A first article, published yesterday presented the current framework set by the EU treaties and the ECJ/CJEU case law to assess the legality of domestic measures aimed at preventing tax evasion or avoidance by multinational groups and companies. As public outrage followed the disclosure of the low amounts of corporate tax paid by some very successful multinationals, it is now time to look at how to improve the Member States’ capability to have their tax jurisdiction fully respected without harming the economic freedoms within the Single Market. The OECD published earlier this year an Action Plan on Base Erosion and Profit Shifting (BEPS). These measures will be presented in the first part of this paper, while the second part will be dedicated to studying how to ensure their compatibility with EU law requirements.
I/ The BEPS Action Plan proposed by the OECD
The OECD recognises that the globalisation of the economy and the development of multinational firms require a more global thinking on tax policy. The increased opportunities for tax planning can harm multiple actors: governments (which earn less taxes and need to spend more to ensure compliance with their tax rules), taxpayers (who will face a higher tax burden to compensate the loss of revenue due to the irregular behaviour of some multinational actors) and businesses (because of a bad reputation and distortions of competition). As the OECD points out, a lot of work has already been done on preventing double taxation; now, the issue is to prevent lower taxation, or even double non-taxation. This work becomes all the more pressing as intangible assets (the most classic example is intellectual property rights) become key generators of profits in an increasingly digital economy.
The actions suggested by the OECD can be regrouped in several categories. The first one relates to increasing transnational coordination. There must be an increased cooperation to “address the challenges of the digital economy” in order to correctly attribute to every competent State (i.e., those where the multinational group has an actual activity) the value / profits created on the basis of “digital products and services”. The more developed coordination would also be useful to tackle the challenges of a globalised economy to reduce loopholes and other inappropriate reductions of the tax burden. In this category of actions, there is also the prevention of treaty abuse. The OECD believes that tighter anti-abuse clauses added to bilateral double taxation conventions (DTCs, often based on the OECD Model Tax Convention) would “contribute to restore source taxation in a number of cases”. Another appropriate change to these DTCs, still according to the OECD, would be a review of the definition of permanent establishments to prevent the dissociation between the sales (of the permanent establishment) and the benefits (partly or fully attributed to another group’s company).
A second group of actions regards reinforcing domestic rules on Controlled Foreign Companies (CFC), thin capitalisation and transfer pricing (which have been presented in the previous article). The OECD reckons that in many countries the CFC rules “do not always counter BEPS in a comprehensive manner” and notes that “while CFC rules in principle lead to inclusions in the residence country of the ultimate parent, they also have a positive spill-over effect in source countries because taxpayers have no (or much less of an) incentive to shift profits into a third, low-tax jurisdiction”. Similarly, rules on interest deductions (thin capitalisation) also need to be reviewed to avoid base erosion. Furthermore, the OECD suggests identifying best practices and offers to develop transfer pricing guidance. Transfer pricing alone is the topic of three planned actions aiming at ensuring that “transfer pricing outcomes are in line with value creation”: “BEPS by moving intangibles among group members” must be prevented, and so must excessive transfers of risk and thin capitalisation.
A third category of suggestions relate to increased transparency. In particular, the OECD identifies “preferential regimes” as the cause of a potential “race to the bottom” which would “ultimately drive applicable tax rates on certain mobile sources of income to zero for all countries”, whether they wished it or not. Therefore, the OECD suggests establishing compulsory spontaneous exchange of certain information and requiring “substantial activity for any preferential regime”. Increased transparency regards also the data on BEPS, which must be developed and properly analysed. The asymmetry of information between multinational groups (taxpayers) and tax administrations will have to be reduced; therefore, the OECD suggests requiring taxpayers to disclose their aggressive tax planning arrangements and reviewing the transfer pricing documentation. Finally, the OECD wants dispute resolution mechanisms, in particular the mutual agreement procedure in case of a DTC-related dispute between two countries, to become more effective, in order to increase legal certainty for businesses.
The OECD also states that these various actions need a swift implementation, and a way to reach that purpose would be the adoption of a multilateral legal instrument which would amend the existing (often bilateral) DTCs. In addition, the reform process should include consultations with businesses and the “civil society”.
II/ Implementing these actions in conformity with EU law
The aim of this second part is to assess the compatibility of the OECD recommendations with the existing EU treaties and ECJ case law. Although most actions are directed to the Member States, let us remember that, according to well-established case law (see, e.g., case C-118/96, Safir ), “although direct taxation does not as such fall within the purview of the Community, the powers retained by the Member States must nevertheless be exercised consistently with European Community law”.
Regarding the measures of increased transnational coordination, there should not be any problem with EU law. On the contrary, EU institutions would welcome some coordination, if not harmonisation of the multiple national tax laws. Furthermore, Article 352 TFEU authorises the Council, on a proposal of the Commission and with the consent of the Parliament, to unanimously adopt measures aiming at attaining “one of the objectives set out in the Treaties” without the same treaties providing “the necessary powers” to the EU. Action at EU level would be, of course, the strongest mean of the coordination advocated by the OECD. It may actually even be the best solution, since the challenges are common to all European countries and will be best addressed at EU level, in order also to ensure compatibility with the Single Market rules. Moreover, EU law outweighs international law; therefore, a European legal instrument would ensure a de facto swift and identical modification to all existing bilateral DTCs between Member States.
Actions to increase transparency would be compatible with EU law as well. Indeed, the principle of transparency is a principle of European law. In addition, preventing tax competition that relies on “special regimes” (which regularly violate State aid rules) is an objective that would be welcomed by the European institutions. Moreover, the concept of mandatory exchange of information already exists in certain directives. Finally, rules imposed on multinational companies to disclose more tax planning documentation should pose no problem, provided these requests of information do not represent “undue administrative constraints” (see, e.g., case C-201/05, Test Claimants in the CFC and Dividend Litigation Group ).
In the end, the key point is ensuring the compatibility of reformed CFC, thin cap and transfer pricing rules with EU law. In the previous article, the conditions set by the treaties and the ECJ were reviewed, and it is evident that these requirements will need to be taken into account by Member States adapting their domestic rules to hinder tax avoidance or evasion. Rules may become tougher on tax dodgers, but they need to be specifically targeted at them; a proportionate solution could be to always give the possibility to the concerned taxpayers to prove the commerciality of their actions. Furthermore, preventing unjustified transfers of risk and intangible property must be fitted into the CJEU requirements that the “controlled company is actually established in the host Member State and carries on genuine economic activities there”. On the one hand, if Member States feel that this stance of the Court of Justice excessively restricts their ability to properly allocate taxing rights to prevent tax avoidance/evasion, they will have to adopt new instruments of secondary law or even modify the EU treaties. On the other hand, it is worth noting that the CJEU itself has recognised that “it is for the Member States to take the measures necessary to prevent double taxation by applying, in particular, the apportionment criteria followed in international tax practice” (see, e.g., case C-513/04, Kerckaert and Morres v Belgium ), so that the new rules, insofar as they do not threaten the basic principles of the Single Market, may be accepted by the CJEU.
In addition, it must be remembered that the notion of “abuse of law” is already present in EU primary and secondary law. So, Article 65(1)(b) TFEU authorises Member States “to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation […]”, provided that these measures do “not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 63.” (Article 65(3) TFEU). As to secondary law, the original Article 1(2) of the Parent-Subsidiary Directive (90/435/EC, amended in 2003), which applies to the taxation of cross-border dividends, indicated that “this directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of fraud and abuse”. Article 5 of the Interest & Royalty Directive (2003/49) says the same and also allows Member States not to apply its provisions if “the principal motive or one of the principal motives is tax evasion, tax avoidance or abuse.” The Merger Directive (2009/133/EC) entails a similar provision. These texts all provide an additional legal basis and framework for reforming existing DTCs following the recommendations of the OECD.
To conclude, there seems to be an agreement at global level on the need to reform existing international tax conventions in order to achieve more fiscal ‘justice’ or fairness. In the EU, this mainly requires action by Member States, which are the ones competent for direct taxation. However, the growing role of EU norms also impacts the area of tax law and Member States must be careful to draw their rules in conformity with the principles promoted by the EU, in this case in particular the fundamental economic freedoms. EU legal texts and the case law of the CJEU both provide a framework within which Member States may act. In addition, it may be preferable to act at EU level on some fiscal issues, in order to maximise the effect of the actions suggested by the OECD.