On 6 November 2014, the International Consortium of Investigative Journalists sent shockwaves through the public by publishing information about more than 548 tax deals between the Luxembourg tax authorities and over 300 multinationals. The ensuing scandal is better known as LuxLeaks. It was only a harbinger of things to come.
BelgiumLeaks followed soon afterwards, as well as PanamaLeaks. Suddenly, everyone is interested in tax issues, and tax specialists are facing a barrage of questions from friends and family alike. Unfortunately, many people seem to believe that a tax specialist's job is to help avoid taxes. The reality is different, however. Tax specialists in fact help ensure that their business clients are informed as well as possible about the potential tax-related consequences of their activities.
Compliance with a constantly growing set of (tax) rules is becoming increasingly important. This entails filing tax returns, levying withholding tax on payments, screening the reliability of contracting parties in the framework of the anti-money laundering legislation, checking whether contracting parties have complied with their tax and social security obligations, etc.
Whereas the monitoring of tax compliance used to be done solely by the tax administration, it should be noted that businesses are increasingly subject to internal compliance checks as well as audits by clients or external advisors.
In other words, the profession of tax specialist has changed significantly in the past fifteen years. More particularly, at least six specific events or developments during this period have thoroughly changed the attitude of taxpayers and their advisors.
1) Creation of the Office for Advance Tax Rulings
Any taxpayer can request an advance opinion from the Office for Advance Tax Rulings, established in 2003, on the tax consequences of a given transaction or situation which, for tax purposes, is not effective yet. It appears that 2003 was indeed a tipping point for tax specialists: whereas previously their job often consisted of arguing with the tax administration about the consequences of a taxable transaction after its implementation, they were now offered the opportunity to sit down with competent, proactive members of the tax administration in a spirit of dialogue to determine tax consequences beforehand.
2) Excess profit rulings
In general, the decisions of the Office for Advance Tax Rulings are published, albeit on a no-name basis. An important exception is the 35 excess profit rulings, which have not been published. In this type of ruling, the real profit made by a multinational is compared to a hypothetical, average profit which a stand-alone company in a similar situation would make. The difference is considered excess profit by the Belgian tax authorities, and the tax base of the multinational is adjusted accordingly.
The excess profit rulings were characterised as illegal state aid by EU Commissioner for Competition Vestager on 11 January 2016, who asked that Belgian taxpayers be ordered to repay over 600 million euros. Belgium has appealed this decision and is now awaiting the Court of Justice's position. In the meantime, Belgium had filed a request with the President of the General Court of the European Union in order not to recover the amounts with the tax payers as long as the Court of Justice did not render a decision on the content of the case. This request was dismissed on 19 July.
3) TAXE1 and TAXE2 resolutions
In the wake of LuxLeaks, the European Parliament created a Special Committee on Tax Rulings and Other Measures Similar in Nature or Effect (TAXE1). The activities and investigations of this committee resulted in a resolution approved by the European Parliament on 25 November 2015.
After the adoption of this resolution, the mandate of the special committee was extended by another six months (TAXE2) to enable it to continue its activities. The report of TAXE2 was adopted in committee on 21 June 2016 and is adopted by the plenary session of the European Parliament on 6 July 2016.
The importance of TAXE1 and TAXE2 lies in the fact that, for the first time, the European Parliament has used public sessions to question and investigate stakeholders and shame unwilling companies into cooperating. The reports (final TAXE1 [1] and draft TAXE2 [2] ) contain a series of practical recommendations, with a request that the president of the European Parliament submit them to the European Council, the Council of Ministers, the Commission, the Member States, the national parliaments, the UN, the G20 and the OECD.
4) Publication and exchange of tax rulings
On 29 April 2015, Belgian Finance Minister Johan Van Overtveldt decided to voluntarily and automatically exchange all tax rulings issued since 1 January 2015 with foreign tax administrations.
At the European level, in order to make the ruling practice more transparent and tackle corporate tax evasion more efficiently, the Council of the European Union decided to amend the directive on administrative cooperation in the field of taxation (Directive 2011/16/EU). As from 1 January 2017, national tax authorities in the EU will be obliged to automatically exchange information about international tax rulings and transfer pricing arrangements concluded with companies.
5) A change in mentality
NautaDutilh's Private Equity Sector Team has been exchanging and developing knowledge for years. The team publishes a quarterly private equity barometer, based on a survey of a select group of private equity firms and venture capital players. The results provide us with insight into certain sector trends.
Click here to view the latest Private Equity Barometer.
One clear trend, first noted in Q3 2015, is growing interest in obtaining advance tax rulings. This trend was confirmed by our last two barometers. It appears that more and more respondents are reporting post-closing issues, including in relation to tax matters, and are requesting tax rulings in order to adequately protect themselves. The attitude with respect to tax rulings has indeed changed dramatically over the past year. Whereas one year ago more than 60% of respondents deemed Belgian ruling practice to be a non-issue, more than 65% now feel otherwise.
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6) The debt-equity ratio
The abovementioned shift in mentality is probably due to a greater awareness of, for instance, BEPS (Base Erosion and Profit Shifting) rules, which are likely to further change the tax climate in which businesses operate. BEPS comprises an extensive list of points for action, one of which is discussed below (Recommendation 4).
The deductibility of the costs of intra-group and other loans often comes up in ruling requests. On more than one occasion, the Office for Advance Tax Rulings has had the opportunity to rule on this issue and determine the conditions for deductibility. The deductibility of interest on (especially intra-group) loans is indeed under fire, as it leads to base erosion and/or profit shifting from one state to another.
In October 2015, the OECD published its final report on the limits of interest deductibility under the BEPS rules. The OECD recommends that the Member States define a "fixed percentage" limit on interest deductibility by a company (or group of companies). This limit should be between 10 and 30 percent of EBITDA (i.e. the German model). Excessive interest payments should not be deductible, but may be carried forward to future financial years. A minimum threshold of 3,000,000 euros should apply. In addition, a specific limit based on the purpose of the loan should be introduced (i.e. the Dutch model). A final agreement was reached at the European level on 17 June 2016 (following the most recent session of the European Council on the Anti-tax Avoidance Directive (ATAD)). ATAD is adopted by the Council on 19 June 2016.
Belgium still applies a 5:1 debt-equity ratio. As indicated, excess interest is not deductible. This ratio is applicable to intra-group loans, but not to financial leasing or factoring companies or companies engaged in PPP projects. Moreover, there is a specific provision for group companies whose activity consists of the daily management of group cash flows ("cash pooling"). For these companies, a netting principle is applied: the deductible interest is equal to the positive difference between the interest paid and the interest received within the group.
Pursuant to the OECD's recommendations, Belgium would like to impose stricter limits. This means that the interest deduction could be disallowed for the acquisition of financial fixed assets. As of writing, however, there is no legislation in the pipeline. Furthermore, recent literature indicates that the interest deduction for the acquisition of financial fixed assets should be disallowed in any case if dividends are paid immediately or a capital decrease occurs.
These developments have clearly significantly changed the job of tax specialist. The claim that tax specialists help set up constructions to avoid (or worse, evade) taxes rings hollower than ever. On the contrary, tax specialists have become a trusted partner of both taxpayers and the authorities, working to achieve optimal compliance. It will be interesting to see to if this trend continues.
[1] See: European Parliament: Tax rulings and other measures similar in nature or effect
[2] See: European Parliament: Special Committee on Tax Rulings and other measures similar in nature of effect.
