International

Tax Law

Pr. Martin Collet1


Introduction .......................................................................................................................................................... 2
1. ALLOCATING TAXING RIGHTS BETWEEN COUNTRIES ...................................................................................... 3
1.1. Domestic tax systems and cross-border situations .................................................................... 3
1.1.1 The features that are common to all the domestic tax systems .......................................... 3
1.1.1.1. Taxpayers ............................................................................................................................................... 3
1.1.1.2. Tax Bases and tax rates .................................................................................................................... 3
1.1.1.3. Collection methods ............................................................................................................................ 4
1.1.2. How tax systems deal with cross-border operations? ........................................................... 4
1.1.2.1. The concept of residence ................................................................................................................ 4
1.1.2.1.1. Individuals ......................................................................................................................................... 4
1.1.2.1.2. Companies ......................................................................................................................................... 5
1.1.2.2. The concept of source ....................................................................................................................... 5
1.1.2.2.1 Taxing the Permanent establishments (PE) ........................................................................ 5
1.1.2.2.2 Taxing some specific items of income in the source jurisdiction ............................... 6
1.1.2.3 Taxing the MLE groups: the transfer pricing issue ............................................................... 6
1.1.2.3.1. The concept of transfer pricing ................................................................................................ 6
1.1.2.3.2. How tax law deals with transfer pricing ............................................................................... 6
1.2. The issue of double taxation ................................................................................................................. 9
1.2.1. Risks of double taxation ...................................................................................................................... 9
1.2.2. Methods used to tackle the issue ................................................................................................... 10
1.2.2.1 Double tax relief methods .............................................................................................................. 10
1.2.2.2. Tie-breaker rules .............................................................................................................................. 11
1.2.3. Tax dispute resolution mechanisms (Mutual agreement procedure - MAP) ............. 12
2. ENSURING A LEVEL PLAYING FIELD ................................................................................................................ 13
2.1. Promoting non-discrimination .......................................................................................................... 13
2.2. Dealing with State aids and subsidies ............................................................................................. 14
2.3. Tackling other harmful tax practices .............................................................................................. 17
3. FIGHTING TAX EVASION AND TAX AVOIDANCE ............................................................................................... 17
3.1. Where tax evasion and tax planning by multinational companies come from? ........... 17
3.1.1. Tax competition .................................................................................................................................... 17
3.1.2 Mismatches or gaps in International tax rules ......................................................................... 18
3.1.2.1. The Hybrids example ...................................................................................................................... 18
3.1.2.2. Mismatches in the interpretation of the same Tax treaty: the France and
Luxembourg case ............................................................................................................................................. 19
3.2. The States responses .............................................................................................................................. 19
3.2.1. Mechanisms of collect and exchange of information ............................................................ 19

1 Martin Collet (martin.collet@u-paris2.fr) is Professor of Law at Université Panthéon-Assas (Paris II), where he
manages the master programs in tax law and in International taxation, and is member of the Conseil des
prélèvements obligatoires. He is the author of many publications on taxation, public finance and administrative law
and is also a board member of several law journals. He has experience as a consultant and has been a partner of
Corpus Consultants since its creation in 2011 by Robert Badinter, former French Minister of Justice and former
President of the French Constitutional Counsel. Professor Collet recently published Finances publiques (LGDJ, 4ème
éd., 2019), Droit fiscal (Presses universitaires de France, 7ème éd., 2019), L’impôt confisqué (Odile Jacob, 2014) and
Procédures fiscales (Presses universitaires de France, 3ème éd., 2017) with Pierre Collin.

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3.2.1.1. Bilateral and multilateral Instruments ................................................................................... 19
3.2.1.2. The FATCA and the CRS examples ............................................................................................ 19
3.2.1.3. The Country-by-Country Reporting (CbCR) example ...................................................... 20
3.2.1.4. The “DAC 6” Directive example .................................................................................................. 20
3.2.2 Anti-abuse rules ..................................................................................................................................... 21
3.2.2.1. General anti-abuse rules ............................................................................................................... 21
3.2.2.2. PPT provisions ................................................................................................................................... 21
3.2.3. Addressing the tax havens challenges ........................................................................................ 22
3.2.3.1. The Controlled foreign companies (CFC) rules example ................................................ 22
3.2.3.2. Addressing “rent a star” schemes .............................................................................................. 23

Introduction

Definition

Sources
- Domestic laws
- “tax treaties”/“bilateral conventions”/“Double taxation agreement” (DTA);
- Multilateral conventions; E.g. Convention on Mutual Administrative Assistance
in Tax Matters (OECD); Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent Base Erosion and Profit Shifting ("Multilateral Instrument"
or "MLI") (OECD).

“The MLI is a multilateral agreement intended to swiftly implement various
treaty related proposals arising out of the G20/OECD Base Erosion and Profit
Shifting Project (“BEPS Project”). As a multilateral agreement concluded between
a large number of jurisdictions, the MLI has a mix of mandatory provisions and
optional provisions (that signatory jurisdictions can make reservations against).
Signatory jurisdictions may also choose which of their DTAs they wish to be
modified by the MLI. A DTA is only modified by the MLI if both parties to the DTA
choose for the DTA to be modified by the MLI. Likewise, the DTA is only modified
under the MLI to the extent that it is agreed by both parties (i.e. to the extent that
both parties do not make reservations on the optional provisions in the MLI). The
modifications to a DTA by the MLI take effect only after both parties to the DTA
ratify the MLI according to their respective domestic procedures” (IRAS, 2018).

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1. ALLOCATING TAXING RIGHTS BETWEEN COUNTRIES

1.1. Domestic tax systems and cross-border situations

1.1.1 The features that are common to all the domestic tax systems

1.1.1.1. Taxpayers

Individuals/Businesses/the case of “flow-through” entities (“fiscally
transparent”)

1.1.1.2. Tax Bases and tax rates

Individuals:
Income taxes. Levy on “net income” over an annual tax period/comprehensive
tax/ Families are often imposed on their “household income”/“Worldwide
base”/Progressive

Property taxes (real estate)

Inheritance taxes (“federal estate tax” in the US) and gift taxes (tax on
transfer of property)

Payroll taxes

Businesses:
Corporate income tax. Net profit (receipts minus expenses) over an annual tax
period/Proportional (or flat) rate

Consumption taxes (sales tax/excises tax/VAT…) “Broad-based” taxes (VAT
or GST) or narrow based taxes (excises/specific taxes)/Collected only at the last
point of sale to the final end user (consumer) or also on intermediate
transactions between businesses (VAT).

The case of custom duties (“tariffs”). Customs duties (tariffs) are a tax on
imported goods from outside the country. Tariffs raise the price of imported
goods relative to domestic goods (goods produced at home): are supposed to
protect the domestic industries and consumers.

To be able to calculate the customs duties to be paid when trading goods, three
factors have to be taken into consideration:
- The value of the goods.
- The customs tariff to be applied, depending on classification of goods.
- The origin of the goods.

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1.1.1.3. Collection methods

Direct and Indirect taxes.

Withholding taxes.

1.1.2. How tax systems deal with cross-border operations?

1.1.2.1. The concept of residence

1.1.2.1.1. Individuals

“183-day rules”/“centre of vital interests”

The French example
French Tax Code (Article 4 B) provides that an individual is deemed having
his/her domicile for tax purposes in France if any of these three alternative
criteria is met:
1/The individual has his/her home in France, or has his/her principal place of
abode in France.
– Home: place where the taxpayer normally lives and has the center of his/her
family interest.
– Principal place of abode: if the taxpayer stays for 6 months or more in France,
or if the taxpayer stays less than 6 months in France but significantly longer than
in any other country.
2/ They carry out a professional (non-secondary) activity in France.
3/ The center of their economic interest is in France (i.e. the center of
professional activities, principal place of investments, source of income…).

Limited or unlimited tax liability?
Article 4A of the French tax code sets forth the following principles:
- When the tax domicile is located in France, Individuals are liable to French
personal income tax (PIT) on the basis of their worldwide income (i.e. French-
sourced and foreign-sourced income) = unlimited liability.
- When the tax domicile is located outside France, Individuals are liable to French
PIT solely with respect to their French-sourced income = limited liability.

Special cases: US and citizenship. “If you are a U.S. citizen or resident alien
living or traveling outside the United States, you generally are required to file
income tax returns, estate tax returns, and gift tax returns and pay estimated tax
in the same way as those residing in the United States. Your income, filing status,
and age generally determine whether you must file a return. Generally, you must
file a return if your gross income from worldwide sources is at least the amount
shown for your filing status in the Filing Requirements table in Chapter 1
of Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.” (IRS)

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1.1.2.1.2. Companies

Place of incorporation/place of management (“additional test”)/combination of
the 2 first approaches

1.1.2.2. The concept of source

1.1.2.2.1 Taxing the Permanent establishments (PE)

Definition. The PE definition initially comprised two distinct thresholds (OECD
Model, art. 5):
- a fixed place of business through which the business of the enterprise is wholly
or partly carried on ;
- or, where no place of business can be found, a “dependent agent” : a person
acting on behalf of the foreign enterprise and habitually exercising an authority
to conclude contracts in the name of the foreign enterprise.

All over the world, most of the domestic rules share a same approach. E.g. France
(art. 209 FTC):
"Business carried out in France" are liable to tax in France: no definition provided
by the French Tax Code, therefore, the notion had to be precised by case law.

According to case law, a business is carried out in France in 3 possible situations:
– Profits are generated by an establishment in France;
– Profits are generated by a representative in France;
– Profits are generated by a full business cycle in France.

The Google case (France). (Document 6)

EU Proposal on digital business activities’ taxation. On 21 March 2018, the
European Commission proposed new rules to ensure that digital business
activities are taxed in a fair and growth-friendly way in the EU.

“Proposal 1: A common reform of the EU's corporate tax rules for digital activities

This proposal would enable Member States to tax profits that are generated in
their territory, even if a company does not have a physical presence there. The
new rules would ensure that online businesses contribute to public finances at
the same level as traditional 'brick-and-mortar' companies.

A digital platform will be deemed to have a taxable 'digital presence' or a virtual
permanent establishment in a Member State if it fulfils one of the following
criteria:

- It exceeds a threshold of €7 million in annual revenues in a Member State
- It has more than 100,000 users in a Member State in a taxable year
- Over 3000 business contracts for digital services are created between the
company and business users in a taxable year.

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The new rules will also change how profits are allocated to Member States in a
way which better reflects how companies can create value online: for example,
depending on where the user is based at the time of consumption.

Ultimately, the new system secures a real link between where digital profits are
made and where they are taxed (…)”.

1.1.2.2.2 Taxing some specific items of income in the source jurisdiction

Passive incomes. “Passive incomes”: the recipient is not actively involved in the
activity that generates the income):
- Income derived from real estate and immovable property: rental incomes
(and capital gains derived from the sale thereof), which generally may be
taxed by the country of source where the immovable property is located.
- Business profits or payments which may include dividends, interest, royalties
or technical fees: the country of source can levy a withholding tax.

1.1.2.3 Taxing the MLE groups: the transfer pricing issue

1.1.2.3.1. The concept of transfer pricing

Background. “Transfer pricing refers to the rules and methods for pricing
transactions between related parties. Such transactions can be sale or purchase
of goods, provision of services, borrowing or lending of money, use or transfer of
intangibles, etc. (…)

When related parties transact with each other, their pricing may not reflect
market conditions due to a lack of independence in their commercial and
financial relations. As a result, their profits and tax liabilities may be distorted,
especially when they are located in different jurisdictions with different tax rates.
This creates concerns that the related parties may not be paying their fair share
of tax and are able to derive a tax advantage as a group.

To ensure taxpayers transact with their related parties at pricing that reflects
independent pricing, (Tax authorities) applie the internationally endorsed arm’s
length principle. If taxpayers do not comply with the arm’s length principle and
have understated their profits, (Tax authorities) will adjust their profits upwards
as provided in the (General Tax code)” (IRAS, 2018).

The Starbuck’s case (Document 7).

1.1.2.3.2. How tax law deals with transfer pricing

The Arm’s length principle. “(Most countries in the world) endorse the arm’s
length principle as the standard to guide transfer pricing. (They) subscribe to the

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 principle that profits should be taxed where the real economic activities
generating the profits are performed and where value is created. A proper
application of the transfer pricing rules would ensure this outcome (…).

The arm’s length principle requires a transaction with a related party to be made
under comparable conditions and circumstances as a transaction with an
independent party. The premise is that where market forces drive the terms and
conditions agreed in an independent party transaction, the pricing of the
transaction would reflect the true economic value of the contributions made by
each party in that transaction.

Therefore, if two related parties derive profits at levels above or below the
comparable market level solely because of their special relationship, the profits
will be deemed as non-arm’s length. In such a case, (Tax authorities) can make
necessary adjustments to the taxable profits of the Singapore taxpayer. This is to
reflect the true price that would be derived on an arm’s length basis” (IRAS,
2018).

Application of the principle. Tax authorities recommend that taxpayers adopt
the following three-step approach to apply the arm’s length principle in their
related party transactions: Step 1 - Conduct comparability analysis; Step 2 -
Identify the most appropriate transfer pricing method and tested party; Step 3 -
Determine the arm’s length results.

Step 1 – Conduct comparability analysis
Comparability analysis is at the heart of the application of the arm’s length
principle. This requires:

(a) Identifying the commercial or financial relations between the related parties
and the conditions and economically relevant circumstances attaching to those
relations in order that the transaction between the related parties is accurately
delineated.
(b) Comparing the conditions and the economically relevant circumstances of the
related party transaction as accurately delineated with the conditions and the
economically relevant circumstances of comparable transactions between
independent parties.

The comparability analysis conducted under Step 1 will have:
(a) Set out the factual substance of the commercial or financial relations between
the related parties and accurately delineated the actual transaction;
(b) Compared the economically relevant characteristics of the actual related
party transaction and independent party transactions;
(c) Identified the differences (if any) in the economically relevant characteristics
between the related party transaction and the independent party transactions
that can materially affect the price of the related party transaction; and
(d) Determined reasonably accurate adjustments that can be made to eliminate
the effect of any such differences. (IRAS, 2018)

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 Step 2 – Identify the most appropriate transfer pricing method and tested
party

Five methods. “There are five internationally accepted methods for evaluating a
taxpayer’s transfer prices or margins against a benchmark based on the prices or
margins adopted by independent parties in similar transactions.

Traditional transaction methods Transactional profits methods
CUP method Transactional profit split method
Resale price method Transactional net margin method
Cost plus method (“TNMM”)

Traditional transaction methods compare the price of related party transactions
with that of transactions between independent parties. On the other hand,
transactional profits methods compare the profit arising from related party
transactions with that generated in independent party transactions.

Internal and external comparables. The diagram below illustrates internal and
external comparables:

CUP method. The CUP method compares the following two prices:
(a) The price charged for properties or services transferred in a related party
transaction; and
(b) The price charged for properties or services transferred in an independent
party transaction in comparable circumstances.

A difference between the two prices above may suggest that the related parties
are not dealing at arm’s length. Therefore, the price in the related party
transaction may need to be substituted with the price in the independent party
transaction. (…)

As the CUP method is the most direct way to determine arm’s length price, it
should generally be preferred to the other methods. However, a less direct
method is necessary if comparable independent party transactions cannot be
found or where reasonably accurate adjustments for differences in comparability
cannot be made. (…)

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Resale price method. The resale price method is applied where a product that
has been purchased from a related party is resold to an independent party.
Essentially, it values the functions performed by the “reseller” of a product.

In this method, the resale price to the independent party is reduced by a
comparable gross margin (the “resale price margin”) to arrive at the arm’s length
price of the product transferred between the related parties.

Under arm’s length conditions, the resale price margin should allow the reseller
to recover its selling and operating costs, and earn a reasonable profit based on
its FAR (Functions performed, Assets used and Risks assumed). (…)

Cost plus method. The cost plus method focuses on the gross mark up obtained
by a supplier for property transferred or services provided to a related
purchaser. Essentially, it values the functions performed by the supplier of the
property or services.

In this method, a comparable gross mark up2 is added to the costs of the supplier
of goods or services (“cost base”) in the related party transaction to arrive at the
arm’s length price of that transaction. (…)

Transactional profit split method. The transactional profit split method is
based on the concept of splitting the combined profits of a transaction between
related parties in a similar way as how independent parties would under
comparable circumstances. (…)

TNMM. The TNMM compares the net profit relative to an appropriate base (such
as costs, sales or assets) that is attained by a taxpayer from a related party
transaction to that of comparable independent parties. This ratio of net profit and
the appropriate base is commonly known as the net profit indicator or profit
level indicator. (…)

Step 3 – Determine the arm’s length results

Once the appropriate transfer pricing method has been identified, the method is
applied on the data of comparable independent party transaction(s) to arrive at
the arm’s length result” (IRAS, 2018).

1.2. The issue of double taxation

1.2.1. Risks of double taxation

Juridical/economic. “Juridical double taxation”: the same income is being taxed
twice – once in the jurisdiction where the income arises and another time in the

2 The difference between margin and mark-up is that margin is sales minus the cost of goods sold, while
mark-up is the amount by which the cost of a product is increased in order to derive the selling price.

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 jurisdiction where the income is received. “Economic double taxation” can arise
when two jurisdictions tax the same economic transaction differently because of
conflicting rules relating to the inclusion of income and deduction of expenses.

Transfer pricing and double taxation. “Where two or more tax authorities take
different positions in determining arm’s length prices, double taxation may occur.

When a (Country A) tax resident taxpayer suffers double taxation from
adjustments made by (Country A Tax authority) or a foreign tax authority to the
transfer prices of its related party transactions, it can choose to resolve the issue
through:
(a) Taking legal remedies in the jurisdiction in which the transfer pricing
adjustments are made; and/ or
(b) Requesting (Country A Tax authority) to resolve the double taxation through
the Mutual Agreement Procedure (“MAP”)”. (IRAS)

1.2.2. Methods used to tackle the issue

1.2.2.1 Double tax relief methods

“Double tax relief”. Three methods by which countries may give relief for double
taxation (according to their domestic law or DTA):

1/ Exemption method: the country of residence does not tax the foreign income of
its tax residents. This income (generally a dividend) is “exempt”.

2/ Credit method: the income earned from abroad is taxed in the country of
residence. But, the foreign tax paid abroad is “credited” against the tax on the
income charged by the country of residence (i.e. the country of residence gives
credit for the foreign tax suffered).

3/ Deduction method: foreign taxes are treated as an expense of doing business.
The country of residence taxes the foreign income, but allows a deduction from
the foreign income for any foreign taxes paid.

Comparison of the three methods:
Example 1:
Country A: country of residence; tax rate 20% /
Country B: location of a Branch; tax rate 25%.
No relief Deduction Exemption Credit
Country B branch profits 1000 1000 1000 1000
Country B tax rate 25% 250 250 250 250
Net after-tax profits 750 750 750 750
Country A tax on 1000 at 20% 200 - - 200
Country A tax on 750 at 20% - 150 - -
Credit for Country B tax - - - (200)3

3 The credit for foreign taxes cannot normally exceed the amount of tax on the income charged by the

country of residence.

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 Total tax paid 450 400 250 250
Effective tax rate 45% 40% 25% 25%

Example 2:
Country A: country of residence; tax rate 20% /
Country C: location of a Branch; tax rate 15%.
Exemption Credit
Country C branch profits 1000 1000
Country C tax rate 15% 150 150
Net after-tax profits 850 850
Country A tax on 1000 at 20% - 200
Credit for Country B tax - (150)
Total tax paid 150 250
Effective tax rate 15% 20%

1.2.2.2. Tie-breaker rules

OECD Model Tax Convention on Income and capital, Article 4

RESIDENT
1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who,
under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management
or any other criterion of a similar nature, and also includes that State and any political subdivision or local
authority thereof. This term, however, does not include any person who is liable to tax in that State in
respect only of income from sources in that State or capital situated therein.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States,
then his status shall be determined as follows:
a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him;
if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the
State with which his personal and economic relations are closer (centre of vital interests);
b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent
home available to him in either State, he shall be deemed to be a resident only of the State in which he has an
habitual abode;
c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of
the State of which he is a national;
d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States
shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both
Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective
management is situated.


Article 4.2 provides 4 successive criteria for assessing an individual's tax
residence. I.e. the criteria should be successively assessed in the order they are
set forth:

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1.2.3. Tax dispute resolution mechanisms (Mutual agreement procedure - MAP)

OECD Mechanism. Article 25 of the OECD Model (Document 2)

MAP. “MAP is a dispute resolution facility provided under (domestic laws/DTA
provisions). It is a facility through which (Country A Tax authority) and the
relevant foreign competent authority resolve disputes regarding the application
of the DTAs. Usually, a MAP is entered into between two competent authorities
but it is possible for IRAS to enter into a multilateral MAP involving three or more
competent authorities.

MAP provides an amicable way for (Country A Tax authority) and the relevant
foreign competent authority to agree on the transfer pricing for their taxpayers’
related party transactions for past fiscal years to eliminate double taxation
arising from transfer pricing adjustments. Where the agreed MAP outcome
between (Country A Tax authority) and the relevant foreign competent authority
is accepted by the relevant taxpayers, it is binding on the relevant parties” (IRAS,
2018).

Effectiveness. BEPS, Action 14.

European mechanism.
European Commission - Press release. Brussels, 10 October 2017

Fair Taxation: Commission welcomes new rules to resolve tax disputes

The European Commission welcomes EU Member States' formal green light for
new rules to better resolve tax disputes. The decision taken by EU finance
ministers at the ECOFIN Council meeting in Luxembourg today will ensure that
businesses and citizens can resolve disputes related to the interpretation of tax
treaties more swiftly and effectively. It will also cover issues related to double
taxation - a major obstacle for businesses, creating uncertainty, unnecessary
costs and cash-flow problems.

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 Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and
Customs, said: "We proposed this new system to improve legal certainty and EU
competitiveness by creating a binding obligation on Member States' authorities
to resolve tax disputes in a timely manner. This is an important step to allow EU
citizens and businesses alike to have fair tax treatment. I commend the quick
action of Member States and the European Parliament to support this upgrade of
the current rules."
(…)
Today's agreement will ensure that taxpayers faced with tax treaty disputes can
initiate a procedure whereby the Member States in question must try to resolve
the dispute amicably within two years. If at the end of this period, no solution has
been found, the Member States must set up an Advisory Commission to arbitrate.
If Member States fail to do this, the taxpayer can bring an action before the
national court to do so. This Advisory Commission will be comprised of 3
independent members and representatives of the competent authorities in
question. It will have 6 months to deliver a final, binding decision. This decision
will be immediately enforceable and must resolve the dispute.
Estimates show that there are currently around 900 double taxation disputes in
the EU today, estimated to be worth €10.5 billion. The new rules formally
adopted today will better meet the needs of businesses and citizens and any
double taxation will be removed.

2. ENSURING A LEVEL PLAYING FIELD

2.1. Promoting non-discrimination

European Law. First application on direct tax matters: Judgment of the Court of
28 January 1986, Case 270/83, Commission v. French Republic (Freedom of
establishment in regard to insurance - Corporation tax and shareholders' tax
credits): “4. The fact that the laws of the Member State on corporation tax have
note been harmonized cannot justify discrimination practised in a Member State
against branches and agencies of insurance companies having their registered
office in another Member State. Although it is true that in the absence of such
harmonization, a company’s tax position depends on the national law applied to it,
Article 52 of the Treaty prohibits the Member States from laying down in their laws
conditions for the pursuit of activities by persons exercising their rights of
establishment which differ from those laid down for their own nationals”
(Summary).

Second example: CJCE, 27 February 2002, Case 302/00, Comm. c/ France: “30.
Although Article 575A of the amended GTC does not establish any formal distinction
according to the origin of the products, it adjusts the system of taxation in such a
way that the cigarettes falling within the most favourable tax category come almost
exclusively from domestic production whereas almost all imported products come
within the least advantageous category (…). It appears, therefore, that the system of

13
 taxation is designed in such a way as to benefit a typical domestic product and
handicaps imported cigarettes to the same extent”.

WTO Rules. (Document 9)

2.2. Dealing with State aids and subsidies

WTO and direct taxes: the US Reform. (Document 9/10)

State Aids: the European perspective.
Consolidated version of the Treaty on the Functioning of the European Union - PART
THREE: UNION POLICIES AND INTERNAL ACTIONS - TITLE VII: COMMON RULES ON
COMPETITION, TAXATION AND APPROXIMATION OF LAWS - Chapter 1: Rules on
competition - Section 2: Aids granted by States.
Article 107 (ex Article 87 TEC)
1. Save as otherwise provided in the Treaties, any aid granted by a Member State or
through State resources in any form whatsoever which distorts or threatens to distort
competition by favouring certain undertakings or the production of certain goods
shall, in so far as it affects trade between Member States, be incompatible with the
internal market.
2. The following shall be compatible with the internal market:
(a) aid having a social character, granted to individual consumers, provided that such
aid is granted without discrimination related to the origin of the products concerned;
(b) aid to make good the damage caused by natural disasters or exceptional
occurrences;
(c) aid granted to the economy of certain areas of the Federal Republic of Germany
affected by the division of Germany, in so far as such aid is required in order to
compensate for the economic disadvantages caused by that division. Five years after
the entry into force of the Treaty of Lisbon, the Council, acting on a proposal from the
Commission, may adopt a decision repealing this point.
3. The following may be considered to be compatible with the internal market:
(a) aid to promote the economic development of areas where the standard of living is
abnormally low or where there is serious underemployment, and of the regions
referred to in Article 349, in view of their structural, economic and social situation;
(b) aid to promote the execution of an important project of common European interest
or to remedy a serious disturbance in the economy of a Member State;
(c) aid to facilitate the development of certain economic activities or of certain
economic areas, where such aid does not adversely affect trading conditions to an
extent contrary to the common interest;
(d) aid to promote culture and heritage conservation where such aid does not affect
trading conditions and competition in the Union to an extent that is contrary to the
common interest;
(e) such other categories of aid as may be specified by decision of the Council on a
proposal from the Commission

Specific rulings.

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 - Advances pricing agreements” (APA): tax rulings which endorse transfer
pricing arrangements proposed by the taxpayer for determining the
taxable basis of an integrated group company.
- “Confirmatory rulings”, which confirm the application, or the non-
application, of a certain legislative provision to a specific situation.

The EU investigations in 2006. (Document 11)

EU Commission publishes decision to open McDonald’s state aid case on tax
ruling

June 7, 2016 Americas, Europe, European Commission, Featured News,
Luxembourg, United States

The European Commission on June 7 published the non-confidential version of its
decision to open a State aid investigation into whether a tax ruling granted by
Luxembourg to McDonald’s may have granted State aid to the fast food giant.
The Commission’s decision, first announced December 3, 2015, questions
whether Luxembourg granted a selective advantage to McDonald’s by
misapplying the US-Luxembourg tax treaty so as to lower tax paid by McDonald’s
Luxembourg subsidiary.
In 2009, Luxembourg confirmed in a tax ruling that McDonald’s Europe
Franchising, owner of McDonald’s European intellectual property and franchising
rights, was not subject to tax in Luxembourg on profits it received from royalties
paid by franchisees operating restaurants in Europe and Russia.
Luxembourg based its ruling on McDonald’s claim that McDonald’s Europe
Franchising was a resident and could thus take advantage of the US-Luxembourg
tax treaty. The royalties — routinely transferred from Luxembourg to a US
branch via a Swiss branch — were exempt from taxation in Luxembourg because
they were attributable to a United States PE under the treaty, the ruling
concluded.
Later that same year, McDonald’s told the Luxembourg tax authorities that the
profit was not in fact subject to tax in the United States because the US branch
was not a PE under US law.
McDonald’s argued that notwithstanding the fact that there was no US PE under
US law, under Luxembourg law and the Luxembourg/US tax treaty, McDonald’s
US entity would be a US PE, so the income should be exempt from Luxembourg
tax under the treaty.
Luxembourg accepted the company’s position in a second private tax ruling in
September 2009, confirming again that McDonald’s had no PE in Luxembourg
and exempting all profits from taxation in Luxembourg.
As a result, since 2009 McDonald’s paid no tax on the royalty payments in either
country. These untaxed profits amounted to more than €250 million (USD 273
million) in 2013 alone.
According to Luxembourg, its position is in line with Luxembourg law, and since
the rulings are a mere interpretation of relevant provisions of Luxembourg law,
they cannot lead to a finding of discriminatory treatment between taxpayers.
The Commission’s preliminary decision, though, was that the Luxembourg tax
administration should have only agreed to exempt income from corporate

15
 taxation to the extent that the income may be taxed in the United States pursuant
to the Luxembourg–US tax treaty. By instead reaching an erroneous
interpretation of the treaty and law, Luxembourg conferred a selective advantage
on McDonald’s, the Commission said.


European Commission - Press release. Brussels, 4 October 2017

The European Commission has decided to refer Ireland to the European Court
of Justice for failing to recover from Apple illegal State aid worth up to €13
billion, as required by a Commission decision.

The Commission decision of 30 August 2016 concluded that Ireland's tax benefits
to Apple were illegal under EU State aid rules, because it allowed Apple to pay
substantially less tax than other businesses. As a matter of principle, EU State aid
rules require that illegal State aid is recovered in order to remove the distortion
of competition created by the aid.
Commissioner Margrethe Vestager, in charge of competition policy, said "Ireland
has to recover up to 13 billion euros in illegal State aid from Apple. However, more
than one year after the Commission adopted this decision, Ireland has still not
recovered the money, also not in part. We of course understand that recovery in
certain cases may be more complex than in others, and we are always ready to
assist. But Member States need to make sufficient progress to restore competition.
That is why we have today decided to refer Ireland to the EU Court for failing to
implement our decision."
The deadline for Ireland to implement the Commission's decision on Apple's tax
treatment was 3 January 2017 in line with standard procedures, i.e. four months
from the official notification of the Commission decision. Until the illegal aid is
recovered, the company in question continues to benefit from an illegal
advantage, which is why recovery must happen as quickly as possible.
Today, more than one year after the Commission's decision, Ireland has still not
recovered any of the illegal aid. Furthermore, although Ireland has made
progress on the calculation of the exact amount of the illegal aid granted to Apple,
it is only planning to conclude this work by March 2018 at the earliest.
The Commission has therefore decided to refer Ireland to the Court of Justice for
failure to implement the Commission decision, in accordance with Article 108(2)
of the Treaty on the Functioning of the European Union (TFEU).

Background
Ireland has appealed the Commission's August 2016 decision to the Court of
Justice. Such actions for annulment brought against Commission decisions do not
suspend a Member State's obligation to recover illegal aid (Article 278 TFEU) but
it can, for example, place the recovered amount in an escrow account, pending
the outcome of the EU court procedures.
Also, Member States still have to recover illegal State aid within the deadline set
in the Commission decision, which is usually four months. Article 16(3) of
Regulation 2015/1589 and the Commission's recovery notice (see Press Release)
provide that Member States should immediately and effectively recover the aid
from the beneficiary.

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 If a Member State does not implement a recovery decision, the Commission may
refer the matter to the Court of Justice under Article 108(2) of the Treaty on the
Functioning of the European Union (TFEU) that allows the Commission to
directly refer cases to the Court for violations of EU State aid rules.
If a Member State does not comply with the judgment, the Commission may ask
the Court to impose penalty payments under Article 260 TFEU.

2.3. Tackling other harmful tax practices

Preferential tax regimes.

Position of the problem.

OECD Works. (BEPS, Action 5)

Peer review.

Efficiency.

3. FIGHTING TAX EVASION AND TAX AVOIDANCE

Fraud/Tax Evasion/Tax Avoidance/Tax Planning/ Aggressive Tax planning

Council Directive (EU) 2018/822 of 25 May 2018 amending Directive
2011/16/EU as regards mandatory automatic exchange of information in the
field of taxation in relation to reportable cross-border arrangements (“DAC
6”): “Aggressive tax-planning arrangements have evolved over the years to
become increasingly more complex and are always subject to constant
modifications and adjustments as a reaction to defensive countermeasures by the
tax authorities. Taking this into consideration, it would be more effective to
endeavour to capture potentially aggressive tax-planning arrangements through
the compiling of a list of the features and elements of transactions that present a
strong indication of tax avoidance or abuse rather than to define the concept of
aggressive tax planning. Those indications are referred to as ‘hallmarks’.”
(« marqueurs ») (Annex 4 of the Directive delivers these hallmarks).


Legitimacy of tax planning?

3.1. Where tax evasion and tax planning by multinational companies come from?

3.1.1. Tax competition

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 What is a Tax havens? Originally, “tax havens” are characterised by a set of 7
characteristics (according to the Gordon Report4): “The study was limited to
transactions involving countries having (1) low rates of tax when compared with
the United States, and (2) a high level of bank or commercial secrecy that the
country refuses to breach even under an international agreement. Several
additional characteristics of most tax havens include: (a) relative importance of
banking and similar financial activities to its economy; (b) the availability of
modern communication facilities; (c) lack of currency controls on foreign
deposits of foreign currency; (d) self- promotion as an offshore financial center”
(Gordon Report, p. 3-4).

Tax havens from an international perspective (the EU Blacklist)

Tax havens from a domestic point of view (the French example: see below:
CFC rules/ “rent a star schemes”).

3.1.2 Mismatches or gaps in International tax rules

3.1.2.1. The Hybrids example

Definition. “Hybrid mismatch arrangements exploit differences in the tax
treatment of an entity or instrument under the laws of two or more tax
jurisdictions to achieve double non-taxation” (OECD, Action 2).

E.g. Payment between two entities of the same group for Convertible
bonds/Preference shares

Under these arrangements, A Co (resident in Country A) issues a hybrid financial
instrument to its parent B Co (resident in Country B).
- Country A treats the instrument as debt, so that payments under the
instrument are treated as deductible interest to A Co.
- Country B treats the instrument as equity, so that payments under the
instrument are treated as exempt dividends to B Co.
The tax outcome is D/NI (Deduction no inclusion).

How to tackle this issue? “The recommended primary rule is that countries
deny the taxpayer’s deduction for a payment when this flow is not included in the
taxable income of the recipient in the counterparty jurisdiction or it is also
deductible in the counterparty jurisdiction.
If the primary rule is not applied, then the counterparty jurisdiction can generally
apply a defensive rule, requiring the deductible payment to be included in income
or denying the duplicate deduction depending on the nature of the mismatch.”
(OECD, Action 2)

4 “Tax havens and their use by United States taxpayers: an overview” : a report to the Commissioner of

Internal Revenue, the Assistant Attorney General (Tax Division) and the Assistant Secretary of the
Treasury (Tax Policy) by Gordon, Richard A; United States. Internal Revenue Service, 1981.

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3.1.2.2. Mismatches in the interpretation of the same Tax treaty: the France and
Luxembourg case

3.2. The States responses

3.2.1. Mechanisms of collect and exchange of information

3.2.1.1. Bilateral and multilateral Instruments

Bilateral Tax treaties. E.g. OECD Model, art. 26 (Document 2).

OECD Convention. “The “Convention on Mutual Administrative Assistance in Tax
Matters” ("the Convention") was developed jointly by the OECD and the Council
of Europe in 1988 and amended by Protocol in 2010. The Convention is the most
comprehensive multilateral instrument available for all forms of tax co-operation
to tackle tax evasion and avoidance, a top priority for all countries.

The Convention was amended to respond to the call of the G20 at its 2009
London Summit to align it to the international standard on exchange of
information on request and to open it to all countries, in particular to ensure that
developing countries could benefit from the new more transparent environment.
The amended Convention was opened for signature on 1 June 2011.

125 jurisdictions (in sept 2018) participate in the Convention, including 17
jurisdictions covered by territorial extension*. This represents a wide range of
countries including all G20 countries, all BRIICS, all OECD countries, major
financial centres and an increasing number of developing countries”.

“The Convention on Mutual Administrative Assistance in Tax Matters, by virtue of
its Article 6, requires the Competent Authorities of the Parties to the Convention
to mutually agree on the scope of the automatic exchange of information and the
procedure to be complied with.

Against that background, the Multilateral Competent Authority Agreement on the
Exchange of CbC Reports (the "CbC MCAA"), for the automatic exchange of
Country-by-Country Reports, and the Multilateral Competent Authority
Agreement on Automatic Exchange of Financial Account Information (the "CRS
MCAA"), for the automatic exchange of financial account information pursuant to
the Common Reporting Standard, have been developed”.

3.2.1.2. The FATCA and the CRS examples

FATCA. “The Foreign Account Tax Compliance Act (FATCA) is a 2010 United
States federal law requiring all non-U.S. financial institutions to search their
records for customers with indicia of 'U.S.-person' status (such as a U.S. place of
birth), and to report the assets and identities of such persons to the U.S.

19
 Department of the Treasury. FATCA also requires such persons to self-report
their non-U.S. financial assets annually to the Internal Revenue Service” (IRS).

CRS. “The Common Reporting Standard (CRS) is an information standard for the
automatic exchange of information regarding bank accounts on a global level,
between tax authorities. Developed in 2014 by the Organisation for Economic Co-
operation and Development (OECD).

The idea was based on the U.S. Foreign Account Tax Compliance Act (FATCA)
implementation agreements and its legal basis is the Convention on Mutual
Administrative Assistance in Tax Matters. 97 countries had signed an agreement
to implement it, with more countries intending to sign later. First reporting
occurred in 2017, with many of the rest starting in 2018.”

3.2.1.3. The Country-by-Country Reporting (CbCR) example

Transfer pricing documentation (BEPS, Action 13)

The French CBCR example

3.2.1.4. The “DAC 6” Directive example

COUNCIL DIRECTIVE (EU) 2018/822 of 25 May 2018 amending Directive
2011/16/EU as regards mandatory automatic exchange of information in the
field of taxation in relation to reportable cross-border arrangements:

“(6) The reporting of potentially aggressive cross-border tax-planning
arrangements can contribute effectively to the efforts for creating an
environment of fair taxation in the internal market. In this light, an obligation for
intermediaries to inform tax authorities of certain cross-border arrangements
that could potentially be used for aggressive tax planning would constitute a step
in the right direction. In order to develop a more comprehensive policy, it would
also be necessary that as a second step, following the reporting, the tax
authorities share information with their peers in other Member States. Such
arrangements should also enhance the effectiveness of the CRS. In addition, it
would be crucial to grant the Commission access to a sufficient amount of
information so that it can monitor the proper functioning of this Directive. Such
access to information by the Commission does not discharge a Member State
from its obligations to notify any State aid to the Commission.

(7) It is acknowledged that the reporting of potentially aggressive cross-border
tax-planning arrangements would stand a better chance of achieving its
envisaged deterrent effect where the relevant information reached the tax
authorities at an early stage, in other words before such arrangements are
actually implemented. To facilitate the work of Member States' administrations,
the subsequent automatic exchange of information on such arrangements could
take place every quarter.

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 (8) To ensure the proper functioning of the internal market and to prevent
loopholes in the proposed framework of rules, the reporting obligation should be
placed upon all actors that are usually involved in designing, marketing,
organising or managing the implementation of a reportable cross-border
transaction or a series of such transactions, as well as those who provide
assistance or advice. It should not be ignored either that, in certain cases, the
reporting obligation would not be enforceable upon an intermediary due to a
legal professional privilege or where there is no intermediary because, for
instance, the taxpayer designs and implements a scheme in-house. It would thus
be crucial that, in such circumstances, tax authorities do not lose the opportunity
to receive information about tax-related arrangements that are potentially linked
to aggressive tax planning. It would therefore be necessary to shift the reporting
obligation to the taxpayer who benefits from the arrangement in such cases”.

3.2.2 Anti-abuse rules

3.2.2.1. General anti-abuse rules

The traditional answer: the GAAR.

E.g. ATAD Directive (COUNCIL DIRECTIVE (EU) 2016/1164 of 12 July 2016
laying down rules against tax avoidance practices that directly affect the
functioning of the internal market)

Article 6
General anti-abuse rule
1. For the purposes of calculating the corporate tax liability, a Member State
shall ignore an arrangement or a series of arrangements which, having been put
into place for the main purpose or one of the main purposes of obtaining a tax
advantage that defeats the object or purpose of the applicable tax law, are not
genuine (authentic) having regard to all relevant facts and circumstances. An
arrangement may comprise more than one step or part.
2. For the purposes of paragraph 1, an arrangement or a series thereof shall be
regarded as non-genuine to the extent that they are not put into place for valid
commercial reasons which reflect economic reality.
3. Where arrangements or a series thereof are ignored in accordance with
paragraph 1, the tax liability shall be calculated in accordance with national law.

3.2.2.2. PPT provisions

Principal Purpose test (PPT). “The PPT is contained in the MLI’s Article 7,
“Prevention of Treaty Abuse,” which states that a treaty benefit may be denied
where it is reasonable to conclude that one of the principal purposes of the
arrangement or transaction in question was to gain the benefit unless it is

21
 established that granting that benefit would be in accordance with the object and
purposes of the relevant provisions of the treaty.

The broad wording of the PPT, together with limited interpretive guidance to
date, results in uncertainty as to whether treaty benefits will continue to apply in
a variety of situations. To partially address these concerns, the CRA indicated at
the CTF Conference that it is considering establishing a centralized committee
(similar to the GAAR Committee), which would handle the application of the PPT
to transactions undertaken by taxpayers. As with the application of the GAAR, it is
helpful for the CRA to administer the PPT in a consistent manner, and with some
restraint, particularly following the surge of spending recently on international
audits, and the broad manner in which the ambiguous wording of the PPT is
potentially capable of being construed” (OECD).

3.2.3. Addressing the tax havens challenges

3.2.3.1. The Controlled foreign companies (CFC) rules example

Definition. “Category of anti-avoidance rules, or an extension of the tax base,
designed to tax shareholders on passive or highly mobile income derived by non-
resident companies.

Taxation of profits developed by non-resident companies in the hands of their
resident shareholders.

In the absence of such rules, that income would otherwise have been exempt
from taxation (under a territorial system) or only taxed on repatriation (e.g.
under a worldwide tax system with a deferral regime)” (BEPS, action 1, 2015, p.
23).

French CFC Rule: FTC, art. 209 B
- French corporations are required to include in their taxable income profits
made by their more than 50% owned foreign subsidiaries and branches (The
50% holding is determined by direct and indirect control of shares and voting
rights).

- The CFC rules are only applicable if the foreign legal entity or PE in which the
French company owns the requisite percentage of shares is in a country with a
privileged tax regime. A privileged tax regime is defined by the FTC as a tax
regime in which a foreign jurisdiction subjects taxable income of a foreign entity
to at least 50% or lower of the income tax liability that would have been incurred
in France, had the activity of the foreign entity been performed in France.

Profits of the foreign entity that fall under the CFC rules are no longer taxed
separately. They are now aggregated with the other taxable profits of the French
parent company. Consequently, any tax losses incurred by the French parent
company may be offset against the foreign entity’s profits.

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 The French parent company can avoid the application of the CFC rules if it
demonstrates that the foreign entity carries an effective trading or manufacturing
activity, conducted from its country of establishment or registered office.
Furthermore, the CFC rules, in principle, are not applicable with respect of
foreign branches or subsidiaries located in another EU country. However, this
exception is not applicable if the French tax authorities can demonstrate that the
foreign entity located in another EU country constitutes an artificial arrangement,
set up to circumvent French tax legislation. This concept is similar to the ‘abuse of
law’ concept, although it does not have all the same characteristics.)

3.2.3.2. Addressing “rent a star” schemes

The “rent a star” schemes.
Example 1
- Mr. X, a famous athlete, has transferred his image rights to XCo, a company
incorporated in a favorable tax jurisdiction.

- XCo enters into agreements with third parties (advertisers, sponsors…),
granting them rights to use Mr. X’s image in exchange for royalties
payments.

- Mr. X is also an employee of XCo, and receives a salary, much lower than
royalties received by his company.

Example 2
- Mrs. Y is a famous singer. She transfers all of the rights to her songs to YCo,
a company she incorporated in a low tax jurisdiction.

- She also entered into an employment agreement with YCo, pursuant to
which she is an employee of the company.

- Mrs. Y performs concerts. All proceeds of her concerts are paid to YCo.
Mrs. Y only receives a small portion of the concerts proceeds, as salary.

The French answer: art. 155 A CGI. Section 155 A of the FTC aims at combatting
such schemes. Amounts paid to a person domiciled or an entity established
abroad in consideration for services provided by a person domiciled or
established in France are taxable in France if:
- the person domiciled in France directly or indirectly controls the foreign
person or entity which receives the payment ; or
- the service provider does not prove that the foreign person or entity
principally carries on an industrial or commercial business other than the
provision of services ; or
- the foreign person or entity is established in a country where it benefits
from a privileged tax regime within the meaning of article 238 A of the
FTC.

Personal scope

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 Section 155 A applies to any individual or entity assisting another individual
having their tax domicile in France or an entity established in France.

A service provider:
- An individual having their tax domicile in France pursuant to section 4 B of the
FTC.
- May also be a foreign tax resident.
- An entity (company, association…) having its effective place of management in
France (or outside of France).
- A French permanent establishment of a foreign entity.

A foreign entity/individual assisting the French service provider:
-May be an entity of an individual
- Receives compensation for the services provided
- May be established in a low tax jurisdiction or not.

Where the foreign entity is established in a low tax jurisdiction:
- “Low tax jurisdiction” as construed pursuant to section 238 A of FTC:
- Where income/profits are tax exempt, or where the amount of tax due is less
than half of what would be the standard taxation of the same income/profits in
France.

Section 155 A automatically applies, amounts received by the foreign entity’s are
taxable in France:
- If the service provider is French tax resident: taxation of all fees received by the
foreign entity.
- If the service provider is not French tax resident: taxation of fees received in
consideration of services performed in France only.

Territorial scope
If the service provider is an individual with his/her tax domicile in France: 155 A
applies to payments received as payment of services provided in France and
outside of France.

If the service provider is a French company subject to corporate income tax : 155
A applies to payments received as payment of services provided in France and
outside of France, unless services are provided within the course of a business
carried out outside of France (i.e. a foreign PE): territorial scope of corporate
income tax.

If the service provider has not his/her domicile for tax purposes or effective place
of management in France: 155 A applies to fees paid in consideration of services
provided in France.

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