Q&A: EU tax transparency package

What has been announced?

On 18 March 2015, the same day as the UK Budget, the European Commission released its tax transparency package. This comprises a number of proposed measures, designed to boost transparency as part of the Commission’s ‘broad agenda’ against corporate tax avoidance.

The initiatives proposed are:

• the automatic exchange of information on tax rulings between tax authorities;
• examining the feasibility of new transparency requirements by companies, such as the public disclosure of certain tax information by multinationals;
• reviewing the code of conduct for business taxation to make it more effective in ensuring fair and transparent tax competition within the EU;
• repealing the Savings Tax Directive, in order to have a streamlined framework for the automatic exchange of financial information; and
• quantifying the scale of tax evasion and avoidance.

What is the timing?

The package will be submitted to the European Parliament for consultation and to the Council for agreement. It is envisaged that the tax ruling proposal will be agreed by the end of 2015, so that it can enter into force on 1 January 2016.

What are the proposals on rulings?

It is proposed that every three months, every member state would be obliged to report to all the other member states on the tax rulings they have issued in that period.

This proposal is a significant step forward. It follows the launch last year, by the EU competition directorate-general, of investigations into whether a number of specific rulings amount to illegal state aid. These include investigations into rulings given by Ireland to Apple, by the Netherlands to Starbucks, and by Luxembourg to Amazon and to Fiat Finance and Trade. In addition, the release of the large volume of ‘LuxLeaks’ material showed that more than 340 companies had obtained tax rulings in Luxembourg, which in some cases resulted in effective tax rates of less than 1%.

The Commission considers that greater transparency for tax rulings is ‘urgently needed’ in order to tackle ‘aggressive tax planning’ and to ensure fair tax competition. It believes that this will enable a member state to see whether a tax ruling of another member state will have an impact on its own tax base and to react to aggressive tax planning. However, the Commission acknowledges that the rulings in themselves are not considered to be a problem.

The proposals cover all advance cross-border tax rulings and all advance pricing arrangements. Purely domestic rulings and rulings to individuals would be exempt, and rulings would not be made public: the information would be exchanged between tax authorities only. This appears to be a pragmatic decision to ensure that the existing mechanisms for the exchange of information can simply be extended to rulings, so that the proposals can be brought into effect quickly. At this stage, the Commission does not consider that public disclosure would be any more effective in reacting to abusive practices, and it would present additional challenges in relation to protecting sensitive commercial information. However, the question of public disclosure in the future will be kept under review.

What are the other key points?

The proposal for the public disclosure of information by multinationals is probably an inevitable extension of the country-by-country reporting requirements, but it is surprising that it is being brought forward at such an early stage. The Commission is not proposing immediate changes, but it will assess the impact of possible public disclosure requirements, including considering the likely costs, benefits and risks.

The intention to collect data on the scale of tax evasion and avoidance is welcome, and arguably long overdue. It is surprising that the EU and the OECD have brought forward significant proposals to deal with what is perceived to be aggressive tax avoidance, without having a clear baseline for the scale of the problem. Indeed, the measurement of the scale of the OECD BEPS issue is merely included as one of the actions (action 11) and no report has been issued to date*.

What should businesses and advisers do?

One point which is not brought out strongly from these proposals is the contribution that rulings can make towards achieving certainty in a business’s tax affairs. Properly used, a rulings system can bring savings to both taxpayers and tax authorities. It is unfortunate that agreements between multinational businesses and tax authorities are routinely labelled as ‘sweetheart deals’ by some commentators.

There is a risk that the exchange of information on rulings could become burdensome for all parties, particularly as the definition of a ruling is very wide. It is defined as ‘any communication or other instrument or action of similar effect, given by or on behalf of a member state, regarding the interpretation or application of its tax laws’.

If read literally, this could result in almost all communications between HMRC and a UK-based multinational becoming disclosable, which is surely not the intention and could lead to the system grinding to a halt. Businesses and HMRC need to communicate the benefits of the UK rulings process, and work towards a manageable solution.

What else is in the pipeline?

Action 5 of the OECD’s BEPS action plan is to counter harmful tax practices more effectively. This has a priority of improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes. To date, this has focused on intangibles, but it has wider application. However, it will not be as wide ranging as the Commission’s proposal, as it only relates to rulings in relation to certain ‘preferential’ regimes relating to income from geographically mobile activities and not to all rulings.

*Editor's note: The OECD has since published a discussion draft on action 11 (improving the analysis of BEPS) of the BEPS action plan. Comments are invited by 8 May 2015.