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Targeting the facilitators of tax evasion

Tax authorities have begun to focus not only on punishing tax evaders, but also on targeting the intermediaries that facilitate tax evasion. The G7 Bari declaration of 13th May re-emphasised this approach, with an added focus on those who seek to circumvent the new Common Reporting Standard (CRS) requirements.

In recent years, the US has targeted intermediaries via its Swiss Bank Programme. Now the UK has introduced measures which target businesses that “fail to prevent” the facilitation of tax evasion and which carry potentially unlimited fines. These new UK laws are worthy of consideration both because they have global reach, and as an example of an approach which may spread to other jurisdictions
The new legislation is modelled upon 2010 UK anti-bribery legislation; another illustration of the trend towards treating tax evasion as being akin to other financial crimes.

From September 2017 the UK will have two new 'corporate criminal offences' enabling the prosecution of businesses that “fail to prevent” (FTP) the facilitation of tax evasion. The new FTP offences are widely drafted so as to cover both the facilitation of UK and overseas tax evasion, and the actions of not just a business but also its agents and associated persons. Thus, a Swiss business that had a UK branch where an associated person facilitated German tax evasion would be exposed.

The definition of “associated person” covers all who perform services for a business, such as employees, agents, subsidiaries, distributors, or even joint ventures. The draft guidance indicates that the UK tax authority will not be constrained by contractual wording, and will instead look at the facts and circumstances.

Criminal facilitation can be active, for example specifically aiding a tax evader, or passive, for example an act of omission such as failing to act upon inaccurate or incomplete declarations of tax residence for the purposes of CRS.

The only defence will be to show that the business had implemented “reasonable procedures” designed to prevent its associated persons from facilitating tax evasion.

Six guiding principles determine what 'constitutes reasonable procedures'. These are:

  • Having a documented risk assessment
  • Proportionate and risk-based prevention procedures
  • Demonstrable top level commitment
  • Due diligence
  • Communication (including training)
  • Risk monitoring and review

As a result, UK businesses, particularly those in high-risk areas such as the financial sector are implementing compliance programmes. Alignment with existing anti financial crime programmes is key, particularly for those businesses managing a range of cross border tax risks. Early determination of a suitable approach so as to identify weaknesses and establish appropriate checks and controls will mitigate both the risk of fines and the costs of remediation.

There will always be persons who seek to evade tax and it is not always possible to prevent the actions of customers or agents. But the clear message is that you have to try. Swiss tennis fans might reflect on the Samuel Beckett quote that Stanislas Wawrinka famously adopted: “Ever tried. Ever failed. No Matter. Try again. Fail again. Fail better”. When it comes to avoiding being penalized for the tax evasion of others, those who make pre-emptive efforts to manage the risks might “fail better” than those who don’t.

Source: Tax Blog Deloitte

OECD launches facility to disclose CRS avoidance schemes

As part of its ongoing efforts to maintain the integrity of the OECD Common Reporting Standard (CRS), the OECD is today launching a disclosure facility on the Automatic Exchange Portal which allows interested parties to report potential schemes to circumvent the CRS. Also today, a further important step to implement the CRS was taken, with an additional 500 bilateral automatic exchange relationships being established between over 60 jurisdictions committed to exchanging information automatically pursuant to the CRS, starting in 2017.

OECD launches facility to disclose CRS avoidance schemes
This facility is part of a wider three step process the OECD has put in place to deal with schemes that purport to avoid reporting under the CRS. As part of this process all actual or perceived loopholes that are identified are systematically analysed in order to decide on appropriate courses of action. This will further strengthen the effectiveness of the CRS which by design already limits opportunities for taxpayers to circumvent reporting to the greatest possible extent. It has a wide scope in terms of the Financial Institutions required to report, the financial information to be reported and the scope of Account Holders subject to reporting. It also requires that jurisdictions, as part of their effective implementation of the Standard, put in place anti-abuse rules to prevent any practices intended to circumvent the reporting and due diligence procedures. The disclosure facility can be accessed through the Automatic Exchange Portal.
The three step process to deal with CRS avoidance schemes complements the ongoing peer reviews carried out by the Global Forum on Tax Transparency and Exchange of Information for Tax Purposes to ensure the effective implementation of the CRS in all jurisdictions.

Over 1800 bilateral exchange relationships in place for the exchange of CRS information
There are now over 1800 bilateral relationships in place across the globe, most of them based on the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information ("the CRS MCAA"). The full list of automatic exchange relationships that are currently in place under the CRS MCAA is available online. With respect to the jurisdictions exchanging as of 2017, now virtually all have activated their relationships under the CRS MCAA, while a significant number of new exchange relationships have now been put in place with respect to 2018 jurisdictions. The remaining exchange relationships are expected to be activated in the course of this year.
A further activation round is scheduled to take place in July 2017 which will allow the remaining jurisdictions to nominate the partners with which they will undertake automatic exchanges. The next update on the latest bilateral exchange relationships will be published before the summer break, with updates to follow on a periodic basis. In total, 100 jurisdictions have agreed to start automatically exchanging financial account information in September 2017 and 2018, under the CRS.
Today's wave of activations of bilateral exchange relationships is a further crucial step towards the timely implementation of the OECD-developed international standard for the automatic exchange of financial account information, the CRS, and reflects the determination of jurisdictions around the world to deliver on their political commitment to fight tax evasion.

Media queries should be directed to Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration (+33 6 26 30 49 23) or Achim Pross, Head of the International Co-operation and Tax Administration Division (+33 6 21 63 27 67).

EU Council agrees its position on taxation dispute resolution mechanisms

The EU Council reached an agreement on the draft directive. It will adopt its final version once the European Parliament has given its opinion.

Member states are expected to transpose the directive into their national law by 30 June 2019.

The rules will apply to complaints submitted after that date on issues relating to the tax year starting on or after 1 January 2018. The member states can agree to apply the directive to complaints related to earlier tax years as well.

The proposal for a Council directive on double taxation dispute resolution mechanisms aims to introduce a more coordinated EU approach to taxation dispute resolution.

It aims to set up a mechanism for resolving disputes between member states that may arise from the application of agreements that provide for the elimination of double taxation.

The draft legislation concerns businesses that operate in several EU member states, and also individuals, as well as the rights of those persons.

The directive aims to make the resolution of disputes relating, in particular, to double taxation more effective and efficient, more accessible to taxpayers and more transparent.

The proposal is part of the EU's wider effort to create a fair and efficient corporate tax system in the EU, and to enhance tax certainty.

For more detailed information, click here

Swiss government adopts recommendations on amended tax proposal 17

The Swiss government steering body comprised of federal and cantonal representatives has adopted recommendations on a balanced tax proposal 17 (TP17) for the attention of the Federal Council. It sees an urgent need to swiftly adopt and implement a new corporate tax reform proposal.

The steering body met a total of five times between March and May. Representatives of the cities and communes were additionally invited to those meetings, thereby ensuring that the concerns of the communes are factored into the recommendations.

Hearings were also held with parties and business and employer associations in order to prepare TP17. All sides welcomed the overall direction of TP17, which has the following three objectives:

- Boosting appeal as a business location
- International acceptance
- Productivity of tax revenue
- TP17 should be structured in as balanced a way possible within this framework. Consequently, the new tax-related special arrangements should be designed rather restrictively and greater importance should be attributed to the interests of the cities and communes.

The steering body recommends the following core elements to the Federal Council in the sense of a whole package that is balanced:
- Patent box: introduction of a mandatory patent box in accordance with the OECD standard at cantonal level.
- Research and development deductions: the additional deduction for R&D costs may not exceed 50% of the actual costs. The deductions should focus primarily on personnel expenses.
- Maximum burden: the tax relief on profits arising from the two aforementioned instruments may not exceed 70%. The relief leeway is thus restricted relative to the third series of corporate tax reforms.
- Partial taxation of dividends: the partial taxation of dividends from qualified participations (minimum stake of 10%) should be 70% at federal level and at least 70% at cantonal and communal level.
- Vertical equalization: the Confederation will now pay the cantons 21.2% of direct federal tax revenue instead of 17%.
- Clause to take the communes into account in connection with the increase in the cantons' share of direct federal tax.
- Child allowances: the minimum amount for child and education allowances is to be increased by CHF 30. Child allowances will thus rise to at least CHF 230 and education allowances should be at least CHF 280.

The aim is for the cantons to disclose their plans for cantonal implementation before the decision on tax proposal 17 is made. This will increase the transparency of the proposal.

Next steps
The Federal Council will decide on the parameters in June. Thereafter, the Federal Department of Finance will prepare a consultation draft. The consultation should be completed by December 2017. It is envisaged that the dispatch for the attention of Parliament will be adopted in spring 2018.

The steering body believes swift implementation at cantonal level is extremely important. Consequently, the cantons should push ahead with their cantonal implementation projects in parallel to the federal proposal. This will force the cantons to shorten their usual legislative timeframes, but the steering body deems this to be necessary due to the urgency of the proposal.

Download the Core recommendations of the steering body on the TP17 substantive parameters (PDF, 35 kB)

Belgian Fairness Tax partially violates EU law

On 17 May 2017, the Court of Justice of the EU (ECJ) has ruled that the Belgian fairness tax is not fully in accordance with EU law. In particular the ECJ finds that the fairness tax partially violates Article 4 of the Parent-Subsidiary directive (PSD) and can violate the freedom of establishment. The ECJ hereby confirms the position that was taken by the Advocate-General (AG) in its opinion of 17 November 2017 and adds a potential additional violation. The judgement can be found here.

No prohibition as such by EU law

The fairness tax as such is not precluded by EU law since it does not constitute a withholding tax within the meaning of the PSD. According to the ECJ, one of the cumulative criteria required for the fairness tax to qualify as withholding tax is not fulfilled, namely that the taxable person must be the holder of the shares.


Partial violation of Article 4 PSD

Belgium implemented the PSD by providing that 95% of the qualifying received dividends can be deducted from the taxable profit of the parent company. Hence, the taxable amount may not exceed 5% of the dividends received. However, if a resident company redistributes dividends in a taxable period following the taxable period in which it received these dividends, the application of the fairness tax may lead to a higher tax burden than allowed under the PSD. This stems from the fact that the received dividends are included in the tax base of the fairness tax upon redistribution. As expected (after the conclusions of the AG), the ECJ now confirms that this effect of the Fairness tax is in breach with the PSD.


Potential violation of Article 49 TFEU (freedom of establishment)

The potential violation of the freedom of establishment is relevant only for Belgian establishments of foreign companies, for which fairness tax is calculated starting from the part of the gross dividends distributed by the foreign company that corresponds proportionally to the positive part of the accounting result of the Belgian establishment in the global accounting result of the foreign company. The ECJ refers to the situation whereby a non-resident company having a permanent establishment in Belgium distributes dividends from reserves that have a pure non-Belgian origin. In this case, the non-resident company will still be subject to the fairness tax even though the profits of its Belgian permanent establishment do not form part of the dividends distributed, which would not be the case if the non-resident company would conduct an economic activity in Belgium through a subsidiary. According to the ECJ, it is for the referring court (the Belgian Constitutional Court) to ascertain whether this situation could lead to a less advantageous treatment of a Belgian PE compared to a resident company (i.e. a resident subsidiary of a non-resident company).


Possibility to reclaim the fairness tax

In view of the above, companies that find themselves in a situation in which fairness tax is levied in violation of Article 4 PSD, can in our opinion already reclaim (part of) the fairness tax that was levied. Non-resident companies of which the Belgian establishment was subject to fairness tax, will have to wait for the Belgian Constitutional Court’s decision.


Future of the fairness tax

Finally, please note that there is still uncertainty about the government’s plans with respect to the fairness tax. Two political parties (the French-speaking and the Flemish socialist parties) have declared being in favor of maintaining the tax by only carving out the situations in which it is found to infringe EU law. The French-speaking socialist party has already introduced a law proposal in this respect. On the other hand, the Minister of Finances seems to be in favor of a deep reevaluation of the system which could lead to the full abolishment of the fairness tax, as stated in the proposal for corporate tax reform (regarding which there is still no political agreement, except on the fact that a potential reform would only apply as from assessment year 2019).

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