Action 1 BEPS-Tackling BEPS Recent Development

CFE Forum Reports on European Taxation – 6
Servaas van Thiel (Editor)

Policies for a sustainable tax future
Tackling base erosion and profit shifting

Recent developments in VAT

and the financial transactions tax
CFE Forum 2014
© 2015 Confédération Fiscale Européenne

Avenue de Tervuren 188 A
B-1150 Brussels
ISBN 978-92-990057-4-3

Recent developments in VAT and financial transactions tax
CFE Forum 2014
Contributors
Piergiorgio Valente
Georg Kofler
Tom O´Shea
Hans van den Hurk
Eduardo Gracia
Lorena Viñas
Hans Mooij
María Amparo Grau Ruiz
Kristen Parillo
Walter Hellerstein
Daniela Doležalová
Marie Lamensch
Servaas van Thiel
Loes Brilman
Madalina Cotrut
Larisa Gerzova
Oana Popa
Imprint
2014 Confédération Fiscale Européenne

Avenue de Tervuren 188A
B-1150 Brussels
ISBN 978-92-990057-4-3
The complete contents of this work are copyright protected. Any use not explicitly
permitted by copyright requires written agreement from the publisher.
This applies in particular to reproductions, translations, microfilming and storage as

well as processing in electronic systems.
No liability assumed for errors and omissions

Foreword CFE President
Dear Readers,
The Confédération Fiscale Européenne (CFE)1 is the European association of the tax
profession, representing 180,000 tax advisers throughout Europe. It was founded in 1959
and today has 32 member organizations from 25 European states. The CFE holds an
annual Forum in Brussels, on current international tax issues, which brings together pro-
fessional tax advisers, senior officials from the European Commission and from member
states, leading academics and other experts in the fields of politics, business and public
administration.
This book reports on the CFE Forum that was held on Thursday 27 March 2014 to
discuss: „Policies for a sustainable tax future“. The background for this Forum was the
consideration that, as Europe is struggling with cross-border tax evasion and tax avoi-
dance, it is time to start moving forward with a well-designed plan to tackle the problem
at the EU and global level. For this it was considered vital that the right questions are
being addressed in order to close the existing gaps, mismatches and loopholes of the EU
tax systems and to find alternative sources of revenue. It was also assumed that, in doing
so, the EU has to align with the other key global players to preserve its competitiveness in
the field of taxation. That is why the CFE Forum addressed the OECD´s „Base Erosion
and Profit Shifting“ (BEPS) Action Plan. In addition the Forum explored recent indirect
tax developments including the EU proposal for a Financial Transactions Tax and the
future VAT, as two blueprints that are expected to have a major impact on treasuries and
on businesses.
The contributions contained in this report are based on the speeches given at the Forum
and on additional papers provided by academics on related topics. The CFE would like
to thank all the contributors to the Forum and to this book, and especially Prof. Servaas
van Thiel who, as in previous years, has made this publication possible.
Jiří Nekovář
President of CFE
1 The CFE Brussels office is located at 188A, Avenue de Tervuren B-1150 Brussels, and can be reached at Tel: +32 2 761 00 91 -
Fax: +32 2 761 00 90 Brusselsoffice@cfe-eutax.org - www.cfe-eutax.org.
Table of Contents
Foreword CFE President

by Jiří Nekovář
1. Base Erosion, Profit Shifting and Tax Governance: Future Prospects 1

by Piergiorgio Valente
1.1. Global taxpayers in a global market 1

1.2. Base erosion concerns 2
1.3. Base erosion and tax governance models 3
1.4. Base erosion and profit shifting: critical areas requiring action 7
1.4.1. Base erosion, profit shifting and transfer pricing 9
1.4.2. Base erosion, profit shifting and jurisdiction to tax 12
1.4.3. Base erosion, profit shifting and digital economy 15
1.4.4. Base erosion, profit shifting and treaty abuse 16
1.5. Preliminary conclusions 16
1.6. Future prospects 18
2. Hybrid Loans in the Parent-Subsidiary-Directive 21

by Georg Kofler
2.1. Introduction 21
2.2. Debt or equity and amendments to the Parent-Subsidiary Directive 22
2.3. Open issues 26
I
3. BEPS & Anti-abuse Rules: The EU Law Dimension 31
by Tom O’Shea
3.2. The tax planning spectrum 32
3.2.1. Tax planning versus wholly artificial arrangements 32
3.2.2. Tax planning in the EU 32
3.3 Anti-abuse rules & EU Law 34
3.3.1. The Court‘s approach 34
3.3.2. CFC rules 35
3.3.3. Thin capitalisation rules 37
3.3.4. Transfer pricing rules 39
3.4 Conclusions 43
4. Proposed Amended Parent-Subsidiary Directive Reveals 45

the European Commission’s Lack of Vision
by Hans van den Hurk
4.2. The amendments: an audacious Plan 46
4.2.1. Introductory remarks 46
4.2.2. Hybrid loans 47
4.2.3. Interim conclusions 58
4.3. The GAAR: a bridge too far? 59
4.3.2. The Commission’s proposal 59
4.3.3. The text of the GAAR 60
4.3.4. Resistance on the part of the Member States 62
4.3.5. “Directive shopping” 63
4.3.6. ECJ case law 65
4.3.7. Interim conclusions 69
4.4. Conclusions 69
II
5. The BEPS Action Plan and Transfer Pricing Documentation 71
requirements: an EU perspective
by Eduardo Gracia and Lorena Viñas
5.2. Objectives and scope of the OECD transfer pricing documentation 71
(TPD) requirements
5.3. Compliance issues 72
5.4. A two-tiered approach to TPD 75
5.5. Country by Country (CbC) Reporting 76
5.6. OECD TPD versus EU TPD 78
5.7. Conclusions 78
6. BEPS and International Dispute Resolution 79

by Hans Mooij
6.1. The winding path of international tax dispute resolution through history 79
6.2. OECD BEPS Action No. 14: A last call for more effective dispute 85
resolution
6.3. The TRIBUTE initiative for a specialised international tax tribunal at the 98
Permanent Court of Arbitration at the Hague Peace Palace
7. Country by Country Reporting: Main Concerns Raised 111

by a Dynamic Approach
by María Amparo Grau Ruiz

7.2. The initial approach within the European Union: country 112
by country reporting as a matter of corporate social responsibility
7.3. The approach taken by the OECD with the BEPS Action Plan 114
7.3.1. Proceeding on another track 114
7.3.2. Critical considerations 115
7.3.3. Timeframe for adoption and implementation of the template 130
7.4. Final remarks 131
III
8. News Analysis: Does BEPS Spell the End of Tax Planning? 135
by Kristen A. Parillo
8.1. BEPS and tax planning in the EU 135

8.2. CbC reporting: an overloaded weapon? 137
8.3. BEPS and dispute resolution 140
9. Jurisdiction to Tax in the Digital Economy: Permanent 143

and Other Establishments
by Walter Hellerstein
9.1. The digital economy 143

9.2. Jurisdiction to tax: substantive jurisdiction and enforcement jurisdiction 144
9.2.2. The relationship between substantive jurisdiction 145
and enforcement jurisdiction
9.3. Specific policy recommendations for aligning the rules of substantive 147
and enforcement jurisdiction in the digital economy
9.3.2. Possible changes to the PE definition 147
9.4. Effective collection of VAT/GST in the digital economy 151
9.5. Relationship between direct and indirect tax enforcement issues 154
in the digital economy
9.6. Conclusion 155

10. Financial Transactions Tax in the Context of Financial Market 157

Regulation
by Daniela Doležalová

10.2. Financial transactions tax and liquidity of capital markets 157
10.3. Financial transactions tax and different types of capital market 159
10.4. Financial transactions tax and clearing and settlement 161
10.5. Financial transactions tax and repo and securities lending markets 162
10.6. A financial transactions tax that exceeds profit 163
10.7. Summary and conclusions 165
IV
11. Introducing a Harmonised Financial Transactions Tax 167
in the EU: A Failure in 2012, Two Steps Ahead in 2013,
and One Step Backward in 2014
by Marie Lamensch
11.1. The case for a financial transactions tax and the failure to 167
introduce it at an EU-wide level in 2012
11.2. The 2013 proposal for enhanced cooperation on a financial 170
transactions tax in 11 Member States: two steps ahead
11.3. No agreement on the 2013 proposal and the May 2014 Joint 176
Statement towards a more progressive implementation of the tax:
1 step backward

12. The European Court Upholds the Council Decision 183

Authorising Eleven Member States to Introduce
a Financial Transactions Tax.
by Servaas van Thiel

12.2. Enhanced cooperation in the case of the FTT 184
12.3. Arguments of the parties and decision by the Court 187
12.4. Final remarks 190
13. Impact of Taxation on Business Mobility in Europe 193

by Loes Brilman

13.2. Dutch exit taxes upon emigration 195
13.3. Immigration of a business 198
13.4. Asset transfers in PE situations 199
13.5. Alternative means of business migration 201
13.6. Dutch exit tax provisions in the light of double tax conventions 202
and EU law
13.6.1. Double tax conventions 202
13.6.2 EU Law 204
13.7. Towards a Dutch exit tax system 2.0 208
V
14. CFE Forum 2014: Policies for a Sustainable Tax Future 211
by Madalina Cotrut, Larisa Gerzova and Oana Popa
14.1. Welcome and Introduction 211

14.2. BEPS: better policies in the EU context? 211
14.2.1. BEPS within the EU framework: compatibility 211
and implementation
14.2.2. Coordination, harmonization or more competition: 216
what future route?
14.2.3. CFE award ceremony 220
14.2.4. The BEPS Action Plan from an EU perspective 222
14.3. Indirect taxes: The future of VAT and the financial transactions tax 224
14.4. Forum conclusion 224

15. References to reading materials 225
VI
BEPS & Tax Governance
1. Base Erosion, Profit Shifting and Tax Governance:

Future Prospects
by Piergiorgio Valente2
1.1. Global taxpayers in a global market
In its BEPS Report, the OECD points out that multinational enterprises frequently ex-
ploit the differences between the various national tax regimes with the aim of reducing
income tax burdens of the group. Internationally acknowledged principles have not
succeeded in keeping pace with the momentous changes that have been taking place
– especially in the last few years – in the various economic sectors. International tax
rules that are provided in national tax systems are basically the expression of an eco-
nomic environment that used to be characterized by a low level of “cross-border economic
integration”. National tax systems are apparently rather reluctant to regulate phenomena
involving “global taxpayers”, or transactions in which intellectual property and relevant
communication-related technologies are becoming ever more significant.
The global market – to which global rules and regulations ought to be applied – is
instead regulated by a variety of legal systems, as many as there are States involved in
cross border economic transactions. States, however, do not have the ability to effec-
tively regulate cross-border situations by themselves, because they are operating within
the framework of specific and well-defined geopolitical limits.3 Interaction between
and/or among the above mentioned multiplicity of national tax regimes may result in
so-called “overlapping” situations in the exercise of taxing rights, which again carry dou-
ble taxation risks for taxpayers.
Current national and international provisions that originate from principles developed
by the League of Nations in the 1920s have the purpose of reducing cases of doub-
le taxation, because these cause distortions that strongly inhibit sustainable economic
2 Prof. Piergiorgio Valente is Chairman of the Fiscal Committee of the CFE and partner in Valente Associati GEB Partners,
Italy.
3 “Liberalisation of trade and capital markets has been an important component of globalisation. This process has embraced
both OECD countries (which have taken further steps in this direction) and emerging economies (notably the BRICs). The
resulting increased competition and pressures to produce where profitability is greatest have been accompanied (on the
supply of funds side) by much greater mobility of capital” (cf. Matthews S., What is a “Competitive” Tax System?, in OECD
Taxation Working Papers, No. 2, 9 September 2013).
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growth. The interaction between and/or among the numerous national tax legislations,
however, may also generate “gaps” that offer taxpayers the opportunity to eliminate or
significantly reduce their income tax levels by means of so-called “aggressive tax planning
schemes”, which, although formally legitimate, do not seem to be consistent with the
goals envisaged by international tax rules and principles.4
Once superseded the idea of the Nation-State, which political confines used to coincide
with geographical ones, concerted action is absolutely essential.
1.2. Base erosion concerns
Nowadays the OECD is primarily concerned with base erosion and profit shifting
(BEPS), because this widely-spread phenomenon entails tax planning strategies in
which taxpayers make use of loopholes in tax laws to “channel” or “shift” profits to low-
tax countries, with the objective and the result of significantly lowering or entirely avoi-
ding tax burdens. Although the current focus is on tax planning activities of enterprises
and taxpayers, tax competition and government incentives also play a role in tax base
erosion and this “public” sector side of the issue was the focus of the OECD report:
Harmful Tax Competition: An Emerging Global Issue, which was published in 1998.5 The
EU has also been addressing harmful tax practices in its Code of Conduct on Harmful
Tax Competition and has extensively discussed the topic in the framework of High
Level Council “Code of Conduct” Group.6 In the past few years, governments and orga-
nizations, however, have not so much been reworking and developing new proposals
with regard to domestic laws, but they rather seem to be centring on “private” sector
tax practices.
4 The EU Commission made several attempts in a number of documents to provide a clear definition of aggressive tax
planning: “Aggressive tax planning in general can be described as the practice whereby tax payers exploit loopholes of a single
tax system or mismatches in the interaction between two or more tax systems via complex and/or artificial arrangements to
reduce their tax liability. In these cases, the tax savings could be considered to be unintended by any of the jurisdictions invol-
ved, but the arrangements are generally not illegal. Such tax planning schemes frequently lack transparency and are therefore
difficult to detect. Member States may not even be aware of their existence and therefore fail to propose effective remedies.
It is therefore plausible that some schemes would not achieve their intended tax benefits if they were subject to effective
exchange of information provisions” (DOC: Platform/003/2013/EN, PLATFORM FOR TAX GOOD GOVERNANCE,
Draft Discussion Paper on the “Tax Havens” Recommendation).
5 For the full text of the Report see: http://www.oecd.org/tax/transparency/44430243.pdf.
6 See the conclusions of the ECOFIN Council on 1 December 1997 (available at: http://ec.europa.eu/taxation_customs/
resources/documents/coc_en.pdf).
2
BEPS has also become the concern of the G207 to the point that the latter launched a
BEPS Action Plan,8 outlining a number of concrete actions to be implemented. The
G20 is strongly committed to international cooperation to protect the integrity of nati-
onal tax systems, focusing on three related areas:
»» Addressing tax avoidance, particularly base erosion and profit shifting (BEPS) to
ensure profits are taxed in the location where the economic activity takes place;
»» Promoting international tax transparency and the global sharing of informati-
on so that taxpayers with offshore investments comply with their domestic tax
obligations;
»» Ensuring that developing countries benefit from the G20’s tax agenda, parti-
cularly in relation to information sharing.9 In May 2014 the current G20 Presi-
dency, Australia, hosted the G20 International Tax Symposium in Tokyo, Japan,
discussing developments in international taxation and focusing on the key items
of the G20 tax agenda, such as the future of the international taxation lands-
cape, work carried out by the OECD in relation to the BEPS Project and the
automatic exchange of tax information.10
The matter being quite complex, there are many questions and a number of uncertain-
ties as to the processes and measures to be adopted. For the past fifty years, the OECD
has been the reference point for the international tax arena, and it has been standar-
dizing procedures and processes and creating conditions for mutual consent between
and among member countries. The development work on concrete BEPS actions to be
7 The G20 brings together 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy,
Japan, the Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States of
America plus the European Union. The objectives of the G20 refer to: 1. Policy coordination between its members in order
to achieve global economic stability and sustainable growth; 2. Promoting financial regulations that reduce risks and prevent
future financial crises; 3. Modernizing international financial architecture.
8 The meeting held in Mexico by the G20 leaders on 18-19 June 2012 clearly stated in the final Declaration that preventing
BEPS was a top priority. This was restated at the meeting held on 5 and 6 November 2012 by the G20 Finance Ministers who
were requesting a progress report for their next summit. A joint statement was issued – in concurrence with the G20 meeting
of November 2012 by the UK Chancellor of the Exchequer, and Germany’s Minister of Finance and, later on, also France’s
Economy and Finance Minister – strongly urging that coordinated action be implemented so as to enhance international tax
standards and to endeavor in providing the OECD with all the necessary support to detect loopholes and mismatches in tax
laws. The issue was also addressed by US President Obama who stated in his President’s Framework for Business Tax Reform
that, in order to effectively tackle such an important phenomenon as income-shifting by MNEs, a tax reform is a must.
9 https://www.g20.org/g20_priorities/g20_2014_agenda/tax.
10 For the event details please visit the Tax Symposium event page.
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implemented will therefore be mainly carried out by the OECD, while the G20 remains
in charge of providing the overall political guidance for further decision-making. Not-
withstanding the fact that a number of countries will neither be involved in discussions
nor be represented at the table, non-OECD G20 countries (such as Argentina, Brazil,
China, India, Indonesia, Russia, Saudi Arabia and South Africa) participated in the pro-
ject and attended the OECD Fiscal Affairs Committee meeting, i.e., the venue in which
the Action Plan was endorsed. In order to guarantee equity on all levels and to prevent
non-compliance with agreed standards, the support and ratification of the Action Plan
by all G20 countries involved is fundamental.11
The envisaged actions do not have the purpose of modifying current international
standards with regard to the allocation of taxing rights over cross-border income flows.
A number of action points set forth a requirement for greater reliability as to where
economic activities are carried out, putting special emphasis on the importance of ac-
tual sales for taxable profits.12
In the OECD’s opinion, unilateral actions involve significant risks if the timetable is
not duly observed; as such, unilateral actions represent a risk that should be duly taken
into consideration.
1.3. Base erosion and tax governance models
The search for effective strategies by Tax Authorities also concerns the introduction
of incentives for taxpayers with ethical behaviours and of disincentives for those who
persist in adopting aggressive tax planning behaviour.13
11 Some key economies that are non-OECD Members will also be participating on a peer basis. Some of these are EU
countries, but the vast majority are not G20 members. Within the context of G20 deliberations, the EU is represented by
the Presidents of the European Commission and the European Council.
12 A two-year term has been established for the purpose of implementing the Action Plan. Generally, with regard to inter-
national agreements, the above term is exceptionally brief.
13 Cf. Towery E. M., How do disclosures of tax aggressiveness to Tax Authorities affect reporting decisions? Evidence from
Schedule UTP, The University of Texas at Austin Red McCombs School of Business, December 2012; Murphy K., Aggres-
sive tax planning: Differentiating those playing the game from those who don’t, Centre for Tax System Integrity, Research
School of Social Sciences, The Australian National University, 13 December 2002.
4
A pivotal issue within such a scenario is building a better relationship between Tax
Authorities and taxpayers, which should be based on dialogue, mutual trust and co-
operation rather than on conflicting encounters. The experiences of many Countries
substantiate the validity of cooperative relations between Tax Authorities and taxpayers,
as well as between the former and tax consultants, in view of the intermediary role
played by the latter.14
Larger entities ought to implement structured corporate tax risk systems, with a clear-
cut allocation of liabilities within the framework of internal controls as a whole.15 The
objective is to enhance the diffusion of models no longer exclusively based on the
“minimization of tax burdens”, but on a true and proper “tax risk management”. The imple-
mentation of such models involves the adoption of a tax risks “map” and the definition
of a clear-cut allocation of liabilities within the overall picture of the company’s tax
governance system.
Moreover, in entrepreneurial groups, tax governance does not only essentially meet
the need to guarantee both management and prevention of risks connected to the tax
variable, but also to provide any support that might be required during tax audits In
that regard, tax governance is nothing more than corporate governance applied to the
tax variable.
Corporate governance, on the other hand, is closely linked to the role played by corporate
constituencies – the CEO, the CFO, the Board of Directors16, the management, and the
shareholders – as well as their relationships. Notwithstanding these constituencies being
the main players, governance systems are influenced by a much broader group of con-
14 See van Thiel (Editor) (2009): “The Conféderation Fiscale Européenne at 50 years: commemorative book issued on the
occasion of the 50th anniversary of the CFE with a special focus on taxpayer rights and taxpayer charters”, DATEV.
15 With regard to large corporations, the Italian Tax Authorities announced that an approach based on the so-called “enhan-
ced relationship” strategy had already been adopted for quite some time. Such strategy consists in the search for dialogue
with large corporations, aimed at preventing rather than repressing tax violations, through a preventive encounter on such
themes that have a particularly strong impact, such as transfer pricing and structured financial operations. The Italian Tax
Authorities also launched within the same context a consultation on 25 June 2013 for the realization of a pilot project which
will be leading to the future determination of a new regime on the Tax Authorities-large corporations relations. The project
is based on the OECD’s findings within the framework of “cooperative compliance” which outlines more advanced and
transparent forms of cooperation between the Tax Authorities and taxpayers. For further details cf. Valente P., Mattia S.,
“Italy’s Pilot Program for a Collaborative Compliance Regime for Large Taxpayers”, in Tax Notes International, Vol. 71, No.
13, 23 September 2013.
16 The Board of Directors plays a fundamental role in corporate governance, as it approves the organizational strategies and
develops a policy direction, among other tasks.
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stituents, including creditors, labour unions, customers, suppliers, investment analysts,

the media, and regulators.17 The shareholders delegate decision-making powers to the
management, which is required to act in the interests of the former. A set of corporate
governance rules is useful to align the interests of the management and the shareholders,
reducing the risk of fraudulent behaviour and conflicts of interest. Each party involved
in the corporate structure has a specific interest – whether direct or indirect – in the
performance of the company. The role of corporate governance is precisely that of
balancing all these interests and avoiding conflicts.
Implementation of tax governance models is the answer of the multinational enterprise’s

Board of Directors to the various issues raised in relation to (i) liabilities and oppor-
tunities the enterprise might incur on a tax level; (ii) liabilities and opportunities that
“best interpret” the interests of shareholders and of other parties that might be involved.
The adoption of tax governance models is, thus, strictly connected to the enterprise’s
need to “neutralize” its tax risks.18
The afore-mentioned management models might represent a platform on which to

“graft” new and more advanced audit forms by the Tax Authorities. The control em-
phasis would shift to the ascertainment and the reliability and consistency of the risk
management and control system, in a dialoguing relationship with the various corporate
management Bodies and with the auditors as well.
An effective tax risk management strategy by multinational enterprises plays a signifi-

cant role within a context in which the focus of the entire international community and
of the OECD, in particular, revolves around aggressive tax planning schemes and the
phenomenon of tax base erosion as a side-effect of profit shifting.
17 Larcker D., Tayan B., Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences,
New Jersey, 2011; Phillips M., “Reappraising the Real Entity Theory of the Corporation”, Florida State University Law Re-
view Vol. 21, 1994, at 1061-64. See Dignam A.J., Galanis A., The Globalization of Corporate Governance, 2009.
18 Tax risk, in its different manifestations, may be defined as the obstacle that hinders the full realization of the enterprise’s
strategy. In that sense, management of tax risks is an integral part of tax management. Cf. Valente P., Manuale di Gover-
nance fiscale, Ipsoa, 2011, p. 657 et seq.
6
1.4. Base erosion and profit shifting: critical areas requiring action
Erosion of the taxable base through profit shifting may prejudice States’ tax revenue,
sovereignty and fiscal equity.19
In order to counter the above-cited phenomenon, the OECD published in February

2013 the Report entitled “Addressing Base Erosion and Profit Shifting” (hereinafter also
“BEPS Report”), which highlights the fact that multinational enterprises are increa-
singly exploiting the differences between the various national tax regimes with the sole
purpose of considerably reducing income tax.
Data provided on the extent of the phenomenon and its impact on developing as well
as on developed countries, disclose that it is precisely the key-principles of taxation on
cross-border activities that underpin the opportunities fostering base erosion and profit
shifting.20
The OECD’s opinion is that considerable revenue losses are being borne by both deve-
loping and developed countries. As a result, public investment is not being adequately
funded and strictly domestic taxpayers are bound to bear higher tax burdens, all of
which has a detrimental effect on competition between enterprises. Estimates on the
amounts involved may, however, not be particularly reliable and there is a necessity to
provide methods for the purpose of gathering and analysing BEPS data.21
19 For further details, cf. Valente P., “Sviluppi in ambito internazionale per contrastare l’erosione di base imponibile: quali
prospettive?”, in Corriere Tributario, No. 38/2013; Valente P., “Aggressive Tax Planning: Profili elusivi delle transazioni
finanziarie”, in Il fisco, No. 22/2013; Valente P., Vincenti F., “Italy’s Measures Against Tax Evasion And Aggressive Tax
Planning”, in Tax Notes International, Vol. 69, No. 11, 18 March 2013.
20 Cf. Love P., “BEPS: why you’re taxed more than a multinational”, 13 February 2013, http://oecdinsights.org/2013/02/13/
beps-why-youre-taxed-more-than-a-multinational/; Houlder V., “OECD presents plan to close tax loopholes”, 12 Februa-
ry 2013, http://www.ft.com/intl/cms/s/0/8afcf050-74f2-11e2-8bc7-00144feabdc0.html#axzz2OYpXfEcE; Kadet J. M.,
“Letter to OECD Beps (Base Erosion and Profit-Shifting) - Recommending Approach to Change Behavior of Multina-
tionals Re Profit Shifting into Low-Tax Countries”, 23 January 2013; Mitchell D. J., “Targeting Multinationals, the OECD
Launches New Scheme to Boost the Tax Burden on Business”, 27 March 2013, http://www.cato.org/blog/targeting-multi-
nationals-oecd-launches-new-scheme-boost-tax-burden-business; Valente P., “Tax planning aggressivo. Il Rapporto OCSE
«Addressing Base Erosion and Profit Shifting»”, in Il fisco, No. 12/2013.
21 Figures occasionally cited within the EU refer to revenue losses amounting to Euro 1 trillion. Whether this estimate is
accurate or not is debatable. It seems that the said estimate originated from a report issued by the “Group of the Progressive
Alliance of Socialists & Democrats in the European Parliament”, where the Euro 1 trillion estimate indicates that figures for
tax evasion amount to Euro 850 bn; in other words, the black economy in the EU is equal to 18.4% of GNP. The residual
amount of Euro 150 bn is presumably due to tax avoidance. As such, the Euro 1 trillion estimate cannot be deemed reliable.
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With a view to counteract “artificial” profit shifting, the BEPS Report suggests the ad-
option of a “comprehensive” action plan which should include:
»» instruments intended to neutralize effects from hybrid mismatch arrangements
and arbitrages;22
»» new Transfer Pricing rules with special reference to the regulation of intangi-
bles;
»» a re-definition of the fundamental rules on “jurisdiction to tax” or “right to tax” of
the various States and a re-crafting of principles contained in Double Tax Trea-
ties so as to align such principles to the changed economic context;
»» the crafting of more effective anti-abuse rules at both the national and interna-
tional level (i.e., general anti-abuse regulations, CFC rules, etc.);
»» a tax regime of inter-company loans and countering measures for harmful tax
regimes.23
Areas requiring prompt action have been set forth in detail in the OECD Report titled
“Action Plan on Base Erosion and Profit Shifting” (July 2013), which identifies key actions to
be introduced and enforced on both the national and the international level, in order to
successfully counter the tax base erosion phenomenon.24
Principles contained in the BEPS Report and in the Action Plan were included in the
G20 Leaders Declaration, adopted at the close of the summit held in St. Petersburg on
5 and 6 September 2013, which perceived the fight against tax evasion, aggressive tax
22 Cf. Goodall A., “Billions of dollars at stake as EC and OECD address tax arbitrage”, 5 March 2012, http://www.taxjour-
nal.com/tj/articles/%E2%80%98billions-dollars-stake%E2%80%99-ec-and-oecd-address-tax-arbitrage-41901; Feetham
N., “Tax Arbitrage: The Trawling of the International Tax System”, Spiramus Press, 6 April 2011.
23 After the OECD Council Meeting in Paris on 29 and 30 May 2013, the document “Update: Base Erosion and Profit
Shifting”, illustrating actions engaged in by the OECD on the matter, was published. In particular, within the context of
countering actions to the base erosion and profit shifting phenomenon, the OECD established the following three interim
work groups: the “Countering base erosion” group deals with the examination of anti-avoidance measures and instruments
to counter harmful tax practices; the “Jurisdiction to tax” group follows issues connected to CFC rules and also such regu-
lations involving e- services and products; the “Transfer pricing” group is in charge of the study on the questions involving
determination and application of the arm’s length principle.
24 There are fifteen (15) areas that require intervention: the digital economy; hybrid instruments; CFC rules; interest expenses
and other financial instruments; harmful tax regimes; treaty abuse regime; permanent establishments; transfer pricing and
intangibles; procedures for the settlement of international controversies; taxable base erosion and multilateral instruments;
transfer pricing risks and capital; transfer pricing and high-risk transactions; taxable base erosion and economic analysis;
disclosure of tax planning schemes; transfer pricing and documentation.
8
planning and the taxable base erosion phenomenon as a most crucial factor in order to
overcome the global economic crisis.25
With a view to greater international tax coordination and cooperation, the most central
factors are:
»» general implementation of the 1988 Multilateral Convention on cooperation
and administrative assistance in tax matters;
»» activities carried out by the OECD’s Global Forum on Transparency and Ex-
change of Information, aimed at verifying implementation of tax transparency
standards by the systems of the various States involved.26
Among the critical areas mentioned earlier, within national and international debates,
transfer pricing rules become especially important, as are rules on permanent establish-
ments, within the context of determining the right of States to tax.
1.4.1. Base erosion, profit shifting and transfer pricing
In transfer pricing, the principle that is universally acknowledged is the so-called “arm’s
length” principle, according to which – for tax purposes – “associated” enterprises be-
longing to the same multinational group must “allocate” income according to the same
procedures that are applicable between independent third parties, operating under com-
parable circumstances. The purpose of the arm’s length principle is to guarantee that
the price applied and the conditions established in transactions entered into between
associated entities are identical to the ones provided for transactions carried out bet-
ween independent third parties.27
25 For that purpose, the 20 most advanced Countries in the world have made a commitment to support OECD interventions
with the actual enforcement of the principle pursuant to which profits must be taxed in the Country in which the economic
activities from which they derive, take place. They also agreed to identify, within the context of the respective systems, any
gaps that might be exploited by multinational enterprises to transfer profits to lower tax jurisdictions, eroding thus the taxable
base. Furthermore they will develop proposals for the countering of the profit shifting phenomenon, in compliance with
provisions of the OCED’s Action Plan. Finally, they committed to support OECD actions for the development of a global
model for automatic information exchange, at a multilateral and bilateral level, aimed at more effective tax transparency.
26 For more details on the 1988 Multilateral Convention and on activities being carried out by the OECD’s Global Forum,
cf. Valente P., Convenzioni internazionali contro le doppie imposizioni, Ipsoa, 2012, p. 923 et seq.
27 Cf. Rectenwald G., “A Proposed Framework for Resolving the Transfer Pricing Problem: Allocating the Tax Base of
Multinational Entities Based on Real Economic Indicators of Benefit and Burden”, Duke Journal of Comparative & Inter-
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According to the Action Plan, the arm’s length principle must be preserved and safe-
guarded. Further measures to counter involuntary double non-taxation should be kept
within the arm’s length criterion.
Compliance with the arm’s length principle entails that the remuneration related to tran-
sactions entered into between associated parties must correspond to functions carried
out, risks assumed and assets employed by each of the parties involved: consequently,
in a transfer pricing study, the lower the risk (and the functions performed) which one
of the parties assumes in a transaction under examination, the lower the profit margin
attributable to that party. The position of the OECD is that such circumstances might
constitute an incentive to transfer functions, risks and assets to jurisdictions “where their
returns are taxed more favourably”.28
Where transactions are unmistakably substantiated by a due analysis of functions car-

ried out, risks taken, and assets utilized along with the proven existence of reasonable
substance, there is a logical conclusion that the situation cannot possibly involve an
artificial separation of taxable income from activities that engendered it.
Various tax planning structures analysed by the OECD provide for the allocation of
significant high-value risks and intangibles in jurisdictions with “privileged” tax regi-
mes, with consequent erosion of the tax base (through profit shifting) of the parent
company’s State.29 Within that kind of setting, arrangements put in place within the
structure of a multinational group, and their compliance to the actual behaviour of the
parties involved in the inter-company transactions, are especially relevant.
Ownership and exploitation of intangibles are a significant aspect of value creation in

multinational enterprises and they invest frequently in intangible assets, because these
generally guarantee a faster growth rate compared to the return on investments in tan-
gible assets. In addition, cross-border transfers of intangibles may produce interesting
results for multinational groups from a tax planning standpoint and States are, in turn,
national Law, Vol. 23:425, 2012.

28 Cf. OECD, Addressing Base Erosion and Profit Shifting, February 2013, p. 42.
29 Clarity on the term “intangible” is essential to avoid incoherent interpretation and to ensure proper application thereof.
In the absence of a clear-cut definition, the results might amount to mere disputes and increased double taxation cases. A
proper definition of intangible assets, in order to be acknowledged for transfer pricing purposes, should be endowed with
three specific features which are ownership, control, and transferability.
10
particularly attentive to any transfers of intangible assets, because of the possible erosi-
on of the tax base that may result from those transactions.
For this purpose, it may be worth noting that business features or concepts such as the
value of an ongoing concern, goodwill, corporate synergies, personnel, etc. may have
an impact on both the evaluation of a transaction and on the transfer price of the int-
angible. As the above features or concepts are not – in and of themselves – assets that
may be either owned, controlled and/or transferred, they should be excluded from the
definition under examination.
It is essential to make a distinction between allocation of ownership and remuneration

for functions carried out as these may (or may not) have contributed to the develop-
ment and/or improvement of the intangible.
Functions performed will clearly have to be remunerated on the basis of the various
facts and circumstances of the specific individual cases. However, in general terms, it
would be reasonable to expect that service providers – who are highly qualified and
carry out important functions that contribute to the development or enhancement of
the intangible – be recognized a significant fee for their services and this without them
involving in any acquisition of rights or shares in the potential intangible deriving from
his services. Pursuant to the arm’s length criterion, the logical assumption is that a ser-
vice provider – performing at high level by adding functions such as R&D or marketing
– is expected to receive a higher remuneration than a service provider merely providing
routine activities.30 The project on the regulation of intangibles that is currently being
defined by the OECD should provide adequate answers to the phenomenon under
discussion.31
In transfer pricing, a significant issue relates to documentation as Tax Authorities are

becoming ever more demanding and the general scenario worldwide is undergoing con-
stant and ever more accelerated changes. It could be rather difficult to establish rules
30 What must be clearly understood is that, within an arm’s length context, neither service provider would have title to any IP
share. The foregoing particularization is rather relevant in order not to reduce the concept of IP ownership within a transfer
pricing framework into something that might become entirely unstable and/or even arbitrary. Circumstances in which issues
might arise with regard to some kind of joint or shared ownership based on the alleged importance of the relevant functions
should be avoided.
31 Cf. OECD, Discussion Draft, Revision of the Special Considerations for Intangibles in Chapter VI of the OECD Trans-
fer Pricing Guidelines and related Provisions, 6 June to 14 September 2012.
11
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that last beyond a 3-year term and to provide documentary support with the various
details required by the interested Tax Authorities. A key aspect would be to establish
what kind of information might be deemed suitable/useful by the Tax Authorities.
What may possibly be more practical is to concentrate on information regarding any
particular risk involved by a given activity, while the kind of information Tax Authori-
ties request in connection with Transfer Pricing Risk Assessment should be generally
based on the particular kind of enterprise concerned.
Finally, there are a number of discussions regarding the requirement for country-by-
country reporting, which is discussed in more detail in Chapters 5.5. and 7 in this volume.
1.4.2. Base erosion, profit shifting and jurisdiction to tax
The global dimension of the corporate income of a multinational (in view of its being
an expression of the group’s unitary management) causes its redefinition on a territorial
basis by single Tax Authorities to be particularly complex, with consequent (i) difficul-
ties in applying linking criteria or connecting factors to a given Country (in order to
identify the “jurisdiction to tax”), (ii) potential conflicts among Administrations for taxing
claims, (iii) double taxation risks.32
The theme mentioned before plays an increasingly dominant role, also by reason of the
growing importance of the so-called “internet economy” and “multinational digital enterprises”
(see Chapters 1.4.3. and 9 in this volume), the intangible components of which conside-
rably facilitate the shifting of risks, functions and assets (and profits, as a consequence).
Within such a context, one of the most critical (and most interesting) themes, at an
international level, is the identification of the necessary requirements to detect, in a
State’s territory,33 a permanent establishment of a non-resident entity (as well as of the
tax principles that are necessary to allocate profits to such permanent establishment).34
32 Consequently, a number of competitive evolutionism forms have been emerging on a planetary scale; these involve enter-
prises, on the one hand, and Tax Authorities, on the other.
33 As far as States are concerned, the global dimension of markets is the source for the erosion of national sovereignty
and of the essential exacerbation of tax competition: such kinds of phenomena require the definition of competition rules
as well as of well-defined restrictions to the steering of economic policies. Cf. Valente P., Manuale di Governance fiscale,
Ipsoa, 2011, p. 27 et seq.
34 In general, on the permanent establishment issue, cf. Valente P., Convenzioni internazionali contro le doppie imposizioni,
12
In general, the issue of the so-called “hidden permanent establishment” refers to a company
that is “formally independent”, although linked to foreign entities by controlling relations,
i.e., with regard to the latter’s branches. The issue arises less frequently in the (opposite)
case, i.e., of entities without any legal status, which are qualified as mere “offshoots” on
the national territory of the foreign entity, as a consequence of the activity being carried
out by these.35
Some critical aspects may arise, first and foremost, in connection with the actual in-
dependence of the entity carrying out activities in a given State with respect to the
non-resident enterprise and, secondly, with regard to whether the same entity is acting
within the context of its “ordinary activities”. Under such circumstances, the “hidden per-
manent establishment” – where its existence is alleged/ascertained – generally emerges as
a branch that may be traced back to the “agent permanent establishment” category. 36
Further critical issues may arise in connection with the strictly “preparatory or ancillary”
nature of the activity carried out by the resident enterprise with respect to the foreign
entity’s own activity. Any requalification of the former as a permanent establishment
in a given State of the foreign entity is, in such case, done pursuant to provisions that
identify “material permanent establishments” (cf. in particular, Art. 5, par. 1 of the OECD
Model).
In“7.
assessments
The fact thatasa to whether
company whichor isnot a permanent
a resident establishment
of a Contracting has been
State controls or isactually
controllediden-
by
tified,
a company which is a resident of the other Contracting State, or which carries on business out
it is necessary, above all – as par. 7 of Art. 5 of the OECD Model points – to
in that
take
otherthe following
State (whetherinto consideration:
through a permanent establishment or otherwise), shall not of itself constitute
either company a permanent establishment of the other”.
For the purpose of determining whether the activity, ultimately carried out by the resi-
dent company to the advantage of the non-resident entity, may lead to its requalification
as (“material” or “personal/agent”) “hidden permanent establishment” of this latter, it would
35 For a comprehensive definition of a (material and personal/agent) “hidden permanent establishment”, cf. Valente P.,
Vinciguerra L., Stabile organizzazione occulta: profili applicativi nelle verifiche, Ipsoa, 2013, p. 10 et seq.
36 The notion of “hidden permanent establishment” also refers to the case in which an entity “formally” acts as an “indepen-
dent agent”, which – in effect – does not fulfill the “legal and economic independence” requirements (i.e., independent agent,
so-called “de facto”). For further details, cf. Valente P., Vinciguerra L., Stabile organizzazione occulta: profili applicativi nelle
verifiche, Ipsoa, 2013, p. 12 et seq.
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be necessary to reconstruct – as a whole – the activity and the procedures in which it

is carried out, and assert (or exclude) the “ancillary or preparatory” nature thereof, or any
requirements that might lead to a conclusion regarding the existence of an “agent per-
manent establishment”, by referring to the program of the multinational group considered
as a whole.
Some of the criteria that allow identifying a “hidden permanent establishment” are:
»» the lack of an authentic separation (whether intentional or not) – in connection with
the entities to which management of the activity and the carrying out of the
functions have been delegated – between the resident company and the foreign
enterprise;
»» the existence of a substantial subordinate (although informal) relationship (whether
deliberate or not) of the management staff of the resident company vis-à-vis top
executive management levels of the foreign entity;
»» the circumstance that the resident entity (voluntarily or involuntarily) carries out
activities in favour of one or more foreign group companies, without any re-
muneration;
»» the existence of special agreements, which subject-matter is the prior deter-
mination of the economic settlement of transactions concluded between the
resident company and the non-resident entity;
»» the participation of the foreign entity in one or more phases required for the
stipulation of contracts in the name and on behalf of the foreign enterprise,
possibly even in the absence – with regard to the former – of the power to
negotiate contractual terms;
»» the circumstance, for example, that the interested parties avail themselves (whe-
ther deliberately or not) of the same or identical IT tools.
14
1.4.3. Base erosion, profit shifting and the digital economy
As mentioned, one of the most critical (and most interesting) themes is the identi-
fication of the necessary requirements to detect, in a State’s territory,37 a permanent
establishment (PE) of a non-resident entity, within the context of the so-called “internet
economy”.
The idea of extending the scope of the PE concept, so that it may encompass e-econo-
my, might produce entirely new methodologies and or approaches for the allocation of
international cross-border taxing rights. In view of the degree of complexity regarding
this topic and the speed with which new business models are evolving within the e-
economy, a dedicated e-business regime is difficult to accomplish.
This entire theme would require more exhaustive policy debates on direct/indirect tax
solutions. Work done by the EU on the above issue with regard to both VAT and com-
petition aspects might be worth investigating.
Actions do not specifically aim to amend current international standards on the alloca-
tion of taxing rights with respect to cross-border income. It should however be obser-
ved how a number of action points require increased reliance on the place/s in which
a given business activity occurs.
As far as smaller open economies are concerned, the fact of attributing increased im-
portance to sales when evaluating where profits should be taxed would produce subs-
tantial revenue losses from a corporate income tax standpoint. Such a situation would
not be acceptable, especially since smaller countries are not G20 members and have no,
or hardly any, effect on new rules but would rather incur the highest tax revenue losses.
37 As far as States are concerned, the global dimension of markets is the source for the erosion of national sovereignty
and of the essential exacerbation of tax competition: such kinds of phenomena require the definition of competition rules
as well as of well-defined restrictions to the steering of economic policies. Cf. Valente P., Manuale di Governance fiscale,
15
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1.4.4. Base erosion, profit shifting and treaty abuse
The issue of whether there is an intention/purpose that envisages the implementation

of domestic anti-abuse regulations that are meant to supersede tax treaties should be
addressed. If such an intention or purpose exists, the matter requires some further and
in-depth consideration because this would undercut any tax treaty’s legal certainty and
predictability.
When taxpayers invest, a key aspect is the fact that the text of the tax treaty is expected
to be reliable. Rules are necessary to fight treaty abuse, but these should be structured
as treaty provisions and not on the basis of national laws of the single countries invol-
ved.
Several norms to curb treaty abuse have already been provided by the OECD Model
Tax Convention, under the Commentary to Article 1. The main task on this subject is
then to focus on crafting effective treaty rules and regulations to prevent treaty abuse.
1.5. Preliminary conclusions
The BEPS Action Plan has been focusing on international taxation and on almost all its
varied aspects. Whereas the tax system, at a global level, was originally designed to avo-
id or minimize double taxation, it is now focusing on how to avoid double non-taxation
and both of these aspects must necessarily be on the BEPS agenda.
The BEPS project is subject to political pressures, and it is precisely in view of such
pressures that any international tax reforms are to be thoroughly pondered and adopted
only if it is ensured that the proper checks and balances are kept in place across-the-
board.
In order to avoid any unilateral actions, governments are required to agree on what they
deem acceptable tax competition; businesses, on the other hand, are required to abide
by agreed principles and rules. Where such agreements are not reached, as previously
indicated, this might engender unilateral actions, which generate double taxation risks. 38
38 It is therefore paramount that there will be a full-fledged endorsement by the various interested parties in addition to the
16
The BEPS Report clearly distinguishes between what is intentional and unintentional
double non-taxation. Making such a distinction is especially important as it establishes
the difference between what may be deemed efficient tax planning as opposed to ag-
gressive tax planning, as far as businesses are concerned, and what may be deemed stan-
dard tax policy as opposed to harmful tax practices, as far governments are concerned.
The difference between intentional and unintentional double-taxation must be carefully

weighed in practical terms in order to be able to implement actions that can successfully
deal with BEPS issues. Further agreement is required to ensure that the main focus of
the work on BEPS should aim at results, whether referring to either tax policy or tax
planning. Defining the concepts would surely be very useful.
A further purpose of the BEPS project is to detect the various aspects of the interna-
tional tax system that are inefficient or that should be improved. The above matters
should be treated by crafting open rules on the basis of well-established principles, so
as to avoid treating issues by means of specific anti-abuse provisions. Moreover, the
Tax Authorities should be enabled to optimize information access by introducing an
automatic information exchange flow between and among the Tax Authorities of the
various countries.
The above guidelines, if complied with, would ensure and further a level playing field
that would advance and foster international trade and any positive results ensuing the-
refrom. The role of the Action Plan is fundamental in achieving the above objectives.
Another pivotal aspect to be duly considered is that any amendments or reforms to
international rules or systems involving taxation rights between countries must ensure
that taxing rights are allocated on a proportional basis. Conveying greater significance
to sales as an economic activity indicator, when assigning the right to corporate profits,
rather than referring to current international taxation principles, is an element that must
be thoroughly investigated prior to the adoption of any revisions or amendments.
It is finally expected from the BEPS project that it will foster greater transparency on
tax competition while providing, at the same time, a precise definition of appropriate
governmental as well as corporate behaviours.
G20 countries, so as to attain agreed and consistent standards for the specific purpose of avoiding and minimizing cases of
double taxation at international level.
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1.6. Future prospects
Tax competition among States and countering actions that are currently under the
OECD’s scrutiny for the purpose of curbing aggressive tax planning and “double non-
taxation” (which can drastically erode States’ taxable bases) are fuelling debates at all
levels: national, EU and international.
The “harmful tax regimes”, which the OECD intends to counteract while improving
transparency levels and information exchange among States:
»» affect the allocation of financial assets and services;

»» erode taxable bases of Countries with non-privileged tax regimes;
»» create distortions in markets’ freedom to operate;
»» negatively impact equity, neutrality and the general “acceptance” of tax systems.
The fight against harmful taxation represents – thus – a significant “passage” within the
context of the several interventions which the international community has been dri-
ving forward with the aim to thwart aggressive tax planning and double non-taxation,
both of which erode States’ taxable bases.
“Double non-taxation” and “double taxation” give rise to some particularly critical issues
by reason of the increasing use made by multinational enterprises of hybrid mismatch
arrangements.39
In connection with the debates on hybrid instruments and the need to buttress existing
regulations on the matter of Controlled Foreign Companies, it might be worth seizing
the opportunity to identify best practices for the development of rules to counter the
erosion of the tax base as a result of inter-company loan transactions. In that regard,
the OECD’s intention to adopt as promptly as possible any relevant recommendations
on the matter, and to move on to a thorough overhaul of the OECD’s Transfer Pricing
Guidelines, ought to be welcomed.
39 Cf. OECD Report, Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues, March 2012; OECD, Public Dis-
cussion Draft, BEPS Action 2: Neutralise the effects of Hybrid Mismatch Arrangements (Recommendations for Domestic
Laws), 19 March 2014 – 2 May 2014; OECD, Public Discussion Draft, BEPS Action 2: Neutralise the effects of Hybrid
Mismatch Arrangements (Treaty Issues), 19 March 2014 – 2 May 2014.
18
On the transfer pricing issue, questions involving intangibles and document require-
ments are especially important. With regard to the first, it should be emphasized that,
based on OECD studies, it appears that the shifting of taxable base within the context
of multinational groups represents one of the preferred channels used by enterprises
for profit shifting purposes. For the same reason, more than ever before the need
to revise the relevant regime contained in the OECD’s Transfer Pricing Guidelines is
strongly felt.
As regards document requirements, one of the top priorities is the proposal to introdu-
ce regulations setting forth the use by multinational enterprises, of a standard Form to
convey information relating to:
»» the economic activity carried out;

»» the allocation of income among the various Countries in which these enterpri-
ses operate;
»» taxes paid in each of the interested States.40
Reference to the allocation of income among the various jurisdictions has provided the
required input for the debate on the theme of permanent establishment. In that respect,
a revised definition for “permanent establishment”, ex Art. 5 of the OECD Model, is
essential as is an analysis of:
»» profit allocation methods to permanent establishments, on the basis of provisi-

ons ex Art. 7 of the OECD Model;41
40 “The section of the master file on financial and tax positions includes country-by-country reporting of certain informa-
tion relating to the global allocation of profits, the taxes paid, and certain indicators of the location of economic activity
(tangible assets, number of employees and total employee expense) among countries in which the MNE group operates. It
also requires reporting of the capital and accumulated earnings as well as aggregate amounts of certain categories of pay-
ments and receipts between associated enterprises” (Cf. OECD, Discussion Draft on transfer Pricing Documentation and
CbC Reporting, 30 January 2014).
41 “ACTION 7 - Prevent the artificial avoidance of PE status. Develop changes to the definition of PE to prevent the artifi-
cial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific
activity exemptions. Work on these issues will also address related profit attribution issues” (cf. OECD, Action Plan on Base
Erosion and Profit Shifting, July 2013).
19
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»» the issues raised by e-commerce, in terms of any links of incomes produced

with a given territory and the determination of taxing rights of the interested
States.42
The aim to counter aggressive tax planning schemes and the taxable base phenomenon
is closely linked to the development of administrative cooperation among States on tax
matters through the adoption43 of:
»» specific disclosure rules that allow Tax Authorities to identify key risk areas;
»» rules intended to enforce effective procedures for the settlement of internatio-
nal controversies;
»» multilateral tools allowing States to implement measures designed to counter tax
evasion and avoidance.
42 “ACTION 1 - Address the tax challenges of the digital economy. Identify the main difficulties that the digital economy
poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a
holistic approach and considering both direct and indirect taxation. Issues to be examined include, but are not limited to, the
ability of a company to have a significant digital presence in the economy of another country without being liable to taxation
due to the lack of nexus under current international rules, the attribution of value created from the generation of marketable
location-relevant data through the use of digital products and services, the characterisation of income derived from new
business models, the application of related source rules, and how to ensure the effective collection of VAT/GST with respect
to the cross-border supply of digital goods and services. Such work will require a thorough analysis of the various business
models in this sector” (Cf. OECD, Action Plan on Base Erosion and Profit Shifting, July 2013). Cf. also, OECD, Public
Discussion Draft, BEPS Action 1: Address the Tax Challenges of the Digital Economy, 24 March 2014 – 14 April 2014.
43 “ACTION 14 - Make dispute resolution mechanisms more effective. Develop solutions to address obstacles that prevent
countries from solving treaty-related disputes under MAP, including the absence of arbitration provisions in most treaties
and the fact that access to MAP and arbitration may be denied in certain cases” (cf. OECD, Action Plan on Base Erosion
and Profit Shifting, July 2013).
20
PS Directive & Hybrid Loans
2. Hybrid Loans in the Parent-Subsidiary-Directive
by Georg Kofler44
2.1. Introduction
The EU’s Action Plan to strengthen the fight against tax fraud and tax evasion45 expli-
citly addresses the Parent-Subsidiary-Directive46 by foreseeing actions with regard to
hybrid loans and a review of anti-abuse provisions in EU legislation.47 Both items have
been addressed in stakeholder consultations48 and have been taken up in a proposal
from the Commission to amend the Directive.49 The two issues have, however, been
split up in Council: While political agreement on the amendment regarding hybrid loans
was reached in June 2014,50 the inclusion of an autonomous anti-abuse clause in the
Directive has been postponed as it “requires further discussion since so far different
views have been expressed by Member States and several Member States have raised
concerns on this part of the proposal”51. This contribution will hence take a closer look
at the amendment of the Directive with respect to hybrid loans.
44 Prof. Georg Koffler is Professor of Tax Law at the Johannes Kepler University in Linz, Austria. He can be reached at
georg.kofler@jku.at.
45 See Actions 14 and 15 in the Communication from the Commission An Action Plan to strengthen the fight against tax
fraud and tax evasion, COM(2012)722 final (6 December 2012).
46 Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of pa-
rent companies and subsidiaries of different Member States (recast), [2011] OJ L 345, pp. 8 et seq., as amended by Council
Directive 2013/13/EU of 13 May 2013 adapting certain directives in the fields of taxation, by reason of the access of the
Republic of Croatia, [2013] OJ L 141, pp. 30 et seq.
47 See Action 15 in Communication from the Commission An Action Plan to strengthen the fight against tax fraud and tax
evasion, COM(2012)722 final (6 December 2012).
48 See the Stakeholders’ Consultation Amendment of the Parent Subsidiary Directive to ensure that the Application of
the Directive does not inadvertently prevent Effective Action against Double Non-Taxation in the Area of Hybrid Loan
Structures, D.1 (2013) (27 March 2013), and the Stakeholder meeting A review of anti-abuse provisions in EU legislation,
D(2013) (12 April 2013).
49 Proposal for a Council Directive amending Directive 2011/96/EU on the common system of taxation applicable in the
case of parent companies and subsidiaries of different Member States, COM(2013)814 final (25 November 2013).
50 Dok. 10419/14 FISC 92 ECOFIN 529 (20 June 2014).
51 Dok. 10419/14 FISC 92 ECOFIN 529 (20 June 2014), p. 8; see also, e.g., Dok. 9397/14 FISC 78 (30 April 2014), p. 7.
21
Kofler
2.2. Debt or equity and amendments to the Parent-Subsidiary Directive
Measures against “hybrid mismatch arrangements” have not only been put on the agen-
da of the OECD’s BEPS project,52 but have also been part of the work of the EU. One
specific hybrid mismatch arrangement, where the different qualification of a financial
instrument as debt or equity in two or more countries is used for tax planning, has
raised specific concerns because of the ensuing unintended double non-taxation.53 Such
double benefit arises if a hybrid loan is deemed to be debt leading to deductible interest
payments in the subsidiary’s State while the parent State treats it as equity and payments
upon it as exempt profit distributions.54 Planning with such mismatches is largely view-
ed as an exploitation of “loopholes” and “an unacceptable practice whereby companies
escape proper taxation”55. In that light the Code of Conduct group recommended that:
“[i]n as far as payments under a hybrid loan arrangement are qualified as a tax de-
ductible expense for the debtor in the arrangement, Member States shall not exempt
such payments as profit distributions under a participation exemption”.56
While some Member States have already implemented rules following that recommen-
dation under which no tax exemption should be granted for hybrid loan payments that
are deductible in the source Member State,57 there were, however, doubts whether such
52 See Action 2 in the OECD’s Action Plan on Base Erosion and Profit Shifting (19 July 2013), and the Discussion Draft
Hybrid Mismatch Arrangements (4 April 2014); see also the preceding Report Hybrid Mismatch Arrangements: Tax Policy
and Compliance Issues (March 2012); for analyses see, e.g., Schnitger, A. & Oskamp, M., “Empfehlungen der OECD zur
Neutralisierung von ‘Hybrid Mismatches’, 23 Internationales Steuerrecht (2014), pp. 385 et seq.; Lüdicke, J., “‘Tax Arbitrage’
with Hybrid Entities: Challenges and Responses”, 68 Bulletin of International Taxation (2014), pp. 309 et seq.
53 See generally for the issues raised by hybrid mismatch arrangements or – in other terms – international tax arbitrage, e.g.,
Kofler, G.. “Steuergestaltung im Europäischen und Internationalen Recht”, in: Hüttemann, R. (ed.), Gestaltungsfreiheit und
Gestaltungsmissbrauch im Steuerrecht, Deutsche Steuerjuristische Gesellschaft 34, pp. 213 et seq. (at pp. 232 et seq.) (Colo-
gne: Verlag Dr. Otto Schmidt, 2010); Kofler, G. & Kofler, H., “Internationale Steuerarbitrage”, in: Brähler, G. & Lösel, Ch.
(eds.) Deutsches und internationales Steuerrecht – Gegenwart und Zukunft, Festschrift Djanani, pp. 381 et seq. (Wiesbaden:
Gabler, 2008).
54 See, e.g., Commission Staff Working Document, Impact Assessment, SWD(2013)474 final (25 November 2013) p. 11.
55 See the explanation in the Proposal for a Council Directive amending Directive 2011/96/EU on the common system of
taxation applicable in the case of parent companies and subsidiaries of different Member States, COM(2013)814 final (25
November 2013), p. 4.
56 See the Report of the Code of Conduct Group of 25 May 2010, Doc. 10033/10, FISC 47, par. 31, noting that “[i]n as
far as payments under a hybrid loan arrangement are qualified as a tax deductible expense for the debtor in the arrangement,
Member States shall not exempt such payments as profit distributions under a participation exemption”.
57 See, e.g, § 10(7) of the Austrian Corporate Income Tax Act and § 8b(1) 2nd sentence of the German Corporate Income
Tax Act.
22
rules (would) violate the Parent-Subsidiary-Directive.58 While Article 4 of the Parent-

Subsidiary-Directive leaves Member States the choice to provide relief from economic
double taxation either by exempting incoming dividends or by granting an indirect cre-
dit, the Directive could be understood as forcing a Member State that has chosen the
exemption method to provide such exemption even if the profit distribution has been
treated as a tax deductible payment in the Member State where the paying subsidiary is
resident.59
Hence, and in line with a Parliament’s resolution,60 the EU Commission has subse-
quently addressed this issue in its Action Plan to strengthen the fight against tax fraud
and tax evasion61 by noting:
“The area of mismatches, which deals with issues such as hybrid loans and hybrid
entities, and differences in the qualification of such structures between jurisdictions,
is an area of particular importance. Detailed discussions with Member States have
shown that in a specific case an agreed solution cannot be achieved without a legisla-
tive amendment of the Parent-Subsidiary Directive. The objective will be to ensure
that the application of the directive does not inadvertently prevent effective action
against double non-taxation in the area of hybrid loan structures.”62
Following up on the Action Plan and after holding a stakeholder consultation,63 the
Commission proposed a corresponding amendment to the Parent-Subsidiary-Directive
November 2013), pp. 2-3.
60 In the European Parliament resolution of 19 April 2012 on the call for concrete ways to combat tax fraud and tax evasion
(2012/2599(RSP)), P7_TA(2012)0137, the Parliament called “for a review of the Parent-Subsidiary Directive and the Inte-
rests and Royalties Directive in order to eliminate evasion via hybrid financial instruments in the EU”.
61 See Action 14 in Communication from the Commission An Action Plan to strengthen the fight against tax fraud and tax
evasion, COM(2012)722 final (6 December 2012).
62 Communication from the Commission An Action Plan to strengthen the fight against tax fraud and tax evasion,
COM(2012)722 final (6 December 2012), p. 9.
63 Stakeholders’ Consultation Amendment of the Parent Subsidiary Directive to ensure that the Application of the Directive
does not inadvertently prevent Effective Action against Double Non-Taxation in the Area of Hybrid Loan Structures, D.1
(2013) (27 March 2013).
23
Kofler
in late 2013.64 According to that proposal, Art 4(1) of the Directive would be amen-
ded so that the Member State of the parent company (or the Member State of its
permanent establishment) “shall” “refrain from taxing such profits to the extent that
such profits are not deductible by the subsidiary of the parent company” or apply
the indirect credit method. While the Commission clearly intended that the deductible
portion must consequently be taxed in the Member State of the parent company,65 this
conclusion has been doubted in literature: It has been argued that the Commission’s
proposal would merely give Member States the option (but not impose the obligation)
to withdraw the exemption in such cases,66 or that the proposed language of Art. 4(1)
(a) would force Member States to “switch” to the indirect credit method insofar as the
exemption method would not be applicable because the payments have been deductible
in the source State.67
64 Proposal for a Council Directive amending Directive 2011/96/EU on the common system of taxation applicable in
the case of parent companies and subsidiaries of different Member States, COM(2013)814 final (25 November 2013).
This proposal was accompanied by Commission Staff Working Documents on an impact assessment (SWD(2013)474 fi-
nal), an executive summary of that impact assessment (SWD(2013)473 final), and an implementation plan (SWD(2013)475
final); moreover, the Commission issues a press release on Questions and Answers on the Parent Subsidiary Directive,
MEMO/13/1040 (25 November 2013). The European Parliament has issued its report on 24 March 2014 (A7-0243/2014).
For analyses of the Commission’s proposal see Weber, D., “Proposal for a Common Anti-abuse provision and anti-hybrid
loan arrangements in the Parent-Subsidiary Directive”, 6 Highlights & Insights on European Taxation (2014/3), pp. 47 et
seq.; Marchgraber, C., “Tackling Deduction and Non-Inclusion Schemes – The Proposal of the European Commission”, 54
European Taxation (2014), pp. 133 et seq.
65 See the Proposal for a Council Directive amending Directive 2011/96/EU on the common system of taxation applicable
in the case of parent companies and subsidiaries of different Member States, COM(2013)814 final (25 November 2013), p.
4 (“Accordingly, the Member State of the receiving company (parent company or permanent establishment of the parent
company) shall tax the portion of the profit distribution payments which is deductible in the Member State of the paying
subsidiary.”) and p. 7 (“The Member State of the receiving company shall therefore tax the portion of profits that is deduc-
tible in the source Member State.”). See also Commission Staff Working Document, Impact Assessment, SWD(2013)474
final (25 November 2013) p. 15 (“obligation to tax”).
66 Marchgraber, C., “Tackling Deduction and Non-Inclusion Schemes – The Proposal of the European Commission”,
54 European Taxation (2014), pp. 133 et seq. (at pp. 135-136). This argument is partly based on Pt. 3 of preamble to the
proposal, according to which the Member State of the parent company and the Member State “should” – and not “shall”
or “must” – not allow those companies to benefit from the tax exemption applied to received distributed profits, to the
extent that such profits are deductible by the subsidiary of the parent company. Moreover, it is asserted that Member States
under the current version of the Directive may extend the benefits foreseen in the Directive also to situations not fulfilling
the criteria laid down in the Directive (e.g., the 10% ownership requirement). While this certainly true (see, e.g., Kofler, G.,
Mutter-Tochter-Richtlinie Art 3 at m.nos 29 et seq. (Vienna: LexisNexis, 2011)), this conclusion is based on the wording of
the Directive itself (argumentum “at least” in Art. 3). No such clause is, however, found in Art. 4: Member States must apply
the Directive to certain qualified situations (Arts. 1, 2 and 3), and Arts. 4 and 5 define the legal ramifications with binding
force once a situation falls under the Directive (argumentum “shall” in Arts. 4 and 5).
67 Weber, D., “Proposal for a Common Anti-abuse provision and anti-hybrid loan arrangements in the Parent-Subsidiary
Directive”, 6 Highlights & Insights on European Taxation (2014/3), pp. 47 et seq. (at p. 56).
24
This discussion is, however, largely moot: The political agreement reached in Council
on addressing hybrid-loan structures in the Parent-Subsidiary-Directive clearly estab-
lishes an obligation to tax.68 According to the political agreement reached in Council
in June 2014,69 Member States that choose the exemption method under Art. 4(1)(a)
“shall”:
“refrain from taxing such profits to the extent that such profits are not deductible
by the subsidiary, and tax such profits to the extent that such profits are deductible
by the subsidiary”.
This amendment will have to be implemented by Member States by 31 December 2015

at the latest. Technically, the amendment addresses only situations where (part of) the
payment itself is deductible in the subsidiary’s State.70 Only that portion shall be “taxed”
by the parent’s State. Hence, general rules on deductibility in the subsidiary’s State that
do not directly relate to the payment itself, e.g., provisions on a notional interest deduc-
tion, do not trigger taxation in parent’s State. As for the subsidiary’s State, the Commis-
sion has moreover taken the position that:
“[n]o withholding tax would be imposed on the profits distributed by the subsi-
diary as the payment in the Member State of the subsidiary would be treated as
an interest payment under the Interest and Royalties directive. There is a pending
proposal in Council to align the current 25% eligibility shareholding threshold in
the Interest and Royalties directive to the 10% of the PSD [COM (2011)714]. Mo-
reover, typically hybrid financial arrangements are set up in Members States having
a zero withholding on interest payments under domestic or double tax conventions
provisions.”71
68 See Dok. 10419/14 FISC 92 ECOFIN 529 (20 June 2014); see also Dok. 9397/14 FISC 78 (30 April 2014).
69 Following the political agreement on 20 June 2014, the amendment will be adopted at a forthcoming Council session, after
finalisation of the text; see the Council’s press release Dok. 9402/14 PRESSE 254 (20 June 2014).
70 See also the explanation of the Proposal for a Council Directive amending Directive 2011/96/EU on the common system
of taxation applicable in the case of parent companies and subsidiaries of different Member States, COM(2013)814 final
(25 November 2013), p. 4.
71 See the explanation of the Proposal for a Council Directive amending Directive 2011/96/EU on the common system of
25
Kofler
2.3. Open issues
However, the “obligation to tax” raises some issues. First, no details on this obligation
are specified in the Directive. The preamble, however, establishes that the companies
should not be allowed “to benefit from the tax exemption applied to received distribut-
ed profits, to the extent that such profits are deductible by the subsidiary of the parent
company”.72 Hence, the amendment aims at non-exemption of the deductible portion.
Therefore the new rule requires that the deductible portion be included in the parent’s
tax base. It does, however, neither require effective taxation (e.g., in a loss situation
of the parent company), nor does it exclude Member States’ ability to apply a special
(non-discriminatory, non-state aid) tax rate to such profits. This former point is also
made clear in the draft statement by the Commission: In it the Commission stresses
that the proposed amendments to Art. 4(1)(a) “are applicable in situations of double
non-taxation deriving from mismatches in the tax treatment of profit distributions bet-
ween Member States which generate unintended tax benefits” and confirms that these
amendments “are not intended to be applicable if there is no double non-taxation or
if their application would lead to double taxation of the profit distributions between
parent and subsidiary companies”.73
Second, an obligation to tax based on the general Internal Market harmonization com-
petence under Art. 115 TFEU seems, at first glance, to be at odds with the principle of
subsidiarity. The Commission has hence spent some effort to demonstrate that Mem-
ber States’ individual or bilateral actions would not solve the problem but might even
“result in additional mismatching or in the creation of new tax obstacles in the Internal
Market”.74 Indeed, one could even make the argument that double non-taxation (just
as double taxation)75 is generally not in line with the Internal Market and warrants EU
action.76
72 See Pt 3 of the Preamble in Dok. 10419/14 FISC 92 ECOFIN 529 (20 June 2014).
73 See Dok. 10419/14 FISC 92 ECOFIN 529 (20 June 2014), p. 9.
74 Commission Staff Working Document, Impact Assessment, SWD(2013)474 final (25 November 2013) p. 14; see also the
analysis in the explanation of the Proposal for a Council Directive amending Directive 2011/96/EU on the common system
of taxation applicable in the case of parent companies and subsidiaries of different Member States, COM(2013)814 final
(25 November 2013), p. 5.
75 See, e.g., Kofler, G., “Double Taxation and European Law: Analysis of the Jurisprudence”, in: Rust, A. (ed.), Double
Burdens within the European Union pp. 97 et seq. (Kluwer, 2011).
76 Some years ago the Economic and Social Committee has even proposed to alter (former) Art. 293 EC and add a provision
to the EC Treaty to the effect that “[d]ouble taxation or the absence of taxation is incompatible with the internal market.”
26
Apart from the technical operation of Art. 4(1)(a), this amendment raises a broader
issue of interpretation. As noted above, the Commission thought that rules implemen-
ting the Code of Conduct recommendation under which no tax exemption should be
granted for hybrid loan payments that are deductible in the source Member State: “can-
not be safely implemented under the PSD without an explicit amendment of the text of
the PSD”,77 and that Member States that would nevertheless implement such solution
would risk facing: “complaints from businesses for infringement of EU law”. 78
It is, however, not entirely clear why unilateral action was viewed as infringing on the
Parent-Subsidiary-Directive. While the Commission clearly states that the problem of
double non-taxation does not arise if the Member State of the parent company choo-
ses the credit method,79 it seems that it also believes that Member States can exercise
the choice between the exemption method and the indirect credit method provided in
Art. 4 of the Directive only once (and not “switch-over” to the indirect credit method
in specified situations, such as low taxation or passive income).80 Relying on the ECJ’s
See the Opinion of the Economic and Social Committee on Taxation in the European Union — Report on the development
of tax systems, [1997] OJ C 296, p. 37, Appendix II.
77 Commission Staff Working Document, Impact Assessment, SWD(2013)474 final (25 November 2013) p. 11.
78 Commission Staff Working Document, Impact Assessment, SWD(2013)474 final (25 November 2013) p. 11; see also
See the explanation in the Proposal for a Council Directive amending Directive 2011/96/EU on the common system of
79 See Commission Staff Working Document, Impact Assessment, SWD(2013)474 final (25 November 2013) p. 5.
80 Stakeholders’ Consultation Amendment of the Parent Subsidiary Directive to ensure that the Application of the Directive
does not inadvertently prevent Effective Action against Double Non-Taxation in the Area of Hybrid Loan Structures, D.1
(2013) (27 March 2013) paras. 7 and 8 with note 8: “The Commission Services expressed the view that the Code of Conduct
Group guidance would clash with the obligations contained in the PSD. In fact, the way the directive is currently drafted
obliges the Member State of the parent company to exempt received profit distributions irrespective of the tax treatment to
which they have been subject in the Member State of the subsidiary (e.g. even though they are deductible). […] The Commis-
sion Services also found the alternatives of switching from exemption to tax credit or of taking national measures to prevent
abuse of law by taxpayers not suitable to solve the double non-taxation issue”. This is because “[t]he option to avoid double
taxation through exemption or tax credit is a choice of methods, but Member States must be consistent in their choice and
apply that method across the board. National measures to prevent abuse of law by taxpayers may apply to transactions which
are considered to be wholly artificial, entered into mainly for the purpose of avoiding taxation; but that is a high threshold,
not suitable for justifying the denial of exemption in case of hybrid loan payments”. See also Commission Staff Working
Document, Impact Assessment, SWD(2013)474 final (25 November 2013) p. 5: “In October 2011, an analysis carried out
by the Commission Services stated that the solution agreed by the Code of Conduct Group clashes with the Parent Subsi-
diary Directive3 (‘PSD’). Under the PSD, subject to various eligibility conditions, the Member State of the receiving parent
company (or, under certain circumstance, of a permanent establishment of that parent company) is obliged to exempt profit
distribution payments from subsidiaries of another Member State from taxation (or to grant a credit for the taxation levied
abroad on the subsidiary level or lower tier levels). This is the case even if the profit distribution has been treated as a tax
deductible payment in the Member State where the paying subsidiary is resident“.
27
Kofler
Cobelfret decision,81 the Commission specifically notes that: “[t]he tax exemption ob-
ligation under Article 4(1)(a) in the PSD applies unconditionally when Member States
have opted for relieving double taxation on subsidiaries’ profit distributions through
exemption”.82
This interpretation was not shared by all Member States,83 does not follow from the
Cobelfret case and seems to threaten domestic “switch-over” clauses. Indeed, as men-
tioned before, Art 4(1) of the Parent-Subsidiary Directive leaves Member States with
the choice of providing relief from economic double taxation either by exempting
incoming dividends or by granting an indirect credit for the underlying corporate tax.
Even though both methods may lead to different results,84 they are considered to be
equivalent and it is left to the discretion of the Member States to decide which method
should apply. Art 4, moreover, grants a Member State leeway to provide for the appli-
cation of both methods simultaneously, one method to apply in its relations with some
Member States and the other method in its relations with other Member States,85 based,
for example, on the method chosen in a particular tax treaty. In addition, it is also per-
missible to provide for the application of both methods for dividends from different
subsidiaries in one and the same Member State, the method to be applied to a concrete
dividend payment being determined according to specified conditions, such as the level
of taxation.86
Against this background, the amendment of the Parent-Subsidiary-Directive was not

necessary to enable Member States to take action against hybrid loan structures, but
rather only to oblige them to do so. This also implies that even before the amendment
81 ECJ, 12 February 2009, Case C-138/07, Belgische Staat v Cobelfret NV, [2009] ECR I-731.
82 Commission Staff Working Document, Impact Assessment, SWD(2013)474 final (25 November 2013) p. 5 with note 4.
83 Commission Staff Working Document, Impact Assessment, SWD(2013)474 final (25 November 2013) p. 6, noting that
“[on the need to amendment the PSD, some Member States expressed doubts – mainly on the grounds that they did not
believe it was necessary to change the PSD in order to implement the guidance. Nevertheless, it seemed that most Member
States would either support or not oppose a targeted amendment of the PSD to remove any possible barrier to the effective
implementation of the Code of Conduct Group solution.”
84 Case C-446/04, FII Group Litigation [2006] ECR I-11753, paras. 43-44; ECJ, 12 February 2009, Case C-138/07, Belgische
Staat v Cobelfret NV, [2009] ECR I-731, para. 31.
85 See de Hosson, F., “The Parent-Subsidiary Directive”, 18 Intertax (1990), pp. 414 et seq. (at pp. 432-433); Tumpel, M.
Harmonisierung der direkten Unternehmensbesteuerung in der EU p. 270 (Österreichische Staatsdruckerei, 1994); Deutsch,
E., “Internationales Schachtelprivileg und Quellenbesteuerung nach der Mutter-Tochter-Richtlinie”, 48 Österreichische Steu-
erzeitung (1995), pp. 458 et seq. (at p. 459).
86 For a discussion see Kofler, G., Mutter-Tochter-Richtlinie Article 4 at m.no. 6 (Vienna: LexisNexis, 2011).
28
of the Directive, rules denying exemption in hybrid loan structures could be structu-
red in accordance with the Directive: While there might be some doubts as to how
the indirect credit system operates with regard to hybrid loan situations in multi-tier
situations,87 it seems clear that in a two-country situation an indirect credit works just
like a non-exemption because the deductibility in the subsidiary’s State leaves no tax on
the “distribution” to be credited by the parent’s State.88
87 See for calculations and analyses Marchgraber, C., “Tackling Deduction and Non-Inclusion Schemes – The Proposal of
the European Commission”, 54 European Taxation (2014), pp. 133 et seq. (at pp. 136-138).
88 Kofler, G. & Kirchmayr, S., “Beteiligungsertragsbefreiung und Internationale Steuerarbitrage”, 12 Zeitschrift für Gesell-
schaftsrecht und angrenzendes Steuerrecht (2011), pp. 449 et seq.
29
30
BEPS & Anti Abuse
3. BEPS & Anti-abuse Rules: The EU Law Dimension
By Tom O’Shea89
3.1. Introduction
The OECD’s Base Erosion & Profit Shifting (BEPS) project has been creating conside-
rable debate and discussion in the international tax community. This short paper, based
on a talk given at the CFE Forum 2014, highlights one aspect of the EU law dimension
to the BEPS project, in particular, the jurisprudence of the ECJ in the direct tax (inclu-
ding tax treaties) field.
The jurisprudence of the ECJ clearly shows that certain types of tax planning are ac-
ceptable to the ECJ. Moreover, when the principle of proportionality is applied, nati-
onal anti-abuse rules, such as CFC, thin capitalisation and transfer pricing rules, may
fail if the taxpayer is able to demonstrate that its CFC is carrying on genuine economic
activities or the loans or associated transactions are commercially justified even though
they do not meet the arm’s length principle.
Part 3.2. examines the “Tax Planning Spectrum” in the EU, which has wholly artificial
arrangements (unacceptable tax planning) at one end of the spectrum and genuine
economic activities/commercial justification for the transactions at the other end (ac-
ceptable tax planning). Part 3.3. looks at anti-abuse rules in the EU with a particular
emphasis on three types: controlled foreign company (CFC) rules (Cadbury Schweppes),
thin capitalisation rules (Thin Cap GLO) and transfer pricing (SGI). Finally Part 3.4.
offers some conclusions.
89 Dr Tom O’Shea is a Senior Lecturer in Tax Law at Queen Mary University of London, Centre for Commercial Law
Studies and a Chartered Tax Adviser. Email is t.o’shea@qmul.ac.uk. This article is based on a talk given by the author at
the CFE Forum 2014, on an article published in EC Tax Journal in 2012 entitled “CFC Reforms in the UK: Some EU Law
Comments”, ECTJ, 13, 1, 65-89 and on Chapter 4 of Tom O’Shea, “EU Tax Law and Double Tax Conventions” (Avoir
Fiscal Limited, London. 2008) ISBN 978-0-955916403.
31
O‘Shea
3.2. The tax planning spectrum
3.2.1. Tax planning versus wholly artificial arrangements
The BEPS project intersects with the jurisprudence of the Court of Justice of the EU
(ECJ) in the area of anti-abuse tax rules of the Member States and abuse of EU law.
The ECJ has developed a fairly settled jurisprudence whereby the EU Member States
can maintain anti-abuse rules provided that such rules are aimed at preventing wholly
artificial arrangements designed to circumvent the national tax laws of the Member
States. However, the ECJ has also made it clear that some tax planning is perfectly
acceptable.
Thus, it is clear from the Court’s jurisprudence that there is a tax planning spectrum.
At one end of that spectrum, transactions involving wholly artificial arrangements are
outlawed, whilst at the other extremity the Court is willing to accept tax mitigation
strategies undertaken by the taxpayer. Understanding this tax planning spectrum is fun-
damental for tax advisers embarking on tax mitigation strategies for their clients. It is
also important for the BEPS project since all tax planning involving the exercise of the
EU freedoms must comply with EU law. Therefore, it is of the utmost importance that
the BEPS project takes EU law into account when making changes to the international
tax landscape.
3.2.2. Tax planning in the EU
The ECJ has accepted that “taxpayers may choose to structure their business so as
to limit their tax liability”.90 Moreover, in RBS Deutschland, the Court highlighted that
“taxable persons are generally free to choose the organisational structures and the form
of transactions which they consider to be most appropriate for their economic activities
and for the purposes of limiting their tax burdens”.91 Thus, in Barbier, a pure inheritance
tax planning case, the Court stressed that an EU national “cannot be deprived of the
90 ECJ, 21 Feb. 2006, C-255/02, Halifax plc, Leeds Permanent Development Services Ltd and County Wide Property Invest-
ments Ltd v Commissioners of Customs & Excise, (“Halifax”), [2006] ECR I-01609, para.73.
91 ECJ, 22 Dec. 2010, C-277/09, The Commissioners for Her Majesty’s Revenue & Customs v RBS Deutschland Holdings
GmbH, (“RBS Deutschland”), [2010] ECR I-13805, para.53. See Tom O’Shea, “ECJ Takes a Stand on ‘Abusive Practices’ in
UK VAT Cases”, Tax Notes International, Feb. 7, 2011, 417-421.
32
BEPS & Anti Abuse
right to rely on provisions of the Treaty on the ground that he is profiting from tax
advantages which are legally provided by the rules in force in a Member State other than
his State of residence”.92
However, the Court has also pointed out the other side of the coin in Tanoarch, stressing
that “preventing possible tax evasion, avoidance and abuse is an objective recognised
and encouraged by the [VAT] directive”93 and that the effect of the principle prohibi-
ting abuse of rights is “to prohibit wholly artificial arrangements which do not reflect
economic reality and are set up with the sole aim of obtaining a tax advantage”.94 The
Court indicated in Cantor Fitzgerald that the principle of the neutrality of VAT “does not
mean that a taxable person with a choice between two transactions may choose one of
them and avail himself of the effects of the other”.95
The consequences of this mixed case law seem to be clear. Tax planning done within
certain parameters is acceptable to the ECJ. However, “wholly artificial arrangements”
lacking “economic reality” and set up with the sole aim of securing a tax advantage may
be challenged. Moreover, EU nationals cannot use EU law rights (such as the freedom
of establishment) to circumvent national tax rules. The Court made this clear in Cad-
bury Schweppes, when it stated that EU nationals must not “improperly or fraudulently
take advantage of provisions of Community law”.96 However, the Court pointed out
that the fact that the company “was established in a Member State for the purpose of
benefiting from more favourable legislation does not in itself suffice to constitute abuse
of that freedom”.97
92 ECJ, 11 Dec. 2003, C-364/01, The heirs of H. Barbier v Inspecteur van de Belastingdienst Particulieren/Ondernemingen
buitenland te Heerlen, (“Barbier”), [2003] ECR I-15013, para. 71.
93 ECJ, 27 Oct. 2011, C-504/10, Tanoarch s.r.o. v Daňové riaditeľstvo Slovenskej republiky, (“Tanoarch”), [2011] ECR
I-10853, para. 50.
94 Tanoarch, para. 51.
95 ECJ, 9 Oct. 2001, C-108/99, Commissioners of Customs & Excise v Cantor Fitzgerald International, (“Cantor Fitzge-
rald”), [2001] ECR I-07257, para. 33.
96 ECJ, 12 Sep. 2006, C-196/04, Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v Commissioners of Inland
Revenue, (“Cadbury Schweppes”), [2006] ECR I- 07995, para. 35. For a more detailed analysis of this case, see Tom O’Shea,
“The UK‘s CFC rules and the freedom of establishment: Cadbury Schweppes plc and its IFSC subsidiaries – tax avoidance
or tax mitigation?” EC Tax Review, 2007, 1, 13-33.
97 Cadbury Schweppes, para. 37.
33
O‘Shea
3.3 Anti-abuse rules & EU Law
3.3.1. The Court‘s approach
It seems clear from the jurisprudence of the Court to date, that anti-abuse rules of the
EU Member States which treat the cross-border situation less favourably than a similar
domestic situation may constitute a restriction on the exercise of the freedoms. This
reasoning has been applied by the ECJ in relation to CFC rules in Cadbury Schweppes; in
relation to thin capitalisation rules in Thin Cap GLO98 and in relation to transfer pricing
rules in SGI.99
Thus, in Cadbury Schweppes, the Court focused on the different treatment of an ori-
gin State parent company with subsidiaries located in another Member State which
were subject to a lower level of taxation. The Court determined that UK’s CFC rules
operating in such circumstances were liable to hinder the exercise of the freedom of
establishment.100 Similarly, in Thin Cap GLO, the Court highlighted that national thin
capitalisation rules gave rise to a difference in tax treatment between resident borrowing
companies “according to whether or not the related lending company is established in
the United Kingdom”.101 In SGI, the Court applied similar thinking in relation to Bel-
gian transfer pricing rules, when it noted that “the tax position of a company resident
in Belgium, which, like SGI, grants unusual or gratuitous advantages to companies with
which it has a relationship of interdependence that are established in other Member
States is less favourable than it would be if it granted such advantages to resident com-
panies with which it has such a relationship”.102
Consequently, such anti-abuse rules need to be justified and the rules need to comply
with the principle of proportionality. This is clear from an examination of the three
cases concerning anti-abuse legislation: Cadbury Schweppes, Thin Cap GLO and SGI.
98 ECJ, 13 Mar. 2007, C-524/04, Test Claimants in the Thin Cap Group Litigation v Commissioners of Inland Revenue,(“Thin
Cap GLO”), [2007] ECR I-02107. See Tom O’Shea, “Thin Cap GLO and Third Country Rights: Which Freedom Applies?”
Tax Notes International, 23 April 2007, 371-375.
99 ECJ, 21 Jan. 2010, C-311/08, Société de Gestion Industrielle, (“SGI”), [2010] ECR I-00487. For a detailed comment on
SGI, see Tom O’Shea, “ECJ Upholds Belgian Transfer Pricing Regime“, 2010 WTD 19-1.
101 Thin Cap GLO, para. 40.
102 SGI, para. 43.
34
BEPS & Anti Abuse
3.3.2. CFC rules
In Cadbury Schweppes, the Court was quick to point out that “the mere fact that a resident
company establishes a … subsidiary, in another Member State cannot set up a general
presumption of tax evasion and justify a measure which compromises the exercise of
a fundamental freedom guaranteed by the Treaty”.103 Instead, the Court indicated that
“a national measure restricting freedom of establishment may be justified where it spe-
cifically relates to wholly artificial arrangements aimed at circumventing the application
of the legislation of the Member State concerned”.104 The Court stressed that in order
for a restriction on the freedom of establishment to be justified on the ground of
prevention of abusive practices, the specific objective of such a restriction must be to
prevent conduct involving the creation of wholly artificial arrangements which do not
reflect economic reality”.105 The Court explained that “ the type of conduct described
in the preceding paragraph is such as to undermine the right of the Member States to
exercise their tax jurisdiction in relation to the activities carried out in their territory
and thus to jeopardise a balanced allocation between Member States of the power to
impose taxes”.106
The Court noted that “the intention to obtain tax relief prompted the incorporation
of the CFC and the conclusion of the transactions between the latter and the resident
company does not suffice to conclude that there is a wholly artificial arrangement in-
tended solely to escape that tax”.107 The Court explained that in order to find that a
wholly artificial arrangement exists “there must be, in addition to a subjective element
consisting in the intention to obtain a tax advantage, objective circumstances showing
that, despite formal observance of the conditions laid down by Community law, the
objective pursued by freedom of establishment, as set out in paragraphs 54 and 55 of
this judgment, has not been achieved”.108 Thus, “in order for the legislation on CFCs to
comply with Community law, the taxation provided for by that legislation must be ex-
cluded where, despite the existence of tax motives, the incorporation of a CFC reflects

35
O‘Shea
economic reality”.109 In other words, there must be an actual establishment intended

to carry on genuine economic activities in the host Member State. If there is, then the
CFC rules cannot be applied to that low-taxed entity.
Thus, the Court applied the “Halifax” two-prong test: “a subjective test consisting in
the intention to obtain a tax advantage”110 followed by an objective test comprising “ob-
jective 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”.111
The Court explained that if checking those objective 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 parti-
cular in the case of a ‘letterbox’ or ‘front’ subsidiary”.112
On the issue of proportionality, the Court indicated that the resident company, which
is best placed for that purpose, must be given an opportunity to produce evidence that
the CFC is actually established and that its activities are genuine”.113
The ECJ concluded that it was a matter for the national court to determine whether the
United Kingdom’s CFC legislation could be restricted to wholly artificial arrangements
or whether, “where none of the exceptions laid down by that legislation applies and
the intention to obtain a reduction in United Kingdom tax is central to the reasons for
incorporating the CFC, the resident parent company comes within the scope of appli-
cation of that legislation, despite the absence of objective evidence such as to indicate
the existence of an arrangement of that nature”.114 If the former situation applied, then
the United Kingdom’s CFC regime was compatible with EU law. If the latter situation
applied then the CFC rules were incompatible with the freedom of establishment.

111 Cadbury Schweppes, para. 67
36
BEPS & Anti Abuse
Thus, the ECJ held that CFC rules “must not be applied where it is proven, on the basis
of objective factors which are ascertainable by third parties, that despite the existence
of tax motives that CFC is actually established in the host Member State and carries on
genuine economic activities there”.115
3.3.3. Thin capitalisation rules
The ECJ applied similar thinking in Thin Cap GLO, but in this case it dealt with the
United Kingdom’s thin capitalisation regime. The Court noted that “a national mea-
sure restricting freedom of establishment may be justified where it specifically targets
wholly artificial arrangements designed to circumvent the legislation of the Member
State concerned”.116 However, the Court pointed out that the “mere fact that a resident
company is granted a loan by a related company which is established in another Mem-
ber State cannot be the basis of a general presumption of abusive practices and justify
a measure which compromises the exercise of a fundamental freedom guaranteed by
the Treaty”.117
The Court stressed that in order “for a restriction on the freedom of establishment to
be justified on the ground of prevention of abusive practices, the specific objective of
such a restriction must be to prevent conduct involving the creation of wholly artificial
arrangements which do not reflect economic reality, with a view to escaping the tax
normally due on the profits generated by activities carried out on national territory”.118
The Court made a link between the conduct of the taxpayer in Marks & Spencer,119
“which involved arranging transfers of losses incurred within a group of companies to
companies established in the Member States which applied the highest rates of taxa-
tion and in which the tax value of those losses was therefore the greatest”,120 and the

119 The Court referred to paragraph 49 of Marks & Spencer. See ECJ, 13 Dec. 2005, C-446/03, Marks & Spencer, [2005]
ECR I-10837. For a more detailed analysis of the Marks & Spencer case, see Tom O’Shea, “Marks and Spencer v Halsey (HM
Inspector of Taxes): Restriction, Justification and Proportionality”, [2006] 15(2) EC Tax Review 66-82.
37
O‘Shea
conduct of the taxpayers in Thin Cap GLO, pointing out that this conduct was capable
of undermining “the right of the Member States to exercise their tax jurisdiction in
relation to the activities carried out in their territory and thus to jeopardise a balanced
allocation between Member States of the power to impose taxes”.121 The Court noted
that thin capitalisation legislation was “able to prevent practices the sole purpose of
which is to avoid the tax that would normally be payable on profits generated by activi-
ties undertaken in the national territory. It follows that such legislation is an appropriate
means of attaining the objective underlying its adoption”.122 However, the Court still
had to investigate whether such anti-abuse legislation was compatible with the principle
of proportionality.
The Court explained that such legislation did not comply with the principle of pro-
portionality where it did not have “the specific purpose of preventing wholly artificial
arrangements designed to circumvent that legislation, but applies generally to any situa-
tion in which the parent company has its seat, for whatever reason, in another Member
State”.123 However, such anti-abuse legislation could be justified “by the need to combat
abusive practices where it provides that interest paid by a resident subsidiary to a non-
resident parent company is to be treated as a distribution only if, and in so far as, it
exceeds what those companies would have agreed upon on an arm’s-length basis, that is
to say, the commercial terms which those parties would have accepted if they had not
formed part of the same group of companies”.124
The Court went on to apply the Halifax formula, discussed above, using the arm’s
length test as an objective measure of determining whether a wholly artificial arrange-
ment existed. The Court stated that the fact that “a resident company has been granted
a loan by a non resident company on terms which do not correspond to those which
would have been agreed upon at arm’s length constitutes, for the Member State in
which the borrowing company is resident, an objective element which can be indepen-
dently verified in order to determine whether the transaction in question represents, in
whole or in part, a purely artificial arrangement, the essential purpose of which is to

38
BEPS & Anti Abuse
circumvent the tax legislation of that Member State”.125 Then, following the opinion
of Advocate General Geelhoed, the Court set out how the principle of proportiona-
lity works in this sphere, highlighting in paragraph 82 that “national legislation which
provides for a consideration of objective and verifiable elements in order to determine
whether a transaction represents a purely artificial arrangement, entered into for tax rea-
sons alone, is to be considered as not going beyond what is necessary to prevent abusive
practices where, in the first place, on each occasion on which the existence of such an
arrangement cannot be ruled out, the taxpayer is given an opportunity, without being
subject to undue administrative constraints, to provide evidence of any commercial
justification that there may have been for that arrangement”. Thus, the taxpayer must
be given the opportunity to rebut the presumption that a wholly artificial arrangement
has taken place by providing commercial justification for the loan in question. If the
taxpayer satisfies this requirement then the anti-abuse rules fail at this stage. However,
if the taxpayer fails to provide the necessary commercial justification for the loan in
question then phase two of the proportionality test kicks-in and this requires that “the
re-characterisation of interest paid as a distribution is limited to the proportion of that
interest which exceeds what would have been agreed had the relationship between the
parties or between those parties and a third party been one at arm’s length”.126
The Court noted in paragraph 87 of Thin Cap GLO that it was a matter for the natio-
nal court to determine “whether those provisions allow taxpayers, where the transac-
tion does not satisfy the arm’s-length criterion, to produce evidence of the commercial
justifications for that transaction, under the conditions referred to in the preceding
paragraph”. Paragraphs 82 and 83 of the Thin Cap GLO judgment are, therefore, funda-
mental to understanding the law in this area and, in particular, to understanding how the
principle of proportionality operates in the area of thin capitalisation anti-abuse rules.
3.3.4. Transfer pricing rules
In SGI, a Belgian transfer pricing “anti-abuse” case, the Court applied similar reasoning
to that applied in relation to thin capitalisation anti-abuse legislation. Having determi-
ned that the cross-border situation was treated less favourably than a similar dome-

39
O‘Shea
stic one (see paragraph 43 of the SGI judgment), the Court quickly determined that
such legislation amounted to a restriction on the freedom of establishment. The Court
stressed that such anti-abuse legislation could deter a resident company from “acqui-
ring, creating or maintaining a subsidiary in another Member State or from acquiring or
maintaining a substantial holding in a company established in that State because of the
tax burden imposed, in a cross border situation, on the grant of advantages at which
the legislation at issue in the main proceedings is directed”.127
The Court also noted that the legislation in question could have “a restrictive effect on
companies established in other Member States. Such a company could be deterred from
acquiring, creating or maintaining a subsidiary in Belgium or from acquiring or maintai-
ning a substantial holding in a company established in that State because of the tax bur-
den imposed there on the grant of the advantages at which that legislation is directed”.
Consequently, the decision in SGI turns on the issue of justification and the application
of the principle of proportionality. As regards balanced allocation, the Court observed
that “such a justification may be accepted, in particular, where the system in question
is designed to prevent conduct capable of jeopardising the right of a Member State to
exercise its tax jurisdiction in relation to activities carried out in its territory”.128 Again,
the Court applied its Marks & Spencer reasoning, pointing out that to give companies
“the right to elect to have their losses or profits taken into account in the Member State
in which they are established or in another Member State could seriously undermine a
balanced allocation of the power to impose taxes between the Member States, since the
tax base would be increased in one of the States in question, and reduced in the other,
by the amount of the losses or profits transferred”.129
The Court stated that “to permit resident companies to transfer their profits in the
form of unusual or gratuitous advantages to companies with which they have a re-
lationship of interdependence that are established in other Member States may well
undermine the balanced allocation of the power to impose taxes between the Member
States … because, according to the choice made by companies having relationships of
interdependence, the Member State of the company granting unusual or gratuitous ad-
127 SGI, para. 44.

128 SGI, para. 60.
129 SGI, para. 62.
40
BEPS & Anti Abuse
vantages would be forced to renounce its right, in its capacity as the State of residence
of that company, to tax its income in favour, possibly, of the Member State in which the
recipient company has its establishment”.130 Therefore, by having transfer pricing rules
to counter this type of tax planning abuse, the Belgian rules at issue achieved the objec-
tive of protecting a balanced allocation of taxing powers between the Member States.
The Court also noted that “a national measure restricting freedom of establishment
may be justified where it specifically targets wholly artificial arrangements designed to
circumvent the legislation of the Member State concerned”.131 In this respect the Court
again cited Marks & Spencer but, in this instance, referred to paragraph 57 of that judg-
ment. Here, the Court underlined that a Member State may have anti-abuse rules which
“specifically” target wholly artificial arrangements. In such circumstances, the need to
prevent tax avoidance is a stand-alone justification for the national anti-abuse rules in
question. However, if the national anti-abuse rules are “not specifically” designed to
combat wholly artificial arrangements they may still be justified by the need to ensu-
re a balanced allocation of taxing powers between the Member States taken together
with the need to prevent tax avoidance. This becomes clear in the next paragraph of
the SGI judgment (paragraph 66) where the ECJ explained that if the Member State’s
anti-abuse legislation (transfer pricing in this instance) “is not specifically” designed to
exclude from the tax advantage it confers “such purely artificial arrangements … [it]
may nevertheless be regarded as justified by the objective of preventing tax avoidance,
taken together with that of preserving the balanced allocation of the power to impose
taxes between the Member States”.132
The Court gives a simple explanation for this, stressing that “to permit resident com-
panies to grant unusual or gratuitous advantages to companies with which they have a
relationship of interdependence that are established in other Member States, without
making provision for any corrective tax measures, carries the risk that, by means of
artificial arrangements, income transfers may be organised within companies having a
relationship of interdependence towards those established in Member States applying
the lowest rates of taxation or in Member States in which such income is not taxed”.133
130 SGI, para. 63.

131 SGI, para. 65.
132 SGI, para. 66.
133 SGI, para. 67.
41
O‘Shea
Therefore, the Belgian transfer pricing rules at issue were able to prevent these types of
abusive practices involving wholly artificial arrangements.
The Court concluded that in the light of “those two considerations, concerning the
need to maintain the balanced allocation of the power to tax between the Member Sta-
tes and to prevent tax avoidance, taken together, it must be held that legislation such as
that at issue in the main proceedings pursues legitimate objectives which are compatible
with the Treaty and constitute overriding reasons in the public interest and that it is
appropriate for ensuring the attainment of those objectives”.134 The only matter remai-
ning was for the Court to apply the principle of proportionality in this case.
In applying the principle of proportionality in SGI, the Court used the same reasoning
which it adopted in Thin Cap GLO and in Halifax. It accepted that the arm’s length test
was an objective criterion to determine whether the conduct of the taxpayer amounted
to a wholly artificial arrangement but it stressed that the taxpayer must be given an op-
portunity to provide evidence of commercial justification for the transaction.
The Court repeated what it said in Thin Cap GLO paragraph 82, underlining that na-
tional legislation “which provides for a consideration of objective and verifiable ele-
ments in order to determine whether a transaction represents an artificial arrangement,
entered into for tax reasons, is to be regarded as not going beyond what is necessary
to attain the objectives relating to the need to maintain the balanced allocation of the
power to tax between the Member States and to prevent tax avoidance where, first,
on each occasion on which there is a suspicion that a transaction goes beyond what
the companies concerned would have agreed under fully competitive conditions, the
taxpayer is given an opportunity, without being subject to undue administrative cons-
traints, to provide evidence of any commercial justification that there may have been
for that transaction”.135 If the taxpayer provided such “commercial justification” then
the anti-abuse rules in question would fail. However, if the commercial justification was
unforthcoming or unsatisfactory in the eyes of the national court, then part two of the
proportionality test took effect.
134 SGI, para. 69.

135 SGI, para. 71.
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BEPS & Anti Abuse
The Court stressed that “where the consideration of such elements leads to the con-
clusion that the transaction in question goes beyond what the companies concerned
would have agreed under fully competitive conditions, the corrective tax measure must
be confined to the part which exceeds what would have been agreed if the companies
did not have a relationship of interdependence”.136
The Court concluded that it was a matter for the national (Belgian) court “to verify
whether the legislation at issue in the main proceedings goes beyond what is necessary
to attain the objectives pursued by the legislation, taken together”.137
3.4 Conclusions
There are a number of important conclusions to be noted from this discussion.
First, the BEPS project needs to take into consideration the views of the ECJ, ex-
pressed in its tax avoidance and tax abuse jurisprudence, concerning national anti-abuse
rules, because in a European Internal Market environment such anti-abuse rules must
comply with EU law. It should also be recalled that the European Internal Market ex-
tends beyond the territory of the EU when EU fundamental freedoms are extended
to non-member States. Examples include the free movement of capital which applies
generally to all non-member States (subject to numerous derogations) and international
agreements where the EU has extended some of its fundamental freedoms to non-
member States, such as the European Economic Area (EEA) Agreement and the EU-
Switzerland bilateral agreements.
Second, the jurisprudence of the ECJ, discussed above, makes it clear that the emphasis
of the Court is on the national anti-abuse legislation138 (CFC, thin capitalisation and
transfer pricing) of the Member States, not on tax avoidance as such which it defines
as wholly artificial arrangements designed to circumvent the national tax system. It is
important to recognise that the Court sees two types of anti-abuse rule: those which are
136 SGI, para. 72.

137 SGI, para. 76.
138 For a more detailed explanation of the difference between the two types of anti-abuse legislation and how each may be
justified, see Tom O’Shea, “CFC Reforms in the UK – Some EU Law Comments”, ECTJ, 13, 1, 65-89.
43
O‘Shea
specifically designed to combat tax avoidance and those which are not specifically designed
to combat tax avoidance but operate more generally. The Court is satisfied that both
types of anti-abuse rule which restrict the exercise of a fundamental freedom may be
justified. From SGI and Marks & Spencer, it is clear that the former may be justified by
the need to combat tax avoidance. Whereas the latter may be justified by the need to
ensure a balanced allocation of taxing rights, taken together with, the need to protect
against tax avoidance.
Last, it is important to note for the purposes of the BEPS project that while the ECJ
has accepted that the Member States can maintain anti-abuse rules which combat whol-
ly artificial arrangements designed to circumvent their national tax systems, such rules
must comply with the principle of proportionality. In other words, if the taxpayer can
demonstrate that its CFC carries on genuine economic activities then CFC rules which
amount to a restriction on its freedom of establishment may not be applied. Similarly,
in transfer pricing and thin capitalisation situations, if the taxpayer can demonstrate
commercial justification for its transactions which deviate from the arm’s length prin-
ciple, then such anti-abuse rules may also fail. Therefore, in a European Internal Market
context, the OECD’s BEPS project must take the jurisprudence of the ECJ and EU
law into account.
44
PS Directive Amendments
4. Proposed Amended Parent-Subsidiary Directive Reveals

the European Commission’s Lack of Vision
by Hans van den Hurk139
4.1. Introduction
With the OECD going to great lengths to make international tax law more straightfor-
ward, increase fairness and enhance transparency, the European Commission also made
a contribution to this process. Anticipating the implementation of elements from the
OECD Report on Base Erosion and Profit Shifting (BEPS),140 the Commission submit-
ted proposals to adapt the Parent-Subsidiary Directive (90/435)141 and make it more fit
for the purpose of combating base erosion and profit shifting. On 25 November 2013,
the Commission presented its views on how to adapt the Parent-Subsidiary Directive
(90/435) to the modern day requirements for sound tax systems (the proposed Parent-
Subsidiary Directive (2011/96)).142
The Commission advocates a provision to counter the abuse of hybrid financing and
a general anti-avoidance rule (GAAR), both of which would improve the modern tax
world. Or so one would think after reading the Commission Staff Working Document
(SWD), which explains why these two points should be introduced into the Parent-Sub-
139 ©2014 Hans van den Hurk. Originally published in 68 Bull. Intl. Taxn. 9, pp. 488-497, Journals IBFD. Bulletin for Inter-
national Taxation is available online, please visit http://www.ibfd.org <http://www.ibfd.org> . Reproduced with permission.
Hans van den Hurk is Professor of European Corporate Income Taxes at the University of Maastricht. This article is partly
based on a lecture given in London, at the Queen Mary College, University London, during the 9th Avoir Fiscal Seminar on
31 January 2014, a lecture in Brussels during the Confédération Fiscale Européenne (CFE) meeting on 26 March 2014, and
a presentation in Berlin during the 1st Annual Berlin Conference on EU and International Tax on 11 April 2014. The views
expressed in this article are the author’s own and do not necessarily represent those of any of the organizations for which he
works. The author can be contacted at hans.vandenhurk@maastrichtuniversity.nl.
140 OECD, Addressing Base Erosion and Profit Shifting (OECD 2013), International Organizations’ Documentation IBFD,
also available at www.oecd.org/tax/beps.htm; OECD, Action Plan on Base Erosion and Profit Shifting (OECD 2013), Inter-
national Organizations’ Documentation IBFD, also available at www.oecd.org/tax/beps.htm.
141 Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent
companies and subsidiaries of different Member States, OJ L 225 (1990), EU Law IBFD [hereinafter Parent-Subsidiary
Directive (90/435)].
142 Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of
parent companies and subsidiaries of different Member States, OJ L 345, 29 Dec. 2011, EU Law IBFD, recently amended by
Directive 2013/13/EU [hereinafter Parent-Subsidiary Directive (2011/96)]
45
van den Hurk
sidiary Directive (90/435).143 There is therefore a link to the Action Plan to strengthen
the fight against tax evasion, published in December 2012.144 The question is, however,
whether or not the proposed amendments are effective and suitable.
4.2. The amendments: an audacious plan
4.2.1. Introductory remarks
The Commission wants to end the application of the Parent-Subsidiary Directive

(90/435) to hybrid loans. If the Parent-Subsidiary Directive (90/435) were not to be
amended, remuneration paid in respect of loans issued in Member State A could be
deductible, as it would qualify as interest in the Member State of the payor, while re-
muneration received in Member State B could be exempt, as, in the Member State of
the payee, it would be considered to be a participation benefit. The Commission also
wants to introduce a GAAR into the Parent-Subsidiary Directive (90/435), i.e. a general
definition of abuse to enhance clarity and uniformity.
The proposed amendments are quite extensive. It should also be noted that some Mem-
ber States have statutory rules in place to exempt revenue derived from hybrid loans,145
while in others such issues are dealt with through the system created by court decisions
or administrative rulings.
Implementing an anti-abuse rule is more complicated, as the national legislation of

some Member States contains principles, concepts or provisions that go beyond what
the Commission proposes. It is intended that the Member States would uniformly im-
plement the GAAR as proposed by the Commission. So, once harmonization was in
place, national anti-abuse rules could be circumvented by invoking the direct effect of
the revised Parent-Subsidiary Directive (2011/96). All in all, in the author’s opinion,
the Commission’s proposals are not well designed and the chances of the amendments
being accepted are questionable, as it is unlikely that all 28 Member States will want
143 European Commission, Commission Staff Working Document, SWD (2013) 474 final.
144 European Commission, Communication from the Commission to the European Parliament and the Council: An Action
Plan to strengthen the fight against tax fraud and tax evasion, COM(2012) 722 final (6 Dec. 2012), EU Law IBFD.
145 For example, the Netherlands.
46
to implement all of them.146 The situation with Switzerland further complicates mat-
ters. Switzerland has concluded an agreement with the European Union, which states
that the Parent-Subsidiary Directive applies to structures between the Member States
and Switzerland.147 But rather than referring to the scope of the current or the amen-
ded Parent-Subsidiary Directive, the agreement refers to the original Directive, dating
from 1990. The text of the agreement provides no possibility for a later version of the
Parent-Subsidiary Directive to be included within its scope. The Member States would
probably find it difficult to accept that the possibility to facilitate a hybrid loan for tax
purposes could continue to apply since Switzerland could be used to “facilitate” such
financing.148
This article first provides an overview of the proposed amendments, following which it
discusses the probability of their successful implementation.
4.2.2. Hybrid loans
A. The current position
Some Member States have rules under which loans are re-qualified as capital contri-
butions. As a result, income from such loans is, according to civil law is, regarded as
dividend under tax law. In certain Member States, such income is also exempt under a
participation regime or a ruling to this effect that may be concluded with the tax au-
thorities.149
This position may differ from the tax qualification in the Member States of the borro-
wing party, which may allow deduction of the interest paid. The Commission wishes
to amend the Parent-Subsidiary Directive (90/435), so that this income would not be
146 See, for example, letter IFZ/2014/88U of former State Secretary F.H.H. Weekers of 27 January 2014 to the President
of the Senate of the States General. One of the issues he discusses is the amendment of the Parent Subsidiary Directive
(90/435) as proposed by the European Commission.
147 Agreement between the European Community and the Swiss Confederation providing for measures equivalent to those
laid down in Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments
(26 Oct. 2004), EU Law IBFD. See especially art. 15.
148 Member States will be hesitant to apply article 15 of the agreement referred to in supra n. 147 if the consequence is that
Switzerland can still exempt interest from hybrid loans.
149 For example, Luxembourg.
47
van den Hurk
exempt if a deduction was possible for tax purposes in the Member State of the debtor.
This would deal with mismatches resulting from hybrid loans. Of the different amend-
ments proposed, this one would seem to have the best chance of being accepted. One
of the reasons is the current political climate. In which it would be difficult to oppose
such an idea. With all the discussions regarding fairer tax legislation to prevent mul-
tinational enterprises (MNEs) from taking advantage of mismatches in international
transactions, none of the Member States could reasonably oppose implementing this
proposal. Such mismatches are, after all, also targeted by the BEPS framework. As the
SWD also demonstrates, all of the Member States, bar one, would adopt this proposal.
One Member State (Luxembourg) is neutral, although the author does not think that
Luxembourg would veto the amendment.
B. What approach should be adopted?
The Commission did not take an easy route, i.e. there was a “consultation”150 and the
Code of Conduct Group151 considered the best way to rectify the adverse effects of
hybrid mismatches (double non-taxation). The Member State of the payor could, of
course, follow the qualification of the Member State of the payee. The opposite is also
an option. The Code of Conduct Group opted for the latter. Accordingly, the Member
State of the payee would follow the qualification of the Member State of the payor and
double non-taxation would no longer be possible.
The lack in the current Parent-Subsidiary Directive (90/435) of a link between the
Member State of the payee and Member State of the payor makes it possible to ge-
nerate a benefit. Such a benefit arises if a loan is considered to be a hybrid from the
perspective of the Member State of the payee, i.e. it has the character of a loan, while
other Member States regard the related income to be a dividend. And, subject to all of
the criteria of the Parent-Subsidiary Directive (90/435) being fulfilled, the dividend is
exempt. No requalification for tax purposes in the Member State of the payor takes
place and the reimbursement paid, i.e. the interest, continues to be deductible for tax
purposes. According to the Commission, this is undesirable.
150 European Commission, supra n. 143, at p. 5.

151 The EU Finance Ministers established the Code of Conduct Group (Business Taxation) at a Council meeting on 9 March
1998 to assess the tax measures that may fall within the scope of the Code of Conduct for business taxation.
48
The Commission, therefore, formulated the following three alternative proposals regar-
ding these planning opportunities:
»» alternative 1: do nothing;
»» alternative 2: amend matters so that remuneration paid that is deductible in the
member state of the payor is excluded from deduction in the member state of
the payee;
»» alternative 3: amend matters so that the exemption does not apply to profits that
are deductible in the source Member State.
Alternative 1 needs no mention, as obviously, doing nothing is always an option. The

difference between alternatives 2 and 3 is that the latter includes the obligation of im-
plementation.152 This would make alternative 3 the only viable option. Either that or
doing nothing, in which case commissioning the report was unnecessary.
The Commission’s preference for alternative 3 is obvious. Why? Simply because this
would be the most effective option to realize its tax policy, i.e. the prevention of double
non-taxation when hybrid loans are used.153 Likewise, the Commission assumes that
the introduction of alternative 3 would have a positive effect on the tax revenues of
the Member States. Undoubtedly, this would ultimately be correct, but the author can
imagine this would not necessarily apply to Member States, such as Luxembourg and
the Netherlands. Nevertheless, from an international perspective, double non-taxation
should clearly be prevented.
152 The Commission Staff Working Document, supra n. 143, refers to alternatives 0, 1 and 2.
153 In the author‘s view, this is, effectively, the sole alternative. Any other alternative would imply a continuation of differen-
ces among Member States, which would be detrimental to the character of the single internal market.
49
van den Hurk
C. Does the new Parent-Subsidiary Directive (2011/96) suffice?
Article 4(1) of the proposed new Parent-Subsidiary Directive (2011/96) reads as fol-
lows:

„Where a parent company or its permanent establishment, by virtue of the association
of the parent company with its subsidiary, receives distributed profits, the Member Sta-
te of the parent company and the Member State of its permanent establishment shall,
except when the subsidiary is liquidated, either:
a) refrain from taxing such profits; or

b) tax such profits while authorising the parent company and the permanent estab-
lishment to deduct from the amount of tax due that fraction of the corporation
tax related to those profits and paid by the subsidiary and any lower-tier subsidiary,
subject to the condition that at each tier a company and its lower-tier subsidiary fall
within the definitions laid down in Article 2 and meet the requirements provided
for in Article 3, up to the limit of the amount of the corresponding tax due.
This is very simple, sufficiently capturing the intention of the Commission. The Mem-
ber State of the payee would follow the Member State of the payor. This sounds good,
considering the international developments as exemplified in the OECD BEPS report.
Still, the author feels that the change is unsatisfactory. Why? Because it solves only
one side of the problem. It would be gratifying to see companies within the European
Union no longer being able to take advantage of double non-taxation. It has, after
all, been decided to create an internal market similar to that of an individual Member
State. It is a good thing that this would be resolved. However, there are still many situ-
ations where, in similar circumstances, double taxation can (partly) arise. And if a level
playing field within the European Union is really desired, such situations should also
be eliminated. The current proposal is too one-sided and, therefore, too limited. Any
situation in which the holding company provides a loan to the operating company and
in which this loan has equity features may, broadly, give rise to a situation of double
non-taxation. Similarly, a situation may arise in which the creditor Member State does
fully tax the income from the loan but the interest on the debtor loan cannot be deduc-
ted either, or, at least, not in full, or it may be deducted at an effectively lower tax rate
than commonly applicable in that Member State, as it relates to a situation that may be
50
qualified as tax avoidance. The reasons for this frequently involve interest payments
to associated parties, while the loan is considered not to be fully at arm’s length. The
author provides some examples of this in section E. But, first it is necessary to discuss
the question of whether or not, if it were desirable to capture all of these possibilities
in a single regulation, the Parent-Subsidiary Directive (90/435) is a suitable instrument
for doing so (see section D).
D. Has the Parent-Subsidiary Directive’s “sell by” passed?
Is the Parent-Subsidiary Directive (2011/96) the appropriate instrument to resolve a

situation where the interest in the Member State of the payor is not fully deducted, but
where there is a complete “pick-up” of the interest in the Member State of the payee?
This may be where the limits of the acquis communautaire within corporate income ta-
xation arise. Evidently, it is strange that interest is dealt with in the Parent-Subsidiary
Directive (2011/96). However, the Commission feels that a hybrid loan should fall
within the ambit of the Parent-Subsidiary Directive (2011/96), even though a hybrid
loan is, for all intents and purposes, a loan. One reason for using the Parent-Subsidiary
Directive (2011/96) to resolve the hybrid loan issue may be the fact that the Interest
and Royalties Directive (2003/49)154 would appear to be even less suitable for this pur-
pose.155 Accordingly, the Commission has reverted to the Parent-Subsidiary Directive
(90/435). In author’s opinion, this is a weak position.
This article now considers a number of examples of the counterpart of double non-
taxation, i.e. double taxation (see section E). It turns out that the Commission did not
wish to resolve this issue by means of the Parent-Subsidiary Directive (2011/96). In the
author’s opinion, this is a missed opportunity. Both double non-taxation and double
taxation are evidence of flawed tax legislation as far as neutrality is concerned. And if
there are any “repairs” required with regard to harmonization, the author would suggest
that this be done correctly the first time, so that the measures have the same effect in
all of the Member States.
154 Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable interest and royalty payments
made between associated companies of different Member States, OJ L157 (2003), EU Law IBFD [hereinafter: Interest-
Royalties Directive (2003/49)].
155 DE: ECJ, 21 July 2011, Case C-397/09, Scheuten Solar Technology GmbH v. Finanzamt Gelsenkirchen-Süd, ECJ Case
Law IBFD.
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van den Hurk
It is evident that this should be done by way of a secondary legislative instrument. The
current system of two directives is no longer effective for three reasons. First, as there
are various types of hybrid situations, it is not always clear which of the two directives
should apply. Second, the requirements for shareholders with regard to the two direc-
tives differ. This is undesirable. Third, the Commission no longer wants the Parent-
Subsidiary Directive (90/435) to contain only minimum harmonization measures.156
Therefore, the author suggests replacing both directives with a single, neutral regulati-
on. As a regulation does not have to be implemented by the Member States, it has the
same effect in the whole European Union, which is a major benefit. In circumstances
in which Member States are no longer permitted any leeway in creating their own more
favourable policy, this would seem to be the best solution. It would also be necessary
to include situations of double taxation. Neutrality would, therefore, be at the heart of
the regulation.
A regulation is, in principle, not possible for direct taxes but since all Member States
have to agree on amendments to the Parent-Subsidiary Directive (90/435), they could
also agree on amendments to the Treaty on the Functioning of the European Union
(TFEU).157 If Member States really want a European tax policy, they should be able to
decide about the most effective way to implement it, keeping in mind the interests of
the players of the internal market, i.e. the companies.
However, the adjustments proposed reveal that the Commission has a different view
on this. The author does not know whether this is a deliberate choice or merely the
consequence of trying to arrive at a politically more acceptable alternative. That said,
and given the improbability of having a regulation in place, the two directives need
to be amended. Following the proposed amendments, the Parent-Subsidiary (90/435)
and the Interest and Royalties (2003/49) Directives could no longer be considered to
be appropriate support for companies if, tax revenue wise, the Member States were to
become overly greedy in cross-border situations. The proposed Parent-Subsidiary Di-
rective (2011/96) would, from now on, give rise to limitations. This simply seems the
wrong path to follow.
156 The current Directives set minimum rules for a country to observe, but those countries are free to go beyond that if
this enhances the functioning of the internal market. The amendments proposed are much stricter (for example, prohibition
to exempt income from hybrid loans) and should have the same wording in all Member States to create a level playing field.
157 Treaty on the Functioning of the European Union (TFEU) (consolidated version), OJ C83 (2010), EU Law IBFD.
52
In the remainder of this article, the author assumes that the current system of two
directives will be maintained. However, where appropriate and necessary, the author
suggests proposals to adapt the two directives and, therefore, to realize the same effect
as a regulation.
E. Examples of double taxation
Opening remarks
The Commission has decided to try to counter non-taxation, but it has failed to take
action against double taxation. Maybe the Commission is blind to this. The author, in
this section, sets out some examples to illustrate the sometimes completely obvious and
sometimes more nuanced forms of double taxation that may arise within a group of
companies. Most of these examples relate to specific provisions of national law that
permit the full deduction of interest paid to creditors. These examples of situations
where double taxation continues to exist are not exhaustive. In this respect, it should
be noted that the article solely focuses on double taxation that arises as the result of
treating interest deductions differently from the main rule.158
A Dutch example
One example relates to the application of a Dutch provision in the Wet op de vennootschaps-
belasting (Corporate Income Tax Law, Vpb) (1969), i.e. article 10a(3)(b).159 Under this rule,
a deduction for interest is denied if the loan is the consequence of a transaction, such as
a dividend distribution, but where the dividend is not paid, which has the effect that the
dividend becomes an interest-bearing loan. The provision, however, allows an interest
deduction in such situations if there is reasonable taxation in the other country, i.e. a 10%
tax. But, even if the tax rate in that country is more than 10%, the exception is not to be
granted if that tax is effectively not applied due to existing losses. In essence, the Nether-
lands “uses” foreign losses to avoid having to grant an interest deduction and apparently
assumes an improper use of a right. Assuming that the losses have effectively been rea-
lized in the other country, i.e. have not been „purchased“, the result is double taxation.
158 For example, thin capitalization.

159 NL: Wet op de vennootschapsbelasting (Vpb) [Corporate Income Tax Law] 1969, National Legislation IBFD.
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van den Hurk
Considering the internal market, it would be better if the Netherlands had no mirror-
image provision. From a Dutch perspective, it would have been consistent to exempt
interest received from another country that could not be deducted there due to a loss.
From a systematic point of view it is doubtful whether or not consideration should be
given to the tax rate when losses have been incurred. In such a situation, the author
would generally argue for refraining from taxation in the country of receipt because, as
a result of the losses, there is, effectively, no deduction.
A second Dutch example
Another example involves a situation envisaged in article 10a of the Vpb. In this situati-
on, due to the application of the Belgian notional interest deduction, the actual tax bur-
den falls below 10%. Assume that the effective tax rate is 5%. In these circumstances,
the current article 10a of the Vpb denies an interest deduction, even if this is matched
by partial taxation. Evidently, this does create double taxation. If the normal tax rate
in the country of the notional interest deduction is 35%, it would be reasonable to al-
low a 5/35th interest deduction. At the very least, it would make the Dutch regulation
(proportionally) neutral.
A third Dutch example
This example concerns the situation in which a foreign group company provides a
group loan with a term exceeding 10 years (an “article 10b loan”) to a Dutch subsidiary,
where the rate of interest on the loan is (too) low. If the loan qualifies as an article 10b
loan, the associated interest is not deductible. Nevertheless, in the country of the payee,
the lower interest paid, or even the higher interest if it can be considered to be at arm’s
length, is subject to taxation. Article 10b of the Vpb was enacted long ago to counter
mismatches in international transactions.160 In the author’s opinion, in this situation, it
is also clear that the country of the payee should adopt the approach of the country of
the payor and exempt the interest.
160 See Explanatory Memorandum, Parliamentary Documents II, 2005-2006, 30572, no. 3, p. 50.
54
A fourth imaginary example
This example relates to the situation in which a country’s tax system allows interest to
be deducted at normal rates, but where, subject to conditions, an exception to the main
rule applies. As a result, the interest can only be deducted in another box at a reduced
rate. From the perspective of the debtor country, this deviates from what is considered
to be common between independent third parties. As a result, the deduction in the
country of the payor is at a lower rate than the normal rate. This is the reason why not
all of the income should be subject to taxation. Once again, double taxation (partial or
not) remains. In the latter case, the author would argue for exchanging the disadvantage
in terms of the rate for a disadvantage in terms of the taxable base and to correct this
at the level of the creditor. This would, as far as possible, guarantee neutrality.
Potential amendments
To deal with the examples considered above, the proposed text of the Parent-Subsidiary
Directive (2011/96) could be supplemented by the following conditions: refrain from
taxing such profits to the extent that such profits are not deductible by the subsidiary
of the parent company;
»» however, if such profits are deductible at a lower rate or burden than the normal
rate or burden, profits will be exempted at lr/rr or lb/rb × profits;161
»» however, if such profits are fully deductible but do not result in any cash flow
benefit in the current year, profits will be exempted to the extent that the subsi-
diary can demonstrate that these deductions will not result in cash flow benefits
in the future.
161 Rr = regular rate; rb = regular burden; lr = lower rate; and lb = lower burden
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van den Hurk
Yet another example
And still not all of the relevant situations have been considered. Diagram 1 sets out an
example of a regularly occurring issue in respect of which, as yet, current EU law has
no solution. It concerns situations where the debtor Member State has thin capitaliza-
tion legislation, as a result of which interest is partly non-deductible. Such interest con-
tinues to be interest in the source Member State and is, therefore, taxed in the creditor
Member State.
Diagram 1: Thin capitalization example
Holding company
NL BV
Loan
Operating
company D GmbH
This looks like a perfectly ordinary situation in which the holding company provides a
loan to the operating company, but in respect of which not all interest on the loan is
deductible, as the subsidiary has been excessively financed by the loan. Consequently,
this is not a hybrid loan, but, rather, a normal loan. The result is, however, that the com-
pany is excessively financed in the Member State of the payor. Accordingly, the interest
received by the holding company is subject to tax in the hands of this company. As the
subsidiary has been excessively financed by a loan, the interest in Germany cannot be
fully deducted.
This situation would initially appear to be covered by the Parent-Subsidiary Directive

(90/435) or the Interest and Royalties Directive (2003/49), or perhaps even by the
Dutch participation exemption under article 13(4)(b) of the Vpb. This could not be
further from the truth. The non-deductible interest is simply taxed in the Netherlands,
as it does not relate to a hybrid loan. As it is, both Member States deem the loan to be
a full loan. Germany, though, deems part of the interest to be non-deductible, as too
much debt capital has been used to finance the operating company. The result could be
56
the following. According to Germany, the excessive financing means that the debt-equi-
ty ratio is not at arm’s length. A mutual agreement procedure (MAP) would, therefore,
have to be initiated between Germany and the Netherlands to prevent double taxation
from arising as a result of the denial of the interest deduction. The Netherlands could
take the position that the MAP need not apply, as it could not be used to determine the
correct debt-capital allocation, but would, rather, be linked more to the correct reim-
bursement amount of interest. This is, after all, not the result of an allocation rule in a
tax treaty. And even if these Member States could arrive at a solution under a MAP, this
would still take many years. If popular belief dictates that the Parent-Subsidiary Direc-
tive (90/435) should be amended to reflect to modern times, i.e. to avoid double non-
taxation, the author thinks that, likewise, it should also be used to eliminate double taxa-
tion. And here too, it is illogical to resolve these issues by way of the Parent-Subsidiary
Directive (90/435), but unfortunately the acquis communautaire offers no alternatives.
Further potential amendments
The situation outlined above is the reason why a few further paragraphs should be
added to the Parent-Subsidiary Directive (2011/96). The full article would, therefore,
read as follows:
a) refrain from taxing such profits to the extent that such profits are not deductible by
the subsidiary of the parent company;
»» however, if such profits are deductible at a lower rate or burden than the normal
rate or burden, profits will be exempted at lr/rr or lb/rb × profits;
»» h
owever, if such profits are fully deductible but do not result in any cash flow
benefit in the current year, profits will be exempted to the extent that the subsi-
diary can demonstrate that these deductions will not result in cash flow benefits
in the future.
b) Profits as described under (a) include not only interest from a hybrid loan but all
interest not deductible by the subsidiary of the parent company or any related com-
pany from the parent company, provided that all criteria of the Directive are met.
c) “Associated company” means any company that, directly or indirectly, holds at least
10% of the shares of the first company.
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F. A final problem: Switzerland
Although Switzerland is not a Member State, a bilateral agreement has been concluded
between the European Union and Switzerland, under which both agree on a number
of rights and obligations.162 This has been supplemented with an article in the Savings
Agreement between the European Union and Switzerland that effectively makes the
Parent-Subsidiary (90/435) and the Interest and Royalties (2003/49) Directives appli-
cable in relation to Switzerland.163 However, rather than being based on the latest versi-
on so of these Directives, the Savings Agreement relates to the initial versions of both
Directives. This is due to its application being based on an agreement according to
international law and the bilateral Savings Agreement between the European Union and
Switzerland would have to be renewed each time a directive is amended.
If the elimination of the mismatch following the use of hybrid financing is not included
in the new version of the Savings Agreement with Switzerland,164 Switzerland would
have a significant tax advantage, i.e. the only state on the European continent, surroun-
ded by Member States, with the ability to offer financing companies the opportunity to
exempt income from hybrid loans. The Swiss courts may not go along with this, but the
author, nevertheless, thinks that such an option should be blocked ab initio.
4.2.3. Interim conclusions
Nobody would oppose closing down ways for companies to obtain an “easy to get”
double dip through the use of a hybrid loan. The question is whether or not this should
be done via the Parent-Subsidiary Directive (90/435), as a hybrid loan is still a real loan
under the laws of many Member States. The impossibility of dealing with this in the
Interest and Royalties Directive (2003/49) reveals that the system of directives is far
from perfect. This unsatisfactory result would be acceptable if, in addition to situations
of double non-taxation, double taxation was also neutralized. Unfortunately, this is not
the case.
162 Potential consequences of the Swiss referendum of 9 February 2014 are disregarded here.
163 See supra n. 147.
164 And preferably with other neighbouring third states with which the European Union has concluded Savings Agreements
(Andorra, Liechtenstein, Monaco and San Marino).
58
4.3. The GAAR: a bridge too far?
In addition to hybrid loans, the proposed Parent-Subsidiary Directive (2011/96) also

includes the introduction of a GAAR. The Commission considers this to be necessary,
given the developments regarding BEPS. In this regard, it appears that the Commission
wants to implement at EU level what the OECD has proposed, but in their enthusiasm
to take the lead in this aspect of tax policy, neither of the two organizations seems to
be thinking about the question as to whether a GAAR would be an appropriate solution
and whether there might be more effective methods of countering abuse.
4.3.2. The Commission’s proposal
As with the hybrid loans, the Commission has formulated three alternatives regarding
the introduction of a GAAR, which are referred to as options 0, 1 and 2 (options 1, 2
and 3 in this article). These are as follows:
»» option 1: do nothing;
»» option 2: update the current anti-abuse rule in the Parent-Subsidiary Directive
(90/435) in light of the 2012 Recommendation on aggressive tax planning,165
with the Member States being able to choose whether or not the GAAR would
be implemented; and
»» option 3: update the current anti-abuse rule in the Parent-Subsidiary Directive
(90/435) in light of the 2012 Recommendation on aggressive tax planning and
make their implementation mandatory.
The Commission’s choice for option 3 is, again, unsurprising, as this would make it
possible to apply the anti-abuse concept across the European Union without the op-
tion of “Directive shopping”. By definition, “abuse” is about applying a rule in a way
that the legislature had not intended. The laws in the 28 Member States are far from
165 Recommendation on aggressive tax planning, C(2012) 8806 final (6 Dec. 2012), available at http://ec.europa.eu/taxati-
on_customs/resources/documents/taxation/tax_fraud_evasion/c_2012_8806_en.pdf.
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van den Hurk
harmonized. As the Member States are unwilling to agree on a harmonization of the

rules, harmonization of the exception to such rules is unlikely to be accepted. Such an
approach is most likely to fail.
The Commission is trying to prevent companies from using intermediate holding com-
panies in Member States with more liberal laws than other Member States. However,
ending the option to use a more favourable system of another Member State, means
ending one of the most important aspects of the internal market, i.e. the ability of
companies to use the “cheapest alternative”. In other words, Member States should be
able to compete with each other within the European Union - something that would be
impossible under the proposed amendments.
The Commission refers to other reasons in favour of a mandatory implementation of

a GAAR. These are broadly that such a policy would be in line with the proposals on
the Common Consolidated Corporate Tax Base (CCCTB) and the financial transac-
tions tax (FTT).166 The only question that the author would want to see answered is
why the existence of a GAAR in these two proposals is a good reason to include this
in the Parent-Subsidiary Directive (90/435). Even if this were different, the character
of the CCCTB, which is based on “formulary apportionment”, is so different from the
Parent-Subsidiary Directive (90/435) that, while a GAAR may be entirely suitable for
the CCCTB, it is anomalous with regard to a traditional system, such as that on which
the Parent-Subsidiary Directive (90/435) is based. This is even more so with regard to
the FTT.
4.3.3. The text of the GAAR
The anti-abuse rule in article 1(2) of the Parent-Subsidiary Directive (90/435) cur-
rently reads as follows: „This Directive shall not preclude the application of domestic
or agreement-based provisions required for the prevention of fraud or abuse (emphasis
added).“
166 Proposal for a Council Directive Implementing Enhanced Cooperation in the Area of Financial Transaction Tax art. 13,
COM(2013) 71 final, EU Law IBFD; European Commission, Proposal for a Council Directive on a Common Consolidated
Corporate Tax Base (CCCTB) art. 80, COM(2011)121/4, EU Law IBFD.
60
This would be replaced by the following amended text: „This Directive shall not pre-
clude the application of domestic or agreement-based provisions required for the pre-
vention of tax evasion (emphasis added).“
The difference between the old and new wording lies in phrase “fraud or abuse”, which
would be replaced by the term “tax evasion”. The author considers this to be an extra-
ordinary amendment, if only because the Dutch translation of the term “tax evasion”
relates to situations that, effectively, constitute abuse of the law. So far, there is no dif-
ference between the term “tax evasion” and the phrase “fraud or abuse”. Obviously, in
the event of “avoidance”, i.e. the use of the law to avoid taxation, there may likewise be
situations that could be legitimate from a legal perspective, but unacceptable for other
reasons. Why the phrase “fraud and abuse” has to be replaced by the term “tax evasion”
is incomprehensible to the author.
Consequently, after article 1 of the Parent-Subsidiary Directive (90/435), a new article

1a would be introduced, which would read as follows:
Article 1a:
1. Member States shall withdraw the benefit of this directive in the case of an artificial
arrangement or an artificial series of arrangements which has been put into place
for the essential purpose of obtaining an improper tax advantage under this directi-
ve and which defeats the object, spirit and purpose of the tax provisions invoked.
2. A transaction, scheme, action, operation, agreement, understanding, promise, or

undertaking is an artificial arrangement or a part of an artificial series of arrange-
ments where it does not reflect economic reality. In determining whether an ar-
rangement or series of arrangements is artificial, Member States shall ascertain, in
particular, whether they involve one or more of the following situations:
(a) the legal characterisation of the individual steps which an arrangement consists
of is inconsistent with the legal substance of the arrangement as a whole;
(b) the arrangement is carried out in a manner which would not ordinarily be used
in a reasonable business conduct;
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van den Hurk
(c) the arrangement includes elements which have the effect of offsetting or cancel-
ling each other;
(d) the transactions concluded are circular in nature;
(e) the arrangement results in a significant tax benefit which is not reflected in the
business risks undertaken by the taxpayer or its cash flows.
With regard to this text, the author thinks that this simply represents a “European legis-
lature” noting a few abuse-related elements so as to suggest artificiality. The words “in
particular” indicate that this is not an exhaustive enumeration. But if the enumeration
is considered from the perspective of the Commission, i.e. the prevention of “Directive
shopping”, the authors fails to understand this.
4.3.4. Resistance on the part of the Member States
Officially, little is known about what the Member States think about the introduction
of a GAAR. The Commission’s reports, however, reveal that the Member States are, to
say the least, divided. The main problem is that the proposal does not lead to a mini-
mum harmonization (as the current Parent-Subsidiary Directive (90/435)), but, rather,
to full harmonization. In the author’s opinion, the Member States will have an obliga-
tion to include the GAAR in their legislation. There is no room for a less far-reaching
standard, while, in view of equal treatment, an even stricter standard within a Member
State seems to be out of the question. If a Member State were to implement a stric-
ter GAAR, companies whose transactions fall within the scope of the revised Parent-
Subsidiary Directive (2011/96), could reasonably be expected to invoke the Directive.
One example involves Germany, a Member State with strict anti-abuse provisions. The
consequence of implementing an EU GAAR, if this is less strict than that desired
by Germany, is that companies could invoke the provision of the Parent-Subsidiary
Directive (2011/96). Such a situation is something that many Member States do not
want and is the consequence of different legal systems. A tax system can be considered
to be a part of a social infrastructure. Germany’s tax system is complicated. Germany
has, according to reports, already announced that it would not to accept the GAAR, as
certain situations that are now covered by their anti-abuse regulations could be avoided
once the GAAR has been implemented by invoking the Parent-Subsidiary Directive
(2011/96).167
167 See supra n. 143
62
Reportedly, the Netherlands is also opposed to the GAAR,168 which is something that
the author can well imagine. The Dutch tax system is complicated and the legislature
has opted for a system of closed standards. They are onerous and quite detailed.169
Any situation beyond the scope of the new GAAR, but covered by specific corporate
income tax provisions intended to counter erosion, could be subverted by invoking
the provision of the amended Parent-Subsidiary Directive (2011/96). Accordingly, the
author would suspect that the GAAR initiative is doomed to fail, at least from a Dutch
perspective.
The question is, therefore, is the GAAR necessary at all? The case law of the Court
of Justice of the European Union (ECJ) on abuse of the law is available to taxpayers
and there is even more extensive case law on substance. These issues are discussed in
section 4.3.6.
4.3.5. “Directive shopping”
The proposed Parent-Subsidiary Directive (2011/96) seems to relate to what is referred

to as “Directive shopping”. But can this be dealt with by means of amendments to the
Parent-Subsidiary Directive (90/435)? In this regard, the following example in Diagram
2 should be considered.
Diagram 2: „Directive shopping“ example
United
States
United
States
The
Netherlands
Spain
Spain
168 See Letter of the Secretary of State, IFZ/ 2014/88U, supra n. 146
169 See, for example, arts. 13l, 15ad, 10a, 10b Vpb.
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van den Hurk
In the situation on the left hand side of Diagram 2, the dividend distribution from
Spain to the United States is subject to a 15% withholding tax. However, once a Dutch
intermediate holding company has been added to the structure (the situation on the
right hand side), under the Parent-Subsidiary Directive (90/435), a 0% withholding
tax applies to the dividend distribution from Spain to the Netherlands and again a 0%
withholding tax applies to the dividend distribution from the Netherlands to the United
States.170
Examining the text of the amended Parent-Subsidiary Directive (2011/96), the author
fails to envisage how this situation could be captured and dealt with by the revised
text. Of course, if the Dutch intermediate holding company were a pure “letterbox
company”, the author can certainly think of dealing with that situation. But what if the
Dutch intermediate holding company performs services for all of the operating com-
panies? In such circumstances, it would seem obvious to the author that the structure
is predominantly motivated by business reasons. And to then ask the question why this
intermediate holding company is, for example, established in the Netherlands would
seem to go against everything that the European Union stands for. Companies are free
to choose a Member States in which to operate. The only test that arises where the
protection of the EU fundamental freedoms is involved is whether or not, in this case,
the right of establishment has been applied and, in particular, that the choice for a given
Member State is not wholly artificial. Any harmonization proposal that goes against
these fundamental rights should be rejected. And yet, the Commission seems to want
to counter just this type of situation. This may have to do with pressure from Member
States worried by the erosion of withholding taxes, as companies can make use of an
EU intermediate holding company.
The author feels that any situations where such withholding taxes are avoided due to the
application of the revised Parent-Subsidiary Directive (2011/96) could be countered
by appealing to the, in his opinion excellent, case law of the ECJ, especially, as concep-
tually, the ECJ has adopted a sufficiently dynamic approach. Member States could be
assured that they have sufficient protection against abuse because of the cooperation
between national legal institutions and the ECJ. Any cases of doubt should be brought
before the courts. This is the argument against an “open standard” solution because
170 Denmark is one of the few countries that apply a beneficial owner test under the Parent-Subsidiary Directive (90/435).
See section 3.6.1.
64
the taxpayer has to pay for this. However, countering abuse within the European Union
as such is a principle that cannot simply be dealt with within a closed standard, as the
core of abuse lies in the myriad of written and unwritten rules of the tax system of
various Member States.171 The 28 Member States have 28 different tax systems, all with
their own written and unwritten rules for preventing the national legislative system
from being used improperly. This is the most likely reason why the Commission states
it would be difficult to get its proposal accepted. The Commission should not regret
this, as current EU and international legislation offers sufficient ways to counter abuse.
4.3.6. ECJ case law
A. Opening comments
The author does not intend to provide an extensive analysis of the concept of abuse
in EU law.172 If any reference is made to abuse and EU law in this respect, it could
reasonably be assumed that this relates to the extent to which requirements can be set
in respect of substance. Many Member States do not appreciate companies interpo-
sing a company between a company in their Member State and the holding company
elsewhere in the world in a Member State with no or a very limited withholding tax on
dividend distributions.
Some Member States counter this through the statutory requirement that the benefits
of the Parent-Subsidiary Directive (90/435) are only available if the party receiving the
dividends is the ultimate beneficiary. Other Member States apply the current article
1(2) of the Parent-Subsidiary Directive (90/435) and counter the structure by invoking
abuse. An example of the first group of Member States is Denmark. This involved a
case where a Danish subsidiary was initially held directly by a company established on
Bermuda, after which a Cypriot company was interposed. The Cypriot company had
no employees, no office space and no costs. The Danish tax authorities lost the case,
right up in the highest Danish court, as the Parent-Subsidiary Directive (90/435) does
171 The Netherlands uses the concept of “fraus legis” as an open standard principle to deal with situations that are not
covered by the legislation.
172 See, for example, Tom O’Shea, CFC Reforms in the UK - Some EU Law Comments, 13 EC Tax Journal, p. 65 (2012).
65
van den Hurk
not contain a beneficial ownership condition.173 This was the correct conclusion in the
author’s opinion, as this is the consequence of harmonization. While article 1(2) of the
Parent-Subsidiary Directive (90/435) does offer possibilities to counter abuse, benefi-
cial ownership provisions, in the author’s opinion, go way beyond this.
The author has serious doubts as to whether or not Denmark would benefit from the
proposed amendment to the Parent-Subsidiary Directive (2011/96). In many respects,
the author thinks that it would be more prudent to make the ECJ paramount in any dis-
cussion or a situation like that in Denmark. In this respect, the author briefly discusses
two relevant ECJ decisions in sections B and C below, that are useful with regard to the
question whether substance requirements should be set. These respectively concern the
well-known fishery cases (Cases C-3/87,174 C-216/87175 and C-221/89176) and Cadbury
Schweppes (Case C-196/04),177 which is more familiar to tax lawyers. Both (sets of) cases
relate to the situation in which it was thought that the nexus of a company was relatively
meagre. On a first reading, the cases would seem to be contradictory. In the fishery
cases, the ECJ accepted a reasonable number of substance requirements, whereas, in
Cadbury Schweppes, the criteria went no further than “not being wholly artificial”. The
type of activity seems, however, to be partly decisive with regard to the extent of subs-
tance required to obtain protection from, in these cases, the freedom of establishment.
B. The fishery cases (quota hopping)
The three quota-hoping cases dealt with the issue of whether or not Spanish fishermen
who had incorporated a UK company had the same rights to operate in UK territorial
waters as UK fishermen. The UK did not accept this and decided that a number of
requirements would have to be satisfied to gain access to UK waters. The Spanish fis-
hermen had assumed that simply establishing a company in the UK would be sufficient.
173 J. Bundgaard; Danish Case Law Developments on Beneficial Ownership; Tax N. Intl. p. 63 (1 Oct. 2012).
174 UK: ECJ, 14 Dec. 1989, Case C-3/87, The Queen v. Ministry of Agriculture, Fisheries and Food, ex parte Agegate Ltd.
175 UK: ECJ, 14 Dec. 1989, Case C-216/87, The Queen v. Ministry of Agriculture, Fisheries and Food, ex parte Jaderow
Ltd and Others.
176 UK: ECJ, 25 July 1991, Case C-221/89, The Queen v. The Secretary of State for Transport, ex parte Factortame and
Others.
177 UK: ECJ, 12 Sep. 2006, Case C-196/04, Cadbury Schweppes plc, Cadbury Schweppes Overseas Ltd v. Commissioners
of Inland Revenue, ECJ Case Law IBFD.
66
They were wrong. The following can, therefore, be inferred from the ECJ case law
regarding the requirements that a government can or cannot impose.
Three requirements were acceptable:
(1) 75% or more of the fishermen had to be nationals of a Member State;
(2) the captain and his crew had to pay social security contributions to the UK; and
(3) the fishery activities had to start in the United Kingdom or 50% of the catch had to
be supplied directly to the United Kingdom, or the boat had to moor at least four
times a year in the United Kingdom with at least 15 days between each arrival.
It was, however, not acceptable that 75% of the crew had to consist of individuals who
were resident in the UK. The ECJ, therefore held that the UK Merchant Shipping Act
infringed on EU law, as its provisions were disproportionate compared with its objec-
tive, i.e. to protect quotas.
What can be concluded from these cases? It is apparently possible to set requirements
for foreign parties who wish to use the resources of other Member States. Why does
the author consider this case to be important? Because a comparison can be drawn
with using another resource of a Member State, i.e. tax treaties. What is the difference?
Member States with favourable tax treaties agree to apply such tax treaties, while Mem-
ber States that consequently experience a reduction in tax revenue would disagree.
The fishery cases concerned the UK, which viewed its “fishery treasure” as being trans-
ferred to Spanish fishermen, whereas, with regard to “Directive shopping”, it was Spain
that saw its tax revenues reducing. In any case, the similarity is that the “losing” Member
State thinks that certain requirements can be established before erosion of income can
be accepted. In fact, such requirements can be compared to substance requirements.
The receiving Member State does not have to simply grant a resident of another Mem-
ber State the same rights as its own residents. Requirements may be set to the extent
that the foreign residents have ties with, in this case, the UK economy.
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van den Hurk
C. Cadbury Schweppes
This case concerned tax planning since an Irish subsidiary was used to prevent group
profits from effectively being taxed at the level of the UK head office when they were
generated. At that time, the United Kingdom applied a credit system and controlled
foreign company (CFC) legislation, as a result of which the undistributed profits of
low-taxed, profitable subsidiaries were taxed in the hands of the UK parent company.
The ECJ held that the United Kingdom could not simply ignore the existence of the
Irish subsidiary, except if such an entity were “wholly artificial”. Effectively, the conclu-
sion is that, with regard to “letterbox companies?”, their existence could be ignored as
a result of the application of UK CFC legislation.
D. The difference between the cases
Obviously, one case involved the question of whether a Member State could “discrimi-
nate” against “inbound operations”, while the other concerned the question whether
“outbound operations” could be ignored. In the author’’ opinion, this difference is not
that relevant.
The primary issue would seem to be that the ECJ set no fixed substance requirements,
but, rather, adapted the requirements depending on the operations in question. Such
an approach appears to be logical. With regard to the discussion on the GAAR, it is
also very important. This is because the question is, for example, is there a difference
between a company establishing an intermediate holding company in the Netherlands
to cluster holding activities and the application of tax treaties where such a company is
involved in energy extraction operations in the Netherlands? Apparently the ECJ consi-
ders the operations of a company in a Member State before answering the question as
to what a company can be expected to fulfil in terms of substance in that Member State.
In other words, far from being a static concept as might be assumed from the dictum in
Cadbury Schweppes, substance is a far more dynamic concept, as operations are assessed
before it can be decided what should be the nexus.
The ECJ has apparently been very deft in dealing with artificial structures. The question
is, therefore, whether or not the ECJ should have the final say regarding structures of
abuse. In this respect, the author believes that the ECJ is quite capable of providing
68
indicators for national courts to use as part of their assessment as to whether or not
national legislation is contrary to EU law and to what extent.
The author likewise believes that the ECJ should be employed as an arbitrator outside
the European Union with regard to the assessment of abuse. In this regard, the ECJ has
extensive experience, greater than any other court, of dealing with different national tax
systems and economic components.
4.3.7. Interim conclusion
Every situation is different. This is why the author has always argued for working with
open standards. The interpretation of the GAAR as proposed by the Commission is
static and, therefore, in the author’s opinion, will not work. The Member States also
have reasons to dislike such an approach. The author’s suggestion is, therefore, not to
incorporate a GAAR into directives but to allow the ECJ case law to be paramount.
4.4. Conclusions
A directive is always the second best option, in view of article 288 TFEU which pro-
vides that a regulation shall have general application and shall be binding in its entirety
and directly applicable in all Member States, whereas a directive shall be binding, as to
the result to be achieved, upon each Member State to which it is addressed, but shall
leave to the national authorities the choice of form and methods.
The article is set out in this order for a good reason. The ultimate form of harmoni-
zation is a regulation, which directly applies in all Member States without having to be
implemented (in fact, implementation is not even permitted). Given the prohibition on
implementation, a regulation applies in the same way in all Member States.
A directive is the most well-known form of harmonization and is particularly suitable

to fit harmonization to national circumstances. As a directive must always be imple-
mented in national legislation, it offers the possibility to align the measure with prevai-
ling needs. Member States are allowed to go beyond what a directive prescribes. The
Netherlands did this with a 5% participation criterion instead of the 25% prescribed in
the Parent-Subsidiary Directive (90/435).
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van den Hurk
The amended Parent-Subsidiary Directive (2011/96) does not, however, resemble a

harmonization measure that is intended to raise the rules to a given minimum level.
Both the GAAR and the prescribed method of dealing with hybrid loans reveal the
Commission’s desire to realize full harmonization. In the author’s opinion, the amended
Parent-Subsidiary Directive (2011/96) is not the right instrument to do this.
The author considers the first part of the proposed amended Parent-Subsidiary Directi-
ve (2011/96) to be definitely unilateral, which is one of the reasons why it should not be
adopted. Should the Commission and (ultimately) the Member States decide that dou-
ble taxation also should be dealt with, it would an excellent opportunity to do it right in
one step, but this would mean replacing the Parent-Subsidiary Directive (90/435) with
a regulation.178 This would be the best way forward in the European Commission’s plan
for a serious tax policy. Even the fact that current rules should be changed in order to
make this possible does not change the author‘s opinion. For both amendments to be
implemented, unanimity among all Member States is required. Therefore, the European
Commission should seriously consider the creation of a solid basis for tax policy in line
with the necessary development of a strong internal market for companies.
Finally, the author’s assessment of the second part of the proposed amended Parent-
Subsidiary Directive (2011/96) is entirely negative. The author considers this amend-
ment both unnecessary and infeasible. In this respect, it would be better to allow more
extensive cooperation between the national courts and the ECJ.
178 This approach could also be applied with regard to the Interest-Royalties Directive (2003/49).
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BEPS & TPD
5. The BEPS Action Plan and Transfer Pricing

Documentation requirements: an EU perspective
by Eduardo Gracia and Lorena Viñas179
5.1. Introduction
According to Action 13 of the OECD Action Plan on Base Erosion and Profit Shifting
(the „BEPS Action Plan“), dated 19 July 2013, transfer pricing documentation require-
ments must be re-examined by September 2014.
This Action, which requires changes to Chapter V of the OECD Transfer Pricing Gui-
delines, as related to transfer pricing documentation, is directed to develop transfer pri-
cing documentation rules to enhance transparency for tax administrations, while taking
into account the compliance costs for business.
In the context of revisions to the abovementioned Guidelines, the OECD prepared a

Discussion Draft on Transfer Pricing Documentation and CbC (country-by-country)
Reporting (the „Discussion Draft“), dated 30 January 2014. It is proposed that the text
of Chapter V of the OECD Transfer Pricing Guidelines be deleted in its entirety and
replaced with the text of the proposed Discussion Draft, which was submitted for
comment by interested parties by 23 February 2014.
An analysis of the most relevant content of the OECD Discussion Draft will be car-
ried out in sections 5.5. to after which a comparison will be made with the EU TPD
requirements in 5.6.
5.2. Objectives and scope of the OECD transfer pricing documentation

(TPD) requirements
The OECD Discussion Draft begins by identifying the three objectives for requiring
transfer pricing documentation, which are the following:
179 Ashurst LLP, Madrid.
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Gracia & Viñas
»» to provide tax administrations with the information necessary to conduct an

informed transfer pricing risk assessment;
»» to ensure that taxpayers give appropriate consideration to transfer pricing re-
quirements in establishing prices and other conditions for transactions between
associated enterprises and in reporting the income derived from such transac-
tions in their tax returns;
»» and to provide tax administrations with the information that they require in or-
der to conduct an appropriately thorough audit of the transfer pricing practices
of entities subject to tax in their jurisdiction.
The OECD points out that these objectives should be considered in designing approp-
riate transfer pricing documentation requirements.
As for the scope of the Discussion Draft, despite the Draft‘s recommendation that tax
authorities should limit the documentation to be provided by small and medium-sized
enterprises, the Draft does not make it clear which companies or groups should be
bound by the documentation requirements.
It is important to take into account that if one of the most important rationales is to
help tax authorities assess risks, the documentation requirements should be confined to
where the risks are, which are usually large corporations.
5.3. Compliance issues
The Discussion Draft also provides guidance for the development of transfer pricing
documentation rules so that transfer pricing compliance is more straight-forward and
more consistent among countries, while at the same time providing tax administrations
with more focused and useful information for transfer pricing risk assessments and
audits.
A first guidance concerns contemporaneous documentation. The Discussion Draft sets

out that the determination of the transfer price for tax purposes must be based on
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BEPS & TPD
information reasonably available at the time of the determination of the transfer price.
According to the OECD, the best practice is to require that both the master file and the
local file be prepared no later than the due date for the filing of the tax return for the
fiscal year in question. However, as the CbC Reporting is based on financial statements,
best practice would extend the date for its completion to one year following the last day
of the fiscal year of the ultimate parent entity of the MNE group.
A second guidance concerns materiality. The Discussion Draft recommends that only
those transactions between associated enterprises which are sufficiently material (re-
ferring to the most important transactions) will require full documentation. As a con-
sequence, specific materiality thresholds must be provided. The OECD clarifies that
such materiality thresholds must take into account the size and the nature of the local
economy, the importance of the MNE group in that economy, and the size and nature
of local operating entities, in addition to the overall size and nature of the MNE group.
However, there are a couple of issues in relation to materiality that raise doubts. On the
one hand, it is not clear whether materiality must be determined taking into account
the transaction or the group. If the OECD wants to require materiality from transac-
tions, then it should put a high number as a minimum threshold for a transaction to
be controlled or documented in this way. Otherwise, we are going to oblige too many
companies to do useless paperwork. However, if the OECD wants to determine mate-
riality taking into account the group, then it should use a common definition of small
and medium-sized enterprise in order to avoid distortions in the market (and, in parti-
cular, in the EU Single Market), since otherwise entry barriers would be established (as
a result of applying a „race to the bottom“ approach by each country) or compliance
costs would be increased. It is recommended that the existing European definition of
small and medium-sized enterprise is used for these purposes, at least within the EU
boundaries.
On the other hand, doubts have arisen on how the materiality provision interacts with
the Discussion Draft‘s recommendations on documentation-related penalties, since it is
not clear how such interaction is going to take place. For example, if a taxpayer makes
a judgment call that a transaction is not material and does not need documentation, a
possible outcome is that a tax auditor could agree that there is no adjustment needed,
but disagree that the transaction was not material for purely documentation reasons and
hold that it should have been documented, thereby triggering documentation-related
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Gracia & Viñas
penalties (see also in this regard the fifth guidance below). Regarding this second issue,
it is considered that to the extent the Discussion Draft or the final document in Chapter
V of the OECD Transfer Pricing Guidelines is not more explicit about it, documen-
tation-related penalties will become the norm, just for the fact that the documentation
was not produced, even if it is useless. This outcome (i.e. the fact that documentation-
related penalties are not linked to the results of the adjustments) would be contrary to
the objective of limiting the compliance costs for taxpayers which inspires the Discus-
sion Draft.
A third guidance concerns frequency of documentation updates. According to the

OECD Discussion Draft, it is recommended that transfer pricing documentation be
periodically reviewed. In general, both the master file and the local file should be revie-
wed and updated annually. However, in order to simplify compliance burdens on taxpa-
yers, tax administrations may determine that the searches in databases for comparables
supporting part of the local file be updated every three years rather than annually. This
update of comparables every three years should be assessed positively, since it responds
to the standard practice of most EU tax authorities in APA negotiations and is a pure
reflection of the fact that database compilers need not less than that period of time to
gather sufficient and credible financial information from a number of different indus-
tries, countries and regions to refresh their content in a meaningful manner, given the
different delays and deadlines to file corporate and financial information across them.
A fourth guidance concerns language. The Discussion Draft recommends that as a ge-
neral matter the master file be prepared and submitted to all tax administrations in Eng-
lish. Notwithstanding this general guidance, translations of relevant parts of the master
file may be requested if necessary. The general concern about this issue is how certain
tax administrations will react given their traditional opposition to the use of foreign
languages and especially the courts of specific jurisdictions in which all the documents
must be prepared in the corresponding local language. Regarding the local file, the Dis-
cussion Draft states that it should probably be prepared in the relevant local language.
A fifth guidance concerns documentation-related penalties. The Discussion Draft states

that the tax authorities will not impose penalties if taxpayers make a reasonable ef-
fort, in good faith, to demonstrate through reliable documentation that their controlled
transactions satisfy the arm‘s-length principle („ALP“), and, in particular, if taxpayers
fail to submit data to which the MNE did not have access. However, a decision not to
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BEPS & TPD
impose penalties in those cases does not mean that adjustments cannot be made to
income where prices are not consistent with the ALP. It is important to point out that
the Discussion Draft does not clarify what happens if the taxpayer does not produce
documentation and there is no adjustment. As a consequence, doubt as to whether it is
possible to impose sanctions in such cases arises. In this regard, the question is to what
extent the documentation must be an obligation by itself or a burden of proof. It would
be convenient that documentation obligations were linked to the risk of tax shifting
which would be tackled by way of the transfer pricing legislation.
In relation to the documentation-related penalties, it is also unclear what effect the im-
position of transfer pricing penalties should have on access to treaty mutual agreement
procedures (MAP) and to the EU Arbitration Convention (the „AC“) taking into ac-
count that taxpayers who have incurred a „serious penalty“ are denied access to the lat-
ter. The problem is that there is no common definition of a „serious penalty“ or, rather,
no common definition of what kind of infringements should prevent the taxpayer from
availing of ways to avoid economic international double taxation, not even among the
28 EU Member States. Having 28 different definitions in the AC means there is a very
big loophole that can give rise to an inability to avoid double taxation in cases where
penalties were imposed at the will of just one tax authority in a given tax audit.
5.4. A two-tiered approach to TPD
According to the OECD Discussion Draft, in order to achieve the three objectives pre-
viously mentioned, countries should adopt a standardised two-tier structure consisting
of: (i) a master file containing standardised information relevant for all MNE group
members; and (ii) a local file referring specifically to material transactions of the local
taxpayer.
The master file should contain common standardised information relevant for all MNE
group members. Its purpose is to provide a complete picture of the global business, fi-
nancial reporting, debt structure, tax situation and the allocation of the MNE‘s income,
economic activity and tax payments so as to assist tax administrations in evaluating the
presence of significant transfer pricing risks. As mentioned above in the compliance
issues section, the OECD recommends that the master file is prepared and submitted
to all tax administrations in English. The information contained in the master file can
75
Gracia & Viñas
be grouped in the following five categories:
»» Organisational structure.
»» Description of MNE’s business(es).
»» MNE’s intangibles.
»» MNE’s intercompany financial activities.
»» M
NE’s financial and tax positions: This part of the master file on financial and
tax positions includes the CbC Reporting of certain information, although it is
questioned whether it should be a completely separate document.
The information required in the local file supplements the master file and it is focused
on information relevant to the transfer pricing analysis related to transactions taking
place between a local country affiliate and associated enterprises in different countries
and which are material in the context of the local country‘s tax system. As also menti-
oned above in the compliance issues section, the OECD recommends that the local file
is prepared in the relevant local language. The local file should include information on:
»» The local entity (mainly, information on the management structure of the local
entity and a local organization chart).
»» The controlled transactions in which the local entity is involved.
»» Relevant financial information (e.g. the annual local entity financial accounts for
the fiscal year concerned).
5.5. Country by Country (CbC) Reporting
The CbC Reporting is the great novelty that the Discussion Draft has introduced in the
OECD transfer pricing documentation. The proposed CbC Reporting template includes
certain information relating to the global allocation of profits, the taxes paid and certain
indicators of the location of economic activity (tangible assets, number of employees and
total employee expense) among countries in which the MNE group operates. It also inclu-
des information on the capital and accumulated earnings as well as aggregate amounts of
certain categories of payments and receipts between associated enterprises.
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BEPS & TPD
It must be mentioned that a number of difficult technical questions arise in designing

the country-by-country template. It is also important to highlight that the CBC Re-
porting is an important step and that it has many positive aspects, although it also has
some risks and certain negative aspects as will be explained below:
A widely held positive aspect is that CBC Reporting (and in general all exchange of
information on Advance Pricing Agreements (APAs) and rulings on this matter) will
contribute to an end of harmful tax competition between tax administrations because
it fosters transparency and, as a consequence, transparency of practices not in line with
the market. It is also considered that the CbC Reporting is a document that could be
useful for the purposes of the common consolidated corporate tax base.
One of the big risks of the proposed CbC Reporting template as it is designed now,
is that by requiring more information than is strictly necessary to assess a taxpayer‘s
transaction, some tax authorities could be encouraged to ask for a larger share of tax re-
venue simply by comparing the amount of the taxes paid elsewhere (a kind of so-called
„formulary apportionment“) instead of by rightly applying the arm‘s length principle.
When we developed the EU Transfer Pricing Documentation by means of the Code of
Conduct on Transfer Pricing Documentation for Associated Enterprises in the EU that
was adopted by the Council of the EU in June 2006, we tried to avoid this „temptation“
by all means.
In addition, the CbC Reporting can also be questioned for other reasons. First there are
confidentiality concerns and, in this sense, it would be desirable that the information in
the CbC Reporting remains only in the hands of the parent company and be exchanged
only under Double Taxation Conventions with a confidentiality clause. Second, there
are concerns over the large amount of time and resources that would be needed to
compile the information required for the proposed CbC Reporting template. Third,
concerns have arisen over the design of the template, because the proposal seems to be
targeted at multinational enterprises. In this sense, it is important to take into account
that there are many other sorts of investors, such as funds, partnerships or management
companies which are not contemplated in the design of the proposed CbC Reporting
template.
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Gracia & Viñas
5.6. OECD TPD versus EU TPD
The OECD TPD is very inspired by the Code of Conduct on Transfer Pricing Do-
cumentation for Associated Enterprises in the EU of 27 June 2006 (the „Code of
Conduct“), which concerns the implementation of standardised and partially centra-
lized transfer pricing documentation for associated enterprises at European level (EU
TPD) and entails a move, at the level of the OECD, from a liberal system to a much
more standardised one with prescriptive obligations, which is a generalisation of what
the Code of Conduct had recommended at European level (but which not all Member
States have adopted as compulsory).
As a result of the above, we see, a similarity between the OECD TPD and the EU TPD
in that the OECD TPD follows a two-tier structure (consisting of a master file and a local
file) as does the EU TPD, which also consists of two main parts: (i) the master file (con-
taining relevant general information on the MNE‘s group); and (ii) the country-specific
documentation (containing similar information to the OECD local file).
As to the content, the most basic and significant difference between the OECD TPD
and the EU TPD is in the CbC Reporting, which is not required at European level and
which implies an increase in compliance work by MNEs because it entails the provision
of a significant amount of information.
5.7. Conclusions
Action 13 of the BEPS Action Plan will clearly entail a significant move against profit
shifting by raising substantially the standard of transparency among States and MNEs.
Having said that, it is also important to remember first of all that the scope of the infor-
mation that must be provided in order to comply with the documentation obligations
should be fine-tuned and be less prescriptive, since, as it is designed now, too much
information is required, which is not always relevant and appropriate.
Secondly, it should be underlined that confidentiality of the information is a must and

one of the key factors when deciding about who should have access to it.
Finally, there is also need to review the scope of obligations on documentation and the
consequences of not complying with them, both for penalty purposes and for accessing
relief of international double taxation.
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BEPS & Dispute Resolution
6. BEPS and International Dispute Resolution
by Hans Mooij180
6.1. The winding path of international tax dispute resolution through

history
The first model income tax treaty ever, that of the League of Nations of 1928, referred
treaty parties for the settlement of their disputes to technical advice, either binding or
non-binding, by a technical body to be appointed by the League of Nations Council, or
alternatively to arbitration or even adjudication by the Permanent Court of Internatio-
nal Justice – the predecessor, until 1946, of the present International Court of Justice
of the Peace Palace at The Hague.181 The commentary to the model explains that this
rule was taken from other international conventions.182 This was the first and by all me-
ans courageous attempt by an official body to professionalise international tax dispute
resolution up to the standard customary in other areas of international public law. Until
then dispute resolution under the small body of tax treaties present was characterised
by a non-binding, negotiation based process between contracting states following a
first example in the 1899 income tax treaty between Austria and Prussia.183 The other
institution of the Peace Palace, the Permanent Court of Arbitration, had arbitrated an
international tax dispute, on the Japanese House Tax, as early as in 1905.184 The Per-
manent Court of Arbitration was uniquely created, in 1899, to facilitate the resolution
of inter-state disputes of all kinds, including tax disputes. Indeed, there were a few tax
treaties concluded between the World Wars I and II which to a more or lesser extent
followed the League of Nations 1928 model in this respect; notably the 1926 income
tax treaty between the United Kingdom and Ireland and the 1934 succession duties tax
180 Hans Mooij is an independent international tax expert and a former tax treaty negotiator and competent authority for
the Netherlands government. He co-operates in a recent initiative to establish an international tribunal for arbitration and
mediation in tax matters with the Permanent Court of Arbitration of the Peace Palace at The Hague. This article is partly
based on a presentation he gave at the CFE Forum 2014 held in Brussels on 27 March 2014.
181 Article 14 of the League of Nations 1928 model.
182 Commentary on Article 14. Reference was made in particular to the 1923 Geneva Convention for the Simplification of
Customs Formalities.
183 Zvi Altman, Dispute Resolution under Tax Treaties, p. 13-14 (IBFD, 2005).
184 A multi-party arbitration, under the Japanese treaties of commerce and navigation with the United Kingdom, Germany,
and France, respectively; see: Katerina Perrou, Taxpayer Participation in Tax Treaty Dispute Resolution, p. 8-12 (IBFD, 2014).
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Mooij
treaty between Czechoslovakia and Romania.185 And there were some disputes on tax
treaty interpretation known to have actually been referred by authorities to international
adjudicating bodies.186
Both the institutions of the Peace Palace and international arbitration and adjudication
fell out of grace with the tax authorities, however, after World War II. The League of
Nations 1943 Mexico and 1946 London model tax treaties deleted all references to third
party technical advice, arbitration or adjudication with no other explanation than that
no specific cases had arisen to justify them any longer187 - which as matter of fact may
have been true given the still limited number of tax treaties and equally rare disputes
at the time. It appears more relevant however that in view of the League of Nations’
inability to prevent war, trust in international organisations and international courts had
significantly weakened,188 and authorities were keen to restore their full jurisdiction over
their disputes – to become “judges in their own cause”.189
Instead, these later models introduced a taxpayer “right to appeal” with the authorities
against any double taxation that would be suffered despite the provisions of the treaty
– the “specific case” MAP procedure of Article 25(1) of the OECD model income tax
treaty as we know it now.190 The 1963 OECD model subsequently explained the obliga-
tion for authorities to resolve double taxation on such an appeal by a taxpayer as merely
including an obligation to “endeavour”, but not necessarily reach a resolution.191 This
restriction on the authorities’ obligation, however much inevitable due to the limits on
the discretionary powers authorities may face,192 considerably watered down the value
of the taxpayer acquired right to intervene in the authorities’ disputes. Also, the 1963
OECD model introduced a possibility for authorities to communicate by way of a joint
185 Zvi Altman, idem, p. 16-18.

186 A. R. Albrecht, The Enforcement of Taxation under International Law, British Year Book of International Law Vol. 30
(1953), p. 454-474.
187 Procès-Verbaux of the UN Economic Council, 4th year, 9th session, Supplement No. 2, Report of the Fiscal Commis-
sion, p. 9.
188 Zvi Altman, idem, p. 56-57.
189 Michael Edwardes-Ker, Tax Treaty Interpretation, Ch. 2.02, p. 3 (In-Depth Publishing, 1994-terminated).
190 Article XVI of the League of Nations 1943 Mexico model and Article XVII of the 1946 London model, respectively.
191 Article 25(2) of the OECD model.
192 Klaus Vogel on Double Taxation Conventions, Art. 25 supra m.nos. 76ff, p. 1368 -1369 (Kluwer Law International,
1997).
80
commission of authorities’ representatives.193 While the relevant OECD Commentary

advises to entrust the chairmanship of each delegation to a high official or experienced
judge, to facilitate reaching an agreement through their participation,194 this is a far cry
from the independent third party technical advice envisaged under the League of Na-
tions 1928 model.
In the decades to follow the authorities gradually had to admit again, under pressure
from international business, but some also honestly and out of their own initiative,
that all too often MAP remains unsuccessful, and that circumstances might necessitate
calling on third party expert assistance to advance the resolution of a dispute. The Eu-
ropean Arbitration Convention of 1990195 established pseudo arbitration for intra-Eu-
ropean transfer pricing disputes as an automatic extension of MAP after the elapse of
a 2 years time period – only “pseudo” and not real, as arbitration panels comprise not
just independent experts but representatives from the authorities as well, and arbitrati-
on awards serve only as “advice” – the very term - from which authorities may deviate
if they wish. Much more than the joint commission under the MAP provisions of the
OECD model, this pseudo arbitration recalls the instrument of the technical advisory
body under the League of Nations 1928 model. The European Convention should
be understood primarily as an incentive for the authorities to speed up pending MAP
consultations. Hence no request from the taxpayer is needed for the arbitration stage to
kick in, whereas it does require the taxpayer’s consent to prolong the MAP stage beyond
the 2-year period. Next to the Convention there is a Code of conduct addressing a few
details of the mode of application of both the arbitration and the preceding MAP.196
By contrast, the OECD concentrated its effort first on attempting to improve the func-
tioning of MAP by issuing in 2007 basic guidance for authorities, and taxpayers, on
how a MAP might be organised and conducted generally – the MEMAP Manual.197 Fol-
lowing the same track, the U.N. Tax Committee in 2012 published its own MAP Gui-

194 Klaus Vogel on Double Taxation Conventions, Art. 25 supra m.nos. 76ff, p. 1368 -1369 (Kluwer Law International,
1997).
195 Convention 90/436/EEC of 23 July 1990 on the elimination of double taxation in connection with the adjustment of
profits of associated enterprises.
196 Revised Code of Conduct for the effective implementation of the Convention on the elimination of double taxation in
connection with the adjustment of profits of associated enterprises, Official Journal C 322/1, 30 December 2009.
197 Manual on Effective Mutual Agreement Procedures (OECD, 2007).
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de.198 Both MEMAP and the U.N. Guide fall short however of guidance as to how dis-
putes might best be brought to an actual resolution. In the 2008 Update of the OECD
model income tax treaty, at last, a taxpayer right was supplemented allowing a taxpayer
to claim from authorities that they submit for arbitration – and this is mandatory arbi-
tration, as opposed to the non-committal of MAP - any dispute left unresolved after 2
years of MAP consultation.199 200 Illogically, the OECD model does not recognise the
taxpayer, while claimant, also as party to the arbitration, thus reducing its role to that of
a mere whistle-blower. Who should administer the arbitration and under which proce-
dural rules is left entirely to the discretion of the authorities. The OECD Commentary
only offers a sample of rules which authorities may or may not agree,201 thus leaving the
choice of arbitrators and applicable rules as a potential source of further dispute and an
instrument for authorities to stalemate or otherwise frustrate arbitration proceedings.
This touches on a misunderstanding I often encounter among tax experts, i.e. that
elaborate rules would slow down the arbitration process. The opposite is true however.
Elaborate rules protect arbitration from being delayed or ultimately frustrated by a lack
of a pre-established solution for whatever question or difficulty over the applicable
procedure as there may occur in practice. Also, rules are necessary for determining the
scope of arbitration, thereby protecting parties against any unwanted scenarios and se-
curing those scenarios and modalities which parties do want.202 Referring the agreement
of procedural rules to the level of administration saves the treaty negotiators time and
effort, and as a matter of fact competent authorities being more familiar with dispute
resolution techniques may be better equipped indeed to do that job. But to postpone
discussions on applicable rules until an actual dispute has arisen, when parties are in a
mood to haggle over anything (rules included) or not to agree any rules at all, is a recipe
for failure. E.g. the OECD sample includes a streamlined arbitration process based on
the “last best offer” or “final offer” approach, “baseball arbitration” as it is more com-
198 Guide to the Mutual Agreement Procedure Under Tax Treaties (United Nations, 2012).
200 For a detailed analysis of the differences between the respective approaches to arbitration under the OECD model and
the European Convention see: Monique van Herksen and David Fraser, Comparative Analysis: Arbitration Procedures for
Handling Tax Controversy, International Transfer Pricing Journal, May/June 2009, p. 2-19.
201 Annex to the Commentary on Article 25 of the OECD model.
202 Michael Lennard, Transfer Pricing Arbitration as an Option for Developing Countries, p. 186-187, Intertax, 2014 (Vol.
42), Issue 3.
82
monly named.203 This approach is believed to work faster than the ordinary arbitration
procedure. But the gain in time is not due to less (or even an absence of) procedural
rules. Rather it results from limitations imposed on disputing parties which are required
to make a bid for a solution, and on arbitrators who may only choose from these two
bids rather than assess the disputed matter by their own judgment.
The arbitration clause which was recently included as an alternative provision into the
U.N. model income tax treaty,204 via its 2011 update, is a step back from the OECD
clause. The U.N. model, again, denies taxpayers any right to claim arbitration. It is the
authorities on either side which may request for arbitration after the elapse of 3 years of
MAP consultations, 1 year more than under the OECD model and the EU Arbitration
Convention. Neither is the arbitral decision immediately binding on the authorities,
leaving them another 6 months to agree a different solution. In that, the U.N. model
resembles more the EU Arbitration Convention. The U.N. model does not provide for
any fixed procedural rules either, but like the OECD model it offers only a sample of
rules which authorities might agree to adopt.205
Under the U.N. sample baseball arbitration is the preferred approach for reason of its
lower cost.206 It is fairly obvious why the U.N. model had to take a more cautious route
to arbitration than the OECD model. Developing countries tend to be suspicious about
tax arbitration, mostly so it seems because they consider it an OECD invention, and
thus part of the old order of rule-makers and rule-takers.207 Objectively however there
is little reason for much reluctance to the extent that developing countries are usually
the weaker party in MAP discussions with developed countries, due to their lesser eco-
nomic and political powers and technical ability, and arbitration would often be the only
option for them to obtain a fair and expert judgment of their disputes. Also, arbitration
would relieve the burden from their domestic court system which is usually ill-develo-
ped and untrained to deal with tax issues, if there is a court system in place at all. The
Commentary on the U.N. model lists a number of pros as well as cons for developing
203 Para. 6 of the OECD sample, and para. 2 and 3 of the commentary thereon.
204 Article 25(5), Alternative B, of the U.N. model.
205 Annex to the Commentary on Article 25(5), Alternative B, of the UN model.
206 Para. 6 of the U.N. sample.
207 Michael Lennard, idem, p. 184.
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countries to take into account when considering tax arbitration.208
Now, what will be the next move? Will authorities revert en masse to arbitration and to
the trusted facility of the Peace Palace, as was originally envisaged under the League of
Nations 1928 model? There was never real ground for any political objections that tax
arbitration would threaten national sovereignty to begin with, and in fact such reserva-
tions are waning, just as they have long been overcome in the area of investment arbit-
ration.209 And for those few authorities barred by genuine constitutional restraints from
going to arbitration,210 mediation and other techniques for alternative dispute resolution
present a viable alternative.211 That taxation is not too technical a substance matter to
arbitrate on is shown by the occasional investment arbitrations dealing with tax issues.212
But of course a specialised tax tribunal would be much better placed for the task than
any tribunal for commercial arbitration, if authorities would ever contemplate turning
to a commercial tribunal for their mutual disputes. There is definitely increased scope
for severe and complex disputes which are difficult or even impossible to resolve any-
more by the authorities among themselves, due to the vast expansion in recent years of
the global tax treaties network, the often huge budgetary interests involved in particular
in the area of transfer pricing, and the unfortunate yet seemingly unstoppable tendency
towards less convergent interpretations of treaty provisions by local authorities and
courts in OECD non-member as well as member states.213
The recent initiative I have the honour to be involved in, to establish a specialised tribu-
nal for arbitration and mediation in tax matters with the Permanent Court of Arbitrati-
on, is certainly meant to anticipate on such development. I will elaborate on details of
this initiative in part 6.3 of this contribution.
208 Para. 4 and 5 of the Commentary on Article 25 of the U.N. model.

209 See: William W. Park and David R. Tillinghast, Income Tax Treaty Arbitration, p. 11/12 (IFA/Sdu, 2004).
210 Para. 65 of the Commentary on Article 25 of the OECD model.
211 William W. Park and David R. Tillinghast, idem, p. 12.
212 See e.g.: L.J. de Heer and P.R.C. Kraan, Legal Protection in International Tax Disputes – How Investment Protection
Agreements Address Arbitration, European Taxation, 2012 (Vol. 52), No.1, p. 3-10.
213 See: Wim F.G. Wijnen, Some Thoughts on Convergence and Tax Treaty Interpretation, Bulletin for International Taxa-
tion, 2013 (Vol. 67), No. 11, p. 575-579.
84
6.2. OECD BEPS Action No. 14: a last call for more effective
dispute resolution
But first there is the OECD BEPS Action No. 14 waiting to materialise.214
Action No. 14 calls for improvement of the effectiveness of MAP, as well as for sup-
plementing existing MAP provisions in tax treaties with a mandatory and binding ar-
bitration provision (both in order to ensure certainty and predictability for business)
as a complement to the actions proper to counter base erosion and profit shifting.215
Measures are scheduled to be finalised by September 2015, as one of least priorities.216
Whereas the BEPS Action Plan was released as early as in July 2013, to date no guidance
whatsoever has been disclosed however regarding the actual content of any follow-up
work.
Cynics may want to characterise Action No. 14 as a price to pay for the acceptance of
BEPS by the multinational enterprises. True is that business traditionally is in favour
of mandatory arbitration, doubting whether authorities will genuinely try to resolve
disputes and inherent double taxation through MAP. I only recall here the consecutive
statements to this effect (1984, 2000, and 2002) by the International Chamber of Com-
merce.217 It was pressure from business that eventually pushed European member states
to bring their Arbitration Convention to life, and that made the majority of OECD
members persuade the OECD to include mandatory arbitration into its model income
tax treaty. Now there is a general expectation that more disputes will arise due to BEPS
and its focus on strengthening national tax claims of different states which will inevita-
bly overlap, most notably in the areas of hybrid entities, limitations of interest and other
deductions, transfer pricing in relation to intangibles and domestic anti-avoidance rules.
Also, there are likely to be more cases barred from MAP or arbitration on account of
214 Action Plan on Base Erosion and Profit Shifting, p. 23 (OECD, 2013).
215 Action No. 14 literally reads: “Develop solutions to address obstacles that prevent countries from solving treaty-related
disputes under MAP, including the absence of arbitration provisions in most treaties and the fact that access to MAP and
arbitration may be denied in certain cases.”
216 Action Plan on Base Erosion and Profit Shifting, p. 34.
217 International Chamber of Commerce, The Resolution of International Tax Conflicts, Document 180/240 (ICC, 1984);
ICC, Document 180/483 of 3 May 2000, at: http://www.iccwbo.org/Advocacy-Codes-and-Rules/Document-centre/2000/
Arbitration-in-international-tax-matters; and ICC, Document 180/455 Rev. 2 of 6 February 2002, at: http://www.iccwbo.
org/Advocacy-Codes-and-Rules/Document-centre/2002/Arbitration-in-International-Tax-Matters--Bilateral-Convention-
Article.
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BEPS allegations over avoidance and abuse and penalties so imposed, whether justified
or not.218 Even the Tax Justice Network, which is not known to be business-friendly,
recognises this and admits a “clear need” to improve dispute settlement.219
As summarised by a report on a major U.S. tax conference earlier this year: “If the busi-
ness community does not publicly support Action 14, the resulting double taxation pro-
blems arising from a lack of multilateral coordination on enforcement of cross-border
disputes could make current concerns over stateless income appear insignificant.”220
Indeed, in response to the BEPS Action Plan, BIAC, while declaring its determina-
tion to engage constructively in the BEPS process, expressed its concern about an
increased risk of double taxation due to the new rules and said it was reassured by the
BEPS Action on MAP and arbitration.221 This feeling of reassurance may however
have been premature. I have no doubt that the OECD intentions to improve MAP and
further promote mandatory arbitration are honest, but it remains to be seen whether
the OECD manages to raise sufficient commitment from the authorities, and how far
the pressures of the BEPS agenda in general and its limited resources still permit the
OECD to advance on this particular issue which it has ranked already as of lower
priority. These two, commitment from the authorities and support from international
business, seem interdependent on each other. No initiative for an improvement of
international dispute resolution can carry much weight if it is not supported by inter-
national business. Otherwise there is insufficient incentive for authorities to invest. At
the same time international business has little interest in supporting any such initiative
if there is no clear indication from authorities first that they too are willing to commit
themselves, otherwise it would be pulling a dead horse. In that case multinational enter-
prises would probably continue to prefer solving their double taxation issues through
direct dealings with authorities.
218 Article 8(1) of the European Arbitration Convention; and para. 26 of both the Commentary on Article 25 of the OECD
model income tax treaty and the Commentary on Article 25 of the U.N. model income tax treaty.
219 Sol Picciotto, Can the OECD Mend The International Tax System?, Tax Notes International, September 16, 2013, p.
1112-1113. Mr Picciotto wrote this article in his capacity of senior adviser of the Tax Justice Network.
220 Mindy Herzfeld, Beyond BEPS: The Problem of Double Taxation, report on the Fourth Pacific Rim Tax Institute con-
ference on 30-31 January 2014, Tax Analysts, February 11, 2014.
221 BIAC, Letter of 24 October 2013 to Mr Mike Williams, Vice-Chair of the OECD Committee on Fiscal Affairs, and Mr
Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, at: http://www.biac.org/members/
tax/BEPS/24_October_2013_BIAC_Letter_to_OECD_on_BEPS.pdf
86
It is beyond any dispute that the functioning of MAP is troublesome. Recent OECD
statistics covering the period of 2006 to 2012 show a jump in the number of MAP cases
from some 2,300 to more than 4,000 as per the end of 2012, as well as of the average
cycle time of completed cases from just over 22 months to almost 25,5 months, and
these figures concern MAP cases between OECD member states alone.222 As it appears
the release of MEMAP in 2007 so far had little, if any, effect. Statistics of the EU Joint
Transfer Pricing Forum on the operation of the European Arbitration Convention are
in line with the OECD MAP statistics.223 EU data, to the extent available,224 show an
average time cycle of almost 28 months for MAP cases completed in 2012. Actually this
is less of a bad figure as it seems, considering that it concerns only transfer pricing cases
which as a rule are of greater complexity, both factually and technically, and thus require
more effort and time from the authorities than ordinary MAP cases. The EU statistics
also show a sharp rise of pending MAP cases, having peaked at some 850 as per the end
of 2012. More significant, however, is that from these 850 some 250 cases were initiated
in the same year 2012. This leads to the conclusion not only that authorities are not
successful in cleaning up old MAP cases, but also and more importantly, that taxpayers
are regaining trust to submit requests for new cases, instead of (exclusively) pursuing
domestic court procedures. I note in respect of the latter that in some states authorities
allow taxpayers access to MAP only on the condition that they give up the right to take
their case to a domestic court. This is a clear departure from the rule provided under
Article 25(1) of the OECD model income tax treaty that a MAP request may be filed
irrespective of the remedies provided under domestic law.
Of the pending MAP cases the EU statistics record some 325 cases to have exceeded
the 2-year time limit, so that these, as such, qualify for arbitration. Strikingly, however,
almost none actually went to arbitration. According to the 2012 statistics there were 2
arbitrations in progress, and another 5 cases about to be submitted for arbitration. Ad-
ded to the 2 arbitrations reportedly completed in the past,225 this shows a stunning low
figure of only 9 arbitrations under the European Convention over the entire period of
222 OECD, Mutual Agreement Procedure Statistics for 2012, at: http://www.oecd.org/ctp/dispute/mapstatistics2012.htm
223 European Commission, EU Joint Transfer Pricing Forum, Statistics on Pending Mutual Agreement Procedures (MAPs)
under the Arbitration Convention at the end of 2012, December 2013, at: http://ec.europa.eu/taxation_customs/resour-
ces/documents/taxation/company_tax/transfer_pricing/forum/jtpf/2013/jtpf_012_2013_en.pdf
224 Major member states including Germany, Italy and France failed to deliver data in this respect.
225 See: L. Hinnekens, European Arbitration Convention: Thoughts on its Principles, Procedures and First Experience, EC
Tax Review 2010 (Vol. 19), No. 3, p. 109-116.
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18 years – until 2013 - since the Convention took effect in 1995. The statistics report,
as the most important reason applicable in over 70 cases, that the taxpayers agreed to a
further extension of the MAP stage. One can well imagine that in some cases an agree-
ment between the authorities was at hand and considered worth waiting for. But it may
also be that taxpayers’ confidence in arbitration as it is organised under the Convention
is so low that they rather prefer the authorities to muddle along or alternatively with-
draw their MAP request altogether. For reason of its “pseudo” nature the arbitration
procedure provided under the Convention has been the subject of severe criticisms
right from its outset, with some denouncing it as “a fig leaf ”226 and some predicting
“a slow and lonesome death”.227 The functioning of the Arbitration Convention and
options for improvement is the subject of an on-going and hot debate within the EU
Joint Transfer Pricing Forum228 and now features on the agenda of the EU Platform
for Tax Good Governance as well.229 However, it is unclear whether European ambi-
tions extend to adjusting either the Arbitration Convention or its Code of conduct, or
to expanding the scope of tax arbitration to other areas than transfer pricing. This is
probably due to reservations from member states against transferring more sovereignty
to the EU. It were the same sovereignty concerns that caused member states to prefer
the instrument of a separate Convention over the initial proposal for a EU directive
presented as early as in 1976, and these concerns caused a long and painful delivery
process for the Arbitration Convention.
Nevertheless, using a multilateral treaty for tax arbitration with a geographic scope
beyond Europe, deserves further consideration. To date the IBFD Tax Treaties Da-
tabase turns out a meagre number of some 170 out of over 7,000 bilateral income
tax treaties concluded worldwide which contain an arbitration clause of some sort.
Moreover, many of these clauses still provide for arbitration only as an item for further
consideration in future or, alternatively, subject to agreement between the authorities
226 L. Hinnekens, idem, p.109.

227 F.C. de Hosson, The slow and lonesome death of the Arbitration Convention, Intertax 2003 (Vol. 31), No. 12, p. 482-
483.
228 Summary Record EU Joint Transfer Pricing Meeting 39, Brussels, 6 March 2014, item 4, at: http://ec.europa.eu/ta-
xation_customs/resources/documents/taxation/company_tax/transfer_pricing/forum/jtpf/2014/jtpf_003_2014_en.pdf
229 Summary Record Platform for Tax Good Governance 3, Brussels, 6 February 2014, item 8.1, at: http://ec.europa.
eu/taxation_customs/resources/documents/taxation/gen_info/good_governance_matters/platform/meeting_20140206/
summary_record.pdf
88
on a case-by-case basis, and are thus inherently unreliable.230 It might be argued that the
arbitration clause in the OECD model tax treaty exists only since 2008, and given time
for authorities to accept the concept of arbitration and implement it into their policies,
the number of arbitration clauses agreed will grow. Even so, it is obvious that it will
still take long before the number of arbitration clauses agreed reaches a truly substan-
tial number if this is to depend on bilateral initiatives only. Action 15 of the OECD
BEPS Action Plan considers a multilateral instrument “a promising way forward” as
a means to effect swift implementation of the measures resulting from its work.231 In
this respect Action 15 mentions various examples - changes to the definition of per-
manent establishment or to transfer pricing provisions, or the introduction of treaty
provisions relating to hybrid mismatches- but not arbitration. However, the multilateral
format would perfectly fit arbitration too, and even more so if the opportunity would
be used to agree uniform, transparent and binding arbitration procedures, and effective
governance to enforce their proper observance, vital elements which the present EU
Arbitration Convention and the OECD model income tax treaty are badly missing. In a
recent policy paper setting out the UK priorities for the BEPS project the UK Treasury
and Revenue Service, as one of the very first among authorities, took the bold position
to support both mandatory arbitration and a multilateral instrument.232 They pointed
out, and rightfully so, that the ability to deal with frequently arising multilateral disputes
in the area of transfer pricing, would be an additional advantage of such a multilateral
instrument.
At least some of the input under Action 14 may be expected to come from the MAP
Forum which the OECD Forum on Tax Administration established at the end of
2013.233 The MAP Forum is reported to be a permanent effort by the participating
authorities, currently from some 25 states, to improve MAP by identifying and sharing
best practices. This particular initiative deserves a warm welcome, first of all because
it is an effort which authorities have genuinely decided among themselves to take on,
and it is therefore not merely imposed by any higher and abstract levels of Government
230 Para. 14-16 of the Commentary on Article 25 of the U.N. model income tax treaty
231 Action Plan on Base Erosion and Profit Shifting, p. 23-24.
232 HM Treasury and HM Revenue & Customs, Tackling aggressive tax planning in the global economy: UK priorities for
the G20-OECD project for countering BEPS, March 2014, p. 34-35, at: in https://www.gov.uk/government/uploads/sys-
tem/uploads/attachment_data/file/293742/PU1651_BEPS_AA_-FINAL_v2.pdf
233 OECD Forum on Tax Administration, Work Programme 2013/14, at: http://www.oecd.org/site/ctpfta/ftaworkpro-
gramme201213.htm; and Tax Notes International, February 3, 2014, p. 418.
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or international bodies. This provides evidence that many authorities are still prepared
to assume, not just as a matter of lip service, responsibility for proper dispute settle-
ment. And indeed, such is their responsibility: the fact that authorities are not under
an actual obligation to resolve disputes should not serve as an excuse for them not
to bother much. Both OECD MEMAP Manual, U.N. MAP Guide and EU Code of
conduct are perfectly clear on this, instructing authorities that they “are obliged only to
use their best endeavours to reach an agreement”234, and that they “should make every
effort to reach a timely agreement on each issue submitted to the MAP”235, meaning “as
quickly as possible having regard to the complexity of the issues in the particular case
in question”.236
Some authorities have concluded elaborate administrative rules for their mutual MAP pro-
ceedings pursuant to the recommendation in this respect of the OECD MEMAP.237 Ex-
amples are the arrangements concluded by the U.S. authorities with the UK authorities,238
with the Netherlands authorities,239 and with the authorities of Australia, Canada and
Japan within the context of their PATA association.240 While apparently warranted by
numerous and frequent requests for MAP dispute settlement, understandable in view
of the intense economic relations between the states involved, such arrangements at the
same time illustrate authorities’ goodwill and sense of responsibility. I wholeheartedly
disagree with the suggestion that authorities would have some legitimate right to “veto”
any dispute settlement where this would lead to an unreasonable position from their per-
spective.241 If a once agreed treaty provision in practice produces results for a contracting
state which its authorities experience as too burdensome to accept, the proper way for
them to proceed is to have the provision amended through a renegotiation of the treaty,
and not to apply the provision differently from its clear wording or intended meaning, or
to deny its application at all. While taxpayers are of course the ultimate beneficiaries of
234 Para. 8.2 of the OECD MEMAP.

235 Para. 11 of the U.N. MAP Guide.
236 Article 6.1, supra (a), of the Revised Code of conduct to the EU European Arbitration Convention.
237 Best Practice No. 16 of the OECD MEMAP.
238 IR-2000-79, November 13, 2000, at: http://www.irs.gov/pub/irs-news/ir-00-79.pdf
239 IR-2003-116, October 7, 2003, at: http://www.irs.gov/uac/The-U.S.-and-The-Netherlands-Develop-New-Administrati-
ve-Arrangements-for-Mutual-Agreement-Procedure
240 MAP Operational Guidance for Member Countries of the Pacific Association of Tax Administrators (PATA), June 25,
2004, at: http://www.irs.gov/pub/irs-utl/pata_map_guidance_-_final.pdf
90
dispute resolution, it is wrong to think that authorities would themselves have no interest
in a resolution and for that reason would have little incentive to put serious effort into a
MAP. Residence states in any case have an immediate revenue interest, in that taxpayers
may attempt to credit or deduct unresolved foreign tax against their domestic tax, and of-
ten succeed in particular where they do not report the foreign tax as conflicting with a tax
treaty. Source states may even speculate on residence states to thus unilaterally resolve the
double tax, a beggar-my-neighbour policy. Both source and residence states may suffer
harm to their investment climate if their authorities recurrently leave tax disputes unre-
solved. Developing countries, usually heavily dependent on foreign investments, would
be most vulnerable in this respect. This impact on a country’s investment climate of
the question, whether or not it has facilities for effective dispute settlement in place and
whether or not its authorities are prepared to fully use them, must not be underestimated.
E.g. large numbers of unsettled MAP cases in India reportedly cause foreign investors to
reconsider planned investments there or even to leave the country altogether. Apparently
the Indian authorities now recognise this, since in a recent meeting with a BIAC delegati-
on they expressed their anxiousness to expedite the resolution of pending disputes and to
look for ways to minimise new ones arising.242 Reversely, investor host states that compete
for foreign investment holdings, can derive substantial benefit from offering effective tax
dispute settlement at international level, and in a much more acceptable manner than by
offering tax concessions. Some argue that the responsibility of authorities for effective
settlement of international tax disputes should to the same extent be mirrored by a taxpa-
yer right.243 I note that the European Parliament recently commissioned a study on arbit-
ration practices in general throughout the European Union and potential future measures,
to be completed by the end of 2014, which eventually might affect EU taxpayers as well.244
In any case improvement of dispute settlement under the OECD BEPS Action 14 would
tie in well with the current debate elsewhere on taxpayer rights charters. I refer especially
to the study conducted under the auspices of the CFE and its partner organisations,245
and the consultations by the European Commission on a “European Taxpayer’s Code”.246
242 See the BIAC Media Release of 1 March 2014 at: http://www.biac.org/comms/releases/2014/1403_BIAC_News_In-
dia_China_Tax_Meetings.pdf
243 Katerina Perrou, idem, p. 137.
244 Contract IP/C/JURI/IC/2013-047. See for further coverage e.g. at: http://kluwerarbitrationblog.com/
blog/2014/04/09/would-you-assist-us-in-guiding-the-european-parliament-in-its-future-actions-related-to-arbitration
245 Michael Cadesky, Ian Hayes, David Russell, Towards Greater Fairness in Taxation, A Model Taxpayer Charter, Prelimi-
nary report (AOTCA, CFE and STEP, 2012).
246 At: https://circabc.europa.eu/faces/jsp/extension/wai/navigation/container.jsp
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In order to identify any best practices one necessarily has to first identify the obstacles
to which such practices should respond. However, there is a total absence of informa-
tion on why MAP does not work in individual cases under both the OECD and the
EU statistics. I am not aware that any authorities anywhere actually disclose such infor-
mation to the public or even to their parliament. MAP is still very much a black box. It
is this lack of transparency which breeds mistrust among taxpayers, whether founded
or not. Mistrust that authorities do not spend much effort to actually reach solutions.
Or that authorities give higher priority to cases involving multinational enterprises over
those involving ordinary, small taxpayers in consideration of the political influence
multinationals are able to cast. Or that authorities use the large discretion tax treaties
attribute to them for resolving double taxation to favour multinationals in a manner
inconsistent with any attributive rules under the treaties. There may be some authorities
which actually commit such wrongs, and they of course should be concerned about
transparency. But otherwise which truth is so inconvenient to authorities that it would
be worth hiding? That authorities have disputes among each other, and that they find
them increasingly difficult to resolve in an amicable manner? But disputes are the daily
bread-and-butter of all areas of law, public or private, and it would only be strange if
this is any different for tax treaties. By contrast authorities could excuse themselves by
exposing the true causes for MAP failures – demonstrating that external causes, or the
other authorities, are to blame, as the case may be. It may be hoped that within the MAP
Forum, among their peers, authorities for once dare to be candid. This is another reason
why I believe the initiative of the MAP Forum deserves to be welcomed, at least for the
time being. But at the same time there is no reason to be overly optimistic. After all, au-
thorities while peers within the MAP Forum are each other’s opponents in actual MAP
cases. Why would they disclose their weaknesses to their opponents if they risk that this
might subsequently be used against them? Another issue is if the MAP Forum would
want to examine whether authorities in practice actually live up to its recommendations,
and whether authorities would allow the Forum to do so. Also this remains to be seen,
because member states‘ sovereignty in the area of tax administration has so far been
something almost sacred to the OECD. In any case the MAP Forum itself has not been
sharing any information on its functioning or programme with the public. It would be
a reassurance, both of its true intentions and its relevance, if the MAP Forum were to
decide on transparency at least in respect of its own work.
One can easily imagine various causes for MAP failures. The most obvious cause is a
lack of capacity or expertise on the side of the authorities. Such capacity lacks are felt
92
more painfully due to the sharp rise in number of MAP cases over the last years as
illustrated by OECD and EU statistics. At the same time however a certain practice
has developed among authorities to impose higher demands on taxpayers as to how
they should properly present a MAP request and contribute to MAP discussions by
providing additional information and giving presentations on their position to both
authorities.247 This saves authorities substantial and unnecessary work, and may speed
up the progress of MAP discussions, while, as a fortunate side effect for taxpayers, of-
fering them some opportunity to monitor or even steer the MAP process. Reinforcing
the competent authority function by adjusting priorities within the tax administration at
large can be a solution for developed countries availing of sufficient quantities of trai-
ned experts, but not for developing countries which usually employ little tax expertise
to begin with and would have to weigh such an investment of their precious human and
other resources against other and often more compelling needs. The U.N. MAP Guide
mentions the option of hiring services of external experts or consultants, e.g. econo-
mists or industry specialists in complex transfer pricing cases or for the translation of
documents or foreign laws or for interpretation services in face-to-face meetings with
foreign authorities.248
The Commentary on the OECD model income tax treaty suggests a more limited role
for external experts in making required factual determinations.249 Next to this, one can
also imagine external expert assistance in assessing the merits of a MAP case – the
strengths or weaknesses of authorities’ positions -, develop a strategy for MAP discus-
sions, or handle the administrative burden of correspondence with foreign authorities
and taxpayers or recordkeeping. Especially for developing countries outsourcing some
of the MAP function may be worthwhile considering, to relieve their most urgent needs
and in the longer term to help building local capacity. Since developing countries may
not have the financial resources to pay for such services, as the U.N. MAP Guide points
out,250 these countries in particular may seek to cover the additional expenses by char-
ging a user fee from the taxpayer having requested the MAP. While the rule is that MAP
requests should be free of any charges,251 this is obvious for MAP related work which
247 Para. 2.2.1 and 3.3.1-3.3.3 of the OECD MEMAP; and para. 94 and 149-154 of the U.N. MAP Guide.
251 Para. 2.2.1 of the OECD MEMAP; and para. 96 of the U.N. MAP Guide.
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authorities perform themselves in the ordinary course of their duties, but an exception
for external services would seem reasonable. Given that most of the complicated MAP
cases requiring external expertise concern multinational enterprises, a user fee would
ordinarily mean only a minor burden on taxpayers, and, more so, if the rate of the fee
would vary with financial interest involved in a case.
“Empowerment” of competent authorities appears to be another obstacle that emer-

ged more recently, and would reportedly be one of the focal issues of the OECD
MAP Forum.252 Empowerment means that the people who are discussing a competent
authority adjustment have the ability to agree such adjustment without the risk of being
reversed by another department. A leading U.S. tax official was recently recorded to
complain: “U.S. competent authority negotiators aren’t seeing eye-to-eye with some of
their counterparts in other countries”.253 One should be careful however not to assume
the existence of an empowerment problem too quickly. Occasionally, e.g. where huge
financial interests are at stake, authorities, while sufficiently empowered, may nonethel-
ess need additional approval from a higher administrative or political level, and this
should be accepted as reasonable, as it is no different from treaty negotiations. It is only
where competent authorities are habitually being overruled and sent back to discuss
anew, that empowerment may truly be considered an issue.
Ordinarily competent authorities are attributed a special mandate directly by the

Government or responsible Cabinet minister.254 Empowered authorities should of
course not be hesitant to use their powers, even though that may not make them popu-
lar with officials whose decisions or acts they override. Even so, as the U.N. MAP Guide
points out, certain matters connected with the execution and/or implementation of a
tax treaty may be reserved to the competence of other authorities, or domestic law may
give other authorities such as the Ministry of Foreign Affairs the right to interpret in-
ternational treaties and agreements.255 Whereas no empowerment issues are pre-empted
in the OECD MEMAP, it would be a mistake to think that such issues are typical for
developing countries. Developed countries may experience similar problems as well, e.g.
where they are organised as a federation of states, and authorities of individual states
retain taxing powers and responsibilities of their own, as is the case of Germany.
252 Mindy Herzfeld, idem.

253 Mindy Herzfeld, idem.
255 Para. 53 and 54 of the U.N. MAP Guide.
94
There are still other reasons why authorities may find it difficult or even impossible to
concede in MAP discussions, which in my experience occur more frequently in practice
than “real” empowerment issues. E.g. authorities may be bound by domestic policies
on treaty interpretation, which they may even have designed or issued themselves. Or
they may be prevented by a prior decision from a domestic court, in particular where
under the local doctrine as prevails in their state, domestic courts are not bound by
MAP outcomes.256
Whatever the issue may be, empowerment or other, in all these cases only arbitration
can provide an effective dispute resolution, arbitration awards being binding on states as
a whole, all authorities within all departments and at all levels included, as well as on do-
mestic courts. Where authorities are insufficiently empowered and at the same time are
prevented by their Constitution to agree arbitration, a “catch-22” situation arises from
which it seems there is no escape anymore. While it is the discretion of each individual
state to decide how it organises its mode of dispute settlement, there remains a primary
responsibility to ensure proper dispute settlement facilities, and to the extent a state
fails to do so it arguably breaches the good faith required by the Vienna Convention
in the application of its tax treaties. In treaty negotiations other states are entitled and
in my view should enquire whether adequate dispute settlement is guaranteed, which is
currently still custom to leave unaddressed and simply take for granted. Absent such a
guarantee, other states should be reluctant about entering into a treaty in the first place.
Another cause that may seriously hamper MAP discussions or cause them to fail, are
cultural or even personal controversies, or at least mismatches, between authorities.
This cause is more serious in practice than it may seem from the outside. The tax tre-
aties network having expanded at a truly global level, cultural diversities among com-
petent authorities are sharper and more common now than in the early days when tax
treaties were mostly between Western OECD member countries. “Unlocking” such
controversies would make a clear case for mediation by independent third party ex-
perts.257 Whereas tax mediation is, by now, an established and generally successful
256 John F. Avery Jones, The relationship between the mutual agreement procedure and internal law, EC Tax Review 1999
(Vol. 8), No. 1, p. 4-8.
257 Joe Dalton, Unlocking MAP disputes: Is mediation the key?, interviews with John Avery Jones, Peter Nias and Diane
Hay, International Tax Review, October 2013, p. 14-16.
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practice at domestic level in a number of states, e.g. the UK,258 U.S.,259 Australia260 and
the Netherlands,261 it is still very much unexplored territory at international level. There
is only a brief mentioning of it in the OECD MEMAP262 and the Commentary to the
OECD model tax treaty,263 but the U.N. MAP Guide and the Code of conduct to the
EU Arbitration Convention leave it untouched altogether. Mediation is typically non-
binding on the disputing parties in that it does not render judgment on any issue under
dispute. Its function is purely to facilitate, aimed to normalise or canalise relations bet-
ween parties so that they can proceed with resolving their dispute by their own strength.
For any mediation to be successful it is essential that both parties are really interested in
resolving their dispute one way or another. Often the first step in a mediation process is
to make parties question themselves whether they, in honesty, care about a solution. Tax
mediators pair a firm background in taxation with a formal accreditation as mediator.
The use of mediation could mean a significant contribution to improving the MAP ins-
trument. Mediation would be most suited for relatively minor disputes in the course of
a long-standing relationship between states which authorities are careful not to harm.
While at the domestic level, explaining the proper understanding of or approach to
technicalities of a disputed subject may not often be part of the mediation effort, this
might be different at the international level where complex and unsettled legal issues
are more frequent. As opposed to regular MAP discussions, international tax mediation
might well involve the respective taxpayer(s), thus paving the way for a co-operative,
or collaborative, dispute resolution such as an international tax ruling or international
compliance agreement.264 The latter, however novel, is definitely a promising approach
as the existing example of a bi- or multilateral APA already shows. Co-operative dispute
258 HMRC, Resolving Tax Disputes, Practical Guidance for HMRC Staff on the Use of Alternative Dispute Resolution
in Large or Complex Cases, at: http://www.hmrc.gov.uk/practitioners/adr-guidance-final.pdf; and: Peter Nias and Geoff
Lloyd, ADR and its role in tax litigation, Tax Journal, 9 March 2012, p. 11-2.
259 U.S. IRS, Appeals - Introduction to Alternative Dispute Resolution, Publication 4167, at: http://www.irs.gov/pub/
irs-pdf/p4167.pdf
260 Australian Taxation Office, Alternative Dispute Resolution (ADR) in ATO disputes, PS LA 2013/3, at: http://law.ato.
gov.au/atolaw/view.htm?locid=%27PSR/PS20133/NAT/ATO%27&PiT=99991231235958
261 Belastingdienst (Dutch tax and customs administration), How does mediation work?, at: http://www.belastingdienst.nl/
wps/wcm/connect/bldcontenten/standaard_functies/individuals/contact/you_do_not_agree/mediation/how_does_me-
diation_work
262 Para. 3.5.2 of the OECD MEMAP.
264 OECD, Co-operative Compliance: A Framework, p. 33-34 (2013).
96
resolution can cover any area besides transfer pricing, it can include the determination
of both facts and legal interpretations, and it can be applied either in advance to prevent
a dispute from arising, or ex post to resolve a dispute once it has arisen.
In addition to adjudication the role of taxpayers is a classic issue in international tax

dispute resolution.265 Traditionally taxpayers are not admitted as party to MAP discus-
sions or tax arbitrations, since they are not party to tax treaties and as such cannot be
party to disputes over tax treaties or their settlement either. At the same time, however,
international tax disputes concern taxpayer interests, in so far as taxpayers are ultimate
beneficiaries of successful dispute resolutions. Also, it requires a special request by a
taxpayer to have authorities start MAP discussions on its individual case. Just as under
the OECD sample it requires another request by the taxpayer to have the authorities
engage in a subsequent arbitration. It is thus not without reason if taxpayers feel „ow-
nership“ over tax disputes between their home and host states. The OECD and U.N.
MAP guidance only give some consideration to such feelings by allowing taxpayers to
offer presentations to authorities in MAP discussions,266 and the OECD sample and
the European Arbitration Convention by allowing witness testimonies in arbitration
proceedings.267 Moreover there may be a human rights issue involved to the extent that
taxpayers should be allowed the possibility to defend themselves, e.g. in cases where
authorities allege acts or omissions of a taxpayer to have caused double taxation, or
where they argue an abusive conduct of a taxpayer to prevent any resolution of double
taxation. Taxpayers may contest MAP outcomes before their domestic courts, provided
the courts do not consider themselves prima facie bound by those outcomes. However
there is little point for taxpayers in doing so as this might revive double taxation at their
own expense. Pleas that taxpayers should be admitted as party in MAP discussions or
arbitrations continue to be heard to date268 and may be expected to emerge also in the
context of the BEPS Action Plan. The chance however that authorities will ever accept
taxpayers as a party to the proceedings should be considered negligible, which reduces
the topic to something of an academic fetish.
265 Michael Edwardes-Ker, idem, Ch. 2.02, p. 2.

266 Para. 3.3.2 of the OECD MEMAP; and para. 154 of the U.N. MAP Guide.
267 Para. 11 of the OECD sample; and Article 10(2) of the European Arbitration Convention.
268 William W. Park and David R. Tillinghast, idem, p 43-46; Mario Züger, Arbitration under tax Treaties – Improving Legal
Protection in International Tax Law, p. 5-10 (IBFD, 2001); and Katerina Perrou, idem, Ch. 8, p. 205-237.
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Authorities are very protective of their exclusive ownership of international tax dispu-
tes. They can derive some support for their position from experiences with investment
arbitration where investors may act as claimant. While initially introduced to depoliticise
disputes and offer investors a fair hearing before an independent and qualified tribunal,
the possibility for investor claims has in practice led to large numbers of new claims,
many ill-founded and unsupported by the investor state authorities, even to such extent
that it recently caused the United Nations’ UNCTAD organisation to urge reform.269
It should be noted however that investor claims for arbitration are not routed via the
authorities of the investor’s residence state first and are therefore not in any way fil-
tered, unlike taxpayer claims in MAP proceedings. Taxpayers are not found to press
hard either for being admitted as party in MAP or tax arbitration proceedings. Rather,
taxpayers are known to be concerned mainly that disputes between authorities and
inherent double taxation are in any case adequately resolved, no matter how. As said,
confidence among taxpayers in international tax dispute resolution is generally low. It is
the sole responsibility of authorities to care for improvement, both of the effectiveness
of dispute resolution mechanisms and of taxpayer confidence. To this effect any dis-
pute resolution should be timely, comprehensive and effective. In addition, arbitration
awards should be fair and expert. Proceedings should be so transparent that taxpayers
are able to verify that these conditions are all sufficiently met. Authorities should begin
by demonstrating stronger commitment to realise the improvements needed. This is
much more urgent than admitting taxpayers as a party.
6.3. The TRIBUTE initiative for a specialised international tax tribunal at

the Permanent Court of Arbitration at the Hague Peace Palace
Ever since the days of the League of Nations 1928 model tax treaty, the thought of
a permanent international body for tax arbitration or adjudication has continued to
occupy the minds of many in the international tax community. I should only recall, as
an outstanding example of some 10 years ago, the grand design drawn by Zvi Altman
for a ‘Global Tax Organization’ hosting an ‘International Tax Tribunal’ – a true world
tax court.270 Earlier this year the Chief of the United Nations International Tax Coope-
269 United Nations Conference on Trade and Development , Reform of Investor-State Dispute Settlement: in Search of
a Road Map, UNCTAD Publications No. 2, June 2013, at: http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d4_
en.pdf
270 Zvi D. Altman, idem, Ch. 7, p. 351-490.
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ration Section, Michael Lennard, expressed as his aspiration, as a confidence-building

measure to ease the path for arbitration for developing countries, “a list of possible ar-
bitrators and eventually … a permanent arbitral body with developing-country friendly
funding mechanisms and a regular jurisprudence, but there is a long way to go, if it
ever happens.”271 The recent TRIBUTE initiative, short for ‘International Tribunal of
Independent Tax Experts‘, undertakes to demonstrate that such a permanent tax arbit-
ration tribunal is actually well within reach, by offering a fully operational sample, with a
proper venue, especially designed rules, own experts, organisation and all, ready for the
international tax community to adopt. The initiative is a joint effort of the Permanent
Court of Arbitration at the Hague Peace Palace272 and a number of international tax
and arbitration experts (of which I am one), all acting in their personal capacity, inde-
pendently and unpaid.
The envisaged tribunal will be supported by the Permanent Court of Arbitration. The
Court is a full organ of the United Nations organisation, and specialises in facilitating
the resolution of disputes between states, at which it is unique, besides disputes bet-
ween state entities and private parties notably in the area of bilateral investment trea-
ties. As such the Court is believed to be the only existing venue where tax authorities
worldwide would ever go to for their internal, country-to-country disputes. I note that
the income tax treaty between Germany and Austria273 refers cases for arbitration to the
European Court of Justice. The European Court however lacks any experience in arbi-
tration, and moreover it would likely be unacceptable to non-European member States.
Like other tribunals which the Permanent Court of Arbitration houses, the tax tribunal
will not be an integral part of the Court itself but will be governed by a separate legal
body. The Court will provide the logistics and the administration for the tribunal’s cases,
supported by standard routines to be developed especially for that purpose. Compared
to usual practice under the European Arbitration Convention and the OECD and U.N.
samples where one of the disputing parties (often the residence country of the taxpayer
concerned) is charged with organising and administrating the arbitration,274 organisati-
on by the Court is impartial and prevents any parties from developing ties with arbitra-

272 At: http://www.pca-cpa.org
273 Article 25(5) of that treaty.
274 Article 7.2, supra (d), of the Revised Code of Conduct of the European Arbitration Convention; para. 12 of the OECD
sample; and para. 12 of the U.N. sample.
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tors over the organisation process. It relieves parties from administrative duties which,
in particular for parties with limited resources, might otherwise be troublesome to fulfil.
Moreover, the Court’s supervision may be expected to discipline parties in living up
more closely to their own agreed procedural rules in respect of communications and
timelines. The Court’s organisation likewise warrants the neutrality of the place of ar-
bitral sessions as these may be conducted at any location in the world to which parties
agree, or even through video or telephone conferencing, and thus not per se in the
territory of one of the disputing parties.
Another major function which the Court will assume is the role of its Secretary Gene-
ral as appointing authority. I.e. where parties fail to agree one or more arbitrators the
Court’s Secretary General will decide that appointment, to prevent the arbitration from
stranding. Also, the Secretary General will advise for each case the rate of the arbitra-
tors’ fees based on what he considers appropriate in the circumstances of the case and
by comparison to other cases arbitrated by the Court’s tribunals. The tax tribunal will be
available for the resolution of disputes arising under bilateral and multilateral tax trea-
ties, the European Arbitration Convention, or domestic tax laws or contractual arrange-
ments, wherever there is a legal instrument which permits arbitration. The tribunal will
also offer facilities for mediation and other forms of collaborative dispute resolution, as
well as technical expert assistance. The tribunal’s services will be accessible to all States,
whether member of the Permanent Court of Arbitration treaty or not.
Tax arbitration to date is still in its infancy. The rules of the European Arbitration
Convention as well as the OECD and U.N. samples are basic and unfinished by any
standard, both for proceedings and for governance. This is the more striking since the
international tax issues with which they are meant to deal are often highly complex
while involving large financial interests. TRIBUTE aims to introduce modern tech-
niques that are designed in the framework of commercial arbitration and that have been
applied to similarly complex commercial disputes relating e.g. to sophisticated financial
products and transactions.275 These new techniques establish a fair balance between
the thoroughness of the proceedings necessary to do justice to the level of complexity
of each single dispute, and vital demands for time and cost efficiency. Time and cost
efficiency are vital to businesses in the settlement of their commercial disputes. To this
275 The specialised panel of P.R.I.M.E. Finance is servicing the settlement of such complex financial disputes; see at: http://
primefinancedisputes.org
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end the tribunal will offer a special set of rules for disputing parties to adopt, which
provides among others for short standard time limits of 45 days for the various com-
munications between the disputing parties and the arbitrators (the Code of Conduct
of the European Arbitration Convention and the OECD and U.N. samples apply time
lines of up to 4 months depending on the stage of communications); optional expe-
dited proceedings; interim measures; and even emergency proceedings resulting in the
delivery of an arbitration award within 15 days.
This set of special rules comes in addition to the familiar procedural rules of the OECD
and the U.N. for mutual agreement on tax arbitration and the European Arbitration
Convention, all of which are available as alternative sets of procedures for parties to
choose from when approaching the tribunal for its arbitration services (unless parties
have committed to any particular rules beforehand). As said the OECD and U.N. sam-
ples both include, as an option, a streamlined process for “baseball arbitration”, or “last
best” or “final offer” approach.276 TRIBUTE would prefer to offer rules for baseball
arbitration as a separate and independent alternative, and based rather on the relative
agreement under the tax treaty between the United States and Canada.277 This is in re-
cognition of current United States tax treaty policies which allow only that latter type
of arbitration, a welcome contrast still to prior days when the United States rejected tax
arbitration as a whole. Baseball arbitration is rarely practised in commercial arbitrations,
reserved as it is for cases where parties have raised their stakes to extremes and must mi-
tigate if they want to stand any chance of winning the arbitral award. But for certain tax
arbitration cases it may well be a format suited for wider use, e.g. where factual issues or
only minor principal topics are at stake.278 TRIBUTE will also provide drafts for supple-
mentary procedural rules on the basis of the UNCITRAL rules279 as generally used in
arbitrations on trade disputes, which offer a more robust protection of the arbitration
process against any delaying or stalemating by parties, than the rules of the European
Arbitration Convention and the OECD and U.N. samples. These supplementary rules
are intended to apply to any case by default where the rules agreed between parties fail
to address a certain procedural situation or issue. Also, modern commercial arbitration
276 Para. 6 of the OECD sample and para. 2 and 3 of the commentary thereon; and para. 6 and 11 of the U.N. sample,
indicating the “last best” or “final offer” even as the default approach.
277 Memorandum of Understanding agreed under Article XXVI of the income and capital tax treaty between the United
States of America and Canada.
278 Para. 13 of the commentary on the OECD sample; and para. 13 of the commentary on the U.N. sample.
279 At http://www.uncitral.org/pdf/english/texts/arbitration/arb-rules-revised/arb-rules-revised-2010-e.pdf
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increasingly works with fixed pools of experts specialised in the subject matter of the
dispute at hand, rather than generalist arbitration experts who are hired on an ad hoc
basis. Likewise TRIBUTE seeks to produce a list of candidate experts on the main areas
of international taxation and the main industry branches, available to the tax tribunal.
Another feature distinguishing modern commercial dispute settlement is the increasing

use of mediation and other ADR techniques, either as alternative for, or in connection
with, arbitration. TRIBUTE believes mediation is an indispensable instrument in sett-
ling international tax disputes too, and to this effect will present draft mediation rules
for the tribunal, governing its envisaged mediation services, as well as a list of candidate
certified tax mediators for the tribunal to adopt. Mediation might alternatively be pro-
vided as a pre-litigation stage of an arbitration process, subsequent to an unsuccessful
MAP where there is no arbitration available, or as part of a MAP process. TRIBUTE
considers proposing that as part of the intake process of claims for arbitration the
tribunal’s mediators first ‘map’ the relevant merits of the dispute and on this basis ad-
vise parties which format they believe most efficient for its settlement, either technical
expert assistance, mediation or one of the variants of arbitration.
The TRIBUTE initiative is not meant to persuade any states into adopting tax arbit-
ration as their policy. That is of course a matter for states decide for themselves. Any
agreements states conclude to submit to arbitration are voluntary. The tribunal is not
a “world tax court” where authorities can be summoned to stand trial and answer for
their acts or omissions. Neither does TRIBUTE intend to force any procedural rules
on parties seeking arbitration or even criticise any rules which parties may wish to apply.
The tribunal will operate just as well on the rules of either the European Convention or
the OECD or U.N. samples or modifications thereof or any other rules of parties’ own
design. Nor does TRIBUTE want to oblige parties to accept as arbitrators experts from
the tribunal’s list, or accept as appointing authority the Secretary General of the Per-
manent Court of Arbitration. Parties remain free to agree any other arbitrators, or any
other appointing authority, such as the Director of the OECD Centre for Tax Policy
and Administration under the OECD sample, or the Chair of the U.N. Tax Committee
under the U.N. sample.280 Notwithstanding, in particular those parties which have little
access themselves to the experts available for dealing with their specific dispute, often
developing countries, or prefer an appointing authority of a perfectly neutral stature,
280 Para. 13, supra (b), of the OECD sample; and para. 5 of the U.N. sample.
102
would be expected to welcome the availability of the tribunal’s experts or the Secretary
General of the Permanent Court of Arbitration. Disputing parties are the sole owners
of their dispute and as such should be free to adopt any rules or any arbitrators or their
appointing authority according to their own preferences. Rather, the ambition of TRI-
BUTE is just to offer a reliable expert facility to those states which are committed to
arbitration already or would be except for the present lack of such facility.
It is hoped, however, that the availability of the tribunal once established may contri-
bute to encouraging more states to consider and eventually adopt arbitration. Building
confidence is key, i.e. confidence in the tribunal’s expertise, efficiency and impartiality.
One should be well aware that at present there still is suspicion and a risk aversion
approach among developing countries in particular, feeling that “arbitration is more
likely to be used as a sword against them than as a shield for them“.281 It is vital that
this confidence is shared by all interested members of the international tax community.
E.g. a tribunal exclusively owned by the OECD would probably be mistrusted by non-
OECD member states,282 whereas, on the contrary, a tribunal exclusively owned by the
U.N., would probably be regarded by OECD members with little less scepticism. At the
same time any exclusively government-owned tribunal, whether OECD or U.N., might
easily discourage taxpayers, in particular multinational enterprises, from requesting arbi-
tration, as is essential under many bilateral tax treaties to trigger the arbitration process.
I am not even mentioning the tribunal’s own sense for independence which any such
one-sided ownership would damage. The tribunal’s success would seem best secured if
the members of the international tax community were all to share in its governance and
the responsibility for its proper functioning.
Confidence in the tribunal is expected to depend not just on its governance, but mostly
on the quality of its arbitrators and their decisions. The arbitrators which TRIBUTE
seeks must be knowledgeable and appreciative of both general and specific topics of
international taxation such as transfer pricing; of specific business practices of major
industries e.g. the extraction industry, manufacturing, or electronic commerce; of the
varying interests of tax administrations and taxpayers, of both technical and admi-
nistrative or other practical issues; as well as of the variations in culture and doctrine

282 Para. 15 of the commentary on the OECD sample hints at a possibility of a list of experts to be developed by the OECD
Committee on Fiscal Affairs.
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between different jurisdictions. The background of the arbitrators must be balanced,

business as well as government, and practice as well as academic – preferably individuals
having a mixed experience. Furthermore, the choice of arbitrators must be diverse in
gender and nationalities. As a matter of fact TRIBUTE deliberately recruits candidate
arbitrators from non-Western countries first, notably Latin America and Asia, to pre-
vent any prejudices that its initiative would be dominated by Western views or preferen-
ces. It is believed that the tribunal will have enough force of attraction to gather, over
time, a sufficiently large pool of experts with the required denominations to cover all
relevant topics. To the extent necessary arbitrators will receive additional training and
instruction how to properly manage cases, achieving a fair and balanced result in a time
and cost efficient manner. The U.N. sample expressly requires arbitrators to certify their
independency and impartiality.283 Endorsement as arbitrator by the tribunal is definitely
meant as such certification. Of course every arbitrator, before being appointed in an in-
dividual case, will be questioned once more whether they have or had involvement with
the dispute at hand or any of the disputing parties or their teams, which might jeopardi-
se their impartiality. Apart from relying on good arbitrators, the tribunal will avail itself
of qualified tax mediators, who are accredited as mediator in their home state and have
experience in tax matters at least at domestic level, experts in dispute resolution, and
tax lawyers and tax accountants experienced in cross-border issues who are to provide
technical analysis and assistance.
In drawing up their decisions the tribunal’s arbitrators will obviously take account of
such commonly accepted authorities as the provisions of relevant treaties, explanations
thereto as agreed by states, provisions on treaty interpretation and application of the
Vienna Convention on the Law of Treaties, European law, domestic laws, and OECD
or U.N. Commentaries, Guidelines or reports. Parties may agree (in the course of an
agreement over terms of reference), that specific authorities be observed by the arbit-
rators, in particular where they choose to apply the procedural rules of the OECD or
U.N. samples. By contrast the tribunal’s own rules do not require any terms of refe-
rence, thereby preventing such terms themselves from becoming the subject of dispute.
However arbitration is not just about applying bare rules in a vacuum. Disputes often
are part of a wider context, involving e.g. budgetary interests, jurisdictional, economic
or cultural aspects, administrative concerns, or a perceived agreed balance of source
283 Para. 1 of the commentary on the U.N. sample.
104
and residence country taxing rights underlying a tax treaty.284 As much as such aspects
may contribute to the rise of disputes, they may be part of the key to unlocking disputes
just the same. Some have argued that it would be inappropriate to introduce arbitration
to resolve fundamental differences in national perspectives on issues of treaty interpre-
tation or application.285 I firmly disagree as I am confident that arbitrators are capable
of deciding any differences in views, however fundamental or irreconcilable they may
seem in parties’ own eyes. Arbitrators only need to be aware of the relevance of any
such aspects for the particular case they are dealing with. TRIBUTE intends to have the
tribunal’s mediation experts query all claims for arbitration at their stage of take-in as
to the potential presence of such aspects, and their findings will be first and important
red flags for the arbitrators in their eventual dealings with cases. Arbitrators have a large
degree of freedom to judge on the basis of fairness, taking stock of whatever different
natured issues or concerns there may be connected to the dispute proper. This is what
distinguishes arbitration from any domestic court cases where the courts are bound to
only apply the law, not seldom to their dismay.
Another reason why arbitrators must have discretion to decide a case on the basis of
fairness is that they otherwise might get stuck, like the disputing parties before them
in a MAP when they attempted to solve the case solely on the basis of the applicable
treaty law. E.g. the OECD Transfer Pricing Guidelines explicitly acknowledge that it is
impossible to provide rules which cover every case and that a “reasonable accommoda-
tion” should be attempted in view of the imprecision of the various pricing methods.286
Under the European Arbitration Convention arbitrators are bound, imperatively and
exhaustively, to apply the arm’s length principle in determining the allocation of profits
between associated enterprises,287 thus prohibiting ex aequo et bono determinations or
any kind of reasoning or negotiated base.
However, since the European Convention borrows from the relevant provisions of the
OECD Model Tax Convention, arbitrators are allowed to use the OECD Guidelines
which effectively re-opens the door for applying principles of fairness.288 International
284 Michael Lennard, idem, p. 179/180.

285 Sol Picciotto, idem, p. 1113.
286 Para. 2.10 of the OECD Transfer Pricing Guidelines (July 2010).
287 Article 4(1) of the European Arbitration Convention.
288 L. Hinnekens, idem, p. 110 and 111.
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tax arbitration is supposed to hold the promise of exploring: “the shared sense of
justice … (which) goes well beyond merely seeking the avoidance of double taxation
without any reference to its context and the alternative ways to seek that goal”.289 This
is a delicate issue from the perspective of confidence building. It may be that criticisms
about international arbitrations applying a too narrow, partisan view, come predomi-
nantly from developing countries in reaction to lost investment arbitrations against
multinational enterprises. I have little doubt however that this idea that justice should
be done is shared as a general premise by developed countries as well.
Ideally the quality of arbitrators and the fairness of their judgments should be verifiable
for the wider public through the publication of their arbitral awards. The importance
of publication has been stressed enough. In short, publication serves the causes of
consistency, transparency, accountability, and thereby legitimacy in the corpus of arbi-
tral decisions. Also there is a clear public policy point to publication, i.e. committing
governments to individual awards in cases lost.290 NGOs make their support for tax
arbitration conditional on its procedures and outcomes being open and transparent.291
Within the context of the European Arbitration Convention systematic publication
of awards, and thereby monitoring of the arbitral proceedings, has been suggested to
bolster the confidence and willingness of multinational enterprises to submit their im-
portant transfer pricing cases to arbitration.292 Of course taxpayer confidentiality needs
to be protected but in general it would be enough for that purpose to merely anonymise
or redact an award. The European Convention and the OECD and U.N. samples all
provide for publication subject to approval by the authorities and taxpayers concer-
ned.293 Yet, to date, I am unaware of any tax arbitration awards ever being published.
It appears authorities make a habit of opposing publication. As in the case of MAP
outcomes and proceedings it is difficult to understand which honest interests authori-
ties might have in non-disclosure. The issue of publication would deserve a stiff debate
by the international fora. The envisaged tax tribunal could never impose a publication
obligation, and the decision whether or not to publish, and in which redaction, would

291 Sol Picciotto, idem, p. 1113.
292 L. Hinnekens, idem, p. 113.
293 Article 7.4, supra (ii), of the Revised Code of Conduct of the European Arbitration Convention; para. 15 of the OECD
sample; and para. 6 of the commentary on the U.N. sample.
106
in each single case remain exclusively for the disputing parties. Public however will be
the names of the tribunal’s arbitrators and other available experts, as well as summaries
of their relevant backgrounds. Furthermore, the permanency of the tribunal, different
from the ad hoc arbitrations under the European Convention and the OECD and U.N.
samples, will allow it to establish working routines for its arbitrators and administration,
and to have arbitral awards and proceedings shared internally among its arbitrators.
This will achieve, be it in a different way than by publication, the consistency in arbitral
approaches and determinations of cases so much wanted by the outside world.
The main threat to confidence in the envisaged tax tribunal, as in any tribunal, are con-
cerns over high costs, especially where costs are perceived as undue and caused merely
by inefficiencies in the arbitration process. The relatively light procedures provided
under the European Arbitration Convention and the OECD and U.N. samples can all
be understood to address cost concerns, in addition to the sovereignty issue. Such con-
cerns are exclusive to tax authorities of course, since at present they are the sole ones
to bear the costs of arbitration absent any rules on access fees or other cost sharing
arrangements affecting interested taxpayers. High costs may easily work as a disincen-
tive, in particular for developing countries, to let a meritorious but complicated case
run to arbitration. In the view of TRIBUTE however no party should be or feel barred
from turning to arbitration solely because of the costs involved. It is argued that the
costs of eventual mandatory arbitration even cause authorities to deny taxpayers access
to MAP.294 This sounds rather speculative to me, as I am personally unaware of such
practice occurring more than just occasionally, but of course it should not happen at all.
A recent OECD study noted that fees and expenses incurred by parties for legal coun-
sel and experts are the largest cost component in investment arbitrations, averaging
about 82% of the total costs of a case, as opposed to arbitrator fees and registration
fees payable to tribunals which account for only 16% and 2%, respectively.295 It may well
be that the high-earning arbitration lawyers will cast a willing eye at international tax
arbitration too. But whether their services will be much in demand remains to be seen.
Unlike investment arbitrations where the parties are often a private investor versus a
state, tax arbitrations to date are exclusively between states. Like in MAP proceedings
294 Michael Lennard, idem, p. 180 and 181.

295 David Gaukrodger and Kathryn Gordon, Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy
Community, OECD Working Papers on International Investment , 2012/03 (OECD, 2012), p. 19; at: http://www.oecd.org/
investment/investment-policy/WP-2012_3.pdf
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it may be assumed that states will have a preference for their own officials to represent
them, for reasons of confidentiality or cost. Assistance of external litigators may at
some point however become indispensable, e.g. to deal with procedural issues, examine
witnesses or experts, and present summaries or statements before the arbitrators, duties
which officials as a rule are unqualified to perform. Moreover, it is not unlikely that
states which are so deeply opposed against each other that they were unable to agree
over MAP, and were unable to agree in mediation or whose disputes were even judged
no longer fit for mediation, seek an expert litigator in an effort to maximise their chance
of winning the arbitration. It would definitely be unfair to hold such “judicialisation”
as a threat to the quality of the arbitral judgment. Arbitrators generally know how to
appreciate “sticky notes” or “untailored power point formats”, which parties with less
resources may deliver, and they know to see through slick presentations as well.296 But it
may not reasonably be expected from arbitrators to puzzle out details of disputes where
parties themselves are unable to do so. TRIBUTE aims for the experts of the tribunal
to draw up a basic analysis of the technical merits of cases and their potential for arbi-
tration at their first intake, and to share that with the parties. There will also be tribunal
experts available to offer basic training to parties in principles of arbitration and on
how to best prepare their arbitral cases. But the tribunal’s experts of course cannot
take over the role of litigators. They are confined to remain neutral in the dispute: they
cannot be member of any party’s team, nor can they assist, let alone represent, parties
before the arbitrators. Obviously, in simplified proceedings such as baseball arbitration
there would be less need for legal counsel. Simplified proceedings however hold an
increased risk of disappointing parties, the less experienced in particular, that the result
of a fair hearing and a reasonable result on the merits would not be met, and that they
would be disadvantaged.297 Especially for transfer pricing disputes which are by nature
complicated both on the facts and the principles and usually involve huge financial inte-
rests, simplified proceedings would appear not recommendable in most cases.
Parties may in any case trust the tribunal’s arbitrators to manage their cases to contain
costs, and in particular be cautious not to let litigators prolong their oral submissions or
amass files beyond what may still be useful to the settlement of a case. Moreover, TRI-
BUTE intends to have dispute resolution experts monitor arbitration cases throughout
their entire process and where necessary advise the arbitrators, as an extra safeguard

108
of the process’ efficiency and steady course towards an effective settlement without
straying off into side roads, however interesting those might seem from a theoretical
perspective. Finally, whereas the European Arbitration Convention and the OECD and
U.N. samples provide for the costs of arbitration to be equally shared by the disputing
parties, under the TRIBUTE own rules the attribution of costs will be for the arbitra-
tors to determine, the leading principle being that the party losing the arbitration bears
all costs. However, arbitrators will be allowed an express discretion to take into account
the financial position of parties. This is in recognition of developing countries’ limited
ability to pay.298 In extremis, even where a state loses the arbitration, it may therefore
still not have to bear any of the costs. This discretion will apply to all types of costs:
registration fee, arbitrator fees, costs of legal counsel, experts and witnesses, and travel
expenses.
A permanent tax arbitration tribunal is believed to match well with the OECD BEPS
Action Plan, in particular Action 14 for the improvement of dispute resolution and the
promotion of the use of arbitration. More generally the creation of the tribunal would
be of significant help to balance the aim of prevention of double non-taxation on
the one hand with the need for resolving remaining double taxation on the other. For
purposes of the U.N. Tax Committee the tribunal could represent an important con-
tribution in building confidence in tax arbitration among developing countries, a topic
that the U.N. Tax Committee may soon add to its work program. For European mem-
ber states the presence of the tribunal may open the way to improved proceedings and
governance for their arbitrations under the European Arbitration Convention, where
such improvements cannot be achieved through amendments of the Convention itself.
It may therefore be hoped that the OECD, U.N. Tax Committee and European Com-
mission, as well as international business as ultimate beneficiary of improved dispute
settlement, all embrace the TRIBUTE initiative. Their support would in turn be a valu-
able asset for the tribunal in its effort to gain worldwide public confidence. Arbitration
indeed is “part of the new solution in a multi-polar tax world”,299 and it is essential to its
long term success that all members of the international tax community have input and
a sense of ownership in its development and implementation.

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110
BEPS & CbC Reporting
7. Country by Country Reporting: Main Concerns Raised

by a Dynamic Approach
by María Amparo Grau Ruiz300
7.1. Introduction
Nowadays many reporting obligations exist in several fields related to business activi-
ties. There is also an expansive movement towards improved reporting, which is affec-
ting taxation. In fact, the international extent of the obligation to report is currently
under discussion in particular in the OECD in the framework of the BEPS Action Plan
and the template for Country by Country (CbC) reporting.301
The question arises why this requirement to report internationally in tax matters has
arisen?, what is its real purpose?, what should be reported?, to whom? Is this a matter
of soft-Law, or hard-Law? Is a global or a regional approach needed?
Some international standards for country by country reporting have already been deve-
loped (i.e. in specific sectors: extractive industries, banking and finance), and are beco-
ming domestic legal requirements in the USA and in the European Union (EU). Section
7.2 will briefly set out the EU approach to CbC reporting.
At international level, the state of the art of the applicable rules is different depending
on the context. The existing uncertainty is strongly criticized, because taxpayers face
substantial challenges due to multiple standards. In a near future, some changes may be
expected to result from the work which the OECD carries out, in the framework of it
BEPS Action Plan, on transfer pricing documentation and a CbC reporting template.
This will be further discussed in section 7.3. against the general background that a
new uniform report across countries is globally required not to affect the competitive
300 ©2014 IBFD. Originally published in 68 Bull. Intl. Taxn. 10, pp. 557-566, Journals IBFD. Bulletin for International Ta-
xation is available online, please visit http://www.ibfd.org <http://www.ibfd.org>. Reproduced with permission. Financial
and Tax Law Professor, Universidad Complutense de Madrid. Principal Investigator of the DESAFIO research project on
‘Fiscal measures to promote socially responsible foreign investment: legal approach and impact on institutions and accoun-
tancy in developing economies’ (DER2012-36510) https://www.ucm.es/proyecto-desafio/. The author can be contacted at
grauruiz@ucm.es
301 This text reflects the author’s contribution to the CFE Forum 2014, Brussels, 27 March 2014.
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position of firms, and that the more complex the proposed reporting template will be,
the less likely it is to be adopted.302
7.2. The initial approach within the European Union: country

by country reporting as a matter of corporate social responsibility
In the past, the European Union approach has clearly connected the country by coun-
try reporting to Corporate Social Responsibility, stressing the importance of company
transparency. At the EU level, country by country reporting has been understood basi-
cally as the disclosure of payments to governments. It has been included as a part of a
responsible business initiative package of measures, and it has also been considered as a
contribution to the agenda for change of the European development policy.
After a process, that was initiated in 2010 with a public consultation on the country by
country reporting by multinational companies,303 the EU Commission, in 2011, propo-
sed rules on the disclosure of payments to governments by the extractive and forestry
industries. This implied the revision of the accounting Directives (78/660/EEC and
83/349/EEC) to cover large non-listed companies and of the transparency Directive
(2004/109/EC) to cover listed companies. EU companies would be required to report
payments to governments on a country and project basis where those payments had
been attributed to a specific project, and with appropriate thresholds, on the basis of
companies‘ existing reporting structures. The Commission would further define ma-
terial criteria through delegated acts, and the system would be reviewed and modified
within five years.
The rules proposed by the Commission went beyond the US Dodd-Frank act (for
targeted sectors: oil, gas and mining, and focused on listed extractive companies only).
They would apply to EU logging industry too, and would affect large unlisted com-
panies, as well as listed companies. As such the action would complement the efforts
undertaken in the framework of the Extractive Industries Transparency Initiative,304 by
legally requiring companies registered or listed in the EU to disclose.
302 BIAC Comments on the Discussion Draft. Public comments received Volume I - Letters A to C Discussion Draft on
Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 97 et seq.
303 26 October 2010 Public consultation on country by country reporting by multinational companies (to 22 December
2010). 18 January 2011 Received contributions. 4 April 2011 Summary report. April 2011 Single Market Act. October 2011
Communication ‘A renewed strategy 2011–2014 for Corporate Social Responsibility’.
304 See http://eiti.org
112
Similarly, the European Parliament noted, in its Report dated 28 January 2013, that
Corporate Social Responsibility should be applicable to all enterprises so as to create a
fair and equal playing field;305 however, the way in which extractive industries operate in
developing countries required a move beyond a voluntary approach.
As country by country reporting presents financial information for every country in

which a company operates, rather than a single set of information at a global level, it
shows the company‘s financial impact in host countries.
After intense work at the EU level,306 a legal framework was created, that will also
‘contribute to the fight against tax fraud and corruption’, and there is a wish for more
transparency on tax paid by all large companies and groups: what taxes they pay, how
much and to whom.307
With the adoption, on 26 June 2013, of Directive 2013/34/EU on the annual financial
statements, consolidated financial statements and related reports of certain types of
undertakings, and with its chapter 9 that deals with reporting on payments to govern-
ments) an attempt was made to include tax payments on a country by country basis,
but it was unsuccessful and the Commission will have to report on it by 2018.308 On 26
February 2014 the European Parliament and the Council reached agreement on annual
publication duties and Corporate Social Responsibility criteria (concise and useful in-
formation may be provided at group level, in a flexible way).
305 In addition, on the 6 February 2013, the European Parliament adopted two important Resolutions: ‘Corporate Social
Responsibility: accountable, transparent and responsible business behaviour and sustainable growth’; and ‘Corporate Social
Responsibility: promoting society’s interests and a route to sustainable and inclusive recovery’.
306 See the 9 April 2013 Agreement on disclosure requirements for the extractive industry and loggers of primary forests,
the 16 April 2013 Proposal for a directive enhancing the transparency of certain large companies on social and environmental
matters and the 22 May 2013 European Council Conclusions.
307 On 12 June 2013 Commissioner Barnier stated: ‘we have created a framework where businesses and governments must
disclose revenues from natural resources. This framework will also contribute to the fight against tax fraud and corruption’.
‘But we must go further now and take measures on more transparency on tax for all large companies and groups – the taxes
they pay, how much and to whom. I think it should be possible to introduce rules for the publication of the information on
a country by country basis, similar to those approved for banks in CRD IV, or in the Commission’s proposal on improving
the transparency of certain large companies on non-financial reporting, adopted in April’.
308 Though in autumn 2013 the European Parliament Members sought to include the publication of tax payments, in De-
cember 2013 the JURI Committee voted against it at this stage.
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7.3. The approach taken by the OECD with the BEPS Action Plan
7.3.1. Proceeding on another track
In the BEPS Action Plan, Action 13 on transfer pricing documentation refers to coun-
try by country reporting. The rules to be developed would include a requirement that
Multinational Enterprises (MNE) provide ‘all relevant governments’ with ‘needed in-
formation’ on the allocation of their global income, economic activity and taxes paid to
individual countries.309 Its purpose is to enhance transparency ‘for tax administrations’,
taking into account the compliance costs for business.
Initially it considers whether a global template can be developed for transfer pricing
documentation. This template will include ‘a high level view of the Multinational Enter-
prises‘ global activity’, commonly known as country by country reporting, as the cor-
responding comment in the Action Plan reads. The MNE will have to provide an
overview of the profit earned and tax paid, assets owned and number of employees in
each of the jurisdictions in which it operates.
Originally, the section of the master file on financial and tax positions also included a
country by country report.310 However, as the call to develop a common template for
country by country reporting to tax authorities does not specifically limit its application
to transfer pricing administration, in a Discussion Draft, the OECD suggested to widen
the scope by considering whether ‘information relevant to other aspects of tax adminis-
tration and the BEPS Action Plan should also be included in the common template’.311
309 CBI and the 100 Group in their Comments on the Discussion Draft, clarify that MNEs do not globally ‘allocate’ income,
but rather recognise it in-line with international tax and accounting rules. In this sense, the accounting IT systems used by
MNEs are primarily designed to provide information to comply with IFRS or local GAAP; these systems are generally not
programmed to provide transfer pricing data in the format required by the country by country reporting. And the data that
must be manually assembled, require a tremendous amount of time. Public comments received Volume I - Letters A to C
Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 224 et seq.
310 The period covered is the fiscal year of the reporting MNE and the Constituent Entity that ends on the same date or
in the next twelve months. Reporting MNE is the ultimate parent entity. Constituent Entity is any separate business unit
of the MNE group that is an associated enterprise to the reporting MNE (Permanent Establishment with separate income
statement too).
311 OECD Country by Country Reporting Public Consultation, Discussion Draft on Transfer Pricing Documentation and
Country by Country Reporting, 30 January 2014.
114
When designing the template, a wide variety of views were expressed by countries at the
meeting of Working Party No. 6 (of the Committee on Fiscal Affairs) held in Novem-
ber 2013. Some specific instructions were drafted,312 and on 30 January 2014 the OECD
invited comments on the Discussion Draft containing revised guidance on transfer pri-
cing documentation and country-by-country reporting. The written comments received
by 23 February 2014 were published on 3 March 2014 and discussed by Working Party
No. 6 at its March 2014 meeting. A public consultation took place on 19 May 2014,
followed by further discussions at the Working Party’s May meetings, and an update by
webcast on 26 May 2014.
7.3.2. Critical considerations
At an early stage, the lack of clarity with regard to the actual objective pursued (only a
high-level risk assessment tool?, or a means for other BEPS actions?) did not allow a
proper assessment of the scope of the template (is it a proportionate measure?). The
idea of a three-tier approach (properly distinguishing among the country by country
report, the master file and the local file) hopefully will help to solve this problem. But, in
fact, it creates another problem: what information has to be disclosed at each of these
three levels? and what will that information be used for?
The provision of information and financial data is not only a matter of good faith and
cooperation from the taxpayer. The extent of the proposed disclosure and the limits
applicable to confidentiality are especially problematic.
312 In summary, revenue numbers should be taken directly from (if one exists): the Constituent Entity’s statutory financial
statement; its audited financial statement prepared for any other purpose (e.g. financing, regulatory, tax etc.); or annual reve-
nues as reflected in the Constituent Entity’s internal management accounts. The amounts should generally be reported in the
Constituent Entity’s functional currency. It should not be required that the amounts of revenue or other financial informati-
on be reported using the same accounting standards for all Constituent Entities, unless taxpayers wish consistent accounting
principles and single currency. Income Earnings before Income Tax should be taken from the same financial statement as
the revenue numbers. Regarding Income Tax Paid (on Cash Basis) to country of organisation and to other countries, cash
payments of tax and not tax accruals should be reported. Tax payments should be reported in the same currency. When
the tax is paid by one entity on behalf of a combined group of associated enterprises operating in a country, it should be
allocated among members in proportion to their shares. The total amount of withholding tax paid with respect to payments
received from other entities should be considered (not on employee salaries, social welfare taxes, payments of pensions).
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In addition, more flexibility is demanded by businesses in order to find a balance with

the burdens imposed on taxpayers, regarding how to present and elaborate on the in-
formation to be usable and reliable.313 This issue is particularly important for regulated
sectors.314
Although country by country reporting may serve to identify targets and have a de-
terrence function, by itself, it is not the magic potion to cure base erosion and profit
shifting.315
A. What is the true objective?
In accordance with the Lough Erne G8 Leaders‘ Communique made in June 2013,
comprehensive and relevant information on the financial position of multinational
enterprises would be of greatest use to tax authorities, if it were presented in a stan-
dardised format focusing on high level information on the global allocation of profits
and taxes paid.
There is also a mandate from the G20 -St Petersburg Declaration, to develop a com-
mon template for companies to report to tax administrations on their worldwide al-
location of profits and tax, in order to ensure that profits are taxed where economic
activities occur and value is created. This does not concern only transfer pricing, but all
313 The ICC comments on the Discussion Draft consider: it is essential that the draft CbCR template is further refined in
order to: (a) enhance the proposed instrument as a risk assessment tool; (b) eliminate unnecessary compliance costs; and (c)
avoid any inadvertent move towards formulary apportionment. This can be best achieved by: (i) refining the data set; and (ii)
ensuring an appropriate degree of flexibility for businesses in choosing the source of that data. Public comments received
Volume II - Letters D to J Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at
304 et seq.
314 As the ITC explains in its comments on the Discussion Draft, some regulatory aspects may be extremely important for
specific sectors. One example could for instance be import quotas for specific products (e.g., some commodities or natural
resources), which may translate in a particular corporate organization / way to operate in a country. Price regulations in the
pharmaceutical sector are another example. There are other sectors that are heavily regulated in different ways (defence,
government procurement, hazardous goods, gambling). Public comments received Volume II - Letters D to J Discussion
Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 380 et seq.
315 See Comments on the Discussion Draft by Antony Ting, University of Sydney. In his opinion, if a MNE knows that it
will have to disclose the detailed country-by-country information to tax administrations, it may have less incentive to under-
take aggressive BEPS transactions. The potential tax benefit may be outweighed by the increased risk of tax investigations
and audits. Public comments received Volume I - Letters A to C Discussion Draft on Transfer Pricing Documentation and
CbC Reporting 23 February 2014, at 65 et seq.
116
the techniques used for base erosion and profit shifting.316 It is, of course, related to risk
assessment by tax authorities, but also to corporate accountability both to stakeholders
and the general public.317
Additionally, the controversy about the content and implementation of country by

country reporting in the EU, and its review towards the end of the decade, call for a tax
oriented high level risk assessment tool as the appropriate response to action point 13
from a European perspective.318
The debate on the narrow or wide scope of country by country reporting is ongoing.
It seems the initial draft template could have gone well beyond the original proposal of
a high-level risk assessment tool. It looked as if the drafters wanted to put everything
they could in the template to make an extraordinary weapon.319 They should have born
in mind that imposing many requirements often complicates the implementation and
does not help to rebuild public trust.320 A refining process is open.
What seems paradoxical at a first glance, might lead to a good result. By ‘emptying’ the
proposed template, MNEs and tax administrations could more easily work with it; and
as there would be less confidentiality problems, a minimum public accountability would
exist. More information may not be the answer; but more targeted information is. In
this sense, the country by country template should be kept as simple as possible.321
316 TEI comments on the Discussion Draft: the OECD notes that the CbC reporting template may be used for purposes
other than transfer pricing administration, including general tax administration and addressing other BEPS action items.
Including it in Chapter V would therefore be inconsistent with a future expansion of its role. The template also lends itself
to digitalised reporting, which may facilitate the review of its voluminous data by tax authorities. Public comments received
Volume IV - Letters S to Z Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at
74 et seq.
317 The BEPS Monitoring Group (BMG) is a group of experts on various aspects of international tax, set up by a number
of civil society organizations which research and campaign for tax justice including the Global Alliance for Tax Justice, Tax
Justice Network, Christian Aid, Action Aid, Oxfam, Tax Research UK. Public comments received Volume I - Letters A to C
318 See Business Europe Comments on the Discussion Draft. Public comments received Volume I - Letters A to C Discus-
sion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 207 et seq.
319 As stressed in Parillo, K.A. : News Analysis: Does BEPS Spell the End of Tax Planning?, Tax Notes International, Vol.
74, No.1, April 7, 2014, reprinted as Chapter 8 in this volume.
320 Antony Ting, in the Comments on the Discussion Draft, refers to Vodafone Group Plc, Sustainability Report 2012/13
(2013), at 66-76 and highlights that MNEs may attempt to ‘hide’ asmuch information as possible in the CbC report.
321 As the Federation of German Industries (BDI) explained in the Comments on the Discussion Draft, the scope of the
template will be crucial for the amount of new administrative burden. Public comments received Volume I - Letters A to C
Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 83 et seq. In the same line,
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This could also facilitate the inclusion of a cooperative compliance approach, in which
transparency is provided in exchange for certainty, following on from the risk assess-
ment.322 The instrument of cooperative compliance could be applied in the internati-
onal context to improve the overall information position of both tax authorities and
business, and at the same time avoid excessive documentation compliance burdens.323
B. Challenges with regard to compliance
What should be in the big picture?
In line with the G8 mandate, the country by country reporting template should compri-
se high-level data to establish the footprint of a MNE across the world, and determine
which countries within its footprint give cause for concern.
If this document is a tool for case selection, in order to offer the global overview of
the multinational’s business on a stand-alone basis, any information which does not
BIAC expressed that the current template goes well beyond that objective in the amount of detail asked for, and will create
a disproportionate increase in the compliance burden businesses face. One reason for this concern is the proposed inclusion
of the country by country report in the master file, which suggests that the template is a transfer pricing tool which can be
used for transfer pricing risk assessment and full audit purposes. This does not seem to fit with the original mandate for a
high-level risk assessment tool, and we strongly believe the difference between the two should be very clearly articulated.
When that is done, the amount of information required for the template can be significantly reduced to allow for a more
effective focus on high level risks. Public comments received Volume I - Letters A to C Discussion Draft on Transfer Pricing
Documentation and CbC Reporting 23 February 2014, at 97 et seq.
322 According to the CBI and the 100 Group, the Discussion Draft attempts to bring together two distinct objectives that
would be better addressed by two separate outputs: 1. Delivering a breakdown of the global results of multinational enter-
prises (MNEs) to facilitate a high-level risk assessment (CBCR); and 2. Ensuring taxpayers give appropriate consideration to
transfer pricing requirements, and provide tax administrations with information to facilitate an informed transfer pricing risk
assessment (the master and local files). Public comments received Volume I - Letters A to C Discussion Draft on Transfer
Pricing Documentation and CbC Reporting 23 February 2014, at 224 et seq.
BIAC believes that the identification of low-risk taxpayers needs a standardized, comprehensive approach. As the ITC
proposes, once a taxpayer is classified as low risk, then it would be reasonable to require a more simplified transfer pricing
documentation requirement. Public comments received Volume I - Letters A to C Discussion Draft on Transfer Pricing
323 CBI and 100 Group Comments on the Discussion Draft: It is essential that governments enacting CBCR into local
legislation maintain consistency regarding the CBCR template and resist the temptation for additional requirements. Ibidem.
BIAC Comments on the Discussion Draft: if businesses are able to provide useful information for risk assessment purposes
(through the provision of the CbC report and other tax authority specific risk assessment tools), and a low level of risk is
identified, then there should be some mechanism through which the subsequent TPD compliance burden should be reduced.
This should include a reduced level of detail required in the TPD (e.g. master file and country file). Other measures such as
reducing the reporting requirements for group members that are a small part of the MNE group, or for transactions within
an MNE group that are small, would help reduce the compliance burden. Ibidem.
118
contribute to draw this ‘big picture’ will place an undue burden on business with no
corresponding benefit for tax authorities, and therefore should be excluded from the
template.
If the quantity prevails over the quality of the data, the overall objective will not be
achieved efficiently. An excess of irrelevant data for risk assessment is likely to diminish
the utility of the template. It should be manageable, and should try to avoid problems
related to the confidentiality regime.324
The global information provided in the template, as snapshot of a particular MNE’s tax
risk, should show the global position of profits and taxes paid within a multinational
group, rather than provide a comparison between different MNEs, with different busi-
ness models, structures and operations.325
On the one hand, some data could be difficult to produce or could be highly misleading
in the form specified, and duplicative of information that would be included in the
transfer pricing documentation master file.326 In addition, unless one, universal, stan-
dard, and short activity list is adopted, the number of differing and granular classifica-
tion standards available would likely cause confusion.327
On the other hand, it is quite obvious that all this ‘big picture’ information could not
be ‘sufficient’ to determine that there is an underpayment of tax. The rationale behind
the data provision is unclear and any interpretation of data by the tax administrations
without further details to reconcile the data will be hazardous and inappropriate.328
324 According to Comments on the Discussion Draft made by BIAC: The OECD should also give careful consideration
to the potential impact of the disclosure of such a large volume of data on the tax administrations that often face resource
constraints when dealing with tax audits and enquiries. This will likely be a more significant concern for developing country
tax administrations. Ibidem.
325 It is important that this is clearly set out in the OECD’s guidelines for using the country by country reporting template
for risk assessment.
326 See EY Comments on the Discussion Draft. Public comments received Volume II - Letters D to J Discussion Draft on
327 See BIAC Comments on the Discussion Draft. BIAC believes that a limited number of business activity indicators are
preferable to a long list. However, the ‘other’ category is likely to be over-used. Public comments received Volume I - Letters
A to C Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 97 et seq.
328 A3F (Association Française des Femmes Fiscalistes) Comments on the Discussion Draft. Public comments received
Volume I - Letters A to C Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at
2 et seq.
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There is also a fear that onerous requirements will lead to unintended gaps in the do-
cumentation, with the result that the MNE will be considered as non-compliant, thus
facing penalties, or not having access any longer to arbitration or mutual agreement
procedures.329
The original template required ‘too much information’. Only a few key metrics are
necessary to provide an indication of an MNE’s risk profile. The template, as an initial-
step high-level risk assessment tool, should be aimed at determining whether and where
to devote resources to conduct a detailed examination.330
Moreover, country by country reporting should not be used as a substitute for the ‘risk
assessment process’ to be conducted by tax authorities in line with the OECD Draft
Handbook on Transfer Pricing Risk Assessment.
Country by country reporting information should not substitute a detailed transfer pri-
cing analysis. Any transfer pricing advisor, when writing a transfer pricing report, is not
trying to highlight risks to the tax authorities, but to comply with the minimum legal
documentation requirements.331
The OECD could offer training to interpret the limited parameters of country by coun-
try reporting. Additional information should not be routinely required from taxpayers
in the template, but should be dealt with through local tax returns or other local infor-
mation mechanisms.
329 Working Group for Economic Administration (AWV - Arbeitsgemeinschaft für wirtschaftliche Verwaltung) Comments
on the Discussion Draft. Public comments received Volume I - Letters A to C Discussion Draft on Transfer Pricing Docu-
mentation and CbC Reporting 23 February 2014, at 70 et seq.
330 PWC believes tax authorities can complete a high-level risk assessment from the MNE’s business activity code, revenue,
pre-tax income, and taxes on a current provision basis (as discussed more fully below). These factors provide the tax authori-
ties sufficient information to evaluate whether further questions or inquiries are appropriate (i.e., the purpose of a high-level
risk assessment). Because of the increase in compliance burden for each additional data point included in the Template, the
group 14 believes that the other financial and economic factors listed 9 of 16 (e.g., tangible property, number of employees,
employee expense) could be made available by an entity under examination, as appropriate, if the tax authority believes addi-
tional inquiries are appropriate. Similarly, the group believes intercompany payments are transfer pricing specific and, as such,
if needed are included more appropriately in the local transfer pricing documentation. Public comments received Volume III
- Letters K to R Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 147 et seq.
331 See ITC Comments on the Discussion Draft. Public comments received Volume II - Letters D to J Discussion Draft
on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 380 et seq. TEI Comments on the Discussion
Draft add that the template requires ‘too little’ information if the information were to be used for proposing adjustments
based on formulary apportionment as a substitute for a detailed audit of individual transactions that applies the arm’s length
principle. Public comments received Volume IV - Letters S to Z Discussion Draft on Transfer Pricing Documentation and
CbC Reporting 23 February 2014, at 74 et seq.
120
Clearly, the differences in the purpose, the information to be included, and the due date,
support that the template be a separate, standalone document.332 At the same time, its
preparation may serve for some internal checks within the MNEs too.333
The information required in the template should be clearly defined to provide certainty
to taxpayers, and should have the broadest possible support to avoid unexpected chan-
ges in the short-term, though the country by country template is likely to evolve in the
future (i.e. through specific templates by industry, or adding a voluntary disclosure sec-
tion). At present, expanding the template for particular industries by adding fields could
complicate the risk assessment.334 The best would be the enemy of the good.
Now, the development of additional standard forms and questionnaires beyond the
country by country template would be premature.335 The OECD should wait until the
use of the template has been fully evaluated after two years, to check that it is meeting
its objectives and is workable;336 or until the report proves to be effective for high-level
risk assessment purposes and the forms can be implemented multilaterally.337
332 PWC recommends the template and the master file be separated because it increases the chances of retaining the confi-
dential nature of the master file information and assists with filing deadlines. Public comments received Volume III - Letters
K to R Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 147 et seq.
333 As stated in the ITC Comments on the Discussion Draft: From a practical perspective, a company may decide to ask
one of its advisors to do the transfer pricing documentation and another to prepare the country by country reporting. In
fact, it is probably preferable that these documents are separated as a control mechanism. Public comments received Volume
II - Letters D to J Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 380 et seq.
334 Banking and Finance Company Working Group on BEPS Comments on the Discussion Draft: One option would be
to create a separate template tailored to financial services companies, but we fear that expanding the template for particular
industries by adding fields and columns would necessarily complicate the risk assessment platform for both taxpayers and tax
administrators. Public comments received Volume I - Letters A to C Discussion Draft on Transfer Pricing Documentation
and CbC Reporting 23 February 2014, at 73 et seq.
335 It is even stated in Deloitte Comments on the Discussion Draft that to prevent tax authorities from being ‘swamped’ with
excessive information, no supplementary pages should be permitted with regard to the template. Public comments received
Volume II - Letters D to J Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 30.
336 See ABI Comments on the Discussion Draft. Public comments received Volume I - Letters A to C Discussion Draft on
337 See BIAC Comments on the Discussion Draft. Public comments received Volume I - Letters A to C Discussion Draft
on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 97 et seq.
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Proportionality and flexibility demanded
The compliance burden on businesses should be proportionate to tax authorities’ ob-

jectives. The data should be achieved without unnecessary administrative effort and
cost on either side.338 There should be an appropriate balance between the utility of
the information requested and the burden on MNEs. Proportionality should be res-
pected in the contents and the timing of the provision of relevant information to tax
authorities, and in specific rules on the application of documentation-related penalties,
if applicable.339
MNEs are organised in different ways and use different systems to report financial
information both internally and externally. Therefore, expecting a country by country
report to be produced on a consistent basis for all businesses could perhaps be unre-
alistic.340 What may be easily obtainable by one MNE may be an extreme burden for
another MNE. There is no ‘one size fits all’ approach.
Flexibility, by not mandating a hierarchical approach to the data sources, would minimi-
se compliance costs. There could be optionality over whether a ‘bottom-up’ or a ‘top-
down’ approach is used. The template could allow the use of the most meaningful data
compiled in the most systematic way for each MNE.341 If a group has a consolidation
in a country for other purposes, that one could be used for purposes of country by
country reporting on the template.342
338 TEI Comments on the Discussion Draft: The country by country reporting template should be designed to permit an
MNE to populate the template with minimal additional cost and, where possible, based on information it already reports, or
at least collects in some form. Public comments received Volume IV - Letters S to Z Discussion Draft on Transfer Pricing
339 See Valente Associati GEB Partners Comments on the Discussion Draft. Public comments received Volume II - Letters
D to J Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 115 et seq. BASF in
its Comments on the Discussion Draft recommends the OECD to explicitly clarify that the absence of the CBCR or trans-
fer pricing documentation cannot be the reason on its own to make an adjustment on transfer prices. Adjustments and the
connected penalties should be applied only in case the audited controlled transactions of the taxpayer do not satisfy the arm’s
length principle. Public comments received Volume I - Letters A to C Discussion Draft on Transfer Pricing Documentation
122
This optionality could be a workable solution, with a safeguard that businesses can
only change their approach when there is a good reason (i.e. implementation of new
systems).343 In any event, the tax authorities could be able to ask why the taxpayer has
used a particular route, and the taxpayer should confirm that no material divisions or
activities are left out.344 A default method might be proposed, but with the ability of
the MNE to elect to apply the other approach. This would prevent additional costs for
businesses not currently set up for a single selected approach.345
However, several reasons have been expressed for rejecting the use of a bottom up
template: bottom up data cannot reveal that BEPS is occurring because the impact of
BEPS is implicit within it; it does not contribute to ensure that profits are taxed once,
and once only; and to suggest that an entity-by-entity approach be used for country by
country reporting is a contradiction in terms.346
It is also interesting to take into account that in many companies, integrated reporting
is currently being driven from the top down.347
It has been discussed if it would be possible to wholly or partially exempt reporting for
smaller members of the MNEs group and still assure the provision of relevant infor-
mation for risk screening purposes.348
343 See Deloitte Comments on the Discussion Draft. Public comments received Volume II - Letters D to J Discussion Draft
344 See ICC Comments on the Discussion Draft. Public comments received Volume II - Letters D to J Discussion Draft on
345 See BDO Comments on the Discussion Draft. Public comments received Volume I - Letters A to C Discussion Draft
on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 91.
346 See Beps Monitoring Group Comments on the Discussion Draft. Public comments received Volume I - Letters A to
C Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 163 et seq. A bottom up
approach to country by country reporting would result in a totally new consolidation taking place without any consideration
of the impact of differing local accounting standards, the impact of intra-group transactions and the impact of group conso-
lidation adjustments on total income of the firm. It is only top down data that reveals sales / revenue data on both a source
and destination basis and separates intra-group transactions from those with third parties that could reveal the information
that the whole BEPS project are meant to address. As in any consolidated financial statement preparation system, of which
it is a form, the individual jurisdiction reports must reconcile to the overall consolidated financial statements. It is central to
the concept of country by country reporting that it should provide a consolidated view of the results of a multinational cor-
poration on a jurisdiction-by-jurisdiction basis, excluding all intra-group trading within each country and explicitly revealing
the intra-group transactions undertaken on an inter-jurisdictional basis.
347 PWC, Mesuring and managing total impact: A new language for business decisions at 11. Document available at www.
pwc.com/totalimpact.
348 See Federation of German Industries Comments on the Discussion Draft. It is even said that the numbers disclosed
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Those in favour of materiality defend that it should also apply in determining whether
a country needs to be included in the template, and that MNEs could provide an expla-
nation of the approach taken in this respect, in the area reserved for ‘Additional Infor-
mation’. Where a MNC group’s presence in a particular country is very limited, it has
been proposed that it should not be required to apply the full reporting requirements
of the template. This de minimis rule could be crafted in a way that does not mean that
the de minimis countries do not have access to information.349
The limit to the flexibility with regard to sources of data is that the tax authorities know
at the end what they are getting.
Coherence with other (integrated) national or international reporting initiatives
There are various in-country reporting requirements in force that cannot be ignored.
The country by country template -created as a separate document, could allow some
sort of harmonisation through legislation in countries that currently require reporting
in different forms.350
MNEs could be exempted from preparing this country by country reporting template if
the MNE is already subject to a similar separate reporting requirement. An ‘equivalence’
approach could be adopted for industries that have to meet Dodd-Frank, EU and/or
other disclosure requirements.
In case more than one jurisdiction imposes a similar disclosure requirement on a par-
ticular MNE, the rule should be that what is elaborated for one, should be acceptable
for the other.351 In that case, the tax authorities could refer to the report prepared under
would only need to be materially accurate. Public comments received Volume I - Letters A to C Discussion Draft on Transfer
Pricing Documentation and CbC Reporting 23 February 2014, at 83 et seq.
350 TEI Comments on the Discussion Draft: the CbC reporting template is not transfer pricing documentation in the tra-
ditional sense, but more akin to information reporting. In many cases, information reporting is a different area of the local
tax code that does not generally reference guidance from the OECD. Public comments received Volume IV - Letters S to Z
124
any other requirements, albeit in a different format, because they could reuse the same
data to minimize additional work. It is necessary to care about consistency of approach
between the different reporting initiatives to keep the compliance burden manageable
and avoid confusions.352
Penalties or negative consequences for small differences due to some variations of the
templates, when they are basically ‘equivalent’, should not be applicable. The OECD
could develop Tax Reporting Standards that can be used by MNEs to ensure that they
have sufficient and consistent guidance on this disclosure regime, and to avoid mis-
reporting.353
C. What confidential information is to be protected?
Nowadays the jurisdictions that safeguard confidentiality are attractive places for for-
eign investment and many tax authorities have been already working on ways to protect
confidentiality.354 Some disclosures would violate laws in the host country or breach
contractual obligations towards third parties, and should not be required.355 Unless the-
re would be an accompanying change in local law, the companies should be able to re-
fuse to provide protected information, and the courts should not enforce the requested
disclosure.356
353 See BMG Comments on the Discussion Draft. Public comments received Volume I - Letters A to C Discussion Draft
354 Keeping it safe, Joint OECD/Global Forum guide on the protection of confidentiality of information exchanged
for tax purposes, available on line at http://www.oecd.org/tax/transparency/final%20Keeping%20it%20Safe%20with%20
cover.pdf
355 See Federation of German Industries Comments on the Discussion Draft. Public comments received Volume I - Let-
ters A to C Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 83 et seq. See
Federation of German Industries Comments on the Discussion Draft. Public comments received Volume I - Letters A to C
356 See TEI Comments on the Discussion Draft. A reference is made to privacy and other information protection legislation
in many countries and the European Union (i.e. the EU Data Protection Directive). Public comments received Volume IV
- Letters S to Z Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 74 et seq.
125
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In practice, quite often commercially sensitive data and business knowledge are not
shared widely within the multinational group, because it would increase the risk of
it being shared with competitors.357 In addition, external transfer pricing advisors are
required to sign strict Non-Disclosure Agreements, which could be also required to
members from the tax administration moving to the private sector.
An excessive level of detail required in a country by country report could potentially

lead to situations where data are considered to be confidential, and disclosing them
could pose a conflict of law. This conflict could be resolved through some reporting
exemptions,358 or by excluding the country data, and making it clear why they were
excluded.359 Particularly, in the case of data included in APAs and other rulings, dis-
closure of this information might have to be limited to the countries party to specific
agreements.360
There are several options to deal with this issue. The business sector has expressed a
wide preference for a stringent confidentiality regime under which they would file in-
formation in the parent company’s jurisdiction, who would share it under the exchange
of information articles in double taxation conventions or tax information exchange
agreements, because the information is only provided through them if it is relevant and
confidentiality is protected.
If the Treaties cannot be applied, some criteria have been pointed out before the temp-
late is exchanged: ‘a) The information in the template is relevant to the tax affairs of the
relevant enterprise, b) It is reasonable, proportionate to the risk under consideration,
and not unduly onerous to produce, c) the information is used appropriately, and d)
confidentiality is maintained’.361
357 See Deloitte Comments on the Discussion Draft. Public comments received Volume II - Letters D to J Discussion Draft
359 See CBI and 100 Group Comments on the Discussion Draft. Public comments received Volume I - Letters A to C Dis-
cussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 224 et seq.
360 See ICC Comments on the Discussion Draft. 3.6. Public comments received Volume II - Letters D to J Discussion Draft
361 See ABI Comments on the Discussion Draft. Public comments received Volume I - Letters A to C Discussion Draft
on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 22 et seq. BIAC in the Comments on the Dis-
cussion Draft supports disclosure only to the MNE parent’s home country tax administration for sharing to other countries
126
A number of other measures to safeguard confidentiality have been proposed: speci-

fic anti-infringement procedures to protect taxpayers from unauthorized information
disclosure by tax administrations if real damage is demonstrated, or if disclosure is in
conflict with applicable legal restrictions; specific technological means for information
exchange between taxpayers and tax administrations to prevent leakages; or consultati-
on of sensitive information at taxpayer premises, among others.362
A wish has been made: ‘any information received by a tax administration should always
be treated as confidential’.363 This ambition may be understandable in the current search
for safeguards in the middle of uncertainty, but confidentiality will depend on the na-
ture of the information. If connected to the disclosure of relevant information to tax
administrations in another jurisdiction, it would entail that similar conditions would
apply than the ones in article 26 of the OECD MC (related to the assessment or collec-
tion of, the enforcement or prosecution in respect of, or the determination of appeals
in relation to, the taxes concerned).
If a MNE submitted the template to the tax authority of its headquarters country, this
would ensure that its established exchange mechanisms and dispute resolution proce-
dures would be in place prior to sharing the template through its information exchange
agreement or double tax treaty network with other tax authority.364 Additionally, the
under information exchange treaties; and stresses that MNE group members should not be compelled or coerced through
penalties to provide the information to jurisdictions that have not entered into information exchange treaties. Public com-
ments received Volume I - Letters A to C Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23
February 2014, at 97 et seq.
362 See Valente Associati GEB Partners Comments on the Discussion Draft. Public comments received Volume II - Letters
D to J Discussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 115 et seq.
364 PWC on behalf of the group of fourteen U.S. headquartered multinational entities, Comments on the Discussion Draft.
The existing treaties and tax information exchange agreements must be leveraged if the template is adopted and information
contained on the template is to be shared among tax authorities. The HTA is the proper recipient of the template, because
the HTA can ensure that appropriate dispute resolution mechanisms exist (e.g., an objective, efficient, and effective domestic
administrative appeals function; a mandatory binding, baseball style arbitration; etc.) between it and other tax authorities
before the template is shared. Public comments received Volume III - Letters K to R Discussion Draft on Transfer Pricing
Documentation and CbC Reporting 23 February 2014, at 147 et seq. The Federation of German Industries, in the Com-
ments on the Discussion Draft, supports that country by country reporting and Transfer Pricing Documentation should
not be required prior to the implementation of Action Item no. 14 of the BEPS Action Plan ‘Making Dispute Resolution
Mechanisms More Effective’. This means that Master File and Country-by-Country data are only to be shared under the
information exchange provision of tax treaties. Furthermore a prerequisite must be to have a binding arbitration mechanism
in the tax treaty between the jurisdictions requesting the information. Public comments received Volume I - Letters A to C
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OECD could consider the possible situation of a headquarters country that does not
require reporting pursuant to the template.365
Obviously, the sharing of the template could be done pursuant to an existing bilateral
exchange of information relationship or through a new relationship established for
this purpose, including pursuant to a multilateral instrument such as is contemplated
under Action 15 of the BEPS Action Plan. At the moment, under the Convention on
Mutual Administrative Assistance in Tax Matters, the requested state has no obligation
to supply information which would disclose any trade, business, industrial, commercial
or professional secret, or trade process.
Does the information proposed for inclusion in the country-by-country report fall
within these categories? Will the information in the country by country report be sensi-
tive enough to justify being treated as confidential? This could happen when related to
the way in which the companies make profits.366 There is an open debate on what type
of information is legitimate for companies to treat as confidential, and what should
be publicly disclosed?367 The way to proceed with the country by country reporting
template could be, first, to agree on the content that is not commercially confidential in
principle, and then to establish an exception procedure to discuss if a report contains
confidential data in a particular case.368
Alternatively, the country by country reporting template could be kept at the parent
company level and delivered to the interested tax authorities upon request.369 However,
tax authorities in non-headquarter countries face obstacles accessing information about
transactions with related parties outside their jurisdiction.
366 BIAC Comments during the Public consultation on 19 May 2014.
367 See BMG Comments on the Discussion Draft. Public comments received Volume I - Letters A to C Discussion Draft
368 BMG Comments during the Public consultation on 19 May 2014. Bearing in mind the actual risk of different interpreta-
tions of a definition of commercial confidentiality, the proposal referred in the text could be adopted.
369 See Base firma Comments on the Discussion Draft. Public comments received Volume I - Letters A to C Discussion
128
Another option would be making the country by country reporting template public.
This, of course, would solve concerns about how to ensure access by authorities to it.
It would also promote the understanding of the role of companies in society and in the
assessment of tax. Through comparisons with their performance in other countries,
societies could hold both governments and corporations accountable.370 In this regard,
many companies have already begun to implement the total tax impact measurement
of their overall tax contribution. This sort of publication may encourage fair compe-
tition.371
At the end of this review, it is clear that all the filing and sharing questions will depend
on the final contents of the template.
D. The situation of developing countries
There needs to be objective criteria to both justify confidentiality and to deny informa-
tion to other tax authorities. Confidentiality should not be construed as the equivalent
of a non-tariff barrier to exclude developing country participation.
Many developing countries do not yet have tax treaty networks that allow information
exchange. They would incur costs, and would face administrative obstacles to obtaining
(what should be only) information for a preliminary risk assessment. These non-OECD
countries, to which the OECD template is also offered, could be left aside, if approp-
riate measures are not taken to meet the needs of developing countries under a treaty
370 See Christian Aid Comments on the Discussion Draft. Public comments received Volume I - Letters A to C Discussion
Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 257 et seq. Almost six out of ten CEOs
(59%) agreed that multinationals should be required to publish revenue, profit and tax disclosures on a country-by-country
basis, although 36% of US CEOs (compared with 19% globally) disagreed. That 59% of CEOs agreed is surprising given
what are believed to be widely held concerns that mandatory ‘country by country’ disclosure requirements will focus on
data that is costly for businesses to generate and is not easy for the reader to understand. Perhaps this reflects the acknow-
ledgement by CEOs that the provision of some kind of meaningful information on tax is a key part of building greater
understanding. 17th Annual Global CEO Survey: Tax strategy, corporate reputation and a changing international tax system.
Document available at www.pwc.com/taxceosurvey
371 By assessing all the taxes that a business pays and collects on behalf of the relevant tax authorities; that is, those taxes
that represent a cost to the business, such as corporation tax, and those that are generated by a business’s operations, but
don’t impact on its results, such as sales and payroll taxes. PWC, Measuring and managing total impact: A new language for
business decisions at 24. Document available at www.pwc.com/totalimpact
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based system. A public template could also help these countries to assess the MNE‘s
performance before they operate in their territory.372
The country by country report may also assist development policy. There is a real op-
portunity to improve the capacity of developing country authorities to better under-
stand business structures and functions. They should be directly included in the process
of designing this report.
7.3.3. Timeframe for adoption and implementation of the template
The OECD is rushing to finalise the country by country reporting template in the Ac-
tion Plan, within the shortest possible deadline.373 If the other Action Plan items were
first completed, the OECD could determine what information is necessary to imple-
ment them, and devise the reporting standards accordingly. A change of the deadline
(from September 2014 to December 2015) could allow all the stakeholders to give the
report adequate consideration.
Once the template would be adopted, if one relevant jurisdiction chose to implement
it significantly in advance of other governments, MNEs would be potentially exposed
to an unreasonable global reporting commitment timetable.374 To ensure that no global
organization is placed at a competitive disadvantage, it has been proposed that the tem-
plate should not be required of MNEs until all G20 and OECD nations have enacted
372 Eurodad Comments during the Public Consultation held on 19 May 2014.
373 See TEI Comments on the Discussion Draft. giving stakeholders a mere 25 days to comment on the template (and the
Discussion Draft generally). Indeed, the Draft itself notes that ‘it reflects limited consideration of the issues in the short
time since the publication of the Action Plan . . . .’ The OECD introduces the significant possibility that the CbC reporting
template will become obsolete after the OECD completes the other BEPS action items and countries begin to implement the
OECD’s recommended changes to the international tax system. Public comments received Volume IV - Letters S to Z Dis-
cussion Draft on Transfer Pricing Documentation and CbC Reporting 23 February 2014, at 74 et seq. The French Women
Tax Experts Association hold the opinion that Action 13 addresses TP documentation and CbC Reporting in isolation of all
other BEPS actions and with an accelerated timeline. A3F (Association Française des Femmes Fiscalistes) Comments on the
Discussion Draft. Public comments received Volume I - Letters A to C Discussion Draft on Transfer Pricing Documentation
130
regulatory or legislative changes that require locally headquartered MNEs in each juris-
diction to complete it, and have agreed upon measures to resolve disputes.375
Of course, the new country by country regime should be accompanied by a sensible

phase-in period, to provide businesses with sufficient time to implement changes to
systems and processes and present information consistently.376 In the event of extensive
data being included in the template, the adoption of some transitional measures could
be considered: a phased roll-out of the country by country report, beginning with less
commercially sensitive information, or even a grandfathering period allowing a level of
flexibility in order to comply.377
7.4. Final remarks
Base Erosion and Profit Shifting is a risk. The tax administrations should be able to
decide whether or not, and where to devote their scarce un-coordinated resources to
deal with it.378 But country by country reporting is a tool of interest beyond companies
and tax authorities, as it may show to all the stakeholders that the tax system is working
effectively and fairly.
The OECD is now focusing on stateless income, with a view also to the debate between
source versus residence-based income tax at a later stage. However, there is a risk that
the information provided, will fuel that debate and could ultimately be in favour of a
formulary apportionment method.379 Although the international reporting standard will
375 PWC on behalf of the group of fourteen U.S. headquartered multinational entities Comments on the Discussion Draft.
Public comments received Volume III - Letters K to R Discussion Draft on Transfer Pricing Documentation and CbC
Reporting 23 February 2014, at 147 et seq.
376 See ICC Comments on the Discussion Draft. Public comments received Volume II - Letters D to J Discussion Draft on
378 See BIAC Comments on the Discussion Draft. Ibidem.
379 See A3F Comments on the Discussion Draft: assuming OECD guidelines on TP documentation and CbC Reporting
as drafted are applied consistently by OECD member states, in practice information will be shared widely with non- OECD
members states, with no guarantee of reciprocity. We view a risk that the information provided will lead to adjustments based
on non-OECD methods, which will not be resolved under Mutual Agreement Procedures A3F (Association Française des
Femmes Fiscalistes) Comments on the Discussion Draft. Public comments received Volume I - Letters A to C Discussion
131
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be a best practice, are we living the change towards a new system, without actually re-
cognising that it is happening (back-door global soft-law)?380 When producing soft-Law,
the legal certainty deficit can be a structural feature. In spite of it, soft law will probably
work if a sound robust global standard is found. A reporting template with not too
many requirements could be good and acceptable.381 There is a common interest in ag-
reeing a minimum worldwide reporting template to be filled in the same way, applicable
to all companies and in all countries, but it is necessary to proceed with extreme caution.
Another route could be explored to avoid complexity: the upgrade of the tax administ-
ration. An international tax authority382 would be better placed to deal with a worldwide
issue. The talks with MNEs could be better held by a multinational administration
composed of the tax authorities from the affected countries in each case. This type of
organizational arrangement should be sustained over time, going further than the exis-
ting occasional simultaneous tax examinations. By including developing tax authorities
in each team, a learning process could be possible by sharing the work experience. It
would be a further step in the direction of tax inspectors without borders, caring for
tax information without borders.
An important shortcoming of the template is that the amount of tax paid (either on a
cash or accrued basis) will reflect the effect of preferential regimes and rates promoted
by many States through their specific tax policy choices. Companies taking advantage
of them will attract undue attention from tax authorities who may consider a taxpayer
high risk solely because of a low tax payment, when in fact the taxpayer has behaved
in accordance with the country’s rules.383 In order to solve this problem, the template
could include a reference to the tax benefits applied and their justification. This would
show how companies manage their tax affairs in a responsible way, in connection with
other reporting standards.
380 Martín Jiménez, A.; Calderón Carrero, J.M.: ‘El Plan de Acción de la OCDE para eliminar la erosión de bases imponibles
y el traslado de beneficios a otras jurisdicciones (‘BEPS’): ¿el final, el principio del final o el final del principio?’, Quincena
Fiscal Aranzadi, No.1, 2014 (BIB 2014\267). Reporting obligation, perimeter. To whom. Too many sensitive data, without
defined confidentiality safeguards. Which part is not sensitive? Interaction of different reporting obligations. Is there a
proportionate penalty if this obligation is not met? Risk or temptation for the national tax administration to tax any value
creation identified within its territory, by employing the data required to the company.
381 BMG Comments during the Public consultation on 19 May 2014.
382 As OXFAM recognized at the OECD Forum 2014, that took place on 5-6 May. Video is available at http://webcastcdn.
viewontv.com/client/oecd/forum2014/05052014_blue.html
383 See TEI Comments on the Discussion Draft. Public comments received Volume IV - Letters S to Z Discussion Draft
132
At the time of writing it seems that, in the template, country level financial data will be
required for all countries, and that there will be flexibility regarding sources of financial
data, provided a consistent approach is followed for the entire group and from year to
year.384 Only the passage of time will allow us to judge whether the final decisions have
been successful.
384 ‘Tentative decisions taken by WP6’, Live Webcast Update on BEPS Project 2 April 2014, 3:00pm – 4:00pm (CEST), at
slides 26 – 28. ‘Eliminate transactional reporting in C by C template, limit transactional reporting to local file. Retain reporting
of activity measures on a country basis – number of employees, tangible assets, capital and retained earnings. Require country
level financial data for all countries but not entity-by-entity reporting. Include a list of entities and PE’s included in each
country with numbers / activity codes for each. Provide flexibility regarding sources financial data provided a consistent
approach followed for entire group and from year to year. C by C template a separate document / not part of master file.
Clarify that the master file is supposed to be a high level overview. Flexibility as to whether master file should be prepared on
a group – wide basis or by line of business’.
133
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BEPS & Tax Planning
8. News Analysis: Does BEPS Spell the End

of Tax Planning?
by Kristen A. Parillo385
8.1. BEPS and tax planning in the EU
Does the OECD’s base erosion and profit-shifting initiative signal an end to the heady
days of creative tax planning? Maybe not in the European Union. The media frenzy
following the July 2013 release of the OECD’s 15-point BEPS action plan, and the
September 2013 G-20 leaders’ declaration that they ‘‘fully endorse’’ the project, promp-
ted some transparency advocates and pundits to conjure up doomsday scenarios for
the providers and recipients of the kind of tax planning that has resulted in stateless
income and ultra-low effective tax rates.
Those observers believe that the underlying message of the BEPS initiative is that the
tax planning party is over: The days of aggressive and artificial tax planning, arbitrage,
no- or low-tax burdens, treaty shopping, and tax mitigation are coming to an end. In
other words, tax advisers ought to start lining up other job opportunities.
In the EU, however, the outlook for tax practitioners may not be quite as bleak. At the
Confédération Fiscale Européenne’s (CFE) Forum 2014 in Brussels on March 27, par-
ticipants were reminded that any efforts to reform EU member states’ tax regimes as
part of the BEPS project will have to comply with the EU treaties and tax directives and
a significant amount of European Court of Justice case law interpreting those rules.
The ECJ has made it clear in its judgments in cross-border tax cases that tax planning
is OK up to some limits.386 ‘‘This doesn’t get mentioned very often, but the ECJ has no
problem whatsoever with tax planning generally,’’ said Tom O’Shea of the Centre for
Commercial Law Studies at Queen Mary University of London, ‘‘so you will all have
385 Kristen A. Parillo is a contributing editor with Tax Notes International. E-mail: kparillo@tax.org.
This article was reprinted from Tax Notes Int’l, April 7, 2014, p. 7, with the kind permission of the author and the Permis-
sions Editor of Tax Analysts.
386 See prior analysis in: Tax Notes Int’l, Nov. 11, 2013, p. 489; and Tax Notes Int’l, Jan. 13, 2014, p. 107.)
135
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jobs in Europe in the coming years.’’ O’Shea noted that the Court, starting with Halifax
(C-255/02), repeatedly said that ‘‘taxpayers may choose to structure their business so
as to limit their tax liability.’’ In RBS Deutschland (C-277/09), the ECJ held that ‘‘taxable
persons are generally free to choose the organisational structures and the form of tran-
sactions which they consider to be most appropriate for their economic activities and
for the purposes of limiting their tax burdens.’’
However, the ECJ set boundaries on both the kind of tax planning that is acceptable
under EU law and on the scope of legislation that member states may implement to
prevent tax evasion, avoidance, and abuse. In Tanoarch (C-504/10), the Court acknow-
ledged that ‘‘preventing possible tax evasion, avoidance and abuse is an objective recog-
nized and encouraged by the [VAT] directive.’’ In Cantor Fitzgerald (C-108/99), the ECJ
explained that ‘‘the principle of the neutrality of VAT does not mean that a taxable per-
son with a choice between two transactions may choose one of them and avail himself
of the effects of the other.’’
O’Shea said the Court’s decisions have demonstrated that ‘‘if you structure your tax
planning properly, you will survive a challenge in the eyes of the ECJ.’’ He pointed to
Barbier (C-364/01), a case that examined a pure inheritance tax scheme involving Belgi-
um and the Netherlands. The ECJ held that Dutch rules that calculated inheritance tax
differently, depending on whether immovable property was located in the Netherlands,
violated the free movement of capital. The Court wrote: A Community national cannot
be deprived of the right to rely on the provisions of the Treaty on the ground that he
is profiting from tax advantages which are legally provided by the rules in force in a
Member State other than his State of residence.
O’Shea said the line of ECJ cases examining member states’ anti-abuse rules, the U.K.
controlled foreign corporation rules in Cadbury Schweppes (C-196/04) and its thin cap
rules in Thin Cap GLO (C-524/04), and Belgium’s transfer pricing rules in SGI (C-
311/08), provide clear guidelines that national anti-abuse rules that apply in an EU
cross-border context, but not in a domestic context, constitute a restriction on the
exercise of the EU freedoms. Anti-abuse rules that are found to constitute a restriction
require justification and must satisfy the principle of proportionality in order to survive
an ECJ challenge.
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BEPS & Tax Planning
The Court will accept a member state’s need to prevent abusive tax practices as a
stand-alone justification, but only if the anti-abuse rule is specifically designed to target
‘‘wholly artificial arrangements’’ aimed at circumventing the application of the relevant
member state legislation (Cadbury Schweppes). If a national anti-abuse rule is not specifi-
cally designed to combat abusive tax practices, the rule may still be justified by the need
to preserve a balanced allocation of taxing rights, along with the need to prevent tax
avoidance (Thin Cap and SGI). In the Thin Cap case, the Court set out a two-part test for
determining whether the rules were proportionate and could therefore be justified as
targeting wholly artificial arrangements: First, the affected taxpayer must have the op-
portunity ‘‘to produce . . . evidence as to the commercial justification for the transaction
in question’’; and second, the interest may be re-characterized as a distribution ‘‘only in
so far as it exceeds what would have been agreed upon at arm’s length.’’
O’Shea noted that the ECJ applied this test in the SGI case. The requirement that a
taxpayer be given the opportunity to produce evidence of commercial justification is
significant, O’Shea said, because it can enable the taxpayer to rebut the presumption
that a ‘‘wholly artificial arrangement’’ exists and, thus, potentially defeat the national
anti-abuse rule. ‘‘This is the difference between the expert tax planner of the future, i.e.,
the next five years, and the lazy tax planners of the past,’’ O’Shea said.
A key takeaway from the ECJ’s case law on tax abuse is that ‘‘it’s a good idea to avoid
wholly artificial arrangements that don’t reflect economic reality and are set up with the
sole aim of obtaining a tax advantage,’’ O’Shea said, adding, ‘‘So if you can avoid that,
then you are probably avoiding most of the problems from an ECJ perspective.’’
8.2. CbC reporting: an overloaded weapon?
Conference participants also debated the implications for companies operating in

the EU of the OECD’s discussion draft on proposed changes to the OECD trans-
fer pricing documentation rules and the development of a country-by-country (CbC)
reporting template. The discussion draft, released January 30, was issued in response
to the BEPS action plan’s item 13, which calls for a re-examination of transfer pricing
documentation rules. Stakeholders submitted more than 1,100 pages of comments on
the draft. OECD officials announced during separate events on March 31 and April
2 that changes will be made to the discussion draft’s proposals to make the reporting
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Parillo
less burdensome. Whether the coming carve-back of the proposals will placate the tax
community remains to be seen.
At the CFE conference, Eduardo Gracia, managing partner and head of the tax depart-
ment at the Madrid office of Ashurst LLP, outlined several concerns he has with the
draft. In the section on documentation-related penalties, the draft says tax authorities
should refrain from imposing a penalty on a taxpayer for failing to provide data to
which the taxpayer did not have access, but it cautions that a decision not to impose
such a penalty does not preclude adjustments to income if prices are not consistent
with the arm’s-length principle. ‘‘Of course, that’s reasonable,’’ Gracia said. ‘‘One thing
does not preclude the other. What it doesn’t say, though, is what happens if the taxpayer
does not produce documentation and there is no adjustment yet?’’
Gracia noted that in the discussion draft’s section on materiality, the OECD tries to
limit the application of tax authorities’ demands for full documentation to only the
most important transactions. The draft therefore recommends that transfer pricing do-
cumentation requirements include specific materiality thresholds that take into account
the size and nature of the local economy, the importance of the multinational group
in that economy, and the size and nature of local operating entities (in relation to the
overall size and nature of the multinational group). Gracia said it’s not clear how the
materiality provision interacts with the draft’s recommendations on documentation-
related penalties. He said if a taxpayer makes a judgment call that a transaction is not
material and doesn’t need documentation, a possible outcome is that a tax authority
could agree that there is no adjustment needed, but disagree that the transaction was
not material and hold that it should have been documented — thereby triggering do-
cumentation penalties. „That’s something that’s not in the paper,’’ Gracia said, ‘‘and
I’m afraid that to the extent the discussion draft or final document in chapter V [of the
OECD transfer pricing guidelines] is not more explicit about it, documentation-related
penalties will become the norm, just for the fact the documentation was not produced,
even if it’s useless.’’
In addition to the huge amount of time and resources that would be needed to compile
the information required for the proposed CbC reporting template, Gracia questioned
the design of the template. He said the proposal seems to be targeted at multinational
enterprises. ‘‘There are many other sorts of investors in this world,’’ Gracia pointed out.
‘‘What about funds, management companies, partners? Those sorts of things are not
contemplated here.’’
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BEPS & Tax Planning
Another concern, Gracia said, is that by requiring more information than is strictly ne-
cessary to assess a taxpayer’s transaction, some tax authorities could be encouraged to
ask for a larger share of tax revenue simply by comparing different CbC reports. ‘‘That
is one of the big risks of the [CbC template] as it is designed now, and it’s something
we tried to avoid by all means when we developed the EU transfer pricing documenta-
tion,’’ Gracia said, referring to the code of conduct on transfer pricing documentation
for associated enterprises in the EU that was adopted by the Council of the European
Union in June 2006. The code, which is optional for multinational groups, sets out the
maximum threshold of documentation obligations.
Amparo Grau of Complutense University of Madrid also weighed in, questioning whe-
ther the drafters designed the CbC reporting template to be a high-level risk assess-
ment tool or whether they exceeded their mandate and took other BEPS actions into
account. She noted that one of the stakeholder submissions on the draft commented
that a CbC reporting regime by itself is not a ‘‘magic potion’’ to cure BEPS. ‘‘That’s
true,’’ Grau said, adding that it seems like the drafters ‘‘want to put everything they can
in the template to make this extraordinary weapon.’’ As for the scope of the discussion
draft, Gracia said that despite the draft’s recommendation that tax authorities limit the
documentation to be provided by small and medium-size enterprises, the draft doesn’t
make it clear which companies or groups should be bound by the documentation re-
quirements. ‘‘If one of the most important rationales is to help tax authorities assess
risks, [the documentation requirements] should be confined to where the risks are —
which are usually large corporations,’’ Gracia said. ‘‘Or, if the OECD wants to put the
materiality on transactions, then it should put a high number as a minimum threshold
for a transaction to be controlled or documented in this way. Otherwise, we’re going to
oblige too many companies to do paperwork for very useless purposes.’’
Also unclear, Gracia said, is the effect that the imposition of transfer pricing penalties
should have on access to treaty mutual agreement procedures (MAP) and to the EU
Arbitration Convention. He noted that taxpayers who have incurred a ‘‘serious penalty’’
are denied access to the latter. ‘‘The problem is that there is no common definition of
what a serious penalty is’’ among the 28 EU member states, Gracia said. ‘‘Having 28 dif-
ferent definitions means there’s a very big loophole that can give rise to an inability to
avoid double taxation in cases where penalties were imposed,’’ he added.
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8.3. BEPS and dispute resolution
Hans Mooij, a tax adviser and former tax treaty negotiator for the Dutch government,
discussed the prospects for action 14, which calls for solutions to obstacles that prevent
countries from resolving treaty related disputes under a MAP. Action 14 also says that
consideration should be given to supplementing existing MAP provisions in tax treaties
with a mandatory and binding arbitration provision.
Mooij said the OECD’s desired output on action 14 is ambitious. He noted that the
measures are scheduled to be finalized by September 2015, and ‘‘so far we haven’t
seen any indication, any guidance on what those measures might entail.’’ Some cynics
have suggested that action 14 is simply a ‘‘price that the OECD has offered to the big
multinationals to [ensure] their agreement with other BEPS actions that are more or
less threatening to their cause,’’ Mooij added. He said the OECD’s MAP statistics for
2012 (the most recent data available) illustrate the sad state of today’s dispute resolution
mechanisms, as the number of MAP cases between OECD members and the average
cycle time are increasing every year.
More positive news was revealed in the 2012 statistics published by the EU Joint Trans-
fer Pricing Forum, Mooij said, with those data showing an increase in the number of
MAP transfer pricing cases between EU member states that were resolved before arbit-
ration provisions kicked in. Mooij noted that the OECD Forum on Tax Administration
created a MAP forum last November to discuss best practices for improving the MAP.
However, while Mooij applauded the creation of the forum as a ‘‘genuine initiative’’ on
the part of tax authorities to do something about the MAP, he said the forum has so far
not fulfilled a best practice of being transparent to the public.387 ‘‘Since that November
session, no public records have been published and so far they have not released any
intention to share the results of their work with the public,’’ Mooij said.
There’s a general concern that the BEPS initiative will lead to even more disputes,
particularly if countries don’t coordinate their responses and develop new rules wit-
hout taking notice of what other countries are doing vis-à-vis the same taxpayer, Mooij
said, adding, ‘‘That would be a recipe for disaster.’’ The OECD in 2007 published an
online Manual on Effective Mutual Agreement Procedures (MEMAP) that sets out
387 For prior coverage of MAP forum see: Tax Notes Int’l, Feb. 3, 2014, p. 418.
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BEPS & Tax Planning
best practices for conducting a MAP. ‘‘It gives very detailed rules on regulating MAP,
but what MEMAP doesn’t do is provide guidance on how to reach resolution,’’ Mooij
said. Both MEMAP and the OECD commentaries on the model tax treaty also fail to
address the possibility of engaging third-party expertise, such as through mediation,
which Mooij said has become an increasingly popular practice at the domestic level in
many EU countries and the United States. ‘‘There actually is a lot to be gained in MAP,
but the first duty, of course, will be to identify where exactly the obstacles lie,’’ he said.
‘‘If you want to achieve improvement, you should first know where the real problems
are located.’’ Mooij said the MAP data doesn’t identify the most significant causes of
unresolved MAP disputes — whether the problem is a lack of expertise or lack of ca-
pacity, poor communications between tax authorities, personal or cultural differences,
or difficulties in overriding court decisions or policy views held by local authorities.
‘‘We simply don’t know,’’ he said, ‘‘so I would hope within the MAP forum, the tax
authorities for once are willing to be candid as to what the real problems of MAP are.’’
The statement in action 14 that consideration should be given to arbitration is interes-

ting, Mooij said. Neither the EU Arbitration Convention nor the OECD model com-
mentaries discuss the possibility of tax authorities initiating arbitration on their own,
which he finds puzzling. ‘‘That’s a normal commercial practice,’’ Mooij said. ‘‘Whenever
you have a dispute and you cannot resolve it by yourself you seek third-party assis-
tance, in particular, arbitration. But that seems not to be customary or presented by the
OECD.’’ Mooij noted that some people argue that arbitration should be a civil right for
EU citizens. ‘‘We have to realize that there’s not even at present a right for taxpayers
to have double taxation avoided,’’ he said. ‘‘So that’s probably where it should start. . . .
Once there’s a right to have double taxation avoided, then we probably might consider
a right to arbitration as a final means to that end.’’
On the other hand, some critics contend that making arbitration available could lead to
over-regulation and drive up costs, Mooij noted. ‘‘That’s contradicted by modern com-
mercial arbitration practices,’’ he said, ‘‘which is all about time- and cost-efficiency.’’ Ex-
peditious arbitration procedures are possible in the tax area, as evidenced by the recent
U.S. practice of including mandatory and binding arbitration provisions in treaty MAP
articles, Mooij said. ‘‘But it takes two really important elements: the need to have a top
expert arbitrator, and the ability of the tax authorities to prepare the case very well and
narrow the dispute down to the bare essentials,’’ he said. ‘‘So it’s up to the authorities
themselves whether arbitration can be time and cost-efficient.’’
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One of the biggest impediments to a MAP is a lack of trust by taxpayers, Mooij said.
‘‘I think the main duty for the authorities is to try to build more trust by being more
transparent and by having clear proceedings,’’ he said. As for recommendations that
can be offered to the OECD, Mooij said ‘‘there is ample scope for advice.’’ ‘‘And my
advice to Europe,’’ he added, ‘‘is not to remain silent, but try to initiate something on
their own account.’’
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Tax Jurisdiction & the Digital Economy
9. Jurisdiction to Tax in the Digital Economy:

Permanent and Other Establishments
by Walter Hellerstein388
9.1. The digital economy
I will make no effort here to define the digital economy other than to note that others
have undertaken389 or are in the process of undertaking390 that effort. For present pur-
poses, it suffices to paraphrase US Supreme Court Justice Potter Stewart’s observation
about pornography: although we may not be able to define it, “we know it when we
see it”.391
More to the point, since we are assembled to consider issues raised by the OECD’s
Base Erosion and Profit Shifting (BEPS) initiative, we can comfortably rely on the key
jurisdictional issues associated with the digital economy that the OECD identified in
its BEPS Action Plan. They “include … the ability of a company to have a significant
digital presence in the economy of another country without being liable to taxation
due to the lack of nexus under current international rules … and how to ensure the
effective collection of VAT/GST with respect to the cross-border supply of goods and
services.”392 It is important to note that the OECD’s concern with the jurisdictional
challenges created by the digital economy includes both direct and indirect taxes, and my
consideration of these issues will do the same.
388 ©2014 IBFD. Originally published in 68 Bull. Intl. Taxn. 6-7, pp. 346-351, Journals IBFD. Bulletin for International Ta-
xation is available online, please visit http://www.ibfd.org <http://www.ibfd.org>. Reproduced with permission.“ Professor
Hellerstein is Shackelford Professor of Taxation and Distinguished Research Professor, University of Georgia School of
Law, United States. The author can be contacted at wallyh@uga.edu.
389 P. Collin & N. Colin, Task Force on Taxation of the Digital Economy (Jan. 2013), available at www.hldataprotection.
com/files/2013/06/Taxation_Digital_Economy.pdf.
390 OECD, Action Plan on Base Erosion and Profit Shifting (OECD 2013), available at www.oecd.org/tax/beps.htm,
provides for the establishment of „a dedicated task force on the digital economy“ (p. 14), and the European Commission
has established a High Level Expert Group on Taxation of the Digital Economy, described at http://ec.europa.eu/taxa-
tion_customs/taxation/gen_info/good_governance_matters/digital_economy/index_en.htm. In March 2014, the OECD
issued a public discussion draft on digital economy issues. OECD, BEPS Action 1: Address the Tax Challenges of the Digital
Economy (Public Discussion Draft) (OECD 2014), available at http://www.oecd.org/ctp/tax-challenges-digital-economy-
discussion-draft-march-2014.pdf.
391 US: SC, 1964, Jacobellis v. Ohio, 378 US 184, 197 (1964) (Stewart, J., concurring).
392 OECD, BEPS Action Plan, supra n. 390, at p. 14-15.
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Hellerstein
9.2. Jurisdiction to tax: substantive jurisdiction and enforcement

jurisdiction
Legislative solutions to the jurisdictional issues raised by the digital economy are more
likely to be successful if those charged with designing those solutions recognize, and
take account of, two discrete aspects of jurisdiction to tax in undertaking their task.
I have called these two aspects of jurisdiction to tax „substantive jurisdiction“ and
„enforcement jurisdiction“.393 Substantive jurisdiction relates to the power of a country
to impose tax on the subject matter of the exaction. Substantive jurisdiction includes
such questions as whether income has its source in a country, thereby justifying the
country’s exercise of tax power under a generally recognized basis for taxing income, or
whether goods or services are consumed in a country, thereby justifying the country’s
exercise of tax power under a generally recognized basis for taxing consumption.
Enforcement jurisdiction relates to the power of a country to compel collection of
the tax over which it has substantive tax jurisdiction. Enforcement jurisdiction includes
such questions as whether a country has power to enforce the collection of a tax on
income earned by a non-resident from sources within the country or whether a country
has power to enforce the collection of a tax on goods or services purchased by a resi-
dent consumer from a remote vendor.394
Substantive jurisdiction and enforcement jurisdiction are not air-tight categories. To

the contrary, the criteria that are employed for determining the existence of substan-
tive jurisdiction may be the same as those employed for determining the existence of
393 A more systematic and extensive presentation of this analytical framework can be found in W. Hellerstein, Jurisdiction to
Tax Income and Consumption in the New Economy: A Theoretical and Comparative Perspective, 38 Georgia Law Review
1 (2003).
394 The discussion in the text relates to the legal power to enforce the tax, but there are practical issues as well. A country may
have the legal power to enforce a consumption tax against individual consumers, and, therefore, technically possess enforce-
ment jurisdiction, but may lack an effective enforcement mechanism if it has no power to require a remote vendor to collect
the tax. In that case, the absence of enforcement jurisdiction over the remote vendor will effectively deprive the country of
the ability to collect a consumption tax with respect to the goods or services sold by such vendor to local consumers, even if
such local consumers have a legal obligation to remit the tax. This reflects the contemporary state of affairs with respect to
remote vendors selling to local consumers under the sub-national retail sales tax in the United States, where purchasers are
legally obligated to pay a “use” tax (equivalent to the sales tax) on goods purchased from remote vendors. By contrast, under
many VAT systems (for example, in the European Union), the sale by a remote (unregistered) trader to a private consumer
generally will not create even theoretical enforcement jurisdiction over the individual consumer, because he or she is not a
“taxable person” required to remit the tax.
144
enforcement jurisdiction. Nevertheless, because the question of whether a country has

jurisdiction to impose a tax is often distinct from the question of whether a country has
power to compel collection of a tax and because these questions are often addressed
to different participants in the economic activity associated with the tax base at issue,
distinguishing between the two types of jurisdiction can serve a useful function in de-
signing effective legislative solutions to the problems raised by the digital economy.
Furthermore, addressing these issues under the undifferentiated rubric of “jurisdiction
to tax” may lead to legislative recommendations that cannot effectively be implemented
in practice.
9.2.2. The relationship between substantive jurisdiction and enforcement

jurisdiction
Regardless of how a particular aspect of substantive or enforcement jurisdiction is or

should be determined, and reasonable people can and do disagree over these questions,
in attempting to design an effective tax regime in the digital economy (or in any other
context, for that matter), we should take account of the relationship between these two
issues. That relationship may be visualized as follows (see Table 1):
Table 1: Relationship between enforcement and substantive jurisdiction

Substantive Jurisdiction No Substantive Jurisdiction
Enforcement Jurisdiction Enforcement Jurisdiction
Substantive Jurisdiction No Substantive Jurisdiction
No Enforcement Jurisdiction No Enforcement Jurisdiction
As Table 1 indicates, there are four possible relationships between substantive and
enforcement jurisdiction within a country. First, there can be both substantive and
enforcement jurisdiction395 (for example, when an enterprise with a permanent estab-
lishment (PE) in a country earns income from sources within the country,396 or when a
supplier with an establishment in a country sells goods or services to a purchaser in the
395 It is important to note that the ensuing parenthetical examples of substantive and enforcement jurisdiction are based on
existing understandings of power to impose and enforce taxes. It is even more important to emphasize that these existing
understandings are subject to modification in light of their implications for the digital economy. Indeed, the possibility of
such modifications is the raison d’être of the BEPS initiative.
396 Whether the income must be attributable to the PE is another matter, which is considered in section 9.3.2.
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Hellerstein
country). Second, there can be substantive jurisdiction but no enforcement jurisdiction

(for example, when a non-resident enterprise with no employees, agents, or property in
a country earns income from sources within the country, and the income is not subject
to an effective withholding mechanism, or when a supplier with no establishment in
or nexus with a country sells digital services to a private consumer in the country397).
Third, there can be enforcement jurisdiction but no substantive jurisdiction (for examp-
le, when a non-resident enterprise with a PE in a country earns rents unrelated to that
PE from real property in another country, or when a supplier with an establishment
in a country makes a supply in another country to a consumer in that other country).
Fourth, there can be neither substantive nor enforcement jurisdiction - a situation that
needs no parenthetical elaboration.
In examining what our jurisdiction-to-tax rules should look like in the digital economy,
our goal should be to design rules that increase the probability that we end up in the
upper left-hand box or the lower right-hand box. If we find ourselves in the other two
boxes, we are in an untenable situation from the standpoint of tax administration. In
other words, we should try to design our substantive jurisdiction-to-tax rules so that
substantive jurisdiction exists in countries in which:
»» enforcement jurisdiction exists as a legal matter; and

»» such enforcement jurisdiction can be implemented as a practical matter.
By the same token, we should try to design our enforcement jurisdiction rules, so that
enforcement jurisdiction exists (both as a legal and practical matter) in the countries in
which substantive jurisdiction exists. In short, “reverse engineering” has a role to play
in the proper design of a tax regime for the digital economy.
This is not to suggest that we can design our substantive jurisdiction-to-tax rules and
our enforcement jurisdiction rules on a clean slate to achieve the desired goal of har-
monizing the two sets of rules. To the contrary, there are long-standing and deeply
entrenched principles governing substantive and enforcement jurisdiction that restrict
our freedom to “design” jurisdictional rules. Nevertheless, if there is anything that is
397 Again, it must be emphasized that this statement reflects existing “accepted wisdom” that relying on private consumers’
compliance with an obligation to remit a consumption tax amounts to a “tax on honesty,” which is not likely to be effective.
However, we revisit this assumption in section 9.4.
146
as clear as the existence of settled understandings regarding the broad contours of the
rules governing substantive and enforcement jurisdiction in the tax arena, it is the exis-
tence of opportunities to align these two sets of rules. These opportunities exist not
only because of the existence of alternative bases for the exercise of substantive and
enforcement jurisdiction, but also because of the unsettled nature of the precise criteria
for determining the existence of such jurisdiction.398
9.3. Specific policy recommendations for aligning the rules of substantive

and enforcement jurisdiction in the digital economy
In advancing specific policy recommendations for aligning the rules of substantive and
enforcement jurisdiction in the digital economy in light of the foregoing discussion, I
wish to make it clear that these are offered as targeted suggestions designed to focus
and stimulate further thinking and debate and not as “shovel-ready” solutions. Moreo-
ver, all of these recommendations involve assumptions about the appropriate scope
of substantive jurisdiction. If one rejects these assumptions, then the analysis loses its
force, or must be modified to accommodate the revised assumption about the scope of
substantive jurisdiction.
9.3.2. Possible changes to the PE definition
A. Opening comments
If it is determined that it is appropriate to expand our concept of substantive jurisdic-

tion based on source to capture the values associated with “the ability of a company
398 Thus, substantive jurisdiction to tax income may be based on residence or source, and definitions of residence and
source may vary from country to country. Substantive jurisdiction to tax consumption is generally is based on where the
supply to the final consumer occurs (see OECD, International VAT/GST Guidelines (Draft Consolidated Version), ch. 1,
(Feb. 2013), available at www.oecd.org/ctp/consumption/ConsolidatedGuidelines20130131.pdf), but the question of where
consumption occurs (or is deemed to occur) may vary from country to country. Similar alternative jurisdictional bases (and
variations on the precise definitions of those bases) exist for enforcement jurisdiction, although the inquiry is often directed
to a withholding or collection agent (particularly in connection with VATs/GSTs, which depend upon a staged collection
process to implement the tax on final consumption) rather than to the earner of income or the consumer of goods and
services, as it often would be in an inquiry into substantive jurisdiction to tax income or consumption.
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Hellerstein
to have a significant digital presence in the economy of another country”,399 then it

would be appropriate, at least as a matter of principle, to modify the PE concept so
that enforcement jurisdiction is aligned with substantive jurisdiction. However, such
alignment must take account of the practical implications of such legislative alignment.
B. Virtual PE
From a theoretical perspective, if our concept of substantive jurisdiction is defined to

include income associated with a company’s digital presence in a country, the simplest
way to align substantive and enforcement jurisdiction is to modify the PE concept to in-
clude such a digital presence. Indeed, this is precisely what Collin and Colin (2013) have
suggested, recommending the addition of “a separate definition of a virtual permanent
establishment that is specific to the digital economy.”400 Such a definition might be
based on a threshold of digital sales into a country or on a threshold of data collected
from users of the company’s service in the country.
The problem with this suggestion, of course, is the enforceability of this standard from a
practical standpoint, even though enforcement jurisdiction exists as a matter of law under
a virtual PE standard. Indeed, these practical enforcement issues are the ultimate arbi-
ters of our ability to align substantive and enforcement jurisdiction when substantive
jurisdiction is defined to include values associated with a digital presence. In thinking
about these practical issues, we need to ask and candidly answer a number of questions
to determine just how far we can go – or are willing to go – to achieve the goal of alig-
ning substantive and enforcement jurisdiction.
In other words, if the existence of a virtual PE creates a legal obligation of a company

with no physical presence in the country to remit a tax on income attributable to its
virtual presence, the following questions must be considered:
»» Are there available technologies that can block or interfere with the company’s
virtual presence in the country if the company fails to comply with its tax ob-
ligations?
399 OECD, BEPS Action Plan, supra n. 390, at p. 14. For a detailed description of these values, see Collin & Colin, supra
n. 389.
400 Id., at p. 115.
148
»» Assuming such technologies exist, are countries willing to employ them to

enforce compliance with the country’s tax obligations?401
»» If not, are companies, nevertheless, likely to comply with such obligations to
avoid exposure to risk and unresolved tax debts, and might the answer to this
question depend on the nature of the penalties imposed for noncompliance, the
size of the company, and other factors?
»» Alternatively, would countries be willing to employ indirect measures to induce
compliance with the country’s tax obligations, such as imposing withholding
requirements on the company’s resident customers, and are such indirect mea-
sures likely to be successful?
»» Would the success of such indirect measures imposed on the country’s resi-
dents depend on the penalties associated with non-compliance and, if so, what
penalties is a country willing to impose on its residents for failing to withhold
payments from companies with a digital presence in the country?
Needless to say, the foregoing list of questions is hardly exhaustive, but it suffices to
make the essential point. The ability to enforce a tax based on a virtual PE is likely to
depend in substantial part on the political will to use the means that are available, re-
inforced by significant penalties for non-compliance, to ensure effective enforcement
based on the virtual PE. If that political will does not exist, then adoption of a virtual
PE (along with rules of substantive jurisdiction capturing income associated with a
digital presence) may well lead to precisely the type of misalignment of substantive and
enforcement jurisdiction that we should try to avoid.
C. Eliminating PE “safe harbours” and adopting force of attraction

principle for income attributable to digital presence
A more conventional and, perhaps, more practical approach to modifying the PE de-
finition to align substantive and enforcement jurisdiction402 – albeit one less robust
401 The Chinese apparently have access to such technologies. See, for example, Reuters, Britain’s Guardian says its websi-
te blocked in China (2014), available at www.reuters.com/article/2014/01/08/us-china-media-idUSBREA0606320140108.
402 On the continuing assumption that substantive jurisdiction were defined to include income attributable to digital pre-
sence.
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Hellerstein
and theoretically elegant than a virtual PE – would eliminate some or all of the “safe
harbours” in the existing PE definition in conjunction with the adoption of a force of
attraction principle for income from digital activities. For example, the PE definition
might be modified, so that a company would have a PE in a country, assuming that it
constituted a “fixed place of business,” if it:
»» used facilities in the country solely for the purpose of storage, display or delivery
of goods or merchandise belonging to the enterprise;403
»» maintained a stock of goods or merchandise for the same purpose or for the
purpose of processing by another enterprise; or
»» maintained a fixed place of business solely for the purpose of purchasing goods
or merchandise or of collecting information or for carrying on any other activity
of a preparatory or auxiliary character for the enterprise.
Similarly, the PE definition might be modified to narrow the concept of an indepen-

dent agent to make it clear that commissionaire and similar arrangements do not invol-
ve agents of “independent status”, so that a company entering into such arrangements
would have a PE in countries where commissionaires operated on behalf of the com-
pany.404 Furthermore, the PE definition might be modified, so that a company would
have a PE in a country if it controlled or was controlled by a company that resided in or
carried on business in that country through a fixed place of business.405
At the same time, a force of attraction principle would be adopted with respect to in-
come from digital activities so that any profits the non-resident company derived from
such activities in the country would be taxable as long as the company had a PE in the
country. This would, of course, require an amendment to article 7 of the OECD Model
(2010), which limits a country’s power to tax profits derived from the country to those
“attributable to” a PE in the country.406 Nevertheless, it is a change that falls well within
403 In effect, this would eliminate OECD Model Tax Convention on Income and on Capital art. 5(4) (22 July 2010), Models
IBFD, from the existing PE definition.
404 This would involve a modification of art. 5(6) OECD Model (2010).
405 In effect, this would eliminate 5(7) OECD Model (2010) from the existing PE definition (although it would require that
the related enterprise have a PE in the country, not simply “carry on business” there).
406 OECD Model Tax Convention on Income and on Capital: Commentary on Article 7(1) (22 July 2010), Models IBFD.
150
the range of existing tax practice, as reflected in the existing domestic law of some
countries,407 and would constitute a reasonable policy response to the problem identi-
fied by the BEPS Action Plan; namely, a company’s “significant digital presence in the
economy of another country without being liable to taxation due to the lack of nexus
under current international rules”,408 notwithstanding the OECD’s historical opposition
to the force of attraction principle.409
The combination of these two changes, expanding the definition of PE to embrace a

broader range of activities, including ownership of or by a related company with a PE
in the country and operating through a local commissionaire, and adopting a force of
attraction principle for income from digital activities, would further the objective of
aligning substantive and enforcement jurisdiction in the digital economy. Moreover, in
contrast to the adoption of a virtual PE, the expanded concept of a PE would, in many
if not most cases, give rise to enforcement jurisdiction in a practical as well as a legal
sense, because there would be assets “on the ground” that could be seized if the lawful
tax debt were not paid. Furthermore, because the force of attraction principle would be
limited to income from digital activities, one could preserve the existing PE rule, which
limits taxable profits to those attributable to a PE, for other income. Indeed, if one
were concerned about a general expansion of the PE concept, one could likewise limit
the expansion of the PE standard to income from digital activity, so that no expanded
PE would be recognized, and no income “attributable to” that expanded PE would be
taxable, if it did not constitute income from digital activity.
9.4. Effective collection of VAT/GST in the digital economy
The digital economy raises jurisdictional issues for consumption tax regimes that are
analogous to those confronting income tax regimes. In some respects, however, the
problem is more limited under consumption taxes because it arises largely in the con-
407 For example, the United States applies such a rule to foreign enterprises that are not residents of countries with which
the United States has an income tax treaty when they are “engaged in a trade or business within the United States.” See US:
Internal Revenue Code (IRC), sec. 864(c)(1)(A). In such cases, “[a]ll income … from sources within the United States”, other
than periodical income (such as interest, dividends, and rents), “shall be treated as effectively connected with the conduct of
a trade or business within the United States” (sec. 864(c)(3) IRC), and thereby subject to tax under US law (sec. 882 IRC).
408 OECD, BEPS Action Plan, supra n. 390, at p. 14.
409 Para. 12 OECD Model Commentary on Article 7(1) (2010).
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Hellerstein
text of business-to-consumer (B2C) transactions. VAT/GST (hereinafter: VAT, for the

sake of simplicity) applies to business-to-business (B2B) transactions as part of the
staged collection process that is the central design feature of VAT.410 Nevertheless, in
the B2B context, the jurisdictional issues raised by the digital economy are addressed
by the reverse charge or self-assessment mechanism, under which registered businesses
acquiring services or intangibles from non-resident suppliers account for the tax due
and pay it directly to the taxing authorities.411 In such cases, there is a good fit between
substantive jurisdiction (the customer’s location412) and enforcement jurisdiction, be-
cause the customer is registered for tax purposes.413
In the B2C context, however, the basic problem of aligning substantive jurisdiction and
enforcement jurisdiction resembles the same problem considered in section 3 with re-
spect to income taxes. Because there is widespread agreement that consumption should
be taxed where it occurs,414 the desired alignment between substantive and enforcement
jurisdiction is normally achieved when the supplier is established415 in the country whe-
re consumption occurs (or is deemed to occur).
The difficult questions arise when the supplier is not established in the jurisdiction in
which consumption occurs (or is deemed to occur). We now confront essentially the
same enforcement question we considered in section 3 in connection with income ta-
xes; namely, what do we do when there is substantive jurisdiction (i.e. income is derived
from digital activities in the country, or consumption occurs in the country, but the
company that we would normally look to in order to enforce the tax – the company
earning the income or the company making the digital supplies - is only “digitally pre-
410 In principle, however, businesses should not bear the ultimate burden of the tax, which rests on final consumers. In
most instances, this objective is achieved by allowing businesses to deduct the VAT that they pay on their purchases against
the VAT that they collect on their sales.
411 See OECD, Taxation and Electronic Commerce: Implementing the Ottawa Framework Conditions pp. 46-47 (OECD
2001).
412 See OECD, Draft International VAT/GST Guidelines, supra n. 398, at guideline 3.2.
413 Despite the good fit between substantive and enforcement jurisdiction in the B2B consumption tax context because of
the reverse charge mechanism, it has been suggested that there are other problems with effective application of the reverse
charge mechanism for digital supplies. M. Lamensch, Are „reverse charging“ and „one-stop-scheme“ efficient ways to collect
VAT on digital supplies?, 1 World Journal of VAT/GST Law 1 (2012).
414 OECD, Draft International VAT/GST Guidelines, supra n. 398, at ch. 1.
415 I use the term “established”, in a somewhat circular sense, to mean that there is nexus under existing law with the sup-
plier, so that it can be compelled to comply with the country’s tax collection and remittance obligations.
152
sent” there). One “solution,” analogous to the creation of a virtual PE, would create an
obligation for remote suppliers to comply with tax collection obligations in the country
into which they make digital supplies.416 Accordingly, we now must essentially re-ask
the questions we posed with respect to the practical enforcement of a virtual PE but
now framed as questions with respect to the practical enforcement of consumption tax
applied to digital supplies from a physically remote supplier:
»» Are there available technologies that can block or interfere with the supplier’s
ability to make digital sales in the country if the supplier fails to comply with its
tax obligations?417
»» If suppliers contend that they are unable to identify the location of their online
customers, are there available technologies that can facilitate the identification
of Internet users?
»» Assuming such technologies exist, are countries willing to employ them to
enforce compliance with the country’s consumption tax obligations?
»» If not, are suppliers, nevertheless, likely to comply with such obligations to
avoid exposure to risk and unresolved tax debts, and might the answer to this
question depend on the nature of the penalties imposed for non-compliance,
the size of the company, and other factors?
»» Alternatively, can third parties (for example, financial intermediaries or certified
tax collection agents)418 be enlisted to effectuate tax collection with respect to
B2C digital supplies?
416 This, of course, is essentially what the European Union has done with respect to electronically provided services from
non-EU suppliers to EU private consumers, including an optional “one-stop-shop” scheme, under which suppliers can regis-
ter in single Member State of identification, charge and collect VAT according to the rate where their customers reside, and
pay over the amounts to the tax administration they have elected, with the tax administration reallocating the VAT revenue
to the Member State of the customer. See A. Cockfield, W. Hellerstein, R. Millar & C. Waerzeggers, Taxing Global Digital
Commerce sec. 6.03[B][2][b], 6.03[B][3] (Kluwer Law International 2013). The practical results of this approach, and, in
particular, of the “one-stop-shop” option remain uncertain, with one report that only 453 businesses had registered under
this scheme as of 2011, “a relatively low figure in view of the millions of suppliers that are supplying online.” See Lamensch,
supra n. 413, at p. 7.
417 Any consideration of available technologies should keep in mind that technologies are constantly evolving at a rapid
pace. See, for example, OECD, Taxation and Electronic Commerce, supra n. 411, pp. 17-47 (discussing „interim“, „medium
term“ and „long term“ consumption tax mechanisms depending on available technologies).
418 The US sub-national Streamlined Sales and Use Tax Agreement, for example, requires participating states to provide
agents certified under the Agreement to perform all of the seller’s sales and use tax functions, other than the seller’s obli-
gation to remit tax on its own purchases. See sec. 403 of the Streamlined Sales and Use Tax Agreement, available at www.
streamlinedsalestax.org.
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Hellerstein
»» Alternatively, would countries be willing to impose consumption tax obligations

directly on resident consumers purchasing digital supplies and to employ availa-
ble technologies to assure compliance with such obligations?
»» Would the success of such measures imposed on the country’s residents depend
on the penalties associated with non-compliance and, if so, what penalties is a
country willing to impose on its residents for failing to comply with a consump-
tion tax reporting obligation for purchases of digital supplies?
As in the case of the questions raised regarding income taxes, the foregoing list of ques-
tions is hardly exhaustive, but it suffices to make the essential point. A country’s ability
to enforce a consumption tax based on B2C digital supplies purchased from suppliers
with no physical presence in the country is likely to depend in substantial part on the
political will to use the means that are available, reinforced by significant penalties for
non-compliance, to ensure effective enforcement.
9.5. Relationship between direct and indirect tax enforcement issues

in the digital economy
If the preceding discussion has accomplished nothing else, it should at least have un-
derscored the importance of aligning our rules of substantive jurisdiction with our
rules of enforcement jurisdiction and of thinking about enforcement jurisdiction both
in legal and practical terms. It also suggests that the underlying practical enforcement
issues in the digital economy are the same in the direct and indirect tax contexts; name-
ly, how to enforce a tax attributable to digital activity in a country when the economic
actors associated with such activity have no physical presence in the country.
Beyond the proposals offered above for addressing or thinking about this basic issue,
I would like to close by briefly addressing one suggestion that has emerged from the
ongoing debate about how, if at all, the PE concept should be modified in light of the
digital economy and the relationship of this issue to the analogous issue under con-
sumption taxes. Specifically, it has been suggested that the issues raised by the digital
economy can be addressed more effectively by VATs than by income taxes and that this
constitutes a reason not to move towards adoption of a virtual PE.419
419 See, for example, A.M. Parker, U.S. Officials Blast „Virtual PE“ Concept, Saying VAT Might Capture Online Sales,
154
Whatever one might say about the merits of adopting a virtual PE, the premise underly-
ing the suggestion that VATs are better equipped than income taxes to address the issu-
es raised by the digital economy seems misguided at best. The underlying problem that
the digital economy raises for income tax regimes is the same problem that it raises for
consumption tax regimes once one determines that there is substantive jurisdiction to
tax in a country, namely, the practical difficulties of enforcing a tax when the economic
actors that one normally looks to for tax enforcement are physically absent. Because
the enforcement problem is essentially the same under both regimes, one should not
assume that consumption tax regimes are any better equipped than income tax regimes
to address these issues. Indeed, there is much to be gained by approaching these issues
as the BEPS Action Plan counsels, “taking a holistic approach and considering both
direct and indirect taxation”420 in forging a common solution to a common problem.
9.6. Conclusions
In addressing the challenging questions of tax policy raised by jurisdiction to tax in the
digital economy, this article has focused on the pragmatic and wholly unoriginal point
that “tax administration is tax policy.”421 It has emphasized the importance of admi-
nistrative concerns in designing jurisdictional rules that are appropriate for the digital
economy, and, in particular, the goal of aligning the jurisdictional assignment of the
tax base with the ability to enforce collection of the tax in the jurisdiction to which the
base is assigned. The article has also suggested that, whatever differences there may be
in the underlying objectives of income tax and consumption tax regimes, they confront
common enforcement problems in the digital economy, and there may therefore be
common solutions to these shared problems.
Bloomberg BNA, Daily Tax Report (24 Sept. 2013). One official in the Office of Tax Policy, US Treasury, is quoted as saying
that „a consumption tax, such as a value-added tax, might better address the issue of companies doing business online in a
country while having no physical presence there“.
420 OECD, BEPS Action Plan, supra n. 390, at p. 14.
421 Casanegra de Jantscher, Milka, “Administering the VAT,” in Gillis, Malcom, Carl S. Shoup, and Gerard P. Sicat, eds.,
Value Added Taxation in Developing Countries (Washington: World Bank, 1990), 171-79, at 179 (emphasis in original).
155
156
FTT & Financial Market Regulation
10. Financial Transactions Tax in the Context of Financial

Market Regulation
by Daniela Doležalová422
10.1. Introduction
In September 2011 the European Commission submitted a proposal for a harmonised

tax on financial transactions in the European Union (EU), but there was no unanimity
to adopt this proposal in the EU Council of Ministers.423 On 22 January 2013, the EU
Council of Ministers adopted a Decision authorising eleven Member States to go ahead
on the basis of „enhanced cooperation“.424 This contribution briefly touches on the
crossroads between the FTT as proposed by the Commission, and the way financial
markets function and are regulated, with a focus on liquidity issues (10.2) the risk of
cascading on markets for bonds and derivatives (10.3), clearing and settlement (10.4),
repo and security lending (10.5) and the risk of the FTT exceeding profits of certain
dealers (10.6). Some conclusions are offered in 10.7.
10.2. Financial transactions tax and liquidity of capital markets
If we analyze different pieces of EU legislation aimed at regulating the financial

markets,425 we can see that the corner stone of all these legislative proposals is the
concept of liquidity. For example, only highly liquid instruments may be accepted as
collateral,426 or are acceptable as a part of investment portfolios held by financial ins-
422 Daniela Doležalová RNDr. Mgr. Works for the Czech Ministry of Finance and can be reached at Daniela.Dolezalova@
mfcr.cz.
423 For further details see Chapters 11 and 12 in this volume.
424 Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain.
425 See for instance Regulation (EU) No 648/2012 (EMIR), Regulation (EU) 153/2013 supplementing EMIR, Directive
2014/65/EU (MiFID II), Regulation (EU) No 600/2014 (MiFIR), Regulation (EU) 575/2013/EU (CRR).
426 Article 46 of Regulation (EU) No 648/2012 (EMIR), on collateral requirements, provides that: „A CCP shall accept
highly liquid collateral with minimal credit and market risk to cover its initial and ongoing exposure to its clearing members.
For non-financial counterparties, a CCP may accept bank guarantees, taking such guarantees into account when calculating its
exposure to a bank that is a clearing member. It shall apply adequate haircuts to asset values that reflect the potential for their
value to decline over the interval between their last revaluation and the time by which they can reasonably be assumed to be
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Dolezalová
titutions, such as collective investment undertakings, insurance or reinsurance compa-

nies, banks, central counterparties or central securities depositaries.427 Likewise, pre/
post-trade transparency rules, which enhance price formation in the capital markets
and help investors to get the best price available, apply only to financial instruments for
which there is a liquid market.428 Also, only highly liquid over the counter (OTC) deri-
vatives may be subject of mandatory central clearing or mandatory trading on trading
venues.429 If the less liquid instruments are held by banks on their balance sheets, then
higher capital requirements are imposed on them.430
On the other hand, the Directorate General Taxation and Customs Union of the Eu-
ropean Commission (TAXUD) has expressed the opinion that the capital market is the
place where speculation or betting (without any benefits to real economy) prevails. They
have said many times that one of the main intentions of the Financial Transactions Tax
(FTT) is to reduce the volume of trading which would inevitably lead to very significant
shrinkage of liquidity.431
liquidated. It shall take into account the liquidity risk following the default of a market participant and the concentration risk
on certain assets that may result in establishing the acceptable collateral and the relevant haircuts.“
427 For instance Article 47 of Regulation (EU) No 648/2012 (EMIR), on investment policy, provides that: „A CCP shall
invest its financial resources only in cash or in highly liquid financial instruments with minimal market and credit risk. A
CCP’s investments shall be capable of being liquidated rapidly with minimal adverse price effect.“
428 See Articles 4, 9, 11, 14 and 18 of Regulation (EU) No 600/2014.
429 See Article 28 and 32 of Regulation (EU) No 600/2014, Article 4 and 5 of Regulation (EU) No 648/2012.
430 Regulation (EU) No 575/2013.
431 See for instance: The non-technical TAXUD paper: „FTT – Non-technical answers to some questions on core features
and potential effects“; http://ec.europa.eu/taxation_customs/taxation/other_taxes/financial_sector/index_en.htm
From the paper: „5. Would retail investors, pensioners or SMEs not end up having to pay the tax? No. Generally speaking,
there is no danger of this happening. On the contrary, retail investors, pensioners and SMEs could actually benefit from the
FTT. Firstly we must bear in mind that 80 to 90% of the financial transactions we are discussing here and almost all the ‘fi-
nancial market bets’ that aim to make a large profit from a small initial investment take place between investment bankers and
traders. Only a fraction of all so-called ‘hedging transactions’ taking place in the financial markets have a ‘real’ background,
i.e. are the result of goods, services or shares actually provided, or the result of loans granted and the need to hedge against
the associated price, exchange rate, interest or default risks. Instead, most ‘hedging transactions’ are ‚bets‘ between two or
several investment bankers with the aim of making a profit from the ‚bet‘ itself. Retail investors and SMEs are not involved
directly or indirectly. If these bets work out well, most of the profits go to the investment bankers and traders involved, in the
form of high bonuses, and only a very small part is paid out to the shareholders and investors. If, however, the bets backfire,
then the bank’s shareholders or the investors in a fund (including the small savers and pensioners indirectly involved), or – in
the worst case scenario – the taxpayers suffer the consequences. The FTT will enable the chaff (bets) to be separated from
the wheat (hedging against real risks). There will be significantly fewer of these bets (the Commission estimates that their
volume will be reduced by around 75%), and the size of the bets will shrink, i.e. the leverage effect of the capital invested,
will change accordingly. The size of the bonuses paid to the investment bankers involved is likely to shrink substantially,
while retail investors’ earnings will not. At the same time, the risks to shareholders and investors, including retail investors
and pensioners, will be reduced.“
158
It thus seems that there is a significant discrepancy regarding the understanding of the
question how liquidity is a key factor for the smooth functioning of capital markets.
We can use price transparency as a good example. Price transparency allows investors
to control whether they get the best prices available. But such publicity can be impo-
sed only on highly liquid instruments for which there are a lot of willing buyers and
sellers, so that market makers are not the most important providers of liquidity. The
FTT has the potential to significantly decrease liquidity mainly on the fixed income
market432 which heavily depends on market makers (see below). In such circumstances
price transparency would lead to much higher bid-ask spreads because in the market
maker model, transparency can create a ‘winner’s curse’,433 making it costly for market
makers/dealers to hedge their position. Higher bid-ask spreads mean higher cost for
investors; increased cost of trading drives reduced volumes; and lower volumes mean
much higher bid-ask spreads to compensate. Such a vicious circle is the reason why
price transparency is not applicable on illiquid markets and instruments.
One may thus ask the question why we impose obligations to have highly liquid finan-
cial markets and then we make them difficult to comply with because of tax legislation
fraught with unintended consequences.
10.3. Financial transactions tax and different types of capital market
The FTT is designed as a one size fits all approach which is not appropriate because
different types of capital market have different characteristics. One single approach to
a FTT, for instance, does not recognize the differences that exist between the equity
market and the fixed income/derivative market regarding issues such as liquidity, tra-
ding techniques (such as matched principle trading, facilitation) and the crucial role of
market making.
432 The impact of the tax varies across asset classes, reflecting differences in market size and structure:
Cash equities: more liquid, lower impact; Government bonds: highly liquid, but uncertain given reliance on market-making
and linkages to other markets (repos, derivatives); Corporate bonds: lower liquidity markets, therefore greater liquidity effect;
Derivatives: possible impact on spreads, but big effect on competitive dynamics.
433 This works as follows. After a market maker executes a transaction with an investor, they enter the interdealer market to
hedge the risk. However, if because of the publication of trade information, the other dealers can predict this dealer’s need
to hedge, the other dealers can benefit by taking up contrarian positions in the interdealer market, thereby making it costly for
the successful bidder to offset the risk of the position. Market makers will need to compensate for this risk of adverse price
movements by increasing the transaction costs that they charge to investors. Investors will require compensation for these
increased costs from the issuers of bonds (governments, companies), in the form of higher borrowing costs.
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Dolezalová
On the fixed income market several hundred thousand bonds are traded, contrary to
the roughly thirty thousand equities that are traded at the equity market. Unlike equities
(which do not mature) bonds have maturities ranging from some months to many years
and many new bonds are issued on a continuous basis. Almost 70% of all bond transac-
tions between final investors are concluded through market makers or dealers acting in
a similar way because liquidity in the fixed income market is very volatile and not stable
over long periods of time (roughly 60% of bonds are traded less than 20x per month).
This specific need for bond trading to use market makers would lead to a cascading ef-
fect and thus a higher tax burden on bonds than on equities.434 What is worse, the FTT
would make market making economically unsustainable and it is very clear that it would
hit in particular the fixed income markets very seriously.435
The same may be said about derivative markets which quite heavily depend on market
making as well. Furthermore, complex derivatives between client and dealer are often
hedged in the interdealer market as a set of more vanilla trades. In this way, a single
client trade can also engage the dealer436 in a number of (maybe 3 or 4) trades in the
434 Transactions in equities are usually concluded between final investors so those trades would be taxed just once. As men-
tioned above, this is not true for bonds when very often more than one transaction occurs between final investors when an
„intermediary/dealer/market maker“ is needed. Because the FTT is gross – it would be charged on each leg of a transaction
- so the tax would be paid several times depending how liquid or illiquid fixed income market would be at present (i.e. how
many intermediaries/dealers would be involved). What is more, quite often 2 firms who wish to transact (one seller, one
buyer) may have technical reasons why they cannot trade directly together (more often than not credit issues). To facilitate
this, a dealer (who is able to trade with both parties) will interpose themselves between the 2 parties. Thus, party A would
buy from the dealer and party B would sell to the dealer. At no point is the dealer at risk (such activity is often referred to as
„riskless principal“) but is merely interposed for operational and/or practical reasons. However under the proposed FTT,
an additional FTT liability would arise.
435 Market making requires that the market maker trades regularly with other counterparties to distribute the exposure gene-
rated from a client trade to other dealers who, in turn, may trade the opposite position with their client. As such, in addition
to the trades which a dealer executes with its clients, there is also a background of buys and sells with other dealers/market
makers as positions reach equilibrium across the market. In executing a given client trade (and associated FTT) it is very
difficult to predict the number of market based buys and sells the market maker will enter into to distribute that position.
Since these market/making trades would also be subject to FTT, the dealer/market maker would need to price them into the
cost of the trade with the original client (i.e. include the cost of hedging). As a result, market making in its current form will
cease, and firms will have to focus on agency business matching clients as this is the only predicable way to accommodate the
FTT. Given the well documented liquidity patterns in fixed income markets, the ability to buy or sell anything but on-the-run
bonds will be greatly reduced.
436 In addition, it would make a difference to a client whether their counterparty is EU based on not. If the EU client faces
an EU counterparty the original trade would be subject to the FTT, and since the dealer is EU based any hedges the EU
dealer undertakes would also be subject to the FTT – the cost of which would be factored into the price of the client trade.
However if the EU client faces a non EU dealer, the initial trade is subject to FTT but any hedges undertaken by the non
EU dealer (executed with another non EU dealer) would not be subject to FTT. Thus, the non EU dealer would not have
to pass this cost on to the original client – therefore the non EU dealer could quote a more aggressive price to the original
client, winning business at the expense of EU dealers.
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interbank market each for the same notional as the initial trade but hedging a particular
subset of the original risk.
10.4. Financial transactions tax and clearing and settlement
The FTT does not distinguish between genuine trading and back-to-back transactions
concluded for settlement purposes. We talk about genuine trading when an OTC deri-
vative contract is concluded between original counterparties (e.g. between a bank dealer
and its corporate client who wants to hedge its business). Such an OTC derivative
contract must be then settled. This may be done bilaterally between original counter-
parties or by using central clearing (i.e. both original counterparties use the service of
clearing members who are participants in a relevant central counterparty/CCP which
offer clearing of the OTC derivatives concerned). Under current models for clearing
OTC derivatives, the capacity in which the clearing member acts, either as agent or as
principal, determines the structure of the cleared trades. Where the clearing member
acts as agent, the end-user will face the CCP directly because, although the clearing
member may appear to be a party to the trade, it is not the true counterparty (here,
there is just one transaction, albeit involving three parties). Where the clearing member
acts as principal, the end-user will face the clearing member, and the clearing member
will face the CCP (here, there are two identical ‘back-to-back’ transactions among the
three parties).437
According to the proposed FTT, any modification of a contract gives rise to the tax as a
taxable transaction.438 Our understanding therefore is that not only original transactions
would be taxed but also all “technical” back-to-back transactions concluded between
clients and clearing members (or clients and participants).
437 The agent model is used mostly in the US and the principal model used in the EU (because of insufficiently harmonized
insolvency law). Because the FTT is gross, it would be charged on genuine trading as well as on back-to-back transactions
which are needed to ensure central clearing of OTC derivatives.
438 Article 2.2 of the draft FTT provides: „Each of the operations referred to in points (a), (b), (c) and (e) of paragraph 1(2)
shall be considered to give rise to a single financial transaction. Each exchange as referred to in point (d) thereof shall be
considered to give rise to two financial transactions. Each material modification of an operation as referred to in points (a) to
(e) of paragraph 1(2) shall be considered to be a new operation of the same type as the original operation. A modification is
considered to be material in particular where it involves a substitution of at least one party, in case the object or scope of the
operation, including its temporal scope, or the consideration agreed upon is altered, or where the original operation would
have attracted a higher tax had it been concluded as modified.“
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This would again lead to a cascading effect that would have a particularly negative im-
pact on the central clearing of OTC derivatives. If we take into account the key role of
central clearing provided by CCPs for enhancing systemic stability of financial institu-
tions it is quite controversial to make central clearing more costly by imposing the FTT
on back-to back transactions.439
10.5. Financial transactions tax and repo and securities lending markets
Repo and securities lending markets play a crucial role as a source of cash and financial
instrument which may be used as collateral and as a source of financial instruments
which may be used for settlement.440 The European Securities and Markets Authority
(ESMA) is expected to impose a clearing obligation on the first set of OTC derivatives
in the autumn of 2014.441 All financial institutions will have to clear those OTC deriva-
tives through CCPs and provide clearing members and CCPs with initial margins (i.e.
with collateral).
Annexes I and II of Regulation (EU) 153/2013 supplementing EMIR clearly define

financial instruments that are eligible for collateral, as those instruments that have an
active outright sale or repurchase agreement market (with a diverse group of buyers and
sellers) to which the CCP can demonstrate reliable access including in stressed condi-
tions, and that have reliable price data published on a regular basis.
439 See The City of London: „Implications of a financial transaction tax for the European regulatory reform agenda“;
http://www.cityoflondon.gov.uk/economicresearch
440 A repurchase agreement (repo) is the sale of a security coupled with an agreement to repurchase it, at a specified price,
at a later date. So a dealer sells the securities to investors, usually on an overnight basis, and buys them back the following
day. For the party selling the security (and agreeing to repurchase it in the future) it is a repo; for the party on the other end
of the transaction, (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement. Repo markets
play an important role in monetary policy as the source of short-term borrowing controlled by central banks. Repo markets
are a source of highly liquid securities (mainly government bonds) which can be used as collateral (mainly as initial margins
in case of central clearing). Securities lending is a transaction when one party lends securities to another party and receives a
fee as the payment for the loan. Those transactions are usually collateralized (the lender receives collateral). Securities lending
plays an important role in preventing settlement failures and it also enables hedge funds and other investment vehicles to sell
shares short. One can sell securities without owning them at the moment the trade is concluded but those securities must be
delivered at the time of settlement (usually 2 or 3 days later).
441 The public Consultations on clearing obligation (organised by ESMA) were accomplished in August 2014; http://www.
esma.europa.eu/page/OTC-derivatives-and-clearing-obligation;
162
It is quite obvious that the FTT would hit mainly short-term repo markets because
there is no concept of tenor in the FTT proposal. Thus an overnight trade (i.e. a trade
with 1 day duration) is taxed at the same level as a 1 year trade. Since interbank fun-
ding is conducted on a short term basis to maintain liquidity, the cost of funding on an
overnight basis would be approximately 250 days times 0.1%, i.e. 25% of the notional
amount per year. To give some context, in repo markets quote markets, a price diffe-
rence of 1 basis point is material.
The FTT may thus cause a shortage of available collateral and financial institutions may
be forced to use cash, which is expensive and inefficient. This would also drain liquidity
from financial institutions like insurance companies, collective investment undertakings,
pension funds, and banks. It should be said that repos or reverse repos cannot be repla-
ced by pledges442 because of very different legal regimes. Repos and reverse repos are
within the scope of the Financial Collateral Directive443 so the legal regime (including
insolvency law) is harmonized throughout the EU. This is not true for pledges. Such a
move would represent a fundamental change to financial markets, and should not be
considered lightly.
10.6. A financial transactions tax that exceeds profit
One of the biggest problems we see with the FTT is the fact that the tax imposed on
certain financial activities risks to be much higher than the real profit, so that the FTT
can easily result in the liquidation of those financial activities and the corresponding
economic activity. This is very obvious in the case of market makers who make money
from spreads between bids and offers.444 In some cases the tax may be even 50 times
442 To secure a debt a market participant can make a pledge of collateral. This usually means that the borrower places some
collateral (often securities) into an account over which the lender has some rights, including the right to take control of the
account (and the assets held within it) in the event of the default of the borrower. The lender may take pledged assets only
if the debt is not properly serviced. For example, the pledged assets cannot be re-used by the lender to secure his own debt.
Unlike pledged securities, securities sold in repo transactions may be re-used by the buyer until the time when the buyer sell
the securities back. Or the buyer may replace those securities by other securities with the same value etc. The legal regime
of repos is much more flexible (allowing broad re-use of securities provided under repos) than the legal regime of pledges.
443 Dir. 2002/47/EC http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02002L004720090630&q
id=1410911990792;
444 Market makers act as principals. The principal does not charge a fee or concession but rather he charges a „mark-up“.
If you are dealing with a principal, he can provide you a „bid“ and „ask“ quote. The „bid“ is what he is willing to pay to buy
an instrument from you, and the „ask“ is what he requires in order to sell an instrument to you. So his profit is the difference
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Dolezalová
higher than the profit on an individual transaction. Anecdotal commentary suggests

that the amount of FTT payable under the proposed rules would amount to 3 to 5
times the gross trading revenues of a typical trading business – this is before the costs
of running the business (staff, infrastructure, capital etc) are taken into account.
A first example comes from the repo market. In case of a typical 1 day repo tran-
saction with a nominal value of EUR 100 million, the revenue of a market maker is
somewhere between EUR 139 and 417, but the tax paid by the market maker would be
EUR 200,000. To absorb the tax the spread for overnight repos should enlarge from
5-15 basis points to approximately 72.1%. But such a spread does not make any sense
so short-term repo markets would in particular be pushed out of the FTT zone (even
out of the EU) completely. It may encourage uncollateralized lending and thus increase
systemic risk in the market. Also the fact that it would be impractically expensive to use
government bonds as collateral would reduce demand for these assets, thus increasing
the cost of issuance.445
A second example comes from the derivatives market when we use dealer pages on
Bloomberg. The EU dealer quotes the bid/offer spread „0.4 basis points (bps) for 10
year USD Interest Rate Swap“446 with a nominal value of USD 100 million. To absorb
the tax paid by the dealer the spread should be enlarged into 2.4 bps (i.e. 1 bps of the
tax imposed on an original derivative contract and 1 bps of the tax imposed on an
offsetting derivative contract). But with such spreads the dealer cannot compete with
dealers based outside the FTT zone. While a figure of 1 basis point (0.01%) seems small
to financial market outsiders, it is enormous for institutions when they trade.
There is a strong possibility that EU dealers in derivatives would lose all non-EU clients
and most EU clients.
between the bid and offer (i.e. the bid-ask spread).

445 Investors are not willing to pay a “good” price for bonds on primary market if it is quite clear that they would have almost
no chance to sell them later on secondary market.
446 The bid-offer spread is the difference between the price at which the dealer buys and the price at which the dealer sells a
given product. The example given reflects that for a 10 year Interest Rate Swap a representative bid-offer spread quoted to
a client (as opposed to another dealer/market-maker) would be around 0.4 basis points
164
10.7. Summary and conclusions
This contribution looked at the possible impact of the FTT as proposed by the Com-
mission on the way financial markets function and are regulated. It noted that the FTT
may negatively affect the liquidity of capital markets (10.2) that it carries a risk of
cascading or tax cumulation in particular on markets for bonds and derivatives (10.3),
that it would make central clearing more costly by imposing the FTT also on back-to
back transactions (10.4), that it would adversely affect short-term repo markets and
cause a shortage of available collateral447 (10.5) and that in some instances the tax risks
exceeding the profits of traders thus pushing certain activities out of the EU and into
third countries (10.6).
To sum up there are strong indications that the current draft FTT breaches basic legal
principles, because we believe that no tax may be designed in such a way that it would
destroy the economic activity or business of tax payers.
447 Bank of America, Merrill Lynch: „Financial Transaction Tax – toll or roadblock?“; 19 March 2013.
165
166
FTT Harmonisation in the EU
11. Introducing a Harmonised Financial Transaction Tax in

the EU: A Failure in 2012, Two Steps Ahead in 2013, and
One Step Backward in 2014
by Marie Lamensch448
11.1. The case for a financial transactions tax and the failure
to introduce it at an EU-wide level in 2012
European governments and citizens are paying a high price for the economic crisis that
started in 2007 and that is largely attributed to the financial sector.449 Unsurprisingly
therefore, the claim that this sector should contribute to covering the costs of the crisis
by means of a tax on financial transactions has emerged,450 also in view of its current
“under taxation” as compared to other sectors,451 and of the rescue interventions which
several States were forced to undertake to save their banks from bankruptcy as a result
of the crisis.452
448 Professor Dr Marie Lamensch is Chargée de cours at the Université Catholique de Louvain (Louvain-la-Neuve) and
Postdoctoral researcher at the Institute for European Studies of the Vrije Universiteit Brussel. She can be contacted at marie.
lamensch@vub.ac.be or marie.lamensch@uclouvain.be.
449 The financial crisis eventually resulted in a sovereign debt crisis, which led to the adoption of austerity measures by Eu-
ropean governments. See the Treaty on Stability, Coordination and Governance (available at http://european-council.europa.
eu/media/639235/st00tscg26_en12.pdf), providing for much stricter rules than the previous Stability and Growth Pact (still
available at http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:31997Y0802(01)).
450 European Commission (2013): “Proposal for a Council Directive implementing enhanced cooperation in the area of
financial transaction tax”, COM(2013) 71 final (hereafter referred to as the “2013 European Commission proposal” or “the
2013 proposal”), p. 2 (explanatory memorandum). According to the latest Eurobarometer survey, 66% of EU citizens sup-
port the idea of a tax on financial transactions (2014 Eurobarometer survey on ‘The crisis and the economic governance in
Europe”, carried out by the European Parliament, Analytical Summary p. 20). See also Trade Union Advisory Committee
to the OECD (2010): The parameters of a financial transaction tax and the OECD global public resource gap 2010-2020.
451 Inter alia because of the exemption of these transactions from value-added-tax, traditionally justified by the practical
difficulties involved in calculating the tax. See A. Kerrigan (2010): “The Elusiveness of neutrality – why is it so difficult to
apply VAT to financial services”, International VAT Monitor, Vol. 21, No. 2 (18. March 2010): pp. 103-112.
452 Including, in the EU: in the UK, Ireland, France, the Netherlands, Belgium and Luxembourg. On that question, see M.
Fratiani and F. Marchionne (2009): “Rescuing Banks from the Effects of the Financial Crisis, Working Paper Kelley School of
Business, available at http://ssrn.com/abstract=1476786 or http://dx.doi.org/10.2139/ssrn.1476786 and H-W. Sinn (2010):
“Casino Capitalism, How the Financial Crisis Came About and What Needs to be Done Now’, Oxford University Press,
Chapter 9.
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Lamensch
Taxing financial transactions is not a new idea.453 In fact, several States already individu-
ally tax a limited number of financial transactions.454 However, no agreement could ever
be reached on the levy of a coordinated and broad tax on “all” financial transactions at
a regional or international level.455
In September 2011, in spite of a difficult context,456 the European Commission made

a proposal for the introduction of a harmonized tax on financial transactions in the
EU.457 The objective of this proposal was threefold.458 It, first, aimed at preventing the
fragmentation of the Internal Market that could result from numerous uncoordinated
national approaches to taxing financial transactions (both in view of the high mobility
of most of the transactions potentially taxed and their tendency to concentrate in low
tax areas,459 and also in view of the risks of double taxation or unintentional non-
taxation).460 Second, it sought to ensure that the financial sector would make a fair and
substantial contribution to public finances in order to, on the one hand, cover the costs
of the financial crisis and, on the other hand, set a level playing field with other (more
taxed) sectors. Third, it intended to be a disincentive to speculative transactions.461
453 In 1936, Keynes proposed a tax on all securities transactions, in order to reduce destabilizing speculation in equities on
Wall Street (J. Maynard Keynes (1936): “The General Theory of Employment, Interest and Money”, Macmillan Cambridge
University Press, p. 105). In 1972, Tobin’s proposal to tax currency exchange transactions aimed at reducing destabilizing
currency speculation (J. Tobin (1978): “A Proposal for International Monetary Reform”, Eastern Economic Journal, p. 153).
454 Including, in the EU: the British Stamp duty, the Belgian securities tax, the French tax on high frequency trading and on
naked sovereign credit default swaps, and the Italian tax on equity transactions.
455 In November 2010, for example, the G20 failed to reach agreement on a FTT as suggested in the International Expert
Report: “How can we implement today a Multilateral and Multi-Jurisdictional Tax on Financial Transactions” (submitted to
the G20 members in September 2010, available at http://www.leadinggroup.org/IMG/pdf/Rapport_TTF_ANG_300112_
bis.pdf), because of fierce opposition by several countries including the US, Canada, India and the UK (“G20 fails to
endorse financial transaction tax”, Reuters 4 November 2011, http://www.reuters.com/article/2011/11/04/g20-tax-idUS-
N1E7A302520111104).
456 I.e. the recent failure to reach an international agreement at G20 level (see previous footnote).
457 European Commission (2011): “Proposal for a Council Directive on a common system of financial transaction tax and
amending Directive 2008/7/EC” COM(2011) 594 final (hereafter referred to as the “2011 European Commission proposal”
or “the 2011 Proposal”).
458 2011 European Commission proposal, p. 2 (Explanatory Memorandum).
459 2011 European Commission proposal, p. 4 (Explanatory Memorandum). For example: distortions caused by taxation
induced geographical delocalization of activities, or by very mobile products such as derivatives.
461 I.e. that “do not contribute to the efficiency of financial markets or of the real economy”. 2011 European Commission
proposal, p. 2 (Explanatory Memorandum).
168
There was also the hope that this proposal would be a first tangible step towards taxing
financial transactions at the global level, because it showed “how an effective tax on financial
transactions can be designed and implemented, generating significant revenue”.462
In a nutshell, what the European Commission proposed in 2011 was to tax all transac-
tions made on (secondary) financial markets, once at least one EU financial institution
is involved as party in the transaction. The tax would have applied to “all markets”
(including regulated markets or over-the-counter transactions), “all instruments” (e.g.
shares, bonds, derivatives etc.) and “all actors” (e.g. banks, but also asset managers),
with the objective to minimise potential distortions across different market segments,
and reduce the risk of tax-planning, substitution and relocation.463 Minimum tax rates
were foreseen, i.e. 0.1% for trading in shares and bonds, and 0.01% for derivative ag-
reements such as options, futures or interest rate swaps.464 The receipts generated by
the tax would have constituted an own resource for the EU budget, thereby reducing
the gross-national-income based resource drawn from the participating Member States
accordingly.465
In spite of positive opinions by the European Parliament,466 the Economic and Social
Committee,467 and the Committee of Regions,468 the proposal did not receive the re-
quired unanimous support in the Council.469 Eleven Member States (i.e. Austria, Bel-

463 2011 European Commission proposal, p. 6 to 8 (Explanatory Memorandum).
465 2011 European Commission proposal, p. 3 (Explanatory Memorandum). The proposal was drafted in the context of
the economic crisis, and it is therefore not surprising that it foresees that the revenue would simply be used to increase
taxing States’ own public finances. To be noted, however, that other revenue allocation options have been suggested for a
tax on financial transactions. See for example: CISDE (2011): “The FTT for people and the planet, financing climate justice,
available at http://www.socialjustice.ie/sites/default/files/file/Policy%20Issues/Taxation/2011-06-08%20-%20The%20
FTT%20forpeople%20and%20the%20planet%20-%20Financing%20Climate%20Justice.pdf; B. Gates (2011): “Innovation
with Impact: Financing 21st Century Development”, Bill Gates “Notes”, http://www.gatesnotes.com/Development/G20-
Report-Innovation-with-Impact; B. Jetin (2009): “Financing development with global taxes: Fiscal revenues of a currency
transaction tax”. See also International Expert Report “How can we implement today a Multilateral and Multi-Jurisdictional
Tax on Financial Transactions” quoted above (footnote 8), which proposed using the tax revenue to support developing
countries.
466 P7_TA-(2012)0217.
467 ECO/321 – CESE 818/2012.
468 CDR 332/2011.
469 European Commission, Press release IP/12/1138. Member States that were against the proposal include the UK, Swe-
den, the Czech Republic and Bulgaria (R. Christie and J. Brunsden (2011): “EU Transaction Tax Debate Highlights Euro-
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Lamensch
gium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia Slovenia and Spain),
however, wished to move on with the introduction of a tax on financial transactions,
and asked authorisation to the Council to start enhanced cooperation in that field.470
Authorisation was granted on 22 January 2013, following the consent of the European
Parliament on 12 December 2012.471
11.2. The 2013 proposal for enhanced cooperation on a financial

transactions tax in 11 Member States: two steps ahead
The European Commission adopted a proposal for a Council Directive implementing

enhanced cooperation in the area of financial transaction tax on 14 February 2013.472
This was a major step forwards, because chances of adoption of a harmonized tax on
financial transactions in a significant part of the EU now seemed rather high given, as
indicated above, that enhanced cooperation means that the Member States concerned
had pro-actively asked authorisation to move on and be allowed to tax financial transac-
tions in a broad and harmonized way.
The 2013 proposal pursues the same objectives as the 2011 proposal, i.e. the harmo-
nization of financial transaction taxes in the participating Member States,473 the con-
tribution of financial institutions to covering the costs of the financial crisis together
with setting of a level playing field with other sectors,474 and providing a disincentive to
speculative transactions that are not “welfare enhancing” and present a risk to triggering
Area Disagreement”, Bloomberg Businessweek (8 November).

470 COM(2012) 631 final/2.
471 European Parliament legislative resolution of 3 July 2013 on the proposal for a Council directive implementing enhan-
ced cooperation in the area of financial transaction tax (COM(2013)0071 – C7-0049/2013 – 2013/0045(CNS)). The 2011
European Commission proposal was, as a consequence, withdrawn. The legal basis for the proposed Directive is Article
113 TFEU because it is aimed at harmonsing legislation concerning indirect taxation, which is needed to ensure the proper
functioning of the Internal market and avoid distortions of competition.
472 “2013 European Commission proposal” or “2013 Proposal”, see footnote 3.
473 However, this objective is not fully reached under this proposal because double taxation may still arise in case of appli-
cation of both the harmonised tax and a local tax in a non-participating Member State.
474 The explanatory memorandum notes that, so far, the financial sector has experienced high profitability in the last decades
which could be partially the result of safety nets provided by governments, combined with financial sector regulation and
VAT exemptions. 2013 European Commission proposal, p. 4 (Explanatory Memorandum).
170
other crises in the financial sector in the future.475 The features of the proposed tax
also remain mostly similar, although some adaptations were necessary due to the fact
that this is no longer an EU-wide initiative, but an initiative of 11 Member States under
enhanced cooperation.
More precisely, the proposed tax is again designed to affect all markets, all instruments
and all actors. “All markets” are covered because the tax affects instruments negotiable
on regulated and non-regulated (secondary)476 markets.477 “All instruments” are covered
because not only purchases and sales or exchanges, repurchases and reverse repurchases
are taxed, but also transfers between separate entities of a group, securities lending and
borrowing agreements.478 Moreover, where a derivative contract results in a supply of
financial instruments, this supply will also be subject to the tax. Furthermore, an ad-
dition as compared to the 2011 proposal is that any material modification of a taxable
financial transaction is considered as a new taxable transaction of the same time as the
original one.479 Finally, “all actors” are also covered (including not only banks but also,
for example, asset managers), it being understood that because the tax is focused on
financial transactions carried out by financial institutions, transactions with the Euro-
pean Central Bank, the European Financial Stability Facility, the European Stability
Mechanism, the European Union (when exercising the function of management of
its assets, of balance of payment loans, and of similar activities) and the central banks
of Member States are excluded.480 For the same reason, financial activities traditionally
carried out by retail investors (e.g. the conclusion of insurance contracts, mortgage
lending, consumer credits, enterprise loans, payment services etc.) are also excluded.481
475 2013 European Commission proposal, p. 4 (Explanatory Memorandum), and Recitals (1) and (3) of the Preamble of
the proposed Directive.
476 Article 4 a) of the 2013 European Commission proposal. Primary markets are excluded so as not to undermine the
raising of capital by companies and governments and to avoid impacting on households. A change as compared to the
2011 proposal is that the issue of units and shares of UCITS and AIF is no longer considered not to be a primary market
transaction, so that it does not fall within the scope of the tax (Article 3(4)(a) of the 2013 European Commission proposal).
477 This can be concluded from the definition of the taxable transactions under Article 2, and as confirmed in Recital (4) of
the Preamble of the 2013 European Commission proposal.
478 Article 2(2) of the 2013 European Commission proposal. See also the Explanatory Memorandum, p. 8. A change as
compared to the 2011 proposal is that repurchases, reverse repurchases and securities, lending and borrowing agreements
are treated as single transactions.
479 Article 2(2) of the 2013 European Commission proposal and Explanatory Memorandum, p. 8.
480 Article 4b) to g) of the 2013 European Commission proposal.
481 Although the subsequent trading of these structured products is included.
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Lamensch
Central Counterparties and Central Securities Depositories are not subject to the tax
either, to the extent they are not themselves engaged in trading activities.482 Last but
not least, currency transactions on spot markets remain outside the scope of the tax,
with the objective to preserve the free movement of capital.483 However, derivatives
contracts based on currency transactions are covered by the tax since they are not as
such currency transactions.484
For purchases and sales of financial instruments other than derivatives, the taxable
amount is the price (or any other form of consideration) received, except when it is lo-
wer than the market price,485 in which case the taxable amount is to be the market price
determined at arm‘s length at the time the tax becomes chargeable.486 For purchases
or sales, transfer, exchange, conclusion of derivative contracts, the taxable amount is
the notional amount referred to in the derivatives contract at the time it is purchased,
sold, transferred, exchanged, concluded or when the operation concerned is materially
modified.487 As under the 2011 proposal, a different rate applies depending on the type
of transaction, i.e. 0.1% of the market price for trading in securities, such as shares
and bonds, and 0.01% of the notional amount underlying the product for derivatives
agreements and „financial-market bets“.488
In practice, the proposed tax is due whenever a taxable transaction involves at least
one financial institution489 “established” (see below) in the territory of a participating
482 Article 2 a) and b) of the 2013 European Commission proposal.

485 Article 6(1) of the 2013 European Commission proposal.
486 Article 6(2) and (3) of the 2013 European Commission proposal.
487 Article 7 of the 2013 European Commission proposal and Explanatory Memorandum, p. 11. As noted above, a modi-
fication entails a new taxable transaction.
488 The explanatory memorandum notes that the provision of minimum tax rates (above which there is room of manoeu-
vre for national policies) are set at a level sufficiently high for the harmonisation objective of the proposed directive to be
achieved, but at the same time low enough so that delocalisation risks are minimised. 2013 European Commission proposal,
p. 12 (Explanatory Memorandum).
489 As defined under Article 2(8) which reads as follows: “(8) ‚Financial institution‘ means any of the following: (a) an
investment firm as defined in Article 4(1)(1) of Directive 2004/39/EC; (b) a regulated market as defined in Article 4(1)(14)
of Directive 2004/39/EC and any other organised trade venue or platform; (c) a credit institution as defined in Article 4(1)
of Directive 2006/48/EC; (d) an insurance and reinsurance undertaking as defined in Article 13 of Directive 2009/138/EC
of the European Parliament and the Council; (e) an undertaking for collective investments in transferable securities (UCITS)
as defined in Article 1(2) of Directive 2009/65/EC of the European Parliament and of the Council11 and a management
172
Member State acting either for its own account or for the account of another person
or acting in the name of a party to the transaction, and it is payable to that participating
Member State.490 Interestingly, the tax must be paid by any financial institution involved,
which may include both the seller and purchaser in case both are financial institutions.491
The concept of “establishment” is defined very widely under Article 4 of the 2013 pro-
posal, giving the proposed tax a very wide scope of application. As a matter of fact, in
addition to Article 4(1) points (a) to (e), that quite traditionally foresee that any financial
institution that has been authorized to act as such on the territory of a participating
Member State, or has its registered seat, its permanent address or usual residence or
a branch within that Member State will be deemed to be “established” (and therefore
required to pay the tax there whenever involved in a taxable transaction),492 Article
4(1) point (f) more remarkably provides that any financial institution that is party493
to a taxable transaction with another financial institution established in a participating
company as defined in Article 2(1)(b) of Directive 2009/65/EC; (f) a pension fund or an institution for occupational reti-
rement provision as defined in Article 6(a) of Directive 2003/41/EC of the European Parliament and of the Council12, an
investment manager of such fund or institution; (g) an alternative investment fund (AIF) and an alternative investment fund
manager (AIFM) as defined in Article 4 of Directive 2011/61/EU of the European Parliament and of the Council13; (h)
a securitisation special purpose entity as defined in Article 4(44) of Directive 2006/48/EC; (i) a special purpose vehicle as
defined in Article 13(26) of Directive 2009/138/EC; (j) any other undertaking, institution, body or person carrying out one
or more of the following activities, in case the average annual value of its financial transactions constitutes more than fifty per
cent of its overall average net annual turnover, as referred to in Article 28 of Council Directive 78/660/EEC14: (i) activities
referred to in points 1, 2, 3 and 6 of Annex I to Directive 2006/48/EC; ii) trading for own account or for account or in the
name of customers with respect to any financial instrument; (iii) acquisition of holdings in undertakings; (iv) participation
in or issuance of financial instruments; (v) the provision of services related to activities referred to in point (iv)”.
490 Article 3 of the 2013 European Commission proposal. See below Article 4 of the 2013 European Commission proposal
defining broadly the scope of the concept of “establishment”. The tax is due when the financial transaction occurs, which
means that subsequent cancellation cannot be considered as a reason to exclude chargeability of the tax, except in cases of
errors (Article 5 of the 2013 European Commission proposal).
491 Article 10(1) of the 2013 European Commission proposal. Also to be noted that exchanges are considered as two separa-
te taxable transactions (expl. Notes p. 8). In case the tax due on account of a transaction has not been timely paid each party
to that transaction should be held jointly and severally liable for the payment of the tax. Moreover, participating Member
States should have the possibility to hold other persons jointly and severally liable for payment of the tax, including in cases
where a party to a transaction has its headquarters located outside the territory of the participating Member States. Article
10(2) and (3) of the 2013 European Commission proposal.
492 Article 4(1) points (a) to (e) of the 2013 European Commission proposal read as follows: “For the purposes of this
Directive, a financial institution shall be deemed to be established in the territory of a participating Member State where any
of the following conditions is fulfilled: (a) it has been authorised by the authorities of that Member State to act as such, in
respect of transactions covered by that authorisation; (b) it is authorised or otherwise entitled to operate, from abroad, as
financial institution in regard to the territory of that Member State, in respect of transactions covered by such authorisation
or entitlement; (c) it has its registered seat within that Member State; (d) its permanent address or, if no permanent address
can be ascertained, its usual residence is located in that Member State; (e) it has a branch within that Member State, in respect
of transactions carried out by that branch;
493 Acting either for its own account or for the account of another person, or in the name of a party to the transaction.
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Member State (in accordance with the previous points), or with a party established in
the territory of that Member State which is not a financial institution,494 will also be
deemed to be established in that Member State, and therefore required to pay the tax
whenever involved in a taxable transaction (so-called “counterparty principle”).495 Also
remarkable is that Article 4(1) point (g) further provides that any financial institution
that is party496 to a taxable financial transaction in a structured product or one of the
financial instruments that is issued within the territory of that Member State (with the
exception of instruments which are not traded on an organised platform)497 will also be
deemed to be established and required to pay the tax (so-called “issuance principle”).498
The “counterparty principle” was already part of the 2011 proposal,499 but the „issuan-
ce principle“ was not. It can be seen as a second step ahead for the taxation of financial
transactions at a large scale because it clearly improves the resistance of the tax against
relocation in a non-participating States, given it suppresses the temptation to reloca-
te activities and establishments as the trading in any financial instruments issued in a
participating Member State will anyway be taxable.500 The financial institution deemed
established in a participating Member State under Article 4 of the 2013 proposal may,
494 In accordance with Article 4(2) of the 2013 European Commission proposal, which provides that: “A person which is
not a financial institution shall be deemed to be established within a participating Member State where any of the following
conditions is fulfilled: (a) its registered seat or, in case of a natural person, its permanent address or, if no permanent address
can be ascertained, its usual residence is located in that State; (b) it has a branch in that State, in respect of financial transac-
tions carried out by that branch; (c) it is party to a financial transaction in a structured product or one of the financial inst-
ruments referred to Section C of Annex I to Directive 2004/39/EC issued within the territory of that Member State, with
the exception of instruments referred to in points (4) to (10) of that Section which are not traded on an organised platform”.
495 Article 4(1) point f) of the 2013 European Commission proposal read as follows: “For the purposes of this Directive,
a financial institution shall be deemed to be established in the territory of a participating Member State where any of the
following conditions is fulfilled: (…) (f) it is party, acting either for its own account or for the account of another person, or
is acting in the name of a party to the transaction, to a financial transaction with another financial institution established in
that Member State pursuant to points (a), (b), (c), (d) or (e), or with a party established in the territory of that Member State
and which is not a financial institution”.
496 Again, acting either for its own account or for the account of another person, or in the name of a party to the transaction.
497 This concerns essentially shares, bonds and equivalent securities, money-market instruments, structured products, units
and shares in collective investment undertakings and derivatives traded on organised trade venues or platforms.
498 Article 4(1) point g) of the 2013 European Commission proposal read as follows: “For the purposes of this Directive, a
financial institution shall be deemed to be established in the territory of a participating Member State where any of the fol-
lowing conditions is fulfilled: (…) (g) it is party, acting either for its own account or for the account of another person, or is
acting in the name of a party to the transaction, to a financial transaction in a structured product or one of the financial inst-
ruments referred to in Section C of Annex I of Directive 2004/39/EC issued within the territory of that Member State, with
the exception of instruments referred to in points (4) to (10) of that Section which are not traded on an organised platform”.
499 Article 3(1)e) of the 2013 European Commission proposal.
500 2013 European Commission proposal p. 5 (Explanatory Memorandum).
174
however, prove that there is no link between the economic substance of the transaction
and the territory of any participating Member State (safeguard clause).501
The 2013 proposal also provides for a very wide anti-avoidance rule, based on the
anti-avoidance rule proposed in the 2012 European Commission recommendation on
aggressive tax planning.502 Under this rule, artificial arrangements, i.e. “lacking com-
mercial substance”, leading to a tax benefit will be ignored. For the application of this
rule, the “subjective intentions” of the taxpayer will not be taken into account if the
arrangements in question defeat the object, spirit and purpose of the tax provisions
that would otherwise apply.503 A more specific anti-abuse provision also foresees that a
depositary receipt or similar security issued with the essential purpose of avoiding tax
on transactions in the underlying security issued in a participating Member State will be
considered as “issued” in that participating Member State in case a tax benefit would
otherwise arise.504
The 2013 proposal does not go as far as organizing the administration of the tax (pro-
cedural autonomy of the Member States), but the explanatory memorandum suggests
501 Article 4(3) of the 2013 European Commission proposal.

502 European Commission (2012): “Recommendations on Aggressive Tax Planning”, C(2012)8806 final. Article 13 of the
2013 European Commission proposal reads as follows: “1. An artificial arrangement or an artificial series of arrangements
which has been put into place for the essential purpose of avoiding taxation and leads to a tax benefit shall be ignored.
Participating Member States shall treat these arrangements for tax purposes by reference to their economic substance. 2.
For the purposes of paragraph 1 an arrangement means any transaction, scheme, action, operation, agreement, grant, un-
derstanding, promise, undertaking or event. An arrangement may comprise more than one step or part. 3. For the purposes
of paragraph 1 an arrangement or a series of arrangements is artificial where it lacks commercial substance. In determining
whether the arrangement or series of arrangements is artificial, participating Member States shall consider, in particular,
whether they involve one or more of the following situations: (a) the legal characterisation of the individual steps which an
arrangement consists of is inconsistent with the legal substance of the arrangement as a whole; (b) the arrangement or series
of arrangements is carried out in a manner which would not ordinarily be employed in what is expected to be a reasonable
business conduct; (c) the arrangement or series of arrangements includes elements which have the effect of offsetting or
cancelling each other; (d) transactions concluded are circular in nature; (e) the arrangement or series of arrangements results
in a significant tax benefit but this is not reflected in the business risks undertaken by the taxpayer or its cash flows. 4. For
the purposes of paragraph 1, the purpose of an arrangement or series of arrangements consists in avoiding taxation where,
regardless of any subjective intentions of the taxpayer, it defeats the object, spirit and purpose of the tax provisions that
would otherwise apply. 5. For the purposes of paragraph 1, a given purpose is to be considered essential where any other
purpose that is or could be attributed to the arrangement or series of arrangements appears at most negligible, in view of all
the circumstances of the case. 6. In determining whether an arrangement or series of arrangements has led to a tax benefit
as referred to in paragraph 1, participating Member States shall compare the amount of tax due by a taxpayer, having regard
to those arrangement(s), with the amount that the same taxpayer would owe under the same circumstances in the absence
of the arrangement(s)”.
503 Article 13(4) of the 2013 European Commission proposal. The question may be raised how the “purpose of avoiding
tax” (point 1) is to be assessed irrespective of the “intentions” of the taxpayer (point 3).
504 Article 14 of the 2013 European Commission proposal.
175
Lamensch
that the participating Member States introduce national, publicly accessible, registries
for the entities required to pay the tax, and, for example, make use of existing “Business
Identification Codes” for both financial and non-financial institutions, the “Classifica-
tion of Financial Instruments” for financial instruments and the “Market Identifier
Code” for the different markets.505 The proposed Directive does not address issues of
administrative cooperation either, which are already covered in existing instruments
relating to the assessment and recovery of taxes.506
Preliminary estimates offered by the European Commission indicate that the revenues
of the proposed tax could be in the order of magnitude of EUR 31 billion annually.507
11.3. No agreement on the 2013 proposal and the May 2014 Joint Statement
towards a more progressive implementation of the tax: 1 step backward
In accordance with enhanced cooperation rules, all Member States can participate in the
discussions that started in the competent Council working group after the release of the
2013 proposal, but only the 11 participating Member States will have the right to vote
and agree on the Directive.508
Taxing financial transactions remains a highly controversial issue, and objections did
not fail to arise from non-participating Member States, in particular from the UK (see
Chapter 12 of this volume).509 The truth is that the debate around the relevance and
possible impact of a tax on financial transactions is highly polarised, even among eco-
nomists.

508 Article 20 TEU.
509 UK Ministry of Finance George Osborne for example held that „the financial transactions tax that people have talked
about is not a tax on bankers as people present it; it‘s a tax on jobs, it‘s a tax on investment, it‘s a tax on people‘s pensions and
pensioners and that is why the United Kingdom does not want to be a part of it”. Euro-sceptic Nigel Farage even went as
far as claiming that support in Europe for an FTT „shows that those in Brussels are now revelling in their efforts to destroy
the British financial industry as well as hurt the millions of people who will see their pensions reduced because of this FTT
measure.“ The Guardian of 6 May 2014. Ironically, the most ancient tax on financial transactions that is still in existence is
the UK stamp duty is due upon each acquisition of shares at the at the London Stock exchange. The financial sector also
unsurprisingly reacted very negatively to the 2013 European Commission proposal: See for example PWC (2013): Financial
Transaction Taxes - Developing a Strategic Response”.
176
Proponents of such a tax argue that there is excessive trading activity due to the pre-
dominance of short-term speculation,510 that this causes price volatility over the short
and long run (i.e. persistent deviation from fundamental equilibrium), and that a tax
would have a stabilizing effect.511 Along those lines, the European Commission holds
that the proposed tax would have “a strong dampening effect” on transactions by high-
frequency traders,512 because frequent and in-numerable short term bets will bear a high
tax burden.513 The European Commission also exposes the practices of proprietary
traders, who do not only broker transactions, but also themselves take the opportunity
to buy the product to be brokered first before selling it, which provides them with two
sources of income (the brokerage fee and the difference between their purchase price
and their selling price), which business model would also be affected by the proposed
tax.514 Those in favour of taxing financial transactions also argue that such a tax would
compensate the exemption of financial services from VAT,515 and that the tax would
generate substantial revenue that could be used to achieve policy goals.516
510 Schulmeister notes that the volume of transactions in the global economy is 73,5 times higher than nominal world GDP,
while it was “only” 15,3 times higher in 1990, and that this increase is due to the spectacular boom of the derivatives markets.
S. Schulmeister (2009): “A General Financial Transaction Tax: A Short Cut of the Pros, the Cons and a Proposal”, WIFO
Working Papers 344/2009, p. 5.
511 J. Keynes (1936): “The General Theory of Employment, Interest and Money”, Macmillan Cambridge University Press,
p. 105; J. Tobin (1978): “A Proposal for International Monetary Reform”, Eastern Economic Journal, p. 153–159; J.E. Stiglitz
(1989): “Using Tax Policy to Curb Short-Term Trading”, Journal of Financial Service Research, 3, p. 101; L. Summers and
V. Summers (1989): “When Financial Markets Work Too Well: A Cautious Case for a Securities Transaction tax”, Journal
of Financial Service Research, 3, p. 261; P. Spahn (1995): “International Financial Flows and Transaction Taxes: Survey and
Options” IMF Working Paper WP/95/60; S. Schulmeister (2009): “A General Financial Transaction Tax: A Short Cut of
the Pros, the Cons and a Proposal”, WIFO Working Papers 344/2009, p. 5; International Expert Report (2010): “How can
we implement today a Multilateral and Multi-Jurisdictional Tax on Financial Transactions”; D. Baker, R. Pollin, T. McArthur
and M. Sherman (2009): “The Potential Revenue from Financial Transactions Taxes”; S. Schulmeister (2009): “J. Brondolo
(2011), “Taxing Financial Transactions: An Assessment of Administrative Feasibility,” IMF Working Paper WP11/185. See
also the “Statements of Support for a Financial Transaction Tax (FTT)” signed inter alia by renowned economists such as
S. Griffith-Jones, P. Krugman, A. Persaud, J. Sachs, J. Stiglitz, L. Summers (available at http://www.cepr.net/documents/
ftt-support.pdf).
512 High-frequency traders and fund and hedge fund managers’ business model is based on quick successions of financial
transactions and on frequent transactions with high profit (and loss) potential. The more frequently that things are bought
and then sold again, the more short-term ‘bets’ are made with the same amount of capital, and the higher the ‘bets’ are in
nominal terms, the higher will be the gains and the more the fees that are raked in.
513 Non-Technical Notes by the European Commission for the 2013 proposal, p. 2 and 3 (available at http://ec.europa.eu/
taxation_customs/resources/documents/taxation/other_taxes/financial_sector/faq_en.pdf)
514 Ibidem, p. 3.
515 European Commission (2011): “Financial Transaction tax: Making the Financial Sector Pay its Fair Share”: Press Release
IP/11/1085 (28/09/2011).
516 European Commission (2011): “Impact Assessment on the financial transaction tax”, SEC 2011/1102.
177
Lamensch
The opponents to a tax on financial transactions base their criticisms on a fundamen-

tally different perception of the trading and price dynamics in financial markets.517 They
traditionally argue that high transaction volumes reflect the liquidity necessary for the
price discovery process (i.e. to find equilibrium price) and that speculation is an essential
factor in that (stabilizing) process. According to these opponents, a deviation of asset
prices from their fundamental equilibrium cannot be the result of speculation, but only
of exogenous shocks.
Opponents also put forward that financial institutions will either make sure to circum-
vent the tax, or forward the cost to the customers. They, however, recognise that each
market is different, and that it is too early to determine to what extent this would be
possible as it depends on the profitability and elasticity of the financial products.518 The
European Commission, however, stresses that the application of very low tax rates
means that private investors should hardly be affected by the tax.519 It also relativizes the
possible indirect impact on investors, in view of the fact that 80 to 90% of the financial
transactions that would be impacted by the tax take place between investment bankers
and traders (such as the high-frequency ‘hedging transactions’ discussed above), and
that forwarding or shifting the entire tax burden would not be possible (so that their
business models would simply be called into question).520
517 S. Schulmeister (2009): “A General Financial Transaction Tax: A Short Cut of the Pros, the Cons and a Proposal”, WIFO
518 K. Habermeier and A. Kirilenko (2003): “Securities Transaction Taxes and Financial Markets”, IMF Staff Paper 50, p.
165; C. Comotto (2013°: “Collateral Damage: the impact of the Financial Transaction Tax on the European repo market
and its consequences for the financial markets and the real economy”, International Capital Markets Association European
Repo Council; J. Vella (2013):
519 For example, the amount of tax due on a EUR 10 000 purchase of shares would be EUR 10, while EUR 100 would be
due in the case of hedging a foreign currency transaction valued at EUR 10 000 000.
520 Most of which are simply ‚bets‘ between two or several investment bankers with the aim of making a profit from the
‚bet‘ itself; only a fraction of all ‘hedging transactions’ taking place in the financial markets being the result of “real activities”.
178
Opponents to an FTT also insist on its adverse economic impact and argue that it
would have a negative impact on GDP growth in the participating Member States
which would exceed the expected tax revenue.521 The European Commission does not
deny this (after all, one of the objectives of the tax is to reduce the number of some
types of financial transactions), but nuances that the long-run costs to GDP could be
minimal if the tax revenue is used to fund growth-enhancing initiatives.522 It also seems
relevant to recall here that the UK has been levying a 0,5% stamp duty on stock transac-
tions for decades, that this tax is generating substantial revenue, and that it apparently
has not caused any harm to the London Marketplace.523
Finally, opponents to the tax refute the idea that the financial sector would be less taxed
as a result of the VAT exemption, on the (sensible) argument that this exemption actu-
ally burdens the sector with irrecoverable tax (because they are not entitled to an input
VAT credit).524
The debate is far from being closed, and one may wonder whether it ever will, in view
of the fundamental disagreement on the questions whether speculative transactions
are putting markets at risk or constitute an essential part of their smooth functioning,
and whether or not a tax would have a stabilizing effect (it being understood that for
conventional equilibrium economists, the very concept of a tax on financial transaction
is running counter the fundamental assumption of market efficiency).525
521 OXERA (2011): “What would be the economic impact of the proposed financial transaction tax on the EU? Review of
the European Commission’s economic impact assessment”, Oxford, available at http://www.oxera.com/Oxera/media/Oxe-
ra/downloads/reports/The-economic-impact-of-the-proposed-FTT.pdf ?ext=.pdf (this study concerns the 2011 proposal).
Concerning the 2013 proposal, some even predict spillover effects on non-participating Member States. See London Eco-
nomics (2013): “The Impact of a Financial Transaction Tax on Corporate and Sovereign Debt”, prepared for International
Regulatory Strategy Group: London.
522 European Commission (2013): “Impact Assessment on the financial transaction tax”, SWD/2013/28.
524 S. Adams (2011): “VAT and financial services”, in “Tax by Design, The Mirrlees Review”, Oxford University Press, p.
197; R. De la Feria and B. Lockwood (2010): Opting for Opt-In? An evaluation of the European Commission’s Proposal for
reforming VAT on Financial Services”, Fiscal Studies, 31(2):171-202.
179
Lamensch
Beyond the question of the relevance and impact of the proposed tax, the legality of
the 2013 proposal is also being called into question. As discussed in Chapter 12 in this
volume, the UK has indeed challenged the legality of the Council decision to authorise
enhanced cooperation on a common framework of financial transaction tax, as well as
the scope of the proposed tax. In fact, the UK government claimed that it would have
illegal extra-territorial effects because of the counterparty and the issuance principles
(which, as noted above, give a remarkably wide scope of application to the tax), and
would therefore not respect the rights of non-participating Member States. The Court
of Justice of the European Union rejected the UK claim because the legislation has
not yet been adopted and cannot be challenged a priori,526 but would probably have to
re-examine the question if the Directive were adopted.
This is actually likely to take more time than initially foreseen. The 2013 proposal was
indeed meant to enter into force on 1 January 2014, but the participating Member Sta-
tes are still discussing the scope of application of the tax. They have, in particular, and
surprisingly perhaps, not yet reached an agreement concerning the type of instruments
that should be covered. On 6 May 2014, in the margin of the ECOFIN Council, 10
of the 11 participating Member States (Slovenia not participating in view of the fort-
hcoming elections in the country) eventually adopted a Joint Statement in which they
(surprisingly) held that the “harmonised financial transaction tax is to be based on a progressive
implementation of the tax”, which will “first focus on the taxation of shares and some derivative”,
in order “to ensure that each step towards full implementation of the financial transaction tax is
designed in a manner that takes due consideration of the economic impact”,527 in contradiction
with the clear statement in the explanatory notes preceding the 2013 Proposal that a
broad scope of application of the tax to “all financial instruments” is necessary in view
of the substitutability of most of the instruments (see above). According to the Joint
Statement, the entry into effect of the first stage should take place by 1 January 2016 “at
the latest”,528 but it is not yet clear what transactions exactly would be taxed in this first
phase of implementation. In any case, the Joint Statement clarifies that the participating
Member States willing to impose taxation on products that are not included in the first
526 See Case C-209/13 UK v Council.

527 “Joint Statement by ministers of Member States participating in enhanced cooperation in the area of financial transac-
tion tax” on 6 May 2014 (available at: http://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/
Internationales_Finanzmarkt/2014-05_06-ftt-statement-anlage.pdf ?__blob=publicationFile&v=2, (hereafter “2014 Joint
Statement”), p. 1.
528 2014 Joint Statement, p. 2.
180
phase of implementation in order to maintain existing taxes, would be allowed to do so

(which is rather telling of the probably very reduced scope of application of the first
phase of implementation!).529
With this ultimate step backward, the mountain may well bring forth a mouse. Exclu-
ding bonds and other derivatives from the initial phase of the tax without clear time-
frame for a second or a third phase would indeed amount to merely replacing existing
taxes like the Belgian stock exchange tax, the UK’s stamp duty and the existing recently
adopted French and Italian taxes. Hence, the opponents to a broad tax on financial
transactions may well have won yet another battle in a war which has now lasted for
several decades.
529 2014 Joint Statement, p. 2.
181
182
FTT at the European Court
12. The European Court Upholds the Council Decision

Authorising Eleven Member States to Introduce
a Financial Transactions Tax.
by Servaas van Thiel530
12.1. Introduction
On 30 April 2014 the Court of Justice of the European Union (CJEU)531 rejected, in
Case C 209/13, an action for annulment532 that had been brought by the UK against
Council Decision 2013/52/EU. That Decision had authorised enhanced cooperation533
between 11 Member States (Belgium, Germany, Estonia, Greece, Spain, France, Italy,
Austria, Portugal, Slovenia and Slovakia) on the Commission proposal for a common
system of financial transaction tax (FTT),534 after it had become clear that no unanimity
could be reached in the Council on that proposal.535
In its submission the UK had argued infringement of Articles 327 TFEU and 332
TFEU (claiming that the Council Decision did not respect its rights and obligations
while causing costs for non-participating Member States) and of customary internati-
530 Prof van Thiel works in the Delegation of the European Union to the United Nations and other International Organi-
sations in Geneva, and teaches international and European law at the Institute for European Studies of the Free university
Brussels.
531 All Court Decisions are available at: http://curia.europa.eu/juris/recherche.jsf. This case was decided by the Court’s
Second Chamber composed of Judges Silva de Lapuerta (President of Chamber), Lenaerts (Rapporteur), da Cruz Vilaça
(Vice-President of the Court), Arestis and Bonichot. After hearing Advocate General Wahl, the Court had decided to pro-
ceed to judgment without an Opinion.
532 An application for annulment under Article 263 TFEU, was brought by the UK on 18 April 2013. Article 263 TFEU
provides that the CJEU has jurisdiction to review the legality of legislative acts and of acts of the EU institutions (and of
bodies, offices or agencies of the Union) intended to produce legal effects vis-à-vis third parties. For that purpose actions
must be brought by a Member State, the European Parliament, the Council or the Commission on grounds of lack of com-
petence, infringement of an essential procedural requirement, infringement of the Treaties or of any rule of law relating
to their application, or misuse of powers, within two months of the publication of the measure or of its notification to the
plaintiff. Any natural or legal person may, under the same conditions, institute proceedings against an act addressed to that
person or which is of direct and individual concern to them, and against a regulatory act which is of direct concern to them
and does not entail implementing measures.
533 Article 329(1) TFEU.
534 Council Decision 2013/52/EU of 22 January 2013 authorising enhanced cooperation in the area of financial transaction
tax published in OJ 2013 L 22, p. 11.
535 Council Decision 2013/52/EU, preamble paragraph 5.
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van Thiel
onal law (claiming that the Decision had extra-territorial effects), but these arguments
were successfully countered by the lawyers of the Council, which, as defendant in the
case, had been supported by other intervening Member States (Belgium, Germany,
France, Austria and Portugal) as well as by the European Parliament and the European
Commission.
This note will briefly discuss first the possibility of enhanced cooperation between EU
Member States and its use in the case of the FTT (12.2), and second the arguments of
the parties in Case C 209/13 and the decision of the Court (12.3), before making some
more final remarks (12.4).
12.2. Enhanced cooperation in the case of the FTT
The Lisbon Treaty (Treaty on the Functioning of the European Union or TFEU) pro-
vides for “enhanced cooperation” between certain Member States, which essentially
means that if a Commission proposal for a common action cannot be adopted by the
Council, certain Member States can ask for authorisation to go ahead with the pro-
posed action anyway. As such, enhanced cooperation is a kind of “institutionalised”
two-speed Europe allowing willing Member States to carry the European integration
process further between themselves.
However, to prevent distortions the TFEU provides for a number of substantive and
procedural conditions for “enhanced cooperation”. As to procedure, interested Mem-
ber States must address a request to the Commission, specifying the scope and objecti-
ves of the enhanced cooperation proposed, after which the Commission may (or may
not) submit a proposal for a Council Decision to authorise the enhanced cooperation
(Article 329 TFEU).536 In this first step therefore, the Commission exercises an overall
political control over enhanced cooperation, in its capacity as the exclusive initiator of
EU legislation and guardian of the European integration process.
536 Article 330 TFEU provides that all members of the Council may participate in its deliberations, but that only members
of the Council representing the Member States participating in enhanced cooperation may take part in the vote. Unanimity
shall be constituted by the votes of the representatives of the participating Member States only. A qualified majority shall be
defined in accordance with Article 238(3).
184
Moreover, as a matter of principle, enhanced cooperation must be open to all Member

States, subject to compliance with any conditions of participation laid down by the
authorising decision (Article 328 TFEU).537 This means that enhanced cooperation can
never be exclusive, but that the in-group (or „ins“) must always leave an open door to
allow the „outs“ to join at a later moment.
As to substance, enhanced cooperation must comply with the Treaties and Union law
and may neither undermine the internal market or economic, social and territorial cohe-
sion, nor constitute a barrier to or discrimination in trade between Member States, nor
distort competition between them (Article 326 TFEU). Moreover, enhanced cooperati-
on must respect the competences, rights and obligations of non-participating Member
States, which, on their part may not impede its implementation by the participating
Member States (Article 327 TFEU). In the same sense, expenditure resulting from im-
plementation of enhanced cooperation, other than administrative costs entailed for
the institutions, shall be borne by the participating Member States (Article 332 TFEU).
On 28 September 2011 the European Commission adopted a proposal for a Council

Directive on a common system of financial transactions tax (FTT) and amending Di-
rective 2008/7/EC (‘the 2011 proposal’).538
After three meetings of the Council (on 22 and 29 June and 10 July 2012), it became ap-
parent that it would not be possible to achieve unanimous support for the FTT within
the Council in the foreseeable future and, consequently, that the objective of the whole
European Union adopting the FTT could not be attained within a reasonable period. In
those circumstances, between 28 September and 23 October 2012, 11 Member States
(Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia
and Slovakia) informed the Commission that they wished to establish enhanced co-
operation between themselves in the area of FTT,539 requesting that the scope and
objectives of the enhanced cooperation be based on the 2011 Commission proposal.
Reference was also made in particular to the need to avoid evasive actions, distortions
and transfers to other jurisdictions.
537 Article 331 TFEU provides the rules and procedures for Member States who wish to participate in enhanced cooperation
that is in progress.
538 COM(2011) 594 final.
539 Recital 6 of the preamble to Council decision
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van Thiel
On 22 January 2013 the Council, on proposal by the Commission, adopted the con-
tested decision, which essentially authorises the 11 participating Member States to
establish enhanced cooperation in FTT between themselves by applying the relevant
provisions of the Treaties (Article 1). On 14 February 2013 the Commission adopted
a proposal for a Council Directive implementing enhanced cooperation in the area of
FTT (‘the 2013 proposal’).
As outlined in more detail in Chapters 10 and 11 in this volume, the proposed FTT
would apply to all financial transactions, on condition that at least one party to the tran-
saction is established in a Member State and that a financial institution established in the
territory of a Member State is party to the transaction, acting either for its own account
or for the account of another person, or acting in the name of a party to the transaction
(Article 1(2) of the 2011 proposal). A financial institution is deemed to be established
in the territory of a Member State where any of the following conditions is fulfilled: (e)
it is party, acting either for its own account or for the account of another person, or is
acting in the name of a party to the transaction, to a financial transaction with another
financial institution established in that Member State, or with a party established in the
territory of that Member State and which is not a financial institution (Article 3(1) of
the 2011 proposal).
As regards the scope of the FTT, Article 3(1) of the 2013 proposal also provides: ‘This
Directive shall apply to all financial transactions, on the condition that at least one party
to the transaction is established in the territory of a participating Member State and
that a financial institution established in the territory of a participating Member State is
party to the transaction, acting either for its own account or for the account of another
person, or is acting in the name of a party to the transaction’ (counterparty principle).
Under Article 4.1 of the 2013 proposal a financial institution is “deemed to be estab-
lished in the territory of a participating Member State where any of the following con-
ditions is fulfilled: (g) it is party, acting either for its own account or for the account of
another person, or is acting in the name of a party to the transaction, to a financial tran-
saction in a structured product or one of the financial instruments referred to in Sec-
tion C of Annex I of Directive 2004/39/EC issued within the territory of that Member
State, with the exception of instruments referred to in points (4) to (10) of that Section
which are not traded on an organised platform.” For a person which is not a financial
institution Article 4(2) provides that he or she shall be deemed to be established within
186
a participating Member State where any of the following conditions is fulfilled: (c) it is
party to a financial transaction in a structured product or one of the financial instru-
ments referred to in Section C of Annex I to Directive 2004/39/EC issued within the
territory of that Member State, with the exception of instruments referred to in points
(4) to (10) of that Section which are not traded on an organised platform.’
12.3. Arguments of the parties and decision by the Court
In a preliminary procedural argument, Germany considers that the action is (manifestly) inad-
missible, because the UK pleas bear no relation to the subject-matter of the contested
decision (which would be contrary to Article 120(c) of the Court’s Rules of Procedure).
The Court, however, holds that the content of the UK application satisfies the require-
ments of clarity and precision (laid down Article 120(c) of its Rules of Procedure and
relevant case-law), because it enabled the Council and the intervening Member States to
prepare their arguments against the UK pleas and it allowed the Court to carry out its
review of the contested decision.540
On substance the UK first claims that the contested decision authorises the adoption of
an FTT which produces extraterritorial effects contrary to Article 327 TFEU and cus-
tomary international law, and which causes costs for non-participating Member States
contrary to Article 332 TFEU. The Decision infringes Article 327 TFEU because, as a
result of ‘the counterparty principle’ laid down in Article 3(1)(e) of the 2011 proposal,
and the ‘issuance principle’ laid down in Article 4(1)(g) and (2)(c) of the 2013 proposal,
the decision permits the introduction of an FTT applicable to institutions, persons
or transactions situated or taking place in the territory of non-participating Member
States, a fact which adversely affects their competences and rights. The Decision also
infringes customary international law which permits legislation with extraterritorial ef-
fects only on the condition that there exists between the facts or subjects at issue and
the State exercising its competences thereon a sufficiently close connection to justify an
540 The Court recalls that its rules of procedure provide that an application initiating proceedings must state the subject-
matter of the dispute and a summary of the pleas in law on which the application is based and that the statement must be
sufficiently clear and precise to enable the defendant to prepare his defence and the Court to rule on the application. It
is therefore necessary for the essential points of law and of fact on which a case is based to be indicated coherently and
intelligibly in the application itself and for the heads of claim to be set out unambiguously so that the Court does not rule
ultra petita or fail to rule on a claim (Case C 360/11 Commission v Spain paragraph 26, and Case C 545/10 Commission v Czech
Republic paragraph 108).
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van Thiel
encroachment on the sovereign competences of another State. In this case, the extrater-
ritorial effects of the future FTT stemming from ‘the counterparty principle’ and ‘the
issuance principle’ are not justified in the light of any accepted rule of tax jurisdiction
under international law (and will impose costs on Member States which are not partici-
pating in the enhanced cooperation, or the non-participating Member States).
The UK claims, secondly, that implementation of the Decision will cause indirect costs
for the non-participating Member States, because, under the mutual assistance and ad-
ministrative cooperation Directives they are obliged to provide mutual assistance in the
assessment and recovery of the FTT without being entitled to seek the recovery of the
related costs.541 This is contrary to Article 332 TFEU under which expenditure linked
to the implementation of enhanced cooperation in the area of FTT may in principle,
be borne only by the participating Member States. The UK claims that the concept
of ‘expenditure resulting from implementation of enhanced cooperation’, within the
meaning of Article 332 TFEU, covers expenditure linked to requests for assistance or
cooperation based on the national legislation adopted to give effect to enhanced coope-
ration in the area of FTT.
On the substance, the Council, the intervening Member States, the European Parliament and the
Commission submit that the UK pleas are unfounded. On the first plea, they submit that
the principles of taxation disputed by the UK are, at this stage, purely hypothetical
components of draft legislation which is yet to be adopted. Consequently, the UK ar-
guments, based on the alleged extraterritorial effects of the future FTT, are premature
and speculative, and thus ineffective in the context of this action.
On the second plea they argue that it invites a premature debate on the manner in which
the EU legislature will regulate the question of liability for costs linked to the imple-
mentation of enhanced cooperation authorised by the contested decision. Further, that
decision in no way regulates questions of mutual assistance for the purposes of the
application of the future FTT.
541 Council Directives 2010/24/EU of 16 March 2010 concerning mutual assistance for the recovery of claims relating to
taxes, duties and other measures (OJ 2010 L 84, p. 1) and 2011/16/EU of 15 February 2011 on administrative cooperation
in the field of taxation and repealing Directive 77/799/EEC (OJ 2011 L 64, p. 1).
188
The Council, Austria, Portugal and the Commission add that the second plea rests on a misin-
terpretation of Article 332 TFEU, which only concerns operational expenditure to be
borne by the EU budget in relation to measures establishing enhanced cooperation and
not the mutual assistance and administrative cooperation expenditure, disputed by the
UK.
The Court first notes that, in the context of an action against the authorisation of
enhanced cooperation on the basis of Article 329 TFEU, its review is limited to the
question whether that decision is valid as such in the light of, inter alia, the provisions,
contained in Article 20 TEU and in Articles 326 TFEU to 334 TFEU, which define the
substantive and procedural conditions relating to the granting of such authorisation.
That review should not be confused with the review which may be undertaken, in the
context of a subsequent action for annulment, of a measure adopted for the purposes
of the implementation of the authorised enhanced cooperation.
The Court subsequently rejects the first plea by which the UK essentially challenges the
possible extraterritorial effects on non-participating Member States which the future
FTT might have if it would have recourse to the counterparty and issuance principles.
The Court notes that the principles of taxation that are being challenged by the UK are
not in any way constituent elements of the contested Council decision, which simply
has the objective to authorise 11 Member States to establish enhanced cooperation bet-
ween themselves in the area of the FTT. In fact, those principles merely correspond to
elements in the 2011 Commission proposal (‘the counterparty principle’) and the 2013
Commission proposal (the ‘issuance principle’).
The Court also rejects the second plea, that the future FTT will, contrary to Article
332 TFEU, give rise to costs for the non-participating Member States because of the
obligations of mutual assistance and administrative cooperation. The Court again notes
that the contested decision does not contain any provision related to expenditure linked
to the implementation of the enhanced cooperation. It clarifies that it is obvious that
the question of the possible effects of the future FTT on the administrative costs of
the non-participating Member States cannot be examined for as long as the principles
of taxation in respect of that tax have not been definitively established as part of the
implementation of the enhanced cooperation authorised.542 Those effects are depen-
542 The Court does not answer the question whether the concept of ‘expenditure resulting from implementation of en-
189
van Thiel
dent on the adoption of ‘the counterparty principle’ and the ‘issuance principle’, which
are however not constituent elements of the contested decision.
12.4. Final remarks
The Court has limited itself strictly to testing the legality of the authorisation decision,
while avoiding any indication on what it might think about the compatibility with the
Treaty of the essential elements of the Financial Transactions Tax, such as the ‘coun-
terparty principle’ and the ‘issuance principle’, which, as proposed by the Commission
in 2011 and 2013, are likely to be constituent elements of future EU legislation on a
FTT if and when it will see the light of day. Though this modest approach is perhaps
understandable from a strictly legalistic point of view, and in view of the political sen-
sitivity of the topic between Member States, it could have been useful for the Court
to give more guidance on the possible incompatibility of the proposed FTT with the
substantive requirements that are imposed by the Treaty.
Particularly important is the Treaty condition that the FTT may neither „undermine the
internal market“, nor constitute a „barrier to or discrimination in trade between Mem-
ber States“, nor distort competition between them (Article 326 TFEU). It remains to be
seen, for instance, how the Court will interpret the concept „undermining the internal
market“. In a common sense approach one may assume that this covers situations in
which a piece of EU legislation is likely to drive a significant volume of economic acti-
vity out of the EU and into third countries. This is exactly what financial market experts
claim that the future FTT, as proposed by the Commission, would do. As is discussed in
more detail in Chapter 10 in this volume, the FTT is likely to significantly increase the
costs which market makers and dealers will want to charge their clients (also because
the FTT is expected to exceed the spread on very short and high volume transactions
such as repurchase agreements), to such an extent that a large part of trading in bonds
and derivatives within the EU risks to become uncompetitive. To the extent that the
FTT is expected to drive business to third countries it could be said to undermine the
internal market.
hanced cooperation’, within the meaning of Article 332 TFEU, does or does not cover the costs of mutual assistance and
administrative cooperation referred to by the United Kingdom in its second plea.
190
The FTT is also likely to distort competition between member states, because it will be
more advantageous for financial institutions to do their work in a Member State that
does not apply the FTT (and with counterparties from third countries) rather than in a
Member State that does apply the FTT. In this respect one my reasonably expect that a
certain volume of business will be transferred from the „ins“ to the „outs“.
What is, however, interesting is that in both cases the disadvantage of the FTT, will be
affecting the „ins“ rather than the „outs“ (at least to the extent the „outs“ can avoid the
FTT by trading with third country counterparties rather than with their colleagues from
the „ins“). And that again could be seen as an economic disadvantage that is inherent
in any tax. No doubt, most Member States would agree that it is their own sovereign
choice whether or not to accept the economic disadvantages that inevitably accompany
the introduction of a tax. In the end, therefore, it is not so clear why the UK would have
a reason to complain against the FTT under the substantive conditions of enhanced
cooperation (except to the extent the FTT would drive business from the UK to third
countries).
In any case, the question of the Treaty compatibility of a FTT, as structured along the
lines of the 2011 and 2013 Commission proposals, seems to have become rather aca-
demic. In fact, as set out in Chapter 11 in this volume, ten of the eleven Member States
have declared in their joint statement of March 2014, that they intend to proceed in a
step by step approach „taking due consideration of the economic impact“.
191
192
Tax & Business Mobility
13. The Impact of Taxation on Business Mobility in Europe
by Loes Brilman543
13.1. Introduction
The Treaty on the Functioning of the European Union (“TFEU”), and more specifi-
cally its Article 26(2), provides that: “the internal market shall comprise an area without
internal frontiers in which the free movement of goods, persons, services and capital
is ensured in accordance with the provisions of the Treaties.” When it comes to taxa-
tion, however, EU Member States remain largely competent to design their direct tax
systems in accordance with their domestic policy objectives. At present most EU states
impose exit taxes upon the emigration of a business to secure tax claims with respect
to accrued but unrealized capital gains.544 These exit taxes typically only apply to per-
sons who move their tax residence abroad (tax on an accrual basis) and not to persons
who stay in their home jurisdiction (tax on a realization basis) which may constitute an
obstacle to the mobility of business taxpayers who wish to transfer their business across
the border.545
These two conflicting parameters (private sector mobility and national sovereignty re-
sulting in exit taxation), require striking a balance between obtaining a maximum level
of mobility whilst maintaining national sovereignty over direct taxes. For that purpose
the benchmark of international tax neutrality can be used (taxation should not influ-
ence business decisions and not lead to a suboptimal allocation of production factors)
and more in particular the benchmarks of capital export neutrality (CEN: taxation is
neutral as to whether to invest at home or abroad),546 and of capital import neutrality
543 Loes Brilman, from Tilburg University, received the Albert J. Rädler Medal prize for her LLM thesis „Emigration and
immigration of a business: impact of taxation on European and global mobility“.
544 An analysis of various tax systems shows that there are, roughly, three types of exit taxation: a deemed disposal of assets
at fair market value (see Dutch provisions analyzed below); a deemed liquidation of the business; a real liquidation of the
business transferring abroad triggering a final (liquidation) tax. The exact nuances of these different types or methods differ
from country to country.
545 The main focus will be on European mobility. At a European level we have already achieved some level of integration via
certain coordination mechanisms. At a global level, in the absence of such mechanisms mobility may face more obstructions.
546 See amongst others: P. Richman, ‘Taxation of foreign investment income, and economic analysis’, Baltimore, MD:
Johns Hopkins Press 1963; T. Horst, ‘A note on the optimal taxation of international investment income’, Quarterly Journal
193
Brilman
(CIN: taxation is neutral as to whether an investment is made by domestic or foreign

investors).547 CIN is also an appropriate benchmark to safeguard a state’s fiscal sove-
reignty understood as the right of self-determination within a specific territory,548 as
closely related to the principle of fiscal territoriality.549 CIN ultimately implies source
based taxation, which is in line with the principle of fiscal territoriality.550 When CIN
and fiscal sovereignty are put together, it is required that States will not lose their source
country entitlement to tax certain items of income generated within the territory of
their jurisdiction. CIN is thus the operational benchmark that we will use, because mo-
bility can be fostered while a minimum level of sovereignty can be safeguarded.
This contribution assesses how the Dutch exit tax rules impact on the mobility of
businesses, respectively in the case of the emigration of a business (13.2), the immigra-
tion of a business (13.3), the transfer of assets in ‘permanent establishment situations’
(13.4) and in the case of alternative means of business migration, such as cross border
mergers and divisions (13.5). Although the focus is on the Dutch tax system, some
comparative elements from nine other tax jurisdictions will be mentioned.551 The sub-
sequent question is to what extent the current Dutch tax system contravenes double tax
of Economics 94 no. 4, June 1980, pp. 793-798, p. 794; S. Bond, L.Chennels, M.P. Devereux, M. Gammie, and E. Troup,
‘Corporate Tax Harmonisation in Europe: A guide to the Debate, The Institute for Fiscal Studies, Glasgow: Bell and Bain
Ltd. 2000, p. 32; M.J. Graetz and A.C. Warren Jr., ‘Income Tax Discrimination and the Political and Economic Integration
of Europe’, The Yale Law Review, Faculty Scholarship Series. Paper 1614, 2006, p. 1197; and M.A. Desai and J.R. Hines Jr.,
‘Evaluating International Tax Reform’, Harvard NOM Research paper no. 03-48, June 2003, par. 3.1.
547 See M.S. Knoll, ‘Reconsidering International Tax Neutrality’, University of Pennsylvania Research paper no. 09-16,
May 2009, p. 3. See also E.C.C.M. Kemmeren, ‘Principle of origin in tax conventions – a rethinking of models’, Dongen:
Pijnenburg Vormgevers 2001, p. 72 and C.M. Radaelli, ‘Harmful tax competition in the EU: policy narratives and advocacy
coalitions’, Journal of Common Market Studies, vol. 37 no. 4, December 1999, pp. 661-82, note 5.
548 See S.J.J.M. Jansen (ed.), ‘Fiscal sovereignty of the Member States in an Internal Market – past and future’, EUCOTAX
Series on European Taxation. Alphen aan de Rijn: Kluwer Law International 2011, p. 233. For a detailed discussion of the
concept of fiscal sovereignty I refer to M. Isenbaert, ‘EC Law and the Sovereignty of the Member States in Direct Taxation’,
IBFD Doctoral series, volume 19, Amsterdam: IBFD Publications 2010 and S. Douma, ‘Optimization of Tax Sovereignty
and Free Movement’, IBFD Doctoral series, volume 21, Amsterdam: IBFD Publications 2011.
549 See also: P.B. Musgrave, ‘Combining Fiscal Sovereignty and Coordination – National Taxation in a Globalizing World’, in
I. Kaul and P. Conceição (red.), ‘The New Public Finance’, Oxford: Oxford University Press 2006, pp. 167-193, p. 172. and
Kiekebeld and Smit, in: S.J.J.M. Jansen (ed.), ‘Fiscal sovereignty of the Member States in an Internal Market – past and future’,
EUCOTAX Series on European Taxation. Alphen aan de Rijn: Kluwer Law International 2011, p. 132.
550 See also: M.S. Knoll, ‘Reconsidering International Tax Neutrality’, University of Pennsylvania Research paper no. 09-16,
May 2009, p. 6 and p. 14; K. Vogel, ‘Worldwide vs. source taxation of income – A review and re-evaluation of arguments
(Part II)’, Intertax 10, 1988, p. 311; and D.M. Weber, ‘Een stelsel gebaseerd op het territorialiteitsbeginsel: EG-aspecten en
contouren’, WFR 2004/1297, par. 3.2.1;
551 These jurisdictions include the following: Austria, Belgium, France, Germany, Hungary, Italy, Poland, Sweden and the
United States of America.
194
conventions and EU law (13.6). Finally, recommendations are given for improving the
current system or for introducing an alternative system (13.7).
13.2. Dutch exit taxes upon emigration
For Dutch tax purposes, emigration occurs when a taxpayer can no longer be conside-
red a resident of the Netherlands. For individual taxpayers who are liable to tax under
the Personal Income Tax Act 2001 (“PITA”), the place of residence is determined on
the basis of the criterion ‘living in’ the Netherlands, which is further specified by the
notion of the center of vital interest. For companies liable to tax under the Corporate
Income Tax Act 1969 (“CITA”) the main criterion is ‘establishment’, which is further
specified by the concept of the place of effective management. However, the Nether-
lands apply an incorporation system, and a residence fiction is included in the CITA,
stipulating that companies incorporated under Dutch law will remain liable to Dutch
corporate income tax, even if the place of effective management has been transferred
abroad.552
The Dutch tax consequence of emigration is, put briefly, a deemed alienation of assets
and the addition of the difference between the fair market value and book value to the
profits that are taxable in the Netherlands. Emigration, however, does not necessarily
trigger an exit tax because there are partial and final settlement provisions under Dutch
tax law. The partial settlement provisions regulate the transfer of part of the business
abroad, combined with the simultaneous or subsequent emigration of the taxpayer.
This implies that when, for example, (part of) a taxpayer’s business is left behind in the
Netherlands, there will be no exit tax settlement. The final settlement provisions are
broader in scope; emigration is not required and they also apply to the transfer of the
entire business abroad. The final settlement provisions may, for example, be triggered
when a non-resident taxpayer transfers its business activities (e.g. permanent establish-
ment) from the Netherlands abroad.
552 A company will continue to exist under Dutch company law for as long as the statutory seat is situated in the Nether-
lands, and even if the real seat is transferred abroad. It is, therefore, possible to transfer the place of effective management
without this resulting in the liquidation of the company.
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These exit tax provisions hinder business mobility because they impose tax on profits
that have not been realized. In its National Grid Indus decision (NGI),553 which spe-
cifically dealt with the Dutch exit tax provision with respect to companies, the Court
of Justice of the European Union (CJEU) basically allowed the imposition of an exit
tax as such, because it is considered an appropriate measure to preserve the allocation
of taxing powers between Member States. Furthermore, the emigration state does not
have to take into account value decreases occurring after emigration. The Court only
held the requirement of immediate payment of the exit tax claim as disproportional,
and ruled that Member States should give companies, who transfer their place of ef-
fective management, the choice between immediate or deferred payment of the tax. In
case of deferred payment, Member States can require the provision of security (such
as a bank guarantee), compliance with administrative obligations or the payment of
recovery interest.
In response to the Court’s ruling in the NGI case, the Dutch legislator amended the
Dutch Recovery Act. In accordance with the Law on deferral of exit taxation,554 emig-
rating businesses are now offered the option between immediate and deferred payment,
and, in case of deferred payment, the Dutch tax authorities can require the provision
of sufficient security, the payment of recovery interest, and the provision of an admi-
nistrative information so that the Dutch tax authorities can determine to what extent
unrealized capital gains have been realized.555
The deferral of payment will be terminated (and the tax will be recoverable) in case the
taxpayer no longer resides in an EU/EEA State, in case the provided security is no lon-
ger sufficient, or in case the unrealized gains would be considered realized in a domestic
situation. It should be emphasized that this realization will not only be considered to
have taken place upon alienation but also as a consequence of regular use, i.e. by virtue
of depreciation.556
553 CJEU National Grid Indus (Case C-371/10).

554 Act of 14 May 2013, amending the Recovery Act 1990 (Law on deferral of exit taxation).
555 Article 25a(1) of the Dutch Recovery Act 1990.
556 Article 25a(2) of the Dutch Recovery Act 1990. See also Kamerstukken II, 2011/12, 33 262, nr. 3, p. 5.
196
Finally, the deferral is not time-restricted. Taxpayers can, however, also choose to opt
for payment in ten annual installments.557 The adjusted legislation will not only apply
to companies (with which the NGI case dealt), but also to entrepreneurs (natural per-
sons). Moreover, mergers and divisions are provided for in the adjusted policy as well.
The scope of the Law on deferral of exit taxation is limited to business emigrations (or
asset transfers) from the Netherlands to another EU or EEA-Member State. Business
emigrations to third countries are excluded from the option between immediate and
deferred payment.
It may be clear that exit taxes are in principle undesirable in the light of European
mobility. Exit taxes only apply to persons moving their tax residence abroad and they
can seriously hinder a taxpayer’s ability to move to another state, as a tax is imposed on
something which is not there yet. Under the new Dutch Law on deferral of exit taxati-
on, immediate payment is no longer required with respect to migrations within the EU/
EEA. However, the Law on deferral of exit taxation has potentially introduced new
obstructions to mobility. Under this Law, deferral is subject to certain conditions, which
under the CIN benchmark should go no further than necessary to protect the source
country entitlement of states. Security should thus only be required when there is a
true and genuine risk of non-recovery and compliance with administrative obligations
should only be required to the extent that this will facilitate the determination of the
extent to which gains have actually been realized. However, CIN does not require the
calculation of recovery interest. The Netherlands’ source country entitlement would
also be preserved if no such interest is charged. Moreover, the obligation of having to
pay recovery interest can potentially diminish the advantage (in terms of cash flow) of
not having to pay the exit tax immediately; a taxpayer might as well take up a bank loan
and pay the exit tax claim immediately. Therefore, it would be preferable in the light of
European mobility not to require the calculation of recovery interest.
557 Article 25a(3) of the Dutch Recovery Act 1990.
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Brilman
13.3. Immigration of a business
For Dutch tax purposes, immigration occurs when a foreign taxpayer becomes subject
to tax in the Netherlands as a resident taxpayer. Immigration as such is not a taxable
event in the Netherlands. Rather, a central issue upon immigration is how the business’
assets and liabilities are valued and whether or not a step-up is granted by the immig-
ration state.
There are roughly two different approaches: states can ‘take over’ the original book
value used in the emigration state, or states can value the assets of an immigrated busi-
ness at fair market value. The latter approach implies the provision of a tax base step up
from original book value to fair market value. As most states, the Netherlands uses the
step-up approach. Hence, businesses that transfer to the Netherlands will receive a step
up in tax base upon immigration (i.e. when the Dutch ‘tax life’ of the business starts)
and will have to record all assets and liabilities at fair market value on their opening ba-
lance. There is only one precondition: the tax base step up will only apply when assets
and liabilities have not already been valued for Dutch tax purposes (e.g. via the presence
of a permanent establishment in the Netherlands prior to immigration). Equal to the
foundation of a purely domestic business, there is a deemed acquisition of assets that
are transferred to the Netherlands upon immigration.
There are also states that do not provide a step up in base. In the absence of a step up,
the immigration state will impose a tax on a gain that is larger than the gain actually
accrued within that state’s jurisdiction. Had the business not migrated, it would not have
been confronted with a larger total tax burden.
It follows that European mobility would be fostered if a step up is provided. In additi-

on, by providing a step up, states will not lose their source country but simply impose
a tax on exactly that what they are entitled to, which is compatible with the benchmark
of capital import neutrality.
198
13.4. Asset transfers in PE situations
Assets and liabilities may be transferred between a head office and a permanent es-
tablishment without there being a business migration. Two (outbound) situations are
analyzed: 1) the transfer of assets from a Dutch head office to the foreign PE, and 2)
from a Dutch PE to a foreign head office.
In the Netherlands, the preferred method for profit allocation to a PE is the functio-
nally separate entity approach. This means that for Dutch tax purposes, a PE is treated
as if it is an independent part of the business, and the main assumption is that it deals
with other parts of the business at arm’s length. Assets are allocated on the basis of the
economic ownership and use in the (significant people) functions performed.558
When assets are transferred from a Dutch head office to a foreign PE, the tax conse-
quences will depend on whether the assets are transferred temporarily or permanently.
Thus, the first step in asset transfers to a PE is the analysis of whether the transfer is
permanent or temporary in character. This analysis will be carried out on the basis of
the servitude criterion.559 It can be said that an asset is subservient to the PE in case 1)
the asset is managed in or from the PE, and 2) exploitation of the asset is controlled
and monitored in or from the PE.560 If both elements 1) and 2) of the servitude cri-
terion are positive, then it is assumed that the asset is transferred permanently to the
PE. If one or both of the elements are negative, then the asset transfer is considered
temporary.
In case of temporary asset transfers, the Netherlands will apply a “rent-rental analysis”,
under which the PE will be considered the tenant or lessee of the asset and the head
office is considered the lessor.561 From an accounting perspective, the economic owner-
ship of the asset does not transfer and the head office will charge an arm’s length rent
to the PE. In case of a permanent asset transfer, the Netherlands will apply a “buy-sale
558 See Resolution BNB 2011/91 (PE profit allocation), par. 2.2.
559 This servitude criterion (in Dutch: ‘dienstbaarheidscriterium’) has been developed by the Dutch Supreme Court. See for
example HR BNB 1997/264 and HR BNB 2003/246.
560 See case law mentioned in the previous note and P.J.J.M. Peeters, ‘Winsttoerekening aan een vaste inrichting’, TFO
2011/122, par. 6.
561 See HR BNB 1986/100; HR BNB 1990/36; HR BNB 2007/117; and Resolution BNB 2011/91 (PE profit allocation),
par. 5.1.
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analogy” where it is assumed that the PE has bought the asset and the head office sold
it and the PE is treated as the economic owner.562 As the PE is treated as if it were an
independent and separate legal entity, the PE should value the acquired asset at fair
market value.563 For the purpose of calculating the PE profit, the depreciation base
is higher after the transfer of the asset and the profit will be lower. Consequently, the
exemption which the Netherlands has to provide as a residence state will be lower as
well. It follows that the “realization” of a transferred asset occurs gradually by means
of the lower exemption.
With respect to the second situation, where assets are transferred from a Dutch PE
to a foreign part of the business, there are various options. These include the transfer
from a Dutch PE to the head office of a limited resident taxpayer or to the head office
of a non-resident. The Dutch tax treatment is again dependent on the nature of the
asset transfer, i.e. temporary or permanent. In case of a temporary asset transfer, the
final result will be an at arm’s length remuneration (rent) from the head office to the PE
for both the limited and the non-resident taxpayer. In case of a permanent transfer of
assets, the treatment differs for the two. More specifically, with respect to the limited
resident taxpayer, it should be noted that such a taxpayer is considered a resident taxpa-
yer for Dutch corporate income tax purposes. Consequently, the assets the transfer is a
non-event from a tax perspective as the independence fiction does not apply (assets are
transferred within the resident taxpayer’s business). Furthermore, the exit provisions do
not apply based on a strict interpretation of the wording of these provisions. Based on
a teleological interpretation of the final settlement provision, however, an exit tax may
be imposed on the transfer of assets in situations such as these. Alternatively, based on
Dutch case law, some mechanism of temporal compartmentalization may be applied.
With respect to the non-resident taxpayer, the transfer from a Dutch PE to the foreign
head office may result in either one of two outcomes. The transfer could amount to
the alienation of assets on the basis of the independence fiction, as a consequence of
which the so-called “total profit concept” would apply and the gain would be included
in the taxable profit. Alternatively, the transfer could not result in the alienation or rea-
lization of the assets, as the assets remain within the taxpayer’s worldwide business. On
562 See also Resolution BNB 2011/91 (PE profit allocation), par. 5.1.
563 See also HR BNB 1994/190; Explanatory Memorandum Bvdb 2001, p. 33-38 (commentary on article 9); and OECD
PE-report 2010, part I, par. 196.
200
the basis of case law, however, an exit tax settlement would then be in order (following
a teleological interpretation of the settlement provision) as the Netherlands might lose
its tax claim after the transfer.
As regards the impact on mobility, the analysis provided in the context of the tax treat-
ment upon emigration applies also whenever the transfer of assets in PE situations
triggers an exit tax. In situations where such a tax is not imposed due to a strict inter-
pretation of the exit provisions, but where it should be imposed in order to preserve
the Netherlands source country entitlement, it would be preferable to amend the Dutch
exit provisions so that they will also apply based on their wording (strict interpretation).
13.5. Alternative means of business migration
In addition to emigration, immigration, and transfers of assets and liabilities in PE

situations, there are also other methods such as cross-border mergers and divisions and
cross-border conversions. In most cases, such alternative methods of business migrati-
on trigger the same tax consequences as a “simple” emigration or immigration (i.e. exit
tax or step up).
In a purely domestic situation, states typically provide for the deferral of taxation in
situations of mergers, divisions or conversions (provided that certain conditions are
met). In order to provide for equivalent deferral of taxation in a cross-border con-
text, the EU Council of Ministers adopted the Tax Merger Directive,564 with the main
objective of taking away the tax problems arising when two or more companies from
different Member States merge, or when a company divides into entities in different
Member States.
In the Netherlands, from a tax law perspective, there are various provisions regulating
the tax consequences of a cross-border merger or division. Generally, similar to the
Dutch exit provisions, both the merger and the division are deemed alienations of (part
of) a business. This means that as a main rule, a tax claim will have to be settled. How-
ever, it is, under conditions, possible to transfer the book value to the acquiring entity,
564 See Council Directive 2009/133/EC. This directive is the codified version of Council Directive 90/434/EEC and
Council Directive 2005/19/EC.
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both in domestic and in certain cross-border situations. Under Dutch tax law, there are
roughly three “standard” requirements which have to be met in order to receive the
facility. If these are met, the facility will apply automatically. If not, the taxpayer can
nonetheless ask for the facility but additional requirements may apply.
With respect to cross-border conversion, there may in principle be a deemed liquidation

under Dutch tax law. Cross-border conversion can be divided into two main categories
for Dutch tax law; non-regulated and regulated conversions. The non-regulated con-
versions are four conversions to which the liquidation fiction of the Dutch conversion
provision does not apply. These conversions are therefore not accompanied by a final
tax settlement (unless the real seat is transferred abroad; the regular exit tax provisions
will then apply). The regulated conversions are those conversions in which the conver-
ted legal entity is deemed to be liquidated. Nonetheless, it is possible to request for a
facility with the Dutch tax authorities.
Thus, there are alternative means of business migration in which a taxpayer may benefit
from deferral on the basis of the facilities that may apply, which is in accordance with
the neutrality benchmark.
13.6. Dutch exit tax provisions in the light of double tax conventions
and EU law
13.6.1. Double tax conventions
In general, it is assumed that the Netherlands will lose its tax claim after emigration, as
tax treaties allocate taxing rights to the state of residence. Under the exit tax system ap-
plied by the Netherlands, the specific fact that triggers taxation is treated as a domestic
event, i.e. a fictitious alienation immediately prior to the actual emigration. The question
arises whether this tax treatment is permissible under double tax conventions (DTCs),
or whether it constitutes treaty override?
202
Taking the OECD Model Convention (OECD MC) as a starting point, article 7 regula-
tes the allocation of taxing rights with respect to business profits. This article basically
takes residence as the criterion for the allocation of the taxing right over business pro-
fits, with the PE as an exception. Article 13 of the OECD MC is applicable to capital
gains, and this article takes the legal act of alienation as a starting point. From the
OECD comments to article 13, it follows that the legal act of alienation both encom-
passes a real alienation and a fictitious alienation. Hence, the Dutch provisions are not
incompatible with the treaty provisions itself.
With respect to the treaty override question, it should first of all be noted that treaty
override arises when a state infringes the good faith principle by unilaterally appropri-
ating taxing rights which were previously given up by concluding a DTC. In order to
determine whether the Netherlands exit provisions amount to treaty override, both
case law and literature are analyzed. In this respect, the Dutch Supreme Court held that
when certain income is allocated to the Netherlands by virtue of the nature of that
income, the DTC leaves room for the Netherlands to tax that income based on Dutch
tax law. Within that framework, legal fictions such as the Dutch exit provisions can be
applied as well. It is, however, not allowed to include in the Dutch tax base income that,
by its nature, has not been allocated to the Netherlands. In those situations, there would
be a unilateral change in the allocation of taxing rights, constituting treaty override. An
exception to this rule is the explicit agreement between the countries involved that the
effects of national legal fictions will be accepted for the purpose of the allocation of
taxing rights under the DTC.
Furthermore, in the context of exit taxation with respect to emigrating substantial

shareholders (the rules of which differ from those that apply to emigrating businesses),
the Dutch Supreme Court ruled in several cases that the Dutch exit provisions are
aimed at taxing the increases in value of the shares which relate to the period that the
shareholder was a resident of the Netherlands. In the Court’s opinion, this tax does not
infringe the good faith principle and therefore, there is no treaty override.
In view of the above, the Dutch exit provisions on emigrating businesses do not consti-
tute treaty override, as there is no infringement of the good faith principle, nor is there
conflict with the treaty provisions themselves.
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13.6.2 EU Law
A. The freedom of establishment
Article 49 of the TFEU provides: “Within the framework of the provisions set out
below, restrictions on the freedom of establishment of nationals of a Member State in
the territory of another Member State shall be prohibited. Such prohibition shall also
apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals
of any Member State established in the territory of any Member State. Freedom of
establishment shall include the right to take up and pursue activities as self-employed
persons and to set up and manage undertakings, in particular companies or firms within
the meaning of the second paragraph of Article 54, under the conditions laid down for
its own nationals by the law of the state where such establishment is effected, subject
to the provisions of the Chapter relating to capital.”
In general, the Dutch exit tax provisions on businesses represent a restriction to the
freedom of establishment. Companies transferring their place of effective management
outside the Netherlands are taxed on an accruals basis whereas in a purely domestic
situation, transferring companies are taxed on a realization basis. This is a difference in
treatment that constitutes an obstacle to free movement. More specifically, transnatio-
nal transfers become less attractive than purely domestic transfers due to the imposition
of exit taxes, resulting in a restriction to the freedom of establishment without there
being an objective difference in the situation. Consequently, it has to be judged on a
case by case basis whether this different tax treatment can be justified by an imperative
reason of public interest, and if so, whether the scrutinized provisions are appropriate
to attain the aim.
Various cases have been ruled by the Court of Justice of the European Union (CJEU)
with respect to the above, both on individual migrations and corporate migrations.
Some of these cases were general, dealing with the accessibility of the freedom of esta-
blishment and migration as such (such as Daily mail,565 Uberseering566 and Cartesio567).
Other cases specifically dealt with exit taxation, such as NGI. The very broad line that
565 CJEU Daily mail (Case-81/87)

566 CJEU Überseering (Case C-208/00).
567 CJEU Cartesio (Case C-210/06).
204
can be found in all cases is that the freedom of establishment ensures that foreign tax-
payers are treated in the host Member State in the same way as nationals of that State.
Moreover, the freedom of establishment ensures that the Member State of origin does
not hinder establishment of its nationals in another Member State.
In summary, companies that transfer from an „incorporation jurisdiction“ can invoke

the freedom of establishment, but companies that transfer from a „real seat jurisdic-
tion“ cannot, with two exceptions. First, when the destination state recognizes the legal
personality and enables continuity in a legal form of that state (cross-border trans-
formation or conversion), the departure state may require the emigrating company to
give up its initial status as a company, but may not force that company to dissolve and
liquidate (disproportionate).568 Secondly, when there is no clear and precise national law
with respect to the liquidation upon transfer, reliance on the freedom of establishment
should also be possible.569 When a company cannot rely on the freedom of establish-
ment (under a real seat system) the question whether exit taxes pose an infringement
to the freedom of establishment becomes irrelevant. Since the Netherlands applies an
incorporation system, the freedom of establishment does apply to companies migrating
from the Netherlands.
From the CJEU case law on exit taxation on emigrating companies (the Court con-
firmed its earlier NGI ruling, discussed above, in Commission versus Portugal570 and
Commission versus Spain),571 it follows that Member States can impose an exit tax upon
the emigration of a business. In addition, the “exit state” does not have to take into ac-
count value decreases that occur after emigration. The immediate recovery of tax claim
was however considered disproportional by the CJEU, which held that Member States
have to offer companies the choice between immediate and deferred payment, where in
case of deferred payment certain conditions may apply.
568 As follows from the Cartesio case.

569 As can be derived from the EFTA Court case Arcade Drilling AS (Case E-15/11).
570 CJEU Commission v. Portugal (Case C-38/10).
571 CJEU Commission v. Spain (Case C-64/11).
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B. Dutch tax treatment of emigrating businesses in the light of EU law
In the Netherlands, emigrating businesses can currently choose between either imme-
diate or deferred payment. In the latter case, the Dutch tax authorities will require the
provision of security, compliance with administrative obligations and payment of re-
covery interest. The question is whether these conditions are in itself fully compatible
with the freedom of establishment.
Regarding the first requirement, the provision of sufficient security, the Court put for-
ward that “Directive 2008/55, in particular Articles 5 to 9, provides the authorities of
the Member State of origin with a framework of cooperation and assistance allowing
them to actually recover the tax debt in the host Member State”.572 Furthermore, secu-
rity should only be required in case this is truly necessary (thus when there is a real and
serious risk of non-recovery).573 This would require a case-by-case analysis, in which the
traceability of assets and the functioning of cooperation mechanisms in that particular
situation should be taken into account. The Dutch legislator has in fact argued that in
practice such a case-by-case approach will be applied.574
With respect to the administrative obligations, currently taxpayers will have to provide all
necessary data enabling the Dutch tax authorities to determine to what extent unrealized
gains have been realized. In addition, they will have to submit their fiscal balance sheet
and profit and loss account drawn up in accordance with Dutch standards. In light of the
Futura case,575 the requirement to submit the annual accounts based on Dutch standards
is too strict and therefore disproportional. In parliamentary proceedings on the Law on
deferral of exit taxation, it has been argued that in practice it will be possible to discuss
the necessity of providing certain accounts in a particular case with the Dutch tax autho-
rities.576 This implies a case-by-case approach. It follows that to the extent that in practice
only information that is actually relevant for determining the extent of realization will
have to be submitted, the administrative obligations should be compatible with EU law.
572 See CJEU National Grid Indus (Case C-371/10), par. 78.
573 See See Conclusion A-G Mengozzi 28 June 2012, par. 82 and EFTA Court Arcade Drilling AS (Case E-15/11). See also:
V-N 2012/51.17, note of D.S. Smit. It is argued that when, for example, the shareholders can be held liable for the tax debt
of the enterprise, securities should not be required.
574 See Kamerstukken II, 2012/13, 33 262, nr. 5, p. 9.
575 CJEU Futura (Case C-250/95).
576 See Kamerstukken II, 2012/13, 33 262, nr. 5, p. 9.
206
With respect to the calculation of recovery interest, the way this requirement is current-
ly applied under Dutch tax law is incompatible with EU law. Under the Law on deferral
of exit taxation, interest is charged as from the time that the payment term of the tax
assessment expires. In a purely domestic situation, such interest would only be charged
from the moment of actual realization onwards. There is a clear discrimination with
respect to the timing of the interest calculation between the cross-border transfer and
the purely domestic transfer, which is incompatible with the freedom of establishment.
As an alternative to deferred payment, taxpayers can opt for payment in ten annual
installments. In this respect, the CJEU argued in the DMC case577 that payment in five
annual installments can be considered proportional, and thus accepted phased deferral
before actual realization because the risk of non-recovery increases over time. In this
case, the Court explicitly took into consideration that no interest was due if a taxpayer
would opt for payment in 5 annual installments. With respect to the Dutch system, the
payment term is ten years rather than five. Nonetheless, the fact that interest is being
charged in the Netherlands situation may still be problematic in the light of EU law.
C. Dutch tax treatment on immigrating businesses in the light of EU law
Ideally, taxpayers should be confronted with the same total tax burden, irrespective of
whether or not they transferred their business cross-border. Without the provision of a
step up, the immigration state will impose a tax over more than what accrued within its
jurisdiction, and the total tax burden may be higher. The following question may then
be asked: does EU law require the provision of a step up? Even though this has not
explicitly been ruled by the CJEU, this seems to be the case. More specifically, in the
NGI case, the Court held that in accordance with the principle of fiscal territoriality
linked to a temporal component, profits arising after migration are to be taxed exclusi-
vely in the immigration state, and that it is also for that state to take into account value
fluctuations occurring after the migration (more specifically, after the date on which the
Member State of origin loses all fiscal connection with the company578).579 The Court
577 CJEU DMC Beteiligungsgesellschaft mbH, (Case C-164/12).

578 Taking into consideration the fact that the Netherlands applies an incorporation system with an establishment fiction,
this wording may lead to discussions as the Netherlands will never lose all fiscal connection with a migrated business, without
this business changing its statutory seat.
579 See CJEU National Grid Indus (Case C-371/10), paras. 58 and 61.
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thus implicitly required that immigration states provide a step up. Without the provision
of a step up in base, states would impose a tax on more than they are entitled to on the
basis of the principle of fiscal territoriality which can result in double taxation and obst-
ructions to the freedom of establishment (from an inbound perspective). Furthermore,
immigrating businesses should be treated similar to domestic businesses who become
liable to tax for the first time in a state (e.g. domestic start-up businesses), implying that
assets and liabilities are to be recorded on an opening balance sheet at fair market value.
13.7. Towards a Dutch exit tax system 2.0
The analysis of the Dutch tax rules on business migration shows that in particular exit
taxation has some problems in the light of European mobility and capital import neu-
trality, tax conventions and EU law. In designing a Dutch (exit) tax system 2.0, relating
to the emigration of a business taxpayer and some cross-border asset transfers, two
approaches can be taken. As a practical approach, the current system may be improved
without making any drastic changes. Alternatively, an entirely new system may be intro-
duced, which is capable of solving the exit tax problem not only on a Dutch level, but
also on an intra-state level. Indeed, even if one state has an exit tax system that is fully
compatible with EU law and our normative benchmark, there may still be a problem if
the immigration State does not provide a step up in tax base. The main problem of exit
taxation in a general sense thus arises from the interaction of different taxing jurisdic-
tions, and the ideal solution should also be on that level.
As regards the improvement of the current system, the option between immediate and
deferred payment should be offered to emigrating businesses.580 In case of deferred
payment, conditions can apply, but only to the extent that these are necessary to safegu-
ard the Netherlands’ source country entitlement. This implies that the Dutch tax autho-
rities should determine on the basis of general guidelines whether and to what extent
security and administrative requirements apply in a particular case. Recovery interest
should only be charged from the moment of actual realization onwards, and not from
the moment the payment term of the tax assessment expires, as this is incompatible
with EU law and not required in order to preserve the Dutch source country entitle-
580 Automatic deferral of payment is not required on the basis of EU law, and may not even be desirable in the light of
safeguarding a state’s source country entitlement.
208
ment. On a more general level, the Dutch exit provisions should ideally be rephrased so
that the wording of these provisions is in line with the purpose and scope thereof, and
that they will apply in all situations where the Netherlands can possibly lose its taxing
right with respect to profits that accumulated within the Dutch taxing jurisdiction (as
may be the case in certain PE situations).
As regards the introduction of a new system, several alternatives to the current exit tax
system are being discussed. These include various compartmentalization systems, such
as residence-based compartmentalization581 and succeeding-residency compartmentali-
zation.582 Alternatively, some sort of trade system for exit claims may be used, including
a system of co-emigration of the exit tax claim.583 Furthermore, matching systems have
been suggested in the literature584 and the European Commission has argued that there
are roughly two ‘flavours’ to ensure coordination and resolve mismatches; emigration
at fair market value (no immediate collection of the exit tax and step-up in immigration
state) and emigration at book value (take over book value and divide taxing rights pro
rata temporis).585 It should be noted that some alternatives resemble others.
Analyzing the various alternatives in the light of the mobility benchmark and against
the background of EU law, and in particular the freedom of establishment, the system
of co-emigration of the exit tax claim would be a very good alternative. In brief, this
system works as follows: the emigration state would sell the exit tax claim to the immig-
ration state, implying that the emigration state can immediately collect its exit tax claim
The original book value will be maintained after the migration, and the immigration
state can fully tax the gains upon actual realization. The ‘disputable’ element of this
system of co-emigration may be the political feasibility thereof. It would also require
some sort of coordination mechanism, but this will simply be the case in all situations
where a solution is sought on a supranational level. More important are the multiple
581 See E.C.C.M. Kemmeren, ‘Nederlandse exitheffingen anno 2005 zijn onhoudbaar, maar een passend alternatief is denk-
baar’, WFR 2005/1613.
582 See Conclusion A-G Wattel 28 August 2012. See also the case of the German Bundesfinanzhof of 28 October 2009,
I R 99/08.
583 See P.J. Wattel, ‘Handel in exitclaims’, NTFR 2002/303, par. 6 and F.G.F. Peters, ‘De aanmerkelijkbelangregeling in inter-
nationaal perspectief. De exitheffingen en de vestigingsplaatsfictie in het licht van de nationale regeling, belastingverdragen,
BRK en het EG-recht.’ Deventer: Kluwer 2007.
584 See B.J.M. Terra and P.J. Wattel, ‘European Tax Law’, student edition, Deventer: Kluwer 2012, p. 514.
585 See a.o. EC COM(2006) 823 final, EC COM(2006) 825 final.
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benefits of this system. First, the system fully endorses the emigration and immigration
states’ source country entitlement as both get what they are entitled to on the basis of
the principle of territoriality. In addition, taxpayers are not pulled into a country’s pro-
blem of having to secure a tax claim. This is the responsibility of the State in question,
not of an emigrating taxpayer. Under this system, taxpayers will not be confronted with
any exit tax related issues and they can exercise their freedom of establishment without
restrictions. The system is thus fully compatible with EU law. Finally, the system is rela-
tively simple for tax authorities, as there is no need to follow the claims for many years
and over multiple borders, nor will it be necessary to extensively exchange information
between states. To summarize, the system is fully compatible with the normative bench-
mark and EU law and is capable of solving the exit taxation issues from a Dutch tax
perspective, and at a higher international level.
210
Policies for a Sustainable Tax Future
14. CFE Forum 2014: Policies for a Sustainable Tax Future
by Madalina Cotrut, Larisa Gerzova and Oana Popa586
14.1. Welcome and introduction
On 27 March 2014, the Confédération Fiscale Européenne (CFE) held its Forum 2014
in Brussels. The topic for discussion was „policies for a sustainable tax future“. Her-
mannus Erdwiens, President of the Regional Tax Office of Magdeburg, State Saxony-
Anhalt, Germany, welcomed the attendees. Jiří Nekovář, President of the CFE, gave
an introduction. Prof. Piergiorgio Valente, Chairman of the CFE Fiscal Committee,
partner, Valente Associati GEB Partners, Italy, moderator of sessions 1 and 2, introdu-
ced the members of the panel and provided the background to the topic. Valente high-
lighted recent developments in the area of the base erosion and profit shifting (BEPS)
phenomenon. He identified the causes for BEPS (for example, the tax sovereignty of
countries and a lack of cooperation and transparency) and possible effects thereof, i.e.
double taxation and double non-taxation. Valente outlined initiatives aimed at tackling
tax evasion and improving transparency at the levels of the OECD, European Union
and G20. Finally, it was noted that substantial changes are expected within the interna-
tional framework with regard to the allocation of cross-border taxable profits.
14.2. BEPS: better policies in the EU context?
14.2.1. BEPS within the EU framework: compatibility and implementation
Dr Georg Kofler, Professor of Tax Law at the University of Linz, Austria gave a pre-
sentation on „BEPS within the EU Framework – Compatibility and implementation“.
Kofler started by outlining the work of the OECD on BEPS, which is supported by the
G20 and the European Union. In particular, in 2013, the OECD issued two reports, i.e.
586 ©2014 IBFD. Originally published in 54 Eur. Taxn. 6, pp. 264-269, Journals IBFD. European Taxation is available online,
please visit http://www.ibfd.org <http://www.ibfd.org> . Reproduced with permission. Ms Cotrut is Principal Research
Associate, IBFD, Amsterdam and can be contacted at m.cotrut@ibfd.org. Ms Gerzova is principal Research Associate, IBFD
and can be contacted at l.gerzova@ibfd.org. Mr Popa is Senior Research Associate, IBFD and Managing Editor of „Corpo-
rate Investment Income“ and „Private Investment Income“, and can be contacted at o.popa@ibfd.org.
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Cotrut, Gerzova & Popa
the Report Addressing Base Erosion and Profit Shifting of 12 February 2013587 and the
Action Plan on Base Erosion and Profit Shifting of 19 July 2013,588 which sets forth 15
Actions to address BEPS. It is expected that the BEPS Action Plan will be completed
in 2015. Kofler discussed each of the 15 BEPS Actions and relevant steps at the level
of the OECD and European Union in that context.
For example, as regards Action 1 (address the tax challenges of the digital economy),
the OECD issued a discussion draft on the Tax Challenges of the Digital Economy589
on 24 March 2014. In turn, at the EU level, there is a Commission High Level Expert
Group on Taxation of the Digital Economy. As regards Action 3 (strengthen CFC
rules), at the level of the European Union, Council Resolution on coordination of the
Controlled Foreign Corporation and thin capitalization rules within the European Uni-
on, 2010/C 156/01 was adopted on 8 June 2010.590 As regards Action 5 (counter harm-
ful tax practices more effectively, taking into account transparency and substance), there
is the Standard for Automatic Exchange of Financial Account Information from the
OECD591 and various actions by the European Union including, inter alia, the Action
Plan to strengthen the fight against tax fraud and tax evasion (COM(2012) 722) (the EU
Action Plan),592 the Commission Recommendation on aggressive tax planning, C(2012)
8806,593 as well as the Proposal for a mandatory automatic exchange of information in
the field of taxation, COM(2013) 348.594
587 OECD, Addressing Base Erosion and Profit Shifting (2013), International Organizations‘ Documentation IBFD (BEPS
Report).
588 OECD, Action Plan on Base Erosion and Profit Shifting (2013), International Organizations‘ Documentation IBFD
(BEPS Action Plan).
589 See OECD, Public Discussion Draft BEPS Action 1: Address the Tax Challenges of the Digital Economy 24 March
2014 – 14 April 2014, available at http://www.oecd.org/ctp/tax-challenges-digital-economy-discussion-draft-march-2014.
pdf
590 Council Resolution on coordination of the Controlled Foreign Corporation (CFC) and thin capitalization rules within
the European Union, 2010/C 156/01 (8 June 2010).
591 See OECD, Standard for Automatic Exchange of Financial Account Information. Common Reporting Standard, availa-
ble at http://www.oecd.org/ctp/exchange-of-tax-information/Automatic-Exchange-Financial-Account-Information-Com-
mon-Reporting-Standard.pdf.
592 Communication from the Commission to the European Parliament and the Council: An Action Plan to strengthen the
fight against tax fraud and tax evasion, COM(2012) 722 final (6 Dec. 2012), EU Law IBFD.
593 European Commission, Commission Recommendation on aggressive tax planning, C(2012) 8806 final (6 Dec. 2012)
594 Proposal for a Council Directive amending Directive 2011/16/EU as regards mandatory automatic exchange of infor-
mation in the field of taxation, COM(2013) 348 final (12 June 2013).
212
Further, Kofler referred to the EU Action Plan. The EU Action Plan contains 34 con-
crete actions. As regards the EU Action Plan, Kofler elaborated, inter alia, on a number
of actions addressing specific issues, for example, exchange of information, aggressive
tax planning, third countries and good governance, hybrid loan structures, anti-abuse,
as well as relevant EU instruments available in that respect. For example, as regards the
issue of exchange of information, Kofler stated that Action 1 of the EU Action Plan
calls for „full and effective implementation and application“ of the new framework for
administrative cooperation, Action 12 of the EU Action Plan calls for the adoption of
standard forms for exchange of information and, finally, Action 16 calls for the promo-
tion of automatic exchange of information, in respect of which there is the Proposal
for a Council Directive amending Directive 2011/16/EU as regards mandatory auto-
matic exchange of information in the field of taxation, COM(2013) 348.595
As regards aggressive tax planning, Action 8 of the EU Action Plan calls for a recom-
mendation on aggressive tax planning. In this respect, the Commission Recommenda-
tion on aggressive tax planning of 6 December 2012, C(2012)8806,596 contains recom-
mendations to Member States to include a subject-to-tax clause in their tax treaties and
to adopt a general anti-avoidance rule.
Finally, at the EU level, there are also a number of ideas as regards the issue of double
taxation. As such, the Working Paper Double Taxation in the Single Market, D(2013)
of 12 April 2013 was published following the Communication from the Commission
on Double Taxation in the Single Market, COM(2011) 712.597
Dr Tom O‘Shea, Professor at Queen Mary University of London, United Kingdom,

followed with a presentation on „BEPS & Anti-abuse Rules: The EU Law Dimension“.
O‘Shea discussed the issue of tax planning in the light of the case law of the ECJ. He
stated that tax planning is, in principle, accepted by the ECJ and illustrated this through
a number of ECJ cases. He started by referring to Halifax (Case C-255/02),598 in which
595 Id.
596 Supra n. 7.
597 Commission Communication, Double Taxation in the Single Market, COM(2011) 712 final (28 Mar. 2012), EU Law
IBFD.
598 UK: ECJ, 21 Feb. 2006, Case C-255/02, Halifax plc, Leeds Permanent Development Services Ltd, County Wide Pro-
perty Investments Ltd v. Commissioners of Customs & Excise, BUPA Hospitals Ltd, Goldsborough Developments Ltd v.
Commissioners of Customs and Excise and University of Huddersfield Higher Education Corporation v. Commissioners of
213
the ECJ stated that taxpayers may choose to structure their businesses so as to limit
their tax liability.599 He continued by quoting the ECJ VAT case, RBS Deutschland Hol-
dings (Case C-277/09), in which the ECJ held that taxable persons are generally free to
choose the organizational structures and the form of transactions that they consider
most appropriate to their economic activities and for the purposes of limiting their tax
burdens.600
O‘Shea pointed out, however, that, at the same time, the case law of the ECJ also de-
monstrates that Member States are allowed to prevent wholly artificial arrangements.
In this respect he referred to Tanoarch (Case C-504/10), in which the ECJ recalled that
preventing possible tax evasion, avoidance and abuse is an objective recognized and
encouraged by the VAT Directive (2006/112);601 but the effect of the principle prohibi-
ting abuse of rights is, therefore, to prohibit wholly artificial arrangements that do not
reflect economic reality and are set up with the sole aim of obtaining a tax advantage.602
O‘Shea further discussed the assessment of the national anti-abuse rules of the EU
Member States by the ECJ, i.e. controlled foreign company rules, thin capitalization ru-
les and transfer pricing rules. O‘Shea pointed out that in an EU environment anti-abuse
rules constituting restrictions on the freedoms require justification and must meet the
principle of proportionality.
In this context, O‘Shea discussed the relevant case law of the ECJ, i.e. Cadbury
Schweppes (Case C-196/04)603 as regards CFC rules, Thin Cap (Case C-524/04)604 as
regards thin capitalization rules and SGI (Case C-311/08)605 as regards transfer pricing.
Customs and Excise, ECJ Case Law IBFD.

599 See Halifax (C-255/02), para. 73.
600 UK: ECJ, 22 Dec. 2010, Case C-277/09, The Commissioners for Her Majesty‘s Revenue & Customs v. RBS Deutschland
Holdings GmbH, para. 53, ECJ Case Law IBFD.
601 EU VAT Directive (2006): Council Directive 2006/112/EC of 28 November 2006 on the common system of value
added tax, OJ L347 (2006), EU Law IBFD.
602 SK: ECJ, 27 Oct. 2011, Case C-504/10, Tanoarch s.r.o. v. Daňové riaditeľstvo Slovenskej republiky, paras. 50 and 51,
ECJ Case Law IBFD.
603 UK: ECJ, 12 Sept. 2006, Case C-196/04, Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v. Commissio-
ners of Inland Revenue, ECJ Case Law IBFD.
604 UK: ECJ, 13 Mar. 2007, Case C-524/04, Test Claimants in the Thin Cap Group Litigation v. Commissioners of Inland
Revenue, ECJ Case Law IBFD.
605 BE: ECJ, 21 Jan. 2010, Case C-311/08, Société de Gestion Industrielle SA (SGI) v. Belgian State, ECJ Case Law IBFD.
214
In Cadbury Schweppes and Thin Cap, the ECJ stated that national measures restricting
specific freedoms under EU law may be justified where they specifically target wholly
artificial arrangements.606 In particular, in order for a restriction to be justified on the
grounds of prevention of abusive practices, the specific objective of such a restriction
must be to prevent conduct involving the creation of wholly artificial arrangements
that do not reflect economic reality, with a view to escaping the tax normally due on the
profits generated by activities carried out on national territory.
Moreover, in SGI, the ECJ clarified that national legislation that is not specifically de-
signed to exclude from the tax advantage it confers such purely artificial arrangements
may nevertheless be regarded as justified by the objective of preventing tax avoidance,
taken together with that of preserving the balanced allocation of the power to impose
taxes between the Member States.607
With regard to what may constitute a purely artificial arrangement, O‘Shea referred to
an example in the Thin Cap case where the ECJ discussed that the fact that a resident
company has been granted a loan by a non-resident company on terms that do not
correspond to those that would have been agreed upon on an arm‘s length basis cons-
titutes, for the Member State in which the borrowing company is resident, an objective
element that can be independently verified in order to determine whether the transac-
tion in question represents, in whole or in part, a purely artificial arrangement.608
Moreover, in Thin Cap the ECJ established the criteria of proportionality of the dome-
stic measures. In particular, national anti-abuse rules should be treated as proportional,
where (1) on each occasion on which the existence of a purely artificial arrangement
cannot be ruled out, the taxpayer is given an opportunity to provide evidence of any
commercial justification that there may have been for that arrangement, and, where
there is no such underlying commercial justification and (2) the re-characterization of
interest paid as a distribution is limited to the proportion of that interest that exceeds
what would have been agreed had the relationship between the parties or between those
parties and a third party been one at arm‘s length.609
606 Cadbury Schweppes (C-196/04) , para. 51 and Thin Cap (C-524/04), para. 72, respectively.
607 SGI (C-311/08), para 66.
608 Thin Cap (C-524/04), para. 81.
609 Id., paras. 82 and 83.
215
Finally, O‘Shea noted that if transactions are found to be abusive, they must be recha-
racterized. In this respect he referred to the case of Paul Newey (Case C-653/11), in
which the ECJ stated that it is for the referring court, by means of an analysis of all the
circumstances of the dispute in the main proceedings, to ascertain whether the contrac-
tual terms do not genuinely reflect economic reality.610
14.2.2. Coordination, harmonization or more competition: what future route?
Prof. Dr Hans van den Hurk, Tax Partner Deloitte, Professor at Maastricht University,
Netherlands, discussed the amendments proposed by the European Commission on 25
November 2013 to the Parent-Subsidiary Directive (2011).611 The first point of discus-
sion referred to the proposed solution with regard to hybrid loans (i.e. if a hybrid loan
payment is tax deductible in the subsidiary‘s Member State, it must subsequently be
taxed by the Member State where the parent company is established). Van den Hurk ob-
served that the text of the proposed amendment seems to be reasonable in light of the
BEPS Action Plan, but noted that the Directive only solves instances of double non-
taxation and not double taxation. A practical example of a „reverse double dip“ leading
to double taxation was discussed and Van den Hurk opined that this should be solved
through a fundamental change to the Interest and Royalties Directive (2003/49).612 He
pointed out, however, that directives should not be used if they do not provide at least
a minimum level of harmonization. Instead of the solution proposed by the European
Commission, Van den Hurk suggested a solution based on the concept of neutrality
(i.e. a neutral system that excludes double non-taxation but also double taxation), which
could only be achieved through a Regulation.
In the second part of his presentation, Van den Hurk addressed the proposed GAAR
(i.e. a common anti-abuse rule that allows states to ignore artificial arrangements used
for tax avoidance purposes and ensure taxation takes place on the basis of real econo-
610 UK: ECJ, 20 June 2013, Case C-653/11, Her Majesty’s Commissioners of Revenue and Customs v. Paul Newey t/a
Ocean Finance, para 49, ECJ Case Law IBFD.
611 EU Parent-Subsidiary Directive – recast (2011): Council Directive of 30 November 2011 on the common system of
taxation applicable in the case of parent companies and subsidiaries of different Member States (recast), OJ L 345/8, (2011),
EU Law IBFD.
612 EU Interest and Royalties Directive (2003): Council Directive 2003/49/ EC of 3 June 2003 on a Common System of
Taxation Applicable to Interest and Royalty Payments Made Between Companies of Different Member States, OJ L157
(2003), EU Law IBFD.
216
mic substance) and discussed what the change actually entails. The main question with
regard to this proposal concerns the definition of abuse, as every system has its own
understanding of the concept. Van den Hurk discussed an example of abuse and whe-
ther the proposed change would solve this. He opined that there is no need for GAAR
in the European context as the background to abuse is in the domestic law. Instead,
because interpretations of the ECJ can be used in all 28 EU Member States and even
in the OECD BEPS environment, the ECJ perspective seems to be very reasonable. In
this respect, Van den Hurk observed that the ECJ never changes its mind but decides
on totally different cases. At the end of his presentation, Van den Hurk reiterated his
conclusions with regard to the two points discussed: with regards to hybrid loans, he
restated the need for neutrality and with respect to GAARs, he concluded that they are
unclear and unnecessary and and interpretations should be left to the ECJ.

Dr Ramon Dwarkasing, Associate Professor in Transfer Pricing at Maastricht Univer-
sity, Managing Partner at Dwarkasing & Partners and Of Counsel at TPA Global, the
Netherlands, discussed transfer pricing aspects of the BEPS Action Plan. Dwarkasing
first described global trends with respect to transfer pricing, pointing out relevant facts
such as:
»» 80% of worldwide transactions take place between associated enterprises;

»» in 2012, for the first time, foreign direct investment inflows in developing coun-
tries exceeded the amount of foreign direct investment inflows in developed
countries, the EU accounting for almost two thirds of this global foreign direct
investment decline;
»» the period between 1997 and 2011 showed a significant increase in transfer pri-
cing legislation implementation in countries worldwide.
Dwarkasing observed the increasing risk of cross-border transfer pricing disputes bet-
ween states that follow different approaches (i.e. the UN Transfer Pricing Manual613
and the OECD Transfer Pricing Guidelines)614 and, therefore, the increasing risk of
significant double taxation. In this respect, he pointed out differences between the UN
613 UN, Transfer Pricing: Practical Manual for Developing Countries (Oct. 2012), available at www.un.org/esa/ffd/tax/
documents/bgrd_tp.htm.
614 OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2010).
217
Transfer Pricing Manual and the OECD Transfer Pricing Guidelines with regard to
location saving advantages (LSA), marketing intangibles and risk allocation/formulary
apportionment.
Dwarkasing started his presentation on the transfer pricing aspects of the BEPS Ac-
tion Plan by quoting the declaration adopted at the end of the G20 Summit of 5 and 6
September 2013 in St. Petersburg: „Profits should be taxed where economic activities
deriving the profits are performed and where value is created“. He mentioned that the
BEPS Action Plan has 15 action points and is organised around 3 main pillars:
»» the coherence of corporate tax at the international level;

»» realignment of taxation and substance;
»» transparency, coupled with certainty and predictability
Dwarkasing provided an overview of the BEPS Actions on transfer pricing, as follows:
»» Action 4: limit base erosion via interest deductions and other financial pay-
ments, which includes transfer pricing guidance regarding financial transactions
and low value added intra-group services;
»» Action 8: assure that transfer pricing outcomes are in line with value creation
– which includes rules to prevent BEPS by moving intangibles among group
members;
»» Action 9: assure that transfer pricing outcomes are in line with value creation
– risks and capital – which includes rules to prevent BEPS by transferring risks
among, or allocating excessive capital to, group members;
»» Action 10: assure that transfer pricing outcomes are in line with value creation –
other high risk transactions – which includes rules to prevent BEPS by engaging
in transactions that would not, or would only very rarely, occur between parties
at arm‘s length;
»» Action 13: re-examine transfer pricing documentation – including a require-
ment to provide all relevant governments with necessary information on global
allocation of the income, economic activity and taxes paid among countries
according to a common template
218
Dwarkasing mentioned the deadlines for the BEPS Actions on transfer pricing. He no-
ted that delegates of the Committee on Fiscal Affairs have determined that formulary
apportionment is not a practical solution to BEPS in the timeframe available for the
action and that special measures, either within or beyond the arm‘s length principle,
may be required with regard to intangible assets, risk and overcapitalization to address
flaws in the current system.
Dwarkasing continued by highlighting some points on Action 13 (i.e. country-by-coun-

try reporting) and discussed its impact on business. He addressed the risk of increased
compliance costs and tax controversy versus the additional extra revenue for govern-
ments and expressed concern regarding whether or not information to be disclosed
under the country-by-country reporting will be in line with privacy legislation and in-
formation protection regulation. Dwarkasing highlighted the concern of business that
certain tax authorities will use the country-by-country reporting template to improperly
apply a formulary apportionment approach. Dwarkasing concluded his presentation by
mentioning that the process in respect of BEPS actions on transfer pricing is going too
fast and advised that this should be done with a lot of care.
Colonel Giampiero Ianni, Head of the International Cooperation Office – Public Fi-
nance 2nd Dept. – Analysis and International Cooperation, Guarda di Finanza General
Headquarters, Italy delivered a presentation on „Countering international tax evasion
and tax avoidance in the BEPS framework – The experience of the Guarda di Finanza“.
Ianni started his presentation with an overview of the operational activities of the fi-
nancial police, mentioning, in this respect, the responsibility to carry out investigations,
audits and checks in the field of economic and financial crimes. Ianni mentioned that
economic financial crime is a complex concept, implying tax crimes, money laundering,
corporate crimes, market abuses and corruption.
In the course of its activity, Guarda di Finanza engages in international cooperation

in tax areas with three lines of action: civil, criminal and intelligence tools. In the area
of tax information exchange, Guarda di Finanza is included in the worldwide list of
competent authorities for the exchange of information. In describing the responsibi-
lities and competencies of Guarda di Finanza, Ianni explained that cooperation with
European bodies, such as Europol, is particularly effective in fighting different forms
of international tax crime, such as carrousel fraud. Ianni observed that the cornerstone
of Guarda di Finanza experience consists in the unification of all international coope-
ration areas within a single entity that acts as a central collector of information.
219
Ianni drew attention to the extensive network of senior officers of the Italian financial
police at 19 locations worldwide. He talked about operational projects of Guarda di
Finanza, giving some examples of risk factors for tax audits, such as:
»» citizens deleted from the resident population register and emigrating to tax ha-
vens;
»» foreign companies with Italian shareholders that control resident companies;
»» resident companies that have made purchases from entities located in tax ha-
vens;
»» resident companies that have financial and commercial relations with subjects
of the same group.
At the end of his presentation, Ianni gave details on the process for tracking problems
and on the analysis procedure and shared some outcomes of their tax investigations.
14.2.3. CFE award ceremony
The afternoon sessions started with the CFE award ceremony. Stephen Coleclough,
past President of CFE, announced that the recipient of the Albert J. Radler Medal prize
was Loes Brilman, from Tilburg University, for her LLM thesis „Emigration and immi-
gration of a business: impact of taxation on European and global mobility“.
14.2.4. The BEPS Action Plan from an EU perspective
Stella Raventos, partner, ECIJA legal, moderator of Session 3 introduced the members
of the session and provided the background to the topic.
Eduardo Gracia, Managing partner at Ashurst, Spain, started his presentation by giving
an overview of the OECD transfer pricing documentation requirements. He pointed
out that BEPS Action 13 stipulates the re-examination of transfer pricing documenta-
tion, which will require a significant amendment of Chapter V of the OECD Transfer
Pricing Guidelines. He commented on the Discussion Draft on Transfer Pricing Docu-
220
mentation and country-by-country reporting issued on 30 January 2014615 (Discussion

Draft Report). He commented that the Discussion Draft Report puts emphasis on
compliance, which will attract high costs if it is burdensome. He recommended that
only transactions between associated enterprises that are sufficiently material should
require full documentation, thus specific materiality thresholds should be provided. He
analysed the frequency of the documentation updates required and when penalties may
apply. The Discussion Draft Report provides that the documentation should encom-
pass a master file and a local file. He also commented on the EU Code of Conduct on
Transfer Pricing Documentation for Associated Enterprises,616 highlighting that this
Code of Conduct is optional, sets out the maximum threshold of documentation and
consists also of two main parts, the master file and the country specific documentation.
He ended his presentation with a comparative chart of the transfer pricing documenta-
tion required by the European Union and OECD.
Hans Mooij, Tax Adviser and former Income Tax Treaty Negotiator for the Nether-
lands government, further discussed the impact of the BEPS Report on international
dispute resolution. He pointed out that there are three objectives of BEPS Action 14:
»» to remove obstacles that prevent countries from solving treaty-related disputes

under the mutual agreement procedure;
»» to have more arbitration provisions in most treaties;
»» to increase access to the mutual agreement procedures
He continued by highlighting the number of mutual agreement procedures that have

been resolved at the OECD and EU level. He commented that an increasing number
of disputes are due to a lack of a coordinating mechanism and pointed out that trans-
parency is the tool to identify the real obstacles. Also, difficulties may arise due to the
fact that it is not the authorities that are interested in resolution, but only taxpayers. He
concluded that the main impediment in mutual agreement procedures is the lack of
trust among taxpayers and, thus, he recommended that more work should be done to
increase transparency and to obtain clear decisions.
615 OECD, Discussion Draft on Transfer Pricing Documentation and Country-by-Country Reporting (2014), International
Organizations’ Documentation IBFD
616 OJ C/2006/176 (28 July 2006).
221
Amparo Grau, professor at Madrid Complutense University further analysed the Dis-
cussion Draft Report. She pointed out that the scope of country-by-country reporting
is not base erosion and profit shifting but disclosure of payments to governments. She
presented the historical steps taken by the European Union as regards corporate social
responsibility and country-by-country reporting. She pointed out that corporate social
responsibility should be applicable to all enterprises so as to create a fair and equal
playing field in comparison with country-by-country reporting, which presents financial
information for every country that a company operates in rather than a single set of
information at the global level. She pointed out that it shows, instead, the company‘s
financial impact on host countries.
She also discussed the impact of the OECD BEPS Report on the Discussion Draft Re-
port, concluding that the country-by-country reporting system, by itself, is not a magic
cure to base erosion and profit shifting.
All sessions were followed by lively discussions that considered the various topics and
issues raised.
14.3. Indirect taxes: the future of VAT and the financial transactions tax
Petra Pospíšilová - Tax Director, ČSOB Bank, Czech Republic, moderator of Session 4,
introduced the members of the panel and provided the background to the topic.
Manfred Bergmann, Director Indirect Tax and Tax Administration, DG TaxUD, Euro-
pean Commission spoke about the future of VAT policy and the financial transaction
tax (FTT).
Bergmann discussed the challenges in the area of VAT, such as complexity, fraud (the
tax gap and the missing trader), the emergence of new business models and accelerating
technical progress (the Internet) and revenue distribution (the destination principle).
With regard to the FTT, Bergmann touched upon the procedure of enhanced coopera-
222
tion, the Commission proposals of 2011617 and 2013,618 expected market reactions and
alternative policy options under discussion.
Daniela Doležalová, Ministry of Finance of the Czech Republic discussed the FTT
from the financial market perspective. Doležalová started by presenting the following
shortcomings of the FTT from the perspective of financial markets:
»» the FTT does not recognize differences between the equity market and fixed
income/derivative market;
»» the FTT does not capture the difference between genuine trading and back-to-
back transactions concluded for settlement purposes;
»» there are legal uncertainties regarding the definitions used with regard to the
FTT and the moment of chargeability;
»» inclusion of the repo market and securities lending market, which play a crucial
role as a source of collateral and financial instruments needed for settlement;
»» repos and reverse repos cannot be replaced by pledges because of the applica-
bility of a very different legal regime.
Doležalová gave two examples of negative synergies between FTT and other regulati-
ons. In this respect, she detailed the contradictions between the FTT and EMIR (Eu-
ropean Market Infrastructure Regulation)619 and between the FTT and the MIFID II.
Doležalová continued her presentation with examples of transactions on the financial
market, highlighting the effects of the FTT and drawing a comparison between the tax
and profit. Doležalová concluded her presentation, in respect of FTT implementation,
with the practical advice to „look before you leap“.
Stephan Schulmeister, WIFO Austrian Institute of Economic Research, provided an

overview of the financial transactions for the last 10 years and discussed the FTT for
EU Member States supporting the FTT Proposal. He pointed out that any financial
617 Eur. Commn., COM (2011) 594 (28 Sept. 2011) (FTT Proposal).
618 Eur. Commn., COM (2013) 71 final (14 Feb. 2013) (revised FTT Proposal).
619 Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives,
central counterparties and trade repositories, OJ L 201.
223
transaction is taxable if at least one partner is established in an EU Member State

supporting the FTT. Furthermore, he pointed out that any transaction is also taxable
if the instrument was issued in one of the 11 EU Member States supporting FTT.
He discussed some issues of the FTT Proposal, emphasizing that the tax rate on spot
transactions is ten times higher than on derivatives and that the „ counterparty prin-
ciple“ impedes a clear-cut FTT implementation. Furthermore, he stated that consensus
among the EU Member States does not yet exist, as different modifications of the FTT
Proposal are still being discussed. He concluded by making some recommendations
that the FTT should be a clear and simple concept and a uniform and one-sided tax rate
of 0.01% should be appropriate.
The session continued with a lively discussion that considered the various topics and
issues raised.
Ian Hayes, Vice President of the CFE, followed with a brief presentation on the „Pro-
ject report on CFE‘s work on greater fairness in taxation: A Model Taxpayer Charter“.
14.4. Forum conclusion
Piergiorgio Valente, Chairman of the CFE Fiscal Committee, Partner at Valente As-
sociati GEB Partners, Italy provided a summary of the CFE Forum 2014 and made
concluding remarks.
224
References to reading materials
15 References to reading materials
»» OECD (2013): „Action Plan on Base Erosion and Profit Shifting“, http://
www.oecd.org/ctp/BEPSActionPlan.pdf
»» OECD (2013): „Addressing Base Erosion and Profit Shifting, http://www.ke-
epeek.com/Digital-Asset-Management/oecd/taxation/addressing-base-erosi-
on-and-profit-shifting_9789264192744-en#page1
»» Council Decision enhanced cooperation Financial Transactions Tax: http://www.
consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/134949.
pdf and http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%20
16977%202012%20INIT
»» The 2011 and 2013 Commission proposals on Financial Trnsactions Tax:
http://ec.europa.eu/taxation_customs/taxation/other_taxes/financial_sec-
tor/index_en.htm
»» 2013 Lough Erne G8 Leaders‘ Communiqué available at: https://www.gov.uk/
government/publications/2013-lough-erne-g8-leaders-communique
225


Recent developments in VAT

and the financial transactions tax
CFE Forum 2014
© 2015 Confédération Fiscale Européenne

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B-1150 Brussels
ISBN 978-92-990057-4-3

Action 1 BEPS-Tackling BEPS Recent Development

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CFE Forum Reports on European Taxation – 6

Servaas van Thiel (Editor)

Tackling base erosion and profit shifting

CFE Forum Reports on European Taxation – 6

CFE Forum 2014

Servaas van Thiel (Editor)

© 2015 Confédération Fiscale Européenne

Policies for a sustainable tax future

Tackling base erosion and profit shifting

CFE Forum 2014

2014 Confédération Fiscale Européenne

This applies in particular to reproductions, translations, microfilming and storage as

No liability assumed for errors and omissions

Foreword CFE President

1. Base Erosion, Profit Shifting and Tax Governance: Future Prospects 1

1.1. Global taxpayers in a global market 1

2. Hybrid Loans in the Parent-Subsidiary-Directive 21

4. Proposed Amended Parent-Subsidiary Directive Reveals 45

6. BEPS and International Dispute Resolution 79

7. Country by Country Reporting: Main Concerns Raised 111

7.1. Introduction 111

8.1. BEPS and tax planning in the EU 135

9. Jurisdiction to Tax in the Digital Economy: Permanent 143

9.1. The digital economy 143

10. Financial Transactions Tax in the Context of Financial Market 157

10.1. Introduction 157

12. The European Court Upholds the Council Decision 183

12.1. Introduction 183

13. Impact of Taxation on Business Mobility in Europe 193

13.1. Introduction 193

14.1. Welcome and Introduction 211

1. Base Erosion, Profit Shifting and Tax Governance:

1.1. Global taxpayers in a global market

1.2. Base erosion concerns

1.3. Base erosion and tax governance models

stituents, including creditors, labour unions, customers, suppliers, investment analysts,

Implementation of tax governance models is the answer of the multinational enterprise’s

The afore-mentioned management models might represent a platform on which to

An effective tax risk management strategy by multinational enterprises plays a signifi-

In order to counter the above-cited phenomenon, the OECD published in February

1.4.1. Base erosion, profit shifting and transfer pricing

Where transactions are unmistakably substantiated by a due analysis of functions car-

Ownership and exploitation of intangibles are a significant aspect of value creation in

national Law, Vol. 23:425, 2012.

It is essential to make a distinction between allocation of ownership and remuneration

In transfer pricing, a significant issue relates to documentation as Tax Authorities are

1.4.2. Base erosion, profit shifting and jurisdiction to tax

be necessary to reconstruct – as a whole – the activity and the procedures in which it

1.4.3. Base erosion, profit shifting and the digital economy

1.4.4. Base erosion, profit shifting and treaty abuse

The issue of whether there is an intention/purpose that envisages the implementation

1.5. Preliminary conclusions

The difference between intentional and unintentional double-taxation must be carefully

1.6. Future prospects

»» affect the allocation of financial assets and services;

»» the economic activity carried out;

»» profit allocation methods to permanent establishments, on the basis of provisi-

»» the issues raised by e-commerce, in terms of any links of incomes produced

2. Hybrid Loans in the Parent-Subsidiary-Directive

2.2. Debt or equity and amendments to the Parent-Subsidiary Directive

rules (would) violate the Parent-Subsidiary-Directive.58 While Article 4 of the Parent-

This amendment will have to be implemented by Member States by 31 December 2015

2.3. Open issues

Against this background, the amendment of the Parent-Subsidiary-Directive was not