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Intellectual Property Tax Planning in the EU Common Market

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Intellectual Property Tax Planning in the EU Common Market Master Thesis LLM International Business Tax Law Intellectual Property Tax Planning in the EU Common Market The Anti-Tax Avoidance Directive and Aggressive Tax Planning Structures in the post-BEPS era Prof.Ronald Russo-Supervisor Rebwar Taha -2nd Reader Antonios Tzimas, anr: 776034 Academic Year: 2016-2017 Date of Submission:14/09/2017 1 Contents Section 1: Introduction 1) Abbreviations, Acronyms and Definition 4 2) Introduction of the Topic 6 3) Research Question 7 a) Motivation of the Research Question 8 4) Standard outline of the Paper 9 Section 2: Development of the Normative Framework 1. Economic Relevance of Intellectual Property in the Modern Era: 10 Innovation and Economic Growth 2. Size, magnitude and significance of Intellectual Property worldwide 10 3. Importance of Intellectual Property for Innovative Businesses 10 4. Relationship between IP and Innovation: Supporting, contradictory, or neutral 11 5. Backlash from recent uses of Intellectual Property for Tax Planning 12 Main Body Section 3: Contemporaneous Empirical Overview: Intellectual Property Tax Planning & Aggressive Tax Planning in the IP Context 1) Section Outline 14 2) Introduction to Intellectual Property for business 14 a) Types of taxes relevant to Intellectual Property 17 3) Overview of IP Holding by MNEs 17 a) Own Development-Facilities for IP Development 18 i) R&D incentives 18 ii) IP Boxes Input 19 iii) Cost Contribution Arrangements 19 b) Acquisition from 3rd parties-Transfer Considerations of IP 20 c) Centralized and decentralized ownership 21 i) Economic, Legal and Beneficial Ownership 23 ii) Transfer of IP to a CFC 24 iii) IP Holding Companies 26 4) Global IP Exploitation 28 a) IP Boxes and R&D output 29 b) Strategic Transfer Pricing 29 i) Transfer Pricing Methods 30 ii) Transfer Pricing for IP 31 c) Advance Tax Rulings& Advance Pricing Arrangements 32 d) State Aid issues 33 5) “Aggressive Tax Planning and Indicators”: The 6 Structures 35 2 Section 4: Legal Research, Literature Review and Hypothesis Development 1) Why the BEPS Actions are not enough 2) Legal Analysis of the Anti-Tax Avoidance Package 39 a) Focus on the Anti-Tax Avoidance Directive 41 b) Other contents of the Package 43 Section 5: Analysis and Evaluation 1) Analysis and evaluation of ATAD 46 a) Criticism and problematic points in the ATAD provisions 46 i) Main Problems 46 ii) Art.4 Interest Limitation Rule 46 iii) Art.3 Exit Taxation 48 iv) Art.7 General Anti-Abuse Rules 49 v) Art.8 Controlled Foreign Company Rules 50 vi) Art.9 Hybrid Mismatches 52 2) Analysis and evaluation per Tax Planning Strategy Analysis 54 a) The Double Irish with a Dutch Sandwich Structure 54 b) Luxembourg as an Intermediary Jurisdiction for Back to Back Licensing 56 c) Structuring with a Foreign Permanent Establishment 58 d) Two Tiered IP ATP Structure 59 e) ATP Structure based on IP and Cost Contribution Arrangements 62 3) General Assessment of the ATAD effects on the 6 Structures 65 a) Problems Solved 66 b) Problems not solved 67 Section 6: Summary and Conclusions 1) Major positive changes due to the ATP-Policy Perspective 69 2) Major criticism of changes due to the ATP-Policy Perspective 69 a) General Points of Criticism 69 b) Specific Points of Criticism 70 3) How can MNEs adapt to different regulatory requirements after the ATAP enactment-A Corporate Perspective 72 a) Location Options 72 b) Strategic Restructure Options 73 c) Transfer Pricing 73 d) Targeted Anti-ATAD Options 73 4) Research question answered 74 5) Conclusion 75 3 Section 1: Introduction 1.1 Abbreviations, Acronyms and Definitions ATAP: Anti Tax Avoidance Package ATAD:Anti Tax Avoidance Directive APAs: Advance Pricing Agreements ATAs: Advance Tax Agreements BEPS: Base Erosion and Profit Shifting CBCR: Country by Country Reporting CCA: Cost Contribution Agreements CCCTB: Common Consolidated Corporate Tax Base CFC: Controlled Foreign Company DTTs: Double Tax Treaties GAAR: General Anti Avoidance Rules IP Box: Intellectual Property Box IPRs: Intellectual Property Rights IGOs: Intergovernmental Organizations MNEs: Multinational Enterprises MS: Member State OECD: Organization for the Economic Cooperation and Development PE: Permanent Establishment R&D: Research and Development SMEs: Small and Medium Sized Enterprises SAAR: Specific Anti Avoidance Rules TP: Transfer Pricing The Thesis of LLM International Business Tax Law is composed, and meant to be understood by a person of some knowledge in the field, not an expert or a tax law professor Thus, I will not define every single term encountered, but will do so only in instances where the term has a subjective/ambiguous/context-dependent meaning. ● Tax Avoidance-Tax Evasion-Tax Planning-Aggressive Tax Planning et al. According to the EU Paper: Corporate Tax Practices and Aggressive Tax Planning in the EU: ”The term “aggressive tax planning ”has no fixed meaning and can mean different things 4 to different people”1.But researching the EU Commission terminology and other resources2, I found that: Tax avoidance: Is generally used to describe the arrangement of a taxpayer’s affairs that is intended to reduce his tax liability. That arrangement might be legal (in line with the “letter of the law”)but also contradicts the intent of the law it purports to follow3 (against the “spirit of the law”), as the sole/predominant motive is reduction of taxes4.In the EU, the notion is limited to “wholly artificial arrangements aimed at circumventing the application of the legislation of the MS concerned5”, as defined in the standard-setting Cadbury-Schweppes6. Tax evasion carries an element of dishonesty. In this sense, the term tax evasion is “generally used to mean illegal arrangements where the liability to tax is hidden or ignored, f.e. By hiding income or information from the tax authorities7”. That may preclude tax liability from arising at all, and instead gives rise to criminal liability, if investigated. Such was the case of Enron, were facts and circumstances were not sufficiently disclosed. Tax planning: Arrangement of a person’s business and/or private affairs in order to minimize tax liability. Tax planning is legitimate conduct, and tax arrangements that comply with the specific wording of the law, whereas tax avoidance is more in the “grey area”8. The avoidance of double taxation, ubiquitous in International Tax Framework, as well as in tax practice, is the main justification for tax planning. One might say that it is even necessary for good governance in the international business framework. ”Tax planning may reach a point beyond what is tolerated within a legal system. That gives rise to what has been labelled “Aggressive tax planning”9. Aggressive tax structures exploit technicalities and differences or gaps between tax systems, and usually utilize tax advantages, such as double deductions(“double dipping”). 1 European Parliament: Corporate Tax Practices and Aggressive Tax Planning in the EU [http://www.europarl.europa.eu/RegData/etudes/IDAN/2015/563446/IPOL_IDA(2015)563446_EN.pdf] 2 International Tax Structures in the BEPS Era: An analysis of the Anti-Abuse Measures & OECD Glossary of Tax Terms 3 OECD Glossary of Tax Terms [http://www.oecd.org/ctp/glossaryoftaxterms.htm] 4 As in the cases of Royal Bank of Scotland. International & European Taxation course, IBTL LLM. 5 The application of anti-abuse measures in the area of direct taxation – within the EU and in relation to third countries & Direct Taxation: Communication on the application of anti-abuse measures-within the EU and in relation to third countries-Frequently Asked Questions [http://europa.eu/rapid/press-release_MEMO-07-558_en.htm?locale=en] 6 Case C-196/04, 12 September. Restriction of freedom of establishment can be justified when relating to a wholly artificial arrangement, which aims to circumvent legislation of the MS concerned. 7 OECD Glossary of Tax Terms[http://www.oecd.org/ctp/glossaryoftaxterms.htm] 8 Fairer Shores: Tax havens, tax avoidance, and corporate social responsibility. Jasmin M. Fisher [http://www.bu.edu/bulawreview/files/2014/03/FISHER.pdf ] 9 International Tax Structures in the Beps Era: An analysis of the Anti-Abuse Measures 5 “Aggressive tax planning takes advantage of the technicalities of a tax system, and can take various forms and effects including several tax advantages, such as double deductions in two jurisdictions, and might even result in “double non-taxation”, or arrangements that “push the limits “of acceptable tax planning and can be classified as tax avoidance10”. Usually, the line between tax avoidance and tax planning is very fine, and is determined by the respective tax jurisdiction, or the assessment of tax authorities11. Finally, in the EU, the concept of Abuse is seminal, as it is a necessary prerequisite for anti- abuse rules to be justified. Hence, for their activation, a wholly artificial arrangement is necessitated, “despite formal observance of Community rules”12. Form and substance are utilized in such an analysis13”. Their detection may also lead to a justified forfeiture of fundamental freedoms for the person/entity. Jurisprudence in Cadbury Schweppes Case14 focusses on two main points15: a)Does the corporate entity/structure created reflect economic reality? And b)Does the company physically exist in terms of premises, staff and equipment? 1.2 Introduction of the Topic Intellectual Property Tax Planning in the EU vows to investigate one of the major issues in International Corporate Taxation, that relates to the development, holding, transfer, exploitation, reporting and taxation of Intangible Assets. Although the subjects of the research are MNEs, wherever it is needed, a view from a policy standpoint will be granted. Global Economy and Business, as it stands now, is heavily related to Intellectual Property, the latter either as stand-alone, or embedded in Products/Services/Entities. Through all levels of the economy, from research, development, to intercompany transactions, corporate processes, marketing, sales of products, or provision of services, almost everything an MNE will do, has some association with Intangible Assets, one way or another.
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