Question 1

In answering the questions below assume the CCCTB Proposal 2011 is the applicable legislation.

Where appropriate refer to the applicable article(s) of the CCCTB as follows (example):

Art. 122 (1) CCCTB 2011 states the tax audit of group members may be initiated by the principal tax authority. The principal tax authority means the competent authority of the Member State in which the principal taxpayer is resident or, if it is a permanent establishment of a non-resident taxpayer, is situated (art. 4(11) CCCTB 2011).

Cookie Factory 'DE APPELGAARDE' B.V. combines the finest Belgian chocolate with nuts, peanuts, crispy, fruits and other delicious ingredients into high quality products. The chocolate we use comes from Belgium, from the well-known plant of Marnix Verschoor, with whom we have done business since the start of our company. The chocolate is produced to our own special recipe. DE APPELGAARDE replaced over the last four years all panning kettles by the most modern PLC controlled coating machines. Cookie factory DE APPELGAARDE BV existed 50 years. That anniversary was celebrated with many customers, suppliers and other business relations. Visitors of this party who wanted to give a present were asked to contribute a gift for charities.

1. In the 12 months ended 31 December 2015 DE APPELGAARDE BV incurred 2.000.000 R&D expenses. How should DE APPELGAARDE BV account for these expenses for tax purposes? Is any tax incentive available? (2 points)

2. Costs of the party were in total EUR 25.000. Does this amount influence the tax base of DE APPELGAARDE BV? (2 points)

3. DE APPELGAARDE BV acquires a computer with a purchase price of 1.000 for its permanent establishment in Belgium. Describe the tax consequences of this event. (2 points)

4. The computers used by the DE APPELGAARDE BV’s permanent establishment in Belgium broke down. DE APPELGAARDE BV therefore purchases a new machine in December 2015. The purchase price is 120.000. DE APPELGAARDE BV sells the old machine, acquired in 2013 with a book profit of 20.000 in January 2015. Describe the tax consequences of this event. (2 points)

5. DE APPELGAARDE BV bought a new warehouse. Purchase costs for the warehouse amounted 2.000.000. DE APPELGAARDE BV received a subsidy of the Dutch government for this environmentally friendly investment of 500.000. How should DE APPELGAARDE BV take these facts into account in its tax account? (2 points)

Answers

1. Art. 12 CCCTB 2011 rules deductible expenses shall include all costs of sales and expenses net of deductible value added tax incurred by the taxpayer with a view to obtaining or securing income, including costs of research and development and costs incurred in raising equity or debt for the purposes of the business. Art. 14 CCCTB 2011 (non-deductible expenses) does not contain any limitations. So the R&D costs are deductible for tax purposes.

2. Art. 14(b) limits the deductibility of entertainment costs to 50%. So yes, the tax base is influenced by these costs but the costs are deductible only for 50% x 25.000 = 12.500

3. The CCCTB is applicable to the Belgian permanent establishment. Art. 55 CCCTB 2011 rules a resident taxpayer shall form a group with all its permanent establishments located in other Member States. The depreciation base shall comprise according to art. 33 comprise any cost directly connected with the acquisition, construction or improvement of a fixed asset, not including deductible value added tax. The computer with a purchase price of 1.000 is not an asset referred to in art. 36 CCCTB 2011. So art.39 CCCTB 2011 is applicable. The computer will, as part of the asset pool of the group be depreciated at an annual rate of 25% of the depreciation base, so depreciation is 250 per year.

4. DE APPELGAARDE BV purchases a new machine with a purchase price of 120.000 in December 2015. DE APPELGAARDE BV sells the old machine, acquired in 2013, with a book profit of 20.000 in January 2015(!!). Art. 38 CCCTB 2011 allows for roll over relief as the asset is disposed of voluntarily and has been owned for a minimum period of three years prior to the disposal. Art. 38(2) CCCTB 2011 allows the replacement asset is purchased in the tax year prior to the disposal. The amount by which the proceeds exceed the value for tax purposes of the asset (= the capital gain) shall be deducted in the year of disposal. The depreciation base of the replacement asset shall be reduced by the same amount. In this case DE APPELGAARDE BV does not own the asset for more then three years. This however does not imply deferral is not allowed. The requirement that the assets must be owned for a minimum period of three years prior to the disposal only applies if the disposal is voluntarily. Thus it should be determined what “voluntarily” implies. If a machine breaks down and cannot be fixed the disposal is not voluntarily. This is not the case if it is possible to fix the machine at reasonable cost.

5. In order to calculate DE APPELGAARDE BV’s depreciation base the new warehouse ‘s purchase price of 2.000.000 shall be reduced by the subsidy of 500.000. The depreciation rate is 2,5% (art. 36 (a) CCCTB 2011: depreciation in 40 years). So 2,5% x 1.500.000 is the amount of depreciation per year = 37.500.

Question 2

ZYX BV, a pharmaceutical company, is a limited liability company incorporated under Dutch law. The company owns 80% (!) of the shares in WVU Ltd, incorporated under UK law, but having its central place of management in the Netherlands.

WVU Ltd makes a taxable profit of EUR 4.000.000. CIT in the Netherlands is 25%. WVU BV distributes 100% of its profits (= dividend).

1. Are the two companies both resident taxpayers for Corporate Income Tax purposes in the Netherlands? If so why? If not, why not, and which conditions should be fulfilled in that case to treat the companies as resident taxpayers in the Netherlands. (2 points)

2. Explain in words and with a numerical example related to the case concerning ZYX BV and WVU Ltd above why the classical system results in economic double taxation for the shareholder. (2 points)

3. Describe and explain with numerical examples, which solutions countries have chosen to solve the problem of economic double taxation. (2 points)

4. ZYX BV and WVU Ltd. want to apply for consolidation in the Netherlands. Will their request be granted by the Dutch tax administration if the two companies are both resident in the Netherlands? (2 points)

5. Suppose the two companies would both be resident taxpayers in the UK. Would their request for consolidation in that country be granted? (2 points)

Answers

1. ZYX BV is a resident taxpayer in the Netherlands as it is incorporated under Dutch tax law. WVU Ltd is incorporated under UK law but is also a resident taxpayer in the Netherlands as it has its central place of management in the Netherlands which is the other criterion under Dutch tax law establishing residency in the Netherlands for tax purposes.

2. Profit	4.000.000
   CIT 25%	1.000.000
   Dividend	3.000.000
   Taxable income	3.000.000
   Income Tax e.g. 50%	1.500.000
   Total Tax (CIT + IT)	1.500.000

   Economic double taxation implies that two or more taxable subjects must pay tax to one or more tax authorities on the same amount of income. In this case both the company and the shareholder pay tax on the (distributed) profit of the subsidiary. There is no tax rate reduction, full or partial exemption of the distributed profit at the level of the shareholder, or possibility to credit the CIT against Income Tax to be paid at the level of the shareholder.

3. For Corporate Taxpayers countries chose as solutions for the problem of economic double taxation participation exemption, dividend reduction (U.S.) or imputation. For non-corporate taxpayers paying income tax (individuals, associations, foundations, in many countries partnerships etc.) the solutions are the modified classical system (tax rate reduction), imputation system and reduced Taxation of distributed profits: (split-rate method (lower or higher CIT-rate in case of distribution), dividend deduction method, zero rate method (IT-rate or CIT-rate in case of distribution). See the slides of lecture 2 for numerical examples.

4. In the Netherlands both parent and subsidiary must be resident taxpayers. The parent company must have a right to exercise more than 95 % of the voting rights or an ownership right amounting to more than 95% or the company’s capital or more than 75% of the rights giving entitlement to profits. Thresholds must be met throughout the tax year. Moreover a number of other requirements must be fulfilled.

5. A request for consolidation would not be granted, as the UK Corporate Income Tax does not offer the possibility of consolidation. Instead the UK CIT allows for group relief. A lossmaking member of the group transfers its loss to a profit-making member of the group.

Question 3

See attachment.

Answers

No answers available.

Question 4

See attachment.

Answers

1. Fiona Oy would have to pay capital gains tax of € 12 million (60 million X 20%) for the transfer of its assets.

2. The capital gains tax is deferred on a roll-over basis. Glory GmbH records the same tax value of the asset as the value assigned to Fiona Oy prior to the transfer. When Glory GmbH disposes of the asset transferred, tax is due on the difference between the disposal value and the original value for tax purposes. (i.e. The potential tax liability of Fiona Oy is shifted to Glory GmbH upon the transfer of assets.)

3. The carry forward of losses of Fiona Oy would no longer be available as Fiona Oy is completely dissolved. After the merger, Glory GmbH would lose the potential tax benefits as the carry forward of losses of Fiona Oy cannot be used to offset future profits of Glory GmbH.

4. Glory GmbH would be able to use the carry forward of losses of 25 million if it makes profits in year 2015.

Question 5

The Guardian 12 September 2009

http://www.theguardian.com/commentisfree/2009/feb/11/taxavoidance-tax

“In recent days the Tax Gap series of articles has identified secrecy, complex organisational structures, tax havens and profit hungry accountancy firms as the key ingredients of the tax avoidance industry. They all come together in the biggest tax avoidance scheme of all, known as 'transfer pricing'.

The name of the game is to shift profits to low tax jurisdictions and avoid taxes in countries where corporations have substantial trading operations.“

1. Please criticise the view of the Guardian above. (5 points)

2. How do companies determine transfer prices? (2 ½ points)

3. What tax risks are involved in connection with transfer pricing. (2 ½ points)

Answers

1. Transfer pricing is not a tax avoidance scheme, but for tax purposes a method to calculate the amount of profit to be allocated to a separate legal entity that is part of a group of companies in respect of internal transactions within the group, and for management control purposes a method to achieve the desired degree of decentralisation. As determining the correct transfer price that reflects the price third parties would use for a similar transaction is not easy and therefore for tax authorities is difficult to control several companies take the risk to misprice internal transactions in such a way that they shift profits to low tax countries. Hus the wording of the article is incorrect: the game is “transfer mispricing”.

2. Companies may use:

   1. Traditional transactional methods:

      1. Comparable Uncontrolled Price Method (CUP)

      2. Resale Price Method (RPM)

      3. Cost Plus Method (CP)

   2. Transactional profit methods:

      1. Profit Split (PS)

      2. Transactional Net Margin Method (TNMM)

3. Transfer pricing risk consists of both tax technical risks and risks that relate to processes, people and systems. In respect of tax technical risks the tax authorities may not accept the transfer pricing method chosen (compliance risk); the risk that the tax authorities may not accept the transfer pricing method may be wrongly estimated resulting in a financial accounting risk; using methods/prices may lead to reputational risks that may possibly not be acceptable for tax authorities/courts may result in reputational risks; in case of mergers and acquisitions wrong prices may be used which results in a transactional risk; and the risk that TP legislation changes is a legislative risk. In respect of risks that relate to processes, people and sytems operational risks and management risks in respect of transfer pricing can be identified. The operational risk that the work floor does not pass the correct information to the tax director or to the ICT systems and the management risk that there is insufficient knowledge within the organization or hired in knowledge from third parties is insufficient.

Question 6

1. Why do we find less tax information in annual reports compared to other types of corporate disclosure? (2 ½ points)

2. For what purposes is information on tax in annual reports needed? (2 ½ points)

3. Is tax ethics relevant for companies? If so, why? If not, why not? (2 ½ points)

4. Why is it remarkable that companies do not spend most of the budget available for tax management on transfer pricing? (2 ½ points)

Answers

1. Because tax information has a higher level of confidentiality compared to other types of accounting information. Disclosing detailed tax information may put companies at risk of catching the tax authority’s attention, which may lead to undesirable tax audit. Moreover, competitors may take advantage of such sensitive tax information.

2. Tax information in annual reports informs stakeholders of a company’s tax position and a provides a holistic view on corporate financial condition. It also provides information of how accounting profits are related to tax expense by referring to tax reconciliation in the note sections of audited financial statements.

   (* Stakeholders = shareholders, banks, employees, tax administration)

   Investors need …:

   1. More information on Tax Risk Management

   2. More information on Tax Obligations (cash flow)

… then most companies provide at present.

Tax administrators require (BEPS/EU) and will get more information on …:

1. Country by country reporting (Action 13)

2. More reliable data (Action 11: a.o. as research on tax aggressiveness based on information in annual reports as data mentioned in these reports is often incorrect)

3. Information on Aggressive Tax Planning (Action 12)

… then most companies provide at present.

3. Tax ethics is relevant for companies. Tax ethics implies that companies are aware that society is a cooperative venture for mutual advantage and that there is a moral compliance obligation: they should pay a fair amount of tax (the fair share obligation). Companies should not only meet their legal but also their moral obligations. If they do so they do not run a reputational tax risk.

4. It is remarkable that most companies do not spend most of the budget available for tax management on transfer pricing CFO’s in a 2013 EY Transfer Pricing Survey identified Transfer pricing risk no. 2 just behind global compliance.

Question 7

“Under cooperative compliance the company and tax authorities share information proactively and this can have a major impact on, for instance, the commercial accounts”.

1. Explain why cooperative compliance has an impact on commercial accounts. (2 ½ points)

2. ICT enables tax authorities to choose for cooperative compliance. Explain why this is the case in respect of corporate income tax. (2 ½ points)

The title of Wiecher Munting’s lecture is “Aligning information to connect audit and tax.” He argues information about Transfer Pricing is more or less crucial to levy Corporate Income Tax in a fair and efficient manner”. The OECD wants to align tax information and management accounting information by requiring companies to make aRead more