Saturday, December 23, 2006

Christmas (tax) Reading

The year can be closing and some people are thinking in buying last minute presents, writing their Christmas cards and gathering around their family, away, very far away from international taxation.

Then again the “usual suspects” come with large pieces of reading material for the Christmas vacation so that our attention is not focused elsewhere. The “usual suspects” suspects are the OECD and the EU Commission, which released a series of reports that for the ones that attempt to follow the international tax developments, it basically means extra tax reading and no fiction novels. Do not even think about it!

The European Commission (usual suspect n.1) adopted a Communication on a co-ordination of national direct tax systems, a Communication that invites Member States to adopt an EU-coordinated approach on exit taxation and a Communication that invites Member States to adopt an EU coordinated approach to cross-border loss relief.

The aim of the first Communication is to coordinate the national direct tax systems to ensure that they are compatible with EU law and interact coherently with each other. The second Communication provides specific guidance for the EU Member States on designing exit tax mechanisms compatible with EC law principles. Finally, the third Communication follows up the Marks & Spencer case, and invites Member States to develop a coordinated approach to cross-border loss relief that eliminates what the EU Commission says to be one of the “main obstacles to cross-border investments”! Perhaps a bit exagareted, specially if we take what the ECJ said in the M&S case.

Remeber, that the European Commission plans to issue a further Communication in early 2007 to report on progress to date in the CCCTB, which miraculously solves the problems identified on the EU communication. What a coincidence! This is called the inversed stick and carrot approach! The ECJ basically intends to beat the Member States with the soft law stick until they find the light of the CCTB! Now it’s a question to see if it lights the whole Europe or only a few brave bunch!

The OECD (usual suspect n.2) had to respond at the level of its Brussels counterpart and the new impetus to the knotty PE project was the answer. The OECD published the expected new versions of Parts I, II and III of its Report on the Attribution of Profits to Permanent Establishments, along with a cover note containing an update on the status of that project. This means that we may send the previously published discussion drafts of Parts I-III to the trash bin and start reading the new ones in a “fun” game of finding the differences!

The OECD discreetly says that the new versions of Parts I (General Considerations), II (Banks) and III (Global Trading) reflect the broad consensus of OECD member countries around an approach to attributing profits to permanent establishments which is based upon the arm’s length principle as described in the 1995 OECD Transfer Pricing Guidelines. One wonders whether the previous drafts failed that test! As to the announced necessary changes to the language of OECD Model Tax Convention and Commentaries, somewhere in 2007 appears to be the target of the OECD! The Part IV (Insurance) is still a bit behind the rest of the gang but do not stress because the OECD promises us to provide extra reading ASAP!

A special thanks for the ECJ (usual suspect n.3), which has the dignity of closing well ahead for the Christmas season!

Have a nice Christmas (reading)!

Tiago Cassiano Neves

Next post: what to expect from 2007!


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