CFE Tax Advisers Europe - 2017 Technical & Policy Publications by CFE Tax Advisers Europe

CFE Tax Advisers Europe 2017 Technical & Policy Publications

CFE Publications 2017 Opinion Statements – Policy and Technical position papers published in 2017 by CFE Tax Advisers Europe FISCAL COMMITTEE OPINION STATEMENTS In 2017, the Fiscal Committee of CFE Tax Advisers Europe published 10 Opinion Statements: • • • • • • • • • •

Opinion Statement FC 01/2017 on VAT groupings and related issues concerned with fixed establishments and the cost sharing exemption. Opinion Statement FC 02/2017 on the response to Consultation on the OECD BEPS Action 6 Public Discussion Draft on non-CIV examples Opinion Statement FC 03/2017 on the proposed Directives for the introduction of a Common Corporate Tax Base & Common Consolidated Corporate Tax Base Opinion Statement FC 04/2017 on the proposed Directive on Double Taxation Dispute Resolution Mechanisms in the European Union Opinion Statement FC 05/2017 on the VAT exemption of services provided by an independent group of persons (Article 132 (1) (f) of Directive 2006/112/EC) Opinion Statement FC 06/2017 on the working paper by DG TAXUD on a toolbox to ensure consistency between tax and development policies in the (re) negotiation of double tax treaties with developing countries Opinion Statement FC 07/2017 on Tax Certainty Opinion Statement FC 08/2017 on the OECD request for input on work regarding the tax challenges of the digitalised economy. Opinion Statement FC 09/2017 on the European Commission Proposals on the way towards a single European VAT area Opinion Statement FC 10/2017 on the EU Commission consultation on the fair taxation of the digital economy

PROFESSIONAL AFFAIRS COMMITTEE OPINION STATEMENTS In 2017, the Professional Affairs Committee of CFE Tax Advisers Europe published 5 position papers: • • • • •

Opinion Statement PAC 1/2017 on the European Commission public consultation ‘Disincentives for advisers and intermediaries for potentially aggressive tax planning schemes’ Opinion Statement PAC 2/2017 on the European Commission public consultation on protection of whistleblowers CFE response to the European Commission questionnaire on the protection of whistleblowers in the field of tax for the Platform on Tax Good Governance Opinion Statement PAC 3/2017 on the European Commission Proposal for a Council Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation “DAC6” CFE supplementary response to the European Commission consultation on protection of whistleblowers in the area of tax In relation to the questionnaire on the protection of whistleblowers following the 25th Meeting of the CFE Professional Affairs Committee Opinion Statement ECJ-TF 1/2017 on Case C-464/14, SECIL, concerning the free movement of capital and third countries.

ECJ TASK FORCE OPINION STATEMENTS In 2017, the ECJ Task Force of CFE Tax Advisers Europe published 4 Opinion Statements: • • •

•

Opinion Statement ECJ-TF 1/2017 on Case C-464/14, SECIL, concerning the free movement of capital and third countries Opinion Statement ECJ-TF 2/2017 on Joined Cases C-20/15 P and C-21/15 P, World Duty Free Group and Others, concerning the requirements of selective aid in the sense of Art. 107 TFEU. Opinion Statement ECJ-TF 3/2017 on Case C-682/15, Berlioz Investment Fund SA, concerning the right to judicial review under Article 47 EU Charter of Fundamental Rights in cases of cross-border mutual assistance in tax matters. Opinion Statement ECJ-TF 4/2017 on Case C-283/15, X (“pro-rata personal deductions”), concerning personal and family tax benefits in multi-state situations.

Opinion Statement FC 01/2017 VAT GROUPINGS AND RELATED ISSUES CONCERNED WITH FIXED ESTABLISHMENTS AND THE COST SHARING EXEMPTION Submitted to the European Institutions on 8 November 2017

The CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax profession in Europe. Our members are 26 professional organisations from 21 European countries with more than 200,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to assure the quality of tax services provided by tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law in Europe. The CFE is registered in the EU Transparency Register (no. 3543183647‐05). We will be pleased to answer any questions you may have concerning CFE comments. For further information, please contact Jeremy Woolf Chair of the CFE Indirect Taxes Committee, or Mary Dineen Advisor to the Fiscal Committee at CFE, at brusselsoffice@cfe-eutax.org.

Problem with the current law & practice 1

VAT groups are permitted under the law of some member states. The pressures on member states to implement VAT grouping rules are likely to be increased by the recent decisions of the Court of Justice in C-326/15 DNB Banka AS v Valsts ieņēmumu dienests, C-605/15 Minister Finansów v Aviva and C-616/15 Commission v Germany. The Court in those cases considered that the exemption in article 132(1)(f) of Directive 2006/112/EC, for supplies of services by independent groups of persons for their members, does not extend to the financial and insurance sectors. Since this exemption has previously been viewed as a way of avoiding disproportionate VAT liabilities arising in an exempt supply chain in the financial and insurance sectors, unless the Directive is changed, those sectors are likely to want VAT groupings to be introduced as an alternative way of avoiding disproportionate VAT liabilities.

However, particularly in the light of the judgment of the Court in C-7/13 Skandia America Corp (USA), filial Sverige v Skatteverket, one issue that has been causing problems for tax authorities and taxable persons is cross-border supplies involving VAT groups. Problems currently arise:

(i)

in identifying whether a company is a member of a VAT group. These problems arise because VAT registrations do not indicate that they relate to a group. The registrations will frequently be in the name of a different group company. The VIES system also does not always contain information that a registration relates to a group and who the members of the group are. The invoicing rules relating to VAT groups also differ from country to country. Particularly in relation to cross-border transactions, this can make it very difficult for traders to know if their customer or supplier is properly registered for VAT. This issue is of importance, since it impacts on who is liable to account for VAT on cross-border transactions. Tax authorities also require this information to be able to determine whether VAT has been correctly accounted on transactions. Indeed, it will become even more important if the Commissions’ proposal, announced on 4 October 2017, to amend article 138 of the Directive so that it becomes a substantive condition to identify the VAT status of the customer, is adopted;

(ii)

in determining who should be accounting for tax or recovering input tax on transactions. This is because different member states adopt different approaches to the recognition of VAT groups. Some member states recognise the existence of VAT groupings in other member states while others do not. This can cause problems for taxable persons to know on what basis and capacity they should be making claims to

recover input tax or accounting for output tax. It can also cause problems in determining who the supply should be treated as being made by and to.

Substantive changes to the scope of the grouping provisions and the exemption in article 132(1)(f) of Directive 2006/112/EC 3

The CFE considers that one long-term solution to many of the problems would be the creation of EU wide VAT groups subject to harmonised rules. The CFE appreciates that there has previously not been a sufficient consensus between member states to make this development likely in the medium term. If it increases the numbers of countries adopting VAT grouping provisions, the recent decisions of the Court of Justice in C-326/15 DNB Banka AS v Valsts ieņēmumu dienests, C-605/15 Minister Finansów v Aviva and C-616/15 Commission v Germany may make states more sympathetic to reforms. 4

Especially if the creation of EU wide VAT Groups is not a possibility, the CFE considers that it would be desirable to amend article 132(1)(f) of Directive 2006/112/EC to make it clear that this exemption can be utilised by financial and insurance companies that are members of a grouping. Such an approach accords with the Commission’s submissions in C-616/15 Commission v Germany and also the Commissions’ Proposals to amend the Directive in Com 2007 747. Assuming such groupings are to be permitted within the EU on a cross-border basis, we can see that the rule will probably need to make it clear that the supplies made by the members must be exempt under the rules of the country where the grouping is established and where the members make their supplies (an approach which is similar to that adopted in in C-136/99 Ministre du Budget and Another v Société Monte Dei Paschi Di Siena [2000] ECR I6109).

Other possible reforms relating to article 11 VAT groupings 5

Even if there is no consensus for the changes outlined above, the CFE considers that there would be merit in adopting the following changes in relation to article 11 of the 2006 Directive VAT groupings: (i)

having a special prefix or suffix for VAT registrations relating to VAT groups, so it is easier for tax authorities and traders to appreciate that a person is a member of a VAT grouping. On a more general note, we also consider that it would be desirable to have separate VAT registrations for established and non-established traders, as is applied in Spain;

(ii)

altering the VIES system so that it more clearly indicates that a registration relates to a VAT grouping and also states who the members of the group are;

(iii)

standardising the rules relating to invoicing of transactions concerning VAT groups. We consider that the invoice should clearly identify the actual supplier and customer and the VAT grouping;

(iv)

standardising the rules and/or practices about the recognition or non-recognition of VAT groupings in other member states. Because it better accords with the current wording of the Directive and reduces the number of capacities in which a company will have dealings with any one tax authority, the CFE considers that there would be considerable merit in having a rule that member states should not recognise VAT groupings in other states. This should have the benefit of limiting the number of capacities in which a taxable person has to deal with any tax authority to two. The contrary approach of recognising VAT groupings in other member states as separate taxable persons means that a company may have dealings with a tax authority in a vast multitude of different capacities, which is clearly likely to complicate the system. This is an issue that we consider further in the Annex below;

(v)

having an explicit recognition that invoices can be issued on transactions between fixed establishments in different countries or members of a VAT grouping even though the transaction is not a taxable transaction for VAT purposes in that state;

We can also see that the increasing digitalisation of the economy may require changes to what should be considered a fixed establishment for VAT purposes. In particular, it may be questioned whether the existing case law, with its focus on “human and technical resources”, remains appropriate given global digitalisation. Businesses do not need a physical presence anymore in a country to transact business.

The conditions for article 11 VAT grouping 6

The European Commission have also prepared a paper for the VAT Expert Group (VEG No 63) and a Working Paper 918 on the issue of the meaning of “financial economic and organisational links” for the purposes of the VAT grouping rules in article 11. Whilst we agree with much of the paper, there are some comments that possibly suggest that an unduly

restrictive approach might be proposed. In particular, at the end of paragraph 3.6.1, the Working Paper observes that: “Certain situations could be seen as failing to pass the economic link test. For instance, it seems difficult to see how this could be met in a scenario involving companies operating in different economic sectors or where the activity of such entities is completely unrelated.” 7

It is not uncommon for corporate groups to undertake a range of often distinct activities in different sectors. It would be very unfortunate if such groups could not be eligible for a single group registration. Although different members of the group may undertake distinct activities, there will invariably be management and related services provided to all the members of the group by at least one member of the corporate group. There is also no reason why the same facts should not support the existence of both a financial, economic and organisational linkage. An example is provided by a franchise agreement. The guidance at the beginning of paragraph 3.6.1 of the Working Paper would appear to accept that an economic link does exist if one group company provides services to the other group companies. It states that an economic link can exist if “one member carries out activities which are wholly or substantially to the benefit of other members”. The CFE endorses these comments which support a broader approach than is suggested by the passage quoted above at the end of the paragraph. Especially if new criteria are being devised, even in cases where the group conducts distinct and independent activities, it would be unfortunate if VAT grouping cannot exist in a case where one member of the corporate group renders services to all the members of the VAT group. A broader construction of the provisions is also more consistent with the decision of the Court of Justice in C-85/11 Commission v Ireland. As is correctly recognised in the Working Paper, in that case the Court considered that a company that was not a taxable person could be a member of a VAT group. However, if a restrictive approach is adopted in relation to the requirement for economic links, it is difficult to see how this requirement could ever be satisfied in relation to such companies. The Court at paragraph 40 considered that there was no justification for giving the provision a restrictive interpretation.

Another issue raised in the Working Paper is whether account can be taken of relations with members of a corporate group that are not members of the VAT group because they have no establishment in the relevant state: see scenario 3 at paragraph 3.5.2.1. This scenario gives an example of a non-established parent company with two subsidiaries that are established in the same state. It would again be unsatisfactory if those two subsidiaries could not form a VAT

group, even though the parent cannot be a member, because it is not established in the state in question. There is nothing explicit in the wording of article 11 that prevents the subsidiariesâ&#x20AC;&#x2122; relationship with their parent from resulting in the necessary financial, economic and organisational links even though the parent is not eligible to join the grouping because it is not established in the country.

ANNEX 1

The question, of what recognition should be given to VAT groupings in other states, is not only significant when assessing procedural requirements. It also has potential substantive implications. For example, it may impact on whether a transaction should be considered to be purely internal, with the consequence that it should not be considered to be a taxable supply in the light of the judgment of the Court in C-204/210 Ministero dell'Economia e delle Finanze and another v FCE Bank plc.

One issue that may make it more difficult for Member States to come to a consensus on the correct approach to the recognition of VAT groupings in other Member States is the different approaches that Member States adopt when determining which fixed establishments can be considered to form part of a VAT grouping. Some Member States limit the entitlement to establishments in its territory. The Court of Justice clearly considered that such an approach was open to a Member States to adopt in C-7/13 Skandia America Corp (USA), filial Sverige v Skatteverket. Other Member States consider that all the establishments of a member or the representative member can be regarded as forming part of the single taxable person, on the basis that it is the entire taxable person that is admitted to the VAT grouping. The attraction of this broader approach is that it enables VAT groupings to be treated in the same way as a single taxable person. It thereby minimises distortions between companies that operate using a branch network and companies that have a corporate grouping structure. Particularly in the exempt sector, the more restrictive approach has significant disadvantages for a company joining a VAT grouping or that is compelled to join a group if it receives services from fixed establishments in other member states or third countries. This is because such supplies will be subjected to a VAT liability which would not have arisen on supplies between two of its establishments if the company was not a member of a VAT group, as a result of the judgment of the Court in C-204/210 Ministero dell'Economia e delle Finanze and another v FCE Bank plc1.

It is accepted that this decision may encourage some businesses to provide internal services in jurisdictions which enable it to minimise the amount of irrecoverable input tax that is incurred. However, this can be countered by the adoption of anti-avoidance provisions similar to those introduced in the United Kingdom: see s 43(2A)-(2E) VATA 1994.

One suggested objection to the wider rule is that it is extra-territorial. However, it is important to appreciate that a Member State that takes the broader view is not seeking to obtain any extraterritorial taxing powers. It is the place of supply rules that determine where supplies should be taxed, and therefore which countries’ rules a supply should be subject to. Provided Member States are not required to recognise the VAT groupings in another Member State, the broader view should therefore have no impact on other Member States’ taxing rights. Having a common rule that Member States are not required to recognise a VAT grouping in another Member State should therefore have no impact on other Member States’ taxing rights2.

With Member States that do not recognise VAT groupings or which adopt the approach of treating all the fixed establishments of a member as part of the grouping, the approach of not recognising VAT groupings in other states, also has the benefit of making administration simpler for both taxpayers and tax authorities. This is because it has the consequence that the relevant company or person will just have dealings with the tax authority as a free-standing company, if groupings are not recognised in the country, or as a member of the grouping, if the grouping is recognised in the country. Even in counties, such as Sweden, which just treat fixed establishments within its country as being part of the grouping, it means that a company that is a member of a grouping will just have dealings with a tax authority in two capacities, since its establishments within the grouping will be regarded as forming part of one taxable person while all the other establishments will be regarded as another entity.

The contrary approach, of recognising a company as being part of a separate taxable person in each jurisdiction in the European Union where it is a member of a VAT group, means that a company may have to undertake dealings with a tax authority in large number of different capacities, since it will be treated as forming part of a separate taxable person in each country where it is a member of a VAT group. It will inevitably be simpler for a company and the tax authorities to just have dealings with a tax authority in one or two capacities, rather than a large multitude of capacities. This is another major benefit of having uniform rules that do not require Member States to recognise VAT groupings in other member states. It also better

It also possibly receives some support from the decisions of the Court of Justice in C240/05 Administration de l'enregistrement et des domaines v Eurodental Sàrl [2006] ECR I-11479, where the Court at paragraph 54 considered that a Member State was not required or entitled to allow a right to deduct VAT because another Member State has exercised a transitional option to tax the supplies, and in C-136/99 Ministre du Budget and Another v Société Monte Dei Paschi Di Siena [2000] ECR I-6109, where the Court considered that a trader was only entitled to make an 8 th Directive claim if the supply is taxable in the country of refund as well as in the country where the business was established.

accords with one of the objectives of the VAT grouping rules, which is to simplify administration.

Opinion Statement FC 02/2017

Response to Consultation on the OECD BEPS Action 6 Public Discussion Draft on non-CIV examples

Prepared by the CFE Fiscal Committee Submitted to the OECD on 2 February 2017

The CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax profession in Europe. Our members are 26 professional organisations from 21 European countries with more than 200,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to assure the quality of tax services provided by tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law in Europe. The CFE is registered in the EU Transparency Register (no. 3543183647‐05). We will be pleased to answer any questions you may have concerning CFE comments. For further information, please contact Stella Raventós Chairwoman of the CFE Fiscal Committee, or Mary Dineen Fiscal Officer at CFE, at brusselsoffice@cfe-eutax.org.

Introduction This Opinion Statement by the CFE Fiscal Committee relates to the OECD public discussion draft “BEPS Action 6 Discussion Draft on non-CIV examples (hereinafter the “Discussion Draft”), released for public consultation on 6 January 2017. We will be pleased to answer any questions you may have concerning our comments. For further information, please contact Ms. Stella Raventós, Chairwoman of the CFE Fiscal Committee or Mary Dineen, Fiscal Officer of the CFE, at brusselsoffice@cfe-eutax.org.

General remarks The Discussion Draft includes three draft examples with regard to the treaty entitlement of nonCIV Funds when applying the principle purpose test (hereinafter “PPT”) as described in the BEPS Action 6 final report. The CFE welcomes that the OECD is seeking practical solutions for the issue of non-CIV funds claiming treaty protection for income from investments made through special purpose companies and intermediary investment vehicles. The CFE recognizes the inherent difficulties when applying the PPT in cases whereby the selection of a jurisdiction to locate the aforementioned entities is influenced by the potential tax consequences of the selection, including the possibility to claim treaty protection. It is particularly difficult to determine whether obtaining the benefit of a tax treaty has been one of the principal purposes for which a structure has been set up or a transaction is structured. The CFE supports the approach of including examples in paragraph 14 of the Commentary on the PPT to clarify this rule for non-CIV funds. However, this approach is not without potential pitfalls. Firstly, it raises the question whether the example can be relied upon if the circumstances of a particular case are not completely identical to the circumstances described in the relevant example. Secondly, the examples given may describe facts of a particular situation (maybe taken from real life examples) which may not necessarily be relevant or decisive. Finally, there is a risk that, in order to make the examples not too “open-ended” and prone to “abuse”, the examples contain caveats that are one-sided in that they fail to mention that there may be other, positive, circumstances that may justify the granting of tax treaty benefits. The comments below on the three draft examples given by the Discussion Draft address these issues.

Comments on the Discussion Draft Examples

3.1

Comments on the regional investment platform example The CFE has the following comments on the regional investment platform example:

(i)

Firstly, it is unclear what the reference in the first sentence of the regional investment platform example to “Fund” being an “institutional investor” implies. The CFE recommends that this reference should be deleted.

(ii)

Secondly, the example states that the Fund is subject to regulation in State T, the State in which it is resident. The CFE has two comments in this regard: (i) as a general rule, it is not the fund itself which is regulated, but rather it is the fund manager, and (ii) there are many funds that have been established under the laws of one jurisdiction and are managed by a manager located in another jurisdiction. In addition, funds may be organized under the laws of, and be a tax resident of, a jurisdiction that has not entered into a tax treaty with the state in which the investment is made. The CFE recommends that the OECD confirms (i) whether the manager of a Fund and/or the Fund itself is 2

regulated (or in which jurisdiction), and (ii) the fact that the jurisdiction in which the Fund is located did not enter into a tax treaty as referred to above, is irrelevant for the purposes of reaching the conclusion made in this example. (iii)

3.2

Thirdly, the implicit caveat in the last sentence of the description of this example (“in the absence of other facts or circumstances showing that RCo’s investment is part of an arrangement or relates to another transaction undertaken for a principal purpose of obtaining the benefit of the Convention…” ) is drafted in a one-sided way. Therefore, the CFE recommends that the example also specifically clarifies that there may be other facts and circumstances than those described that have driven the decision to establish the regional investment platform in State R and that may justify the conclusion that it would not be reasonable to deny the benefits of the relevant tax treaty.

Comments on the securitisation company example The CFE has the following comments on the securitisation company example:

3.3

(i)

Firstly CFE recommends to delete the phrase, “Investors’ decisions to invest in RCo are not driven by any particular investment made by RCo” as the presentation of this fact contradicts other facts of this example, in particular the fact that “ RCo,… was established by a bank which sold to Rco a portfolio of loans …. owed by debtors located in a number of jurisdictions.” .One may assume that it is because of this selection of loans that the Investors make the investment. Therefore, CFE fails to see how the Investor’s decision to invest in RCo will not be driven by the any “particular investment” made by RCo.

(ii)

Secondly, the same comment made under the regional investment platform example under point (iii) applies in relation to the securitisation company example.

Comments on the immovable property non-CIV fund example The CFE has the following comments on the immovable property non-CIV fund example: (iii)

Firstly, the CFE recommends that it be confirmed that the conclusion reached in the last paragraph would not differ if the Real Estate Fund was not fiscally transparent as indicated.

(iv)

Secondly, the CFE recommends that it be confirmed that the conclusion reached in the last paragraph would not differ if the investors were unable to claim treaty protection in cases whereby they had made the investment directly. See also our comments on the regional investment platform under point (ii).

(v)

Thirdly, the same comment made under the regional investment platform example under point (iii) applies to the immovable property non-CIV fund example.

Opinion Statement FC 3/2017

on the proposed Directives for the introduction of a Common Corporate Tax Base & Common Consolidated Corporate Tax Base Prepared by the CFE Fiscal Committee Submitted to the European Institutions on 9 June 2017

The CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax profession in Europe. Our members are 27 professional organisations from 21 European countries with more than 200,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to assure the quality of tax services provided by tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law in Europe. The CFE is registered in the EU Transparency Register (no. 3543183647‐05). If the reader has any queries please contact Ms. Geraldine Schembri, Head of the CFE Task Force on CCCTB or Ms. Mary Dineen, Advisor, CFE Fiscal Committee at mdineen@cfe-eutax.org

1. Introduction This is an Opinion Statement of the CFE Fiscal Committee, on the proposals published by the EU Commission in October 2016 re-launching the Common Consolidated Corporate Tax Base (the “Proposals”). The Proposals envisage the implementation of two Council Directives, the first introducing a common corporate tax base (“2CTB”) and the subsequent directive implementing the consolidation element (“3CTB”).

2. CFE Position Increasing transparency, clarity and simplification of corporate tax laws in the internal market is essential to ensuring the E.U. is in a position to attract foreign direct investment (“FDI”) and encourage indigenous business to grow. This is more pertinent than ever before in the context of the prevailing political climate and the risks of increased tax competition from the U.S. and potentially the U.K. in the coming years. SMEs, in particular, play a vital role in developing the economy of the internal market and their success is pivotal to the success of the economy of the internal market. CFE therefore welcomes any proposal that aids and facilitates SMEs to develop and expand their business in a cost effective manner. However, there is no unanimous position within the CFE on the common consolidated tax base as proposed by the Commission. Some members are opposed to both a 2CTB and a 3CTB. Those members who are supportive of a common tax base believe that this should focus on its original purpose: finding effective solutions to cross-border issues by reducing compliance burdens and legal uncertainty (e.g. transfer pricing, offset of losses incurred in other member states).

3. Comments on the Proposals generally Following consultation with the Member Organisations of CFE the following are the primary general concerns raised regarding the Proposals: 3.1

BEPS

The tax landscape in the Member States is subject to much change as a result of the implementation of the BEPS project at EU and national level. Therefore, some CFE members believe that the timing of the Proposals is not ideal; it would be preferable to give time to the BEPS related changes, to take effect, allowing Member States an opportunity to assess the situation prevailing after these provisions are cemented into national tax regimes. In addition, whilst we appreciate that the Proposals are intended to balance and supplement the anti-avoidance measures contained in the Anti-Tax Avoidance Directive (ATAD) 1 and 2, the same concern can be voiced in relation to the need for tax certainty. Allowing time for the implementation of BEPS related measures and the ATAD would have the added advantage that any proposal in the nature of a 3CTB would be focused on issues and needs arising in a post-BEPS tax environment. 3.2

Erosion of national tax sovereignty 2

A key concern of CFE members is the erosion of national tax sovereignty and the effect this will have on the flexibility of Member States to react to fiscal and economic issues as they arise in the future. It is vital for Member States that they have the ability to introduce fiscal measures to react to economic issues and stimulate economic growth generally or a particular sector of the economy as the necessity arises. This can also negatively affect the competitiveness of the Member States and consequently the competitiveness of the internal market as a whole. Flexibility is also required for Member States to respond to any new abusive practices that might arise over time. Given the different tax environments which exist across the Member States a specific antiabuse measure required in one Member State may not be required in another. Therefore, Member States need the flexibility to tackle abusive tax practices arising on a country specific basis. In addition, the 2CTB and 3CTB only provide for a single tax rate. Countries which currently apply higher corporate tax rates to certain classes of income or capital gains would lose that ability under a 3CTB. One must also consider the impact of the 3CTB on the national budgets of Member States. One member organisation has even suggested that an impact assessment should be carried out for each individual country. In addition, the proportion of a multinational’s profits allocated to Member States will fluctuate year-on-year due to changes in staff and asset levels in the country and in other Member States. This will make it very difficult for countries to accurately forecast corporate tax receipts. 3.3

Tax competitiveness & knowledge-based economies

One of the five key objectives of the “Europe 2020” agenda is to increase investment in R&D in EU Member States. 1 CFE welcomes any measure that makes Europe more attractive as a location for R&D investment and as such welcomes the addition of the “super deduction” for R&D expenditure and the accelerated deduction for start-ups. A concern exists that knowledge and service based economies, will be adversely affected if the 3CTB results in a lack of flexibility to develop and implement tax policy for R&D as they see fit within the BEPs framework. Therefore, we believe that countries should remain free to allow additional R&D relief. 3.4

Transition Period & Tax certainty

Concern exists about the management of the transitional system; the implementation of the 2CTB and subsequent 3CTB will have huge practical implications and challenges for both tax authorities and taxpayers alike. Some tax authorities may require additional time and financial resources to implement an additional supranational system and will have to oversee two concurrent systems of tax administration, a national system for those companies not within the ambit of 2 or 3CTB and a supranational system to manage those companies falling within the 2 and 3CTB. The situation will be compounded if no sufficient guidance is provided on new measures; the legislation in its proposed form will not be sufficient to provide clarity, particularly in light of the lacuna that will 1

While the target is that by 2020, 3% of the EU's GDP should be invested in R&D, in 2013, the average of the EU countries was only 2.02%: http://ec.europa.eu/eurostat/web/europe-2020-indicators .

inevitably develop in the interim period between the loss of domestic tax jurisprudence to the development of new European jurisprudence. Member States’ corporate tax regimes are based on detailed legislation, guidance, precedents and case law – this would become redundant under a 2 CTB regime for the MNE’s falling within the ambit of the legislation. They would become subject to new rules and new definitions, which would create huge uncertainty for such businesses and tax authorities. One should also look at the experience in the field of indirect tax, where despite the VAT directives there are still issues of uncertainty and considerable divergences of national practices between Member States. Tax certainty is of paramount concern to business, and is the present focus of OECD, and more recently EU attention2. Any proposed changes to the tax system on a European wide level, no matter how laudable the ultimate aim, will not be successful if it leads to tax uncertainty, increased compliance burden and increased disputes. Whilst the proposals may increase tax certainty in the longer term3, it is vital that the uncertainty in the shorter term is mitigated as much as is possible. In this regard, careful implementation is required. Measures to mitigate uncertainty could include the publication of a detailed commentary to supplement any new legislation and a legal mechanism to create more certainty at the initial stages of the compliance process, so that taxpayers do not have to wait many years for clarification to be provided by the courts. The importance of such a mechanism for tax certainty is highlighted he EU Commission Taxation Paper 67, “Dispute prevention and early issue resolution programs, as well as effective dispute resolution procedures are considered of particular relevance to enhance tax certainty in the international context.”4

4. Comments on specific provisions within the Proposed Directive for a 2CTB 4.1

Cross – border loss relief (Article 42 Proposed Directive)

Our members have differing views on the introduction of an interim mechanism for cross-border loss relief. Those members in favour of a 3CTB strongly support a temporary mechanism for crossborder loss relief as part of the first 2CTB step. The following concerns have been voiced by some members: 



The legislation lacks critical details such as whether recapture must take place according to country or entity basis, additional clarity on areas such as this would avoid legal uncertainty and inconsistent implementation by Member States. It is not compatible with the basic principle of tax law, as affirmed by the BEPs project, that tax should be paid where the value is created.

See the IMF/OECD Report on Tax Certainty presented to the G20 in March 2017 and the European Commission Taxation Paper 67 entitled ‘Tax Uncertainty: Economic Evidence & Policy Responses’ 3 The Commission Taxation Paper 67 identifies the proposals as a source of increasing tax certainty. It states the following at page 6: “In perspective, the new common consolidated corporate tax base, proposed in October 2016, promises to simplify the corporate tax system for companies which are or plan to be active in more than one Member State, to reduce the compliance costs and ultimately promote tax certainty” 4 European Taxation Paper 67 at page 29.



The approach taken in Article 42 differs from the position adopted by the ECJ Case, which has held that a parent company can only use the losses of a foreign branch or subsidiary in circumstances whereby the losses are “trapped” i.e. if it is not possible for the subsidiary to utilise the losses in its Member State of residence. This will lead to a divergence in treatment for companies which will fall within the CCCTB regime and those that will remain subject to domestic tax regimes. Such divergences of treatment should be avoided if possible. 4.2

Exit Tax (Article 29 of the proposed Directive.)

There is a concern that the exit tax provisions contained in Article 29 of the proposed Directive are not compatible with principles enshrined in ECJ case law5. The ECJ enunciated the principle that an upfront imposition of an exit tax is not compatible with the EU treaty freedoms unless it contains the option for a deferral of the payment in situations involving a relocation to within the EU or EEA. The provisions of Article 29 differ from those contained in the Article 5 (2) of the Anti-Tax Avoidance Directive that allows for a deferral of payment over 5 years upon relocation within the EU/EEA. 4.3

Super Deduction for Research & Development

The CFE welcomes all initiatives taken to encourage the growth of research and development activities being carried out in the EU. However, our members believe that Member States should be allowed to implement additional R&D incentive measures within the BEPS framework at a national level, particularly those members’ whereby the current domestic regime is more favourable than that proposed under the super deduction. As previously referred to, a risk exists that the super deduction for R&D will narrow the tax base in some countries and consequently lead to a rise in tax rates in later years; this would negatively affect tax competitiveness of Member States. 4.4

Allowance for growth & development (AGI)

Our Member Organisations do not take a unanimous position on this. Some of our members welcome the proposal and believe it will redress the imbalance that currently exists between debt and equity financing as a result of the interest deduction relief available to companies. Other Member Organisations wish to highlight that it is currently more difficult to obtain equity finance in the EU than in competitors such as the U.S., the effective penalty in the AGI does not reflect the reality that companies may have no alternative but to finance through debt. There is a risk that the imposition of the effective penalty will punish companies in times of austerity or economic slowdown, and consequently impede any possible economic recovery. CFE suggests that a provision should be included whereby the penalty would be payable over time and that no effective payment would arise immediately.

5. Comments on specific provisions within the Proposed Directive for a 3CTB

As first espoused by the ECJ in National Grid Indus BV v Inspecteur Van de Belastingdienst Rijnmond (Case C371/10)

5.1

Dispute Resolution

Many of our members have expressed sincere concerns about the future of dispute resolution mechanisms under the 3CTB system. The primary concern is that the jurisprudence of domestic courts, developed over many years will become void and leave a vacuum in relation to legal certainty of key taxation concepts. The CJEU will become the legal forum for the resolution of disputes, with the ECJ as the ultimate arbitrator. In order to avoid legal uncertainty tax disputes would need to be resolved within a short timeframe. As the work at the EU on proposed Directive for Dispute Resolution and at OECD level under the MLI currently demonstrates, it is vital that taxpayers have access to time effective and efficient recourse to dispute resolution, the ECJ would not be a time efficient or effective forum for dispute resolution under the CCCTB. Some of our members also opine that the 3CTB will lead to an increase in dispute resolution relating to the application of formulary apportionment and profit calculation; this would lead to further delays in the system. Given that, what is proposed is a complete overhaul of the tax system in the EU and the inherent uncertainty which results from this it is essential that disputes can be resolved to restore tax certainty. 5.2

Formulary Apportionment

We understand that the Commission is amenable to suggestions regarding improvements to the system for profit calculation. Many of our members have expressed serious doubts about the appropriateness of the allocation keys chosen as part of the proposed formulary apportionment method. The nature of the allocation keys is such that it favours “old-fashioned” traditional economies and biased against service-orientated industries and the digital economy, which the EU is trying to promote. The following issues have been raised by some of our members:   



The proposed allocation keys would result in outcomes that contravene the principle that profit should be taxed where value is created. Sales from trade outside the EU would also be reallocated to other member States based on an EU wide assets and labour formula. A two-tier system will develop within member states; one for companies within the CCCTB system and another for the other companies. This will lead to inevitable compliance burdens and complexities for tax authorities, as is the case with a 2CTB discussed previously at 3.4. It will not eliminate transfer pricing; only within the EU for the companies coming within the ambit of the legislation. MNEs will still be subject to traditional transfer pricing rules when dealing outside the EU. As above, this leads to a two-tier system, which will lead to increased complexity and compliance costs for MNEs and tax authorities.

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There is a risk that the anti-avoidance provisions contained in the Proposals are insufficient to deter MNEs from engaging in formula factor manipulation. It has been noted that the inclusion of sales introduces an element of destination-based tax; this will be more advantageous to the larger Member States. A mechanism should be included which would seek to redress this imbalance against smaller Member States. Many of our members take issue with the exclusion of intangibles from the formula. Given the importance of intangible assets in the modern business environment, ignoring the value that they generate is simply not a realistic way of allocating profits.

Opinion Statement FC 4/2017

on the proposed Directive on Double Taxation Dispute Resolution Mechanisms in the European Union Prepared by the CFE Fiscal Committee Submitted to the European Institutions on 23 May 2017

The CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax profession in Europe. Our members are 27 professional organisations from 21 European countries with more than 200,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to assure the quality of tax services provided by tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law in Europe. The CFE is registered in the EU Transparency Register (no. 3543183647‐05). If the reader has any queries please contact Ms. Stella Raventos-Calvo, Chair of the CFE Fiscal Committee or Ms. Mary Dineen, Advisor to the Fiscal Committee of the CFE at mdineen@cfe-eutax.org

1. Introduction The CFE welcomes the Commission’s proposals to expand and improve the mechanisms available to Member States to resolve double taxation disputes with the introduction of a Council Directive1 (the “Proposed Directive”). The CFE has also commented on this matter in the context of the OECD BEPS consultation process, in January 2015 and April 20162 and in response to the 2016 EU Commission Public Consultation entitled “Consultation on Improving Double Taxation Dispute Resolution Mechanisms”. This Opinion Statement complements these previous opinion statements.

2. Background Double taxation impedes businesses operating cross-border and consequently hampers the development of the single market. Easily accessible, efficient and effective dispute resolution mechanisms are a crucial element to any corporate tax reforms for a fairer and more effective system of taxation within the internal market. Fair and efficient taxation requires not only that business pay a fair share of tax where it arises but also conversely, that business is not subject to double taxation or other tax obstacles to operating their business cross-border. The experience of CFE members concurs with the findings set out in the preamble to the Proposed Directive that the main problems with the EU Arbitration Convention3 arise from the ability of taxpayers to invoke and rely on the procedures and the length and the effective conclusion of the procedure. In addition, the lack of transparency results in increased uncertainty. Tax certainty is essential for a fair and robust internal market. Therefore, CFE encourages and welcomes any measures that expand the nature of disputes subject to the mechanism, empower taxpayers’ involvement within the process, and are result orientated with a focus on mandatory resolution of the disputes within a fixed time-frame. CFE encourages the swift implementation of the Proposed Directive on the basis that action is urgently required; there is already an unacceptable number of outstanding cases (worth an estimated EUR 10.5 billion)4 and as set out in the preamble to the Proposed Directive increased and more comprehensive audits by tax authorities are leading to an increase in cases. In this context CFE welcomes the agreement reached at ECOFIN on 23 May 2017 on a final text for the Proposed Directive.

Existing mechanisms

Proposal for a Council Directive on Double Taxation Dispute Resolution Mechanisms in the European Union. CFE and AOTCA Opinion Statements FC 3/2015 and FC 4/2016, January 2015 and April 2016, available on the CFE website: http://www.cfe-eutax.org/node/5352 3 Convention of the elimination of double taxation in connection with the adjustments of profits and associated enterprises (90/436/EEC). 4 Figure from European Commission Press Release, Strasbourg 25 October 2016. 2

3.1

National legal remedies

National legal remedies are generally not very effective when dealing with double taxation disputes on the basis that national courts do not have jurisdiction to rule on the levying or reduction of taxes in another jurisdiction. Therefore, whilst a taxpayer may have the ability to challenge the imposition of a tax under domestic tax legislation or in relation to the provisions of a bilateral or supranational tax treaty, the inability to bind the other jurisdictions in cases of double taxation results in the taxpayer not getting an effective remedy before the national courts. In addition, it is common practice that domestic law prohibits tax authorities from deviating from the decisions of national courts. Therefore, any contrary decision arrived under another mechanism is rendered ineffective in practice. Given the shortcomings of wholly domestic remedies, other mechanisms have developed to provide redress to taxpayers subject to cross-border double taxation. 3.2

Mutual Agreement Procedure

The primary avenue of recourse is to invoke the Mutual Agreement Procedure contained in bilateral double tax treaties. The wording generally derives from Article 25 of the OECD Model Tax Convention. The countries involved appoint competent authorities to manage the MAP procedure, generally speaking the tax authority assumes the role of the competent authority. A request to institute a Mutual Agreement Procedure must be submitted within three years of the initial notification of the impugned tax liability. The competent authority can declare the request to be valid, invalid or refuse to accept the request. In many Member States the taxpayer has no legal remedy to contest this decision. MAP entails the tax authorities negotiating an agreement to cancel the double taxation; the taxpayer is not a party to the proceedings. During the course of the MAP the taxpayer provides all information requested by the tax authorities. In many instances the countries are only required to “endeavour to resolve” the dispute, so in many cases no agreement is reached and the double taxation remains outstanding. This is alleviated in a limited number of tax treaties by a provision for mandatory binding arbitration at the request of the taxpayer if agreement has not been reached within 2 years of the presentation of the case (inserted into the OECD Model Tax Treaty on 2008).

3.3

EU Arbitration Convention

Within the EU, an additional avenue of recourse exists in the form of the EU Arbitration Convention (the “Convention”). The Convention provides a mechanism for the elimination of double taxation, but only in relation to an adjustment of profits between associated enterprises. The Convention contains a provision for mandatory binding arbitration, but only in relation to transfer pricing related disputes, which satisfy three preconditions. The Convention is complemented by the Revised EU Code of Conduct for the effective implementation of the Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises, which offers guidance and clarifications on the practical application of the Convention.

The Convention necessitates that Member States appoint competent authorities to take session of this arbitration function. Under the rules of the convention, an arbitration procedure may apply if there are double taxation issues where the following conditions are satisfied:   

The parties are “connected parties”; The financial relationship is one which would only apply to connected parties and not to unconnected parties; and The profits are or could be subject to tax in two (or more) Member States.

The taxpayer has three years from the date of the impugned notification to invoke the procedure. If the authorities fail to reach agreement within 2 years mandatory binding arbitration in invoked. An advisory commission is set up with both tax authorities represented; a decision is reached within 6 months. OECD transfer pricing guidance and terminology can be relied upon under the procedure. 4. Shortcomings of existing procedures. Whilst these aforementioned existing procedures assist taxpayers in mitigating and redressing the effects of double taxation to a certain extent, they are no longer sufficient to deal with the complexity and risks associated with the current global tax environment. Although in theory, the Member States should seek to achieve a satisfactory outcome for the taxpayer, in reality a conflict of interest can arise for the Member States in the negotiating process. Under the present system, negotiations do not take place on a legal level but more on a political level in the sense that they take place between the tax authorities. The taxpayer is not a party to these negotiations between the tax authorities. From a purely procedural perspective this is not ideal as the taxpayer is the party with the most accurate information on pricing policy and decisions taken and not the tax authority. Equally, from a fair procedures perspective it means their interests cannot be central to those proceedings, if they are not a party to them. Consequently, problems arise in relation to legal certainty and the effectiveness of the process, particularly for the taxpayer. The MAP often costs a great deal of time and money and the outcome of the procedure is extremely uncertain for the taxpayer. CFE members have found that in practice taxpayers reach agreement to settle the dispute with the tax authority rather than embarking on an uncertain, costly and timely MAP procedure. From the taxpayer’s perspective, the aim of the procedure is not solely to resolve the double taxation but also to clarify the nature and extent of the taxing rights of the different jurisdictions, for example, the applicable rate and applicable legislation. In particular, problems arise in cases where there is no mandatory and binding arbitration; where there is no stipulated period in which the competent authorities must reach mutual agreement the taxpayer is subject to increased uncertainty about their tax position for a long and undefined period of time, which is an undesirable outcome for any taxpayer. Conversely, the experience of our members is that the threat of arbitration acts as an impetus for the tax administrations to reach an agreement in terms of the Convention.

5. Comments on the new procedures under Proposed Directive The Proposed Directive will build upon and expand the existing mechanisms provided under the EU Arbitration Convention broadening the scope, streamlining the process and addressing some of the salient shortcomings. Consequently, CFE considers the Proposed Directive a positive development. In particular, CFE welcomes the following salient improvements: 5.1

Extension of the scope

A crucial element of the Proposed Directive, which the CFE endorses, is the extension of the scope of relevant disputes beyond just transfer pricing to include all taxpayers that are subject to taxes on income and capital under bilateral tax treaties and the Convention5. 5.2

Increased effectiveness & efficiency in the process

In order to increase effectiveness the Proposed Directive introduces a stipulation for the mandatory resolution of disputes subject to strict and enforceable timelines, this is a positive development for taxpayers and for tax certainty generally. 5.3

Taxpayers’ role and rights

The Proposed Directive seeks to empower the taxpayer and strengthen their role in the process. Taxpayers have always had the right to institute proceedings. However, the Proposed Directive seeks to empower the taxpayer during the process, for example, by notifying them of the terms of reference of the dispute, the proposed timeframe for completion and the terms of conditions of taxpayers’ or a third parties involvement. CFE welcomes these proposals and believes such measures will increase tax certainty and reduce administrative burden for taxpayers. CFE believes that the proposal allowing the taxpayer recourse to the national courts to ensure compliance in the event that the appropriate mechanisms are not applied is essential to a successful system of dispute resolution. In addition, the incorporation of an independent advisory council to make assessments at different stages, for example, if a taxpayer’s complaint is rejected, or in the event that the two Member States fail to reach agreement to eliminate double taxation pursuant to the MAP procedure will be an invaluable development from the perspective of ensuring taxpayers’ right are protected. 5.4

Alternative dispute resolution mechanisms

One of the salient improvements under the Proposed Directive is the inclusion of an additional layer of protection in the form of an automatic and mandatory arbitration procedure to be completed within fifteen months in the event that the Member States fail to reach a conclusion to the initial MAP phase. CFE welcomes the proposal to have an option between an Advisory Commission and an Alternative Dispute Resolution Commission. In particular, CFE believes the broader and more flexible approach to the form of alternative resolution procedure, which can be applied, will greatly improve the process for both the competent authorities and the taxpayer. 5.5

Tax Certainty

The Proposed Directive is essential to improving tax certainty within the EU. The recently published European Commission paper on tax uncertainty states, “Dispute prevention and early issue resolution 5

Pursuant to the final compromise, reached on 23 May 2017 it was agreed that on a case-by-case basis of excluding disputes that not involve double taxation.

programs, as well as effective dispute resolution procedures, are considered of particular relevance to enhance tax certainty in the international context.”6 The Proposed Directive specifies that in reaching an opinion the Advisory Commission or Alternative Dispute Resolution Commission must take into account the applicable national rules, and the terms of the relevant double tax treaty, or in the absence of a treaty the terms of the OECD Model Tax Treaty; this is a positive development in terms of improving tax certainty. In addition, the publication of decisions is a positive development; the draft report prepared for the Parliament goes a step further and proposes that the Commission develop a centrally managed webpage containing final decisions for the benefit of all taxpayers. CFE believes this would be a positive initiative.7 6. Points to note about the Proposals 6.1

Parallel procedures

Consideration should be given to the practical implications for taxpayers and tax authorities of two parallel arbitration procedures being available to the taxpayer to invoke. At present there are two procedures available to taxpayers vis a a viz the MAP procedure under double tax treaties and in addition, the Convention can be invoked in cases of transfer pricing related disputes. Many Member States will become signatories to the MLI in June 2017 and are likely to adopt the arbitration provisions. The proposed Directive does not address parallel MAP proceedings, but – in Art 15(5) –proceedings under the Directive and other arbitration or dispute resolution proceedings by stating that “[t]he submission of the case to the dispute resolution procedure according to Article 6 [i.e., dispute resolution by Advisory Commission] shall put an end to any other ongoing mutual agreement procedure or dispute resolution procedure on the same dispute in case the same Member States are concerned, with effect on the date of appointment of the Advisory Commission or Alternative Dispute Resolution Commission”. Hence, the procedure under the Directive is supposed to take precedence, so that there should not arise cases with two alternative final and binding decisions. 6.2

Form of decision given by the Advisory Commission or Alternative Dispute Resolution Commission (the “Commissions”)

Under the Proposed Directive, the Commissions reach conclusions and issue an Opinion. This can be contrasted with the position under the MLI whereby the competent authorities present their respective proposal to the Arbitration panel and the panel choose one solution (“base-ball arbitration”). CFE welcomes the adoption, in the proposed Directive of the conventional arbitration. Whilst we acknowledge the speed and alleged reduced costs of the procedure, we do not think baseball arbitration is an appropriate tool to deal with complex cases, such as those on transfer pricing issues8. 6.3

Role of the European Court of Justice

At present, the Convention is a multi-lateral instrument that is not within the jurisdiction of the ECJ. The Proposed Directive will be a directive; therefore, implementation by Member States into domestic law will be subject to the jurisdiction of the ECJ. In addition, depending on the wording of the final 6

European Commission Taxation paper 67-2017 ‘Tax Uncertainty: Economic Evidence & Policy Reponses’ Draft Report ‘Proposal for a Council Directive on Double Taxation Dispute Resolution Mechanisms in the European Union’ (COM(2016)0686 – C8-0035/2017 – 2016/0338(CNS)) Prepared by the Committee on Economic and Monetary Affairs (Rapporteur: Michael Theurer) 8 See CFE/AOTCA Joint Opinion Statement FC 3/2015 on making dispute mechanisms more effective. Submitted to the OECD in January 2015. 7

Directive the ECJ may have competence over the disputes themselves. Whilst this is a positive development for uniformity and tax certainty, given the large volume of cases that may be referred there may be capacity issues for the ECJ dealing with the disputes in a timely manner. The capacity of the ECJ will be further stretched if it is the case that the proposed directive for a common consolidated corporate tax base becomes law. A backlog of cases in the ECJ will frustrate the intentions of the Proposed Directive if the ECJ cannot deal with the referrals in a timely manner.

6.4

Incentives for tax authorities to engage

Whilst, in many cases the tax will already have been paid in the first State prior to dispute procedure being invoked, it has been suggested that it may be worth considering using the payment of the tax as a leverage to encourage speedy resolution of disputes between tax authorities. For example, the use of blocked accounts whereby the tax would become lodged in a blocked account, which would only become unblocked once there has been a satisfactory resolution of the dispute. The sum should be limited to the highest amount of tax, which may become due in order to avoid double taxation.

Opinion Statement FC 05/2017 VAT exemption of services provided by an independent group of persons (Article 132 (1) (f) of Directive 2006/112/EC) Prepared by the CFE Fiscal Committee Submitted to the European Institutions on 13 April 2017

1. Introduction In four pending cases, the Court of Justice of the European Union will bring some clarification to the scope of the VAT exemption in Article 132 (1) (f) of Directive 2006/112/EC (The “VAT Directive”), commonly referred to as the “cost sharing associations exemption”. Opinions have already been delivered by the Advocate General in cases C-274/15 Commission vs Luxembourg, C-326/16 Aviva and C-605/15 DNB Banka. An Opinion has also been delivered by Advocate General Wathelet in Case C615/15 European Commission v Germany. Due to the significance of this VAT exemption for many economic operators, the CFE considers that it is important to make a few technical comments on the position adopted by Advocate General Juliane Kokott in the Case C‑605/15 Minister Finansów v. Aviva Towarzystwo Ubezpieczeń na Życie S.A. w Warszawie1 (the “Opinion”)

2. CFE Technical Comments According to the conclusions of the Advocate General Juliane Kokott in the Opinion, an independent group of persons (Article 132(1)(f) of the VAT Directive) may supply exempt services only to those of its members which are subject to the same legal system as itself. Advocate General Kokott bases her opinion on the grounds set out below. The following are CFE’s comments on those grounds. 2.1 The “historical logic” of the exemption scheme. In the Directive 77/388/EEC, this provision was governed by Article 13 of the Sixth Directive, which the Advocate General considered applied only to ‘exemptions within the territory of the country’ (para. 42 of the Opinion). However, in 1963, the European Parliament suggested that the Commission should allow Member States to either tax, exempt or leave out of the scope of VAT activities having at that time no impact on the internal market. At the time, the European Parliament feared that the proposal of the Commission for a First VAT Directive to introduce a VAT system in two phases was not ambitious enough and that consequently Member States would never be prepared to adopt a tax system that secured neutrality on intracommunity transactions2. This is the historical origin and motivation of the current VAT exemptions. Interestingly, at that time, immovable property and financial services were not included in the list of the operations left to the choice of the Member States. Article 13 of the Sixth VAT Directive also later included banking, insurance, gambling, postal service etc. which can hardly be considered as exclusively rendered “within the territory of a country”. 2.2 The Advocate General observes that cross-border services are explicitly dealt with in Chapter 7 of the Directive 2006/112/EC (para. 44 of the Opinion). Opinion of Advocate General Kokott delivered on 1 March 2017. (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 page. 45). 1 2

It is very true that some cross-border services are explicitly dealt with in Chapter 7 of the VAT Directive, but only in so far as they are related to the intra-EU movement of goods. Chapter 7 of the VAT Directive does not include all possible cross-border services, but only a few services connected with the international trade in goods. Such exemptions are those which permit a credit of the related input VAT, while chapters 2 and 3 relate to exemption with no right to deduct the related input VAT; 2.3 The Advocate General observes that a broad interpretation of Article 132(1)(f) of the VAT Directive would give rise to an inconsistency with Article 11 of the VAT Directive. This allows Member States to regard as a single taxable person ‘persons established in the territory of that Member State’ who are ‘closely bound to one another’ in some way by a group (para. 46 of the Opinion). It should firstly be observed that it does not follow from this that article 11 is just directed at purely internal transactions. Although other member states are not required to adopt similar groupings, some member states (such as the United Kingdom and the Netherlands) take the view that the entirety of a taxable person including its establishments in other states becomes part of any VAT grouping. The CFE also observe that article 11 expressly makes it optional for states whether to recognise such groupings. This reflects the fact that the Community system of VAT is going through a process of gradual harmonisation of national laws: see Articles 99 and 100 of the EC Treaty (now Articles 93 EC and 94 EC). As the Court has repeatedly stated, this harmonisation, as brought about by successive directives and in particular by the Sixth Directive, is still only partial (see Case C36/99, Ideal Tourisme para. 37; C-165/88 ORO Amsterdam Beheer and Concerto v Inspecteur der Omzetbelasting para. 21). However, article 132(1)(f) is a more tightly focused provision which is not similarly expressed as being optional, and is clearly intended to have a harmonised application; 2.4 The Advocate General also takes the view that article 11 and 132 (1) f) are underpinned by the same rationale. However, this does not imply, as suggested by the Advocate General, that the applications of those exemptions should be subject to the same conditions or should be interpreted in the same way. If article 132 (1) (f) was just intended to have an impact on the VAT charged within a Member State, the wording of the exemption could have been restricted in the same manner to article 11. The administrative cooperation instruments should also mitigate the practical difficulties that the Advocate General refers to, when ascertaining whether the conditions for the VAT exemption to apply in different jurisdictions. As with cross-border input tax claims, states can also require taxable persons to provide information: note C-73/06 Planzer Luxembourg Sàrl v Bundeszentralamt für Steuern at para 35.

2.5 The Advocate General observes that “the fact that the exemption provided for in Article 132(1)(f) of the VAT Directive, as the wording of that provision makes clear, must not give rise to a distortion of competition, also indicates that the exemption should be confined to a single Member State” (para. 50 of the Opinion). However, the CFE observes that according to the case law, the special measures that member states may retain, in order to prevent certain types of tax evasion or avoidance may not exceed the limits strictly necessary for achieving that aim. In particular, such measures cannot have a

general nature (see Case 324/82, Commission v. Belgium, para.29), such as the prohibition of crossborder activities. In accordance with the EU principle of proportionality, measures imposing financial charges on economic operators are only lawful if the measures are appropriate and necessary for meeting the objectives legitimately pursued by the legislation in question. Of course, when there is a choice between several appropriate measures, the least onerous measure must be used and the charges imposed must not be disproportionate to the aims pursued (Case 265/87, Schäder, para. 21). It would be unfortunate if a different approach were adopted in this context, so that the exemption is prevented from applying in cross-border context even though there is no distortion of competition. 2.6 The Advocate General observes that that a restriction on the freedom to provide services that may be present is also justified by the need to guarantee the effectiveness of fiscal supervision (Para. 58 of the Opinion). As has already pointed out, the CFE believes that this can be satisfactorily ensured by existing legal instruments such as the Council Regulation (EU) No 904/2010 of 7 October 2010 on administrative cooperation and combating fraud in the field of value added tax and the fact that the onus is on a taxpayer to prove his entitlement to rely on an exemption. 2.7 The Advocate General also observes that a broader construction will allow tax optimisation models that are very easy to set up, particularly for groups of companies that operate globally. “The latter simply have to form with those of their affiliates that operate in Europe a group, established in a third State where there is no VAT (such as the United States, for example), to purchase all the services, subject to VAT, that they had previously purchased from Europe from third parties, an arrangement which cannot be described as artificial” (para. 62 of the Opinion). Even if this is correct, it is important to appreciate that exactly the same point can be made in relation to the other VAT exemptions listed under article 135(1) a to l of the VAT Directive. There is nothing to prevent companies being setup outside the EU, for example in the US, or even in the EU, to render services into the EU with similar benefits. To date, neither the Court of Justice, nor the Member States have ever argued that the VAT exemption on such services should be limited to a purely local supplies.

2.8 Finally, the Advocate General is of the opinion that based on the schematic position of Article 132(1)(f) of the VAT Directive, the VAT exemption could not apply to the banking and insurance sectors but should be restricted to the exemptions related to the public interests (such as cost sharing associations of doctors). This issue has also been recently considered by Advocate General Wathelet in his Opinion in Case C-615/15 European Commission v Germany who at paragraphs 86 and 94-111 considered that the exemption should extend to those in the banking and insurance sector. 3 The CFE agrees with this view expressed by Advocate General Wathelet for the reasons expressed in that Opinion. It also observes that when discussing the adoption of the Sixth VAT directive and the scope of that

Advocate General Wathelet at paragraph 77 refers to the United Kingdom’s non-adoption of the exemption in article 132(1)(f). The exemption has recently been introduced into UK law as Group 16 of Schedule 9 of the Value Added Tax Act 1994.

exemption in 1976, the Member States were at that time considering either a narrow interpretation or a broader one. In the end, it was the French broader position that prevailed and Article 13( A) (1) f) of the Sixth directive (which preceded article 132 (1) f) of the VAT Directive was not restricted to any particular sector. Advocate General Kokott refers to the 2007 working documents on the banking and insurance VAT exemptions. However, no reference is made by her to the statements made at the time by the Presidency of the Council4, which clearly stated that article 132(1) f) of the VAT Directive already applies to the banking and insurance sectors and that it therefore not necessary for the Council to extend the scope of that provision.

3. Conclusion For these aforementioned reasons, and with due respect, the CFE considers that it would be unfortunate if the Court adopts a similarly restrictive approach to the exemption to that adopted by Advocate General Kokott.

Document FISC 139 of 8th November 2010

Opinion Statement FC 6/2017

ON THE WORKING PAPER BY DG TAXUD ON TOOLBOX TO ENSURE CONSISTENCY BETWEEN TAX & DEVELOPMENT POLICIES IN THE (RE) NEGOTIATION OF DOUBLE TAX TREATIES WITH DEVELOPING COUNTRIES

Prepared by the CFE Fiscal Committee Submitted to the European Institutions on 15 November 2017

The CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax profession in Europe. Our members are 30 professional organisations from 24 European countries with more than 200,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to assure the quality of tax services provided by tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law in Europe. The CFE is registered in the EU Transparency Register (no. 3543183647‐05). If the reader has any queries please contact Mr. Piergiorgio Valente, Ms. Stella Raventos-Calvo, CFE representatives to the EU Platform for Tax Good Governance at brusselsoffice@cfe-eutax.org

1. Introduction This Opinion Statement is based on written comments submitted by CFE to the European Commission Platform for Tax Good Governance Meeting on 15 June 2017. The Opinion Statement concerns the Working Paper prepared by the European Commission (DG Taxud) regarding the creation of a so-called toolbox with which Member States would reference and consult when negotiating bilateral tax treaties with developing countries so as to ensure fair treatment of developing countries and a uniform and balanced approach to negotiation with developing countries by Member States. The proposed toolbox is contained in Annex 1 to this Opinion Statement.

2. The appropriateness of the toolbox to ensure consistency between tax and development policies in the negotiation of DTAs with developing countries From the outset, it is necessary to underline a primary concern regarding the prioritisation at EU level of consistency in Member States’ policies for the negotiation of Double Taxation Agreements (DTAs) with developing countries as compared to other tax-related issues arising in the Single Market. In our opinion, at the current stage of EU integration in the area of taxation, the EU should focus its efforts and resources in fields where the lack of coordination has been proved to negatively impact the functioning of the Single Market, for example:      

Tax Uncertainty; Respect of Taxpayers’ Rights; Fight Against Tax Evasion and Aggressive Tax Planning; Elimination of Double Taxation; Digitalisation; Tax Incentives for Innovation and Entrepreneurship.

Until the establishment of a more deeply coordinated EU tax framework, Member State could address other taxation matters at domestic level. Furthermore, it is important to highlight that in the event that EU intervention is not fully justified, and perceived to put further pressure on Member States’ sovereignty there is a risk of negative reactions when EU coordination is considered most vital. In addition, due consideration should be given to the fact that several steps have been taken by important international organisations worldwide to enhance tax policies of developing countries (UN Model Tax Convention/Practical TP Manual for Developing Countries / Manual for Negotiation of Bilateral Tax Treaties between Developed and Developing Countries). By undertaking action in the same sector, the EU risks unnecessarily duplicating work already completed at international level at a time when the impact is yet to be properly evaluated. At this stage, it might be more prudent to urge Member States to exploit the work already completed rather than to undertake further work in the same direction. Notwithstanding the above considerations, should the EU proceed with the efforts to coordinate Member States policies as regards DTA negotiations with developing countries, we believe that a toolbox could be useful for a number of reasons. Firstly, it would provide a common point of reference 2

for all Member States. Secondly; a tool box would avoid encroaching on the sensitive issue of Member States sovereignty, as it would not have binding effect. However, at this point it must be also noted that lack of binding legal effect might undermine the effectiveness of the instrument. Thirdly, toolboxes are in principle flexible instruments, the content and scope of which may be shaped in line with the purposes pursued. Hence, its impact may vary considerably depending on its scope and content. Consequently, we consider that a toolbox may be an appropriate instrument. This however shall depend on its specific content as well as the procedures put in place to monitor its effect and to update it.

3. Scope & Content of the Toolbox The draft toolbox addresses important issues that arise upon negotiation of DTAs that may require particular attention when it comes to developing countries. Nevertheless, the questions suggested could be characterised as generic and narrow. We consider the questions generic on the basis that they raise major issues, which are particularly difficult to answer, without providing practical tools to assist Member States in addressing them. In addition, we consider such questions to be narrow in scope because of their focus on specific articles of common DTAs, thus entailing a serious risk of neglecting a number of other issues, for example, there is no reference to arbitration and exchange of information. In our view, a toolbox should not be exhausted in an outline of the questions Member States should ask before getting to the negotiation table but suggest solutions and give specific guidance on the proper ways to respond to such questions. By way of example, we would suggest that the toolbox would refer to:  

  

Definition of “developing countries”; Classification of developing countries in specific categories that merit diverse approaches: (i) tax havens or not; (ii) reasons for lack in transparency requirements (lack of resources or other); (iii) size and policies towards EU etc. Exchange of information and experience among Member States as regards negotiation of DTAs with specific developing countries; Launch of regular EU reports on the status and evolution of developing countries; Establishment of procedural standards to be followed by Member States for the negotiation of DTAs with developing countries. For example, it could be required that to this end Member States (i) conduct preliminary reports and/or (ii) request reports and data by negotiating counterparty and/or (iii) identify a priori potential problems that may arise from the adoption of adjusted policies supposed to balance taxing power of developing counterparties (such as investment disincentives and/or double taxation).

4. Are the 6 Questions posed in the Toolbox the most relevant questions The set of questions suggested in the annexed toolbox deals with some of the most significant issues arising in the context of DTA negotiations. Nevertheless, and notwithstanding the aforementioned general concerns, we believe that there is room to improve and expand the set of questions proposed. The following are some suggestions in this regard. 

An important question for MS to ask when considering DTA negotiations 3

with a so-called developing country relates to the type of such developing country. As mentioned before, the term “developing countries” comprises a huge number of countries, very different in capacity, type of economy, general policies. The specific characteristics of each developing country – potential DTA counterparty should constitute primary consideration for MS. 

The adequacy of the safeguards for information exchange with the developing country should be a priority for MS, taking into account the high level of protection guaranteed to EU taxpayers’ right to privacy and confidentiality.



Due account should be taken of the fact that main purpose of the action under consideration is to enhance economic development and to promote placement on equal footing of developing countries. To this end, Member States considering DTAs with developing countries could consider the simultaneous signature of International Investment Agreements.



Questions 2 & 3 of the Toolbox entail the risk that MS produce different PE definitions and/or different provisions on technical services. Such risk undermines the function of the Single Market as well as certainty in EU taxation.

5. Suggested Follow-Up In light of our reservations as regards prioritisation of the toolbox discussed, we would primarily consider follow-up in one of the following forms:

II.

III. IV.

A pan-European study as regards (i) the status and general features of existing DTAs between MS and developing countries and (ii) the up-to-date impact of existing DTAs on the economy of developing countries; A study to identify common features of developing countries and specify appropriate categorization. Such categorization could serve as useful tool for the determination of the approach to be taken in the negotiations’ table. The establishment of procedural rather than substantial standards with respect to negotiations between MS and developing countries. The establishment of specific forum for dialogue and information exchange on the matter among MS on a regular basis.

ANNEX

TOOLBOX TO ENSURE CONSISTENCY BETWEEN TAX AND DEVELOPING POLICIES IN THE (RE-)NEGOTIATION OF DOUBLE TAX TREATIS WITH DEVELOPING COUNTRIES

In the External Strategy, the Commission recalled the new EU approach for supporting domestic public finance in developing countries. The "Collect More-Spent Better" strategy1 outlines how the EU intends to assist developing countries over the coming years in building fair and efficient tax systems, including by tackling corporate tax avoidance.

The External Strategy also suggested that Member States should apply a balanced approach to negotiating bilateral tax treaties with low-income countries, taking into account their particular situation. Tax treaties are usually aimed at preventing double taxation, allocating taxing rights and promoting foreign direct investment (FDI), with the purpose of fostering economic and political links between countries. Recently, tax treaties have also started to play an increasingly important role in addressing tax evasion, promoting transparency and allowing exchange of information in tax matters. These functions can be imbalanced if the parties involved present different economic features, i.e. unequal level of economic development.

Developed countries may sometimes not be conscious of the impact that DTAs have on developing countries, or of the most appropriate measures to support their domestic public finance. Granting taxing rights to developing countries could allow them to better cover their public financing needs.

While the negotiation of double tax treaties with developing countries is the sovereign competence of Member States, it is important to ensure consistency between tax and development policies. In this context, Member States could take steps to re-consider their tax policies with developing countries, in order to reduce spill-overs and ensure consistency with development needs. Appropriate policy in this area would support the EU's wider development goals.

It is worths mentioning that institutions such as the IMF and the United Nations, among others, are increasingly questioning whether double taxation treaties between developing and developed countries in their current form support sustainable development, given the economic asymmetry between the parties involved. Whereas tax treaties between developed and industrialized economies are broadly symmetric, with a similar amount of cross-border activity in each direction, a treaty between a developing and an industrialized economy is most likely to be asymmetric. It usually involves a larger 1

COM (2015) â&#x20AC;&#x201C; Collect More, Spend Better â&#x20AC;&#x201C; Supporting developing countries to better mobilise and use domestic public finances, Discussion Paper

flow of capital towards the developing country and a larger flow of capital revenues towards the industrialized economy.

Those asymmetries may lead to significant negative spill-overs. Generally, ‘spill-over’ refers to the impact that one jurisdiction’s tax rules or practices may have on another's. Two main types of spill-overs can be identified: 1) base spill-overs, which affect directly the tax base under which a country levies a tax and 2) tax rate spill-overs, which arise from the tax rate applied. For developing countries, spillovers have a more pronounced impact on specific elements of their tax treaties network, such as the right to levy withholding taxes. These elements are critical for domestic revenue mobilization.

Domestic revenue mobilisation is by far the most important source of the fiscal space required to achieve sustainable development. On average, developing countries raise less than 20% of GDP in taxes, compared with 30-45% in OECD countries. Around half of all low- and lower-middle-income countries (LICs and LMICs) still have tax-to-GDP ratios below 15%. Studies comparing tax efforts (a country’s actual tax-to-GDP ratio compared with a potential tax to-GDP capacity based on the country’s economy) suggest there is considerable room for improvement in many developing countries.2

Capacity building for developing countries can help them to cope with spill-overs, but this is not enough on its own. The existence of imbalanced bilateral tax treaties, which result in lost revenue and base erosion (e.g. through treaty abuse) is particularly damaging for developing countries.

Developing countries are highly dependent on source based taxation. Therefore withholding taxes on outbound payments are an essential component of their tax income, and are generally easier to administer and collect. However, tax treaties can reduce the capacity of developing countries to levy withholding taxes.

Beyond withholding taxes, other issues of relevance for developing countries in double tax treaties include the definition of a permanent establishment, capital gains, fees for technical services, transfer pricing or the absence of anti-abuse clauses. The studies and reports outlined in Annex I may be a good source of information for Member States, when undertaking impact assessments and/or reviewing their tax policies towards developing countries.

The following section aims at identifying the relevant issues when negotiating DTAs with developing countries or when considering renegotiating them. The relevance of these issues and the solutions proposed will depend on the specific situation of the developing countries concerned. There may be a

COM(2015) – Collect More, Spend Better – Achieving development in an inclusive and sustainable way, Working Stuff Paper, p. 6.

need for a more detailed assessment of the advantages and disadvantages of the possible options in order to meet development goals and ensure a balanced allocation of tax revenues.

RELEVANT QUESTIONS FOR CONSIDERATION BY MEMBER STATES When reviewing their policy in relation to DTAs with developing countries, Member States could consider the following questions. (Each question includes references to relevant documents where more detailed information can be found): 1) Do my DTAs with developing countries reduce their capacity to levy withholding taxes in a disproportionate way? Is the benefit of the reduced withholding tax (in terms of additional foreign investments) really sufficient to compensate for the loss of tax revenues? Allocating taxing rights is one of the primary aims of DTAs. However, a balanced approach on the taxes levied by the source country should be applied, as developing countries rely mostly on that type of income. In this respect, the withholding tax rate should allow for an appropriate distribution of taxing rights between the residence and the source country. It should also be borne in mind that DTAs which provide for low withholding taxes do not always increase tax revenues in the developed countries (i.e. residence countries). This is particularly the case where (i) the residence country applies 'tax sparing/matching credit clauses', which allow the taxpayer to deduct a higher tax rate from the tax bill despite the reduced tax rate in DTAs or (ii) the residence country disallow the imputation of the foreign withholding tax. In addition, the literature3 shows that a reduced withholding tax rate may result in a treaty override in the source country, which is a frequent source of legal uncertainty for business and investments. See: COM(2016)24; IMF (2014); NORAD (2009); VIDC (2014); Action Aid (2016). 2) Should the notion of permanent establishment be adjusted to accommodate the particular needs of developing countries? The following issues may justify adjusting the notion of permanent establishment (PE) in DTAs with developing countries: 1) The period of time required to qualify business activities in a source country as PE might be excessively long (e.g. construction sites, extractive activities, etc.); 2) The definition of the status of PE might be too narrow, with classes of activities being excluded from such definition (e.g. loans, marketing, specific agents' activities, etc.); 3) The profits attributed to PEs might be limited, for example because of an exemption for such profits or the application of the functionally separated entity principle, which restricts the activities attributed to PEs to those strictly carried out by PEs themselves. This approach may conflict with domestic rules of many developing countries. Often, they still apply the relevant business activity principle, which takes a wider approach to defining PEs' activities, and therefore try to exercise 'force of attraction' in respect of such profits.

Reference to this topic is made, among others, in IMF Policy Paper "Spill-overs in international corporate taxation", IBDF "Tax Treaty Override and the Need for Coordination between Legal Systems: Safeguarding the Effectiveness of International Law", ActionAid "Mistreated".

If provisions such as those described above are included in a DTA, this may prevent source countries from levying taxes on PE activities, limiting the possibility of taxing domestic activities despite a substantial economic presence in the source country. See: IBFD (2015); UN (2015)4; Action Aid (2016). 3) Could a new article on "Fees for Technical Services" in tax treaties ensure fairness and new tax resources for developing countries? Fees for technical services refer to payments for any service of a managerial, technical or consultancy nature which are not provided by an employee of resident companies of contracting states or through PEs. Provisions may be introduced for levying taxes on activities whose economic benefit is de facto only for the source state but that are operated in the residence country of a company or in a third country and aimed at responding to rapid changes in modern economies, particularly with respect to cross-border digital services. The introduction of such clause in DTAs could be helpful for allocating tax rights on economic activities substantially carried out in a state. It could also provide certainty for businesses, by clarifying their tax treatment for such services in advance. Such clauses have recently been discussed in the UN Committee of Experts on International Cooperation in Tax Matters and a new provision covering this matter should be included in the UN Model Convention, when it is next updated by the end of 2017. See: UN (2016); IBFD (2015) 4) Does the DTA's provide for a fair allocation of capital gain tax rights by source countries? Capital gains may be generated by different economic transactions, i.e. sales of immovable properties or assets, shares, exploitation rights, financial instruments, etc. Most DTAs with developing countries provide for source taxation for the first category of transactions only (sales of immovable properties) and link taxing rights of the source country to residencebased criteria. Business may take advantage of this, shifting their capital gains to other sources which are not covered by DTAs. It would be important to ensure that capital gain provisions include a broad scope of economic transactions. See: UN (2015)4; Dutch Ministry of Foreign Affairs (2013); Eurodad (2013). 5) Which measures could be introduced to simplify the administration of transfer pricing? The implementation of transfer pricing rules and the use of transfer pricing documentation are essential to assess the taxable basis of multinational enterprises (MNEs) and to tackle aggressive tax planning. Dealing with such documents requires investment in terms of time and resources, which are not always available to developing countries. Different approaches could be undertaken in order to facilitate transfer pricing issues for developing countries. These could include (1) developing more detailed provisions for the Arm's Length Principle in DTAs or guidance on how it should be applied in concrete situations, (2) improving public data availability for comparability studies and capacity building of tax administration and (3) introducing appropriate anti-avoidance rules, See: IMF (2014); IMF/OECD/UN/ World Bank (2011); OECD (2014). 6) Should DTAs without a proper anti-abuse clause be re-negotiated? The improper use of tax treaties to exploit differences in tax legislation between two contracting states is a concern for every country. It can give rise to double non taxation and lead to a direct loss of tax revenues. Due to their weak administrative capacities, developing countries may be more vulnerable to such treaty shopping. Accordingly, the introduction of an anti-abuse clause in DTAs might be highly relevant for developing countries. 8

See: UNCTAD (2015); UN (2015)4; SOMO (2013).

APPENDIX I

1: Member States' as well as third countries' reports 1) IBFD (2015): " Possible effects of the Irish Tax System on Developing Economies" (IR) http://www.budget.gov.ie/Budgets/2016/Documents/IBFD_Irish_Spillover_Analysis_Report_ pub.pdf

A summary of the report can be found in Annex II

2) IBFD (2013): "Onderzoek belastingverdragen met ontwikkelingslanden" (NL) https://www.eerstekamer.nl/overig/20130830/_onderzoek_belastingverdragen_met/docum ent

A summary of the report can be found in Annex II

3) Dutch Ministry of Foreign Affairs (2013): IOB Study: Evaluation issues in financing for development, analysing effects of Dutch corporate tax policy on developing countries https://www.government.nl/documents/reports/2013/11/14/iob-study-evaluation-issues-infinancing-for-development-analysing-effects-of-dutch-corporate-tax-policy-on-developingcountries 4) NL (2013): Government's response to the IBFD report https://www.government.nl/documents/parliamentarydocuments/2013/09/09/government-s-response-to-the-report-from-seo-economicsamsterdam-on-other-financial-institutions-and-the-ibfd-report-on-develop 5) NORAD - Norwegian Government (2009) “Tax Havens and Development” https://www.regjeringen.no/contentassets/0a903cdd09fc423ab21f43c3504f466a/engb/pdfs/nou200920090019000en_pdfs.pdf https://www.regjeringen.no/globalassets/upload/ud/vedlegg/utvikling/tax-havens-short.pdf

2: Commission/ European Parliament papers 1) COM (2016)18 – Platform for Tax Good Governance, Follow-up of the Communication on the External Strategy: Tax Treaties between Member States and Developing Countries 10

http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/g en_info/good_governance_matters/platform/meeting_2016/20160614_paper_tax_treaties_ developing_countries.pdf 2) COM(2016)24 – Communication on an External Strategy for Effective Taxation http://ec.europa.eu/transparency/regdoc/rep/1/2016/EN/1-2016-24-EN-F1-1.PDF

3) COM (2015) – Collect More Spend Better – Achieving development in an inclusive and sustainable way https://ec.europa.eu/europeaid/sites/devco/files/pol-collect-more-spend-better-swd20151015_en.pdf 4) COM(2015) – Collect More Spend Better – Supporting developing countries to better mobilise and use domestic public finances https://ec.europa.eu/europeaid/sites/devco/files/com_collectmorespendbetter_20150713_en.pdf 5) European Parliament resolution of 8 July 2015 on tax avoidance and tax evasion as challenges for governance, social protection and development in developing countries http://www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P8-TA-20150265&language=EN 6) European Parliament resolution of 26 February 2014 on promoting development through responsible business practices, including the role of extractive industries in developing countries http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P7-TA-20140163+0+DOC+XML+V0//EN 7) COM(2010) 163 – Communication Tax and Development, Cooperating with Developing Countries on Promoting Tax Good Governance in Tax Matters https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/com(2010)163_en.pdf 8) COM (2010) – SEC(2010) 426: Staff Work Document accompanying the Communication from the Commission Tax and Development Cooperating with Developing Countries on Promoting Good Governance in Tax Matters https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/sec(2010)426_en.pdf 9) COM(2009) 201 – Communication Promoting Good Governance in Tax Matters http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2009:0201:FIN:EN:PDF

7) EP - Committee on Development (2011) “Report on Tax and Development – Cooperating with Developing Countries on Promoting Good Governance in Tax Matters” (Rapp.: Hon. Eva Joly)

http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+REPORT+A72011-0027+0+DOC+PDF+V0//EN

3: Papers by International Organisations 1) IMF (2014): "IMF Policy Paper, spill-overs in international corporate taxation" http://www.imf.org/external/np/pp/eng/2014/050914.pdf

A summary of the report can be found in Annex II

2) IMF/OECD/UN/ World Bank (2011): "Supporting the development of more effective tax systems" https://www.oecd.org/ctp/48993634.pdf

3) OECD (2014) “Report to G20 Development Working Group on the Impact of BEPS in Low Income Countries” http://www.oecd.org/tax/part-1-of-report-to-g20-dwg-on-the-impact-of-beps-in-lowincome-countries.pdf https://www.oecd.org/g20/topics/taxation/part-2-of-report-to-g20-dwg-on-the-impact-ofbeps-in-low-income-countries.pdf

4) UN (2016) “Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries” http://www.un.org/esa/ffd/wp-content/uploads/2016/05/manual_btt.pdf

5) UN (2015)1 “Addis Ababa Action Agenda of the Third International Conference on Financing for Development” http://www.un.org/esa/ffd/wp-content/uploads/2015/08/AAAA_Outcome.pdf

6) UN (2015)2 “Resolution adopted by the General Assembly on 27 July 2015: Addis Ababa Action Agenda of the Third International Conference on Financing for Development (Addis Ababa Action Agenda)” http://www.undocs.org/A/RES/69/313

7) UN (2015)3 “Post-2015 Development Agenda entitled ‘Transforming our world: the 2030 Agenda for Sustainable Development’, adopted by the United Nations General Assembly in September 2015” 12

http://www.un.org/ga/search/view_doc.asp?symbol=A/RES/70/1&Lang=E

8) UN (2015)4 “Protecting the Tax Base of Developing Countries” http://www.un.org/esa/ffd/wp-content/uploads/2015/07/handbook-tb.pdf

A summary of the report can be found in Annex II 9) UN (2014) “Papers on Selected Topics in Negotiation of Tax Treaties for Developing Countries” http://www.un.org/esa/ffd/wp-content/uploads/2014/08/Papers_TTN.pdf

10) UN (2013) “Handbook on Administration of Double Tax Treaties for Developing Countries” http://www.un.org/esa/ffd/wp-content/uploads/2014/08/UN_Handbook_DTT_Admin.pdf

11) UN (2011) “United Nations Model Double Taxation Convention: 2011 Update” http://www.un.org/esa/ffd/wp-content/uploads/2014/09/UN_Model_2011_Update.pdf

12) UNCTAD (2015) “International Tax and Investment Policy Coherence – Chapter V” http://unctad.org/en/PublicationChapters/wir2015ch5_en.pdf

4: Papers by NGO's 1) Action Aid (2016): "Mistreated" http://www.actionaid.org/sites/files/actionaid/actionaid__mistreated_tax_treaties_report_-_feb_2016.pdf

A summary of the report can be found in Annex II

2) Action Aid Dataset of tax treaties signed by low income countries in Asia and Sub-Saharan Africa http://www.actionaid.org/sites/files/actionaid/aa_treaties_dataset_feb_2016.xlsx

3) Action Aid (2014) “Policy Brief on Double Taxation Agreements” http://actionaid.org/sites/files/actionaid/policy_brief_on_double_taxation_agreements.pdf

4) Eurodad (2015): " Fifty Shades of Tax Dodging" http://www.eurodad.org/files/pdf/5630c89596bec.pdf

5) Eurodad (2013): “Double Taxation Agreements in Latin America - Analysis of the Links among Taxes, Trade and Responsible Finance” http://www.eurodad.org/files/pdf/524d3b7c8e8ed.pdf

6) SOMO (2013) “Should the Netherlands Sign Tax Treaties with Developing Countries?” http://www.hollandquaestor.nl/documents/pdf/publicaties/overige/somo-rapport-shouldthe-netherlands-sign-tax-treaties-with-developing-countries.pdf

7) VIDC (2014) “A Legal and Economic Analysis of Double Taxation Treaties between Austria and Developing Countries” http://www.vidc.org/fileadmin/Bibliothek/DP/Neuwirth/Studie_Doppelbesteuerungsabk/BraunFuen tes_AustrianDTTs_Layout_final3.pdf

Opinion Statement FC 7/2017

ON TAX CERTAINTY

Prepared by the CFE Fiscal Committee Submitted to the European Institutions on 20 November 2017

The CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax profession in Europe. Our members are 27 professional organisations from 21 European countries with more than 200,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to assure the quality of tax services provided by tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law in Europe. The CFE is registered in the EU Transparency Register (no. 3543183647‐05). If the reader has any queries please contact Mr. Piergiorgio Valente and Ms. Stella Raventós-Calvo, CFE representatives to the EU Platform for Tax Good Governance or Ms. Mary Dineen, Advisor to the Fiscal Committee of the CFE at mdineen@cfe-eutax.org

1. Introduction In a time of immense change in the international tax environment, CFE believes that tax certainty must become a priority of policy makers. Whilst CFE appreciates the importance of measures to tackle aggressive tax avoidance schemes and base erosion and profit shifting (BEPS), it believes that the balance of legislation must be redressed to promote certainty for taxpayers and business and consequently the economic growth. CFE welcomes the increased focus on tax uncertainty and its harmful consequences. The OECD and European Commission have recently published the following reports on this subject:  

The OECD /IMF Report on Tax Certainty presented to the G20 in March 2017 (The “OECD /IMF Report”)1 The European Commission Taxation Paper entitled ‘Tax Uncertainty: Economic Evidence and Policy Responses’2 (The “Taxation Paper”)3

Whilst CFE welcomes these reports it also urges that tangible action follows. The importance of tax certainty is best explained through an analysis of the implications of tax uncertainty and conversely, the benefits of tax certainty.

2. Implications of Uncertainty Tax uncertainty undermines all taxpayers’ freedom and is a global concern and issue for all taxpayers; it results in a lack of confidence of one’s tax obligations meaning taxpayers are not in a position to make informed decisions of the consequence of their investments, business decisions and the risks related to them. Tax uncertainty jeopardises prospective growth, effectively discouraging investment, innovation and entrepreneurship and the economy as a whole. From the initial investment stage and throughout the commercial process tax uncertainty can undermine the progression and have negative impact on business. For example, businesses face the dilemma of how best to deal with an adverse tax assessment caused by unclear law or unclear interpretation of the law; whilst the business has the right to challenge the assessment, huge uncertainty exists for the taxpayer in the considerable interim period until the challenge is concluded. During this time the company will have to assess whether to declare the tax assessment as a contingency in its accounts, and will be unable to utilise the amount of the assessment for other business purposes, thereby impeding the ability to carry on its business and risking reputational damage should the assessment be public. As highlighted in the Taxation Paper, tax uncertainty particularly impacts SMEs as they do not have the resources to deal with the 1

OECD / IMF Report to G20 Ministers on Tax Certainty March 2017 European Commission Taxation Working Paper 67 of 2017, ‘Tax Uncertainty: Economic Evidence & Policy Responses’ . 3 Taxation Papers are written by the staff of the European Commission’s Directorate-General for Taxation and Customs Union, or by experts working in association with them. Taxation Papers are intended to increase awareness of the work being done by the staff and to seek comments and suggestions for further analyses. These papers often represent preliminary work, circulated to encourage discussion and comment – thee views expressed are those of the authors and not of the European Commission. 2

aforementioned implications of tax uncertainty4. Therefore, very often companies are unfairly forced to accept an increasing level of tax injustice by not appealing erroneous tax assessments, especially in those jurisdictions where effective damages would not be paid to restore the taxpayer’s position.

3. Benefits of Certainty The CFE strongly believes that legal certainty in the EU and worldwide will benefit all stakeholders for the following reasons:  

Taxpayers will be more informed of their tax obligations and will incur less compliance costs to fulfil them; It will decrease the risk of tax disputes for all stakeholders resulting in:  Businesses being able to employ more resources for productive activities;  Tax authorities having more resources to fight against real tax fraud instead of having to combat erroneous but understandable misinterpretation of the law  Consumers benefitting from more efficient production costs and subsequently less expensive goods and services on the market.

In our view, achieving increased tax certainty should be founded on simple, clear, and coherent rules throughout the EU. This approach is in line with the finding in the 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”5 . Simple and clear rules leave less margin for ambiguous interpretations and consequently for disputes. In addition, within the EU coordinated Member States’ rules prevent mismatches among national legislations.

4. Achieving A Balance Between Tax Certainty and Reforms An efficient tax system demands a delicate balance between ensuring certainty on the laws and their application but also updating legislation to keep abreast with societal and economic developments. However, if the balance is not reached, frequent and extensive amendments to the law do not allow for the establishment of general practices and will lead to tax uncertainty and undermine the tax system as a whole. In our view, and in line with the results of the Taxation Paper, the achievement of a desired balance is based on two main pillars:

4.1



Clarity of rules / uniformity of laws;



No retrospective legislation and limited retroactive tax legislation.

Clarity of laws

Legislation should set clear general principles, which seek to prevent double interpretations and/or manipulation of the rules by taxpayers/tax administrations. General Anti Avoidance Rules (GAARs)

Ibid at page 3. European Commission Taxation Working Paper 67 of 2017, ‘Tax Uncertainty: Economic Evidence & Policy Responses’ at page 24 5

cause particular problems in this regard. The introduction of GAARs can lead to much tax uncertainty, particularly when the tax authorities seek to apply them to existing situations. The interaction between GAARs and Specific Anti Avoidance Rules (SAARs) can also lead to confusion and tax uncertainty. Different definitions of concepts in different EU directives also leads to uncertainty for taxpayers and should be avoided. 4.2

Retrospective / retroactive legislation

A slight difference exists between retroactive and retrospective legislation but the distinction is crucial and must be highlighted. Retrospective legislation operates on subject matter taking place prior to the enactment (e.g. penalising conduct that was lawful when it occurred) whereas retroactive legislation operates prospectively to change the law in relation to subject matter which was until that point in time legal. The CFE completely opposes retrospective legislation and believes retroactive legislation should only be allowed in very limited circumstances and, if used, should allow for sufficient grandfathering periods for the taxpayer to be given time to comply with the new laws. In the UK, for example, the Government has introduced a protocol in the event there is a change in the law outside a normal fiscal event (i.e. a measure not announced at the time of the Budget) and in such circumstances whereby the change takes immediate effect (i.e. from the time of the announcement and before the legislation is enacted). A change that takes effect from a date earlier than the date of announcement will be wholly exceptional. The details of this protocol are fully explained in Appendix B at the end of the first report of the Tax Professionals’ Forum6. In other Member States, whilst retrospective legislation is completely illegal, in terms of changes to the law having retroactive effect it is considered good practice to allow what is known as a “grandfathering” period to allow taxpayers who organised their affairs in line with previous law time to adjust their affairs to make them compatible with new law. CFE endorses measures such as early publication and grandfathering periods.

5. Good Practices to Address The Issues on Tax Uncertainty Given that urgent solutions are required to address the problem of tax uncertainty, the following are some suggestions of best practices that could increase tax certainty. In the course of identifying proper solutions, reference may be made to the EU Guidelines for a Model Taxpayer Charter and the Model Taxpayer Charter.7 The latter constitutes an initiative of 3 international tax professional organisations, CFE, AOTCA and STEP. It was compiled in 2013 and was updated in 2016, to take into account the developments in the meantime. 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 sustainable tax systems. Amongst others, the Model includes provisions on taxpayers’ fundamental right to tax certainty. 6

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/204925/taxprofessionalforu m_061211.pdf 7 CFE, AOTCA, STEP, A Model Taxpayer Charter, 2016 (second edition), available at: http://www.cfeeutax.org/sites/default/files/Model%20Taxpayer%20Charter%2C%20preliminary%20report%2C%20text.pdf

Building on the results of the survey for the compilation of the Model and drawing inspiration from the principles reflected therein, we hereby suggest the following best practices to enhance certainty in taxation within the Single Market. 5.1

Establishment of high standards for the drafting of tax legislation

Tax laws should be clear and simple. 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 States8. It is essential that such consultation is meaningful and comments and recommendations are taken into consideration, otherwise the legitimacy of the process is undermined. 5.2

Consolidation of Taxpayers’ Rights

Taxpayers’ rights should be clarified and established in binding legal instruments at Member State and EU level9. Such instruments may provide an objective point of reference for all stakeholders and increase certainty on the functioning of the tax system. We recommend that such instruments should be effective and applied by tax administrations, taxpayers and the courts. In this respect, although we welcome the Commission’s initiative to issue Guidelines for a Model for a European Taxpayers’ Code, we stress that it does not make any reference to the effect to be given to taxpayers’ codes. 5.3

Dispute Resolution

The establishment of fair and effective procedures for the resolution of tax disputes is a vital element of every sustainable tax system that ensures tax certainty for taxpayers. In this regard, we welcome the newly adopted EU Double Tax Dispute Resolution Directive and we urge for its further enhancement. In respect of enhancement, we propose that: I.

II. III.

the scope of the Directive be extended to indirect taxes, cases where double taxation is highly likely to occur as well as to taxes “similar/identical” to the ones explicitly falling under the Directive’s scope; the scope of the Directive be extended to cover cases involving bilateral/multilateral rejection of a double taxation complaint; issues arising in connection with the interaction between domestic and crossborder proceedings are addressed.

U.K. Paper entitled ‘Making better Law’ includes recommendations on how best to improve the consultation process as part of the legislative process published January 2017 9 The necessity for such instruments to be legally binding is greater in civil law jurisdictions that in common law jurisdictions, where soft law is more likely to be adhered to by authorities and therefore effective.

5.4

Advance Certainty – Prevention of Disputes

Advance Pricing Agreements (APAs) are 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. CFE recommends the adoption of an EU directive to clearly outline the framework of APAs and also rulings generally within the EU. All Member States should be required to establish simple and effective procedures for the conclusion of APAs. Coordination of national procedures would benefit investment by simplifying the rules applicable in the Single Market. In addition, simple and effective procedures should be available for the conclusion of bilateral and multilateral APAs. 5.5

Cooperation at All Levels

Cooperative relations amongst all stakeholders in the field of taxation would increase tax certainty. In this respect, CFE understands cooperation to be that between:  

Taxpayers and tax administrations; and Amongst tax jurisdictions for the establishment of coordinated tax rules at international level.

As regards the former, the potential of cooperative compliance was outlined by the OECD in 2008 in a ‘Study Into the Role of Tax Intermediaries’10. It was then verified 5 years later in the OECD’s Report ‘Cooperative Compliance: A Framework’11 drawing on the experience of 24 countries having introduced cooperative compliance regimes. Most recently, the OECD / IMF Report endorsed cooperative compliance 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”12. As regards the latter, common understanding of the fundamental principles of taxation at EU/worldwide level or at least minimum coordination of national rules to prevent loopholes would cut on one of the most important sources of tax uncertainty.

OECD, Study Into The Role of Tax Intermediaries, 2008, available at: http://www.oecd.org/tax/administration/studyintotheroleoftaxintermediaries.htm 11 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 12

OECD / IMF Report to G20 Ministers on Tax Certainty March 2017 at page 21

Opinion Statement FC 08/2017

Response to OECD REQUEST FOR INPUT ON WORK REGARDING THE TAX CHALLENGES OF THE DIGITALISED ECONOMY

Prepared by the CFE Fiscal Committee Submitted to the OECD on 13 October 2017

The CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax profession in Europe. Our members are 30 professional organisations from 24 European countries with more than 200,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to assure the quality of tax services provided by tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law in Europe. The CFE is registered in the EU Transparency Register (no. 3543183647‐05). We will be pleased to answer any questions you may have concerning CFE comments. For further information, please contact Stella Raventós Chair of the CFE Fiscal Committee, or Mary Dineen Advisor to the CFE Fiscal Committee, at brusselsoffice@cfe-eutax.org.

Introduction

This Opinion Statement by the CFE Fiscal Committee is in response to the OECD request for input on work regarding the tax challenges of the digitalised economy published on 22 September 2017.

We will be pleased to answer any questions you may have concerning our comments. For further information, please contact Ms. Stella Raventós, Chair of the CFE Fiscal Committee or Mary Dineen, Adviser to the CFE Fiscal Committee, at brusselsoffice@cfe-eutax.org.

General Remarks

CFE supports the conclusion reached by the BEPS Action 1 Report that because “the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes”. The BEPS process involved long and detailed consultations with a broad spectrum of stakeholders, however, none of the three options identified in the BEPS Report were recommended at that stage nor was ring-fencing the digital economy endorsed. The digital economy cannot be ring-fenced and it is still not clear that the targeted taxation matters identified in the BEPS report, are appropriate. In particular, they violate the principle of neutrality, efficiency, certainty and simplicity espoused by the Ottawa Framework for designing tax policies for the digital economy. Ideally, CFE believes the sensible approach is to allow the BEPS Project take effect and subsequently assess how problems which persist can be addressed in light of the new post-BEPS taxation framework. In practice we recognise the imperative that governments feel to be seen to “be doing something” but we would strongly recommend that the OECD needs to build a clear international consensus before it puts forward any clear recommendations. Not to do so would risk undermining all the consensus building that has surrounded the BEPS project itself. CFE welcomes the publication of the Outline of the Interim Report for the G20 Finance Ministers and in particular Chapter II which will contain “Analysis of heavily digitalised business models and their value chains to shed light on how and where value is created” and a “Discussion of the tax system (both direct and indirect taxation) and the issues raised by the new business models, including the impact of digitalisation on a number of traditional tax bases and on tax systems generally (i.e. beyond BEPS)” . This will bring up to date the really helpful description and analysis contained in the 2015 BEPS Action 1 report and can form the basis for a detailed analysis of how there could be modifications, or additions, to existing tax regimes to address any lacuna in the taxation of the highly digitalised parts of national economies and international business.

It is important that any new taxes do not stifle the growth of the digital economy or discourage innovation. Further, any new laws should be restricted by threshold to only very large highly digitalised companies. Any new measures must focus on the formulation of growth-orientated approaches, which exploit the opportunities of digitalisation for economic growth. In addition, any new tax which deviates from settled tax practice and the international tax framework will inevitably lead to great tax uncertainty for all stakeholders. Uncertainty will result in non-uniform application to entities and practices beyond the anticipated scope of the new laws. To mitigate this risk, any new legislation should be aligned, as much as possible with existing international practice and norms. Net income taxation within digital economy structures should be pursued to the maximum extent possible. Double non-taxation is a problem, this is indisputable, equally indisputable is the problem of double taxation â&#x20AC;&#x201C; and its negative effect on the world economy, consumers and taxpayers. It is extremely difficult to design a new tax that is not going to have unintended consequences and lead to double taxation. Any new tax must be designed in a manner to avoid double taxation, and must come within the ambit of double taxation treaties, otherwise the whole tax treaty system, which international taxation is built upon and network will be completely undermined. In the event that any new measures are implemented, it is vital that more robust dispute resolution measures are implemented as envisaged in Action 14 of the BEPS project. Access to effective dispute resolution mechanisms has been identified by all stakeholders as a significant problem for taxpayers. The addition of one of these new taxes will further exacerbate scarce resources to deal with disputes, increase waiting lists before appropriate fora and ultimately contribute to increased tax uncertainty. Finally, taxpayersâ&#x20AC;&#x2122; rights must be safeguarded. Implementation of any new tax must be done in a manner to avoid uncertainty for taxpayers, ensuring that sufficient information is provided. New tax obligations should not be overly onerous on taxpayers and proper controls should be exercised over tax obligations (particularly in the context of a withholding tax).

Response to section B

3.1

Question B1

What issues are you experiencing with the current international taxation framework? (e.g. legal administrative burden, certainty)

After a time of immense change in the international tax environment, CFE believes that establishing legal and tax certainty in the international taxation framework is of the utmost importance and must become a priority of policy makers. Whilst CFE appreciates the importance of measures to tackle aggressive tax avoidance schemes and base erosion and profit shifting (BEPS), the balance of legislation must be redressed to promote certainty for taxpayers, and tax administrators. In addition, access to effective dispute resolution is a prevalent issue for business in the current time. It is probable that the introduction of a new tax on digital transactions will lead to increased disputes and uncertainty for taxpayers. The introduction of unilateral actions by states have led to increased uncertainty and despite the unilateral nature still have a global impact given the universality of the digital economy. Uncertainty is also arising due to problems with characterisation of transactions and income e.g. due to the servicification of production in the increasingly digitalised world.

3.2

Question B2

Implication of highly digitalised business models and their value chain on taxation policy & systems It is clear that difficulty has arisen with aligning existing bases on which countries seek to establish their taxing rights with taxing highly digitalised business models. This is evidenced from increased disputes regarding value chains and profit attribution, such as the recent high profile case before the French Supreme Court in which the French tax authorities failed in their attempt to assert the existence of a PE by Googleâ&#x20AC;&#x2122;s Irish entity (Google Ireland Limited) in France and consequently levy 1.2 billion euro in tax.

Opportunities to improve tax administration services and compliance strategies created by digital economies. With respect to the opportunities for the tax system, it must be stressed that digitalisation is a prime opportunity to develop an improved tax system, that is less burdensome and more fair. For example, the potential of blockchain technologies should be explored in this respect.

Response to section C

4.1

Question C1

Although still early in the implementation of the BEPS package, how have the various BEPS measures (especially those identified at particularly relevant for the digital economy â&#x20AC;&#x201C; i.e. BEPS Actions 3, 2, 7 and 8-10) addressed the BEPS risks and the broader tax challenges raised by digitalisation? Please feel free to support your answers with real life examples illustrating these impacts. 4

It is simply too early to give an informed opinion on how the BEPS package has addressed the BEPS risks and the broader tax challenges raised by digitalisation. For example, within the EU the Anti-Tax Avoidance Directives1 (“ATAD”) and the proposed amendments to ATAD pursuant to the second AntiTax Avoidance Directive2 (“ATAD 2”) have not yet been implemented in Member States, and will not be for a number of years3 . Great uncertainty still exists as to how new guidance, principals and practices espoused under the BEPS Action Plan will work in practice, be interpreted by tax authorities or ruled upon by the courts. It needs time to take effect, to assess its impacts, positive and negative. As an example, great uncertainty exists over the profit allocation rules in light of the changes made by BEPS Action 7 and the interaction with BEPS Actions 8-10. Introducing new methods of allocation to the digital economy would lead to further confusion without having a clear view of how the changes under the BEPS project may have impacted the digital economy. 4.2

Question C2

VAT/GST changes agreed in the BEPS Package to level the playing field between domestic and foreign suppliers of intangibles and services. These changes demonstrate the difficulties of trying to address one problem and acting too quickly. The result is an inconsistent approach between digital and paper versions of the same product, which is unhelpful. It should be noted that in relation to VAT the issue is very often misunderstood. While it is clear to tax practitioners that VAT is neutral in B2B transaction, and therefore even in case a B2B transaction between a non-resident digital business and a resident business is not taxed, VAT will be fully collected at a later stage, policy makers tend to believe that that case would result in a loss of tax. The focus should be addressed mainly on B2C transactions.

Response to section D1

As regards the three proposed solutions in this section before detailed comment can be made the proposals need to be enhanced with more substantial detail; more concrete details are required on key concepts such as applicable thresholds, to the extent this is possible.

Council Directive (EU) 2016/1164 laying down rules against tax avoidance practices that directly affect the functioning of the internal market. 2 Council Directive amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries 3 ATAD provisions must be implemented in Member States before 1 January 2019, or 1 January 2020 in the case of exit taxes. The provisions of ATAD 2 must be implemented by 1 January 2020 or 1 January 2022 for reverse hybrid mismatches. 5

In addition much greater information must be ascertained on the serious impact that is to be expected. As results in the OECD Taxation Working Paper No. 32 20174 demonstrate, not always the tax burden is not always is held by the person who is legally responsible for the payment. ”In practice, the discussion regarding who bears a tax is often linked to the assumption that the economic burden may align with the legal tax liability. In reality, there can often be large and unintended differences between legal tax liability and ultimate economic incidence. In fact, legal tax liability often bears little relationship to who actually bears a given tax. Moreover, the dynamics whereby a tax burden is reallocated among different actors in the economy are not reflected in tax collection amounts, making economic incidence difficult to analyse”. Being an organisation of tax professionals and not economists, CFE is not in the position to assess whether and to what extent any of the proposed “digital tax” will be effective with respect to it being borne by the intended targets. Nevertheless, by considering the OECD study, it is clear that to some extent (document says from 30 up to 50% for CIT and from 100 110% of any other indirect tax) any additional tax charged to the Digital economy will end up to an increase of costs for consumers and/or for workers. Therefore, policy makers should assess these policy options in the context of the actual incidence of the chosen digital tax, and bear in mind that the effect will not be a mere increase of tax collection; most likely digital business will simply pass on part or the whole of that tax to consumers, with adverse consequences for consumers. 5.1

Tax nexus concept of “significant economic presence”

General remarks This concept is at variance with the conclusion reached by the BEPS Action 1 Final Report, which CFE agrees with, that the digital economy cannot be isolated from the economy as a whole. Given the novel and nebulous nature of this concept, double taxation is invariably going to occur, along with increased level of disputes, increased tax uncertainty and opportunity for new arbitrage. Specific Answers I.

It will be very difficult to select the extent a transaction must be “digital” and fall within the scope. It would be very important to clarify the relation between digital presence and significant economic presence. Every website, digital transaction and element of a digital

Milanez, A. (2017), “Legal tax liability, legal remittance responsibility and tax incidence: Three dimensions of business taxation”, OECD Taxation Working Papers, No. 32, OECD Publishing, Paris. http://dx.doi.org/10.1787/e7ced3ea-en 4

transaction has at some point human involvement at a physical location. When deciding what transactions should be included within the scope equal consideration should be given to startup companies and SMEs which also rely on digital platforms to carry out their business. Further, it should be noted that any possible changes and increased administrative and compliance cross-border burdens will disproportionately affect the ability of smaller enterprises to carry out and expand their business domestically and cross-border. Similarly, the cost of double taxation will adversely affect SMEs far more the MNEs. In this context, at EU level new minimum thresholds are being introduced as part of the changes to the MOSS system to alleviate compliance burden for small business providing online B2C e-commerce services across borders. Further simplification measures are also proposed to alleviate the burden on SME. II.

Similarly, defining or imposing a threshold under which a digital presence will be established will be problematic. Regardless of how it is measured or determined, once it is based on the concept of “significant economic presence” it will lead to a two-tier system of taxation with a complete divergence in the basic principles underlying that taxation of the digital economy and “traditional economy”.

III.

Similarly in relation to attributing value, emphasis purely on where goods are supplied to, deviates from the current OECD and international tax principles that value should be attributed to criteria such as where functions are performed, risks assumed and assets utilised.

IV.

CFE believes that the imposition of taxes based on something as vague and imprecise as a “significant economic presence” will result in double taxation. In the case that this option is pursued it is vital that the issue of double taxation is equally addressed.

5.2

Withholding tax on certain types of digital transactions

General Remarks Whilst, this proposal may prima facie appear to be the most straightforward, on closer examination the administration of such a tax poses major obstacles, namely who should bear the burden of applying the withholding tax. In addition to the fundamental problem of administration, this proposal would increase the compliance burden on all parties to a digital transaction, result in unequal tax treatment of the same goods sold cross-border via digital or in the traditional means and will lead to double taxation. The adverse impact on SMEs and start-ups could be detrimental to profitability and future growth, and it is likely to disproportionately affect SMEs in comparison to MNEs. 7

Finally, as highlighted at above, in reality this tax will be passed onto the consumer in the form of higher prices or lesser service offering. Specific Answers I.

As outlined above in the context of the concept of a â&#x20AC;&#x153;significant economic presenceâ&#x20AC;? it is very difficult to delineate transactions which should come within this definition. It is likely that no matter where the line is drawn, it will appear arbitrary and will encompass some transactions not suitable to a withholding tax. If implemented the definitions should be drawn in as narrow a manner as possible so as not to capture unintended transactions. This is particularly at the beginning test phase of the new tax.

II.

The threat of double taxation could be mitigated by ensuring that an appropriate clause is negotiated into double taxation treaties or a clause inserted to the OECD Multilateral instrument5 to allow an appropriate credit / exclusion but again quantifying this in practice will be very difficult. It will lead to an increase in disputes and increased administrative burden.

III.

The primary issue on implementation is choosing an appropriate withholding tax agent. The obvious choice is financial institutions but when ones delves deeper it becomes clear that this would be an impossible task for financial institutions. How are they to assess which online payment transactions fall within the ambit of the withholding tax? How are they to carry out the function? Given this tax is largely aimed at B2C transactions it is wholly impractical to require the customers to withhold the tax. Finally, as previously stated in practice it is highly likely that the cost of any withholding tax will ultimately be borne by the consumer and not the MNEs which the measure aims to tax.

IV.

In terms of implementation it may be instructive to examine the commentary and debate relating to the 2017 introduction of Article 12A into the U.N. Model Tax Convention allowing for a gross source tax on payments for technical services at bilaterally agreed rate. Instructive also was the necessity to introduce alternative options in the relevant Commentary due to failure to reach full consensus.

5.3

Digital equalisation levy

General Remarks

At the 2017 IFA Congress in Brazil, Mr. Saint-Amans identified the MLI as a viable tool in implementing future changes where general consensus is reached. 8

CFE is opposed to the introduction of a digital equalisation levy. A levy based on turnover would ignore different operational models that could distort competition further and result in an over burden on some business models whilst having no impact on others targeted. In particular, CFE believes the introduction of a digital equalisation levy would: I.

Undermine the long established transfer pricing principles and undermine the assumptions on which OECD transfer pricing guidelines are based (people functions risk) if different allocation keys are used.

II.

Lead to a two-tier tax system, / means of allocating profit – one for the “traditional economy” and another for digital.

III.

Adversely impact smaller consumer economies (i.e. smaller countries) if it is heavily weighted in terms of sales.

Comment on domestic tax measures which have been introduced to address the direct tax challenges of highly digitalised business models

6.1

U.K. Diverted Profit Tax

The UK introduced a Diverted Profits Tax (DPT) with effect from January 2015, in the middle of the BEPS Action Plan, to prevent the artificial avoidance of a Permanent Establishment or the diversion outside the UK of what would otherwise have been UK, taxable, profits. The measure was designed to discourage such behaviour and included a higher rate of tax on such profits, 25 compared with the headline corporation tax rate at the time of 20%. The measure was introduced, so we were informed, to discourage undesirable behaviour by a very limited number of companies but the broad nature of the measures, and the lack of precise targeting, has meant that most large international businesses are potentially caught and it has created a very considerable compliance burden to demonstrate to the UK tax authority, HM Revenue & Customs, that the particular business is outside the DPT provisions. DPT was also designed to be a separate tax, outside the existing UK Double Tax Agreement network, which seems contrary to the collaborative spirit underpinning the BEPS Action Plan. 6.2

Italian Web-Tax

Italy introduced the so-called Web Tax by virtue of Law Decree 50/24.4.2017 which came into effect in its current form on June 24th, 2017. Remarkably, the adoption of the above legislation follows two failed attempts to tax digital economy – in 2014 and 2015 – but also a number of tax dispute settlement agreements with web companies, including Apple (in 2015 for € 315,000,000 and Google (in 2017 for € 300,000,000). 9

The Web Tax legislation forms part of the Italian Budget Correction Law for 2017 and is structured as voluntary disclosure regime, introducing targeted procedures instead of new taxes. In brief, the provisions are addressed to multinational corporations fulfilling the following conditions: i. Have consolidated revenue over â&#x201A;Ź 1 billion; ii. Provide goods or services in Italy for total annual value over â&#x201A;Ź 50 million; iii. Provision of goods/services in Italy is effected either directly or using an Italian affiliate; iv. Do not constitute subject of investigation by the Italian tax authorities. Such corporations may activate a reinforced cooperation procedure with a view to identifying jointly with the Italian tax authorities any debts of potential Italian permanent establishment (PE). In essence, the corporation shall request through respective application assessment of the existence of Italian PE by the tax authorities. If a PE is indeed identified, its tax debts for past tax years shall be the subject of joint evaluation (by the tax authorities and the corporation). Once the debts are agreed and paid through the so-called verification with acceptance mechanism, the corporation may benefit from: I.

reduction of applicable administrative penalties by 50%; and

II.

non-application of criminal penalties.

In addition, the corporation can access the Italian cooperative compliance regime, which provides for a number of benefits in the long term, on the basis of mutual transparency and cooperation. Taking into account that the above described legislation has just been introduced, it is too early to assess its impact. In addition, issuance of further implementing regulations is expected to complete the legislative framework. Nevertheless, any unwanted implications may not be expected to be important, considering that the legislation: I.

introduces tax-related procedures (and not new taxes) and

II.

is based on voluntary compliance.

END

Opinion Statement FC 9/2017

on European Commission Proposals on the way towards a single European VAT area

Prepared by the CFE Fiscal Committee Submitted to the European Institutions on 1 December 2017

The CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax profession in Europe. Our members are 27 professional organisations from 21 European countries with more than 200,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to assure the quality of tax services provided by tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law in Europe. The CFE is registered in the EU Transparency Register (no. 3543183647‐05). If the reader has any queries please contact Ms. Mary Dineen, Advisor to the Fiscal Committee of the CFE at brusselsoffice@cfe-eutax.org

1. Introduction This Opinion Statement comments on the European Commission proposals on the follow-up to the Action Plan on VAT towards a single EU VAT area published on 4 October 2017. It examines the proposed cornerstones of the definitive VAT system and the introduction of the concept of a Certified Taxable Person (“CTP”)1. Given the lack of substantial detail currently available on the cornerstones, the comments will be preliminary and high level comments and will be supplemented by an additional Opinion Statement once more detailed proposals are published in 2018. The Opinion Statement also looks at the proposals in relation to the short-term “quick fixes”, namely: 

Call-Off stock arrangements - Simplification and harmonisation of rules regarding call-off stock arrangements



VAT identification number – recognition of VAT identification number of the customer as a substantive condition in order to exempt from VAT an intra-Community supply of goods;



Chain transactions - Simplification of rules in order to ensure legal certainty regarding chain transactions2



Proof of intra-Community supply – Common frame work of recommended criteria for the documentary evidence required to claim an exemption for intra-Community supplies3

2. General remarks The CFE understands the wishes of the European Commission to tackle fraud and to improve and simplify the VAT system for cross-border transactions within the EU. However, the question arises as to whether the proposed definitive regime will actually fight fraud or, instead, possibly create new means of perpetrating fraud. The European Commission has presented proposals which are a combination of a number of quick fixes relating to the current VAT system, and cornerstones of a new definitive VAT system. However, in the context of the introduction of the definitive VAT system the proposals merely present general cornerstones, the CFE is concerned that this combination is not a solid enough basis for proper 1

Proposal for a Council Regulation amending Regulation (EU) No 904/2010 as regards the certified taxable person 2 Proposal for a Council Directive amending Directive 2006/112/EC as regards harmonising and simplifying certain rules in the value added tax system and introducing the definitive system for the taxation of trade between Member States 3 Council Implementing Regulation amending Implementing Regulation (EU) No 282/2011 as regards certain exemptions for intra-Community transactions

consideration prior to reaching such a drastic decision as an agreement on a definitive system. Appropriate consideration cannot be given until the more detailed rules are worked out at the next stage in 2018. Therefore, the CFE believes that the better approach at this stage of events, is to consider making adjustments to the current system in order to minimize fraud and improve the system by implementing quick fixes.

3. Certified Taxable Person The proposed new concept of a certified taxable person (”CTP”) is a key element of the new proposals regarding a definitive VAT regime. A business with this certification will be considered a reliable VAT taxpayer throughout the EU and therefore be subject to lesser administrative constraints and eligible to apply some of the so-called quick fixes. In order to receive the classification, businesses must apply to the national tax authority of the Member State of establishment and demonstrate that they have satisfied the 3 criteria contained in the proposed Article 13a (2) of Directive 2006/112/EC. The 3 criteria focus on compliance record, procedures and financial solvency.

Comments Necessity / appropriateness 

From the outset, the CFE questions the necessity for a CTP on the basis that it may just another layer of bureaucracy and uncertainty in circumstances whereby it will not be a universally applicable concept.



If the rationale for the introduction of CTP is to fight against missing trader fraud, it may have been useful to consider other measures that would impact less on business organisations.

Applications process 

The CTP concept is one of the cornerstones, in any case during the first step, and thus should be fraud proof. From that perspective, it is essential that the procedure of obtaining the status is fully harmonized and that all member states apply the same strict procedure. In order to minimize the risk of fraud, the CTP should be monitored after being recognized as CTP. Such monitoring process should also take into account change of ownership of the CTP. Otherwise we see dangers that the CTP status will distort where businesses establish (because they will move to where it is easiest to obtain it) and also being used as a vehicle to continue committing fraud.



The vague nature of the terms in the proposed Art 13a(2) of Directive 2006/112/EC such as “serious infringement” or financial solvency” will give Member States significant discretion. It is noted that increased harmonisation of the criteria might be helpful and avoid different standards being applied in practice across Member States. For example, if all Member States do not apply the same standard on subjective criteria when granting the CTP classification, business refused will experience adverse impacts on their trading relations although that company may have been granted by another Member State given the subjective nature of the tests.



The CTP is analogous to the Authorised Economic Operator (“AEO”) number 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 – it will be essential that a CTP classification be obtained in a much shorter time frame if it is to have practical applicability, e.g. allow business to avail of the “quick fixes”. In this regard, the capacity of the tax authorities to handle a large number of CTP applications in a short time frame will be essential.



It is not certain that the tax authorities of all Member States will be able to review thousands of taxable persons within a short period of time. It is technically impossible that hundreds of thousands of taxable persons could qualify as a CTP at a given moment in time. Any difference in time of taxable persons qualifying for the CTP, even of one day, may cause commercial damage to eligible persons and therefore could constitute an infringement to the general principle of non-discrimination.



In terms of communicating / verifying the CPT status, it should be noted that the VAT number as such cannot be used as this number is linked to many other national legislations.



It should be clear that the purchaser to a non-CTP would have an immediate right to deduct input VAT, as is currently the case in pure national transactions.

Impact on Start-Ups and SMEs 

There is an issue for both SMEs and new companies. New companies will not be eligible to apply for CTP status as they will not be in a position to satisfy the requirement of a history of tax compliance. An exemption for new companies should be included in light of this, although this could be a route for fraudulent business to obtain CTP status. SME’s will generally have neither sufficient structures nor staffing to satisfy the requirements.



Because they in practice will not be eligible for CTP states, the new proposals will result in cash-flow problems for SMEs and new businesses and will also means that SME’s will be penalised with disproportionate costs on professional advice and training resources.



Businesses not able to meet the criteria for genuine reasons would be in the same uncertified category as fraudulent businesses. A business that has had a period of resourcing or cash flow difficulties impacting its compliance history may not meet the criteria, but there is no inference that it is committing fraud. Customers will not see any difference, only know that their supplier is uncertified, which could create problems for ‘fit and proper’ tests carried out in the supply chain.



The conditions required to obtain CTP status may change pursuant to a change in shareholders or simply due to changes in economic conditions.



The wording of the Explanatory Memorandum to the proposal seems to suggest that the CTP concept will only be in place during the period until 2027, as it would allow for a gradual implementation of the definitive system. However, the fact that some business are not eligible to be a CTP or did not apply could result in a commercial disadvantage, for example in the case of businesses performing occasional intra-community supplies.

VAT Groups 

The question arises as to whether a VAT group can apply for CTP status or whether the individual member of a VAT group should apply.



There is a further question around whether one business in a VAT group that is not able to meet the criteria would prevent the whole group from being a CTP. What would happen where new businesses join a group? If they can gain CTP status by means of joining an existing CTP VAT group, this gives the new business an advantage over new businesses that are not joining an existing VAT group.



In case of a fixed establishment it is unclear whether it should separately apply or obtain CTP status through the head office, and which tax administration should be competent.

The VIES system 

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. A concern exists that the operation of the current VIES system already causes difficulties when checking VAT numbers particularly with groups or when large numbers of searches are required. If the CTP must apply to individual businesses in VAT groups, VIES would need to be adapted to

accommodate this search, as it 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 with using the system.

4. Destination principle / One Stop Shop The change to a destination-principled VAT system will substantially impact all businesses trading in the EU Single Market. The Commission have now proposed the first step in implementing the definitive VAT system. Under a destination-based VAT system, the supplier shall be liable for VAT at a rate applicable in the Member State of destination. Goods traded cross-border will be subject to the rate of VAT applicable in the destination country. Whilst tax will be collected by the country of origin it will ultimately be transferred to the destination country. The mechanism for allowing this new destination system to operate a One Stop Shop. The suppliers will not be required to register in the destination Member State for purposes of VAT, but can avail of the ‘one stop shop’ digital portal. By means of the ‘one stop shop’ portal businesses will be able to file declarations and declare VAT on cross-border transactions in a single return and the same rules and the language of their state of establishment. Member states will accordingly settle their VAT that is due directly.

Comments •

The European Commission has been very positive about the success of the Mini One Stop Shop (MOSS). However, it is not clear how far Member States are checking whether tax should be being paid in another member state (rather than domestically).

•

The Commission states that changing over to OSS will cut fraud by 80% however clarification must be given on how this figure was reached.

•

Given that fighting fraud is a fundamental reason for the new system, it must be certain that the new system will in fact achieve this aim but also work effectively in practice.

•

The logistics of actually transferring the money between Member States must be examined. There will be substantial sums of money involved with the new scheme – much more so that under the current MOSS so the mechanism by which funds will be transferred between Member States is very important.

•

Although the problems may be lessened by the initial proposals to limit the application to supplies of goods, in the event they are extended to services we consider that the proposals will cause classification problems. In countries that have a variety of rates, 6

classification of supplies particularly of services has generated a lot of litigation. It is likely to be particularly difficult for an SME based in one state to be aware of the practice of classification in another country. One of the attractions of the current system is that these issues do not need to be considered when cross-border supplies are made between businesses. These problems will be increased by the Commissions’ proposals to give Member States greater freedom to fix rates. •

Unless they are CTPs, the proposals have the disadvantage of increasing the cash flow costs of making cross-border supplies. In addition, further discussion and clarity is required in relation to the question of tax offset at cross border level.

5. Quick fixes Three of the so called “quick fixes” will only apply to CTPs – therefore much more clarity is needed on the concept and criteria for certification as a CTP.

5.1

Chain Transactions •

It is questionable as to why this quick fix should only be applicable to CTPs.

•

The CFE is concerned that the proposals do not address the implications of the Facet Trading decision4. By requiring businesses to account for VAT without any right of recovery this decision can frequently drive businesses into insolvency. Given the increasing co-operation between tax authorities we would question whether there is any need for the provisions to operate in such a draconian manner.

5.2

Proof of intra-Community supply – Common frame work of recommended criteria for the documentary evidence required to claim an exemption for intra-Community supplies •

In relation to the documentation required for proof that the goods were transferred, it should be noted that the requirements are in fact more onerous than those which already exist in some Member States, for example Slovenia. However, other Member

Case C 536/08

States do require more proof than that proposed so for those member states it would be a simplification. •

The CFE seeks clarity on whether the purchaser will also need 2 documents as proof.

•

This only applies to CTP’s, which means that two systems would be in place: the general rules with no specific documentation requirements for non-CTPs and specific documentation requirements for CTPs. This gives rise to the increased chance of genuine mistakes occurring, increasing risks of penalties and administrative burden which disproportionately affects smaller businesses.

5.3

Call-Off stock arrangements - Simplification and harmonisation of rules regarding call-off stock arrangements •

It is questionable as to why this quick fix should only be applicable to CTPs, it means that two systems will be in operation, leading to uncertainty and additional administrative burden for tax authorities which will need to operate two concurrent systems. This gives rise to the increased chance of genuine mistakes occurring, increasing risks of penalties and administrative burden which disproportionately affects smaller businesses.

•

A potential issue may arise in Italy, on the basis that the proposal for Call-off stock in Document 569 is already in force for all taxpayers.

5.4

VAT identification number – recognition of VAT identification number of the customer as a substantive condition in order to exempt from VAT an intraCommunity supply of goods 

This proposal is introducing a concept that the CJEU has held on a number of occasion to be disproportionate, for example in the Plöckl case5 where the Court held that a supply could not lose the benefit of exemption simply because of the failure to provide a VAT number.



There is a risk that the proposal will create double taxation on the basis that one will not be in a position to exempt cross-border supplies unless they have a VAT number. However, issues could arise if the customer is not in a position to give a valid VAT number or mistakenly gives an incorrect number.

Case C 24/15

ď&#x201A;ˇ

Given the central role to be played by the VIES operational system it will be essential that the system is fully functional and easy to use. For example, CFE members have experienced problems with the current VIES system of ascertaining VAT numbers for an entity which is within a VAT group, or large companies are currently experiencing difficulty with doing bulk checks on the VIES system.

Opinion Statement FC 10/2017

POSITION PAPER EU CONSULTATION ON FAIR TAXATION OF THE DIGITAL ECONOMY

Prepared by the CFE Fiscal Committee Submitted to the EU Institutions on 6 December 2017

The CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax profession in Europe. Our members are 308 professional organisations from 24 European countries with more than 200,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to assure the quality of tax services provided by tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law in Europe. The CFE is registered in the EU Transparency Register (no. 3543183647‐05). We will be pleased to answer any questions you may have concerning CFE comments. For further information, please contact Stella Raventós Chair of the CFE Fiscal Committee, or Mary Dineen Advisor to the CFE Fiscal Committee, at brusselsoffice@cfe-eutax.org.

Introduction

This Opinion Statement by the CFE Fiscal Committee is in response to EU public consultation on the fair taxation of the digital economy. We will be pleased to answer any questions you may have concerning our comments. For further information, please contact Ms. Stella Raventós, Chair of the CFE Fiscal Committee or Mary Dineen, Adviser to the CFE Fiscal Committee, at brusselsoffice@cfe-eutax.org.

General remarks on the EU consultation

In circumstances where the OECD is in the advanced stages of completing its Report on the Tax Challenges of the Digitalised Economy (due to be published Spring 2018), the CFE believes the EU Commission is premature in proposing unilateral action in the context of fair taxation of the digital economy. Similarly, any proposed legislation within the EU before the OECD’s Final Report on the Tax Challenges of the Digitalised Economy (expected 2020) would constitute a unilateral action, and be at variance with the view taken by the members of the OECD that the OECD taskforce on the digital economy should focus on internationally agreed long-term solutions and that short-term or unilateral action is not the best way forward. The CFE believes the format of this public consultation is too rigidly framed and does not reflect the level of technical refinement the issues require, nor does it encourage meaningful engagement with stakeholders or enable detailed debate about the merits of the various proposals. Many of the questions do not relate to technical aspects but rather are more akin to political statements (e.g. at 4.2 “Social fairness is impacted because some digital companies do not pay their fair share of tax”). Such a technically complex subject as the taxation of the digital economy cannot, and should not, be distilled down into overly simplified statements. In addition, multiple choice is an inappropriate tool for examining complicated tax proposals. Given the huge importance of this topic and the effect any proposed EU legislative action will have on the single market, meaningful engagement beginning from a neutral position should take place.

Digital economy should not be ring-fenced

CFE supports the conclusion reached by the BEPS Action 1 Report1 that because “The digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring‐fence the digital economy from the rest of the economy for tax purposes”. The BEPS process involved long and

Addressing the tax Challenges of the Digital Economy, OECD BEPS Action 1 Final Report , published October 5th 2015 2

detailed consultations with a broad spectrum of stakeholders, but none of the three options identified in the BEPS Report were recommended at that stage nor was a ring fencing the digital economy endorsed. This conclusion echoes the conclusion in the Report of the Commission Expert Group on Taxation of the Digital Economy2 which found that “There should not be a special tax regime for digital companies. Rather, the general rules should be applied or adapted so that ‘digital’ companies are treated in the same was as others”. In addition, any proposed solutions targeted at the digital economy in isolation would violate the principle of neutrality espoused under the internationally agreed Ottawa Framework.

Timing of the proposals

Ideally, CFE believes the sensible approach is to allow the BEPS Project take effect and subsequently assess how problems which persist can be addressed in light of the new post-BEPS taxation framework. In practice we recognise the imperative that the certain larger EU Member States are under enormous political pressure to be seen to “be doing something” but we would strongly recommend that the EU not take unilateral steps to tax the digital economy but work within the OECD framework to build a clear international consensus on the best way forward. Not to do so would risk undermining all the consensus building that has surrounded the BEPS project itself. It is simply too early to assess how the BEPS project has addressed the BEPS risks and the broader tax challenges raised by digitalisation. Great uncertainty still exists as to how new guidance, principles and practices espoused under the BEPS Action Plan will work in practice, be interpreted by tax authorities or ruled upon by the courts. It needs time to take effect, to assess its impacts, positive and negative. Imposing a whole new legislative framework, whilst jurisdictions are still in the process of implementing BEPS and the MLI will distort the BEPS process and may not achieve the intended aims as measures were prematurely adopted without proper consideration. Significant changes have been made to the threshold for the creation of a PE in light of BEPS Action 7 – targeting mainly BEPS relating to commissionaire structures and the use of the preparatory and auxiliary exemption contained in Article 5(4) of the OECD Model Treaty. These changes affect the digital economy and the business models being operated. Time should be allowed to assess how effective these new rules will be. Similarly, great uncertainty exists over the profit allocation rules in light of the changes made by BEPS Action 7 and the interaction with BEPS Actions 8-10. Introducing new rules for

Report of the Commission Expert Group on Taxation of the Digital Economy, published 28 /05/2014. Available at https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/gen_info/good_go vernance_matters/digital/report_digital_economy.pdf 3

the creation of a PE for digitalised companies and/or new methods for allocating profits to those PEs would lead to further confusion without having a clear view of how the changes under the BEPS project may have impacted the digital economy. In addition, it would violate the principle of neutrality. More specifically, within the EU the Anti-Tax Avoidance Directives 3 (“ATAD”) and the proposed amendments to ATAD pursuant to the second Anti-Tax Avoidance Directive4 (“ATAD 2”) have not yet been implemented in Member States, and will not be for a number of years5 . Once again, the various provisions contained in the ATAD (e.g. CFC rules) could alleviate some of the issues experienced with effective taxation of the digital economy, and time should be allowed in order to assess the issues which prevail after implementation in Member States.

Adverse effect on competitiveness

It is important that any new taxes do not stifle the growth of the digital economy or discourage innovation within the EU. The EU must also focus its policy initiatives on the formulation of growthorientated approaches, which exploit the opportunities of digitalisation for economic growth, particularly for start-ups and SMEs to flourish within the EU rather than focusing solely on taxing successful digital companies which have developed outside the EU.

Tax Certainty

In addition, any new tax which deviates from settled tax practice and the international tax framework will inevitably lead to great tax uncertainty for all stakeholders. Net income taxation within digital economy structures should be pursued to the maximum extent possible. Uncertainty will result in nonuniform application to entities and practices beyond the anticipated scope of the new laws. To mitigate this risk, any new legislation should be aligned, as much as possible with existing international practice and norms. Double non-taxation is a problem, this is indisputable, equally indisputable is the problem of double taxation – and its negative effect on the world economy, consumers and taxpayers. It is extremely difficult to design a new tax that is not going to have unintended consequences and lead to double taxation. Any new tax must be designed in a manner to avoid double taxation, and must come within

Council Directive (EU) 2016/1164 laying down rules against tax avoidance practices that directly affect the functioning of the internal market. 4 Council Directive amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries 5 ATAD provisions must be implemented in Member States before 1 January 2019, or 1 January 2020 in the case of exit taxes. The provisions of ATAD 2 must be implemented by 1 January 2020 or 1 January 2022 for reverse hybrid mismatches. 4

the ambit of double taxation treaties, otherwise the whole tax treaty system, which international taxation is built upon and tax treaty network will be completely undermined. In the event that any new measures are implemented, it is vital that more robust dispute resolution measures are implemented as envisaged in Action 14 of the BEPS project. Access to effective dispute resolution mechanisms has been identified by all stakeholders as a significant problem for taxpayers. The addition of one of these new taxes will further exacerbate scarce resources to deal with disputes, increase waiting lists before appropriate fora and ultimately contribute to increased tax uncertainty. Finally, taxpayers’ rights must be safeguarded. Implementation of any new tax must be done in a manner to avoid uncertainty for taxpayers, ensuring that sufficient information is provided. New tax obligations should not be overly onerous on taxpayers and proper controls should be exercised over tax obligations (particularly in the context of a withholding tax).

Short-term solutions

CFE does not agree with a two-step approach. This concept is at variance with the conclusion reached by the BEPS Action 1 Final Report, which CFE agrees with, that the digital economy cannot be isolated from the economy as a whole. It believes that short-term solutions will add huge tax uncertainty and create administrative burdens for business, and in particular, SMEs. In addition, given the time it takes to agree and implement new legislation (e.g. the ATAD originates from a 2015 BEPS Report but the earliest implementation will be 2019) long-term solutions could be identified and agreed within this time frame – negating the need for the so called stop gap “short-term” solutions by the time of implementation at Member State level. As regards the four proposed short-term solutions in this section no comment can be made given the complete lack of detail provided on each of the proposals. If the EU Commission concludes that it will propose a two-step approach, full details of the form the short-term solutions should be provided to the stakeholders.

Long-term solutions

8.1

General Comments

CFE believes that the EU should not act unilaterally in respect of proposing long-term solutions, but rather should operate within the framework of the OECD to reach agreement on an international level. Given the highly mobile and globalised business models operating within the digitalised economy it is not practical to have an EU solution alone.

Corporation tax is a direct tax rather than an indirect tax based on consumption. Corporation tax is a tax on the income of a company. The BEPS process focused on aligning this taxation with where the value is created. Many of the new long-term solutions proposed contradict this basic principle and focus instead on consumption – not value creation – completely undermining and contradicting the whole premise of the BEPS project. If the EU wishes to raise more revenue from the digital economy it should focus on developing tax policies which encourage indigenous digital companies to operate within the EU and tax the income of those companies. Any new tax should be confined to only very large digital companies and should not affect start-ups or SMEs. As with the short-term solutions above, the CFE cannot provide detailed comments on the five suggested long-term proposals given the absence of detail on salient aspects such as scope, definition, and mechanics of operating the proposals. 8.2

Specific Comments

“Digital presence in the EU” It will be very difficult to select the extent a transaction must be “digital” and fall within the scope. It would be very important to clarify the relation between digital presence and significant economic presence. Every website, digital transaction and element of a digital transaction has at some point human involvement at a physical location. When deciding what transactions should be included within the scope equal consideration should be given to startup companies and SMEs which also rely on digital platforms to carry out their business. Further, it should be noted that any possible changes and increased administrative and compliance cross-border burdens will disproportionately affect the ability of smaller enterprises to carry out and expand their business domestically and cross-border. Similarly, the cost of double taxation will adversely affect SMEs far more the MNEs. In this context, at EU level new minimum thresholds are being introduced as part of the changes to the MOSS system to alleviate the compliance burden for small business providing online B2C e-commerce services across borders. Further simplification measures are also proposed to alleviate the burden on SME. Defining or imposing a threshold under which a digital presence in the EU will be established will be problematic. Regardless of how it is measured or determined, once it is based on the concept of “significant economic presence” it will lead to a two-tier system of taxation with a complete divergence on the basic principles underlying that taxation of the digital economy and “traditional economy”. This will also violate the neutrality principle of the Ottawa Convention. 6

In relation to attributing value, emphasis purely on where goods are supplied to, deviates from the current OECD and international tax principles that value should be attributed to criteria such as where functions are performed, risks assumed and assets utilised. CFE believes that the imposition of taxes based on something as vague and imprecise as a “digital presence in the EU” will result in double taxation. In the case that this option is pursued it is vital that the issue of double taxation is equally addressed. Destination‐based corporate tax & Unitary Tax Proposed taxes such as a Destination-based corporate tax and unitary taxation are completely at variance with the concept of corporation tax and deviates completely from the underlying principle of the BEPS process that taxation should be based on where the value is created. Residence tax base with destination tax rate This proposal to define the applicable rate of tax based on the “turnover‐weighted average of the tax rates of the countries where the turnover is created” will unduly encroach upon the sovereignty of Member States to set their own tax rate.

Confédération Fiscale Européenne Joint PAC/FC Opinion Statement 1/2017 on the European Commission public consultation ‘Disincentives for advisers and intermediaries for potentially aggressive tax planning schemes’

Submitted to the European Commission on 15 February 2017

CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax profession in Europe. Our members are 26 professional organisations from 20 European countries with more than 100,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law 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 concerning the CFE comments. For further information, please contact Wim Gohres, Chair of the CFE Professional Affairs Committee wim.gohres@nl.pwc.com or the CFE Brussels Office brusselsoffice@cfe-eutax.org +32 2 7610091, Avenue de Tervuren 188A, Brussels.

CFE PAC/FC Opinion Statement 1/2017 CFE, the leading European federation of tax advisers, is pleased to submit comments to the European Commission on the public consultation of 10 November 2016 concerning introduction of effective disincentives for advisers, promoters and enablers of aggressive tax planning schemes resulting in tax avoidance or evasion. CFE welcomes the initiatives and efforts of the European Commission to contribute to more efficient tax systems where a level-playing field is secured throughout the EU internal market. Further to the reply to this consultation, CFE wishes to summarise the main points and remarks related to the above European Commission initiative in an Opinion statement.

1. Executive summary 1.1. CFE highlights the positive role of the tax advisers in Europe and their contribution to the rule of lawtax advisers play a fundamental role in making complex tax systems work; 1.2. Considering the intrinsic complexity of tax systems, any envisaged disclosure regime must not undermine the ability of taxpayers to seek advice and tax advisers to provide it; 1.3. CFE supports Commissionâ&#x20AC;&#x2122;s efforts for improved tax transparency â&#x20AC;&#x201C; by doing so, the EU should seek to implement OECD recommendations, in particular Action Point 12, in a coordinated way to ensure level-playing field within the EU; 1.4. In respect of the objectives of this policy initiative, CFE believes that the EU should continue to facilitate administrative cooperation between Member states to tackle cross-border abuse and to improve voluntary compliance of taxpayers by introducing reassurances on the fairness of the tax system; 1.5. While mandatory disclosure regime could be a useful instrument for provision to the tax authorities of information about tax arrangements that might undermine the integrity of the tax system, CFE believes that the European Commission should take into account the principle of subsidiarity and the need for intervention at EU level, considering that several EU Member states have already introduced mandatory disclosure regimes; 1.6. Any disclosure obligations should take into account the right against self-incrimination; any upcoming proposal should include exemption for tax advisers similar to the one laid down in Article 34(2) of the Anti-Money Laundering Directive1; 1.7. The country-specific scope of the right of non-disclosure and confidentiality, as well as professional privilege, need to be respected in any future proposal in light of the diverse regulatory ambient for the tax profession in Europe; 1.8. Excessively burdensome mandatory disclosure rules at EU level could potentially decrease the attractiveness of the EU Internal market, which could run affront to the efforts of making the EU the most dynamic and innovative market in the world.

Directive (EU) 2015/849 of 20 May 2015

CFE PAC/FC Opinion Statement 1/2017

2. General remarks CFE welcomes the European Commission’s efforts to address the issues of aggressive tax avoidance, and to contribute to tax transparency and integrity of the tax systems. As the most representative body of the European tax advisers, we are supportive of European Commission’s policy and legislative agenda to the extent it contributes to better and more efficient business environment, where tax advisers are able to provide timely advice. While CFE supports the EU objectives in the fight against tax evasion and aggressive corporate tax avoidance, we are concerned about the possibility that contemplated proposals in respect of effective disincentives, could potentially go beyond the final recommendations of OECD.2 Any disproportionate measures that might go beyond OECD recommendations, might have an adverse impact on the business environment and the tax profession. 3. Country-specific and regulatory aspects/ Subsidiarity At the outset, we would like to draw attention to the subsidiarity principle of the EU Treaties. While there could be a legal basis for harmonisation of this matter at EU level, we call on the Commission to assess the necessity for harmonisation at EU level from a proportionality/ internal market perspective. An appropriate level playing field could effectively be maintained while entities are subject to national disclosure regimes, as suggested by OECD BEPS Action Point 12. Several EU member states have already introduced mandatory disclosure national regime, i.e. the DOTAS in the UK, disclosure rules in Ireland and Portugal. The DOTAS process in the UK has been assessed as successful by the UK tax authorities.3 The fact that national disclosure regimes are assessed as successful, questions the need for EU action from an EU internal market perspective. Country-specific regulatory aspects need to be taken into account when assessing the appropriate EU mandatory disclosure rules (“MDR”) policy decision. Considering the divergent regulatory environment for the tax professionals in Europe, certain MDR policy options (i.e. Code of Conduct for Tax Professionals), if transposed to national codes, may amount to regulation for unregulated (or self-regulated) professionals, or additional layer of regulation for regulated professionals. There is also a possibility of increased compliance burden imposed on tax advisers – i.e. training for staff on the details of the regime, developing internal compliance policies, procedures etc. On basis of the subsidiarity argument, MDR need to be appropriate for a particular Member state and for the addresses of such rules (taxpayers or tax advisers). Otherwise, the proposed rules could be difficult to follow from 2

Communication COM(2016) 451 final of 5 July 2016 , page [8]: “The Commission will work closely with the OECD and other international partners on a possible global approach to greater transparency on advisors' activities, going beyond the recommendation in BEPS Action 12.” 3 “DOTAS has proved to be highly successful and the Government has used information from DOTAS to introduce a range of anti‐avoidance measures every year since 2004 ‐ a total of 49 measures, closing off over £12 billion in avoidance opportunities”, HMRC Consultation Document of 9 December 2009

CFE PAC/FC Opinion Statement 1/2017 the outset, and unlevel the playing field of the profession. For instance, if EU-wide rules target diverging national professional regulation environments, such an approach could result in ineffective rules. The rules might be effective in a particular country, but not in another. This could distort the level playing field at the level of the profession, the tax compliance environment, and ultimately, the EU internal market. EU should continue to facilitate administrative cooperation between Member states to tackle crossborder abuse and to improve voluntary compliance of taxpayers by introducing reassurances on the fairness of the tax system. Member states should also be encouraged to use the instruments under EU law for cooperation and exchange of information, tax rulings, GAARs, the Parent-Subsidiary Directive, and the Anti-Tax Avoidance Directive. CFE wishes to point out that disclosure mechanisms should be relevant for specific Member states, whilst practices should not depart from OECD recommendations. Adequate national legislation, where deemed appropriate by Member states, should be supported by EU’s coordinating efforts. 4. Design features of a potential disclosure regime CFE believes that mainstream tax advice should be left outside of scope of any envisaged MDR. Objective criteria limiting the scope of the reporting obligation to relevant scenarios (cases) should be considered by the European Commission. Therefore, as a design principle, any proposal should seek to ensure that the rules do not impose a compliance burden for tax advisers, and any benefit of the identification of reported avoidance scheme must be balanced with lowest possible compliance burden for all stakeholders involved. Also, rules need to be clear, concise and easy to understand to avoid further ‘red tape’ perception. Any future impact assessment should include reference to quantifiable cost/ benefit analysis in the sense of identifying and quantifying the compliance burden on the tax advisers and businesses, depending on the envisaged regulatory model. 5. Tax advisers contribute to the rule of law CFE believes that the tax advisers contribute to the rule of law and the positive business dynamics of the European market. By providing timely tax advice, the tax advisers serve the general public interest to the best of their abilities. The pursuit of the profession of tax advisers is thus in the best interest of the European economy. It is in this respect important to appreciate and advance both the taxpayer right to tax advice and the positive role of the tax adviser in performing their duties. CFE refers in that respect to the CFE Guidelines (Professional Code)4 and CFE’s Manifesto5 on the ethical and professional principles that guide the work of the European tax advisers that perform their duties under the umbrella of the CFE.

CFE Guidelines – Professional Code: http://www.cfeeutax.org/sites/default/files/Professional%20Code_20042012.pdf 5 CFE Manifesto: http://www.cfe-eutax.org/sites/default/files/Manifesto_Paris%202009_final.pdf

CFE PAC/FC Opinion Statement 1/2017 6. Tax advisers ensure compliance Tax advisers play an important role in ensuring taxpayer compliance. They are bound by law and/ or codes of conduct of their professional bodies, ensuring their independence and professional integrity. CFE believes these prerogatives should be respected and safeguarded. The right to effective legal representation and a client confidentiality is part of taxpayers’ fundamental rights to privacy and a fair trial. These will only be effective if clients can trust that information shared with their adviser will remain confidential and that tax advisers are not seen as watchdogs of the administration, national or international. Tax professionals, when representing clients in tax matters, should be granted recognised privilege throughout the EU, not only if they are member of the profession of lawyers or state regulated accountants or tax advisers. The importance of tax advisers´ independence and qualification should not be undermined by applying one-size-fits-all approach. 6 Mandatory disclosure regime in any form or level should not hinder the provision of quality tax advice to taxpayers. The vast majority of the tax advisers are not involved in developing, promoting or selling aggressive tax planning schemes. Potentially excessive administrative burden resulting from regulation at EU level might result in fewer possibilities for taxpayers to get access to affordable, timely and good quality tax advice. 7. Scope of the right of non-disclosure The rights and obligations of tax advisers should be fully respected in any upcoming proposal. The right of non-disclosure is considered a common standard for the legal profession and is often referred to as client-attorney privilege in the United States, or legal professional privilege. As recognised by Article 6 of the European Convention of Human Rights (ECHR) and the jurisprudence of the European Court of Human Rights, the right of fair trial includes this principle. Article 8 of the ECHR guarantees the confidentiality aspects related to the right of protection of correspondence and the right of non-interference by public authorities with this right (professional privilege). The existence of national specific laws or case-law which deals with the scope of the right of nondisclosure indicates: - the importance of this right at level of the profession, - the different regulatory ambient in this respect among various EU countries, and, - derived right of non-disclosure could exist based on case-law, again country specific. 7 The European Professional Affairs Handbook for Tax Advisers8, based on surveys conducted with memberorganisation of the CFE, specifies the modus operandi of the right of non-disclosure:

CFE Opinion Statement PAC 2/2016 and FC 8/2016 on the role of tax advisers with regard to tax avoidance submitted to the European Institutions and OECD, June 2016; More on the European tax advisers’ priorities in the period 2014-2019: http://www.cfeeutax.org/sites/default/files/European%20Tax%20Advisers'%20Priorities%202014-2019,%202page%20version.pdf 7 See, page 6 of the NOB (Dutch Order of Tax Advisers) Opinion Statement ‘The Tax Advisers and the Right of NonDisclosure’, cf. CJEU judgment C-550/07 (Akzo/Akcross); On the existence of a derived right of non-disclosure: Judgment of the Supreme Court of the Netherlands NJ 1994, 552 of 29 March 1994 8 On the different regulatory aspects of the tax profession in Europe, European Professional Affairs Handbook, Second Edition, CFE and IBFD (2013)

CFE PAC/FC Opinion Statement 1/2017 -

In 5 of 22 European countries, tax advisers enjoy right of non-disclosure guaranteed by law/ caselaw (Croatia, Netherlands, Ireland, Romania, Slovakia), but does not extend to criminal proceedings; In Austria and Germany, where tax advisers may represent clients before criminal courts, they also enjoy right of non-disclosure; in France the right of non-disclosure for tax advisers is extended by law towards tax authorities, tax and criminal courts and public prosecutors; equally strong in Poland and the Czech Republic; In Greece, Italy, Latvia, Portugal, Spain, Switzerland, Ukraine and the United Kingdom a right of non-disclosure is not guaranteed for tax advisers unless they are lawyers; Belgium accords a right of non-disclosure of client information to the state, also related to requests from tax authorities. There are exceptions in the Belgian legislation (i.e. anti-money laundering legislation) and where the professional needs to be heard as a witness by a court.

Mandatory disclosure of tax avoidance schemes at present exists as a legal obligation in the UK, Portugal and Ireland. The above indicates that the scope of the right of non-disclosure and related rights are guaranteed by instruments of international law, while the exact scope of the right of nondisclosure is operationalised by law or case-law in different jurisdictions. MDR must therefore be appropriate to the compliance environment in a specific jurisdiction, which questions regulation at EU level in light of the subsidiarity arguments. Some of the problems envisaged by CFE include difficulties in implementation and doubling of rules in jurisdictions which operate General Anti Avoidance Rules (GAARs).9 CFE refers to the Opinion Statement PAC 2/2016 and FC 8/2016., in respect of the position adopted by the CFE and its member organisations with respect to the right of non-disclosure. Where tax advisers are obliged to notify tax administration of certain arrangements, unless prohibited by law, tax advisers should inform the client of this obligation, prior to the clientÂ´s decision to enter into the said arrangement; tax advisers shall not be obliged to report to the tax administration any documentation other than a description of the arrangement itself; if the tax adviser is not certain whether to notify the tax authorities or not, for example, if by reporting they would infringe the taxpayerâ&#x20AC;&#x2122;s fundamental rights, they should seek professional legal advice before disclosing such information.10 8. Elements of a potential disclosure regime 8.1. Who should report? CFE believes that the reporting obligation should rest with one party- the taxpayer.11 Wherever a taxpayer is assisted by a tax adviser, the tax adviser will be obliged by law, professional code or duty of care, to inform the taxpayer of a reportable scheme and, in all probability,

See, cf. CFE and AOTCA Joint Opinion Statement FC 7/2015 and PAC 1/2015 on Mandatory Disclosure Rules (April 2015) 10 CFE Opinion Statement PAC 2/2016 and FC 8/2016 11 CFE Member organisations from the United Kingdom (CIOT and ICAEW) refrain from endorsing this CFE position

CFE PAC/FC Opinion Statement 1/2017 will assist the taxpayer to report. Reporting from tax advisers, which are bound by professional secrecy, could require explicit waiver of such rights. These obligations are country-specific: in some countries, the client may not waive these rights. In countries which already operate mandatory disclosure regimes, i.e. the UK, the obligation to report ordinarily rests with the tax adviser with a default to the taxpayer where legal privilege applies and the client does not waive it. Also, where there is no promoter or external adviser, for example in case of in-house schemes, the obligation to report also rests with the taxpayer. Having in mind these country-specific developments, CFE again underlines the subsidiarity principle and the country-specific regulatory issues that might arise in a MDR designed at EU level. 8.2. Hallmarks General hallmarks could be designed at EU level, i.e. confidentiality from competitors, confidentiality from the tax authorities, standardised (off-the-shelve) schemes could serve as appropriate general hallmarks. Specific hallmarks on the other hand are necessarily pertaining to specificity of a particular tax system of a Member state and are therefore impossible to design at EU level. De minimis/ threshold test should also be included in any future proposal, in order to exclude insignificant schemes from the reporting obligation. Mandatory disclosure rules should not concern legality of tax schemes, as they would normally be intended at providing exceptional information to authorities limited to cases substantially affecting state revenues. This will ensure that mandatory disclosure rules are better targeted and the ambit of the rules is appropriate to ensure better compliance and lower administrative burden. Presumably, there will always be aggressive avoidance schemes which will not have been disclosed as they would fall outside envisaged hallmarks, but this should by no means entail introduction of hypothetical hallmarks, i.e. â&#x20AC;&#x2DC;a general artificial arrangement or an artificial series of arrangements created for the essential purpose of avoiding or evading taxation and which leads to a tax benefitâ&#x20AC;&#x2122;, as indicated in the questionnaire. Hallmarks need to be designed in relation to objective and factual criteria. In respect of the general hallmarks, unusually high fees or contingency fees should not be per se be assumed to relate to abusive, mass-marketed or novel avoidance schemes, as there might be legitimate reasons to justify the higher level of fees, e.g. reputation of the adviser, complexity of the structure, size of transactions involved, urgency, multiple location of client offices etc. They should not therefore trigger disclosure per se. It would therefore seem more appropriate to rely on a combination of hallmarks, to achieve the intended result. 8.3. What to disclose? For proportionality and privacy reasons, if a future Commission proposal considers a reporting obligation placed on the tax advisers, they should be obliged to report only the scheme itself based in its eligibility for mandatory disclosure, not the related correspondence, documentation, memos, client emails etc. CFE wishes to point out to the principles of privacy related to the publication of sensitive commercial information, the issue of who is handling this information and to whom it might be transferred or exchanged, what type of IT safeguards would be in place.

CFE PAC/FC Opinion Statement 1/2017 Potentially, large amount of data that would be disclosed and held by various institutions related to both businesses and individuals, and this merits considerations as to the practical protection of the right of privacy and confidentiality. CFE believes that information should be disclosed to national tax authorities only. Considering that mandatory disclosure might entail breach of the confidentiality principle, disclosures in the public interest ought to take into account relevant judicial authorisations. 12 Mishandling of sensitive commercial might adversely affect businesses and taxpayers’ rights. Data and documentation already covered by other reporting obligations, such as EU legislation on automatic exchange on tax rulings, or country by country reporting, should be excluded from any mandatory disclosure obligation. Double reporting obligations should be avoided. 8.4. When to disclose? If the disclosure obligation is on the tax adviser, they should be obliged to report once the scheme has been made available to the client. If the obligation is on the client, then it might be when they put the arrangement in place. Thus, obligation on the tax adviser to disclose the scheme when it was made available to the client would embrace two aspects: all the elements of the deemed aggressive tax planning scheme necessary for its implementation are in place; and, confirmation by the client that the scheme is to be put in place, or the client wishes to enter into the proposed transactions. Mere preparatory or ancillary activities or communication with the client should not be covered and this should not trigger disclosure obligation. Correspondence confidentiality is also covered by the principle of professional secrecy. For instance, in Ireland, the legislation requires disclosure within five working days. With respect to ‘bespoke’ schemes, the disclosure is required at the date the promoter becomes aware that the scheme, or part of it, was implemented. Regarding ‘standard’ schemes, disclosure is required from the date the promoter makes the scheme available for implementation. 9. Retroactivity The European legal order is based on rule of law. Thus, any proposal should consider disclosure obligations that have pro futuro effect only. Retrospective rules undermine the confidence of the legal system and in the EU institutions. As such, these are in breach of the principles of legal certainty and legitimate expectations, binding principles of EU law. 10. Domestic/ international tax schemes Regarding international tax schemes, it should be noted that complex structures and transactions entail multiple advisers that are responsible for particular aspects of the scheme. Frequently there will be a mixture of firms of tax advisers, accountants, lawyers and clients involved, each responsible for only part of the transaction, even separate offices within the same network of firms. If the proposal includes multiple reporting to multiple authorities in multiple jurisdictions, these could amount to confusion and undue or excessive compliance burden. The administrative burden for the tax administrations could be significant, whether they would have the administrative resources to process these type of data. Identical schemes reported in different countries 12

Philip Baker QC, IFA Studies on International Fiscal Law Volume 100b

CFE PAC/FC Opinion Statement 1/2017 may be interpreted differently, so this may give rise to additional costs for dispute resolution, possibly litigation costs etc. Additionally, not all intermediaries involved have sufficient knowledge and oversight of the structure or the material tax consequences for every party of the transaction. Therefore, Member states should not be obliged by upcoming EU proposals to hold advisers responsible where they are based outside their jurisdictions. In Ireland, for instance, there is exception in circumstances where the tax adviser has insufficient knowledge of the overall scheme as they are providing advice on one part of the scheme. Potentially extraterritorial reporting obligations might create enforcement problems and extremely complicated compliance burden in jurisdictions with no significant connection with aggressive or abusive tax planning practices. 13 11. Publication of information The information to be disclosed should not be made available to the general public. Sensitive commercial information should not be made public for obvious reasons, as it could affect taxpayers’ right of privacy. If the disclosure obligation for the tax advisers goes further than the disclosure obligation for taxpayers, taxpayers could refrain from asking for professional tax advice and could instead put the scheme in place by themselves or by taking advice from a consultant who is not bound by professional rules. Additionally, this might benefit large companies that have their tax affairs dealt with by an internal tax department, instead of consulting a tax adviser. This could both undermine the effectiveness of any envisaged MDR, but could also potentially affect the work of the tax advisers in terms of level playing field in the profession. 12. Self-incrimination The right against self-incrimination is a fundamental right. Any disclosure obligation should take this right into account. Therefore any upcoming EU proposal should guarantee an exemption for tax advisers, similar to the exemption of Article 34(2) of the Anti-Money Laundering Directive.14 Where for reasons of self-incrimination the taxpayers are prevented from disclosing, the tax adviser should not be required to report or be held liable criminally for enacting, promoting or assisting in tax avoidance scheme. This is raison d’etre of the legal privilege and the right against self-incrimination, which cannot be circumvented by asking someone else to report. The right of non-disclosure with regard to taxation arises from the client’s fundamental right of access to tax advice and is, as such, a right associated with the client and not with the tax adviser. The client’s right to tax advice is a prerequisite of the tax adviser’s obligation of confidentiality on tax matters. 13. Secret reporting The provision of comprehensive tax advice is dependent on a relationship based on trust between the client and the tax adviser. Any duty to make secret disclosure could seriously undermine this relationship. Such an obligation would also discourage taxpayers from effectively seeking tax advice

For instance, these type of extraterritorial compliance obligations already exist in the US FATCA legislation, in which context the above considerations are to be taken into account 14 Article 34(2): “‘Member states shall not apply the obligations laid down in Article 33(1) to […] tax advisers only to the strict extent that such exemption relates to information that they receive from, or obtain on, one of their clients, in the course of ascertaining the legal position of their client, or performing their task of defending or representing that client in, or concerning, judicial proceedings, including providing advice on instituting or avoiding such proceedings, whether such information is received or obtained before, during or after such proceedings.”, Directive (EU) 2015/849 of 20 May 2015

CFE PAC/FC Opinion Statement 1/2017 and assistance in tax matters from tax professionals bound by professional ethical standards, which could as a result mean lower overall compliance with the law. The role of tax advisers in securing compliance in this respect is crucial. In the environment of provision of tax advice, unlike in anti-money laundering environment, the client-adviser relationship is crucial, so it is not justifiable to introduce obligation of secret reporting. 14. Potential penalties CFE believes that nothing in the envisaged Commission proposals should prevent taxpayers from obtaining access to impartial tax advice. If the European Commission aims to target a small minority who is persistently in breach of the law, any envisaged legislation should be sufficiently clear and precisely targeted and serve as disincentive to those only, not to the vast majority of tax professionals who are acting within the law. 15. EU Code of Conduct for professionals providing tax advice In respect of the possibility of adopting a European Code of conduct for tax advisers, as an alternative policy instrument to mandatory disclosure (option “E” - possible policy actions of the public consultation). Such EU-wide Code of conduct would potentially establish common rules, ‘soft-law’, which would not be binding, but presumably transposed into the national codes of conduct of the professional associations. This type of EU action could pose compliance, supervision and enforcement problems. EU Code of conduct might also create unlevelled paying field at the level of the profession, considering that the provision of tax advice outside of professional organisation would not be covered by the EU Code of conduct. Even if the EU Code of conduct for professional organisations providing tax advice applies to all actors, it would not cover schemes conceived and set up by the taxpayer himself (i.e. by internal tax department of a company).

End/

CFE Professional Affairs Committee Opinion Statement PAC 2/2017 on the European Commission public consultation on protection of whistleblowers

Submitted to the European Commission on 17 May 2017

CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the European tax advisers. Our members are 26 professional organisations from 20 European countries with more than 200,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law 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 concerning the CFE comments. For further information, please contact Wim Gohres, Chair of the CFE Professional Affairs Committee wim.gohres@nl.pwc.com or the CFE Brussels Office brusselsoffice@cfe-eutax.org +32 2 7610091, Avenue de Tervuren 188A, Brussels.

CFE, the European association of tax advisers, is pleased to submit comments to the European Commission public consultation on whistleblowers’ protection. In addition to our response to the European Commission questionnaire, this position paper in the form of an Opinion Statement further clarifies our remarks.

Executive Summary

CFE acknowledges the recent initiatives at EU level (European Parliament, European Commission) for protection of whistleblowers who disclose information that is considered to be in the public interest and is aimed at protection of European Union’s financial interests. CFE supports transparency and policies that strengthen the integrity of the tax systems and encourage voluntary compliance among taxpayers, in line with EU’s ambitions of creating a more dynamic and competitive Single Market. In respect of the European Commission whistleblowers’ public consultation, CFE supports the Commission’s aim to conduct a comprehensive impact assessment and a targeted stakeholder consultation before reaching a decision on the appropriate measures to be taken (legislative or nonlegislative). In respect of the initiatives to protect whistleblowers who disclose information that belong to private entities, CFE draws attention to the need to strike the right balance between the objectives of these policy initiatives, and the danger not to encourage false reporting or breach of the confidentiality principle that can seriously undermine the relationship between the client and the tax advisor. Failure to acknowledge the specificity of the relationship between tax advisers and clients may damage the trust in both tax advisers and in the public institutions in case of publishing taxpayers’ confidential information. The protection of whistleblowers should not be extended to individuals who fail to follow internal disclosure procedures. In cases where internal codes of conduct are in place, such individuals are in breach of the client confidentiality principle by way of disclosing sensitive taxpayers’ information to the press or the general public, whereby the relevant quality compliance/ ethics teams have not been duly informed prior to the disclosure.

Background As noted in the European Commission's inception impact assessment of 26 January 2017 on horizontal or further sectoral EU action on whistleblower protection, and the European Parliament Report on the role of whistleblowers in the protection of EU’s financial interests of 20 January 2017 (2016/2055/INI) (De Jong Report), as well as different reports of the OECD (ie. Committing to Effective Whistleblower Protection, 2016), Transparency International and other international bodies, the protection of whistleblowers’ reporting who are disclosing information in public interest that amounts to wrongdoing gained significant traction. The European Union has committed to protecting the whistleblowers in both the public and the private sector, including revelation of cross-border fraud and irregularities related to protection of European Union’s financial interests.1 The European Parliament on the other hand has called upon the European Commission to proceed with establishment of comprehensive whistleblowers’ protection framework at EU level, specifically where EU funds are concerned.2 In such a context, where the European Commission is following up on these motions, the CFE welcomes the public consultation as an effective instrument for the European institutions to gather appropriate feedback from all affected parties, and specifically the targeted impact assessment study of most relevant stakeholders. General remarks As matter of principle, CFE welcomes the direction taken by the European Union towards improved transparency and framework for protection of individuals who are disclosing information on a threat to the public interest. As noted by the European Commission, a legislative framework for whistleblowers’ protection already exists in some Member states, and partially at EU level.3 Protection of whistleblowers organised in a proper manner could serve legitimate public policy interests, such as targeting and reducing corruption, abuse of public funds, improving transparency and strengthening the integrity of the system. In order to strike the right balance, CFE welcomes the Commission’s aim to conduct a thorough impact assessment in order to gather input, specifically as to the scope of the action at EU level (legislative or non-legislative). Additionally, avoiding overlap with existing EU legislation that accords protection to whistleblowers, subsidiarity aspects in respect of the rules already implemented by certain Member states, as well as the proportionality of legislation that might affect purely domestic situations in such a context are equally relevant. At this stage, it seems appropriate to limit the future proposals to cases involving a cross-border element aiming to protect the financial interests of the European Union, i.e. corruption, embezzlement of European Union funds or breach of EU State aid rules. Both legislative and

Communication of the European Commission of 5 July 2016 Messerschmidt Report, European Parliament, 21 October 2017, Opinion of the Committee on Constitutional Affairs, point (8) 3 Cf. Articles 37 and 38 of the 4th Anti-Money Laundering Directive 2

non-legislative proposals that might be horizontal or sectoral in nature ought to respect the principle of subsidiarity. Objectives of the policy initiative- drawbacks With respect to the objectives of the policy initiative, CFE would like to comment on some drawbacks of the rules that might impose legal obligation on private sector entities towards whistleblowers. CFEâ&#x20AC;&#x2122;s comment are related on the policy aspects of relevance for the tax advisers. As rule, tax advisers adhere by strict ethical codes of practice and standards, which often encourage speaking up against practices that might undermine the integrity of the tax advisory entity, to identify misconduct within the company, or to report a wrongful behaviour. Such a protection, specifically in large advisory firms, is guaranteed by dedicated risk and quality teams who are responsible to address the concerns and the disclosures made in the course of the tax advisory activities.4 As a rule, a protection for whistleblowers should not encourage false reporting, reporting to the press where adequate internal procedures or Code of conducts exist, or disclosure of sensitive information in the public domain. The issue of handling of these data, and to whom disclosures are made remains important. The measures should not encourage publication of sensitive tax information, as this could undermine the confidence in the public institutions and the European institutions (i.e. with relation to tax returns, personal income tax information, etc.). Specificity of the tax adviserâ&#x20AC;&#x201C; client relationship CFE considers important that prospective EU proposals acknowledge the specificity of the relationship between the tax advisor and the client, in case tax advisers are affected by future proposals. The sensitivity of this relationship, and the confidentiality of the documents and information provided in the course of this relationship must remain protected. A breach of the confidentiality principle could undermine the relationship of trust that exists between a tax adviser and their client, also leading to serious damage in the reputation of a tax advisory firm. A whistleblower protection scenario thus ought to acknowledge the client confidentiality principle, the specificity of the treatment of confidential documents and the protection of interests of both the tax advisers and the client- the taxpayer. Specifically, where internal Codes of conduct exist, the protection of whistleblowers should not be extended to individuals who failed to follow internal disclosure procedures and breached the confidentiality principle by disclosing to the press, the general public etc. Striking the right balance between these obligations is crucial for the confidence in the tax advisers, and encouragement of false reporting or over reporting for potential rewards or similar benefits unrelated to ethical standards could seriously undermine the provision of tax

For instance, PwC has adopted and implemented a Code of Conduct and Risk Management Policies that are aims to manage both internal and external expectations in respect of disclosing misconduct or wrongful practices identified by individuals within the firm 4

advice and the trust of the clients. Additionally, measures for protection of whistleblowers should not encourage ‘leaking’ of confidential business information in the public domain. The client confidentiality principle and whistleblowing With respect to the client confidentiality and the tax advisers, the scope of this right obliges tax advisers and employees of tax advisory firms for that matter that provide tax advice and have access to client confidential information and documents, to treat the information received in the course of their engagement as confidential.5 Considering that the client (taxpayer) owns the information or the document that is being handled by the tax adviser, it is a decision of the client whether to release the tax advisor from the confidentiality duty. Hence the importance of striking the right balance in this respect.6 Below is a brief summary of the scope of the client confidentiality duty for tax advisers in some European jurisdictions, that might be undermined by proposals which fail to acknowledge the specificity of the relationship between the client and the tax adviser. The client confidentiality rules for tax advisers are a matter of legislative regulation in the following jurisdictions: ● Austria, Belgium, Croatia, Czech Republic, France, Germany, Italy, Latvia, Malta, Poland and Slovakia Violation of the client confidentiality rules can be considered a criminal/ administrative offence or misdemeanour in the following jurisdictions: ● Austria, Belgium, Czech Republic, France, Germany, Luxembourg, the Netherlands, Poland and Portugal The client confidentiality rules are regulated by professional bodies with mandatory membership in the following jurisdictions: ● Luxembourg, Portugal and Romania The client confidentiality principle is established by professional associations with voluntary membership in the following jurisdictions: ●

United Kingdom, Finland, Republic of Ireland, the Netherlands, Russia and Switzerland

The client confidentiality principle is also encapsulated in the CFE Professional Code and Ethics, as updated at the CFE General Assembly of 20 April 2012, http://www.cfe-eutax.org/sites/default/files/Professional%20Code_20042012.pdf 6 The exception to this rule would be the Czech Republic, where a derogation exists for the Czech tax advisers, who may handle information without client’s consent, if this is in the client’s interest 5

Some jurisdictions do not have specific confidentiality rules in place, however, client confidentiality may still be protected by general provision of the law, or it may be implied term of the contract between the tax adviser and the client, such as in Greece, Spain and Ukraine. An upcoming whistleblowers’ protection proposal should also take into account relevant case-law of the European Court of Human Rights, specifically Guja v Moldova, where the Court confirmed that a disclosure of confidential information cannot be protected where among other criteria, the individual had a recourse to more discrete means to remedy the wrongdoing.7 CFE also takes note of the Draft Opinion of the European Parliament’s Committee of Employment and Social Affairs of 24 March 2017, where the Committee recalls that in the event of false reporting or false accusations, those responsible should be held accountable.8 Ends/

Iacob GUJA v. Moldova (ECtHR, Application No. 14277/04) Opinion of the European Parliament’s Committee of Employment and Social Affairs of 24 March 2017 on the legitimate measures to protect whistleblowers acting in the public interest when disclosing the confidential information of companies and public bodies, 2016/2224/(INI) 8

Opinion Statement PAC 3/2017 on the European Commission Proposal for a Council Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation COM/2016/025 final - 2016/010 (CNS) Submitted to the European Commission on 27 July 2017

CFE is the European tax advisersâ&#x20AC;&#x2122; association. Our members are 26 professional organisations from 20 European countries with more than 200,000 individual members. CFE aims to safeguard the professional interests of tax advisers, to exchange information about national tax laws and professional law, and to contribute to the coordination of tax law and policy in Europe. CFE is registered in the EU Transparency Register (no. 3543183647â&#x20AC;?05). We will be pleased to answer any questions that you may have concerning 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 188A Brussels.

Executive summary

i. CFE welcomes the European Commission policy approach for increased transparency and efforts to strengthen the integrity of the tax systems, in particular the renewed efforts for increased tax certainty; ii. The design of certain aspects of the proposal leaves scope for uncertainty and faces the challenge of divergent implementation in the member states. Definitions need to be clear and concise, as rules that are too widely drawn are overly burdensome for taxpayers and unhelpful for tax authorities, which stand to receive massive numbers of disclosures but very little useful information; in particular the definitions of ‘cross-border arrangement’, ‘taxpayer’ and ‘made available’; iii. The proposal could benefit from including a requirement for member states’ tax administrations to issue implementation guidance, providing clarity in relation to determining what is required to be disclosed; iv. CFE advocates adherence to the OECD BEPS 12: 2015 Final Report principles, whereby the member states define country specific hallmarks together with a list of excluded tax regimes and outcomes that are not required to be disclosed. These hallmarks could then be assembled on EU level and become reportable except for the excluded arrangements v. Bearing in mind that hallmarks define what constitutes a reportable cross-border arrangement, these essential features should be well-defined, clear and concise. Hallmarks should be part of the main text of the directive; vi. CFE believes that the main benefits test also belongs to the main text of the directive. The main benefits test needs to be applicable to all hallmarks in order to ensure that the reporting obligation is limited to relevant arrangements only; vii. The directive should specify a range of penalties applicable to infringement of national provisions adopted pursuant to the directive concerning Article 8aa) and Article 8aaa). Conversely, penalties that are ‘effective, proportionate and dissuasive’ could be subject to different interpretation by member states; viii. CFE welcomes the professional privilege waiver as well as the non-retroactivity of the proposal; ix. Bearing in mind the intrinsic complexity of tax systems, the EU legislation should not undermine ability of taxpayers to seek tax advice, and for tax advisers to provide it. A clear distinction needs to be acknowledged between ordinary tax advice (as it is provided by the vast majority of tax advisers) and marketed, ‘off-the-shelf’ schemes (provided by a small minority). This difference

should also impact the timing and deadline of the reporting. In all situations the CFE proposes that reporting should be done no later than 20 working days after the start of reporting obligation.

Comments on the policy framework

CFE, the European association of tax advisers, has already stated its preliminary remarks in respect of the mandatory disclosure rules and effective disincentives for tax advisers in its Opinion Statement PAC/FC 1/2017 of 15 January 20171. The comments below relate to the European Commission proposal of 21 June 2017.2

1. Transparency 1.1 CFE welcomes the European Commission policy approach for increased transparency and efforts to strengthen the integrity of the tax systems, in particular the renewed efforts for increased tax certainty. 1.2. Mandatory disclosure of reportable cross-border tax arrangements that undermine the integrity of the tax systems could be a helpful instrument for tax authorities if the mechanism is designed in an adequate and proportionate manner. 2. Comments on the framework 2.1. In respect of the framework of the instrument (mandatory disclosure of reportable crossborder arrangements to tax authorities coupled with an automatic exchange of information), CFE believes that such a policy choice could work well at EU level and might help in establishing better cooperation between member states and improving voluntary compliance of taxpayers. 2.2. The design of certain aspects of the proposal leaves nonetheless scope for uncertainty and faces the challenge of divergent implementation in the member states. Definitions need to be clear and concise. Conversely, inconsistency in the wording might undermine the purpose of this instrument. Rules that are too widely drawn, resulting in too much disclosure, are overly burdensome for taxpayers and unhelpful for tax authorities, which stand to receive massive numbers of disclosures but very little useful information. They also potentially divert valuable resources that could be put to better use. 2.3. Recent EU anti-avoidance legislation (ie. EU Anti-Tax Avoidance Directives “ATAD” 1 & 2) Directive on administrative cooperation on advance cross-border rulings (“DAC 3”), Directive on administrative cooperation on country-by-country reporting (“DAC 4”), Directive on Double Taxation Dispute Resolution Mechanisms) promises to address many loopholes effectively superseding the need for EU-wide mandatory disclosure.

CFE Opinion Statement PAC/FC 1-2017 of 15 January 2017 https://goo.gl/SuHXMW Proposal for a Council Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation COM/2016/025 final - 2016/010 (CNS) 2

3. Implementation guidance 3.1. The proposal could benefit from including a requirement for member states’ tax administrations to issue implementation guidance, providing clarity in relation to determining what is required to be disclosed. 3.2. Tax authorities should be required to provide meaningful examples of the types of transactions that fall within each hallmark. Clarity could be further improved by tax administrations providing examples of what is not required to be reported, that is what is considered to be ordinary tax planning. Outlining such examples of transactions that are considered routine and not subject to disclosure rules, coupled with a detailed guidance from the tax authorities could help to improve the clarity of the rules. 3.3. CFE suggests that implementation guidance and examples are prepared in consultation with taxpayers and tax advisers and should be made available prior to mandatory disclosure rules coming into effect. 3.4. Ongoing publication of the reported information by tax authorities will also be important. The publication of details of the type of schemes that have been disclosed by taxpayers would help to provide clarity for all taxpayers. 3.5. Tax authorities should declare publicly what is their view of the reported arrangements, whether they are acceptable not, accompanied with their reasoning as to the non-acceptability. 4. Ordinary tax advice v. mass-marketed schemes 4.1. Bearing in mind the intrinsic complexity of tax systems, the EU legislation should not undermine ability of taxpayers to seek tax advice, and for tax advisers to provide it. A clear distinction needs to be acknowledged between ordinary tax advice (as it is provided by the vast majority of tax advisers) and marketed, ‘off-the-shelf’ schemes (provided by a small minority). 4.2. CFE welcomes the professional privilege waiver as well as the non-retroactivity of the proposal. Tax advisers play an important role in ensuring taxpayer compliance. They are bound by law and/ or codes of conduct of their professional bodies, ensuring their independence and professional integrity. The right to effective legal representation and a client confidentiality is part of taxpayers’ fundamental rights to privacy and a fair trial. These will only be effective if clients can trust that information shared with their adviser will remain confidential. 5. Adherence to the OECD principles 5.1. In spite of the absence of minimum standard under the OECD BEPS Action point 12, the legislative efforts of the EU need to adhere to the principles of the OECD BEPS project. The forthcoming results of OECD Working Party 11 are of relevance to ensure consistency between the mandatory disclosure frameworks in the EU and the rest of the world. 4

5.2. CFE believes that a more appropriate solution is that the member states define country specific hallmarks as recommended by BEPS Action 12 paragraph 240 together with a list of excluded tax regimes and outcomes that are not required to be disclosed. These hallmarks could then be assembled on EU level and become reportable except for the excluded arrangements. This would prevent the reporting of arrangements which are not considered to be aggressive avoidance. It is not clear why the European Commission has deviated from this approach. 5.3. CFE also proposes that the directive excludes from the obligation to report those arrangements which have already been reported on the basis of another directive such as the Directive on automatic exchange of cross-border rulings. 5.4. CFE also proposes that the definition of a cross-border arrangement entails the requirement that there is a tax impact in at least two jurisdictions. This is now a separate criterion under the Commission’s proposal, but not a standard requirement. 6. Hallmarks 6.1. The proposal places the hallmarks in an Annex to the directive, with Article 23a) and Article 26a) empowering the European Commission to adopt delegated acts on basis of Article 290 of the Treaty on the Functioning of the European Union (“TFEU”) in order to amend the list of hallmarks on potentially aggressive tax planning arrangements. ‘Annex IV’ in relation to hallmarks could thus be amended by the European Commission on basis of Article 290 TFEU, whereas this Treaty article concerns amendment or supplementation of non-essential elements of the legislative act. Hallmarks define what constitutes a reportable cross-border arrangement, and as such they are an essential element of the directive. On that basis, the main benefits test and the hallmarks should be placed in the main text of the directive and thus amended in accordance with the procedure laid down in Article 115 TFEU (unanimity). With regard to the hallmarks some CFE members feel that the EU proposal may be appropriate to make necessary changes to the Annex in response to updated information on arrangements or series of arrangements. 6.2. The hallmarks need to be consistent, clear and concise. Bearing in mind that hallmarks define what constitutes a reportable cross-border arrangement, these features are essential parts of the directive and should be well defined, limited in scope and related to objective and factual criteria. 7. Proportionality 7.1. In respect of the proportionality of the policy response, whereby European Union actions need not exceed what is necessary to achieve the objective of the Treaties for better functioning of the EU internal market, the policy response with respect to mandatory disclosure rules needs to be justified and proportionate. 7.2. As noted in CFE Opinion Statement of 15 January 2017, mandatory disclosure obligations are prima facie in breach of the principles of privacy and confidentiality as guaranteed by Article 8 of the European Convention of Human Rights, unless justified and proportionate.

II. Comments on the substantive aspects of the proposal 8. Burden of disclosure 8.1. The proposal places the burden of disclosure of reportable cross-border arrangements on the intermediary, with default to the taxpayer where the disclosure obligation is not enforceable due to legal professional privilege, absence of intermediary within the EU or in-house schemes. The purpose of this policy effort is assisting tax administrations to identify and to track arrangements that undermine the integrity of the tax systems and to exchange information on such abusive arrangements, without undue burden on the work of tax advisers. 8.2 As a matter of principle and practicality CFE believes the obligation to disclose should be placed on the taxpayer, with the tax adviser (if present) to inform the taxpayer on the obligations to report and explain the consequences of non-complying and to provide technical assistance and support where needed. The tax adviser in such situation has a duty of care to inform the taxpayer and if the taxpayer is not willing to comply should terminate his engagement with the client. In choosing the taxpayer as the obliged reporter, the reporting obligation would start after the first steps of implementation. For bespoke advice this is a balanced approach as it will exclude non-implemented schemes from reporting. Other than schemes which are offered to all kind of tax payers, there is no reason to report such a bespoke non implemented scheme. 8.3 The CFE recognises that for promotors of fully designed “off-the-shelf” schemes, capable for immediate implementation without serious modification by potential clients (according to the ‘made available’ definition of the UK DOTAS) should be reported as soon as they are made available for implementation. In such cases, CFE accepts that in this case the intermediary or promotor should carry the burden of reporting. CFE proposes that the UK definition of ‘made available’ becomes part of the proposal for this reason. In this way undue burden on tax advisers and taxpayers is avoided in line with the recommendation of OECD BEPS 12. The DOTAS ‘made available’ definition thus makes the distinction between who has to report and consequently when to report. 8.4. CFE Member organisations from the United Kingdom (CIOT and ICAEW) do not support the CFE position and believe that, as in the UK’s Disclosure of Tax Avoidance Scheme (DOTAS), the principal obligation to disclose should fall on the tax adviser except in those cases where the tax adviser is prevented from disclosing as a result of the legal professional privilege of the client. In such cases (and where there is no external adviser e.g. in-house schemes or a non-UK based promoter does not disclose the scheme) the obligation to disclose falls to the taxpayer. The DOTAS scheme is regarded as having achieved policy objectives similar to those expressed by the Commission. 8.5 In view of the position of some of CFE member organisations CFE suggests as an alternative that the decision who should report is left to the member state. This would mean that there should

be a mechanism to prevent reporting of the taxpayer in one member state and of the intermediary in another member state or accept that the same arrangement is reported twice. 9. Tests to trigger disclosure and the applicable time period 9.1. In respect of the timing of disclosure and the tests that trigger disclosure, a single test in respect of the timing of disclosure would seem to be more appropriate, whereby the taxpayers shall disclose no later than 20 working days once the first step in the implementation has taken place, i.e. for promotors of ‘off-the-shelf-schemes’ no later than 20 working days beginning on the day after the reportable cross-border arrangement has been made available. 9.2. National legislation, such as DOTAS in the UK, is supplemented by detailed guidance to provide certainty on the application of the tests that trigger disclosure in respect of the timing of the reporting (i.e. ‘makes a firm approach test’ and ‘makes a scheme available for implementation’ test). In the absence of detailed guidance, Article 8aaa 1) of the directive could be difficult to implement and will lack sufficient clarity and certainty to satisfy the basic requirements of the rule of law.

10. Definitions 10.1. The definition of ‘cross-border arrangement’ under Article 1 e) should benefit from redrafting, whereby a reportable scheme ought to have ‘a tax-related impact on a least two jurisdictions’. In a similar vein, the term ‘taxpayer’ should not be defined as a ‘person that uses a reportable crossborder arrangement to potentially optimise their tax position’. For the purposes of this directive, a person or entity that benefits from reportable cross-border arrangement could be entitled a ‘reportable taxpayer’, as not all taxpayers engage in cross-border tax planning. 10.2. The proposal does not specify or carry sufficient guidance in respect of the arrangements where more than one tax adviser is involved in a cross-border arrangement. The directive aims to establish disclosure obligation only for the intermediary that carries the responsibility vis-a-vis the taxpayer, without any specific reference or guidance on the applicability of this standard/ test. This might create confusion as to the member state where the disclosure should occur, as well as the adequate identification of the intermediary that carries the responsibility for disclosure. This issue may be solved if the taxpayer has the obligation to report except in cases of promotors of predesigned schemes. 11. Penalties The proposal envisages penalties for non-compliance, whereby the provision of Article 8aaa) lacks clarity as to their scope in view of the implementation in member states. The proposal could benefit from specifying a range limiting the scope for penalties applicable to infringement of national provisions adopted pursuant to the directive concerning Article 8aa) and Article 8aaa). Otherwise, the penalties that are ‘effective, proportionate and dissuasive’ could be subject to different interpretation by member states, potentially adopting penalties that might be truly dissuasive in one, but objectively lenient in another member state. 7

III. Comments in relation to the hallmarks 12. In respect of the suitability of designing hallmarks at EU level that could flag potentially aggressive tax planning arrangements with cross-border implications, CFE has already put forward its position that an appropriate solution would embrace the OECD BEPS approach with country specific hallmarks. 13. CFE believes that the main benefits test belongs to the main text of the directive. The main benefits test needs to be applicable to all hallmarks in order to ensure that the reporting obligation is limited to relevant arrangements only. 15. The specific hallmark B3) related to the arrangements designed for passing-through of funds using interposed entities without commercial justification could also benefit from clarity, in the sense of specifying that it potentially relates to highly contrived and artificial arrangements designed for the sole purpose of obtaining a tax advantage. This too would need to be coupled with detailed guidance to avoid divergent implementation and interpretation. 16. The specific hallmarks under C) need to be linked to the main benefits test, and specify that these hallmarks indicate reportable transactions only when such transactions are without commercial justification and payment was made for the sole purpose of obtaining a tax advantage. 17. The specific hallmark C1b) concerns deductible cross-border payments made between related parties that become reportable when the receiving jurisdiction levies a statutory corporate tax rate lower than half of the average rate in the EU. With respect to this hallmark, it needs to be specified that this condition would only be satisfied where there is no commercial justification for the deductible cross-border payment towards the lower-tax jurisdiction, and the payment was made for the sole purpose of obtaining a tax advantage. Therefore establishing a link to the main benefit test seems appropriate. 18. In respect of the hallmarks E), the arrangements that do not conform with the armâ&#x20AC;&#x2122;s length principle and the OECD Transfer-Pricing Guidelines, including allocation of profits between members of the same corporate group should also be specified to include that the arrangement was made for the sole purpose of obtaining a tax advantage without any commercial justification. Thus, the hallmarks E1) and E2) need to be linked to the main benefit test.

CFE ▪ 188A, Av. de Tervuren ▪ B – 1150 Brussels European Commission Directorate General for Taxation and Customs Union Unit for Direct Tax Policy and Cooperation Unit Corporate Tax Transparency Sector Ioanna Mitroyanni, Head of Sector

188A, Av. de Tervuren B – 1150 Brussels Tel. + 32 2 761 00 91 Fax + 32 2 761 00 90 brusselsoffice@cfe-eutax.org www.cfe-eutax.org Brussels, 28 November 2017

Dear Ms Mitroyanni, The comments below supplement the CFE response to the European Commission questionnaire on the protection of whistleblowers in the field of tax for Platform on Tax Good Governance of 15 June 2017. CFE has submitted comments on the European Commission public consultation on whistleblowers and clarified our position with an Opinion Statement PAC 2/2017 of 17 May 2017. Furthermore, for the purposes of the Platform Tax Good Governance, CFE submitted comments on the questionnaire of 15 June 2017, which feed into the European Commission impact assessment on the policy initiative for whistleblowers’ protection. In relation to the questionnaire on the protection of whistleblowers in the field of tax for Platform on Tax Good Governance of 15 June, and following the 25th Meeting of the CFE Professional Affairs Committee of 21 September 2017, CFE supplements our response with the additional remarks below. At the outset, CFE welcomes the policy initiative to reinforce the comprehensiveness of the legal framework for protection of individuals who voluntarily disclose information of wrongdoings that can have harmful effect on various entities and interests. By doing so, these individuals contribute to the transparency and integrity of public and private entities, as well as safeguarding the broader societal and public interests. Definitions CFE believes that whistleblowing should have been clearly defined. Arguably there is no single definition of who qualifies as a whistleblower, however a working definition is necessary. Elements that play a role in reaching a comprehensive definition include timing, form of disclosure, previous knowledge on the matter by the recipient, disclosure of information through a conduit. For instance, in case of a disclosure made to a colleague about an issue, who reports to the relevant authorities, the question is whether the individual has blown the whistle himself or herself. In respect of timing, for instance, an individual could be worried about something, and makes a disclosure to the authorities sometime later, the question arises when did he or she blow the whistle and who did he or she report to. Furthermore, there should be a definition for a whistleblower. Questions that bear on this definition include limitations to the scope of individuals covered ie. the issue of whether anybody could blow the whistle or whether legal entities themselves could make a voluntary disclosure. Furthermore, the survey should have made it clear that a person is a whistleblower if he or she makes an internal report

too (for instance, an employee reporting to his employer). An individual who engages in external reporting is clearly blowing the whistle. Eligibility for protection is another issue to be considered in providing a definition of whistleblower. For instance, shall an individual qualify as whistleblower only if he or she is eligible for protection, or are protected whistleblowers type of whistleblowers. In respect of questions that concern the features included in the legislative framework, CFE opines that it is not always possible to protect whistleblowers from discriminatory or retaliatory acts by individuals at a managerial position at a whistleblower’s place of employment. It is only possible to sanction managers who behave in certain way (or allow their employers to do so), and/or to require employers to compensate whistleblowers if they are unfairly treated at work. Anonymity In respect of availability of anonymous reporting for whistleblowers, anonymity should have been clearly defined for the purposes of the survey. Presumably what is meant is complete anonymity which means that nobody will ever know the identity of the whistleblower. Complete anonymity requires complex and expensive reporting mechanisms. For instance, if an organisation pays an outside third party provider to receive whistleblowing reports and to feedback to whistleblowers. Confidentiality With regards to the issue of confidentiality for the whistleblowers and persons accused of wrongdoing by the whistleblower, confidentiality should have been defined. Presumably what is meant is that a very limited number of people will ever know the identity of the whistleblower or the identity of the accused. Anonymity should not have been mentioned in this context, as it is different. Also, it would have been better if separate questions had been posed about the confidentiality of whistleblowers and the confidentiality of accused persons. Linking the two gives the impression that if the whistleblower’s identity is kept confidential than the accused’s identity should automatically also be kept confidential, and vice versa. Views should have been sought on different approaches being taken towards whistleblowers and those they accuse. Final remarks The direction taken by the European Commission towards improved transparency and framework for protection of individuals who are disclosing information on already committed fraud or abuse as well as threat to the public interest is laudable. CFE recognises that whistleblowing is a form of civic engagement and a reflection of the freedom of expression, which is a fundamental right protected by the EU Charter of Fundamental Rights and the European Convention of Human Rights and Fundamental Freedoms. By doing so, the EU needs to take into account the best international standards and the jurisprudence of the European Court of Human Rights. Considering the complexities of this policy area, it is vital to provide clear definitions in the course of the policy options surveying and the subsequent analysis. Such a clarity would feed into a comprehensive and pertinent stakeholder input and involvement. Please do not hesitate to contact us for further information related to the CFE remarks. With my best wishes, Wim Gohres

Chairman of the CFE Professional Affairs Committee

Opinion Statement ECJ-TF 1/2017

on the judgment of the Court of Justice of the EU of 24 November 2016 in Case C-464/14, SECIL, concerning the free movement of capital and third countries Prepared by the CFE ECJ Task Force Submitted to the European Institutions in February 2017

The CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax profession in Europe. Our members are 26 professional organisations from 21 European countries (18 EU member states) with more than 100,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to assure the quality of tax services provided by tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law in Europe. The CFE is registered in the EU Transparency Register (no. 3543183647‐05). —1—

This is an Opinion Statement prepared by the CFE ECJ Task Force1 on Case C-464/14, SECIL, in which the 5th Chamber of the Court of Justice of the European Union (ECJ) delivered its judgment on 24 November 2016,2 following the Opinion of Advocate General Wathelet of 27 January 2016.3 The case concerned the discriminatory Portuguese taxation of dividends received by corporate shareholders from their subsidiaries in third States, namely in Lebanon and Tunisia. In a clear and instructive judgment, the Court not only clarified the scope and impact of the Treaty provisions on free movement of capital but also the legal ramifications of the Euro-Mediterranean Agreements with Lebanon and Tunisia. Should the reader have any questions please do not hesitate to contact Mary Dineen CFE Fiscal Officer or Georg Kofler Chair of the ECJ Taskforce at brusselsoffice@cfe-eutax.org I.

Background and Issues

At issue in SECIL were the Portuguese rules on the avoidance of economic double taxation of inter-company dividends. In briefest summary, those rules provided that:  A company resident in Portugal could deduct dividends from its taxable amount, in full or in part (50%), if those dividends were distributed by another Portuguese company.  Both the full and the partial deduction were only available if the distributing company was “subject to and not exempt from corporation tax” (Article 46(1)(a) and (8)(a) of the Corporation Tax Act): the full deduction additionally required a direct holding of at least 10% or an acquisition value of € 20M (Article 48(1)(c) of the Corporation Tax Act). The full deduction would, however, be reduced by 50% when the income derived from profits that had not been taxed (Article 48(11) of the Corporation Tax Act).  While Portuguese tax law also extended this treatment to distributions from qualifying EU subsidiaries, it did not apply the same treatment for dividends from third-country subsidiaries.

The case concerned Portugal’s apparently discriminatory treatment of dividends from third-country subsidiaries. SECIL, a Portuguese company, had major shareholdings in companies resident in Lebanon and Tunisia (direct holdings of 28.64% and 98.72%), respectively. The dividends that SECIL received from those subsidiaries were then fully taxed in Portugal. The question arose whether, given the full or partial deduction available for domestic dividends, such taxation violated either the Treaty provisions on the free movement of capital (Articles 63 to 65 TFEU) or the Euro-Mediterranean Agreements with Lebanon4 and Tunisia respectively.5 Both agreements were concluded by the European Communities and their Member States (including Portugal), and contain provisions on establishment and capital movement but also certain tax carve-outs (Articles 31, 33 and 85 and Articles 31, 34 and 89, respectively).

1 Members of the Task Force are: Alfredo Garcia Prats, Werner Haslehner, Volker Heydt, Eric Kemmeren, Georg Kofler (Chair), Michael Lang, 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 EU:C:2016:896. 3 EU:C:2016:52. 4 Euro-Mediterranean Agreement establishing an association between the European Community and its Member States, of the one part, and the Republic of Lebanon, of the other part, signed in Luxembourg on 17 June 2002 and approved on behalf of the European Community by Council Decision 2006/356/EC of 14 February 2006, [2006] OJ L 143, p. 1. 5 Euro-Mediterranean Agreement establishing an association between the European Communities and their Member States, of the one part, and the Republic of Tunisia, of the other part, signed in Brussels on 17 July 1995 and approved on behalf of the European Community and the European Coal and Steel Community by Decision 98/238/EC ECSC of the Council and of the Commission of 26 January 1998, [1998] OJ L 97, p. 1.

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The referring Portuguese court in SECIL phrased its questions so as to raise the issue of the concurrent applicability of the provisions of the TFEU and of the Euro-Mediterranean Agreements. While AG Wathelet provided a lengthy analysis of the relationship between those provisions,6 the Court started with the broad principle of Article 63 TFEU, which lays down a clear and unconditional prohibition of discriminatory restrictions of the free movement of capital between the EU and third countries that can be relied upon before national courts,7 and then seems to have considered the Euro-Mediterranean Agreements only to address whether Portugal could rely on the "grandfathering" clause for pre-1994 restrictions, in Article 64 TFEU. In broad terms, the Court took the following approach:  First, the Court interpreted Articles 63 and 65 TFEU in order to determine whether SECIL could in principle rely on the free movement of capital in order to challenge the tax treatment of the dividends received from its subsidiaries in Lebanon and Tunisia (yes, it could).8  Second, it addressed whether the tax treatment of dividends paid to that beneficiary company constituted a restriction within the meaning of Article 63 TFEU (yes, it did)9 and whether such a restriction was justified, specifically by the need to ensure the effectiveness of fiscal supervision (possibly).10  Third, as Articles 63 and 65 TFEU potentially precluded the taxation of the dividends in question, the Court considered whether Portugal could rely on Article 64(1) TFEU, which “grandfathers” restrictions on direct investments that existed on 31 December 1993. Specifically, the Court considered whether the conclusion of the EC-Tunisia and EC-Lebanon Agreements could in principle affect that (yes, it could).11  Fourth, on that basis, the Court interpreted the provisions of the EC-Tunisia and ECLebanon Agreements to determine whether they could actually be relied on in the main proceedings (yes, they can).12  Finally, the Court explained the consequences of all those issues for the main proceedings.13

The Court’s judgment in SECIL is precise and instructive. Not only does it clarify the scope of the free movement of capital in third-country situations (the focus of this Opinion Statement), but it is also the first case in the direct tax area that deals with the Euro-Mediterranean Agreements. While the ECJ has already interpreted provisions of those agreements and also the Association Agreements and Partnership and Cooperation Agreements in other areas of law,14 SECIL makes it clear for the first time that those agreements contain directly effective free movement provisions which can be invoked by taxpayers against discrimination in Member States’ direct tax systems. SECIL is therefore a significant addition to the existing body of direct taxation case-law for capital movements to or from third countries, which prior to SECIL the Court had developed only based on the worldwide 6

See Opinion of AG Wathelet, 27 January 2016, Case C-464/14, SECIL, EU:C:2016:52, paras 31 et seq. See ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 24, referring to ECJ, 14 December 1995, Joined Cases C-163/94, C-165/94 and C-250/94, Sanz de Lera and Others, EU:C:1995:451, paras 41 and 47, ECJ, 18 December 2007, Case C-101/05, A, EU:C:2007:804, paras 21 and 28, and ECJ, 4 June 2009, Joined Cases C-439/07 and C-499/07, KBC Bank NV, EU:C:2009:339, para. 66. 8 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 31-44. 9 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 45-51. 10 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 52-72. 11 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 73-92. 12 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 93-96, paras 97-129 (on the ECTunisia agreement) and paras 130-156 (on the EC-Lebanon agreement). 13 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 157-169. 14 See, with further references, Opinion of AG Wathelet, 27 January 2016, Case C-464/14, SECIL, EU:C:2016:52, paras 33-36. 7

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effect of Article 63 TFEU, with regard to Article 40 of the EEA Agreement,15 and in respect of movements of capital between a Member State and the overseas countries and territories (OCTs).16 II.

The Judgment of the Court

II.1. Applicability of Article 63 TFEU 5.

The free movement of capital in Article 63 TFEU is the only free movement provision that extends to third countries. It is therefore, and unlike, e.g. Article 49 TFEU on the freedom of establishment, not limited to EU-EU situations. The Court therefore had to determine whether Article 63 TFEU was applicable, or Article 49 TFEU instead, because the tax treatment of dividends may fall within the scope of either freedom. It held that determination of the relevant freedom depended on the purpose of the relevant national legislation:17 Within the scope of Article 49 TFEU was national legislation intended to apply only to shareholdings which enable the holder to exert a definite influence on the company’s decisions and to determine its activities. Article 63 TFEU applied to national legislation intended to apply to shareholdings acquired solely with the intention of making an investment without any intention to influence the management and control of the company.18 This leaves the question of other shareholdings, and legislation that does not clearly fall within one of those two categories.

6. In addressing this in SECIL, the Court followed FII Group Litigation 2,19 Itelcar20 and Kronos21, demonstrating that the national legislation, and not the facts, is decisive when identifying the applicable freedom in third-country situations: National legislation on the tax treatment of dividends that does not apply exclusively to situations in which the parent company exercises decisive influence over the company paying the dividends must be assessed by reference to Article 63 TFEU (which is not excluded by Article 49 TFEU), irrespective of the size of its shareholding in the distributing company established in a nonmember State.22 In SECIL the Portuguese legislation was not intended to apply exclusively to situations in which the recipient company had a decisive influence over the distributing company (and also the 10% direct holding required for a full deduction did not restrict the rule to such situations23). Accordingly free movement of capital applied even though the shareholdings in the subsidiaries resident in Lebanon and Tunisia amounted to 28.64% (with an indirect holding of 51.05%) and 98.72%, respectively.

15 See with regard to Article 40 of the EEA Agreement, e.g., ECJ, 28 October 2010, Case C-72/09, Établissements Rimbaud SA, EU:C:2010:645; ECJ, 6 October 2011, Case C-493/09, Commission v Republic, EU:C:2011:635; ECJ, 20 October 2011, Case C-284/09, Commission v Germany, EU:C:2011:670, paras 95 et seq.; ECJ, 25 October 2012, Case C‑387/11, Commission v Belgium, EU:C:2012:670, para. 88; ECJ, 8 November 2012, Case C-342/10, Commission v Finland, EU:C:2012:688, paras 53-54. 16 See for these issues, e.g., ECJ, 5 June 2014, Joined Cases C‑24/12 and C‑27/12, X BV and TBG Limited, EU:C:2014:1385. 17 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 31. 18 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 32 and 33, referring to ECJ, 13 November 2012, Case C-35/11, Test Claimants in the FII Group Litigation, EU:C:2012:707, paras 91 and 92. 19 ECJ, 13 November 2012, Case C-35/11, Test Claimants in the FII Group Litigation, EU:C:2012:707, para. 99. 20 ECJ, 3 October 2013, Case C‑282/12, Itelcar, EU:C:2013:629, paras 16 et seq. 21 ECJ, 11 September 2014, Case C‑47/12, Kronos International Inc., EU:C:2014:2200, paras 37 et seq. 22 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 33, referring to ECJ, 10 April 2014, Case C-190/12, Emerging Markets Series of DFA Investment Trust Company, EU:C:2014:249, para. 30. 23 See ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 40, and, e.g., ECJ, 3 October 2013, Case C-282/12, Itelcar, EU:C:2013:629, para. 22, and ECJ, 11 September 2014, C-47/12, Kronos International, EU:C:2014:2200, para. 35.

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However, the Court stated again that application of Article 63 TFEU should not extend the scope of the freedom of establishment for non-EU-situations via the backdoor.24 However the Court concluded that since the Portuguese legislation related “only” to the tax treatment of dividends and did not cover the conditions of access to the market of a non-member State by a company resident in Portugal or vice versa, the application of Article 63 TFEU would not enable economic operators outside the territorial scope of the freedom of establishment to profit from that freedom.25 Hence, Article 63 TFEU applied.

II.2. Restriction on the free movement of capital under Article 63 TFEU 8.

Following the long line of case-law on dividend taxation,26 the Court was quick to identify the restriction on free movement of capital, as the Portuguese rules clearly distinguished between domestic dividends (full or partial deductibility) and comparable third-country dividends (full taxation).27 That difference in treatment was likely to discourage companies resident in Portugal from investing in companies established in non-member States such as the Republic of Tunisia and the Republic of Lebanon. Accordingly it held that to the extent income from capital originating in non-member States received less favourable tax treatment than dividends distributed by companies established in Portugal, the shares of companies established in non-member States are less attractive to investors residing in Portugal.28

II.3. Justification of the restriction on the free movement of capital under Article 65(1)(a) and (3) TFEU 9.

The Court traditionally reads Article 65(1)(a) and (3) TFEU as codifying its older caselaw29 so that a distinction must be made between the differences in treatment authorised by Article 65(1)(a) and discrimination prohibited by Article 65(3). Based on that reading, restrictive domestic legislation may be regarded as compatible with the provisions of the Treaty on the free movement of capital if the difference in treatment: (1) concerns situations not objectively comparable; or (2) is justified by an overriding reason in the public interest.30 While the Court quickly dismissed the notion that domestic and foreign dividends might not be comparable with regard to tax rules which seek to prevent or mitigate the economic double taxation of distributed profits (they clearly are31), it went on to evaluate whether the restriction was justified by overriding reasons in the public interest and was proportionate.32

24 See on that issue, e.g., ECJ, 11 September 2014, Case C-47/12, Kronos International, EU:C:2014:2200, para. 53; ECJ, 10 April 2014, Case C-190/12, Emerging Markets Series of DFA Investment Trust Company, EU:C:2014:249, para. 31. 25 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 42-43. 26 See, e.g., ECJ, 10 February 2011, Joined Cases C-436/08, C-437/08, Haribo and Salinen, EU:C:2009:17. 27 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 45-49, also noting that the Portugal-Tunisia double taxation convention (whose dividend article is patterned along the lines of the OECD MC) does not prevent such unfavourable treatment. 28 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 50, referring to ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, para. 64, and ECJ, 10 February 2011, Joined Cases C-436/08, C-437/08, Haribo and Salinen, EU:C:2009:17, para. 80. 29 E.g., ECJ, 15 July 2004, Case C-315/02, Anneliese Lenz, EU:C:2004:446, para. 27; ECJ, 7 September 2004, Case C-319/02, Petri Manninen, EU:C:2004:484, para. 29. 30 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 52-54, referring to ECJ, 10 May 2012, Joined Cases C‑338/11 to C‑347/11, Santander Asset Management SGIIC SA et al, EU:C:2012:286, para. 23. 31 55, referring to see ECJ, 10 February 2011, Joined Cases C-436/08, C-437/08, Haribo and Salinen, EU:C:2009:17, para. 84. 32 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 56 et seq.

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10. Two grounds of justification were considered: the need (1) to ensure the effectiveness of fiscal supervision; and (2) to prevent “tax evasion”,33 both of which have, in principle, already been accepted by the Court.34 While the second ground could be dismissed quickly in SECIL (because the Portuguese rules do not specifically target wholly artificial arrangements which do not reflect economic reality and the sole purpose of which is to avoid the tax normally due or to obtain a tax advantage),35 the Court clarified its approach to the effectiveness of fiscal supervision in a third-country context:  First, the Court confirmed that “movements between Member States and non-member States fall within a legal context different from that in force within the Union and that the framework for cooperation between the competent authorities of the Member States established by [the Mutual Assistance Directive36] does not exist between those authorities and the competent authorities of a non-member State where that State has not entered into any undertaking of mutual assistance”.37  Second, the Court reiterated settled case-law which shows that where the legislation of a Member State makes advantageous tax treatment dependent on the satisfaction of requirements, compliance with which can be verified only by obtaining information from the competent authorities of a non-member State, it is, in principle, legitimate for that Member State to refuse to grant that advantage if it proves impossible to obtain such information from that non-Member State.38 The obligation of the non-Member State to provide information under a double taxation convention can be sufficient to ensure effective fiscal supervision.39 11. Under the Portuguese regime at issue in SECIL, eligibility in domestic law for (full or partial) deduction was dependent on the distributing company being subject to Portuguese corporate tax (Article 46(1) and (8) of the Corporation Tax Code), a condition which the Court said the tax authorities must be able to verify. The Court then left it to the national court to determine whether the exchange of information provision in Article 23 of the Portugal-Tunisia double taxation convention enabled the Portuguese tax authorities to obtain from Tunisia the information which would enable them to verify satisfaction of this condition. If so, the denial of a full or partial deduction could not be justified by the need to ensure the effectiveness of fiscal supervision.40 No such convention existed with Lebanon, so that a justification based on the effectiveness of fiscal supervision is available with regards to dividends from the Lebanese subsidiary.41 However, the Court also left it to the domestic court to determine whether a partial deduction would be available on the basis 33 In SECIL, the Court explicitly uses the (narrow and specific) terms “tax evasion”, “tax fraud” and “evasion of taxes”, but, as is visible from the references, certainly means the broader case-law on tax avoidance as in, e.g., Cadbury Schweppes (ECJ, 12 September 2006, Case C-196/04, EU:C:2006:544), Thin Cap Group Litigation (ECJ, 13 March 2007, Case C-524/04, EU:C:2007:161, paras 72 and 74), Glaxo Wellcome (ECJ, 17 September 2009, Case C-182/08, EU:C:2009:559, para. 89) and Itelcar (ECJ, 3 October 2013, Case C-282/12, EU:C:2013:629, para. 34). This translation confusion obviously stems from the French technical terms “évasion fiscale” which is better translated as “tax avoidance”. 34 See on the prevention of tax evasion and avoidance, e.g., ECJ, 11 October 2007, Case C-451/05, ELISA, EU:C:2007:594, para. 81, and for the effectiveness of fiscal supervision, e.g., ECJ, 18 December 2007, Case C101/05, A, EU:C:2007:804, para. 55, and ECJ, 5 July 2012, Case C-318/10, SIAT, EU:C:2012:415, para. 36. 35 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 59-62. 36 Directive 77/799, as amended by Council Directive 2006/98 of 20 November 2006 ([2006] OJ L 363, p. 129), in force at the material time in the main proceedings, and Council Directive 2011/16/EU of 15 February 2011, on administrative cooperation in the field of taxation and repealing Directive 77/799/EEC ([2011] OJ L 64, p. 1). 37 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 64, referring to ECJ, 10 February 2011, Joined Cases C-436/08, C-437/08, Haribo and Salinen, EU:C:2009:17, paras 65 and 66. 38 See, e.g., ECJ, 28 October 2010, Case C-72/09, Établissements Rimbaud SA, EU:C:2010:645, para. 44; and ECJ, 19 July 2012, Case C-48/11, A Oy, EU:C:2012:485, para. 36. 39 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 64, referring to ECJ, 17 October 2013, Case C-181/12, Welte, EU:C:2013:662, para. 63. 40 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 67-68. 41 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 69.

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of another provision (Article 48(11) of the Corporate Tax Act) that might not require such verification: in such a case the justification related to fiscal supervision would not apply,42 and, as a consequence, SECIL would be entitled to at least the 50% deduction. II.4. The “grandfathering clause” in Article 64(1) TFEU 12. Next, the Court had to establish whether an unjustified restriction may nevertheless be authorized under the “grandfathering clause” in Article 64(1) TFEU. That clause “enshrines the power of the Member State, in its relations with non-member States, to apply restrictions on capital movements which come within the substantive scope of that provision, even though they contravene the principle of the free movement of capital under Article 63(1) TFEU”.43 According to Article 64(1) TFEU, the provisions of Article 63 are without prejudice to the application to non-member States of any restrictions which existed on 31 December 1993 under national or Union law adopted in respect of the movement of capital to or from third countries involving direct investment (including in real estate), establishment, the provision of financial services or the admission of securities to capital markets. The Court approached this analysis based on the two criteria of Article 64(1) TFEU: the nature of the capital movement, and the timing of any change. 13. With regards to the nature of the capital movement, the Court noted that the concept of “direct investment” was defined in the “old” capital movements Directive44 and concerns investments of any kind undertaken by natural or legal persons and which serve to establish or maintain lasting and direct links between the persons providing the capital and the undertakings to which that capital is made available in order to carry out an economic activity.45 As for shareholdings in new or existing undertakings, “direct investment” requires that the shares held by the shareholder enable him, either pursuant to the provisions of the national laws relating to companies limited by shares or in some other way, to participate effectively in the management of that company or in its control.46 Moreover, Article 64(1) TFEU may not only “grandfather” national measures which restrict establishment or investment as such but also – as might be the case in SECIL – measures which restrict payments of dividends deriving from them.47 To determine whether “direct investments” were involved, the Court focused on the size of the shareholdings in the Tunisian and Lebanese subsidiaries, i.e. 98.72% and 28.64% respectively, and concluded that such shareholdings were such as to enable the shareholder to effectively participate in the management or control of the distributing company and could therefore be regarded as a direct investment.48 42 Indeed, the ECJ left it to the national court to determine whether a deduction may be available based on another provision that foresees a 50% deduction when the income comes from profits that have not actually been taxed (Article 46(11) of the Corporation Tax Code), which might be applicable in situations where the liability to tax of the distributing company in the State of residence cannot be verified. If so, the overriding reason in the general interest, based on the need to ensure the effectiveness of fiscal supervision, cannot be relied on to justify the restriction resulting from the refusal to grant the partial deduction provided for in Article 46(11) of the Corporation Tax Code, in the case of dividends originating in Tunisia and Lebanon. See ECJ, 24 November 2016, Case C464/14, SECIL, EU:C:2016:896, paras 70-71. 43 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 86, referring to ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, para. 187, and ECJ, 24 May 2007, Case C-157/05, Holböck, EU:C:2007:297, para. 39. 44 See the nomenclature of the capital movements set out in Annex I to Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty (article repealed by the Treaty of Amsterdam) ([1988] OJ L 178, p. 5). 45 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 75, referring to ECJ, 24 May 2007, Case C-157/05, Holböck, EU:C:2007:297, paras 33 and 34. 46 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 76, referring to ECJ, 24 May 2007, Case C-157/05, Holböck, EU:C:2007:297, para. 35. 47 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 77, referring to ECJ, 13 November 2012, Case C-35/11, Test Claimants in the FII Group Litigation, EU:C:2012:707, para. 103. 48 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 79-80.

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14. With regards to whether the restriction already “existed on 31 December 1993”, the Court noted that this criterion “presupposes that the legal provisions relating to the restriction in question have formed part of the legal order of the Member State concerned continuously since that date”.49 In relation to Tunisia and Lebanon this was not affected by the fact that Portugal has subsequently introduced a tax benefit scheme for contractual investments in the Portuguese-speaking African Countries and Timor-Leste.50 However, a Member State waives Article 64(1) if: (1) it repeals the provisions which gave rise to the restriction in question (i.e., even an identical provision reintroduced later on would not be covered by Article 64(1)),51 or (2) it adopts provisions that alter the logic underlying the earlier legislation. It acknowledged, however, that Article 64(1) TFEU would still cover provisions introduced in 1994 or later which, in their substance, are identical to previous legislation or which merely reduce or eliminate an obstacle to the exercise of Union rights and freedoms in earlier legislation.52 15. The Court in SECIL then noted that a change in the logic of legislation can also be brought about by international agreements: A “Member State waives the power provided for in Article 64(1) TFEU also where, without formally repealing or amending the existing rules, it concludes an international agreement, such as an association agreement, which provides, in a provision with direct effect, for a liberalisation of a category of capital referred to in Article 64(1). That change in the legal framework must therefore be deemed to amount, in its effects on the possibility of invoking Article 64(1) TFEU, to the introduction of new legislation, since it is based on logic different from that of the existing legislation.”53 Hence, if the EC-Tunisia and EC-Lebanon Agreements (both of which were concluded after 31 December 1993) provided for a “liberalisation of” the direct investment in question, Portugal could not rely on Article 64(1) TFEU.54 II.5. Interpretation of the Euro-Mediterranean Agreements with Lebanon and Tunisia 16. Accordingly, application of Article 64(1) TFEU depended on whether the logic of the Portuguese legislation had been changed after 31 December 1993 by the EC-Tunisia and EC-Lebanon Agreements. To determine this, the Court had to interpret the EC-Tunisia and EC-Lebanon Agreements to see whether those agreements provided for a relevant liberalization of direct investment.55 In briefest summary of the Court’s extensive analysis:  the provisions on capital movements in Article 34 of the EC-Tunisia Agreement and Article 31 of the EC-Lebanon Agreement had direct effect56 and the situations in SECIL fell under those provisions,57 so that those provisions could be relied on in a situation such as SECIL in relation to the tax treatment of those dividends in Portugal;

49 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 81, referring to ECJ, 18 December 2007, Case C-101/05, A, EU:C:2007:804, para. 48. 50 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 83-84; see also Opinion of AG Wathelet, 27 January 2016, Case C-464/14, SECIL, EU:C:2016:52, paras 159-163. 51 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 87, referring to ECJ, 18 December 2007, Case C-101/05, A, EU:C:2007:804, para. 49. 52 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 88, referring to ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, para. 192, and ECJ, 24 May 2007, Case C-157/05, Holböck, EU:C:2007:297, para. 41. 53 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 89. 54 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 90-91. 55 For an extensive analysis of those provisions see Opinion of AG Wathelet, 27 January 2016, Case C464/14, SECIL, EU:C:2016:52, paras 58 et seq. 56 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 97-104 (on the EC-Tunisia Agreement) and paras 130-133 (on the EC-Lebanon Agreement). 57 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 105-109 (on the EC-Tunisia Agreement) and paras 134-136 (on the EC-Lebanon Agreement).

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 the discriminatory tax treatment under the Portuguese legislation in SECIL constituted a restriction on the free movement of capital that was in principle prohibited by those provisions,58 that the prohibition was also not limited by the specific “tax carve-outs” in Article 89 of the EC-Tunisia Agreement or Article 85 of the EC-Lebanon Agreement59 and that it was not grandfathered by Article 33 of the EC-Lebanon Agreement (Art 33(2));60  justifications under the rule of reason, specifically based on the need to preserve the effectiveness of fiscal supervision, must, also be allowed under the EC-Tunisia and EC-Lebanon Agreements, with the same effects as under Articles 63, 65 TFEU.61 17. Hence, a refusal to grant a full or partial deduction of the dividends from the recipient company’s taxable amount was, in principle, prohibited by Article 34 of the EC-Tunisia Agreement and Article 31 of the EC-Lebanon Agreement, respectively, subject to being justified by overriding reasons in the public interest relating to the need to preserve the effectiveness of fiscal supervision.62 The Court then returned to Article 64(1) TFEU. It concluded that where the restriction under the respective EU-Mediterranean Agreements cannot be justified (e.g., because information can be obtained under the Portugal-Tunisia double taxation convention), then the EC-Tunisia and EC-Lebanon agreements (are deemed to63) have altered the logic of the Portuguese legislation in force in 1993. As such Portugal cannot rely on the “grandfathering clause” of Article 64(1) TFEU for restrictions on “direct investments” that “existed on 31 December 1993”, and the failure to extend full (or partial) exemption to dividends from those states is a prohibited restriction on the free movement of capital. II.6. Consequences 18. The Court provided guidance on the consequences of its findings. It confirmed that Article 63 TFEU requires a Member State “which has a system for preventing economic double taxation as regards dividends paid to residents by other resident companies to accord equivalent treatment to dividends paid to residents by non-resident companies”.64 This right of taxpayers is connected with the right to a refund of charges levied in a Member State in breach of the rules of Union law,65 i.e., “reimbursement not only of the tax unduly 58 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 111-114 (on the EC-Tunisia Agreement) and paras 138-142 (on the EC-Lebanon Agreement). 59 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 115-121 (on the EC-Tunisia Agreement) and paras 143-152 (on the EC-Lebanon Agreement). 60 See for that interpretation of Art. 33(2) of the EC-Lebanon Agreement ECJ, 24 November 2016, Case C464/14, SECIL, EU:C:2016:896, paras 134-136. 61 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 122-128 (on the EC-Tunisia Agreement) and paras 153-155 (on the EC-Lebanon Agreement). 62 Such justification, however, is not available in relation to dividends from the Tunisian subsidiary if the relevant information on the tax liability can be obtained by the Portuguese tax administration based on the exchange of information clause in the Portugal-Tunisia double taxation convention. It may likewise not be available with regard to both dividends from the subsidiaries in Tunisia and Lebanon (where no double taxation convention exists) if the provision granting a partial exemption can be applied in situations in which the tax liability of the companies distributing those dividends cannot be verified, a matter which it is for the referring court to determine. ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 157-162. 63 The English text (para. 160 of the judgment) refers to a “deemed” change (“must be deemed to amount”). The original Portuguese version refers to the treaty change given the same treatment, for purposes of Art, 64(1) TFEU, as a domestic legislative change, as do other language versions (e.g., the German “gleichzusetzen”). The Court obviously focuses the effect of the Agreements on the national rule and nothing turns on that difference in language. 64 Para 163, referring to ECJ, 10 February 2011, Joined Cases C-436/08 and C-437/08, Haribo and Salinen, EU:C:2011:61, para. 60, and ECJ, 13 November 2012, Case C-35/11, Test Claimants in the FII Group Litigation, EU:C:2012:707, para. 38. 65 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 164, referring to ECJ, 15 September 2011, Case C-310/09, Accor, EU:C:2011:581, para. 71.

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levied but also of the amounts paid to that State or retained by it which relate directly to that tax”.66 As the Court further noted, “the only exception to the right to repayment of taxes levied in breach of EU law is in a case in which a charge that was not due has been directly passed on by the taxable person to another person”.67 In SECIL, therefore, Portugal is obliged to repay with interest the amounts collected in breach of Articles 63 and 65 TFEU, Article 34 of the EC-Tunisia Agreement and Article 31 of the EC-Lebanon Agreement, and the respective amounts correspond to the difference between the amount paid by SECIL and the amount it should have paid pursuant to Article 46(1), Article 46(8) or Article 46(11) of the CIRC as if the dividends distributed by the third-country subsidiaries had been paid by a company established in Portugal.68 III. Comments 19. The Court’s judgment sets out a precise and instructive analysis of the application of Article 63 TFEU in third country situations. This Opinion Statement aims to highlight some of the issues it analysed. The starting point is that Article 63(1) TFEU is a “special” freedom insofar as it extends the prohibition on the free movement of capital also to capital movements “between Member States and third countries”, while Articles 45, 49 and 56 on workers, establishment and services are limited to EU situations. This non-reciprocal liberalization pursues objectives other than that of establishing the internal market, such as that of ensuring the credibility of the single Union currency on world financial markets and maintaining financial centres with a world-wide dimension within the Member States.69 20. Sometimes, however, investments by taxpayers could be viewed as an establishment and also as a capital movement, e.g., investment in companies and the subsequent flow of dividends.70 It is now well settled case-law that the “purpose”71 of the legislation concerned must be taken into consideration in determining whether national legislation falls within the scope of one or other of the freedoms of movement.72 66 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 166, referring to ECJ, 15 October 2014, Case C-331/13, Nicula, EU:C:2014:2285, para. 28. 67 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 165, referring to ECJ, 6 September 2011, Case C-398/09, Lady & Kid and Others, EU:C:2011:540, para. 18, and ECJ, 15 September 2011, Case C310/09, Accor, EU:C:2011:581, paras 72 and 74. 68 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 167-168. 69 See ECJ, 18 December 2007, Case C-101/05, A, EU:C:2007:804, para. 31; ECJ, 20 May 2008, Case C194/06, Orange European Smallcap Fund NV, EU:C:2008:289, para. 87. 70 The Court assumes that the nomenclature of the capital movements set out in Annex I to Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty (article repealed by the Treaty of Amsterdam) ([1988] OJ L 178, p. 5) has indicative value of what is a “capital movement” (see, e.g., , 17 October 2013, Case C-181/12, Welte, EU:C:2013:662, para. 20), and that returns on investments (e.g., the receipt of dividends) are likewise covered by Article 63 TFEU (see already, e.g., ECJ, 6 June 2000, Case C-35/98, Verkooijen, EU:C:2000:294, para. 29). 71 It should be noted briefly that the English version of the judgment (e.g., paras 31 and 34) uses the term “purpose” and also refers to the “intention” of the national legislation (para. 32), while other language versions consistently use the term “object” (e.g., “Gegenstand” in German, “objet” in French, “objeto” in Spanish, “voorwerp” in Dutch, “objeto” in Portuguese, “oggetto” in Italian) or refer to the scope of applicability of the national rule (e.g., “nationale Regelung, die […] anwendbar ist” in German). It is not entirely clear if this is a relevant difference in the eyes of the Court and would imply either a subjective or an objective approach, and if the former should be evaluated (e.g., through the use preparatory materials etc). 72 See, e.g., ECJ, 12 September 2006, Case C-196/04, Cadbury Schweppes, EU:C:2006:544, paras 31-33; ECJ, 12 December 2006, Case C-374/04, Test Claimants in Class IV of the ACT Group Litigation, EU:C:2006:773, paras 37-38; ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, para. 36; ECJ, 13 March 2007, Case C-524/04, Test Claimants in the Thin Cap Group Litigation, EU:C:2007:161, paras 26-34; ECJ, 10 May 2007, Case C-492/04, Lasertec, EU:C:2007:273, para. 19; ECJ, 24 May 2007, Case C157/05, Holböck, EU:C:2007:297, para. 22; ECJ, 6 November 2007, Case C-415/06, Stahlwerk Ergste Westig GmbH, EU:C:2007:651, para. 13; ECJ, 4 June 2009, Joined Cases C-439/07 and C-499/07, KBC Bank NV, EU:C:2009:339, para. 68; ECJ, 17 September 2009, Case C-182/08, Glaxo Wellcome, EU:C:2009:559, para. 36; ECJ, 10 February 2011, Joined Cases C-436/08, C-437/08, Haribo and Salinen, EU:C:2009:17, para. 34; ECJ, 10 April 2014, Case C-190/12, Emerging Markets Series of DFA Investment Trust Company, EU:C:2014:249, para. 25; ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 31.

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a. Focusing on the taxation of dividends and capital gains, as explained above national legislation that applies only to those shareholdings which enable the holder to exert a definite influence on the company’s decisions and to determine its activities falls exclusively within the scope of Article 49 TFEU on freedom of establishment (i.e., no protection in third-country situations),73 while national provisions which apply to shareholdings acquired solely with the intention of making a financial investment without any intention to influence the management and control of the undertaking must be examined exclusively in light of the free movement of capital.74 b. However, if national legislation applies to all shareholdings, the Court’s older case-law had raised doubts as to whether it is necessary that the shareholding in question is not a controlling shareholding, in order for Article 63 TFEU to apply. The Court uses that fact-led approach to identify the relevant freedom in intra-EU-situations75 (where it does not really matter which freedom applies), and had also applied it in Burda76 and KBC Bank77 with regard to third-country situations. This would lead to the strange result that legal protection in third-country situations would decrease with the size of a shareholding and that Article 63 TFEU could be treated as secondary to Article 49 TFEU in a situation where the latter does not even apply. Furthermore it would be at odds with Article 64(1) TFEU, which makes it apparent that Article 63 TFEU covers, in principle, capital movements involving establishment or direct investment.78 More recent caselaw in FII Group Litigation 2,79 Itelcar,80 Emerging Markets Series of DFA Investment Trust Company,81 Kronos82 and SECIL83 has, however, overcome these doubts (at 73 See, e.g., ECJ, 12 September 2006, Case C-196/04, Cadbury Schweppes plc, EU:C:2006:544, paras 31 et seq.; ECJ, 13 March 2007, Case C-524/04, Test Claimants in the Thin Cap Group Litigation, EU:C:2007:161, paras 33, 34, 101 and 102; ECJ, 10 May 2007, Case C-492/04, Lasertec, EU:C:2007:273, paras 22 et seq. (however, noting in para. 23 that there was in fact a two thirds holding); ECJ, 10 May 2007, Case C-102/05, A and B, EU:C:2007:275, paras 25 et seq.; ECJ, 18 July 2007, Case C-231/05, Oy AA, EU:C:2007:439, paras 22 et seq.; ECJ, 6 November 2007, Case C-415/06, Stahlwerk Ergste Westig GmbH, EU:C:2007:651, paras 14 et seq. (concerning permanent establishments); ECJ, 10 February 2011, Joined Cases C-436/08, C-437/08, Haribo and Salinen, EU:C:2009:17, para. 35; ECJ, 19 July 2012, Case C-31/11, Scheunemann, EU:C:2012:481, para. 30 (however, noting in para. 31, that there was in fact a 100% holing); ECJ, 13 November 2012, Case C-35/11, Test Claimants in the FII Group Litigation, EU:C:2012:707, paras 91 and 98. 74 See, e.g., ECJ, 17 September 2009, Case C-182/08, Glaxo Wellcome, EU:C:2009:559, paras 40 and 4552; ECJ, 10 February 2011, Joined Cases C-436/08, C-437/08, Haribo and Salinen, EU:C:2009:17, para. 35; ECJ, 13 November 2012, Case C-35/11, Test Claimants in the FII Group Litigation, EU:C:2012:707, para. 92; ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 32. It should be noted, however, that earlier caselaw had assumed a (potential) concurrent application of both freedoms in these situations; see, e.g., ECJ, 12 December 2006, Case C-374/04, Test Claimants in Class IV of the ACT Group Litigation, EU:C:2006:773, paras 3738; ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, paras 36, 80 and 142; ECJ, 24 May 2007, Case C-157/05, Holböck, EU:C:2007:297, para. 24; ECJ, 26 June 2008, Case C284/06, Burda GmbH, EU:C:2008:365, para. 71; ECJ, 4 June 2009, Joined Cases C-439/07 and C-499/07, KBC Bank NV, EU:C:2009:339, para. 69. 75 See for the delimitation of the freedoms based on the factual size of a shareholding in internal market situations where potentially two freedoms apply; e.g., ECJ, 26 June 2008, Case C-284/06, Burda GmbH, EU:C:2008:365, paras 71 et seq.; ECJ, 18 June 2009, Case C-303/07, Aberdeen Property Fininvest Alpha Oy, EU:C:2009:377, paras 33 et seq.; ECJ, 21 January 2010, Case C-311/08, Société de Gestion Industrielle (SGI), EU:C:2010:26, paras 33 et seq. 76 ECJ, 26 June 2008, Case C-284/06, Burda GmbH, EU:C:2008:365, paras 72 et seq. 77 ECJ, 4 June 2009, Joined Cases C-439/07 and C-499/07, KBC Bank NV, EU:C:2009:339, paras 68 et seq. (holding that “to the extent to which the holdings in question confer on their owner a definite influence over the decisions of the companies concerned and allow it to determine their activities, it is the provisions of the Treaty relating to freedom of establishment which apply”). 78 See on that point ECJ, 13 November 2012, Case C-35/11, Test Claimants in the FII Group Litigation, EU:C:2012:707, paras 101-102. 79 ECJ, 13 November 2012, Case C-35/11, Test Claimants in the FII Group Litigation, EU:C:2012:707, para. 99. 80 ECJ, 3 October 2013, Case C‑282/12, Itelcar, EU:C:2013:629, paras 16 et seq. 81 ECJ, 10 April 2014, Case C-190/12, Emerging Markets Series of DFA Investment Trust Company, EU:C:2014:249, para. 30. 82 ECJ, 11 September 2014, Case C‑47/12, Kronos International Inc., EU:C:2014:2200, paras 37 et seq. 83 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 33.

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least in relation to dividends) and clearly demonstrated that only the Union-law characterization of the national measure84and not the facts are decisive as to the applicable freedom when it comes to third-country situations: national legislation on the tax treatment of dividends that does not apply exclusively to situations in which the parent company exercises decisive influence over the company paying the dividends must be assessed in the light of Article 63 TFEU (which is not excluded by Article 49 TFEU), irrespective of the size of its shareholding in the company paying the dividends. c. In third-country situations, therefore, where it is apparent from the purpose of national legislation that it can only apply to shareholdings that enable the holder to exert a definite influence on the decisions of the company concerned and to determine its activities, neither Article 49 TFEU nor Article 63 TFEU may be relied upon.85 Relying on the “purpose” of national legislation to identify the applicable freedom is, however, not an easy task and additionally triggers the question of when a holding gives the shareholder “definite influence on the company’s decisions and allowing them to determine its activities”.86 While investment in a branch generally triggers Article 49 TFEU,87 and the Court’s case-law seems to imply that holding requirements of 100%,88 90%,89 75%,90 66,66%,91 65%,92 more than 50%,93 exactly 50%,94 34%95 or even 25%96 will also trigger the exclusive application of Article 49 TFEU, a holding requirement of 10% is not enough to exclude the application of Article 63 TFEU: as the Court has confirmed in Haribo and Salinen,97 Itelcar,98 Kronos99 and SECIL,100 a domestic threshold of 10% excludes from the scope of the fiscal advantage those shareholdings acquired solely with the intention of making a financial investment without any intention to influence the management and control of the undertaking, but does not in itself make the relevant tax benefit (e.g., the deduction at issue in SECIL) applicable only to those shareholdings which enable the holder to exert a definite influence on the company’s decisions

See infra point c. See, e.g., ECJ, 13 November 2012, Case C-35/11, Test Claimants in the FII Group Litigation, EU:C:2012:707, paras 91 and 98. 86 See for that criterion ECJ, 12 September 2006, Case C-196/04, Cadbury Schweppes plc, EU:C:2006:544, para. 31.; ECJ, 13 March 2007, Case C-524/04, Test Claimants in the Thin Cap Group Litigation, EU:C:2007:161, para. 27; ECJ, 17 September 2009, Case C-182/08, Glaxo Wellcome, EU:C:2009:559, para. 47. 87 ECJ, 6 November 2007, Case C-415/06, Stahlwerk Ergste Westig GmbH, EU:C:2007:651, paras 14 et seq. However, investments in partnerships may also be covered by Art. 63 TFEU; see for intra-EU situations, e.g., ECJ, 6 December 2007, Case C-298/05, Columbus Container Services BVBA & Co., EU:C:2007:754, and ECJ, 23 January 2014, Case C-164/12, DMC Beteiligungsgesellschaft mbH, ECLI:EU:C:2014:20, 88 ECJ, 13 April 2000, Case C-251/98, Baars, EU:C:2000:205, para. 21; ECJ, 5 November 2002, Case C208/00, Überseering BV, EU:C:2002:632, para. 70; ECJ, 7 September 2006, Case C-470/04, N, EU:C:2006:525, paras 24 et seq.; ECJ, 12 December 2006, Case C-374/04, Test Claimants in Class IV of the ACT Group Litigation, EU:C:2006:773, para. 39; ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, para. 37; ECJ, 18 June 2009, Case C-303/07, Aberdeen Property Fininvest Alpha Oy, EU:C:2009:377, paras 33 et seq.; see also ECJ, 6 December 2007, Case C-298/05, Columbus Container Services BVBA & Co., EU:C:2007:754, para. 30 (concerning holdings in a partnership). 89 ECJ, 18 July 2007, Case C-231/05, Oy AA, EU:C:2007:439, paras 21 et seq. 90 ECJ, 13 March 2007, Case C-524/04, Test Claimants in the Thin Cap Group Litigation, EU:C:2007:161, paras 32 et seq. 91 ECJ, 10 May 2007, Case C-492/04, Lasertec, EU:C:2007:273, para. 23. 92 ECJ, 21 January 2010, Case C-311/08, Société de Gestion Industrielle (SGI), EU:C:2010:26, paras 34 et seq. 93 ECJ, 12 September 2006, Case C-196/04, Cadbury Schweppes plc, EU:C:2006:544, paras 6 and 32. 94 ECJ, 26 June 2008, Case C-284/06, Burda GmbH, EU:C:2008:365, para. 70. 95 ECJ, 21 January 2010, Case C-311/08, Société de Gestion Industrielle (SGI), EU:C:2010:26, paras 34 et seq. 96 ECJ, 10 May 2007, Case C-492/04, Lasertec, EU:C:2007:273, para. 21; ECJ, 19 July 2012, Case C-31/11, Scheunemann, EU:C:2012:481, paras 25 et seq. 97 ECJ, 10 February 2011, Joined Cases C-436/08, C-437/08, Haribo and Salinen, EU:C:2009:17, para. 36. 98 ECJ, 3 October 2013, Case C‑282/12, Itelcar, EU:C:2013:629, para. 22. 99 ECJ, 11 September 2014, Case C‑47/12, Kronos International Inc., EU:C:2014:2200, para. 35. 100 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 40. 85

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and to determine its activities. This is because “a holding of such a size does not necessarily imply that the owner of the holding exerts a definite influence over the decisions of the company in which it is a shareholder”.101 d. The Court’s case-law also consistently states “that, since the Treaty does not extend freedom of establishment to non-member States, it is important to ensure that the interpretation of Article 63(1) TFEU as regards relations with those states does not enable economic operators who fall outside the territorial scope of freedom of establishment to profit from that freedom”.102 Article 63(1) TFEU should, therefore, not serve to apply the freedom of establishment "through the back door”.103 However, in all direct tax cases so far, the Court has not yet identified such a risk because the tax legislation under consideration did “not cover the conditions of access to the market of a nonmember State by a company resident in Portugal or to the market in a Member State by a company from a non-member State”.104 21. Even though Article 63 TFEU constitutes a unilateral “liberalisation” by the Member States in relation to movement of capital with third countries, the concept of “restrictions” is to be understood in the same manner in relations between Member States and third countries as it is in relations between Member States.105 If a restriction is found in a third-country situation, the Court proceeds with the well-known analysis of comparability,106 justifications107 and proportionality.108 Due to the different degree of legal integration, however, movements of capital to or from third countries still take place in a different legal context from that which occurs within the EU,109 specifically because of the existence of administrative cooperation within the EU in the direct tax area.110 This may lead to differences with regard to the comparability analysis or a potential justification.111 As is evidenced by, e.g., SECIL, the need for effective fiscal supervision may be a valid ground of justification in a third-country context if the tax advantage depends on the satisfaction of requirements, compliance with which can be verified only by obtaining information from the competent authorities of a non-Member State.112 Conversely, such justification is not available where an obligation for the non-Member State to provide information results from an exchange of information provision in a double taxation convention (e.g., a standard exchange of 101

ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 40. ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 42. 103 See on that issue, e.g., ECJ, 13 November 2012, Case C-35/11, Test Claimants in the FII Group Litigation, EU:C:2012:707, para. 100; ECJ, 11 September 2014, Case C-47/12, Kronos International, EU:C:2014:2200, para. 53; ECJ, 10 April 2014, Case C-190/12, Emerging Markets Series of DFA Investment Trust Company, EU:C:2014:249, para. 31; ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para 42-43. 104 See ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 43, and also, e.g., ECJ, 13 November 2012, Case C-35/11, Test Claimants in the FII Group Litigation, EU:C:2012:707, para. 100. 105 See ECJ, 18 December 2007, Case C-101/05, A, EU:C:2007:804, para. 38; ECJ, 20 May 2008, Case C194/06, Orange European Smallcap Fund NV, EU:C:2008:289, para. 88. 106 See, e.g., ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, para. 170; ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 54 et seq. 107 ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, paras 171-172; ECJ, 18 December 2007, Case C-101/05, A, EU:C:2007:804, paras 28 et seq.; ECJ, 20 May 2008, Case C-194/06, Orange European Smallcap Fund NV, EU:C:2008:289, paras 89 et seq.; ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 56 et seq. 108 E.g., ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 56 et seq. 109 See ECJ, 18 December 2007, Case C-101/05, A, EU:C:2007:804, para. 36; ECJ, 20 May 2008, Case C194/06, Orange European Smallcap Fund NV, EU:C:2008:289, para. 89; ECJ, 10 February 2011, Joined Cases C436/08, C-437/08, Haribo and Salinen, EU:C:2009:17, paras 65 and 66; ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 64. 110 E.g., Council Directive 2011/16/EU of 15 February 2011, on administrative cooperation in the field of taxation and repealing Directive 77/799/EEC ([2011] OJ L 64, p. 1). 111 ECJ, 18 December 2007, Case C-101/05, A, EU:C:2007:804, para. 38; ECJ, 12 December 2006, Case C446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, paras 170-171; ECJ, 20 May 2008, Case C194/06, Orange European Smallcap Fund NV, EU:C:2008:289, paras 89-90. 112 See, e.g., ECJ, 28 October 2010, Case C-72/09, Établissements Rimbaud SA, EU:C:2010:645, para. 44; and ECJ, 19 July 2012, Case C-48/11, A Oy, EU:C:2012:485, para. 36. 102

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information provision along the lines of Article 26 OECD-MC) or any other agreement (e.g., a Tax Information Exchange Agreement or the OECD/Council of Europe Multilateral Convention on Exchange of Information).113 However, the Court has not yet explicitly addressed the situation where the third country does not, in fact, comply with its obligation to provide the relevant information. 22. Moreover, even if Article 63 TFEU applies in principle in a third-country situation, Article 64(1) TFEU “enshrines the power of the Member State, in its relations with non-member States, to apply restrictions on capital movements which come within the substantive scope of that provision, even though they contravene the principle of the free movement of capital laid down under Article 63(1) TFEU”.114 It is also clear from the Court’s settled case-law that tax legislation of Member States is capable of falling within Article 64(1) TFEU.115 a.

According to this “grandfathering clause”, the provisions of Article 63 shall be without prejudice to the application to third countries of any restrictions existed on 31 December 1993116 under national or Union law adopted in respect of the movement of capital to or from third countries involving direct investment (including in real estate),117 freedom of establishment, the provision of financial services118 or the admission of securities to capital markets. SECIL has given useful guidance on the type of capital movement in question, e.g., a “direct investment”) and also on whether the restriction “existed on 31 December 1993”), both of which must be satisfied for Article 64(1) TFEU to apply.

What SECIL has clarified is that (1) the notion of “direct investment” (i.e., the possibility to participate effectively in the management of a company or in its control) refers to the concrete investment made by the taxpayer and not which investments are intended to be addressed by the domestic rule (e.g., shareholdings of 98.72% and 28.64%, respectively, are sufficient);119 and that (2) the subsequent conclusion of directly effective international agreements (including Euro-Mediterranean Agreements) may alter the logic of domestic legislation so that, even though unchanged on its face, the restriction at issue had not “existed on 31 December 1993”.120

23. The path of analysis for third-country situations may therefore be summarised as follows:

113 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 64, referring to ECJ, 17 October 2013, Case C-181/12, Welte, EU:C:2013:662, para. 63. 114 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 86, referring to ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, para. 187, and ECJ, 24 May 2007, Case C-157/05, Holböck, EU:C:2007:297, para. 39. 115 See, e.g., ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, paras 174-196; ECJ, 24 May 2007, Case C-157/05, Holböck, EU:C:2007:297, paras 37-45; ECJ, 21 May 2015, Case C-560/13, Wagner-Raith, EU:C:2015:347, para. 41. 116 For analysis of this criterion see, e.g., ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, paras 189 et seq.; ECJ, 24 May 2007, Case C-157/05, Holböck, EU:C:2007:297, paras 39 et seq.; ECJ, 18 December 2007, Case C-101/05, A, EU:C:2007:804, paras 47 et seq.; ECJ, 10 April 2014, Case C-190/12, Emerging Markets Series of DFA Investment Trust Company, EU:C:2014:249; ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 81 et seq. In respect of restrictions existing under national law in Bulgaria, Estonia and Hungary, the relevant date shall be 31 December 1999. 117 ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, paras 174 et seq.; ECJ, 24 May 2007, Case C-157/05, Holböck, EU:C:2007:297, paras 32 et seq.; ECJ, 18 December 2007, Case C-101/05, A, EU:C:2007:804, paras 46 et seq.; ECJ, 20 May 2008, Case C-194/06, Orange European Smallcap Fund NV, EU:C:2008:289, paras 98 et seq.; ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 75 et seq. 118 See ECJ, 21 May 2015, Case C-560/13, Wagner-Raith, EU:C:2015:347 (concerning taxation of income derived from third-country investment funds). 119 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 79-80. 120 ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 89-91.

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Does the restrictive domestic measure cover only situations of definitive influence (e.g. branches,121 controlling shareholdings)? No

Yes No protection by the TFEU,123 but other (EU) international agreements may apply.

Exclusive application of the freedom of capital movement.122

Does the transaction factually facilitate an establishment (e.g. a controlling shareholding)? No

Yes

Freedom of capital movement applies irrespective of the concrete size of the shareholding 124 (unlike in internal market situations125) Is it an “old” restriction (i.e. one existing on 31 December 1993) regarding direct investment, financial services etc under Article 64(1) TFEU? No

Yes

Test for comparability of situations,126 justifications,127 proportionality128.

The domestic measure is “grandfathered”, i.e., may be applied even though it contravenes the principle of free movement of capital.129

121 ECJ, 6 November 2007, Case C-415/06, Stahlwerk Ergste Westig GmbH, EU:C:2007:651, paras 14 et seq. However, investments in partnerships may also be covered by Art. 63 TFEU; see for intra-EU situations, e.g., ECJ, 6 December 2007, Case C-298/05, Columbus Container Services BVBA & Co., EU:C:2007:754, and ECJ, 23 January 2014, Case C-164/12, DMC Beteiligungsgesellschaft mbH, ECLI:EU:C:2014:20, 122 See, e.g., ECJ, 17 September 2009, Case C-182/08, Glaxo Wellcome, EU:C:2009:559, paras 40 and 4552; ECJ, 10 February 2011, Joined Cases C-436/08, C-437/08, Haribo and Salinen, EU:C:2009:17, para. 35; ECJ, 13 November 2012, Case C-35/11, Test Claimants in the FII Group Litigation, EU:C:2012:707, para. 92; ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, para. 32. 123 See, e.g., ECJ, 12 September 2006, Case C-196/04, Cadbury Schweppes plc, EU:C:2006:544, paras 31 et seq.; ECJ, 13 March 2007, Case C-524/04, Test Claimants in the Thin Cap Group Litigation, EU:C:2007:161, paras 33, 34, 101 and 102; ECJ, 10 May 2007, Case C-492/04, Lasertec, EU:C:2007:273, paras 22 et seq. (however, noting in para. 23 that there was in fact a two thirds holding); ECJ, 10 May 2007, Case C-102/05, A and B, EU:C:2007:275, paras 25 et seq.; ECJ, 18 July 2007, Case C-231/05, Oy AA, EU:C:2007:439, paras 22 et seq.; ECJ, 6 November 2007, Case C-415/06, Stahlwerk Ergste Westig GmbH, EU:C:2007:651, paras 14 et seq. (concerning permanent establishments); ECJ, 10 February 2011, Joined Cases C-436/08, C-437/08, Haribo and Salinen, EU:C:2009:17, para. 35; ECJ, 19 July 2012, Case C-31/11, Scheunemann, EU:C:2012:481, para. 30 (however, noting in para. 31, that there was in fact a 100% holing); ECJ, 13 November 2012, Case C-35/11, Test Claimants in the FII Group Litigation, EU:C:2012:707, paras 91 and 98. 124 ECJ, 17 September 2009, Case C-182/08, Glaxo Wellcome, EU:C:2009:559, paras 49 et seq.; ECJ, 13 November 2012, Case C-35/11, Test Claimants in the FII Group Litigation, EU:C:2012:707, para. 99; ECJ, 3 October 2013, Case C‑282/12, Itelcar, EU:C:2013:629, paras 16 et seq.; ECJ, 10 April 2014, Case C-190/12, Emerging Markets Series of DFA Investment Trust Company, EU:C:2014:249, paras 27 et seq.; ECJ, 11 September 2014, Case C‑47/12, Kronos International Inc., EU:C:2014:2200, paras 37 et seq.; ECJ, 24 November 2016, Case C464/14, SECIL, EU:C:2016:896, para. 35. For a different position with regard to third-country situations see, however, ECJ, 26 June 2008, Case C-284/06, Burda GmbH, EU:C:2008:365, paras 72 et seq., and ECJ, 4 June 2009, Joined Cases C-439/07 and C-499/07, KBC Bank NV, EU:C:2009:339, paras 68 et seq.; also relying on the factual size of the holding, e.g., ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, paras 38 et seq. 125 See for the delimitation of the freedoms based on the factual size of a shareholding in internal market situations where potentially two freedoms apply; e.g., ECJ, 26 June 2008, Case C-284/06, Burda GmbH, EU:C:2008:365, paras 71 et seq.; ECJ, 18 June 2009, Case C-303/07, Aberdeen Property Fininvest Alpha Oy, EU:C:2009:377, paras 33 et seq.; ECJ, 21 January 2010, Case C-311/08, Société de Gestion Industrielle (SGI), EU:C:2010:26, paras 33 et seq. 126 See, e.g., ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, para. 170; ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 54 et seq. 127 ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, paras 171-172; ECJ, 18 December 2007, Case C-101/05, A, EU:C:2007:804, paras 28 et seq.; ECJ, 20 May 2008, Case C-194/06, Orange European Smallcap Fund NV, EU:C:2008:289, paras 89 et seq.; ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 56 et seq. 128 E.g., ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 56 et seq. 129 ECJ, 12 December 2006, Case C-446/04, Test Claimants in the FII Group Litigation, EU:C:2006:774, paras 174 et seq.; ECJ, 24 May 2007, Case C-157/05, Holböck, EU:C:2007:297, paras 32 et seq.; ECJ, 18 December 2007, Case C-101/05, A, EU:C:2007:804, paras 45 et seq.; ECJ, 20 May 2008, Case C-194/06, Orange European Smallcap Fund NV, EU:C:2008:289, paras 98 et seq.; ECJ, 21 May 2015, Case C-560/13, Wagner-Raith, EU:C:2015:347; ECJ, 24 November 2016, Case C-464/14, SECIL, EU:C:2016:896, paras 73 et seq.

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IV. The Statement 24. The Confédération Fiscale Européenne welcomes the precise and instructive judgment in SECIL. The judgment clarifies the application of Article 63 TFEU on free movement of capital to tax legislation which denies tax benefits to dividends originating in non-EU Member States, and demonstrates that Member States may not rely on the Article 64(1) TFEU “grandfathering clause” if the logic of their tax legislation changed after 31 December 1993,which change can also be brought about through the conclusion of directly applicable international agreements (e.g., Euro-Mediterranean Agreements). 25. The Confédération Fiscale Européenne appreciates the further clarification that provisions with direct effect in EU international agreements with third countries, such as the EuroMediterranean Agreements, can create economic rights that can be relied upon by taxpayers.

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Opinion Statement ECJ-TF 2/2017 on the judgment of the Court of Justice of the EU of 21 December 2016 in Joined Case C-20/15 P and C-21/15 P, World Duty Free Group and Others, concerning the requirements of selective aid in the sense of Art. 107 TFEU Prepared by the CFE ECJ Task Force Submitted to the European Institutions in 2017

The CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax profession in Europe. Our members are 26 professional organisations from 21 European countries (18 EU member states) with more than 100,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to assure the quality of tax services provided by tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law in Europe. The CFE is registered in the EU Transparency Register (no. 3543183647‐05). —1—

This is an Opinion Statement prepared by the CFE ECJ Task Force1 on Joined Cases C-20/15 P and C-21/15 P, World Duty Free Group (formerly Autogrill España); Banco Santander and Santusa Holding, in which the Grand Chamber of the Court of Justice of the European Union (ECJ) delivered its judgment on 21 December 2016,2 following judgments of the General Court of the European Union of 7 November 2014 in Autogrill España3 and of 7 November 2014 in Banco Santander and Santusa4 and the Opinion of Advocate General Wathelet of 28 July 2016.5 The case concerned Spanish tax rules which allowed Spanish enterprises tax amortization of financial goodwill arising from the acquisition of shareholdings in foreign companies, but not fromthe acquisition of shareholdings in domestic companies. The Grand Chamber reversed the judgments of the General Court and clarified the meaning of selective aid as the term is used in Art. 107 TFEU. It held that an aid can be regarded as selective if the national tax measure deviates from the reference framework: it is not necessary to show that the national tax measure actually favours a specific group of undertakings or the production of specific goods. I.

Background and Issues

The Spanish corporate tax law at issue provided: If an undertaking taxable in Spain acquires a shareholding in a foreign company equal to at least 5% of that company’s capital and retains that shareholding for an uninterrupted period of at least one year, the goodwill resulting from that shareholding may be amortized. Such amortization is not possible if the undertaking acquires a shareholding in a domestic company.

The Commission brought infringement proceedings against Spain and ultimately delivered two decisions. By its first decision, it declared the Spanish provisions incompatible with the internal market insofar as they allowed amortization of goodwill resulting from acquisitions of shareholdings in foreign undertakings located in the EU.6 By its second decision, the Commission held the Spanish provisions incompatible with the internal market insofar as they were applied to shareholdings in foreign undertakings located outside the EU.7 In both decisions the Commission ordered Spain to recover the aid granted under the preferential amortization regime.

Autogrill España, now World Duty Free Group, and Banco Santander and Santusa Holding each brought an action against the Commission’s decisions seeking annulment of the decisions.

In two judgments, the General Court decided – on the basis of largely identical grounds – in favour of the applicants and annulled several parts of the Commission’s decisions. With regard to the question of whether a tax regime can be regarded as selective the General Court applied its three step approach. As a first step, it is necessary to identify the common or normal tax regime (reference framework) in the Member State concerned. The second step, is to examine whether the relevant provision derogates from the reference framework by differentiating between economic operators who, in the light of the objective assigned to the reference framework, are each in a comparable factual and legal situation. The third

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 Raingéard 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 EU:C:2016:981. 3 General Court, 7 November 2014, T-219/10, Autogrill España, EU:T:2014:939. 4 General Court, 7 November 2014, T-399/11, Banco Santander and Santusa, EU:T:2014:938. 5 EU:C:2016:624. 6 Commission Decision 2011/5/EC of 28 October 2009. 7 Commission Decision 2011/282/EU of 12 January 2011.

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step is to analyse whether the measure can be justified by the nature or general structure of the system of which it forms part.8 However, the General Court added an additional requirement concerning the second step. It held that a derogation from the common or normal tax regime does not automatically make a tax measure selective. For the General Court the condition of selectivity is only satisfied if a category of undertakings which are favoured by the tax measure at issue can be identified. As a result, a tax measure which constitutes a derogation from the common or normal tax regime but which is general in nature and is potentially available to all undertakings cannot be regarded as selective aid.9 5.

The General Court found that the Spanish tax rules applied to all shareholdings of at least 5% in foreign companies which are held for an uninterrupted period of at least one year. As a consequence, the Spanish tax rules were not aimed at favouring any particular category of undertakings or productions. According to the General Court, a tax measure which is applied regardless of the nature of the activity of the undertaking is not, in principle, selective.10

The Commission appealed against the two judgments arguing that the General Court erred in law in the interpretation of the selectivity condition in Article 107(1) TFEU. The Court of Justice joined the cases.

7. On 28 July 2016, Advocate General Wathelet delivered his opinion. He argued in favour of the Commission and proposed setting aside both judgments of the General Court. In his opinion the selectivity of a tax measure was not dependent on the identification of a specific sector or category of undertakings which benefits from the measure.11 According to him, a tax measure which derogates from the general tax regime and differentiates between undertakings performing similar operations is selective, unless the differentiation created by the measure is justified by the nature or general scheme of the system of which it is a part.12 A tax measure is selective in nature where undertakings benefiting from the measure enjoy a tax advantage to which they would not be entitled under the normal tax regime and which cannot be claimed by undertakings performing similar operations because it does not apply to all economic operators.13 The essential question to be asked is whether a measure distinguishes between undertakings which are in a comparable situation.14 With regard to comparability the Advocate General referred to the judgment of the General Court stating that undertakings acquiring shareholdings in a foreign company are in a similar situation to undertakings acquiring shareholdings in a company established in Spain.15 8.

As an additional argument against the view of the General Court the Advocate General explained that seeking to identify undertakings with specific characteristics would be an

8 See General Court, 7 November 2014, T-219/10, Autogrill España, EU:T:2014:939 para.33 and General Court, 7 November 2014, T-399/11, Banco Santander and Santusa, EU:T:2014:938 para.37. 9 See General Court, 7 November 2014, T-219/10, Autogrill España, EU:T:2014:939 paras 44 and 45 and General Court, 7 November 2014, T-399/11, Banco Santander and Santusa, EU:T:2014:938 paras 48 and 49. 10 See General Court, 7 November 2014, T-219/10, Autogrill España, EU:T:2014:939 para.57 and General Court, 7 November 2014, T-399/11, Banco Santander and Santusa, EU:T:2014:938 para.61.. 11 Opinion of AG Wathelet, 29 July 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:624 para.86. 12 Opinion of AG Wathelet, 29 July 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:624 para.91. 13 Opinion of AG Wathelet, 29 July 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:624 para.85. 14 Opinion of AG Wathelet, 29 July 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:624 para.85. 15 Opinion of AG Wathelet, 29 July 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:624 para 77.

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extremely imprecise exercise that would create legal uncertainty.16 While in most situations it will be possible to identify a specific sector which benefits from the tax measure such identification will be more difficult with regard to tax benefits which are not sectorspecific. 9.

The Advocate General acknowledged that the Court of Justice held in the Gibraltar judgment that a tax system must, in order to be capable of being recognized as conferring selective advantages, “be such as to characterise the recipient undertakings, by virtue of the properties which are specific to them, as a privileged category.”17 AG Wathelet came to the conclusion that this finding was due to the particular circumstances of the case. In Gibraltar, the tax advantage for offshore companies was not granted through a derogation from the normal tax regime but rather from a general tax system that in fact benefitted such companies. In those particular circumstances, even a general tax regime can be regarded as selective if it is possible to identify a category of undertakings favoured by it.18 On the other hand, in situations where a tax measure derogates from the general scheme the additional requirement of identifying a specific category of undertakings which benefit from the tax advantage is not necessary.

10. In the case at hand, he concluded that the benefit of being able to amortize goodwill does not apply to all economic operators. The measure favours only economic operators which satisfy the legislative conditions laid down, that is to say undertakings taxable in Spain which acquire shareholdings in a foreign company. And so it discriminates against economic operators which carry out similar operations but have acquired shareholding in a company established in Spain.19 II.

The Judgment of the Court of Justice

11. The Court of Justice addressed two issues, namely the notion of selectivity and the concept of export aid. The two issues are closely connected. However, in this Opinion Statement we only focus on the first: the notion of selectivity when considering the application of the State aid rules to tax matters. The Court followed the reasoning of its Advocate General and ruled that selectivity does not depend on whether a specific group of undertakings can be identified which benefits from the tax advantage. According to the Court, a measure must be considered selective if it derogates from the general scheme and cannot be justified by the nature or overall structure of the system.20 As a consequence, the Court of Justice set aside the judgments of the General Court. It referred the case back to the General Court to examine whether the undertakings that acquired Spanish shareholdings were in a factual and legal situation comparable to that of undertakings that acquired foreign shareholdings. 12. According to the Court of Justice, the General Court erred in law by requiring the Commission to identify certain specific features that are characteristic of and common to the

16 Opinion of AG Wathelet, 29 July 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:624 para.84. 17 See ECJ, 15 November 2011, Case C-106/09 P and C-107/09 P, Commission and Spain v. Government of Gibraltar and United Kingdom, EU:C:2011:732 para. 104. 18 Opinion of AG Wathelet, 29 July 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:624 para. 102. 19 Opinion of AG Wathelet, 29 July 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:624 para. 92. 20 ECJ, 21 December 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:981 para. 60.

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undertakings that are the recipients of the tax advantage by which they can be distinguished from those undertakings that are excluded from the advantage.21 The Court of Justice stated that the condition of selectivity is satisfied where the Commission is able to demonstrate that the tax measure constitutes a derogation from the ordinary or normal tax system applicable in the Member State concerned, and thereby actually introducing differences in the treatment of comparable22 operators.23 The fact that the number of undertakings able to claim entitlement under a national measure is very large, or that those undertakings belong to various economic sectors, is not sufficient to call into question the selective nature of that measure and so its classification as State aid.24 13 Following the approach of AG Wathelet, the Court of Justice reaffirmed its settled case law on selectivity in tax matters as being separate from the approach in the specific context of de facto selectivity of a measure of general application (i.e., the Gibraltar case). III. Comments 14. WDFG is another cornerstone in the increasingly important area of State aid control in direct taxation. The Courtâ&#x20AC;&#x2122;s judgment sets out a precise and instructive analysis of the notion of selectivity and this context. It follows the line of reasoning set out in Commission v. Germany where the Court identified a national measure as being selective wherethe grant of a tax advantage consisting in the transfer of hidden reserves was conditional on the location of the asset sold.25 While the Court did not have to develop a specific analysis of the reference framework, it clearly ruled that domestic measures can be selective even where they do not identify the benefitting operators ex ante. However, this judgment could not address a number of pressing issues for the application of State aid in the direct tax area. 15. The identification of the reference system is left for the General Court to define in the light of the criteria provided by the Court. The Commission indicated that the reference system would be the general Spanish system for the taxation of companies and, more specifically, the rules relating to the tax treatment of financial goodwill within that system.26 This shows the difficulty in identifying the level at which the reference framework is to be determined. In our view, in this case approaches to the reference framework could range from a broad approach to a narrow one, from the general corporate tax system, to the general amortization rules, to the specific tax amortization rules for financial goodwill, or even more specifically for foreign shareholding acquisitions. Furthermore, it remains to be determined whether such criteria operate bundled together, or separately. 16. The General Court had limited the scope of Article 107 TFEU by requiring the Commission to prove ex ante that the tax advantage benefits a specific group of undertakings or the production of specific goods. This view was also taken by Advocate General Kokott in her

21 ECJ, 21 December 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:981 para. 78. 22 In para. 63 the Court of Justice reports the position held by the Commission, according to which the companies buying shareholdings in foreign companies are in a comparable situation compared to companies acquiring shareholdings in companies established outside Spain in light of the objective pursued by the reference system for the taxation of companies and, more specifically, the rules relating to the tax treatment of financial goodwill within that tax system. 23 ECJ, 21 December 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:981 para 67. 24 ECJ, 21 December 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:981 para. 80. 25 ECJ, 19 September 2000, C-156/98, Commission v. Germany, EU:C:2000:467. 26 ECJ, 21 December 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:981 para 77.

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opinion in Finanzamt Linz.27 Those attempts to limit to the selectivity criterion were perhaps driven by the uncertainty created by the Gibraltar judgment28 and the wording of Article 107(1) TFEU (“certain undertakings or the production of certain goods”), as well as concerns as to the constitutional balance of powers between the Member States and the European Union.29 17. By contrast, the judgment of the Court of Justice does not endorse this strict approach to the application of State aid provisions. Tax advantages – even of a general nature – which are available for everybody who fulfils the requirements of the respective provision can now qualify as State aid under Article 107(1) TFEU where they derogate from the general or normal tax scheme. Advocate General Wathelet criticises the reasoning of the General Court as “excessively formalistic” and “restrictive”.30 18. Even without regard to the open issue of State aid challenges concerning particular “tax rulings”, all Member States apply different tax rules for individuals and corporations; many of them grant specific direct tax benefits for e.g. R&D, for the protection of the environment, for small enterprises, for ailing companies or for start-ups. It remains still to be decided which of these tax benefits are to be seen as State aid, how the three step approach for selectivity can be applied and whether the other criteria like effect on trade and on competition will play a more important role in the future. For many of these issues, the Commission has set out its views in the Notice of 2016.31 19. Moreover, WDFG reopens the debate as to the relationship between State aid rules and the fundamental freedoms because the solution suggested by AG Kokott in her opinion in Finanzamt Linz can now no longer be applied.32 The Court in Aer Lingus applied both rules simultaneously, but also noted that reimbursement under the fundamental freedoms must not give rise to new aid incompatible with the TFEU.33 20. Finally, given the risk of recovery Member States are well advised to notify potential aid accordance with Article 108(1) TFEU. IV. The Statement 21. The Confédération Fiscale Européenne welcomes the clarification of the notion of selectivity in the World Duty Free Group judgment. It is now clear that a tax measure which derogates from the normal tax scheme can constitute state aid even if the tax measure appears to be general in nature and does not lead to a benefit for a specific predefined group of undertakings. However, given the variety of tax rules in each Member State, further clarification on the determination of the reference framework, the comparability test and the scope of potential justification will be necessary. 27

Opinion of AG Kokott, 16 April 2015, Case C-66/14, Finanzamt Linz, ECLI:EU:C:2015:242 para. 105 et seq. The Court outlined at length the difference between this case and the Gibraltar case. Gibraltar had created a general rule which only de facto favoured certain undertakings. Here the de facto benefit for certain undertakings made the system selective. However, where a provision deviates from the reference framework it is not necessary to show that ‘certain undertakings’ or the ‘production of certain goods’ are favoured, see ECJ, 21 December 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:981 para. 72 et seq. 29 Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, ECLI:EU:C:2015:661 para 85. 30 Opinion of AG Wathelet, 29 July 2016, Joined Case C-20/15 P and C-21/15 P, World Duty Free Group, Banco Santander and Santusa Holding, EU:C:2016:624 para. 85. 31 See the Commission Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union, [2016] OJ C 262/1. 32 According to the opinion of AG Kokott, the fundamental freedoms will apply to all forms of discrimination unless a subsidy specifically targets ‘certain undertakings’ or ‘the production of certain goods’ in which case the State aid rules would have priority. 33 ECJ, 21 December 2016, Joined Case C-164/15 P and C-165/15 P, Commission v. Aer Lingus, EU:C:2016:990 para. 123. 28

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Opinion Statement ECJ-TF 3/2017

on the judgment of the Court of Justice of the EU of 16 May 2017 in the Case C-682/15, Berlioz Investment Fund SA, concerning the right to judicial review under Article 47 EU Charter of Fundamental Rights in cases of cross-border mutual assistance in tax matters Prepared by the CFE ECJ Task Force Submitted to the European Institutions in November 2017

The CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax profession in Europe. Our members are 28 professional organisations from 23 European countries (18 EU member states) with more than 100,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to assure the quality of tax services provided by tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law in Europe. The CFE is registered in the EU Transparency Register (no. 3543183647‐05). —1—

This is an Opinion Statement prepared by the CFE ECJ Task Force1 on the Case C-682/15, Berlioz Investment Fund SA, in which the Grand Chamber of the Court of Justice of the European Union (ECJ) delivered its judgment on 16 May 2017,2 following the Opinion of Advocate General Wathelet of 10 January 2017.3 The case concerned the levying of tax penalties for the partial refusal by a third party to provide the Luxembourg tax authorities with information requested, by way of of mutual assistance under Directive 2011/16, by the French tax authorities. Having clarified that when exchanging information by way of mutual assistance under an EU Directive, EU Member States are implementing European Union Law, the Grand Chamber confirmed the right to judicial review in connection with the levying of penalties and acknowledged Berlioz's legal standing to challenge the foreseeable relevance of information which one tax authority asks another to exchange by way of mutual assistance. When reviewing the legality of the request in this context, the judiciary will ascertain whether manifestly irrelevant information is being requested, without necessarily informing the taxpayer of the detail. I.

Background and Issues

1. This case addresses the need to reconcile effective cross-border tax exchange of information with the protection of the fundamental rights of [relevant] persons in tax matters. 2. EU Directive 2011/16 allows for mutual assistance by way of cross-border exchange between tax authorities of "foreseeably relevant" (see below) information relating to tax matters. Such information is covered by an obligation of secrecy. 3. The Directive obliges the requested State to gather and provide the relevant information. However, the requested State may refuse, inter alia, when the requesting State4 has not exhausted its usual sources of information. Requests are to be conveyed through the standard form, which includes among other things the identity of the person under examination or investigation and the tax purpose for which the information is sought. 4. Implementing Directive 2011/16, has largely reformed the Luxembourg tax system's approach to mutual assistance. In particular, the reform allows the Luxembourg tax authorities to exchange with other tax authorities information which is foreseeably relevant to any tax matter connected with the interpretation and application of domestic or treaty provisions. The condition for Luxembourg tax authorities to supply information is that the request states the legal basis, identifies the requesting authority and contains the information prescribed by relevant treaties and domestic laws. The holder of information is then obliged, without any right of appeal, to provide the Luxembourg tax authorities with the requested information in full, together with the documents on which the said information is based, subject to a penalty of up to Eur 250 000. Whilst not being entitled to challenge the legality of the request itself, the holder of the information may nevertheless apply to the judiciary to review the penalty.5.

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:2017:373. 3 ECLI:EU:C:2017:2. 4 See Art. 17(1) of the Directive. 5.This limitation of jurisdiction formed the basis for the third question submitted by the Luxembourg court to the ECJ, and thus the core reason for why Luxembourg’s law could be said to violate Article 47 of the Charter.

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5. Article 47 EU Charter of Fundamental Rights guarantees the right to an effective remedy and to a fair trial in reasonable time before an independent and impartial tribunal established by law. 6. In Berlioz the French tax authorities requested the Luxembourg tax authorities to gather information connected with the entitlement of Cofima – a company resident in France – to obtain an exemption from French withholding taxation a payment of dividends. Accordingly the Luxembourg tax authorities asked Berlioz, – a Luxembourg resident investment fund and a shareholder of Cofima – to provide such information. In particular, the request concerned the place of effective management, employees (including their identification and residence in Luxembourg), the existence of contracts Berlioz and Cofima, Berlioz's shareholdings in other companies, and Cofima’s securities recorded as assets of Berlioz, as well as the names and addresses of Berlioz's members, the amount of capital held by each member and the percentage of share capital held. 7. Berlioz provided all such information, except that it refused to provide the names and addresses of its members, the amount of capital held by each of them and the respective percentage of share capital., 8. After such refusal, the Luxembourg tax authorities imposed a tax penalty, against which Berlioz brought an action before the Tribunal Administratif, in order to verify whether the request for information was well founded. The Tribunal Administratif reduced the fine on grounds of proportionality, but declined to review the legality of the information request itself and the exclusion of a right to judicial review of the request. Berlioz appealed to the Cour Administrative, arguing that this approach constituted a breach of the right to an effective judicial remedy under Article 6 (1) ECHR. By reference to Article 47 EU Charter, the Cour Administrative referred six questions to the Court of Justice of the European Union, under the preliminary ruling procedure. 9. The preliminary questions focus on whether: (1) when imposing a penalty for failing to provide information, Luxembourg implements EU law in the sense of Article 51(1) EU Charter ; (2) Article 47 EU Charter entitles the holder of information, on whom a penalty has been applied for the failure to provide it when requested, to challenge the legality of the domestic order that requested its provision; (3) Article 47 EU Charter gives the national court unlimited jurisdiction to review the legality of that order; (4) the effect of Articles 1(1) and 5 of EU Directive 2011/16 is that foreseeable relevance is a condition for the information order to the holder of the information to be legal; (5) Articles 1(1) and 5 of EU Directive 2011/16 and Article 47 EU Charter prevent the requested authority from examinng the validity of the request for information; and (6) Article 47(2) EU Charter requires the national court to have access to the request for information between the tax authorities and to communicate it to (here) Berlioz. 10. The Advocate General proposed that the Court should consider Luxembourg's rules to implement European Union law in the sense indicated by Article 51(1) EU Charter. He suggested that accordingly Article 47 EU Charter allows the holder of information to challenge the legality of the order, by having the national court verify the legality of the order with a view to determining whether the request was foreseeably relevant. II.

The Judgment of the Court of Justice

11. The Court of Justice followed the reasoning of its Advocate General and supported a preexisting line of reasoning that reconciles the need to protect fundamental rights of persons with securing effective cross-border mutual assistance in tax matters.

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12. Extending its reasoning in Åkerberg Fransson6 to the legal field of tax information exchange, the Court held the domestic provision constituting the legal basis for the penalty constituted implementation of EU Directive 2011/16, on the basis that it was intended to enable the Luxembourg authority to comply with its obligations under that Directive.7 Accordingly, the Court acknowledged that this case falls within the scope the EU Charter by virtue of its Article 51 (1). 13. Furthermore, it applied its settled case law8 to acknowledge that the general principle of protection against arbitrary or disproportionate interventions by public authorities in the private sphere is a right guaranteed by EU law, thereby enabling the application of Article 47 EU Charter to require judicial review in connection with the levying of a tax penalty. The Court distinguished Berlioz from Sabou,9 as the Directive itself does not confer rights on persons, but only covers mutual assistance between tax authorities. It nevertheless went on to distinguish the facts of that case from the situation in Berlioz on the grounds that the relevant person here was the addressee of an information order and subject to a penalty on that basis, and not merely the subject of an information request which had not yet had other legal consequences.10 In so doing, the Court pre-empted any criticism that a mere information holder was protected in a situation where the same protection would be denied to the taxpayer whose affairs were under investigation. 14. After affirming that foreseeable relevance was a necessary characteristic of information for it to be requested, and that the requesting authority (in this case, France) has in principle the discretion to assess this,11 the Court proceeded to interpret this requirement. In doing so, it acknowledged the value of the OECD Model Convention and defines foreseeable relevance by reference to recital 9 of Directive 2011/16. According to the Court, the standard aims to enable the requesting authority to “obtain any information that seems to it to be justified for the purpose of its investigation, while not authorising it manifestly to exceed the parameters of that investigation nor to place an excessive burden on the requested authority”.12 15. In this context, the Court held that the requested authority must be put in a position to verify that the requesting authority has not exceeded the parameters of its investigation, and is not confined merely to a formal verification of regularity, but can have regard to the substance of the matter under investigation.13 16. Importantly however, both the requested authority and the national court in the requested authority's territory are limited in their substantive review to ascertaining whether the information request is “manifestly devoid of any foreseeable relevance, having regard to the taxpayer, the information holder and the tax purpose pursued by the request”.14 17. The Court added that the national court must have full access to the information request if it is to carry out an effective judicial review under Article 47 EU Charter,15 i.e. to ascertain whether the information request manifestly lacks foreseeable relevance. By contrast, the information request generally need not be disclosed to the information holder or subject of investigation, but can remain secret in accordance with Article 16 of Directive 2011/16.16 6

ECJ, 26 February 2013, C-617/10, Åkerberg Fransson, EU:C:2013:105 para. 28. ECJ, 16 May 2017, C-682/15, Berlioz, EU:C:2017:373, para. 41. 8 See ECJ, 16 May 2017, C-682/15, Berlioz, EU:C:2017:373 para. 51 and the case law quoted therein. 9 ECJ, 22. October 2013, C-276/12, Sabou, EU:C:2013:678 para. 36. 10 ECJ, 16 May 2017, C-682/15, Berlioz, EU:C:2017:373 para. 58. 11 ECJ, 16 May 2017, C-682/15, Berlioz, EU:C:2017:373 paras. 70-71 and 79. 12 ECJ, 16 May 2017, C-682/15, Berlioz, EU:C:2017:373 para. 68. 13 ECJ, 16 May 2017, C-682/15, Berlioz, EU:C:2017:373 para. 82. 14 ECJ, 16 May 2017, C-682/15, Berlioz, EU:C:2017:373 paras 81 and 85-86. 15 ECJ, 16 May 2017, C-682/15, Berlioz, EU:C:2017:373 para. 92. 16 ECJ, 16 May 2017, C-682/15, Berlioz, EU:C:2017:373 para. 101. 7

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III. Comments 18. The Court’s judgment marks another important step forward in the protection of taxpayers’ rights in the framework of cross-border tax disputes, which is particularly timely given the fast-increasing cross-border sharing of information by tax authorities. 19. In particular, the judgment provided three important results. First, EU fundamental rights, as reflected in the Charter, apply to the administration of taxation in the same way as to other fields, under the conditions set by Article 51 of the Charter. Second, companies, as well as individuals, are entitled to judicial review of the imposition of penalties in appropriate cross-border situations. Third, it reconciled the need to fight abusive and fraudulent practices with access to an effective legal remedy by limiting the circumstances and scope of judicial review to cases of disproportionate exercises of state power. The Court’s interpretation of the concept of “foreseeable relevance” is highly significant, as it will from now on bind EU Member States when exchanging information based on EU Directives. First, the Court made it clear that the requesting authority has discretion to decide what information they require in order to conduct their investigations under domestic tax law. Secondly, it also clarifiedthat the requested authority nevertheless has the power to review the requesting authority’s exercise of that discretion on substantive grounds. Thirdly, it , resolved that tension by providing the standard of such review: the requested authority may deny providing information only where a request is “devoid of any foreseeable relevance”.17 20. This limit on the requesting authority’s discretion in determining the content of its request obviously aims at reconciling the interests of taxpayers, third parties, and the tax authorities and should therefore have a broader application. It is to be hoped that national courts (that do not already legitimately apply a higher standard of protection to taxpayers18) will follow that approach in cases of information exchanged on the basis of similar clauses contained in bilateral treaties of EU Member States and perhaps also by courts of non-EU States when interpreting the treaties with EU countries and beyond. 21. The standard set for the requested State to assess foreseeable relevance reflects the views already held by scholars. It also interacts harmoniously with the object and purpose of the limit established by the OECD Model Convention in respect of cross-border mutual assistance on request. One may therefore reasonably expect that going forward EU tax authorities will have to meet this standard when making requests, as requested tax authorities of EU Member States will be allowed to treat as inadequate requests that do not meet it. 22. For the first time the Court has interpreted the expression “foreseeable relevance” and, in doing so, it uses the concept of “manifest irrelevance” of the information requested. This is used to ensure a certain threshold of protection of “relevant persons’” against arbitrary exercise of power in cross-border mutual assistance cases in direct tax matters. However, 17 ECJ, 16 May 2017, C-682/15, Berlioz, EU:C:2017:373 para. 78. It is notable that the Court repeatedly, but not consistently, uses the adverb “manifestly” to seemingly qualify the threshold for denying the exchange of information, especially when referring to the domestic court’s review of the administration’s decision (see e.g. paras 86, 89, 92; see also para. 81 for its use with respect to the requested authority). In other paragraphs that qualifier is not used. This could be read to mean that there is a higher threshold for a court to deny the exchange of information than it is for the requested authority, since it is possible for relevance to be entirely absent without this being “manifest”, i.e. obvious – a reading that may be particularly likely in the German language version of the judgment, where it refers to “völlig” (i.e. devoid of any/totally) and “offenkundig” (i.e. manifest) respectively. However, in light of the Court’s explicit holding that “the limits that apply in respect of the requested authority’s review are equally applicable to reviews carried out by the courts” (para. 85) it is not convincing to deduce the existence of different standards of review from the slightly different wording. This notwithstanding, the precise nature of the standard is not entirely clear. 18 Such higher standards would be generally permissible under Art. 17 of Directive 2011/16, according to which a requested State is not required to collect information that it would be unable to collect under its domestic law.

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it is doubtful whether this threshold can effectively secure the protection of the relevant persons’ rights. We also wonder whether this offers an effective protection against fishing expeditions or requests for information that is unlikely to be relevant to the tax affairs of a given taxpayer19. 23. Given this standard, it seems appropriate (from the perspective of securing an effective legal remedy) that an assessment of any manifest irrelevance of a request for information is to be carried out by the judiciary of the requested State. This is especially true given that such Court will have the possibility to verify the actual merits of the request for information, unlike the person subject to the information request, who is generally only entitled to see the standard form (it appears that there are limited circumstances where that person may be entitled to more information, but the Court deals with this very briefly and the circumstances are not wholly clear)20.

IV. The Statement 17. The Confédération Fiscale Européenne welcomes this judgment in that it marks a new page in the protection of taxpayers’ rights. In line with the principle wherever there is a right, there is a remedy, it shows that European Union law may reconcile the interest in securing an effective protection of tax collection with that in respecting fundamental rights. As mentioned above, we wonder whether the threshold of “manifest irrelevance” can effectively secure the protection of the relevant persons’ rights. We also wonder whether this offers an effective protection against fishing expeditions or requests for information that is unlikely to be relevant to the tax affairs of a given taxpayer 21. 18. One feature of this judgment is the very limited input that the person subject to the information request in relation to the requested state’s response to the request for mutual assistance. For this reason, it is clear that that person should aim to engage with the requesting State in order to influence the information which is requested, rather than waiting until the cross-border request has been made.

See Recital 9 of the Directive. ECJ, 16 May 2017, C-682/15, Berlioz, EU:C:2017:373 para. 100. 21 See Recital 9 of the Directive. 20

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Opinion Statement ECJ-TF 4/2017 on the decision of 9 February 2017 of the Court of Justice of the EU in Case C-283/15, X (“pro-rata personal deductions”), concerning personal and family tax benefits in multi-state situations Prepared by the CFE ECJ Task Force Submitted to the European Institutions in 2017

The CFE (Confédération Fiscale Européenne) is the umbrella organisation representing the tax profession in Europe. Our members are 26 professional organisations from 21 European countries (18 EU member states) with more than 100,000 individual members. Our functions are to safeguard the professional interests of tax advisers, to assure the quality of tax services provided by tax advisers, to exchange information about national tax laws and professional law and to contribute to the coordination of tax law in Europe. The CFE is registered in the EU Transparency Register (no. 3543183647‐05).

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This Opinion Statement has been prepared by the CFE ECJ Task Force1. It concerns Case C283/15, X, in which the First Chamber of the Court of Justice of the European Union (ECJ) delivered its judgment on 9 February 20172. In general terms, the Court followed the Opinion of Advocate General Wathelet of 7 September 2016.3 The case concerned tax legislation permitting the deduction of ‘negative income’ relating to a dwelling. The issue was whether the fundamental freedoms must be interpreted as precluding a Member State from refusing the benefit of that deduction to a self-employed non-resident in circumstances where that person receives 60% of his total income within that Member State, and 40% within a non-Member State. Therefore, he does not receive income that enables him to qualify for an equivalent right to deduct, within the Member State where his dwelling is located. Having recognised that the freedom of establishment applies to the case, the First Chamber confirmed the right of that person to a deduction of ‘negative income’ relating to his dwelling. Subsequently, it held that a self-employed person can claim an equivalent right of deduction in any Member State of activity within which that person receives income, in proportion to the share of that income received within each Member State of activity. A ‘Member State of activity’ is any Member State that has the power to tax such income from the activities of a non-resident as is received within its territory, irrespective of where the activities are actually performed. Finally, the Court stated that the fact that the non-resident taxpayer concerned receives part of his taxable income within a third country rather than a Member State, is not relevant. I.

Background and Issues

The Court’s decision in X4 adds another judgment to the extensive body of case-law on the Schumacker doctrine, which, however, has not dealt with the situation in which a taxpayer earns income in several source States. By expanding that doctrine to multi-state situations, the judgment in X obliges all source Member States to grant personal and family benefits on a pro-rata basis in the absence of sufficient taxable income in the taxpayer’s residence State.

The case concerned the year 2007: X is a non-resident national of the Netherlands who owns a dwelling located in Spain, his only State of residence.5 In the taxable year at issue he derived income from professional activities from two companies in which he holds majority shareholdings, one of which is established in the Netherlands and the other in Switzerland. The income from the Dutch source represented 60% of his total taxable income, and the income from the Swiss source 40%. In accordance with the applicable bilateral tax conventions, the income from the Swiss source was taxed in Switzerland and the income from the Netherlands source in the Netherlands.6 He did not receive any income

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:2017:102. 3 ECLI:EU:C:2016:638. 4 The ECJ Task Force notes the increasing number of “X” or similarly anonymised cases, with two – C-283/15 and C-317/15 – even decided in the same month. This makes it hard to identify the specific case and for this reason we suggest also to refer to the technical matter it addresses, e.g., “pro-rata personal deductions” in the present case. 5 NL: ECJ, 9 Feb. 2017, C-283/15, X, ECLI:EU:C:2017:102, para. 10, ECJ Case Law IBFD. 6 X (C-283/15), para. 12.

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taxable in Spain, in 2007 or in the four following years, after which X ceased to be resident in Spain.7 3.

Under the Dutch Wet inkomstenbelasting 2001 (Personal Income Tax Act 2001; PITA 2001), taxable income for residents does not only include income from work, but also notional income from a primary dwelling that is owned by the taxpayer. The gross income from residence is calculated as a percentage of the value of the dwelling. From that gross notional income expenses may be deducted, including interest and costs arising from debts incurred in order to acquire the dwelling. If the amount of those expenses exceeds the value of the “advantages”, the taxpayer is in a situation of so-called “negative income”. Under Dutch rules, this notional income can only be negative or zero. This can be off-set against other income or will increase losses available for carry forward. Generally, nonresidents do not have this negative notional income.

As regards the fundamental freedoms in such a situation, the Dutch courts acknowledge the ECJ’s case law that “negative income” relating to immovable property located in the Member State of which a taxpayer is a resident forms a tax advantage linked to his personal situation, which is relevant to the assessment of his overall ability to pay.8

Therefore, in the current case, the Hoge Raad der Nederlanden (Supreme Court of the Netherlands) had doubts as to the scope of the Schumacker case-law,9 because X did not receive all, or almost all, of his family income in a single Member State, other than that of his residence, which has the power to tax that income and which could, therefore, take account of his personal and family circumstances. The Court’s decisions in Gschwind,10 de Groot11 and Commission v. Estonia12 can be read, in the opinion of the referring Hoge Raad der Nederlanden, as meaning that the Member State where an activity is carried out must always take account of the personal and family circumstances of the person concerned if the Member State of residence is not in a position to do so.13

The Supreme Court’s preliminary questions were: “(1) Must the provisions of the FEU Treaty relating to free movement be interpreted as precluding national legislation under which a European Union citizen who resides in Spain and whose work-related income is taxed in the amount of approximately 60% by the Netherlands and approximately 40% by Switzerland may not deduct from his workrelated income, which is taxed in the Netherlands, his negative income arising from his dwelling in Spain, which is owned by him for his personal use, even if he receives such a low income in Spain, as his State of residence, that the abovementioned negative income could not have led to tax relief in the tax year in question in the State of residence? (2) (a) If Question 1 is answered in the affirmative: must every Member State in which the European Union citizen earns part of his income take into account the full amount of the abovementioned negative income? Or does that obligation apply to only one of the States concerned in which work is carried out, and if so, to which? Or must each of 7

X (C-283/15), para. 11. Based on, e.g., LU: ECJ, 18 July 2007, C‑182/06, État du Grand Duchy of Luxemburg v Hans Ulrich Lakebrink and Katrin Peters-Lakebrink, EU:C:2007:452, ECJ Case Law IBFD; NL: ECJ, 16 Oct. 2008, C-527/06, R. H. H. Renneberg v Staatssecretaris van Financiën, EU:C:2008:566, paras 64-71, ECJ Case Law IBFD; and NL: ECJ, 18 June 2015, C-9/14, Staatssecretaris van Financiën v D.G. Kieback, EU:C:2015:406, para. 19, ECJ Case Law IBFD; see also X (C-283/15), para. 26. 9 Starting with DE: ECJ, 14 Feb. 1995, C-279/93, Finanzamt Köln-Altstadt v Roland Schumacker, EU:C:1995:31, ECJ Case Law IBFD. 10 DE: ECJ, 14 Sept. 1999, C-391/97, Frans Gschwind v Finanzamt Aachen-Außenstadt, EU:C:1999:409, ECJ Case Law IBFD. 11 NL: ECJ, 12 Dec. 2002, C-385/00, F.W.L. de Groot v Staatssecretaris van Financiën, EU:C:2002:750, ECJ Case Law IBFD. 12 EE: ECJ, 10 May 2012, C-39/10, European Commission v Republic of Estonia, EU:C:2012:282, ECJ Case Law IBFD. 13 X (C-283/15), paras 17-18. 8

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the States in which work is carried out (not being the State of residence) allow part of that negative income to be deducted? In the latter case, how is that deductible part to be determined? (b) In this regard, is the Member State in which the work is actually performed the decisive factor, or is the decisive factor which Member State has the power to tax the income earned thereby? (3) Would the answer to the two questions set out under (2) be different if one of the States in which the European Union citizen earns his income is [the Swiss Confederation], which is not a Member State of the European Union and also does not belong to the European Economic Area? (4) To what extent is it significant in this regard whether the legislation of the taxpayer’s country of residence (in this case, Spain) makes provision for the possibility of deducting mortgage interest relating to the taxpayer’s property and the possibility of offsetting the tax losses arising therefrom in the year in question against possible income earned in that country in later years?” II.

The Judgment of the Court of Justice

While the Dutch Supreme Court did not identify a specific freedom, the Court decided that this case falls under the freedom of establishment (Article 49 TFEU),14 and subsequently added that the Schumacker-doctrine, which was initially developed in the area of free movement of workers (Article 45 TFEU), can be transposed to that freedom as well.15

In substance, the Court then established that to the extent the legislation of a Member State deprives non-resident taxpayers of the opportunity that is open to resident taxpayers, to deduct negative income relating to immovable property in the State of residence (”negative income”), it treats non-residents less favourably than residents. Subsequently, it must be assessed whether this different treatment constitutes discrimination.16

The Court held that in respect of the tax advantage of taking into account “negative income”, the mere fact that a non-resident may have received, within the Member State where his activity is performed, income on conditions more or less similar to those of the residents of that State is not sufficient to render his situation objectively comparable to the situation of the latter. In addition, it is necessary that, as a result of the non-resident’s receiving the major part of his income outside the Member State of residence, that State is not in a position to grant him the advantages which accrue from taking into account his aggregate income and his personal and family circumstances.17

10. Furthermore, the Court held that where a non-resident receives, within a Member State where he performs some of his activities, 60% of his total global income, it cannot be inferred, for that reason alone, that his Member State of residence will not be in a position to take account of his aggregate income and his personal and family circumstances. The Court held it would differ only if it were established that the person concerned received, within his State of residence, either no income or income of so modest an amount that that State would not be able to grant him the advantages that would accrue from account being taken of his aggregate income and his personal and family circumstances. The Court stated that this appeared exactly to “be the situation of X, since it is apparent from the documents in the file submitted to the Court that X did not, in the tax year at issue in the

X (C-283/15), paras. 20-23. See X (C-283/15), para. 36, referring to NL: ECJ, 11 Aug. 1995, C-80/94, G. H. E. J. Wielockx v Inspecteur der Directe Belastingen, EU:C:1995:271, ECJ Case Law IBFD; NL: ECJ, 27 June 1996, C-107/94, P. H. Asscher v Staatssecretaris van Financiën, EU:C:1996:251, ECJ Case Law IBFD; and DE: ECJ, 28 Feb. 2013, C-425/11, Katja Ettwein v Finanzamt Konstanz, EU:C:2013:121, ECJ Case Law IBFD. 16 X (C-283/15), paras 27 et seq. 17 X (C-283/15), paras 37-38. 15

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main proceedings, receive any income within the Member State where he was resident, namely the Kingdom of Spain”.18 11. The Court also clarified that this conclusion would not be invalidated if X were, in addition, to have received the remainder of his income in that year within a State other than the Netherlands and Spain. The fact that a taxpayer receives the major part of his income within several States other than that where he is resident as opposed to just one, has no effect on the application of the principles deriving from the Schumacker case-law. For the Court, “the decisive criterion is whether it is impossible for a Member State to take into account, for the calculation of tax, the personal and family circumstances of a taxpayer in the absence of sufficient taxable income, although such circumstances can otherwise be taken into account when there is sufficient income.”19 12. As a result, the Court answered the first question so that “Article 49 TFEU must be interpreted as precluding a Member State, the tax legislation of which permits the deduction of ‘negative income’ relating to a dwelling, from refusing the benefit of that deduction to a self-employed non-resident where that person receives, within that Member State, 60% of his total income and does not receive, within the Member State where his dwelling is located, income that enables him to qualify for an equivalent right to deduct.”20 13. In relation to the second question, the Court held that the personal and family circumstances of a taxpayer should be taken into account by granting a tax advantage in the form of reduced taxation. Consequently, the concept of a “Member State of activity” cannot be understood as one other than a Member State that has the power to tax all or part of the income from the activity of a taxpayer, wherever the activity generating that income is actually performed.21 14. The Court also stated that the freedom of the Member States to allocate among themselves their powers to impose taxes, and in particular to avoid the accumulation of tax advantages must be reconciled with the necessity that taxpayers of the relevant Member States concerned are assured that, ultimately, all their personal and family circumstances will be duly taken into account. This should be the case irrespective of how the Member States concerned have allocated that obligation amongst themselves. If such reconciliation does not to take place, the freedom of Member States to allocate the power to impose taxes amongst themselves would be liable to create inequality of treatment of the taxpayers concerned which would be incompatible with freedom of establishment. That inequality would not be the result of disparities between the provisions of national tax law.22 15. In the situation where a self-employed person receives his taxable income within a number of Member States, other than his State of residence, that reconciliation can be achieved only by permitting him to submit a claim for his right to deduct ‘negative income’ to each Member State of activity where that type of tax advantage is granted, in proportion to the share of his income received within each such Member State. The taxpayer is responsible for providing the competent national authorities all the information on his global income required by them to determine that proportion.23 16. Hence, the Court answered the second question so “that the injunction imposed by the answer to the first question concerns any Member State of activity within which a self-employed person receives income enabling him to 18

X (C-283/15), paras 39-41. X (C-283/15), para. 42. 20 X (C-283/15), ruling 1 and para. 43. 21 X (C-283/15), para. 45. 22 X (C-283/15), para. 47. 23 X (C-283/15), para. 48. 19

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claim there an equivalent right of deduction, in proportion to the share of that income received within each Member State of activity. In that regard, a ‘Member State of activity’ is any Member State that has the power to tax such income from the activities of a non-resident as is received within its territory, irrespective of where the activities are actually performed.”24 17. The Court then held that the provisions of the freedom of establishment oblige all Member States not to discriminate against a self-employed person who performs a professional activity within a Member State other than his State of residence. This obligation also applies if the taxpayer carries out the remainder of his activities within a third State, even if the latter is not a Member State.25 18. Therefore, the Court answered the third question so that “[t]he fact that the non-resident taxpayer concerned receives part of his taxable income not within a Member State, but within a non-Member State, is of no relevance to the answer to the second question”.26 19. Finally, the Court found that the last question on the effect of the (potential) deductions in Spain is inadmissible, because it is a hypothetical question.27 Hence – unlike AG Wathelet28 – the Court did not substantively address the question of the relationship of the Schumacker-based consideration of a taxpayer’s negative rental income with the limits to crossborder loss relief following from, e.g., Marks & Spencer.29 III. Comments III.1.

Grey, instead of black and white

20. With this important judgement, the Court further develops its Schumacker case-law to multi-state situations from which a number of taxpayers will benefit.30 This evolution does, of course, not only apply in the context of the free movement of workers (Art. 45 TFEU), for which the Schumacker line of case-law was initially developed, but also with regard to the freedom of establishment (Art. 49 TFEU)31 and the free movement of capital (Art. 63 TFEU).32 It will also be relevant in respect of the freedom to provide services (Art. 56 TFEU). 21. The Court continues the starting-point that, in general, it is for the taxpayer’s State of residence to take into account his personal and family circumstances,33 which is also in line

X (C-283/15), ruling 2 and para. 49. X (C-283/15), paras 51-52, referring, by analogy, to Kieback (C-9/14), para. 35. 26 X (C-283/15), ruling 3 and para. 52. 27 X (C-283/15), para. 55. 28 Opinion of Advocate General Wathelet, 7 Sept. 2016, C-283/15, X, EU:C:2016:638, paras 71 et seq., ECJ Case Law IBFD. 29 UK: ECJ, 13 December 2005, C-446/03, Marks & Spencer plc v David Halsey (Her Majesty's Inspector of Taxes), EU:C:2005:763, ECJ Case Law IBFD. 30 This development may also be relevant for the interpretation and application of the EU-Switzerland agreement. Indeed, as AG Wathelet noted, the interpretation in X “constitutes an application of the judgment of 14 February 1995, Schumacker (C-279/93, EU:C:1995:31), where there are several States of activity. That judgment precedes the signature of the Agreement between the European Community and its [Member States], of the one part, and the Swiss Confederation, of the other, on the free movement of persons, signed in on 21 June 1999 (OJ 2002 L 114, p. 6; ‘the Agreement’). Consequently, in accordance with Article 16(2) of the Agreement, account must be taken of that case-law” (see Opinion of AG Wathelet, 7 September 2016, C-283/15, X, EU:C:2016:638, para. 70 with further references in footnote 30). The Court did, however, not address the question if that pro-rata application of the Schumacker-doctrine may also be invoked against Switzerland. 31 See X (C-283/15), para. 36, referring to Wielockx (C-80/94), Asscher (C-107/94), and C-425/11, Ettwein (C425/11). 32 NL: ECJ (Grand Chamber), 5 July 2005, C-376/03, D. v Inspecteur van de Belastingdienst/Particulieren/Ondernemingen buitenland te Heerlen, EU:C:2005:424, paras. 24 et seq., ECJ Case Law IBFD. 33 See, inter alia, Schumacker (C‑279/93), paras 31 and 32; Kieback (C-9/14), para. 22; X (C-283/15), para. 30. 25

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with the OECD Model Tax Convention on Income and Capital.34 It is, moreover, settled case law since Schumacker that resident and non-resident individuals are, as a general rule, non-comparable with regard to the personal and family circumstances.35 The scope of the case-law arising from the judgment in Schumacker extends to all the tax advantages connected with the non-resident’s ability to pay tax that are granted neither in the State of residence nor in the State of employment.36 This so-called “subjective ability to pay” is obviously viewed from an European angle (without regard to the qualification under domestic law37) and includes personal and family tax benefits, such as spousal splitting,38 tax rate benefits for retirement income,39 the zero-rate bracket40 or tax-free allowance,41 and the deduction of childcare costs,42 but also extends to the effects of negative rental income on progressivity43 and – as in the present case – the tax base.44 However, it needs, to be distinguished from the Court’s case law with regard to income-related expenses (“expenditure linked directly to the income of a person”45) i.e. the “objective ability to pay”, in cases such as Gerritse46 and Scorpio,47 where comparability of non-resident and resident taxpayers is not in doubt when the source State exercises its taxing right over the respective income. 22. This notion of non-comparability of taxpayers with regard to their personal and family circumstances has limits however. Indeed, the Court decided that the situations of residents and non-residents can be, by exception, comparable in situations where the Member State of residence is not in a position to grant tax advantages connected to its resident’s personal and family circumstances.48 In Schumacker, the Court established two (seemingly) cumulative criteria for such comparability i.e. (1) that a person does not have significant taxable annual income in the Member State of residence (so that the income is insufficient to take into account personal and family circumstances) and (2) that the taxpayer earns the major part of his taxable annual income from an activity in another (Member) State,49

34 See Art. 24(3) OECD Model Tax Convention on Income and Capital (2014) and the OECD Commentary (2014) on Art. 18 para. 1, Arts 23A and B, paras 41-42, and Art. 24 paras 8, 36. 35 See Schumacker (C‑279/93), paras 31 and 32, and X (C-283/15), para. 30. 36 Lakebrink and Peters-Lakebrink (C‑182/06), para. 34; Kieback (C-9/14), para. 27. 37 See conversely, e.g., DE: ECJ, 6 July 2006, C-346/04, Robert Hans Conijn v Finanzamt Hamburg-Nord, EU:C:2006:445, ECJ Case Law IBFD, where the Court has treated expenses for tax advise as income-related expenses (and applied the Gerritse approach), whereas such expenses were deemed to be personal under German domestic law. 38 Schumacker (C‑279/93); Gschwind (C-391/97); LU: ECJ, 16 May 2000, C-87/99, Patrick Zurstrassen v Administration des contributions directes, EU:C:2000:251, ECJ Case Law IBFD; see also DE: ECJ, 25 January 2007, C-329/05, Finanzamt Dinslaken v Gerold Meindl, EU:C:2007:57, ECJ Case Law IBFD. 39 FI: ECJ, 9 Nov. 2006, C-520/04, Pirkko Marjatta Turpeinen, EU:C:2006:703, ECJ Case Law IBFD. 40 SE: ECJ, 1 July 2014, C-169/03, Florian W. Wallentin v Riksskatteverket, EU:C:2004:403, ECJ Case Law IBFD; see also DE: ECJ, 12 June 2003, C-234/01, Arnoud Gerritse v Finanzamt Neukölln-Nord, EU:C:2003:340, ECJ Case Law IBFD. 41 D (C-376/03), paras. 24 et seq. 42 BE: ECJ, 12 Dec. 2013, C‑303/12, Guido Imfeld and Nathalie Garcet v État belge, EU:C:2013:822, ECJ Case Law IBFD. 43 Lakebrink and Peters-Lakebrink (C‑182/06). 44 Renneberg (C-527/06). 45 See for that terminology, e.g., Conijn (C-346/04), para. 20. 46 Gerritse (C-234/01). 47 DE: ECJ, 3 Oct. 2006, C‑290/04, FKP Scorpio Konzertproduktionen GmbH v Finanzamt Hamburg-Eimsbüttel, EU:C:2006:630, ECJ Case Law IBFD. 48 Schumacker (C‑279/93), paras 36–38; De Groot (C-385/00), para. 89; Wallentin (C-169/03), paras 17–18; Kieback (C-9/14), paras 24–35; ECJ, 19 Nov. 2015, C-632/13, Skatteverket v Hilkka Hirvonen, ECLI:EU:C:2015:765, para. 31, ECJ Case Law IBFD; and X (C-283/15), paras 32–38. 49 See, e.g., Schumacker (C‑279/93), para. 36, and also, e.g., D (C-376/03), paras. 28 et seq.

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which was often understood to be a “strict” limit of approximately 75%50 or 90%51 of worldwide income. However, it should also be noted that these percentages were included in the domestic tax laws concerned and that the Court left room for other approaches.52 Those cumulative criteria were also reiterated in more recent decisions, such as the 2013 case of Imfeld and Garcet.53 From subsequent case law it is also clear that the State of residence’s ability to take personal and family circumstances into account is to be determined under the legislation of that State.54 Therefore, if the State of residence exempts certain income from taxation and hence cannot grant personal and family benefits, the source State is not relieved from its Schumacker-obligation.55 (A different perspective needs to be taken, however, if the residence State does not impose a certain tax at all, e.g., a wealth tax, in which case the Court focused on the overall wealth of the taxpayer.56) 23. This means, however, that the starting-point remains that the Member State of residence is primarily responsible for accounting for the personal and family circumstances of its residents. If in that Member State sufficient taxable income is earned for doing so, the situation of this taxpayer in the Member State where the activity is performed, is not comparable to the situation of a resident of that State. However, strongly encouraged by the opinion of Advocate General Wathelet,57 the Court refined its Schumacker case law by accepting that, if the taxable income in the Member State of residence is insufficient to take into account the personal and family circumstances, the situation of a non-resident taxpayer in the Member State of activity i.e. the source State, is comparable to that of a resident of that Member State. 24. The second Schumacker-criterion i.e. that the taxpayer earns the major part of his taxable annual income from an activity in another (Member) State,58 is therefore effectively abolished and negative conflicts of competence avoided: X makes clear that the criterion of having obtained the “major part” or ”almost all” of the non-resident’s taxable income from an activity performed in another Member State does not mean that this income must satisfy a certain threshold if it is otherwise impossible for the taxpayer’s Member State of residence to take into account his personal and family circumstances in the absence of sufficient taxable income in that State. In that case, any taxable income in other (Member) States of activity is sufficient. Moreover, in this context, it does not matter that the nonresident taxpayer receives a remainder of his income in the year concerned within a State – a Member State or a third State – other than the Member State of activity concerned and the Member State of residence. While this focus became evident in X, already previous cases pointed in this direction: In Kieback, for example, the Court had referred to the classical Schumacker-situation as a mere example and made an effective causal (and not 50 For the approach in Estonia, e.g., Commission v Estonia (C-39/10), para. 18, and more generally for a 75% threshold Art. 2(2) of the Commission’s recommendation of 21 December 1993 on the taxation of certain items of income received by non-residents in a Member State other than in which they are resident, [1994] OJ L 39/22. 51 Based on, e.g., Gschwind (C-391/97), para. 32; see also explicitly, e.g., D (C-376/03), para. 30 (“The Court has thus allowed a Member State to make grant of a benefit to non-residents subject to the condition that at least 90% of their worldwide income must be subject to tax in that State”.) 52 See, e.g.,Gschwind (C-391/97), para. 32: “It follows from the foregoing that Article 48(2) of the Treaty is to be interpreted as not precluding the application of a Member State's legislation under which resident married couples are granted favourable tax treatment such as that under the splitting procedure whilst the same treatment of non-resident married couples is made subject to the condition that at least 90% of their total income must be subject to tax in that Member State or, if that percentage is not reached, that their income from foreign sources not subject to tax in that State must not be above a certain ceiling, thus maintaining the possibility for account to be taken of their personal and family circumstances in the State of residence.” 53 Imfeld and Garcet (C‑303/12), para. 44. 54 See, e.g., Commission v Estonia (C-39/10), para. 53. 55 Wallentin (C-169/03). 56 See D (C-376/03), paras. 24 et seq. 57 AG Opinion in X (C-283/15). 58 See, e.g., Schumacker (C‑279/93), para. 36.

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cumulative) connection between the situations in the residence and the source States, 59 and in Commission v. Estonia the Court put an obligation on the source State to grant its personal and family tax benefits even though only approximately 50% (and not “almost all”) of the income was earned there.60 25. The effect of that comparability is, in general, that the source Member State has to grant non-discriminatory treatment: It has to grant the non-resident taxpayer the same personal and family benefits it grants its own residents (at least proportionally61), i.e., the personal and family benefits its legislation provides.62 Hence, the effect and nature of potential benefits may greatly vary from State to State; in an extreme case, therefore, where the source State does not provide any personal and family benefits at all for its own residents, there would equally be no benefits available for taxpayers in Schumacker or X positions. III.2.

Relationship with De Groot and Kieback

26. It may also be noted that X is compatible with De Groot.63 In the latter case, the Court decided that several Member States of employment could release the State of residence from the obligation to take the taxpayer’s personal and family circumstances into account. That is only possible if it is not necessary for the taxpayer’s aggregate annual income to reach a minimum threshold of 90% earned in a Member State other than his Member State of residence. Therefore, the idea that the phrase “a major part” of the income must be interpreted as a 90%-threshold, as such, should not be deemed to have been adopted, despite the fact the Court in Gschwind specifically used that threshold.64 If the 90% threshold were, indeed, a hard criterion on its own, a taxpayer’s personal and family circumstances may not always taken into account. Such a result would be inconsistent with the ability-to-pay principle, the direct-benefit principle, the open-market economy with free competition, the efficient allocation of production factors, tax neutrality, the establishment of a level playing field, international tax neutrality, capital and labour import neutrality, and origin-based taxation. Such a condition would hamper the development of the internal market. Therefore, the refinement given by the Court in its X decision matches perfectly with its role as a protector of the establishment of the internal market. 27. However, X rests uneasy with Kieback, which related not to proportions of annual income in various countries but rather to timing proportions and the taxpayer’s change of residence. In Kieback, the Court has held that no discrimination arises in the case of successively or simultaneous employed activities in several countries after a change of residence, because the Member State where the non-resident taxpayer pursued his activity before leaving is not in a better position than his new state of residence to assess his personal and family circumstances.65 A Member State from which, during only a part of the taxable year, a part (but not the major part) of his annual income is received is not bound to grant the same advantages as granted to residents.66 The result in X contrast strongly with the result in the Kieback case: Mr. Kieback’s “negative income” from his owner-occupied house located in Germany over the period 1 January until 31 March 2005 could not be taken into account in any of the States involved. In 2005, he left for the United 59 See Kieback (C-9/14), para. 25, noting that comparability “is the case particularly where a non-resident taxpayer receives no significant income in his Member State of residence and derives the major part of his taxable income from an activity pursued in the Member State of employment, so that the Member State of residence is not in a position to grant him the advantages which follow from the taking into account of his personal and family circumstances”. 60 Commission v Estonia (C-39/10). 61 See infra Chapter III.3. of this Opinion Statement. 62 See also, e.g., X (C-283/15), para. 48. 63 De Groot (C-385/00), paras 100, 102. 64 Gschwind (C-391/97), para. 32. 65 Kieback (C-9/14), para 29. 66 Kieback (C-9/14), paras 30-34.

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States to reside and work there. Until 31 March 2005, he lived in Germany and worked as an employee in the Netherlands. The “negative income” could not be taken into account in the United States (no tax jurisdiction during the period concerned), not in Germany (no income), and not in the Netherlands (non-resident status). If Mr. Kieback had been a Dutch resident, he would have been entitled to fully deduct this amount from his employment income during the period from 1 January until 31 March 2005.67 The X decision could be a reason to reconsider Kieback, because the Court may have overlooked the fact that the tax liability in the United States only started on 1 April 2005. In general, a State does not take into account any income, positive or negative, that is received in the period before tax liability commences. As a consequence, it is more than likely that Mr. Kieback was not able to take into account, in the United States, the “negative income” from his home in Germany received during the period 1 January 2005 to 31 March 2005. III.3.

Effect: pro-rata allocation

28. In the situation where not taking into account the personal and family circumstances of a non-resident taxpayer constitutes discrimination, the Court decides that Member States must permit a non-resident taxpayer to take into account his personal and family circumstances on a pro-rata basis i.e. grant the personal and family tax benefits “in proportion to the share of that income received within each Member State of activity”.68 The latter notion – “Member State of activity” – is to be understood from a tax perspective: It is not necessarily the State in which the taxpayer’s income-generating activity is actually performed, but rather “any Member State that has the power to tax such income from the activities of a non-resident as is received within its territory”.69 This approach should be supported: Only States that can and may tax the income of a taxpayer under their domestic tax laws respectively tax treaties can grant tax advantages connected with the non-resident taxpayer’s personal and family circumstances. If a State cannot or may not tax his income, it simply cannot take into account the taxpayer’s personal and family circumstances for tax purposes. 29. As the Court has decided in X, the obligation to take into account a taxpayer’s personal and family circumstances is “in proportion to the share of that income received within each Member State of activity” and hence does not fall on only one of the source Member States concerned in which taxable income is earned (e.g., the State where most of the income is earned). Indeed, all of the relevant states contribute to the taxpayer’s ability to pay taxes; in each of those states, the taxpayer benefits from the state’s infrastructure to create his wealth. The taxpayer competes in all of those states in an open market. From those perspectives, the Court is right in obliging them all to take into account the taxpayer’s personal and family circumstances, and not just one of them. However, the fraction of benefits to be granted should logically not be determined by reference to the portion of worldwide income that may be taxed in any given State, but by reference to the portion that State actually imposes a tax on. Furthermore, the Court did not establish a complete system of “fractional taxation” under which each Member State (including the State of residence) grants benefits only in proportion to its share of the taxable income (even though Member States could establish such a system70), but rather imposes a pro-rata obligation on source Member States if – and only if71 – the residence Member State cannot grant personal and family benefits.

See Art. 3.1 PITA 2001. X (C-283/15), paras 44 et seq. 69 X (C-283/15), para. 45. 70 De Groot (C-385/00), paras 100-101. 71 See supra para. 23 of this Opinion Statement. 68

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30. As previously noted72, where the pro-rata system applies, each source Member State has to apply its own system of taking into account personal and family circumstances in a nondiscriminatory manner,73 irrespective of whether this is done through a personal allowance, a deduction, a tax credit, a general lower tax rate or any other form of relief. From a more technical perspective, however, the question arises as to how the “proportional” taking into account of personal and family circumstances should be accomplished. This issue was not very explicitly addressed in X. A practical approach is that each of the relevant States in which any of the non-resident taxpayer’s taxable income is earned should take a part of the taxpayer’s personal and family circumstances into account, if the domestic tax system does so for a resident taxpayer. For example, if at taxpayer’s personal and family circumstances are taken into account by means of a deduction from his taxable income, the personal allowances can be taken into account in proportion of the taxable source State income to the aggregate annual taxable income earned in each State (i.e., worldwide income) before benefits are granted. Moreover, as “income” is not defined by EU law, each source Member State needs to calculate the amounts of (domestic and worldwide) “income” in accordance with its own tax laws. In multi-state situations, therefore, there is likely not one fraction but rather multiple fractions that may vary according to the domestic income definitions of the source States involved. As a consequence, the sum of the fractions calculated by each source Member State may also not add up to 100 per cent, suggesting the possibility of an “incomplete” granting of benefits overall. However, that result will be purely the consequence of different income definitions, which are a textbook example of a disparity that the fundamental freedoms are unable to address. 31. For a Member State to apply the pro-rata approach in accordance with X, it needs information about the taxpayer’s income in other Member States and also third countries, in order to assess the taxpayer’s worldwide income (the denominator in the fraction). That problem is not entirely new and existed already in classical two-state Schumacker situations (where it had to be established in the source State that the “major part” or ”almost all” of the non-resident’s taxable income was earned there, i.e., demonstrating that no significant taxable income was earned anywhere else). The issue may become even more nuanced in multi-state situations. Instead of focusing exchange of information between Member States, however, the Court merely stated that it is the taxpayer’s responsibility “to provide to the competent national authorities all the information on his global income needed by them to determine that proportion”.74 32. The Court also acknowledged the interest of Member States “to avoid the accumulation of tax advantages”.75 Therefore, any source Member State in which only a part of the taxpayer’s aggregate annual income is earned, need and should not take into account the full amount of that taxpayer’s personal and family circumstances (e.g., negative rental income). If the full amount were to be allowed as a deduction, a substantial risk of double deduction (or a “double dip”) would exist. Such a double dip would also not be in line with the core ideas of the Internal Market.76 33. However, implementing such an approach and avoiding granting isolated “advantages” to non-residents (e.g., personal and family tax benefits) without the corresponding “disadvantages” that residents face (e.g., progressivity based on worldwide income) will pose certain challenges for domestic legislators. While such “disadvantages” under residence72

See supra Chapter III.1. of this Opinion Statement. See also X (C-283/15), para. 48 (noting that the taxpayer may “submit a claim for his right to deduct ‘negative income’ to each Member State of activity where that type of tax advantage is granted, in proportion to the share of his income received within each such Member State”). 74 X (C-283/15), para. 48. 75 X (C-283/15), para. 47. 76 De Groot (C-385/00), paras 100–102; see also X (C-283/15), para. 47. 73

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based taxation are certainly not a good reason to deny non-residents (proportionate) personal and family tax benefits,77 the Court’s decisions in Gielen78 and Hirvonen79 seem to imply that an option granted to non-residents to be taxed like residents (with the corresponding personal and family tax benefits) is not in itself sufficient to comply with the fundamental freedoms. Indeed, in X the taxpayer had initially exercised such an election but withdrew it subsequently in light of the ensuing heavier taxation,80 but that does not seem to have had any effect on the Court’s holding. It would, however, be strange that offering an option to be treated as a resident is not sufficient to comply with EU law, as it is neither in the interest of taxpayers nor of tax administrations to always require all non-residents from other Member States to declare their worldwide income to the source State just to comply with Schumacker and X (and, e.g., tax them under a progression scheme). IV. The Statement 34. The Confédération Fiscale Européenne welcomes the pro-rata approach to personal and family deductions developed by the X judgment. In doing so, the Court contributes to the establishment of the internal market. Indeed, the pro-rata approach satisfies an open market economy with free competition, an efficient allocation of production factors, tax neutrality, a level playing field, international tax neutrality, the ability-to-pay principle, the direct benefit principle, and origin-based taxation. 35. The Confédération, however, also notes that the implementation of X will pose a number of technical and policy issues for domestic legislators that have not yet been addressed by the Court. These include the calculation of the relevant proportions of income and possible mechanisms to avoid “cherry picking” by non-residents.

See specifically De Groot (C-385/00), paras 70-71. NL: ECJ, 18 March 2010, C-440/08, F. Gielen v Staatssecretaris van Financiën, EU:C:2010:148, paras 50 et seq., ECJ Case Law IBFD. 79 Hirvonen (C-632/13), para. 42. 80 See X (C-283/15), para. 14, where it is noted that based on the taxpayer’s option to be treated in the same way as resident taxpayers “[t]he total tax thus calculated was greater than that which X would have had to pay if he had not exercised the option of being treated in the same way as resident taxpayers, with consequent taxation in Switzerland with respect to the income received in that State, namely 40% of his total income, and if he had, in addition, been permitted to deduct in its entirety the ‘negative income’ arising from the dwelling owned by him and located in Spain.” 78

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