In the wake of the final OECD BEPS reports issued in October, the European Council adopted amendments to Directive 2011/16/EU providing for the automatic exchange of information concerning advance cross border rulings (ACBR) and advance pricing arrangements (APA) between Member States. The amendments, which will come into force from 1 January 2017, cannot be read in isolation. Instead, they should be seen as part of a larger picture which also incorporates the exchange of certain rulings issued prior to that date. Below we address the key questions that are front of mind for many tax professionals.
Which rulings are covered?
The definitions of ACBRs and APAs are broadly drafted to include any agreement with an authority regarding the application of a provision that has a cross border impact (ACBR) or that determines in advance the transfer pricing of a cross border transaction (APA). The Amended Directive excludes bilateral and multilateral APAs with third countries from the transparency requirements but only where the relevant international agreement under which it was negotiated does not permit disclosure to third parties. In such a scenario however, the relevant information (see below) as provided in the request that leads to the APA shall be shared instead.
The new rules will apply to all APAs and ACBRs issued on or after 1 January 2017. For rulings issued before 1 January 2017, the following rules will apply:
- For ACBRs and APAs issued, amended or renewed between 1 January 2012 and 31 December 2013, exchange shall take place under the condition that they are still valid on 1 January 2014.
- For ACBRs and APAs issued, amended or renewed between 1 January 2014 and 31 December 2016, exchange shall take place irrespective of whether they are still valid or not.
It will be the discretion of Member States whether or not to exclude from the automatic information exchange ACBRs and APAs issued to companies with an annual net turnover of less than €40 million at a group level, if such ACBRs and APAs were issued, amended or renewed before 1 April 2016 . However, this discretional exception will not apply to companies conducting mainly financial or investment activities.
What information will be shared?
The initial sharing of information under the Amended Directive will not include the complete and formal ACBR or APA document but will be limited to specific information, including:
- Identification of the person, other than a natural person, and where appropriate the group of persons to which it belongs
- Summary of the content of the ACBR or APA, including a description of the relevant business activities, transactions or series of transactions, without disclosure of commercial, industrial, or professional secrets, commercial process, or information that's disclosure would be contrary to public policy
- Dates of issuance, amendment or renewal, start date and end date of the period of validity (where specified)
- Type of ruling or arrangement
- Amount of the transaction or series of transactions, if referred to in the ACBR or APA
- Description of the criteria used for the determination of the transfer pricing or transfer price in the case of an APA, as well as the method used
- Identification of the other Member States likely to be concerned by the ACBR or APA, as well as the person(s) in those other Member States.
Under the existing Directive, Member States can request additional information including the full text of the ACBR or APA. This will continue to be the case.
Who will have access, and when?
The European Commission plans to develop a secure central database to facilitate the exchange and to enable all Member States to provide the required information in a fixed template. All Member States will have access to the database, as well as the European Commission. However, the European Commission shall only have access to the database in order to ensure that the exchange of information requirements are executed in accordance with the right procedures.
Under the Amended Directive, information relating to applicable, existing ACBRs and APAs will need to be uploaded to the central database prior to January 1, 2018. Information concerning ACBRs and APAs issued after December 31st, 2016 should be in the central database within 3 months following the end of the half of the calendar year during with they are issued.
What does this mean for taxpayers?
Due to the benefits of ACBRs and APAs to taxpayers and tax authorities alike (advance certainty, cooperation, and transparency), tax authorities in most jurisdictions are expected continue to support the issuance of ACBRs and APAs.
Although these amendments will result in more tax authorities having access to a greater level of information concerning MNEs tax affairs, it is important to note that the exchange of information between different member and non-Member States is not a new concept. Exchange of information on request has been actively used by tax authorities in Europe and beyond for many years, as has spontaneous information exchanges, which involve governments exchanging taxpayer information that is deemed relevant but was not previously requested by the receiving country. The introduction of these amendments do however represent a new era of transparency and exchange of information due to the automatic nature of the exchange and the development of a centralised database with multijurisdictional access.
Companies with rulings should be aware of these changes and should bear in mind these requirements when determining their ACBR and APA strategy going forward. Fundamental to this will be ensuring a transparent and consistent approach to transfer pricing documentation, particularly in light of the new OECD requirements (ie country-by-country reporting, masterfile and local file) that are being adopted by an ever increasing number of countries.
Finally, the introduction of these rules by the EC is likely to be looked to by other (non-EU) countries as a 'pilot' for future automatic exchange of ACBRs and APAs, as discussed by the OECD in the final BEPS report on Action 5 and as called for by the G20 in its November 2016 official communique endorsing the BEPS reports.