Part I: Introduction and general concepts

Question 1

What is international tax law?

Answer 1

• Definition: “all rules that determine where and how, in a cross border context, specific income of a taxpayer may be taxed and how this tax must be assessed and recovered”
• No separate set of rules, but various sources of law:
  
  1. Basic general principles of internation tax law
  2. National tax laws
  3. Bilateral tax treaties (based on Model Conventions)
  4. EU law
  5. International guidelines (in particular OECD material)

Question 2

What are the basic principles of international tax law?

Answer 2

1. Fiscal sovereignty of the states: the right of a state to regulate its own tax matters and to legislate for everyone within its territory
2. Territoriality: requirement of personal (taxpayer) or “objective” income link with the territory or both
   
   • Determined under national tax law
     
     • Nationality principle: USA
     • Residence principle: Belgium
     • Territoriality principle: Hong Kong: only income that is sourced on HK territory: also for resident taxpayers is taxed in HK

Question 3

What are the relevant provisions in TFEU?

Answer 3

• General non-discrimination principle: article 18
• Fundamental freedoms:
  
  • Free movement within internal market: art. 26, §2
  • Goods: art. 28
  • Persons: art. 21
  • Employment: art. 45
  • Establishment: art. 49
  • Services: art. 56
  • Capital: art. 63
• Prohibition on (fiscal) state aid: art. 107-108
• Increasing impact of European Court of Justice case law, also in the field of tax treaties

Question 4

What are the income tax directives?

Answer 4

• Examples:
  
  • Directive on Mutual assistance between tax authorities (1977) replaced by new Directive adopted 15 Feb 2011 (many recent amendments to allow (i) automatic exchange of bank info on investment income (ii) rulings) etc..
  • Parent-Subsidiary Directive (1990, recast 2011 with later amendments)
  • Anti Tax Avoidance Directive I and II (2016/2017)
  • Tax Dispute Resolution Mechanisms Directive (2017)
• Impact of Tax Directives on Tax Treaties
• Impact of the Tax Dispute Resolution Mechanisms Directive on the resolution of economic double taxation resulting from transfer pricing adjustments

Question 5

What is the soft law in international taxation?

Answer 5

• International guidelines or recommendations
• OECD Guidelines:
  
  • Transfer Pricing Guidelines (1995-1999-2010-2017)
  • Base Erosion & Profit Shifting (“BEPS”) of October 2015: 15 Reports
• EU Commission: a few examples
  
  • Code of conduct against harmful tax competition (1998)
  • Recommendation on Fair & Efficient corporate tax system (June 2015)
• There is a competition going on between OECD & EU Commission

Question 6

What are bilateral tax treaties?

Answer 6

• Bilateral tax treaties are based on 2 main types of model treaties: OECD and UN
  
  • Many other national Model tax treaties: US model, Dutch model, Belgian model,…
• Main focus: OECD Model Tax Convention + Commentary

Question 7

What is the concept of sovereignty?

Answer 7

• Basis for taxation
  
  1. Personal sovereignty: based on residence / nationality
  2. Territorial sovereignty: objective connection of income with a state’s territory -> source rules
  3. Functional sovereingty = continental shelf

Question 8

What is tax jurisdiction?

Answer 8

• “The limits of the competence of a State to prescribe norms in a specific field of law (i.e. tax law) that are valid for a given territory and person” → law that can be enforced and is recognised by other States”
• Criteria in tax law: nationality, residence, territorial: source, destination or consumption, functional (continental shelf)

Question 9

What is the difference between limited and unlimited tax liability?

Answer 9

• Unlimited: someone gets taxed on their world-wide income: Principles
  
  • Nationality
  • Residence
• Limited: part of income link to territory or to functional link
  
  • Territorial link
  • Functional link

Question 10

What is international double taxation or double non-taxation?

Answer 10

• Multiple applications of sovereignty + different types of tax liability lead to international double (non) taxation
• International double taxation does not mean the different layers of taxation within one state (eg. within federal state)
  
  • It is concurring taxing rights exercised by 2 or more States

Question 11

What are the forms of double taxation?

Answer 11

1. Economic double taxation
   
   • ​​2 taxpayers - 2 states - Same tax - same object - same taxable year
   • Eg. dividend distributions, transfer pricing adjustments
2. Juridical (legal) double taxation
   
   • One taxpayer - 2 states - same tax - same object - same taxable year
   • Examples/causes:
     
     • Concurrence of personal sovereignty and territorial sovereignty (residence vs. source);
     • Concurrence of two different criteria of personal sovereignty (residence vs. nationality);
     • Concurrence of two different criteria to determine territorial sovereignty (i.e. conflicting source rules);
     • Different interpretation of same test (e.g. residence)

Question 12

What is international double non taxation and its causes?

Answer 12

• Neither of two relevant States exercises taxing rights over item of income
• Examples/causes:
  
  • Tax havens (the well known, but also UAE, countries with territorial tax regimes (HK) etc.
  • States intentionally or unintentionally do not tax a certain item of income:
    
    • Eg. Swiss cantons on certain types of companies, Uruguay with tax free zones
    • Tax incentives to attract foreign investors or certain businesses
    • Individuals earning income below a threshold do not pay tax (tax free bracket, PIT is progressive)
  • Domestic laws of States are not harmonized
    
    • Causes hybrid mismatches
      
      • eg. profit participating loan between Lux and borrower’s States
    • At the origin of the BEPS action plans (trying to restore coherence of the international tax system) and the amendment of the EU Parent/Subsidiary Directive per 1/1/16
  • OECD Model: allocates taxing rights, does not impose an obligation to tax

Question 13

What are patent boxes?

Answer 13

• 15 patent box regimes in the EU: very favourable tax regimes for income derived from patents

Question 14

What is the purpose of the OECD Model Tax Convention of 2017?

Answer 14

1. Prevention of international juridical (and economic?) double taxation
2. Prevention of tax evasion (= fraud)
3. Non discrimination
4. Assistance (in particular exchange of information) between tax authorities
5. Assistance in collection of taxes
   * Purpose is not in the title but this must all be seen against the broader objective of a bilateral tax treaty = fostering international trade and investment

Question 15

What are some recent developments as a result of BEPS Action Plans October 2015?

Answer 15

• Action 6 (“Preventing the granting of treaty benefits in inappropriate circumstances”)
• Amendment to title of OECD Model
  
  • New title: “Convention between State A and State B for the elimination of double taxation and the prevention of tax evasion and avoidance”
• New preamble:
  
  • “Desiring to further develop their economic relationship and to enhance their co-operation in tax matters”
  • Intending to conclude a Convention for the elimination of double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty shopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of 3rd States)”

Question 16

What is the effect of the OECD Model Tax Convention?

Answer 16

• OECD Model Convention is a non-binding model treaty which is highly influential on the conclusion of binding bilateral tax treaties
• Vast majority of the more than 3500 bilateral tax treaties around the world currently follow the OECD Model:
  
  • Exceptions: US treaties following US Model (but to a large extent US Model follows OECD Model) and treaties with developing countries following UN Model
• Because of the BEPS Actions several amendments are made to the OECD Model
  
  • Amendments are essential to realize the BEPS actions: combating international tax avoidance and double non taxation
  • How to achieve this goal with 3500 bilateral treaties that need to be amended? Time lag to (re)negotiate a treaty is several years
  • The Multilateral Instrument adopted on 7 June 2017

Question 17

What are the general characteristics of tax treaties? The 6 cardinal rules?

Answer 17

1. Two core notions in distributive rules
2. Tax treaties restrict the application of domestic law in Residence and in Source State > supremacy of international law over domestic law
3. Assessment of tax is based on national tax law (not on tax treaty)
4. Terms may have different meaning in tax treaties and in national law = relative effect of tax treaties
5. Usually tax treaties improve taxpayer’s situation; sometimes they do not
6. The relationship between tax treaties and conflicting subsequent domestic tax law = treaty override

Question 18

What are the two core notions in distributive rules?

Answer 18

1. Residence state: one single concept: art. 4 OECD MC
2. Source State: variety of rules in function of type of income

Question 19

What is the effect of the supremacy of international law over domestic law?

Answer 19

• Source State (e.g. employment income; dividends & interest)
• Residence State (worldwide income taxation: treaties impose obligation to avoid international juridical double taxation by way of exemption/credit)
• Double non-taxation is not excluded (art. 23: exemption if income “may be taxed in other State” ≠ subject to tax – requirement)
  
  • ⇔ double non taxation through tax avoidance structures (see modified preamble)
• Consequence: apply domestic taw law first, then see if tax treaties restrict domestic law

Question 20

What is the relative effect of tax treaties?

Answer 20

• Terms may have different meaning in tax treaties and in national law
• Definitions and classifications of income under tax treaties are only relevant for applying the treaty
• No relevance for application of domestic tax law

Question 21

What is treaty override?

Answer 21

• The relationship between tax treaties and conflicting subsequent domestic tax law
• Later domestic legislation conflicts with a country’s treaty obligations
  
  • Solution depends on (consitutitional law of country concerned)
• Unintentional
  
  • Often solved by courts through interpreation of treaty in favor of treaty
• Intentional override
  • In several countries treaties have same rank as domestic law and “later in time” rule applies to solve conflict
    
    • USA (clear case law since 1888), UK (Padmore-case)
    • Sweden, Germany (but issue under reconsideration by Bundesfinanzhof)
    • But not in Australia and Canada (e.g. Australian International Tax Agreements Act: “the provisions of this Act have effect notwithstanding anything inconsistent (…) with any Act imposing Australian tax”)
  • In several (often civil law) countries treaties have a higher rank than domestic law (“unconditional supremacy of international law”) and thus conflict is solved in favor of treaty rule even if domestic law is of later date (“treaty is lex specialis”)
    
    • Belgium: Supreme Court 1971: Franco Suisse Le Ski; in tax treaty matters (also if domestic law is enacted to prevent tax abuse: Supreme Court 5/12/2003)

Question 22

How do tax treaties become operative in domestic law of countries?

Answer 22

• Automatic: eg. Japan
• Parliamentary approval = vote of approving bill:
  
  • Germany, NL, Italy, Belgium, USA after approval by the Senate
• Legislation necessary to transform treaty into domestic law:
  
  • Canada, UK, Australia, Ireland
  • UK House of Lords: No rights accrue to a taxpayer under the treaty itself, only under the legislation incorporating the treaty in its domestic law (see Commerzbank case)

Question 23

How do we distinguish between the situation at domestic level and the situation under international law?

Answer 23

• Situation at domestic level (i.e. between State and taxpayer, see previous slides) to be distinguished from situation under international law (i.e. between the 2 Contracting States)
• Treaty override is breach of international law: art. 26/27 Vienna Convention: pacta sunt servanda
• International law remedies for injured State
  
  • Sanctions under international law (Art. 60 VCLT ): suspension or termination of treaty; but detrimental to taxpayer: no tool against double taxation anymore
  • Traditional retaliation: reduce level of diplomatic relations, economic sanctions or boycott imports from or exports to other State etc.
  • Procedure before International Court of Justice (if 2 countries or tax treaty recognizes jurisdiction of Court): no precedent
• Complaint by taxpayer under mutual agreements procedure (Art. 25 OECD MC)
  
  • But result is often that procedure remains unresolved; State will not overturn its constitutional law
• •Better solution: renegotiate the treaty… but no solution guaranteed

Question 24

What is the globalisation of economy?

Answer 24

• Integration of national economies and markets
• Fostering of innovation > technology
• Shift from country-specific operating business models to global models with integrated supply chains
• Growth of service sectors
• Growth of digital economy
• Creation of wealth
• Globalisation of economy (incl. services and digital economy)
  
  • Makes it easier for businesses to locate productive activities in geographical locations distant from physical location of customers
  • facilitates tax planning

Question 25

Is taxation international?

Answer 25

• No, taxation remains local and is at the core of countries’ sovereignty:
  
  • Non-harmonized tax rules
  • Cross-border trade = international double taxation (frictions following from interaction of domestic laws) but quite some opportunities for double non-taxation
  • Tax competition between countries: increased attractiveness of smaller economies or the race to the bottom?

Question 26

What has happened since the League of Nations (1920)

Answer 26

• Since the League of Nations (1920) efforts international common tax standards have been developed to eliminate international double taxation (along fixed lines: residency v. source, arm’s length principle, non discrimination)
  
  • OECD Model Convention since 1963; UN Model Convention since 1980
  • Network of + 3500 bilateral tax treaties
    
    • Belgium + 100 approved
  • Emerging + some BRICS economies oppose residence taxation principle and claim source taxing rights (UN Model)

Question 27

What is the consequence of unharmonized tax rules?

Answer 27

• Inconsistencies: A leading principle of domestic tax law (coherence/matching principle) is often lacking at the international forum
• Double non-taxation, deduction/non-inclusion, profit shifing from high to low tax jurisdictions:
  
  • Stateless income (see Starbucks/Apple below); double deduction/non-inclusion (profit participating loans); profit shifting from high tax to low tax jurisdictions (transfer mispricing, thin capitalization)
  • Profits not taxed where economically earned/where value is created
  • Digitalised business avoids taxation in state of customer because no physical presence needed under business model

Question 28

What is the weakness of OECD Model Convention and bilateral tax treaties?

Answer 28

• Allocate taxing rights between two states, not taxes > double non-taxation (in particular Art. 23 A “exemption” for foreign-source income “that may be taxed”)
  
  • No obligation to tax

Question 29

What are the tax practices of MNE’s?

Answer 29

• Companies are set up with profit maximization purpose to create, inter alia, shareholders value. Tax is seen as just another cost that should be minimized within the boundaries of the legislation
• Exploiting tax arbitrage opportunities because of unharmonized tax rules, tax incentives and flaws in tax treaties
• More confidence in taking aggressive tax positions:
  
  • Google, Starbucks, Amazon, Apple, Fiat, Microsoft, Mc Donalds, Ikea etc. (public hearings UK/US: not illegal, but immoral)

Question 30

What can be the commentary on the behaviour of MNE’s?

Answer 30

• Governments: loss of revenues (but national parliaments voted the defective tax bills)
  
  • Loss estimated at 100 to 240 billion $ per year (4% to 10% of global corporate tax revenues)
• Community of taxpayers: if there are winners there always losers that pay the bill avoided by the first (public outcry feeded by press)
• MNE’s: reputational risk
  
  • But may be assesed differently from company to company
  • Not engaging in tax planning is competitive disadvantage
  • Tension MNE v. domestically operating companies (small and big)

Question 31

What is the Starbucks case?

Answer 31

• NL ruling = agreement on tax base with NL authorities
• No tax on accounting profit (1) of Starbucks NL roasting factory
• Only taxable on 10% of payroll cost + depreciation of plant & equipment (2)
• Difference between (1) accounting profit and (2) taxable profit is deductible royalty
• Every year “taxable” profit: around 2 mio €
• Minus financial expenses
• Taxable profit around 1,5 mio € x 25% tax

Question 32

What are the most important points out of the OESO Action Plan?

Answer 32

• “There is an increased disconnection between the location where value creating activities and investment take place and the location where profits are reported for tax purposes”
• “No or low taxation is not per se a cause of concern, but it becomes so when it is associated with practices that artificially segregate taxable income from activities that generate it”
• “The fact that new ways of doing business may result in a relocation of core business functions and consequently a different distribution of taxing rights which may lead to low taxation is not per se an indicator of defects in the existing system”
• “Inaction in this area would likely result in some governments losing tax revenues, the emergence of competing sets of international standards, and the replacement of the current consensus-based framework by unilateral measures which would lead to global tax chaos marked by massive re-emergence of double taxation”
• The G20 leaders in 2012: “Despite the challenges we all face domestically, we have agreed that multilateralism is of even greater importance in the current climate and remains our best asset to resolve the global economy’s difficulties”

Question 33

What are the political reactions?

Answer 33

• Parliamentary investigations against companies and PWC in UK, US and Australia
  
  • Margaret Hodge Chair of UK House of Commons Public Accounts Committee: “we are not accusing you of being illegal, we are accusing you of being immoral”
• Hearings of special TAXE Committee of European Parliament on tax rulings
  
  • Tax authorities, business, advisors
  • Report of 25 November 2015

Question 34

What is the BEPS project?

Answer 34

• OECD / G20
• Base Erosion and Profit Shifting (BEPS) project
  • The main purpose is “to provide countries with instruments, domestic and international, aiming at better aligning rights to tax with real economic activity” of MNEs under very ambitious timetable (Dec. 31, 2015)
  • BEPS action plan will restore taxation where cross-border income will go untaxed (or is taxed insufficiently) but does not directly aim at changing the existing international standards of allocating taxing rights (as asked by certain BRICS)
  • 15 actions organised around three main pillars (right column next slide) with different enforceability standards:
    
    1. Minimum standard: engagement of MS to implement
    2. Common approach: if implemented, BEPS solutions will be followed
    3. Recommendations: if implemented, free to follow

Question 35

What are the final deliverables of the OECD action plans?

Answer 35

• Unprecedented (political) support (OECD Members, G20 Members, non OECD Members, developing countries) assembled in Inclusive Framework > ambitious time table achieved
• Profit taxation aligned to economic activity and where value is created (i.a. where R&D occurs and intangibles are created will drive profit taxation) = new international framework
• Transparency towards tax authorities (exchange of rulings, CbC reporting)

Question 36

On what does the success of the OECD Action Plans depend?

Answer 36

• Success depends on widespread and coherent implementation
  
  • OECD TP Guidelines = “automatic”
  • Different approaches (minimum standards, common approaches, recommendations) = different implementation requirements
  • Different techniques
    
    • Changes to treaties (role multilateral instrument = complex and still many incoherent results because of the many optional provisions)
    • Changes to domestic law
  • Taxation of digital economy – which is at the core of the problem - is unsatisfactory result (AP 1)
  • Dispute resolution is a poor success (AP 14): only 26 countries (out of + 100 participants) accept arbitration

Question 37

How does the monitoring work for the OECD Action plans?

Answer 37

• Monitoring:
  
  • Assessment of compliance with minimum standards (peer review) by OECD and G20 Member and non Member Countries
  • Assessment of compliance by MNE’s (local tax authorities, role of CBCR “flash lights”)

Question 38

What are the EU Action?

Answer 38

• Action Plan on Tax Fraud and Tax Evasion (Dec 2012)
• Automatic exchange of tax rulings (as of 2017)
• Changes to Parent/Sub Directive (as of 2016)
  
  • Anti hybrid rule: MS of parent may not exempt “dividends” which have been deducted by sub (<> PPL)
  • General anti-avoidance rule (GAAR): no Directive benefits if one of main purpose is tax avoidance
• Anti Tax Avoidance Directives I and II (2016/2017), turning OECD soft law into EU hard law
  
  • Limitations on interest deductibility
  • Controlled Foreign Company Legislation
  • Exit taxation
  • GAAR in CIT of all MS
  • Anti hybrid legislation

Question 39

What is the state aid review?

Answer 39

• Commission investigations and decisions against Lux (Amazon*, Fiat*, Ikea*, Engie*), NL (Starbucks), Ireland* (Apple), Belgium* (Excess Profit Rulings), Gibraltar (rulings)

Question 40

What is the effect of the OECD/EU Action Plans on Starbucks?

Answer 40

• State Aid Investigation by EU-Commission on NL ruling
• EU Commission - ruling confers state aid
  
  • TP on sale of beans between CH and NL tripled <> OECD TP Guidelines
  • Profit determination and deductible royalty <> OECD TP Guidelines
  • Commission lost its case on 20 September 2019: rulings can grant state aid but lack of sufficient proof by Commission that misapplied the OECD TP Guidelines
• Rulings automatically exchanged
  
  • Within EU on basis of Directive (2017)
  • Within OECD on basis of AP 5

Question 41

What is the BEPS Project?

Answer 41

• Base Erosion and Profit Shifting (2015)
• Main purpose: provide countries with instruments to better align rights to tax with real economic activity.
• Restore taxation where cross-border income will go untaxed or not taxed sufficiently.
  
  • Does not directly aim at changing the existing the international standards of allocating taxing rights.

Question 42

What are the actions plans by BEPS?

Answer 42

• 15 actions organised around 3 main pillars:
  
  1. Minimum standard: engagement of MS to implement
  2. Common approach: if implemented, BEPS solutions will be followed
  3. Recommendations: if implemented, free to follow

Question 43

What were the final deliverables of BEPS?

Answer 43

• Unprecedented (political) support
• More transparency towards tax authorities:
  
  • Exchange of rulings
• Success depends on widespread and coherent implementation.
• Different techniques:
  
  • Changes to treaties: role multilateral instrument
  • Changes to domestic laws

Question 44

What has BEPS failed to provide?

Answer 44

1. Taxation of digital economy: core of the problem (AP1) = no solution
2. Dispute resolution poor success: only 26/100 countries accept.

Question 45

What are the EU actions against aggressive tax planning?

Answer 45

• Automatic exchange of tax rulings
• Changes to Parent/sub directive:
  
  • Anti-hybrid rule: MS of parent max not exempt dividends which have been deducted by sub against profit participating loans.
  • General anti-avoidance rule: no directive benefits if one of the main purpose = tax avoidance.
• ATAD I and II:
  
  • Limitations on interest deductibility
  • Controlled Foreign Company Legislation
  • Anti-hybrid legislation
• State aid review: Commission investigations and decisions:
  
  • Amazon, Starbucks, Excess profit rulings,…