Back in 2017 the European Commission opened an in-depth probe into a UK scheme that exempts certain transactions by multinational groups from the application of UK rules targeting tax avoidance. The EU commission concluded its investigations in a decision issued 2 April 2019. According to the decision the UK “Group Financing Exemption” is in breach of EU State aid rules. Under the Scheme foreign multinationals would benefit from tax exemption of profits related to payments of interest on intragroup loans. “In conclusion, the Commission finds that the United Kingdom has unlawfully implemented the contested measure to the benefit of certain UK resident companies in breach of Article 108(3) of the Treaty. The Commission also finds that the Group Financing Exemption constitutes State aid that is incompatible with the internal market within the meaning of Article 107(1) of the Treaty, in as far as it applies to non-trading finance profits from qualifying loan relationships, which profits fall within Section 371EB (UK activities) of TIOPA. By virtue of Article 16 of Regulation (EU) 2015/1589 the United Kingdom is required to recover all aid granted to the beneficiaries of the Group Financing Exemption.” “The group financing exemption scheme, included in the Taxes Acts as Chapter 9 of Part 9A of Taxation (International and Other Provisions) Act 2010, constitutes aid within the meaning of Article 107(1) of the Treaty, in as far as it applies to non-trading finance profits from qualifying loan relationships, which profits fall within Section 371EB (UK activities) of Part 9A of TIOPA. It does not constitute aid when applied to non-trading finance profits from qualifying loan relationships that fall within Section 371EC (capital investments from the UK) of Part 9A of TIOPA and that do not fall within Section 371EB (UK activities) of Part 9A of TIOPA. To the extent that the group financing exemption scheme constitutes aid, it forms an ‘aid scheme’ within the meaning of Article 1(d) of Regulation (EU) No. 2015/1589. The aid granted under the aid scheme is incompatible with the internal market and was unlawfully put into effect by the United Kingdom in breach of Article 108(3) of the Treaty. “The United Kingdom shall recover all incompatible aid granted under the aid scheme from the beneficiaries of that aid.” “Recovery of the aid in accordance with Article 2 shall be immediate and effective.” “(1) Within two months following notification of this Decision, the United Kingdom shall submit the following information to the Commission: (a) a list of the beneficiaries that have received aid under the aid scheme; (b) a list of the tax payers that have applied the group financing exemption to non-trading finance profits from qualifying loan relationships falling within Section 371EC (capital investments from the UK) of Part 9A of TIOPA and not falling within Section 371EB (UK activities) of Part 9A of TIOPA; (c) for each beneficiary, the CFC charge actually charged in determining the beneficiary’s liability under the corporate income tax return, for each tax year that he has applied the group financing exemption, as well as the relevant corporate income tax return forms;128 (d) for each beneficiary, the CFC charge that would have been charged if he had not applied the group financing exemption, including underlying calculations, for each tax year that the beneficiary has applied the group financing exemption; (e) the total aid amount and its detailed calculation (principal aid amount and recovery interest) to be recovered from each beneficiary; (f) documents demonstrating that the beneficiaries have been ordered to repay the aid. (2) For each beneficiary, the United Kingdom shall supply the Commission with supporting evidence demonstrating how the extent to which non-trading finance profits from qualifying loan relationships fall within Section 371EB of Part 9A of TIOPA has been calculated. (3) For each tax payer, referred to in paragraph (1)(b) of this Article, the United Kingdom shall supply the Commission with supporting evidence demonstrating that the non-trading finance profits from qualifying loan relationships fall within Section 371EC of Part 9A of TIOPA and do not fall within Section 371EB of Part 9A of TIOPA. (4) The United Kingdom shall keep the Commission informed of the progress of the national measures taken to implement this Decision until recovery of the aid in accordance with Article 2 has been completed. On request by the Commission, it shall immediately submit information on the national measures already taken and on those planned to be taken, in order to comply with this Decision, including detailed information on the amounts of aid and recovery interest already recovered from the beneficiaries.” The UK government together with a long list of 75 Multinational Groups benefitting from the Scheme have appealed the decision to the General Court of the European Union. Related TP guidelinesRelated TP case laws TPG2022 Chapter X paragraph 10.66As a credit rating depends on a combination of quantitative and qualitative factors, there is still likely to be some variance in creditworthiness between borrowers with the same credit rating. In addition, when making comparisons between borrowers using the kind of financial metrics... TPG2022 Chapter X paragraph 10.96In considering arm’s length pricing of loans, the issue of fees and charges in relation to the loan may arise. Independent commercial lenders will sometimes charge fees as part of the terms and conditions of the loan, for example arrangement fees or commitment... Rio Tinto has agreed to pay AUS$ 1 billion to settle a dispute with Australian Taxation Office over its Singapore Marketing HubOn 20 July 2022 Australian mining group Rio Tinto issued a press release announcing that a A$ 1 billion settlement had been reached with the Australian Taxation Office. “The agreement resolves the disagreement relating to interest on an isolated borrowing used to pay... TPG2022 Chapter X paragraph 10.72Publicly available financial tools are designed to calculate credit ratings. Broadly, these tools depend on approaches such as calculating the probability of default and of the likely loss should default occur to arrive at an implied rating for the borrowing. This can then... TPG2022 Chapter X paragraph ...

Mining group BHP Billiton had not in it’s Australian CfC income included income from associated British group companies from sales of Australian goods through Singapore. The tax authorities held that the British companies in BHP’s dual-listed company structure fell within a definition of “associate”, and part of the income should therfore be taxed in Australia under local CfC legislation. In December 2017 BHP won the case in an administrative court but this decision was appealed to the Federal Court by the authorities. The Federal Court found in favor of the tax authority. The court found that both BHP’s Australian and British arms are associates, and therefore subject to tax in Australia under Australien CfC rules. BHP has now asked the High Court for leave to appeal ...

Anti Tax Avoidance measures are now beeing implemented across the EU with effect as of 1 January 2019. The EU Anti Tax Avoidance Package (ATAP) was issued by the European Commission in 2016 to counter tax avoidance behavior of MNEs in the EU and to align tax payments with value creation. The package includes the Anti-Tax Avoidance Directive, an amending Directive as regards hybrid mismatches with third countries, and four Other measures. The Anti-Tax Avoidance Directive (ATAD), COUNCIL DIRECTIVE (EU) 2016/1164 of 12 July 2016, introduces five anti-abuse measures, against tax avoidance practices that directly affect the functioning of the internal market. 1) Interest Limitation Rule  – Reduce profitshifting via exessive interest payments (Article 4) 2) Exit Taxation – Prevent tax motivated movement of valuable business assets (eg. intangibles) across borders (Article 5) 3) General Anti-Avoidance Rule (GAAR) – Discourage Artificial Arrangements (Article 6) 4) Controlled Foreign Company (CFC) – Reduce profits shifting to low tax jurisdictions (Article 7, 8) 5) Hybrid Mismatch Rule – Reduce Hybrid Mismatch Possibilities (Article 9 + ATAD II) The first measure, interest limitation rule aims to prevent profitshifting activities that take place via exessive interest payments . This rule restricts deductibility of interest expenses and similar payments from the tax base. The second measure, exit taxation, deals with cases where the tax base (eg. valuable intangible assets) is moved across borders. The third measure is the general antiavoidance rule (GAAR) which allows countries to tackle artificial tax arrangements not govened by rational economic reasons. The fourth measure is the controlled foreign company (CFC) rule, which is designed to deter profit-shifting to low-tax countries. The fifth measure, the rule on hybrid mismatches, aims to limit cases of double non-taxation and assymetric deductions resulting from discrepancies between different tax systems. ATAD II, COUNCIL DIRECTIVE (EU) 2017/952) of 29 May 2017, an amending Directive as regards hybrid mismatches with third countries, contains a set of additional rules to neutralize hybrid mismatches where at least one of the parties is a corporate taxpayer in an EU Member State, thus expanding the application to Non-EU countries. The second directive also addresses hybrid permanent establishment (PE) mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches. (Article 9, 9a and 9b) Other measures included in the Anti Tax Avoidance Package Package are mainly aimed at sharing information and improving knowledge among EU Member States. 1) Country-by-Country Reporting (CbCR) – Improve Transparency (EU Directives on Administrative cooporation in the field of taxation) 2) Recommendation on Tax Treaties – Address Treaty Abuses 3) External Strategy – More Coherent Dealing with Third Countries 4) Study on Aggressive Tax Planning – Improve Knowledge (2015 Report on Structures of Aggressive Tax Planning and Indicators and 2017 Report on Aggressive Tax Planning Indicators)   The Country-by-Country Reporting (CbCR) requirement introduces a reporting requirement on global income allocations of MNEs to increase transparency and provide Member States with information to detect and prevent tax avoidance schemes. The Recommendation on Tax Treaties provides Member States with information on how to design their tax treaties in order to minimise aggressive tax-planning in ways that are in line with EU laws. The External Strategy provides a coherent way for EU Member States to work with third countries, for instance by creating a common EU black list of Low Tax Jurisdictions . The Study on Aggressive Tax Planning investigates corporate tax rules in Member States that are or may be used in aggressive tax-planning strategies. Most of the measures introduced in ATAD I are now implemented and in effect as of 1 January 2019. ATAD II, addressing hybrid mismatches with Non-EU countries, is also being implemented and will be in effect as of 1 January 2020. A Non official version of the 2016 EU Anti Tax Avoidance Directive with the 2017 Amendments ...

The Bundesfinanzhof confirmed prior case law according to which the provisions on hidden deposits and hidden profit distributions must be observed in the context of the additional taxation. On the question of economic activity of the controlled foreign company, the Bundesfinanzhof refers to the ruling of the European Court of Justice concerning Cadbury-Schweppes from 2006. According to paragraphs §§ 7 to 14 in the Außensteuergesetz (AStG) profits from controlled foreign companies without business activity can be taxed in Germany. In the case at hand the subsidiary was located in a rented office in Cyprus and employed a resident managing director. Her job was to handle correspondence with clients, to carry out and supervise payment transactions, manage business records and keep records. She was also entrusted with obtaining book licenses to order these sub-licenses for the benefit of three of Russia’s and Ukraine’s affiliates, which distributed the books in the Russian-speaking market. The license income earned by subsidiary was taxed at 10 percent in Cyprus. The Income was considered ‘passive’ as the subsidiary lacked the necessary ‘actual economic activity’. On that basis the Bundesfinanzhof rejected the appeal of the taxpayer. Click here for English translation Click here for other translation ...

A tax assessment based on Japanese CFC rules (anti-tax haven rules) had been applied to a Japanese Group’s (Denso), subsidiary in Singapore. According to Japanese CFC rules, income arising from a foreign subsidiary located in a state or territory with significantly lower tax rates is deemed to arise as the income of the parent company when the principal business of the subsidiary is holding shares or IP rights. However, the CFC rules do not apply when the subsidiary has substance and it makes economic sense to conduct business in the subsidiary in the low tax jurisdiction. According to the Supreme Court, total revenue, number of employees, and fixed facilities are relevant in this determination. The Singapore subsidiary managed it’s own subsidiaries or affiliates in other territories, and while the income from services to logistics in those territories represented 85% of its revenue, between 80% and 90% of it’s income came from dividends from its subsidiaries and affiliates. The Supreme Court held that the Singapore subsidiary had conducted a broad range of businesses – including finance and logistics – with the economically rational purpose of streamlining its ASEAN operations, and thus set aside the CFC taxation. Click here for English translation ...

The European Commission has opened an in-depth probe into a UK scheme that exempts certain transactions by multinational groups from the application of UK rules targeting tax avoidance. It will investigate if the scheme allows these multinationals to pay less UK tax, in breach of EU State aid rules ...

A tax assessment based on Japanese CFC rules (anti-tax haven rules) had been applied to a “TH Corp”‘s, subsidiary in Singapore. According to Japanese CFC rules, income arising from a foreign subsidiary located in a state or territory with significantly lower tax rates is deemed to arise as the income of the parent company when the principal business of the subsidiary is holding shares or IP rights. However, the CFC rules do not apply when the subsidiary has substance and it makes economic sense to conduct business in the subsidiary in the low tax jurisdiction. Judgement of the court. According to the court, total revenue, number of employees, and fixed facilities are relevant in this determination. The Court held that the Singapore subsidiary had conducted a broad range of businesses – including finance and logistics – with the economically rational purpose of streamlining its ASEAN operations, and thus set aside the CFC taxation. Excerpt “Satisfaction of the substance and control criteria (a) According to the above-mentioned findings, A1 rents an office in Singapore and uses it for the regional control business. Therefore, it can be said that A1 has fixed facilities in Singapore, the country where its head office is located, which are deemed to be necessary for the conduct of its main business, the regional control business. Therefore, it satisfies the substantive criteria (Article 6-6(4) and (3) of the Act). (b) According to the facts certified above, A1 holds general meetings of shareholders and meetings of the board of directors, executes the duties of officers, and prepares and keeps accounting books in Singapore. Therefore, it can be said that A1 manages, controls and operates its own business in the country where its head office is located, and therefore, the management control standard (Article 66-6 Article 66-6, paragraphs 4 and 3). Conclusion According to the above, A1 satisfies all of the requirements for exemption from application, namely, the business criterion, the country of domicile criterion, the substance criterion and the control criterion. Therefore, the plaintiff is exempted from the application of Article 66-6(1) of the Measures Act in each of the fiscal years in question.” Click here for English translation Click here for other translation ...

The legislation on ‘controlled foreign companies’ in force in the United Kingdom provided for the inclusion, under certain conditions, of the profits of subsidiaries established outside the United Kingdom in which a resident company has a controlling holding. The UK tax authorities thus claimed from the parent company of the Cadbury Schweppes group, established in the United Kingdom, tax on the profits made by one of the subsidiaries of the group established in Ireland, where the tax rate was lower. The Court was asked to consider whether this legislation was compatible with the provisions of the Treaty on freedom of establishment (Articles 43 and 48 EC). The Court recalled that companies or persons could not improperly or fraudulently take advantage of provisions of Community law. However, the fact that a company has been established in a Member State for the purpose of benefiting from more favourable tax legislation does not in itself suffice to constitute abuse of the freedom of establishment and does not deprive Cadbury Schweppes of the right to rely on Community law. The Court then analysed the legislation in terms of freedom of establishment. According to settled case-law, although direct taxation falls within the competence of the Member States, they must none the less exercise that competence consistently with Community law. The Court noticed the difference in the treatment of resident companies depending on whether the CFC legislation was or was not applicable: in the first instance the company is taxed on the profits of another legal person, whereas this is not the case in the latter instance (that is, when a resident company has a subsidiary taxed in the United Kingdom or a subsidiary established in another Member State where the tax rate is higher than in the United Kingdom). The Court noted that the separate tax treatment is such as to hinder the exercise of freedom of establishment, dissuading a resident company from establishing, acquiring or maintaining a subsidiary in a Member State with a lower tax rate. The Court pointed out that a national measure restricting freedom of establishment may be justified only where it specifically relates to wholly artificial arrangements aimed at circumventing the application of the legislation of the Member State concerned and does not go beyond what is necessary to achieve that purpose. In order to find that there is such an arrangement there must be, in addition to a subjective element, objective and ascertainable evidence – with regard, in particular, to the extent to which the CFC physically exists in terms of premises, staff and equipment – that the incorporation of this subsidiary does not reflect economic reality, that is to say it is not an actual establishment intended to carry on genuine economic activities in the host Member State. The tests conducted under the national legislation must incorporate these factors if they are to be compatible with Community law. The Substance Test 67 As suggested by the United Kingdom Government and the Commission at  the hearing, that finding must be based on objective factors which are ascertainable by third parties with regard, in particular, to the extent to which the CFC physically exists in terms of premises, staff and equipment. 68 If checking those factors leads to the finding that the CFC is a fictitious establishment not carrying out any genuine economic activity in the territory of the host Member State, the creation of that CFC must be regarded as having the characteristics of a wholly artificial arrangement. That could be so in particular in the case of a ‘letterbox’ or ‘front’ subsidiary (see Case C-341/04 Eurofood IFSC [2006] £CR 1-3813, paragraphs 34 and 35). 69 On the other hand, as pointed out by the Advocate General in point 103 of his Opinion, the fact that the activities which correspond to the profits of the CFC could just as well have been carried out by a company established in the territory of the Member State in which the resident company is established does not warrant the conclusion that there is a wholly artificial arrangement ...

In this case a tax assessment based on Japanese CFC rules (anti-tax haven rules) had been applied to a Japanese Group’s subsidiary on Cayman Islands. According to Japanese CFC rules, income arising from a foreign subsidiary located in a state or territory with significantly lower tax rates is deemed to arise as the income of the parent company when the principal business of the subsidiary is holding shares or IP rights. However, the CFC rules do not apply when the subsidiary has substance and it makes economic sense to conduct business in the subsidiary in the low tax jurisdiction. The Court upheld the tax assessment. Click here for English translation ...