Luxembourg: Post-Truth In Tax Matters: Considerations Regarding A Recent Eurodad Report

On 7 December 2016, the European Network on Debt and Development (Eurodad) released a report entitled "Survival of the Richest: Europe's role in supporting an unjust global tax system 2016" which was produced by NGOs in countries across Europe. At the core of the report is the accusation that the number of Advance Pricing Agreements (APAs), referred to as secret "sweetheart deals" in the report, significantly increased over the last years.

The key messages of the report have been much-cited in newspapers in Luxembourg and across the globe. Unfortunately, the journalists covering the topic merely relied on the information provided in the executive summary of the report without conducting a critical review of its content. Otherwise, the misrepresentations in the report would have been detected and pointed out.

Below we summarise few examples of these misrepresentations:

#1 Classifying APAs as secret "sweetheart deals"

An APA is an agreement between a taxpayer and a tax authority on the application of an appropriate transfer pricing methodology in regard to a specific intra-group transaction, confirming the arm's length nature of a transfer price (i.e. the price for goods or services transferred between members of the same group). The latter has to be substantiated in a transfer pricing study that is consistent with the OECD Transfer Pricing Guidelines.

The report denounces APAs as secret "sweetheart deals" which is wrong in many respects. First, an APA only confirms the agreement of the tax authorities with the transfer pricing methodology applied by a taxpayer. As such, APAs do not entail any particular benefit to taxpayers.

Second, APAs are not secret at all since they are exchangeable with the tax authorities of all EU and OECD Member States. Hence, there is full transparency with all the tax authorities that are concerned. Starting from the position that not publishing something involves secrecy is a point of view but it should not be presented as objective in any way.

Third, the report impressively shows how statistics can be used to disguise or misrepresent information. According to the report the number of APAs in the EU has soared from 547 in 2013, to 972 in 2014 and it finally reached 1,444 by the end of 2015. The authors of the report then compute a sharp increase of over 160 per cent between 2013 and 2015 (and an increase of almost 50 per cent from 2014 to 2015). The report further points out that the most dramatic increases have occurred in Belgium and Luxembourg where the amount of APAs "skyrocketed" increasing by 248 per cent and 50 per cent respectively in just one year (from 2014 to 2015).

The truth is that the report presents aggregated figures (adding the number of new rulings granted in a given year to the number of previously existing rulings) instead of APAs on a year-by-year basis. Hence, it is only natural that the number of rulings significantly increases over time as APAs usually remain valid for a number of years.

Last but not least, the report fails to explain what is wrong about taxpayers receiving up front confirmation of the transfer pricing policies that they adopt. This has been recognised as a positive development as it allows tax authorities in Europe and around the world to verify the TP policies up front. Even the EU Commission acknowledges the positive effect of APAs on removing legal uncertainty from transfer pricing and supports the continued use of this instrument by EU Member States.

#2 Red cards for failing to support "public" Country-by-Country Reporting (CbCR)

The report rates countries "red" which are not in favor of public CbCR. However, this is reflective of the mindset of the report's authors and lacks any sense of objectivity.

As part of its Base Erosion and Profit Shifting (BEPS) Project, the OECD developed a template for multinational enterprises (MNEs) to report annually and for each tax jurisdiction in which they do business certain information on its group companies. According to the OECD, CbCR should be automatically exchanged with all tax jurisdictions involved. Thus, all tax authorities that are concerned with the taxation of a MNE have access to this information.

The report advocates the public disclosure of CbCR information. Nevertheless, the disclosure of this commercially sensitive information is extremely problematic for MNEs as it also discloses their business strategy. Therefore, the OECD is strongly opposing against the idea of publishing CbCR.

However, it is not even a question whether one is in favor of public disclosure of CbCR or not. Notably, the French Constitutional Court (Conseil constitutionnel) held on 8 December 2016 (No. 2016-741 DC) that the public country-by-country reporting rules introduced in French law on 8 November 2016 are not compatible with the French constitution and repealed the relevant Article from French tax law. Thus, not only may the French tax authorities not publish CbCR but it may even not be possible to share CbCR with jurisdictions that would adopt "public" CbCR. These constitutional concerns should exist in many jurisdictions and render "public" CbCR non-practicable.

#3 "Very problematic" tax treaties with developing countries

The report states that European governments continue to sign "very problematic" tax treaties with developing countries as they impose restrictions on tax systems in developing countries. However, this is what tax treaties do, they allocate taxing rights between the Contracting States and determine how double taxation is avoided. This involves a restriction of the taxing rights of the Contracting States (in general, both Contracting States negotiate the same allocation of taxing rights).

The primary purpose of tax treaties is the elimination of double taxation as an obstacle to international trade and investment. Tax treaties promote the development of economic relations between countries and foster cross-border business activities.

The description of tax treaties as "very problematic" is entirely subjective. These tax treaties are negotiated between Sovereign states with their eyes open and reflect the balance of interests of both states and a desire to improve trade. A developing country can easily revoke a treaty if the terms are harmful to its best interest.

Most development specialists agree, however, that trade is the most important means for developing countries to improve their status, so encouraging trade by double tax treaties should be encouraged not discouraged.

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