Issue 13 | November 2013

Global Tax Policy and

13Issue November 2013

In this issue

“ It simply isn’t reasonable to look at, for example, turnover and then corporation tax payments and reach a conclusion from that. But one can see why people do jump to particular conclusions and I think it’s for businesses themselves to go out and do more to explain.”

David Gauke,Exchequer Secretary to Her

Majesty’s Treasury

See page 8

Global updates — 6

Themes and issues

Country updates

Czech Republic: Trends in Czech Republic tax audits — fewer audits, larger reassessments and a heightened role for the Specialised Financial Authority

44Italy: Italy’s 2013 tax audit guidelines focus on large business taxpayers

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Germany: Chancellor Merkel wins the German federal election: coalition partner and concrete tax agenda remain unclear

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Greece: Major tax reform in Greece starts with the introduction of a new contemporary Income Tax Code

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India: GAAR rising: India’s Central Board of Direct Taxes

application of GAAR

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Australia: Australia’s new coalition government —

challenges ahead

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Mexico: Mexico’s ambitious tax reform program — increased burden and heightened enforcement draw criticism

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How tax policy supports the aspirations of Singapore as a regional or global hub

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European Union update26

risk: Two years on, leading practices emerge

20

Tax administration aspects of the tax annex

G20 Leaders’ Declaration

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OECD: International VAT and GST Guidelines move to the next stage

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is published each quarter by EY.

Contributing editor Rob Thomas T: +1 202 327 6053 E: rob.thomas@ey.com

To access previous issues and to learn more about EY’s Tax Policy and Controversy global network, please go to ey.com/tpc or sign up to receive future editions via email by going to ey.com/emailmeTPC.

Connect with EY Tax in the following ways: ey.com/tax ey.mobi for mobile devices twitter.com/eytax for breaking tax news

OECD meets with business on

action plan

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Netherlands: Dutch government extends the application of substance safe harbor rules

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controversy continued to unfold across the globe as we entered the second half of 2013. On 19 July, the OECD released its long-awaited “Action Plan” on base erosion

Ministers’ meeting in Moscow, with the stated goal of ensuring the “coherence” of international corporate taxation.Since then, we have seen a number of unilateral developments unfold; the outgoing Australian government legislated a measure requiring the tax authority to publish the gross income, taxable income, and taxes paid of large taxpayers. The Irish Finance Minister proposed a ban on “stateless” companies that are incorporated in Ireland but for tax purposes are not treated as being a resident of any country. And Mexico released a substantial reform package that can be described as “BEPS-inspired”. All of these issues and many more are explored in greater depth in this 13th

debate, David Gauke MP, Exchequer Secretary to the Treasury in Her Majesty’s Government of the United Kingdom. Mr. Gauke provides a rare inside view of evolving tax policy and enforcement trends, noting that the UK is determined to use its tax regime to “win the global race” for businesses looking to relocate or make new investments. He also explains the UK’s approach to tax administration and enforcement, balancing the need to tax economic activity with the desire to attract business investment. Mr. Gauke comments on the BEPS Action Plan, the use of General Anti-Avoidance Rules

Abusecontrived” structures and the UK’s “conscious” decision to reduce its reliance on corporate tax revenue.

new developments in the European Union. The European Council made public the legal opinion that found that the

WeWith the speed, volume and complexity of tax policy, legislative and regulatory change continuing to accelerate, accessing the leading global insights has never been more important.

EY is pleased to make available a new Tax portal,

providing earlier access to all articles in this publication and more, including interviews with minute-by-minute tweets of key news, daily tax alerts and more interviews with the leading stakeholders in the world of tax.

Access the new portal at

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lcomejurisdiction for taxation under the norms of customary public international law. It was widely reported in early September that the European Commission has begun an investigation of the tax ruling processes of three member countries, Luxembourg, Ireland and the Netherlands, including assessing whether some rulings might be in contravention of EU state aid rules. More recently, the Commission has chosen to consider whether the UK’s Patent Box regime and Cyprus’ IP Box are consistent with the Code of Conduct for Business Taxation.

The OECD has begun consultations on the BEPS Action Plan and the business community is and will be actively involved with the OECD as it considers options for implementing the 15 Action Plan items. An initial meeting of business representatives

opportunity for the business community to engage with the OECD on the Action Plan and, as noted in our article at page 14, the OECD has made a clear commitment to consult with business as it develops its recommendations.

The OECD’s work on the BEPS Action Plan was acknowledged by the G20 leaders during their meeting in St. Petersburg on 5-6

endorsed in the “Tax Annex” to the G20 Leaders’ Declaration following the meeting. In particular, the Tax Annex emphasizes the importance of exchanging information and encourages all countries to join in the automatic exchange of information based on the development of a new global standard. The Annex

the development of a new global tax standard: to automatic exchange of information.” As noted in our article on page 20, the G20 anticipates that a new de facto standard will be presented in early 2014, with automatic exchange commencing between G20 members in 2015.

The tax risks for business travelers are an area of continuing

to be a focus for many tax and immigration authorities, but also why the risks have continued to grow. As a result, more multinational companies are beginning to assess and effectively manage the risks of a globally mobile work force.

The OECD has been working for a number of years on practical

complex area is explored in depth on page 36. We explain the history of the OECD’s consultation process, explore the details of the consolidated OECD guidelines that were published in February 2013 and outline the issues that will likely shape the development of future guidelines.

the recent government shutdown in the US will continue to drive the need for tax reform on both a national and global level. At the same time, we expect that enforcement efforts will continue to accelerate as tax administrators focus their limited resources on those taxpayers and structures that are perceived as being the highest risk.

Global Director Tax Policy services Tel: +44 20 7951 0150 Email: csanger@uk.ey.com

Rob Hanson Global Director Tax Controversy services Tel: +1 202 327 5696 Email: rob.hanson@ey.com

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6

Global updates

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Netherlands

Dutch Government extends application of substance safe harbor rules

Gabon

Gabon to introduce anti-avoidance rule focusing on indirect transfers of assets

France

French Government releases draft Finance Bill for 2014

Ghana

Ghana publishes Transfer Pricing Return and Practice Notes on transfer pricing regulations

Mexico

2014 Tax reform package proposed

United States

repair regulations

Costa Rica

Costa Rica introduces transfer pricing regulations

Argentine Senate approves tax reform bill, Argentine tax reform on capital gains and dividends enters into force

Canada

Canada releases draft legislation for 2013 budget measures, CRA issues 2012–13 APA Program Report

Ireland

Ireland’s 2014 budget proposals set forth international tax measures

Access insights on these developments plus EY’s Global Tax Alerts at:

ey.com/taxalerts

HMRC issues Brief 28/13 interim tax repayments arising from avoidance

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Italy

Italy issues operative guidelines on tax audits for 2013

Switzerland

Switzerland poised to sign OECD Convention on Mutual Administrative Assistance in Tax Matters

Australia

Australian Federal Court grants summary judgment against

structure based on GAAR

Mauritius

India — Mauritius treaty negotiations proposed

Malaysia

Malaysian Prime Minister announces GST effective 1 April 2015 at the rate of 6%

South Africa

Treasury seeks to limit interest deductions involving cross-border group member debt

Japan

tax increase, announces tax reform package

Hong Kong enacts new law to enter into stand-alone tax information exchange agreements

Germany

Chancellor Merkel wins the German federal election — coalition partner and concrete tax agenda unclear

China

China signs OECD Convention on Mutual Administrative Assistance in Tax Matters, new China-Switzerland tax treaty includes anti-abuse treaty override clause

Vietnam

Vietnam releases draft anti-treaty shopping provisions

Philippines

Philippines’ new regulation disallows a taxable deduction in the event of failure to withhold tax on the payment

South Korea

Korea announces 2013 tax reform proposals

Russia

Russian Tax Authorities publish guidance on two high tax risk transactions

India

Indian Tax Administration

pricing safe harbor

Finland

Draft government bill reduces corporate income tax rate to 20%, introduces additional restrictions on corporate tax deductions

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An interview with David Gauke, Exchequer Secretary to Her

Majesty’s TreasuryIn

terv

iew

The phrase “open for business” has featured a lot in the last year or so. What does this really mean and how does it work in the UK?

David Gauke: I think the first point to make is that we recognize that we are in a globalization era and that there are options and choices for businesses regarding where they locate their headquarters, their staff, their intellectual property and their manufacturing. A number of factors come into play for that, including infrastructure and skills, but one of the key factors is the tax regime. As a country, we are determined to “win the global race,” to use the Prime Minister’s phrase and we want people to see the UK tax system as a positive reason for locating and investing in the UK as well as bringing jobs to the UK and not a negative reason as it has been at times. We’ve made considerable progress on that front, but what drives us is a desire to attract genuine economic activity into the UK and we have put in place, I believe, a tax regime that is very attractive and consistent with that objective.

Looking at the overall tax mix and the last budget forecast, by 2017, less than 6% of total taxes will come from corporate taxes in the UK. This is significantly lower than the average 10% that has been reminiscent of OECD countries. Are you happy over this policy choice because it brings in other taxes?

David Gauke: There is a conscious decision here — a policy decision. Analysis suggests that corporation tax is one of the more damaging taxes. Of course, at the same time as making our tax system more attractive in terms of reducing rates, we want an effective regime. Indeed, we’ve strengthened enforcement and have also been one of the lead voices, if not the lead voice, calling for reform of the international tax architecture to ensure that economic activity is taxed where that activity occurs.

We want to ensure that our tax system is efficient and we’re also conscious of the fact that ultimately it’s always real people who end up paying the tax, whether tax is raised at the company level or in some other way. Corporation tax is ultimately going to be paid by a combination of shareholders, employees, suppliers and customers, and we can have a debate as to what the relevant shares are, but in the end, real people pay these taxes anyway.

Interest relief

Rob Thomas: With regard to the architecture of the international tax system and the UK corporate tax road map, I think you’ve used the words “Government remains committed to interest being relieved as a normal business, irrespective of where the proceeds to the loan are put to use.” When I look around the world, in the last couple of years I see many other countries move in reverse to this. Does that still remain a strong policy focus for you?

David Gauke: We remain committed to the roadmap, and its purpose is to provide certainty and stability. What I’ve said on a number of occasions is that we did look very closely at treating and changing the tax treatment of interest payments. For starters, there isn’t a huge pot of money that some people think there might be, which would enable you to, for example, lower the rate, particularly when you start to look at some of the hard cases and potential detrimental impacts on infrastructure.

Furthermore, any change in this area would involve a great deal of uncertainty and, at this moment, additional uncertainty would not be helpful for the UK as a place to do business.

So that’s why we looked long and hard and took the decision to maintain the existing regime for the tax treatment of interest.

Rob Thomas: When the UK’s corporate tax roadmap came out, it was pretty much simultaneous to the new approach to policymaking. Are you happy with the results thus far?

David Gauke: Yes, I think it’s had a number of benefits to the UK. First, I think it fits with the roadmap in terms of stability within the tax system. People know much more than they did in the past on where they stand and where the process is and that’s meant fewer surprises.

Second, I think it’s played into producing better quality tax law. We’ve had some really difficult and challenging areas to address,

introduction of a patent box, which could easily have gone wrong. I’m not saying that the process has necessarily always been smooth and that everybody is delighted with the end result. In particular, the CFC reforms created a significant challenge, but I think we’ve had a process that has benefitted from the expertise that lies outside the Treasury and HMRC. Of course, we’ve been unable to respond to absolutely every request and

Global and EMEIA Tax Policy Leader T: +44 20 7951 0150 E: csanger@uk.ey.com

Rob Thomas Director — Tax Policy & Controversy T: +1 202 327 6053 E: rob.thomas@ey.com

“ … we looked long and hard and took the decision to maintain the existing regime for the tax treatment of interest.”

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“ … when we are reforming the law in a way that is designed to attract more investment and more business, it is important to have a proper understanding of how businesses will respond to that change.”

“I would stress, of course, that we don’t expect that HMRC get

more money out of taxpayers than the law requires.”

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concern, but particularly when we are reforming the law to attract more investment and more business, it is important to have a proper understanding of how businesses will respond to that change. I think it has enabled us at a technical level to ensure that the law is as thorough as possible and achieves the objectives that we set out.

Tax administration

Rob Thomas: In terms of achieving those objectives, policy is one side of the coin, whereas the smooth and effective administration of the policy is the other. How much does the administration support the objective? Where do you see themes or concepts in other countries that might work effectively for UK taxpayers?

David Gauke: I’m struck when talking to international businesses in particular about how positive their view of the competence of HMRC is. They recognize that HMRC is tough and wants to ensure that the UK Exchequer gets the revenue that it should, but I’m repeatedly told how HMRC has a better understanding of its business than many other tax authorities and that HMRC understands how business works, how it is easier to get an opinion or a decision out of HMRC than it is from other jurisdictions. When you look at the numbers, you can see that HMRC has been very successful in getting more money out of large businesses in recent years. Given this and the fact that HMRC is also getting positive feedback, it seems to me that the approach HMRC has taken in terms of tax administration is also an asset to our tax system and makes the UK a more attractive location. Businesses know where they stand, earlier.

Rob Thomas: At the heart of this engagement is horizontal monitoring or real-time audit route — the enhanced relationship that the OECD has recently refreshed. We sometimes see this enhanced relationship challenged by other commentators, arguing that tax authorities are going soft. This isn’t our perspective – is it yours?

David Gauke: Sir Andrew Park reviewed a number of large settlements, and his review revealed that the HMRC had achieved reasonable, if not better settlements, for the Exchequer. I think that demonstrates that the approach is working. The facts support this view, given the yield that HMRC is achieving when it comes to large businesses and its effectiveness in making sure that business pays tax that is due. I would stress, of course, that we don’t expect that HMRC get more money out of taxpayers than the law requires.

So on both policy development and tax administration, our approach is quite clear. We want to tax economic activity that occurs in the UK in accordance with the law, but we also want to have a system that is competitive and conducive to businesses choosing to invest in the UK and employing people in the UK.

The “fair tax” debate

What is your opinion on the discussions we see in the press about certain businesses that have paid no corporation tax, for example due to tax depreciation on heavy investment in infrastructure, the taking up of available incentives and so on. What should they be doing, and what should we all be doing in terms of getting the right message out to the media?

David Gauke: Obviously, I don’t want to get drawn into individual cases, but clearly when government and Parliament determines that there should be incentives for investment, such as in the form of capital allowances, it doesn’t seem to me to be justifiable to criticize a company for making use of those capital allowances. That’s acting in accordance to Parliament’s intentions.

I think there is a challenge for large businesses. Understandably, at a time when benefits are being reduced and taxes are higher than people would like, there is a heightened sense of injustice, if there is a perception that someone is not paying the tax that is due. I think in that environment it’s necessary for businesses to be prepared to communicate and that’s not always easy. Tax is a complex matter, but businesses need to be prepared to go out and explain why they pay the tax they pay and that it simply isn’t reasonable to look at, for example, turnover and then corporation tax payments and reach a conclusion from that. One can see why people jump to particular conclusions, and I think it’s for businesses themselves to do more to explain. If only one side of the argument is heard then people will automatically assume that businesses have reduced their corporation tax payment through some artificial behavior and that’s not necessarily the case.

“ … it simply isn’t reasonable to look at, for example, turnover and then corporation tax payments and reach a conclusion from that. But one can see why people do jump to particular conclusions, and I think it’s for businesses themselves to go out and do more to explain, because if only one side of the argument is heard then people will automatically assume that businesses have reached a corporation tax payment on the basis of some

“ I think the general anti-abuse rule should be given time to bed in, to see the impact that it has. I believe that we’ve got the balance right between dealing with aggressive tax avoidance but also ensuring that taxpayers are not faced with a level of uncertainty that deters investment.”

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Rob Thomas: Where do you see that line between center ground of tax planning to access available incentives and unacceptable structuring?

David Gauke: I would focus on where behavior is contrived, where it’s artificial and where it’s not driven by commercial purposes. If a company gets a loan from a parent company because it’s a cheaper rate, then that seems to me to be one thing, but if it’s a very contrived arrangement, purely driven by reducing a tax bill, then that’s another.

GAAR

That’s a good link to the UK’s new General Anti-Abuse Rule

behind it and how you see it developing? Could you touch on how it’s been designed and where you see it going as well as the protections that have been put in place?

David Gauke: I think there’s been a debate as to whether we should have a GAAR for some time. The previous government looked at it some years ago but decided not to proceed. We asked Graham Aaronson to put together a group to look at this, and he pulled together a large number of tax experts from business and

academia and the law and they concluded that a general anti-avoidance rule would not be appropriate, but a general anti-abuse rule would be, and we’ve obviously consulted very thoroughly on this and decided to take it forward.

It’s a useful additional tool for HMRC, though it’s not a solution to every issue of tax avoidance. But it is something that will help HMRC deal with some of the very aggressive tax avoidance schemes for example, that HMRC succeed in dealing with in the end, but only after many years of litigation. I think this will help deter some of these schemes right from the start.

It is narrowly focused, and I think that is the right approach. There are safeguards there because this is a departure from our previous approach, where the burden was on HMRC. And there’s an advisory panel that’s producing a lot of detailed guidance.

Coming back to the answer to the previous question, it is very much focused on the aggressive artificial contrived behavior, and that, I think, will be helpful to HMRC and deter some of that behavior.

How do you address the concern from business that the GAAR could morph over time?

David Gauke: Many other jurisdictions already have a GAAR of one description or another. The truth is that no Parliament can bind its successors, and if businesses are concerned about what future governments may do, whether we’ve got in place a GAAR or not, they may have that concern. I hope that this can stand the test of time and that we can build a consensus around this as an appropriate means of responding to aggressive tax avoidance. We have gone into this after very careful study, after an independent group has looked at the various options and decided against a general anti-avoidance rule. Although there’s clearly going to be a debate on this, I think the general anti-abuse rule should be given time to bed in, for us to see the impact that it has. I believe that we’ve got the balance right between dealing with aggressive tax avoidance but also ensuring that taxpayers are not faced with a level of uncertainty that deters investment.

“ Rightly we have an international tax regime that wants to prevent double taxation, so that economic activity is not taxed twice, which would be damaging for international trade and world prosperity. But we don’t want to see those rules exploited so that economic activity is not taxed at all.”

“In short, it’s not just tax, but it also includes tax, that as a Government we

recognize that businesses have choices as to where they locate, where they

invest and we believe that the UK is a great place in which to do business.”

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The UK has presidency of the G8 at the moment. What’s your messaging been to the G8 on avoidance and where do you think this will go?

David Gauke: In many respects, the international tax architecture hasn’t really moved with the times. Rightly we have an international tax regime that wants to prevent double taxation, so that economic activity is not taxed twice, which would be damaging for international trade and world prosperity. But we don’t want to see those rules exploited so that economic activity is not taxed at all. There is an issue with the way the world has moved, use of new technology, perhaps greater reliance on intellectual property and the way that multinationals structure their businesses. The architecture hasn’t moved with the times and what we want to do is to ensure that it does. The UK has obviously led the way in this, but this is a matter of the world’s major economies working together.

This is an international issue and the answer is an international solution. The G8 is about encouraging a process through the G20 and of course the OECD who are already very heavily engaged in this debate. The G8 and G20 have been very prominent in supporting the OECD in their work in this area.

Rob Thomas: We’ve seen calls from some commentators for a completely new plumbing system rather than a refinement of the existing architecture. What do you hope to see?

David Gauke: Let’s look at some of the ideas that emerge during the course of this process, whether it is at the G8 or the G20 or from the OECD. We want to have something that is workable, something that works in practice and not just in theory, where we can get international agreement The degree to which the system needs to be fundamentally changed — the sort of tear out the plumbing and restarting again – is clearly going to be part of the debate. But we obviously want to make sure that we have a system that does facilitate international trade and investment.

Rob Thomas: Can you comment on the financial transactions

David Gauke: We have consistently said that this is a bad idea and that the UK will not participate in it. We have concerns over the wider implications even for those jurisdictions that won’t have the FTT in place. The European Union has huge challenges to address, and I can’t see how a tax that’s going to reduce GDP is going to be helpful for that process. But obviously there are specific legal concerns that we have, as well as the way that this has been pursued.

Thinking about the international landscape, do you see a future where we all coalesce on a single system or are we likely to have bunches of countries abiding by particular architectures?

David Gauke: I see the OECD as being the key organization in this process. I think it is for those of us in the G8 and the G20 to give momentum to this process and, although the issue of corporate tax avoidance has perhaps been more prominent in the UK than elsewhere, it is a debate that will apply across the board at one point or another. So I see there being a very strong case for the G8 and the G20 countries cooperating. But the OECD is the driving force in terms of doing the work in this area, and I think that’s how it will continue to be.

Rob Thomas: Finally, do you have any key takeaways for our corporate readers?

David Gauke: In short, as a Government we recognize that businesses have choices as to where they locate, where they invest and we believe that the UK is a great place in which to do business. We’ve got a huge amount going for us, but we can genuinely say – and I don’t think we could have said this as a country three years ago- that we have a tax system that is attractive and demonstrates our commitment to providing an environment that is friendly for businesses to grow and invest.

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Webcast

OECD’s Base Erosion and

Webcast archiveWith its February report Addressing Base Erosion

project focused on a review of current international tax regimes and coordinated consideration of possible approaches for addressing concerns about BEPS. This work has been endorsed by both the G8 and G20 groups.

On 19 July 2013, the OECD issued its much-anticipated BEPS Action plan, which reiterates the themes of the initial report on BEPS — that, in the OECD’s view, gaps in the interaction of domestic tax rules of various countries, the application of bilateral tax treaties to multijurisdictional arrangements and

the rise of the digital economy with the resulting relocation of core business functions have led to weaknesses in the international tax system.

We invite you to view an archive of a recent webcast during which a panel of senior EY international tax professionals from France, Germany, the Netherlands, the UK and the US discussed the OECD action plan and its implications for multinational businesses.

To view the webcast archive, visit:

ow.ly/o8BHy

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Themes and Issues

OECD meets with business

shifting action plan

On 1 October 2013, the Organisation for Economic Co-operation and Development

to the OECD on the Action Plan on Base

01

Strategic International Tax Policy Services Leader T: +1 202 327 5824 E: barbara.angus@ey.com

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on BEPS over the next two and a half years, was issued by the OECD on 19 July 2013 in connection with a meeting of the G20 Finance Ministers and Central Bank Governors.1 The OECD issued more detailed documents on two of the Action Plan focus areas, transfer pricing for intangibles and enhanced transfer pricing documentation, on 30 July 2013.2 The OECD — BIAC

representatives to engage with the OECD on the Action Plan and the 15 focus areas. In the Action Plan, the OECD expressed a commitment to consult with the business community as it works to develop recommendations in each of the focus areas.

Business representatives from around the world and from a range of industries participated in the 1 October meeting of BIAC and OECD on the BEPS Action Plan, including several representatives of EY. The OECD was represented at the meeting

Australia, Canada, France, Italy, Mexico, the Netherlands, Spain, and the United Kingdom. Key members of the OECD secretariat also participated in the meeting, including Pascal Saint-Amans, who is the Director of the OECD’s Centre for Tax Policy and Administration, and Joe Andrus, who leads the OECD’s transfer pricing work.

OECD BEPS action plan

interaction of domestic tax rules of various countries, the application of bilateral tax treaties to multijurisdictional arrangements, and the rise of the digital economy with the resulting relocation of core business functions, have led to weaknesses in the international tax system. The OECD acknowledges that in many circumstances existing domestic law and treaties yield the correct result, but states in the Action Plan that without coordinated action in the areas that give rise to policy concerns, countries that wish to protect their tax base may resort to unilateral action that could result in a resurgence of double taxation as well as global tax uncertainty. The Action Plan thus concludes that fundamental, consensus-based changes are needed to address double non-taxation and cases of no or

the activities that generate it.

1. For more information regarding the Action Plan, see EY Global Tax Alert, , issued on 19 July 2013. 2. For more information, see EY Global Tax Alerts, OECD issues Revised Discussion Draft on the Transfer Pricing Aspects of Intangibles, issued on 31 July 2013 and OECD

invites public comments on the White Paper on Transfer Pricing Documentation, issued on 1 August 2013.

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The 15 focus areas — or Actions — set forth in the Action Plan, each of which is

completed in 2014 or 2015, are as follows:

1. Address the challenges of the digital economy

2. Neutralize the effects of hybrid mismatch arrangements

3. Strengthen CFC rules

4. Limit base erosion via interest deductions and other

5. Counter harmful tax practices more effectively, taking into account transparency and substance

6. Prevent treaty abuse

7. permanent establishment status

8. Assure that transfer pricing outcomes are in line with value creation — intangibles

9. Assure that transfer pricing outcomes are in line with value creation — risks and capital

10. Assure that transfer pricing outcomes are in line with value creation — other high-risk transactions

11. Establish methodologies to collect and analyze data on BEPS and actions to address it

12. Require taxpayers to disclose aggressive tax planning arrangements

13. Re-examine transfer pricing documentation

14. Make dispute resolution mechanisms more effective

15. Develop a multilateral instrument for amending bilateral treaties

discussionThe discussion at the OECD-BIAC meeting covered all 15 of the Actions at a high level and like the Action Plan itself was organized around four groupings of the Actions. From the BIAC side, there was a reiteration of the importance of the BEPS project and an expression of the interest of the business community in actively consulting with the OECD throughout the process. From the OECD side, there was a reiteration of the strong political level commitment to the BEPS Action Plan from both OECD countries and G20 countries. It was further noted that the BEPS project is about developing new tax policy tools that can be used to address

may allow what the OECD refers to as “double non-taxation” while maintaining the historic focus on addressing double taxation.

Focus on “International coherence”

through 5, which are grouped in the Action Plan under “Establishing International Coherence of Corporate Taxation.” OECD representatives stated that inconsistencies have appeared in the global tax system and that no one is to blame for this but it must be addressed. With respect to Action 2 on Hybrids, it was noted that the work in this area will build on work done in developing the OECD’s 2012 report on hybrid mismatch arrangements. With respect to Action 5 on addressing harmful tax practices, it was noted that the OECD has previously carried out work in this area, that the work here also will involve non-member countries, and that the goal is to develop common rules allowing countries to design their own tax rules “without harming their neighbors.”

“ The comments from business representatives focused in particular on the need for clarity and certainty in the rules that are to be developed. It was also stressed that any new rules must be prospective in effect.”

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The comments from business representatives focused in particular on the need for clarity and certainty in the rules that are to be developed. It was also stressed that any new rules must be prospective in effect. Examples were provided on the non-tax reasons for use of debt instead of equity and the role of the arm’s length standard in the debt-equity area was emphasized. With respect to the Actions on hybrids and interest deductibility, business representatives noted that the results of hybrid treatment often are intended by a government and that both the level of debt and the use of hybrid instruments can be impacted by the applicable regulatory regimes for industries such as banking and insurance.

A similar comment was made in the context of CFC rules regarding the special considerations for certain industries such

Action 5 on harmful tax practices, it was noted that the substantiality test for exclusion from treatment as a harmful tax practice should be a relative standard rather than an absolute standard and that the substantiality standard must be clear. In this regard, it also was suggested that exchange of information between countries on the details of their regimes, rather than on rulings, issued would provide the most useful information.

Focus on substanceThe meeting discussion then turned to Actions 6 through 10, under the heading of “Substance.” With respect to Action 6 on preventing treaty abuse, OECD representatives noted that rules like the

United States and the main purpose tests used by the United Kingdom would be considered as the OECD develops its

recommendations for anti-abuse rules. With respect to the three Actions on transfer pricing, OECD representatives stated that work is the most advanced on the intangibles Action because of the pre-existing OECD project, but that the OECD working party would also be turning its attention to the other two transfer pricing Actions on risks and capital and high-risk transactions. Importantly, OECD representatives reiterated the commitment to consultation on all the transfer pricing items. This will begin with the consultation on intangibles, which is scheduled for 12–13 November 2013.

Business representatives began their discussion by expressing the importance of maintaining the arm’s length standard for transfer pricing. With respect to Action 6, it was noted that the focus should be on treaty-based solutions and that domestic law provisions, including domestic general anti-abuse rules, should not be used to override treaties. With respect to Action 7, business representatives stressed the potential for double taxation that would be created if the PE standard were lowered or were made less clear, reiterated the need for certainty, and provided illustrations of where activities are done in different entities for business reasons that are unrelated to the PE threshold. With respect to the transfer pricing Actions, several business representatives provided explanations of their business models as illustrations of the kinds of substance involved and the complexity that would

from the traditional transfer pricing approaches in these areas.

Read more on the 3 October 2013 publication by the OECD of a memorandum seeking input on the development of an approach for country-by-country reporting to tax authorities of income, taxes paid and economic activity.

ey.com/GL/en/Services/Tax/International-Tax/Alert--OECD-seeks-input-on-country-by-country-reporting

OECD seeks input on

“ Business representatives began their discussion by expressing the importance of maintaining the arm’s length standard for transfer pricing.”

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Focus on transparency and certaintyNext the meeting discussion focused on to Actions 11 through 14, grouped under the heading “Transparency and Certainty.” The bulk of the discussion in this grouping related to Action 13 on transfer pricing documentation. OECD representatives stressed the critical importance of increased information reporting. The greatest political imperative is around developing a new template for country by country reporting to tax authorities of high-level information regarding income, activities and taxes. This information is to be used for risk assessment purposes only and thus should be distinguished from the more detailed reporting that is proposed to be done through a new two-tier master

on both these initiatives will proceed in tandem and will the subject of discussion during the November consultation with business. The OECD on 3 October 2013 issued a short document listing a series of key points on which business input is requested to be provided at the November consultation, including:

• What types of information regarding income should be required

• What of information regarding taxes should be required

• What other categories of location information, such as data on revenue by customer, tangible and intangible assets, employees and management, and research and marketing expenditures, should be required

• What mechanisms should be used for reporting and sharing this information

With respect to Action 12, it was noted that there is a strong to the OECD Forum on Tax Administration’s ongoing work on “cooperative compliance.” With respect to Action 14 on improving the Mutual

representatives stressed the commitment to this work, which is important because of the increasing inventory of unresolved

governments, and the potential today for denial of access to relief under MAP.

Business representatives stressed the importance of close consultation and input from the business community during the development of the approaches for increased transfer pricing documentation and country by country reporting. It was noted that high level information must be used only for risk assessment purposes. The critical need to ensure the

reported under these new approaches was stressed. Business representatives also expressed appreciation for the OECD’s commitment to working on improving MAP.

Focus on processThe meeting discussion concluded with Actions 1 and 15. With respect to the digital economy, OECD representatives discussed the OECD’s earlier work on ecommerce but indicated that many governments believe the world has changed. With respect to Action 15, OECD representatives focused on a multilateral instrument as an alternative to separate bilateral action and also noted that such a multilateral instrument also could serve more global purposes as well.

19

OECD just one year away, it is important for companies to be focused now.”

Business representatives discussed the business models used in

between digital activity and more traditional business activity. The importance of taking a cautious approach in developing any changes to the PE standard was stressed. The complexity of the

At the close of the meeting, OECD representatives expressed appreciation for the productive dialogue, underscored the short timetable for the OECD to complete its work, and reiterated the need or input from the business community on many of the Actions.

The discussion at the OECD-BIAC meeting highlighted the breadth and complexity of the work to be done by the OECD in connection with the Action Plan. While the project is extremely ambitious, the political level interest in this work and the commitments of all OECD and G20 countries mean that the work will advance consistent with the timetable set by the OECD. With

away, it is important for companies to be focused now. Companies must keep informed about developments in the OECD and, importantly, about the perspectives of the countries in which they have operations or plan to invest. Companies also should consider how to participate in the broader global debate regarding the full range of potential international tax changes by engaging with OECD and country tax policy makers. Finally, companies should begin evaluating the implications for their business models and structures of potential changes in the areas under consideration by the OECD in connection with the Action Plan.

20

Themes and Issues

Addressing business traveler risk: Two years on, leading practices emerge

02

20

In the April 2011 edition of the Global

we highlighted the growing focus of tax authorities on the movement of business travelers, viewing them through the lens of not only income tax and social security compliance, but whether they were triggering wider issues such as the creation of a permanent establishment. Scrutiny of one issue could lead to more, leaving

and heavy remediation requirements. With more than two years having passed since our initial article, these focus areas have become

implemented by multinational companies in their move to reduce their risks.

Human Capital T: +1 713 750 1528 E: jay.sternberg@ey.com

Kim Crowley Human Capital T: +1 617 585 0437 E: kim.crowley@ey.com

21

area for many tax authorities. These individuals may be employees who take occasional business trips to a variety of locations, employees who take regular business trips to a few locations or employees who go on an extended business trip to one single location. These employees are not on a formal assignment to a different work location and are not seconded to a host entity. The risks associated with these STBTs continue to grow, and the attention paid by tax and immigration authorities to these individuals has not lessened in the last two years.

Why the focus?While tax and immigration authorities continue to focus on this population, multinational companies are actually tending to increase their reliance on this population. Several factors are contributing to this trend: companies continue to face pressure to keep up with the pace of globalization, using a globally mobile work force, but at the same time, need to manage and reduce costs. For these reasons, short-term business travelers are seen as a growing necessity in today’s business world.

What are the risks?There has been, and continues to be, a clear focus by tax authorities on collecting revenue through personal and corporate income taxes. Multinational companies now also know that the risks they face with regard to these short term business travelers do not end there. Companies can face fees and penalties, or other negative consequences, even when an employee’s travel does not cause a personal or corporate tax liability. These negative consequences are not limited to direct tax costs and can include:

Business reputation risk: The general public is more in tune and critical of companies that are perceived as not

immigration laws. Negative press about a company alone has the ability to tarnish a brand. Some jurisdictions, however, have gone even further and created limits on an organization’s ability to do business if that company is not in compliance with local laws and obligations. This risk of business interruption continues to grow.

Employee dissatisfaction: When an employer does not address the tax and immigration requirements of their traveling employees, and employees face negative consequences as a result, the employees may place blame on their employer and expect the employer to rectify the situation. This will take time from the focus of an employee and can result in reduced productivity and potentially even the loss of an employee.

Budgetary risk: When an employee’s business travel causes a company to incur unexpected tax or penalty costs, those costs will typically not have been properly accrued for. As a result,

Risk of prosecution: Failure to report income, withhold income taxes, pay taxes or adhere to immigration policies can result in

company.

Employment law risk: Employees working in different jurisdictions without the associated control and visibility from the corporate level could subject the employer to the employment law of that jurisdiction, without the employer being aware of it.

Short-term business travelers

Regulatorycompliance

Businessreputation

risk

Unhappyemployees

Budgetaryrisk

Permanentestablishment

risk

Employmentlaw risk

Risk ofprosecution

Non-compliance with complex immigration, withholding tax, social security and other reporting requirements creates a potential for penalty assessment

Inherent risks of short-term business travel

Senior assignees in certain countries can create permanent establishment (PE) risks for employing entity

Non-tracked employees could pose risk of employment law exposure to the company

Failure to report income,withhold income taxes, pay taxes or adhere to immigration policies can result in criminal prosecution

of the company.Non-compliance with local legislation can result in failure to properly budget and allocate costs

It's employees in a particular country can seriously harm an organization's reputation and may impact its ability to operate in that country

Employees do not want personal tax and immigration exposure

Inherent risks

22

Are the risks real?The risks are very real. More and more often, authorities are taking action and companies are paying the price. Further, the risks extend to not just foreign travel, but to domestic travel as well. This is evidenced in the range of examples noted below.

USA: US$20m assessed in under-withheld taxes, penalties and interest for domestic short-term business travelers.

UK: A company pays more than £40m in back taxes and penalties for failure to accurately report home paid income in the UK.

UK: Of 407 immigration investigations in the UK, 72% resulted in prosecution and criminal sanctions, of which 46% included jail sentences of seven to 12 months.

A European multinational was assessed €5m in penalties for failing to report full home paid compensation for employees assigned to work in India. Indian authorities then opened a fuller three year investigation.

A manufacturer was the subject of a payroll audit in China, resulting in the requirement for payment of approximately US$25m in back taxes and US$8m in penalties.

Social security authorities led a raid and criminal investigation on a multinational company, resulting in a US$8m assessment of back social security tax and penalties.

An enquiry into a related matter uncovered an internal control breakdown requiring a multinational company to restate previously published

correctly report employer paid tax expense.

company had its entire foreign retirement

Japanese tax purposes, requiring the payment of back taxes of US$8m and US$1m in penalties.

How are companies

Compliance with the law is a black and white issue and companies must address risk issues in a more proactive manner.Multinational companies are not only assessing the risk, but are increasingly quantifying that risk. Companies are reviewing their processes, ranging from how a business unit approves business travel to how employees book travel arrangements and what activities the employees are carrying out while in the

host location. Companies are also reviewing their corporate structure, transfer pricing strategies and chargeback positions and assessing how all the different moving parts may together impact business traveler risk.

The effort to broadly assess these risks can be complicated by the fact that the assessment, and any action plan to address the risk, must be cross-functional in nature. Tax, Finance and Human Resources, and even the payroll and travel departments must be involved, some of which may have been outsourced to different vendors and some of which may reside in different geographical locations

risk can be managed within long-established processes, many companies are either revisiting their processes or creating new ones designed to identify and manage the risks earlier in the life cycle.

“ Compliance with the law is a black and white issue and companies must address risk issues in a more proactive manner.”

“... any action plan to address the risk, must be cross-functional in nature. Tax, Finance and Human

Resources, and even the payroll and travel departments must be involved, some of which may

have been outsourced to different vendors and some of which may reside in different geographical

locations altogether.”

23

The image below demonstrates EY Tracer’s periodic summary reporting that summarizes data reviewed, reviews analysis performed and presents system analysis of company travel data in a series of useful summary charts.

EY has released a smart phone application that helps business travelers and their employers avoid global tax traps and immigration violations. This technology helps companies to manage the increasing risks associated

create and, in extreme cases, keeping executives out of jail. The new app works in conjunction with EY’s existing

assists organizations in navigating the myriad of

personal and corporate tax and immigration rules for more than 100 countries. Employees who download the app can use it to report their location to a central tracking system, allowing travel data to be analyzed by employers to avoid tax surprises and comply with immigration laws. The app tracks current location, home location and whether time spent abroad has been a work

information is transmitted.

Global travel movement — number of business trips between top 10 country combinations

KeyMovement betweencountries

10289

49 4945

29

29

29

28

26

USA UK1

USA Mexico5

USA Japan2USA Ireland3UAE Turkey 4

USA Chile10

UAE Egypt6UAE Lebanon7UAE USA8USA France9

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Organizations are even developing formal short-term business traveler programs, the goal of which is to manage and minimize risks, while allowing employees to remain mobile and to address the business needs of the company around

Such a short-term business traveler program may include the following elements:

• A pre-assessment process to determine immigration requirements and any personal, social and corporate tax exposure, before an employee leaves on the short term business trip

• A method of tracking employees’ travel on a regular basis

• A method for collecting and a repository for storing employee demographic data

• A means of analyzing the travel and demographic data on a regular basis in order to assess risk

Using such a process, the company can better assess at what point an individual may trigger a liability. At that time, an informed decision can be made to allow the employee to continue to travel, incur the liability or to restrict the employee’s travel.

A short term business traveler program can also address employee satisfaction. An important component of any such program is what the company will do for the employee when an employee does incur a personal tax liability in a jurisdiction other than his or her home. Multinational companies need their employees to be globally mobile. But companies must also make sure that employees are not personally incurring a greater tax burden or having to personally

their own.

Finally, a company that has such a program will be able to better assess the costs associated with their business travel and correctly, and more timely, accrue for these costs. As is often the way, it is not the very fact that these costs are incurred, more the uncertainty and dislike of surprises that can be a driving motivation.

What does “compliance” mean?Compliance is determined both country by country, and employee by employee. Today, more than ever, companies must focus on the details. When looking to be compliant, a company must consider:

• Does the individual have the required immigration documents to enter and work in the host location?

• Is an employee subject to income and social tax in the host location?

• Does the employee have a tax return

• Does the company have an income reporting or tax withholding requirement in the host location?

• Do the employee’s activities in the host location create corporate tax implications?

• What are the potential risks and costs of non-compliance?

• Does the company have the required human resources in the various cross-functional departments to implement the processes required to be compliant?

• Does the company have the needed technology and infrastructure to be compliant in the host location?

While some companies have progressed to implementing more sophisticated and formal business traveler programs, many companies efforts in this area are still in the relatively early stages. These companies may be working to resolve current compliance issues while at the same time developing and implementing a more sophisticated program for the future. The need to move people around the globe continues to accelerate while organizations try to play catch-up. A company that wants to reduce and manage risk must be willing and able to attack this issue on these two fronts simultaneously.

Organizations should expect continued focus by tax authorities on the short-term business traveler population, particularly as leading practices are shared and technology continues to enable a higher level of enforcement. Tax is an ever changing landscape. Just as so many companies are in the early stages of addressing this topic, so are the tax

acting sooner rather later should outweigh the costs in the long term. Organizations are focused on how to manage the risk and minimize the costs of short-term business travelers, while tax authorities around the world are focused on how to target this population and be

organizations, even those who have addressed this issue, need to remain proactive and focused.

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2013–14 EY Global tax risk and controversy survey — your invitation to shape the survey results

25

A number of converging trends are having an unprecedented impact on the way in which countries set tax policy. And that policy discussion has now gone global, and tax is at the core of the G8 and G20 agendas.

Rapid globalization, advancements in communications and technology, a weak and continually shifting global economy and changes in the way in which trade is conducted and business operates are all driving a new look at how multinationals are taxed. In the next few years, we will potentially see the biggest reform of global taxation in a lifetime. It will be a critical time for business taxation and for business taxpayers. At the same time, the drumbeat of tax enforcement continues to grow steadily louder. Tax revenues

entrenched; media focus has turned to the tax policies of multinational companies. Companies tell us that tax audits have become more focused and, in some cases, aggressive, as revenue bodies work to try and secure all tax revenue that they feel is due to them.

What do your peers think about the growing tax and controversy risks and what are they doing to manage them more effectively? The answers will be in EY’s 2013–14 Global tax risk and controversy survey. We are pleased to invite you to help shape the survey,

survey report.

Fill in the survey at:

ey.com/2013taxrisksurvey

26

Themes and Issues

European Union update

In parallel with developments at the national level and mirroring the wider international

EU is increasingly focusing on combatting avoidance, evasion and fraud. But also

more recent EU activity highlights the shifting focus both onto national level policies and whether in fact some elements of EU harmonization itself may be contrary to EU law.

03

Steve Bill Tax Policy & Controversy T: +44 7768 035826 E: steve.bill@uk.ey.com

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27

transparency, the recently adopted Capital Requirements Directive IV was extended at the last minute to encompass

requirements enter into force on 1 January 2014, by which time individual Member States are required to enact their own

this data, consider the potential economic consequences of publication of such information and report to the European

enacted following the Commission’s review, then all affected institutions will need to publicly disclose this data on a country-by-country basis from 1 January 2015.1

This development is mirrored in the revised Accounting

CBRC obligations for large extractive and logging companies. Beyond this, the Commission is now proposing to introduce similar requirements into the Transparency Directive so that all large companies and groups will be required to declare, in the words of Michel Barnier the EU Internal Market Commissioner, “the taxes they pay, how much and to whom.” This extension of

change before implementation.

The EU Administrative Cooperation Directive, which entered into force in January 2013, provides, inter alia, for the automatic

income and capital from 1 January 2015. These are income

from employment, director’s fees, life insurance, pensions and immovable property. Such is the heightened desire of the Commission to combat tax evasion/that, even before these provisions have been implemented, the Commission proposed in June of this year to extend the scope of automatic information exchange to cover income from dividends, capital

1 January 2015. This followed the launching of a pilot project along similar lines between the UK, France, Italy, Germany and Spain. If adopted, this will mean that Member States would share as much information amongst themselves as they have committed to doing with the USA under the Foreign Account Tax

In parallel with these developments, the EU Council has given the Commission a mandate to renegotiate the EU’s agreements with Switzerland, Liechtenstein, Monaco, Andorra and San Marino to ensure that these countries continue to apply measures equivalent to those applied in the EU for the taxation of savings income.

In June the EU Council adopted two Directives designed to help Member States combat intra-community “carousel” fraud. The

mechanism to counter fraud in the following sectors: mobile phones, integrated circuit devices, supplies of gas and electricity, telecoms services, game consoles, tablet PCs and laptops,

The second enables Member States to immediately introduce the reverse charge in other sectors in cases of sudden and massive

time, pending authorization for such a measure from the Council. Both Directives will apply until 31 December 2018, by which time it is hoped that the Commission will have put forward proposals for a new, more fraud-resistant VAT system.

account balances,” bit.ly/19g8wOV.

“ The Commission has very recently escalated its efforts to eliminate ‘harmful tax measures’ in the EU by using its State aid powers to begin scrutinizing rulings given by some

investments in a country.”

28

Common consolidated corporate tax base

detailed technical discussions on this proposal was agreed by Member States, under which work on the proposal would

the tax base with discussion of the issue of consolidation being postponed to a second step when work on the base has been

not yet ready for a political discussion. On this basis, the Irish Presidency produced a new compromise text that is serving as the basis for ongoing discussions.

Harmful tax measuresThe Commission has very recently escalated its efforts to eliminate “harmful tax measures” in the EU by using its State Aid powers to begin scrutinizing rulings given by some Member

a country, in order to give certainty in advance on how transactions will be taxed.2

The Financial TimesThe Irish Times Sueddeutsche Zeitung

Handelsblatt Neue Zuericher Zeitung

of EU Member States — Ireland, Luxembourg and the Netherlands, though other countries are understood to also have been contacted — to provide information related to certain preferential tax rulings.

This development relates to the ongoing discussion on how multinational companies are taxed and mirrors wider efforts currently being led by the OECD to shed more light on international tax policy issues — including BEPS Action #5, which sets out the desire to “Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes.”

Despite relating to Member States’ tax policies, the current scrutiny comes from the Directorate-General for Competition

general, tax matters are handled by Taxud, the Commission’s Taxation and Customs Union Directorate-General, headed by Commissioner Algirdas Šemeta. However, whenever a certain Member State’s policy measures may have a relevant impact in relation to competition in the internal market, DG Competition is the relevant competent body.

2. See EY Global Tax Alert, “European Commission scrutinizes Member States’ tax schemes under State Aid criteria”.

Earlier this year it was reported that the UK patent box regime is under review to determine whether it might be regarded as a harmful tax measure under the European Union’s Code of Conduct for Business Taxation. On Tuesday 22 October the Code of Conduct group met to consider in detail whether it considered that the UK and Cyprus patent box regimes breached the Code. We understand that no consensus was reached and so the matter is therefore being referred, without a recommendation, to the December meeting of the Council of Economic and Finance Ministers

this matter will be decided by agreement between Member States.

The Code of Conduct contains a set of criteria for identifying potentially harmful tax regimes. The

Commission found in its draft assessment that the UK

criteria failed were:• Criteria 4, Genuine economic substance; and• Criteria 5, Applying an OECD compatible approach

The UK government remains committed to the Patent Box and believes its arguments are strong. In particular, it believes that the principle of equal treatment

means that the Patent Box should continue in its current state. The UK does not believe that changes to the regime will be necessary, but is considering what changes could be made to address the concerns.

UK Patent Box – healthy competition or a harmful tax practice?

29

Many countries provide rulings for taxpayers, including for taxpayers

in a country, in order to give certainty in advance on how transactions will be taxed. The question here is whether rulings provided by the countries concerned are preferential rulings, giving discretionary incentives, or simply set out for the taxpayer how the generally applicable law applies in their circumstances.

The information requests are probably driven by questions around whether a Member State’s tax-reducing measure

State Aid legal framework allows for the Commission to demand from the Member State a repayment from the recipient of

respectively from the addressee of the illegitimately granted tax advantage, i.e. the ruling. Such a repayment could potentially be demanded with retroactive

granted. Additionally, contingent on the individual case, the EU State Aid legal framework allows for the Commission to

Member State.

Preferential tax treatments will only be considered to be illegitimate State Aid under the Article 107 et seq. of the Treaty on the Functioning of the EU if the

1. The tax advantage under scrutiny effectively lowers the tax burden that normally applies.

2. The tax advantage is granted by the Member State or through the Member State’s resources.

3. The tax advantage affects the competition and trade between Member States.

4. The tax scheme is of a selective character.

At this stage, it remains to be seen whether, based on a case-by-case examination of the granted rulings, the

Whatever the outcome, these new developments are a reminder of the focus on the tax policies of individual countries, not just the companies operating under those policies. Moreover, the EU State Aid legal framework provides for a legally binding instrument, which directly grants the Commission directly with far reaching

The Financial Transaction Tax (FTT)It appears that the 11 Member states that have requested and received authorization from the Council to proceed with the introduction of a Financial

reaching agreement upon the scope and type of FTT they want to implement. Early agreement is therefore unlikely, and much may depend upon the formation and attitude of the new German government following the recent federal election.

It is not only the opinion of the new German government that is of relevance to the FTT, though, in an opinion dated 6 September 2013, the Legal Service for

view that the “counterparty” rule in the

a harmonized FTT is contrary to EU law.

The counterparty rule provides that a

outside each of the EU11 jurisdictions

is deemed to be established in a PMS if it

example, the acquisition of equities or

that PMS.

Thus, a UK bank, or a US bank, would be deemed to be established in Germany, simply by virtue of being party to a

corporate client that is authorized or has its registered seat in Germany. In such a case, that respective bank would be liable to the EU FTT in Germany on the

In summary, the CLS expressed the view that the deemed establishment rule is contrary to EU law because it:

• Exceeds Member States’ jurisdiction for taxation under the norms of customary public international law as they are understood by the EU

• Is not compatible with Article 327 of the Treaty for the Functioning of the European Union as it infringes on the taxing competencies of the non-PMS

the “enhanced cooperation” procedure governing the operation of the EU

• Is discriminatory and likely to lead to distortion of competition to the detriment of non-PMS

It is unlikely that the CLS opinion will spell the end of the entire EU FTT project but that is likely to act as a catalyst to further change the proposal content.

Although the timing of the CLS opinion has come as something of a surprise, the conclusions are not at all surprising. Many commentators have already expressed the view that the counterparty rule is the most controversial and legally questionable aspect of the Directive, not least as it has no precedent or analog in international tax law. The CLS opinion is also consistent with the UK’s protective submission to the European Court of

enhanced cooperation procedure particularly with respect to its comments on the operation of public international law.

“ The information requests are probably driven by questions around whether a Member State’s tax-reducing measure

30

Some media outlets expressed the view that the CLS opinion signals the end of the EU FTT project. At this stage, it appears that the more likely outcome is that the EU FTT proposal will survive, albeit that its scope and content will change — a process which seems to be already under way.

There remains powerful political support among key European stakeholders for some form of EU FTT. The public reaction to the CLS opinion includes comments from the German government that it “advocates a swift introduction of the FTT for good reasons.” The EU Commission has also continued to defend its position robustly.

Nonetheless, while the CLS opinion is not binding as a matter of EU law on the

practice for the PMS to ignore the opinion given by the CLS, especially as the CLS is the Council’s own in-house legal unit, and is tasked with the responsibility of representing the Council before the ECJ in defense against the UK’s legal challenge. Accordingly, it is likely that the “counterparty” rule will not feature in the

One group of PMS, principally France, Italy and Spain, have already indicated that they would like to completely remove the

and move instead entirely to an “issuance” basis of taxation. In other words, they would like the FTT to apply

involving securities issued by entities domiciled in the PMS. The CLS opinion will therefore lend further weight to this stance, and arguably weaken the contrary view that has been expressed by some of the other PMS that have advocated the

retention of the establishment rule. This is because the inclusion of any establishment basis of taxation without the inclusion of a counterparty rule would

located in the PMS to transact wherever

outside the PMS and give rise to a migration of business outside the PMS.

Directive, there is a key question as to how, if at all, the FTT could effectively apply to, in particular, transactions in derivatives and depositary receipts. For example, in relation to derivatives, the current proposal applies the issuance rule

may be that the PMS seeks to extend the issuance rule to apply also to OTC derivatives, and to recast the issuance rule along the lines proposed by the European Parliament, by allowing the place of issuance of the derivative to “look through” to the location of the issuance of the underlying security. However, even this extension would apply only potentially to tax equity derivatives and bond derivatives. It would not appear effective to catch either interest rate derivatives or foreign exchange derivatives traded OTC or on exchanges located outside the PMS.

Another possible option would be for the PMS to supplant the counterparty rule with a form of reverse charge — something

papers that have been circulated in Member States’ discussions. Essentially, this would involve applying the tax charge only to parties actually established in a PMS, and would result in those parties looking to pass on the cost of the FTT in circumstances where a counterparty was established outside the PMS. The

that it would mean that to be effective

be primarily liable to FTT — and it is unlikely that this would carry any support amongst industrial concerns in the PMS.

The intervention of the CLS in such a robust way at this stage in proceedings would indicate that revised proposals can expect a similarly thorough legal analysis in future. This suggests a further delay in the policy-making process. It has already been reported in Germany this week that a Commission source has ruled out 2014 as a potential start date, with 1 January 2015 now being the earliest date. This seems more realistic.

The CLS opinion has not yet been formally debated by the EU Member States in the EU FTT working group meetings. The CLS summarized their views at the last working group meeting on 9 September 2013. Although the UK and Luxembourg expressed their agreement, and the Commission expressed disagreement, with the CLS opinion, the Lithuanian Presidency deferred discussions of the issues on the basis that the Member States had not had

It is expected that negotiations on the shape of the EU FTT will continue in earnest following the outcome of the German elections on 22 September 2013, and that inevitably these negotiations will need to take account of the CLS opinion.

“ It appears unlikely that the CLS opinion will spell the end of the entire EU FTT project but that, nonetheless, it is likely to act as a catalyst to further change the proposal content.”

“The intervention of the CLS in such a robust way at this stage in proceedings

would indicate that revised proposals can expect a similarly thorough legal analysis in future. This suggests a further delay in

the policy-making process.”

3131

July

September

October

30 OECD invites public comments on the White Paper on Transfer Pricing Documentation

OECD invites public comments on the Revised Discussion Draft on Transfer Pricing Aspects of Intangibles

31 OECD issues Revised Discussion Draft on the Transfer Pricing Aspects of Intangibles

Global Forum on Tax Transparency publishes New reports reviewing jurisdictions’ information exchange

01 OECD invites public comments on the white paper on transfer pricing documentation

OECD publishes Effective Personal Tax Rates on Marginal Skills Investments in OECD Countries: A New Methodology

05 OECD publishes Public comments on new draft elements of the OECD International VAT/GST Guidelines

27 OECD engages with developing countries on BEPS

03 OECD issues memorandum on transfer pricing documentation and country by country reporting

01 OECD meets with business on base erosion and profit shifting action plan

14 OECD report recommends new approaches to encouraging business innovation via tax incentives

22 European Commission creates Expert Group to guide EU approach to taxing the digital economy

22 OECD publishes comments received on the White Paper on Transfer Pricing Documentation

22 OECD publishes comments received on the revised discussion draft on transfer pricing aspects of intangibles

23 European Commission proposes a new standard VAT return

10 United Nations publishes Draft ECOSOC resolution

19 OECD releases Action Plan on Base Erosion and Profit

23 United Nations publishes Dates and provisional agenda for the ninth session of the Committee of Experts on International Cooperation in Tax Matters

31

Timeline from the European Commission, OECD and the United NationsKeep up to date with recent multinational news and developments.

Read about these developments and more in EY’s real time tax alert library at

ey.com/taxalerts

OECD

United Nations

European Commission

32

Themes and Issues

Tax administration aspects of the tax annex to the St Petersburg G20 Leaders’ Declaration

Aside from the important issues under consideration in the OECD’s Base

Plan, the last few years of G8 and G20 meetings have included a focus on the need to expand programs for sharing tax information, including discussions on the types of information to be shared, which countries should participate and whether participating countries legal frameworks

G20 meeting continued this focus, with the Leaders’ Declaration and associated “tax annex” document providing more

the introduction of multilateral, automatic information exchange.

04

Rob Hanson Global Leader — Tax Controversy Services T: +1 202 327 5696 E: rob.hanson@ey.com

32

33

The tax annex to the G20 Leader’s Declaration1

contains three items concerning the sharing of taxpayer information:

• Declaration 2 — “The Global Forum on Transparency and Exchange of Information for Tax Purposes has played a critical role in ensuring that the international standard of exchange of information on request endorsed by the G20 is implemented effectively around the world.”

• Declaration 3 — “The G20 has now endorsed the development of a new global tax standard: to automatic exchange of information.”

• Declaration 4 — “The next challenge regarding automatic exchange of information is now to get all jurisdictions to commit to this standard and put it into practice.”

Global Forum on Transparency and Exchange of Information Initial efforts by the G8 led to the establishment of the Global

countries and has been behind the creation of 1,100 new bilateral exchange of information agreements.2 The Global

currently chaired by Mr. Kosie Louw of the South African Revenue Service.

The work of the global forum has been to scrutinize all countries to determine their compliance with the new international norm regarding transparency. Countries are reviewed in two phases:

• Phase I asks:

• Do they have the legal framework for obtaining bank

shares, etc.?

• Can they compel the production of such information?

• Are they able to safeguard the information from unlawful disclosure?

• Do they have a framework for exchanging information, i.e., either treaties or tax information exchange agreements?

• Phase II asks whether the countries actually provide information when requested.

Through its extensive review activities, the Global Forum continues to successfully convince countries previously viewed

the exchange of tax information.

Once legal issues preventing transparency have been resolved, then the actual exchange of information is carried out using

believes is not in compliance and has information located in the other country.

offshore location has to be detected and the tax authority has to be able to demonstrate why it believes tax avoidance is at issue.

1. g20.org/load/782804366.

34

means of exchanging information, the G8

activities to add to available information

exchanges on a multilateral basis. An automatic exchange is where information

located in a source country is

request, provided to an individual’s country of residence.

In connection with the June meeting of the G8 hosted by the UK, the OECD released a paper3 citing unprecedented political support for expanding cooperation, including automatic exchanges. At the same time, the European Commission announced changes to its Administrative Cooperation Directive, which addresses automatic information exchange providing for the exchange of information consistent with

announced their intent to engage in a pilot automatic exchange of information project. Declaration 3 contains this endorsement of automatic exchanges.

But in this regard, as noted by Declaration 4, there are practical considerations. What is the standard to be used for conveying information between governments on a uniform basis? What information should be included? What language issues need to be eliminated and how will the information need to be structured to ensure an electronic format is acceptable to everyone’s technology?

Because of the prior activities by the OECD and the more recent activities associated with adoption and implementation of FATCA, it appears

overcoming these obstacles. The G-20 Declaration it has as a target a “new single global standard for automatic exchange of information by February

by mid-2014 … expect[ing] to begin to exchange information automatically on tax matters among G20 members by the end of 2015.”

Declaration 4 of the tax annex calls upon all other jurisdictions to join the G20 in implementing the automatic exchange of information as a new global standard at the earliest possible opportunity, while

use of information exchanged. In that regard, the tax annex notes the importance of the OECD’s Multilateral Convention on Mutual Administrative

multilateral information exchange. According to the Global Forum website, there are now some 60 signatories to the Convention, which is open to both OECD member and non-member countries.

are already signatories. The tax annex notes that it is expected that all jurisdictions should join the Convention without further delay.

ConclusionWhile the Global Forum continues

secrecy, the tax annex to the G20 Declaration is further evidence of a

which tax authorities plan to share tax information.

For companies, at a minimum this means an increase in burden, for

countries will be adding new forms they will require be submitted in order that they have the information they need to participate in the automatic exchange programs. In the US, FATCA has already had a far-reaching impact on US-based companies as well as foreign companies with US assets or clients. Companies are advised to now analyze their organization’s corporate footprint, their customer base and the business practices and operational procedures of each of their entities in readiness for this next phase. Successful compliance will involve expanding on existing processes, hence reviews of existing information reporting and withholding compliance processes and procedures should be performed.

35

Webcast

Webcast archive: EY Global

efforts to comply with transfer pricing rules and yet fewer than twenty percent of companies say they

their transfer pricing policies in real time or on a monthly basis.

This is just one insight mentioned on a recent webcast to discuss the results of EY’s latest transfer pricing survey. This latest survey of transfer pricing

controversy and double-taxation are on the rise. EY’s report explores how companies have been working hard to adapt by better managing their cross-border activities.

Download the report at: ey.com/2013TPsurveyand view the webcast archive at: ow.ly/o8E8N

36

Themes and Issues

OECD: International VAT and GST Guidelines move to the next stage

For a number of years, the Organisation for Economic Co-operation and Development

how to apply value-added and goods and

cross-border context. In this article, we discuss the OECD’s recent consultation process and the likely future development of the VAT/GST Guidelines.

05

Claudio Fischer Tax Policy & Controversy T: +41 58 286 3433

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37

Launch of the consolidated version of the VAT/GST Guidelines

8 November 2012 in Paris,1 businesses, academics and country representatives unanimously came to the conclusion that there is a strong need for internationally agreed-upon principles on

February 2013 with the publication of the consolidated version

on the place of taxation for cross-border supplies of services and

The Guidelines are intended to consist of a set of framework principles that countries can implement in their national legislation. The key objective of the process is to build the largest possible worldwide consensus on using the Guidelines as the future international standard for applying VAT to cross border trade with the view to minimizing risks of double taxation and unintended non-taxation.

Consultation commentsAs part of the process, the OECD invited interested stakeholders to provide comments on the draft consolidated VAT Guidelines before 4 May 2013. The text of the draft consolidated VAT Guidelines as well as the comments that the OECD received from a number of businesses, interested parties and professional

found in full on the OECD website.2

An analysis of the comments shows that there is a broad agreement among commentators with the approach and general orientation of the Guidelines. Notwithstanding this general agreement, there seem to be three main areas where changes or additional guidance information are still needed:

1. Chapter 3 of the draft consolidated VAT Guidelines addresses the place of taxation for cross border supplies of services and intangibles supplied to businesses that have establishments in more than one jurisdiction. Together with other commentators, in our response, we reminded the OECD that,

“an establishment” for VAT purposes, double or non-taxation can result if two jurisdictions involved in a supply apply

either that both jurisdictions seek to attract the place of

neither country provides a place for taxation because the existence of an establishment is denied.

As a possible solution to this issue, we recommended that the OECD should examine in more detail to what extent the

establishment” used in the OECD Model Tax Convention could

and indirect taxes as it would remove the current mismatch

example, in a company having an establishment for VAT purposes in a country even if it does not have a permanent establishment for income tax purposes. As such, aligning the

businesses and tax administrations alike.

1. See July 2013 edition of this publication at ey.com/tpc.2. oecd.org/ctp/consumption/public-comments-international-vat-gst-guidelines.htm.

38

2. The draft Guidelines addresses the case where a customer acquires services for use by other establishments, requiring

the services or intangible. This internal recharge is treated as consideration for a supply within the scope of VAT. In general, the commentators supported this approach. However a number of concerns were raised in respect of the scope of this method and aspects of its implementation. In particular, we expressed the concern that applying the recharge method to determine the right to tax may trigger other, unwanted consequences that have nothing to do with the place of

addition, we and other commentators requested that the OECD provide further guidance on the valuation on any internal charge as adopting this approach is likely to raise valuation issues and possible transfer pricing implications, particularly if the chosen approach differs between the jurisdictions involved.

3. for place of supply could applyDeciding where a supply of services should be taxed is a

consumption but where is a service “consumed”? Generally. VAT legislation adopts a series of proxy tests that seek to ensure that VAT applies in the most appropriate place. For

international telephone call is “consumed”, so the proxy for taxation may be to apply tax in the country where the caller is located.

It is common understanding that the proposed main rule for determining the place of taxation for services under the Guidelines is the place where the customer is located and that this rule should be applied as broadly as possible. But the

may require alternative rules. The Guidelines suggest a two-step approach to determine which jurisdiction has the taxing rights over a supply of a service:

• appropriate result under the criteria of the Guidelines.

• The second step applies if the main rule does not lead to an

context, the Guidelines mention services related to immovable property as an example of a likely exception. They indicate that these supplies should be taxed at the place where the property is located.

We and other commentators agree with this approach but we would welcome more guidance in this area. After all, double

two jurisdictions apply different proxies to determine the place of supply. We therefore suggested in our comments that the OECD should provide an exhaustive list of all types of services which would not fall under the main rule in order to provide the highest level of clarity and certainty for business.

Next stepsThe OECD is currently updating the draft Guidelines in the light of the responses received and incorporating necessary changes.

it is expected that the consolidated VAT/GST Guidelines will completed and presented at the second meeting of the OECD Global Forum on VAT, which will take place on 17 and 18 April 2014 in Tokyo, Japan.

In the longer term, the OECD will then move onto to developing VAT/GST Guidelines on the place of taxation for cross border

developing anti-abuse provisions and provisions on mutual cooperation and dispute resolution.

We will continue to report on progress in this publication on the VAT/GST Guidelines. We will continue to help the OECD in developing the Guidelines further and to contribute our opinions and insights on these topics, based on our experience of working with clients from around the world, to the expert group which was set up to assist the OECD Member States’ delegates in their work.

“ It is expected that the consolidated VAT/GST Guidelines will completed and presented at the second meeting of the OECD Global Forum on VAT, which will take place on 17 and 18 April 2014 in Tokyo, Japan.”

39

The latest edition of EY’s global indirect tax client newsletter, , is now available.

focus in this publication is on developments and hot topics that could have an impact on your day-to-day operations and your future business plans — whether you do business in one country or across multiple jurisdictions.

In addition to our regular ‘snapshot’ overview of recent and upcoming indirect tax changes around the globe, the latest issue contains the following articles:

Trends and themes

• EU: 2015 changes — VAT compliance issues for EU suppliers of e-services

• OECD: International VAT/GST Guidelines move to the next stage

•

• The EU Financial Transaction Tax

• Managing indirect taxes in rapid-growth markets

Country updates

•

• Croatia: EU accession — recent developments and further new rules

• Denmark: Payroll duty

• Germany: VAT groups and limited partnerships

• Luxembourg: New partial exemption VAT recovery rules

• Peru: Customs valuation of related-party sales

• Russia: VAT pitfalls and opportunities relating to cross-border intercompany service agreements

ey.com/IDTB

Indirect tax: the color blind tax that’s due whether the bottom line is black or red

39

Australia Australia’s new coalition government:

challenges ahead

With Australia’s conservative leader Tony Abbott sweeping

election recently, Australia’s voters have effectively punished the outgoing Labor government for six years of turbulent government and a failure to fully maximize the

mining boom.

Alf Capito

and Australia T: +61 2 8295 6473 E: alf.capito@au.ey.com

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41

With Abbott’s successful election campaign promising to cut taxes, now is a good opportunity to take stock and assess the impact of the Coalition’s tax reform agenda. The following provides a high level summary of the Coalition’s announced positions on key business tax reform issues.

Known proposalsBusiness taxation• The company tax rate is to be cut by 1.5 percentage points to

28.5%, for all companies, from 1 July 2015.

• The Paid Parental Leave Scheme levy of 1.5% will be imposed on companies with taxable incomes in excess of AUD$5 million

levy is not expected to attract franking credits. Whether the company tax rate cut will fully offset the cost of the levy, will

be applied against the levy.

• Company tax loss carry-back rules that were recently enacted are proposed to be discontinued. This prior measure provided eligible companies with up to $1 million loss carryback relief,

documents cite the loss carry back as an “inappropriate substitute for the long-promised company tax rate cut. There is no information on date of application or transitional rules.

• be retained.

•

• Other business concessions introduced by the previous government and funded from the mining tax package are to be discontinued, including the small business instant asset write-off and accelerated depreciation for motor vehicles.

• innovation incentives will be reviewed under the Coalition’s policy to “Boost the Competitiveness of Australian Manufacturing.”

Resources

2012 may continue.

allow investors to deduct mining exploration expenses against their taxable income, from 1 July 2014, capped at AUD$100 million over a three year forward estimate.

Financial services

will be discontinued.

International taxA pre-election interview reported that the Coalition was

anti-avoidance and transfer-pricing measures to strengthen

Coalition recognizes the need for strong anti-avoidance measures and addressing “tax-base erosion,” but is concerned that the changes should be introduced with wider industry

42

In addition to the Coalition’s stated positions on the above tax measures, the Coalition may implement tax “savings” measures that were recently announced by the former Labor government. These include, for example:

AUD$1 billion plus per year revenue boost expected from proposed thin capitalization and other international tax

A key issue for the incoming government will be to examine the basis for the previous government’s announcement to repeal section 25–90, which provides a deduction for companies borrowing funds to invest in overseas subsidiaries producing exempt dividends. That proposal, coming on top of the other international integrity measures, could generate inequitable outcomes for companies expending overseas. The consultation processes had only started before the election, to consider how this proposal would work.

An important factor that will impact the timing of some of the proposed changes is that the existing composition of the

until 1 July 2014. Senate vote counting is continuing and therefore, the fate of a number of key Coalition tax reforms, including the proposed repeal of the mining tax and carbon pricing, is uncertain.

There may be immediate changes in store for the Australian

May 2013 that it would establish a parliamentary committee to conduct regular hearings with the ATO and also launch an

possibility of separating compliance and administration

The Coalition does not propose to return the budget to surplus

reform, it announced that a comprehensive white paper is to be issued within two years. This will provide an opportunity to revisit the large number of outstanding recommendations of the Henry Tax review that have yet to be considered, plus potentially additional tax reform issues.

However, there is a critical need for improvements to Australia’s tax policy process. There is still a huge backlog of previously announced tax measures, unresolved despite varying start dates,

impediments for affected businesses. The August 2013 EY report “Ensuring Australia’s economic sustainability — Government Agenda 2014“1 highlights the critical need for the

backlog of previously announced measures. It also advocates improvement of the tax policy process to ensure that tax reforms are subject to effective consultation with business and are

need to be managed by the new government. Affected businesses will need to consider their commercial strategies and their engagement with government in relation to the prioritization, development and implementation of the reforms.

“ There is a critical need for improvements to Australia’s tax policy process. There is still a huge backlog of previously announced tax measures, unresolved despite varying start dates, which is

for affected businesses.”

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2. IMF World Economic Outlook, October 2013 – page 81: http://www.imf.org/external/pubs/ft/weo/2013/02/pdf/text.pdf

unpaid taxes in its bid to return the federal budget to surplus” reported The Australian Financial Review on 21 October 2013.1

Australia’s federal budget does indeed continue to struggle,

3.1% of GDP in 2013, accompanied by a fall in GDP growth from 3.7% in 2012 to 2.5% in 2013.2 In common with many other countries, and following on from the recent strengthening of Australia’s General Anti-Abuse Rule, one

make adjustments in tax policy itself, but also to increase overall levels of tax enforcement.

This increased focus on tax enforcement is one driver behind a recent internal restructuring of the ATO, and an analysis conducted by EY shows that more resources will be devoted to scrutinizing the tax affairs of people with more than A$5 million in assets, as well as taking a closer look at their associated business operations.

The EY study shows that the recently restructured ATO team responsible for auditing wealthy people — known as “Private groups and high wealth individuals” — now has 7000 fewer corporate taxpayers to scrutinize, but with no corresponding drop in ATO funding or resources. This additional capacity will undoubtedly lead to an increase in the volume and scope of tax audits of high wealth individuals. Recent evidence shows that this trend has already begun.

Recent information from the ATO sets out that they plan some 500 reviews and audits of the very rich this year, which means almost 20 per cent of the high net worth population monitored by this group can expect some form of additional scrutiny. This is a marked increase from the 290 audits of

of almost all taxpayers in this category being audited over the course of the next few years.

formed of a few hundred individuals, whereas it stands at around 2600 today. Australia’s commodity boom has created an expansion of this target pool, which has seen an increase in resources and capacity being applied to its scrutiny as the debate on taxation continues to focus on both multinational companies and high net worth individuals. Taxpayers who are

audits, or 1.4 per cent of the 70,000 population meeting that criteria — will be audited or reviewed.

Glenn WilliamsEY AustraliaT: +61 2 9248 4920E: glenn.williams@au.ey.com

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Czech Republic

Trends in Czech Republic tax audits: fewer audits, larger reassessments and a heightened role for the Specialised Financial Authority

A report from the Czech General Financial Directorate

interesting insights into tax audit developments. Trendlines that show a reduction of the overall number of audits but an increase in the overall monetary value of reassessed taxes demonstrates that the tax authorities are becoming more successful in focusing their efforts on the taxpayers and transaction that pose the highest risk.

Lucie Rihova Tax Controversy Leader — Czech Republic T: +420 225 335 504 E: lucie.rihova@cz.ey.com

Radek Matustik Tax Policy & Controversy T: +420 225 335 932 E: radek.matusik@cz.ey.com

44

45

The GFD recently published a document titled, Information on the Activities of the

.1 This is an annual text that summarizes the collection of individual taxes, and changes to the organization of the tax administration, and provides information on international cooperation and tax audit statistics. This article focuses on tax audits.

The following graphs illustrate the development of the number of tax audits conducted since 2002 and the overall monetary value of tax reassessments for the same period.

The graphs make two things very clear:

to fall

continues to rise

Within these overall trendlines, the

apparent; for example, if a tax entity was subject to an audit in 2002, the average reassessment was slightly in excess of

case of audits held in 2012, the average reassessment was almost CZK200,000

corporate taxpayer perspective, it is apparent that the same trends are playing out among tax audits of corporate taxpayers.

Level of reassessed tax in individual years (in CZK billion)

Number of tax audits in individual years

1. For the sake of completeness, it should be noted that the graph of reassessments does not include the reduction of assessed tax losses. In 2012, assessed tax

9

8

7

6

5

4

3

2

1

02002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

180,000

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

02002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

46

According to the GFD, the following factors have impacted most on the gradual increase in tax reassessments:

• A concentration on more demanding, deeper, more effective and targeted tax audits where reassessments or a reduction of tax losses are anticipated

• which carried out a small number of audits but with very high reassessed amounts

• The use of analytical software that helps identify companies for a tax audit based on risk analysis

The increased effectiveness of tax audits is also to be seen in the increase in the number of cases submitted to the police. In 2012, the police received 1,711 such submissions, most involving alleged involvement in the criminal act of reducing tax, fees and similar statutory payments or of not paying tax, social security contributions or similar statutory payments.

According to the GFD, the most frequent reassessments in relation to corporate taxpayers focus on the following transactions:

• Uncorroborated services posted to tax-deductible expenses

companies

• Errors in accounting procedures impacting on tax liabilities

Anecdotal evidence also points to a number of other transactions that have come under increased scrutiny in recent years:

• Failure to corroborate arm’s length price in the case of

• Failure to corroborate the acceptance and tax deductibility of

• Failure to corroborate the conditions for a VAT exemption on deliveries to another Member State or exports to third countries

• Claiming a deduction of value added tax on “non-corroborated level of shrinkage”

• Incorrect accounting and tax evaluation of items related to

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Quick Q&ADoes the Czech Republic have a GAAR?Czech tax law does not include one single, complex tax anti-avoidance concept. Rather, it is made up of several partial tax anti-avoidance rules. These rules, and other anti-avoidance concepts not directly written in the law, are to a large extent interpreted by the court cases of the Supreme Administration

of these principles by the Czech courts is still developing; however, there appears to be some consistency. Typically, a

substantiate a transaction and its tax treatment. The application of anti-avoidance rules is highly dependent on the particular circumstances of each individual case and the judgment of the respective Czech tax authority or respective court.

enforcement?The relationship between Czech tax authorities and taxpayers is rather formalistic. Tax authorities usually take a non-aggressive approach if the taxpayers meet their tax requirements and are able to cooperate with tax authorities.

What is the statute of limitations in relation to tax?The rules are very complex. The general period set by the Tax

years. The same rules apply for transfer pricing.

allow taxpayers to withhold certain documents?Generally there are no such privileges. The burden of proof is on the taxpayer. If the taxpayer withholds any documents, there is a risk that the taxpayer will not prove the applied tax treatment and will have to pay additional tax and related penalties.Q&A

48

The tax audit process can generally be divided into the following three steps:

1. Start of the tax auditThe Czech tax authorities will announce their initial visit and

meeting.

2. Tax audit

authority. The taxpayer has an obligation to cooperate with the Czech tax authority during the tax audit and is also entitled to provide explanation and prove his or her claims. The taxpayer is

is under the tax audit.

3. End of tax auditBefore the end of the tax audit, the Czech tax authority submits

can comment on the draft report within deadline. Comments and objections are assessed by Czech tax authorities and are

The signature of a tax audit report means the end of the tax audit, but it does not necessarily mean that the taxpayer agrees with the conclusions and argumentation contained in the tax audit report. Additional tax assessment is then issued.

Q&A

Quick Q&A

How to reduce the risk Despite the development of tax regulations and the existence of new reasons for reassessment, taxpayers do gradually seem to be responding to the new focus of the tax authorities and are responding to reduce their risk exposure in these areas. Companies wishing to reduce the risk associated with tax audits are undertaking preventative reviews of the management and documentation of such issues with a view to reducing risk exposure and generating additional supporting documentation.

In the case of tax audits already underway, the procedure and recommendation for minimizing tax reassessments differs case by case. However, once the tax administrator expresses legitimate doubts regarding the level of tax claimed, the burden of proof regarding the facts of the case and the technical position usually lies completely with the tax entity. Given the disparity between the extensive experience of the tax administrator and the likely lack of experience of the taxpayers suitable focus and attention is needed.

Cloud computing has burst onto the commercial

as the hardware and software that supports

that creates complexity for taxing jurisdictions.

Despite that complexity, governments are actively investigating and writing tax laws in this area, increasing the risk that taxpayers will be caught unprepared in some countries. In a recent report

Organisation for Economic Co-operation and

computing transactions as an area in which “international tax standards may not have kept pace with changes in global business practices.”

This new guide from EY summarizes the cloud computing corporate tax regimes in 57 countries, providing valuable insight into a complex subject that continues to develop at a rapid pace.

2013–14 EY cloud

available

Access the guide at

49

50

Germany Chancellor Merkel wins the German federal election: coalition partner and concrete tax agenda remain unclear

Angela Merkel’s Conservatives won the German federal elections on 22 September 2013, but failed to achieve a majority of seats in the German Bundestag. Because the German representative vote system requires a majority in parliament, her CDU/CSU party must secure a coalition partner.

50

Ute Witt Tax Policy Leader — Germany T: +49 30 25471 21660 E: ute.witt@de.ey.com

51

It is not currently clear which party will join such a coalition. Her previous coalition partner, the Liberal Democrats, suffered from heavy losses in the elections and failed to achieve the minimum threshold of at least 5% of voter support. Therefore, Chancellor Merkel lost her partner and must identify a new relationship. Merkel’s conservative party has started coalition negotiations with the social democrats as they did from 2005 to 2009. Because the social Democrats have said that they will ask all of their

agreement, some uncertainty still remains. If the coalition negotiations fail, Merkel could engage in formal negotiations with the Green Party.

With respect to tax policy, both potential partners have similar agendas, including:

• An increase in top rates of personal income tax

• Increases in inheritance tax

• Increases in capital gains withholding tax

• The reintroduction of a recurrent net wealth tax

However, with the clear victory of the Conservatives and their commitment against tax increases, we currently do not

With respect to international tax policy, it is highly unlikely that a new German government will change its position on the

continuing to support both. For multinational companies, it is probable that we will see more aligned tax audits in

compromises in both tax audits and binding rulings.

The coalition negotiations are expected to

an end before late November or December because it is still not clear when the new coalition partners will agree on their tax agenda for the next four years. It is recommended that readers monitor the situation by regularly checking our coverage at

ey.com/taxalerts

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Greece

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Major tax reform in Greece starts with the introduction of a new contemporary Income Tax Code

Under current policies, Greece

years, swinging back from a

10% of GDP in 2009. It should therefore be no surprise that successive Greek governments have adopted an array of economic measures in parallel with tax changes that

country’s international tax framework.

Stefanos Mitsios Tax Policy Leader, Head of Tax — Greece T: +30 210 2886 363 E: stefanos.mitsios@gr.ey.com

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Greece’s national economy has contracted for 20 consecutive quarters,1 and the country is now in its sixth year of a recession, which has been deepened by budget cuts linked to a €240 billion bailout from the euro area and the International Monetary Fund. Aiming to

governments have imposed several

years, with particular emphasis on pay cuts, reduction of public sector spending and changes in the tax framework.2

toward 3% of GDP in 2017, the ratio of public debt to GDP is not expected to decline before 2016 and will not fall below

further exceptional support from lenders to Greece.

This effort toward economic reform has led to a variety of consecutive changes in domestic tax law, not all of which are progressing to the desired results. However, it can now be argued that a viable and long-anticipated tax framework is set to cover any pre-existing discrepancies. Within this context, tax reform has been initiated, but it is far from complete. Reform commenced with the enactment of a new Transactions Tax

Code of Books and Records, in corroboration with the new ITC

Moving forward, the reformed tax framework will be supplemented with the adoption of a new incentive laws’

shift away from austerity and toward growth to “reboot” the economy, while

Transactions Tax Reporting Code have

expected in due course.

Focusing on income taxation, the “new law” voted on 23 July 2013 introduced a completely overhauled Income Tax Code

revenues to be incurred in tax years starting on or after 1 January 2014. This budget-neutral ITC was announced as part of the Greek government’s effort to

enhancing transparency and combating tax avoidance and evasion. In essence, however, the new law aims at introducing simpler and more straightforward tax rules with a view to establishing a new, more equal distribution of the costs of

source, as well as to enhance clarity and legal certainty among taxpayers and the tax authorities.

changes with respect to the major corporate tax rates that were introduced in early 2013 — a corporate income tax rate increase from 20% to 26%, the reduction of the withholding tax rate on dividend distributions from 25% to 10% and an increase in interest withholding tax from 10% to 15%.

The new code contains a series of anti-avoidance provisions that were not present in the previous code. In particular, earlier transfer pricing, thin capitalization and anti-tax haven provisions have been

supporting the Government’s desire to combat tax avoidance and evasion.

1. Hellenic Statistical Authority: statistics.gr/.2. See article in the August 2011 edition of this publication.

“ The new code contains a series of anti-avoidance provisions, which were not present in the previous code. In particular, earlier transfer pricing, thin capitalization and anti-tax haven provisions have been

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The new and amended provisions in the ITC contain a number of elements of which multinational companies should be aware.

European and international standardsThe previous regime did not include

with international and European standards. The new ITC bridges this gap

adhere to the OECD principles, so as to facilitate the domestic provisions’ interpretations. Within this context, tax

completeness and clarity the legal basis for the country to claim as its tax residents those who have their center of vital interests in Greece.

In particular, an individual is considered a Greek tax resident when the individual either:

• Maintains in the territory his or her permanent/main residence or his or her domicile or the center of vital interests

• Is a consular or diplomatic employee or public servant working under a similar regime or a public servant of Greek nationality working abroad

• Remains in Greece for over 183 days

12-month period

A legal entity is deemed as Greek tax resident when Greece is either:

• The place of establishment, incorporation, registered seat

Or

• The place of effective management

The concept of “effective management” is included in the Greek tax legislation according to the meaning set by the OECD guidelines.

Limitations to interest deductibility Previously, accrued interest paid or

deductible to the extent the total amount

bond loans and loans granted by third parties for which guarantees of any kind have been provided by associated

In line with other EU countries, the new measures introduce a general limitation for interest deductibility. The amount of

not tax deductible to the extent of it exceeds 25% of the earnings before interest, taxes, depreciation and

adjustments; such non-deductible

years. Nevertheless, the such expenses would be recognized as tax deductible to

interest expenses recorded in the company’s books does not exceed €1 million per year.

Credit institutions are excluded from these provisions.

The ITC in conjunction with the new Tax

provisions, setting in place the legal basis for the taxation of all income. In this context, the term “associated person” is extended to legal persons, individuals and any other body of persons, and encompasses two persons whereby:

• One of them holds directly or indirectly shares, part or quotas in the other of at least 33%, estimated on the basis of total value or number, or equivalent

voting rights.

• Another person participates directly or indirectly in them in any of the aforementioned ways.

or

• There is between them direct or indirect management dependence or control or the possibility for the one person to

other or of a third person to do exercise

“ In line with other EU countries, the new measures introduce a general limitation for interest deductibility. The amount of net

company is now not tax deductible to the extent of it exceeds 25% of the earnings before interest, taxes, depreciation and

55

Moreover, the concept of “business restructurings” was also introduced in the new law, which follow the guidelines set out in the 2010 OECD Report on the transfer pricing aspects of

that may be considered as either a domestic or cross-border

enterprises should be concluded on the basis of the arm’s length principles. Business restructurings may, among other things, involve transfers of assets, movement of intangible assets, the termination or substantial renegotiation of existing

multinational enterprises

of sharesEU Directive 2009/133/EC on the common system of taxation applicable to mergers, spin-offs, transfers of assets and

exchanges of shares concerning companies of different Member States is now transposed into the ITC. Through this integration,

covers all kinds of transactions that are now embedded in the Greek Income Tax Code, such as mergers, divisions, contributions of assets, exchanges of shares and transfers of the

transactions may be lost if it is found that the principal objective, or at least one of the principal objectives, behind such

corresponding transaction was not motivated by sound commercial reasons. This rule effectively quotes the corresponding provision found in the EU Merger Directive.

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CFC rules are introduced into Greek tax legislation, by virtue of

foreign companies must pay tax on their pro rata share of the “undistributed” income of a foreign company, provided that the conditions of “control” as set in domestic law are cumulatively met.

What is less clear, however, is whether the pro rata share refers only to passive income. Said conditions include the following:

• The domestic entity has direct or indirect participation of 50%

• The foreign company is subject to taxation in a non-cooperative country or in a country with preferential tax regime.

• The foreign company is not listed.

• “passive” income.

The effect of these new rules is to bring forward the timing of the liability for domestic tax from the time of distribution of the

it is derived by the foreign company.

These CFC rules do not apply in cases where the foreign legal entity is a tax resident of an EU/EEA Member State and an

procedure for the exchange of information on request of

the economic activity of the legal person meets the criteria of an

at tax evasion.

Tax Procedures Code Alongside the ITC, a Tax Procedures Code was also providing the long-awaited compilation of procedural provisions previously scattered in several different pieces of legislation into a single legal document. This includes the GAAR provision, on the basis

This tax legislation is ultimately aimed at setting the basis for the

ConclusionThese recent measures, taken together, represent substantial change to the Greek tax architecture, their ultimate goal being to reform the system in an effort to boost healthy growth. It is hoped that action in this direction will reduce the odds of another crisis in the long term, by boosting competitiveness and avoiding the buildup of large external imbalances. For companies operating in Greece, there are many items impacting compliance, planning and controversy.

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The deductibility of interest on borrowings has recently come under greater scrutiny in many countries and is seen as a cornerstone issue

This quarter, our Global Tax Desk Network focused on thin capitalization and the related debt and equity characterization issues that may arise under select foreign tax regimes in relation to related-and non-related-party borrowings. The countries and regions covered in our 10 September webcast included Germany, Benelux, India and China, covering the following issues:

• Interest deductibility concepts

• Thin capitalization and earning stripping rules

• Debt and equity characterization considerations

• Interest withholding tax

• BEPS considerations and current political and legislative developments

During this live, interactive webcast, viewers had the opportunity to ask questions through the website.

Webcast

Webcast archive:

deductibility of interest

View an archive of the program at:

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India GAAR rising: India’s Central Board of Direct

on the application of GAAR

On 23 September 2013, India’s Central Board of Direct Taxes

1

General Anti-avoidance

Rajan Vora Tax Controversy Leader — India T: +91 226 192 0440 E: rajan.vora@in.ey.com

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The new rules prescribe a minimum threshold limit of INR30m

parties before GAAR may be applied. The rules also carve out exceptions in the case of certain investments by Foreign

obtained on or after 1 April 2015 irrespective of the date of arrangement. However, income from the transfer of investments made before 30 August 2010 is protected from the GAAR

tainted, the tax consequences would be limited to the tainted part only. The Rules also prescribe various forms for reference by the Tax Authorities with respect to the various stages of reference. The time limits for such procedures have also been stipulated. The Rules would be effective so as to apply for the tax year beginning 1 April 2015 and subsequent years.

BackgroundIn order to address aggressive tax planning and tax avoidance,

Act, 2012 introduced GAAR provisions under the present Indian 2

The way the GAAR provisions were originally worded gave rise to

uncertainty, especially in cases where transactions that had

vulnerable to being treated as ‘impermissible’ by the authorities. As a result, the Prime Minister constituted an Expert Committee

on GAAR. The Finance Minister also issued a statement in January 2013 on the decisions taken by the Government of

3

some of the decisions.4

applicability was deferred to tax year 2015–16.

2. See EY Global Tax Alert dated 20 March 2012, 3. See EY Global Tax Alert dated 14 January 2013, Press Release from the Ministry of Finance and Final Report of the Expert Committee on GAAR.4. See EY Global Tax Alert released on 1 March 2013,

Finance Bill is the legislation introduced in the Parliament for debate and passage. Once the Bill is passed by the Parliament, it goes to the President for his assent.

Once the Presidential assent is given, it then becomes Finance Act. It is only after becoming an Act that it can be enforced.

Parliamentary processes in India

Rules for the application of GAARThe Rules are to come into force on 1 April 2016. They would, therefore, apply to a tax year beginning 1 April 2015 and all subsequent years.

The Rules reiterate that GAAR applies to any arrangement with respect to a tax

2015–16 onwards.

The Rules also provide a monetary threshold in addition to certain exceptions where GAAR would not apply. These exceptions are as follows:

• Any arrangement where the aggregate

arrangement in the relevant tax year

computed with respect to reduction, deferral or avoidance of tax or with reference to an increase in the refund of tax. In case of an increase in loss, the

been chargeable had such increased loss been the total income.

• In the case of an FII which:

• Is assessed as per the provisions of the ITL

• Indian treaty

• Has invested in listed or unlisted securities with prior permission of the competent authority in accordance with the applicable regulations

• A nonresident investor in an FII who has invested in an FII, directly or indirectly, by way of an offshore derivative instrument or otherwise

• Any income derived from the transfer of investments made prior to 30 August

The Rules also clarify that, where a part of an arrangement is GAAR-impacted, the tax consequences would be determined with reference to such impacted part only

Procedural mattersThe ITL provides that, on satisfaction of the conditions for invoking GAAR at any stage of assessment or reassessment proceedings, the Tax Authority can refer the case to the Commissioner. The

GAAR is required to be invoked, should issue a notice to the taxpayer for submitting objections. Where no objections are received within the prescribed time, the Commissioner can issue such directions as he or she may

the taxpayer objects to invoking GAAR

the taxpayer’s explanations, he or she would be required to refer the matter to an Approving Panel. The Approving Panel shall either declare an arrangement to be impermissible or otherwise, after examining the relevant material and making further inquiry.

The Rules provide for mode, manner, form and time limit for the various steps involved in the procedure for invoking GAAR.

AnalysisTo a large extent, the Rules have addressed the concerns of taxpayers. The carving out of exceptions for FIIs and investors in FIIs, subject to their satisfying certain conditions, should address some

positive. Many other recommendations of the Shome Committee appear, by now, to have been incorporated, either in the ITL or in the Rules. Notably, the GAAR provisions in the ITL, read with the procedure prescribed in the Rules, provide

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“ The way the GAAR provisions were originally worded gave rise to serious concerns by business that GAAR may create

that had typically been considered to be legitimate tax

would have become vulnerable to being treated as ‘impermissible’ by the authorities.”

three opportunities for the taxpayer to raise its objections against the invocation of GAAR, once before the Tax Authority, the second before the Commissioner and the third before the Approving Panel.

The Shome Committee Report had recommended grandfathering of investments existing as of the date GAAR becomes applicable. But, considering that the proposal of introduction of GAAR was already in the public domain as part of DTC 2010, the GOI decided to grandfather investments made before 30 August 2010. The Rules merely permit grandfathering income from transfer of such investment and do not

One would, therefore, need to carefully analyze tax implications in respect of investments made, including investments acquired as a result of group reorganization.

Based on the Shome Committee Report, there were expectations about an assertive acceptance of the overarching principles that GAAR applicability may be restricted to cases of blatant abuse and contrived tax avoidance transactions. This expectation has not been met. Also, there is no clarity on the interplay between

recommendation that GAAR would not apply in a case where SAAR is applicable. There can, therefore, be ambiguity about the applicability of GAAR in a case where

provisions in the respective treaty are

with the formulation and publication of illustrative examples, will help provide certain clarity to taxpayers.

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“ There is no clarity on the interplay between GAAR and

Committee recommendation that GAAR would not apply in a case where SAAR is applicable.”

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Italy Italy’s 2013 tax audit guidelines focus on large business taxpayers

The Italian tax authorities are generally perceived to be aggressive in their dealing with large corporate taxpayers, especially in relation to international issues.

News that recent tax audit guidance provided to teams with the Italian Revenue Agency calls for “a maximum amount of revenue to be raised by focusing on large taxpayers posing the highest risk” means that multinational companies

attention to their tax risk

make efforts to collaboratively reduce it where possible. For some groups, this may include considering whether a new Italian cooperative compliance program is suitable for future adoption.

Maria Antonietta Biscozzi Tax Controversy Leader — Italy T: +39 02 8514312 E: maria-antonietta.biscozzi@it.ey.com

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its annual guidelines1

Guidelines detail goals to achieve and tax strategies to pursue while carrying out FY 2013 tax audit activities they are consistent with a broader action plan signed by the Minister of Finance in April 2013 that covered tax policy objectives for the 2013 to 2015 period and set forth the desire of the Italian

avoidance.

has been set at a level compatible with a “maximum effort using the available resources and with the aim to optimize the results of each audit by focusing on the cases of greatest risk”.

The Guidelines also state that the tax audit activities to be carried out during FY 2013 should follow the approach of past years, focusing on taxpayers and transactions characterized by

avoidance potential.

taxpayers into different categories of taxpayers. The Guidance

turnover or operating revenues not lower than €100 million, which are generally subject to the Tax Tutoring Program.2 This program consists of a more in-depth form of tax control which is

by also implying an enhanced level of transparent and cooperative relationship between authorities and taxpayers.

With reference to the LBT category, the Guidelines state that:

• Tax audit activities to be carried out in FY 2013 will mainly concern taxpayers that have already been subject to the Tax Tutoring Program in prior years. In this respect, for taxpayers

tax control activities might be limited to an update of the

• complied with advanced tax rulings sought from the Revenue.

• positively consider the past efforts of the taxpayer in building a transparent and cooperative relation with the tax administration. For instance, the Guidelines state that a cooperative approach is demonstrated if the taxpayer has complied with the Transfer Pricing documentation standard

3

• Guardia di Finanza

coordinate more when carrying out audit activities.

1. Circular Letter 25/2013.

than €100 million, but it has been gradually extended to all LBT. 3. For additional details on the transfer pricing standard documentation requirements, see EY International Tax Alerts, Italian government adopts transfer pricing

documentation discipline of 4 June 2010 and New Italian Transfer Pricing documentation standard established of 1 October 2010.

On 1 August 2013, the Revenue issued Circular Letter 26/2013

Decree 83/2012 to the bad debt relief regime. While addressing the main features of the amendments, the Revenue pooled

may be of help in understanding when bad debt losses may be deducted in general.

Read more at

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audit prioritiesThe Guidelines also identify certain high risk areas and tax positions to which audit activities will give priority and devote particular attention. These include:

• Transactions qualifying as aggressive tax planning schemes applied on an international scale as addressed by the OECD report on Aggressive Tax Planning based on After-Tax hedging 20134

• Tax base erosion schemes as addressed by the OECD

5

• limitation will expire on 31 December 20136

• Deduction of costs arising from transactions with entities located in black list countries7

•

• Situations whereby foreign entities may be attracted to Italian tax residency

• Situations that may typically reveal the existence of an Italian

Efforts to build a cooperative compliance framework

tax administration should make in order to promote the creation of a cooperative framework. To this purpose, the tax authorities are called to boost pre-litigation settlements and encourage taxpayers to implement internal tax control models aimed at complying with tax rules.

In this respect, the Guidelines also refer to the June 2013 launch of a pilot project to implement a Co-operative Compliance

Tutoring Program for LBT compliant with the guidelines issued by the OECD in the Co-operative Compliance: A Framework from Enhanced Relationship to Co-operative Compliance report.8

Based on the June announcement by the Italian Revenue, the CCP should imply a commitment by LBT to a transparency behavior in exchange for openness and responsiveness by the

effective manner. As reported by the Italian Revenue Agency, the underlying purpose of this new model of relationships is to implement an ex-ante rather than the traditional ex-post

taxpayers’ compliance and of providing certainty and predictability in advance.

The CCP should enable taxpayers to reduce the compliance

6. This would generally coincide with FY 2008.7. For additional details on the mentioned black list cost rule, see EY Global Tax Alert titled Italy’s Supreme Court rules on the deduction of expenses related to transactions

with Black List entities of 17 July 2013. 8. Document available in the OECD website: oecd.org/tax/administration/co-operative-compliance.htm.

positions to which audit activities will give priority and devote particular attention. These include ... tax base erosion schemes

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Admission to the CCP pilot projectAn LBT admitted to the pilot project will engage with the Italian Revenue Agency in ad-hoc meetings in order to jointly discuss and examine several issues, such as taxpayers’ internal tax control framework, role and responsibility of the Revenue Agency, and obligations and incentives for taxpayers, among others. Qualifying LBTs are required to possess the following characteristics:

• 2011 not less than €100 million

• Have implemented an organizational model pursuant to

adopted a Tax Control Framework to manage tax risks

Since the number of participants in the pilot project is limited

will be taken into account within the selection process of LBT such as:

In many regards, these recent developments show how the Italian Revenue Agency is closely aligned to other OECD countries; “risk-rating” allows them to more effectively allocate their audit resources to higher risk taxpayers, while the adoption of a collaborative compliance approach rewards taxpayers who behave transparently with greater certainty and an early resolution of tax issues with less extensive audits and lower compliance costs.

• Being part of a multinational group of companies or carrying out a business activity in Italy or abroad through permanent establishments

• Participating in similar co-operative compliance programs in other foreign jurisdictions or having subscribed a code of conduct with other tax administrations

• Having already entered into initiatives falling within the concept of co-operative compliance in Italy, such as the International Tax Ruling procedure or the transfer pricing documentation requirements regime

“ In many regards, these recent developments show how closely aligned to other OECD countries the Italian Revenue Agency is.”

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Mexico Mexico’s ambitious tax reform program: increased burden and heightened enforcement draw criticism

The Mexican government faces a serious challenge: within just a few months of the inauguration of President Peña, it has become clear that the

social programs — in

element of his campaign — are not matched by the tax revenue currently being collected, which as a percentage of GDP is not only among the lowest in the OECD but is below even the average in Latin America, and barely half of Brazil’s.

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Manuel E. Tron Americas Tax Policy Leader E: manuel.tron@mx.ey.com

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Last year, the Federal Congress approved an amnesty program

through which taxpayers not current with their federal tax obligations could come forward and secure compliance while enjoying substantial discounts in the process. The amnesty program, which was managed by the

to secure funds to the order of $40 billion

However, much more revenue will be needed to pay for the promised social programs and, because of the amnesty, less revenue may be available from current and future enforcement efforts.

which were already being litigated in

expected that the SAT would have recovered at least 50% during the next three to four years, based upon the recent experience in the percentage of cases won by the SAT against taxpayers. In other words, the Government started with some extra cash this year, but is still in need of much more for the coming years.

It now appears, however, that Mexico may seek revenue from targeting what is perceived as inappropriate tax planning.

Mexico is a very active OECD member, and, starting with the OECD Secretary

includes many active members in the Working Parties of the Tax Committee. These include Armando Lara, a high

also the President of the Tax Experts Committee of the United Nations, and currently chairs the OECD’s tax Working

within the OECD on strategies to “tackle aggressive tax planning,” following a report with the same name issued by the OECD a couple of years ago.

Additionally, it is worth considering that Mexico is a member of the G20, and it was in their meeting in Mexico that the G20 asked the OECD to work on base erosion

meeting of the G20, the Secretary General of the OECD presented the Heads

Recent developments within the Mexican Tax Administration Services

auditing supply chain restructurings. This increased focus appears to be a consequence of personnel changes within Mexico’s Treasury

General Administrator for Large Taxpayers has publicly expressed in several forums his intent to identify and challenge companies that have undertaken restructurings to reduce their tax liabilities in Mexico while maintaining their business functions and customers in Mexico, including maquila conversions. This audit program initiative is intended to challenge companies that have been engaged in what the SAT considers

Read more in this EY Global Tax Alert:

chain structures

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The BEPS Report deals with cases of international tax planning of multinational

OECD says, the tax bases of the countries around the world are being eroded and

generated are shifted to countries with more favorable tax regimes. The BEPS Report and the Action Plan also suggest a series of measures that may be adopted multilaterally, after proper consideration and analysis over the next few of years.

Mexico thus was faced with the challenge of introducing a tax reform proposal that would allow the Government to generate the tax revenue required to operate the country, fund the new social programs, and take the country to a new level of development. In this context, all of the OECD suggested actions against aggressive tax planning were likely “music to the ears” of the Mexican tax authorities, already predisposed as they are to follow OECD suggestions.

In this context, the revenue authorities abandoned the idea of proposing a lowering of the corporate income tax rate and the elimination of some “preferential tax regimes” for labor unions, political parties and other “socially relevant entities”, together with a substantial

the elimination of generally exempted goods and services under VAT law.

Instead, the team in charge of tax reform prepared a package, which was formally submitted to the Federal Congress by President Nieto on 8 September, which is much more in line with the current thinking of the left-leaning opposition

effort to try to obtain the collaboration in Congress to secure the approval not only of the tax reform, but also of oil and

its tax regime.

The resulting proposal is tough on various Mexican industries and MNCs. In addition, it increases the tax burden on the middle class by eliminating the VAT exemption on the sales of homes, on private school fees

and as well as increasing the income tax rate to 32% while severely restricting the deductibility of medical expenses and other personal deductions.

Among the most relevant changes that affect MNCs and local Mexican industries and business in general are:

• The elimination of the VAT exemption on temporary imports, even if under a valid Maquila program

• The limitation of the deductibility, for income tax purposes, of payments made to employees which are not taxable in their hands

• The elimination of the deductibility of the reserves of insurance companies, even with respect to those reserves required as a matter of law

• The reduction of the deductible amounts for certain assets deemed not necessary for the operation of businesses

• The inclusion of a tax on dividends at a 10% rate, on top of the corporate rate of 30% which results in an effective rate

without considering the deduction limitations which can elevate the actual effective rate much higher. This tax is proposed in such a way that it would not be reduced by tax treaties

• The abandonment of scheduled reductions in the corporate income tax rate in 2014 and 2015, leaving the current 30% rate in place

Worthy of particular comment are the following proposals, which may be

1. The inclusion of a provision in the Income Tax Law allowing the Mexican tax authorities to condition the application of existing tax treaties in cases where the resident of the other country is a related party of the Mexican resident making the payment, and to request evidence of the double taxation that would otherwise occur if the treaty is not applied as a requisite for its application.

If approved, this provision would empower the SAT to actually override

criteria of the Mexican Supreme Court, which clearly establishes that domestic law is inferior in hierarchy than international treaties.

2. Payments made by resident companies to related parties resident in other countries in which the income tax on the income received is less than 75% of what would have been the Mexican tax on the same income will not be deductible for income tax purposes.

If this provision is approved as proposed, it would severely affect MNCs, particularly those groups with operating companies in countries where the corporate income tax rate is less

countries such as the Czech Republic, Denmark, Singapore, Sweden, Switzerland and the United Kingdom,

“ The revenue authorities abandoned the idea of proposing a lowering of the corporate income tax rate and the elimination of some ‘preferential tax regimes’ for labor unions, political parties and other ‘socially relevant entities,’ together with a substantial

generally exempted goods and services under VAT law.”

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3. Payments, expenses, investments and all type of deductions in general, which are taken in Mexico but also deducted in other countries, will not be deductible for income tax purposes for Mexican resident entities. If this provision is approved as proposed, all of the entities established in Mexico by US parent companies in which the check-the-box

lose all of their deductions and subsequently would be taxed on their gross income.

4. The inclusion of a new General Anti-

Tax Code allowing the tax authorities to re-characterize transactions and structures with no demonstrable

drafted would, if approved, generate

end up in court.

5. concerning the piercing of the corporate veil for tax purposes, through which shareholders will become jointly liable for taxes due from companies. If approved as proposed, the new rule will make the shareholders liable in all cases, as a general rule, and not only in the case of fraud or abuse. This provision is clearly against corporate law principles in Mexico and could severely deter new investments in the country.

6. A whole new series of rules regarding tax related crimes through which

and tax advisors may be found liable and subject to imprisonment.

The new reform package has attracted criticism at both national and

the Mexican Congress will carefully review the proposals, and we are optimistic the proposed changes will not be approved precisely as they are drafted today. EY continues to work closely with members of Congress to improve the proposal and urge others to make their views known.

“ Worthy of particular comment are the proposals

The tax committee of Mexico’s lower House of Congress revised the proposed tax

2013. The full House voted on and approved the Revised Proposal on 18 October 2013, it will now move on to the Senate for debate and vote.

Overall, the tax committee accepted many of the President’s original proposals

deposits.

Read more at:

ey.com/GL/en/Services/Tax/International-Tax/Alert--Mexico-s-lower-House-of-Congress-approves-tax-reform-proposal

Latest: Mexico’s lower House of

• Mexico’s tax reform proposal

• Mexico’s tax reform proposal

maquiladora industry

• Mexico’s tax reform bill includes introduction of mining royalty

• Mexico’s President presents tax reform proposal to Congress

ey.com/taxalerts

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Netherlands Dutch government extends the application of substance safe harbor rules

On 30 August 2013, the Dutch State Secretary of Finance and the Minister of Foreign Trade and Development Cooperation published a letter to the Dutch Parliament regarding the role of The Netherlands in international taxation and its tax treaty network with

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Arjo van Eijsden Tax Policy & Controversy Leader — Netherlands T: +31 88 407 8411 E: arjo.van.eijsden@nl.ey.com

Tax Policy & Controversy T: +31 88 40 79019 E: sjaak.de.pagter@nl.ey.com

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Recently, there have been numerous international discussions on the taxation of multinational companies and the allocation of taxing rights. The Netherlands has been actively engaged in the different international discussions on taxation, with the aim of developing a durable solution while not harming the

position of the Dutch government has

platforms are indeed the place for such discussions. Furthermore, measures should be taken in an international context and not unilaterally by individual countries in order to be effective. This has been previously stated in various communications by the Dutch government, for example in its letter to the Dutch Parliament on

in the 30 August letter.

The 30 August letter addresses four key items:

• Application of safe harbor rules on

licensing companies, and application of the same to all companies where no

requested

• Application of safe harbor rules on substance to holding companies that wish to conclude an advance tax

• Exchange of information regarding companies with an APA but who have no other activities in The Netherlands

• Tax treaties with developing countries

Dutch substance requirementsIn 2001, the Dutch government published safe harbor rules regarding Dutch substance requirements. These requirements have to be met in order for a Dutch company to be able to obtain advance certainty from the Dutch tax authorities. Furthermore, a Dutch company is then able to obtain a Dutch

government would generally not exchange information spontaneously to foreign tax authorities if the substance requirements are met.

A key element of these requirements is that important decisions are made in The Netherlands and the company has certain nexus with The Netherlands. Examples of these requirements are that the board of directors consists of at least 50% of Dutch residents, that main board decisions are taken in The Netherlands, the main bank account is maintained from The Netherlands and book keeping is prepared and maintained in The Netherlands. In the meantime, other countries have followed the Dutch example and have implemented similar rules.

In the 30 August letter, the Dutch government underlines that holding and intermediate companies make an important contribution to the Dutch economy and that it is not willing to take measures that may damage The Netherlands’ position as an attractive location for such companies. Hence, the Dutch government will not alter the main elements of the Dutch tax regime, such as the Dutch participation exemption, the tax treaty network and the possibility to obtain tax rulings from the Dutch tax authorities. However, as the government also wishes to avoid abusive situations, particularly regarding developing countries. The Dutch government states that existing Dutch substance requirements can play a role in preventing such abusive situations.

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The Dutch government also makes it clear that meeting these

substance requirements have to be met by companies in order to obtain an APA or ATR. If a company does not yet have such

substance in the near future, a tax ruling may also be obtained on that basis.

Furthermore, the substance requirements will become relevant

company must explicitly declare in its tax return whether it meets these substance requirements. If so, the Dutch tax

Special attention should be paid by companies that wish to or have concluded an APA with the Dutch tax authorities. If such a company, or the group to which it belongs, does not have other activities in The Netherlands besides the activities required to satisfy the minimum substance requirements, the Dutch tax authorities will exchange information regarding the APA with foreign tax authorities. Although it is not clear yet how and in what form such information will be exchanged, this should further support The Netherlands’ position that it is fully transparent towards its tax treaty partners.

In the letter, the Dutch government also underlines its desire to avoid double taxation through an extensive tax treaty network, of which an important part is the 23 tax treaties with developing countries. With respect to tax treaties currently in place or under negotiation with developing countries, discussions with treaty partners will be initiated in order to determine whether anti-abuse provisions need to be included. One example concerns the treaty with Zambia, where the Netherlands will invite Zambia to discuss an update of the existing tax treaty.

ImpactThe 30 August letter makes it clear that the Dutch government is committed to maintaining its key position for international

policy and practice, the Dutch tax authorities will continue to provide certainty in advance, including on international holding

certainty, the existing safe harbor rules regarding the required level of substance in The Netherlands remain relevant.

In light of these new policies, it is recommended that companies

Netherlands review their level of Dutch substance and — where necessary — take any appropriate action. In this respect, we underline that other jurisdictions may have different ideas about

recommended to perform a substance check from a local perspective as well.

“ With respect to tax treaties currently in place or under negotiation with developing countries, discussions with treaty partners will be initiated in order to determine whether anti-abuse provisions need to be included.”

The Tax Council1the inaugural release of the monthly TTC/EY Tax Reform Business Barometer, measuring the expected likelihood of reform at each stage of the federal government process,

initial stages of tax reform in 2013.

• Despite concerns over the federal government shutdown and the debt limit, business tax professionals put the median likelihood of some progress on federal tax reform at 70% for a detailed tax reform plan to be released by the Chairman of the US House of Representatives Committee on Ways and Means this year. Respondents had a median expectation of 35% that the Senate Finance Committee Chairman will put forward a tax reform plan.

• These median likelihoods are lower than last month’s

not only the uncertainties associated with the current budget impasse, but also the reduced time available this calendar year.

• The median respondent had a three-in-ten expectation that the House Ways and Means Committee will pass tax reform legislation by the end of this year. The median respondent had a one-in-twenty expectation that the Senate Committee on Finance would pass tax reform legislation this year.

• The business tax professionals had a median expectation of 20% in early October that federal tax reform will be enacted by the end of 2014, down slightly from 23% in September.

• 73% of respondents ranked the revenue-neutrality vs. revenue-raising issue as the biggest or second biggest hurdle to federal tax reform, followed by reluctance to

• Those percentages declined from last month, while the percentage citing the “Remaining time in CY2014 given other legislative priorities” rose from 18% to 27%.

• 42% of the respondents said federal tax reform would

“Policymakers, the business community and the public share a strong interest in a simpler, fairer tax system that is more conducive to economic growth. Even given the challenges of such a task, with visions of 1986, they know it’s possible,” says Lynda Walker, Executive Director of The Tax Council. “This survey is designed to capture attitudes about likelihood, timing and the manner in which progress will be made — undoubtedly changing with each aspect of the process and each new proposal.”

Designed to provide an assessment of views by leading tax business executives and practitioners, the Barometer will track opinions each month as tax reform is debated and developed in Congress.

“During the development of the 1986 Tax Reform Act, there were many highs and lows on the prospects of tax reform actually succeeding. The Barometer provides a real-time assessment of the business community’s expectations,” says Tom Neubig, Director of Quantitative

reform will be a multi-year process, but key decisions are expected to be made in the early deliberations, and

should be engaged.”

Download full copies of the Barometer — now and in the future at

ey.com/UStaxreformbarometer

The Tax Council and EY launch United States tax reform business barometerTracking the expectations of the business community in relation

legislation that substantially broadens the tax base or changes the tax rate for either corporate or individual taxpayers.

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How tax policy supports the aspirations of Singapore as a regional or global hub

For nearly three decades, Singapore has been adjusting its tax policies and strategies to strengthen and sharpen its economic competitiveness and capabilities. Whilst Singapore is very much an open free market with relatively light regulation, it nevertheless takes economic planning very seriously.

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Russell Aubrey Partner, International and Transaction Tax Services T: +65 6309 8690 E: russell.aubrey@sg.ey.com

Sandie Wun Senior Manager, Transaction Tax Services T: +65 6309 8081 E: sandie.wun@sg.ey.com

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From 1985 to 1986, Singapore’s

undertook a major strategic economic review and reconvened in 2001 to review its development strategy and formulate a blueprint to restructure the economy. This included a review of Singapore’s tax system and policy, which concluded that there was a pressing need to look ahead, plan and anticipate. Based on the ERC’s recommendations and in line with developing Singapore as a “hub for

were implemented.

What is meant by a hub for business?There are two meanings of “hub.” In

multinational business may centralize its management activities and business operations, whether regionally or globally. Singapore has been successful in attracting several thousand multinational organizations by implementing coherent policies in many areas including education, governance, communications, transportation and taxation. These policies have built upon Singapore’s geographic advantages, of being at the center of South East Asia and having a deep water port at the nexus of major shipping lanes.

More generally, a hub is a place in which an ecosystem of businesses in the same industry can work together and

cooperate, where suppliers and customers can meet and where expertise is raised. Most notably with its world-class infrastructure and transport links, Singapore has become reknown as a logistics hub, achieving internationally acclaimed accolades such as “No.1 Logistics Hub”1 and “World’s Best Airport”.2 Beyond the logistics hub that Singapore the country has also become a

global trading and marine and offshore engineering, where it is the world’s leader.

Recognizing that the global economic environment has advanced and the contest has become more intense in the global economic arena, three major objectives were set to further boost Singapore’s attractiveness as a global hub, encouraging enterprise development, reducing business costs and keeping incentives relevant in the knowledge-based economy.

Encouraging enterprise development

gradual reduction in Singapore’s corporate income tax rate. Through a number of tax rate cuts, Singapore’s prevailing corporate tax rate of 17% is one of the lowest in the region, after Hong Kong’s 16.5%.

Tax yearHeadline corporate income tax rate (%)

2002 24.5

2003–2004 22

2005–2007 20

2008–2009 18

2010–2013 17

Singapore recognized that too low a tax rate could lead to negative repercussions. Singapore does not want to be branded as a tax haven, given the negative perceptions of tax havens and likely counteractions by other countries. Home country-controlled foreign corporation rules in overseas jurisdictions tend to focus on the statutory tax rate and hence a lose rate, high result in no reduction of effective tax rates globally for MNCs investing in Singapore. Additionally, regulators worldwide may expand their scrutiny against perceived tax havens by putting them on tax blacklists and subjecting transactions with those listed to more onerous tax implications and conditions. Thus since 2000, a redirected strategy has been employed aimed at SMEs, using corporate tax rebates and partial exemptions, rather than a straight cut in the headline tax rate.

Introducing tax frameworks to support various corporate and regulatory developments is also vital in encouraging enterprise development. For example, the

1. The World Bank recently ranked Singapore as the No. 1 Logistics Hub amongst 155 countries globally in the 2012 Logistics Performance Index.

2. Singapore Changi Airport is named the World’s Best Airport at the 2013 World Airport Awards. Available at: worldairportawards.com/.

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international hub for holding companies, a decision was made to shift from a full imputation corporate tax system to a

Inland Revenue Authority of Singapore

treatment of alternative business forms such as the limited liability partnership

well as for corporate amalgamations. With the tax framework in place, the level of clarity and certainty for investors is increased, consequently encouraging enterprise development.

A group relief system was introduced in 2003 to enable losses to be transferred between members of the same corporate group. This was done to encourage entrepreneurship, enabling higher risk, potentially loss making, new businesses could be housed in separate limited liability companies.

Singapore also recognized that enterprise development results from mergers and

announced in the 2010 Singapore Budget, granting qualifying companies tax allowances and stamp duty waivers as part of a strategy for growth and internationalization.

Reduce overall business costs and uncertainty in tax treatment

international hub for holding companies, a decision was made to shift from a full imputation corporate tax system to a

This reduced business costs incurred in tracking franking credits and reducing tax compliance costs that resulted from the

The IRAS has also been reviewing withholding tax compliance procedures, thereby easing administrative costs.

In line with Singapore being an international hub, tax policy Singapore has introduced foreign tax credit pooling.

in their claim of foreign tax credits, reducing Singapore tax payable on foreign income remitted to Singapore, and simplifying tax compliance.

Singapore has also shaped its tax policies and administrative processes to acknowledge the need for tax certainty, a commodity particularly valued by

with some exceptions, tax legislation and practices are not as developed as in the Western world.

The Singapore tax authorities are increasingly engaging in discussions with businesses and the tax profession. In comparison with earlier years, there has

IRAS on tax legislation in terms of e-tax guides, public consultations, as well as avenues for open discussion between the taxpayer and the IRAS such as the Enhanced Taxpayer Relationship program and the Voluntary Disclosure Program.

In 2005, an advanced ruling system was introduced in Singapore wherein investors could ask for a binding response to clarify uncertain interpretations of the legislation

provide certainty of non-taxation of companies’ gains on disposal of equity investments, safe harbor rules have been announced in the domestic tax legislation.

77

Business incentivesSingapore has successfully evolved from attracting MNCs that undertake only manufacturing activities in Singapore to attracting those who also undertake higher value-added activities such as services, supply chain management functions,

based economy. While maintaining its traditional focus on

Singapore is also leveraging its “brand name,” which is strongly associated with integrity. Government agencies, such as the

broad-based tax incentives to encourage the “right types” of high-value hub investment in areas such as fund management, education, medical services, clean energy, international

provisions on tax incentives are typically put in place ensure that their effectiveness is monitored and those which are not popular

Over the years, there have been more generous incentives for expenditure related to intellectual property as well as R&D activities. An example is the Productivity and Innovation Credit

encourage companies to invest in six areas along the innovation value chain: R&D, design, automation, training, registration and acquisition of intellectual property rights. Over the past three

objectives of encouraging productivity and innovation growth may be met.

3. taxacademy.sg/.

Through the use of tax policies, Singapore has advanced its position internationally as a favorable regional and global hub, and it is likely that that tax policies will continue to be an important tool employed in this regard. That said, Singapore’s economy is very

and regional trends. But with strong basic foundations in place, Singapore needs to stay relevant to changing business circumstances globally as well as the developing countries in its neighborhood — not least it’s ASEAN colleagues. This means it must constantly seek to adapt and improve tax policies and their administration as circumstances change.

There are positive signs that Singapore will achieve this adaptation of tax policy. One example is the collaboration between IRAS and the leading professional services companies in Singapore to establish the Tax Academy of Singapore.3 The Academy aims not only to increase the tax knowledge of professionals in Singapore through tax education and updates on regional tax developments, but also to create opportunities for the sharing of tax knowledge between government, academia and tax professionals, in both industry and consulting.

Another example is the increased presence of government agencies, such as the Economic

Singapore in locations around the globe, including New York, Paris and London. These overseas centers act as in-country touch-points for potential investors into Singapore, and provide an opportunity for a two-way learning process and exchange of ideas to exist.

Conclusion

“ Singapore must stay relevant to changing business circumstances globally as well as the developing countries in its neighborhood — not least it’s ASEAN colleagues.”

Corporate income tax rates

1. IMF World Economic Outlook Database — September 2012.

78

Jurisdiction

GDP 2012

1

2013 Corporate

income tax rate

statutory

2013 Corporate

income tax rate

and sub-national,

Worldwide vs.

territorial taxation

Notes

United States 15,653 35.00% 39.00% Worldwide

Japan 5,984 38.01% Territorial Effective for years ending on or after 1 April 2012. Includes recent

income tax surtax of 10%. Effective headline corporate tax rate will decline to 35.64% in 2015.

France 2,580 36.10% Territorial The Finance Bill for 2013 extends the application of the 5%

ending on or before 30 December 2015. This surtax applies to companies with annual turnover exceeding EUR250 million.

Argentina 475 35.00% Worldwide

Pakistan 231 35.00% Worldwide

Brazil 2,425 34.00% Worldwide

Venezuela 338 34.00% Worldwide

India 1,947 33.99% Worldwide Foreign companies 43.26%: small increase from the existing 5% to 10% and 2% to 5% in the surcharge for the tax year 2013–14, imposed on domestic companies and foreign companies respectively

Belgium 477 33.99% Territorial

Germany 3,367 33.00% Territorial

Italy 1,980 31.40% Territorial

Australia 1,542 30.00% Territorial

Spain 1,340 30.00% Territorial

Mexico 1,163 30.00% Worldwide An additional 10% corporate income tax will be imposed on certain

dividends would be on the distributing company, there would be no tax treaty protection.

Nigeria 273 30.00% Worldwide

Philippines 241 30.00% Worldwide

Norway 500 28.00% Territorial Corporate tax rate is reduced from 28% to 27% with effect from 1 January 2014.

South Africa 391 28.00% Territorial

Egypt 255 26.50% Worldwide

79

Canada 1,770 15.00% 26.23% Territorial

Greece 255 26.00% Territorial Income from business activity acquired by entrepreneurs, private

single-entry accounting books is subject to taxation at 26% for income up to EUR50,000 and at 33% for the portion of income exceeding EUR50,000. New private businesses and entrepreneurs

China 8,250 25.00% Worldwide

Indonesia 895 25.00% Worldwide

Netherlands 770 25.00% Territorial

Islamic Republic of Iran 484 25.00% Worldwide

Austria 391 25.00% Territorial

Colombia 365 25.00% Worldwide Reduction of the corporate income tax rate from 33% to 25%

establishment in Colombia. Those taxpayers will continue to be subjected to a 33% tax rate on income and capital gains of Colombian source.

Denmark 309 25.00% Territorial

Malaysia 307 25.00% Territorial

Israel 247 25.00% Territorial Increase in the standard corporate income tax rate from 25% to 26.5% effective 1 January 2014.

Portugal 211 25.00% Territorial

Algeria 207 25.00% Worldwide

Finland 247 24.50% Territorial The Finnish government recently announced that the statutory CIT rate will be lowered to 20% as of 2014.

Korea 1,151 24.20% Worldwide 24.2% top tax rate includes a 10% surcharge applicable to taxable

tax rates are the same in 2013, large companies with taxable income exceeding KRW100 billion will see the minimum tax rate raised from the current 15.4% to 17.6%.

United Kingdom 2,434 23.00% Territorial Mainstream rate of corporation tax will reduce to 21% in 2014 and

1973.

Thailand 377 23.00% Territorial Thailand recently enacted a two-phased corporate tax rate reduction. Phase one reduction is from 30% to 23% and is effective for accounting periods beginning on or after 1 January 2012. Phase two reduces it down to 20% for accounting periods beginning on or after 1 January 2013 and 1 January 2014.

Sweden 520 22.00% Territorial

Switzerland 623 7.80% 21.17% Territorial

Russia 1,954 20.00% Territorial

Turkey 783 20.00% Territorial

Saudi Arabia 657 20.00% Worldwide

Chile 268 20.00% Worldwide

Poland 470 19.00% Worldwide

Czech Republic 194 19.00% Territorial

Taiwan 466 17.00% Worldwide

Singapore 268 17.00% Territorial

Hong Kong SAR 258 16.50% Territorial

Romania 171 16.00% Worldwide

Ireland 205 12.50% Worldwide

United Arab Emirates 362 0.00% N/A

2013 Corporate income tax rateNote: Where applicable, rates include an average subnational

40%

35%

30%

25%

20%

15%

10%

5%

0%

Uni

ted

Stat

es

Arg

entin

a

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a

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i Ara

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Taiw

an

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ania

Irela

nd

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40%

35%

30%

25%

20%

15%

10%

5%

0%

Fran

ceBe

lgiu

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ly

Spai

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ustr

alia

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Port

ugal

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and

Uni

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King

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land

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ssia

Turk

ey

Gree

ce

Czec

h Re

publ

icSi

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ore

Hon

g Ko

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AR

80

Uni

ted

Stat

es

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Fran

ce

Arg

entin

a

Paki

stan

Braz

il

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a

Indi

a

Germ

any

Italy

Spai

n

Nor

way

Sout

h A

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a

Egyp

t

Swed

en

Cana

da

Uni

ted

King

dom

Finl

and

Kore

a

Thai

land

Switz

erla

nd

Turk

ey

Saud

i Ara

bia

Gree

ce

Pola

nd

Czec

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ic

Russ

ia

Chile

Taiw

an

Sing

apor

e

Hon

g Ko

ng S

AR

Rom

ania

Irela

nd

Uni

ted

Ara

b Em

irate

s

40%

35%

30%

25%

20%

15%

10%

5%

0%

Aust

ralia

Mex

ico

Nig

eria

Phili

ppin

es

Colo

mbi

a

Indo

nesi

a

Net

herla

nds

Portu

gal

Denm

ark

Isla

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Rep

ublic

of I

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Israe

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Belg

ium

The trend toward a reduction of statutory CIT rates started with the tax reforms in the United Kingdom and the United States in the mid-1980s, which

to be cut in recent years, accompanied by various base broadening measures,

more limited utilization of losses and continuing to restrict depreciation

Figure 1 below shows that the statutory CIT rates in OECD member countries dropped on average by more than seven percentage points between 2000 and 2012, from 32.6% to 25.5%. This trend seems to be widespread, as rates have been reduced in more than 90 countries. Within the OECD area, the rate has stayed constant in Norway and the United States, as well as in non-OECD

reduce rates in 2013 and beyond.

2012 2000

0

10

20

30

40

50

60

JPN

USA FR

ABE

LPR

TDE

UA

US

MEX ES

PLU

XN

ZLN

OR

ITA

SWE

CAN

AU

TDN

KIS

RN

LD FIN

KOR

GBR

CHE

EST

CHL

GRC

ISL

SVN

TUR

CZE

HU

NPO

LSV

KIR

E

OECD average in 2000 (32.6%) and 2012 (25.5%)

81

Statutory corporate income tax (CIT) rates in OECD nations, 2000 and 2012

Jurisdiction Tax policy leader Email/telephone

Tax controversy leader Email/telephone

Ariel Becher ariel.becher@ar.ey.com 54 11 4318 1686

Ariel Becher ariel.becher@ar.ey.com 54 11 4318 1686

Australia Alf Capito alf.capito@au.ey.com +61 2 8295 6473

Howard Adams howard.adams@au.ey.com +61 2 9248 5601

Austria Andreas Stefaner andreas.stefaner@at.ey.com +43 1 21170 1040

Martin Schwarzbartl martin.schwarzbartl@at.ey.com +43 1 21170 1405

Herwig Joosten herwig.joosten@be.ey.com +32 2 774 9349

Philippe Renier Philippe.renier@be.ey.com +32 2 774 9385

Brazil Romero Tavares romero.tavares@br.ey.com +55 11 2573 3444

Julio Assis julio.assis@br.ey.com +55 11 2573 3309

Milen Raikov Milen.raikov@bg.ey.com +359 2 8177 100

Milen Raikov Milen.raikov@bg.ey.com +359 2 8177 100

Canada Greg Boehmer greg.c.boehmer@ca.ey.com +1 416 943 3463

Gary Zed gary.zed@ca.ey.com +1 403 206 5052

Chile Carlos Martinez carlos.martinez@cl.ey.com +56 2 267 61261

Carlos Martinez carlos.martinez@cl.ey.com +56 2 267 61261

China Becky Lai becky.lai@hk.ey.com +852 2629 3188

Henry Chan henry.chan@cn.ey.com +86 10 5815 3397

Colombia Margarita Salas margarita.salas@co.ey.com + 57 1 484 7110

Margarita Salas margarita.salas@co.ey.com + 57 1 484 7110

Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras,

Rafael Sayagués rafael.sayagués@cr.ey.com +506 2208 9880

Rafael Sayagués rafael.sayagués@cr.ey.com +506 2208 9880

EY contacts

Global and EMEIA Director — Tax Policy Global Director — Tax Controversy

+44 207 951 0150 +1 202 327 5696

Global Leaders

82

Jurisdiction Tax policy leader Email/telephone

Tax controversy leader Email/telephone

Croatia Denes Szabo denes.szabo@hr.ey.com +385 2480 540

Denes Szabo denes.szabo@hr.ey.com +385 2480 540

Cyprus Philippos Raptopoulos philippos.raptopoulos@cy.ey.com +357 25 209 999

Philippos Raptopoulos philippos.raptopoulos@cy.ey.com +357 25 209 999

Czech Republic Libor Fryzek libor.fryzek@cz.ey.com +420 225 335 310

Luice Rihova lucie.rihova@cz.ey.com+420 225 335 504

Denmark Trine Bonde Jensen Trine.b.jensen@dk.ey.com +45 7010 8050

Sune Hvelpund sune.hvelplund@dk.ey.com +45 51 58 2604

Ecuador Fernanda Checa fernanda.checa@ec.ey.com +593 2 255 3109

Fernanda Checa fernanda.checa@ec.ey.com +593 2 255 3109

Estonia Ranno Tingas ranno.tingas@ee.ey.com +372 611 4578

Ranno Tingas ranno.tingas@ee.ey.com +372 611 4578

European Union Marnix van Rij marnix.van.rij@nl.ey.com +31 70 328 6742

Klaus Von Brocke klaus.von.brocke@de.ey.com +49 89 14331 12287

Finland Tomi Johannes Viitala

+358 207 280 190

Jukka Lyijynen

+358 207 280 190

France Charles Menard charles.menard@ey-avocats.com +33 1 55 61 1557

Charles Menard charles.menard@ey-avocats.com +33 1 55 61 1557

Germany Ute Witt ute.witt@de.ey.com +49 3025 471 21660

Jürgen Schimmele juergen.schimmele@de.ey.com +49 211 9352 21937

83

Jurisdiction Tax policy leader Email/telephone

Tax controversy leader Email/telephone

Greece Stefanos Mitsios stefanos.mitsios@gr.ey.com +302 102 886 365

Tassos Anastassiadis tassos.anastassiadis@gr.ey.com +30 21 0288 6592

Becky Lai becky.lai@hk.ey.com +852 2629 3188

Henry Chan henry.chan@cn.ey.com +86 10 5815 3397

Botond Rencz botond.rencz@hu.ey.com+36 1 451 8602

Botond Rencz botond.rencz@hu.ey.com +36 1 451 8602

India Ganesh Raj ganesh.raj@in.ey.com +91 120 6717110

Rajan Vora rajan.vora@in.ey.com +91 22 619 20440

Indonesia Rachmanto Surahmatrachmanto.surahmat@id.ey.com+62 21 5289 5587

Dodi Suryadarma dodi.suryadarma@id.ey.com +62 21 5289 5236

Ireland David Smyth david.smyth@ie.ey.com +353 1 2212 439

David Smyth david.smyth@ie.ey.com +353 1 2212 439

Israel Arie Pundak arie.pundak@il.ey.com +972 3 568 7115

Gilad Shoval gilad.shoval@il.ey.com +972 3 623 2796

Italy Giacomo Albano giacomo.albano@it.ey.com +39 06 8556 7338

Maria Antonietta Biscozzi maria-antonietta.biscozzi@it.ey.com +39 02 8514 312

Japan Koichi Sekiya koichi.sekiya@jp.ey.com +81 3 3506 2447

Koichi Sekiya koichi.sekiya@jp.ey.com +81 3 3506 2447

Kazakhstan Zhanna Tamenova Zhanna.S.Tamenova@kz.ey.com +7 727 259 7201

Zhanna Tamenova Zhanna.S.Tamenova@kz.ey.com +7 727 259 7201

Latvia Ilona Butane ilona.butane@lv.ey.com +371 6704 3836

Ilona Butane ilona.butane@lv.ey.com +371 6704 3836

Lithuania Kestutis Lisauskas kestutis.lisauskas@lt.ey.com +370 5 274 2252

Kestutis Lisauskas kestutis.lisauskas@lt.ey.com +370 5 274 2252

84

Jurisdiction Tax policy leader Email/telephone

Tax controversy leader Email/telephone

Marc Schmitz marc.schmitz@lu.ey.com +352 42 124 7352

John Hames john.hames@lu.ey.com +352 42 124 7256

Malaysia Kah Fan Lim kah-fan.lim@my.ey.com +60 3 7495 8218

Kah Fan Lim kah-fan.lim@my.ey.com +60 3 7495 8218

Malta Robert Attard robert.attard@mt.ey.com +356 2134 2134

Robert Attard robert.attard@mt.ey.com +356 2134 2134

Mexico Jorge Libreros jorge.libreros@mx.ey.com +52 55 5283 1439

Enrique Ramirez enrique.ramirez@mx.ey.com +52 55 5283 1367

Middle East Mohammed Desin mohammed.desin@sa.ey.com +966 2667 1040

Mohammed Desin mohammed.desin@sa.ey.com +966 2667 1040

The Netherlands Arjo van Eijsden arjo.van.eijsden@nl.ey.com +31 10 406 8506

Arjo van Eijsden arjo.van.eijsden@nl.ey.com +31 10 406 8506

New Zealand Aaron Quintal aaron.quintal@nz.ey.com +64 9 300 7059

Kirsty Keating kirsty.keating@nz.ey.com +64 9 300 7073

Norway Arild Vestengen arild.vestengen@no.ey.com +47 24 002 592

Arild Vestengen arild.vestengen@no.ey.com +47 24 002 592

Panama Luis Ocando luis.ocando@pa.ey.com +507 208 0144

Luis Ocando luis.ocando@pa.ey.com +507 208 0144

Peru David de la Torre david.de.la.torre@pe.ey.com +51 1 411 4471

David de la Torre david.de.la.torre@pe.ey.com +51 1 411 4471

Philippines Emmanuel Castillo Alcantara emmanuel.c.alcantara@ph.ey.com +63 2 894 8143

Wilfredo U. Villanueva wilfredo.u.villanueva@ph.ey.com +63 2 894 8180

Poland Zbigniew Liptak zbigniew.liptak@pl.ey.com +48 22 557 7025

Agnieszka Talasiewicz agnieszka.talasiewicz@pl.ey.com +48 22 557 7280

85

Jurisdiction Tax policy leader Email/telephone

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Carlos Manuel Baptista Lobo carlos.lobo@pt.ey.com +351 217 912 000

Paulo Mendonca paulo.mendonca@pt.ey.com +351 21 791 2045

Puerto Rico Teresita Fuentes teresita.fuentes@ey.com +1 787 772 7066

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Romania Alexander Milcev alexander.milcev@ro.ey.com +40 21 402 4000

Jean-Marc Cambien marc.cambien@ro.ey.com +40 21 402 4191

Russia Alexandra Lobova alexandra.lobova@ru.ey.com +7 495 705 9730

Alexandra Lobova alexandra.lobova@ru.ey.com +7 495 705 9730

Russell Aubrey russell.aubrey@sg.ey.com +65 6309 8690

Siew Moon Sim siewmoon.sim@sg.ey.com +65 6309 8807

Slovak Republic Richard Panek richard.panek@sk.ey.com +421 2 333 39109

Peter Feiler peter.feiler@sk.ey.com +421 2 333 39155

Slovenia Lucijan Klemencic lucijan.klemencic@si.ey.com +386 1 58 31721

Lucijan Klemencic lucijan.klemencic@si.ey.com +386 1 58 31721

South Africa Keith Engel keith.engel@za.ey.com +27 11 772 5082

Christel Brits christel.brits@za.ey.com +27 11 502 0100

South Korea Min Yong Kwon Min-Yong.Kwon@kr.ey.com +82 2 3770 0934

Min Yong Kwon Min-Yong.Kwon@kr.ey.com +82 2 3770 0934

Spain Eduardo Verdun Fraile eduardo.verdunfraile@es.ey.com +34 915 727 419

Maximino Linares maximino.linaresGil@es.ey.com +34 91 572 7123

Sweden Johan Hörberg johan.horberg@se.ey.com +46 8 5205 9465

Johan Hörberg johan.horberg@se.ey.com +46 8 5205 9465

86

Jurisdiction Tax policy leader Email/telephone

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Switzerland Claudio Fischer

+41 58 286 3433

Walo Staehlin walo.staehlin@ch.ey.com +41 58 286 6491

Taiwan Sophie Chou sophie.chou@tw.ey.com +886 2 2720 4000

Sophie Chou sophie.chou@tw.ey.com +886 2 2720 4000

Thailand Yupa Wichitkraisorn yupa.wichitkraisorn@th.ey.com +66 2 264 0777

Ruth Chaowanagawi ruth.chaowanagawi@th.ey.com +66 2 264 0777

Turkey yusuf.penezoglu@tr.ey.com +90 212 368 5547

yusuf.penezoglu@tr.ey.com +90 212 368 5547

Ukraine Jorge Intriago jorge.intriago@ua.ey.com +380 44 490 3003

Vladimir Kotenko vladimir.kotemko@ua.ey.com +380 44 490 3006

Chris Sanger csanger@uk.ey.com +44 20 7951 0150

Jim Wilson jwilson8@uk.ey.com +44 20 7951 5912

United States Michael Dell michael.dell@ey.com +1 202 327 8788

Rob Hanson rob.hanson@ey.com +1 202 327 5696

Venezuela Alaska Moscato alaska.moscato@ve.ey.com +58 212 905 6672

Alaska Moscato alaska.moscato@ve.ey.com +58 212 905 6672

Vietnam Huong Vu huong.vu@vn.ey.com +84 90 343 2791

Huong Vu huong.vu@vn.ey.com +84 90 343 2791

87

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