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INTRODUCTION
Over the last few months, both the EU Commission and the OECD (through the BEPS initiative) have issued a series of recommendations / directives, which will change the international tax environment over the next few years.
Countries which will most likely be affected by these changes are those which consider themselves as international financial and business centres and benefit substantially on the inflow of international investors who use the tax and other advantages offered by these jurisdictions in their international tax planning.
It is expected that these jurisdictions will need to take swift measures in adapting their tax systems to cater for the new requirements.
In this article we examine how two of the major EU countries in this area, namely Luxembourg and the Netherlands, respond to the new challenges.
As a comparison, we can also see how Cyprus compares, as far as its own actions so far.
RESPONSE BY LUXEMBOURG
The Luxembourg government fully supported the BEPS project and actively participates in tax policy discussions both at the European and international level. It has repeatedly stressed the need to create a level playing field in order to ensure a fair application of international tax standards.
Luxembourg, as any other jurisdiction, is fighting against unfair tax competition from other countries, including non-European countries. As a result of the EU and the Global Forum initiatives on tax cooperation and exchange of information Luxembourg progressively moved to end of the banking secrecy.
Luxembourg has already taken steps toward enhanced transparency in tax matters and has already implemented a number of concrete measures into its domestic law.
Transparency
Luxembourg specifically promoted the introduction of the automatic exchange of information for tax purposes as a global standard and has finally implemented the automatic exchange of information on the basis of the European Savings Taxation Directive.
As far as businesses are concerned, they understood the need to anticipate the changes that are likely to occur in the international tax scene, including the fact that they may have to explain to the tax authorities, and even publicly, their tax strategy and the amount of taxes they are paying worldwide. The pressure under Lux – leaks and the recent decisions on state aid by the EU Commission on the Fiat and Starbucks cases make changes in this area by the business community an absolute necessity.
EU Parent / Subsidiary Directive
Earlier on this year, the Luxembourg government presented a bill to Parliament to transpose into domestic law two recent amendments to the EU Parent- Subsidiary Directive, ie: (i) the general anti- abuse rule and (ii) the anti-hybrid rule.
As a result, income which is derived from a shareholding which falls within the scope of this directive scope will no longer be exempt in Luxembourg, if it is tax-deductible in another EU member state. In addition, the provisions of the directive will no longer be granted if the transaction may be considered as abusive, based on the directive’s new wording.
These provisions will be enacted with effect as from 2016, which is the requirement of the directive.
IP Box Regime
Following discussions on IP regimes occurring at the EU and OECD levels, the Luxembourg government confirmed its willingness to modify the current Luxembourg IP regime in order to follow the ‘modified nexus approach’ as requested by the OECD and has started the legislative process to modify the Luxembourg domestic law.
Transfer Pricing
Luxembourg recently enhanced its transfer pricing regulations, fully in line with the OECD guidelines, by clarifying the relevant legislation. Furthermore, a specific provision on the documentation requirements for taxpayers performing transactions between related parties has also been introduced into the Luxembourg tax law.
Tax Rulings
Luxembourg has a well-established practice of tax rulings. Since 2015, the existing ruling process has been formalized and modernized. One of the main features of this enhanced framework is the establishment of a central ruling commission, which will provide binding rulings in response to written requests made by corporate taxpayers, provided that certain conditions are met and subject to a fee of Euro 3.000 to Euro 10.000, depending on the complexity of the request.
Luxembourg has been an active participant and has made the political commitment to apply the new regulations which will result from these discussions. Luxembourg, however, should not be expected to take the approach of moving unilaterally when it comes to anti-BEPS regulations.
The government of Luxembourg has stressed the need to promote a coordinated implementation of the BEPS actions at the international level to ensure a level playing field worldwide. In this respect the Luxembourg government is working on a comprehensive tax reform for 2017 that will take into account some of the BEPS recommendations while ensuring a competitive tax framework, in line with the international tax rules.
RESPONSE BY THE NETHERLANDS
The Netherlands has been waiting for the final OECD recommendations in order to reform its own regulations, including its transfer pricing rules and anti-hybrid provisions. Representatives of the Dutch government actively and constructively participate in the various OECD and EU initiatives.
The Dutch Secretary for Finance, Eric Wiebes, has reported to the House of Representatives on the impact of the OECD's base erosion and profit shifting project on Dutch tax rules. Amongst other things he commented as follows:
"The Government believes that combating international tax avoidance and abuse is socially desirable and that measures are unavoidable. At the same time, we must ensure that fair competition and employment in the Netherlands are safeguarded."
"Our system has always taken account of companies that operate internationally, and ensures that national and multinational companies are treated equally. The participation exemption, the absence of withholding tax on interest and royalties, our extensive treaty network, and providing certainty in advance are therefore not in themselves up for discussion."
"I list the main strengths of the Dutch tax system. While these strengths entail a limited risk of abuse, unfocused, and disproportionate countermeasures could have major consequences for the Dutch tax climate for businesses. The Netherlands has promoted these features of its tax system during discussions within the OECD and the EU, and will continue to do so in the future. The Government considers the main strong points of our tax system to be our extensive treaty network, the participation exemption, absence of withholding tax on interest and royalties, our efficient tax administration, and our efficient dispute resolution procedures."
"These elements help to create a transparent, clear, and attractive tax climate for international businesses. Where the BEPS reports touch on these advantages, the Government is prepared to make them more robust to prevent abuses".
Transparency
Dutch tax authorities have been monitoring BEPS discussions in both the EU and the OECD and are keen to retain the country’s reputation for business friendliness, while ensuring a level playing field. At the same time, the Netherlands is seeking to emphasize its own tax transparency. In particular, in light of the intense publicity surrounding the EC’s investigation into the tax ruling practices of the Dutch and other tax authorities, the Netherlands has been eager to show that its dealings with taxpayers are above board.
Treaty Abuse
The Netherlands has already taken measures which prohibit the issue of tax residence certificates for companies in situations where, in the Dutch authorities’ view, the application of the tax treaty to income payable from source countries to the Netherlands could be unjustified. This policy also includes exchange of information with source countries where, in the Dutch authorities’ view, the application of the tax treaty could be unjustified.
Recently, the law was changed to expand reporting obligations on ‘substance’ to the Dutch tax authorities, which can, under certain circumstances, be spontaneously exchanged with tax treaty countries.
The Dutch “Innovation Box”
The Dutch government supported the 2014 agreement between the UK and Germany to strengthen substance requirements in the rules governing patent and innovation box regimes.
The substance requirements were included in the final OECD BEPS recommendations and the Netherlands is committed to introducing these recommendations in its domestic law in the course of 2016.
Country - by – Country (“CbC”) Reporting
The Netherlands favors multilateral rules, which apply equally to all countries and supports the OECD initiative on CbC reporting to tax authorities.
In September 2015, the Dutch government proposed draft legislation in order to implement the OECD BEPS action point 13 (CbC reporting) as from January 2016.
WHAT ABOUT CYPRUS RESPONSE?
So far, Cyprus has taken limited actions to respond to the challenges on implementing the EU and OECD proposals/action in this area.
EU Parent / Subsidiary Directive
The government of Cyprus is in the final stages of introducing changes in order to transpose in its own legislation the two recent amendments to the EU Parent- Subsidiary Directive, ie: (i) the general anti- abuse rule and (ii) the anti-hybrid rule.
Transparency
In the area of transparency and reporting, the Cypriot government is one of the early adopters of the Standard on Automatic Exchange of Information as from 2017. However actions still need to be taken on transparency on the issuing of tax rulings.
Treaty Abuse / Transfer Pricing / IP Box Regime
However, no actions have been taken so far on the issues of substance and treaty abuse, transfer pricing and the Cyprus IP Box regime.
Conclusion
A number of recent changes in the tax legislation are positive steps in maintaining Cyprus position as an international business centre, but many more need to be done.
The Ministry of Finance and the business community of Cyprus should soon start discussions on how to reform the Cyprus taxation system, in order to deal with the upcoming issues and improve Cyprus position internationally to be able take advantage of these international tax initiatives and challenges.
