Weekly Tax News – 8 April 2019

Customs controls in case of a no-deal Brexit

On 3 April, the tax Commissioner, Pierre Moscovici, recalled the customs consequences of a no-deal Brexit for companies. If the UK would leave the EU without an agreement, it would become a third country overnight, bearing the consequences in terms of immediate application of the European Customs Code to the traffic of goods from the UK. Given the important commercial traffic between the United Kingdom and the EU, the preparation of a no-deal brought the Member States to hire new customs officers, mainly in Belgium, Germany, France, Ireland and the Netherlands. A sensible increase of customs formalities (in a range between 40% and 50%) has also been estimated. Customs duties, VAT and excise duties on goods imported from the United Kingdom should also be paid to customs by importers, which would have a cash flow impact on companies. Exporters must, for their part, comply with the obligation to provide customs documentation to justify the exemption from VAT on exports.

The Commission concludes the UK gave selective advantages to certain multinationals

On 2 April, the European Commission found that a UK tax scheme unduly exempted certain multinational groups from rules targeting tax avoidance. In particular, the Group Financing Exemption provided a derogation from the general Controlled Foreign Company (CFC) rules. The purpose of the CFC rules is to prevent UK companies from using subsidiaries abroad to avoid UK taxation. Between 2013 and 2018 the CFC rules included the Group Financing Exemption, granting an exemption from CFC rules for the financing income received by an offshore subsidiary from another foreign group company, even if this income was “UK connected” or derived from “UK activities”. Therefore, a multinational operating in the UK was able to finance a foreign subsidiary paying little or no tax from the income deriving from such transaction. As a result of the investigation started in October 2017, the Commission concluded that the UK Group Financing Exemption is illegal under EU State Aid rules. Therefore, the UK should now reassess the tax liability of the companies that have benefitted from the application of this rule.

State aid investigation into Slovakia’s tax on the food retail sector

On 2 April, the European Commission opened an in-depth investigation into a tax regime on the food retail sector in Slovakia. The concerns regard a possible selective advantage granted to certain retailers over the competitors via tax exemptions. The tax regime entered into force only in January 2019 and the Commission has asked Slovakia to suspend its application until the conclusion of the investigation under EU state aid rules. The measures provide that food retailers should pay a quarterly tax equal to 2,5% of the turnover, with exemption granted on the basis of certain conditions concerning the size, geographic scope of operation in Slovakia and/or type of activities of the retailer. On the basis of the exemptions, only seven retailers should pay the tax, six of them owned by foreign companies. The Commission will now investigate further to assess whether the food retail tax and its exemptions confers a selective advantage on companies that are exempted.

The EU Joint Transfer Pricing Forum issued a Report on the Application of the Profit Split Method in the EU

In March, the EU Joint Transfer Pricing Forum has published a Report on the application of the profit split method. The profit split method (PSM) is one of the five transfer pricing methods delineated in the OECD Transfer Pricing Guidelines to establish whether the conditions imposed on the commercial or financial relations between associated enterprises are consistent with the arm’s length principle. The Report (that should be regarded as complementary to, and supportive of, the text of the OECD Revised Guidelines) aims at clarifying certain concepts in applying the PSM: (i) when to use the PSM and (ii) how to split the profit based on the concepts described in the revised OECD Guidelines as well as by providing an inventory of recurrent splitting factors.