The World after Brexit: Brits Dream of Golden Ages, Europeans Hope for Taxit!
by Adrian Luca
Naturally, after the irreparable occurred, even those opposing Brexit now try to see the full half of the glass.
Anti-Brexit Britons are coming with a realism that makes one think of its usefulness one month ago, when it could have brought even more votes - to the pro-Brexit camp.
The Chancellor of the Exchequer has admitted it's pointless to mimic a budget surplus, if it realistically cannot happen. He also came up with the proposition of a corporate tax rate of 15%, unseen outside the East which seeks desperate solutions to draw in investor. Trade Minister Lord Price, an esteemed businessman, talked in Hong Kong about sending and army of trade attachés to explain that "freed from Brussels' more bureaucratic tendencies, we will be able to tackle any excessive red tape that can choke small businesses," the UK would enter a "second golden age of trade and investment." Let us add here that the decision seems closer to nationalize the bankrupt steel plants owned by India's Tata Steel.
We can imagine the waves sent by such declaration in the context of UK in, not one step closer to get exit from the EU. It's only that Europe - anti-Brexit until a couple of days ago - now has other priorities, when it does not run moving trucks to Berlin and Paris to relocate business from non-European London, and hustles about displaying its own freedom provided by a Union without the ever-looming British naysayer. Here's a meaningful recent anecdote from our camp, of those remaining and called to close ranks and staunchly follow the European Project.
In the European Parliament, convened on Tuesday, 5 July, in Strasbourg, the declaration about the EU completing the list of uncooperating tax jurisdictions had a somehow different echo. To call things by their proper name, as Commissioner Moscovici did, these jurisdictions are tax havens; he recalled that work is in progress for the automatic exchange of information on the beneficial owners of registered structure, for finding "who does what." This is a sensitive matter that has become unavoidable especially after this spring's mega-leak called Panama Papers. And somehow I feel talks becoming more resolute about most of companies in the database of Panama lawyers Mossack Fonseca being registered in the jurisdiction of… British Virgin Islands (more than 113,000 of them, which is more than half), and paradoxically not in Panama itself (only one in four companies).
On the open front of all-out combat against tax evasion, it would have sounded improper to remind that the BVI were part of the overseas territories where people automatically get British citizenship, implicitly becoming EU citizens. So, while not necessarily under EU jurisdiction, one cannot see them as unaffiliated, either. But things seem to have changed since 24 June.
"It turned out that the big problem was the beneficial ownership of the UK. The structures of different foundations that the UK has built up during centuries. We know that this is one of the fundamental parts of the system of tax avoidance that exists in the world, and for that reason I think that we today can say we are going to turn Brexit intoTaxit." The very undiplomatic declaration belongs to Finnish MEP Nils Torvalds (ALDE) (see the script of the film released by the Audiovisual Unit of the EP, minute 3.59). A former member of the Communist Party of Finland (apparenty up to its Central Committee), a former journalist, the son of a well-known poet and the father of an even more famous software engineer (Linus Torvalds, the creator of Linux, the open-source operating system), Mr. Nils Torvalds might well not be the lead vocalist of the European establishment, just like Finland isn't Germany. Nevertheless, he coined a catchy term that has the potential of a European career.
This 'TAXIT' might easily expand over areas seen until recently through a British fog. For instance, the CCCTB (Common Consolidated Corporate Tax Base), which's not-much-surprising re-launch this year was reminded by Moscovici, the French. (Especially that until now one of CCCTB's opponents to negotiate with was - easy guess - the UK).
The Brexit vote now changes the way the EU lays the sensitive matters; among them, of course, the much-politicized topic of trans-European taxation, with transfer prices and profit allocation as keywords. Ultimately, the positions of both sides sum up to profit allocation; the winners are the promoters of the idea that the UK loses more than it wins in the EU (we mentioned it in our 24 June post).
About the Way Europe Confiscated National Taxation
The whole tax reform under work nowadays in Brussels is centered on the reformulation of the concept of tax advantage on a national level that does not cause damage on a European level.
In this respect, the recent internal working paper on state aid and tax ruling released by the DG Competition is quite eloquent. A working paper, indeed, because it puts to work those who failed to understand that from a certain level on they must analyze their fiscal position on a European level, and cannot count on a possible national protection. "While the Member States enjoy fiscal autonomy in the design of their direct taxation systems, any fiscal measure a Member State adopts must comply with the EU State aid rules, which bind the Member States and enjoy primacy over their domestic legislation."
The document further reads, "As early as 1974, the Court of Justice of the European Union clarified that the Commission's competence in the field of State aid control also covers the area of direct business taxation."
Which brings us to the intragroup transactions and of their prices - the so-called transfer prices, which the Tax Administration wants at market levels; well, in the new context, it's no longer the field of national tax administration, but of the EU's, plain and clear.
Because the Commission Decision on State Aid which Luxemburg Granted to Fiat also came from Brussels last month. It took the Commission nearly nine month to release it in full, after announcing the conclusion last October - it ordered Luxemburg to recover the unpaid tax from Fiat, through its Fiat Finance and Trade division in Luxemburg, which has enjoyed an unfair competitive advantage following a tax ruling issued by the Luxembourg authorities in 2012.
I will get back to the technical arguments used by the Commission; for now, I only mention the extreme interpretation of tax advantage for a group of companies. It's the next level of considering conformance in transfer prices.
It's the Brussels level. "The arm’s length principle therefore necessarily forms part of the Commission’s assessment under Article 107(1) of the TFEU (Treaty on the Functioning of the European Union) of tax measures granted to group companies, independently of whether a Member State has incorporated this principle into its national legal system. It is used to establish whether the taxable profits of a group company for corporate income tax purposes has been determined on the basis of a methodology that approximates market conditions, so that that company is not treated favourably under the general corporate income tax system as compared to non-integrated companies whose taxable profit is determined by the market. Thus, for any avoidance of doubt, the arm’s length principle that the Commission applies in its State aid assessment is not that derived from Article 9 of the OECD Model Tax Convention, which is a non-binding instrument, but is a general principle of equal treatment in taxation falling within the application of Article 107(1) of the TFEU, which binds the Member States and from whose scope the national tax rules are not excluded. Consequently, in response to Luxemburg’s argument that the Commission, in undertaking such an assessment, replaces the national tax authorities in the interpretation of Luxembourg law113, the Commission recalls that is not examining whether the contested ruling complies with the arm’s length principle as laid down in Article 164(3) L.I.R. or the Circular, but whether the Luxembourg tax administration conferred a selective advantage on FFT for the purposes of Article 107(1) of the TFEU by issuing a tax ruling that endorses a profit allocation that departs from the amount of profit that would have been taxed under the general Luxembourg corporate income tax system if the same transactions had been executed by independent companies negotiating under comparable circumstances at arm’s length."
Sounds complicated? It's nevertheless clear!
It's clear we're entering a new tax Europe. Honestly, it now seems a very long time since July 2013, when I announced the beginning of the BEPS Era of worldwide steps against Base Erosion & Profit Shifting. The BEPS, via the OECD, is perhaps the pretext to reach faster the targets of the European project, the core of which is the EU tax policy.
The question still stands: so where are we, and how do we play in the new TAXIT?