We are pleased to present you our annual year-end tax bulletin summarising the most relevant current tax developments in the Netherlands, Belgium, Luxembourg and Switzerland. It also provides an insight into (ongoing) international developments, mainly at OECD level, with a focus on developments and changes relevant for internationally operating businesses.
Main changes in international taxation in more detail
"Due to the principal purpose test ("PPT") effective in many treaty relationships as from 1 January 2020 and the consequences of the CJEU's so-called Danish cases, MNEs focus even more on substance and economic reality to ensure treaty and EU Directive benefits in the future. MNEs not only align their legal structures with business structures, they also improve their transfer pricing documentation and prepare for full transparency of their tax position.
MNEs give also priority to: control over mandatory disclosure reporting, practical solutions to reduce double taxation due to transfer pricing corrections, unexpected application of multiple anti-abuse rules, more withholding taxes and new interest deduction limitations.
The work of the OECD on taxation of the globalised and digitalised economy will continue in 2020 after having made important progress in 2019. Some MNEs already started preparing for the impact of these plans."
Overview of OECD developments
The multilateral instrument ("MLI") implements the treaty-related anti-tax avoidance measures of the BEPS project in bilateral tax treaties. A total of 90 jurisdictions have signed the MLI to date, and more jurisdictions have expressed their intention to do so. The number of countries that have ratified the MLI has further increased during 2019, and even more countries are expected to complete the ratification procedure in the near future. The current status is that the MLI has entered into force, or will enter into force as of 1 February 2020, for 37 jurisdictions. A regularly updated overview of the signatories and ratifications is available here. Our four home market countries (the Netherlands, Belgium, Luxembourg and Switzerland) also completed the MLI ratification procedure during 2019. This means that the MLI has now entered into force for the Netherlands (on 1 July 2019), Belgium (on 1 October 2019), Luxembourg (on 1 August 2019) and Switzerland (on 1 December 2019). As a result, many bilateral tax treaties concluded by our home market countries with other countries that have also ratified the MLI will be impacted. The earliest date the MLI will apply in practice for our home market countries is 1 January 2020. The MLI will also affect the tax treaties between each of our home market countries, with the exception of the Switzerland-Netherlands tax treaty, the Switzerland-Belgium tax treaty and the Netherlands-Belgium tax treaty, which have been or will be updated bilaterally to the BEPS minimum standards.
Our home market countries have all opted for the application of the so-called principal purpose test ("PPT"), like all other jurisdictions that signed the MLI. The PPT is an anti-abuse rule that under certain circumstances denies the availability of treaty benefits, such as for dividends and capital gains. It will be increasingly relevant to demonstrate business purposes of an arrangement or transaction. For more information on the MLI, including an overview of the MLI choices made by our four home market countries, we refer to our MLI webpage.
Taxation of the globalised and digitalised economy
Also during 2019, tax policymakers have kept on pushing forward the company tax debate. International developments and actions have been taking place predominantly in the international tax policy arena, mostly within the context of the OECD and the Inclusive Framework. Matters have remained a high priority on tax agendas at EU levels too, where voices have been raised to further seek agreement on and implement EU-wide measures if the pursuit of corporate tax reforms were to stagnate at some point at an international level.
Where the debate, which was initiated in mid-2017, started with a focus on multinationals operating digital business models, matters are now tilting towards a discussion on restabilising the entire international tax regime that has come under pressure as a result of the globalisation and digitalisation of our economies. The perception has grown that multinationals do not pay their fair share of corporate tax, regardless of the 2015 BEPS deliverables and their implementation in many countries, including the EU. The discussion is moving beyond the BEPS outcomes and beyond internet companies only, towards assigning the corporate tax basis also to market jurisdictions and securing taxation of business earnings at a certain global minimum tax rate for multinational companies in virtually all economic sectors and industries.
The OECD has published various documents throughout 2019, and hosted webinars and public consultations on them. OECD publications include a policy note on 29 January 2019, a policy outline document on 13 February 2019, a programme of work on 31 May 2019, and two concretising reform proposals on 9 October 2019 and 8 November 2019; see our tax flashes respectively here, here, here, here, and here. The programme of work was endorsed by the Inclusive Framework, however without countries committing themselves politically to any of the possible outcomes of further work. The concretising reform proposals of 9 October 2019 and 8 November 2019 have come from the OECD Secretariat, and do not constitute consensus within the OECD Inclusive Framework. The proposals serve to further discussion within that forum which had come to a standstill during the year. The objective nevertheless remains to reach consensus on a solution to these matters by the end of 2020.
Measures suggested and which are now subject to further assessment and concretisation in pursuit of international political consensus before year-end 2020 are built on two pillars. Pillar One focuses on the nexus and allocation of taxing rights by reference to the so-called "Unified Approach" and is aimed on reaching consensus within the Inclusive Framework on key elements early 2020. Pillar Two focuses on a further exploration of possibilities to strengthen taxation rights of countries to ensure that multinational business enterprises are being taxed on their corporate earnings at a certain minimum level that is considered sufficient.
The OECD Secretariat's proposal for a "Unified Approach" under Pillar One suggests adding an overlay to the existing international tax framework. The overlay, as it appears, would apply to big multinational enterprises (i.e. having revenues that exceed EUR 750 million, for instance) with "consumer facing business models", or at least to those big multinational enterprises operating business models other than those explicitly carved out (e.g. extractive industries, commodities, financial services having revenues). For these ring-fenced enterprises, first the traditional transfer pricing model would be modified by introducing a presumed level of remuneration for so-called baseline marketing and distribution functions. The presumed level would be determined using a proxy (fixed remuneration) and applied as a basic assumption as jurisdictions that were to make a case for applying a higher remuneration (which would require an effective mechanism for resolving disputes). Second, and on top of this, a newly devised tax base division system ("new taxing right") would cater for apportioning the tax base – referred to as Amount A – to market jurisdictions. For this purpose, a fixed percentage (possibly with industry-specific variants) would be taken from the multinational's commercial accounting profits (GAAP, IFRS, etc.) and allocated to market jurisdictions by reference to a quantitative turnover threshold test for nexus purposes and a sales-based formula factor for tax base division purposes. The percentages are yet to be established.
Pillar Two, the so-called Global Anti-Base Erosion ("GloBE") proposal, is aimed at reducing the incentive to shift profits to low-tax jurisdictions and effectively achieving a minimum taxation on MNE income. The proposal comprises two linked measures: an "income inclusion rule" and a "tax on base erosion payments". The income inclusion rule would operate as a minimum tax by including the income of a foreign branch or controlled entity in the tax base of the controlling taxpayer if that income was not effectively taxed at a minimum rate. This rule would be more far-reaching than traditional CFC rules. A top up to a minimum (fixed) rate is being considered, as is a so-called switch-over rule for tax treaties allowing the state of residence to apply the credit method instead of exemption in certain situations. The tax on base erosion payments would effectively (i) deny the deduction for corporate tax purposes or introduce a source levy on payments to a related party if that payment is insufficiently taxed in the hands of the recipient involved ("undertaxed payments rule") and (ii) introduce a subject to tax rule that would grant tax treaty benefits only if the beneficiary is "sufficiently taxed" in the other treaty jurisdiction. The OECD acknowledges the need to explore possible carve-outs for regimes compliant under Action 5 on harmful tax practices or other substance-based carve-outs. It also acknowledges the need to consider the compatibility of these rules with the non-discrimination provisions in tax treaties as well as their interaction with the EU fundamental freedoms. The minimum tax rate is yet to be established.
Considering the magnitude of the tax reform initiatives tabled, it is recommended that companies in all economic sectors closely monitor developments in this area and assess the potential impact of the reform proposals on their global business operations. Although the topic has clearly remained a priority throughout 2019, it is still too early to determine at this time whether sufficient political momentum exists for actually bringing about the tax reform initiatives tabled. If the OECD does not achieve a reform of the international tax system, companies should expect EU Member States to further seek to agree on and implement EU-wide measures inspired by the OECD options. An overview of the international developments is available here.
Spontaneous exchange by no or only nominal tax jurisdictions
On 31 October 2019, guidance on the spontaneous exchange by no or only nominal tax jurisdictions was released. As part of BEPS Action 5 to curb harmful tax practices, jurisdictions may only maintain preferential regimes if certain requirements of "substantial activities" are met. In order to ensure a level playing field, these requirements must also apply to jurisdictions with zero or only nominal tax rates. The "Resumption of application of substantial activities factor to no or only nominal tax jurisdictions" requires them to spontaneously exchange information on the activities of certain resident entities with the jurisdiction(s) in which the immediate parent, the ultimate parent and/or the beneficial owners are resident. It is expected that exchanges pursuant to the standard will commence in 2020.
On 5 November 2019, additional interpretive guidance was released giving greater certainty to tax administrations and MNE groups on the implementation of Country-by-Country reporting. The new guidance includes questions and answers on, amongst other topics, the treatment of dividends received, the operation of local filing and the use of rounded amounts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.