UNIVERSITEIT VAN AMSTERDAM The Diverted Profits Tax Thesis for the Master Fiscaal recht: Internationaal en Europees belastingrecht Vincent O'Donoghue 10215026 February 2016 Supervisor: prof. dr. O.C.R. Marres Contents Contents ............................................................................................................................... ii List of abbreviations ........................................................................................................... vi 1 Introduction ................................................................................................................. 1 1.1 A new tax ............................................................................................................. 1 1.2 Main research question ........................................................................................ 1 1.3 Supportive questions ............................................................................................ 1 2 The Diverted Profits Tax ............................................................................................. 3 2.1 Overview .............................................................................................................. 3 2.1.1 The creation of the diverted profits tax ............................................................ 3 2.1.2 Aim of the diverted profits tax ......................................................................... 3 2.2 Entities or transactions which lack economic substance ..................................... 4 2.2.1 Section 80 ......................................................................................................... 5 2.2.2 Section 81 ......................................................................................................... 6 2.2.3 Calculation of the profits .................................................................................. 6 2.2.4 Estimation of the profits ................................................................................... 7 2.3 Artificial avoidance of a Permanent Establishment in the United Kingdom ....... 8 2.3.1 Section 86 ......................................................................................................... 8 2.3.2 Calculation of the taxable diverted profits ....................................................... 9 2.3.3 Estimation of the profits ................................................................................. 10 2.4 Exceptions .......................................................................................................... 10 2.4.1 Small or medium-sized enterprises ................................................................ 10 2.4.2 Loan relationships .......................................................................................... 11 2.4.3 Companies with limited sales or expenses in the UK .................................... 11 2.4.4 Transfer pricing adjustment ........................................................................... 11 2.5 Charging notice .................................................................................................. 12 ii 2.5.1 Duty to notify ................................................................................................. 12 2.5.2 The Charge ..................................................................................................... 12 2.6 Comments .......................................................................................................... 13 2.6.1 Scope too limited ............................................................................................ 13 2.6.2 Uncertainty ..................................................................................................... 14 2.6.3 Existing legislation ......................................................................................... 15 2.7 Effectiveness ...................................................................................................... 16 3 Double tax treaties ..................................................................................................... 17 3.1 Overview ............................................................................................................ 17 3.2 Interpretation of tax treaties ............................................................................... 18 3.2.1 Interpretation of treaties ................................................................................. 18 3.2.2 OECD Commentary ....................................................................................... 19 3.2.3 Case law ......................................................................................................... 20 3.3 OECD model tax convention article 2: Taxes Covered ..................................... 21 3.3.1 Article 2 .......................................................................................................... 21 3.3.2 Paragraph 1 ..................................................................................................... 21 3.3.3 Paragraph 2 ..................................................................................................... 21 3.3.4 Paragraph 3 ..................................................................................................... 23 3.3.5 Paragraph 4 ..................................................................................................... 24 3.3.6 Conclusion ...................................................................................................... 26 3.4 Further implications for an appeal to double tax treaties. .................................. 26 3.4.1 UK Law .......................................................................................................... 26 3.4.2 OECD commentary ........................................................................................ 27 3.5 Conclusion ......................................................................................................... 29 4 EU treaty freedoms.................................................................................................... 30 4.1 Overview ............................................................................................................ 30 iii 4.2 Which freedom applies ...................................................................................... 31 4.2.1 Relevant freedoms .......................................................................................... 31 4.2.2 Which freedom prevails ................................................................................. 32 4.2.3 Conclusion ...................................................................................................... 34 4.3 Is there a restriction? .......................................................................................... 35 4.3.1 Not restrictive because companies have a choice .......................................... 35 4.4 Justifications ...................................................................................................... 36 4.4.1 Wholly artificial arrangements ....................................................................... 36 4.4.2 Proportionality of the diverted profits tax ...................................................... 37 4.4.3 Necessity ........................................................................................................ 38 4.5 Conclusion ......................................................................................................... 39 5 The diverted profits tax and the BEPS project .......................................................... 40 5.1 Introduction and overview ................................................................................. 40 5.2 Comments made on the diverted profits tax in relation to the BEPS project .... 40 5.3 The BEPS action plan and the diverted profits tax ............................................ 41 5.3.1 The Google Tax .............................................................................................. 42 5.3.2 Action plan 7 .................................................................................................. 43 5.4 Differences ......................................................................................................... 45 5.4.1 Difference in the prevention method .............................................................. 45 5.4.2 Differences in scope ....................................................................................... 45 5.4.3 Difference in time........................................................................................... 46 5.5 Conclusion ......................................................................................................... 46 6 Conclusion ................................................................................................................. 48 Bibliography ...................................................................................................................... 50 Literature ........................................................................................................................ 50 Table of Cases ................................................................................................................ 51 iv Annex 1: Finance Act 2015 Part 3 - Diverterd profits tax Annex 2: Example B.2 of the final report on BEPS action plan 1 v List of abbreviations BEPS Base erosion and profit shifting CFC Controlled foreign company CJEU Court of Justice