abuse provisions would be permissible under Article 1(4) PSD and whether those could be further-reaching than Article 1(2) PSD (so that the latter provision would indeed only be a minimum standard) or whether they could only be limited to other, e.g., more specific situations (e.g., targeted anti-abuse rules for certain transactions).

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which do not reflect economic reality.73 From a policy perspective, the provision’s aim was to “make it obligatory for Member States to adopt the common anti-abuse rule” (in light of the diverging approaches and the fact that some Member States do not have any domestic or agreement-based provisions for the prevention of abuse), to achieve a common standard for anti-abuse provisions against abuse of the PSD that “will ensure clarity and certainty for all taxpayers and tax administrations” and to guarantee “an equal application of the EU directive without possibilities for “directive-shopping” (i.e. to avoid that companies invest through intermediaries in Member States where the anti-abuse provision is less stringent or where there is no rule)”.74 Nevertheless, a number of uncertainties arise with regard to each of its tests, i.e., that  the main purpose or one of the main purposes of the arrangement is to obtain a tax advantage (“main purpose test”),  the tax advantage defeats the object or purpose of the Directive (“object or purpose of the Directive test”), and  the arrangement is not genuine having regard to all relevant facts and circumstances (“genuineness test”), i.e., that there are no valid commercial reasons which reflect economic reality for the arrangement (“commercial reasons test”). 26. The general framework and each single component of article 1(2) and (3) is intensely discussed in literature and opinions vary widely,75 also with regard to the remaining leeway for Member States to enact anti-abuse provisions and potential conflicts of the Directive’s Article 1(2) and (3) and domestic implementing rules with the fundamental freedoms, e.g., where the application results in a discriminatory withholding taxation of cross-border dividends. The wording of Article 1(2) and (3) takes clear inspiration from the Court’s case law (but arguably also deviates from it) and the Commission’s recommendation on aggressive tax planning,76 but leaves ample room for interpretation. Since it is nearly identical to Article 6 ATAD77 and has certain similarities to the recently introduced “principal purpose test” (PPT) of Article 29 OECD MC, interpretative guidelines might be derived from the interpretation and application of those provisions. While, however, Article 29 OECD MC seems to focus on the perspective of the State (“benefit”), Article 1(2) PSD arguably targets only situations where the taxpayer obtains an overall “tax advantage”, taking into account the tax position in all relevant Member States (e.g., if the “benefit” of a lower withholding tax in one Member State would be offset by a lower tax credit in the other Member State). Conversely a “tax advantage” is not obtained if the “genuine” arrangement, e.g., direct ownership, would have triggered the same (low) tax burden in the source State.78 27. Certainly, the main (but not only79) focus of that provision – as is evidenced by Eqiom and Deister and Juhler – is the perspective of the subsidiary’s State of residence and its claim to tax outbound dividends,80 i.e., the phenomenon of “Directive shopping”. Such “Directive shopping” includes the interposition of a qualified EU 73

Recital 6 of the Preamble of Council Directive (EU) 2015/121 of 27 January 2015, [2015] OJ L 21, p. 1. See the explanation in the Commission’s Proposal 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 (25 November 2013). 75 For a comprehensive discussion on GAARs in EU law see A. Garcia Prats et al, ‘EU Report’, in: IFA (ed.), Seeking anti-avoidance measures of general nature and scope – GAAR and other rules, CDFI Vol. 103a (2018) [in print] (that report was prepared within the framework of the ECJ Task Force). 76 Commission Recommendation of 6.12.2012 on aggressive tax planning, C(2012)8806 final. 77 Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market, [2016] OJ L 193, p. 1. 78 See Opinion AG Kokott, 19 January 2017, C-6/16, Eqiom, EU:C:2017:34, para. 26 with footnote 14, where a holding of a French subsidiary not through an interposed EU company but rather directly by the Swiss parent would likewise not have triggered a withholding tax because of Art. 15 of the EU-Swiss-Agreement, [2004] OJ L 385, p. 30 (now Art. 9 of the EU-Swiss-Agreement, [2015] OJ L 333, p. 12]). 79 The Commission, however, might have taken a narrower perspective when it confirmed “that the proposed amendments to Article 1, paragraph 2 of the Parent Subsidiary directive are not intended to affect national participation exemption systems in so far as these are compatible with the Treaty provisions”. See Annex III in the political agreement in Dok. 16435/14 FISC 221 ECOFIN 1157 (5 December 2014). 80 See also Example 1 in the Commission’s MEMO/15/4609 (23 November 2013). 74

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company to trigger the application of the Directive with the aim to eliminate withholding taxation of dividends that indirectly benefit non-qualified persons (e.g., individuals, non-qualified EU parent companies or third-country parent companies). However, the mere fact that the ultimate shareholder is not a qualified company does not make an arrangement “not genuine” or “artificial”. 81 Indeed, the ECJ in Cadbury Schweppes has relied on an evaluation of objective factors, in particular evidence of physical existence in terms of premises, staff and equipment, that reflects economic reality, i.e. an actual establishment carrying on genuine economic activities and not a mere “letterbox” or “front” subsidiary. 82 The Commission, moreover, noted that “[o]bjective factors for determining whether there is adequate substance include such verifiable criteria as the effective place of management and tangible presence of the establishment as well as the real commercial risk assumed by it”, but likewise admitted that “it is not altogether certain how those criteria may apply in respect of, for example, intra-group financial services and holding companies, whose activities generally do not require significant physical presence”.83 Also, the mere existence of “substance” (e.g., office space, employees) in itself is likely not sufficient to exclude abuse if it does not bear a relation to the income in question.84 It will eventually be for the Court’s case law to undertake this complicated linedrawing, and it is hoped that the criteria established in Eqiom and Deister and Juhler will also inform the Court’s case law with regard to the interpretation of the new wording of Article 1(2) PSD, and that further clarifications will be made by the Court in the pending “beneficial ownership” cases.85 IV. The Statement 28. The CFE welcomes the Eqiom judgment. In an international context where the fight against tax avoidance and aggressive tax planning is intensifying, it is important to preserve the fundamental principles of a balanced tax system: Free choice of the least taxed route, legal certainty, respect of the principles concerning the burden of proof etc. In this respect, the Court appears to be the guardian of these rights. In line with its previous decisions and upholding the fundamental ideas of the Internal Market, the ECJ in Eqiom and Deister and Juhler clearly confirms that Member States may neither employ general presumptions of abuse nor define any tax planning or structuring as abusive in light of secondary EU law or the fundamental freedoms.

81

See Eqiom (C-6/16), paras 37 and 48-49. See Cadbury Schweppes (C-196/04), para. 68. 83 Commission’s Communication on “The application of anti-abuse measures in the area of direct taxation – within the EU and in relation to third countries”, COM(2007)785, p. 4. 84 See in that direction the Council Resolution of 8 June 2010 on coordination of the Controlled Foreign Corporation (CFC) and thin capitalisation rules within the European Union, [2010] OJ C 156, p. 1, noting as one potential indicator that suggests that profits may have been artificially diverted to a CFC that “there is no proportionate correlation between the activities apparently carried on by the CFC and the extent to which it physically exists in terms of premises, staff and equipment”. See also Opinion AG Kokott, 19 January 2017, C‑6/16, Eqiom, EU:C:2017:34, para. 26, noting that “even where there is a physical presence, one might conclude, in light of the financial and staffing set-up, that the arrangement is artificial. In this regard, what appears to be relevant is, for instance, the actual authority of the company organs to take decisions, to what extent the company is endowed with own financial means and whether any commercial risk exists.” 85 See already the Opinions of AG Kokott of 1 March 2018 in Cases C-115/16, N Luxembourg 1, EU:C:2018:143, C-116/16, T Danmark, EU:C:2018:144, C-117/16, Y Denmark, EU:C:2018:145, C-118/16, X Denmark, EU:C:2018:146, C-119/16, C Danmark I, EU:C:2018:147, and C-299/16, Z Denmark, EU:C:2018:148. 82

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Opinion Statement ECJ-TF 3/2018 on the CJEU decision of 12 June 2018, in Case C-650/16, Bevola, concerning the utilisation of “definitive losses” attributable to a foreign permanent establishment Prepared by the CFE ECJ Task Force Submitted to the European Institutions in November 2018 CFE welcomes the Court’s approach in Bevola, under which the comparability in territorial systems with regard to “definitive losses” was linked to the ability to pay. The Court’s decision in Bevola reaffirms that its concept of “definitive losses”, which was first established in Marks & Spencer and refined, inter alia, in Commission v. United Kingdom is still applicable to permanent establishments. Rejecting a reading of Nordea Bank and Timac Agro advanced by national governments, the European Commission and several national supreme tax courts, under which domestic and foreign permanent establishments were deemed as not comparable in territorial systems, the Court reiterated that the standard for testing comparability remains related to the aim pursued by the national provisions at issue. CFE notes, however, the increasing difficulty of applying the comparability test in a coherent manner, despite all the efforts of the Court in this respect. In applying the ‘final losses’ doctrine, cross-border investing companies that incur losses are still at a disadvantage compared to a domestic company if the enterprise is profit-making overall: the purely national company can immediately deduct any losses, while the company that invests cross-border suffers at the very least an unfavourable “timing difference” on utilisation of losses. The CFE therefore invites Member States to consider the introduction of immediate loss utilisation with a recapture mechanism, and, urges the European Commission to propose harmonising measures in this respect.

CFE Tax Advisers Europe is a Brussels-based umbrella association uniting 30 European national tax institutes and associations of tax advisers from 24 European countries. Founded in 1959, CFE represents more than 200,000 tax advisers. CFE Tax Advisers Europe is part of the European Union Transparency Register no. 3543183647‐05. For further information regarding this opinion statement please contact the Chair of the CFE ECJ Task Force Prof. Dr. Georg Kofler or Aleksandar Ivanovski, Tax Policy Manager at info@taxadviserseurope.org

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This is an Opinion Statement prepared by the CFE ECJ Task Force1 on Case C-650/16, Bevola, in which the Grand Chamber of the Court of Justice of the EU (ECJ) delivered its judgment on 12 June 2018.2 In general terms, the ECJ followed the reasoning of Advocate General Campos SánchezBordona, who had delivered his opinion on 17 January 2018.3 The case concerned the compatibility of the Danish loss rules whereby losses attributable to a foreign (EU) permanent establishment (PE) of a Danish company could not be set-off against taxable Danish income of that company, except in the situation where the company opted for an “international integration regime”. The loss attributable to the Finnish PE of Bevola was of a definitive nature. The Danish tax authorities refused to allow its utilisation, including denying the benefit of the Marks & Spencer doctrine for the company. In its judgment, the Court confirms its approach to “definitive losses” (“final losses”): A loss of a foreign permanent establishment must be taken into consideration by the State of residence of the company, provided that that company has exhausted the possibilities of deducting the loss available under the law of the Member State in which the establishment is situated, and that it has ceased to receive any income from that establishment. The Danish company cannot be required, in order to obtain offsetting of its losses, to opt for an international joint taxation regime.

I.

Background and Issues

1.

Bevola is a Danish resident company with an ultimate Danish parent company, Jens W. Trock. Bevola’s Finnish permanent establishment closed in 2009. According to Bevola, its losses could not be deducted in Finland following the closure. Bevola thus claimed to use them against Danish income, but this was denied by the Danish tax authorities.

2.

Under § 8.2 of the Danish law on corporation tax, taxable income does not include income and expenditure relating to a permanent establishment situated in a foreign state. This general rule is however subject to specific provisions of the corporate tax law establishing national and international joint taxation regime. Under § 31 of the corporate tax law (dealing with the national joint tax regime) a joint income is calculated, consisting of the sum of the taxable income of each individual company covered by the regime. Losses of a foreign permanent establishment may generally only be offset against income of a Danish company if international joint taxation (see below) has been chosen (and maintained for a minimum period of ten years). The ultimate parent company participating in the joint tax regime is designated as the management company for the purposes of the regime. This regime is completed by § 31A allowing the top parent company to extend the tax integration scheme to foreign companies of the group as well as to all foreign permanent establishments owned by Danish and foreign companies participating in the joint taxation regime.

3.

Bevola and its parent company Jens Trock argued that, had Bevola had a Danish establishment, its losses would have been deductible in Denmark; as such the fact that the foreign losses cannot be set off against Danish income constitutes a restriction of freedom of establishment. They also considered that the Finnish losses, as definitive losses, should be deductible from Bevola’s income which is taxable in Denmark, its country of residence. 1

Members of the Task Force are: Alfredo Garcia Prats, Werner Haslehner, Volker Heydt, Eric Kemmeren, Georg Kofler (Chair), Michael Lang, Jürgen Lüdicke, João Nogueira, Pasquale Pistone, Albert Rädler†, Stella Raventos-Calvo, Emmanuel Raingeard de la Blétière, Isabelle Richelle, Alexander Rust and Rupert Shiers. Although the Opinion Statement has been drafted by the ECJ Task Force, its content does not necessarily reflect the position of all members of the group. 2 ECLI:EU:C:2018:424. 3 ECLI:EU:C:2018:15.

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4.

II.

The Danish court hearing the dispute questioned the relevance of the companies’ arguments, especially in view of the possibility, offered by the Danish tax legislation, to opt for the international tax integration regime. The Court thus referred the following question to the ECJ: “Does Article 49 TFEU preclude a national taxation scheme such as that at issue in the main proceedings under which it is possible to make deductions for losses in domestic branches, while it is not possible to make deductions for losses in branches situated in other Member States, including in circumstances corresponding to those in the Court’s judgment [of 13 December 2005] in Marks & Spencer, C-446/03, C-446/03, EU:C:2005:763, paragraphs 55 and 56, unless the group has opted for international joint taxation on the terms as set out in the main proceedings?”

Judgment of the Court of Justice

5.

As a first step, the Court4 notes the existence of a difference in treatment, under Danish law, between Danish companies which have a permanent establishment in Denmark and those whose permanent establishment is situated in another Member State. The former can deduct losses from their local branch for Danish tax purposes, while the latter can deduct losses from their permanent establishment situated in another Member State only if they opt for the international tax integration. This difference in treatment is likely to make it less attractive for a Danish company to exercise its freedom of establishment by creating permanent establishments in other Member States. 5 This difference in treatment is also not called into question by the existence of the optional “international joint taxation” regime under § 31A of the Danish law on corporation tax, the benefit of which “is subject to two strict conditions” (i.e., inclusion of global income and minimum period of ten years).6

6.

The Court then examines whether the difference in treatment constitutes an obstacle to the freedom of establishment. Such a restriction would not exist if (1) the difference in treatment concerns situations which are not objectively comparable, or (2) if an overriding reason in the public interest is found to exist that (3) is proportionate to that objective.7 The Court addresses each step in some detail:

7.

Comparability of situations. Some of the intervening governments8, relying on the Timac Agro9 and Nordea Bank10 cases, consider that a Danish company with local branch and one with a branch in another Member State are not in a comparable situation since the income of the foreign permanent establishment “is not subject to the tax jurisdiction” of Denmark.11 The EU Commission, which shares this reading of the Nordea Bank and Timac Agro cases, points out, however, that those judgments contradict the previous case-law of the Court, “which accorded no importance to the reason for the difference in treatment”.12 According to the Commission, taking into account the comparability analysis, the reason for the difference of treatment would mean considering two situations as not comparable “simply because the Member State would have chosen to treat them differently”.13 Referring to Oy AA,14 X Holding15 and SCA Group Holding,16 the Court recalls that the “comparability of a cross-border situation with an internal

4 In general terms, the Court of Justice follows the reasoning of Advocate General Campos Sánchez-Bordona. We shall thus mainly refer to the judgment. 5 Bevola (C-650/16), para. 29. 6 Bevola (C-650/16), paras 25-27. 7 Bevola (C-650/16), para. 20. 8 I.e., Austria, Germany and Denmark. 9 ECJ, 17 July 2014, C-48/13, Nordea Bank Danmark A/S v Skatteministeriet, EU:C:2014:2087. 10 ECJ, 17 December 2015, C-388/14, Timac Agro Deutschland GmbH v Finanzamt Sankt Augustin, EU:C:2015:829. 11 Bevola (C-650/16), para. 30. 12 Bevola (C-650/16), para. 31. 13 Bevola (C-650/16), para. 31. 14 ECJ, 18 July 2007, C-231/05, Oy AA, EU:C:2007:439. 15 ECJ, 25 February 2010, C-337/08, X Holding BV v Staatssecretaris van Financiën, EU:C:2010:89. 16 ECJ, 12 June 2014, C-39/13 to C-41/13, Inspecteur van de Belastingdienst/Noord/kantoor Groningen and Others v SCA Group Holding BV and Others, EU:C:2014:1758.

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situation must be examined having regard to the aim pursued by the national provisions at issue”.17 It then undertakes to explain in Nordea Bank and Timac Agro, stating that those cases “do not imply the abandonment […] of that method of assessing the comparability of the situations, which is moreover expressly applied in later judgments”.18 Actually, says the Court concerning Nordea Bank and Timac Agro, “there was no need for it to look at the purpose of the national provisions concerned, since they applied the same tax treatment to permanent establishments abroad and those in national territory”.19 Referring to Avoir Fiscal,20 the Court adds that “[w]here the legislature of a Member State treats those two categories of establishments in the same way for the purpose of taxing their profits, it recognizes that, with regard to the detailed rules and conditions of that taxation, there is no objective difference between their situations which could justify a difference in treatment”.21 However, it should not be understood from these statements that “where a national tax legislation treats two situations differently, they cannot be regarded as comparable”,22 as “to accept that a Member State may in all cases apply different treatment solely because the permanent establishment of a resident company is situated in another Member State would deprive Article 49 TFEU of its substance”.23 According to the Court, where, as in the case at hand, the national legislation removes from the taxable base both the income and losses of foreign permanent establishments, it is intended to prevent the double taxation of income and, symmetrically, the double deduction of losses of foreign permanent establishments. As regards such measures, companies with foreign permanent establishments are not, as a rule, in a situation comparable to that of companies with a resident permanent establishment, for which conclusion the Court expressly refers to Nordea Bank and Timac Agro.24 However, situations become comparable from the point of view of the objective of preventing double deduction of losses when the foreign permanent establishment (1) has ceased any activity and (2) whose losses can no longer be deducted in the State in which the permanent establishment is situated.25 This approach is reinforced by considering the aim of the national provisions which the Court said was to ensure that the taxation of a company with a foreign permanent establishment be in line with its ability to pay tax: a company with definitive foreign losses is in a situation comparable to the one of a company with a loss-making resident permanent establishment.26 8.

Justification of the Restriction. Based on settled case law, the Court concludes that the Danish tax rules could be justified by overriding reasons in the public interest relating (1) to the balanced allocation of powers of taxation between the Member States, (2) the coherence of the Danish tax system and (3) the need to prevent the risk of double deduction of losses. a.

Regarding the balanced allocation of taxing rights, it is worth noting that the Court drew special attention to the possibility of the taxpayer being able to choose the place where the losses may be offset, which is something to be avoided.27

17

Bevola (C-650/16), para. 32. Bevola (C-650/16), para. 33, referring to ECJ, 21 December 2016, C-593/14, Masco Denmark ApS and Damixa ApS v Skatteministeriet, EU:C:2016:984, ECJ 22 June 2017, C-20/16, Wolfram Bechtel and Marie-Laure Bechtel v Finanzamt Offenburg, EU:C:2017:488, and ECJ, 22 February 2018, C-398/16 and C-399/16, X BV and X NV v Staatssecretaris van Financiën, EU:C:2018:110. 19 Bevola (C-650/16), para. 34. 20 ECJ, 28 January 1986, 270/83, Commission of the European Communities v French Republic, EU:C:1986:37, para. 20. 21 Bevola (C-650/16), para. 34. 22 Bevola (C-650/16), para. 35, referring ECJ, 22 January 2009, C-377/07, Finanzamt Speyer-Germersheim v STEKO Industriemontage GmbH, EU:C:2009:29, para. 33. 23 Bevola (C-650/16), para. 35, referring to ECJ, 25 February 2010, C-337/08, X Holding BV v Staatssecretaris van Financiën, EU:C:2010:89, para. 23. 24 Bevola (C-650/16), paras 24 and 27. 25 Bevola (C-650/16), para. 38. 26 Bevola (C-650/16), para. 39. 27 Bevola (C-650/16), para. 43, referring to ECJ, 25 February 2010, C-337/08, X Holding BV v Staatssecretaris van Financiën, EU:C:2010:89, para. 29. 18

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9.

b.

As to the coherence of the tax system, the Court recalls that the direct nature of the link between the tax advantage and the compensating tax charge must be examined in the light of the objective pursued by the legislation in question.28 One the one hand, a resident company may use the losses of its domestic permanent establishment while for foreign losses such use is possible only if the company opted for the international joint taxation regime. On the other hand, profits of the domestic permanent establishment are taxed in Denmark while profits attributable to the foreign permanent establishment are not, unless the international joint taxation regime applies. According to the Court, this national provision indeed establishes the necessary link between the tax advantage (use of losses) and the compensating tax charge (taxation of profits).29 Such direct link is moreover in line with the aim to tax according with the company's ability pay, because a “company’s ability to pay tax would be systematically underestimated” if such “company possessing a permanent establishment in another Member State were allowed to set off against its results the losses incurred by that establishment without being taxed on the profits made by it”.30

c.

The risk of double deduction of foreign losses is also viewed by the Court as a justification,31 even if not expressly relied on by the Danish government.

Proportionality. In light of those grounds of justification, the Court had to assess the proportionality of the measure and, in doing so, could largely rely on its judgments in Marks & Spencer32 and Commission v. United Kingdom (“Marks & Spencer II”).33 As the Court narrowed down its analysis to the deductibility of “definitive losses”, it has not directly ruled on the taxpayer’s option to enter the international joint taxation regime and its conditions.34 The Court starts its analysis by noting that “[w]here there is no longer any possibility of deducting the losses of the non-resident permanent establishment in the Member State in which it is situated, the risk of double deduction of losses no longer exists”.35 Denying cross-border loss utilization in such a situation would go beyond what is necessary to achieve the objectives of the Danish rules (i.e., balanced allocation of powers of taxation, coherence of the tax system, and prevention of the risk of the double use of losses) and, conversely, “[a]lignment of the company’s tax burden with its ability to pay tax is ensured better if a company possessing a permanent establishment in another Member State is authorised, in that specific case, to deduct from its taxable results the definitive losses attributable to that establishment.”36 In light of the coherence of the Danish tax system, however, “deduction of such losses can be allowed only on condition that the resident

28

Bevola (C-650/16), para. 45, referring, inter alia, to ECJ, 30 June 2016, C-123/15, Max-Heinz Feilen v Finanzamt Fulda, EU:C:2016/496, para. 30. 29 Bevola (C-650/16), para. 48. 30 Bevola (C-650/16), paras 49 and 50. 31 Bevola (C-650/16), para. 52, referring to Commission v United Kingdom (C-172/13). 32 ECJ, 13 December 2005, C-446/03, Marks & Spencer plc v David Halsey (Her Majesty's Inspector of Taxes), EU:C:2005:763. 33 Commission v United Kingdom (C-172/13). For a detailed analysis see Opinion Statement ECJ-TF 2/2015 of the CFE on the decision of the European Court of Justice in Case C-172/13, European Commission v. United Kingdom (“Final Losses”), concerning the “Marks & Spencer exception”, ET 2016, pp. 87 et seq. 34 Bevola (C-650/16), paras 55-58. However, the Court briefly addressed the conditions of the Danish international joint taxation regime and demonstrated sympathy for the underlying concepts (Bevola (C-650/16), paras 56): “It should be stressed that, if a resident company were free to define the extent to which that joint taxation was applied, it would be able to decide at will to incorporate only non-resident permanent establishments facing losses, which would then be deducted from its taxable income in Denmark, while excluding establishments making profits and subject in their own Member State to a rate of tax that might be more favourable than in Denmark. Similarly, the possibility which would be left to the resident company of altering the extent of international joint taxation from one year to the next would be tantamount to allowing it to choose freely the Member State in which the losses of the nonresident permanent establishment in question were to be taken into account (see, to that effect, judgment of 25 February 2010, X Holding, C-337/08, EU:C:2010:89, paragraphs 31 and 32). Such possibilities would jeopardise both the balanced allocation of powers of taxation between Member States and the symmetry between the right to tax profits and the possibility of deducting losses sought by the Danish tax system.” 35 Bevola (C-650/16), para. 58. 36 Bevola (C-650/16), para. 59.

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company demonstrates that the losses it wishes to set off against its results are definitive”.37 As for when a loss is “definitive” the Court refers to Marks & Spencer38 and the further elaborations in Commission v United Kingdom, 39 according to which “the losses incurred by a non-resident subsidiary may be characterised as definitive only if that subsidiary no longer has any income in its Member State of residence. So long as that subsidiary continues to be in receipt of even minimal income, there is a possibility that the losses sustained may yet be offset by future profits made in the Member State in which it is resident.”40 The Court then, without further discussion, found that standard to be also applicable for the situation of permanent establishments in territorial systems.41 “Definitive” losses hence exist where (1) the company possessing the establishment has exhausted all the possibilities of deducting those losses available under the law of the Member State in which the establishment is situated and (2) it has ceased to receive any income from that establishment, so that there is no longer any possibility of the losses being taken into account in that Member State.42 However, the Court eventually left it for the national court to assess whether those conditions are satisfied in the case of Bevola’s Finnish establishment.43 10. The Court hence concluded: “Article 49 TFEU must be interpreted as precluding legislation of a Member State under which it is not possible for a resident company which has not opted for an international joint taxation scheme, such as that at issue in the main proceedings, to deduct from its taxable profits losses incurred by a permanent establishment in another Member State, where, first, that company has exhausted the possibilities of deducting those losses available under the law of the Member State in which the establishment is situated and, second, it has ceased to receive any income from that establishment, so that there is no longer any possibility of the losses being taken into account in that Member State, which is for the national court to ascertain”.

III.

Comments

11. This Task Force has already had the opportunity to comment on the case law of the Court relating to cross-border use of losses: A 2009 Opinion Statement analysed the consequences for the State of residence of applying either a worldwide or a territorial taxation and the respective effects on the use of foreign losses in light of the Court’s case law;44 moreover, a 2015 Opinion Statement on Commission v. UK (“Marks & Spencer II”)45 addressed a number of issues relating to the question whether losses are “definitive” (“final”).46 The present Opinion Statement will take up questions of comparability, the relevance of the principle of ability to pay in the context of loss-utilization, and the definition of “definitive” or “final” losses in light of Bevola and other recent decisions. It should be noted at the outset that – in line with Gielen,47 but without explicitly referring to it – the Court was not impressed by the 37 Bevola (C-650/16), para. 60, referring to ECJ, 13 December 2005, C-446/03, Marks & Spencer plc v David Halsey (Her Majesty's Inspector of Taxes), EU:C:2005:763, para. 56, and Commission v United Kingdom (C-172/13), para. 27. 38 Marks & Spencer (C-446/03), para. 55. 39 Commission v United Kingdom (C-172/13). 40 See Bevola (C-650/16), para. 63, referring to Commission v United Kingdom (C-172/13), para. 36. 41 See Bevola (C-650/16), para. 64, noting that the standards set in Marks & Spencer and Commission v United Kingdom for group taxation regimes “may be applied by analogy to the losses of non-resident permanent establishments”. 42 See Bevola (C-650/16), para. 64. 43 See Bevola (C-650/16), para. 65. 44 Opinion Statement of the CFE ECJ Taskforce on Losses Compensation within the EU for Individuals and Companies Carrying Out Their Activities through Permanent Establishments, ET 2009, 487 et seq. 45 ECJ, 3 February 2015, C-172/13, European Commission v United Kingdom of Great Britain and Northern Ireland, EU:C:2015:50. 46 Opinion Statement ECJ-TF 2/2015 of the CFE on the decision of the European Court of Justice in Case C-172/13, European Commission v. United Kingdom (“Final Losses”), concerning the “Marks & Spencer exception”, ET 2016, pp. 87 et seq. 47 ECJ, 18 March 2010, C-440/08, F. Gielen v Staatssecretaris van Financiën, EU:C:2010:148, paras 49 et seq.

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existence of the optional “international joint taxation” regime under § 31A of the Danish law on corporation tax, the benefit of which “is subject to two strict conditions” (i.e., inclusion of global income and minimum period of ten years).48

A.

Comparability, Ability to Pay and Double Deduction of Losses

12. The Court’s explanations with respect to comparability of domestic (“resident”) and foreign (“nonresident”) permanent establishments49 are of particular importance. In an attempt to reconcile its decision in Lidl Belgium50 with those in Nordea Bank and Timac Agro, the Court resorts to link the question of comparability to the existence of definitive losses. This marks an important new development that rejects a reading of the latter judgments as excluding the ex ante comparability between domestic and foreign permanent establishments where the residence state applies a territorial tax system. In Bevola, the Court made it clear that it has not abandoned its approach to comparability of domestic and foreign situations from earlier case law.51 This clarification is all the more relevant since its jurisprudence had already been misread in this manner by several national supreme courts in Europe.52 13. The Court reaffirms the principle that comparability needs to be assessed having regard to the aim of the national provision,53 while rejecting the apparent consequence that comparability depends on the legal framework a given State adopts at a given time. A reading that would allow Member States to exclude comparability by way of designing its tax law in such a way as to always treat foreign permanent establishments different from domestic establishments would “deprive Article 49 TFEU of its substance”.54 14. The Court also retains the statement from Nordea Bank and Timac Agro that “companies which have a permanent establishment in another Member State are not, in principle, in a comparable situation to that of companies possessing a resident permanent establishment” with respect to measures concerned with the prevention of double taxation.55 This was followed in those judgments with an exception to this rule of non-comparability in the case where the State has decided to include the results from a resident company’s foreign permanent establishment in its domestic tax base.56 In Bevola, the Court made it clear that this was not to be understood to be the only exception to such rule, as had been contended by several Member States intervening in the case.57 The Court is undoubtedly correct to say that such reading of Nordea Bank (para. 24) and Timac Agro (para. 27) was not necessary, as these merely pointed to situations where the Member State actually treated foreign permanent establishments equal to 48

Bevola (C-650/16), paras 25-27. The Court frequently uses the notion of “residence” when referring to permanent establishments, which are neither taxpayers nor persons (e.g., Bevola (C-650/16), para. 30). It seems that this terminology is not used in a technical sense and must therefore not be confused with the international tax concept of tax residency, which only applies to persons. 50 ECJ, 15 May 2008, C-414/06, Lidl Belgium GmbH & Co. KG v Finanzamt Heilbronn, EU:C:2008:278. 51 Bevola (C-650/16), para. 33. 52 See German Supreme Tax Court (BFH), 22 February 2017, IR 2/15, and Austrian Supreme Tax Court (VwGH), 29. March 2017, Ro 2015/15/0004. 53 Bevola (C-650/16), para. 32. 54 Bevola (C-650/16), para. 35. 55 Bevola (C-650/16), para. 37, referring to Nordea Bank (C-48/13), para. 24, and Timac Agro (C-388/14), para. 27. 56 Nordea Bank (C-48/13), para. 24; Timac Agro (C-388/14), para. 28. In the latter case, the Court refers to Germany’s granting of a “tax advantage” by permitting the deduction of losses, which established comparability. It should be noted here that the Court used that term (in line with its earlier case law on loss relief and the „coherence“ justification) to establish a link between tax benefits and tax burdens, and not in the technical sense relevant for a State aid analysis: there is no indication in the Court’s case law that the granting of loss relief would by itself be considered a tax advantage that could give rise prohibited State aid. In fact, the recent judgment in case Andres makes it clear that loss relief could only be considered an “advantage” in this sense if it were a deviation from the normally applicable tax system (ECJ, 28 June 2018, C-203/16 P, Andres (liquidation Heitkamp BauHolding), ECLI:EU:C:2018:505, para. 88). 57 See the arguments cited in Bevola (C-650/16), para. 30. 49

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domestic establishments; the same cannot be said about the statement in para. 65 of Timac Agro, where the Court denied comparability solely on the fact that Germany did not exercise any tax powers over a foreign permanent establishment (that did not have definitive losses).In relationto that reasoning, the Court’s clarification seems more like a reversal of the earlier judgment. Rather than outright denying comparability in the equivalent situation, the Court accepts, in Bevola, that comparability may nevertheless follow from the existence of losses attributable to a foreign permanent establishment, if that permanent establishment has “ceased activity and whose losses could not, and no longer can, be deducted from its taxable profits in the Member State [of its activity]”.58 15. This result effectively corrects the overly restrictive approach seemingly taken in Timac Agro, which had appeared to abolish the “Marks & Spencer” exception for “definitive losses” incurred by foreign permanent establishments.59 In doing so, it creates a new uncertainty about the structure of the fundamental freedoms’ application, as the criterion defining comparability in this case seems to coincide with the standard used for testing proportionality.60 The Court thus rejects anew the suggestions made by several Advocates General,61 who, concerned with the clarity and dogmatic coherence of the path taken by the Court in this context, urged to drop both the exception for “definitive losses” and the traditional approach to comparability as relevant to the application of the freedom of establishment in such cases.62 16. The Court, finally, links comparability to the ability-to-pay principle, noting that the relevant tax provisions aim at ensuring taxation in line with the company’s ability to pay, which requires the prevention of both double taxation and a double deduction of losses. The Court recognizes that a company is “affected in the same way” whether its domestic establishment has incurred losses or a foreign permanent establishment has “definitively incurred losses”.63 It is thus clear that comparability here is also inextricably linked to the objective of the tax system to tax income in accordance with the taxpayer’s ability to pay. It remains unclear, however, why the Court considers the situation of domestic losses only to be comparable to that of definitive foreign losses, since these are defined, in the Court’s own case law, as losses that could not ever be taken into account anywhere else but in the residence State. But the taxpayer’s ability to pay is clearly already affected where a loss is not definitive: if a taxpayer’s global income is 0, there is no ability to pay (or, in the AG’s words: no tax paying capacity) and thus no tax should be payable in the relevant tax year. This holds true regardless of whether it results from foreign or domestic losses. The fact that losses might be carried forward does not change the lack of capacity to pay taxes in the year when the loss is incurred.64 17. Admittedly, the risk of a double use of losses is increased whenever a permanent establishment exists outside the territory of the State of residence. Any double deduction would, as the Court states too,65 is equally inconsistent with the ability-to-pay principle. Yet, the more proportionate way to prevent this remains a recapture mechanism at the time when the State where the permanent establishment is situated actually grants such deduction. This solution, which was already proposed by AG Sharpston in Lidl

58

Bevola (C-650/16), para. 38. Although one could rightly argue, as AG Campos Sánchez-Bordona did in para. 57 of his Opinion, that this apparent deviation from Marks & Spencer and Lidl Belgium resulted merely from the fact that Timac Agro did not concern such definitive losses (as also pointed out clearly by AG Wathelet in his Opinion on that case, at para. 67). 60 See further below in Chapter III.C. 61 See Opinion AG Kokott, 19 July 2012, C-123/11, A, ECLI:EU:C:2012:488, para. 50; Opinion AG Mengozzi, 21 March 2013, C322/11, K, ECLI:EU:C:2013:183, para. 88; Opinion AG Kokott, 13 March 2014, C-48/13, Nordea Bank Danmark A/S v Skatteministeriet, ECLI:EU:C:2014:153, para. 26; Opinion AG Kokott, 23 October 2014, C-172/13, Commission v. UK, ECLI:EU:C:2014:2321, paras 49-53. 62 Opinion AG Kokott, 13 March 2014, C-48/13, Nordea Bank Danmark A/S v Skatteministeriet, ECLI:EU:C:2014:153, para. 26. 63 Bevola (C-650/16), para. 39. 64 This is supported by the fact that countries typically do not deny a deduction of losses incurred by a domestic establishment on the basis that such loss might be capable to be offset against foreign profits in another country. Indeed, the Court has previously held such denial an unjustifiable restriction of the freedom of establishment (ECJ, 12 September 2012, C-18/11, Philips Electronics, EU:C:2012:532; see also ECJ, 14 December 2000, C-141/99, AMID, EU:C:2000:696). 65 Bevola (C-650/16), para. 39. 59

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Belgium66 (but unfortunately rejected by the Court) is the only one that avoids a disadvantage from establishing a presence in another Member State as protected by the freedom of establishment while also safeguarding the fundamental principles underlying the tax system. The counterargument that such mechanism is insufficiently secure to prevent a double use of losses is unconvincing in light of the experience with already existing domestic (procedural) rules and in the context of increasingly effective exchange of information within the European Union.67 But even if that risk were still considered to be so high as potentially to outweigh the freedom of establishment’s restriction, this question ought to be analysed as a matter of justification, since it is an objection grounded in a lack of coordination of tax administrations rather than an aspect inherent to the companies involved and thus needs to be subject to a proportionality analysis.

B.

Grounds of Justification

18. Contrasting with the lengthy discussion on comparability, the Court was rather short in assessing the justifications for this measure. In this case, the Court has reviewed and considered as applicable three justifications: (1) balanced allocation of taxing rights; (2) coherence of the tax system; and (3) risk of double deductions of losses. The analysis of the Court is well aligned with the Court’s traditional position in similar cases:68 a.

Relying on X Holding,69 the Court first found that allowing a deduction of losses of permanent establishments located in other Member States would undermine the balanced allocation of taxing rights since it would allow taxpayers a right to choose the jurisdiction where its losses (and profits) would be taken into account.

b.

Second, tax coherence would also be undermined since there is a direct link between accepting the losses and taxing the profits of permanent establishments. This link is particularly clear if one takes into account the joint taxation regime where the taxpayer could deduct losses of foreign permanent establishments if it also opts for taxing its profits in Denmark.

c.

Lastly, and even if not mentioned by the Danish government, the Court held that the national provision at stake could also be justified by the need to prevent double use of losses.70

C.

Proportionality and the ‘Definiteness’ of Losses

19. The Court then analyses whether the legislation at issue goes beyond what is necessary to achieving those objectives and concludes that the risk of double deduction of losses no longer exists where there is no longer any possibility of deducting the losses of the non-resident permanent establishment in the Member State in which it is situated.71 Referring to its judgment in Marks & Spencer the Court holds that a Member State has to allow a company to deduct from its tax base the “definite losses” attributable to a permanent establishment located in another Member State. Allowing the deduction of “definite losses” better aligns with the company’s ability to pay.

66

Opinion of AG Sharpston, 14 February 2008, C-414/06, Lidl Belgium GmbH & Co. KG v Finanzamt Heilbronn, EU:C:2008:88, para. 25. 67 Such recapture mechanism is indeed used in several Member States (see, e.g., § 2(8) of the Austrian Income Tax Act) and has also been proposed by the European Commission (see Art 42 of the Commission’s Proposal for a Council Directive on a Common Corporate Tax Base, COM(2016)685 final, on “Loss relief and recapture”). 68 Bevola (C-650/16), paras 41-54. 69 ECJ, 25 February 2010, C-337/08, X Holding, EU:C:2010:89, paras 28-29. 70 See Bevola (C-650/16), para. 52, referring to Commission v United Kingdom (C-172/13), para. 24. 71 Bevola (C-650/16), para. 58.

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20. To benefit from the deduction the taxpayer is obliged to show that the losses in question satisfy the “Marks & Spencer requirements”, as further clarified in Commission v United Kingdom. 72 These requirements were originally stated in the context of a parent-subsidiary relationship and have to be applied by analogy to the losses of a foreign permanent establishment. As a result, losses attributable to a foreign permanent establishment become definitive if, first, the company possessing the establishment has exhausted all the possibilities of deducting those losses available under the law of the Member State in which the establishment is situated and, second, it has ceased to receive any income from that establishment, so that there is no longer any possibility of the losses being taken into account in that Member State.73 The second prong of that test – “ceased to receive any income from that establishment” – seems to imply that (future) positive income from other activities in the source State is irrelevant,74 i.e., that the Court equates a permanent establishment effectively with a separate entity. 21. The “Marks & Spencer requirements” are now, in substance, applied both at the level of the comparability and at the level of proportionality.75 This comparability analysis that seemingly includes a proportionality test, however, resembles the approach in Schumacker76 and X,77 where the Court also established comparability – from the source State’s perspective – based on whether the other State is in a position to take certain tax benefits into account; in those cases the Court effectively mingles the analytical levels of comparability and proportionality. Concerning comparability, the Court has already held that the situation of a resident company with a foreign permanent establishment is not different from the situation of a resident company with a domestic permanent establishment if the permanent establishment has ceased its activity and the losses attributable to the permanent establishment could not, and no longer can, be deducted from its taxable profits in the Member State in which it carried on its activity.78

IV.

The Statement

22. The Court’s decision in Bevola is a continuation of the Court's case-law on cross-border use of losses. The Court reaffirms that its concept of “definitive losses”, which was first established in Marks & Spencer and refined, inter alia, in Commission v. United Kingdom,79 is (still) applicable to permanent establishments. Rejecting a reading of Nordea Bank and Timac Agro advanced by national governments, the European Commission and several national supreme tax courts that would deem domestic and foreign permanent establishments as not comparable in territorial systems, the Court reiterated its standard of testing comparability having regard to the aim pursued by the national provisions at issue. However, the CFE notes the increasing difficulty of applying the comparability test in a perfectly coherent manner, despite all the efforts of the Court in this respect. 23. The CFE welcomes that the Court in Bevola has linked the approach to comparability in territorial systems with regard to “definitive losses” to the idea of ability to pay. For the Court, if a loss is “definitive”, the

72

Commission v United Kingdom (C-172/13). Bevola (C-650/16), para. 64. 74 For a contrary argument by the Austrian government see Opinion of AG Wathelet, 3 September 2015, C‑388/14, Timac Agro Deutschland GmbH v Finanzamt Sankt Augustin, EU:C:2015:533, para. 67 with footnote 45 (“According to the written observations of the Austrian Government, the losses of the Austrian permanent establishment accrued up to 2005 were in principle recoverable and capable of being deferred. The deferred losses could thus be set against any capital gain arising from the transfer, with any balance continuing to exist in principle for an unlimited period as deferred losses of Timac Agro. These losses could therefore be used at a later point in time if the applicant in the main proceedings resumed its business in Austria […]. The losses could also be passed on to the transferee limited company if the permanent establishment was transferred ‘in a tax neutral manner’ […].” 75 For a critical view regarding this duplication see already above at para. 15 of this Opinion Statement. 76 ECJ, 14 Feb. 1995, C-279/93, Finanzamt Köln-Altstadt v Roland Schumacker, EU:C:1995:31. 77 ECJ, 9 Feb. 2017, C-283/15, X v Staatssecretaris van Financiën, EU:C:2017:102. 78 Bevola (C-650/16), para. 38. 79 See the Opinion Statement ECJ-TF 2/2015 of the CFE on the decision of the European Court of Justice in Case C-172/13, European Commission v. United Kingdom (“Final Losses”), concerning the “Marks & Spencer exception”, ET 2016, pp. 87 et seq. 73

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ability to pay principle requires such losses to be taken into account in the state of residence as otherwise the enterprise would be taxed beyond its overall profits. 24. It should be noted, however, that taking this loss into account when it is “final” or “definitive” in the source State implies that there are sufficient profits to offset it in the State of residence. Moreover, applying this concept of "final losses", a company investing in another Member State, where it incurs losses, is still economically disadvantaged if the overall enterprise is in a profit-making position: the purely national company can immediately deduct any losses, while the company that invests beyond its borders suffers at the very least an unfavourable “timing difference”.80 It is doubtful whether this situation is really in line with the fundamental objective of the TFEU to create a single market without internal borders. The CFE therefore invites Member States to consider the introduction of immediate loss utilisation with a recapture mechanism, and urges the European Commission to propose harmonising measures in this respect.81

80

See, e.g., Opinion of AG Sharpston, 14 February 2008, C-414/06, Lidl Belgium GmbH & Co. KG v Finanzamt Heilbronn, EU:C:2008:88, paras 24 and 25. 81 Such an idea is strongly supported by the CFE Tax Advisers Europe to the extent that its member organisations are in favour of the common corporate tax base itself (see CFE Tax Advisers Europe, Opinion Statement FC-1/2016 on the EU Public Consultation on the Relaunch of the CCCTB in January 2016, available at http://taxadviserseurope.org/). See already the (withdrawn) Commission Proposal COM(90)595 for the introduction of a cross-border loss relief mechanism and more recently, in the broader context of corporate tax base harmonization, Art 42 of the Commission’s Proposal for a Council Directive on a Common Corporate Tax Base, COM(2016)685 final, on “Loss relief and recapture See also, e.g., Opinion of AG Sharpston, 14 February 2008, C-414/06, Lidl Belgium GmbH & Co. KG v Finanzamt Heilbronn, EU:C:2008:88, para. 24: “Such a rule, which allowed the deduction of losses while providing for the recapture of the loss relief in future profitable periods, would manifestly be a less restrictive means of avoiding the risk that losses might be used twice than a rule altogether excluding relief for such losses. Although a deduction-and-recapture rule involves a loss of symmetry and hence does not wholly attain the objective of the balanced allocation of the power to tax, that asymmetry is merely temporary where the permanent establishment subsequently becomes profitable. Moreover provision could be made for automatic reincorporation of amounts previously deducted if reincorporation had still not occurred after, for example, five years, or if the permanent establishment ceased to exist in that form.”

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Opinion Statement CFE 1/2018 On the Importance of Taxpayer Rights, Codes and Charters on Tax Good Governance Prepared by CFE Tax Advisers Europe Submitted to the European Commission in June 2018 – EU Platform for Tax Good Governance (CFE representatives: Piergiorgio Valente and Stella Raventós) CFE Tax Advisers Europe have long advocated the fundamental importance of taxpayers’ rights for tax good governance, and the role that clear statements of taxpayer, and tax administration, rights and obligations, can play in this respect. Taxpayer and tax administration rights and obligations are becoming an issue of global interest and for this reason, engagement in this work is of extreme and vital importance for all interested parties and stakeholders. As the leading body representing European Tax Advisers, CFE looks forward to being an active contributor to further progress in the area.

CFE Tax Advisers Europe is a Brussels-based association representing European tax advisers. Founded in 1959, CFE brings together 30 national organisations from 24 European countries, representing more than 200,000 tax advisers. CFE is part of the European Union Transparency Register no. 3543183647‐05. We would be pleased to answer any questions you may have concerning our Opinion Statement. For further information, please contact Mr. Wim Gohres, Chair of the Professional Affairs Committee, Ms. Stella Raventós, Chair of the CFE Fiscal Committee, or Mr. Aleksandar Ivanovski, Tax Policy Manager, at info@taxadviserseurope.org. For further information regarding CFE Tax Advisers Europe please visit our web page http://www.taxadviserseurope.org/

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I. Introduction CFE Tax Advisers Europe has long advocated the fundamental importance of taxpayers’ rights for tax good governance, and the role that clear statements of taxpayer, and tax administration, rights and obligations, can play in this respect. The Foreword to the November 2016 EC publication Guidelines for a Model for A European Taxpayers’ Code set out very clearly the benefit to both taxpayers and tax administrations in establishing taxpayer codes or charters: This European Taxpayers' Code contains guidelines that aim to ensure a balance between the rights and obligations of both taxpayers and tax administrations. It is based on the main general principles and best practices in Member States deemed useful for enhancing cooperation, trust and confidence between tax administrations and taxpayers, ensuring greater transparency on the rights and obligations of both, and encouraging a more service oriented approach of tax administrations. It encourages tax administrations and European taxpayers to adopt and apply all these principles and practices, including new developments and further ideas. As a consequence, this code is not mandatory but should be considered as a model to follow, to which Member States could add or adapt elements to meet national needs or context. Therefore, this European Taxpayers' Code should contribute to more effective tax collection by improving relations between taxpayers and tax administrations, where the mutual understanding of tax rules will reduce the risk of mistakes with potentially severe consequences for taxpayers and subsequent costs for tax administrations. We entirely endorse the view expressed by the Commission that a Code, or Charter, can enhance the efficiency and effectiveness of a tax system and it can also increase the tax morale of a country’s citizens. We accept that some countries will prefer to include the principles of taxpayer rights otherwise included in a code/charter in legislation and it must be for each country to determine the approach which it decides is most appropriate. We believe that the European Commission Platform on Tax Good Governance is an ideal forum to take forward the work on Taxpayer Codes/Charters.

II. Some More Detailed Concerns Since the EC Guidelines for a Model for a European Taxpayers’ Code was published in November 2016, the global efforts to build a better international tax regime have continued and transparency has been a key element in these efforts, but in the context of taxpayer rights, we believe there needs also to be respect for the confidentiality of individual taxpayer information. We discuss some relevant issues in the paragraphs below.

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CFE view the issues of taxpayers’ rights and a taxpayers’ charter as ones deserving of increased attention and consideration, particularly against the backdrop of recent European and international measures targeting tax avoidance and tax evasion. Although measures aimed at eradicating harmful tax practices are welcomed by the CFE, the increased reporting requirements, for taxpayers and tax advisers and disclosure of taxpayer information, which flow from these measures, pose undeniable risks to eroding taxpayers’ rights of confidentiality, privacy and data protection. To that end, the CFE welcomes the fact that the issue has been included for discussion on the work programme of the European Commission Platform on Tax Good Governance.

III. Current State of Play Exchange of information is not a novel concept within taxation, and the majority of tax treaties since the mid-1900s have included provisions for exchange of information. However, public disquiet concerning tax evasion practices revealed in documents leaked to the press over the past decade, coupled with the perceived lack of taxation of digital and tech companies, has led to unprecedented interest in tax policy, tax legislation and tax administration. It is against this backdrop, the concept of fair taxation being paramount, that recent measures have progressed to agreement, both within the European Union and at international level which have enhanced investigative powers of tax administrations and increased the amount of taxpayer information required to be provided to tax administrations. At the international level, the Common Reporting Standard for automatic exchange of financial account information was endorsed by the G20 in 2013. Since then, 116 jurisdictions have become members of the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS), the implementation of which makes these jurisdictions subject to monitoring and peer review processes where tax practices are compared with standards derived from the BEPS Action Plan. The OECD Global Forum on Transparency and Exchange of Information reports that there are over 2700 relationships providing for automatic exchange of offshore account information under the Common Reporting Standard at present, which is a considerable exchange of data. Within the European Union, in 2014 the Directive on Administrative Cooperation was extended to include automatic exchange of information, in order to emulate the OECD CRS. This was followed by further tax transparency reforms in 2015 to the Directive of Administrative Cooperation. Included were automatic exchange of tax rulings and exchange of advance pricing agreements, and in 2016 automatic exchange of country by country reports and the provision to authorities of access to beneficial ownership information, collected pursuant to anti-money laundering legislation. Most recently, the Directive has been revised to incorporate automatic exchange and reporting of tax planning arrangements by tax advisers or taxpayers themselves, where those arrangements meet the benchmark criteria contained in the Directive. This comes into force in the coming weeks.

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The European Union has created the List of Non-Cooperative Jurisdictions for Tax Purposes, which identifies jurisdictions that do not meet the criteria of tax transparency, fair taxation and implementation of anti-BEPS standards. Risk of appearance on this list encourages non-compliant countries to become party to treaties which require automatic exchange of information being put in place. Thus, in a relatively short period there has been a move from an environment with a quite limited exchange of information to what soon will be, certainly within the EU, one with a considerable exchange of information between countries and their tax authorities. It is prudent that legislators and policymakers consider the implications on taxpayers’ rights when progressing these measures to eradicate tax evasion and pursue the goal of fair and equitable taxation. Effective safeguards to protect taxpayers’ fundamental rights, particularly considering the exchange of information which will take place electronically, are crucial. We note that the objective of having the right amount of tax determined and paid in the appropriate territories, especially when achieved by digital intervention, whilst respecting the territorial rights of each and all relevant territories, risks damage to the individual tax rights of taxpayers and their rights of data security. Achievement of an acceptable solution is at the top of all our labours, but it cannot be had by disregarding the crucial importance of the rights of taxpayers.

IV. European Union Guideline for a Model for a European Taxpayers’ Code The CFE welcomed the efforts of the European Union in carrying out a public consultation on the issue of taxpayers’ rights in 2013, and the subsequent publication of the Guideline for a Model for a European Taxpayers’ Code in November of 2016. The CFE welcomes the guiding principles that the European Union set out in the Code, namely: •

lawfulness and legal certainty;

non-discrimination and equality of taxpayers;

presumption of honesty;

courtesy and consideration;

respect of law;

impartiality and independence;

fiscal secrecy and data protection;

privacy; and

representation.

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CFE also welcomes the acknowledgement in the Code that working together (paragraph 3.2), procedures (paragraph 3.3) and resolutions (paragraph 3.4) set out other important elements of wellfunctioning tax systems and need to be appropriately articulated in individual countries. CFE endorsed the European Commission’s approach to address both taxpayer rights and obligations in one document, which CFE believes reflects a balance acceptable to both taxpayers and governments. However, the view of CFE is that this issue has not continued to receive the necessary level of attention in light of the significant reforms which have occurred since the Code was published, in relation to disclosure of tax planning arrangements. Changes which are widely accepted as constructive and beneficial for all taxpayers risk rejection if they ignore the balances inherent in clearly understood and accepted taxpayer rights and obligations. This is particularly the case considering the importance being placed on personal data security and confidentiality following the European Union’s General Data Protection Regulation (GDPR) which came into force on 25 May 2018. The GDPR states that individuals must be informed of the personal data being held and the purpose of it being held by an entity, to be able to access that data and to be able to request data be erased. Though there are obviously considerations overriding some of these provisions for the purposes of carrying out effective tax administration, it is unlikely that all jurisdictions will have the appropriate processes in place to inform taxpayers of what personal data is held and to what end. This will likely result in substantial increases in legal challenges and litigation.

V. CFE Tax Advisers Europe Model Taxpayers’ Charter In recent years, the CFE has worked with other organisation to review practices involving taxpayers’ charters in over 40 countries. This consultation process was carried out in collaboration with the AsiaOceania Tax Consultants´ Association (AOTCA) and the Society of Trust and Estate Practitioners (STEP) over a two-year period. Following this consultation, the parties jointly published a draft Model Charter of Taxpayer Rights and Responsibilities between taxpayers and tax administrations. The Charter and the Final Report can be accessed online at the following link: http://www.taxpayercharter.com/ The Model Taxpayer Charter covers many of the characteristics of a well-functioning tax system, and sets out the following 10 basic principles that are perceived as underpinning the rights of the taxpayer: •

integrity and equality;

certainty;

efficiency and effectiveness;

the right to appeal and the right to dispute resolution;

appropriate assistance;

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confidentiality and privacy;

payment of the correct amount of tax;

representation;

proportionality; and

honesty.

The Model Charter also sets out 10 taxpayer responsibilities, including: •

being truthful;

providing information where reasonably required;

being cooperative;

making payment;

complying with the law;

maintaining accurate records;

taking due care;

retaining responsibility for information in filings;

showing courtesy; and

complying cross-border.

The overriding purpose of the Charter is to foster a relationship of mutual trust, respect and responsibility between taxpayers and tax administration by clarifying taxpayers’ obligations while also clarifying the rights of taxpayers that should be upheld. The Charter aims to ensure that all taxpayers are treated equally and without bias or preference. The CFE does not expect a Taxpayers’ Charter to lead to full harmonisation of taxpayer rights and obligations but believes that it can contribute to an acceptable approximation of laws. Concerning measures to combat tax avoidance and evasion, there is, currently, a notable lack of legal certainty in the area between tax avoidance and tax evasion. The distinction between acceptable and unacceptable tax planning is not a legal but a moral distinction, subject to change according to public opinion. For these reasons, the CFE finds that protecting the legally held rights of taxpayers is all the more significant given the current state of public opinion and as important as ensuring the continuance of legally enforced compliance.

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VI. Future Work Taxpayer and tax administration rights and obligations are becoming an issue of global interest and we, as the leading body representing European Tax Advisers, look forward to being an active contributor to further progress on the Guideline for a Model for a European Taxpayers’ Code within the European Union. CFE believe that should the Code be adopted, for each Member State of the EU there would be a benchmark guiding change which will bolster tax revenues, foster good governance and the rule of law. As such each Member State and the EU will be a representative beacon throughout the world, and an encouragement for those countries adapting to the rigours of the BEPS process. When we, CFE, collaborated with AOTCA and STEP to research and report on taxpayer rights in the book “Towards a Better Tax System, A Taxpayer Charter” our purpose was to make it clear that tax advisers around the world are dedicated to finding and supporting a global tax system that is fit for purpose and which respects the rights of nation states along with those of taxpayers. We did this because we inherently know that the absence of such a balance results in failure and a collapse of collaborative enterprise. We know the United Nations has an active interest in this, particularly for developing countries where the impact of many of the tax changes will be strongly felt. We believe that because of the cross-border impact of the EU’s work, it is a pathfinder and, in consequence, will be given opportunities to make a positive contribution to the work of the UN, the G20 and the BEPS programme of the OECD. For this reason, engagement in this work is of extreme and vital importance for all interested parties and stakeholders.

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10 KEY PRIORITIES
 IN INTERNATIONAL TAXATION
 BY GLOBAL TAX ADVISERS PLATFORM

(GTAP)

“THE ULAANBAATAR DECLARATION”

12 SEPTEMBER 2018


GTAP is an international platform that brings together national and international organizations of tax professionals around the world. The term “tax professionals” includes persons engaged at professional level with tax consultancy, as lawyers or as accountants, and accredited as such pursuant to applicable national law, irrespective of membership of GTAP.

The principal purpose of GTAP is to promote the public interest by ensuring the fair and efficient operation of national and international tax systems including recognition of the rights and interests of taxpayers and the role of tax professionals. To this end, GTAP shall provide the forum for the regular meeting, dialogue and interaction of tax experts from all continents.

GTAP’s fundamental principle is that taxpayers’ and tax advisers’ interests are better pursued and served within a fair and efficient global tax framework. Such context shall favor effective provision of tax advice, continuous improvement of services, smooth cooperation among tax advisers, taxpayers and authorities, respect and professional excellence.

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GTAP is conceived and developed to respond to the tax needs of the modern world. From the perspective of international taxation, the current era is marked by:

(i) International and supranational lawmaking and advisory bodies, such as the European institutions and the OECD; 
 (ii) Transnational taxpayers, i.e. groups of entities structuring their activities without frontiers; and 
 (iii) National tax authorities cooperating closely at international level. 


Territorial boundaries of national tax jurisdictions are fading in favor of a global tax jurisdiction defined by the new technologies. Such technologies are also substituting for a number of tasks which until today were executed by tax professionals. Simultaneously, new opportunities and challenges are opening.

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Remarkably, the ongoing transition has given rise to tax avoidance and evasion phenomena which have caused misunderstanding of the role of, and prejudice against, tax professionals. Hence, it is urgent to enhance trust in the tax profession and reaffirm its role as an enabler of tax compliance. It is high time that the tax profession evolves to respond to the new context. An international platform can embrace the joint effort of tax professionals of the world to track the developments, exchange views and expertise, formulate holistic approaches and stimulate progressive solutions in international tax. It is the most appropriate step to strengthen our voice in a fastchanging arena.

Tax professionals must globalize, digitalize, and regain trust. The desired evolution is possible only through close cooperation at global level. Optimization of tax consultancy within the current framework is the GTAP’s goal. The 10 key priorities set for the pursuit of this goal are outlined below.

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“THE ULAANBAATAR DECLARATION�

1. Strong cooperation among tax professionals In a global tax arena, tax professionals cannot be limited by national boundaries. Effective tax consultancy requires that they adopt a global viewpoint, are aware of developments on a global scale, and can give answers for more than one jurisdiction. Taking into account that the tax world is increasingly globalizing, GTAP considers its utmost priority to assist tax professionals in fulfilling the demands created by these changes. For this purpose, GTAP seeks to ensure availability and diffusion of information on and among different jurisdictions. Therefore, it will employ communication platforms, common data bases, regular meetings and conferences for the exchange of knowledge, experience and ideas, and publications.

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2. Inclusiveness, Openness, Global reach The objective of global tax consultancy can only be achieved in the context of a global network, encompassing all tax jurisdictions. Inclusiveness is a key principle: GTAP shall be open to each and every professional association of accredited tax advisers in every corner of the world, without distinction. GTAP embraces difference and believes in the value created by interaction of singularities. Therefore, GTAP will seek to facilitate participation by keeping to the minimum any costs, applying new communication technologies, and organizing its meetings in all continents on a rotational basis.

3. Position of tax professionals in the tax scenario Trust is an essential tool for the ongoing relationship between tax advisers, their clients and tax administrations. The current global tax framework is defective and its loopholes have allowed practices to develop which are inappropriate in the ethical and constructive global tax system to which we aspire.

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Short term disclosure requirements, introduced as an emergency measure, threaten to drive taxpayers away from their professional advisers. Nonetheless, as a rule, tax professionals’ services are necessary to ensure tax compliance. Tax professionals are the sole persons qualified to interact with the tax authorities representing taxpayers to the latter’s best interests. Tax professionals can render taxpayers and tax authorities’ communication successful and effective, advising taxpayers on a continuing basis on their rights and obligations. GTAP undertakes to increase the trust in tax professionals by, amongst other initiatives, establishing a common code of conduct for the provision of tax advice in a global tax world.

4. Impact on the Renovation of the International Tax Scenario The international tax scenario is changing. Where territorial tax jurisdiction is fading to give space to a global tax world, territorial regimes lose relevance.

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New laws are needed to regulate activities without confines and stateless income. National and international legislative bodies are striving to identify appropriate criteria beyond national territories and physical presence for the taxation of modern economy. Tax professionals have much to contribute. Their experience and expertise must be put at the disposal of legislators with a view to creating together a new, fair and efficient system of taxation, fit for the new conditions. GTAP shall contribute to the discussion, participate in public consultations, take public positions and structure proposals to be used as basis for the new system. In this respect, it is important that tax professionals express themselves with a single voice that will be heard clearly and loudly.

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5. Proposal of a new tax system In the framework of the renovation of the global tax regime, tax professionals are in a position to offer more than contributions: they can take initiatives. Their position in the centre of the tax relations – interacting with both taxpayers and authorities – grants them unique expertise, allowing them to lead the change. Therefore, GTAP shall encourage tax professionals of the world to take up the challenge of proposing a new system: simple, flexible, practical, fit for modern business, a system that can reclaim taxpayers’ confidence.

6. Taxpayers’ Rights In the construction of the new system and the transition towards it, it is crucial to safeguard the rights of taxpayers. Adequate guarantees are a mainstay for the desired fair and efficient tax system as well as for any truly democratic community. Such guarantees are equally a prerequisite for tax professionals to carry out their assignments.

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In this regard, GTAP prioritises taxpayers’ right to fair trial, encompassing the right to obtain advice and present one’s tax case, and be represented in tax disputes by tax professionals. Establishment of such rights in all jurisdictions around the world will be sought through consultation with lawmakers and competent authorities, diffusion of information, opinion statements and legal actions. It is also necessary to ensure that such rights include the confidentiality of communications between tax professionals and clients. In this regard, Tax Professionals shall give due regard to the compliance obligations of taxpayers and should only act for taxpayers who are compliant or will become so following the actions proposed by the tax adviser.

7. Awareness and Foresight The tax system is changing due to the evolution of business and economy. Such evolution is endless and the tax world must follow it closely so as to respond quickly to new needs and ensure effective taxation of new types of income and business models.

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Tax professionals must be prepared for the change: they must be informed and proactive; they must acquire the tools and qualifications needed to serve new tax regimes. GTAP shall seek to monitor the changes and keep tax professionals abreast of them through internal dedicated specialized teams with interdisciplinary qualities. Such teams shall be devoted to research and conduct of studies on business and legal developments from the angle of the tax professional.

8. Preparation for the Digital Era Digital technologies are changing work and life in general. The tax profession could not but be affected: several tasks performed by tax professionals are now a matter of a few clicks. Concerns are accordingly being raised that the tax profession is vanishing. However, GTAP sees a great opportunity where robots undertake tasks – mainly executive and supportive. It is tax professionals’ chance to take new initiatives and innovate.

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To do so they need to qualify to exploit the new technologies’ potential, to extract and combine data, to program executive activities, and to give correct instructions. GTAP will provide tax professionals with procedures and tools to master new technologies, maximize their value and be competitive in an evolving market.

9. Tax Advisers Without Borders (TAWB) The globalizing scenario impacts on relations between advanced and emerging economies. Since the territory of activity is losing relevance, activities in the latter and their potential supervision by tax authorities become particularly important for the global economy. For taxation to work in a global economy, all jurisdictions must be on equal footing.

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GTAP undertakes to ensure that tax professionals in emerging economies can respond to the needs of a global tax jurisdiction. To this end, GTAP shall establish a TAWB (Tax Advisers Without Borders) function to promote exchange programs, conferences, online courses and interaction platforms, digital tools and respective training. Equally, it will promote diffusion of information on the tax system of emerging economies for the benefit of tax professionals in advanced countries.

10. Tax culture and ongoing education Apart from qualified tax professionals, a fair and efficient tax system requires well informed taxpayers and authorities. All parties of the tax relationship must have knowledge of the fundamental principles of taxation, their responsibilities and rights. GTAP will enable the building of such culture. It will seek to ensure that all people all over the world have a real chance to understand taxes and be active participants in tax systems and policy development. To this effect, GTAP favors introduction of relevant lessons into schools and continuous availability of online courses.

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Founders: CFE, AOTCA, WAUTI

Observers: STEP, IAFEI, AMA

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CFE

AOTCA

WAUTI

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IAFEI

STEP

AMA

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Profile for CFE Tax Advisers Europe

CFE Tax Advisers Europe - 2018 Technical & Policy Publications  

This document is a collection of all CFE Opinion Statements and other publications released in 2018

CFE Tax Advisers Europe - 2018 Technical & Policy Publications  

This document is a collection of all CFE Opinion Statements and other publications released in 2018

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