Ref. Ares(2015)1978171 - 11/05/2015
ROOM DOCUMENT # 5 + Annexes 1 and 2
Code of Conduct Group (Business Taxation)
20 March 2013
ORIGIN: Commission
WORK PACKAGE 2011 – PREPARATION OF GUIDANCE NOTES
REVISED DRAFT GUIDANCE
Introduction
1. On 19 December 2011 the Council approved the Code of Conduct Group's 2011 Work
Package as set out in the annex to document 17081/1/11 REV 1 FISC 144. Point 4 of the
Package concerned the preparation of guidance or application notes. It stated that:
While noticing that past assessments will not be affected, the Group will undertake efforts to
consolidate, per type of regime, various case-by-case assessments into general guidance or
application notes for future use. Initially, these efforts will concentrate on regimes concerning income
from mobile capital (intangibles and debt claims) and on regimes for free zones or special economic
zones.
2. At the Code Group meeting on 17 April 2012, the Group held an initial debate on this
matter. It agreed to limit work to four different categories (interest regimes, royalty
regimes, intermediary regimes and special economic zones). It discussed and agreed the
overview of regimes for these categories and the annotated descriptions and
characteristics prepared by the Commission as an annex to room document 5 of 17 April
2012. The Group decided to move forward by asking the Commission to prepare the
necessary documents for that purpose.
3. The Commission therefore prepared draft guidance which was discussed at the meeting
of 10 September and again at that on 17 October 2012 following Member States' written
comments on the draft. At the second meeting it was agreed that the Commission would
revise the draft guidance taking Member States' comments into account.
4. The revised guidance was presented in room document 2 at the meeting on 8 November
2012. Several MS raised points at the meeting. A deadline for the submission of written
comments after the meeting was set as 16 November 2012.
5. A second revised text was presented in room document 5 of 30 January 2013. Following
interventions by a number of Member States at the meeting it was agreed that additional
written comments should be sent to the Commission by 1 March 2013.
Comments received
Page 1 of 19
Revised version of the guidance
Rationale for paragraph 15
Page 2 of 19
Page 3 of 19
Page 4 of 19
Annex 1
Draft guidance for regimes concerning interest, royalties,
intermediaries and special economic zones
I.
Introduction
Purpose of the Guidance
1. The guidance set out below is based on past decisions of the Code of Conduct Group and is
intended to improve the transparency of the Code Group's work. It is also intended to help
Member States as well as third countries identify more easily potentially harmful tax measures
covering beneficially owned income received under four specific types of regime.
1
2. The guidance neither replaces the principles and criteria of the Code of Conduct nor prejudges
the harmfulness of any particular regime. The guidance presents a non-exhaustive list of
elements and characteristics which indicate that a tax measure may be harmful when fully
assessed
2 against the criteria in the Code. Every assessment will continue to be based on the
five criteria of the Code of conduct on a case-by-case approach.
3. The purpose of the text is to provide a guide for the application of the criteria in the Code but it
does not go beyond those criteria nor does it limit them. The guidance can never provide a safe
harbour for a particular regime. A tax measure that is the object of particular scrutiny or that
requires particular attention under the guidance may be found non-harmful by the Code Group;
likewise a measure that is not the object of particular scrutiny or that does not require particular
attention under the guidance may be found to be harmful when assessed by the Group.
4. The purpose of the guidance is not to confine the Group to applying pre-determined general
criteria; rather it should continue to subject each particular regime to a case by case
examination against the Code criteria in the light of the Group's guiding principles set out in
document 16410/08 FISC 174.
3
Relationship with past assessments
1 IT & LU.
2 LU.
3 BE & LU.
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Annex 1
5. As the Work Programme originally noted past assessments, and regimes for which the Group
has agreed in the past that there was no need to assess, will not be affected by the guidance.
Likewise, only regimes that have not been considered by the Group cannot be regarded as
complying with the Code on the basis of this
4 guidance. The current procedure for reopening
past assessments remains in place.
Review of Guidance
6. The countering of harmful tax measures is an ongoing process; therefore the guidance notes
could be periodically reviewed by the Code Group to ensure that they reflect future
developments.
II. Regimes offering privileged treatment for interest income
7. In view of the high mobility of capital and their potentially significant harmful effects for other
Member States, tax regimes of a Member State providing beneficial treatment (within the
meaning of paragraph B of the Code of Conduct) for interest income compared to the general
tax treatment for business income in that Member State will be the object of particular scrutiny
by the Code of Conduct Group, taking special account of the circumstances listed in paragraphs
9 to 11 below.
8. Beneficial treatment, whether granted by law or as an administrative practice, includes but is
not limited to:
a. the non-inclusion in or exemption from the tax base of interest income, whether in whole or
in part;
b. situations in which the tax base for interest income is determined in an artificial way, for
example, if it is not determined using the arm's length principle or if it relies on a formulary
approach such as pre-determined margins or non-arm's length mark-ups on operating
5
expenses, or;
c. the allowance of a deduction for deemed expenses such as deemed interest or management
charges, a contribution to a risk reserve or deemed profit allocations to or from foreign
4 BE.
5 IT.
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Annex 1
permanent establishments where this departs from internationally accepted principles,
notably the rules and guidance agreed within the OECD
6.
7
9. In view of the Code's substance criterion and the high mobility of capital, interest regimes will
require particular attention especially where, whether in law or in fact, the beneficial treatment
is not generally available and targets non-trading interest income. This would be the case if the
regime:
a. does not allow domestic commercial activities or;
b. does not require substance in terms of
8 economic presence.
10. In view of the high risk of international tax planning and its corresponding potential harmful
effects on other Member States, such regimes will require particular attention especially where,
whether in law or in practice, the beneficial treatment is not general and benefits intercompany
and cross border interest income. A non-limitative and non-cumulative list of indicators in this
respect are:
a. the regime does not apply to all companies, for example, if it requires the beneficiary to be
part of an international group;
b. the regime does not apply to all interest income, for example when it mainly affects only
applies to foreign source interest income or to financial transactions carried out with non-
residents, or;
c. the beneficial regime is linked to specific limitations on the deduction of domestic expenses.
11. In view of the Code's reference to the location of business activity in the Community a tax
measure may be potentially harmful if it is not genuinely intended to contribute to a Member
State's economic objectives such as the stimulation of economic growth or innovation.
Indicators of a fiscal purpose rather than a genuine intention to promote economic objectives
might be:
a. the policy purpose underlying the legislation, as supported for example by consultations and
data prepared when introducing the regime;
6 IT.
7 LU & NL.
8 LU.
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Annex 1
b. evidence that the regime leads to
de facto ring fencing, i.e. the majority of the companies
under the regime are foreign owned.
III. Regimes offering privileged treatment for royalty income
12. In view of the relatively high mobility of intangibles and their potentially significant harmful
effects for other Member States, tax regimes of a Member State providing beneficial treatment
(within the meaning of paragraph B of the Code of Conduct)
9 for royalty income compared to
the general tax treatment for business income in that Member State will be the object of
particular scrutiny by the Code of Conduct Group.
13. Beneficial treatment, whether granted by law or as an administrative practice, includes but is
not limited to:
a. the non-inclusion in or exemption from the tax base in whole or in part of royalty income;
b. situations in which the tax base for royalty income is calculated in an artificial way, for
example, if it is not determined using the arm's length principle or it relies on a formulary
approach, such as pre-determined margins or non-arm's length mark ups on operating
10
expenses;
c. the allowance of a deduction for deemed expenses such as deemed interest expenses,
deemed management charges, a contribution to a risk reserve or deemed profit allocations to
or from foreign PEs where this departs from internationally accepted principles, notably
rules and guidance agreed within the OECD
11.
12
14. In view of the high risk of international tax planning and its corresponding potential harmful
effects for other Member States such regimes will require particular attention, especially where
in law or in fact the beneficial treatment is not general or targets intercompany or cross border
royalty income. A non-limitative and non-cumulative list of indicators in that respect are:
9 NL.
10 IT.
11 IT.
12 LU & NL.
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Annex 1
a. the regime does not apply to all companies, for example it requires the beneficiary to be part
of an international group;
b. the regime does not apply to all such income, for example when it only applies to mainly
affects foreign source royalty income or to license agreements with non-residents, or;
c. the beneficial regime is linked to specific limitations on the deduction of domestic expenses.
15. Furthermore, in the light of the potential value of such regimes in stimulating real economic
activity such as R&D, economic growth and innovation, such regimes will require particular
attention if they display any
13 of the following non-exhaustive list of indicators;
a. the regime does not contribute –
de-jure or
de-facto – an economic advantage for the
Member State such as the stimulation of R&D because, for example, it attracts passive
income rather than material investments in scientific research activities;
b. the regime does not allow domestic commercial activities or even does not require substance
in terms of
14 economic presence;
c. the legislative motivation and data prepared when introducing the regime does not clearly
demonstrate the economic motive;
d. the regime is not limited to self developed intangibles, or;
e. the regime does not require the performance of activities related to monitoring, preserving
and maintaining the intangible and its income streams in a manner that is in line with the
nature and value of the intangible.
16. To ensure sufficient transparency the conditions of the regime must be clear and based on
objective terms and conditions. A non-exhaustive list of indicators of a potentially harmful
lack of transparency includes;
a. a lack of any limitation in the regime to intangibles officially registered in a formal Register
b. the lack of transparent and objective regulations for embedded royalties in line with OECD
standards, and;
13 COM (5 March 2013).
14 LU (change in line with that in paragraph 9c; identified at meeting of 30 January 2013)
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Annex 1
c. a lack of an audit process to ensure correct application of the regime, including a risk
assessment approach.
15
17. The significance of the beneficial treatment available under the regime (e.g. effective tax rate
available both in absolute terms and in relation to the generally applicable rate) must be
considered in relation to the its overall positive economic effects, it being understood that the
size and openness of a Member State have to be taken into account. If the beneficial treatment
is not proportionate to the economic objectives attained this may be evidence that a regime is
potentially harmful.
IV. Regimes concerning intermediate financing or licensing activities
18. Regimes providing advance certainty to intermediary financing or licensing activities, whether
by law or by administrative practice, will in principle be the object of particular scrutiny by the
Code of Conduct Group if one or more of the following circumstances apply:
a. the regime provides for a standard approach including fixed spreads for intermediary type
companies rather than relying on a case by case approach taking account of all the facts and
circumstances involved with particular regard to the functions performed and risks assumed;
b. advance certainty provided by a tax administration concerning the profits reported by an
intermediary company does not comply with the OECD Transfer Pricing Guidelines
throughout the period to which it relates including the use of an inappropriate transfer
pricing methodology.
c. advance certainty provided by a tax administration is granted
de jure or
de facto without any
terminal date or with automatic renewal. Similarly if a renewal were granted on application
it would be potentially harmful if such cases were not periodically reviewed by the tax
authority to ensure an individual examination of the underlying facts and to check the
conditions are at arm's length.
d. The regulations covering the conditions for granting advance certainty for intermediary
companies are not publicly available;
15 UK (30 January 2013).
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Annex 1
e. The regulations covering the conditions for granting advance certainty for intermediary
companies does not ensure effective exchange of information of the methodology applied
and of the arm's length profit agreed with other concerned MS.
f. The regime is not equally available (whether on a
de jure or
de facto basis) to domestic
commercial activities or requires no substantial domestic presence.
V. Tax privileges related to special economic zones
19. Without prejudice to the specific and detailed State Aid rules based on Article 107 TFEU,
business tax privileges available for a special geographic area of a Member State ("special
economic zones") will be the object of particular scrutiny by the Code of Conduct Group when
one or more of the following circumstances are met:
a. access to the zone, either
de jure or
de facto, specifically favours foreign investors or
discriminates against domestic investors or the tax benefits available to companies operating
in the zone specifically favour transactions with non-residents or discriminate against
domestic transactions;
b. the regulations for the zone place restrictions on activities that require a substantial
economic presence or highly mobile activities typical of the banking or insurance industry
or intra-group services are permitted in the zone;
c. there is a lack of regular tax audits verifying that the profits accruing in the zone are
commensurate with the business activities carried on within in it;
d. the terms and conditions for establishing a zone, for being allowed to operate in the zone
and the benefits available for companies operating in a zone are not clearly defined in public
legislation, are not limited in time and permission to establish a zone or to be active in a
zone is subject to discretionary powers.
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Annex 2
MS Para
Comments
COM's
response
LU
1
Revised wording in opening sentence proposed by COM
Accept.
in response to LU's comments on paragraph 17.
IT
1
IT comments were made in respect of the intermediaries
Accept.
regime – recognises that beneficial ownership of the
relevant income is implicit in the guidance but asks for
some wording (upfront somewhere in the document)
stating the “scope” of the guidance in this respect.
LU
2
Insertion of "possibly" before "indicate…may be
Reject "possibly" as conditionality already present in
harmful"; replace "considered" with "assessed" and insert
"
may be harmful"; accept "assessed" as more accurate
"exclusively" to emphasis reliance on Code criteria.
word; reject "exclusively" as unnecessary.
LU
4
Asks for explanation of paragraph's purpose in the light of Paragraph 4 was added simply for emphasis hence degree
the last sentence of paragraph 2.
of repetition with preceding paragraphs.
BE, LU
4
Insertion of reference to document 16410/08 in response
Accept.
to comments on paragraphs 11 and 17.
BE,
5
Insertion of reference to regimes which the Group has
COM's view is that this addition is unnecessary. No
LU, NL
decided not to assess.
regime can be revisited whether or not it has been
formally assessed by the Group without a broad
consensus in the Group. A commitment never to look
again at regimes that have not been assessed does not
accord with the consensual approach taken by the Group.
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Annex 2
MS Para
Comments
COM's
response
BE,
5
Insertion of "only" into second sentence.
COM is not entirely certain what this change means. It
LU, NL
appears to distinguish between regimes which the Group
has decided not assess with regimes which have not been
discussed at all (e.g. regimes that were never notified or
regimes in third countries). COM thinks that BE, LU and
NL believe that only regimes that have been never been
discussed at all should not be considered as complying
with the Code.
BE
5
BE queried the phrasing of the second sentence.
The comment was intended to prevent regimes that had
not been considered by the Group from being portrayed
as Code compliant because they satisfy the guidance.
The sentence has been amended to make this clear.
IT
8b
Proposed additional wording for clarification purposes;
Accept.
avoid suggesting that “pre-determined” applies only to
margins and not to mark-ups.
LU
8c
Deletion of reference to asymmetric treatment as a recent
Accept.
addition to the text and not based on either past
assessments or criteria in the Code.
IT
8c
Suggested amendment as the current reference to the
Accept.
OECD TP guidelines will not cover article 7 of the
OECD MTC; change to "rules and guidance agreed
within the OECD".
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Annex 2
MS Para
Comments
COM's
response
NL
8c, 13c
Suggest deleting the phrase “or where this could
Accept.
foreseeably lead to asymmetric treatment” as it is unclear
and difficult to establish.
LU
9b, 15b
Insert "appropriate for the type of activities" to describe
Disagree but see alternative proposed text. In the light of
an economic presence.
paragraph B3 of the Code it is appropriate that the
Guidance reflects the Group's interest in activities that
require little substance as they typically involve mobile
passive income.
BE,
10
Qualifying harmful effects of avoidance as "potential".
Disagree; the document's concern is with the harmful
LU, NL
effects of international tax planning not with any
beneficial impact that it may have on MS. This is not a
question of legal
versus illegal actions but of the harmful
consequences for MS.
LU
10
Deletion of reference to
de jure and
de facto tests
Disagree; LU has never accepted the
de facto
("whether in law or practice").
interpretation of criteria 1 and 2 but this does not reflect
the consensus in the Group.
BE,
10b
Delete "mainly effects" and replaces with "only applies
Disagree; the original wording was intended to ensure
LU, NL
to" in describing what an interest regime covers (e.g.
that a regime which permits small amount of domestic
'mainly effects foreign source income' rather than 'only
income will still be covered.
applies to foreign source income').
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Annex 2
MS Para
Comments
COM's
response
BE,
11, 11a,
Deletion of paragraph.
Disagree in part. Paragraph 11 relies on paragraph B3 of
LU, NL
11b
the Code which refers to the granting of tax advantages
without any real economic activity being undertaken.
Regarding paragraph 11a, statements made by MS during
the legislative process (e.g. during consultation) may well
help the Group understand the purpose of a particular
measure as well as its likely or actual practical effect.
Regarding paragraph 11b, COM believes that the
emphasis in paragraphs 1 to 4 on the Code and the agreed
"guiding principles" in document 16410/08 make it clear
that paragraph 11b cannot itself make a regime harmful.
However COM also recognises that the sentence is
worded very broadly. COM would therefore propose
retaining paragraphs 11, 11a and 11b with the exception
of the words "i.e. the majority of the companies under the
regime are not foreign owned" in 11b.
LU
11, 11b
Deletion of "genuine" and "genuinely".
Disagree with specific changes but accept the wider point
about 16410/08, see below paragraph 17.
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Annex 2
MS Para
Comments
COM's
response
NL
11, 16
Suggest deleting both as they believe the paragraphs will
Reference to paragraph 16 probably meant to say 17 as
present practical problems, e.g. the burden of proof still
these comments reflect NL's earlier comments on para 3c
lies with the Member States and the meaning of
of the old guidance (now para 17). Do not agree that the
"genuine" (paragraph 11) is unclear.
paragraphs should be removed. Most MS will monitor
the effectiveness of tax incentives they have introduced
so information is likely to be available on the
de facto impact of a regime. Ultimately the question would be
whether the information available convinces the Group
members.
IT
13b
As for paragraph 8b above.
Accept.
IT
13c
Changes to make the text consistent with proposals for
Accept.
paragraph 8c.
LU
13c
Deletion of reference to asymmetric treatment as a recent
Accept.
addition to the text and not based on either past
assessments or criteria in the Code.
BE,
14
Qualifying harmful effects of avoidance as "potential".
Disagree; the document's concern is with the harmful
LU, NL
effects of international tax planning not with any
beneficial impact that it may have on MS. This is not a
question of legal versus illegal actions but of the harmful
consequences for MS.
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link to page 2 link to page 3
Annex 2
MS Para
Comments
COM's
response
BE,
14b
Delete "mainly effects" and replaces with "only applies
Disagree; the original wording was intended to ensure
LU, NL
to" in describing what an interest regime covers (e.g.
that a regime which permits small amount of domestic
'mainly effects foreign source income' rather than 'only
income will still be covered.
applies to foreign source income').
COM
15
Insertion of the words "if they display any".
These words make have been added to make it clear that
the factors listed in paragraph 15 should be considered by
the Group when deciding whether or not to consider a
particular measure in more detail.
LU
15b
Change analogous to that in paragraph 9b.
See 9b above.
BE,
15d, 15e Deleted.
Reject. These do not add additional criteria to the Code
LU, NL
but identify possible features of a regime which may be
of interest to the Group. Any subsequent assessment of
that regime would rely on the criteria in the Code. See
additional comm
ents, pages 2 and 3 above.
UK
16c
Suggests changes to wording to take account national
Accept.
rules which operate on a self-assessment basis.
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Annex 2
MS Para
Comments
COM's
response
BE,
17
Insert reference to taking account of size and openness of
Accept in principle and addressed in the introductory
LU, NL
a MS.
comments to the effect that the Code remains paramount
and new text saying that this that includes procedural
matters outlined in document 16410/08. The economic
effects of a particular measure can only be understood in
the context of the MS to which they apply. This covers
not just absolute factors such as the size of the MS but
also dynamic factors such as the state of its economy.
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