4 July 2016
The exchange of information for tax
purposes
How far should it range?
Master thesis International and European Tax Law
Student: Alison Brouwer, 10358366
Mentor: Dr. E. Poelmann
Second reviewer: Mr. M. de Vlugt
17 June 2016, University of Amsterdam.
2
Acknowledgement
This thesis was written by Alison Brouwer, Master student in International and European Tax Law at the University of Amsterdam. With this report I will end my student time and begin a
new chapter in my life. I have thoroughly enjoyed the four years of studying Law at the University of Amsterdam.
I would like to express my sincere gratitude to Dr. E. Poelmann for mentoring me during my Master thesis and showing support towards the subject of my preference. Also I would like to thank my parents for supporting and encouraging me along the way, Mandy Ruyssenaars as a great fellow student and debater and the OECD for the non stop publishing of new articles
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The abstract
The primary goal of international tax treaties is to avoid double taxation. Nowadays, the main focus of the governments also lies on preventing double non-taxation. Over the last decade many questions have been raised about the international exchange of information. There are a lot of new instruments being developed to tackle the problems surrounding the exchange of information between countries. In 2016 the OECD has launched a new Standard for Common Reporting. Also the BEPS project has been introduced, which will tackle the strategies that exploit tax related gaps and mismatches. The new instruments will allow more transparency, which in turn will lead to more requests for information by governments, businesses and citizens.
This thesis presents an analysis of the new instruments and the consequences of these
instruments for governments, businesses and citizens. The main research question is: how far should the exchange of information for tax purposes range? If all countries worldwide would exchange more information for tax purposes, would there be fewer (tax) problems? This report explains the development of the exchange of information, the effectiveness of the ongoing automatic exchange of information and the different perspectives of countries and tax havens. Thereby it highlights two important subjects: Rulings and Aggressive Tax Planning schemes.
After researching the literature in the first instance, there seems to be no set limit with regard to the exchange of information. Even a tax haven such as Panama is agreeing to exchange information automatically. Agreements and implementation are two extremes though. These two extremes need to be examined separately. Yet the important principle of universality in taxation stands opposite the principle of territoriality for the implementation of the tax rules, so that when you look closer you will find that countries are implementing their own
limitations to the exchange. This might change with the introduction of the minimum
standard. One thing is certain, the growing transparency will lead to many questions and these will need to be answered by exchanging information. The exchange of information should therefore range as far as needed to create a fair global economy, but by regarding the confidentiality and privacy rules laid down in legislation.
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Index
ACKNOWLEDGEMENT ... 2 THE ABSTRACT ... 3 LIST OF ABBREVIATIONS ... 5 INTRODUCTION ... 6 SUMMARY ... 71. THE CURRENT STATUS OF THE EXCHANGE OF INFORMATION FOR TAX PURPOSES ... 9
1.1THE HISTORY AND DEVELOPMENT OF THE EXCHANGE OF INFORMATION ... 9
1.1.2 The history ... 9
1.1.3 Which factors contributed to this development? ... 13
1.2RULINGS ... 14
1.2.1 History and development of rulings ... 14
1.2.2. Examples of rulings ... 16
1.2.3 Transparency of rulings ... 19
1.3 THE UPCOMING VISIBILITY OF AGGRESSIVE TAX PLANNING ... 20
1.3.1 Tax planning ... 21
1.3.2 The consequences of Aggressive Tax Planning ... 23
1.3.3 Detecting aggressive tax planning ... 23
1.4CONCLUSION ... 25
2. THE SPONTANEOUS AND AUTOMATIC EXCHANGE OF INFORMATION FOR TAX PURPOSES ... 26
2.1THE SPONTANEOUS EXCHANGE OF INFORMATION ... 26
2.1.1 The functioning of the spontaneous exchange of information ... 27
2.1.2 The recommended instruments ... 27
2.2THE AUTOMATIC EXCHANGE OF INFORMATION ... 29
2.2.1. The functioning of the automatic exchange of information ... 29
2.2.2 The functioning of the automatic exchange of information in the future ... 30
2.2.3 The consequences of the automatic exchange of information ... 32
2.3CONCLUSION ... 35
3. THE DIFFERENT KINDS OF PERSPECTIVE ... 37
3.1THE DUTCH PERSPECTIVE ... 37
3.1.1. The Dutch system ... 38
3.1.2. The implementation and willingness ... 38
3.2THE INTERNATIONAL PERSPECTIVE ... 40
3.2.1. The United States of America ... 40
3.2.2 Tax havens ... 41
3.2.2.1 Panama ... 41
3.3A COMPARISON OF THE DIFFERENT PERSPECTIVES ... 43
3.3.1 Differences ... 43
3.3.1.1 Limitations ... 44
CONCLUSION ... 45
RECOMMENDATION ... 46
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List of abbreviations
AEOI Automatic Exchange of Information APA Advance Price Agreement
ATR Advance Tax Ruling
BEPS Base Erosion and Profit Shifting
CBC XML Country-by-Country Reporting XML Scheme CEO Chief Executive Officer
CRS Common Reporting Standard CTS Common Transmission System DAC Development Assistance Committee
EU European Union
FATCA The Foreign Account Tax Compliance Act FATF Financial Action Task Force
FFIs Foreign Financial Institutions IGA Intergovernmental Agreements IMF International Monetary Fund IRS Internal Revenue Service
OECD Organisation for Economic Co-operation and Development TIEA Tax Information Exchange Agreement
UK United Kingdom
UNDP United Nations Development Programme US United States
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Introduction
Nowadays, the primary goal of the international tax treaties also lies on avoiding
non-taxation. Over the last decade questions about the international exchange of information have risen. A base for the exchange of information is laid down in Article 26 of the OECD Model Tax Convention. Currently the exchange of information for tax purposes is one of the most popular topics in the tax branch. There are a lot of new instruments being developed to tackle the problems surrounding the exchange of information between countries. On the 1st of January 2016 the Common Reporting Standard from the Organisation for Economic
Cooperation and Development (OECD) was launched. This recent development shows how serious the problems are according to the OECD. This new method should enhance the transparency of information. Also with this new method the bank secrecy is no longer a legitimate reason to provide no further information about someone who has their money placed in one of the participating OECD countries.
Furthermore, on the 28th of January 2016 the OECD introduced a new framework called the
BEPS project. BEPS stands for Base Erosion and Profit Shifting (further on: BEPS). This project should provide governments with solutions for modernising international tax rules. As the OECD explains on their website it is hard for countries to keep their national tax laws up to date with the fast globalisation.1 This can lead to all kinds of gaps and mismatches. BEPS is introduced to tackle the strategies that exploit these gaps and mismatches. The main problem is that companies can shift profits to countries where there is very low or even no taxation. With the result that there is no or just a little corporate tax being paid overall. OECD secretary general Gurria states that: the BEPS is eroding the trust of citizens in the fairness of
tax systems worldwide.2 The OECD together with the G20 introduced 15 action points to tackle BEPS. These action points should result in profits being taxed where the economic activities are taking place and where the value is being created. Yet on the other hand they should give businesses more certainty about the application of international tax rules and
1 http://www.oecd.org/ctp/beps-about.htm
2 OECD Press release, G20 finance ministers endorse reforms to the international tax system
7 standardising compliance requirements. This project will therefore create a better
environment for both businesses and citizens.3
So if all countries worldwide were to exchange more information for tax purposes, we might have less (tax) problems. This of course is too short sighted. So why do we need a framework and multiple measures to enhance the exchange of information? Why do not all the countries exchange information spontaneously? There are many reasons for countries to not want to exchange the sensitive information about taxation. These can be of financial matter or for example the rulings that states make with the multinationals are mostly qualified as highly sensitive information. Governments want to make their own choices with whom they share this sensitive information, this is a form of sovereignty. More transparency of this sensitive information could mean a loss of sovereignty. A balance between the exchange of information and the sovereignty of countries is required. To achieve a well balanced tax environment the following question should be asked: How far should the international exchange of information for tax purposes range?
Summary
‘How far should the international exchange of information for tax purposes range’ will also be my main research question. I will research this question by answering the following sub questions:
- How far does the exchange of information for tax purposes currently range?
- Is the spontaneous and automatic exchange of information for tax purposes effective and efficient?
- How does the Dutch perspective relate itself to the international perspective on the exchange of information?
In this thesis I will explain the development of the exchange of information for tax purposes and what the main reasons are for this development. Therefore, I will highlight important subjects as rulings and the upcoming visibility of aggressive tax planning in the first chapter.
3 OECD, G20 finance ministers endorse reforms to the international tax system for curbing
8 My research will also contain the ever progressing automatic and spontaneous gathering of information in chapter two. How does the development of this kind of information gathering relate itself to the bigger picture of the exchange of information for tax purposes? Lastly, I will research the different perspectives and make a comparison between the Dutch and the International perspective. The development of the perspectives will be analysed in chapter three.
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1. The current status of the exchange of information for tax
purposes
Currently there is a lot of discussion about the exchange of information on all kinds of subjects. The exchange of information about criminals, politics and taxes are topics that interest all EU citizens. The EU is playing a growing role in the different communities. For some citizens the role of the EU is becoming too big. For example the United Kingdom has just held a referendum, with the result: a ‘Brexit’.4 Much criticism has been expressed about
the influence of the EU and the loss of sovereignty, but on the other hand the transparency and the exchange of information for all kinds of purposes are being applauded. This seems rather contradictory.5 So do we want to close our borders for EU influences and only let information in? Why do we feel the need for information, transparency and cooperation while on the other hand we want to be self-reliant? Hopefully these questions will be answered when the history and development of the exchange of information are presented. Furthermore, important subjects as Rulings and Aggressive Tax Planning will be discussed.
1.1 The history and development of the exchange of information
At this moment in time information seems to be the key feature in our society. Everybody is eager to have as much information about each other as they can obtain. When the focus lies on the exchange of information for tax purposes it is not only about the financial side, but ethical arguments also play a main role, these will be explained in chapter 1.1.3.6
1.1.2 The history
The OECD has a long history of advising on the exchange of information in their guidelines. The 19th century is the century wherein the modern international tax law arises. In the 20th
4 For more information: EU referendum, The Guardian, 24 March 2016. Brexit: Britain exits
the EU.
5 W. Wallace, The Sharing of Sovereignty: the European Paradox, Political Studies, Volume
47, special issue 1999.
6 Mr. R. Hamers and J.M.L. Gribnau, Tax planning: spel met regels dat om ethische houvast
10 century the first treaties between countries were made to avoid double taxation.7 Primarily through bilateral tax treaties, but also via Mutual Administrative Assistance.
In 1963 the first OECD model treaty about the avoidance of double international taxation was agreed on. This was the treaty that contained the first article about the exchange of
information. This article had a big influence on the other existing treaties and became well known. At first the exchange of information would happen by explicit request.8 In the year 1988 a multilateral treaty was signed by 20 states. This treaty regarded mutual administrative assistance in tax matters and cooperation to tackle tax evasion and avoidance. In 1988 there were still three large restrictions: bank secrecy, the refusal of exchange by the tax havens and the system of providing information only on request. Therefore, the BEPS project was
initiated. Since the launch of the BEPS project much progress has been made. Countries decided to work together on a higher level and under pressure of the US and the other G20 countries tax havens decided to exchange more information. With global coordination the project has encouraged jurisdictions to increase tax audits, investigations and even law changes.9
Since 2009 much progress has been made by the OECD, the EU and the Global Forum on transparency and exchange of information for tax purposes. The goal is to improve
transparency and the exchange of information on request. Since 2012 the political interest is now more focused on the opportunities provided by automatic exchange of information. On the 19th of April 2013 the G20 finance ministers and the Central Bank Governors endorsed automatic exchange of information as the expected new standard. This new standard was set out in the Model Intergovernmental Agreement to Improve International Tax.10 After this model there was a rise of Tax Information Exchange Agreements ( TIEA’s). There was a substantial development in the exchange of information. Yet there were complicated restrictions connected to these TIEA’s. For example, the TIEA between the US and Costa Rica limits the exchange of bank information to cases of tax fraud as defined under Costa
7 The editorial office, Internationale fiscale Informatie- uitwisseling in een
stroomversnelling, 2016/02: Fiscaal Tijdschrift Vermogen.
8 KPMG, automatic exchange of information, The Common Reporting Standard, kpmg.com,
2014.
9 PWC, 10 Minutes on the OECD’s BEPS project, PWC publishing, December 2015.
11 Rican law. So if a person wants to receive bank information they will have to demonstrate that the information is related to tax fraud.11 Such a restriction can be of great influence.
1.1.2.1 The important year 2013
2013 seemed to have been the year of a breakthrough. The European Council unanimously agreed to give priority efforts to extend automatic exchange at EU and global level and
welcomed ongoing efforts to develop a global standard. The Council stated that it was not just an issue of tax fairness, but it had become essential for political and social acceptability of fiscal consolidation.12 This was an important development. The base for this development was
the Tax Savings Directive, adopted in 2003. This meant a multilateral ruling that obliged countries to exchange important information and data.13 In June 2013 the European
Commission welcomed a legislative proposal to extend the scope of automatic exchange of information. This proposal contained: a common standard on information reporting, due diligence and exchange of information, a legal operational basis for the exchange of information and common or compatible technical solutions.14 In September the G20 fully supported the OECD at presenting such a single global standard in 2014.15
1.1.2.2 The recent developments and the BEPS project
In February 2014 a Common Reporting Standard (CRS) for automatic exchange of
information including translating it into domestic law was introduced. In principle there are no restrictions. The CRS is based on the FATCA16, the same information must be reported. A difference between the two is that CRS does not refer to citizenship but to tax residence.17 The CRS contains the reporting and due diligence standard as a foundation for the automatic
11 OECD, Peer review report: Phase 1 and 2 United States, Global Forum on transparency
and exchange of information for tax purposes, November 2013, p. 77.
12 European Commission, Conclusions of the European Council, 22 May 2013, Brussels.
13 European Council, Tax Savings Directive, June 2003.
14 OECD, A step change in tax transparency, OECD report for the G8 Summit, June 2013. 15 OECD, Standard for Automatic Exchange of Financial Account Information in Tax
Matters, OECD publishing 2014.
16 The Foreign Account Tax Compliance Act (FATCA) is an initiative launched by the United
States (US) in 2010 that obliges Foreign Financial Institutes to report information about their US account holders.
17OECD, Model Competent Authority Agreement and the Common Reporting Standard, 15
12 exchange of financial account information.18 In 2015 many countries had implemented the CRS in their national law system. On the first of January 2016 the Netherlands implemented the CRS. On the 28th of January 2016 the BEPS project in it’s newest form was introduced, also known as the Anti-BEPS Directive. The standard that has been formed is a minimum standard for exchanging information. New rules are required to effectively fight aggressive tax practices by large companies states the European Commission in the introduction of this proposal. A few of the mandatory disclosure rules of action point 12 are:
-‐ Improving transparency with Country-by-Country reporting; the problem is that it is very hard to see where the tax is being paid. The solution is a new template with the following groups: profits, sales, employees, assets and paid Income Tax. The mother of the group can now gather this information and the tax authorities will share this information with the other jurisdictions where the multinational operates pursuant to tax treaties.
-‐ Neutralising hybrid mismatch arrangements; the solution for deduction against tax exemption lies in the change of domestic laws. A state will deny the tax exemption if there is a deduction in the other state or vice versa.
-‐ Treaty shopping, letterbox companies; the solution is a minimum whereby only true residents qualify for treaty benefits. Limitation on benefit rules and principal purpose text rules. Treaties are made to prevent double taxation and not to facilitate treaty shopping.19
The package is based on three pillars: ensuring effective taxation in the EU, increasing tax transparency and securing a level playing field. The second one is especially of importance for this report. Under the new rules national authorities will exchange tax-related information about multinational companies’ activities. They will do so on a Country-by-Country basis. The Member States will now have the ability to use the information to identify tax avoidance. The Vice- President Valdis Dombrovskis stated: Today we are taking another step to
strengthen confidence in the entire tax system, making it fairer and more efficient.
18 OECD, Standard for Automatic Exchange of Financial Account Information in Tax
Matters, OECD publishing 2014, p. 17.
19 European Commission, Fair Taxation: Commission presents new measures against
13 And the commissioner for Economic and Financial Affairs, Taxation and Customs stated:
Today we are taking a major step towards creating a level-playing field for all our businesses, for fair and effective taxation for all Europeans.20
So it seems that big developments are being made. A minimum standard has been developed for the exchange of information and a project has been introduced with concrete plans for the future. It is now up to the Member States to implement these concrete plans into their own jurisdictions. January 2016 marked the beginning of a new five year mandate of the Global Forum. In a recent report from the Global Forum figures have shown that around 90 percent of the jurisdictions have the key overarching elements of the legal framework in place.21
1.1.3 Which factors contributed to this development?
There are many factors that can be considered for the development of the exchange of information for tax purposes. Digitalisation has made it easier to communicate with foreign countries. Financial data can also be accessed in an easier way and the exchange of
information has been simplified by digitalisation. Globalisation of the last decade also plays a major role. People seem to consider themselves not just a citizen of their country, but as a citizen of the world. Corporations seem to have the same thought and establish multiple settlements worldwide. This creates the possibility to shift the profits towards the corporations settled in the low tax havens. Due to the digital and global connection between the (world) citizens and the worldwide governments, this profit shifting has become more transparent. Because of the large corporations paying less tax, governments are missing out on tax revenue to pay for example schools and hospitals.22 The thought of having less money for public amenities, so multinationals can realise bigger profits is not a thought welcomed by most citizens. Thereby the tax burden will be shared by less, so the tax burden becomes heavier for the other businesses and citizens. Paying a legislative fair share would seem more ethical. The media has stressed the immorality and lack of ethics of the situation.23 In the first instance the
20European Commission, Fair Taxation: Commission presents new measures against
corporate tax avoidance, European Commission, Press release, 28 January 2016, Brussels.
21OECD, OECD Secretary-general report to G20 Finance ministers, Shanghai 26-27
February 2016.
22 State of Secretary for finance, Antwoorden Staatssecretaris van Financiën op vragen over
mislopen van belastingen, V-N 2016/28.11.
14 loss of money does not have a direct visible impact on citizens and businesses, but the
unfairness does. Of course the loss of money could have effects over time for the citizens, because tax rates can increase and/or public needs could become of a lower quality.
Therefore, by creating a more transparent society questions arise about the exact situation and information is required.
1.2 Rulings
In the battle against tax avoidance by multinationals the focus also lies on a specific kind of agreement: rulings. Rulings are advance agreements made between a state and a
multinational. They are of great importance to tax authorities and corporations, because they provide certainty about the taxation in advance. Rulings can contain all kinds of agreements. Rulings are made in the form of an APA (Advance Pricing Agreement) or an ATR (Advance Tax Ruling).24 It is a legal instrument under which taxpayers may obtain a binding statement
from the tax authorities concerning certain transactions. Tax rulings are applied on request and explain the interpretation of the tax administration and how it will apply to the particular taxpayer. These advance rulings are provided before the taxpayer makes any kind of
arrangement or transaction. Advance rulings are not meant to be generally applied.25 These advance rulings are issued for all kinds of topics, for example international transfer pricing transactions. It is a tool for corporations to clarify and conform taxation agreements. Rulings have existed for many centuries. Even in the Roman time they played a big role in society. Tax policy was a form of public intervention in the economy, the role of the state was to collect the taxes. Advance tax rulings represented one of the pillars of a process of democratization between tax administrations and taxpayers.26
1.2.1 History and development of rulings
The Netherlands has a long history of rulings practice, this partly because of its position as a popular location for multinational enterprises. After the second World War the rulings
24 C. Romano, Advance Tax Rulings and Principles of law: towards a European Tax Rulings
System? Doctoral Series 4, IBFD Publications BV 2002, p.77.
25 Letter of the secretary of state for finance No. DB95/761M, Hoofdlijnen van het
Rulingsbeleid, Vakstudie nieuws of 2 March 1995, at 848.
26 C. Romano, Advance Tax Rulings and Principles of law: towards a European Tax Rulings
15 practice went through a great development. The Dutch Ministry of Finance was searching for a solution for the situation of uncertainty for foreign investors about the fiscal consequences in the Netherlands. These investors were mainly US companies. The investors were aiming for more certainty on the tax treatment of their transactions. More certainty would be found in advance commitments. Rulings also became an important instrument to attract foreign
business to the Netherlands. It was in the 1970’s that the Supreme Court of the Netherlands made a controversial decision.27 The Court decided that the participation exemption was not applicable for a Dutch company for receiving dividends from two German companies. The reason was that the Dutch company was not carrying on a business itself. This might not seem unusual in 2016, but it was in 1973 as most companies established in the Netherlands were only letterbox companies. It was after this decision that the rulings became of great public interest. From that point on it was important to know for sure that the participation exemption in international situations was applicable. Due to the wide public interest it was of great importance to coordinate the rulings policy.
A new situation was created whereby multiple tax offices in the Netherlands were allowed to issue tax rulings. Tax advisors would submit the case to several inspectors to see which one would give the most favourable commitment. This situation is also known as ‘ tax inspector shopping’.28 This was of course an undesirable situation for the tax offices and measures had to be taken. In the late 1970’s the first steps towards the harmonization of the rulings policy were taken. This would lead to the centralization of the ruling activities.29 In 1986 the rulings policy was made public by the secretary of state for finance.30 There were no formal rules issued. It only obtained the rule that it was required for a taxpayer to represent a real and accurate picture of the current situation. Based on this current situation the tax authorities could draw a conclusion to the tax consequences.
So what about the openness of these rulings? Data on rulings were not available in this period of time, but when a tax publisher requested information about the rulings based on the Act of Openness of Government Administration the State Council decided that the publisher had the
27 Hoge Raad 7 November 1973, 17 182, BNB 1974/2.
28 C. Romano, Advance Tax Rulings and Principles of law: towards a European Tax Rulings
System? Doctoral Series 4, IBFD Publications BV 2002, p. 25.
29 Decree of the secretary of state for finance, 21 July 1995, AFZ 99/4519M, VN 1995, at
2641.
16 right to obtain information regarding the rulings.31 The individual rulings would be disclosed in an anonymous form.32 With the increase in complexity and technicality of the tax systems more guidance was needed. It seemed as if the rulings were becoming stricter and had to be measured against certain standards, but the Secretary of State for finance stated that rulings could be issued requiring any topic that required the interpretation of tax law provisions.33 When publishing the rulings, governments do not only have to consider protecting the confidentiality of the taxpayers and the limitations regarding the privacy, but also the preservation of the wide discretionary powers of tax administration in the use of advance rulings as an instrument to attract foreign investors.34
1.2.2. Examples of rulings
Countries all over the world give out rulings to participate in the competition of the global economy. As is stated above advance rulings are of great value to the Dutch economic system. Attracting foreign businesses by creating an attractive tax environment is one of the pillars of the Dutch tax system. Therefore, a lot of examples can be provided. One specific ruling that has had a lot of media attention in the past years, is the ruling regarding the Starbucks corporation. Many examples can also be given of international rulings, one of the most well known is the McDonald’s ruling. Both rulings will be presented.
1.2.2.1. Starbucks
The European Commission has decided that the ‘selective tax advantages’ granted to Starbucks in the Netherlands were improper.35 The Commission found that special arrangements were made to artificially lower their tax bills. The Commission orders Starbucks to pay back the millions of euros lost by these artificial arrangements. The Netherlands have responded by stating that they will appeal and that the Dutch practice is
31 State Council 7 July 1994, No. R02.92.3076, Vakstudie Nieuws, 4 August 1994, at. 2353. 32 Article 67(2) of the General Taxes Act
33 Letter of the secretary of state for finance No. DB95/761M, Hoofdlijnen van het
Rulingsbeleid, Vakstudie nieuws of 2 March 1995, at 848.
34 Carlo Romano, Advance Tax Rulings and Principles of law: towards a European Tax
Rulings System? Doctoral Series 4, chapter 1.5, IBFD Publications BV 2002.
17 lawful and compliant with the international system of the OECD.36 One of the main reasons to appeal is to get certainty on the case law.
How does this ruling become unlawful? A ruling becomes unlawful when it does not reflect the economic reality.37 So when artificial and complex methods are being accepted by the tax authorities this can lead to improper rulings, that could eventually result into state aid. In this case transfer prices were agreed to for transactions of services and goods between the
companies in the Starbucks group that were not competitive. As a result of these non-competitive prices most of the profit could be transferred abroad where there is also no tax being paid. This scenario is contrary to the EU state aid rules. It is forbidden to use any kind of method, without any economic justification, to determine transfer prices whereby the profit can be shifted so the corporation pays less tax. This would lead to an unfair competitive advantage.38
The decision of the Commission is based on the APA (Advance Pricing Agreement) between the Dutch tax authorities and Starbucks issued in 2008. The APA has been based on the International framework of the OECD for transfer pricing via the Transactional Net Margin Method. This method foresees to treat international corporations the same way as the national corporations. Profit is taxed in the same way. The commission gives their own explanation of the OECD guidelines and concludes that a different method had to be used in this situation, the Comparable Uncontrolled Price Method.
Starbucks Manufacturing EMEA BV is situated in the Netherlands. This is the only coffee-roasting factory in Europe. Starbucks Manufacturing sells and distributes roasted coffee and other products such as cups and cakes. The ruling of 2008 gave Starbucks Manufacturing a selective tax advance, whereby the tax base has been reduced. The following doubts have arisen about the ruling. Firstly, the pricing arrangements: the company pays an abnormally high price for certain products to another company in the Starbucks group situated in Switzerland. Secondly, royalties are being paid to another Starbucks Group entity in the
36Ministry of finance, kabinetsreactie op het besluit van de Europese Commissie inzake
Starbucks Manufacturing BV, AFP/2015/948 M, 27 november 2015.
37 A.P. Dourado and R. de Palma Borges, The Acte Claire in EC Direct Tax Law, IBFD,
2008, p. 476.
18 United Kingdom. The value of this royalty has not been linked to a value that is in line with royalty payments between independent companies. The profit has been shifted, via the royalty, to the United Kingdom where it will not be taxed. So the profit is shifted and the tax base is lowered by the high costs paid to an entity in Switzerland.39 The Commission has stated that these arrangements are a form of State aid. The Netherlands will appeal the decision of the European Commission.40
1.2.2.1 McDonald’s
In 2009 Luxembourg granted a second ruling for the multinational McDonald’s. In this international case it is also about royalties and the profit that is shifted with the royalties. It concerns a lower tax rate provided by Luxembourg, a country that has grown rich on financial services. A first ruling at the beginning of 2009 confirmed that McDonald’s Europe
Franchising was not liable to pay corporate tax in Luxembourg. The profits would be subject to taxation in the US via Switzerland. This ruling was based on the treaty between the two countries and as the purpose of Double Taxation Treaties between countries is to avoid double taxation, there would only be taxation in the US. The profits consisted of paid royalties by franchisees operating restaurants in the rest of Europe and Russia. Under the ruling
McDonald’s was required to prove every year that the royalties were subject to taxation in the US and Switzerland.41
It is not the first ruling that raises concern, but it is the second ruling. Contrary to what the first ruling had set out, the profits were not subject to tax in the US. McDonald’s Europe franchising did not have to pay tax in the US, while it did not have any taxable presence in the US under US law. There was no ‘permanent establishment’ under US law and that is why they were not subject to tax in the US. This is why a new request was put in for a second ruling. The second ruling was issued in the end of the year 2009. McDonald’s was no longer required to prove that the profit was being taxed in the US. So with this second ruling Luxembourg accepted that there was no tax being paid for the profits in Luxembourg nor in the US.
39 European Commission, State aid- Netherlands, alleged aid to Starbucks, Official Journal of
the European Union 2014/C 460/03, 19 December 2014, Brussels
40 European Commission, State aid implemented by the Netherlands to Starbucks, SA.38374,
21 February 2014.
41 European Commission, State aid: Commission opens formal investigation into
19 The investigation by the Commission is still in progress. They will investigate if the second ruling is contrary to the EU state aid law.42 By giving out a favourable tax treatment this could
lead to a breach of EU state aid law. Did McDonald’s gain an advantage that was not available to other companies via this second ruling?
1.2.3 Transparency of rulings
The Netherlands have stated that they want to take the lead in exchanging information for tax purposes. In a letter from the Secretary of State for Finance the tension between the right of information and the importance of confidentiality of the tax payer’s data has been highlighted. Only basic data will be exchanged and a request can be denied if a state claims that the
information will damage commercial, industrial or professional confidentiality.43 Also highlighted is the importance of a ruling for a taxpayer. It is only about having certainty in advance and not about specific different ways of taxation. The Secretary of State for Finance notes that the Second Chamber will only be informed of a ruling if this is required. The Second Chamber will be informed in a way that there is no breach of trust towards the taxpayer.44
In principle rulings are not made public. The Secretary of State for Finance sees no reason to make the rulings public or to inform the second Chamber systematically. Even though the second Chamber has a control function. To fulfil this function, you would think that a certain amount of transparency is needed. The Secretary of State for Finance believes this control function can be executed by giving transparency about the policy but not also about the individual cases. A Dutch ruling only foresees in certainty about the interpretation of Dutch law. The point of view of the Dutch tax authorities does not bind other countries. So if international qualifications differ of that from the Dutch this is not because of the given rulings, but because of the different law systems and the countries not being up to date with
42 European Commission, Alleged aid to Mc Donald’s – Luxembourg, State aid cases, SA.38945.
43 State Secretary of Finance, Beantwoording van vragen over automatische uitwisseling van
rulings,3 juni 2016, V-N 2016/31.14.
44 Ministry of finance, letter TK rulings of the state secretary of finance, 2 February 2015,
20 each others systems.45 This is what the BEPS project has been focussing on. Exchanging information for tax purposes could help solve these problems. A beginning has been made by exchanging information about rulings between the Netherlands and Germany and making agreements with Germany on how to exchange this information.46
1.2.3.1. Spontaneous exchange of information about rulings
The EU is working on a new framework. In 2016 a directive was introduced with a proposal for automatic exchange of information on financial account information. In 2015 a first step was taken by the Netherlands and Germany, when they made concrete plans to exchange information spontaneously. Both countries will exchange information actively and
spontaneously about rulings that might have cross border consequences. They do not need to hand in a request for information any longer. In 2015 and 2016 Germany received
information about rulings 74 times. The Netherlands received zero back. Germany accepted the information but did not take any further measures regarding the received information.47 The State secretary of Finance of the Netherlands addresses the important role of established international trust regarding the exchange of information. In practice no requests have ever been denied on formal grounds.48 The spontaneous exchange lies one step behind the automatic exchange of information.
1.3 The upcoming visibility of aggressive tax planning
In 2008, the year of the financial crisis, several American multinationals came under massive criticism by the governments. It became clear that multinationals as Apple, Amazon,
Starbucks and Google were making use of certain tax planning techniques with the aim of
45
The editorial office, Brief aan Tweede Kamer inzake informatieverstrekking over rulings, NTFR 2015/942.
46The editorial office, Nederland en Duitsland gaan spontaan rulings uitwisselen, NTFR
2015/2037.
47 State Secretary of Finance, Beantwoording van vragen over automatische uitwisseling van
rulings,3 juni 2016, V-N 2016/31.14.
48 State Secretary of Finance, Beantwoording van vragen over automatische uitwisseling van
21 paying less tax.49 The media has accused these multinationals of engaging in immoral and illegal conduct, these accusations can be very misleading.
The BEPS action plan refers to tax planning as strategies that exploit gaps in the international tax system.50 Profits are mostly artificially shifted to places where the taxation is less or even none existent. In principle this is not illegal and most public corporations are very cautious about making sure that their tax planning is within the law. To be clear: this is not about tax evasion, but about tax avoidance. This is of great importance, because tax evasion is a serious criminal offence. So why are multiple presidents and CEO’ s submitting their resignation after the publication of the Panama papers?51 The answer seems to lie in the word ‘moral’. It does
not seem morally correct and it leaves citizens with a feeling of injustice.
1.3.1 Tax planning
International tax planning has been a standard part of business in the last couple of decades. Tax planning is an analysis of a financial situation to align financial goals with tax efficiency planning. The aim of tax planning is to accomplish the most tax-efficient plan possible. Tax planning is a necessary item in the world of the complicated tax laws. International
corporations most of the time do not have a choice if they want to participate in tax planning. As the international corporations work cross-border tax planning is a must to avoid double taxation. Tax planning is often encouraged and intended by tax legislation.52 Thereby some countries use tax law as an instrument to create a welcoming tax climate for corporations. Corporations and their tax advisors respond to the provided tax climates by creating certain structures so they can benefit from the provided soft tax climate. Tax planning is driven by an economical drive, but can exceed when it becomes aggressive.53
49 Brian J. Arnold and James R. Wilson, Aggressive international tax planning by
multinational corporations: The Canadian context and possible responses, September
2014:The school of public policy, SPP Research Papers, volume 7, issue 29.
50 OECD, Aggressive tax planning based on after-tax hedging, OECD 2013.
51 Panama papers is the term used for a project, organised by the International Consortium of
Investigative Journalists, involving one of the largest data leaks up to 2016. The data showed how people were hiding their money in offshore accounts to avoid taxation.
52 H. Gribnau, Corporate Social Responsibility and Tax Planning: Not by Rules Alone,
Tilburg Law School, Social & legal studies 2015, vol. 24 (2) 225-250.
22
1.3.1.1. When does tax planning become aggressive?
Aggressive tax planning is actively pushing the limits and searching for the boundaries of the law.54 There are all kinds of aggressive tax planning schemes. Most aggressive tax planning
schemes involve the asymmetric treatment of losses and profits across multiple taxable entities. The losses will be held where they generate the most effective maximum tax loss and the profits where the taxation rate is the lowest. Aggressive tax planning is characterised by innovation in finding new structures to avoid the intended effects of tax laws.55 Braithwaite holds a broad definition of aggressive tax planning: A scheme or arrangement put in place
with the dominant purpose of avoiding tax. He also describes how countries have different
perspectives on aggressive tax planning. He claims that there is a certain core area of what is described as aggressive, but that this core is surrounded by a large penumbra of uncertainty.56 Others describe aggressive tax planning as not just a juridical qualification, but more or less a moral evaluation. It is described as a strategy to aim for the lowest effective tax rate possible, via strategies that are not morally accepted.57
Multinationals as Google, Starbucks and Facebook have argued that their tax planning schemes are not illegal. When you reflect on the rules of the national and international tax legislation this might seem a valid argument. However, rules do rest on certain principles. Gribnau has researched whether the legal system contains specific guidelines for ethical
conduct which go beyond the (letter of the) law. He concludes that the tax legislature
stimulates taxpayers to have a calculating attitude towards the tax system and thereby
sometimes consciously disregard the internal morality of law. Taxpayers who use aggressive tax planning to minimize their tax liability are bending the rules and manipulating the legal system. He also states that the tax rules are imperfect and that is why loopholes are possible. The use of legal structures resulting in paying none or very little taxes does not reflect a corporation’s ethical obligation to contribute to society. Tax is based on a cohesion of rules,
54 HM Revenue & Customs, Tackling aggressive tax planning in the global economy: UK
priorities fort he G20-OECD project for countering BEPS, UK government, March 2014, p.8.
55 J. Braithwaite, Markets in vice, Markets in Virtue, the federation press: NSW Australia
2005.
56 J. Braithwaite, Markets in vice, Markets in Virtue, the federation press: NSW Australia
2005, p. 16.
23 that are grounded in principles that make up the morality of law. Therefore these principals should be taken seriously by the legislators and the Court.58
1.3.2 The consequences of Aggressive Tax Planning
Aggressive tax planning has the main aim to pay less tax and end up with more profit. The avoidance of tax has a harmful effect on the national tax systems. The OECD mentions three specific groups that are being harmed: governments, individual taxpayers and businesses.59 In
the research paper of Arnold and Wilson five specific consequences are summed up when multinational enterprises avoid tax via aggressive tax planning. Firstly, it reduces government tax revenues and so the cost to ensure compliance with the tax rules by multinationals will increase. Secondly, it undermines the integrity of the tax system. This can hold the effect on tax compliance generally. Thirdly, it undermines the fairness of the national tax system. Taxpayers must share the tax burden and if the multinational enterprises do not share this burden, it becomes heavier for the other taxpayers. Fourthly, the competitive disadvantage for small and medium sized enterprises will increase. Lastly, if the opportunities for aggressive tax planning are greater on an international level than on the national level, the enterprises will invest more on the international level.60 All these consequences will result in a negative spiral, whereby the tax authorities, individual taxpayers and businesses around the world will suffer. Multinationals risk reputational damage if their effective tax rate is viewed as being too low. An example is the Starbucks case, whereby British citizens refused to buy their coffee any longer at Starbucks cafes. On the other side corporations that do not use a form of tax planning could find themselves in a competitive disadvantage. Fair competition is being harmed this way.61
1.3.3 Detecting aggressive tax planning
At this point of time aggressive tax planning is not only on the agenda of the economics, but also on the agendas of politicians and journalists. This could be helpful for detecting
58 H. Gribnau, Corporate Social Responsibility and Tax Planning: Not by Rules Alone,
Tilburg Law School, Social & legal studies 2015, vol. 24 (2) p. 225.
59 OECD, Taxing Multinational Enterprises, Policy Brief, BEPS update No. 3, October 2015. 60 Brian J. Arnold and James R. Wilson, Aggressive international tax planning by
multinational corporations: The Canadian context and possible responses, September
2014:The school of public policy, SPP Research Papers, volume 7, issue 29.
24 aggressive tax planning.62 Although making a diversion between legal and illegal tax planning remains complicated. Over the last decade tax planning has become more aggressive and clear legislation seems necessary. At the request of the G20 leaders the OECD launched their international action plan in 2012. BEPS action point 12 generally foresees to tackle aggressive tax planning. In the report it seems clear that the international tax standards may not have been able to keep up with the globalisation. The expectation was that the OECD would set out key pressure areas and provide concrete timelines for solutions.63 In 2013 the OECD
explained via a declaration that there was a need for governments to work together. If the governments would work together, they could develop methods of addressing asymmetries in domestic and international tax laws.64 The focus lies on creating a level playing field.65
International cooperation between governments in the last decade has resulted in a network of thousands of bilateral tax treaties that are based on common standards and shared principles. However, gaps can still be found and structures can still be developed to shift profits. New international standards must be made to ensure that these gaps, frictions, loopholes and mismatches can be detected and even made extinct. The actions stated in the report will only be able to succeed with further transparency. Targeted and comprehensive information is essential for governments to identify risk areas. Early detection of aggressive tax planning is of great value. A new mechanism will have to be developed to obtain this quick information. At the same time businesses require certainty and predictability to make investment
decisions.66 The OECD provides a forum for countries to exchange information on tax
planning schemes, detection methods and response strategies. A database has been developed for aggressive tax planning schemes. The database holds among 400 schemes, so Member States have the ability to adapt quickly and to identify certain schemes or hybrid
mismatches.67
62 OECD, Tackling Aggressive Tax Planning through Improved Transparency and
Disclosure, OECD, February 2011.
63 C. Panayi, Advanced issues in International and European Tax Law, Bloomsbury, Oxford
and Portland, Oregon, 2015.
64OECD, declaration on base erosion and profit shifting, 29 May 2013.
65 OECD/G20, BEPS Project: Countering Harmful Tax Practices More Effectively, taking
into account Transparency and Substance, OECD publishing, 2014, p. 63.
66 OECD, Action Plan on Base Erosion and Profit Shifting, OECD publishing, OECD 2013,
p. 15.
25 1.4 Conclusion
The exchange of information is developing very quickly. Large steps are being taken and a minimum standard has been developed. The BEPS project that has been proposed with 15 action points has put more pressure on the transparency of tax information. Not only
governments have expressed their concerns, but also citizens have raised questions about the ethicality of the Base Erosion and Profit Shifting. More transparency and information is required about the complicated ‘tax situations’. Currently digitalisation and globalisation play a main role in our society and this enables information to travel fast.
Requests for information are transferred into spontaneous and automatic exchanges of information. Although it is not yet certain what other countries do with the received information, the exchange has at least been made possible. Rulings have been made more transparent, but there still remains a tension between the right for information and the importance of confidentiality for the tax payer. In the Netherlands transparency about the policy of rulings is not a problem, but sharing the details of individual cases still seem a step too far.
The upcoming visibility of aggressive tax planning has also lead to the request for more transparency by exchanging information. Aggressive tax planning leads to significant harm for governments, individual taxpayers and businesses. Tax planning schemes have been recognised and placed in a database that is accessible for all countries. Also new international standards should enable countries to recognise mismatches at an earlier stage and to adapt their laws to prevent these mismatches. The actions that have been presented in the latest BEPS action plan will only succeed with further transparency.
26
2. The spontaneous and automatic exchange of information for tax
purposes
Article 26 of the OECD Model Tax Convention does not explain how to exchange
information, but presents the different kinds of forms of exchanging information. These are not meant to be limited. Thereby the commentary in paragraph 10 of the article states: The
manner in which the exchange of information agreed to in the Convention will finally be effected can be decided upon by the competent authorities of the Contracting States.68 In the
late 90’s information was only exchanged on request. Nowadays information is still exchanged on request, but also spontaneously and automatically. Special clauses are being included in bilateral treaties that information will be exchanged spontaneously. In principle, if this does not happen, this would lead to a breach of the treaty.69 A next step is the automatic exchange of information, no requests or initiative of the contracting states will be needed. The effectiveness and efficiency will be presented on the basis of the consequences of these forms in the following (sub) chapters.
2.1 The spontaneous exchange of information
The spontaneous exchange of information is providing information to another contracting party that is relevant to that party and that has not been requested in the past. The spontaneous exchange of information relies on the active participation and cooperation of the countries. Is the spontaneous exchange of information effective and efficient? The answer to this question depends on the motivation and the initiative of the contracting states.70 Local tax officials need to have the ability to pass on their information to the authority. The OECD recommends that tax authorities use certain instruments that encourage, promote and facilitate effective spontaneous exchange of information.71
68 Commentary on article 26 of the OECD Model Tax Convention, par 10.
69 OECD Committee on fiscal Affairs, Manual on the implementation of exchange of
information provisions for tax purposes, 23 January 2006.
70 OECD Global Forum on transparency and exchange of information for tax purposes, Peer
review report, phase 1 legal and regulatory framework, March 2013, p. 43.
71 African Tax Administration Forum, A practical guide on exchanging information for
27
2.1.1 The functioning of the spontaneous exchange of information
A country can have different kinds of reasons to consider spontaneous exchange of
information. These grounds vary from suspecting that there may be a loss of tax in another country to a likelihood of a particular tax avoidance scheme being used by other taxpayers.72 The country providing the information can find guidance in the OECD manual in what to include in the spontaneously provided information. The checklist of the OECD concludes: the identity of the person to whom the information relates, the information about the payment or transaction, the gathered information and an explanation why this information is thought of as important. Also a reminder that the use of information is subject to the confidentiality rules should be included. A simple example has been set out in the OECD manual where
spontaneous exchange of information may be useful for a tax treaty partner: Country A uses
the exemption method for the purposes of avoiding double tax on employment income. Maria, a resident in country A, was exempted from tax in country A because she was employed for more than 183 days in country B during the 2003 tax year. Because the Convention between country A and country B assigns taxing rights on Maria’s employment income to country B, country A spontaneously informs country B that it granted a tax exemption to Maria for the 2003 tax year.73 The person receiving the provided information should evaluate it and pass it on to the appropriate investigative authorities for action. The OECD manual explicitly emphasizes the importance of feedback to the investigative authority that provided the information. The feedback will include details on how useful the information was to the receiving authorities. Feedback between the authorities will lead to quality improvement in the future for spontaneous information exchanges.
2.1.2 The recommended instruments
An essential part of the legislation regarding the exchange of information is the Council Directive 2011/16 EU. The Directive has established procedures for better cooperation between the EU States and has also presented a secure electronic system for the exchange of
72 OECD Committee on fiscal Affairs, Manual on the implementation of exchange of
information provisions for tax purposes, 23 January 2006. See also the Council Directive
2011/16/EU, art. 9.
73 OECD Committee on fiscal Affairs, Manual on the implementation of exchange of
information provisions for tax purposes, 23 January 2006. See also the Council Directive
28 information. The Directive was amended in 2014 and 2015 and withholds important main provisions on the exchange of information. Deadlines are included to ensure the swift exchange of information. The deadline for the transmission of information gathered by the spontaneous exchange of information should be no longer than one month after it becomes available. Also the feedback should be given within three months after the information was passed on to the authorities.
On the 28th of January 2016 the Commission proposed extending the exchange of information to include Country-by-Country reporting.74 The proposal includes the expansion of the
automatic and spontaneous exchange of information in the EU. An EU legal instrument based on the DAC (Development Assistance Committee) would involve the IT arrangements to facilitate information reporting. The DAC is an international forum of many of the largest funders of aid, observed by the World Bank, IMF and UNDP.75 This EU legal instrument would lead to a single reporting approach, which would lead to costs saving for both authorities and companies. Under the directive information is shared in specific formats. These formats could also be used for the additional items that have been introduced in the proposal. Tax authorities need to be able to gather relevant information on Multinational Groups regarding their transfer pricing, structure and internal transactions. If an authority lacks this information it will not be able to identify the harmful tax practices and therefore will not be able to change its own legislation. Increased transparency is therefore of great importance.76
The resolution of the Council already provides EU Multinational Groups in the Union with a method to provide tax authorities with information on transfer pricing and global operations. This is the European Union Transfer Pricing Documentation. The European Union Transfer Pricing Documentation does not provide any mechanisms for the Country-by-Country
reporting.77 In this report Multinational Groups should provide each jurisdiction in which they
74 European Commission, proposal of a Council Directive: amending Directive 2011/16/EU
as regards mandatory automatic exchange of information in the field of taxation, 28 January
2016.
75 OECD documents, Development Assistance Committee (DAC) (www.oecd.org).
76 Deloitte, Tax Alert: Beps action 5: Countering Harmful Tax Practices More Effectively,
taking into account Transparency and Substance, Deloitte, 8 October 2015.
77 See the new proposals: European Parliament, Briefing, EU Legislation in Progress:
29 conduct business information on the amount of profit they make and the tax they pay. Also the Multinational Groups should provide an overview of the business activities each entity engages in. This proposal proposes that the Directive reduces the administrative burden for the Multinational Groups and that the information is collected and made available to the tax administrations in a certain amount of time. The Country-by-Country reporting and the OECD are now mainly focused on the automatic exchange of information and this will therefore be treated extensively in chapter 2.2.2.
2.2 The automatic exchange of information
From 2012 onwards political interest started to focus on the opportunities provided by automatic exchange of information.78 This is a step further than the spontaneous exchange of information, because the information does not have to be provided when a government feels this is necessary, but will be provided automatically. The G20 endorsed automatic exchange as the expected new standard. In May 2013 the European Council agreed to give priority efforts to extend automatic exchange at a global level.79 The new global standard presents a minimum standard for the information to be exchanged. This new global standard is based on FATCA and the European Union (EU) Savings Directive and is also known as the CRS (Common Reporting Standard). The CRS for Automatic Exchange of Information (AEOI) counts 101 committed jurisdictions which are going to implement the common global standard from 2017.80
2.2.1. The functioning of the automatic exchange of information
The Automatic exchange of information transmits large amounts of information from the tax administration where the account is held to the tax administration where the taxpayer is resident. The resident tax administration is then able to verify whether the provided
information matches the presented income by the taxpayer. The information that is provided
78 OECD, standard for automatic exchange of financial information in tax matters, OECD
publishing, 2014.
79 European Commission, Secretariat General, European Council- Conclusions, 22 May 2013,
Brussels.
80 OECD, Pascal Saint-Amans, Global tax and transparency: We have the tools, now we must
30 mostly regards financial accounts, but other information can also be relevant. For example: pensions, employment income or changes of residence.81
The OECD has presented eight key features for a working ‘automatic exchange of
information system’. From the perspective of the country that is transferring the information: confidentiality and reciprocity, acknowledgement and feedback are the key features to success. From the perspective of the receiving country: defining the scope of
income/transactions, defining the information to capture about the person involved, ensuring data quality, when to receive the information, how to exchange and how to use the
information (risk assessment) are the key features to a successful system. Thereby one of the most important features of the system is the global reach. If not all countries participate then the transparency will not reach the desired effect.82
2.2.2 The functioning of the automatic exchange of information in the future
The automatic exchange of information is also based on the EU Savings Directive and the Directive on Administrative Cooperation. The first Directive was introduced in 2005 and provided the automatic exchange on interest income within the EU and certain non-EU countries. A future proposal for this Directive held a change to primarily remove perceived loopholes as of 2017. This Directive has been repealed, because a significant overlap had developed with other legislation adopted in 2014.83 The Directive of Administrative
Cooperation ensures that information is exchanged automatically regarding five categories: employment, director’s fees, life insurance products not covered by other Directives, pensions and ownership of and income from immovable property. More categories will be added, such as: dividends, capital gains, other financial income and account balances.84
The OECD has developed a minimum standard and aims to implement the common global standard in 2017 in the committed jurisdictions. The OECD is working together with the G20 and the global forum to provide tools and practical guidance for globally consistent
81 OECD, Standard for Automatic Exchange of Financial Account Information in Tax
Matters, OECD publishing 2014, p.
82 OECD, A Step Change in Tax Transparency, OECD Report for the G8 Summit, June 2013.
83Deloitte, The end of the EU Savings Directive as from 1 January 2016. Are there any
residual effects? 16 November 2015, Operational Tax News.
84 KPMG, Automatic Exchange of Information: The Common Reporting Standard. How
31 implementation. The OECD’s Forum on Tax Administration has agreed to a new system: the Common Transmission System (CTS). This is the first global bilateral exchange system to operationalise automatic exchanges of information.85 As Saint-Amans, the director of the
OECD Centre for Tax Policy and Administration, explains: establishing global taxation
standards and making commitments to implement them, while essential steps, are just the start. It is time to move emphatically towards implementation. Not only do governments wish it, but citizens do too. So now the legal basis has been laid down, it is time to create
instruments and implement the new standards into our society.
2.2.2.1. Country-by-Country reporting
In the earlier mentioned proposal of the European Commission an amendment has been made to article 3 of the Council Directive 2011/16/EU. Point 9 is replaced and now stresses the exchange of information, without request, and with pre-established intervals. The available information relates to the information provided by Member States in their tax files. Also a new article has been introduced in the proposal: article 8aa. Article 8aa contains the scope and conditions of mandatory automatic exchange of information on Country-by-Country
reporting. Article 8aa reads that each Member State shall take the necessary actions to require the Ultimate Parent of a Multinational Group that is resident for tax purposes in its territory, to file a Country-by-Country report within 12 months after the last day of the reporting fiscal year.86
Important is the second paragraph of the article: the competent authority of a Member State
where the Country-by-Country Report was received pursuant to paragraph 1 shall, by means of automatic exchange, communicate the report to any other Member State in which, on the basis of the information in the Country-by-Country report, one or more Constituent Entities of the MNE Group of the Reporting Entity are either resident for tax purposes, or are subject to tax with respect to the business carried out through a permanent establishment within the deadline laid down in paragraph 4.87
85 OECD, Pascal Saint-Amans, Global tax and transparency: We have the tools, now we must
make them work, OECD Yearbook 2016.
86European Union, Council Directive 2014/107/EU amending Directive 2011/16/EU, Official
Journal of the EU, 9 December 2014.
87 European Commission, proposal of a Council Directive: amending Directive 2011/16/EU
as regards mandatory automatic exchange of information in the field of taxation, 28 January
32
2.2.2.2 Implementing Country-by-Country reporting
The Base Erosion and Profit Shifting action plan holds 15 action points. Action point 13 provides a template for the Country-by-Country reporting.88 Multinationals will provide the information annually, in each jurisdiction where they do business. The jurisdictions relating to the global allocation of income and taxes paid and also other indicators such as the location of economic activity. At this point in time the total number of signatories counts 39 countries.89
An implementation package has been developed that includes: model legislation and three Model Competent Authority Agreements to facilitate implementation of the exchange of the reports. These three agreements are: the Convention on Mutual Administrative Assistance in Tax Matters, bilateral tax conventions and Tax Information Exchange Agreements (TIEAs). In 2018 the first Country-by-Country reports should be exchanged with information from the year 2016.90 The reports will be electronically transmitted between competent authorities in accordance with the Country-by-Country XML Scheme (CBC XML). The information to be included in the report will be collected by the country of residence of the reporting entity for the Multinational Enterprise Group. The report will be exchanged under the relevant
international exchange of information agreement. A user guide has been developed to guide tax administrations and taxpayers.91
2.2.3 The consequences of the automatic exchange of information
The automatic exchange of information seems to be one of the solutions to the lack of transparency and all the problems arising herewith. The tax administrations need to work together to ensure that taxpayers pay the right amount to the right tax jurisdiction.92 The automatic exchange of information enhances the cooperation between the tax administrations
88 OECD, Transfer Pricing Documentation and Country-by-Country reporting, Action
13-2015 Final Report, 5 October 13-2015.
89 OECD, A new boost to transparency in international tax matters: 6 new countries sign
agreement enabling automatic sharing of Country-by-Country reporting, OECD 12 May
2016.
90 OECD, OECD releases standardised electronic format for the exchange of BEPS
Country-by-Country Reports, OECD press release, 22 March 2016.
91OECD, Country-by-Country Reporting XML Schema: User Guide for Tax Administrations
and Taxpayers, March 2016.
92 European Commission, European Commission proposes public tax transparency rules for
