International tax developments impacting US companies

As we say goodbye to 2014 and hello to 2015, what can we expect on the European tax horizon? A great deal is the answer.

2014 was a busy year with a great amount of work being carried out on the Base Erosion and Profit Shifting (BEPS) project by the Organisation for Economic Co-operation and Development (OECD) which will affect all European jurisdictions. We also saw the topic of tax avoidance take international centre stage on several occasions. Most recently when Luxembourg was accused of rubber stamping many multinationals tax avoidance schemes and the UK announced its attack on such schemes with the introduction of a new Diverted Profits Tax, or “Google” tax as it was trailed.

How can 2015 be as eventful I hear you ask. Well the following issues look set to keep things busy:

• Tax avoidance is and will remain a major issue for all jurisdictions. It is anticipated that the BEPS project will complete in Autumn 2015 bringing with it great change for the G20 and other countries involved.
• The new VAT rules on the supply of e-commerce, telecommunications, broadcasting and e-services came into effect on 1 January 2015 and are causing issues for many in terms of implementation.
• The UK may see a new Government and therefore a possible set of new tax changes in May 2015.
• Major Spanish tax reform has been implemented from 1 January 2015, effecting many domestic and international businesses. 

Tax avoidance and BEPS 

The BEPS project is being undertaken by the OECD to address perceived weaknesses in international tax rules that, in particular, allow multinational enterprises to avoid or minimise tax. 

Base erosion involves reducing the level of profits in a jurisdiction while profit shifting involves moving taxable profits from one (high tax) jurisdiction to another (low tax) one. At the core of the BEPS project is an action plan, commissioned by the G20, identifying 15 areas for tightened rules and greater international harmonisation to address these issues. 

2014 was a busy year for the BEPS project with many action points being considered and draft papers published. Of most significance to many of you will be the following:

Transfer Pricing

Consideration of a new ‘3 tier approach’ to transfer pricing documentation and the definition of ‘intangibles’. There is sufficient certainty around the documentation changes for businesses to consider how they will implement these changes in the future. However, there is still some uncertainty around the definition of ‘intangibles’ and given this part of the project has been ongoing since 2010 it seems reasonable for businesses to expect some clarity on these issues very soon.

Permanent Establishment (PE)

The discussion draft for PEs goes further than originally anticipated. Key areas in which the OECD is proposing change are:

• commissionaire arrangements and similar strategies;
• issues relating to the specific activity exemptions;
• rules to counter the splitting of contracts;
• specific insurance against sector PE proposals; and
• PE profits attribution clauses.

Whilst the discussion paper states that it does not intend to make fundamental changes, the proposed lowering of the PE threshold and narrowing of available exemptions will inevitably lead to material changes on source-based taxing rights. They may also lead to further uncertainty and subjectivity which is far from ideal as the current dispute resolution system for PE claims is already creaking under the pressure of existing claims.

Patent box

Some European jurisdictions have tax breaks in place, known as ‘patent boxes’ allowing companies to pay lower taxes on profits attributable to patents. Such initiatives are designed to encourage research and development in the jurisdiction offering the patent box. 

Such arrangements have come under scrutiny as part of the BEPS project. The OECD feels such preferential tax regimes are harmful and give some jurisdictions an unfair competitive advantage. As such, Germany and the UK have announced a proposal for intellectual property tax regimes, based on a nexus approach. This means that in order for a company to benefit from any such regime in the future they must have a sufficient connection with the country of the patent box regime. Currently, companies can sometimes benefit from the regime even if the research and development undertaken is not carried out in the patent box jurisdiction. 

Under the UK/Germany proposal existing patent box regimes must be closed to new entrants by 30 June 2016 and abolished by 30 June 2021. 

Italy announced just before Christmas that an Italian patent box will be introduced from January 2015. The main rules are as described in our article here. Some implementing measures that will be published in 2015 will establish special rules and special cases. For the moment, no particular reference to the BEPS was announced even though the Italian economy minister has acknowledged the need for an international binding framework based on principles defined by OECD and the Code of Conduct Group. 

Italy have also announced as part of the same decree a new tax credit for R&D and will be introduced in Italy for the year 2015 and for the following 4 years. More details will be available soon. 

The new VAT rules for digital services 

The new EU VAT rules on the sale of e-commerce, telecommunications, broadcasting and e-services came into effect on 1 January 2015. These rules change the place where the VAT is payable from the country in which the supplier of the services belongs to the country that the end-consumer is resident. 

These rules have been trailed for some time but that does not mean that businesses are finding them easy to implement. In our last article we took you through some of the main issues that businesses needed to consider before 1 January 2015. 

The VAT Mini one-stop-shop (MOSS) is an online service that has been designed to help businesses apply the new rules by only registering in one country and using the MOSS to pay the correct VAT in the correct jurisdiction. However, initial reports seem to indicate that for small businesses in particular this is proving quite difficult. The Revenue in the UK has produced further guidance to try and assist businesses get to grips with the new regime. 

Issues facing German businesses are not dissimilar to the UK and details can be found in our article here.   

The MOSS in Italy was introduced in September 2014 and just before the new year the main Italian VAT legislation has been changed to fully implement the MOSS in Italy. At the moment, Italian companies also seem to be struggling to apply the new regime. Main issues include the obligation to invoice individuals and the rate to be applied. As in France and Luxembourg the Italian parliament also introduced on 22 December 2014 a reduced VAT rate on e-books (4%) contrary to the provisions of the VAT Directive which requires the application of the ordinary rate (22%). 

The MOSS is now available in Spain as well. For those wishing to use the scheme a Form 034 must be submitted to request registration in the Special Scheme applicable to telecommunications, broadcast or television services, and services provided electronically in VAT. 

Time will tell as to how well these new rules can actually be applied. If you are experiencing issues with the new rules or have any questions please do contact your usual Osborne Clarke contact or a member of the Osborne Clarke International Tax team. 

Election year in the UK 

For the UK, 2015 will see the general public take to the polling booths once again in a tightly contested general election to appoint the UK’s next Government. This may bring a change of power in which case we may see changes to the tax rules occurring in the following months. This brings with it some uncertainty for businesses operating in the UK, but we would hope the new lower corporation tax rate of 20% will remain for some time. 

Major Spanish tax reform 

In the summer we highlighted the major changes happening in the Spanish corporation tax regime. These are now effective from 1 January 2015. 

A new set of tax legislation has been introduced in Spain including major amendments to Corporate and Individual Income taxes. The main changes to the Corporate Income Tax include the following:

• CIT rate is reduced from 30% to 28% in 2015 and to 25% in 2016 onwards.
• Anti-avoidance provisions to prevent hybrid instruments have been introduced as a response to the OECD BEPS initiative. In addition, intragroup profit participating loans will be characterized as equity instruments.
• The interest barrier rules which limit the amount of deductible interest expenses have been expanded to impose additional restrictions to interest derived in connection with the acquisition of companies.
• The existing participation exemption regime (applying to foreign investments) is extended to Spanish participation (i.e. the distribution of dividends between Spanish companies and the sale of the shares in Spanish companies).
• The corporations will be able to carry forward tax losses indefinitely, with an annual limit of 60% of the company’s net taxable income. 
• The new tax grouping regime allows tax consolidation of any Spanish entities controlled by the same ultimate parent entity, even if the latter is a non-Spanish entity.
• The dividend withholding tax exemption applicable to distributions to European parent companies has been modified to include a broad anti-avoidance provision. The existing holding structures will have to be reviewed to confirm compliance with the new regime. 

UK Diverted profits tax 

The UK Government proposes to introduce a new tax called the “Diverted Profits Tax” or “DPT” from 1 April 2015. The tax will be chargeable at a rate of 25% (4% above the standard rate of corporation tax) on profits which are treated as “diverted” from the UK under the rules. Please click here for further details.
All US groups where UK customer contracts are made through the US parent should consider the impact of these rules as a matter of urgency.