Back to Taxes Committee publications

Finn Kelly
Matheson, Dublin
finn.kelly@matheson.com

 

Report on a session at the 9th Annual IBA Finance and Capital Markets Tax Conference in London

Tuesday 21 January 2020

 

Session chair

Michael Molenaars  Stibbe, Amsterdam

 

Speakers

Anthony Alexandrou  IPG, New York

Francesca Fracassi  Kuwait Petroleum Italia SpA, Rome

Samuel Morgan  BlackRock, London

Glenn Price  Vodafone, London

Andrea Tolley  GSK, London

 

The panel addressed the challenges faced by tax directors in the current volatile political and tax environment, as well as providing an insight into what tax directors really need to hear from their tax advisers.

Beneficial ownership, the ‘Danish cases’ and the effect on multinationals’ holding/finance companies

Michael Molenaars opened the discussion by addressing the impact on multinationals of the recent Court of Justice of the European Union (CJEU) decision in the Danish cases. Molenaars explained that the primary consequence was uncertainty. From a Dutch perspective, there were previously specific criteria that could be applied to determine beneficial ownership. Following the CJEU’s decision, the position is no longer clear as these criteria are now considered to be only an indication of whether a company is the beneficial owner of a payment. Molenaars asked the panel how multinationals cope with the lack of certainty in this respect.

Francesca Fracassi explained that there was currently a lot of litigation in this area in Italy. Fracassi gave an overview of two recent Italian Supreme Court cases. She explained that while the previous requirement to obtain a dividend withholding tax exemption was that the company receiving the dividend payment was subject to corporation tax, this was no longer sufficient. It is now required that the dividend itself is actually subject to tax. This is causing some concern with regard to payments to jurisdictions that apply a participation exemption, such as the Netherlands, but the approach of the Italian Supreme Court seems to be against the Parent-Subsidiary Directive.

Samuel Morgan stated that a noticeable impact of the Danish cases was that the word ‘substance’ was now a board-level matter. He noted the concept can be a difficult one to explain as ‘substance’ is subjective and can mean more than one thing. In addition, Morgan noted that the business imperative is to ensure that the substance requirement is met and that there will be a need to support local entities in this regard and that tax advisers can assist in this.

Tolley explained that substance has always been an important consideration in the pharmaceutical sector. She explained that hiring talented employees in particular jurisdictions could sometimes be a challenge.

Impact of continuing state aid investigations

Molenaars asked the panel how corporates were dealing with the impact of the continuing state aid investigations. Glenn Price said that his team keeps an eye on state aid cases from a general perspective and monitors any cases of particular interest. He explained that these cases did not have the effect of changing current practices as the cases mainly involved historic positions and unilateral rulings. Price pointed out that the number of state aid cases may reduce since many tax authorities no longer provide unilateral rulings following base erosion profit shifting (BEPS) changes and the recent state aid investigations.

Questioned on the effect of state aid on transfer pricing, Price noted that the implementation of BEPS Actions 8–10 through the 2017 Transfer Pricing Guidelines will likely have more of an impact in terms of changing practices than the state aid investigations because of the requirement to consider and document two-sided transactions from both sides.

Multinationals’ tax planning post-BEPS, ATAD and US tax reform

Molenaars asked the panel about the effect that international tax developments were having on tax planning.

Anthony Alexandrou noted the increasing use of tax technology, especially in the context of compliance. Alexandrou explained that his team had individuals specifically dedicated to implementing new tax technology systems. In addition to tax technology, Alexandrou explained that internal resources were increasingly being dedicated to tax controversy.

Morgan noted the impact of the Anti-Tax Avoidance Directive (ATAD) rules, which have put pressure on historic structures involving inter-company debt. Another trend noted by Morgan was that investment companies were increasingly required to act as a detective, particularly in terms of determining how investors treated their investments for tax purposes. This has led to more discussions with investors, although Morgan noted that these questions were being increasingly incorporated into fund subscription documents.

Andrea Tolley explained that the most challenging result of recent times has been the complexity of the new rules introduced by various jurisdictions and how these rules can compete with one another. Fracassi echoed this and noted the rate of change in respect of these new rules. Fracassi said that the main difficulty is to remain up to date and not to miss anything important.

Increased tax transparency requirements

Molenaars noted the increasing tax transparency requirements facing multinationals, including the sixth Directive on Administrative Control (DAC 6) and country-by-country reporting (CBCR). He asked the panel how multinationals are dealing with this.

Alexandrou explained that the increased tax reporting requirements could have an overwhelming impact on all companies. In this regard, he noted that certain innocuous types of transactions, such as secondments, may now be reportable under the new rules. Morgan echoed these statements and noted that there was a concern about high-volume transactions becoming reportable. He explained that this could result in thousands of transactions becoming reportable for a single taxpayer entity which would create the danger of missed reports.

Alexandrou said that it is critical to develop sound processes and good technological tools to assist with accuracy of reporting. Even in cases where reports had been missed, having these processes in place would show that there had been a reasonable basis for having done so. Tolley agreed with this and noted the increasing move towards use of tax technology by both taxpayers and tax authorities. In addition, Tolley noted the general concerns of taxpayers regarding the volume of information that was being shared with tax authorities as a result of the increased reporting requirements.

Fracassi stated that problems may arise where companies over-disclose information, which could potentially create unnecessary questions and worries. Alexandrou agreed and noted the importance of striking a balance in terms of how descriptive taxpayers’ reports should be.

Price stated that legal counsel had an important role to play in assisting taxpayers with their reporting requirements. In particular, lawyers can provide precise advice without excessive caveats in respect of what is reportable and what is not.

Effects of a changing tax environment on the relationship between tax departments and their external advisers

Molenaars queried whether in-house lawyers expected tax advisers to keep them up to date and to advise them of particular developments. Fracassi noted that general circulars regarding recent tax developments were helpful, although she noted that these could be improved by being tailored to individual clients and their particular concerns. Alexandrou agreed with this and added that there is value in law firms understanding clients’ businesses and coming forward with bespoke advice.

Molenaars asked the panel about the effects of a changing tax environment on the relationship between tax departments and their external advisers, as well as what in-house tax teams expect from their tax advisers. Price stated that one noticeable effect was that taxpayers were spending more on legal counsel than before. He explained that it was important to get rigour and clarity on issues because increased reporting requirements mean that many taxpayers now operate on the basis that everything will be shared with tax authorities.

Morgan noted that companies were increasingly asking their tax advisers ‘what is everyone else doing?’. He explained that taxpayers do not want to be aggressively off-market nor do they want to be unnecessarily conservative in their tax positions. Tolley echoed this and stated that a key question for companies was how to manage this.

Tolley stated that companies were being challenged by investors to publish more detail in relation about their taxes. In this respect, she noted the importance of striking a balance in terms of what was shared. In terms of publishing tax-related information, Price explained that Vodafone preferred to own the debate. In particular, he explained that Vodafone had made its CBCR report available to the public. This entailed disclosing additional details over and above what had originally formed the CBCR report in order to provide some context to the numbers included in the report.

Tax in the digital world: consequences for tax departments and new forms of taxation

Molenaars wrapped up the session by asking the panel what their views were on new forms of digital taxation and how the digitisation of tax affects in-house tax teams.

Alexandrou stated that, in his view, the digitisation of tax involved two main aspects. Firstly, it was a reaction by governments to the remote supply of goods and services and, secondly, it was reflected in how tax authorities and governmental agencies were dealing with taxpayers. Alexandrou noted the risks involved with an increasingly faceless interface with tax authorities.

Price stated that, in terms of digital services tax, extending a unified approach to consumer-facing businesses was casting the net too wide. This would result in heavily regulated businesses which are already subject to specific revenue taxes in local jurisdictions having to pay extra taxes as a result of the introduction of a digital services tax. Price noted that this was a challenge for the telecoms industry, who are also subject to local telecoms taxes in many jurisdictions. Hence his view was that the Organisation for Economic Co-operation and Development (OECD) needs to consider double taxation of the telecom sector, not just the digital economy.

Tolley explained that developments in digital taxation will mean that, for multinationals, additional profits would need to be earned by local distributor entities to pay digital services taxes at that level. She noted that, in the pharmaceutical sector, this could have the impact of reducing the amounts available to fund research and development.

 

Back to Taxes Committee publications