FEED Validator

for Atom and RSS and KML

Congratulations!

This is a valid RSS feed.

Recommendations

This feed is valid, but interoperability with the widest range of feed readers could be improved by implementing the following recommendations.

line 34, column 0: description should not contain itemprop attribute (20 occurrences) [help]
```
					<description><![CDATA[The Novo Nordisk AS ruling (C-248/23), issued by  ...
```
line 34, column 0: description should not contain data-wpel-link attribute (20 occurrences) [help]
```
					<description><![CDATA[The Novo Nordisk AS ruling (C-248/23), issued by  ...
```

line 118, column 38: content:encoded should not contain relative URL references: #_ftn1 (322 occurrences) [help]

				</tr></table><br /><br /><hr />]]></content:encoded>
                                      ^

line 139, column 0: content:encoded should not contain data-wpel-link attribute (174 occurrences) [help]
```
										<content:encoded><![CDATA[<a href="https://shop.wolterskluwer.n ...
```
line 255, column 0: content:encoded should not contain loading attribute (4 occurrences) [help]
```
<img loading="lazy" class="alignnone size-full wp-image-19825" src="http: ...
```
line 255, column 0: content:encoded should not contain sizes attribute (3 occurrences) [help]
```
<img loading="lazy" class="alignnone size-full wp-image-19825" src="http: ...
```

Source: https://kluwertaxblog.com/feed/

<?xml version="1.0" encoding="UTF-8"?><rss version="2.0"
xmlns:content="http://purl.org/rss/1.0/modules/content/"
xmlns:wfw="http://wellformedweb.org/CommentAPI/"
xmlns:dc="http://purl.org/dc/elements/1.1/"
xmlns:atom="http://www.w3.org/2005/Atom"
xmlns:sy="http://purl.org/rss/1.0/modules/syndication/"
xmlns:slash="http://purl.org/rss/1.0/modules/slash/"
>
<channel>
<title>Kluwer International Tax Blog</title>
<atom:link href="https://kluwertaxblog.com/feed/" rel="self" type="application/rss+xml" />
<link>https://kluwertaxblog.com</link>
<description></description>
<lastBuildDate>Mon, 23 Dec 2024 09:53:10 +0000</lastBuildDate>
<language>en-US</language>
<sy:updatePeriod>
hourly </sy:updatePeriod>
<sy:updateFrequency>
1 </sy:updateFrequency>
<item>
<title>VAT, Industry Levies and Rebate Schemes</title>
<link>https://kluwertaxblog.com/2024/12/23/vat-industry-levies-and-rebate-schemes/</link>
<comments>https://kluwertaxblog.com/2024/12/23/vat-industry-levies-and-rebate-schemes/#respond</comments>
<dc:creator><![CDATA[Sérgio Vasques (Catholic University, Lisbon) and Conceição Gamito (VdA, Lisbon)]]></dc:creator>
<pubDate>Mon, 23 Dec 2024 09:53:10 +0000</pubDate>
<category><![CDATA[CJEU]]></category>
<category><![CDATA[Hungary]]></category>
<category><![CDATA[VAT]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19836</guid>
<description><![CDATA[The Novo Nordisk AS ruling (C-248/23), issued by the CJEU on September 12, 2024, is the latest in a string of decisions on the VAT regime of rebate schemes in the pharmaceutical sector. In this ruling the CJEU looks at a new question: whether a tax on the sales of pharmaceutical companies can be qualified... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/12/23/vat-industry-levies-and-rebate-schemes/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[The Novo Nordisk AS ruling (C-248/23), issued by the CJEU on September 12, 2024, is the latest in a string of decisions on the VAT regime of rebate schemes in the pharmaceutical sector. In this ruling the CJEU looks at a new question: whether a tax on the sales of pharmaceutical companies can be qualified as a price reduction for the purposes of VAT. Litigation will resume shortly.
<ol>
<li>
<h4> The case</h4>
</li>
</ol>
The Novo Nordisk case concerns a company operating in the Hungarian market.
Novo Nordisk’s products are sold by the company to wholesalers and then by wholesalers to pharmacies. When pharmacies sell products to end consumers, different public subsidy schemes may apply. Certain prescription medicines may be subsidized by the Hungarian National Health Insurance Fund (NEAK). In that case, the consumer pays the pharmacy only a part of the price — the “subsidized price” — and NEAK will afterwards transfer to the pharmacy the remainder.
This rebate scheme is not entirely financed by the Hungarian state, however.
Under Hungarian law, pharmaceutical companies are obliged to make a payment amounting to 10 or 20 per cent of the subsidies granted to such products. To this end, companies are obliged to submit a periodical declaration and make the payment to the Hungarian tax authority, which then transfers the funds to NEAK.
The Novo Nordisk case has obvious similarities with the Boehringer cases.<a href="#_ftn1" name="_ftnref1">[1]</a> Here, too, we are dealing with a rebate which operates after goods have been supplied and which is granted to people other than those who are part to the operation. And here too we have a rebate which results in the company supplying the products not keeping the entire amount resulting from its supply to wholesalers.
The distinctive point of the Novo Nordisk case lies in the fact that this “payment” is mandatory by law and is made for the benefit of a public body, and may therefore be regarded as a tax — as indeed the Hungarian authorities insist it is.
In such cases, where an ex lege payment is made to a public body, can it still be said to be a price reduction for the purposes of Article 90 of the VAT Directive?
<ol start="2">
<li>
<h4> The AG’s take</h4>
</li>
</ol>
In her opinion on the case, Advocate General Tamara Capeta starts by asking the question: “Is such a payment a price reduction, in which case the taxable amount should be reduced for the amount of that payment on the basis of Article 90(1) of the VAT Directive, or is such a payment a discharge of the obligation to pay a special tax, in which case it does not affect the taxable amount?”<a href="#_ftn2" name="_ftnref2">[2]</a>
The AG’s analysis therefore relies on the assumption that Articles 78(a) and 90(1) of the VAT Directive are mutually exclusive — the very same assumption the parties to the case seem to have relied on. A special tax on a transaction cannot for the purposes of VAT simultaneously be part of the transaction’s taxable amount and represent a reduction of its price. It is either one thing or the other.
On this assumption, the AG explores the requirements for the application of Article 78(a). According to CJEU case law, for a payment to be covered by this provision, it must constitute a tax and have the same chargeable event as VAT.
As to the chargeable event, the AG simply remarks that “it is undisputed that the delivery of the medicinal products is the chargeable event for the ex lege payment and for the VAT”.<a href="#_ftn3" name="_ftnref3">[3]</a> As to what is a tax, things are less straightforward.
There being no clear case law on what a tax for the purposes of Article 78(a) is, the Commission suggests one should consider whether a payment is mandated by law, whether it has a predetermined base and rate, who is its beneficiary and what is the intention of the national legislator and the objectives of the payment.
The AG takes a dim view of these criteria, noting they don’t always allow a firm conclusion and certainly not in the case of the payments made by Novo Nordisk. After all, a price reduction can also be mandatory and the law may stipulate its base, amount and beneficiaries. And the legislator’s intention is difficult to prove.
In the AG’s opinion, the decisive point in qualifying the payments made by Novo Nordisk lies in their predictability. A payment should only be qualified as a tax when it is possible to clearly anticipate that the legislator is demanding it as such. In the case at hand, the Hungarian law referred to the payment as a rebate and pharmaceutical companies could not anticipate it would be demanded as a tax.
It follows that the payments made by Novo Nordisk are not covered by Article 78(a) and should instead be regarded as a price reduction under Article 90(1).
“That, however, does not prevent a Member State to enact, in a more explicit manner, a fiscal measure which would fulfil a similar objective of financing the public health policy.”<a href="#_ftn4" name="_ftnref4">[4]</a>
<ol start="3">
<li>
<h4> The ruling</h4>
</li>
</ol>
The CJEU chose a different line of thought.
In its ruling, the court does not refuse to qualify the payments made by Novo Nordisk as a tax. Subject to verification, the CJEU admits that these payments, being mandated by law, do not represent added value nor can be regarded as part of the economic consideration for the supply of these medicinal products.<a href="#_ftn5" name="_ftnref5">[5]</a>
The CJEU also admits the chargeable event for these payments “may coincide with the chargeable event for the VAT due on the subsidised medicines” as the obligation stems from the sale of medicines by pharmaceutical companies and the amount is a function of the quantity sold and the amount of public subsidy.
Therefore, such payments may be regarded as a tax that is part of the taxable amount of supplies made by pharmaceutical companies, under Article 78(a).
According to the CJEU, the classification of these payments as a tax for the purposes of Article 78(a) VAT Directive does not preclude treating them as a price reduction for the purposes of Article 90(a), an altogether different matter.
The purpose of payments based on a legal mandate may be no different from the purpose of payments based on contracts between the pharmaceutical industry and the state, “namely to subsidise the purchase price of prescription medicines reimbursed by social security in the context of outpatient treatment”.<a href="#_ftn6" name="_ftnref6">[6]</a>
The results of legal and contractual payments may also be the same: to oblige companies forgo a fraction of the price they receive from wholesalers.
Whatever the source of the payment obligation, it would be inconsistent with the principle of neutrality to demand from pharmaceutical companies VAT calculated upon an amount which is higher than the amount ultimately received.
The ex lege or ex voluntate source of a rebate scheme should therefore be considered irrelevant in itself. A special tax on pharmaceutical sales must be treated in the same way as a payment resulting from a contract or agreement.
It is on this basis that the CJEU recognises that the payment to which Novo Nordisk is obliged constitutes a reduction in the price of its sales, and that it should therefore be recognised as entitled to rectify the corresponding VAT.
<ol start="4">
<li>
<h4> Not all taxes are created equal</h4>
</li>
</ol>
The CJEU’s approach has ovious merits. By equating contractual obligations with ex lege obligations, which are used interchangeably in many rebate schemes in the pharmaceutical sector, this approach better guarantees the principle of neutrality. Furthermore, by avoiding a discussion on the concept of tax and on its “predictability”, it brings greater certainty to the treatment of these payments.
The court’s position on Novo Nordisk AS nevertheless demands a clear answer to two questions: first, which taxes are covered by Article 78(a); second, in which cases exactly do these taxes lead to a price reduction under Article 90(1).
As to the first question, there is abundant case law.
In the Cooeperatieve Aardappelenbewaarplaats (C154/80) judgement, the CJEU stated that for the purposes of (current) Article 78 the taxable amount should include everything which makes up the consideration, meaning there must be a direct link between the service provided and the consideration received if the supply of a service is to be taxable.<a href="#_ftn7" name="_ftnref7">[7]</a> This doctrine was restated in other decisions relating to the contractual elements of the consideration, Such as Naturally Yours Cosmetics (230/87), Empire Stores (C‑33/93), and Bertelsmann (C‑380/99).<a href="#_ftn8" name="_ftnref8">[8]</a>
In line with this doctrine, the CJEU has held that in order for taxes to be included in Article 78(a) they must also have a direct link with the supply, meaning their chargeable event should coincide with that for VAT. It is from this perspective that the court has analysed the case of various taxes on the sale or registration of cars — De Danske Bilimportorer (C‑98/05), Commission vs. Poland (C-228/09), Commission vs. Austria (C‑433/09), Lidl (C‑106/10) — a commercial advertising screening tax imposed on TV stations — TVI (Joined Cases C‑618/11, C‑637/11, C‑659/11) — or municipal land use taxes — Lisboagás GDL (C‑256/14).<a href="#_ftn9" name="_ftnref9">[9]</a>
As to the second question, we are in uncharted territory. Once a tax is levied on a transaction, how can it be conceived as a price reduction for the seller?
The Novo Nordisk sheds some light into this question. As far as can be surmised from the case, in particular from the request for a preliminary ruling, the payment pharmaceutical companies are obliged to make legally stems from the sale of subsidised medicinal products and is ultimately based on their production price.<a href="#_ftn10" name="_ftnref10">[10]</a>
For this reason, both the AG and the CJEU infer this compulsory payment has the same chargeable event as VAT, that is, the obligation that is imposed on pharmaceutical companies is generated by the supply they make to wholesalers.
This point, however, seems to deserve better scrutiny. In fact, a tax whose chargeable event is the turnover of companies can operate in different ways.
A tax can be levied on the value of transactions so as to be passed on to the buyer along with the price, at the moment a transaction takes place. Or it can instead be levied on the value of transactions so as to be borne by the seller, dissociated from the price. In other words, a tax on turnover can be structured either as a direct or indirect tax — and this is even true of taxes on added value.<a href="#_ftn11" name="_ftnref11">[11]</a>
Many industry levies in the European Union, from the financial sector to telecoms, are calculated upon the turnover of companies and yet they are not intended to be passed on to buyers in the fashion that is typical of consumption taxes. Their chargeable event may “coincide” with that of EU VAT but only to a certain extent: VAT is intrinsically associated with each single transaction while these levies are associated with the aggregate value of transactions for a given period of time.
This may explain the intricacies of the Hungarian compulsory payment, namely the ability to deduct certain (R&D) expenses from the taxable base as well as an assessment mechanism that seems entirely decoupled from the single supplies made by companies. This may also explain why the Hungarian compulsory payment entails a price reduction for pharmaceutical companies: the payment is levied after supplies to wholesalers take place and is not meant — and effectively cannot be — passed on to wholesalers at the moment of supply.
In short, to the extent such compulsory payments are to be qualified as a taxes we should recognise them more as direct than indirect taxes on turnover. Direct taxes on turnover may be taken as price reductions for the purposes of Article 90(1), since they force suppliers to “forgo a fraction of the price” received. And precisely because they are meant to be borne by suppliers, such taxes should not be considered as part of the taxable amount for the purposes of Article 78(a).
Articles 78(a) and 90(1) VAT Directive are indeed mutually exclusive. Either a tax on turnover is of an indirect nature and thus part of the VAT taxable amount or it is a direct tax and may lead to a price reduction. No way out of this squeeze.
<a href="#_ftnref1" name="_ftn1">[1]</a> CJEU, Boehringer Ingelheim Pharma, C-462/16; Boehringer Ingelheim, C-717/19.
<a href="#_ftnref2" name="_ftn2">[2]</a> CJEU, Novo Nordisk A/S, C-248/03, Opinion AG Capeta, 6.06.2024, 25
<a href="#_ftnref3" name="_ftn3">[3]</a> CJEU, Novo Nordisk A/S, C-248/03, Opinion AG Capeta, 6.06.2024, 49.
<a href="#_ftnref4" name="_ftn4">[4]</a> CJEU, Novo Nordisk A/S, C-248/03, Opinion AG Capeta, 6.06.2024, 70.
<a href="#_ftnref5" name="_ftn5">[5]</a> CJEU, Novo Nordisk A/S, C-248/03, 12.09.2024, 36-37.
<a href="#_ftnref6" name="_ftn6">[6]</a> CJEU, Novo Nordisk A/S, C-248/03, 12.09.2024, 48.
<a href="#_ftnref7" name="_ftn7">[7]</a> CJEU, Staatssecretaris van Financïen v Cooeperatieve Aardappelenbewaarplaats, 154/80, 5.02.1981.
<a href="#_ftnref8" name="_ftn8">[8]</a> CJEU, Naturally Yours Cosmetics, 230/87, 23.11.1988; Empire Stores, C‑33/93, 2.06.1994; Bertelsmann, C‑380/99, 3.07.2001.
<a href="#_ftnref9" name="_ftn9">[9]</a> CJEU, De Danske Bilimportorer, C‑98/05; Commission vs. Poland, C-228/09, 20.05.2010; Commission vs. Austria, C‑433/09, 22.12.2010; Lidl, C‑106/10, 28.07.2011; Lisboagás GDL, C‑256/14, 11.06.2015; TVI, 618/11, C‑637/11 and C‑659/11, 5.12.2013.
<a href="#_ftnref10" name="_ftn10">[10]</a> CJEU, Novo Nordisk A/S, C-248/03, Request for a Preliminary Ruling, 18.04.2023, . CJEU, Novo Nordisk A/S, C-248/03, 12.09.2024, 38: “it is apparent (…) that the event giving rise to the ex lege obligation on the taxable person (…) is the sale of the medicinal products”. CJEU, Novo Nordisk A/S, C-248/03, Opinion AG Capeta, 6.06.2024, 49, “it is undisputed that the delivery of the medicinal products is the chargeable event for the ex lege payment and for the VAT”.
<a href="#_ftnref11" name="_ftn11">[11]</a> Alan Schenk/Oliver Oldman, Value-Added Tax: A Comparative Approach, Cambridge, 2007, 42-46.
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/12/23/vat-industry-levies-and-rebate-schemes/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>The Contents of Highlights & Insights on European Taxation</title>
<link>https://kluwertaxblog.com/2024/12/02/the-contents-of-highlights-insights-on-european-taxation/</link>
<comments>https://kluwertaxblog.com/2024/12/02/the-contents-of-highlights-insights-on-european-taxation/#respond</comments>
<dc:creator><![CDATA[Giorgio Beretta (Amsterdam Centre for Tax Law (ACTL) of the University of Amsterdam; Lund University)]]></dc:creator>
<pubDate>Mon, 02 Dec 2024 07:48:27 +0000</pubDate>
<category><![CDATA[Customs and Excise]]></category>
<category><![CDATA[Direct taxation]]></category>
<category><![CDATA[EU law]]></category>
<category><![CDATA[Indirect taxation]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19829</guid>
<description><![CDATA[Highlights & Insights on European Taxation Please find below a selection of articles published this month (November 2024) in Highlights & Insights on European Taxation, plus one freely accessible article. Highlights & Insights on European Taxation (H&I) is a publication by Wolters Kluwer Nederland BV. The journal offers extensive information on all recent developments in European Taxation in the... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/12/02/the-contents-of-highlights-insights-on-european-taxation/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[<a href="https://shop.wolterskluwer.nl/Highlights-Insights-on-European-Taxation-sNPHIEURTX/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>
Please find below a selection of articles published this month (November 2024) in <a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>, plus one freely accessible article.
<a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation (H&I)</a> is a publication by Wolters Kluwer Nederland BV.
The journal offers extensive information on all recent developments in European Taxation in the area of direct taxation and state aid, VAT, customs and excises, and environmental taxes.
 
To subscribe to the Journal’s page, please click <a href="https://www.linkedin.com/company/highlights-insights-on-european-taxation/?viewAsMember=true" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">HERE</a>
 
Year 2024, no. 11
TABLE OF CONTENTS
 
<h4>GENERAL TOPICS</h4>
– KUBERA (C-144/23). EU law precludes Slovenian practice on references for a preliminary ruling. Court of Justice
(comments by Edwin Thomas) (H&I 2024/295)
 
<h4>INDIRECT TAXATION, CASE LAW</h4>
– NARE-BG (C-429/23). No VAT deduction after expiry of limitation period laid down in national legislation. Court of Justice
(comments by Svetlin Krastanov) (H&I 2024/301)
– Drebers (C-243/23). EU law precludes Belgian rules on extended adjustment period for immovable property in case of substantial
renovation. Court of Justice
(comments by John Gruson & Nikhil Mediratta) (H&I 2024/300)
– Makowit (C-182/23). Expropriation of agricultural land subject to VAT. Farmer is taxable person. Court of Justice
(comments by Emilia Sroka) (H&I 2024/270)
– Inspecteur van de Belastingdienst Utrecht (C-639/22 to C-644/22). VAT exemption for pension funds. Court of Justice
(comments by Jeroen Bijl) (H&I 2024/269)
 
<h4>CUSTOMS AND EXCISE</h4>
– Online services for Customs: NCTS, AES and PoUS
(comments by Piet Jan de Jonge) (H&I 2024/280)
– Commission publishes the 2025 version of the Combined Nomenclature
(comments by Piet Jan de Jonge) (H&I 2024/276)
 
<h4>MUTUAL AID</h4>
– Ordre des avocats du barreau de Luxembourg (C-432/23). Protection of exchanges between lawyer and client in company law versus exchange of information on request in tax matters. Court of Justice
(comments by Edwin Thomas) (H&I 2024/294)
For full access to the articles and more information, please visit: <a href="https://www.inview.nl/publication/WKNL_CSL_1693" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.inview.nl/publication/WKNL_CSL_1693</a>
 
<h4>FREE ARTICLE</h4>
– Makowit (C-182/23). Expropriation of agricultural land subject to VAT. Farmer is taxable person. Court of Justice
(comments by Emilia Sroka) (H&I 2024/270)
The doubts raised by the Polish court concerned whether the transfer of ownership of agricultural land through expropriation, in exchange for compensation paid to a farmer who is a VAT-taxable person, should be subject to VAT, even though the farmer was not involved in any real estate transactions and had not taken any steps to facilitate such a transfer.
The ruling of the Court of Justice of the European Union (hereinafter: ‘CJ’) aligned largely with the position of the Polish tax authorities and the EU Commission. The Polish authorities argued that a farmer registered as a VAT-taxable person, who transfers ownership of agricultural land to the State Treasury through expropriation in exchange for compensation, due to the land being repurposed for non-agricultural use, should be considered to be acting as a VAT-taxable person for the purposes of that transaction (Written Comments of the Republic of Poland (RP) in case C-182/23, 28 July 2023, ref. DPUE.9313.168.2023.AJK(2)(AKS), obtained under the access to public information procedure, paragraph 31). The EU Commission adopted a similar position, indicating that the interpretation of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1) (hereinafter: the ‘VAT Directive’) leads to the conclusion that the disputed transaction should be subject to VAT. The fact that the taxable person’s economic activity does not involve real estate transactions does not alter this conclusion (Written Comments of the EU Commission in case C-182/23, 12 July 2023, ref. sj.d(2023)7040197, obtained under the access to public information procedure, paragraphs 36 and 57).
Interestingly, in the EU Commission’s view, it was not the interpretation of Article 9(1) of the VAT Directive, as pointed out by the referring court, that was relevant to resolving the dispute. This provision defines the concepts of the taxable person and economic activity, and the question of whether the farmer is a VAT-taxable person and whether he conducts an economic activity seemed uncontroversial to the EU Commission. Therefore, the EU Commission rightly suggested determining whether Article 2(1)(a) in conjunction with Article 14(2)(a) of the VAT Directive should be interpreted to mean that a transaction occurring under the factual circumstances of this case is subject to VAT. The CJ agreed with the Commission’s position, stating that the referring court’s question essentially seeks to interpret Article 2(1)(a) in conjunction with Article 14(2)(a) of the VAT Directive (paragraphs 22-24).
According to Article 2(1)(a) of the VAT Directive, a supply of goods for consideration within the territory of a Member State by a taxable person acting as such is subject to VAT. This provision establishes that for a transaction to be subject to VAT, two conditions must be fulfilled: first, there must be a supply of goods for consideration within the territory of a Member State; and second, the supply must be made by a taxable person acting as such.
In the case of the first condition, it is necessary to refer to the wording of Article 14(2)(a) of the VAT Directive, which provides that the transfer, by order made by or in the name of a public authority or in pursuance of the law, of the ownership of property against payment of compensation shall be regarded as a supply of goods.
In interpreting this condition, the CJ similar to the EU Commission and the Polish authorities in their written comments, referred to the conclusions of the judgments in Gmina Wrocław (CJ 13 June 2018, C-665/16 Minister Finansów v Gmina Wrocław, <a href="https://www.inview.nl/document/idec626c4818b9421c8ef19e7536b22524#--ext-id-ee5f4548-a360-44b9-bd5b-7338d942b417" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2018:431</a> and CJ 25 February 2021, C-604/19 Gmina Wrocław v Dyrektor Krajowej Informacji Skarbowej, <a href="https://www.inview.nl/document/id8dc0fc5885504f49a89151bf9059a0f0#--ext-id-8df5dead-ddcc-4b2e-ac2f-7a66c374596c" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2021:132</a>).
Based on these judgments, the CJ first confirmed that Article 14(2)(a) of the VAT Directive constitutes lex specialis in relation to Article 14(1) of the VAT Directive, which defines ‘supply of goods’ as the transfer of the right to dispose of tangible property as owner (judgment, paragraph 28). Second, the CJ reiterated that for a transaction to qualify as a ‘supply of goods’ within the meaning of Article 14(2)(a) of the VAT Directive, three cumulative conditions must be fulfilled: (i) there has to be a transfer of a right to ownership, (ii) that transfer must be by order made by, or in the name of, a public authority or in pursuance of the law, and (iii) there must be payment of compensation (paragraph 29).
The CJ emphasized that, in this case, the first two conditions were clearly met (paragraph 30), the expropriation resulted in a change of ownership from the farmer to the State Treasury, and the transfer of ownership was based on a decision issued by the voivode, which is a public authority. However, there was some uncertainty regarding the fulfilment of the third condition. The Polish authorities indicated that, in connection with the expropriation, the voivode initiated proceedings to determine the compensation owed to the farmer for the land taken by the State Treasury and issued relevant decisions awarding compensation. Nonetheless, at the time of the prejudicial request, such compensation had not yet been paid. Thus, they concluded that the transfer of ownership by expropriation would qualify as a supply of goods only at the moment the compensation awarded to the farmer was paid (the Republic of Poland’s (RP) Written Comments, paragraph 20). The CJ also noted that the transaction would be considered a ‘supply of goods’ only if the payment of the compensation ‘has become effective’, leaving this assessment to the referring court (paragraphs 31-32).
For Article 2(1)(a) of the VAT Directive to apply, in addition to the aforementioned condition that there must be a supply of goods for consideration, it is also necessary to fulfil the second condition, namely that the supply must be made by a taxable person acting as such. This particular condition appears to raise the greatest concerns for the referring court, due to the fact that the farmer was not engaged in any economic activity related to real estate transactions but was solely conducting agricultural activities.
It is worth noting that in the Polish practice of applying VAT provisions, administrative courts and tax authorities often treat the sale of real estate used in agricultural economic activity in a specific manner, often concluding that farmers engaging in such transactions are not acting as a VAT taxable person, given that their agricultural activity is not related to real estate trading (G. Kaptur, ‘Podatnik VAT w obrocie nieruchomościami VAT, cz. XXXV – wyrok Trybunału Sprawiedliwości z 11.7.2024 r. (C-182/23, Makowit), cz. I’, Nieruchomości 9 (2024), p. 29).
In this context, it should be noted that according to the CJ’s settled case law, the key issue in determining whether a transaction is subject to VAT is whether the property constitutes part of the taxable person’s business or private assets. In Armbrecht (CJ 4 October 1995, C-291/92 Finanzamt Uelzen and Dieter Armbrecht, <a href="https://www.inview.nl/document/id176319951004c29192admusp#--ext-id-1763_1995-10-04_c-291-92__usp" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:1995:304</a>, paragraphs 17-18), the CJ noted that the distinction between private assets and assets used for economic activities depends on how the assets are used. It was held that a taxable person performing a transaction in a private capacity does not act as a taxable person and that a transaction performed by a taxable person in a private capacity is not, therefore, subject to VAT. This position was further developed in Bakcsi (CJ 8 March 2001, C-415/98 Laszlo Bakcsi v Finanzamt Fürstenfeldbruck, <a href="https://www.inview.nl/document/id176320010308c41598admusp#--ext-id-1763_2001-03-08_c-415-98__usp" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2001:136</a>, paragraphs 37 and 40), where the CJ clarified that a taxable person who sells a business asset is acting in a business capacity and therefore as a taxable person. It was highlighted that when a taxable person has chosen to incorporate, in full or in part, the capital item into his business assets, the fact that the taxable person was not authorised to deduct the VAT attaching to that item is irrelevant. The broad interpretation of economic activity and the principle that assets used for economic purposes in a business are subject to VAT, regardless of the specific details of the transaction, was also emphasized in Polfarmex (CJ 13 June 2018, C-421/17 Szef Krajowej Administracji Skarbowej v Polfarmex Spółka Akcyjna w Kutnie, <a href="https://www.inview.nl/document/id247a6be3930e465fa27c8afd96577514#--ext-id-97571fd0-620d-41c2-b3db-b1ce4fab5cde" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2018:432</a>). Here, the CJ held that even complex transactions, such as the transfer of real estate in return for the redemption of shares, can be treated as supplies of goods within the meaning of the VAT Directive. The Court stressed that the decisive factor is whether the property forms part of the taxable person’s business assets used in economic activity, and not how the transaction was structured (Polfarmex, C-421/17, paragraph 42).
The case Slaby & Kuć (CJ 15 September 2011, C-180/10 and C-181/10, Jarosław Słaby v Minister Finansów and Emilian Kuć and Halina Jeziorska-Kuć v Dyrektor Izby Skarbowej w Warszawie, <a href="https://www.inview.nl/document/idfdbd9e651cb645ddb3560f852eb14290#--ext-id-4e9f7e89-0175-45b5-a653-022aa2ecb832" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2011:589</a>) also serves as a key point of reference. In that decision, the CJ emphasized that a natural person who carried out agricultural activity on land that was reclassified following a change to urban planning regulations, which took place for reasons beyond their control, must not be regarded as a VAT taxable person, unless that person takes active steps to market the property, deploying resources similar to those used by a producer, trader, or service provider in concluding those sales (Slaby & Kuć, C-180/10 and C-181/10, paragraphs 50-51).
In the case at hand, the Polish authorities highlighted that the fact that the expropriated land was used in the farmer’s economic activity means that such property can no longer be considered part of the farmer’s private assets. Therefore, it was argued that the transfer of ownership of such assets should be subject to VAT (RP’s Written Comments, paragraphs 28-30).
The EU Commission took a similar stance, stating that the mere fact that the properties were used in an economic activity (agricultural) was sufficient to conclude that the farmer acted as a taxable person (EU Commission’s Written Comments, paragraph 55). The EU Commission also stressed that, under Article 14(2)(a) of the VAT Directive, it is not required that the taxable person take active steps to sell the property, especially in the case of expropriation, which takes place by operation of law (EU Commission’s Written Comments, paragraphs 53-54). The EU Commission further noted that the fact that the disputed land was used for economic activity at the time of expropriation distinguishes this case from Slaby & Kuć (C-180/10 and C-181/10), to which the referring court alluded when raising its doubts. In those cases, at the time of the disputed transactions, the individuals were no longer engaged in agricultural activities on the disputed land, and the debate before the CJ centered around whether their activity of selling the land could qualify as economic activity. Such a debate did not arise in the present case (EU Commission’s Written Comments, paragraph 56).
The CJ concurred with the tax authorities and the EU Commission (paragraph 38). Importantly, the Court also added that expropriation does not require any active steps from the taxable person and requiring them would be contrary to the nature of expropriation and the effectiveness of Article 14(2)(a) VAT Directive (paragraph 39). Nevertheless, the CJ left some discretion to the national court, stating that if the referring court were to find that the transaction in question was carried out by the farmer as part of the management of assets not intended for agricultural activity, it should conclude that the farmer was not acting as a taxable person, and the transaction would not be subject to VAT (paragraph 40).
As rightly pointed out in the doctrine, in practice, determining whether a property is a part of the taxable person’s business assets or private assets presents various challenges, particularly as the classification of the property may change over time. A taxable person may withdraw the property from the business assets, or property initially held as private assets may become part of the business assets (see Kaptur 2024, op. cit., p. 32-33). It appears that this type of dilemma is closely linked to the specific facts of each case, and it is appropriate that the CJ rightly leaves the resolution of such uncertainties to the national court.
In conclusion, Makowit (C-182/23) fits into the CJ’s established case law, which confirms a broad interpretation of economic activity and holds that properties used in such activities form part of the taxable person’s business assets. This means that their sale is subject to VAT, even if the taxable person does not take active steps to sell the property. The ruling is particularly important as it clarifies that in the case of expropriation imposed by a public authority, the lack of active steps by the taxable person does not preclude VAT liability, provided the property was used in an economic activity.
Dr. Emilia Sroka 
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/12/02/the-contents-of-highlights-insights-on-european-taxation/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>Italian business calls for tax simplification measures</title>
<link>https://kluwertaxblog.com/2024/11/29/italian-business-calls-for-tax-simplification-measures/</link>
<comments>https://kluwertaxblog.com/2024/11/29/italian-business-calls-for-tax-simplification-measures/#comments</comments>
<dc:creator><![CDATA[Umberto Lorenzi (Associate Chiomenti)]]></dc:creator>
<pubDate>Fri, 29 Nov 2024 13:58:22 +0000</pubDate>
<category><![CDATA[Italy]]></category>
<category><![CDATA[OECD]]></category>
<category><![CDATA[Pillar I]]></category>
<category><![CDATA[Pillar II]]></category>
<category><![CDATA[United Nations]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19821</guid>
<description><![CDATA[On 22 November 2024 more than 300 tax experts gathered in Rome for the first Italian International tax conference organized by Italian Association of Joint Stock Companies (Assonime). Under the patronage of the OECD, the European Commission and the Italian Ministry of Economy and Finance (MEF), the event brought together business representatives and institutions to... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/11/29/italian-business-calls-for-tax-simplification-measures/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[On 22 November 2024 more than 300 tax experts gathered in Rome for the first Italian International tax conference organized by Italian Association of Joint Stock Companies (Assonime). Under the patronage of the OECD, the European Commission and the Italian Ministry of Economy and Finance (MEF), the event brought together business representatives and institutions to discuss recent trends in international taxation.
Stefano Firpo, Managing Director of Assonime, emphasized the importance of gathering multinational enterprises (MNEs) and institutions to discuss the current architecture of international taxation, while Alberto Trabucchi, Co-Managing Director and Head of the Tax Department at Assonime, highlighted that the proliferation of actors in the international tax landscape could potentially lead to overlapping guidelines and increased complexity, negatively impacting businesses. Fabrizia Lapecorella, Deputy Secretary General of the OECD, provided further insights into the work done by the OECD and the future endeavours of the OECD Inclusive Framework. She underlined the international tax challenges associated with the increased mobility of individuals, particularly High-net-Worth Individuals (HNWIs), and the importance of increasing tax certainty and reducing tax inequalities, including through collaborative tools. Finally, she reiterated the revenue forecasts for Pillar 2 ranging between US$155-192 billion per year.
The event was divided into three sessions, each followed by roundtable discussions: recent trends in international taxation, the future of Pillar 2, and tax certainty, dispute resolutions, and cooperative compliance.
<h4>Recent trends in international taxation</h4>
The panel discussion was introduced by Benjamin Angel, Director for Direct Taxation, Tax Coordination, Economic Analysis, and Evaluation at the European Commission. He outlined upcoming tax initiatives noting that the priorities will be decided by the new European Commission, such as the revision of the Energy Taxation Directive, the BEFIT proposal, the ATAD 3 Unshell Directive, the revision of EU legislation and directives (so-called decluttering), and initiatives to facilitate SMEs’ activities. He further pointed out that following the Recovery Plan, Cyprus and Malta have revised their tax systems and introduced withholding taxes on certain outbound payments as well as the arm’s length principle. The session featured a roundtable discussion moderated by Alberto Trabucchi with Giorgio Bigoni (Head of Tax, Eni S.p.A.), Paolo Ricca (Tax Director Southern/Eastern Europe, Unilever Italy Holdings S.r.l.), and Giuseppe Zingaro (Head of Group Tax, Unicredit).
The panel discussed the need for a balanced policy framework that supports investments, particularly in light of new measures such as Pillar 2, BEFIT, Pillar 1, and the digital services tax (DST). It was noted that there is uncertainty surrounding the new US administration’s stance on Pillar 1 and Pillar 2. This includes consideration of the global tax environment and the roles of various international actors, such as the contributions of the UN and EU to the international tax landscape.
<h4>The future of Pillar 2</h4>
The panel discussion was introduced by John Peterson, Head of Division – Cross Border and International Division at OECD. He provided updates on the current and future works on Pillar 2 by the OECD, also mentioning that integrity measures will be published soon. The session featured a roundtable moderated by Marco Iuvinale, Director of European Economy and Finance, with Alessandro Bucchieri (Head of Tax Affairs Enel Group), Antonella D’Andrea (Head of Tax, Leonardo S.p.A.), and Fabio Materassi (Global Tax Director, A. Menarini – Industrie Farmaceutiche Riunite S.r.l.).
The panel noted that there is overlap between certain BEPS measures (such as CFC regulations, interest deductibility limitations, and hybrids) and Pillar 2. While Pillar 2 aims to enhance transparency and accountability, its initial implementation phase is overly burdensome due to extensive information collection, complex calculations, and the need for coordination between relevant legislations. This determines the need for permanent safe harbours that would alleviate the compliance burden and complexity associated with Pillar 2.
<h4>Tax certainty, dispute resolutions, and cooperative compliance</h4>
The panel discussion was introduced by Vincenzo Carbone, Deputy Director General and Director of Taxpayers’ Compliance and Enforcement Department at the Italian Revenue Agency. He highlighted the positive developments regarding Advance Pricing Agreements (APA), which tripled between 2019 and 2023, reaching 163 last year, and Mutual Agreement Procedures (MAP), with more than 1,700 closed since 2017 and more than 40 countries involved. The same goes for cooperative compliance, with 148 applications and 115 companies admitted, and if only the lowering of access thresholds (currently 750 million) is considered, the target could be extended to 3,200-3,500 companies, and with the approach of 100 million euros from 2028, the target could be 9,200 companies. The session included a panel discussion led by Guglielmo Maisto, President of IFA International Fiscal Association, with Vincenzo Delmonaco (Global Head Tax Controversy and Risk Management, Philip Morris International), Angelo Garcea (Co-Head of Tax Department, MNEs Tax Strategy Director, Assonime), and Pamela Palazzi.
The panel noted that taxpayers extensively use dispute resolution procedures, finding them effective for resolving double taxation issues. The EU Directive on dispute resolution has also been beneficial, contributing positively to the resolution of such disputes. It was noted that Italy introduced an innovative dispute prevention and resolution provision as part of its Pillar 2 implementation strategy, based on the principle of reciprocity. Overall satisfaction with the Italian cooperative compliance programme was expressed by panellists, emphasizing its role in reducing uncertainties and improving transparency.
<h4>Closing remarks</h4>
The conference concluded with closing remarks from Maurizio Leo, Deputy Minister of the Italian Ministry of Economy and Finance, who presented the work done so far by the current government, with the adaptation of Italian tax legislation to the ECJ jurisprudence and OECD recommendations, the updating of the rules on the tax residence of individuals and legal entities, and the introduction of the GloBE rules.
<h4> Key takeaways</h4>
The event marked the first ever of this type in Italy and was a useful opportunity to foster a frank exchange of views among policymakers. It is clear that we live in a time where geopolitical uncertainty and the ensuing lack of predictability are on the rise, coupled with the disruptive impact of technology. It is crucial that international taxation evolves in a manner that is closely aligned with business developments. The European Union, in particular, must enhance competitiveness by formulating policies that attract and sustain investment over the medium to long term.
The event underscored ongoing challenges and complexities in international taxation:
<ul>
<li>Proliferation and Overlap: The international tax landscape is becoming increasingly complex, with overlapping initiatives from various entities such as the OECD, the EU and the UN.</li>
<li>Pillar 2 Challenges: Pillar 2 risks losing its global nature, facing significant implementation challenges and high compliance costs. The key item to watch is the entry into the force of the UTPRs.</li>
<li>Need for Simplification: There is a strong need to simplify and declutter the overall tax system to reduce the burden on multinational corporations, at least those subject to the GloBE rules.</li>
<li>Cooperation: Continued cooperation and strategic investments are essential to navigate the complexities of international taxation effectively.</li>
</ul>
Regarding Pillar 2, there is uncertainty regarding whether the new US government will continue to support the project. The UTPR is strongly opposed, and it is unlikely the US will accept a mechanism that could affect its tax bases. On the other hand, the Global South, supported by China, is increasingly influential, as seen in recent G20 positions. These countries are less interested in a minimum tax and more focused on rebalancing the allocation of taxing rights, which they believe are unfairly skewed towards developed countries. UN proposals, such as broad-based withholding taxes at source, may become central, especially after the mandate to draft a UN Framework Convention on International Tax Cooperation, which has a special focus on “Fair allocation of taxing rights, including equitable taxation of multinational enterprises” and “Taxation of the digitalized economy”.
Amid all this is Europe, which must take into account various limitations such as (i) the need to find additional resources, especially post-Next Generation EU recovery program, (ii) managing the constraints of the EU Treaty, which leaves direct taxation to individual Member States, and (iii) overcoming the difficulties in achieving political consensus on measures requiring unanimity. Introducing Pillar 2 has limited Europe’s ability to make the necessary strategic investments, which, as the Draghi Report points out, are essential to maintain competitiveness. The fiscal lever to finance investments can only be used with public subsidies or qualified refundable tax credits, both impacting public debt, which the EU aims to control. Compliance costs for European taxpayers are high, with revenue impact estimates falling short of expectations.
Regarding Pillar 1, the EU risks being squeezed between the US, which opposes the DST introduced by European jurisdictions, and the Global South, which seeks source taxing rights on services. The future European Commissioner for Climate Action has indicated a continued pursuit of a shared solution, with a potential Plan B involving a revamped European DST.
<img loading="lazy" class="alignnone size-full wp-image-19825" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2024/11/Picture-Italian-Conference.jpg" alt="" width="781" height="520" srcset="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2024/11/Picture-Italian-Conference.jpg 781w, http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2024/11/Picture-Italian-Conference-300x200.jpg 300w, http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2024/11/Picture-Italian-Conference-768x511.jpg 768w" sizes="(max-width: 781px) 100vw, 781px" />
<img loading="lazy" class="alignnone size-full wp-image-19827" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2024/11/Picture-2-Italian-Conf.jpg" alt="" width="781" height="520" srcset="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2024/11/Picture-2-Italian-Conf.jpg 781w, http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2024/11/Picture-2-Italian-Conf-300x200.jpg 300w, http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2024/11/Picture-2-Italian-Conf-768x511.jpg 768w" sizes="(max-width: 781px) 100vw, 781px" />
 
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/11/29/italian-business-calls-for-tax-simplification-measures/feed/</wfw:commentRss>
<slash:comments>1</slash:comments>
</item>
<item>
<title>The Contents of Intertax, Volume 52, Issue 12, 2024</title>
<link>https://kluwertaxblog.com/2024/11/14/the-contents-of-intertax-volume-52-issue-12-2024/</link>
<comments>https://kluwertaxblog.com/2024/11/14/the-contents-of-intertax-volume-52-issue-12-2024/#respond</comments>
<dc:creator><![CDATA[Ana Paula Dourado (General Editor of Intertax)]]></dc:creator>
<pubDate>Thu, 14 Nov 2024 08:33:39 +0000</pubDate>
<category><![CDATA[Uncategorized]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19814</guid>
<description><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions: Luc De Broe & Dieter Bettens, Earth to OECD: Exercise Restraint in Marking a Home Office as PE One of the trends brought about by digitalization is teleworking. Increasingly, people are working from home... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/11/14/the-contents-of-intertax-volume-52-issue-12-2024/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.12/TAXI2024080" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Luc De Broe & Dieter Bettens, Earth to OECD: Exercise Restraint in Marking a Home Office as PE</a></h4>
One of the trends brought about by digitalization is teleworking. Increasingly, people are working from home instead of at their employer’s office. This presents a number of challenges from a tax perspective. Amongst others, a point of debate is whether a home office can constitute a permanent establishment (PE) if an employee works from there. This article sets out the traditional legal framework to determine the existence of a PE on the basis of the OECD Model Convention. The focus lies on material PEs. Subsequently, this framework is applied to home offices. The article finds that the OECD’s guidance on this point remains rather vague and that different countries have a different practice in recognizing home office PEs. Finally, the article makes several recommendations for possible clarifications on how the home office PE could be fit within the current legal framework of Articles 5 and 7 of the OECD Model Convention in light of the objectives of Article 7.
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.12/TAXI2024081" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">D.R. Post & A. Vvedenskaya, Income Tax Considerations Pertaining to Decentralized Autonomous Organizations (DAOs)</a></h4>
Over the last couple of years, an increasing number of organizations have arisen that are native to blockchain technology. Recent data shows that these decentralized autonomous organizations (DAOs) that are essentially ‘living on the blockchain’ are becoming increasingly popular. They are attracting substantial amounts of funds, operating both in the Web3 space and off-chain, and creating a significant source of novel tax issues. The existing tax academic research on DAOs is often limited to US domestic tax issues following from the DAO’s legal treatment. This article outlines (part of) the existing income tax landscape for the DAOs and some of the arising income tax challenges. The focus is on the general principles of domestic and international income tax systems. The authors argue that the DAOs create fundamental and practical tax issues potentially leading to income taxed ‘nowhere’. Existing tax frameworks cannot fully embed the DAOs and allow them to maintain their distinguishing features. The incorporation of DAOs does not necessarily solve the tax issues and even exacerbates them in certain cases. The authors call upon domestic and international legislators and policymakers to aim for more tax certainty for shareholders and further tax research of the DAOs.
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.12/TAXI2024084" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Monique T. Malan, The De Minimis Exclusions in the ATAD’s CFC Rules: A Normative Analysis</a></h4>
This study undertakes a normative analysis of the four de minimis exclusions in the controlled foreign company (CFC) rules of Article 7 of the European Union’s (EU’s) Anti-Tax Avoidance Directive (ATAD). In the EU, CFC legislation inherently restricts either the freedom of establishment or the free movement of capital. Case law from the Court of Justice of the European Union (CJEU) confirms that, for this restriction to be permissible, the scope of application of CFC legislation must be limited to only capture income from wholly artificial arrangements. First, this study evaluates the design of the four different de minimis exclusions in Article 7 against their stated objective to limit the administrative burden and compliance costs in order to ascertain their (relative) effectiveness. Second, the normative coherence of these provisions is evaluated in the context of the limited application – only to cases of abuse – of the CFC rules in the EU. The study finds that the de minimis exclusions pertaining to Model A (in Article 7(3)) are only effective to a limited extent in achieving their objective and could be redesigned to improve their effectiveness. Further, those pertaining to Model B (in Article 7(4)) are not normatively coherent in an EU context. Therefore, their inclusion cannot be justified, and it is recommended that they be deleted.
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.12/TAXI2024082" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Till Scheider, How Did Anti-tax Avoidance Measures Affect ETRs and Profit Shifting?</a></h4>
This study examines the impact of anti-tax avoidance measures on the effective tax rates (ETR) and profit shifting activities of multinational enterprises (MNEs) across several key countries. It employs a two-pronged approach to evaluate the effectiveness of the base erosion and profit shifting (BEPS) Actions 3 and 13 in particular. First, the study analyses the generally accepted accounting principles (GAAP) ETRs of large listed firms. Second, the data from tax reconciliation is utilized to investigate ETR items. The findings show a significant increase in ETRs since 2017 which suggests a reduction in profit shifting due to implementing CbCR and controlled foreign company (CFC) rules. However, the effectiveness of these measures in terms of profit shifting varies across countries. France and Germany have demonstrated substantial improvements while Sweden has exhibited positive but volatile results. In contrast, Switzerland and the United Kingdom have presented outcomes that are more complex and nuanced. The study highlights the necessity for continuous fiscal vigilance and implementing adaptive tax policies in order to effectively combat tax avoidance.
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.12/TAXI2024083" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Reuven Avi-Yonah, Should the Arm`s Length Standard Be Codified?</a></h4>
There has been a recent proposal in the United States to codify the arm`s length standard (ALS), which is currently only found in regulations as well as in US treaties. This article argues that this proposal is misguided because as long as the ALS is not codified, the US is free to adopt Pillar 1 without changing its domestic tax law by ratifying the Multilateral Tax Convention (MLC). Moreover, the history of the ALS from when it was first introduced in the 1932 US-France tax treaty shows that it was always intended to protect the interests of US multinationals at the expense of the fisc, and should be discarded.
 
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/11/14/the-contents-of-intertax-volume-52-issue-12-2024/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>GHG Pricing for International Shipping: Why It Matters and How Is It Going?</title>
<link>https://kluwertaxblog.com/2024/11/12/ghg-pricing-for-international-shipping-why-it-matters-and-how-is-it-going/</link>
<comments>https://kluwertaxblog.com/2024/11/12/ghg-pricing-for-international-shipping-why-it-matters-and-how-is-it-going/#respond</comments>
<dc:creator><![CDATA[Goran Dominioni (Assistant Professor, School of Law and Government, Dublin City University) and Collins Odote (Associate Dean, Faculty of Law, and Research Director Centre for Advanced Studies in Environmental Law and Policy(CASELAP), University of Nairobi)]]></dc:creator>
<pubDate>Tue, 12 Nov 2024 10:18:19 +0000</pubDate>
<category><![CDATA[Environmental tax policy]]></category>
<category><![CDATA[Greenhouse gas strategy]]></category>
<category><![CDATA[Shipping]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19783</guid>
<description><![CDATA[Dr. Goran Dominioni[1] and Prof. Collins Odote[2] Over millennia, maritime transport has played a vital role in the flourishing of human civilization, allowing for long-distance commerce and cultural exchange. Up to the Industrial Revolution, ships were propelled primarily by humans and wind power, but since the 19th century, the industry shifted towards the use of... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/11/12/ghg-pricing-for-international-shipping-why-it-matters-and-how-is-it-going/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[Dr. Goran Dominioni<a href="#_ftn1" name="_ftnref1">[1]</a> and Prof. Collins Odote<a href="#_ftn2" name="_ftnref2">[2]</a>
Over millennia, maritime transport has played a vital role in the flourishing of human civilization, allowing for long-distance commerce and cultural exchange. Up to the Industrial Revolution, ships were propelled primarily by humans and wind power, but since the 19th century, the industry shifted towards the use of fossil fuels for propulsion. As a result, today shipping accounts for about <a href="https://www.imo.org/en/ourwork/Environment/Pages/Fourth-IMO-Greenhouse-Gas-Study-2020.aspx" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">3 percent of global GHG emissions</a>. As part of the global effort to mitigate climate change, the international shipping sector is embarking on a new path that may see the revamp of the use of wind power and the uptake of alternative fuels as energy sources for this sector.
At the global level this new path was set last year by the International Maritime Organization (IMO) —the United Nations agency that regulates pollution from ships— with the adoption of its <a href="https://www.imo.org/en/OurWork/Environment/Pages/2023-IMO-Strategy-on-Reduction-of-GHG-Emissions-from-Ships.aspx" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">new greenhouse gas (GHG) strategy</a>. According to this strategy, international shipping will need to reach net-zero GHG emissions <a href="https://www.imo.org/en/OurWork/Environment/Pages/2023-IMO-Strategy-on-Reduction-of-GHG-Emissions-from-Ships.aspx" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">by or around 2050</a> and meet stringent interim GHG emissions reduction goals for 2030 and 2040.
Why Does this Matter? A Look Beyond Shipping
The shift towards new energy sources will have profound implications for industry, as it will require adopting new technologies, new safety regulations, and retraining maritime transport workers. But there are at least three reasons why this revolution can have significant consequences beyond the shipping sector and its climate change implications.
First, its potential trade impacts: Today, the international shipping industry plays a vital role in the global economy, accounting for about <a href="https://unctad.org/publication/review-maritime-transport-2021" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">80 percent of international trade</a>. The energy transition of international shipping — whether driven by a GHG levy or other GHG economic instrument— will increase transport costs and potentially impact import and export opportunities for some countries. Some developing countries that rely heavily on international shipping for imports are increasingly voicing concerns about potential food security risks related to the energy transition. Further research on these risks and how to best address them is needed.
Second, to meet these goals, the IMO is working on the adoption of a basket of measures, which includes both a technical element and an economic element, being a GHG pricing instrument. At the moment, it is unclear what type of GHG pricing mechanism will be adopted, as various delegations have <a href="https://onlinelibrary.wiley.com/doi/10.1111/reel.12540" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">supported different types of GHG pricing mechanisms</a>. One of the two leading options on the table of the ongoing negotiations amongst IMO member states as evident from the last round of negotiations during the 82nd Session of the Marine Protection Committee is the implementation of a GHG levy. If adopted, this would be the first global GHG levy. Research conducted at DCU in collaboration with the World Bank shows that implementing a carbon price in international shipping could raise up to <a href="https://openknowledge.worldbank.org/entities/publication/4211e43e-e6d5-4387-8f94-72d3c31c4a86" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">40-60 billion US dollars per year up to 2050</a>. To put this into perspective, <a href="https://www.oecd.org/en/topics/sub-issues/climate-finance-and-the-usd-100-billion-goal.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">public international climate finance</a> mobilized by developed countries for developing countries in 2022 was about 90 billion US dollars. An IMO carbon levy can be a new significant source of finance to support climate action and an equitable transition of the sector, including <a href="https://www.sciencedirect.com/science/article/pii/S0308597X23001963" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">addressing potential negative trade impacts</a> related to its decarbonization. Many see the next COP, as the “<a href="https://www.iddri.org/en/publications-and-events/blog-post/cop29-climate-finance-cop" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">finance COP</a>”. International shipping can help to close the gap between climate needs of developing countries and current climate flows by providing a new and <a href="https://www.tandfonline.com/doi/full/10.1080/14693062.2024.2416493?src=exp-la" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">additional source of finance</a>. The journey to that destination will be clearer in <a href="https://www.imo.org/en/MediaCentre/PressBriefings/pages/MEPC-82-makes-progress-IMO-netzero-framework.aspx" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">April 2025 at the 83rd IMO Marine Environmental Protection Committee</a> Meeting when the member states are expected to agree on the economic instrument to adopted as part of the basket of mid-term measures under strategy.
Last but not least, this revolution offers new development opportunities related to the production of new alternative fuels: The energy transition of international shipping will require the uptake of new zero-carbon bunker fuels. At the moment, it is unclear which fuels will play the primary role, but many look at green ammonia and methanol. For many developed and developing countries, these fuels offer <a href="https://openknowledge.worldbank.org/entities/publication/b5697ebf-30cd-5491-8e34-2edb199ae5b7" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">new development opportunities</a>. In addition, the production of these fuels for shipping can create economies of scale for their production for other sectors, and therefore contribute to the decarbonization of the wider economy.
Charting the New Path for Net-Zero Shipping: How is it going?
The IMO is expected to approve new measures to decarbonize shipping in 2025. The last round of negotiations <a href="https://www.imo.org/en/MediaCentre/MeetingSummaries/Pages/MEPC-82nd-session.aspx" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">concluded recently in London</a> saw increasing convergence among countries on some of the key matters. This is important because the IMO tends to work based on consensus. If consensus can not be found, a<a href="https://doi.org/10.1111/reel.12540" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right"> qualified majority vote</a> will be needed to amend the existing international convention on emissions from shipping.
At this point, the IMO is still on track to deliver new climate measures according to its strategy. However, there remains some divergence as regards the type of economic instrument to adopt to accelerate the journey towards net-zero, which requires to be bridged. Failure to deliver on these expectations would be a significant step back for climate and development. It may induce individual countries to act unilaterally and the EU to step up its <a href="https://climate.ec.europa.eu/eu-action/transport/reducing-emissions-shipping-sector_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">efforts on this matter</a>. This may result in a less coherent and effective regulatory environment to decarbonize the sector, leaving behind some climate-vulnerable countries, and <a href="https://doi.org/10.1017/err.2024.59" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">increasing compliance costs for the industry</a>. It will also mark a huge step backwards for the IMO and its membership in providing leadership through a multilateral and <a href="https://unctad.org/news/transport-newsletter-article-no-108-net-zero-by-2050" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">public-private partnership</a> in decarbonizing the shipping sector.
<a href="#_ftnref1" name="_ftn1">[1]</a> Assistant Professor, School of Law and Government, Dublin City University
<a href="#_ftnref2" name="_ftn2">[2]</a> Associate Dean, Faculty of Law, and Research Director Centre for Advanced Studies in Environmental Law and Policy(CASELAP), University of Nairobi
 
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/11/12/ghg-pricing-for-international-shipping-why-it-matters-and-how-is-it-going/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>Your Homework Will Be Graded: The ECJ’s Apple Decision and Its Implications for International Tax</title>
<link>https://kluwertaxblog.com/2024/11/07/your-homework-will-be-graded-the-ecjs-apple-decision-and-its-implications-for-international-tax/</link>
<comments>https://kluwertaxblog.com/2024/11/07/your-homework-will-be-graded-the-ecjs-apple-decision-and-its-implications-for-international-tax/#respond</comments>
<dc:creator><![CDATA[James Anderson (Skadden), Niels Baeten (Skadden), Nathaniel Carden (Skadden), Elizabeth Malik (Skadden), Giorgio Motta (Skadden), Vanessa Johnson (Skadden) and Ketevan Zukakishvili (Skadden)]]></dc:creator>
<pubDate>Thu, 07 Nov 2024 13:35:48 +0000</pubDate>
<category><![CDATA[Apple]]></category>
<category><![CDATA[European Court Of Justice]]></category>
<category><![CDATA[State Aid]]></category>
<category><![CDATA[Subsidies]]></category>
<category><![CDATA[Tax]]></category>
<category><![CDATA[Taxation]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19797</guid>
<description><![CDATA[This blog post was first published on the Kluwer Competition Law Blog.   On September 10, 2024, the European Court of Justice (ECJ or Court) sided with the European Commission (Commission) and ruled that two Irish subsidiaries of Apple Inc. received unlawful state aid from Ireland in the form of a tax advantage (Case C-465/20... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/11/07/your-homework-will-be-graded-the-ecjs-apple-decision-and-its-implications-for-international-tax/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[This blog post was first published on the Kluwer Competition Law Blog.
 
On September 10, 2024, the European Court of Justice (ECJ or Court) sided with the European Commission (Commission) and ruled that two Irish subsidiaries of Apple Inc. received unlawful state aid from Ireland in the form of a tax advantage (<a href="https://curia.europa.eu/juris/document/document.jsf;jsessionid=8FAC68AEE05E097957906933605C580C?text=&docid=289923&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=878025" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Case C-465/20 P</a>). Ireland <a href="https://www.gov.ie/en/press-release/24349-information-note-re-apple-escrow-fund-and-third-country-adjustment/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">has reported that it will now finalise</a> the recovery of approximately €14.1 billion from Apple, representing unpaid taxes and interest, which has been escrowed for the greater part of the past decade.
 
<h4>Key Points</h4>
<ul>
<li>Tax rulings may give rise to state aid if they provide the company in question with a more advantageous treatment than the normal corporate tax regime in the member state concerned.</li>
<li>The ECJ previously determined that the benchmark against which a tax measure is assessed should be limited to the domestic tax rules of the member state. Earlier Commission decisions finding that tax rulings amounted to illegal state aid, in cases involving Fiat Chrysler, Amazon and Engie, were annulled by the ECJ because it found the Commission disregarded the provisions of applicable national tax law and the explanations put forward by the state to justify the tax ruling, in some cases choosing instead to apply an “abstract” interpretation of the arm’s length principle. (The arm’s length principle is, very broadly, the basis on which tax authorities seek to replace the pricing of transactions between related parties with one more closely reflecting that used in a comparable arm’s length transaction between unrelated parties, if different.)</li>
<li>In contrast, the ECJ in Apple concluded that the Commission was entitled to interpret Irish law in line with the arm’s length principle even though Irish law contained no explicit provision to that effect. In a highly fact-specific judgment, the ECJ in Apple adopted the General Court’s finding that Ireland had accepted that the Irish law in question “corresponded in essence” to the arm’s length principle approach despite no explicit national provision to that effect, and noted that Ireland had put forward no other explanation during the Commission’s investigation for the way in which the tax rulings had determined the chargeable profits of the Irish branches. Accordingly, the ECJ concluded that the Commission was entitled to include the arm’s length principle as part of the reference system.</li>
<li>It remains to be seen whether the new Commission will exploit this judgment to reinvigorate the use of the state aid rules to challenge tax rulings. While addressing perceived unfair tax ruling practices was clearly a priority in the 2010s, competition policy and the international tax arena have both developed new focuses.</li>
<li>Irrespective of how the Commission chooses to use the Apple decision in enforcing state aid rules, the case is consistent with the international trend towards the view that multinational enterprise (MNE) tax transfer pricing policies should be subject to review not just by the countries with primary taxing jurisdiction, but also those countries with an opportunity to tax via the Organisation for Economic Co-operation and Development’s (OECD’s) Pillar 2 Undertaxed Payments Rule (UTPR) and Income Inclusion Rule (IIR). These represent the newest tools through which a country’s application of its own domestic law can be second-guessed by other authorities.</li>
</ul>
 
<h4>State Aid Prior to Apple</h4>
The Commission has been targeting the tax practices of member states over the past decade in line with a fresh enforcement policy of defining tax rulings for MNEs as unlawful state aid. Such tax rulings are, in principle, lawful but may give rise to state aid if they provide a company with more advantageous treatment than the normal corporate tax regime in the state concerned. This policy shift represented a move by the Commission into the assessment of tax administration which is, in principle, an exclusive competence of member states. However, the large majority of the Commission’s decisions finding that bespoke tax arrangements amount to unlawful aid have been annulled on appeal in recent years.
The appeals prior to Apple centred on whether the Commission had correctly identified the “normal” national tax system against which the existence of a potential selective advantage must be assessed.
In the landmark 2022 Fiat Chrysler<a href="#_ftn1" name="_ftnref1">[1]</a> case, which represented the ECJ’s first opportunity to consider the state aid methodology employed by the Commission in its tax ruling decisions, the ECJ laid down the fundamental principle that the reference tax system must be the tax law applicable in the member state concerned. This is inherent in the sovereignty enjoyed by member states in the field of tax administration. This means that general principles and guidelines can only be considered to be part of the reference system where they have been explicitly incorporated into national law. The ECJ followed the same line of reasoning adopted in Fiat in two subsequent judgments delivered in December 2023; Engie<a href="#_ftn2" name="_ftnref2">[2]</a> and Amazon<a href="#_ftn3" name="_ftnref3">[3]</a>.
More specifically, the Court found in Fiat Chrysler and Amazon that the Commission had manifestly disregarded the provisions of the applicable national tax law and explanations put forward by the state in favour of an abstract interpretation of the arm’s length principle. In Engie, the Court ruled that disputes over the interpretation of domestic law should be resolved in favour of the member state’s interpretation where that interpretation is compatible with the wording of the domestic law.
In all three of the abovementioned cases, the ECJ annulled the Commission’s findings on the basis that it had disregarded the applicable national tax law and consequently did not correctly identify the reference tax system, which invalidated the entirety of the reasoning relating to the existence of a selective advantage.
It was largely expected that the ECJ would follow the same line of reasoning in the Apple appeal and find that the Commission had wrongly identified the reference system, or alternatively follow the recommendation of Advocate General Giovanni Pitruzzella to refer the case back to the General Court for a new assessment on the merits.<a href="#_ftn4" name="_ftnref4">[4]</a> In a surprise judgment, however, the ECJ considered itself in a position to give final judgment and upheld the Commission’s assessment.
<table width="633">
<tbody>
<tr>
<td colspan="2" width="633">Progress of Key Tax Ruling State Aid Cases Through the EU Courts<a href="#_ftn5" name="_ftnref5">[5]</a></td>
</tr>
<tr>
<td width="141">Apple (Ireland)</td>
<td width="491">Commission decision upheld by the ECJ (2024)</td>
</tr>
<tr>
<td width="141">Amazon (Luxembourg)</td>
<td width="491">Commission decision annulled by the General Court; General Court upheld by the ECJ (2023)</td>
</tr>
<tr>
<td width="141">Engie (Luxembourg)</td>
<td width="491">Commission decision annulled by the ECJ (2023)</td>
</tr>
<tr>
<td width="141">Excess Profits (Belgium)</td>
<td width="491">Commission decision upheld by the General Court (2023); General Court ruling on appeal at the ECJ</td>
</tr>
<tr>
<td width="141">Fiat Chrysler (Luxembourg)</td>
<td width="491">Commission decision annulled by the ECJ (2022)</td>
</tr>
<tr>
<td width="141">Mead Johnson (UK/Gibraltar)</td>
<td width="491">Commission decision partially annulled by the General Court (2022); no appeal to the ECJ but EC resumed its investigation</td>
</tr>
<tr>
<td width="141">Starbucks (Netherlands)</td>
<td width="491">Commission decision annulled by the General Court (2019); no appeal to the ECJ but EC resumed its investigation</td>
</tr>
</tbody>
</table>
 
<h4>Apple Facts</h4>
Through two tax rulings adopted in 1991 and 2007, the Irish tax authorities confirmed that the greater part of the profits recorded by two Apple group subsidiaries, incorporated but not tax resident in Ireland, were attributable to their head offices outside Ireland rather than to their Irish trading branches. Consistent with the general international tax principle that countries should tax non-residents’ business income attributable to a permanent establishment in the country, Ireland only taxed the profits attributable to the Irish trading branches, and Irish tax law was silent as to how the profit attributable to the Irish branches was to be determined.
In 2016, the Commission disagreed with Ireland’s understanding of its own domestic law and took the view that the allocation of Apple group intellectual property (IP) licenses and associated profits to the foreign head offices rather than the Irish branches was not in line with normal taxation under Irish law. This, the Commission found, gave Apple an advantage in the European market by reducing its corporate tax liability compared to standalone companies operating under normal market conditions, and amounted to illegal state aid. The reference tax system in this case was found to be a market-based outcome in accordance with the arm’s length principle and the authorised OECD approach.<a href="#_ftn6" name="_ftnref6">[6]</a>
The General Court annulled the Commission’s decision in July 2020, finding that the Commission had failed to demonstrate the existence of a selective advantage as a result of the tax arrangements. The Commission appealed this judgment.
 
<h4>The ECJ Apple Judgment in Detail</h4>
The higher court judges, ruling in Grand Chamber composition, overturned the General Court’s conclusion and agreed with the Commission that Ireland’s tax rulings provided Apple with an advantage in breach of the state aid rules. The ECJ reinstated the Commission’s findings that Ireland incorrectly applied its own national tax laws, including the arm’s length principle, by failing to verify whether the Apple IP should have been attributed to the Irish branches instead of the foreign head offices.
The ECJ upheld the Commission’s analysis that Irish law required that only the respective functions of the head office and the branches must be compared before allocating profit to the Irish branches. Whereas the Irish branches performed functions justifying the allocation of the IP to them, the head offices were not able to control or manage the relevant IP licences and, as such, they should not have been allocated the profits derived from the use of those licences.
Notably, the Court reached this conclusion despite the fact that the arm’s length principle had not been explicitly incorporated into Irish tax law at the relevant time, and even though the authorised OECD approach had been introduced after the adoption of the Apple tax rulings.
The ruling raises the important question of how the Court’s reasoning can be reconciled with its pre-existing case law, which established that the analysis should be limited to the domestic law system of the state concerned, such that external rules and principles, including the arm’s length principle, cannot be taken into account unless the national tax system makes explicit reference to them.
The reasoning in the ECJ Apple decision is that — in contrast to the previous appeals — the Commission’s definition of the applicable reference system was already endorsed by the General Court and had not been left open for further discussion on appeal.
The ECJ noted the General Court’s recognition in Apple that there is no autonomous arm’s length principle that applies without that principle having been incorporated into national law. This follows the Fiat Chrysler line of reasoning. Where the cases differed is on the facts. In Apple, in contrast to the other cases, the Commission’s interpretation did not conflict with the relevant provisions of the domestic law. Ireland had also confirmed that the tax law in question “corresponded in essence” to the arm’s length principle approach and put forward no other suitable explanation during the Commission’s investigation for the way in which the tax rulings had determined the chargeable profits of the Irish branches. The Commission was therefore entitled, the ECJ held, to use the arm’s length principle as a tool in its assessment in this case.
Accordingly, in our view, the final Apple ruling is largely contained to the facts of the case, which means that parallels with other rulings and comparable fact patterns cannot easily be drawn. The case demonstrates that the applicable national law and administrative practice of the tax authority as communicated to the Commission during the administrative stage of the proceedings remains key in the state aid assessment of tax rulings.
 
<h4>What Do We Do With Apple in 2024?</h4>
Competition Commissioner Margrethe Vestager, who has vigorously led the Commission’s state aid strategy on tax rulings since the start of her mandate, was emboldened by the judgment after having faced the setbacks in the other major cases. “It is encouraging for us to do more,” she said following the ECJ’s ruling, “the Commission will continue its work on harmful tax competition and aggressive tax planning.”
As Vestager comes to the end of her second term as Competition Commissioner, it will be for her successor in the new Commission to decide whether and how to proceed with the Commission’s state aid policy on tax rulings. Spanish politician Teresa Ribera has been named as the next commissioner in charge of competition policy (as part of a broader Executive Vice President role leading the EU’s green transition), subject to the approval of the EU Parliament, and is expected to take office later this year.
It remains to be seen whether using the state aid rules to tackle perceived unfair tax practices will be a priority for the incoming commissioner, who faces different political challenges than those met by Vestager at the start of her tenure. Ongoing and future cases may well be deprioritised in light of more immediate challenges such as the push for net-zero, the role of industrial policy and the long-term competitiveness of the European Union (EU). The latter two issues were addressed in a lengthy recent report by former European Central Bank chief and Italian prime minister Mario Draghi, who suggested a need for more state-led investment (or even subsidy) in key sectors of the global economy. Coincidently, his report came out the day before the Apple decision.
In conclusion: Apple was a surprise, but a good reminder that MNEs should always consider how their tax structures will be judged, not only by the countries with primary taxing jurisdiction, but also by others with the power to second guess application of domestic law. In 2024 and beyond, this is most prominent in the context of recently enacted Pillar 2 rules that permit participating countries to assess tax in addition to that deemed appropriate by the country with primary taxing jurisdiction via the OECD’s IIR or the UTPR regimes, on a theory that the primary country was entitled to more tax than what it collected.
In the European courts, whilst Apple was a clear message that the Commission still has the ability to review the application of domestic tax rulings under the state aid rules, our view is that Apple may not be the springboard the Commission was waiting for. There are now new, better, and different ways, for multiple jurisdictions, to police other countries’ domestic enforcement, now that the OECD has empowered peer review in the form of Pillar 2.
In other words, your homework will be graded one way or another.
 
<a href="#_ftnref1" name="_ftn1">[1]</a> Case C-885/19 P and C-898/19 P, Fiat Chrysler Finance Europe and others v Commission, judgment of the ECJ, November 8, 2022. See our 22 November 2022 client alert “<a href="https://www.skadden.com/insights/publications/2022/11/eu-court-of-justice-faults-the-european-commission" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">EU Court of Justice Faults European Commission for Expansive Interpretation of State Aid in Tax Rulings</a>”.
<a href="#_ftnref2" name="_ftn2">[2]</a> Case C-451/21 P and C-454/21 P, Engie SA and others v Commission, judgment of the ECJ, December 5, 2023.
<a href="#_ftnref3" name="_ftn3">[3]</a> Case C-457/21 P, Commission v Amazon.com Inc. and others, judgment of the ECJ, December 14, 2023.
<a href="#_ftnref4" name="_ftn4">[4]</a> Opinion of Advocate General Pitruzzella in Case C‑465/20 P, European Commission v Ireland, Apple Sales International, Apple Operations International and Others.
<a href="#_ftnref5" name="_ftn5">[5]</a> Cases concern Commission decisions finding the existence of state aid and ordering the recovery of that aid.
<a href="#_ftnref6" name="_ftn6">[6]</a> OECD’s 2010 Report on the Attribution of Profits to Permanent Establishments.
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/11/07/your-homework-will-be-graded-the-ecjs-apple-decision-and-its-implications-for-international-tax/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>The Contents of Highlights & Insights on European Taxation, Issue 10, 2024</title>
<link>https://kluwertaxblog.com/2024/11/01/the-contents-of-highlights-insights-on-european-taxation-issue-10-2024/</link>
<comments>https://kluwertaxblog.com/2024/11/01/the-contents-of-highlights-insights-on-european-taxation-issue-10-2024/#respond</comments>
<dc:creator><![CDATA[Giorgio Beretta (Amsterdam Centre for Tax Law (ACTL) of the University of Amsterdam; Lund University)]]></dc:creator>
<pubDate>Fri, 01 Nov 2024 08:03:07 +0000</pubDate>
<category><![CDATA[Customs and Excise]]></category>
<category><![CDATA[Direct taxation]]></category>
<category><![CDATA[EU law]]></category>
<category><![CDATA[Indirect taxation]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19790</guid>
<description><![CDATA[Highlights & Insights on European Taxation Please find below a selection of articles published this month (October 2024) in Highlights & Insights on European Taxation, plus one freely accessible article. Highlights & Insights on European Taxation (H&I) is a publication by Wolters Kluwer Nederland BV. The journal offers extensive information on all recent developments in European Taxation in the... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/11/01/the-contents-of-highlights-insights-on-european-taxation-issue-10-2024/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[<a href="https://shop.wolterskluwer.nl/Highlights-Insights-on-European-Taxation-sNPHIEURTX/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>
Please find below a selection of articles published this month (October 2024) in <a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>, plus one freely accessible article.
<a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation (H&I)</a> is a publication by Wolters Kluwer Nederland BV.
The journal offers extensive information on all recent developments in European Taxation in the area of direct taxation and state aid, VAT, customs and excises, and environmental taxes.
 
To subscribe to the Journal’s page, please click <a href="https://www.linkedin.com/company/highlights-insights-on-european-taxation/?viewAsMember=true" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">HERE</a>
 
Year 2024, no. 10
TABLE OF CONTENTS
 
<h4>GENERAL TOPICS</h4>
– Partial transfer of jurisdiction from the Court of Justice to the General Court. New Chamber specialising in preliminary ruling cases (including VAT and Customs cases)
(comments by the Editorial Board) (H&I 2024/263)
 
<h4>INDIRECT TAXATION, CASE LAW</h4>
– Digital Charging Solutions (C-60/23). Supply of electricity for charging electric vehicles at public charging point. Court of Justice
(comments by Giorgio Beretta) (H&I 2024/268)
– H GmbH (C-83/23). No refund of VAT wrongly charged directly to purchaser. Risk of double VAT refund. Court of Justice
(comments by Marie Lamensch) (H&I 2024/262)
– Credidam (C-179/23). Management fees collected by a collective management organisation for copyright. Court of Justice
(comments by Raluca Rusu) (H&I 2024/243)
 
<h4>CUSTOMS AND EXCISE</h4>
– Prysmian Cabluri şi Sisteme (C-168/23). Combined Nomenclature. Classification of an optical fibre cable. Court of Justice
(comments by Piet Jan de Jonge) (H&I 2024/267)
– Centralised Clearance for Import (CCI) system is expanding across EU over time
(comments by Piet Jan de Jonge) (H&I 2024/266)
– Union Customs Code Annual Progress Report 2023
(comments by Piet Jan de Jonge) (H&I 2024/265)
For full access to the article and more information, please visit: <a href="https://www.inview.nl/publication/WKNL_CSL_1693" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.inview.nl/publication/WKNL_CSL_1693</a>
 
<h4>FREE ARTICLE</h4>
– H GmbH (C-83/23). No refund of VAT wrongly charged directly to purchaser. Risk of double VAT refund. Court of Justice
(comments by Marie Lamensch) (H&I 2024/262)
A different fact pattern as compared to previous cases
Since the 2007 judgment by the Court of Justice of the European Union (hereinafter: ‘CJ’) in Reemtsma (CJ 15 March 2007, C-35/05 Reemtsma Cigarettenfabriken GmbH v Ministero delle Finanze, <a href="https://www.inview.nl/document/inod5516569081fabe0d8fba8bf57dddb020#--ext-id-79c70db750a26424fd348f62ea9a101d" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2007:167</a>), we know that tax authorities must accept direct requests for refunds of wrongly paid VAT made by customers in situations where obtaining reimbursement from the supplier would be impossible or excessively difficult. This was confirmed in 2019 in PORR Építési Kft (CJ 19 April 2019, C-691/17 PORR Építési Kft. v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága, <a href="https://www.inview.nl/document/id49dcc587046144f49d5768adcde4c62f#--ext-id-e7a9d1e6-da1e-4817-9880-b2f304d0cd42" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2019:327</a>), in 2022 in Humda (CJ 13 October 2022, C-397/21 HUMDA, <a href="https://www.inview.nl/document/id01f7597f05ca4498915ceb3c051c46be#--ext-id-9fd883c9-1484-4425-8aa2-d424a2be6734" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2022:790</a>) and, more recently, in 2023 in Schütte (CJ 7 September 2023, C-453/22, Schütte, <a href="https://www.inview.nl/document/id5cb665db9e5340c2910e5fdc467d37c0#--ext-id-6bc8eea1-e3e5-4093-bb53-eebe7adefabc" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2023:639</a>).
From this body of case law, we also know that this right of a direct refund can only be granted if the risk of loss of tax revenue has been waived, which excludes situations where the supplier, in fact, has not paid the VAT to the Treasury. In this case, the VAT had initially been paid, albeit it had already been refunded to the supplier. Granting a direct right to a refund to the customer in this situation would, therefore, have resulted in a loss for the Treasury, and thus, logically, it was refused.
In my opinion, this decision should not, however, be considered as a mere repetition of previous case law applied to similar facts.
In previous judgments, indeed, the ‘impossibility’ of obtaining reimbursement was due to the fact that the supplier had been liquidated and, therefore, no longer requested reimbursement (except in Schütte (C-453/22), where, rather, the supplier refused to reimburse the customer and invoked a limitation period). In all those cases, the supplier was not going (to be able) to ask for the refund himself. In contrast, in this case, the supplier was declared insolvent but still decided to request a refund of the wrongly collected VAT. This, even though he knew that he would most likely not be able to reimburse the customer because of the application of the insolvency rules governing the order of priority of creditors. This different fact pattern is very important because, after this judgment, it seems that in situations where the insolvent supplier is first to introduce a request for a refund, the wrongly collected VAT will automatically be included in its insolvency estate, with little chance for the customer to be reimbursed. In contrast, in situations where the customer is the first to introduce the request for a direct refund (on the grounds that it would otherwise be impossible or extremely difficult to obtain reimbursement from the supplier due to its insolvency), the tax administration might be required to grant it.
In my opinion, the question arises whether, based on the neutrality principle, the right to a VAT refund should not always be preserved for the customer who wrongly paid it in the case the supplier has been declared insolvent (whether the procedure is still ongoing or not). One way to do that would be to provide VAT legislation that the reimbursement of wrongly invoiced VAT to a supplier should be refused when this supplier has been declared insolvent in order to allow for direct reimbursement to the customer.
The other means would be to provide in the insolvency legislation that when wrongly collected VAT is being reimbursed to an insolvent supplier, this should not become a part of the insolvency estate but a debt thereof, which should directly be reimbursed to the customer. Since VAT is merely ‘collected’ by the supplier with a view to pass it on to the State, and is usually to be reported separately in the accounts as ‘collected VAT’ (which corresponds to a debt towards the State), there are in my view strong arguments to support that it should never be an amount that is available to its creditors once it has been declared insolvent, whether before payment to the State (where it is considered as a debt towards the State) of after reimbursement by the State (where it should be considered as a debt of the insolvency estate towards the customer).
In the absence of such provisions in the VAT or insolvency legislations, the result is not, in my opinion, satisfactory, because it enables suppliers who wrongly charged VAT to request for it to be reimbursed with the intention to use it for the settlement of their own debts and not for the purpose of reimbursing the customers to whom they have wrongly charged it.
‘Impossible or excessively difficult’?
In Schütte (C-453/22), the CJ confirmed the existence of a right to a direct refund in circumstances in which it may be ‘impossible or excessively difficult’ to obtain reimbursement and clarified that it is also the case when the impossibility to obtain reimbursement from the supplier is due to the expiry of a limitation period.
In this case, it is, in my view, unclear whether the CJ considered that KG would have been entitled to a refund at all, even if the refund had not yet been made to the supplier. As a matter of fact, the CJ states that ‘impossible or excessively difficult’ presupposes that ‘the purchaser or recipient has not ignored any possibility of asserting its rights outside that situation’. The CJ then pointed out that KG should have made its best effort to obtain a corrected invoice (with Italian VAT) and, to that end, could have brought a civil action against the insolvency administrator responsible for the liquidation of E-GmbH with a view to having an invoice which included Italian VAT. It is unclear to me whether the CJ draws from those findings the conclusion that KG should not have been granted a direct refund (the operative part of the decision does not include a decision on this point). But if that is the case, I find it disputable, as I fail to see why this request for a correction should be a decisive criterion for granting the refund of German VAT. Moreover, this is probably not a factor that the tax authorities would have been able to take into account before granting the refund to E-GmbH.
 
Prof. Marie Lamensch 
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/11/01/the-contents-of-highlights-insights-on-european-taxation-issue-10-2024/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>Why must the Dutch Supreme Court resist the temptation of “fraus legis” to follow the CJEU’s interpretative guidance in X BV?</title>
<link>https://kluwertaxblog.com/2024/10/18/why-must-the-dutch-supreme-court-resist-the-temptation-of-fraus-legis-to-follow-the-cjeus-interpretative-guidance-in-x-bv/</link>
<comments>https://kluwertaxblog.com/2024/10/18/why-must-the-dutch-supreme-court-resist-the-temptation-of-fraus-legis-to-follow-the-cjeus-interpretative-guidance-in-x-bv/#respond</comments>
<dc:creator><![CDATA[Błażej Kuźniacki ( PwC Netherlands, Lazarski University and Singapore Management University)]]></dc:creator>
<pubDate>Fri, 18 Oct 2024 11:28:16 +0000</pubDate>
<category><![CDATA[CJEU]]></category>
<category><![CDATA[EU law]]></category>
<category><![CDATA[OECD]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19767</guid>
<description><![CDATA[The author would like to give thanks to Professor Daniel Gutmann, Professor Georg Kofler, and Simon Whitehead for an engaging and intellectually stimulating exchange of views on the CJEU’s judgment in X BV case through the emails. This post benefitted from it. However, the author is solely responsible for its content and no views expressed... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/10/18/why-must-the-dutch-supreme-court-resist-the-temptation-of-fraus-legis-to-follow-the-cjeus-interpretative-guidance-in-x-bv/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[The author would like to give thanks to Professor Daniel Gutmann, Professor Georg Kofler, and Simon Whitehead for an engaging and intellectually stimulating exchange of views on the CJEU’s judgment in X BV case through the emails. This post benefitted from it. However, the author is solely responsible for its content and no views expressed therein can be attributed to anyone except the author.
<h3>1. Introduction</h3>
<h4>1.1 Focus of this post</h4>
The Court of Justice of the European Union (CJEU) judgment of 4 October 2024 in <a href="https://curia.europa.eu/juris/document/document.jsf?text=&docid=290686&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=4044403" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">X BV (C-585/22)</a> is clearly one of the landmark cases determining the compatibility of domestic anti-tax avoidance rules with EU primary law. Although the CJEU concluded that the Dutch anti-tax avoidance rule in question – Art. 10a of the Dutch corporate income tax act (CITA) – is compatible with EU primary law (the freedom of establishment, Art. 49 of the Treaty on the Functioning of the European Union, <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A12012E%2FTXT" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">TFEU</a>), it does not herald the lost for the taxpayer. It is now the interpretative task for the Dutch Supreme Court (Hoge Raad der Nederlanden) to carefully assess the facts of the X BV case to identify whether the abuse existed in accordance with the principle of prohibition of abuse of rights (Cf. <a href="https://doi.org/10.5040/9781509964758" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Kokott 2022</a>, § 2.C). To this end, the Dutch Supreme Court must resist temptation to interpret Art. 10a CITA in line with its own antiabuse judicial doctrine fraus legis. Rather, it must follow the CJEU’s interpretative guidance in line with the principle of prohibition of abuse of rights. Only if the Dutch Supreme Court finds the abuse in accordance with such guidance, Art. 10a CITA could be applied by the Dutch tax authorities to deny the full interest on the loan paid by X to C in accordance with Art. 49 TFEU (section 4 below). This is the focus on the post. However, X BV is of vital importance to tax practitioners at least for the two other reasons, as briefly summarized in the two following paragraphs of this introduction.
<h4>1.2 X BV nuanced the interplay between the arm’s length principle and the principle of prohibition of abuse of rights in comparison to Lexel</h4>
The judgment in X BV nuanced the interplay between the arm’s length principle and the principle of prohibition of abuse of rights in comparison to Lexel (<a href="https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:62019CJ0484" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">C-484/19</a>) by confirming the overarching importance of valid commercial reasons (also called: economic reality or genuine economic activity) to identify abuse. Arm’s length terms of intra-group loans cannot secure against the qualification as “abusive practices’”, if the loans do not have valid commercial reasons apart from obtaining tax benefits, which contradict the purpose of relevant tax provisions and EU law. In other words, arm’s length conditions do not apply as a fully-fledged safe harbour for the principle of prohibition of abuse of rights (see paras 75-77 and 86-88 – whenever this post refers to para. or paras without any other indication, it is the reference to X BV). It will certainly complicate passing the muster of non-abusive transactions and arrangements involving intra-group loans and other payments subject to arm’s length examination, e.g. structures with central corporate treasuries.
<h4>1.3 The CJEU distinguishes between the Swedish anti-aggressive tax planning legislation in Lexel and the Dutch anti-tax avoidance legislation in X BV</h4>
The CJEU distinguishes between the Swedish anti-aggressive tax planning legislation in Lexel and the Dutch anti-tax avoidance legislation in X BV (para. 80). Although both captured arm’s length transactions, only the Dutch one operated by allowing taxpayers involved in intra-group financing to rebut the presumption of abuse by valid commercial reasons. By the same token, only the Dutch legislation gave decisive value to the valid commercial reasons while the Swedish legislation did so towards the intention to obtain a tax benefit. The Swedish legislation, therefore, was not compatible with the two-fold test of abuse, as established by the CJEU case law and applied consistently within the scope of the principle of prohibition of abuse of rights. Likewise, a powerful movement against “aggressive tax planning” and tax competition orchestrated by the European Commission in concert with the OECD (e.g. <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32012H0772" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">the European Commission 2012</a>; <a href="https://www.europarl.europa.eu/legislative-train/theme-an-economy-that-works-for-people/file-safe" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Securing the activity framework of enablers (SAFE)</a>; <a href="https://taxation-customs.ec.europa.eu/taxation/business-taxation/unshell-proposal_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Unshell Proposal</a>; <a href="https://www.oecd.org/en/publications/action-plan-on-base-erosion-and-profit-shifting_9789264202719-en.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">the OECD’s BEPS Action Plan 2013</a>, p. 13; <a href="https://www.oecd.org/en/topics/sub-issues/global-minimum-tax/global-anti-base-erosion-model-rules-pillar-two.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">the OECD Pillar Two</a>; in literature see <a href="https://kluwerlawonline.com/journalarticle/Intertax/43.1/TAXI2015004" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Dourado 2015</a>; <a href="https://www.researchgate.net/publication/367164386_Aggressive_Tax_Planning_ATP_in_Light_of_the_Securing_the_Activity_Framework_of_Enablers_SAFE_Initiative_A_Path_to_Inflation_of_Anti-Tax_Avoidance_Rules_in_the_EU_Law" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Kuźniacki 2022</a>; <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4598045" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Kuźniacki 2023</a>;<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4818304" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Kuźniacki & Visser 2024</a>) does not constitute a justification to restrict fundamental freedoms by means of prevention of tax avoidance in line with the CJEU case law and the general principles of EU law, i.e. the principle of proportionality, the principle of legal certainty and the principle of prohibition of abuse of rights (cf. paras 80-85, 89-92; Lexel, paras 52-57).
<h4>1.4 Outline of the post</h4>
Before the main analysis unfolds, sections 2 and 3 below present key facts of the X BV case and a very brief summary of the CJEU’s decision, respectively. The main analysis in section 4 below aims to provide the answer to the question why the Dutch Supreme Court must resist the temptation of “fraus legis” to follow the CJEU’s interpretative guidance in X BV. Moreover, the readers shall be aware that comprehensive publications on the theme of this post are under construction by the present author to cover the impact of that judgment in the key areas mentioned in sections 1.2-1.3 above.
<h3>2. Facts, dispute and preliminary questions</h3>
A dispute arose between X BV (a Dutch tax resident company), and the Staatssecretaris van Financiën (Dutch Secretary of State for Finance, hereinafter “Dutch tax authorities”) regarding the right to deduct (for the Dutch income tax purposes) the interest paid on an intra-group loan in order to finance the acquisition of a company not related to the existing group of companies.
The dispute arose in the following factual circumstances: X belonged to a multinational group of companies, including companies A and C (Belgium tax residents). A was the sole shareholder of X and the majority shareholder of C. In 2000, X acquired the majority of the shares in F, a Dutch tax resident company. A acquired the remaining shares in F. X financed that acquisition by means of loans contracted with C, which used for that purpose own funds obtained through a capital contribution made by A. As a result of that acquisition, X and F belonged to the same group and constituted the so called fiscal-unity under the Dutch tax law. Thus, their taxation took place on the basis of full consolidation of assets and liabilities and profits and losses as if they were a single taxpayer (paras 4-7).
Interestingly, the Dutch Supreme Court did not provide the CJEU with the following, publicly available facts, as stemming from the proceedings before the Dutch Appeal court in X BV (Gerechtshof Arnhem-Leeuwarden of 2 October 2020, <a href="https://uitspraken.rechtspraak.nl/details?id=ECLI:NL:GHARL:2020:8628" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:NL:GHARL:2020:8628</a>). They reveal that C had 36 full time employees in 2000 and this number increased to 375 as of 2008 (para. 2.6). C provided loans on a regular basis to all entities of the group, including X, which, in turn, transferred their excess cash to C.
<h4><a href="http://www.internationaltaxplaza.info/homepage/news-archive/news-archive-2024/512-news-archive-march-2024/7220-march-2024-009.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Final structure based on facts of X BV case</a></h4>
<img loading="lazy" class="alignnone wp-image-19774" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2024/10/Picture1-300x222.png" alt="" width="403" height="298" srcset="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2024/10/Picture1-300x222.png 300w, http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2024/10/Picture1.png 467w" sizes="(max-width: 403px) 100vw, 403px" />
In 2007, the Dutch tax authorities refused to allow X to deduct interest paid to C in line with Art. 10a CITA. It said that the deduction of interest on loans contracted with related parties, in particular for internal reorganizations or external acquisitions, was restricted if, among the others, subject to certain conditions, the loan was, in law or in fact, directly or indirectly, linked to the acquisition or increase of a participation by the taxpayer, by an entity that is related to the taxpayer and subject to corporate income tax (CIT), or by an individual who is related to the taxpayer and resides in the Netherlands, in an entity that, as a result of this acquisition or increase of participation, becomes an entity related to the taxpayer.
The transaction of the acquisition of F by X fell within the mentioned scope of application of Art. 10a CITA. However, the taxpayer (e.g. X) could retain the right to the deduction of interest if it made plausible that 1) the loan and the related transactions were based, to a decisive extent, on economic considerations, or 2) the “compensatory tax test” has been passed, i.e. the creditor was subject to CIT on the loan interest at least 10% on profits calculated in accordance with CITA.
X challenged denial of deduction by the Dutch tax authorities before the Gelderland District Court and, subsequently, before the Dutch Court of Appeal. The latter court ruled on 20 October 2020 that Articles 49, 56, and 63 TFEU did not preclude the limitation of the interest deduction provided for in Article 10a CITA. X appealed to the Dutch Supreme Court, which referred three preliminary questions to the CJEU, seeking clarification of its previous judgment in Lexel in which the CJEU ruled that transactions at arm’s length are not abusive.
By asking the three questions, considered together, the Dutch Supreme Court seek to know whether: the Articles 49, 56, and 63 TFEU must be interpreted as precluding national legislation under which, in determining a taxpayer’s income, the deduction of interest paid on a loan contracted with a related entity, related to the acquisition or increase of a participation in another entity, which becomes, following this acquisition or increase, a related entity to this taxpayer, is entirely refused when this debt is considered to constitute a purely artificial arrangement or to be part of such an arrangement, even if the said debt was contracted under arm’s length conditions (arm’s length loan) and if the amount of this interest does not exceed what would have been agreed between independent enterprises (arm’s length interest rate).
<h3>3. The CJEU’s decision in a nutshell</h3>
This section is only an extremely short summary of the CJEU decision in X BV to keep this post as concise as possible. I kindly refer all readers to consult the content of the decision while reading sections 4 of this blog post.
In the judgment on X BV, the CJEU followed <a href="https://curia.europa.eu/juris/document/document.jsf;jsessionid=595E9C7027C93C6ED9F356B90638FE6E?text=&docid=283839&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=1775777" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Advocate General (AG) Emiliou opinion on X BV</a> , to consider Art. 10a CITA compatible with Art. 49 TFEU. However, it did not entirely follow the reasoning and the proposition of the AG to reverse the observations in Lexel (para. 56) regarding the treatment of arm’s length principle vis-à-vis one of the general principles of EU law – prohibition of abuse of rights. Rather, the Court nuanced and adjusted its observations in Lexel to the case at hand, considering legal and factual differences between those cases (paras 74-88).
Considering all of the abovementioned reasoning, the CJEU concluded that Art. 49 TFEU “must be interpreted as not precluding national legislation under which, in the determination of a taxpayer’s profits, the deduction of interest paid in respect of a loan debt contracted with a related entity, relating to the acquisition or extension of an interest in another entity which becomes, as a result of that acquisition or extension, an entity related to that taxpayer is to be refused in full, where that debt is considered to constitute a wholly artificial arrangement or is part of such an arrangement, even if that debt was incurred on an arm’s length basis and the amount of that interest does not exceed that which would have been agreed between independent undertakings.”
<h3>4. Will the Dutch Supreme Court resist the temptation of “fraus legis” and follow the CJEU’s interpretative guidance in X BV? If not, it may fail to respect EU primary law</h3>
<h4>4.1 Facts of the X BV case do not seem to indicate abuse in line with the CJEU’s interpretative guidance in that case and the principle of prohibition of abuse of rights</h4>
The CJEU judgment in X BV provided the Dutch Supreme Court with the interpretative guidance on how to apply Art. 10a CITA in line with Lexel and other case law shaping contours of the principle of prohibition of abuse of rights. The economic reality (i.e. valid commercial reasons), objectively verifiable by third parties, constituted almost the entire centre of gravity of such an interpretation, while the subjective tax avoidance intention barely oscillated around the edges of the CJEU’s attention. Indeed, the concepts of economic reality and abuse are closely interlinked with each other so that the lack of the former implies the existence of the latter (Cf. Kokott 2022, p. 75).
The Dutch Supreme Court’s interpretative task requires the application of the interpretative guidance from X BV to the facts, to decide whether or not they indicate abusive practice in accordance with the principle of prohibition of abuse of rights. One of the key parts of that guidance regards the need for a more holistic approach to identify abusive tax avoidance rather than focusing only on the arm’s length terms of the loan provided by C to X, or other formal elements concerning that loan (para. 78).
In the author’s opinion, such a holistic approach to assess abuse in light of the facts of X BV do not indicate abuse. The main reason for that is the fact that A regularly made equity contributions to C, which was the corporate central treasury of the group employing high-skilled finance managers (nearly 400 own employees by 2008). C provided loans on a regular basis to all entities of the group, including X, which, in turn, transferred their excess cash to C. There was, therefore, the economic reality (the valid commercial reasons) in providing the loans in the entire group by C and sufficient degree of relevant economic substance to genuinely do so without any circularity among the transactions that would cancel out each other’s effect, i.e. factual circumstances supporting the existence of valid commercial reasons and the capability of their genuine enforcement (cf. <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4959980" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Navarro 2024</a>, pp.19-22).
<h4>4.2 Why must the Dutch Supreme Court resist the temptation of “fraus legis” to follow the CJEU’s interpretative guidance in X BV?</h4>
The question is now whether the Dutch Supreme Court will meticulously follow the interpretative guidance of the CJEU to identify abuse or its lack in X BV, or it will apply own judicial antiabuse doctrine “fraus legis” to this end. The temptation to do the latter may be high insofar as Art. 10a CITA constitutes the codified judicial antiabuse doctrine “fraus legis”, as arising from the anti-profit drainage case law of the Dutch Supreme Court, bespoke to intra-group loans for purposes of internal or external acquisitions (<a href="https://www.ibfd.org/shop/book/tax-avoidance-revisited-eu-beps-context" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">De Wilde & Wisman</a> 2016, section III.7.2).
Both Art. 267 TFEU and the principle of autonomy of EU terms and concepts (<a href="https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:61981CJ0283" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">CILFIT (283/81)</a>, paras 19-20; For the autonomy of concepts relevant to tax law see <a href="https://www.ibfd.org/shop/book/taxation-foreign-business-income-within-european-internal-market" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Monsenego 2011</a>, p. 23) require the Dutch Supreme Court to detach from its own vision of abuse, as stemming from fraus legis, and to identify of abuse in X BV considering the facts of that case in accordance with the interpretative guidance of the CJEU, which, in turn, stems from the principle of prohibition abuse of rights. The mentioned principle of autonomy also aims to ensure the fullest possible achievement of EU purposes in conformity with the principles guiding the functioning of the EU (<a href="https://www.e-elgar.com/shop/gbp/beneficial-ownership-in-international-taxation-9781802206067.html?srsltid=AfmBOop9f5X7cRGB8aCqlFMh3Rg87QDSxgWLONy5Bb2yLU63kbN0w5Np" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Kuźniacki 2022</a>, p. 71). Moreover, such principle is the source of the principle of effectiveness of EU law and the interpretative directive effet utile (<a href="https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:62007CC0407" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Advocate General E. Sharpston opinion on Stichting Centraal Begeleidingsorgaan voor de Intercollegiale Toetsing</a> (C-407/07), para. 13). Departing from the CJEU interpretive guidance in X BV in favor of fraus legis by the Dutch Supreme Court would jeopardise a compatibility of its judgment with all of the above mentioned principles of EU law.
<h4>4.3 Will the Dutch Supreme Court resist the temptation of “fraus legis” to follow the CJEU’s interpretative guidance in X BV?</h4>
In light of the foregoing, the Dutch Supreme Court must also factor in that its fraus legis doctrine was developed to prevent abuse of domestic Dutch tax law whereas the CJEU developed the principle of prohibition of abuse of rights to prevent abuse of EU law by tax avoidance transactions or arrangements. X BV case is no longer only about prevention of abuse of the Dutch tax law, which would trigger the role of fraus legis and Art. 10a CITA, but about prevention of abuse of Art. 49 TFUE. The fraus legis doctrine and Art. 10a CITA are not bespoke to prevent abuse of Art. 49 TFEU. Even if the CJEU considered Art. 10a suitable to prevent tax avoidance stemming from “the artificial nature of the transactions concerned, arising from the redirection of own funds and the conversion of them in loan capital” (paras 61-64), the decisive part of the proportionality test (stricto sensu) is included later on in the CJEU judgment (paras 66-93), and contains the pivotal interpretative guidance to the Dutch Supreme Court. In that regard, it must be observed that Art. 10a CITA was clearly not targeting only abusive tax avoidance, as identified by the CJEU, to the extent to which it allowed taxpayers to escape the denial of deduction if the interest was subject to at least 10% of taxation (para. 3 with reference to Art. 10a(3)(b) CITA). A low taxation or no taxation is solely of no indication of abuse. It is at most, an indication of aggressive tax planning, which, in the CJEU’s view, is not a phenomenon the prevention of which constitutes an overriding reason in the public interest, justifying a restriction of Art. 49 TFEU (para. 59 with a reference to the <a href="https://curia.europa.eu/juris/document/document.jsf?text=&docid=211053&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=3486658" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Danish cases on interest (C-115/16, C-118/16, C-119/16 and C-299/16)</a>, para. 109 and the case-law cited). The CJEU explicitly considered a legislation preventing aggressive tax planning as incompatible with Art. 49 TFEU (para. 80 with a reference to Lexel, paras 52 to 54).
This shows that Art. 10a CITA, as emerged from fraus legis case law of the Dutch Supreme Court, is by no means a perfect match with the principle of prohibition of abuse of rights to prevent abuse of Art. 49 TFEU. If this Court follows its own judicial antiabuse doctrine to apply Art. 10a CITA to facts of X BV case instead of the CJEU’s interpretative guidance in line with the principle of prohibition of abuse of rights, it risks rendering a judgement violating the EU primary law. Presumably, the avoidance of that risk is sufficient for the judges of the Dutch Supreme Court to carefully follow the CJEU’s interpretative guidance. Certainly, the Dutch Supreme Court knows how to distinguish between aggressive tax planning and abusive tax avoidance. While the widespread legislative prevention of the former still is at the forefront of tax policy agendas of the European Commission and the OECD, only the latter constitutes an overriding reason in the public interest justifying a restriction of Art. 49 TFEU (para. 59 with a reference to the Danish cases on interest, para. 109 and the case-law cited).
Just as the CJEU must rigorously apply the general principles of EU law to prevent abusive tax avoidance to ensure a right balance between fiscal interests of EU Member States and individual freedoms of taxpayers at the EU level (cf. <a href="https://www.ibfd.org/shop/journal/interpreting-european-law-light-oecdg20-base-erosion-and-profit-shifting-action-plan" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Schön</a> 2020, sections 1, 6.3.1 & 7), the Dutch Supreme Court must do so in the Netherlands. Otherwise the liberating forces of the EU’s internal market will be restrained to the detriment of not only taxpayers but also the investment’s attractiveness of EU Member States on a global arena. This is in a square opposition to the current agenda of the Council of the EU to improve the EU competitiveness (<a href="https://hungarian-presidency.consilium.europa.eu/en/programme/programme/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Council of the EU 2024</a>, p. 4). This is also, if not even more so, contrary to the Dutch global position as the world’s leading investment centre (<a href="https://data.imf.org/?sk=40313609-F037-48C1-84B1-E1F1CE54D6D5&sId=1482247616261" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">IMF 2024</a>).
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/10/18/why-must-the-dutch-supreme-court-resist-the-temptation-of-fraus-legis-to-follow-the-cjeus-interpretative-guidance-in-x-bv/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>The Contents of Intertax, Volume 52, Issue 11, 2024</title>
<link>https://kluwertaxblog.com/2024/10/17/the-contents-of-intertax-volume-52-issue-11-2024/</link>
<comments>https://kluwertaxblog.com/2024/10/17/the-contents-of-intertax-volume-52-issue-11-2024/#respond</comments>
<dc:creator><![CDATA[Ana Paula Dourado (General Editor of Intertax)]]></dc:creator>
<pubDate>Thu, 17 Oct 2024 14:42:10 +0000</pubDate>
<category><![CDATA[Uncategorized]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19762</guid>
<description><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions: Tamir Shanan, Doron Narotzki & Noam Zamir, A Time to Institutionalize the International Tax Regime The paper proposes replacing the existing and outdated decentralized international tax system with a centralized tax authority that would... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/10/17/the-contents-of-intertax-volume-52-issue-11-2024/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.11/TAXI2024075" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Tamir Shanan, Doron Narotzki & Noam Zamir, A Time to Institutionalize the International Tax Regime</a></h4>
The paper proposes replacing the existing and outdated decentralized international tax system with a centralized tax authority that would include four branches: a hierarchic judiciary branch that would replace/subject thousands of domestic tax tribunals, a legislative branch that would replace the existing inclusive Organization for Economic Cooperation and Development (OECD) forum that would be more balanced and as such be able to continue developing the international tax policy in the coming challenges that the Twenty-first century will bring, an executive branch that would be responsible for issuing multilateral letter ruling and guidance of how to implement the international principles and norms, assist poor countries whose costs in implementing beneficial practices are high and offer sanctions for countries that secretly deviate from the general principles and foster harmful tax principles. Furthermore, we propose to establish an audit branch that would supervise the compliance of the different countries. The article therefore blesses the recent multilateral cooperation of approximately 140 countries and suggests the time has come to institutionalize the international tax order and centralize it to better face the coming challenges that the technological breakthroughs would bring.
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.11/TAXI2024077" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Ricardo García Antón, Mirroring Comparative Fiscal Federalism to Design the EU Revenue Side</a></h4>
This contribution aims to incorporate comparative fiscal federalism into the design of the EU revenue side. The author concludes that there has been no such ‘Hamiltonian moment’ at the EU after the introduction of the Next Generation Economic Recovery Program (NGEU) and the own resources scheduled in the EU Own Resources Decision (ORD) for the period 2021–2027. The ORD follows a short-term vision needed to pay back the massive debts incurred due to the NGEU without fully endorsing a fiscal federalism route. Learning how the revenue side is structured in decentralized countries could offer important proxies to be applied at the EU level, a centripetal or ‘bottom-up federation’. Federalizing the EU revenue side would imply an explicit recognition of the EU’s power to create income/indirect taxes coupled with the need to provide public goods to European citizens.
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.11/TAXI2024071" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Gianluigi Bizioli, A Hamiltonian Moment for EU Taxation?</a></h4>
This contribution explores the possibility of a ‘Hamiltonian moment’ in the European Union (EU) public finances, drawing a parallel with the historical experience of the United States (US) in the late eighteenth and early nineteenth centuries. It examines the different theoretical positions on the existence and scope of the EU’s authority to tax, as well as the legal and political challenges that such an authority would entail. It argues that the EU does have the power to levy taxes for funding its budget, based on Article 311 of the Treaty on the Functioning of the EU (TFEU), but that this power is constrained by the principles stemming from the common constitutional traditions, the respect for national identities, and the need for democratic legitimation. It suggests that a ‘Hamiltonian moment’ in the EU would require a qualitative change in the structure and size of the EU budget, as well as a stronger involvement of the European Parliament and the national parliaments in the decision-making process on the system of own resources.
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.11/TAXI2024072" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Kristof Boel, Is the Privilege Too Privileged? the Orde van de Vlaamse Balies Case Revisited</a></h4>
The objective of this article is to analyse the concept of the legal professional privilege in the field of taxation. First, the Orde van de Vlaamse Balies case is examined in which the CJEU struck down an element of the mandatory disclosure regime contained in the fifth amendment to the Directive on Administrative Cooperation (DAC 6) as it was considered a disproportionate infringement of the legal professional privilege. The article challenges whether the CJEU was correct in simply further developing its own and the ECtHR’s precedence to reach the conclusion that all activities of lawyers as targeted by the DAC 6 fall within the scope of the strengthened protection of legal professional privilege. Additionally, it is concluded that the CJEU insufficiently took into account the DAC 6’s broader goals. Next, the article investigates ethical considerations concerning legal professional privilege, discussing particularly how it should be delineated in the field of taxation. The article concludes that the scope of legal professional privilege should not be expanded to include the activities of lawyers in tax planning.
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.11/TAXI2024074" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">F. Nyende, Assessing the Impact of Corruption on Taxpayer Perceptions of Fairness: Insights from SMEs in Uganda</a></h4>
Corruption can undermine taxpayers’ trust in the fairness of how public funds are allocated and tax procedures are carried out. While the relationship between corruption and tax system unfairness is largely unexplored, a significant body of knowledge covers these constructs in isolation. This study assesses the influence of corruption on Ugandan small and medium enterprises (SMEs’) perception of tax fairness. The authors use a thematic analysis on semi-structured interview data to assess the effects of corruption on tax fairness perceptions. The findings reveal four types of corruption: petty corruption, petty tax corruption, political corruption, and grand corruption. These have significant influence on income tax unfairness perceptions among SME firms. Tax and government officers as well as the political elite who demand bribes, embezzle taxpayers’ funds, and discriminate among taxpayers based on tribal sentiments incite taxpayers’ distributive and procedural tax unfairness perceptions. The results demonstrate that the government must strive to create an honest bureaucracy and tax administration to improve tax fairness perceptions. This can be done by allowing anti-corruption agencies to work professionally and independently of political influence.
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/10/17/the-contents-of-intertax-volume-52-issue-11-2024/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>The Contents of EC Tax Review, Volume 33, Issue 05, 2024</title>
<link>https://kluwertaxblog.com/2024/10/15/the-contents-of-ec-tax-review-volume-33-issue-05-2024/</link>
<comments>https://kluwertaxblog.com/2024/10/15/the-contents-of-ec-tax-review-volume-33-issue-05-2024/#respond</comments>
<dc:creator><![CDATA[Ben Kiekebeld (General Editor EC Tax Review and tax adviser at Ernst & Young Belastingadviseurs LLP)]]></dc:creator>
<pubDate>Tue, 15 Oct 2024 10:01:26 +0000</pubDate>
<category><![CDATA[Uncategorized]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19760</guid>
<description><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions: Han Kogels, Will the Road to Carbon Neutrality Become Even More Bumpy Than Ever? The first-ever global stocktake of what has been achieved and what still must be achieved since the 2015 Paris Agreement... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/10/15/the-contents-of-ec-tax-review-volume-33-issue-05-2024/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:
<h4><a href="https://kluwerlawonline.com/journalarticle/EC+Tax+Review/33.5/ECTA2024020" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Han Kogels, Will the Road to Carbon Neutrality Become Even More Bumpy Than Ever?</a></h4>
The first-ever global stocktake of what has been achieved and what still must be achieved since the 2015 Paris Agreement on climate change shows that we are not on track to meet the target of limiting global temperature increase in 2050 to 1.5°C above preindustrial levels. Although the EU CBAM is still in its transitional stage and the proposal for a substantial revision of the EU ETD is the only file of the ‘Fit for 55’ package that has not yet been adopted, the EU is one of the better performers on the road to the netzero CO2 emissions target for 2050. In 2023, COP28 has set a new ambitious target for greenhouse gas reductions by 2030. However, the geopolitical situation has dramatically changed by the wars in Ukraine and Gaza. The implications for the energy transition from fossil to renewable sources may make the already bumpy road to carbon neutrality even more bumpy than ever.
<h4><a href="https://kluwerlawonline.com/journalarticle/EC+Tax+Review/33.5/ECTA2024021" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Madeleine Merkx, Rendering Platforms Liable for VAT and Import Duties: Desperate Times Call for Desperate Measures, but What about Proper Checks and Balances?</a></h4>
Following the obligations put on platforms under the VAT e-commerce rules that entered into application on 1 July 2021 the European Commission under the Customs reform has proposed to put the obligation to pay import duties on platforms as deemed importer. In this contribution the author analyses the proposed obligations, including those originally included in the VAT in the digital age (VIDA) proposal. She answers the question to what extent platforms are able to deal with these obligations and whether they create undesired issues as regards competition.obligations and whether they create undesired issues as regards competition.
<h4>Erik Ros<a href="https://kluwerlawonline.com/journalarticle/EC+Tax+Review/33.5/ECTA2024022" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">, Preliminary Procedures at the General Court: More than Meets the Eye?</a></h4>
From 1 October 2024, the General Court will have jurisdiction to hear preliminary rulings in a number of specific areas of EU law. These include VAT, excise duties, customs and tariff classification, compensation and assistance to travellers, and greenhouse gas emissions trading. In this article, the author discusses and evaluates this reform of the preliminary ruling procedure. Among other things, the article discusses the extent to which the reform contributes to reducing the workload of the Court of Justice of the European Union (CJEU). It is further argued that the reform could potentially go beyond a merely practical, technical reallocation of preliminary ruling powers. Any future extension of the General Court’s preliminary ruling jurisdiction to other jurisdictions will potentially fundamentally change the judicial structure of the EU and put the CJEU even more on the track of a constitutional court.
<h4><a href="https://kluwerlawonline.com/journalarticle/EC+Tax+Review/33.5/ECTA2024023" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Melina Konstantinou & Katherina Konstantinou, Balancing Digitalization and Proportionality: The Progress of the FASTER Initiative</a></h4>
The European Commission’s proposed directive ‘Faster and Safer Relief of Excess Withholding Taxes’ (FASTER) aims to standardize, modernize, and digitalize the EU-wide withholding tax procedure to enhance efficiency and fraud resistance. The Council of the EU, through Economic and Financial Affairs Council (‘ECOFIN’), has agreed on a revised directive that retains the core objectives but introduces significant modifications. The initiative focuses on simplifying tax relief procedures, introducing a digital EU tax residence certificate, and implementing fast-track refund systems. The Council’s adjustments include extended deadlines for issuing certificates and fast-track refunds, as well as expanded obligations for financial intermediaries to report transactions and prevent fraud. The directive emphasizes digitalization and proportionality in its implementation. However, concerns about the proportionality of imposed liabilities on financial intermediaries and data protection remain critical issues. The revised directive is pending further consultation with the European Parliament and formal adoption by the Council, with an anticipated implementation deadline extended to 31 December 2028, and national application starting 1 January 2030.
 
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/10/15/the-contents-of-ec-tax-review-volume-33-issue-05-2024/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>The Contents of Highlights & Insights on European Taxation, Issue 9, 2024</title>
<link>https://kluwertaxblog.com/2024/10/01/the-contents-of-highlights-insights-on-european-taxation-issue-9-2024/</link>
<comments>https://kluwertaxblog.com/2024/10/01/the-contents-of-highlights-insights-on-european-taxation-issue-9-2024/#respond</comments>
<dc:creator><![CDATA[Giorgio Beretta (Amsterdam Centre for Tax Law (ACTL) of the University of Amsterdam; Lund University)]]></dc:creator>
<pubDate>Tue, 01 Oct 2024 09:56:59 +0000</pubDate>
<category><![CDATA[Customs and Excise]]></category>
<category><![CDATA[Direct taxation]]></category>
<category><![CDATA[EU law]]></category>
<category><![CDATA[Indirect taxation]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19754</guid>
<description><![CDATA[Highlights & Insights on European Taxation Please find below a selection of articles published this month (September 2024) in Highlights & Insights on European Taxation, plus one freely accessible article. Highlights & Insights on European Taxation (H&I) is a publication by Wolters Kluwer Nederland BV. The journal offers extensive information on all recent developments in European Taxation in the... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/10/01/the-contents-of-highlights-insights-on-european-taxation-issue-9-2024/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[<a href="https://shop.wolterskluwer.nl/Highlights-Insights-on-European-Taxation-sNPHIEURTX/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>
Please find below a selection of articles published this month (September 2024) in <a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>, plus one freely accessible article.
<a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation (H&I)</a> is a publication by Wolters Kluwer Nederland BV.
The journal offers extensive information on all recent developments in European Taxation in the area of direct taxation and state aid, VAT, customs and excises, and environmental taxes.
 
To subscribe to the Journal’s page, please click <a href="https://www.linkedin.com/company/highlights-insights-on-european-taxation/?viewAsMember=true" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">HERE</a>
 
Year 2024, no. 9
TABLE OF CONTENTS
 
<h4>INDIRECT TAXATION, CASE LAW</h4>
– Finanzamt T (C-184/23). Supply of services within VAT group not subject to VAT. Court of Justice
(comments by Thomas Stapperfend) (H&I 2024/238)
– Casino de Spa e.a. (C-741/22). Belgian VAT exemption. EU law does not preclude different treatment online gambling. Court of Justice
(comments by Giorgio Beretta) (H&I 2024/237)
– Chaudfontaine Loisirs (C-73/23). Belgian VAT Treatment for Offline and Online Gambling. Court of Justice
(comments by Giorgio Beretta) (H&I 2024/236)
 
<h4>CUSTOMS AND EXCISE</h4>
– BIOR (C-344/23). Classification of tags intended for the marking of fish. Court of Justice
(comments by Piet Jan de Jonge) (H&I 2024/226)
– New A.TR movement certificate rules for EU–Turkiye Customs Cooperation from 8 July 2024
(comments by Piet Jan de Jonge) (H&I 2024/225)
– A GmbH & Co (C-104/23). Combined Nomenclature. Prefabricated building does not cover a calf hutch. Court of Justice
(comments by Piet Jan de Jonge) (H&I 2024/217)
 
<h4>ECHR</h4>
– Rustamkhanli v Azerbaijan (24460/16). Unannounced on-site tax audit of publishing house. Violation of human rights. ECHR
(comments by Edwin Thomas) (H&I 2024/227)
 
<h4>FREE ARTICLE</h4>
– Finanzamt T (C-184/23). Supply of services within VAT group not subject to VAT. Court of Justice
(comments by Thomas Stapperfend) (H&I 2024/238)
Assessment of the judgment
The judgment of the Court of Justice of the European Union (hereinafter: ‘CJ’) is relatively brief. This is probably due to the fact that the Court considered the answer to the questions referred by the V. Senate of the FFC to be clear and, therefore, only referred in its reasoning to Article 4(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (hereinafter: the ‘Sixth Directive’) (now Article 11(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax: hereinafter the ‘VAT Directive’) and its previous established case law on the necessity of a legal relationship, without going into detail on the teleological interpretation of the law discussed in detail in the FFC’s decision to refer and by Advocate General (AG) Rantos in his Opinion of 16 May 2024 (Opinion of AG Rantos 16 May 2024, C-184/23 Finanzamt T II, <a href="https://www.inview.nl/document/id45433a452a5146f3bec61eb81d39e0df#--ext-id-44e02cad-2d1c-4234-9dbd-82a90b4b89c7" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2024:416</a>). However, it is interesting in this context that the CJ refers to the guidelines of the VAT Committee to interpret the Directive (CJ 11 July 2024, C-184/23 Finanzamt T II, paragraph 41), since these statements by representatives of the executive are not binding (also of Monfort, UR 2024, 572; Widmann, UR 2024, 573). The CJ had already referred to the VAT Committee’s guidelines in its ruling of 8 October 2020 in Weindel Logistic Services (CJ 8 October 2020, C-621/19Weindel Logistik Service, ECLI:EU:C:2020:814). It remains to be seen whether this will become an established interpretative aid in future case law of the CJ.
It is also noteworthy that, in the grounds for judgment, the CJ gives an indication of the significance to be attached to its rulings. The CJ states in paragraph 32 et seq. that, contrary to the referring court’s view, in its judgment of 1 December 2022, C-141/20 Finanzamt Kiel v Norddeutsche Gesellschaft für Diakonie mbH, Norddeutsche Gesellschaft für Diakonie, <a href="https://www.inview.nl/document/idc9f8c9ae4af34c91a0eeadd10ca74453#--ext-id-b220eb3a-f6da-41d3-8e00-514799ee6768" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2022:943</a>, it did not address the issue of whether supplies made between members of the same VAT group are subject to VAT. It examined only the question referred to, namely whether a Member State may consider certain entities to be non-independent ‘by categorization’, without answering the question whether supplies carried out between Member States belonging to the same VAT group fall within the scope of VAT. This should be understood as a clear indication that one should not read too much into the reasoning of CJ’s decisions, which, however, the German courts, in particular, tend to do. In addition, only the operative elements of a ruling have a binding effect with which the CJ is referred to by means of a specific question (as already concluded by Hummel, UR 2021, 173; see also Ismer/Endres-Reich, MwStR 2024, 602).
To summarise: the CJ’s new judgment puts an end to the discussion as to whether the handling of VAT groups under German law is compatible with the requirements of the Directive. The Court has now confirmed such a compatibility several times (as have also Monfort, UR 2024, 571; Sterzinger, MwStR 2024, 603; Widmann, UR 2024, 573). There is no need to change the current national practice. Nevertheless, it would be desirable for the national legislator to adapt the wording of Paragraph 2(2) No. (2) sentence (1) UStG to the case law of the CJ. This applies in particular to the still existing legal restriction with regard to controlled companies in a VAT group to legal entities. Further consideration should also be given to introducing the right of application (Ismer/Endres-Reich, MwStR 2024, 602).
Prof. Dr. Thomas Stapperfend 
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/10/01/the-contents-of-highlights-insights-on-european-taxation-issue-9-2024/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>Taxing Digital, What’s Next?</title>
<link>https://kluwertaxblog.com/2024/09/24/taxing-digital-whats-next/</link>
<comments>https://kluwertaxblog.com/2024/09/24/taxing-digital-whats-next/#comments</comments>
<dc:creator><![CDATA[Maarten de Wilde (Erasmus School of Law, Erasmus University Rotterdam, PwC Rotterdam)]]></dc:creator>
<pubDate>Tue, 24 Sep 2024 14:31:15 +0000</pubDate>
<category><![CDATA[ATAD]]></category>
<category><![CDATA[BEPS]]></category>
<category><![CDATA[DAC 7]]></category>
<category><![CDATA[EU VAT]]></category>
<category><![CDATA[OECD]]></category>
<category><![CDATA[Pillar I]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19745</guid>
<description><![CDATA[After the silent collapse of Pillar One earlier this summer, as it now seems, the question as to what’s next seems to be moving up business agendas and political agendas. On an informal meeting of tax practitioners from business and consultancy in Rotterdam, the Netherlands, on 24 September 2024, the author of the current blog... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/09/24/taxing-digital-whats-next/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[<table>
<tbody>
<tr>
<td width="697">After the silent collapse of Pillar One earlier this summer, as it now seems, the question as to what’s next seems to be moving up business agendas and political agendas. On an informal meeting of tax practitioners from business and consultancy in Rotterdam, the Netherlands, on 24 September 2024, the author of the current blog was invited to reflect on the topic. The exercise resulted in an exploration of developments, culminating in a call for some renewed thinking on company tax reform by seeking a tax-equilibrium through competition rather than through coordination, since this is how the world seems to be working. Please read further below.</td>
</tr>
</tbody>
</table>
<h4>1) Introduction</h4>
The manner in which we tax large companies on their investment returns has been a topic that is in the societal spotlight for quite some time now. There is a lot going on, and it is even more than the eye-catching Apple State Aid ruling of the Court of Justice of the EU of 10 September 2024, where the Court upheld the 2016 Commission decision that the famous tech company had to repay Ireland a staggering amount of 13 billion euros worth of State Aid provided by the country to the company.<a href="#_ftn1" name="_ftnref1">[1]</a> After the silent collapse of Pillar One earlier this summer, as it now seems,<a href="#_ftn2" name="_ftnref2">[2]</a> the question as to what’s next seems to be moving up business agendas and political agendas. To answering this question, this paper explores some of the backgrounds and political and policy considerations that have been driving some of the large-scale developments and winds of change that we see around us in the company tax landscape, in recent years and up to and including today. As a side note the paper briefly assesses why it is precisely those internet companies that have taken center stage in the multinational company tax debate. The explorations culminate in a call for some renewed thinking on company tax reform, that is, by seeking a tax-equilibrium through competition rather than through coordination.
<h4>2) A changing landscape</h4>
<h4>2.1 Transparency, coherence and substance</h4>
Our thinking about the taxation of multinational companies has been changing dramatically. For quite a while now, we have concerned ourselves with unfair tax competition and improper tax planning.<a href="#_ftn3" name="_ftnref3">[3]</a> Initially, matters mainly involved tax havens and letterbox companies. Developments led to the famous Base Erosion and Profit Shifting Project of the G20/OECD, the BEPS project, and its results in 2015 that a large number of countries, including the EU Member States, subsequently transposed into their national company tax systems. Measures that were taken focused on transparency from companies and between tax authorities, tackling tax avoidance and non-taxation due to differences in tax rules in countries, and ensuring that taxation takes place in the geographical location where companies create their commercial value. The three pillars of the BEPS Project that is: transparency, coherence and substance.
Examples of the now almost classical anti-abuse measures that resulted from the BEPS developments can today be found in the EU Anti-Tax Avoidance Directive, the ATAD, for example, that the EU Member States implemented since 2019.<a href="#_ftn4" name="_ftnref4">[4]</a> The Netherlands, by the way and the author’s home country, has even gone somewhat further and has also unilaterally taken additional measures, for example with the legislation introduced in 2022 tackling non-taxation due to differences between countries in the pricing of transactions within groups.<a href="#_ftn5" name="_ftnref5">[5]</a> Political pressure on countries to address their unfairly competitive tax systems has been done through international blacklisting exercises.<a href="#_ftn6" name="_ftnref6">[6]</a> Taxation in the location of value creation has been sought through the strengthening of the at arm’s length standard.<a href="#_ftn7" name="_ftnref7">[7]</a> Within the EU, since September 2023 a proposal is pending to harmonize the at arm’s length standard at EU level.<a href="#_ftn8" name="_ftnref8">[8]</a> Examples of transparency rules are those in the EU Directive on Administrative Cooperation that have been introduced in recent years, the DACs, including those for online platform companies (DAC7) and crypto services (DAC8), and of course the transparency rules on information exchange between tax authorities and reporting obligations for companies (on rulings, DAC3, and involving country by country reporting, CbCR, DAC4).<a href="#_ftn9" name="_ftnref9">[9]</a> In 2024, rules have also been added requiring companies to be transparent to the public about where the pay their company taxes and how much: public CbCR.<a href="#_ftn10" name="_ftnref10">[10]</a>
<h4>2.2 Not: where to tax and how much to tax</h4>
It is important to note that the 2015 anti-BEPS measures do not deal with the almost philosophical question of where, in a geographical sense, companies should pay their company taxes, nor with the question of how much corporation tax should be paid. The BEPS initiative sought its solutions within the existing tax framework. Indeed, the BEPS Project did contain an item on the Digital Economy: Action 1.<a href="#_ftn11" name="_ftnref11">[11]</a> The general finding in that regard, however, was to not address matters raised by fundamentally changing the tax-architectural make-up of the international tax system.
Some believe that this also explains why the societal and political discussions did not die down after the results of the 2015 BEPS project. In the meanwhile, and on top of this, we started to witness some increasing criticisms as to the forum within which the international policy discussions were – and today still are – conducted, within the context of the OECD that is, in the Inclusive Framework on BEPS. And not, for example, within the context of the United Nations. Many countries, especially developing countries but also the emerging major economies, did not – and do not feel – sufficiently heard within the Inclusive Framework and their interests served.
Although matters were already playing out in the background during the upcoming of the BEPS initiative, pressures increased unabated in the period after the release of the BEPS package in 2015. Things started to focus even more emphatically on internet companies. The reason for this is that internet companies can service markets without physically establishing themselves there, while we divide profits for business taxation purposes to countries on the basis of those locations where they make their investments. That raised some questions. Shouldn’t online search engines, social media platforms and online marketplaces, and perhaps all large companies, also pay taxes in the countries where their services and products are marketed? In other words, shouldn’t it be the case that companies also pay their company taxes in the countries where these sell their products and services? And shouldn’t it be the case that these companies actually are to pay a certain minimum level of taxes?
The discussions led to the launch of the BEPS 2.0 project within the Inclusive Framework in 2019, addressing the challenges of the digitalization of the economy, with its two pillars: Pillar One and Pillar Two.<a href="#_ftn12" name="_ftnref12">[12]</a> Pillar One is mainly about the ‘where’ question, whereas Pillar Two is mainly about the ‘how much’ question. With the global political ‘two-pillar agreement’ in the autumn of 2021, Pillar One introduced the so-called “Amount A”, envisaging an allocation of parts of the profits of the biggest companies in the world to market jurisdictions. Pillar Two introduced the so-called “Global Minimum Tax” introducing a 15% global minimum tax level for big companies and top-up taxation where countries do not adhere to the new standard. Pillar Two has made it to the implementation stage in many countries since a year now, including in the EU and the Netherlands. Pillar One, however, is still awaiting some further concretization. Some say that the Pillar One project has come to a halt this summer. More on that later.
<h4>2.3 Unilateral measures and counter measures</h4>
In the meantime, a variety of countries aspiring additional tax revenue influxes have tried to tax those foreign tech companies that service their domestic markets without an establishing of a physical presence via various unilateral measures.<a href="#_ftn13" name="_ftnref13">[13]</a> These initiatives became known as the so-called digital services taxes: sales tax-like levies especially for internet companies and platform companies, which are neither VATs nor profit taxes and therefore do not conflict with, for example, European VAT rules and profit tax rules in international tax treaties. Alternatives explored by various countries and regions include the concept of the so-called digital permanent establishment: an online business presence variant of the traditional fixed permanent establishment. Some well-known examples of countries that have introduced such digital levies at some point in time are Canada, France and India.<a href="#_ftn14" name="_ftnref14">[14]</a>
A frequently heard notion in support of these initiatives is that the place of the product or service recipient actually also is a geographical source of income. The idea that users of internet services create value for the service providing internet companies became fashionable over time, as these companies collect all kinds of personal data and preferences from their users in return for the online services provided, that is, in order to commercially exploit the data accordingly collected: data mining. From a tax perspective, this then provides the angle for countries to tax such a value creation within their geographic territories. Other areas of concern, of course, involve privacy matters and calls for data protection rules.
Within the EU, in 2018, the European Commission published an EU Directive proposal for an EU-wide harmonized approach for a digital levy, amongst others, as part of the so-called Digital Tax Package.<a href="#_ftn15" name="_ftnref15">[15]</a> An important component of the EU’s ambitions, which I feel is sometimes overlooked, has been that the proceeds from such a digital levy would be added to the EU budget as a new own resource, in the same way as we are now seeing with the EU carbon tax (CBAM) and EU emission trading system.<a href="#_ftn16" name="_ftnref16">[16]</a> The idea would be to accordingly help co-finance NextGenerationEU, the ambitious EU investment plan that was launched some years ago. The 2018 EU proposal for a European digital levy was withdrawn from the EU agenda around a year later, reportedly because some EU member states were concerned about the impact of such a levy, and its underlying thinking, for their national industries, such as the automotive industry. After all, aren’t cars nowadays like mobile tablets – digital interfaces – with a possible consequence of a shift of tax revenue from production region Europe to sales region Asia, for instance, considering the newly devised thinking towards market-oriented taxes?
In the meantime, it proved to remain very difficult to get a proper definition of what exactly the digital economy is that we want to subject to taxation – because is it not the economy as such that is digitizing? – which makes a demarcation very difficult to come by from a tax point of view. To this day nobody really seems to know what those so-called ‘consumer facing businesses’ and ‘automated digital services’ exactly are, that we seek to subject to digital taxation. And thinking things through, shouldn’t it be the case that if a product and service recipient would indeed provide a source of income for the product and service provider that should be taxed at the customer location, shouldn’t such then equivalently apply to the economy as a whole regardless of the respective branch of industry. Wouldn’t we otherwise start tax-discriminating one over the other?
<h4>2.4 Two-Pillar Solution, Pillar One comes to a halt</h4>
And, of course, there was also political pressure, from the United States for example. The United States suffered from what the country sees as discriminatory digital levies targeted against U.S. tech companies. This is because, of course, the most successful internet companies are predominantly American companies, and taxation in user jurisdictions would imply some significant tax cost increases for these companies, and at best a shift of tax revenues from the United States to foreign jurisdictions, European countries for instance. In practice, matters involving the rise of digital services taxes came to be discussed in terms of a proliferation of such usurious levies.
The United States responded to the digital tax initiatives of these foreign countries that dared to introduce any such digital services taxes against U.S. businesses with retaliatory levies, duties and tariffs, and threats thereof, imposed on the imports of products from these countries. That led to what became known in the press as the ‘tax wars’ in the period 2018-2021.<a href="#_ftn17" name="_ftnref17">[17]</a> U.S. legislation allows for retaliatory charges against countries that – in American eyes – introduce discriminatory tariffs on U.S. companies.<a href="#_ftn18" name="_ftnref18">[18]</a> In the United States, we see an active role of the U.S. Trade Representative when it comes to putting some counter-pressure on these kinds of digital levies on the grounds of international free trade rules. Worthy of note, perhaps, is that a look at the case law of the Court of Justice, for example its judgments in the 2020 Vodafone and Tesco cases in the state aid domain, an area of EU law that deals with discriminatory taxes as well, the Court does not seem to have much juridical difficulties with sector-specific taxes imposed by the EU Member States.<a href="#_ftn19" name="_ftnref19">[19]</a>
In early 2021, the United States government proposed in the context of the Inclusive Framework to transpose the plans for taxes specifically for tech companies into a less industry-specific alternative. This resulted in a plan for a redistribution of company profits for corporate tax purposes for only the top-100 largest multinationals in the world, as an overlay to the existing system that is: “Amount A” as it has been called. That same year, the plan was politically endorsed, first by the G7 in the summer of 2021, then the G20, and later that year in the autumn of 2021 by almost all jurisdictions that participate in the Inclusive Framework, as part of the two-pillar solution, Pillar One that is, together with that other Pillar, Pillar Two, the 15% global minimum tax system. The two-pillar solution was there.
Part of the Pillar One agreement was the push back of the unilateral measures by countries to the benefit of the U.S., the so-called rollback workstream. Matters were laid down in the global political agreements of 2021 and also in a number of political agreements between the U.S. and those countries that in the meanwhile had taken tax measures unilaterally and which were now running into American countermeasures. However, the path from international political consensus to concretization proved to be unruly in the period thereafter. After various rounds of consultations, releases of discussion papers and some more consultations, the Inclusive Framework finally released a draft multilateral convention on Amount A in October 2023.<a href="#_ftn20" name="_ftnref20">[20]</a> The convention aims to adapt countries’ tax treaty networks with an apparent stroke of the pen to create a new reality of taxation in market jurisdictions. In reality, the treaty has taken on almost monstrously complex proportions.
Since then, things around the multilateral convention on Amount A turned rather quiet. A deadline formulated within the Inclusive Framework to open the convention for signature by the end of June 2024 was not met. The draft convention says that a critical mass of countries that host those in-scope companies to be affected by the new tax measures must ratify the treaty in order for it to enter into force. In effect, this means that nothing will happen as long as the United States does not participate. To get the treaty ratified in the United States, two-thirds of the U.S. Senate must agree to the treaty. It doesn’t look like that’s going to happen any time soon. There are various impact analyses circulating that basically all conclude that the Pillar One plan will cost American companies and the U.S. treasury a lot of money.<a href="#_ftn21" name="_ftnref21">[21]</a> And that’s not what the American voter seems to want.
The convention also states, and this is also part of the political agreement, that if it is not ratified by the end of 2024, countries may revive their initial plans for their unilateral measures. It seems that, although we have not yet seen that much concrete action in this area so far, a number of countries seem quite eager to do so. It should be noted that Canada has already recently taken actual steps by effectuating a digital services tax in the summer of 2024.<a href="#_ftn22" name="_ftnref22">[22]</a> This has immediately led to some pushback from the U.S. Trade Representative with reference to the free trade rules in place between the U.S. and Canada.
<h4>2.5 Towards a U.N. Convention on Tax Cooperation?</h4>
At the same time dissatisfaction has been growing in countries around the world with the OECD-hosted platform within which the international tax policy discussions have been organized and with the results to which this has led. Many developing countries and transition economies do not feel sufficiently heard within the Inclusive Framework and their interests to be insufficiently reflected in the outcomes of the talks.
While Pillar One seems to have come to a standstill the Pillar Two 15% minimum taxation system has degenerated into a set of rules of an almost mythical complexity. Pillar Two seems very hard if not impossible to administer, particularly for the developing world while the forecast of revenue increases grows slimmer by the day. Moreover, the idea exists that Pillar Two deprives the developing world of the opportunity to bind and retain investments to their territory through the use of tax incentives and tax holidays, a tax sovereignty argument basically. At the same time, one of the basic notions under Pillar Two is to put a floor to competition between countries via their fiscal systems and to achieve a global level playing field. And Pillar One, too, if such were to ever see the light of day, would be extremely complex to administer and would arguably yield only modest tax revenues for market jurisdictions, especially in comparison with the projected revenues from those withholding taxes and digital services taxes that had to be cut back as part of the 2021 global political agreement.
In recent years, the United Nations has been working on amendments to the UN Model Convention, the template convention that is, which focuses on the interests of developing countries and countries with economies in transition to a greater extent than, for example, the OECD Model Tax Convention does.<a href="#_ftn23" name="_ftnref23">[23]</a> One of the modifications to the U.N. Model Tax Convention concerns a withholding tax on digital services, Article 12B of the UN Model Tax Convention. In fact, this is some sort of a digital services tax however embedded in tax treaty law that – unlike a digital services tax – is intended to guarantee tax credit eligibility in the company’s country of residence. The provision now has been part of the UN Model Convention since 2021.
So far, the U.N. Model Tax Convention measure has not had that much of traction in terms of subsequent rounds of corresponding incorporation of equivalent provisions into the bilateral tax treaty networks of countries. Often those countries that have an interest in an Article 12B equivalent tax treaty provision – for instance those developing countries and transition economies where digital services are being provided by foreign tech companies that do not have established that much of a physical presence there – do not have a tax treaty in place with the relevant country where the tech companies involved are established. And if a tax treaty is in place, the latter mentioned country – typically the geopolitically and economically dominant party at the negotiation table – may not prove to be particularly keen on modifying the treaty as such a treaty modification would entail a surrendering of its existing taxing rights and ensuing tax revenues. Moreover, any moving towards taking measures unilaterally is politically rather difficult in the light of the existing political agreements on the rollback workstream in the global two-pillar agreement. And indeed, on top, technically, Article 12B also does not really seem to actually solve the demarcation issues mentioned above.
Fueled by the noted discontent in many countries on how events turned in the Inclusive Framework, particularly those in the Global South, the United Nations General Assembly adopted a resolution on a U.N. Framework Convention on International Tax Cooperation in December 2023.<a href="#_ftn24" name="_ftnref24">[24]</a> The envisaged convention should become a reality in the coming years. The central idea is that the United Nations should play a pivotal role in the development of international tax policy, including in the field of international taxation of profits, more or less rather than the Inclusive Framework that is. Notably, the EU and the US, amongst others, seem to consider such differently. The vote on this resolution showed the dividing line sharply. The countries of the EU and the US and a number of other of the most developed countries in the world voted against the resolution. Just about the rest of the world, from Brazil to India, which resulted in a large numerical majority, voted in favor.
Recently, in August 2024, in follow-up to this, a Terms of Reference developed within an ad hoc working group of the United Nations for the development of this convention was agreed upon. 110 countries voted in favor, the EU Member States abstained from voting and 8 countries – including the United States – voted against. Within the context of the United Nations Framework Convention project, a priority has been emerging when it comes to address the challenges of the digitalizing economy and to achieve a fairer taxation of company profits. All that seems to involve the pursuit of a more market-oriented approach toward company tax base division. There is some political tension there, and we will have to see what will come about here.
<h4>2.6 EU tax integration and Own Resources</h4>
And what about the EU? The ambitions of the EU institutions in the company tax dossier should not go unmentioned. For decades, there has been an ambition within the EU institutions to integrate the company taxation systems of the EU Member States into – eventually – an EU-wide company tax system.<a href="#_ftn25" name="_ftnref25">[25]</a> In 2011, this has led to a Commission proposal for an EU Directive for an EU company tax system that divides taxable base among the EU Member States by reference to a formula rather than based on the at arm’s length standard.<a href="#_ftn26" name="_ftnref26">[26]</a> The formula would include a component allocating tax base to the market jurisdiction. The 2011-proposal did not gain sufficient political traction, the EU Member States did not endorse it. With the tail wind momentum of the 2015 BEPS project, the 2011-proposal was relaunched by the Commission in 2016.<a href="#_ftn27" name="_ftnref27">[27]</a> Interestingly, the proposal included measures to support the European economy and its innovative capacity with tax incentives, including for instance a super deduction for R&D investment activities. The international aspects of the plans eventually transposed into the ATAD. The remaining parts of the 2016-relaunch failed again, for similar reasons as the 2011-proposal did 5 years earlier.
After the EU digital levy was removed from the agenda for the reasons we saw above, the Commission’s corporate tax integration ambitions for the internal market joined the momentum around the two-pillar agreement. This is reflected in the European Commission’s Communication on Business Taxation for the 21st Century of 18 May 2021.<a href="#_ftn28" name="_ftnref28">[28]</a> The EU later adopted the Pillar Two Global Minimum Tax as a part of this plan in December 2022, and Pillar Two has now been transposed by the EU Member States into their domestic tax legislation.<a href="#_ftn29" name="_ftnref29">[29]</a> As far as Pillar One is concerned, the intention has been, and indeed still is, to transpose the political outcomes into EU legislation some day. The idea is that a 15% rate will be applied to the envisaged Pillar One tax base influx into the internal market.<a href="#_ftn30" name="_ftnref30">[30]</a> The revenue stream is intended to flow into the EU budget as an own resource to help finance NextGenerationEU. My impression is that, although public information, this is not widely known.
The Commission’s company tax reform ambition culminated in the September 2023 Commission proposal for a Business in Europe: Framework for Income Taxation (BEFIT).<a href="#_ftn31" name="_ftnref31">[31]</a> This, yet again, is a Directive proposal based on the idea of an EU-wide harmonization of company taxes with ultimately, a distribution of tax base among the EU Member States by reference to a formula. Indeed, in the same way as the previous 2011 and 2016 proposals did, and again, among other things, to address the tax challenges raised by the digitalization of the economy via EU tax measures. And indeed, here too, the Directive proposal reveals rather clear language on the ambition of BEFIT as an own resource as well.
<h4>2.7 What’s next?</h4>
Now that Pillar One seems to have stagnated since this summer, the question arises as to what is coming next. What will the EU for instance do? Nothing concrete is known about that yet, but I would not be surprised if we will see the Commission start moving at some point in the not-too-distant future. Very recently, on 9 September 2024, former Italian Prime Minister and former EU Central Bank President Draghi published a report outlining an economic strategy for Europe.<a href="#_ftn32" name="_ftnref32">[32]</a> The message of the report is clear. The EU needs to be pulled out of the doldrums and catch up with its rivals or face ‘slow agony’, and that requires spending of a lot of public money the report says. Interestingly, the report also talks about tax incentives. This too is considered a necessary component to further an achieving of the major strategic policy goals in the area of, for example, the environment and the energy transition, but also when it comes to building innovative and technological strength to further the economic power and strategic independence and resilience of the EU Member States in concert. High-tech companies and their investments, in the EU of course, play a pivotal role in the pursuit of such aims.
It will be interesting to see how any of such envisaged tax incentives to further EU policy ambitions may be shaped. In the internal market State Aid rules apply,<a href="#_ftn33" name="_ftnref33">[33]</a> while the EU is also trying to impose a level playing field on third countries with its Foreign Subsidies Regulation.<a href="#_ftn34" name="_ftnref34">[34]</a> The EU Member States will need to mutually coordinate their incentive mechanisms not to fall foul under the State Aid rules, and that is something of relevance considering for instance the outcome of the recent Apple State Aid case. At the same time, the Global Minimum Tax does not – at least not for the time being – offer too much room to the EU Member States for any tax incentives and other subsidies. The central idea behind the global minimum tax system is that if countries fall below the 15% minimum rate, for instance because of any tax subsidy measures, other countries will proceed to levy additional taxes up to that level in order to neutralize the anticipated effects of the tax subsidy measures involved. Mitigating tax competition, namely, is one of the objectives of the Pillar Two system. This could mean that any of the envisaged EU tax incentives could be soaked-up and neutralized by some Pillar Two top-up tax mechanism somewhere in the world.
There too, we see some serious tensions. The United States and China already subsidize their business communities to quite a large extent and, as it seems, these countries do not seem to care too much about the alignment of their tax policies, or lack thereof, with any level playing field considerations underlying the Pillar Two Global Minimum Tax. The United States already operates a light-variant of the global minimum tax rules and the country considers that sufficient. The U.S. basically opposes both Pillar Two and Pillar One in its current forms, particularly where such would operate to the detriment of U.S. interests. China on the other hand is still holding its cards close to its chest, it seems. Other countries, too, seem to be wanting to continue to operationalize their company tax and fiscal systems to mutually compete for the investment location decisions of multinational business enterprises.
All this puts some serious pressure on the sustainability of the Pillar Two reform as well. With Pillar Two, we tell the world that we want to tackle tax competition. At the same time, when it comes down to it, we see countries focusing their efforts very much on securing measures to keep their countries competitive. We have already seen that the Pillar Two rules are being modified along the way to facilitate those tax credits of a design very similar to those provided in the United States to invest in the U.S. economy under the Inflation Reduction Act.
We see Draghi’s report calling to prevent the EU from putting itself at a disadvantage both competitively and geopolitically by not following suit. European business communities have been raising similar concerns, and increasingly call for action from the EU and its institutions to boost EU competitiveness via fiscal interventions. Once again, all is about innovation, R&D, technology and tech companies, about digitalization, artificial intelligence, and how all this may be cranked-up to promote European prosperity. The OECD reportedly is currently working on frameworks within which countries can or cannot compete with each other via their tax systems without falling foul under the Pillar Two global minimum tax rules. Depending on the room for maneuver that may accordingly be created, the effectiveness of Pillar Two may very well be expected to be further diluted.
And what about the developing world? We see countries looking for possibilities of unilaterally resorting back to digital services taxes, the withholding tax variant in the U.N. Model Tax Convention, digital permanent establishments, or even a unilateral implementation of Pillar One – for example in relation to countries with which no bilateral tax treaty has been put in place. Digital services taxes and withholding taxes increase the cost of doing business, considering their gross base and tax cascading implications. Such, although hard to quantify, may have detrimental implications for local investment climates and ensuing job creation and welfare implications. The Pillar One rulebook is very complex and, if ever implemented, will result in administrative costs and burdens for companies and governments. And we still have not resolved the question as to how to exactly tax-ring-fence the digital part from the rest of the economy. We will have to see whether the U.N. Framework Convention initiative will turn out to be successful. And all this, aside any tax-incidence implications. Although hard to quantify, again, tax imposts on companies tend to be passed on to immobile consumers and (blue collar) workers.
Whichever route it will be, the battle will be uphill it seems. Every transformation of dividing the tax pie from investment jurisdictions to market jurisdictions will inevitably bring winners and losers. Both in terms of revenues and tax burdens. Every minimum rate standard introduced will inevitably have sovereignty implications. We have already seen that, for example, the United States does not seem to shy away from taking counter measures to protect the interests of American business against fiscal interventions from abroad. Worthy of note is the latest development in this regard, the letter from the US Congress to the OECD of 17 September 2024 on the Pillar Two initiative and particularly its extraterritorial top-up tax implications to the detriment of U.S. business interests. The letter contains the following lines: “We write today to renew our objections and express support for a lawsuit filed by the American Free Enterprise Chamber of Commerce in the Belgian Constitutional Court challenging the undertaxed profits rule (“UTPR”), which would surrender U.S. tax sovereignty, allowing unelected foreign bureaucrats to dictate tax policy, and help foreign governments arbitrarily extract hundreds of billions of dollars from the U.S. economy,” whereas “[t]he U.S. Congress remains opposed to the unfair and unworkable OECD global tax deal. Should foreign governments seek to target Americans through the UTPR or other mechanisms in the OECD global tax deal, we will be forced to pursue countermeasures”<a href="#_ftn35" name="_ftnref35">[35]</a> That doesn’t sound too promising.
<h4>3) Final remarks; equilibrium through competition</h4>
The dynamics are fascinating. We tell each other and the world that we want to address the tax challenges of digitization by taxing companies on their investment returns in the market jurisdiction rather than in the investment jurisdiction, Pillar One. Because it increases revenues for the first-mentioned jurisdiction. At the same time, we do not actually seem to want to tax these companies in the market jurisdiction, at least not in those developed countries where the biggest multinational firms reside, but in the investment jurisdiction. Because it would otherwise cost the latter-mentioned jurisdiction its revenues. So, the first pillar of the two-pillar agreement has come to a halt. We also tell each other and the world that we do not want to mutually fiscally compete for the investment location decision of multinational companies, Pillar Two. At the same time, we nevertheless, actually, do seem to want to mutually fiscally compete for the investment location decisions of companies, regardless. Obviously, we cannot have both. So, what will happen at the end of the day with the second pillar of the two-pillar agreement? Time will tell.
This raises the question whether the two-pillar solution will bring us the sustainable international company tax system we pursue and envisage. My feeling is that it will not. My assessment is that we are in for a messy time, of relentless controversy, red tape, multiple taxation, legal proceedings, fiscal fragmentation, and ongoing discussions on how to best move forward. In 2020, I wrote in World Tax Journal that perhaps we should consider abandoning the narrative of seeking a tax-equilibrium through coordination.<a href="#_ftn36" name="_ftnref36">[36]</a> In that paper I wrote that, perhaps, we should start considering thinking in terms of seeking a tax-equilibrium through competition instead, as this is how the world seems to work. I think that such an equilibrium through competition should be feasible. The route towards such would be a tax model that allocates consolidated excess profits to market countries. Preferably coordinated of course and otherwise via self-centered driven regional or unilateral action. If a country or region were to start moving into such a direction, such would attract investment. The intuition here is that companies would respond. Upon such a move there will be not much left for any other countries or regions to do but follow suit. We have seen a similar transformation in U.S. state taxation.<a href="#_ftn37" name="_ftnref37">[37]</a> Any step into such a direction at the international tax stage would indeed require some political courage and perseverance. And perhaps the recognition that the two-pillar solution may actually be degenerating into a two-pillar problem. We’ll see.
 
<a href="#_ftnref1" name="_ftn1">[1]</a> See <a href="https://curia.europa.eu/juris/document/document.jsf?docid=289923&doclang=EN" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://curia.europa.eu/juris/document/document.jsf?docid=289923&doclang=EN</a>.
<a href="#_ftnref2" name="_ftn2">[2]</a> See <a href="https://www.oecd.org/en/topics/sub-issues/reallocation-of-taxing-rights-to-market-jurisdictions/multilateral-convention-to-implement-amount-a-of-pillar-one.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.oecd.org/en/topics/sub-issues/reallocation-of-taxing-rights-to-market-jurisdictions/multilateral-convention-to-implement-amount-a-of-pillar-one.html</a>.
<a href="#_ftnref3" name="_ftn3">[3]</a> See <a href="https://www.oecd.org/en/topics/policy-issues/base-erosion-and-profit-shifting-beps.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.oecd.org/en/topics/policy-issues/base-erosion-and-profit-shifting-beps.html</a>.
<a href="#_ftnref4" name="_ftn4">[4]</a> See <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32016L1164" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32016L1164</a> and <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2017.144.01.0001.01.ENG" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2017.144.01.0001.01.ENG</a>.
<a href="#_ftnref5" name="_ftn5">[5]</a> See <a href="https://www.eerstekamer.nl/wetsvoorstel/35933_wet_tegengaan_mismatches_bij" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.eerstekamer.nl/wetsvoorstel/35933_wet_tegengaan_mismatches_bij</a>.
<a href="#_ftnref6" name="_ftn6">[6]</a> See <a href="https://www.consilium.europa.eu/en/policies/eu-list-of-non-cooperative-jurisdictions/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.consilium.europa.eu/en/policies/eu-list-of-non-cooperative-jurisdictions/</a>.
<a href="#_ftnref7" name="_ftn7">[7]</a> See <a href="https://www.oecd.org/en/topics/policy-issues/base-erosion-and-profit-shifting-beps.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.oecd.org/en/topics/policy-issues/base-erosion-and-profit-shifting-beps.html</a>.
<a href="#_ftnref8" name="_ftn8">[8]</a> See <a href="https://taxation-customs.ec.europa.eu/taxation/business-taxation/transfer-pricing-eu/proposal-harmonised-transfer-pricing-rules-eu_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://taxation-customs.ec.europa.eu/taxation/business-taxation/transfer-pricing-eu/proposal-harmonised-transfer-pricing-rules-eu_en</a>.
<a href="#_ftnref9" name="_ftn9">[9]</a> See <a href="https://taxation-customs.ec.europa.eu/taxation/tax-co-operation-and-control/administrative-co-operation-and-mutual-assistance/enhanced-administrative-cooperation-field-direct-taxation_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://taxation-customs.ec.europa.eu/taxation/tax-co-operation-and-control/administrative-co-operation-and-mutual-assistance/enhanced-administrative-cooperation-field-direct-taxation_en</a>.
<a href="#_ftnref10" name="_ftn10">[10]</a> See <a href="https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/public-country-country-reporting_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/public-country-country-reporting_en</a>.
<a href="#_ftnref11" name="_ftn11">[11]</a> See <a href="https://www.oecd.org/en/publications/addressing-the-tax-challenges-of-the-digital-economy-action-1-2015-final-report_9789264241046-en.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.oecd.org/en/publications/addressing-the-tax-challenges-of-the-digital-economy-action-1-2015-final-report_9789264241046-en.html</a>.
<a href="#_ftnref12" name="_ftn12">[12]</a> See <a href="https://www.oecd.org/en/about/news/press-releases/2023/07/138-countries-and-jurisdictions-agree-historic-milestone-to-implement-global-tax-deal.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.oecd.org/en/about/news/press-releases/2023/07/138-countries-and-jurisdictions-agree-historic-milestone-to-implement-global-tax-deal.html</a>.
<a href="#_ftnref13" name="_ftn13">[13]</a> See <a href="https://taxfoundation.org/blog/oecd-beps-digital-tax/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://taxfoundation.org/blog/oecd-beps-digital-tax/</a>.
<a href="#_ftnref14" name="_ftn14">[14]</a> See <a href="https://taxfoundation.org/research/all/global/digital-taxation/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://taxfoundation.org/research/all/global/digital-taxation/</a>.
<a href="#_ftnref15" name="_ftn15">[15]</a> See <a href="https://joint-research-centre.ec.europa.eu/jrc-news-and-updates/taxation-digital-economy-underpinned-science-2018-03-21_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://joint-research-centre.ec.europa.eu/jrc-news-and-updates/taxation-digital-economy-underpinned-science-2018-03-21_en</a>.
<a href="#_ftnref16" name="_ftn16">[16]</a> See <a href="https://commission.europa.eu/strategy-and-policy/eu-budget/long-term-eu-budget/2021-2027/revenue/next-generation-eu-own-resources_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://commission.europa.eu/strategy-and-policy/eu-budget/long-term-eu-budget/2021-2027/revenue/next-generation-eu-own-resources_en</a>.
<a href="#_ftnref17" name="_ftn17">[17]</a> See <a href="https://news.bloombergtax.com/daily-tax-report/digital-services-tax-why-the-world-is-watching" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://news.bloombergtax.com/daily-tax-report/digital-services-tax-why-the-world-is-watching</a>.
<a href="#_ftnref18" name="_ftn18">[18]</a> See <a href="https://ustr.gov/issue-areas/enforcement/section-301-investigations/section-301-digital-services-taxes" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://ustr.gov/issue-areas/enforcement/section-301-investigations/section-301-digital-services-taxes</a>.
<a href="#_ftnref19" name="_ftn19">[19]</a> See <a href="https://curia.europa.eu/juris/liste.jsf?num=C-75/18" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://curia.europa.eu/juris/liste.jsf?num=C-75/18</a> and <a href="https://curia.europa.eu/juris/liste.jsf?num=C-323/18&language=EN" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://curia.europa.eu/juris/liste.jsf?num=C-323/18&language=EN</a>.
<a href="#_ftnref20" name="_ftn20">[20]</a> See <a href="https://www.oecd.org/en/topics/sub-issues/reallocation-of-taxing-rights-to-market-jurisdictions/multilateral-convention-to-implement-amount-a-of-pillar-one.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.oecd.org/en/topics/sub-issues/reallocation-of-taxing-rights-to-market-jurisdictions/multilateral-convention-to-implement-amount-a-of-pillar-one.html</a>.
<a href="#_ftnref21" name="_ftn21">[21]</a> See <a href="https://crsreports.congress.gov/product/pdf/R/R47988" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://crsreports.congress.gov/product/pdf/R/R47988</a>.
<a href="#_ftnref22" name="_ftn22">[22]</a> See <a href="https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/digital-services-tax.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.canada.ca/en/services/taxes/excise-taxes-duties-and-levies/digital-services-tax.html</a>.
<a href="#_ftnref23" name="_ftn23">[23]</a> See <a href="https://www.un.org/esa/ffd/wp-content/uploads/2018/05/MDT_2017.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.un.org/esa/ffd/wp-content/uploads/2018/05/MDT_2017.pdf</a>.
<a href="#_ftnref24" name="_ftn24">[24]</a> See <a href="https://financing.desa.un.org/post-news/ad-hoc-committee-draft-terms-reference-united-nations-framework-convention-international" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://financing.desa.un.org/post-news/ad-hoc-committee-draft-terms-reference-united-nations-framework-convention-international</a>.
<a href="#_ftnref25" name="_ftn25">[25]</a> See, e.g., <a href="https://taxation-customs.ec.europa.eu/towards-internal-market-without-corporate-tax-obstacles_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://taxation-customs.ec.europa.eu/towards-internal-market-without-corporate-tax-obstacles_en</a>.
<a href="#_ftnref26" name="_ftn26">[26]</a> See <a href="https://eur-lex.europa.eu/EN/legal-content/summary/common-consolidated-corporate-tax-base.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://eur-lex.europa.eu/EN/legal-content/summary/common-consolidated-corporate-tax-base.html</a>.
<a href="#_ftnref27" name="_ftn27">[27]</a> See <a href="https://ec.europa.eu/commission/presscorner/api/files/document/print/en/ip_16_3471/IP_16_3471_EN.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://ec.europa.eu/commission/presscorner/api/files/document/print/en/ip_16_3471/IP_16_3471_EN.pdf</a>.
<a href="#_ftnref28" name="_ftn28">[28]</a> See <a href="https://taxation-customs.ec.europa.eu/communication-business-taxation-21st-century_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://taxation-customs.ec.europa.eu/communication-business-taxation-21st-century_en</a>.
<a href="#_ftnref29" name="_ftn29">[29]</a> See <a href="https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:32022L2523" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX:32022L2523</a>.
<a href="#_ftnref30" name="_ftn30">[30]</a> See <a href="https://commission.europa.eu/strategy-and-policy/eu-budget/long-term-eu-budget/2021-2027/revenue/next-generation-eu-own-resources_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://commission.europa.eu/strategy-and-policy/eu-budget/long-term-eu-budget/2021-2027/revenue/next-generation-eu-own-resources_en</a>.
<a href="#_ftnref31" name="_ftn31">[31]</a> See <a href="https://taxation-customs.ec.europa.eu/taxation/business-taxation/business-europe-framework-income-taxation-befit_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://taxation-customs.ec.europa.eu/taxation/business-taxation/business-europe-framework-income-taxation-befit_en</a>.
<a href="#_ftnref32" name="_ftn32">[32]</a> See <a href="https://commission.europa.eu/topics/strengthening-european-competitiveness/eu-competitiveness-looking-ahead_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://commission.europa.eu/topics/strengthening-european-competitiveness/eu-competitiveness-looking-ahead_en</a>.
<a href="#_ftnref33" name="_ftn33">[33]</a> See <a href="https://competition-policy.ec.europa.eu/state-aid_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://competition-policy.ec.europa.eu/state-aid_en</a>.
<a href="#_ftnref34" name="_ftn34">[34]</a> See <a href="https://competition-policy.ec.europa.eu/foreign-subsidies-regulation_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://competition-policy.ec.europa.eu/foreign-subsidies-regulation_en</a>.
<a href="#_ftnref35" name="_ftn35">[35]</a> See <a href="https://waysandmeans.house.gov/wp-content/uploads/2024/09/U.S.-House-Letter-to-OECD.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://waysandmeans.house.gov/wp-content/uploads/2024/09/U.S.-House-Letter-to-OECD.pdf</a>.
<a href="#_ftnref36" name="_ftn36">[36]</a> See <a href="https://www.econbiz.de/Record/on-the-future-of-business-income-taxation-in-europe-wilde-maarten-floris/10012617884" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.econbiz.de/Record/on-the-future-of-business-income-taxation-in-europe-wilde-maarten-floris/10012617884</a>.
<a href="#_ftnref37" name="_ftn37">[37]</a> See <a href="https://taxadmin.org/wp-content/uploads/resources/tax_rates/apport.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://taxadmin.org/wp-content/uploads/resources/tax_rates/apport.pdf</a>.
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/09/24/taxing-digital-whats-next/feed/</wfw:commentRss>
<slash:comments>1</slash:comments>
</item>
<item>
<title>India’s Telangana High Court on The Writ Challenge Against GAAR Invocation</title>
<link>https://kluwertaxblog.com/2024/09/20/indias-telangana-high-court-on-the-writ-challenge-against-gaar-invocation/</link>
<comments>https://kluwertaxblog.com/2024/09/20/indias-telangana-high-court-on-the-writ-challenge-against-gaar-invocation/#comments</comments>
<dc:creator><![CDATA[Mukesh Butani (Managing Partner at BMR Legal) and Kruthika Prakash (Advocate at BMR Legal)]]></dc:creator>
<pubDate>Fri, 20 Sep 2024 09:52:54 +0000</pubDate>
<category><![CDATA[GAAR]]></category>
<category><![CDATA[SAAR]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19724</guid>
<description><![CDATA[Introduction The Indian GAAR (Chapter X-A of the Income-tax Act, 1961 [‘the Act’])) was introduced in the Finance Act 2012 and came into effect on April 1, 2017. Prior to the introduction of GAAR, Indian courts have dealt with tax avoidance cases and have developed principals, also referred to as judicial doctrine to combat arrangements... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/09/20/indias-telangana-high-court-on-the-writ-challenge-against-gaar-invocation/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[<h4>Introduction</h4>
The Indian GAAR (Chapter X-A of the Income-tax Act, 1961 [‘the Act’])) was introduced in the Finance Act 2012 and came into effect on April 1, 2017. Prior to the introduction of GAAR, Indian courts have dealt with tax avoidance cases and have developed principals, also referred to as judicial doctrine to combat arrangements that were entered into with the intention to avoid taxation (JAAR: Judicial Anti-Avoidance Rules)<a href="#_ftn1" name="_ftnref1">[1]</a>. Even prior to the celebrated Vodafone case, Indian Courts have dealt with the vexed question of tax-avoidance in a catena of judgements articulating various principles, including ‘substance over form’, ‘lifting the corporate veil’, tax evasive structures opposed to public policy<a href="#_ftn2" name="_ftnref2">[2]</a>. Equally, with successive judgements evolved a set of legislative measures to introduce a host of Specific Anti-Avoidance measures in the law<a href="#_ftn3" name="_ftnref3">[3]</a>.
There have been very few GAAR cases so far in India.<a href="#_ftn4" name="_ftnref4">[4]</a> In these case law, GAAR claims have been rejected on procedural<a href="#_ftn5" name="_ftnref5">[5]</a> and revenue threshold grounds<a href="#_ftn6" name="_ftnref6">[6]</a>. However, recently India’s Telangana High Court—in an important decision—decided on a writ challenge against the show-cause notice that invoked GAAR proceedings<a href="#_ftn7" name="_ftnref7">[7]</a>. The Court upheld the invocation of GAAR and its overriding effect over Specific Anti-Avoidance Rules (SAAR). This paper is a critical analysis of the decision.
 
<h4>Recapitulation of the Facts & Issue</h4>
<img loading="lazy" class="size-full wp-image-19737 aligncenter" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2024/09/Screenshot-2024-09-20-114204.png" alt="" width="222" height="159" />
The assessee held shares in Ramky Estate and Farms Limited [‘REFL’] valued at Rs 115 per share. REFL issued bonus shares to its shareholders in the ratio of 5:1; as a result, the face value of each share got reduced to 1/6th of its value. After a short period of 10 days, the assessee sold around 5 lakhs shares to another firm that resulted in a business loss of INR 462 crores. The assessee set-off this short term capital loss against a long term capital gain. Furthermore, the ledger of REFL reflected a writing off of an inter corporate deposit to the tune of INR 288.50 crores.
The Revenue treated this transaction as an impermissible avoidance arrangement<a href="#_ftn8" name="_ftnref8">[8]</a> contending that the motive of the transactions was to claim business loss against taxable gains. As a result, a show-cause notice was issued to the assessee initiating GAAR proceedings under section 144BA of the Act.
The ground for the writ was that the initiation and continuation of the GAAR proceedings was illegal, arbitrary and ultra vires the Act, lacking in subject jurisdiction.
 
<h4>Arguments of the Assessee</h4>
<ul>
<li>Counsel for the assessee argued that the transactions in question are covered under Chapter X of the Act that constitute the SAAR<a href="#_ftn9" name="_ftnref9">[9]</a>.</li>
<li>Section 94(8) of the Act was specifically incorporated as an anti-avoidance provision in relation to bonus stripping<a href="#_ftn10" name="_ftnref10">[10]</a> with respect to the purchase and sale of units of mutual funds.</li>
<li>Counsel argued that section 94(8) of the Act never had the intention of including shares and security within the scope of bonus stripping; if the Parliament would have intended the same, they would have included it within the section.</li>
<li>Hence, as SAAR was applicable to the present case, the assessee argued that GAAR was not applicable. Reliance was placed on the Shome Committee report and the principal of harmonious interpretation.</li>
</ul>
 
<h4>Arguments of the Revenue</h4>
<ul>
<li>The Revenue argued that there was no patent illegality on the grounds of jurisdiction to entertain the writ.</li>
<li>Further, it argued that GAAR proceedings under Chapter X-A of the Act were invoked as the transactions lacked business purpose and commercial substance.</li>
</ul>
 
<h4>Decision of the High Court</h4>
A brief summary of the decision of the High Court is as follows:
First, the Court noted that generally where the general provision of law is in force, the special provision is subsequently enacted and in such a case the special would supersede the general law. However, in the present case, it was the opposite and hence GAAR prevails<a href="#_ftn11" name="_ftnref11">[11]</a>. It is pertinent to note that the Court has not gone into the merits on the application of GAAR. It has answered a limited question on the application of GAAR in view of the non-obstante clause.
Secondly, the Court highlighted that Chapter X-A begins with a non-obstante clause; thus, chapter X-A of the Act gets an overriding effect over and above anything under the Act<a href="#_ftn12" name="_ftnref12">[12]</a>. Further, it looked at section 100 of the Act<a href="#_ftn13" name="_ftnref13">[13]</a> to discern the legislative intention that the GAAR provisions should act as an all-encompassing safety net<a href="#_ftn14" name="_ftnref14">[14]</a>.
Thirdly, it held that the assessee’s assertion that section 94(8) of Act is inapplicable for shares contradicts the argument that SAAR should prevail over GAAR<a href="#_ftn15" name="_ftnref15">[15]</a>.
Thereafter, it rejected the Shome Committee report<a href="#_ftn16" name="_ftnref16">[16]</a> (regarding prevalence of SAAR over GAAR) as it referred to international agreements, not domestic cases<a href="#_ftn17" name="_ftnref17">[17]</a>. On the contrary, it referred to the CBDT circular<a href="#_ftn18" name="_ftnref18">[18]</a> that clarifies that both GAAR and SAAR would be applied depending upon the specifics of each case<a href="#_ftn19" name="_ftnref19">[19]</a>.
Lastly, it noted that JAAR placed the burden of proof on the revenue; on the contrary, as per section 96(2) of the Act, the burden is on the taxpayer<a href="#_ftn20" name="_ftnref20">[20]</a>.
Furthermore, the court held that the Revenue had persuasively shown clear and convincing evidence to suggest that the entire arrangement constituted an impermissible avoidance arrangement<a href="#_ftn21" name="_ftnref21">[21]</a> and that the Petitioner hadn’t provided persuasive proof to counter the claim<a href="#_ftn22" name="_ftnref22">[22]</a>.
 
<h4>Analysis</h4>
As Mr. Pramod Kumar (Former President, Income-tax Appellate Tribunal) puts it, this was not a simple case of bonus stripping but a complex-web of tax driven transactions<a href="#_ftn23" name="_ftnref23">[23]</a>—moreover, not a case of units of a mutual fund—hence, the decision that SAAR doesn’t cover the case appears good in law. Furthermore, we are of the view that there was no patent illegality to sustain the writ.
Assuming SAAR applies, the language of the statute (Chapter X-A of the Act) is such that GAAR will override SAAR for reasons discussed below.
In the authoritative work on Interpretation of Statutes by Justice G.P. Singh, he enunciates (based on case law<a href="#_ftn24" name="_ftnref24">[24]</a>) that where the intention to supersede the special law is clearly evinced, the later general law will prevail over the special law.<a href="#_ftn25" name="_ftnref25">[25]</a> The non-obstante clause in the later general law can be given overriding effect over the special law when there is a clear inconsistency between the two laws<a href="#_ftn26" name="_ftnref26">[26]</a>. In the present case, the presence of the ‘non obstante’ clause in Chapter X-A of Act, which is in the later law, indicates that the GAAR will override SAAR (considering the inconsistency between GAAR and SAAR), assuming SAAR is applicable. GAAR does not preclude bonus stripping in case of shares from the scope of anti-avoidance measures, but section 94(8) of the Act is argued to preclude it.
In the view of the authors, neither SAAR (section 94(8) of the Act) nor GAAR precludes bonus stripping in relation to shares from the scope of GAAR. In fact, there is nothing in section 94(8) of the Act or the relevant Explanatory Memorandum precluding bonus stripping of shares from the scope of anti-avoidance measures. The absence of it only means that there is no specific provision to cover it. Its preclusion from GAAR cannot be assumed or inferred.
However, the argument of the assessee in this case has ignited a debate on GAAR v. SAAR in India. As a matter of fact, the Shome Committee constituted by the Ministry of Finance to give recommendations on the implementation of GAAR specifically recommended that if SAAR provision is applicable, GAAR should not apply<a href="#_ftn27" name="_ftnref27">[27]</a>. Regrettably, the recommendation of the expert committee did not find its way in the final law, neither was this aspect clarified by way of an administrative direction.
The issue of GAAR v. SAAR has divergent rulings and practices across the world<a href="#_ftn28" name="_ftnref28">[28]</a>. In Canada, where the Revenue Authorities have challenged taxpayers’ transactions on both the basis of SAAR and GAAR, the Courts have generally applied the more specific SAAR<a href="#_ftn29" name="_ftnref29">[29]</a>. However, in a recent ruling in Deans Knight<a href="#_ftn30" name="_ftnref30">[30]</a>, the Supreme Court of Canada applied GAAR where SAAR existed<a href="#_ftn31" name="_ftnref31">[31]</a>. The Court clarified that the GAAR applies not only to unforeseen tax strategies but also to tax strategies for which Parliament has already drafted provisions<a href="#_ftn32" name="_ftnref32">[32]</a>. This indicates an increasing judicial trend towards the application of GAAR over SAAR. In China, the China State Administration of Taxation has reaffirmed that only when tax benefits arising from arrangements cannot be eliminated through the application of SAAR that the tax authorities can initiate GAAR investigation<a href="#_ftn33" name="_ftnref33">[33]</a>. In Poland, GAAR will not apply if SAAR applies<a href="#_ftn34" name="_ftnref34">[34]</a>. In Germany if SAAR applies, GAAR cannot be applied cumulatively<a href="#_ftn35" name="_ftnref35">[35]</a>.
In the Statement of the Indian Finance Minister dated January 14, 2013, he had clarified<a href="#_ftn36" name="_ftnref36">[36]</a> that where both GAAR and SAAR are in force only one will be applicable and guidelines will be made in this regard. This in the opinion of the authors was the middle path that the then Finance Minister decided to take, given the expert committee’s recommendations. Further, no such guidelines have been released by the Department of Revenue and it has been left to judicial interpretation. From the principles discussed above, it is our view that the application of GAAR or SAAR in a domestic context (as per Indian law) should clearly be decided on a case-by-case basis based on the language, parliament’s intent and the timing of the statutory provisions.
It will be interesting to see how the Indian courts may interpret GAAR v. SAAR in an international context. The CBDT circular<a href="#_ftn37" name="_ftnref37">[37]</a> discussed above mentions that anti-abuse rules in tax treaties may not be sufficient to address tax avoidance strategies and the domestic anti-avoidance rules become applicable. This guidance suggests that it was the intention of the law makers to retain an empowerment to invoke GAAR in specified situations.
It is our view that unless the tax treaties specifically allow the overriding of domestic anti-avoidance provisions over the tax treaties—as in the cases of India’s tax treaties with Bhutan, Kenya and Malaysia—GAAR should not apply if the case satisfies the Principal Purpose Test/Limitation of Benefits in the tax treaty.
In line with this view, in an excellent recent decision by the Delhi High Court in Tiger Global,<a href="#_ftn38" name="_ftnref38">[38]</a> the Court denied the application of GAAR where the treaty grandfathered acquisitions prior to a specified period thereby holding that GAAR would not override the tax treaty. In summary, there clearly seems to be divergence in the treatment of GAAR v. SAAR vis-à-vis international transactions as opposed to domestic transactions. In our view, this reasoning is in view of the application of the principle of pacta sunt servanda in the international context. But, GAAR v. SAAR in a domestic context would depend—as discussed above—on a case by case basis.
 
<h4>Conclusion</h4>
The decision of the Telangana High Court has been challenged before the Supreme Court. It will be interesting to see what the Supreme Court decides, if it grants leave (allows) in the Special Leave Petition.
 
<a href="#_ftnref1" name="_ftn1">[1]</a> Vodafone International Holdings B.V. v. Union of India (2012) 17 taxmann.com 202.
<a href="#_ftnref2" name="_ftn2">[2]</a> Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1; 19 TC 490; CIT v. Sri Meenakshi Mills Ltd. Madurai, AIR 1967 SC 819 and McDowell & Co. Ltd. v. CTO 1985 3 SCC 230.
<a href="#_ftnref3" name="_ftn3">[3]</a> The Indian Income-tax Act, 1961 (the act) contains several SAAR provisions. One example is the deemed dividend concept (encapsulated in section 2(22)(e) of the Act) that categorises payments of loans or lending assets to a shareholder who has a substantial interest in the company as deemed dividend. In the present case, the assessee argues that section 94(8) applies, which is the SAAR in question. Another example is section 94 of the Act, which is an example of dividend stripping.
<a href="#_ftnref4" name="_ftn4">[4]</a> Butani, Mukesh and Jain, Tarun, General Anti Avoidance Rules in India: The story so far! (December 26, 2023). British Tax Review (2023 Issue 5), pp. 695-703.
<a href="#_ftnref5" name="_ftn5">[5]</a> Reverse Age Health Services PTE Ltd v. Deputy Commissioner of Income Tax ITA No.1867/DEL/2022 dated 17 February 2023.
<a href="#_ftnref6" name="_ftn6">[6]</a> Leapfrog Financial Inclusion (II) Ltd v Assistant Commissioner of Income Tax (Leapfrog) ITA No.365-366/DEL/2023 dated 11 August 2023.
<a href="#_ftnref7" name="_ftn7">[7]</a> Ayodhya Rami Reddy Alla v. PCIT W.P. Nos. 46510 and 46467 of 2022 (Telangana High Court).
<a href="#_ftnref8" name="_ftn8">[8]</a> As per the Indian GAAR (Chapter X-A of the Act) an impermissible avoidance arrangement (‘IAA’) could be caught within the tax net. An IAA (defined in section 96 of the Act) means an arrangement the main purpose of which is to obtain a tax benefit and (A) lacks commercial substance; or (B) not in arm’s length transaction; or (C) results in a direct or indirect abuse of the provisions of the Act; or (D) is carried out in a manner which is not bona fide.
<a href="#_ftnref9" name="_ftn9">[9]</a> “SAAR targets specific arrangements of tax avoidance by laying down the conditions/situations where SAAR may be invoked.” Hemant Sharma and Dr. TP Ghule, General Anti Avoidance Rules v. Specific Anti Avoidance Rules (2013) 36 taxmann.com 38. In the present case, the assessee argues that section 94(8) applies, which is the SAAR in question.
<a href="#_ftnref10" name="_ftn10">[10]</a> Bonus stripping involves buying shares/unit of a company just before issuance the bonus shares/units and selling it shortly with an intent to incur losses. The relevant section 94(8) of the Act, which deals with bonus stripping in relation to units of mutual funds, was introduced with effect from April 1, 2005. The Explanatory Memorandum does not mention anything about bonus stripping in relation to shares. In the view of the authors, the absence of it cannot be argued to mean that the intention of the Parliament was to exclude it from the scope of anti-avoidance tax measures. It just means that there isn’t any specific provision to cover it.
<a href="#_ftnref11" name="_ftn11">[11]</a> Paragraph 27 of Ramky.
<a href="#_ftnref12" name="_ftn12">[12]</a> Paragraph 28 of Ramky.
<a href="#_ftnref13" name="_ftn13">[13]</a> Section 100 of the Act clarifies that Chapter X-A is applicable in addition to or as a substitute for any other existing method of determining tax liability.
<a href="#_ftnref14" name="_ftn14">[14]</a> Paragraph 30 of Ramky.
<a href="#_ftnref15" name="_ftn15">[15]</a> Paragraph 31 of Ramky.
<a href="#_ftnref16" name="_ftn16">[16]</a> In 2012, the Indian Government constituted the Shome Committee headed by tax expert Mr. Parthasarathi Shome. The committee sought to address investor’s concerns about GAAR.
<a href="#_ftnref17" name="_ftn17">[17]</a> Paragraph 33 of Ramky.
<a href="#_ftnref18" name="_ftn18">[18]</a> Circular No 7/2017.
<a href="#_ftnref19" name="_ftn19">[19]</a> Paragraph 35 of Ramky.
<a href="#_ftnref20" name="_ftn20">[20]</a> Paragraph 37 of Ramky.
<a href="#_ftnref21" name="_ftn21">[21]</a> As per the Indian GAAR an impermissible avoidance arrangement (‘IAA’) means an arrangement the main purpose of which is to obtain a tax benefit and (1) lacks commercial substance; or (2) not in arm’s length transaction; or (3) results in a direct or indirect abuse of the provisions of the Act; or (4) is carried out in a manner which is not bona fide.
<a href="#_ftnref22" name="_ftn22">[22]</a> Paragraphs 37 and 42 of Ramky.
<a href="#_ftnref23" name="_ftn23">[23]</a> <a href="https://www.taxsutra.com/dt/experts-corner/jaar-gaar-and-saar-coexistence-without-overlapping" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.taxsutra.com/dt/experts-corner/jaar-gaar-and-saar-coexistence-without-overlapping</a> Last seen on June 27, 2024.
<a href="#_ftnref24" name="_ftn24">[24]</a> Infra note 26.
<a href="#_ftnref25" name="_ftn25">[25]</a> Justice G.P. Singh, Principles of Statutory Interpretation, 12th Edn. 2010 at page 685.
<a href="#_ftnref26" name="_ftn26">[26]</a> R.S. Raghunath v. State of Karnataka AIR 1992 SC 81.
<a href="#_ftnref27" name="_ftn27">[27]</a> Relevant para 3.19 of the Shome Committee report: The Committee recommends that where SAAR is applicable to a particular aspect/element, then GAAR shall not be invoked to look into that aspect/element.
<a href="#_ftnref28" name="_ftn28">[28]</a> <a href="https://www.pwc.com/gx/en/tax/newsletters/tax-controversy-dispute-resolution/assets/pwc-TCDR%20Insights-GAAR-recent-developments.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.pwc.com/gx/en/tax/newsletters/tax-controversy-dispute-resolution/assets/pwc-TCDR%20Insights-GAAR-recent-developments.pdf</a> Last seen on August 8, 2024.
<a href="#_ftnref29" name="_ftn29">[29]</a> <a href="https://taxofindia.wordpress.com/2019/03/12/tax-court-of-canada-invokes-saar-tax-reduction-main-reason-for-appellants-separate/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://taxofindia.wordpress.com/2019/03/12/tax-court-of-canada-invokes-saar-tax-reduction-main-reason-for-appellants-separate/</a> & Jencal Holdings Ltd. v. Her Majesty The Queen 2019 TCC 16.
<h3><a href="#_ftnref30" name="_ftn30">[30]</a> Deans Knight Income Corp. v. Canada 2023 SCC 16.</h3>
<a href="#_ftnref31" name="_ftn31">[31]</a> <a href="https://taxpage.com/articles-and-tips/supreme-court-of-canada-applies-gaar-general-anti-avoidance-rule-in-deans-knight-income-v-canada-dismissing-taxpayers-appeal" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://taxpage.com/articles-and-tips/supreme-court-of-canada-applies-gaar-general-anti-avoidance-rule-in-deans-knight-income-v-canada-dismissing-taxpayers-appeal</a> Last seen on June 27, 2024.
<a href="#_ftnref32" name="_ftn32">[32]</a> <a href="https://taxpage.com/articles-and-tips/supreme-court-of-canada-applies-gaar-general-anti-avoidance-rule-in-deans-knight-income-v-canada-dismissing-taxpayers-appeal/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://taxpage.com/articles-and-tips/supreme-court-of-canada-applies-gaar-general-anti-avoidance-rule-in-deans-knight-income-v-canada-dismissing-taxpayers-appeal/</a> Last seen on August 8, 2024.
<a href="#_ftnref33" name="_ftn33">[33]</a> <a href="https://www.pwc.com/gx/en/tax/newsletters/tax-controversy-dispute-resolution/assets/pwc-TCDR%20Insights-GAAR-recent-developments.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.pwc.com/gx/en/tax/newsletters/tax-controversy-dispute-resolution/assets/pwc-TCDR%20Insights-GAAR-recent-developments.pdf</a> Last seen on August 8, 2024.
<a href="#_ftnref34" name="_ftn34">[34]</a> Id.
<a href="#_ftnref35" name="_ftn35">[35]</a> <a href="https://www.squirepattonboggs.com/-/media/files/insights/publications/2017/02/general-antiavoidance-regimes-alert.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.squirepattonboggs.com/-/media/files/insights/publications/2017/02/general-antiavoidance-regimes-alert.pdf</a> Last seen on August 8, 2024.
<a href="#_ftnref36" name="_ftn36">[36]</a> <a href="https://dea.gov.in/sites/default/files/FM_Statement_GAAR14012013.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://dea.gov.in/sites/default/files/FM_Statement_GAAR14012013.pdf</a> Last seen on September 2, 2024.
<a href="#_ftnref37" name="_ftn37">[37]</a> Circular No 7/2017.
<a href="#_ftnref38" name="_ftn38">[38]</a> Tiger Global v. AAR (2024) 165 taxmann.com 850 (Delhi HC)
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/09/20/indias-telangana-high-court-on-the-writ-challenge-against-gaar-invocation/feed/</wfw:commentRss>
<slash:comments>2</slash:comments>
</item>
<item>
<title>United Nations Tax Framework Convention: Terms of Reference for an Inclusive and Effective International Tax Cooperation? Critical Issues</title>
<link>https://kluwertaxblog.com/2024/09/06/united-nations-tax-framework-convention-terms-of-reference-for-an-inclusive-and-effective-international-tax-cooperation-critical-issues/</link>
<comments>https://kluwertaxblog.com/2024/09/06/united-nations-tax-framework-convention-terms-of-reference-for-an-inclusive-and-effective-international-tax-cooperation-critical-issues/#respond</comments>
<dc:creator><![CDATA[Maria Amparo Grau Ruiz (Full Professor of Financial and Tax Law, Complutense University of Madrid Visiting Professor of Transnational Taxation, Northwestern University) and Maria Amparo Grau Ruiz (Full Professor of Financial and Tax Law, Complutense University of Madrid Visiting Professor of Transnational Taxation, Northwestern University)]]></dc:creator>
<pubDate>Fri, 06 Sep 2024 09:01:56 +0000</pubDate>
<category><![CDATA[UN Tax Convention]]></category>
<category><![CDATA[United Nations]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19716</guid>
<description><![CDATA[The terms of reference (ToR) adopted by the Ad Hoc Committee[i] will be submitted to the UN General Assembly and voted during its 79thth session – taking place from 10 to 24 September 2024 in New York. If these terms of reference are adopted, the negotiating committee will be expected to submit a final text... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/09/06/united-nations-tax-framework-convention-terms-of-reference-for-an-inclusive-and-effective-international-tax-cooperation-critical-issues/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[The terms of reference (ToR) adopted by the Ad Hoc Committee<a href="#_edn1" name="_ednref1">[i]</a> will be submitted to the UN General Assembly and voted during its 79thth session – taking place from 10 to 24 September 2024 in New York. If these terms of reference are adopted, the negotiating committee will be expected to submit a final text to the General Assembly for its consideration at the 82nd session. 193 UN Member States could be voting on a UN global tax treaty in late 2027. If adopted by the General Assembly by a two-thirds majority, this Framework Convention would then be opened for signature and ratification to all UN member jurisdictions.
This is not the time to look the other way, nor to engage in mere futile exercises of “cooperation washing”. If, as the Chair of this Committee said, this is a journey towards achieving justice and equity, and non-exclusion in tax matters, there is still a lot of work to be done. The quantitative and qualitative degree of exclusion can be measured in the eye of the beholder, in similar terms to instability. Whether instability is positive or negative depends on who is judging such instability. A change is destabilizing only if the person judging that change, is determined to maintain, for whatever reason, the status quo. Change in international tax and financial law is constant and normal, because they are not static. What changes are (un)acceptable changes? Do they threaten stability (or not)?<a href="#_edn2" name="_ednref2">[ii]</a>
It has been said that “the momentum for the UN Tax Convention has reached such strength that it will only continue to grow”<a href="#_edn3" name="_ednref3">[iii]</a>; but also that “a UN initiative should not and does not position itself to demolish the existing international tax regime and its achievements, but rather to build on these and ensure the stability and sustainability of the regime”<a href="#_edn4" name="_ednref4">[iv]</a> .
The terms of reference received significant backing from many member States, but some major economies voted against it. It is a real pity that even the fundamental skeleton on which the framework convention is to be built could not be approved by consensus, as difficult as it is to find a balance of all delegations’ inputs and comments. What you say is as important as how you say it. Diplomats skilled in UN negotiations, who were not tax experts may help find a middle ground using less contentious words and sentence constructions.
The root of the problem is that a common mindset for universal concerns is still lacking. Certainly, creating mechanisms for raising some revenues at a global level for global spending may not only solve the problems posed by mobility, digitalization and the difficulty in allocating taxing rights to jurisdictions all over the world, but it may also bring an opportunity to create a fund for spending in global common goods<a href="#_edn5" name="_ednref5">[v]</a> .
It would not be a bad experience to force tandems between countries at different levels of development when it comes to promoting future negotiations by thematic areas. Many States seem to have already learned to take a leap towards the regional approach, overcoming an ineffective unilateral (or bilateral) approach. The role played by regional cooperation in the approval of Resolution 78/230 and the subsequent work by the Ad Hoc Committee must be highlighted<a href="#_edn6" name="_ednref6">[vi]</a>. The classic tension between multilateralism and unilateralism in the international tax architecture is a manifestation of the conflict between centripetal forces and centrifugal forces. Instability may be created by a lack of agreement on substantive issues, but there is also instability in the process<a href="#_edn7" name="_ednref7">[vii]</a>. It is easily understandable that any counterbalances in the dynamics of powers in international taxation should be accompanied by flexibility as a policy strategy that may foster a more inclusive international tax cooperation in the future<a href="#_edn8" name="_ednref8">[viii]</a> .
In the last meeting of the Ad Hoc Committee, the Nigerian representative called on those who had remained on the margins hesitant to join this process: “your perspectives are valuable, and your participation is important. Join us as we move forward together”. Previous drafts had described the Convention as “contributing” to the ongoing “system of governance,” but the final text states that the Convention will “establish […] an international tax system”. This is in line with the position of the African group: the Convention should not be subsidiary to any other ongoing or past international tax reform process that might limit its scope. Thus, developing countries, as Mataba explains, “preferred to give the negotiating committee as much guidance as possible, likely fearing that if the ToR contained broad, unspecific language, it could weaken the operational force of the Convention and sideline their priority areas”. On the contrary, “developed countries wanted the ToR to provide broad, high-level, and non-prescriptive language to ostensibly allow the negotiating committee to have minimal restrictions in designing the Convention”. To what extent are the existing terms of reference guiding the future negotiating Committee without unduly limiting its flexibility?
In any case, the G7 Finance Ministers and Central Bank Governors’ Communiqué<a href="#_edn9" name="_ednref9">[ix]</a> had explicitly supported consensus-based decisions and had asked to prioritize issues more likely to achieve it. This perspective was not accepted. As consensus-only decision-making could allow a minority of states to wield veto power, the developing countries’ bloc favored voting by a simple majority if no consensus emerges<a href="#_edn10" name="_ednref10">[x]</a>. However, we fear that the sense of risk derived from venturing blindfolded (specifically in case of developed States concerned on how future decisions would be made) may lead all to bear the cost of inaction.
Despite the recent conversations in the UN wider forum, some criticism has been pointed out: “Ultimately, it may only serve the purpose of giving developing countries a sense of increased participation in global tax policy formulation – without providing any real participation in actual decision-making. The economic reliance of most developing countries on the developed world and powerful multinationals may be exploited to defeat any true democratization of international tax law and policy formulation at the UN. There is also the risk of compromising the quality of international tax law and policy rules because the OECD may arguably have more expertise on the subject than the UN”<a href="#_edn11" name="_ednref11">[xi]</a>. Brauner argued that “this initiative should not be viewed as a replacement for the OECD and does not require a reversal of the achievements of the existing international tax regime”. We share Quiñones’s view: “the media discourse that has pitted developed against developing countries and the OECD against the UN actually hurts the likelihood of achieving global simple and fair international tax standards, which is a goal for countries and taxpayers alike” . This should not be a discussion centered around what institution takes control and the underlying question of economic dependence<a href="#_edn12" name="_ednref12">[xii]</a>. It is true that “changing the procedural forum, from the OECD to the United Nations, does not change the complexity of the substantive issues, nor the political issues”<a href="#_edn13" name="_ednref13">[xiii]</a> . The problem is that the United Nations is not more likely than the OECD to achieve a consensus on the major, complicated and sensitive international tax issues, and on the numerous technical issues. But “the UN initiative is not only a change in the platform; it also changes the decision-making method. The OECD purportedly operates by consensus, which can only produce either the lowest common denominator or whatever is desired by the strongest party/ies as they force the hands of others to agree. The UN allows for a more flexible majority-based decision-making”, as Brauner recalls, and a framework agreement can make different domestic measures legitimate and does not require measures of the one-size-fit-all variety.
Three types of legitimacy have been identified: input legitimacy (who has a say), throughput legitimacy (procedural criteria, comprising participation, agenda-setting, decision-making and implementation) and output legitimacy (uptake and utility of the end product, or ‘substantive criteria’). Evidently the UN process has had input legitimacy, “but throughput and output considerations are both very alive in the uncertainty about the outcome of the Convention negotiations, and its ultimate relevance and impact”<a href="#_edn14" name="_ednref14">[xiv]</a> . If rules of procedure are not clear so the Convention can achieve its key objective, Bena alerts: “it will be very damaging to the UN’s reputation and at that point there will be no other place to go to negotiate tax rules. So, let’s not take for granted that things will be different this time simply because the negotiations are happening at the UN”.
The G7 Finance Ministers and Central Bank Governors’ Communiqué also highlighted the importance of domestic resource mobilization and capacity building. Many countries agreed on that but felt that these tools were not enough. They think that “while we can make significant changes within our own countries, having a global architecture that supports these efforts would strengthen these moves and greatly amplify their impact”<a href="#_edn15" name="_ednref15">[xv]</a> .
Fortunately, this is not a now or never for “nay-sayers” or “yea-sayers”, although all this could lead to the end of the tax world as we now know it. The UN News announced, “a blueprint for a new universal tax accord that represents an historic step towards changing the financial landscape”. It stressed that “more inclusive and effective international tax cooperation is critical in enabling countries to respond to existing tax-related challenges, from digitalization to global operations of large multinational enterprises, as well as to mobilize domestic resources and use tax policy for sustainable development”, it “is expected to generate significant additional tax revenues for many countries, especially those in the Global South”<a href="#_edn16" name="_ednref16">[xvi]</a> . As can be seen in these explanations, the traditional vision of a Treasury determined to increase its revenue collection (over the rest), prioritizing this objective over other extra-fiscal (non-revenue) goals, continues to prevail. However, Faccio and Ghosh believe that “The UN Convention provides a platform to rework the current defective international tax rules towards more comprehensive solutions and thereby generate a bigger tax pie to be shared among countries”.
In fact, voices are already being heard warning the business sector of the consequences of this sort of tectonic plate movement: “Companies should monitor ongoing developments with respect to the Framework Convention and the protocols that are contemplated. Given the significant potential implications for the international tax landscape going forward, companies may want to engage with policymakers in relevant jurisdictions to share their perspectives”<a href="#_edn17" name="_ednref17">[xvii]</a>. The addition in the final text of “ensur[ing] certainty for both taxpayers and governments” has been explained as “a critical addition to the balance between taxpayer and government rights and obligations. It seeks to untie the hands of governments when faced with taxpayers practicing tax base erosion and profit shifting, as well as other decisions that can significantly impact the expected revenue base of the government. The ToR understands that there are two critical sets of expectations, those of the taxpayer and the government, and that governments are entitled to tools to enforce the rules underpinning their rights, just as companies are”.
Other proposals made to deal also with small initiatives that favor the growth of the social and solidarity economy have been ignored so far<a href="#_edn18" name="_ednref18">[xviii]</a> , although, with good will, they could be derived from generic provisions on sustainability<a href="#_edn19" name="_ednref19">[xix]</a>, as happens with climate aspects. In the case of the latter there is a clearer compromise, as environmental protection is expressly foreseen as a possible protocol in the final text. In this regard, Mataba says: “Although several positive proposals by developing countries made it into the final text, some key issues had to be watered down to secure broader agreement. The removal of the reference to the need to cooperate on climate-related tax measures illustrates this compromise. Some negotiators against the reference argued that such issues were already being handled in other forums such as the <a href="https://urldefense.com/v3/__https:/unfccc.int/documents/64115?gad_source=1&gclid=CjwKCAjw5qC2BhB8EiwAvqa41mhpWJaNIa4_TcOz_d4h47fFOFMVWl0ELsq_6NVD5e_NctyTzTkEbxoCJsUQAvD_BwE__;!!Dq0X2DkFhyF93HkjWTBQKhk!Sg10AeYjubNxwpSpNhYtRd_pHCG_yhv0WnWnwT2rsx-KlD5I3jStG4Ge6acgtaEjWsK9fv3CiHG6pdvMXpwup_RqBEOw$" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">UNFCC</a> and for that reason should not be duplicated in the Convention. However, the Convention explicitly requires consideration of work from other forums, which should allow for climate-related issues to remain on the agenda regardless. In an attempt to find common ground, the ToR also includes broad language that commits the Convention to explore international tax cooperation approaches aimed at achieving sustainable development, including environmental matters. Furthermore, it opens the possibility for the prioritization of work on environmental challenges through the early protocols, which should give the negotiating committee a sufficient mandate to address climate-related tax measures”.
Apart from the geopolitical and strategic benefits that one could expect from siding with the demand of Global Majority countries, when it comes to sharing some of its own declared policy objectives (like decarbonization of the economies), the European Union “stands to gain a great deal if it can work with others at the UN to achieve a comprehensive UN convention. This is not just about taxation, but also about the future role of the EU in a changing world”<a href="#_edn20" name="_ednref20">[xx]</a>. At least in fixing some red lines in problems affecting humankind, there should be consensus. As it is well-known, member States are already bound by obligations set out in their human rights treaties, and the Center for Economic and Social Rights reminded us that “these rights offer a benchmark by which to assess international financial architecture in general and international tax systems in particular”<a href="#_edn21" name="_ednref21">[xxi]</a>, and also mentioned States’ duty to mobilize maximum available resources towards realizing human rights, States’ duty to cooperate internationally, States’ extraterritorial obligation to realize human rights beyond their borders, among others, with the aim of creating a fair and transparent international tax system. Although its input emphasized that the Framework Convention should specify resourcing and realizing human rights as one of its key goals, the final text just reads “Principle 9. Efforts to achieve the objectives of the framework convention should therefore: […] c. in the pursuit of international tax cooperation be aligned with States’ obligations under international human rights law”.
Will all member States be able to overcome entrenched positions and find common ground at a later stage? The Framework Convention and its protocols should not be considered a chicken-and-egg dilemma at all. Negotiators should be people first. Even if a win-win solution cannot be found, a wise agreement can still be reached that is better for both sides than the alternative<a href="#_edn22" name="_ednref22">[xxii]</a>. Think of the divergent, convergent, and transform plate boundaries in tectonic movements. Until now, divergent interests, particularly between developed and developing countries, have heavily influenced the discussions. In the future, one could get more or less of something instead of another and play with timing. As St. Francis of Assisi said: “Start by doing what is necessary, then what is possible. Suddenly you are doing the impossible”.
 
María Amparo GRAU RUIZ, Full Professor of Financial and Tax Law, Universidad Complutense de Madrid; Visiting Professor of Transnational Taxation, Northwestern University. <a href="mailto:grauruiz@ucm.es">grauruiz@ucm.es</a> The author thanks Cassadra Bouzi for her help in searching some useful materials.
<a href="#_ednref1" name="_edn1"></a> [i] More information is available at the following link: <a href="https://financing.desa.un.org/un-tax-convention/second-session?_gl=1*oi4olw*_ga*NTY3MDIwODg1LjE3MjQ3ODA4ODM.*_ga_TK9BQL5X7Z*MTcyNDc4MTAzMS4xLjEuMTcyNDc4MTE2MS4wLjAuMA" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://financing.desa.un.org/un-tax-convention/second-session?_gl=1*oi4olw*_ga*NTY3MDIwODg1LjE3MjQ3ODA4ODM.*_ga_TK9BQL5X7Z*MTcyNDc4MTAzMS4xLjEuMTcyNDc4MTE2MS4wLjAuMA</a>
<a href="#_ednref2" name="_edn2">[ii]</a> Spencer, D.E., “Change and (In)Stability”, Journal of International Taxation, Vol. 34, No. 8, 2023, p. 29.
<a href="#_ednref3" name="_edn3">[iii]</a> Bena, “A UN tax convention is finally in the making. Now what?”, Global Policy Journal Blog, 7 February 2024. https://www.globalpolicyjournal.com/blog/07/02/2024/un-tax-convention-fi nally-making-now-what
<a href="#_ednref4" name="_edn4">[iv]</a> Brauner, Y., “A UN Dawn For The International Tax Regime”, Intertax, Vol. 52, No. 2, 2024, p.3.
<a href="#_ednref5" name="_edn5">[v]</a> Quiñones, N., “The UN Framework Convention On Tax Matters And A New Hope For Multilateralism And Simplification In The Area Of International Taxation”, Kluwer International Tax Blog, 3 April 2024. https://kluwertaxblog.com/author/natalia-2/
<a href="#_ednref6" name="_edn6">[vi]</a> This is the case of Africa, Latin America and the Caribbean. See Quiñones, N., cit., 2024; K., “Inside the UN Tax Negotiations: Key outcomes and future challenges”, IISD, 23 August 2024. <a href="https://www.iisd.org/articles/explainer/United-Nations-Tax-Negotiations" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.iisd.org/articles/explainer/United-Nations-Tax-Negotiations</a>
<a href="#_ednref7" name="_edn7">[vii]</a> See Spencer, D.E., cit., 2023, p. 28.
<a href="#_ednref8" name="_edn8">[viii]</a> Parada, L., 2024, p. 1. See also Picciotto, S., “The Design of a UN Framework Convention on International Tax Cooperation” (April 5, 2024). Available at SSRN: https://ssrn.com/abstract=4785381
<a href="#_ednref9" name="_edn9">[ix]</a> G7 Finance Ministers and Central Bank Governors’ Communiqué, Stresa, 23-25 May 2024, p. 8. https://www.g7italy.it/wp-content/uploads/Stresa-Communique-25-May-2024.pdf
<a href="#_ednref10" name="_edn10">[x]</a> Matonga, G., “Wealthy countries push back as UN moves ahead with global tax plan”, ICIJ, 3 June 2024.
<a href="#_ednref11" name="_edn11">[xi]</a> Onyeabor, E., “Towards a United Nations Tax Convention: Prospects and Challenges for Developing Economies”, Afronomicslaw, 12 December 2023, p. 3. <a href="https://www.afronomicslaw.org/category/analysis/towards-united-nations-tax-convention-prospects-and-challenges-developing" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.afronomicslaw.org/category/analysis/towards-united-nations-tax-convention-prospects-and-challenges-developing</a>. See also PWC, “UN releases draft Terms of Reference for negotiating a Framework Convention on International Tax Cooperation”, Tax Policy Alert, 11 June 2024. <a href="https://www.pwc.com/gx/en/tax/newsletters/tax-policy-bulletin/assets/pwc-un-releases-draft-tor-for-negotiating-a-framework-convention.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.pwc.com/gx/en/tax/newsletters/tax-policy-bulletin/assets/pwc-un-releases-draft-tor-for-negotiating-a-framework-convention.pdf</a>
<a href="#_ednref12" name="_edn12">[xii]</a> Smith, C., Rudgewick, O., “Power shift on tax gives UN the upper hand”, Public Finance, No. 1, 2024, p. 12.
<a href="#_ednref13" name="_edn13">[xiii]</a> Spencer, D.E., “The United Nations: A Forum for International Tax Reform”, Journal of International Taxation, Vol. 34, No. 11, 2023, p. 47.
<a href="#_ednref14" name="_edn14">[xiv]</a> Hearson, M., “What to do with a global majority: making the most of a UN tax convention”, ICTD blog, 22 May 2024. See also Mosquera Valderrama, I.J., Global tax governance: legitimacy and inclusiveness: why it matters, Inaugural lecture, Leiden, 30 June 2023. Retrieved from https://hdl.handle.net/1887/3621136
<a href="#_ednref15" name="_edn15">[xv]</a> Faccio, T., Ghosh, J., “Why Should EU Countries Support a UN Framework Convention on International Tax Cooperation”, Intertax, Vol. 52, No. 5, 2024, pp. 359-360.
<a href="#_ednref16" name="_edn16">[xvi]</a> Travers, E., Why the world needs a UN global tax convention, UN News, 16 August 2024. <a href="https://www.un.org/en/desa/why-world-needs-un-global-tax-convention" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.un.org/en/desa/why-world-needs-un-global-tax-convention</a>
<a href="#_ednref17" name="_edn17">[xvii]</a> EY, “UN Ad Hoc Committee advances Terms of Reference for a Framework Convention on International Tax Cooperation,” Tax News Update, global edition, 22 August 2024 
(2024-1590). <a href="https://globaltaxnews.ey.com/news/2024-1590-un-ad-hoc-committee-advances-terms-of-reference-for-a-framework-convention-on-international-tax-cooperation" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://globaltaxnews.ey.com/news/2024-1590-un-ad-hoc-committee-advances-terms-of-reference-for-a-framework-convention-on-international-tax-cooperation#. https://globaltaxnews.ey.com/news/2024-1590-un-ad-hoc-committee-advances-terms-of-reference-for-a-framework-convention-on-international-tax-cooperation#</a>
<a href="#_ednref18" name="_edn18"></a>[xviii] See my previous input: https://financing.desa.un.org/sites/default/files/2024-03/Grau%20Ruiz%2C%20Maria%20Amparo_Input_AHC%20Tax%20%5BENG%5D.pdf
<a href="#_ednref19" name="_edn19">[xix]</a> The approved text reads: “10. The framework convention should include commitments to achieve its objectives. […] c. international tax cooperation approaches that will contribute to the achievement of sustainable development in its three dimensions, economic, social and environmental, in a balanced and integrated manner”. See Boletto, G., Grau Ruiz, M.A., “A New Bottom-Up Perspective in International Tax Cooperation for Sustainable Development”, Revue Européenne et Internationale de Droit Fiscal, No. 4, 2023, p. 473; Grau Ruiz, M.A., “Repensando la cooperación internacional en cuestiones de tributación para que sea verdaderamente inclusiva y eficaz”; Andrés Aucejo, E., “Hacia una nueva arquitectura de la cooperación tributaria internacional institucionalizada en el siglo XXI, bajo el rol clave de Naciones Unidas: a propósito de la Resolución A 77/441 (29 dic. 2022) y del informe de la Secretaría General A/78/235 (julio 2023), de Naciones unidas sobre promotion of inclusive and effective international tax cooperation at the United Nations” both in García Moreno, A., Machancoses García, E. (eds), Medio siglo de Derecho Financiero y Tributario: Estudios en memoria del Profesor Carmelo Lozano Serrano, Aranzadi, Pamplona, 2024.
<a href="#_ednref20" name="_edn20">[xx]</a> See Faccio, T., Ghosh, J., cit., 2024, p. 360.
<a href="#_ednref21" name="_edn21">[xxi]</a> Countries are losing $480billion dollars a year due to tax abuse. The brunt of that harm is falling on lower-income countries, whose tax losses equate to roughly 49% of their public health budgets (compared to just 9% in higher-income countries). FSee orgette, M., Palak, P., “The UN framework convention on international tax cooperation is now a certainty: What can and must it address?”, Blog Center for Economic and Social Rights, 25 March 2024. <a href="https://www.cesr.org/the-un-framework-convention-on-international-tax-cooperation-is-now-a-certainty-what-can-and-must-it-address/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.</a>cesr.org/the-un-framework-convention-on-international-tax-cooperation-is-now-a-certainty-what-can-and-must-it-address/
<a href="#_ednref22" name="_edn22">[xxii]</a> Fisher, R.; Ury, W; Patton, B., Getting to yes. Negotiating agreement without giving in, Penguin, New York, 2011, p. xii.
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/09/06/united-nations-tax-framework-convention-terms-of-reference-for-an-inclusive-and-effective-international-tax-cooperation-critical-issues/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>The Contents of Highlights & Insights on European Taxation, Issue 8, 2024</title>
<link>https://kluwertaxblog.com/2024/08/30/the-contents-of-highlights-insights-on-european-taxation-issue-8-2024/</link>
<comments>https://kluwertaxblog.com/2024/08/30/the-contents-of-highlights-insights-on-european-taxation-issue-8-2024/#respond</comments>
<dc:creator><![CDATA[Giorgio Beretta (Amsterdam Centre for Tax Law (ACTL) of the University of Amsterdam; Lund University)]]></dc:creator>
<pubDate>Fri, 30 Aug 2024 11:48:51 +0000</pubDate>
<category><![CDATA[Customs and Excise]]></category>
<category><![CDATA[Direct taxation]]></category>
<category><![CDATA[EU law]]></category>
<category><![CDATA[Indirect taxation]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19704</guid>
<description><![CDATA[Highlights & Insights on European Taxation Please find below a selection of articles published this month (August 2024) in Highlights & Insights on European Taxation, plus one freely accessible article. Highlights & Insights on European Taxation (H&I) is a publication by Wolters Kluwer Nederland BV. The journal offers extensive information on all recent developments in European Taxation in the... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/08/30/the-contents-of-highlights-insights-on-european-taxation-issue-8-2024/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[<a href="https://shop.wolterskluwer.nl/Highlights-Insights-on-European-Taxation-sNPHIEURTX/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>
Please find below a selection of articles published this month (August 2024) in <a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>, plus one freely accessible article.
<a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation (H&I)</a> is a publication by Wolters Kluwer Nederland BV.
The journal offers extensive information on all recent developments in European Taxation in the area of direct taxation and state aid, VAT, customs and excises, and environmental taxes.
 
To subscribe to the Journal’s page, please click <a href="https://www.linkedin.com/company/highlights-insights-on-european-taxation/?viewAsMember=true" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">HERE</a>
 
Year 2024, no. 8
TABLE OF CONTENTS
 
<h4>INDIRECT TAXATION, CASE LAW</h4>
– C SPRL (C-696/22). Chargeable event in insolvency proceedings. Continuous supply of services. Court of Justice
(comments by Marilena Ene) (H&I 2024/204)
 
– Adient (C-533/22). No fixed establishment solely because two companies belong to the same group. Court of Justice
(comments by Alexis Tsielepis) (H&I 2024/201)
 
– Lear Corporation Hungary (C-532/23). Delay VAT refund caused by application of national provision. Late payment interest. Court of Justice
(comments by Tamas Feher) (H&I 2024/197)
 
<h4>CUSTOMS AND EXCISE</h4>
– BP France (C-624/22). EU law precludes legislation requiring a physical carbon-14 analysis for calculating incentive tax for incorporation of biofuels. Court of Justice
(comments by Giorgio Emanuele Degani) (H&I 2024/203)
 
<h4>STATE AID</h4>
– P (C-451/21) and P, Luxembourg v Commission and Engie (C-454/21). Annulment of Commission’s decision on tax rulings granted to Engie. Court of Justice
(comments by Rita Szudoczky) (H&I 2024/200)
 
<h4>MISCELLANEOUS</h4>
– Jurisdiction of the General Court in the following areas: common system of VAT, excise duties, the Customs Code, the tariff classification of goods under the Combined Nomenclature. Amendment of Protocol No 3 on Statute of CJEU
(comments by the Editorial Board) (H&I 2024/212)
 
– Belgian Association of Tax Lawyers e.a (C-623/22). Mandatory automatic exchange of information in relation to reportable cross-border arrangements. Right to respect for private life. Principles of equal treatment and non-discrimination. Principle of legality in criminal proceedings. Principle of legal certainty. Court of Justice
(comments by Edwin Thomas) (H&I 2024/198)
 
<h4>FREE ARTICLE</h4>
– P (C-451/21) and P, Luxembourg v Commission and Engie (C-454/21). Annulment of Commission’s decision on tax rulings granted to Engie. Court of Justice
(comments by Rita Szudoczky) (H&I 2024/200)
 
The Engie case is part of the saga of State aid cases on tax rulings. Unlike the other cases, the issue in Engie is not transfer pricing rulings that deviate from the arm’s length principle. Instead, the rulings concern a complex intra-group financing structure that the French headquartered group, Engie, implemented between its Luxembourg subsidiaries to finance a restructuring within the group. The structure resulted in a deduction/non-inclusion outcome leaving the profits earned in Luxembourg by the Engie subsidiaries almost untaxed.
More specifically, the structure scrutinized in the case involves a company in the Engie group (LNG Holding) transferring its business activity to a subsidiary (LNG Supply) whereby the latter finances that acquisition by a mandatorily convertible interest-free loan (ZORA) that it takes out from an intermediary company in the group (LNG Luxembourg). The loan is converted at its maturity into shares. The conversion takes into account the performance, either positive or negative, of LNG Supply during the term of the loan. Thus, at maturity, LNG Supply repays the loan by issuing shares which represent the nominal amount of the loan plus a ‘premium’ consisting of all the profits made by LNG Supply during the term of the loan (called ‘ZORA accretions’). If losses are made during the term, those are also taken into account in the form of ‘ZORA reductions’. From the premium, an amount is deducted that is the result of the application of a percentage corresponding to the tax on the profits agreed upon with the Luxembourg tax administration. In order to finance the loan that it issues to LNG Supply, LNG Luxembourg entered into a prepaid forward sale contract with LNG Holding, which is the sole shareholder not only of LNG Luxembourg but also of LNG Supply. LNG Holding paid, under the forward contract, an amount corresponding to the nominal amount of the ZORA. In return, LNG Luxembourg transferred to LNG Holding the rights to the shares that will be issued at the maturity of the ZORA, including the shares representing the value of the ZORA accretions.
The tax rulings at issue confirm that:
With regard to LNG Supply, the basis of assessment in a given financial year equals to a margin agreed with the Luxembourg tax administration corresponding to a fraction of the value of the gross assets shown on the company’s balance sheet. The difference between the profit actually made in that financial year and the taxable margin constitutes the ZORA accretions for that year, which are considered to be deductible expenses related to the ZORA. Thus, from this aspect, ZORA is treated for tax purposes as a debt instrument.
As regards the intermediary company, LNG Luxembourg, it has the option of either keeping the nominal value of the ZORA in its accounts or increase that value by the ZORA accretions accrued during the period between taking out the ZORA and converting it. Upon conversion, if LNG Luxembourg increases the value with the ZORA accretions, it may choose to apply the tax neutrality regime provided for by Luxembourg law (Article 22bis of the Law on income tax, ‘LIR’), which allows the capital gain corresponding to the ZORA accretions to remain untaxed.
With respect to LNG Holding, the payments received under the forward contract are recorded as financial fixed assets at cost price. Until the conversion, LNG Holding will not recognize any income from ZORA. Upon conversion, all income – including dividends and capital gains – derived from LNG Holding’s participation in its subsidiaries, including the shares in LNG Supply that LNG Luxembourg transfers to Holding after the conversion of ZORA, are exempt from income tax pursuant to Article 166 LIR. Thus, from this aspect, ZORA is treated as an equity instrument, as the income derived from it is entitled to participation exemption in the hands of the recipient.
In a decision of 20 June 2018, the Commission considered that the Luxembourg tax administration granted a selective advantage to LNG Holding by allowing the participation exemption to be applied to the income LNG Holding received in the form of ZORA accretions, which were previously deducted by LNG Supply. The Commission reasoned that the participation exemption is not applicable to income that previously, had not been taxed at the level of the distributing company. The tax ruling that allows such income to be exempted derogates from the Luxembourg provisions on the participation exemption and thus, constitutes State aid. Alternatively, the Commission put forward that Engie received a selective advantage due to the non-application of the Luxembourg general anti-abuse rule (Article 6 of the Law on tax adjustment). As the financing structure put in place by Engie was abusive in the meaning of that provision, the Luxembourg tax administration would have had to deny the tax ruling request by applying the general anti-abuse rule.
Luxembourg and Engie brought an action for annulment before the General Court against the Commission’s State aid decision. The General Court, however, dismissed their action and fully endorsed the Commission’s view expressed in the decision.
The Court of Justice of the European Union (CJ), in its judgment of 5 December 2023 (Joined Cases C-451/21 P and C-454/21 P, <a href="https://www.inview.nl/document/id7aeadeffaa9e4de2ab92c02a2eeca434#--ext-id-05662ed2-3bc5-461a-879d-288d8a442faa" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2023:948</a>), disagreed with both the Commission and the General Court. Consequently, it set aside the General Court’s judgment and annulled the Commission’s decision.
The arguments in the case boiled down, as in most of the State aid cases on tax rulings, to the definition of the reference framework, which is a crucial element of the selectivity analysis. It is in relation to such reference framework that the existence of a selective advantage must be established. The Court of Justice, first, reiterated, referring to its Fiat judgment (CJ 8 November 2022, C.885/19 P and C-898/19 P Fiat Chrysler Finance Europe v Commission, <a href="https://www.inview.nl/document/id4ca926178a47413d89b5892fa91676c7#--ext-id-87d2a46e-03e6-418a-8b07-0e18cd13d328" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2022:859</a>) that the arguments of the applicants calling into question the identification of the reference framework are admissible because the latter is a question of law which can be reviewed by the CJ on appeal.
With regard to the substantive arguments, the dispute between the parties concerned the question whether, under Luxembourg law, the exemption of income from participations at the level of the parent company is made dependent on the taxation of distributed profit at the level of the subsidiary. In other words, whether there was a link of conditionality between Article 164 and Article 166 LIR. In this regard, the CJ emphasized that it is for the Member State to determine, in its own competence and having regard to its fiscal autonomy, the main characteristics of a tax, including the tax base, the taxable event and exemptions. All these elements constitute the reference system for the purpose of the selectivity analysis under State aid law. In the present case, the reference framework encompassed the participation exemption regime under Article 166 LIR. This provision did not make the grant of the exemption of income from participations formally dependent on the prior taxation of distributed profits. Luxembourg maintained that the wording of the provision determines its interpretation. Contrarily, the Commission and the General Court departed from the literal interpretation of the provision, and they understood it as involving a conditionality.
The CJ pointed out that the Commission is, in principle, required to accept the interpretation of the relevant provisions of national law as put forward by the Member State provided that that interpretation is compatible with the wording of those provisions. ‘The Commission may depart from that interpretation only if it is able to establish, on the basis of reliable and consistent evidence that has been the subject of that exchange of arguments, that another interpretation prevails in the case-law or the administrative practice of that Member State.’ (para. 121). The CJ found that the Commission could not establish to the requisite legal standard that an interpretation prevailed in Luxembourg case law or administrative practice other than that put forward by Luxembourg in the proceedings. The General Court erred when it accepted that a 2018 letter by Luxembourg and a 1965 Council of State opinion were enough to substantiate the existence of an interpretation under Luxembourg law of Article 166 LIR that corresponded to the Commission’s interpretation of the provision.
The Commission also argued that if the same income were exempted at the level of the parent company and deducted at the level of the subsidiary, it would escape all liability to tax in Luxembourg which would run counter to the objective of the Luxembourg corporate income tax system. Such interpretation of the relevant provisions cannot be upheld, according to the Commission, even if an express conditionality is absent in the law. In this regard, the CJ held that ‘the Commission cannot establish a derogation from a reference framework merely by finding that a measure departs from a general objective of taxing all companies resident in the Member State concerned, without taking account of provisions of national law specifying the manner in which that objective is to be implemented’ (para. 177).
Overall, according to the CJ, the General Court erred when it endorsed the Commission’s interpretation of the Luxembourg participation exemption regime. Thus, the national law constituting the reference framework was erroneously interpreted by the Commission and the General Court.
With respect to the alternative reasoning of the Commission, in it the Commission found the tax rulings derogated from the reference framework, which includes the general anti-abuse rule under Luxembourg tax law, due to the Luxembourg tax authorities’ non-application of the latter to the financing structures at hand. The General Court confirmed that the Commission could arrive at this finding without taking into account the national administrative or judicial practice relating to the Luxembourg anti-abuse provision, as the provision did not give rise to difficulties of interpretation.
The CJ decided to the contrary. In particular, the Commission could not conclude that the non-application of the anti-abuse provision by the Luxembourg tax administration led to the conferral of a selective advantage on Engie unless the non-application departs from the national case law or administrative practice on the provision. Otherwise, the Commission would itself define what does and does not constitute the correct interpretation of the Luxembourg anti-abuse rule, which would exceed the limits of the Commission’s State aid powers conferred on it by the founding Treaties and would be incompatible with the fiscal autonomy of the Member States.
With the Engie judgment, the CJ sent another clear message to the Commission – along with its judgments in Fiat and Amazon (CJ 14 December 2023, C-457/21 P Commission v Luxembourg, <a href="https://www.inview.nl/document/id6c9ed111d303417ea92315de88bed8bb#--ext-id-3d2820bc-3e80-4804-b907-7d2bf07fbb94" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2023:985</a>) – that the State aid rules have their limits. Specifically, their scope cannot be further stretched at the expense of the fiscal autonomy of the Member States to encompass tax rulings that might constitute (harmful) tax competition measures facilitating aggressive tax planning by MNEs without however being selective. Selectivity is to be established compared to a nationally defined reference system and not in relation to a fictitious, hypothetical or normative system defined by the Commission. The Commission cannot sidestep the reference to the Member State’s own tax system when establishing selectivity by equating the reference system with the general objective of the corporate income tax, that is, the taxation of all companies resident in the Member States concerned. If such general and abstract objective constituted the reference system, any rule, application, non-application or misapplication of a rule or the absence of a rule that leads to non-taxation or lower taxation of taxpayers that are in an objectively comparable situation would qualify as State aid. Not only the definition but also the interpretation of the reference system – more precisely, the national tax rules constituting the reference system – is the competence of the Member States’ authorities, and their interpretation cannot be substituted for by that of the Commission. These are now clear limits set by the Court of Justice with regard to the application of the State aid rules to tax measures. In view of these limits, the reasoning put forward by the Commission with regard to the selectivity of the Engie rulings cannot stand the ground and was rightly quashed by the Court. Nevertheless, the Court’s reasoning left open several alternative routes through which the rulings issued by the Luxembourg tax authorities to the Engie group could be considered selective.
In particular:
The Commission could have argued the existence of an aid scheme under Luxembourg tax law instead of trying to establish the selectivity of the individual tax rulings issued to Engie. In fact, the combined effect of Article 164 and Article 166 LIR is (almost) non-taxation of positive results in the case of transaction financed by ZORA as opposed to those financed by (conventional) debt or equity. The reference system would be constituted by the Luxembourg tax rules concerning debt and/or equity financing under which income does not remain untaxed but is taxed either at the level of the payor or the payee. Taxpayers that use equity or debt financing are in an objectively comparable situation to those who use ZORA and therefore, their different treatment leads to selectivity. In this respect, Luxembourg argued that the financing system implemented by the Engie group was ‘open to all’ and that an application of the tax rules similar to that achieved by the Engie group could lawfully be achieved by other undertakings (see para. 93). Indeed, this can prove the non-selectivity of the Engie rulings. The argument cannot, however, immunize the scheme from the claim of selectivity. It has to be recalled that according to the European Courts` settled case law, selectivity can be established not only in the case of tax measures that make a distinction between undertakings in terms of their specific characteristics but between undertakings which choose to carry out certain transactions and other undertakings which choose not to do so (see GC, 5 November 2018, Case T-239/11 P Sigma Alimentos Exterior v Commission, ECLI:EU:T:2018:781, paras. 44 et seq.).
If the selectivity of the Luxembourg tax legislation, i.e., Article 164 and Article 166 LIR, cannot be established according to the reasoning above, it could be claimed that the practice of the Luxembourg tax administration in applying the provisions concerned constitutes an aid scheme. Thus, the consistent application of the exemption of income from participation at the level of the parent company when the corresponding income had not been taxed at the level of the distributing company benefits all those taxpayers that use ZORA financing. Such practice thus confers a selective advantage on all the undertakings making use of ZORA while the latter are in an objectively comparable situation to those that use debt or equity financing. The fact that the latter could also implement a ZORA structure, does not make the practice general (i.e., non-selective) based on the case law cited in the point above.
Alternatively, it could be argued that an aid scheme is constituted by the administrative practice of the Luxembourg tax administration of consistently non-applying the Luxembourg general anti-abuse rule (Article 6 of the Law on Tax adjustment) to ZORA financing schemes although the conditions for applying that provision are satisfied in the case of those schemes. Such non-application of an anti-abuse provision is a derogation from what is laid down in the law although not in an individual case but consistently in a select group of cases (i.e., where ZORA financing is used), which benefits the taxpayers in this group that engage in a particular financing structure that should be qualified as abusive according to the letter of the law and according to the general judicial interpretation of the law. In this respect, the reasoning of the CJ in Engie imposes a heavy burden of proof on the Commission. In particular, the Commission would have to establish and prove to the requisite legal standard that Luxembourg courts interpret the Luxembourg anti-abuse provision and its conditions of application in a way that would require its application to ZORA structures and thus the tax administration’s practice of not applying it thereto constitutes a derogation from the reference system.
Probably, the easiest and most straightforward way of establishing the selectivity of the individual rulings issued to Engie would be to argue that a selective advantage was granted to the subsidiary (LNG Supply) when the ruling endorsed that it is to be taxed on a fixed margin agreed with the Luxembourg tax authorities instead of on the actual income realized minus business expenses according to the normal rules of the Luxembourg corporate income tax. The CJ itself pointed out the potential selectivity of the ruling in this respect: ‘[t]hat being so, such a conclusion is without prejudice to an examination of the potentially selective nature of the tax rulings at issue in the light of the finding that the income of LNG Supply […] in each financial year concerned was, in return for the deduction of the ZORA accretions as expenses, taxed on the margin agreed with the Luxembourg tax authorities and not under the rules of ordinary tax law […]’ (see para. 172). Why the Commission has not argued this obvious selectivity of the ruling from the outset, especially having regard to the settled case law on the selectivity of such measures (see CJ 22 June 2006, Joined Cases C-182/03 and C-217/03 Belgium and Forum 187 v Commission, <a href="https://www.inview.nl/document/id176320060622c18203admusp#--ext-id-1763_2006-06-22_c-182-03__usp" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2006:416</a>) is the mystery of the Engie case.
Even if one or all of the substantive arguments above could foster the selectivity of the Luxembourg tax treatment of ZORA financing, the question remains whether the Commission could start a State aid case anew based on them or would it be barred by any procedural rules or principles from doing so. Taking into account that the first three arguments concern the underlying Luxembourg tax legislation or administrative practice and not the rulings that were the subject-matter of the Engie case, those grounds could probably be invoked in a case challenging the aid scheme offered by Luxembourg.
Prof. Rita Szudoczky
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/08/30/the-contents-of-highlights-insights-on-european-taxation-issue-8-2024/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>The Contents of Intertax, Volume 52, Issue 10, 2024</title>
<link>https://kluwertaxblog.com/2024/08/27/the-contents-of-intertax-volume-52-issue-10-2024/</link>
<comments>https://kluwertaxblog.com/2024/08/27/the-contents-of-intertax-volume-52-issue-10-2024/#respond</comments>
<dc:creator><![CDATA[Ana Paula Dourado (General Editor of Intertax)]]></dc:creator>
<pubDate>Tue, 27 Aug 2024 09:32:58 +0000</pubDate>
<category><![CDATA[Uncategorized]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19690</guid>
<description><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions: Vladimir Starkov, The Need for Plan B: Comments As of mid-July 2024, the Multilateral Convention (MLC) on Amount A seems to have received a lacklustre response from the majority of stakeholders, despite the extensive... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/08/27/the-contents-of-intertax-volume-52-issue-10-2024/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.10/TAXI2024067" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Vladimir Starkov, The Need for Plan B: Comments</a></h4>
As of mid-July 2024, the Multilateral Convention (MLC) on Amount A seems to have received a lacklustre response from the majority of stakeholders, despite the extensive efforts invested in its development and negotiation. This letter supports Philip Baker’s viewpoint, as previously expressed in this publication, that a new ‘Plan B’ for Amount A is urgently needed. At the same time, this letter offers a different prospective on the design principles for taxing the effects of the digitalized economy that could serve as an alternative to Amount A.
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.10/TAXI2024070" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Reuven Avi-Yonah & Ajitesh Kir, Building the Gateway: Why the Two Pillars Need Each Other</a></h4>
There is a reason the OECD proposed two pillars for its gateway to a better tax future. A gateway requires both pillars, and neither can stand without the other. Pillar 2 is a fait accompli, but it needs countries to implement Pillar 1 as well because in the absence of a clear sourcing rule there is no limit to countries implementing the Qualified Domestic Minimum Top-Up Tax (QDMTT), which would turn off the other parts of Pillar 2 and potentially result in double taxation. Pillar 1 is not going forward in the absence of a Multilateral Tax Convention (MLC), but it can be implemented unilaterally, although that would require overriding existing tax treaties.
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.10/TAXI2024069" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Lukas Hrdlicka, The Pillar 2 Directive and the Qualified Domestic (Minimum) Top-up Tax Puzzle</a></h4>
The article argues for using a teleological interpretation of the Pillar 2 Directive to allow EU Member States to comply with Pillar 2’s soft law requirements for the qualified domestic minimum top-up tax (QDMTT) and its safe harbour (SH). This interpretation is necessary because the directive’s text is not aligned with certain requirements under Pillar 2 soft law since the directive was adopted before the Inclusive Framework issued any administrative guidance. Without the teleological interpretation, EU Member States cannot comply with the qualified domestic top-up tax (QDTT) requirements and, therefore, cannot attain its SH. This would decrease taxpayers’ legal certainty and undermine EU Member States’ fiscal interests.
To pursue the argument, the article analyses Pillar 2’s soft law, i.e., the model rules, the commentary, and two sets of administrative guidance related to the QDMTT and its SH, and compares their provisions with the relevant provisions of the Pillar 2 Directive. Consequently, the study offers solutions to discrepancies between these two sets of rules and joins a broader discussion regarding the relationship between EU tax law and soft law.
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.10/TAXI2024068" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Chidozie Chukwudumogu, Inter-Nation Equity and the Regulation of Tax Competition via the Global Minimum Tax Rule: A Case for Improvement</a></h4>
The Organization for Economic Co-operation and Development (OECD) is an institution that influences policymaking in international tax law, and it is changing the international tax architecture to deal with tax competition by encouraging countries to adopt a global minimum tax rule. This emerging rule – called Pillar Two in international tax circles – is inadequate for dealing with poverty and inequality in an asymmetrical global context. The rule is premised on the notion and argument that tax competition is a problem for international tax law. Notwithstanding, there is existing research and evidence to show that tax competition can also be a solution to the enormous challenge of poverty and inequality as it can have a redistributive effect. This is a valuable factor amid the inefficiently asymmetrical global society with extreme poverty in many countries and enormous wealth in a few others.
This article submits that the Pillar Two minimum tax rule – the Global Anti-Base Erosion (GloBE) Rules encompassing the income inclusion rule (IIR), undertaxed payment/profit rule (UTPR), and qualified domestic minimum top-up tax (QDMTT) – should incorporate inter-nation equity to prevent exacerbating global inequality and poverty. Pillar Two intensifies these for at least two reasons: (1) it restricts the positive redistributive effects of tax competition on an inefficiently asymmetrical global society, and (2) it encourages tax competition more suited for high-income countries (HICs) and less suited for those that are low-income countries (LICs). There is latitude to incorporate a differentiated principle deriving from inter-nation equity into this new Pillar Two rule designed to regulate tax competition globally. This proposal requires that the emerging rule be disenabled in certain circumstances to enable LICs to choose whether to apply the rule without being worse off. The article’s proposal seeks to allow LICs room for effective tax competition needed to attain sustainable development goals.
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.10/TAXI2024065" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Mateusz Kaz´mierczak, Five Years of Digital Services Taxes in Europe: What Have We Learned?</a></h4>
This article aims to assess whether digital services taxes (DSTs) have been effective in achieving their policy goals as well as identify key unresolved questions and highlight how the evidence from five years of DSTs’ existence in Europe can help in resolving them. The article analyses DSTs’ key policy goals with a particular focus on the equalization of the tax gap and creating fair taxation in the context of a tax incidence. It is based on publicly available data related to introducing five selected DSTs based on the similarity of both their design and the economic situation of the countries in which they were introduced. The collected revenue, fiscal efficiency of these taxes, and taxpayers’ reactions strongly indicate that DSTs have been passed on to small and medium-sized enterprises (SMEs) and consumers to a great extent while yielding negligible revenues that contradicts their policy goals. Due to limitations in data availability and the occurrence of two significant disruptions in the economy during the analysed period, some questions remain unanswered. Therefore, in the context of theoretical economic literature applicable to the case of DSTs, this author indicates where additional in-depth research and governmental analysis of DSTs is necessary and what the possible approaches are to obtain sufficient grounds for political decisions regarding introducing similar measures.
<h4><a href="https://kluwerlawonline.com/journalarticle/Intertax/52.10/TAXI2024060" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Jasper Korving, 30 Years of the Economic European Area; a Tax Law Perspective</a></h4>
In 2024, the European Economic Area (EEA) will have existed for thirty years. During that time, the EEA Agreement has served its cause to enlarge the European internal market to Iceland, Liechtenstein, and Norway. Covering fundamental freedoms that need to be interpreted comparably to the Treaty on the Functioning of the EU’s (TFEU’s) fundamental freedoms, a significant amount of case law interpreting the EEA Agreement’s fundamental freedoms has been established from both the CJEU and the European Free Trade Association (EFTA) Court. The author attempts to elucidate the approach taken by both courts to come to judgments creating a homogenous interpretation and application of EU law to the largest possible extent. Besides that, the extension of EU directives to cover EEA situations is relevant. The EEA Agreement foresees a procedure for that, but it does not thus far cover substantive direct tax directives. The author argues that some arguments still exist following which EU direct tax directives should actually be added to the EEA Agreement.
 
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/08/27/the-contents-of-intertax-volume-52-issue-10-2024/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>Japan to introduce “Innovation Box”</title>
<link>https://kluwertaxblog.com/2024/08/20/japan-to-introduce-innovation-box/</link>
<comments>https://kluwertaxblog.com/2024/08/20/japan-to-introduce-innovation-box/#respond</comments>
<dc:creator><![CDATA[Takato Masuda (Nishimura & Asahi (Tokyo))]]></dc:creator>
<pubDate>Tue, 20 Aug 2024 08:35:27 +0000</pubDate>
<category><![CDATA[GloBE Rules]]></category>
<category><![CDATA[IP]]></category>
<category><![CDATA[OECD]]></category>
<category><![CDATA[Tax Incentives]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19685</guid>
<description><![CDATA[One strategic response of countries to the Global Minimum Tax (the GloBE rules) would be restructuring their tax incentives. The top-up tax effectively nullifies any tax incentive that brings the effective tax rate below 15%. This would push countries to redesign tax incentives that would otherwise produce an effective tax rate below 15%. In a... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/08/20/japan-to-introduce-innovation-box/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[One strategic response of countries to the Global Minimum Tax (the GloBE rules) would be restructuring their tax incentives. The top-up tax effectively nullifies any tax incentive that brings the effective tax rate below 15%. This would push countries to redesign tax incentives that would otherwise produce an effective tax rate below 15%. In a July 2021 press release,<a href="#_ftn1" name="_ftnref1">[1]</a> at a very early stage of the global minimum tax project, OECD Secretary-General Mathias Cormann had already emphasized that “[t]his package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it.” As this statement suggests, countries apparently did not want the GloBE rules to bring a definitive end to tax competition, but rather to start a new round of tax competition by developing more attractive tax incentives within the boundaries established by the GloBE rules.
Japan has implemented the main parts of the GloBE rules (the so-called Income Inclusion Rule) from April 1, 2024, while Japan will introduce a new tax incentive for intellectual property, named the “Innovation Box” regime, for seven years beginning April 1, 2025. Is the Innovation Box regime Japan’s strategic response to this new round of tax competition? – Or maybe not. Although “enhancing Japan’s competitiveness” was a key phrase featured in its legislative history, the Japanese Innovation Box might be too modest a tax incentive to make Japan competitive.
Japan has decided to introduce the “Innovation Box” with the following background. It is said that Japan has had tax incentives based on inputs (e.g., R&D expenditures) but not on outputs (income derived from intellectual property) like the IP Box regime in major European and Asian countries. In particular, in July 2023, the Japanese Ministry of Economy, Trade and Industry (METI) posted a report on its website recommending that Japan also introduce the “Innovation Box” regime as an output-based tax incentive to keep pace with global trends.<a href="#_ftn2" name="_ftnref2">[2]</a> Later, the Cabinet proposed introducing the Innovation Box regime when submitting the Tax Reform Package Bill 2024, and the National Diet passed the bill this March. Japan fills the missing output-based tax incentives gap with the newly introduced Innovation Box. In this regard, the Japanese government has noted that the Innovation Box is intended to improve Japan’s competitiveness. For example, the Japanese Ministry of Finance (MOF) published its technical explanation on the tax reform 2024, saying that Japan introduced the Innovation Box to enhance its competitiveness as an R&D center location.<a href="#_ftn3" name="_ftnref3">[3]</a>
However, it may remain questionable whether the Japanese Innovation Box can achieve such an ambitious goal since it appears to be a modest tax incentive for the following reasons. First, the Japanese Innovation Box provides a 30% deduction for qualified IP income.<a href="#_ftn4" name="_ftnref4">[4]</a> Since Japan’s effective corporate tax rate is usually about 30% (including local taxes), the Innovation Box would, at best, reduce the effective tax rate on qualified IP income to about 21%.<a href="#_ftn5" name="_ftnref5">[5]</a> The effective tax rate of 21% may not sound like a significant tax cut, especially considering that some countries offer more drastic tax incentives for intellectual property.<a href="#_ftn6" name="_ftnref6">[6]</a> Second, Japan caps the Innovation Box deduction at 30% of current income (before applying the Innovation Box) minus any unused loss carryforwards. Any amount exceeding this ceiling cannot be deducted and will not be carried over. (For example, if qualified IP income is 300, but current income after offsetting unused loss carryforwards is only 100, the deduction under the Innovation Box would be 30 instead of 90). This sealing would prevent the Japanese Innovation Box from producing significant tax cuts even when combined with other income deduction-type incentives and the current or carryforward losses. Finally, not all income derived from intellectual property is eligible for the Innovation Box. For example, the Innovation Box covers only patents and AI-related software programs; it will not apply to other intellectual property. Furthermore, to qualify for the Innovation Box, the intellectual property must meet the somewhat tricky requirement of “contributing to improving Japan’s international competitiveness.<a href="#_ftn7" name="_ftnref7">[7]</a> Income from licensing or domestic sale of those intellectual property is covered, but so-called embedded royalties are not. Furthermore, income from related party transactions (e.g., licensing to a foreign subsidiary) is excluded, even if they are done at the arm’s length price. For these reasons, the Japanese Innovation Box seems to be a moderate tax incentive.
One might argue that in the age of the GloBE rules, Japan can ensure its competitiveness even with modest tax incentives. However, it may sound a bit optimistic or even naive to think so. It is true that the GloBE rules ensure a minimum effective tax rate of 15%, regardless of the location of the enterprise. Accordingly, the GloBE rule can help Japan maintain its competitiveness by making tax incentives adopted by other countries virtually meaningless as long as the effective tax rate goes below 15%. However, 15% is a fairly low tax rate from the perspective of a high-tax country like Japan. As noted above, even under the Innovation Box, the effective tax rate in Japan is expected to remain well above 15%. Thus, even after implementing the 15% global minimum tax and the Japanese Innovation Box regime, MNEs would still be motivated to establish R&D centers outside of Japan in search of a lower tax rate than in Japan.
In summary, it is fair to say that the Japanese Innovation Box is a moderate tax incentive. Several countries have responded strategically, developing mechanisms to maintain the strong tax incentives of their IP Box regimes even under the GloBE rules.<a href="#_ftn8" name="_ftnref8">[8]</a> In contrast, Japan appears to have a policy of staying away from such movements and seeking to remain a high-tax country. It will be interesting to see if the Japanese Innovation Box can be a game changer even under such a policy.
<a href="#_ftnref1" name="_ftn1">[1]</a> <a href="https://web-archive.oecd.org/2021-07-08/593841-130-countries-and-jurisdictions-join-bold-new-framework-for-international-tax-reform.htm" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://web-archive.oecd.org/2021-07-08/593841-130-countries-and-jurisdictions-join-bold-new-framework-for-international-tax-reform.htm</a>
<a href="#_ftnref2" name="_ftn2">[2]</a> Study Group on Promoting Innovation Investment by the Japanese Private Sector, <a href="https://www.meti.go.jp/shingikai/economy/innovation_investment/20230731_report.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Interim report</a>, 15 (2023). The study group comprises 12 members, including three academics and ten companies, such as Honda and SONY. Its secretariat is the METI which may negotiate tax policy with the Ministry of Finance of Japan from the economic and industrial policy perspectives.
<a href="#_ftnref3" name="_ftn3">[3]</a> Nobuhisa Abe et al., <a href="https://www.mof.go.jp/tax_policy/tax_reform/outline/fy2024/explanation/index.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Reiwa 6 Nendo Zeiseikaisei no Kaisetsu</a> 554 (2024). The authors of this technical explanation are ministry officials. Although these officials wrote in their personal capacity, the technical explanation is generally considered authoritative literature in practice.
<a href="#_ftnref4" name="_ftn4">[4]</a> In a nutshell, the “qualified IP income” is essentially the “domestic self-development” portion of income arising from the licensing or domestic sale of the qualified IP. The “domestic self-development” portion is determined by the ratio of R&D costs directly related to the qualified intellectual property to the remaining R&D costs after excluding those without the domestic or self-development nature. According to the MOF, limiting tax benefits to the self-development portion will ensure that the Japanese Innovation Box is in line with the “nexus approach” recommended by the final report of BEPS Action 5 (Addressing Harmful Tax Practices) (Id. at 555).
<a href="#_ftnref5" name="_ftn5">[5]</a> 21% = 30% * (1 – 30%). See, e.g., <a href="https://www.meti.go.jp/main/yosan/yosan_fy2024/pdf/03.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">METI, Reiwa 6 Nendo (2024 Nendo) Keizaisangyo Kankei Zeiseikaisei Nitsuite</a>, 6 (2023).
<a href="#_ftnref6" name="_ftn6">[6]</a> For the tax rate under the IP Box regime in each country, see, e.g., Alex Mengden,<a href="https://taxfoundation.org/data/all/eu/patent-box-regimes-europe-2023/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right"> Patent Box Regimes in Europe, 2023</a> (2023) (the tax rate under the IP Box regime would be lower than 21% in all of the featured countries).
<a href="#_ftnref7" name="_ftn7">[7]</a> The details of this requirement have yet to be determined and will be laid down by the MOF later. In addition, taxpayers must obtain a certificate confirming the qualification of their intellectual property by the METI and attach it to their tax return.
<a href="#_ftnref8" name="_ftn8">[8]</a> For example, Belgium has reformed its Innovation Income Deduction regime (85% deduction of the qualified IP income, effectively reducing the effective tax rate to 3.75%) to allow taxpayers to convert a certain excessive portion of their deductible amount into a non-refundable tax credit to be carried forward indefinitely, and, in effect, to manage their effective tax rate from year to year.
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/08/20/japan-to-introduce-innovation-box/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>Pillar 2 and alternatives for attracting (as well as keeping) foreign investments</title>
<link>https://kluwertaxblog.com/2024/08/14/pillar-2-and-alternatives-for-attracting-as-well-as-keeping-foreign-investments/</link>
<comments>https://kluwertaxblog.com/2024/08/14/pillar-2-and-alternatives-for-attracting-as-well-as-keeping-foreign-investments/#respond</comments>
<dc:creator><![CDATA[Svetislav V. Kostić (Managing Editor) (University of Belgrade, Faculty of Law)]]></dc:creator>
<pubDate>Wed, 14 Aug 2024 16:25:05 +0000</pubDate>
<category><![CDATA[GloBE]]></category>
<category><![CDATA[OECD]]></category>
<category><![CDATA[Pillar II]]></category>
<category><![CDATA[QDMTT]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19677</guid>
<description><![CDATA[The Pillar 2 initiative (GloBE and QDMTT) has been seen as the end of using low effective corporate income tax rates (either by virtue of low nominal corporate income tax rates and/or through the use of tax incentives) as a means to attract foreign investors. Sacrifices made by the host country in terms of lower... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/08/14/pillar-2-and-alternatives-for-attracting-as-well-as-keeping-foreign-investments/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[The Pillar 2 initiative (GloBE and QDMTT) has been seen as the end of using low effective corporate income tax rates (either by virtue of low nominal corporate income tax rates and/or through the use of tax incentives) as a means to attract foreign investors. Sacrifices made by the host country in terms of lower tax revenues are made meaningless by Pillar 2 mechanisms which allow other jurisdictions to collect top-up taxes on the same profits. For many countries (and even whole regions) in the world today Pillar 2 undermines the very foundations of their economic development policy. In other words, in a Pillar 2 environment states which relied on low effective corporate income tax rates to attract capital from abroad now have to come up with alternatives in order to achieve the same goal. There has been notable debate in academic and policy circles on whether or not Pillar 2 is a good solution for developing countries, but it is safe to say that this ship has sailed – Pillar 2 rules have been adopted by the world’s most powerful economies (eg, several influential common law states, countries in the European Union, etc.) and can no longer be avoided.
The preliminary question which must be addressed is should alternatives to low effective corporate income tax rates even be sought. I.e. should countries stop providing fiscal incentives in any form to corporations in order to attract and stimulate investment. While this may be an interesting theoretical topic for debate it would be safe to assume that countries will continue to attempt to make themselves as attractive as possible as a destination for global capital. Furthermore, Pillar 2 will most certainly not prevent global multinationals from seeking the most beneficial conditions to locate their business. Thus, incentives are here to stay, its just a matter of what form will they take.
Governments which so far relied on low effective corporate income tax rates as a means to attract foreign investors today have several dilemmas.
Firstly, they have to decide if their corporate income tax systems should be divided into two subsections – one for those entities which do, and one for those which do not fall under the scope of Pillar 2 rules. In other words, should our tax systems be based on the 750 Million EUR global revenue divide, where those who would be under this threshold could continue to enjoy all the benefits of the ancien regime in terms of lower nominal tax rates and/or incentives resulting in lower effective tax rates. This approach may be quite tempting as in many jurisdictions, particularly in developing countries, it is the domestic businesses that would not meet the Pillar 2 criteria. Alas, most of such jurisdictions cannot rely purely on domestic sources to drive their growth and are still at an impasse as what to do to attract foreign capital once the measures they have been accustomed to become obsolete.
Secondly, countries may choose to keep their existing tax systems, but introduce a QDMTT mechanism so that those profits which would be taxable in other jurisdictions due to the application of Pillar 2 rules (GloBE rules) are taxed by them.
It should be noted that the choice between the two previously described approaches is not a completely free one in terms of potential legal constraints and that is not just pure econometrics that should decide on which one to implement. E.g. notable non-discrimination issues arise in terms of both of the outlined choices and their potential infringement of the provisions of double taxation treaties (e.g. prohibited capital ownership discrimination provided under Art 24(5) of the OECD Model Tax Convention), bilateral investment protection treaties (e.g. infringement of the fair and equitable treatment, most favored nation treatment in case of those bilateral investment protection treaties which do not contain an applicable tax carveout), as well as other international agreements the respective country is party to. Furthermore, the application of the UTPR mechanisms may also lead to the violation of (tax and non-tax) international treaty obligations. All of these must be researched thoroughly before making the final policy choice.
Thirdly, there is the rather sophisticated route of designing qualified refundable tax credits. In other words, Pillar 2 enables countries to keep some forms of tax incentives, although somewhat limiting their effectiveness (in terms of their ability to lower the effective corporate tax rate). Unfortunately, this approach is burdened with uncertainty. Namely, the acceptability and the corresponding success of the design will have to be ultimately ascertained by other jurisdictions and not the one which has been responsible for the design itself. While this is not an unheard-of situation (e.g. countries which host US investments will often try to make sure that their taxes are creditable for US foreign tax credit purposes, wherein we have the same principle issue – the ultimate success of the design of the respective tax will be determined by the approach of another country’s tax authority), Pillar 2 rules are still quite novel and broad consensus is yet to be found on many issues.
Governments may choose to completely give up on providing incentives through corporate income taxation which leads them to two potential policy options.
One is to dwell more deeply into the possibilities for providing tax incentives within the ambit of other tax forms. E.g. let us assume that a jurisdiction managed to attract headquarters of global multinationals by providing them, in addition to the rule of law, political and financial stability and developed infrastructure, with a competitive corporate tax environment. If such a country can no longer provide low corporate income tax rates it may introduce generous incentives for the income generated by top level management in order to maintain its competitive edge. Although so far much less the object of scrutiny within international taxation developments, such incentives are not beyond reproach and may cause notable political (e.g. such as the most recent ones in Germany in relation to the proposals for tax incentives for inbound high-skilled immigrants) as well as broader social issues (the growth in the cost of housing, the gentrification of certain communities, etc.).
The second one is turning to direct subsidies as the primary tool for attracting foreign investment, a policy choice already adopted by some jurisdictions in combination with the introduction of a QDMTT, most notably Vietnam.
Providing direct subsidies to large multinationals opens up numerous issues. Namely, retaining the low effective corporate income tax rate without introducing a QDMTT essentially leads to the increase in the public revenue of the state of the parent entity. In other words, by giving up a part of your taxation rights (by virtue of a low effective corporate income tax rate) you are just increasing the taxation revenue of another country without any benefit for the taxpayer who’s profits cannot escape the minimum level of tax (it’s just a matter of which jurisdiction will tax them). On the other hand, in reverting to a direct subsidy mechanism you will be seen as not only financially supporting a multinational group (which may be far more politically unpopular than providing a sophisticated tax incentive i.e. a qualified refundable tax credit), but due to the fact that the subsidy will be treated as income under IAS 20 you may also be subsidizing the budget of another state the tune of 15% of the subsidy.
However, if we are able to avoid the hurdles of a political debate (which are often burdened by populist rhetoric), the effect of a direct subsidy is in essence the same as that of a qualified refundable tax credit.
The direct subsidy policy choice is burdened by similar concerns that other Pillar 2 compliant incentives are subject to. The primary danger lies in the subsidy being seen as a direct quid pro quo for the jurisdiction introducing a QDMTT into its tax legislation, which may trigger the application of the no benefits requirement (NBR) found in Pillar 2 rules which have already been discussed on this blog (see: <a href="https://kluwertaxblog.com/2023/09/18/fiscal-subsidies-aspirers-beware-of-the-no-benefit-requirement-in-pillar-two/" data-wpel-link="internal">https://kluwertaxblog.com/2023/09/18/fiscal-subsidies-aspirers-beware-of-the-no-benefit-requirement-in-pillar-two/</a>).
Namely, for a QDMTT to be a “qualified” minimum tax, the jurisdiction implementing it must not provide any benefits which are related to such rules. In other words, a simple introduction of a direct subsidy mechanism to mitigate the effects of Pillar 2 application (in essence the introduction of the QDMTT) may lead to the QDMTT losing its qualified status However, the existence of broad direct subsidy programs in many jurisdictions in the world (e.g. the EU Green and Digital Transformation Deal and similar US initiatives) gives good reason to assume that a subsidy program which can also mitigate the effects of introducing a QDMTT may be implemented successfully, wherein revenues collected by virtue of the QDMTT may provide funding for the subsidy mechanism, although it would not be advisable to establish an express link between the two. The same logic may be applied to the conditioning of granting the subsidy on the beneficiary being subject to a QDMTT. On the other hand, it is evident that certain criterion which have no direct link to the QDMTT or Pillar 2 for that matter, may lead us very close to the same result we would achieve if we were to condition the granting of a subsidy on one being subject to a QDMTT. Actually, the way in which a QDMTT is implemented may guide the definition of the criteria for being eligible for a subsidy. E.g. if all entities who are part of groups whose consolidated revenues are above 750 Million EUR are subjected to QDMTT, and not just those who in addition to meeting this condition are subject to Pillar 2 rules at the level of their headquarters, this would provide broader space to the designers of the subsidy mechanism. In other words, if only those taxpayers whose headquarters or affiliates are subjected to an IIR or an UTPR mechanism would be liable to the QDMTT, this would mean that other taxpayers belonging to comparable groups or even large domestic companies/groups would not have to pay additional tax on their profits. If we were to provide a subsidy only to those companies subject to the QDMTT it would be quite difficult to argue that the primary purpose of the subsidy is to alleviate the burden of additional taxation. If, however all taxpayers, foreign and domestic, who belong to groups whose consolidated revenues are above the Pillar 2 threshold are subjected to an additional layer of tax, regardless of whether or not their headquarters or affiliates are subjected to an IIR or an UTPR mechanism, and the respective jurisdiction starts providing subsidies to all of these entities based on objective criteria which can be met only by large multinational or domestic groups, the link between the subsidy and the QDMTT is much harder to establish making the risk from the application of the NBR anti-avoidance rules considerably lower.
Once the problem of the NBR anti-avoidance rules is overcome, for most countries in the world the constraints for designing the direct subsidy mechanism are quite limited. Provided the country is not a member of the EU, or does not have in its domestic legislation rules which would mirror the EU state aid rules (e.g. EU accession countries), the main concerns to be taken into account are related to WTO law and international trade agreements to which a country is a party to. However, the provisions of the WTO Agreement of Subsidies and Countervailing Measures, as well as most international trade agreements provide quite a wide space for designing subsidy mechanism, wherein the primary criterion for the application of Pillar 2 rules (the size of the multinational group in terms of consolidated revenue) may not be of relevance. This is a matter that will be explored in our next blog.
While the work on alternatives to the tax incentives made obsolete by virtue of the introduction of Pillar 2 rules is in its initial stages it is imperative to notice that we no longer have the luxury of remaining within the ambit of just tax legislation. The quest to attract capital while meeting the Pillar 2 requirements may easily lead to the infringement of other international obligations, those emanating from e.g. bilateral investment treaties, international trade agreements and even WTO law. It is against all of these legal sources, and not only the Pillar 2 ones, that potential measures must be tested prior to their introduction as these additional legal sources may have also effective litigation forums, the consequences of whose decisions may be quite grave.
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/08/14/pillar-2-and-alternatives-for-attracting-as-well-as-keeping-foreign-investments/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
<item>
<title>The Contents of EC Tax Review, Volume 33, Issue 04, 2024</title>
<link>https://kluwertaxblog.com/2024/08/06/the-contents-of-ec-tax-review-volume-33-issue-04-2024/</link>
<comments>https://kluwertaxblog.com/2024/08/06/the-contents-of-ec-tax-review-volume-33-issue-04-2024/#comments</comments>
<dc:creator><![CDATA[Ben Kiekebeld (General Editor EC Tax Review and tax adviser at Ernst & Young Belastingadviseurs LLP)]]></dc:creator>
<pubDate>Tue, 06 Aug 2024 08:50:39 +0000</pubDate>
<category><![CDATA[Uncategorized]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19669</guid>
<description><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:   Rita De La Feria, What Is Tax Fairness? In the last two decades, the term ‘fair taxation’ has become ubiquitous in the European public debate. From a political economy perspective this increased popularity... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/08/06/the-contents-of-ec-tax-review-volume-33-issue-04-2024/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:
 
<h4><a href="https://kluwerlawonline.com/journalarticle/EC+Tax+Review/33.4/ECTA2024018" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Rita De La Feria, What Is Tax Fairness?</a></h4>
In the last two decades, the term ‘fair taxation’ has become ubiquitous in the European public debate. From a political economy perspective this increased popularity is not difficult to understand: the term is sufficiently vague to cover different taxing preferences, appropriately simple to be intuitively understood by voters, and suitably pro-social to convey a compelling story. From a normative perspective, however, it is precisely this vagueness and simplicity that renders the term problematic. From both a theoretical and a policy perspectives, what is meant by fair taxation? What is the impact of taxation on inequalities, broadly construed, and to what extent should the tax system be used to redress them? To answer these questions, the European Association of Tax Law Professors (EATLP) embarked on a massive global research project on ‘Taxation and Inequalities’ in 2022. The overall aim of the project is to fill the scholarship gap and inform policy, by presenting a novel analytical and conceptual framework of taxation and inequalities, informed not solely by tax law, but also by human rights, constitutional and administrative law, as well as public economics, political economy, moral philosophy, and moral and social psychology. This Editorial introduces the core issues at stake, as discussed at the EATLP Congress, held at Antwerp University, in June 2024.
 
<h4><a href="https://kluwerlawonline.com/journalarticle/EC+Tax+Review/33.4/ECTA2024011" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Mees Vergouwen, Conflicts Between Directives and Tax Treaties: Which Obligation Takes Precedence? Three Perspectives</a></h4>
Since 2014, directives in the area of direct taxation may include an obligation to tax income. This article examines the question of which obligation should prevail in the event of a conflict between a directive’s obligation to tax and a tax treaty obligation not to tax. This question of precedence is considered from three different perspectives: the international law perspective, the national law perspective and the European law perspective. This article concludes that the international law perspective, taking into account the national law and European law perspectives, appears to be, essentially, decisive (except for those EU Member States that can override, as a matter of national law, tax treaties). Based on this conclusion, it is recommended that tax treaties that (may) conflict with directives be renegotiated. The purpose of such renegotiations could be to include a subordination clause pursuant to which the tax treaty does not apply insofar as its application is incompatible with a particular directive or Union law obligations in general.
 
<h4>Sophia Piotrowski<a href="https://kluwerlawonline.com/journalarticle/EC+Tax+Review/33.4/ECTA2024019" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">, Interpretation of National Law as a Probatio Diabolica for the Commission?: The CJEU’s Judgment in Engie</a></h4>
With its judgment in Engie, the CJEU has annulled yet another Commission decision on the state aid compatibility of Member States’ tax rulings. The Grand Chamber found that the Commission and the General Court had incorrectly identified the reference system of taxation made up of the ordinarily applicable national law of Luxembourg. When it comes to the interpretation of national law in the state aid procedure, the interpretation provided by the Member State is generally decisive. A high evidentiary threshold applies if the Commission wants to depart from this interpretation. This holds all the more true for Member States’ General Anti-Abuse Rules (GAARs), which are by their very nature general. The judgment could have wide-reaching implications for the enforcement of state aid law by the Commission regarding all types of cases where the interpretation of national law is not altogether clear. For example, the interpretation of national law is a key point in the UK Controlled Foreign Company (CFC) case, which is why AG Medina in her conclusions draws heavily on the Engie judgment. As a result, the Commission will probably lose the UK CFC case.
 
<h4><a href="https://kluwerlawonline.com/journalarticle/EC+Tax+Review/33.4/ECTA2024017" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Antoni Bergas Forteza, Convergence between the Subject to Tax Rule (Pillar Two) and the Proposal for a Council Directive on a Common System of Taxation Applicable to Interest and Royalty Payments Made between Associated Companies of Different Member States</a></h4>
During recent years, the OECD has carried out continuous work regarding the development of the rules that make up Pillar Two, that is, the Income Inclusion Rule (IIR) and the Under taxed Payments Rule (UTPR). Along these same lines, the European Union has followed the same steps and has developed the normative introduction of the same rules. Now, with respect to the Subject to Tax Rule (STTR), because it is applicable through a bilateral tax treaty, its inclusion at the European regulatory level is not so direct; however, there are regulatory proposals capable of providing a tax response similar to that sought by the STTR of the OECD Pillar Two. An example of this is the Proposal for a Council Directive on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States.
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/08/06/the-contents-of-ec-tax-review-volume-33-issue-04-2024/feed/</wfw:commentRss>
<slash:comments>1</slash:comments>
</item>
<item>
<title>Will Coca-Cola’s $9 Billion Transfer Pricing Tax Court Loss Be Overturned By The Eleventh Circuit?</title>
<link>https://kluwertaxblog.com/2024/08/05/will-coca-colas-9-billion-transfer-pricing-tax-court-loss-be-overturned-by-the-eleventh-circuit/</link>
<comments>https://kluwertaxblog.com/2024/08/05/will-coca-colas-9-billion-transfer-pricing-tax-court-loss-be-overturned-by-the-eleventh-circuit/#respond</comments>
<dc:creator><![CDATA[William Byrnes (Texas A&M University Law)]]></dc:creator>
<pubDate>Mon, 05 Aug 2024 03:00:57 +0000</pubDate>
<category><![CDATA[Transfer Pricing]]></category>
<category><![CDATA[blocked income]]></category>
<category><![CDATA[closing agreement]]></category>
<category><![CDATA[coca-cola]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19661</guid>
<description><![CDATA[Coca-Cola announced that it would appeal to the Eleventh Circuit Court of Appeals, based in Atlanta, the Tax Court’s final entered decision of August 2, 2024, in favor of the IRS’ determination of $9 billion of transfer pricing adjustments and the validity of the IRS’ blocked income regulations.[1] The 240-page Coca-Cola 2020 Tax Court decision[2]... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2024/08/05/will-coca-colas-9-billion-transfer-pricing-tax-court-loss-be-overturned-by-the-eleventh-circuit/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[Coca-Cola announced that it would appeal to the Eleventh Circuit Court of Appeals, based in Atlanta, the Tax Court’s final entered decision of August 2, 2024, in favor of the IRS’ determination of $9 billion of transfer pricing adjustments and the validity of the IRS’ blocked income regulations.<a href="#_ftn1" name="_ftnref1">[1]</a>
The 240-page Coca-Cola 2020 Tax Court decision<a href="#_ftn2" name="_ftnref2">[2]</a> held in favor of the IRS concerning $9 billion of transfer pricing adjustments for Coca-Cola’s 2007, 2008, and 2009 tax years. The IRS alleged that U.S. Coca-Cola overcompensated its foreign syrup-manufacturing affiliates, known as “supply points,” by under-compensating U.S. Coca-Cola to use its U.S.-owned proprietary intangibles. The supply points are in seven countries<a href="#_ftn3" name="_ftnref3">[3]</a> but two countries, Ireland and Mexico, account for nearly $8 billion of the adjustment. Coca-Cola Ireland reported an income tax rate of only 1.4 percent during the period at issue.
Coca-Cola relied upon a transfer pricing method recorded in a 1996 IRS closing agreement to calculate its supply points’ transfer pricing for the tax years 1987 through 1995 and has continued to rely upon the closing agreement method afterward. The 1996 closing agreement allowed the supply points to retain a profit equal to 10 percent of gross sales, with the remaining profit split equally between U.S. Coke and the foreign supply point. This closing agreement method became known as the 10-50-50 method. After eleven years of audits that did not challenge the 10-50-50 method, in 2007, the IRS changed tact and began employing a Comparable Profits Method (the “CPM”) using data from Coca-Cola’s unrelated bottlers as comparable entities. The CPM resulted in transfer pricing adjustments of $9 billion dollars from the foreign supply points to U.S. Coca-Cola.
In a follow-up decision in 2023, the Tax Court, based on its 2023 3M decision,<a href="#_ftn4" name="_ftnref4">[4]</a> held that Coca-Cola could not rely on Brazil’s law that blocked royalty payments to thwart the increased transfer pricing adjustment related to Brazil in favor of the U.S.<a href="#_ftn5" name="_ftnref5">[5]</a>
What Do Coca-Cola’s Financial Statements Disclose About This Transfer Pricing Controversy?
The IRS transfer pricing audit, the subject matter of the Coca-Cola Tax Court decision, began with Coca-Cola’s 2007 fiscal year. For its 2007 fiscal year, Coca-Cola reported $7.873 billion in net income before taxes, $1.892 billion in income tax paid, and a 24.0 percent effective tax rate.<a href="#_ftn6" name="_ftnref6">[6]</a> Income tax paid includes U.S. federal, state, local, and Subpart F, as well as foreign income taxes. In its 2007 report, Coca-Cola reported that in 2005, Coca-Cola repatriated $6.1 billion of its previously unremitted foreign earnings and recorded an associated tax expense of approximately $315 million. The relatively low tax expense resulted from a one-year temporary tax incentive for U.S. multinationals to repatriate foreign earnings at an approximate 5.25 percent effective tax rate pursuant to the American Jobs Creation Act of 2004.
Let’s jump ahead to Coca-Cola’s 2016 fiscal year report, the year it was notified that the IRS may assert transfer pricing penalties as part of an IRS transfer pricing adjustment for the years 2007 through 2009. For its 2016 fiscal year, Coca-Cola stated about the IRS’ transfer pricing audit of 2007-2009:<a href="#_ftn7" name="_ftnref7">[7]</a>
The Company has followed the same transfer pricing methodology for these licenses since the methodology was agreed with the IRS in a 1996 closing agreement that applied back to 1987. The closing agreement provides prospective penalty protection as long as the Company follows the prescribed methodology and material facts and circumstances and relevant Federal tax law have not changed. On February 11, 2016, the IRS notified the Company, without further explanation, that the IRS has determined that material facts and circumstances and relevant Federal tax law have changed and that it may assert penalties. … The Company’s compliance with the closing agreement was audited and confirmed by the IRS in five successive audit cycles covering the subsequent 11 years through 2006, with the last audit concluding as recently as 2009.
The disputed amounts largely relate to a transfer pricing matter involving the appropriate amount of taxable income the Company should report in the United States in connection with its licensing of intangible property to certain related foreign licensees regarding the manufacturing, distribution, sale, marketing, and promotion of products in overseas markets.<a href="#_ftn8" name="_ftnref8">[8]</a>
Coca-Cola’s statement regarding its reliance on the closing agreement seems reasonable because the Tax Court issued a summary judgment in favor of Coca-Cola on December 17, 2017, that included the facts of Coca-Cola’s statement.<a href="#_ftn9" name="_ftnref9">[9]</a> In this decision, the Tax Court granted Coca-Cola summary judgment on the limited issue of the validity of its foreign tax credits resulting from Mexico tax paid on the Mexican royalties calculated pursuant to the 1987 IRS closing agreement that the Mexico Tax Authority also accepted. The Tax Court acknowledged the 1987 closing agreement in its decision and that the agreement provided penalty protection for Coca-Cola both during the term of the agreement and for tax years after 1995. The Tax Court stated:
For tax years after 1995, the agreement provided that Coca-Cola would meet the reasonable cause and good faith exceptions of sections 6664(c) and 6662(e)(3)(D) if its supply points continued to calculate royalties pursuant to the method of the agreement (the 10-50-50 method elaborated upon below). This protection applied to all of Coca-Cola’s then-existing and future supply points.<a href="#_ftn10" name="_ftnref10">[10]</a> The closing agreement expired on December 31, 1995. But the IRS examined petitioner’s returns for each of the ensuing 11 years and concluded that “the continuing application of the closing agreement’s terms and conditions to post-1995 years seems appropriate.”
Coca-Cola reported $8.136 billion in income before taxes, $1.586 in taxes paid, and a 19.5 percent overall effective tax rate in 2016. Coca-Cola noted that its accumulated undistributed foreign earnings amounted to $35.5 billion.<a href="#_ftn11" name="_ftnref11">[11]</a>
For its 2017 fiscal year report, Coca-Cola’s income before taxes fell to $6.742 billion but its taxes jumped to $5.560 for an 82.5 percent effective tax rate. The reason for the jump in taxes paid and thus the effective tax rate was the Tax Cuts and Jobs Act one-time transition tax of 15.5 percent applicable to total accumulated cash and cash equivalents of post-1986 untaxed foreign earnings and profits. Coca-Cola estimated $42 billion of accumulated foreign earnings as of 2017, and a transition tax liability estimated at $4.6 billion.<a href="#_ftn12" name="_ftnref12">[12]</a> For its 2018 fiscal year, Coca-Cola’s effective tax rate returned to 19.4 percent, almost its 2016 rate, while its income before taxes grew to $8.350 billion, with taxes paid of $1.623 billion.<a href="#_ftn13" name="_ftnref13">[13]</a>
In its most recent annual 2023 fiscal year filing, Coca-Cola noted that it has set aside a tax reserve of $439 million based on its more likely than not conclusion that the Tax Court decision will be overturned by the Eleventh Circuit Appeals Court.<a href="#_ftn14" name="_ftnref14">[14]</a> The $439 million reserve was determined based on a calculation using the methodologies Coca-Cola thinks the federal courts will ultimately order to be used in calculating the transfer pricing deficiency and the accrued interest on such deficiency. Coca-Cola noted that the calculations incorporated the estimated impact of correlative adjustments to the previously accrued transition tax. If the Tax Court decision is upheld and the IRS’ CPM methodology is applied to all tax years through 2023, the potential aggregate incremental tax and interest liability could be approximately $16 billion, increasing Coca-Cola’s effective tax rate by 3.5 percent for these years.
Coca-Cola reported $12.952 billion in income before taxes, $2.249 billion of income tax paid, and a 17.4 percent effective tax rate for 2023. Not including the potential additional tax if the Tax Court decision is upheld, Coca-Cola estimates a 19.2 percent effective rate for 2024.<a href="#_ftn15" name="_ftnref15">[15]</a>
Overview of the Tax Court Decision of 2020
In its 2020 decision, the Tax Court reached three primary conclusions.<a href="#_ftn16" name="_ftnref16">[16]</a> The first and most important conclusion regards the transfer pricing adjustment. The Tax Court found that the IRS did not abuse its discretion under IRC section 482 when it reallocated income to The Coca-Cola Company by using the CPM whereby the IRS used the foreign supply points as the tested parties and used independent bottlers as the uncontrolled comparables. The first conclusion controls the impact of the second and third conclusions.
The second conclusion concerns the IRS’ collateral adjustment for Coca-Cola’s Mexican peso-based foreign currency gains and losses.<a href="#_ftn17" name="_ftnref17">[17]</a> The Tax Court held that the IRS is allowed to adjust Coca-Cola’s foreign currency losses to correlate with the reduced income of the Mexico supply point after the transfer pricing adjustment in favor of the U.S. Third, the Tax Court held that Coca-Cola is allowed to offset the transfer pricing adjustment regarding its Brazilian supply point with a collateral adjustment for the dividends paid by Brazil to the U.S. in satisfaction of the royalty determined using the 10-50-50 method.
On June 2, 2021, after nearly 200 days (well past the 30-day deadline), the Coca-Cola Company filed a motion with the Tax Court for reconsideration.<a href="#_ftn18" name="_ftnref18">[18]</a> The Tax Court rejected the motion for reconsideration because it was well past the deadline.<a href="#_ftn19" name="_ftnref19">[19]</a>
In a follow-up decision in 2023, the Tax Court, based on its 2023 3M decision,<a href="#_ftn20" name="_ftnref20">[20]</a> held that Coca-Cola could not rely on Brazil’s law blocking royalty payments to thwart the increased transfer pricing adjustment of royalties due from the Brazil supply point.<a href="#_ftn21" name="_ftnref21">[21]</a>
Background of the Coca-Cola – IRS Transfer Pricing Dispute
The Coca-Cola Company transfer pricing dispute arose from IRS Notices of Deficiencies resulting from IRC Section 482 transfer pricing adjustments under which the IRS reallocated significant amounts of foreign income to Coca-Cola U.S. mainly from related supply points plants in Brazil, Chile, Costa Rica, Egypt, Ireland, Mexico, and Swaziland. These supply points produced concentrate syrups, flavoring, powder, and other ingredients used in the production of The Coca-Cola Company brand name soft drinks, including Coca-Cola, Fanta and Sprite, and other nonalcoholic, ready-to-drink beverages.
The supply points sold and distributed concentrate to multiple unrelated bottlers, in Europe, Africa, Asia, Latin America, and the Pacific Rim. The bottlers ranged from small businesses to large MNEs. The bottlers used the supply points’ concentrate to produce finished beverages that they would market directly or through distributors to millions of retail establishments outside the U.S. and Canada. To enable the supply points to manufacture and sell concentrate, they received licenses from Coca-Cola U.S. to use its proprietary IP, including trademarks, brand names, logos, patents, secret formulas, and proprietary manufacturing processes.
In 2007 through 2009, The Coca-Cola Company (Coca-Cola U.S.) reported income from foreign supply points using a revenue distribution method known as the “10-50-50 method”, a formulary apportionment method. The Coca-Cola Company and the IRS agreed to this apportionment method, recorded in a 1996 closing agreement, to resolve previous tax disputes for taxable years 1987-1995. According to the 10-50-50 method, the supply points were authorized to retain profits equal to 10 percent of their gross sales, with the residual profits split equally (50 percent each) with The Coca-Cola Company. Although the 1996 closing agreement did not state which transfer pricing methodology to apply to taxable years beyond 1995, The Coca-Cola Company continued using the 10-50-50 method for its future tax years.
The payments subject to this 10-50-50 method were characterized as royalties, but the 1996 closing agreement permitted the supply points to satisfy their royalties by either making royalty payments or through equivalent dividend distributions. From 2007 through 2009, more than $1.8 billion of income received from the supply points was in the form of dividends. The Coca-Cola Company utilized deemed-paid foreign tax credits (FTCs) attached to the dividend distributions but would not have attached them to royalty payments.
For the tax years 2007 through 2009, the IRS changed tact regarding the 10-50-50 method. The IRS applied a CPM under which the independent bottlers of Coca-Cola beverages were used as benchmark comparable parties. The IRS found that the bottlers were the proper benchmark because they operated in a similar beverage industry, held the same economic risks and contractual relationships, employed the same intellectual property from Coca-Cola, and ultimately shared from the same income stream as the supply points sales. In implementing the CPM, the IRS calculated the average return on operating assets (ROA) for the bottlers. Then the IRS applied the average ROA to the supply points’ operating assets to establish the supply points’ operating profit. Applying the CPM and the ROA data led to the IRS’ $9 billion adjustment from the foreign supply points to Coca-Cola U.S. Two foreign supply points, Ireland and Brazil, accounted for approximately 85 percent of the adjustment.
The Coca-Cola Company alleged that the IRS adjustments were arbitrary and capricious because the IRS disregarded the 10-50-50 method that had been acquiesced to in the immediate prior five audit cycles. The Coca-Cola Company also claimed that the IRS erred in applying the CPM method as the best method. The Coca-Cola Company argued that the unrelated bottlers are inadequate comparable parties to the supply points because the bottlers lack ‘marketing intangibles’ ownership. The Coca-Cola Company claimed that the supply points owned the local rights to use the Coca-Cola U.S.’ marketing intangibles, and such intangibles resulted in the supra-normal level of returns. The Coca-Cola Company viewed its supply points as comparable to master franchisees or long-term licensees.
The Tax Court Holds the 1996 Closing Agreement Cannot Be Relied Upon Beyond 1995.
At the outset of its case, Coca-Cola argued that the IRS acted arbitrarily by departing from the 10-50-50 method to which the parties had agreed when executing the 1996 closing agreement, whereby the parties settled a transfer pricing dispute involving taxable years 1987 through 1995. The Coca-Cola Company pointed the Tax Court to the closing agreement language that for taxable years after 1995, to the extent The Coca-Cola Company applies the 10-50-50 method to determine the amount of its royalty income concerning existing or any future supply points, The Coca-Cola Company shall be considered to have met the reasonable cause and good faith exception to avoid accuracy-related penalties.<a href="#_ftn22" name="_ftnref22">[22]</a>
Regarding the 1996 closing agreement, the Tax Court stated that it was silent on the transfer pricing methodology that the parties were expected to use for taxable years after 1995. The Tax Court stated that parties to a closing agreement may, and sometimes do, bind themselves to particular tax treatments for specified future years. Whereas, noted the Tax Court, Coca-Cola may have wished for the certainty that would arise from the indefinite future application of the 10-50-50 method, there is no evidence within the four corners of the 1996 closing agreement document that the IRS would have agreed to that indefinite future application. The Tax Court emphasized that there is nothing in the IRS closing agreement that suggests that the IRS regarded the 10-50-50 method as the platonic ideal of arm’s-length pricing for The Coca-Cola Company concerning its supply points. The 10-50-50 method was simply a formula to which the parties conformed to settle the dispute before them at that moment in time.
Coca-Cola urged that the ordinary preclusion doctrine would prevent parties from revisiting a settlement agreement’s factual underpinnings in later litigation when they intend their agreement to have a preclusive effect. However, the Tax Court noted that Coca-Cola must demonstrate that in 1996, the parties intended to address the same transfer pricing method for the years to follow 1995 by formalizing such intent within the closing agreement. The Tax Court considered that these sophisticated parties knew how to draft a conclusive closing agreement for future years had they agreed to such future certainty at the time of the agreement.
Explaining The Coca-Cola Company’s Relationships With Its Foreign Supply Points and Independent Bottlers 
The supply points manufacturing activity involves procuring raw materials and using The Coca-Cola Company’s guidelines and production technologies to transform raw materials into concentrate. The procurement activities are limited. Many ingredients are obtained only through The Coca-Cola Company-owned flavor processing plants, and other ingredient purchases are acquired through procurement specialists from The Coca-Cola Company or its subsidiary entities known as “ServCos”. After completing the manufacturing process, the supply points package the concentrate into kits tailored to the needs and capacities of the bottlers to whom the concentrate is then distributed.
The bottlers oversee the finished product manufacturing. Having procured concentrate from the supply points, they prepared finished beverages by mixing the concentrate into purified water, carbon dioxide (for sparkling drinks), sugars, other sweeteners, and additional ingredients obtained from The Coca-Cola Company’s suppliers. The bottlers printed and added brand labels to cans and bottles before distributing or warehousing them as finished products.
From 2007 through 2009, The Coca-Cola Company performed most of the supply chain management. The bottlers were responsible for supply chain management from their concentrate receipt through distributing finished products with the wholesalers and retailers channels. The Coca-Cola Company identified approved suppliers for most raw materials. But the bottlers were responsible for securing the container materials which included aluminum, steel, and plastic. The bottler generally held a geographic territory where it claimed exclusivity. This exclusivity allowed the bottlers to cultivate an intimate understanding of the local retailers and wholesalers’ channels, anticipate local consumer preference, and build bottling and storage capacity.
Who Owned the Coca-Cola Intellectual Property?
Except for Canada, The Coca-Cola Company was the registered legal owner of the worldwide trademarks related to Coke, Fanta, Sprite, and other beverages. The trademark of the Coke products covers the Spencerian script, the dynamic ribbon, the red-and-white color palette, and the contour bottle shape. The Coca-Cola Company perpetuated its global brand by maintaining rigorous standards for the core visual design elements and messaging. The standards provide detailed guidance to keep marketing consistency.
The intercompany agreements granted the supply points no rights or ownership interest to The Coca-Cola Company’s trademarks. The intercompany agreements identified The Coca-Cola Company as the “owner” or “registered proprietor” of the trademarks, and it expressly reserved the right to control all things and acts related to or involving the use of the Coca-Cola trademarks. The supply points received a restricted right to use the trademarks concerning production and sales activities. Unlike most of the supply points, Brazil was initially allowed to contract with the bottlers, and it was therefore authorized to sublicense the use of Coca-Cola trademarks to local bottlers. The sub-licensing rights were later canceled.
The bottlers had access to trademark rights. While the bottlers could use Coca-Cola trademarks in connection with the production, sale, and distribution of finished beverages, they had to acknowledge that The Coca-Cola Company was the sole owner of those trademarks together with any goodwill generated by the bottler’s use of the trademarks. The Coca-Cola Company reserved the right to control most aspects of the trademark, and the bottlers agreed to seek approval from The Coca-Cola Company for advertising, promotions, or other marketing that involved the trademarks. In practice, the ServCos were in charge of administering such approval from The Coca-Cola Company side.
From 2007 through 2009, The Coca-Cola Company showed average book assets of around $15 billion. These assets ($11.7 billion on average) comprised investments in subsidiaries and other affiliates. The Coca-Cola Company’s balance sheets report trademarks and other intangible assets of around $500 million. This figure does not reflect the market value of The Coca-Cola Company’s self-developed intangibles and beverage brands. The Coca-Cola Company is the registered owner of virtually all trademarks covering the Coca-Cola, Fanta, and Sprite brands and of the most valuable trademarks covering the other soft-drink products. The Coca-Cola Company is the registered owner of nearly all of the patents, including patents covering aesthetic designs, such as bottle shapes and caps, packaging materials, beverage ingredients, and production processes. The Coca-Cola Company owns all intangible property from the research and development of new products, ingredients, and packaging. The ServCo agreements executed after 2003 explicitly stipulated that any marketing concepts developed by third-party vendors are property of a subsidiary of The Coca-Cola Company called “Export,” securing the ownership of all developed marketing intangibles.
Four supply points, Ireland, Costa Rica, Egypt, and Swaziland, showed no trademarks or other intangible property on their balance sheets. Only Brazil’s supply point reflects intangible property, representing about 11 percent of its book assets.
What Were the Terms Recorded in Coca-Cola’s Inter-Company and Bottler Agreements?
The supply points sold and distributed concentrate to multiple unrelated bottlers, in Europe, Africa, Asia, Latin America, and the Pacific Rim. The bottlers ranged from small businesses to large MNEs. The bottlers used the supply points’ concentrate to produce finished beverages that they would market directly or through distributors to millions of retail establishments outside the U.S. and Canada. To enable the supply points to manufacture and sell concentrate, they received licenses from The Coca-Cola Company to use its proprietary IP, including trademarks, brand names, logos, patents, secret formulas, and proprietary manufacturing processes.
<blockquote>Although The Coca-Cola Company had relied on the 10-50-50 method to compute royalties payable by the supply points, the intercompany agreements were silent on this method.</blockquote>
For instance, the Mexico supply point agreement specified a royalty computed as an operating profit percentage. The Ireland and Swaziland supply point agreements specified a royalty computed as a percentage of concentrate sales. The Brazil supply point agreement stipulated a $100 royalty. As a business practice, The Coca-Cola Company credited all the supply point payments against the royalty obligation of the 10-50-50 method.
The bottlers remunerated The Coca-Cola Company through the price they paid for the concentrate. The price bundled all of the Coca-Cola Company’s valuable inputs into a single bill, ostensibly for concentrate. With a bundled payment, the bottlers secured not only the physical beverage base but also the entire package of rights and privileges required to operate as official bottlers. The bundled payment includes the right to use the Coca-Cola trademarks, access to approved suppliers, company databases, marketing materials, and support.
The Coca-Cola Company reserves a unilateral right to set the concentrate price, which in theory enabled it to set up the bottler’s profitability, although concentrate prices were established through local negotiation to equitably share operating profit. Although the parties’ goal was to achieve something near a “50 percent-50 percent” split of the profit, in practice, the profit split usually ranged between 45 percent and 55 percent in favor of one party or the other. The bottlers might negotiate a share near the high end of the 50 percent range in cases involving economic headwinds or large capital expenditures.
The Coca-Cola Company derives its share of income through the bottlers’ payments for concentrate. The supply points receive most of this income, remitting to The Coca-Cola Company only what is needed to satisfy the royalty obligation determined under the 10-50-50 method. The administrative and marketing expenses are incurred through The Coca-Cola Company or the ServCos. These expenses are shifted to the supply points books through intercompany charges. The Coca-Cola Company’s income stream reflects its role as the brand owner and administrator. Its gross receipts for 2007 through 2009 consisted primarily of pro-rata royalties for using its intangible property.
The IRS Basis of its Adjustments Of Royalties Due Coca-Cola U.S.
The IRS selected The Coca-Cola Company’s 2007, 2008, and 2009 returns for examination. During the audit work, the IRS Field Exam determined that the 10-50-50 method did not reflect arm’s-length conditions because this method under-compensated The Coca-Cola Company for the use of its intangibles. IRS economists identified The Coca-Cola Company as the legal owner of virtually all the company trademarks and intangible property, thus owning the vast majority of brand value. The supply points functioned essentially as contract manufacturers yet kept most of the income generated by concentrate sales to the foreign third-party bottlers. The IRS concluded that an adjustment to income was warranted to reflect an arm’s length income distribution between The Coca-Cola Company and its supply points.
Concluding that no uncontrolled transaction could accurately capture the value of licensing the Coca-Cola unique brand, the IRS Economists rejected the Comparable Uncontrolled Transaction (CUT) method as an appropriate method. Likewise, the Profit Split method was rejected, finding it unreliable where one party, The Coca-Cola Company, owns all valuable intangible assets while the counterparties, the supply points, own virtually none. Instead, the IRS identified the Comparable Profits Method (CPM) as the best method whereby the third-party bottlers were comparable entities to benchmark the results of the supply points.
In a report that the IRS expert witness, economist T. Scott Newlon, presented to the U.S. Tax Court, Newlon selected 18 independent Coca-Cola bottler entities headquartered in 10 countries having qualified auditors statements for 2007 through 2009. The Newlon report concludes that a return on operating assets (dividing operating income by operating assets) derived from the bottlers’ operations would yield adequate adjustments to the supply points’ income. Newlon concluded that some of the supply points received compensation above arm’s-length. His report features three main recommendations:
[1] The income for Brazil, Chile, Costa Rica, and Mexico supply points will be adjusted downward to reflect an ROA consistent with the ROAs of the Latin American bottler segment.
[2] The income of the Ireland and Swaziland supply points should be adjusted downward to reflect an ROA consistent with the ROAs of bottlers, except for those in East Asia.
[3] Adjusting upward the 2007 and 2008 income for Egypt’s supply point.
The IRS implemented these adjustments consistent with the recommendation. It adjusted downward the income of Brazil, Chile, Costa Rica, and Mexico supply points to reflect the median ROA of the Latin America Bottler segment. It adjusted downward the income for Ireland and Swaziland supply points to reflect the median ROA of the 13 non-East Asia bottlers. To the extent a supply point reported income exceeding its benchmark, the IRS determined to allocate additional royalty income to The Coca-Cola Company from that supply point.
Reflecting these adjustments, the IRS issued a Notice of Deficiency which The Coca-Cola Company challenged before the U.S. Tax Court. Following discovery, the government amended its answer to assess additional deficiencies related to The Coca-Cola Company’s practice referred to as “split invoicing,” under which certain ServCos received compensation from the bottlers at rates that were, on average, higher than the rates specified in the agreements the ServCos would have executed with Export. Concluding that the ServCo agreements with Export were not reflecting arm’s-length conditions, the IRS alleged that excess income ServCo received from the bottlers, such as compensation over a markup on non-direct marketing expenses, should be reallocated to The Coca-Cola Company. These adjustments produced additional deficiencies totaling $134,905,174 for the three audit years.
The IRS’ Best Method Rule Application and Choice of Comparables 
The best method rule requires that the arm’s length result of a controlled transaction must be determined under the method that, under the facts and circumstances, provides the most reliable measure of an arm’s length result. No method is invariably considered more reliable than others. For controlled transfers of intangible property, the regulations provide four methods to determine an arm’s-length result:<a href="#_ftn23" name="_ftnref23">[23]</a> [1] Comparable Uncontrolled Transaction (CUT) method, [2] Comparable Profits method (CPM), [3] Profit Split method, and [4] an unspecified method. CUT provides an especially high degree of reliability only “[i]f an uncontrolled transaction involves the transfer of the same intangible under the same, or substantially the same, circumstances as the controlled transaction.” The Tax Court found that the Coca-Cola Company did not identify pricing data for transactions with unrelated parties that involved the transfer of the same intangibles, and thus, Coca-Cola’s attempt at CUT was inapplicable.
Newlon, in his report prepared for the IRS, determined that the supply points (other than the Egypt supply point) enjoyed levels of profitability unjustified by the level of economic functions. The supply points were engaged almost exclusively in manufacturing functions, and The Coca-Cola Company expert witnesses in the trial also confirmed that the supply points exercised a routine activity that is equivalent to the activities of contract manufacturers. The supply points in Brazil, Chile, and Egypt employ personnel who engage in additional activities, such as marketing, sales, and finance. To the extent the supply points performed non-manufacturing activities, they discharged functions similar to those performed by ServCo employees. The ServCos were compensated for their employees’ services on a cost-plus basis, with an average markup of six percent to seven percent. The Coca-Cola Company did not question the arm’s-length character of the ServCos’ compensation. Based on ServCos then, the arm’s-length compensation for the supply points services should range between six percent and 8.5 percent over cost. But the profits of the supply points exceeded this range.
The supply points’ average annual revenue surpassed the yearly average cost by $3.85 billion ($10.57 billion – $6.72 billion). They enjoyed, on average, a markup on costs of about 57 percent ($3.85 billion ÷ $6.72 billion). That return level is close to seven times the 8.5 percent return that represents the arm’s-length value of their manufacturing activities, using the IRS method.
The Coca-Cola Company, with a 55 percent ROA, was highly profitable; it outperformed 968 (or 97 percent) of the 996 tested companies. But its supply points produced an even higher ROA reflecting intercompany profit shifting. The supply points in Ireland, Brazil, Chile, and Costa Rica generated a ROA of 215 percent, 182 percent, 149 percent, and 143 percent on average ROA, respectively. These four had a ROA higher than the 996 companies from the benchmark group. The supply points in Swaziland and Mexico, each with 129 percent and 94 percent ROA had ROAs higher than 99 percent of the companies in the benchmark group. This situation resulted in the Tax Court pondering a question: Why are the supply points, engaged as they are in routine contract manufacturing, the most profitable food and beverage companies in the world?
In the report that Newlon prepared for the IRS, he included a list of comparable entities consisting in 18 unrelated bottlers, headquartered in ten countries all with qualified auditor statements. In the expert witness report that Newlon later submitted to the Tax Court, this comparable list was enlarged to 24 bottlers. The same report concluded that the best profit level indicator (PLI) is ROA.
Tax Court Decision Regarding Supply Points
The Tax Court concluded that the IRS did not abuse its discretion by using the bottler’s ROA to adjust income between The Coca-Cola Company and the supply points. First, the CPM was a reasonable method to apply given the nature of the assets owned and the activities performed by the controlled taxpayers. Second, the IRS’ selection of comparable parties was appropriate. Third, the IRS computed and applied ROA using reliable data, assumptions, and adjustments. The Tax Court found that the bottlers, in many respects, enjoyed an economic position superior to that of the supply points, which justifies a higher return for the bottlers.
The Tax Court opined that the case is particularly susceptible to applying CPM because The Coca-Cola Company owned virtually all the intangible assets needed to produce and sell the soft-drink beverages. The Coca-Cola Company was the registered owner of almost all trademarks covering the Coca-Cola, Fanta, and Sprite brands and of the most valuable trademarks for other products. The Coca-Cola Company was the registered owner of nearly all the patents, including patents covering aesthetic designs, packaging materials, beverage ingredients, and production processes. The Coca-Cola Company owned all rights to secret formulas and proprietary manufacturing protocols. The Coca-Cola Company owned all intangible property resulting from R&D concerning new products, ingredients, and packaging. The Coca-Cola Company was the counterparty to all Bottler agreements, giving it ultimate control over the distribution system for the soft-drink beverages.
The supply points, by contrast, owned few, if any, valuable intangibles. Their agreements with The Coca-Cola Company explicitly acknowledged that Coca-Cola U.S. owned the company trademarks, giving the supply points only a limited right to use the intellectual property. Four supply points booked zero trademarks or other intangible assets. Only Brazil booked $190 million of intellectual property assets but attributed to local brands. The supply points’ agreements with The Coca-Cola Company granted rights to produce and sell concentrate, and The Coca-Cola Company refers to these rights as “franchise rights.” But the agreements were terminable at will. No supply point enjoyed any form of territorial exclusivity, and no supply point was granted any right, express or implied, to concentrate production. Thus, the Tax Court concluded that the supply points did not own valuable intangible assets in the form of “franchise rights.”
The Tax Court analyzed whether the unrelated bottlers that the IRS selected were reasonably treated as comparable to the supply points. The CPM requires consideration of the general comparability of five factors which include [1] functions performed, [2] contractual terms, [3] risks, [4] economic conditions, and [5] property employed or transferred. The Tax Court found that the five factors were present when comparing the bottlers with the supply points. The Tax Court agreed with the IRS’ analysis that the bottlers operate in the same industry, face similar economic risks, share similar contractual and economic relationships with The Coca-Cola Company, use most of the same intangibles (brand names, trademarks, and logos), and share the same income stream from the sale of soft drinks. In many aspects, the bottlers and supply points share comparable economic conditions. Both sets of companies are participants of the Non-Alcoholic-Ready-to-Drink (NARTD) industry where revenues are dependent on the retail of soft drink beverages, and both face risks from economic cycles.
After its analysis, the Tax Court concludes that the IRS did not abuse its discretion in reallocating income from the supply points to The Coca-Cola Company by using the bottlers’ ROA data. The Coca-Cola Company did not carry its burden of showing that such determination was arbitrary, while the IRS presented substantial evidence supporting its adjustment.
What About the Supply Points’ Marketing Intangibles? 
In its petition, the Coca-Cola Company argued that the supply points owned valuable marketing intangibles generated by the spending of advertising dollars that the IRS neglected to consider when applying CPM. These marketing intangibles should be included among the supply points’ operating assets for their ROA computation.
Yet, the Tax Court found no support for this argument, stating that The Coca-Cola Company and the supply points did not enter into a Qualified Cost-Sharing Arrangement. The Coca-Cola Company was the registered legal owner of all trademarks and intangibles used to manufacture and produce branded beverages. The ServCos’ consumer marketing activities presumably enhanced the value of The Coca-Cola Company’s intangibles in local markets. However, the supply points received only a restricted right to use intangibles in their production and sales activities. The Tax Court concluded that the supply points were neither the legal owners of long-term licenses nor holders of rights constituting an intangible property pursuant to contractual terms. The supply points enjoyed none of the privileges or protections a genuine long-term licensee would otherwise enjoy.
Likelihood of the Eleventh Circuit Overturning the Tax Court? 
Coca-Cola’s argument that it should be able to rely upon the 1996 closing agreement’s 10-50-50 method may resonate with Eleventh Circuit judges. Yet, a closing agreement is not an Advanced Pricing Agreement like at issue in the IRS loss at the Sixth Circuit in Eaton.<a href="#_ftn24" name="_ftnref24">[24]</a> I think Coca-Cola has a steep uphill climb in its Eleventh Circuit Appeal because it lacks contractual documentation regarding using the 10-50-50 method between Coca-Cola U.S. and its foreign supply points. The variants within the contractual documentation with supply points and with the local accounting of payments to Coca-Cola U.S. do not work in Coca-Cola’s favor. Moreover, the lack of a cost-sharing arrangement among the parties regarding a transfer from Coca-Cola U.S. of marketing intangibles or the generation of marketing intangibles by the supply points concerning their expenditure of advertising dollars, or an agreement of substantive rights for the supply points reflected in a long-term license, favors the IRS’ argument that the supply points do not own or control marketing intangibles.
Yet, if Coca-Cola establishes that the supply points have or control some intangibles, taxpayers have had success arguing that a CUT applies and that the IRS’ CPM approach does not. Or, as seen with the most recent Medtronic Tax Court decision (see my <a href="https://kluwertaxblog.com/2022/08/22/medtronic-i-ii-and-iii-who-won-the-irs-or-the-taxpayer/" data-wpel-link="internal">Kluwer International Tax Blog Medtronic article here</a>), the Tax Court has applied a hybrid combined approach of CUT and CPM. Coca-Cola’s litigation team must be keenly aware of the importance that Coca-Cola proves that the supply points hold some intangibles.
Will the Blocked Income Regulations Be Upheld by the Eleventh Circuit?
The Coca-Cola Company contends that if it had owned the trademarks for Brazil, Brazil law would have prevented the Brazil supply point from paying royalties for the use of those trademarks anywhere close to the amounts determined in the IRS Notice of Deficiency. The Brazilian domestic law restricted the amount of trademark royalty and technology transfer payments that Brazilian entities could pay to their foreign parents. The IRS responded that the Brazil law restriction did not control the determination for arm’s-length conditions. The Blocked Income Regulations provide those foreign legal restrictions are taken into account only if certain conditions are met.<a href="#_ftn25" name="_ftnref25">[25]</a> The Coca-Cola Company retorted that the Blocked Income Regulations conditions are met. In the alternative, The Coca-Cola Company contends that the Blocked Income Regulations were invalid under the Administrative Procedure Act.<a href="#_ftn26" name="_ftnref26">[26]</a>
The Tax Court took notice that the validity of the Treasury Regulations Section 1.482-1(h)(2) was undergoing a legal challenge by another taxpayer, 3M Co., whereby the Tax Court granted 3M Co. a motion to submit the case for decision without trial under Rule 122.<a href="#_ftn27" name="_ftnref27">[27]</a> Given the pending status of the 3M case at the time of the initial Coca-Cola decision, the Tax Court reserved its ruling on the validity of the Blocked Income Regulations until a decision in the 3M case. Yet, the 3M case was decided in favor of the IRS, and thus, this aspect of Coca-Cola was also decided in favor of the IRS. However, the Tax Court’s 346-page 3M decision was split nine in favor of the IRS and eight in dissent. The nine judges in favor of the IRS split across three decisions, of which no decision received a majority of the Tax Court. The dissenting judges also filed three decisions.<a href="#_ftn28" name="_ftnref28">[28]</a>
Boiling down the 3M decision to its bare essence, the outcome in the Eleventh Circuit, I think, will be determined by two issues: whether the blocked income regulation validity is controlled by the Supreme Court Court’s 1972 decision Comm’r v. First Security Bank of Utah (“First Security”)<a href="#_ftn29" name="_ftnref29">[29]</a> and whether the blocked income regulation meets the promulgation requirements of the Administrative Procedure Act.<a href="#_ftn30" name="_ftnref30">[30]</a> Regarding the second issue, the U.S. Supreme Court in 2024 overturned the applicability of Chevron deference that favored the government’s (i.e. the IRS’) regulatory interpretation of a statute.<a href="#_ftn31" name="_ftnref31">[31]</a> I previously wrote about the potential impact of Chevron’s overturning on this Kluwer International Tax Blog: “<a href="https://kluwertaxblog.com/2024/07/01/how-may-the-supreme-court-overturning-of-chevron-deference-impact-international-tax-regulations-and-pending-cases" data-wpel-link="internal">How May the Supreme Court Overturning of Chevron Deference Impact International Tax Regulations and Pending Cases</a>?”<a href="#_ftn32" name="_ftnref32">[32]</a> Coca-Cola has a stronger argument for its appeal regarding the IRS’ adjustment applied to its Brazilian subsidiary, with Chevron’s deference overruled.
Regarding the first issue, the IRS has consistently rejected foreign legal restrictions. However, the IRS’s refusal to recognize the impact of foreign legal restrictions was rejected by the Sixth Circuit Court of Appeals in Procter & Gamble Co. v. Commissioner.<a href="#_ftn33" name="_ftnref33">[33]</a> The Sixth Circuit treated foreign legal restrictions as being similar to domestic legal restrictions, although the Sixth Circuit stated that foreign legal restrictions may require heightened scrutiny to make sure that the taxpayer was not responsible for the restriction. In that case, the IRS attempted to apply IRC Section 482 to attribute a two-percent royalty to Procter & Gamble’s Swiss subsidiary from its Spanish subsidiary. The Spanish subsidiary was directly owned by the Swiss subsidiary. The effect of applying IRC Section 482 in that case would have been to increase the Swiss subsidiary’s Subpart F income taxable to Procter & Gamble, the U.S. parent. Following the U.S. Supreme Court decision of First Security,<a href="#_ftn34" name="_ftnref34">[34]</a> the Sixth Circuit held that the restrictions of Spanish law, not Procter & Gamble’s control, caused the Spanish subsidiary to fail to pay royalties. The Sixth Circuit held that because control is a predicate to applying IRC Section 482, that section could not be applied.
The principle of Procter & Gamble was extended in Exxon Corp. v. Commissioner.<a href="#_ftn35" name="_ftnref35">[35]</a> In Exxon, the foreign legal restriction was less formal than the restrictions in prior court decisions. Exxon was involved in a crude oil pricing restriction imposed by the government of Saudi Arabia on a U.S. corporation that required the pricing of oil below the market price. The restriction prohibited the sale of Saudi crude oil at a price above the official selling price set by Saudi Arabia. The IRS tried to reallocate income to Exxon and other U.S. taxpayers who complied with this restriction. The Tax Court nevertheless found that there was a valid and binding restriction of the government of Saudi Arabia and disallowed the reallocation. The U.S. Court of Appeals for the Fifth Circuit, finding that the restriction had the effect of law, affirmed the Tax Court’s ruling in Exxon.<a href="#_ftn36" name="_ftnref36">[36]</a>
Moreover, if the Eighth Circuit overturns the 3M Tax Court decision (whether by its own analysis and judgment or remanding the case to the Tax Court in light of Chevron’s demise), then the last part of the Coca-Cola Tax Court decision addressing the same blocked income regulations may also be remanded by the Eleventh Circuit (because the Coca-Cola decision relied specifically on the outcome of the 3M decision).<a href="#_ftn37" name="_ftnref37">[37]</a>
My crystal ball informs me that the Eleventh Circuit will side with Coca-Cola on the blocked income issue.
Professor William Byrnes is the primary author of the 2,000-page treatise <a href="https://store.lexisnexis.com/products/practical-guide-to-us-transfer-pricing-skuusSku60720" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Practical Guide to U.S. Transfer Pricing</a>.
<a href="#_ftnref1" name="_ftn1">[1]</a>The primary 2020 Tax Court decision was finalized on August 2, 2024. The four-year lapse between its initial Coca-Cola decision and the entry of the final decision was due to the Tax Court waiting on its 2023 decision in the 3M case before adjudicating Coca-Cola’s blocked income regulations claim. After a split Tax Court sided with the IRS on the blocked income regulations in the 3M case decided February 9, 2023, the Tax Court issued its second Coca-Cola decision on Nov. 8, 2023. See “U.S. Tax Court Enters Decision in Ongoing Dispute Between The Coca-Cola Company and the U.S. Internal Revenue Service,” Coca-Cola Press Release, August 2, 2024, <a href="https://investors.coca-colacompany.com/news-events/press-releases/detail/1115/u-s-tax-court-enters-decision-in-ongoing-dispute-between" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://investors.coca-colacompany.com/news-events/press-releases/detail/1115/u-s-tax-court-enters-decision-in-ongoing-dispute-between</a>.
<a href="#_ftnref2" name="_ftn2">[2]</a> Coca-Cola Co. v Comm’r, 155 T.C. 145, 155 T.C. No. 10, 2020 U.S. Tax Ct. LEXIS 27 (Nov. 18, 2020).
<a href="#_ftnref3" name="_ftn3">[3]</a> Brazil, Chile, Costa Rica, Egypt, Ireland, Mexico and Swaziland.
<a href="#_ftnref4" name="_ftn4">[4]</a> Read about the 3M decision at William Byrnes “The 3M Decision: Did Treasury or Congress Overturn Past Jurisprudence?” Kluwer International Tax Blog (Feb. 11, 2023), <a href="https://kluwertaxblog.com/2023/02/11/the-3m-decision-did-treasury-or-congress-overturn-past-jurisprudence" data-wpel-link="internal">https://kluwertaxblog.com/2023/02/11/the-3m-decision-did-treasury-or-congress-overturn-past-jurisprudence</a>.
<a href="#_ftnref5" name="_ftn5">[5]</a> Coca-Cola Co. v. Comm’r, No. 31183-15, 2023 Tax Ct. Memo LEXIS 138 (T.C. Nov. 8, 2023).
<a href="#_ftnref6" name="_ftn6">[6]</a> Coca-Cola 10-K 2007 at 113.
<a href="#_ftnref7" name="_ftn7">[7]</a> Coca-Cola 10-K 2017 at 23.
<a href="#_ftnref8" name="_ftn8">[8]</a> Coca-Cola 10-K 2017 at 41.
<a href="#_ftnref9" name="_ftn9">[9]</a> Coca-Cola Co. v. Comm’r, 149 T.C. No. 21, 5 (U.S.T.C. Dec. 14, 2017).
<a href="#_ftnref10" name="_ftn10">[10]</a> Coca-Cola Co. v. Comm’r, 149 T.C. No. 21, 6 (U.S.T.C. Dec. 14, 2017).
<a href="#_ftnref11" name="_ftn11">[11]</a> Coca-Cola 10-K 2017 at 42.
<a href="#_ftnref12" name="_ftn12">[12]</a> Coca-Cola 10-K 2017 at 41.
<a href="#_ftnref13" name="_ftn13">[13]</a> Coca-Cola 10-K 2018 at 48.
<a href="#_ftnref14" name="_ftn14">[14]</a> Coca-Cola 10-K 2024 at 30.
<a href="#_ftnref15" name="_ftn15">[15]</a> Coca-Cola 10-K 2024 at 61.
<a href="#_ftnref16" name="_ftn16">[16]</a> Coca-Cola Co. v Comm’r, 155 T.C. 145, 2020 U.S. Tax Ct. LEXIS 27, 155 T.C. No. 10 (Nov. 18, 2020).
<a href="#_ftnref17" name="_ftn17">[17]</a> IRC § 987.
<a href="#_ftnref18" name="_ftn18">[18]</a> Coca-Cola Co. v. Comm’r, doc. No. 31183-15, T.C. (filed June 2, 2021).
<a href="#_ftnref19" name="_ftn19">[19]</a> Coca-Cola Co. v. Comm’r, doc. No. 31183-15, T.C. (October 26, 2021). Coca-Cola filed its motion late, 166 days past the 30-day deadline.
<a href="#_ftnref20" name="_ftn20">[20]</a> Read about the 3M decision at William Byrnes “The 3M Decision: Did Treasury or Congress Overturn Past Jurisprudence?” Kluwer International Tax Blog (Feb. 11, 2023), <a href="https://kluwertaxblog.com/2023/02/11/the-3m-decision-did-treasury-or-congress-overturn-past-jurisprudence" data-wpel-link="internal">https://kluwertaxblog.com/2023/02/11/the-3m-decision-did-treasury-or-congress-overturn-past-jurisprudence</a>.
<a href="#_ftnref21" name="_ftn21">[21]</a> Coca-Cola Co. v. Comm’r, No. 31183-15, 2023 Tax Ct. Memo LEXIS 138 (T.C. Nov. 8, 2023).
<a href="#_ftnref22" name="_ftn22">[22]</a> IRC §§ 6664(c) and 6662(e)(3)(D).
<a href="#_ftnref23" name="_ftn23">[23]</a> Treas. Reg. 1.482-4(a).
<a href="#_ftnref24" name="_ftn24">[24]</a> Eaton Corp. v. Comm’r, 2022 U.S. App. LEXIS 23853 (6th Cir. 2022). For my analysis of the Eaton case, see William Byrnes, “Heads I Win, Tails You Lose. Or is an APA a contract subject to contract law?”, Kluwer International Tax Blog (August 29, 2022) <a href="https://kluwertaxblog.com/2022/08/29/heads-i-win-tails-you-lose-or-is-an-apa-a-contract-subject-to-contract-law/" data-wpel-link="internal">https://kluwertaxblog.com/2022/08/29/heads-i-win-tails-you-lose-or-is-an-apa-a-contract-subject-to-contract-law</a>.
<a href="#_ftnref25" name="_ftn25">[25]</a> Treas. Reg. 1.482-1(h)(2)
<a href="#_ftnref26" name="_ftn26">[26]</a> Referring to Chevron, U.S.A., Inc. v NRDC, Inc., 467 U.S. 837, 104 S.Ct. 2778, 1984 U.S. LEXIS 118 (1984).
<a href="#_ftnref27" name="_ftn27">[27]</a> 3M Co. & Subs. v. Commissioner, T.C. Docket No. 5816-13 (filed Mar. 11, 2013).
<a href="#_ftnref28" name="_ftn28">[28]</a> William Byrnes “The 3M Decision: Did Treasury or Congress Overturn Past Jurisprudence?” Kluwer International Tax Blog (Feb. 11, 2023), <a href="https://kluwertaxblog.com/2023/02/11/the-3m-decision-did-treasury-or-congress-overturn-past-jurisprudence" data-wpel-link="internal">https://kluwertaxblog.com/2023/02/11/the-3m-decision-did-treasury-or-congress-overturn-past-jurisprudence</a>.
<a href="#_ftnref29" name="_ftn29">[29]</a> Commissioner v. First Security Bank of Utah, N.A., 405 U.S. 394 (1972).
<a href="#_ftnref30" name="_ftn30">[30]</a> 5 U.S.C. §§ 551–559.
<a href="#_ftnref31" name="_ftn31">[31]</a> Loper Bright Enters. v. Raimondo, Nos. 22-451, 22-1219, 2024 U.S. LEXIS 2882 (June 28, 2024), overturning Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 104 S. Ct. 2778 (1984).
<a href="#_ftnref32" name="_ftn32">[32]</a> William Byrnes, “How May the Supreme Court Overturning of Chevron Deference Impact International Tax Regulations and Pending Cases?”, Kluwer International Tax Blog (July 1, 2024), <a href="https://kluwertaxblog.com/2024/07/01/how-may-the-supreme-court-overturning-of-chevron-deference-impact-international-tax-regulations-and-pending-cases" data-wpel-link="internal">https://kluwertaxblog.com/2024/07/01/how-may-the-supreme-court-overturning-of-chevron-deference-impact-international-tax-regulations-and-pending-cases</a>.
<a href="#_ftnref33" name="_ftn33">[33]</a> 961 F2d 1255 (6th Cir. 1992), aff’d 95 T.C. 323 (1990).
<a href="#_ftnref34" name="_ftn34">[34]</a> Comm’r v. First Security Bank of Utah, 405 U.S. 394, 92 S. Ct. 1085 (1972).
<a href="#_ftnref35" name="_ftn35">[35]</a> 66 T.C.M. 1707 (1993), aff’d sub nom, Texaco, Inc v Commr, 98 F.3d 825 (5th Cir. 1996), cert. denied, 520 U.S. 1185 (1997).
<a href="#_ftnref36" name="_ftn36">[36]</a> Texaco v. Comm’r, 98 F.3d 825 (5th Cir. 1996).
<a href="#_ftnref37" name="_ftn37">[37]</a> Coca-Cola Co. v. Comm’r, No. 31183-15, 2023 Tax Ct. Memo LEXIS 138 (T.C. Nov. 8, 2023).
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
<wfw:commentRss>https://kluwertaxblog.com/2024/08/05/will-coca-colas-9-billion-transfer-pricing-tax-court-loss-be-overturned-by-the-eleventh-circuit/feed/</wfw:commentRss>
<slash:comments>0</slash:comments>
</item>
</channel>
</rss>

If you would like to create a banner that links to this page (i.e. this validation result), do the following:

Download the "valid RSS" banner.
Upload the image to your own server. (This step is important. Please do not link directly to the image on this server.)
Add this HTML to your page (change the image src attribute if necessary):

<a href="http://www.feedvalidator.org/check.cgi?url=https%3A//kluwertaxblog.com/feed/"><img src="valid-rss-rogers.png" alt="[Valid RSS]" title="Validate my RSS feed" /></a>

If you would like to create a text link instead, here is the URL you can use:

http://www.feedvalidator.org/check.cgi?url=https%3A//kluwertaxblog.com/feed/

Home · About · News · Docs · Terms