Tax Justice Network

Tax Justice Network: Feedback DAC8 proposal 1 European Commission Tax fraud & evasion – strengthening rules on administrative cooperation and expanding the exchange of information: Proposal for a directive - COM(2022)707 (‘DAC8’) 30 March 2023 Feedback by the Tax Justice Network1 1. Executive summary In response to the public feedback requested by the EU Commission in relation to its ‘Tax fraud & evasion – strengthening rules on administrative cooperation and expanding the exchange of information’ initiative, the Tax Justice Network makes a number of recommendations to improve the recently proposed crypto reporting rules under the directive on administrative cooperation DAC8 Proposal. The rules proposed under DAC8 should be expanded to cover crypto-asset service provider reporting of not just EU resident but also non-EU resident customers.

…expanded to cover crypto-asset service provider reporting of not just EU resident but also non-EU resident customers. This so-called ‘wider approach’ makes sense not just from a service provider perspective but should also be extended to a ‘wider-wider approach’. Such approach would allow both the publication of statistics on third country crypto- activity hosted by EU crypto-asset service providers, as well as allow spontaneous exchanges of information between EU member states that host service providers and third countries with a significant number of clients with the EU providers. Lastly, the DAC8 rules should be amended to better deal with the rising phenomena of self-hosted wallets and decentralised exchanges.

…rules should be amended to better deal with the rising phenomena of self-hosted wallets and decentralised exchanges. Suggested approaches involve compulsory declaration of self-hosted wallets, an EU wide crypto-asset registry and registration of decentralised applications with crypto-asset service provider functionality. Recommendations are also made regarding the general improvement of the directive’s framework. First of all, there is the clear need for the publication of statistics regarding the effective flows of information on financial accounts under DAC2 (and crypto-assets under DAC8 in the future). Furthermore, the directive framework could be more effectively used by adopting strategies to use automatic exchange of information data to map techniques used for offshore wealth holding.

…adopting strategies to use automatic exchange of information data to map techniques used for offshore wealth holding. Loopholes created in the common reporting standard by the US tax regime should be filled by combining automatic exchange of information data and beneficial ownership data. Finally, both DAC2 and DAC8 data received by EU Member States should be allowed to be used for purposes that go beyond the enforcement of tax laws, like anti-money laundering and anti-corruption. 2. Introduction Automatic exchange of information of financial account information is one of the core policy measures advocated for by the Tax Justice Network since its inception in 2003.

…information is one of the core policy measures advocated for by the Tax Justice Network since its inception in 2003. Together with beneficial ownership transparency and country by country reporting, the automatic exchange of information is a crucial part of what the Tax Justice Network calls the ‘ABC’s of tax transparency’, a set of crucial policy tools for the fight against tax abuse and illicit finance. 1 This submission was prepared by Andres Knobel and Bob Michel. Please send your questions or remarks to [email protected] or [email protected]. Ref. Ares(2023)2319313 - 30/03/2023 Tax Justice Network: Feedback DAC8 proposal 2 Although the world has come a long way since the first adoption of the common reporting standard in 2014, the work is not complete.

…world has come a long way since the first adoption of the common reporting standard in 2014, the work is not complete. Besides loopholes in the current reporting standard and the lack of universal sharing of financial account data, the recent emergence of crypto-assets and crypto- currencies as a means for taxpayers to substitute traditional financial assets and currencies has forced policymakers back to the drawing board. To the extent that the recent DAC8 proposal aims to come to a more solid framework for automatic exchange of information within the EU by mitigating some of the current shortcomings mentioned, the Tax Justice Network is in support of the EU Commission’s efforts. Below, some observations and recommendations are provided regarding the crypto-asset reporting rules included in the DAC8 proposal.

…observations and recommendations are provided regarding the crypto-asset reporting rules included in the DAC8 proposal. 3. Recommendations on the DAC8 crypto-asset reporting rules 3.1. The EU forging ahead of the global standard: impact on third countries The provisions on crypto-asset tax reporting in the DAC8 proposal can be seen against the backdrop of the work by the OECD on the so-called Crypto-Asset Reporting Framework. With the EU taking control of the implementation timelines of the new crypto-asset tax reporting obligations for EU Member States, the EU has moved ahead of the parallel work carried on at OECD/Global Forum. It would be important to consider what the impact of this will be on the implementation timelines of the crypto-asset reporting framework in third countries. This is particularly relevant in the context of increasing challenges to the OECD as a legitimate and…

…income countries. The first version of the OECD reporting framework was submitted for public consultation in March 2022. After a few tweaks, the final version of the framework was approved by the OECD’s Committee on Fiscal Affairs in August 2022. In a subsequent report by the OECD to the G20 in October 2022, it is mentioned that the reporting framework had been agreed among OECD member countries and the G20 countries. But again, no implementation timelines were mentioned. The G20 subsequently endorsed the OECD’s crypto-asset reporting framework in its Bali Declaration of November 2022. At that point, the G20 explicitly called on the OECD to conclude work on the reporting framework implementation package and to provide timelines for implementation. No such timelines were provided by the OECD in the aftermath of the G20 declaration.

…timelines for implementation. No such timelines were provided by the OECD in the aftermath of the G20 declaration. In a subsequent report to the G20 finance ministers in February 2023, the G20 again called on the OECD to conclude the work on the reporting framework implementation package. Understandably, due to the lack of implementation timeline, and with the EU being the biggest crypto- asset market in absolute trade volumes, the EU Commission felt the need to forge ahead and craft its own timeline for implementation of automatic exchange of information on crypto-assets. DAC8 also complements other pending regulatory initiatives like the Markets in Crypto Regulation and the updated Transfer of Funds Regulation, all aimed at making the EU the regulatory market leader of Web 3.0.

…and the updated Transfer of Funds Regulation, all aimed at making the EU the regulatory market leader of Web 3.0. The DAC8 rules (and their interplay with the crypto markets regulation) are designed in such a way that any crypto-asset service provider – both EU-based and third country based – will be subject to reporting obligations if it provides in-scope crypto-asset services to EU resident taxpayers. The extra-territorial reach to third country service providers effectively makes the system watertight from the narrow perspective of EU fiscal interests, and is a welcome lesson learned from earlier designs around implementation of the CRS/DAC2, by copying the FATCA approach more directly.

…lesson learned from earlier designs around implementation of the CRS/DAC2, by copying the FATCA approach more directly. Yet, the proposed reporting regime in DAC8 does not reach its full potential if considered in light of other Tax Justice Network: Feedback DAC8 proposal 3 objectives and obligations under the EU treaties, like the obligation to develop a coherent external development policy under article 208 of the Treaty on the Functioning of the European Union. Article 208 provides that the EU’s development cooperation policy shall have as its primary objective the reduction and, in the long term, the eradication of poverty. The article also provides that the EU shall take account of the objectives of development cooperation in the policies that it implements which are likely to affect developing countries.

…of development cooperation in the policies that it implements which are likely to affect developing countries. The adoption of a system that ensures the worldwide collection of information from crypto-asset service providers with clients residing in the EU but which stops short at collecting and exchanging information relevant information with developing countries is clearly at odds with the objectives of article 208. As per the DAC8 proposal, the new information reporting obligations are set to take effect on 1 January 2025. For third countries, the situation is markedly different.

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originalus šaltinis (PDF) ↗

ATAD Public Consultation – Submission by the Tax Justice Network September 2024 Florencia Lorenzo Bob Michel Ref. Ares(2024)6450276 - 11/09/2024 2 Contents Introduction ................................................................................. 3 ATAD and the Tax Justice Network’s CTHI ................................... 3 Controlled Foreign Companies ........................................................ 5 Phasing out of transactional (Model B) regimes ............................ 5 Tightening the substance carve-out in non-transactional (Model A) regimes ................................................................................. 7 Interest limitation rule ................................................................. 10 Improvements to the fixed ratio EBITDA threshold ..................... 10 Abolishment of the grandfathering of old loans ..........................

EBITDA threshold ..................... 10 Abolishment of the grandfathering of old loans .......................... 12 Limitation on the deduction of intra-group royalty and services payments .................................................................................. 14 Adding a new anti-avoidance tool to the ATADs toolbox .............. 14 Defensive measures without blacklisting ................................... 16 Design options for deduction limitation rule ............................... 18 Conclusions ............................................................................... 20 Annex – ATAD Interest Limitation Rule implementation ............... 22 Bibliography ...............................................................................

............... 22 Bibliography ............................................................................... 24 3 Introduction ATAD and the Tax Justice Network’s CTHI The purpose of the Anti-tax Avoidance Directive (2016/1164) (‘ATAD’) is to lay down minimum standard measures to address the most common forms of aggressive tax planning and avoidance practices and to ensure a minimum level of protection of country’s tax bases.1 The ATAD does so in five areas: the interest limitation rule, exit taxation, the controlled foreign company rules, they hybrid mismatches rule and the general anti-abuse rule (GAAR). The ATAD’s purpose is very close to the objective that underpins the Tax Justice Network’s Corporate Tax Haven Index (CTHI), which is to champion policies that prevent the artificial manipulation of countries’ tax bases and the avoiding of taxes by multinationals.

…policies that prevent the artificial manipulation of countries’ tax bases and the avoiding of taxes by multinationals. The Corporate Tax Haven Index comprises 18 indicators which measure to what extent countries’ tax rules are preventing or conducive to act as a tax haven. Under the subset of ‘anti-avoidance’, four indicators measure countries’ anti-avoidance policies. Two of these indicators – ‘interest deduction limitation rules’ and ‘controlled foreign company rules’ – also figure in the ATAD. The two remaining indicators – ‘deduction limitation of intra- group payments of royalties’ and ‘deduction limitation of intra-group payment of service fees’ are not part of the ATAD but figure in the EU Code of Conduct Group’s ‘defensive measures’ list. Below, we will argue that a harmonized version of these two measures should be included in the ATAD.

…measures’ list. Below, we will argue that a harmonized version of these two measures should be included in the ATAD. In October 2024, the Tax Justice Network will release its renewed Corporate Tax Haven Index. From this update on, the Index will now be updated on a selective and rolling basis, meaning that indicator subsets will be updated in batches.2 Given that the first batch of indicators to be released include, among others, the anti-avoidance indicators, we seize this opportunity to share some of our conclusions regarding the state of play of some the relevant anti-avoidance rules in the ATAD.

…to share some of our conclusions regarding the state of play of some the relevant anti-avoidance rules in the ATAD. These conclusions are based on research of EU countries’ domestic legislations 1 EU (2016), Council Directive (EU) 2016/1164 of 12 July 2016 as amended by Council Directive (EU) 2017/952 of 29 May 2017, available at: https://eur- lex.europa.eu/legal- content/EN/TXT/?uri=uriserv:OJ.L_.2016.193.01.0001.01.ENG&toc=OJ:L:2016 :193:TOC. 2 For more information on the new approach to the Tax Justice Network Indices updates, see M. Meinzer and M. Harari, ‘Transforming our flagship indexes to be even more responsive and timely’, Tax Justice Network Blog, 13 June 2023, available at: https://taxjustice.net/2023/06/13/transforming-our-flagship- indexes-to-be-even-more-responsive-and-timely/.

…at: https://taxjustice.net/2023/06/13/transforming-our-flagship- indexes-to-be-even-more-responsive-and-timely/. 4 as they stood in June 2024 and on our own conception of what we think consist in proper anti-avoidance rules. The graph below shows the variation of scores of EU countries under the Corporate Tax Haven Index’ anti-avoidance indicators in 2024 as compared to 2021. The black dot represents the general score variation over all 18 indicators and not just the anti-avoidance ones. Certain countries drastically improve their score. Belgium, for example, improves its score because it has adopted new CFC rules and switched from Model B (transactional approach) to Model A (non-transactional approach), a change we strongly favour in our scoring. Other countries score less well.

…to Model A (non-transactional approach), a change we strongly favour in our scoring. Other countries score less well. Poland, for example, has worsened its score because in 2022 it abolished its limitations on the deductions on the payment of intra-group royalties and services fees. While the full country ranking, underlying data and updated methodology regarding the anti-avoidance indicators of the Corporate Tax Haven Index will be released only in October 2024, we seize this opportunity to submit our findings in relation to the ATAD, and more specifically, in relation to the ATAD’s CFC rules and interest limitation regime. We also focus on deduction limitations on intra-group royalties and service fees, which are currently not included in the ATAD but should be.

…limitations on intra-group royalties and service fees, which are currently not included in the ATAD but should be. For each of these topics, we make a number of recommendations that should be considered in a revised ATAD and which would serve to make this crucial directive more proficient in realizing its goal, which is to create harmonized and effective anti- avoidance rules in the countries of the EU. 5 Controlled Foreign Companies Phasing out of transactional (Model B) regimes The ATAD requires EU Member Countries to implement one of two options with respect to the inclusion of CFC income in the taxable base.

EU Member Countries to implement one of two options with respect to the inclusion of CFC income in the taxable base. The two options include: (1) Model A – the non-transactional approach which results in an annual inclusion of certain types of (mostly but not limited to passive) income derived by a CFC (article 7(2)(a) of the ATAD); or (2) Model B – the transactional approach which results in an annual inclusion of income that cannot be attributed to the CFC under application of the arm’s-length principle, but is attributable to the EU Member State based in line with assets, functions and risks assumed (article 7(2)(b) of the ATAD. The Tax Justice Network is of the opinion that the transactional approach of Model B was already implemented in EU countries legislation through its application of the at arm’s-length principle in the context of the pricing of intra-group transactions.

…through its application of the at arm’s-length principle in the context of the pricing of intra-group transactions. Said principle is however ill-placed to serve as an anti-avoidance rule, given the high degree of subjectivity of its application and the in-built reliance on tax authority discretionary powers. Such issues are not faced under the Model A regime of the non-transactional approach. For this reason, the Corporate Tax Haven Index penalizes countries that have adopted Model B of the ATAD whereas a good score is achieved by Model A countries. A growing number of EU Countries agrees with the superiority as an anti- avoidance rule of the non-transactional approach of Model A over Model B’s transactional approach. Our research furthermore shows that those EU countries that have adopted transactional CFC regimes (Model B) are doing worse on our Corporate Tax Haven Index.

EU countries that have adopted transactional CFC regimes (Model B) are doing worse on our Corporate Tax Haven Index. On average, Model B countries have a 6 higher ‘haven score’ than Model A countries, meaning that besides in the case of CFC rule, the former countries are generally more akin to adopt policies that are conducive to tax avoidance and base erosion and profit shifting. If these countries’ ‘CTHI value’ is calculated by weighting the haven score with the countries’ share of global cross-border investment, the differences become even more stark.3 Not only are Model B countries more akin to adopt worse policies, these countries also tend to account for larger shares of those cross-border investments, meaning that the impact of their sub-optimal policy choices has larger quantitative repercussions.

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originalus šaltinis (PDF) ↗