Tax Views Article – New developments in Ireland, Luxembourg and Switzerland

New developments in Ireland, Luxembourg and Switzerland

As global organizations face challenges to protect against, prepare for and resolve disputes with tax authorities, a 5-part webcast series from KPMG’s Global Tax Dispute Resolution and Controversy Services’ (GTDR&C) visits key jurisdictions across the globe to provide you with what you need to know to stay current. In the fifth and final webcast of our Around the World series, Sharon Katz-Pearlman led a discussion with tax disputes leaders in Ireland, Luxembourg and Switzerland. Their discussion is summarized below.

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Around the world with KPMG’s Global Tax Dispute Resolution and Controversy network – New developments in Ireland, Luxembourg and Switzerland

A panel discussion moderated by Sharon Katz-Pearlman, Head of KPMG’s Global Tax Dispute Resolution and Controversy Services.

As global organizations face mounting challenges to protect against, prepare for and resolve disputes with tax authorities, a 5-part webcast series from KPMG’s Tax Dispute Resolution and Controversy Services’ (TDRCS) visits key jurisdictions across the globe to provide you with what you need to know to stay current.

The final article of our series is based on a webcast led by Sharon Katz-Pearlman and featuring GDTR&C leaders from KPMG International’s network of firms in Ireland, Luxembourg and Switzerland, who highlighted what tax executives need to know to navigate current challenges in these jurisdictions. Their discussion is summarized below.

You can find details about other webcasts in this series.

Ireland – Liam Grimes, Director, KPMG in Ireland

Tax is topical in Ireland these days as developments on a number of fronts continue to attract media and public interest. For example:

  • The European Commission’s decision that Irish transfer pricing rulings granted to the Apple group constituted illegal state aid has made headlines, and the public and main political parties support the Irish government’s decision to appeal the decision.
  • A pending tax court decision on Ireland’s general anti-avoidance rule is garnering considerable attention.
  • A recent idea was floated by a government minister that returned emigrants should be granted a special 30 percent tax. Whereas this idea generally attracted a negative response (and is unlikely to be introduced) it did encourage lively debate.

Ireland is somewhat unique in that it publishes details of tax defaulters quarterly. In cases where a settlement of tax arrears exceeds 33,000

euros (EUR) and no qualifying voluntary disclosure of previously undisclosed tax liabilities was made in advance of Revenue commencing, Revenue will publish details about the defaulter, including their name, address and amount of tax arrears. The press generally picks up the names of the largest settlements and will identify the names of public figures and celebrities who have appeared on the list. Political and public support for punishing aggressive tax planning has been rising.

Carrot-and-stick approach

Under Revenue’s carrot-and-stick approach, taxpayers with undisclosed tax arrears can avoid being featured on the list by coming forward with the details unprompted. Publication can also be avoided for prompted disclosures, provided disclosure is made before an audit actually begins. Penalties are reduced for both unprompted and prompted voluntary disclosures.

The Defaulters List is just one of a rising number of tools and powers being added to the tax authority’s arsenal. One new power allows Revenue to examine taxpayers’ credit and debit card spending through access to information from merchant acquirers.

New Revenue initiatives

The Irish Revenue is making increasing use of data analytics and third-party data in its enforcement practices. Under the Revenue’s Risk Evaluation Analysis and Profiling (REAP) initiative, a range of tax data is mined to identify potential areas of tax risk. The REAP initiative assigns levels of tax risk to taxpayers using a traffic light system:

  • green ratings are assigned to taxpayers who are presumed to be compliant, which includes most taxpayers
  • amber ratings are assigned when the REAP system flags a potential item of tax risk
  • red ratings signal potential high-risk taxpayers or situations, prompting Revenue to initiate queries, audits or investigations

Revenue is also moving toward fully electronic audits. Most current audits are conducted electronically to some degree, and in certain cases taxpayers are required to submit their records online. Revenue is starting to carry out “cloud audits” by asking for and receiving access to taxpayer’s internal servers and data so auditors can interrogate them remotely.

Finally, the Revenue is making greater use of information exchange with tax authorities of other countries. For example, a bilateral agreement with Switzerland will give the Revenue online access to the details of Swiss bank accounts of account holders with addresses in Ireland. With this information, the Revenue is expected to initiate additional queries and audits.

Audit focus areas

The Irish Revenue’s current areas of audit focus include:

  • transfer pricing in general and correlative adjustments in particular, with significant testing being carried out before tax refunds are issued as a result of transfer pricing adjustments made in other tax jurisdictions
  • claims made under Ireland’s tax incentive regime for promoting research and development.

The Irish Revenue’s audit approach includes efforts to ensure that officers carrying out tax interventions such as a general sweep of shopping malls, are highly visible. Officers wear distinctive vests, for example, when testing electronic point-of-sales systems or monitoring the activity of subcontractors in the construction industry.

Encouraging better compliance

Self-review is a recently adopted technique to encourage compliance. Under this program, taxpayers will receive a letter from Revenue asking them to conduct a self-review of, for example, their payroll taxes and submit a report to Revenue. Such reports are considered as unprompted disclosures, so reduced penalties and non-publication on the Defaulters List would apply if unpaid taxes are detected during a self-review.

The Irish Revenue is also relaunching its Framework for Cooperative Compliance. Under this voluntary program, Revenue will enter agreements with individual large businesses setting out what each side needs to do to enable the business to achieve compliance. Companies are assigned a case manager to act as a liaison, conduct joint reviews of tax risk and help resolve issues. Case managers may also inquire into details of the company’s tax governance, including its tax budget and future plans.

Revamped tax dispute resolution processes

Taxpayers in Ireland are seeing significant changes to the country’s dispute resolution processes. Under a revamped complaints process, taxpayers can make a complaint on a range of issues regarding Revenue’s treatment of their tax affairs in parallel with the formal appeals procedure. Complaints are reviewed by senior reviewers within Revenue, and, if not resolved, by an external reviewer. The system may benefit taxpayers since the decisions of external reviewers are binding on the tax authority but not on the taxpayer, which allows other options for recourse to remain open.

Further, a revamped tax appeals process has moved from semi-formal hearings conducted by tribunals to more formal court hearing, resulting in a backlog and making it more costly and time-consuming to pursue tax cases in court.

This activity is taking place at a time of increasing resource constraints within the Irish Revenue. For the past few years, many senior officials have been devoting their attention to the Organisation of Economic Co-operation and Development’s (OECD) international project to curb base erosion and profit shifting (BEPS) and how it will affect Ireland’s tax regime. The Irish Revenue also faces demographic challenges due to the current wave of retirements, and it is working to fill the gap by recruiting and integrating a high number of experienced tax and legal professionals.

In this environment, companies can reduce their tax audit burden and avoid the consequences of non-compliance – including exposure on the Defaulters List – by conducting regular tax reviews in conjunction with their professional tax advisers. The Irish Revenue looks favorably on companies that regularly engage in tax health checks and may be more likely to waive or reduce penalties if they detect incidents of inadvertent non-compliance.

Luxembourg – Laurent Engel, Partner, Financial Services Tax, KPMG in Luxembourg

The environment for tax disputes in Luxembourg has changed significantly in recent years. In the past, the tax certainty conveyed by country’s binding tax rulings practice reduced occasion for disputes, and disputes that did arise tended to involve smaller businesses that did not meet their obligations under their rulings.

Previously, European Union court decisions were a primary cause of tax disputes involving Luxembourg. The European Free Trade Association’s 2004 decision in Fokus Bank (E-1/04), the European Court of Justice decision in Aberdeen (C-303/07) and other judgments found that withholding taxes on cross-border dividends impeded the free movement of capital. These decisions opened the door for taxpayers to file claims for refunds of withholding taxes paid to a number of non-compliant European jurisdictions, including Austria, Finland, France, Norway, Poland, Spain and Sweden.

With more than 4,000 refund claims filed in over 15 countries by KPMG in Luxembourg alone, Luxembourg saw unprecedented growth in the volume of tax disputes and an increase in the size and sophistication of professional advisers to service them.

Recent events have disrupted the tax certainty that Luxembourg’s tax ruling system previously provided:

  • In November 2014, the International Consortium of Investigative Journalists leaked almost 600 private Luxembourg tax rulings, creating questions over the propriety of these agreements.
  • The European Commission put the ruling practices of EU member states under the microscope. Starting with investigations of specific tax rulings in Belgium Luxembourg, the Netherlands and Ireland, the project was expanded in early 2015 to cover tax rulings throughout the EU. The decisions published so far indicate that the tax benefits granted by certain rulings are state aid and that affected taxpayers could be forced to repay up to 10 years of back taxes. These decisions are being challenged before the European courts.
  • Entry into force of the automatic exchange of information arising from the OECD’s BEPS proposals will give tax authorities new powers to review tax rulings granted by other jurisdictions, in some cases retroactively to ruling granted as early as 2010.

Now Luxembourg tax rulings can be a source of insecurity, and the number of ruling applications has dropped from about 2,000 annually in 1998 to 2014, to just over 700 applications in 2015.1 Taxpayers are increasingly seeking a measure of tax certainty by relying on tax opinions instead.

Like many tax authorities, Luxembourg’s tax authority is gearing up to manage the enormous amount of taxpayer data becoming available under automatic tax information exchange. As in Ireland, taxpayers will be required to file their tax returns electronically, starting in Luxembourg in 2017. Luxembourg’s tax authority has indicated that it will employ data analytics to identify areas of tax risk and target audit activity accordingly.

Further, Luxembourg’s procedural law allows the tax authority to accept returns as filed, with the possibility of raising reassessments within the next 5 years. Given the high amount of taxpayer data that is becoming available, Luxembourg’s tax authority is expected to increase its focus on returns after they have been filed.

Unlike the past, where binding advance tax rulings diminished the potential for tax assessments, Luxembourg’s tax authority now has more time to examine tax filings, more information about their tax positions in other countries, and improved ability to base its assessments on actual (rather than forecast) results.

Unsurprisingly, the increase in assessments has come with increase in tax disputes. Complaints filed against the tax authority have climbed from 338 in 2000 to 1,316 in 2015.2 Bilateral tax disputes and mutual agreement procedures are also rising, and this trend is expected to continue as Luxembourg and other countries work to implement the OECD’s BEPS proposals in their domestic law. Withholding tax refund claims (e.g. based on Aberdeen) will also grow until the EU member states align their laws, which is not expected to occur in the near future.

As in Ireland, companies in Luxembourg stand a better chance of weathering the current climate and avoid tax disputes by conducting a tax diagnostic review to identify and mitigate any potential tax risk exposure.

Switzerland – Markus Wyss, Partner, Global Transfer Pricing Services, KPMG in Switzerland

Companies with business or investments in Switzerland are also dealing with a significantly changing tax landscape, most importantly due to the new Corporate Tax Reform III (CTR III) legislation. These measures, passed by the Swiss parliament in June 2016, are subject to a referendum that is expected to be held in early 2017. The reforms are also subject to referendums at the cantonal level. If the Swiss public votes in the bill’s favor, the reforms would likely take effect in 2019.

Tax changes affecting international companies

The bill takes into consideration the OECD’s BEPS action plan and requests by the EU and aim to provide a corporate tax system that is generally in line with current international standards. Some of the most important changes for international companies are:

  • the elimination of longstanding tax regimes that the EU has considered harmful, including the tax preferences for holding, mixed and principal companies and for finance branches
  • reduction of corporate income tax rates at the cantonal levels to bring combined federal-cantonal rates down to 12–18 percent, depending on the canton
  • introduction of a patent box regime based on the OECD-approved modified nexus approach, a notional interest deduction and a super deduction for research and development expenditures
  • capital tax relief for financings such as participations, patents and similar rights, and intercompany loans.

Once these changes are in place, they are largely expected to benefit both taxpayers and the Swiss federal and cantonal tax authorities. The reforms should ensure the Swiss tax rules are acceptable internationally and provide a level playing field while maintaining the country’s tax competitiveness.

Additional tax changes are being made in response to the OECD’s Action Plan on BEPS. These include:

  • introduction of country-by-country tax reporting and master file/local file documentation requirements, starting in 2017 (Action 13)
  • changes to the permanent establishment definition (Action 7)
  • changes to align transfer pricing policies with OECD’s guidelines on the location of value creation (Actions 8–10)
  • automatic exchange of tax rulings, for 2018 and later years (Action 5).

Complex tax dispute resolution environment

Switzerland is structured as a confederation, with taxes levied at the federal, cantonal and communal level. This has led to a complex and somewhat peculiar structure for resolving tax disputes, which can be summarized as follows:

  • Cantonal tax authorities assess and, if necessary, audit domestic taxes levied at all three levels. The cantonal tax authorities are also the starting point for resolving tax disputes.
  • The federal tax authority reviews assessments made at the cantonal level, especially in cases that may involve withholding taxes (see below). Domestic tax disputes and litigation can be initiated at either the cantonal and federal levels.
  • The State Secretariat for International Financial Matters (SIF) gets involved where a disputed element of tax raises an international tax dispute with a foreign entity or tax authority. The SIF would manage the international aspects of settling the dispute (e.g., through a Mutual Agreement Procedure (MAP). It would also advise and instruct the cantonal tax authority on how to manage the domestic aspects of the dispute.

Another wrinkle is that the federal tax authority also takes charge of enforcing the tax rules for related-party transactions. Switzerland does not have transfer pricing regulations in place. Rather, in the context of transactions with related parties (or persons close to related parties), any cost or income element that is not commercially justifiable may be considered as a hidden profit or monetary benefit and subject to withholding tax. The federal tax authority makes these assessments and also instructs the cantonal tax authorities on any resultant corporate income tax adjustments.

Despite the complexity of this system, it generally worked well for taxpayers. Domestic disputes were often dealt with and settled without litigation, while international disputes handled by the SIF were generally settled with mutually acceptable outcomes.

As tax changes are implemented in Switzerland and internationally, the volume of tax domestic and bilateral disputes and litigation is expected to increase significantly. Switzerland’s 26 cantonal tax authorities may interpret and apply the new rules differently and with varying degrees of aggressiveness. The additional information that the tax authorities will gain on cross-border transactions, subsidiaries and permanent establishments that Swiss and international tax authorities will drive disputes at the international level.

In response, the Swiss authorities are being compelled to adopt more formalistic approaches, leaving less room for negotiated settlement and more need for alternative dispute resolution techniques. In fact, Switzerland’s first arbitration cases will commence in the next few months, and this technique is expected to be used more frequently in the coming years.

However, it seems likely that the Swiss tax environment will remain attractive, characterized by low tax rates, internationally accepted tax incentives (e.g., patent box, R&D super deduction), and taxpayer-friendly tax authorities. The extent of tax change means some tax uncertainty is unavoidable, but Switzerland’s well established rulings culture should help address points of ambiguity and lead to more predictable outcomes going forward.

1See Véronique Poujol, “La fabrique de rulings au ralenti,” Paperjam, September/October 2015, at p 52; and Rapport d’activité Administration des Contributions Directes 2015, page 14.2

2Administration des Contributions Directes.

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